-----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, BOhzOnq/iKxn5+GyIy4UM2bq+zqxI1DCDbO8lkqKmhLHoAZgxLypKOF4QbNwPTtN w9gZP6ujxhhmvL5xOACriw== 0001047469-99-012577.txt : 19990402 0001047469-99-012577.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012577 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COGENERATION CORP OF AMERICA 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: SEC FILE NUMBER: 001-09208 FILM NUMBER: 99579836 BUSINESS ADDRESS: STREET 1: ONE CARLSON PARKWAY STREET 2: SUITE 240 CITY: MINNEAPOLIS STATE: MN ZIP: 55447-4454 BUSINESS PHONE: 6127457900 MAIL ADDRESS: STREET 1: ONE CARLSON PARKWAY STREET 2: SUITE 240 CITY: MINNEAPOLIS STATE: MN ZIP: 55447-4454 FORMER COMPANY: FORMER CONFORMED NAME: NRG GENERATING U S INC DATE OF NAME CHANGE: 19960507 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 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER: 1-9208 COGENERATION CORPORATION OF AMERICA - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 59-2076187 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) ONE CARLSON PARKWAY, SUITE 240; MINNEAPOLIS, MINNESOTA 55447-4454 (612) 745-7900 (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. /X/ Yes / / 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 Report on Form 10-K or any amendment to this Report on Form 10-K. / / As of March 2, 1999, there were outstanding 6,856,769 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 the shares of Common Stock held by non-affiliates of the Company was $27,170,911. 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 1999 Definitive Proxy Statement of Cogeneration Corporation of America ("CogenAmerica"): 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 ------ PREFACE: SELECTED DEFINITIONS ................................................................. 2 Part I Item 1. Business ............................................................................. 5 Item 2. Properties ........................................................................... 29 Item 3. Legal Proceedings .................................................................... 29 Item 4. Submission of Matters to a Vote of Security Holders .................................. 31 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters .................................................................. 32 Item 6. Selected Financial Data .............................................................. 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................................ 34 Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................... 52 Item 8. Financial Statements and Supplementary Data .......................................... 53 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................................................. 54 Part III Item 10. Directors and Executive Officers of the Registrant.................................... 55 Item 11. Executive Compensation ............................................................... 55 Item 12. Security Ownership of Certain Beneficial Owners and Management ....................... 55 Item 13. Certain Relationships and Related Transactions ....................................... 55 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 56 Consolidated Financial Statements ............................................................. F-1 through F-28 Index to Exhibits ......................................................................................... 59
1 PREFACE: SELECTED DEFINITIONS When used in this report, the following terms will have the meanings indicated. "Aquila" means Aquila Energy Marketing Corporation. "Authority" means the Philadelphia Municipal Power Authority. "Bankruptcy Court" means the U.S. Bankruptcy Court for the District of New Jersey. "Btu" means British thermal unit. "Chase" means Chase Manhattan Bank N.A. "CogenAmerica" or "the Company" means Cogeneration Corporation of America. "CogenAmerica Funding" means CogenAmerica Funding Inc. "CogenAmerica Morris" means CogenAmerica Morris Inc. "CogenAmerica Newark" means CogenAmerica Newark Inc. "CogenAmerica Parlin" means CogenAmerica Parlin Inc. "CogenAmerica Pryor" means CogenAmerica Pryor Inc. "CogenAmerica Schuylkill" means CogenAmerica Schuylkill Inc. "Co-Investment Agreement" means the Co-Investment Agreement dated April 30, 1996 between NRG Generating (U.S.) Inc. (currently known as CogenAmerica) and NRG Energy. "Common Stock" means CogenAmerica's common stock, par value $.01 per share. "DuPont" means E.I. du Pont de Nemours and Company. "Dynegy" means Dynegy Marketing and Trade. "EPA" means the U.S. Environmental Protection Agency. "Equistar" means Equistar Chemicals, LP, a joint venture of Lyondell Petrochemical Company, Millennium Chemicals and Occidental Chemical Corporation. "EWG" means an "exempt wholesale generator," as that term is defined in PUHCA. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "FERC" means the Federal Energy Regulatory Commission. "Grays Ferry Partnership" means the Grays Ferry Cogeneration Partnership. "Grays Ferry PPAs" means the power purchase agreements with PECO. 2 "Grays Ferry Project" means the 150 MW cogeneration facility located in Philadelphia, Pennsylvania. "JCP&L" means Jersey Central Power and Light Company. "kWh" means Kilowatt hour. "MCPC" means Mid-Continent Power Company, LLC. "MeesPierson Credit Agreement" means the Credit Agreement dated December 17, 1997 between NRG Generating (U.S.) Inc. (currently known as CogenAmerica) and MeesPierson Capital Corporation. "MW" means megawatt. "Morris ESA" means the Morris energy service agreement dated June 3, 1997 between CogenAmerica Morris LLC and Millennium Petrochemicals Incorporated. "Morris LLC" means CogenAmerica Morris LLC. "Morris Project" means the 117 MW cogeneration facility in Morris, Illinois. "National Ambient Air Quality Standard" means those ambient air quality standards required under the Clean Air Act. "Newark Boxboard" means The Newark Group, Inc. "Newark and Parlin Credit Agreement" means the Credit Agreement dated May 17, 1996 between NRG Generating (Newark) Cogeneration Inc. (currently known as CogenAmerica Newark), NRG Generating (Parlin) Cogeneration Inc. (currently known as CogenAmerica Parlin), Credit Suisse, Greenwich Funding Corporation and any Purchasing Lender, as amended. "Newark Project" means the 58 MW cogeneration facility in Newark, New Jersey. "1990 Amendments" means the Clean Air Act Amendments of 1990. "NMO" means NRG Morris Operations, Inc. "NOx" means nitrogen oxide. "NPI" means NRG Parlin, Inc. "NRG Energy" means NRG Energy, Inc. "O'Brien" means O'Brien Environmental Energy, Inc. "OES" means O'Brien Energy Services Company. "OG&E" means Oklahoma Gas and Electric Company. "OPCI" means O'Brien (Philadelphia) Cogeneration, Inc. 3 "Parlin Project" means the 122 MW cogeneration facility in Parlin, New Jersey. "PECO" means PECO Energy Company. "PJM" means the Pennsylvania - New Jersey - Maryland interconnected power pool. "Plan" means the plan of reorganization of O'Brien, discussed more fully in "Item 1. Business --General" of this report. "POI" means Power Operations, Inc. "PPA" means a power purchase agreement. "PRP" means a potentially responsible party. "Pryor Project" means the 110 MW cogeneration facility in Pryor, Oklahoma. "PSO" means Public Service Company of Oklahoma. "PUHCA" means Public Utility Holding Company Act of 1935, as amended. "PUMA" means, collectively, CogenAmerica's subsidiaries that operate in the United Kingdom and are held by NRG Generating Ltd., a wholly-owned subsidiary of CogenAmerica. "PUPCO" means Philadelphia United Power Corporation. "PURPA" means the Public Utility Regulatory Policies Act of 1978, as amended. "PWD" means the Philadelphia Water Department. "PWD Project" means the two standby/peak shaving facilities with an aggregate capacity of 22 MW in Philadelphia, Pennsylvania. "QF" means a "qualifying small power production facility" or a "qualifying cogeneration facility" as these terms are defined in PURPA. "RCRA" means the Resource Conservation and Recovery Act of 1976. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Supplemental Loan Agreement" means the Supplemental Loan Agreement dated December 10, 1997 between NRG Energy, NRG Generating (U.S.) Inc. (currently known as CogenAmerica) and NRGG Funding Inc. (currently known as CogenAmerica Funding). "TPEC" means Trigen-Philadelphia Energy Corporation, a wholly-owned subsidiary of Trigen. "Trigen" means Trigen Energy Corporation. 4 PART I ALL DOLLAR AMOUNTS, EXCEPT PER SHARE AMOUNTS, SET FORTH IN THIS PART I ARE IN THOUSANDS. ITEM 1. BUSINESS. CERTAIN OF THE STATEMENTS MADE IN THIS ITEM 1 AND IN OTHER PORTIONS OF THIS REPORT AND IN DOCUMENTS INCORPORATED BY REFERENCE HEREIN CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT, AND SECTION 21E OF THE EXCHANGE ACT. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR FROM ANY RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION, THOSE DISCUSSED IN "BUSINESS -- RISK FACTORS" HEREIN. SEE "BUSINESS -- RISK FACTORS -- RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS." FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS ITEM I, PLEASE SEE THE SELECTED DEFINITIONS IMMEDIATELY PRECEDING THIS ITEM 1. GENERAL CogenAmerica, formerly known as NRG Generating (U.S.) Inc. and O'Brien Environmental Energy, Inc., is an independent power producer primarily in the business of developing, owning and managing the operation of cogeneration projects which produce electricity and thermal energy for sale under long-term contracts with industrial and commercial users and public utilities. The Company is currently focusing on natural gas-fired cogeneration projects with long-term contracts for substantially all of the output of such projects including "inside the fence" projects on the premises of the project's steam/energy hosts. The Company's strategy is to develop, acquire and manage the operation of such cogeneration projects and to provide U.S. industrial facilities and utilities with reliable and competitively priced energy from the Company's power projects. CogenAmerica has substantial expertise in the development and management of the operation of cogeneration power projects. The Company's current project portfolio consists of: (i) the Parlin Project; (ii) the Newark Project; (iii) the Morris Project; (iv) the Pryor Project; (v) an 83% interest in the PWD Project; and (vi) a one-third interest in the Grays Ferry Project. All of the Company's cogeneration projects commenced commercial operation in the 1990s. When still known as O'Brien, the Company emerged from bankruptcy on April 30, 1996, under the Plan approved by 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 connection with the consummation of the Plan, all of the shares of O'Brien Class A and Class B Common Stock were canceled and replaced by a new issue of common stock, par value $.01 per share. At that time the Company changed its name to NRG Generating (U.S.) Inc. In addition, NRG Energy advanced approximately $71,200 under loan agreements with the Company and purchased approximately 41.86% of the Common Stock for aggregate consideration of approximately $21,200. NRG Energy also purchased certain subsidiaries of the Company for $7,500 and funded a cash distribution to the O'Brien stockholders aggregating $7,500. 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 5 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. See "Business -- Project Development - -- Co-Investment Agreement with NRG Energy." 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. The following chart summarizes certain information concerning each of the Company's projects. See "Business -- Products and Services -- Energy Segment - -- Parlin Project," "-- Newark Project," "-- Morris Project," "--Pryor Project," "-- PWD Project" and "-- Grays Ferry Project."
PARLIN NEWARK MORRIS PRYOR PWD GRAYS FERRY PROJECT PROJECT PROJECT PROJECT PROJECT PROJECT -------------- -------------- -------------- -------------- -------------- -------------- Capacity (1) 122 MW 58 MW 117 MW 110 MW 22 MW 150 MW Ownership 100.0% 100.0% 100.0% (2) 100% 83.0% (3) 33.3% Availability (4) 95.7% 95.4% 100% 93.7% Standby (5) 93% Ownership date June November November October September January 1991 1990 1998 1998 1993 1998 Type Gas-Fired, Gas-Fired, Gas-Fired, Gas-Fired, Diesel Gas-Fired, Combined Combined Combined Combined Standby Combined Cycle Cycle Cycle Cycle Cycle Power purchaser JCP&L; JCP&L; Equistar OG&E; PSO Authority PECO DuPont (6) Newark Boxboard Expiration year of power purchase 2011 2015 2023 2007 2013 2017 contract Steam purchaser DuPont Newark Equistar Various -- TPEC (7) Boxboard Expiration year of steam purchase 2021 2015 2023 Various -- 2022 contract Fuel provider JCP&L JCP&L Equistar Aquila; PWD Aquila Dynegy Expiration year of fuel supply 2011 2015 2023 Annual 2013 2013 contract Operator POI (8) POI (8) NMO (8) Cogen- OES (9) PUPCO (10) America
(1) Reflects the nameplate capacity of the project. Nameplate capacity may not represent the actual output for a facility at any particular time. (2) Equistar has notified the Morris Project of its intention to exercise an option to purchase a 5% membership interest in Morris LLC, the owner of the Morris Project. A final agreement for the purchase has not been executed. See "Business -- Products and Services -- Energy Segment -- Morris Project." (3) The Company owns substantially all of the assets constituting the PWD Project except for its principal project agreements, which are held by OPCI. All of the common stock of OPCI is held by the Company and all of the 6 preferred stock of OPCI is held by an unrelated third party. The terms of the preferred stock entitle the preferred stockholder to receive dividends equal to 17% of OPCI's earnings (as determined in accordance with the terms of the preferred stock). (4) Reflects availability (as defined in the PPA for the project) during 1998. The Morris Project began commercial operation in November 1998 and the Pryor Project was acquired in October 1998. The Grays Ferry Project began commercial operation in January 1998. (5) The PWD Project consists of two standby/peak shaving facilities which are used only as back-up sources of electricity by the power purchaser. (6) A portion of the power from the Parlin Project is sold to NPI, a wholly-owned subsidiary of NRG Energy, and NPI resells this portion of the power at retail to DuPont under an agreement extending until 2021. (7) TPEC is a wholly-owned subsidiary of Trigen, a partner in the Grays Ferry Partnership. (8) POI and NMO are wholly-owned subsidiaries of NRG Energy. NRG Energy owns approximately 45.2% of the Company's Common Stock. (9) On November 5, 1998 the Company sold OES, a wholly-owned subsidiary of the Company. OES continues to serve as operator of this project under the terms of the existing operations and maintenance contract. (10) PUPCO is a wholly-owned subsidiary of Trigen. PRODUCTS AND SERVICES During fiscal 1998, the Company operated principally in two industry segments: (i) energy -- the development, ownership and operation of cogeneration projects and standby/peak shaving projects through wholly-owned subsidiaries and limited liability companies; and (ii) equipment sales, rental and service -- the sale and rental of power generating, cogenerating and standby/peak shaving equipment and associated services. The Company has determined and previously announced that its equipment sales, rental and service business is no longer a part of its strategic plan. On November 5, 1998 the Company sold OES, a wholly-owned subsidiary of the Company, in a stock transaction to an unrelated third party. The Company is currently pursuing alternatives for the disposition of PUMA, which comprises the remaining operations of the equipment sales, rental and service segment. See Note 18 of the Notes to the Consolidated Financial Statements for financial information with respect to industry segments. ENERGY SEGMENT OVERVIEW. 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 to the successful development and operation of a cogeneration project are permit applications, contracts for sales of electricity and thermal energy, contracts or arrangements for fuel supply and project operation, 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 QFs 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, and possibly to power marketers. 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, petroleum refining, food processing, pharmaceutical and paper industries. The Company owns equity interests in five operating cogeneration projects discussed below -- the Parlin, Newark, Morris, Pryor and Grays Ferry Projects. Revenues from these projects collectively accounted for 65.0%, 60.2%, 49.1% and 63.9% of the Company's total revenues for 1998, 1997, the 1996 transition period and 1996, respectively. 7 The Company owns an 83% equity interest in one operating standby/peak shaving generator project, the PWD Project. Revenues from this project accounted for 5.6%, 6.5%, 5.2% and 4.2% of the Company's total revenues for 1998, 1997, the 1996 transition period and 1996, respectively. Large electrical demand customers use a standby/peak shaving project's power generation equipment as a back-up source of electricity. The availability of an alternative energy source allows these customers to benefit from discounted interruptible energy tariffs from their primary electricity provider. Standby/peak shaving generators typically are required to be available and be capable of providing a specified amount of electricity during peak periods within a limited time. Each of these projects is currently producing revenues under long-term contracts. Business interruption insurance and performance guarantees from the third-party operators have been obtained for the cogeneration projects in connection with the financing of such projects. These arrangements are negotiated and closed prior to commencement of project operations. 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 outage, the Company and any other project owners generally are 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. NEWARK PROJECT. The Newark Project is a 58 MW gas-fired combined cycle cogeneration project located in Newark, New Jersey that utilizes one General Electric Frame 6B combustion turbine with an air inlet chiller system. The Newark Project commenced operation in November 1990. CogenAmerica Newark, a wholly-owned subsidiary of the Company, owns all of the Newark Project. As a QF, the Newark Project sells up to 58 MW of electric power to JCP&L and provides up to 75,000 pounds per hour of steam to Newark Boxboard. In September 1998 the Company completed an upgrade of the electrical and steam production systems and increased the electrical production capacity from 52 MW to 58 MW. The upgrade added a mechanical chiller unit to cool inlet air to the combustion turbine which increased the capacity to supply steam and electricity to Newark Boxboard. The Newark Project accounted for approximately $17,541 and $17,319 in revenues, representing approximately 23.7% and 26.7% of the Company's consolidated revenues, during the years ended December 31, 1998 and 1997, respectively. PARLIN PROJECT. The Parlin Project is a 122 MW gas-fired combined cycle cogeneration project located in Parlin, New Jersey that utilizes two General Electric Frame 6B turbine generators. The Parlin Project commenced operation in June 1991. CogenAmerica Parlin, a wholly-owned subsidiary of the Company, owns all of the Parlin Project. As an EWG, the Parlin Project sells up to 114 MW of electric power to JCP&L and provides up to 150,000 pounds per hour of steam to DuPont. In addition, the Parlin Project sells up to 9 MW of power to NPI, a wholly-owned subsidiary of NRG Energy, which power NPI resells to DuPont. The Parlin Project accounted for approximately $21,527 and $21,685 in revenues, representing approximately 29.1% and 33.5% of the Company's consolidated revenues, during the years ended December 31, 1998 and 1997, respectively. MORRIS PROJECT. The Morris Project is a 117 MW gas-fired cogeneration project located near Morris, Illinois that utilizes three General Electric Frame 6 combustion turbines and three heat recovery steam generators. The Morris Project commenced operation in November 1998. CogenAmerica Morris LLC, a wholly-owned subsidiary of CogenAmerica Funding, currently 8 owns all of the Morris Project. The Morris Project sells as a QF up to an average of 78 MW of electric power and up to 720,000 pounds per hour of steam to Equistar. The Morris Project designed redundancy into the energy production capability of the facility in order to meet Equistar's steam and electric demand, and as a result the Morris Project expects that it will be able to make periodic sales of energy to other customers on a merchant basis. In the Morris ESA, Equistar was granted an option to purchase up to 10% of the Morris Project. In February 1998, Equistar gave notice of its intention to purchase a 5% membership interest in the Morris Project. The parties have not finalized an acquisition agreement. The Morris Project accounted for approximately $5,779 in revenues, representing approximately 7.8% of the Company's consolidated revenues, during the year ended December 31, 1998. The Morris Project commenced commercial operations in November 1998. The Morris facility experienced two unscheduled outages in January 1999 which resulted in service and business interruptions to Equistar. CogenAmerica, Equistar and NRG Energy as provider of construction management services and operation and maintenance services, are currently investigating the matter and are examining their respective rights and obligations with respect to each other and with respect to potentially responsible third parties, including insurers. CogenAmerica's investigation and discussions with Equistar are continuing. The company does not believe that there will be a material adverse impact on the financial statements, however, no assurance can be given as the ultimate outcome of this matter. GRAYS FERRY PROJECT. The Grays Ferry Project is a 150 MW dual-fueled (natural gas and fuel oil) combined-cycle cogeneration plant located in Philadelphia, Pennsylvania that commenced operation in January 1998. The Grays Ferry Partnership owns 100% of the Grays Ferry Project. The Grays Ferry Partnership is a general partnership that is one-third owned by each of CogenAmerica Schuylkill, a wholly-owned subsidiary of the Company, Trigen-Schuylkill Cogeneration Inc., an affiliate of Trigen, and Adwin (Schuylkill) Cogeneration, Inc., an affiliate of PECO. As a QF, the Grays Ferry Project sells all of its electric power to PECO and provides all of its steam to TPEC. In March 1998, PECO declared that the Grays Ferry PPAs were ineffective and ceased paying in full for electricity. The Grays Ferry Partnership instituted a lawsuit against PECO and obtained a preliminary injunction requiring PECO to make electricity payments in full while the litigation proceeds. The Grays Ferry Partnership recorded revenue of approximately $78,126 from PECO in 1998. PECO claims it was not obligated to pay approximately $34,500 of such revenue. The Company has recorded $4,758 of equity in earnings of affiliates representing its pro rata share of the Grays Ferry Partnership's net income for the year ended December 31, 1998. On March 9, 1999 the court issued an order for partial summary judgment in favor of the Grays Ferry Partnership, ruling that PECO's attempted termination of the Grays Ferry PPA was improper. See "Business - Risk Factors -- Grays Ferry Litigation/Default" and "Item 3. -- Legal Proceedings." PRYOR PROJECT. The Pryor Project is a 110 MW combined cycle facility located in Pryor, Oklahoma. Oklahoma Loan Acquisition Corporation ("OLAC"), a wholly-owned subsidiary of the Company, owns 100% of the Pryor Project. The Company acquired all of the capital stock of OLAC on October 9, 1998 from MCPC, which was 50% owned by NRG Energy and 50% owned by Decker Energy, International and associated entities. The facility sells power to OG&E on a dispatchable basis and steam to a number of industrial users including Georgia-Pacific. The facility also sells electricity to PSO when not dispatched by OG&E. Subsequent to the 9 acquisition, the Pryor Project accounted for approximately $3,235 in revenues, representing approximately 4.4% of the Company's consolidated revenues, during the year ended December 31, 1998. PWD PROJECT. The PWD Project comprises two standby peak shaving facilities (each of which has a number of gas and diesel generator sets) located at the PWD's Northeast and Southwest waste water treatment plants in Philadelphia, Pennsylvania. Each facility has a capacity of approximately 11 MW for an aggregate capacity of 22 MW. The PWD Project's Northeast unit commenced operation in May 1993, and its Southwest unit commenced operation in September 1993. OPCI sells the short-start-time capacity of the two units to the Authority, and the Authority has the right to demand energy from the PWD Project at any time on thirty minutes' notice. The biogas portion of each unit (approximately 1 MW in each case) operates as a QF, but the standby generators do not. The PWD Project accounted for approximately $4,134 and $4,206 in revenues, representing approximately 5.6% and 6.5% of the Company's consolidated revenues, during the years ended December 31, 1998 and 1997, respectively. The Company owns substantially all of the assets constituting the PWD Project except for its principal project agreements, which are held by OPCI. All of the common stock of OPCI is held by the Company and all of the preferred stock of OPCI is held by an unrelated third party. The terms of the preferred stock entitle the preferred stockholder to receive dividends equal to 17% of OPCI's earnings (as determined in accordance with the terms of the preferred stock). EQUIPMENT SALES, RENTAL AND SERVICE SEGMENT In 1998, the Company operated its equipment sales, rental and service segment principally through two subsidiaries: OES, which, until it was sold in November 1998, served the United States market; and NRG Generating Limited, a holding company for a number of subsidiaries that operate in the United Kingdom under the common name of PUMA. Revenues from this segment accounted for 29.4%, 33.3%, 41.8% and 28.2% of the Company's consolidated revenues for 1998, 1997, the 1996 transition period and 1996, respectively. The Company has determined and previously announced that its equipment sales, rental and services business is not a part of its strategic plan. Accordingly, on November 5, 1998 the Company sold OES to an unrelated third party for $2,000. The Company is currently pursuing several avenues for the disposition of PUMA, which is not expected to have a material adverse effect on the Company's financial position or results of operations. 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. 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. PUMA exports many of its products primarily through established distributors and dealers in local areas for delivery to markets such as Europe, the Far East, including Hong Kong and mainland China, together with the Middle East and South America. The revenues from the Company's operations in the U.K. are attributable solely to the equipment sales and services segment of the Company's business. The revenues from such operations accounted for 63% of 10 that particular segment's revenue in 1998. See Note 18 of the Notes to the audited Consolidated Financial Statements for financial information with respect to the Company's domestic and foreign operations. PROJECT DEVELOPMENT ACTIVITIES GENERAL The Company, its subsidiaries and affiliates develop, own and manage the operation of power projects which produce electricity and/or thermal energy for sale to industrial and commercial users and to public utilities. The Company follows a disciplined and focused approach to its development efforts. Specifically, the Company focuses its development activities on both the acquisition of operating cogeneration and power generation facilities and the development of greenfield inside-the-fence cogeneration projects. In pursuing new opportunities, the Company plans to adhere to the following stringent selection criteria: PROFITABILITY. The Company does not plan to pursue new greenfield projects or acquisitions merely for the sake of growth, but rather seeks to grow with the addition of profitable projects. MID-SIZE PROJECTS. The Company plans to focus on middle market size projects. DOMESTIC FOCUS. The Company intends to seek opportunities for the foreseeable future exclusively in the U.S., thus avoiding any exposure to foreign political and currency exchange rate risk. MANAGEMENT INPUT AND CONTROL. The Company seeks to have sole ownership of future projects. However, to the extent that a potential partner offers complementary skills and resources, the Company will consider partnering with such a firm, provided that the Company has significant managerial and strategic input. The Company does not plan to pursue purely passive minority stakes. LONG-TERM CONTRACTS. The Company seeks to develop projects that include medium to long-term off-take contracts with creditworthy commercial or industrial offtakers. FUEL RISK. The Company attempts to structure off-take contracts for new projects to avoid the risk of fluctuations in fuel prices. In addition to its internal project development efforts, the Company is party to the Co-Investment Agreement with NRG Energy. Pursuant to this agreement, NRG Energy has agreed to offer to the Company the opportunity to acquire ownership interests in certain power projects initially developed by NRG Energy or with respect to which NRG Energy has entered into a binding acquisition agreement with a third party. The Company continues to believe this Agreement will not serve as the primary source of future project development activities. However, NRG Energy continues to express its commitment to support the business development activities of the Company. See "Business -- Project Development Activities -- Co-Investment Agreement with NRG Energy." 11 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 that are owned by third parties. 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 and all necessary licenses, permits and certifications, conducting contract negotiations with offtakers, 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 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. CO-INVESTMENT AGREEMENT WITH NRG ENERGY Pursuant to the Co-Investment Agreement, NRG Energy has agreed to offer to the Company ownership interests in certain power projects which were 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 exceptions and exclusions, proposed or existing electric power plants within the U.S. which 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, 1999, projects with an aggregate equity value of at least $60,000 or a minimum of 150 net MW. As of the date hereof, ownership interests in projects with an aggregate of more than 240 net MW have been offered under the Co-Investment Agreement, including the 117 MW Morris Project and the 110 MW Pryor Project. Among the exclusions from the Co-Investment Agreement are (i) any ownership interest in a project which is below a level that would cause the project (or its owners) to be in violation of the relevant PPA or applicable state or federal law upon the generation of electricity for sale by such project, (ii) any indirect ownership interest held by NRG Energy in an eligible project arising from NRG Energy's direct or indirect ownership of equity interests in the Company, (iii) any ownership interest in a facility below 25 MW in capacity, and (iv) any ownership interest that is retained in order to later be sold in an "exempt transaction." Exempt transactions include (i) any sale or disposition of all or a portion of an ownership interest that is consummated as a result of a foreclosure or conveyance in lieu of foreclosure of liens or security interests (other than by NRG Energy) encumbering the eligible project or such ownership interest, (ii) any sale or disposition of an ownership interest to a third party that is or will become a participant in the eligible project (such as a local or industry investor, a financial institution or a fuel or equipment supplier), provided that the obligation to sell the interest is incidental to the provision of services or the contribution of assets to the eligible project and is created prior to the execution and 12 delivery of a binding PPA and fuel supply agreement and the completion of an engineering and feasibility study with respect to the project, and (iii) any sale or disposition of an ownership interest to another person as part of a larger transaction involving the sale of all or substantially all of the assets of NRG Energy or the sale of an equity interest in NRG Energy, provided that the person acquiring the ownership interest agrees to be bound by the Co-Investment Agreement with respect to such ownership interest (if such ownership interest has not previously been offered for sale to CogenAmerica pursuant to the Co-Investment Agreement). In January 1998, the Company initiated an arbitration proceeding pursuant to the terms of the Co-Investment Agreement to resolve a dispute with NRG Energy concerning the rights and obligations of the Company and NRG Energy with respect to the Pryor Project. The arbitration proceeding was resolved in favor of the Company and the Company closed on its acquisition of the project on October 9, 1998. NRG Energy has agreed to finance the Company's purchase of ownership interests that may be offered pursuant to its Co-Investment Agreement at commercially competitive terms to the extent funds are unavailable to the Company on comparable terms from other sources. The Co-Investment Agreement requires any such financing to be recourse to the Company and secured by a lien on the ownership interest acquired. The Company is required to repay such financing from the net proceeds of any 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. REGULATION OF THE COMPANY'S PROJECTS In connection with the development and operation of its projects, the Company is significantly affected by federal, state and local energy laws and regulations. SIGNIFICANCE OF QF STATUS With the exception of the Parlin Project and part of the PWD Project, all of the Company's existing electric generating facilities are QFs. Under PURPA, QFs receive certain regulatory and economic benefits. Specifically, the owners of QFs generally receive exemption from the application of PUHCA, rate and other utility regulation under the Federal Power Act, and state laws concerning the rates and the financial and organizational regulation of electric utilities. In addition, PURPA obligates utilities to purchase power offered by QFs at an individual utility's "incremental cost of alternative electric energy," which is sometimes referred to as the "avoided cost standard" and which is defined as the cost that the utility avoids by not generating the power itself or purchasing it from another source. In order to maintain QF status, a generating project must meet certain technological criteria. QFs are required to generate sequentially electricity and thermal energy (generally in the form of steam) under standards prescribed by the FERC. As part of this requirement, every QF is required under FERC regulations to meet certain standards on a calendar year basis relating to the facility's overall thermal efficiency (i.e., conversion of the energy content of fuel into useful electricity and steam) and relative production of electricity versus steam. These standards are referred to collectively as the "operating and efficiency standards." QFs that are qualifying small power production facilities are required to produce a certain amount of their electric power using biomass, waste, renewable resources or geothermal resources as their primary energy source and are generally subject to size restrictions. 13 In addition to the technological requirements for QF status, under FERC regulations no more than 50% of the attributable equity interest in a QF may be owned by an electric utility. The failure of a QF to meet any of the requirements for QF status can result in material adverse consequences to the owner of the facility. Under FERC precedent, for any calendar year in which a QF fails to meet the applicable requirements for QF status, the owner of the facility is required to refund to any utility purchasing power from the facility the difference between the contracted rate for sales of power and the utility's hourly incremental cost of electric energy during the year in question. In addition, contracts for the purchase of power from QFs (including some power purchase contracts for the Company's facilities) frequently provide for termination of the contract or other adverse consequences in the event that the facility is not continuously maintained as a QF. Finally, in the event that a QF is permanently unable to meet the criteria for QF status it risks the loss of all of its regulatory exemptions, most notably the exemption from PUHCA. See "Business -- Risk Factors - -- Loss of QF Status" and "-- Risks Associated with Becoming a Holding Company under PUHCA." SIGNIFICANCE OF EWG STATUS One alternative to QF status is for the owner of a generating project to become an EWG. PUHCA, as amended by the Energy Policy Act of 1992, defines an EWG as a person determined by the FERC to be "engaged directly (or indirectly) and exclusively in the business of ...selling electric energy at wholesale" and meetinG certain other criteria. An EWG is completely exempt from PUHCA, and all companies are free to acquire EWGs without restrictions. Moreover EWGs are permitted to own QFs. The Company has elected to obtain EWG status for its Parlin Project. Because the Parlin Project is not a QF, CogenAmerica Parlin is not exempt from wholesale rate regulation and has therefore filed rates with the FERC as a public utility under the Federal Power Act. In the event that CogenAmerica Parlin lost EWG status, the Company would suffer material adverse consequences under PUHCA. See "Business -- Risk Factors -- Risks Associated with Becoming a Holding Company under PUHCA." SPECIAL STATUS OF PWD PROJECT The PWD Project consists of two identical generation facilities located at separate but proximate sites, each facility consisting of approximately 1 MW of biogas-fired generating equipment and 10 MW of natural gas-fired generating equipment. The owner of the principal project agreements of the PWD Project, OPCI, sells all power produced by the biogas-fired units to a retail customer, the Authority. In addition, OPCI is obligated to provide the Authority with 20 MW of standby power from the natural gas fired generating units upon thirty minutes' notice. The biogas-fired generating units collectively constitute a QF. However, the standby natural gas-fired generation units included within the PWD Project are not part of the PWD QF and therefore do not carry with them any of the regulatory exemptions that otherwise accompany QF status. Nevertheless, the Company believes that the ownership of the natural gas-fired generating units by OPCI does not make it an "electric utility company" under PUHCA, by virtue of 17 CFR 250 of the SEC's regulations. See "Business -- Risk Factors -- Risks Associated witH Becoming a Holding Company under PUHCA." 14 ENVIRONMENTAL LAW AND REGULATIONS In addition to the regulations described above, the Company and its projects are subject to a number of comprehensive environmental laws and regulations, affecting both present and future operations. The laws and regulations applicable to the Company primarily relate to the discharge of emissions into the water and air, but can also include wetlands preservation, waste disposal and noise abatement. Frequently, these laws and regulations require a lengthy and complex process of obtaining licenses, permits and approvals from federal, state and local agencies as well as ongoing reporting and compliance obligations. Compliance may require modification of a project which may increase its cost, extend its completion date or otherwise adversely affect a project before or after its completion. Additional or modified licenses, permits and approvals may be required for any physical or operational changes to the Company's facilities. For some conditions, environmental laws also may impose cleanup or other remediation obligations. In many instances, state laws impose requirements on the Company that are similar to, and in some cases more stringent than, the requirements under federal law. Noncompliance with environmental laws and regulations can result in the imposition of civil or criminal fines or penalties. The current environmental requirements under which the Company's projects operate are subject to amendment, and the Company cannot predict what effect compliance with such amendments may have on the Company's business or operations. As discussed below, the Company believes its facilities are in substantial compliance with applicable environmental requirements. To date, compliance with these environmental regulations has not had a material effect on the Company's earnings and has not required the Company to expend significant capital. In the future, the environmental requirements likely to have the greatest impact on the Company's business and operations are the air quality emission limitations under the Clean Air Act. As originally enacted, the Clean Air Act set guidelines for emission standards for major pollutants (e.g., sulfur dioxide and NOx) from newly constructed stationary sources. The Clean Air Act provides for the regulation, largely through state implementation of federal requirements, of emissions of regulated substances from certain facilities and operations, including an obligation to obtain preconstruction and operating permits for sources of certain air emissions. Each state in which the Company's plants are located implements the requirements of the Clean Air Act through its own state air pollution control statute and implementing regulations. For example, the requirements of the Clean Air Act are implemented in New Jersey through the New Jersey State Air Pollution Act, in Pennsylvania through the Pennsylvania Air Pollution Control Act, in Illinois through the Illinois Environmental Protection Act, and in Oklahoma through the Oklahoma Clean Air Act. Each of the states implements these requirements through regulations promulgated by the EPA and the respective state agencies. In November 1990, significant amendments to the Clean Air Act were adopted by Congress. The 1990 Amendments attempt to reduce emissions from existing sources, particularly previously exempted older power plants. Although the EPA is still implementing the requirements mandated by the 1990 Amendments, the Company believes that air quality regulations in the U.S. will become even more stringent. Currently, the Company believes that all of the Company's operating plants are in compliance in all material respects with applicable federal and state performance standards under the Clean Air Act, the 1990 Amendments and the state statutory and regulatory air quality requirements of the states in which they are located. The 1990 Amendments require the EPA to establish technology-based emission standards 15 for hazardous air pollutants. "Electric utility steam generating units" greater than 25 MW have been excluded from regulation pending completion of an EPA study of hazardous air pollutant emissions from these units to determine whether such regulation is "appropriate and necessary." The final report, issued in February 1998, concluded that regulation of hazardous air pollutant emissions from those units is not necessary with a few possible exceptions. The EPA has decided to conduct further studies of certain utility emissions and will determine at a later date whether regulation of those emissions is appropriate. The EPA plans to issue hazardous air pollutant regulations for combustion sources not included within the scope of the EPA's electric utility study by November 2000. Depending on whether they are finalized, these regulations may require the Company to install additional emission control technology. With the exception of the Pryor Project in Oklahoma, each of the Company's projects are located in an area which does not attain the National Ambient Air Quality Standard for ozone. Accordingly, these projects will be subject to stringent preconstruction review requirements if they undertake "major modifications" to their facilities and they may face more stringent emissions limitations on NOx, a precursor to ozone formation, than facilities that are located in areas attaining the ozone standard. Other requirements apply to "major modifications" to the Pryor Project, as this project is located in an area which meets the National Ambient Air Quality Standards. Additionally, the EPA and several states are in the process of developing more stringent emission limitations to control ground-level ozone across the entire eastern U.S. that may ultimately affect all of the Company's projects. In November 1997, the EPA proposed a rule that would require 22 states in the eastern U.S., including Illinois, New Jersey and Pennsylvania, to make substantial reductions in NOx emissions. If finalized as proposed, this rule potentially could result in the adoption of new NOx emission standards by the affected states. If more stringent NOx standards are adopted by states in which the Company has facilities, the Company could be required to install additional NOx emission control technology at such facilities. In addition, the EPA recently lowered the current National Ambient Air Quality Standards for ground-level ozone and particulate matter, and these new standards will be implemented by the states over the next several years. To comply with the new standards, additional control technology requirements may be required at the Company's existing facilities. The Company does not believe that the effect of any such additional requirements, if implemented, would have a material adverse effect on its financial condition or operations. Section 112(r) of the Clean Air Act requires facilities in certain industries, including electricity generation, to prepare and submit a Risk Management Plan to the EPA which examines certain release scenarios and provides for the public review of this information. The New Jersey Toxic Catastrophe Prevention Act ("TCPA") requires owners of facilities that use an "extraordinarily hazardous substance" to prepare a comprehensive risk management plan covering their use of such substances. The Company's Parlin and Newark Project facilities in New Jersey are subject to these requirements because anhydrous ammonia is used in the air pollution control systems operating at the facility. The TCPA requirements are more stringent than the federal requirements. Although Illinois does not currently have a state program similar to the TCPA applicable to the electricity generation industry, the state is currently developing a program with similar requirements. Pennsylvania does not currently have a similar state program requiring risk management plans for electricity generating units. The Company believes that it is in material compliance with the Clean Air Act and TCPA requirements concerning risk management programs. 16 In addition to the regulations described above, the 1990 Amendments established the North East Ozone Transport Region, which required northeastern states, including New Jersey and Pennsylvania, to work together to determine whether to adopt more stringent controls on the pollutants that contribute to the formation of low-level ozone (i.e., volatile organic compounds and NOx). Pursuant to a September 27, 1994 Memorandum of Understanding between the member states of the North East Ozone Transport Region, New Jersey and Pennsylvania have each proposed regulations to implement a region-wide budget for NOx emissions. While some of the Company's operating plants will be subject to this new rule (as presently drafted), and thus subject to stricter emission limitations, the Company believes that the new rules will not have a material impact on its ability to maintain its present level of operations. The Federal Clean Water Act (the "Clean Water Act"), the New Jersey Water Pollution Control Act (the "Water Pollution Control Act"), the Pennsylvania Clean Streams Law ("the Clean Streams Law"), the Illinois Environmental Protection Act ("the Illinois Environmental Protection Act"), and other water quality laws and regulations in other states establish rules regulating the discharge of pollutants into surface and ground waters. Typically, these water quality laws establish requirements for municipally-owned sewage treatment plants, including pretreatment requirements for industrial users of those plants. Each local municipal sewage authority has established regulations governing connections to and discharges into its sewer system and treatment plants. In accordance with these regulations, the Company is required to obtain permits for the discharge of its wastewater and storm water runoff. The Company believes that it is in substantial compliance with applicable discharge requirements under the Clean Water Act, the Water Pollution Control Act, the Clean Streams Law, the Illinois Environmental Protection Act, and other State water quality regulations. The Resource Conservation and Recovery Act ("RCRA") regulates the generation, treatment, storage, handling, transportation and disposal of solid and hazardous wastes. The Company generates certain non-hazardous and hazardous wastes that are subject to the requirements of RCRA and similar state statutes. The Company believes that it is in substantial compliance with both the RCRA and the similar state statutes. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), requires cleanup of sites from which there has been a release or threatened release of hazardous substances. CERCLA authorizes the EPA and certain other parties to take any necessary response action at Superfund sites, including ordering potentially responsible parties ("PRPs") that are liable for the release to take or pay for such actions. PRPs are broadly defined under CERCLA to include past and present owners and operators of, as well as generators of wastes sent to, a site. In addition, the New Jersey Spill Act ("Spill Act"), the Pennsylvania Hazardous Site Cleanup Act ("Site Cleanup Act"), and the Illinois Environmental Protection Act, and other state laws and regulations, like many other state superfund laws, impose similar liability under state law for discharges of hazardous substances (including petroleum products) and, under certain circumstances, authorizes the collection of treble damages from a responsible party. Similar to CERCLA, PRPs are broadly defined to include owners and operators of the facility where the discharge occurred, the owners of the hazardous substance that is discharged, or anyone who has caused or allowed the discharge to occur. As of the present time, the Company is not subject to liability for any Superfund or other state superfund matters. However, the Company generates certain wastes, including hazardous wastes, and sends certain of its wastes to third-party waste 17 disposal sites. As a result, there can be no assurance that the Company will not incur liability under CERCLA, the Spill Act, the Site Cleanup Act, the Illinois Environmental Protection Act, or other state statutes in the future. State laws and regulations also requires facilities that store significant quantities of petroleum products or other hazardous substances to prepare detailed discharge prevention containment and countermeasure plans and discharge cleanup and removal plans. The Company believes that it is in substantial compliance with these requirements with respect to its plants. 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 the 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. In addition, increased competition is leading to the development of a market for merchant plants. Merchant plants are power generation facilities that sell all or a portion of their electricity into the competitive market rather than pursuant to long-term power sales agreements. The operation of a merchant plant is essentially participation in a commodity market, which creates certain risk exposures, including, among other things, underlying price volatility, credit risk and variation in cash flows. Even though many of its potential competitors have substantially greater resources than the Company, management 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. PRINCIPAL CUSTOMER The Company derived 50%, 57%, 46% and 62% of its revenues in 1998, 1997, the 1996 transition period and 1996, respectively, from JCP&L as a result of the operation of the Newark and Parlin facilities. Approximately 53% and 60% of the Company's revenues during 1998 and 1997, respectively, were derived from the operations of the Parlin and Newark Projects. JCP&L buys substantially all of the power from these projects. For at least the near-term, the Company will continue to be substantially dependent on the operations of these projects. A material decrease in the results of operations for such projects would likely have a material adverse effect on the Company's results of operations and financial condition. The success of the Company will continue to depend in part on its ability to diversify its project portfolio. There can be no assurance that the Company will be successful in its diversification efforts. EMPLOYEES As of December 31, 1998, the Company had approximately 90 full-time employees, including 33 in the energy business and approximately 57 in its equipment, sales and services business. 18 BACKLOG Total production backlog relating to the Company's equipment sales and services business was $4,054 and $3,900 at December 31, 1998 and 1997, respectively. INTELLECTUAL PROPERTY The Company and its subsidiaries do not own any patents or trademarks, but the Company uses the trade name "CogenAmerica." It has applied for federal trademark registration of its full name and its logo (which includes this trade name). RISK FACTORS INFLUENCE BY NRG ENERGY NRG Energy owns approximately 45.2% of the Company's outstanding Common Stock. Five of the Company's eight directors are executive officers of NRG Energy. NRG Energy is a major domestic and international developer of independent power projects. As a result, persons who simultaneously serve as directors or executive officers of the Company and as directors or executive officers of NRG Energy may be subject to conflicts of interest with respect to business opportunities or other investments which may be of interest to both NRG Energy and the Company. While the Company's Amended and Restated Articles of Incorporation impose supermajority requirements in certain circumstances, and while the Independent Directors Committee of the Board of Directors (the "Independent Directors' Committee") has exclusive jurisdiction over the Company's contractual relations and other material transactions with NRG Energy (including under the Co-Investment Agreement), NRG Energy's share ownership may permit it effectively to substantially influence the outcome of matters which may be submitted to a vote of the shareholders, including the election of directors of the Company (other than the members of the Independent Directors Committee, who are nominated by the Independent Directors' Committee rather than by the Board of Directors). NRG Energy also may exert significant influence over the Company's business and affairs through its representation on the Board of Directors and its other relationships with the Company, including the Co-Investment Agreement. See "Business -- Project Development Activities -- Co-Investment Agreement with NRG Energy." A subsidiary of NRG Energy also serves as the operator of the Company's Parlin and Newark Projects, and another subsidiary of NRG Energy is serving as the operator of the Company's Morris Project. A subsidiary of NRG Energy also purchases power from the Parlin Project and sells such power to DuPont. NRG Energy, in its business relationships with the Company and in its role as a shareholder of the Company, may have interests which conflict with those of the Company and the other stockholders of the Company under certain circumstances. SUBSTANTIAL LEVERAGE As of December 31, 1998, the Company had approximately $285,096 of long-term debt, including approximately $219,683 of subsidiary-level indebtedness. The Company may also incur additional indebtedness in the future. Accordingly, the Company has significant debt service obligations. The extent of the Company's leverage may have important consequences for the Company and its shareholders, including, but not limited to, the following: (i) the ability of the Company to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if necessary, may be impaired or such financing may not be available on terms acceptable to the Company; (ii) a substantial portion of the Company's cash flow will be used to 19 pay the Company's interest expense and under certain conditions to repay indebtedness, which will reduce the funds that would otherwise be available to the Company for its operations and future business opportunities; (iii) a substantial decrease in net operating cash flows or an increase in expenses of the Company could make it difficult for the Company to meet its debt service obligations and force it to modify its operations; (iv) the Company may be more highly leveraged than its competitors, which may place it at a competitive disadvantage; and (v) the Company's high degree of leverage may limit its flexibility to react to changes in its operating environment or economic conditions, making it more vulnerable to a downturn in its business or the economy generally. ENERGY PRICE FLUCTUATIONS AND FUEL SUPPLY COSTS The Company's 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, and have resulted, in 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Comparison of the year ended December 31, 1998, 1997 the 1996 TransitioN Period and 1996 -- Costs and Expenses." SEASONALITY The Company's quarterly operating results have varied in the past and may vary significantly in the future depending on many factors, including among others: unusual weather conditions in the areas served by the Company's projects, routine or unanticipated maintenance that may require an outage and general economic conditions. Further, the Company's operating results have been, and are expected to continue to be, highly sensitive to seasonal variations. The Company's operations have historically been seasonal in nature with a disproportionate percentage of revenues and earnings recorded in the Company's first and third quarters, the winter and summer seasons. Based upon all of the foregoing factors, the Company believes that its revenues, expenses and operating results are likely to vary significantly from quarter to quarter in the future, that period-to-period comparisons of its results of operations may not be meaningful and that, in any event, such comparisons should not be relied upon as indications of future performance. PROJECT DEVELOPMENT AND CONSTRUCTION RISKS The projects that the Company develops are generally large and complex and require months or years to complete. Among the principal objectives 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, and arranging project financing and turnkey construction. These objectives are subject to a host of uncertainties which in many instances cannot be anticipated. Moreover, these objectives often are achieved independently of one another, and success in achieving one objective does not necessarily increase the likelihood of achieving others. There can be no assurance that the Company will be able to obtain satisfactory projects from its own development efforts, under the Co-Investment Agreement or from other sources, and satisfactory project agreements, construction contracts, necessary licenses and permits or satisfactory financing commitments in respect of such projects, or that any projects will ultimately be completed. The Company may from time to time 20 devote substantial resources to the pursuit of competitively bid projects that it is not awarded or projects that ultimately prove to be undesirable investments. If its development efforts are not successful, the Company may abandon a project under development. At the time of abandonment, the Company would expense all capitalized development costs incurred in connection with the project and could incur additional losses associated with any related contingent liabilities. Such losses could have a material adverse effect on the Company's results of operations and financial position. The construction, expansion or refurbishment of a cogeneration facility also involves many risks, including supply interruptions, work stoppages, labor disputes, weather interferences, unforeseen engineering, environmental and geological problems and unanticipated cost overruns and start-up problems, including the breakdown or failure of equipment or processes and performance below expected levels of output or efficiency. Such risks may result in reduced revenues or increased expenses and may cause the Company to incur other unrecovered costs. Moreover, most PPAs permit the purchaser to terminate the agreement or impose penalties if the commercial operation of the project is not achieved by a specified date. As a result, any material unremedied delay in, or unsatisfactory completion of, construction of the Company's projects could have a material adverse effect on the Company's business or financial condition. Insurance is maintained to protect against certain of these construction and start-up risks, warranties are generally obtained for limited periods relating to the construction of a new plant and its equipment to varying degrees, and contracts and equipment suppliers are obligated to meet certain performance levels. Such insurance, warranties or performance guarantees may not be adequate to cover lost revenues or increased expenses and, as a result, a project may be unable to fund principal and interest payments under its financing obligations (if any) and may operate at a loss. A default under such a financing obligation could result in the Company losing its interest in any such new cogeneration facility and could have other material adverse effects on the Company's financial condition or results of operations. This could occur if, for example, any such default were to result in defaults under other material contracts or financing obligations of the Company. GENERAL OPERATING UNCERTAINTIES The operation of a power plant involves many risks, including the breakdown or failure of power generation equipment, pipelines, transmission lines or other equipment or processes, fuel interruption, and performance below expected levels of output or efficiency. Moreover, new plants have no operating history and may employ recently developed and technologically complex equipment. Each facility may depend on a single or limited number of entities to purchase electricity or thermal energy, to supply water, to supply fuel, to transport fuel, to dispose of wastes or to transport or "wheel" electricity. The failure of any such power purchaser, steam host, water or fuel supplier, fuel transporter, wheeling utility or other relevant project participant to fulfill its contractual obligations, or the occurrence of other unforeseen construction, start-up or operating difficulties, could have a material adverse effect on the profitability of the project and on the Company. The foregoing operating risks may result in lost revenues or increased expenses, including higher maintenance costs and penalties. Ultimately, the foregoing operating uncertainties can cause a facility to be unable to perform its obligations under its power and steam purchase agreements, triggering default provisions in financing agreements which could render the project insolvent and which could have a material adverse effect on the ability of the Company to service its debt. 21 RISKS INVOLVED IN MAKING MINORITY INVESTMENTS IN PROJECTS The Company currently conducts its business primarily through direct and indirect wholly-owned or majority-owned subsidiaries. However, one of the Company's current project investments, the Grays Ferry Project, consists of a minority ownership interest in a project entity, which is operated by one of the Company's partners. Moreover, future investments in projects may also take the form of minority interests. The Company's ability to control the development, construction, acquisition or operation of such projects may be limited. The Company may be dependent on its co-investors to construct and/or to operate such projects. There can be no assurance that such co-investors will have the same level of experience, technical expertise, human resources management and other attributes as the Company. Any such co-investor may have conflicts of interests, including those relating to its status as a provider of goods or services to, or a purchaser of power or other services from, the project. The approval of its co-investors also may be required for distributions of funds from projects to the Company. DEPENDENCE ON CERTAIN CUSTOMERS AND PROJECTS All of the Company's energy segment earnings are derived from six projects. The Company's projects (including projects in which it may make minority investments) typically rely on a single customer or a few customers to purchase all or substantially all of a facility's output, in each case under long-term agreements that provide the support for any project debt used to finance such facilities. The failure of any one customer to fulfill its contractual obligations to a facility could have a material adverse effect on such facility's financial results and on the Company. As a result, the financial performance of such facilities is dependent on continued performance by customers of their obligations under such long-term agreements. Regulatory developments, including deregulation and industry restructuring activity, may cause major customers to attempt to renegotiate contracts or otherwise fail to perform their contractual obligations. In addition, major customers may attempt to renegotiate contracts or otherwise fail to perform their contractual obligations if changes in current economic conditions make the terms of such contracts less favorable to such customers. The occurrence of one or more of these events could adversely affect the Company's results of operations and financial condition. 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 short-term electric purchases through power marketers and the acceleration of deregulation in the electric utility market. This increased competition may adversely affect the Company's ability to secure future projects and project-level financing, increase project development costs and reduce the Company's operating margins and returns on any future project investments. Any such developments could have a material adverse effect on the Company's results of operations and financial condition. See "Business -- Competition." LOSS OF QF STATUS With the exception of the Parlin Project and part of the PWD Project, all of the Company's 22 existing electric generating facilities are QFs. In order to maintain QF status, a generating project must meet certain technological criteria. QFs that are qualifying cogeneration facilities are required to generate sequentially electricity and thermal energy (generally in the form of steam) under standards prescribed by the FERC. As part of this requirement, every QF is required under FERC regulations to meet certain standards on a calendar year basis relating to the facility's overall thermal efficiency (i.e., conversion of the energy content of fuel into useful electricity and steam) and relative production of electricity versus steam. Accordingly, it is critical for QFs to have steam sales contracts that require the purchaser to accept amounts of steam which allow the facility to meet the requisite operating and efficiency standards. Cessations or material reductions in steam purchases from a cogeneration facility carry the risk that the facility will fail to meet the FERC's operating and efficiency standards, resulting in a loss of QF status. Similarly, for QFs a critical factor in maintaining QF status is the use of enough biomass, waste, renewable resources or geothermal resources (rather than supplementary fossil fuels) to meet the requirements of the FERC's regulations concerning primary energy source. The failure of a QF to meet any of the requirements for QF status can result in material adverse consequences to the owner of the facility. Under FERC, for any calendar year in which a QF fails to meet the applicable requirements for QF status, the owner of the facility is required to refund to any utility purchasing power from the facility the difference between the contracted rate for sales of power and the utility's hourly incremental cost of electric energy during the year in question. In addition, contracts for the purchase of power from QFs (including some power purchase contracts for the Company's facilities) frequently provide for termination of the contract or other adverse consequences in the event that the facility is not continuously maintained as a QF. Finally, in the event that a QF is permanently unable to meet the criteria for QF status it risks the loss of all of its regulatory exemptions, most notably the exemption from PUHCA, as discussed below. See "Business -- Regulation of the Company's Projects -- Significance of QF Status." RISKS ASSOCIATED WITH BECOMING A HOLDING COMPANY UNDER PUHCA In the event that the Company becomes a "holding company" under PUHCA, the Company would suffer material adverse consequences. The following situations would cause the Company to become a holding company under PUHCA: (i) the loss of QF status for one of the Company's generating projects, which would cause the subsidiary owning the project to become an "electric utility company" under PUHCA; (ii) the loss of EWG status for CogenAmerica Parlin, which would also cause such subsidiary to become an electric utility company under PUHCA; and (iii) the loss of OPCI's exemption under 17 CFR ss. 250.7(a) of the SEC's regulations, which would result in OPCI becoming aN electric utility company under PUHCA. See "Business -- Regulation of the Company's Projects -- Significance of QF Status," "-- Significance of EWG Status" and "-- Special Status of PWD Project." One of the requirements under the FERC's regulations for determining QF status of a project is that utility ownership be limited to 50% of the equity interest in the project. Thus, because all of the QFs in which the Company has an ownership interest are either: (i) more than 50% owned by the Company, or (ii) partially owned by a utility whose ownership interest together with the Company's interest exceeds 50%, if the Company became a holding company under PUHCA the QF status of all of the Company's QF projects could automatically be lost, at least temporarily. The loss of QF status for these projects could trigger refund obligations and power sales contract terminations, as described above, and ultimately could require portions of 23 the projects to be divested in order for QF status to be regained. Other consequences of the Company becoming a holding company under PUHCA are difficult to predict but could ultimately include a requirement that the Company divest itself completely of certain of its generating projects and a requirement that NRG Energy, the owner of 45.2% of the Company's stock, divest itself of its interest in the Company. RESTRUCTURING OF THE ELECTRIC UTILITY INDUSTRY The U.S. Congress is considering legislation to repeal PURPA entirely, or at least to repeal the obligation of utilities to purchase from QFs thereunder. There is support for grandfathering 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. Under PURPA, QFs receive the benefit of exemptions from the Federal Power Act, PUHCA and certain aspects of state utility regulation. In addition, PURPA obligates utilities to purchase power offered by QFs at an individual utility's "incremental cost of alternative electric energy," which is sometimes referred to as the "avoided cost" standard and which is defined as the cost that the utility avoids by not generating the power itself or purchasing it elsewhere. All of the Company's projects other than the Parlin Project and a part of the PWD Project are QFs. Since the Company benefits from PURPA, the Company's business could experience a material adverse effect in the event of the repeal of, or a significant change in, PURPA. Various bills have also proposed repeal of 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 requirements of PUHCA which, as interpreted by the SEC, tend to require that retail electric systems owned by the same entity be capable of either electric integration or to be operated in geographic proximity. With the repeal of PURPA and PUHCA, competition for independent power generators from vertically integrated utilities would likely increase. Any such repeal could have a material adverse effect on the Company's financial position or results of operations. While the Company does not believe that ongoing federal and state restructuring efforts necessarily will 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 of the Company's Projects." GRAYS FERRY LITIGATION/DEFAULT PECO, the electric power purchaser from the Grays Ferry Project, has asserted that its PPAs with the Grays Ferry Partnership are not effective based on an alleged denial of cost recovery by the Pennsylvania Public Utility Commission. PECO claims that it is not obligated to pay the rates set forth in the agreements. PECO has further taken the position that, in any event, its total liability under each of the two PPAs is limited to $25,000 ($50,000 in aggregate) by the terms of such agreements. The Company and the Grays Ferry Partnership are in litigation with PECO over its obligations under such agreements. After initially refusing to pay the rates set forth in the PPAs and making payments for the electricity purchased from the Grays Ferry Project at substantially lower rates, PECO has been ordered by the court in which the litigation is pending to comply with the PPAs pending the outcome of the litigation. Following the court order, PECO has resumed paying under protest the full contract rates and, as of December 31, 1998, has paid all amounts then due under the applicable PPAs. Through December 31, 1998, the Grays Ferry Partnership has recorded revenue of approximately $78,100 of which $34,500 represents the amount which PECO 24 claims it was not obligated to pay. For the year ended December 31, 1998, the Company has recorded $4,758 of equity in earnings of affiliates representing its pro rata share of the Grays Ferry Partnership's net income for such period. In addition, the Company's investment in the Grays Ferry Partnership totaled $17,603 on December 31, 1998. On March 9, 1999 the court issued an order for partial summary judgment in favor of the Grays Ferry Partnership, ruling that PECO's attempted termination of the Grays Ferry PPAs was improper. Due to PECO's actions the Grays Ferry Partnership defaulted in the payment of certain interest due under its principal credit agreement, which default has since been cured, and the Grays Ferry Partnership continues to be in default under other provisions of such credit agreement. As a result of such continuing default, the lenders under the credit agreement have the ability generally to prevent the Grays Ferry Partnership from distributing or otherwise disbursing cash held or generated by the Grays Ferry Project. These rights, if exercised by the lenders, could prevent the Grays Ferry Partnership from meeting its obligations to suppliers and others and from disbursing or otherwise distributing cash to its partners during the pendency of the litigation. Any of these actions by the Grays Ferry Partnership's lenders could materially disrupt the Grays Ferry Partnership's relations with its suppliers and could have other potentially material adverse effects on its operations and profitability and, ultimately, on the Company's earnings and financial position. While the Grays Ferry Partnership's lenders have allowed the partnership to meet its obligations to suppliers, the partnership received a notice of default from the lenders on June 22, 1998, for the failure to timely convert the loan used for construction purposes to a term loan. This failure occurred due to the event of default created by the alleged termination of the PPAs by PECO and due to the inability of the Grays Ferry Partnership to declare either provisional or final acceptance of the Grays Ferry Project due to the existence of certain unresolved issues between the Grays Ferry Partnership and Westinghouse Electric Corporation ("Westinghouse") regarding completion and testing of the Grays Ferry Project. These issues between the partnership and Westinghouse are the subject of an ongoing arbitration proceeding. Until there is a satisfactory resolution of the litigation with PECO, the lenders will not allow distributions for the payment of subordinated fees, payments to the subordinated debt lender or equity distributions to the partners. In lieu of making these payments, Grays Ferry Partnership will be required to apply such amounts to the repayment of the loan. During 1998, $18,700 was applied to the repayment of the loan. The Company further expects that at the time the litigation is resolved the loan will be restructured. The Company believes that if PECO's position ultimately is sustained, the Grays Ferry Partnership would cease to be economically viable as currently structured and the Company's earnings and financial position could be materially adversely affected in various respects. Such effects could include, without limitation, a material adjustment to the value of the Company's investment in the Grays Ferry Project, the loss of future income and cash flows from the project and other material costs which would not be recovered. See "Item 3. - --Legal Proceedings." ENVIRONMENTAL LAW AND REGULATION The Company and its projects are subject to a number of comprehensive environmental laws and regulations, affecting many aspects of its present and future operations. The laws and regulations applicable to the Company primarily involve the discharge of emissions into the water and air, but can also include wetlands preservation, waste disposal and noise abatement. Frequently, these laws and regulations require a lengthy and complex process of obtaining licenses, permits and approvals from federal, state and local agencies as well as ongoing reporting and 25 compliance obligations. Compliance may require modification of a project which may increase its costs, extend its completion date or otherwise adversely affect a project before or after its completion. Additional or modified licenses, permits and approvals may be required for any physical or operational changes to the Company's facilities. For some conditions, environmental laws also may impose cleanup or other remediation obligations. In many instances, state laws impose requirements on the Company that are similar to, and in some cases more stringent than, the requirements under federal law. Noncompliance with environmental laws and regulations can result in the imposition of civil or criminal fines or penalties. The current environmental requirements under which the Company's projects operate are subject to amendment, and the Company cannot predict what effect compliance with such amendments may have on the Company's business or operations. In the future, the environmental requirements likely to have the greatest impact on the Company's business and operations are air quality emission limitations under the Clean Air Act. As originally enacted, the Clean Air Act set guidelines for emission standards for major pollutants (e.g., sulfur dioxide and nitrogen oxide ("NOx")) from newly constructed stationary sources. The Clean Air Act provides for the regulation, largely through state implementation of federal requirements, of emissions of regulated substances from certain facilities and operations, including an obligation to obtain preconstruction and operating permits for sources of certain air emissions. Each state in which the Company plants are located implements the requirements of the Clean Air Act through its own state air pollution control statute and implementing regulations. In New Jersey, for example, the requirements of the Clean Air Act are implemented through the New Jersey State Air Pollution Act. In Pennsylvania, the requirements are implemented through the Pennsylvania Air Pollution Control Act, in Illinois through the Illinois Environmental Protection Act, and in Oklahoma through the Oklahoma Clean Air Act. Each of the states implement these requirements through regulations promulgated by the U.S. Environmental Protection Agency (the "EPA") and the respective state agencies. In November 1990, significant amendments to the Clean Air Act were adopted by Congress (the "1990 Amendments"). The 1990 Amendments attempt to reduce emissions from existing sources, particularly previously exempted older power plants. Although the EPA is still implementing the requirements mandated by the 1990 Amendments, the Company believes that air quality regulations in the U.S. may become even more stringent. The 1990 Amendments require the EPA to establish technology-based emission standards for hazardous air pollutants. "Electric utility steam generating units" greater than 25 MW have been excluded from regulation pending completion of an EPA study of hazardous air pollutant emissions from these units to determine whether such regulation is "appropriate and necessary." The final report, issued in February 1998, concluded that regulation of hazardous air pollutant emissions from those units is not necessary with a few possible exceptions. The EPA has decided to conduct further studies of certain utility emissions and will determine at a later date whether regulation of those emissions is appropriate. The EPA plans to issue hazardous air pollutant regulations for combustion sources not included within the scope of the EPA's electric utility study by November 2000. Depending on whether they are finalized, these regulations may require the Company to install additional emission control technology. The EPA and several states are in the process of developing more stringent emission limitations to control ground-level ozone. In November 1997, the EPA proposed a rule that would require 22 states in the Eastern U.S., including Illinois, New Jersey and Pennsylvania, to make 26 substantial reductions in NOx emissions. If finalized as proposed, this rule potentially could result in the adoption of new NOx emission standards by the affected states. If more stringent NOx standards are adopted by states in which the Company has facilities, the Company could be required to install additional NOx emission control technology at such facilities. In addition, the EPA recently lowered the current National Ambient Air Quality Standards for ground-level ozone and particulate matter, and these new standards will be implemented by the states over the next several years. To comply with the new standards, additional control technology requirements may be required at the Company's existing facilities. In addition to the above, the 1990 Amendments established the North East Ozone Transport Region which required northeastern states, including New Jersey and Pennsylvania, to work together to determine whether to adopt more stringent controls on the pollutants that contribute to the formation of low-level ozone (i.e., volatile organic compounds and oxides of nitrogen). Pursuant to a September 27, 1994 Memorandum of Understanding between the member states of the North East Ozone Transport Region, New Jersey and Pennsylvania have each proposed regulations to implement a region-wide budget for nitrogen oxide emissions. 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. There can be no assurance that the Company will be able to arrange the financing needed for additional projects. Also, limitations in the Company's credit agreements may limit its ability to finance future projects on a recourse basis, thereby requiring the Company to finance such future projects on a substantially nonrecourse basis, which may either be unavailable, or available on terms which may not be acceptable to the Company. In order to access capital on a substantially nonrecourse basis in the future, the Company may have to make larger equity investments in, or provide more financial support for, its subsidiaries and other project entities. The Company's ability to arrange financing of additional projects and the costs of such capital are dependent on numerous factors, including general economic and capital market conditions, credit availability from banks and other financial institutions, investor confidence in the Company, its partners and in the independent power market, the success of current projects, the perceived quality of new projects and applicable tax and securities laws. If the Company is unable to secure such financing, or if the terms of such financing are not satisfactory to the Company, its business could be materially adversely affected. See "Business -- Project Development Activities." RECENT HISTORY OF LOSSES The Company filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code on September 28, 1994. Formerly known as O'Brien, the Company emerged from bankruptcy on April 30, 1996, under the Plan approved by the Bankruptcy Court. The Company reported net income of approximately $8,002, $23,352 and $6,423 for the fiscal years ended December 31, 1998, December 31, 1997 and the six months ended December 31, 1996, respectively. However, due in part to costs associated with its bankruptcy proceeding, the Company incurred losses of approximately $17,713 and $40,919 for the fiscal years ended June 30, 1996, and June 30, 1995, respectively. These losses and the Company's bankruptcy 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, 27 rendering it more difficult for the Company to raise capital or otherwise to conduct project development activities. RISKS ASSOCIATED WITH FOREIGN OPERATIONS The Company does not generate power outside of the U.S. Its foreign operations consist of its equipment sales and rental operations based in the U.K. which sell in various international markets and which are subject to the risks inherent in doing business in foreign countries, including changes in currency exchange rates, currency restrictions, changes in duties and quotas, introduction of tariff or non-tarriff barriers, and economic, political and regulatory changes. The Company currently does not engage in hedging transactions. There can be no assurance that any of the factors described above will not have a material adverse effect on the Company's business, operating results and financial condition. See "Business -- Products and Services - -- Equipment Sales, Rentals and Services Segment." YEAR 2000 The Company has implemented a Year 2000 compliance program designed to ensure that the Company's computer systems and applications will function properly beyond 1999. The Company believes that it has allocated adequate resources for this purpose and expects its Year 2000 conversions to be completed on a timely basis. In light of its compliance efforts, the Company does not believe that the Year 2000 issue will materially adversely affect operations or results of operations, and does not expect implementation to have a material impact on the Company's financial statements. However, there can be no assurance that the Company's systems will be Year 2000 compliant prior to December 31, 1999, or that the failure of any such system will not have a material adverse effect on the Company's business, operating results and financial condition. In addition, to the extent the Year 2000 problem has a material adverse effect on the business, operations or financial condition of third parties with whom the Company has material relationships, such as venders, suppliers and customers, the Year 2000 problem could have a material adverse effect on the Company's business, results of operations and financial condition. RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS This Report on Form 10K 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. The Company also may make other such forward-looking statements in the future. Without limiting the generality of the foregoing, the words "believe," "anticipate," "estimate," "expect," "intend," "plan," "seek" and similar expressions, when used in this Report on Form 10-K or in such other statements are intended to identify forward-looking statements. All forward-looking statements and information in this Report on Form 10-K or in such other statements are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and are intended to be covered by the safe harbor created thereby. Such forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, without limitation, those discussed above. The Company is unable to control or predict many of these factors, and investors are cautioned not to put undue reliance on such forward-looking statements. The Company disclaims any obligation to update or review any forward-looking statements contained in this Report on Form 10-K or in any statement referencing the risk factors and other cautionary statements set forth in 28 this Report on Form 10-K, whether as a result of new information, future events or otherwise. ITEM 2. PROPERTIES. The Company's corporate headquarters are located in suburban Minneapolis, Minnesota. On June 4, 1998, the Company entered into a lease with respect to approximately 6,745 square feet of space for its corporate headquarters which continues until July 17, 2003. The headquarters for PUMA's executive offices and its principal manufacturing facility (each of which serve the Company's equipment sales, rentals and services segment) are located in Ash, Canterbury, Kent, United Kingdom. The Newark, PWD, Parlin, Grays Ferry, Pryor and Morris project entities (each of which is in the Company's energy segment) lease property for the sites of its facilities from the commercial user of electric or thermal energy for a nominal fee. The lease terms equal or exceed that of each respective electric or thermal supply agreement. Management believes that these leased premises are suitable and adequate for the Company's projects. ITEM 3. LEGAL PROCEEDINGS. The Company or a subsidiary is party to the following legal proceedings: 1. 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, O'Brien Environmental Energy, Inc. ("O'Brien"), during the class period of O'Brien's bankruptcy. The plaintiffs alleged various violations of the Federal securities laws, claiming 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. The parties in this action have agreed on a proposed settlement, which was filed with the District Court for its approval on March 18, 1999. Management does not expect the outcome of this litigation to have a material adverse effect on the Company. 2. 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 objected to treatment of the class under the Plan. This matter has been consolidated with the Stevens class action case described in paragraph number 1 above. The parties in this action have agreed on a proposed settlement, and on February 11, 1999, filed the proposed settlement with the District Court for its approval. Management does not expect the outcome of this litigation to have a material adverse effect on the Company. 3. IN RE: O'BRIEN ENVIRONMENTAL ENERGY, Case No. 94-26723, U.S. Bankruptcy Court for the District of New Jersey, filed September 29, 1994. Calpine Corporation ("Calpine"), an unsuccessful bidder for the acquisition of O'Brien in the bankruptcy case, filed an application for allowance of an administrative claim for approximately $4,500 in break-up fees and expenses in the bankruptcy case. The Bankruptcy Court denied the application 29 in full, by order dated November 27, 1996. Calpine filed an appeal from the Bankruptcy Court's order denying its application. On May 29, 1998 the United States District Court for the District of New Jersey upheld the Bankruptcy Court's order. Calpine filed an appeal with the United States Third Circuit Court of Appeals on June 26, 1998. The appeal has been briefed, but oral arguments have not yet occurred. Management does not expect the outcome of its bankruptcy case to have a material adverse effect on the Company. 4. GRAYS FERRY COGENERATION PARTNERSHIP, TRIGEN-SCHUYLKILL COGENERATION, INC., NRGG (SCHUYLKILL) COGENERATION INC. AND TRIGEN-PHILADELPHIA ENERGY CORP. V. PECO ENERGY COMPANY, ADWIN (SCHUYLKILL) COGENERATION, INC. AND THE PENNSYLVANIA PUBLIC UTILITY COMMISSION, Court of Common Pleas Philadelphia County, April Term 1998, No. 544, filed April 9, 1998. This action arose out of PECO's notification to the Grays Ferry Partnership that PECO believes its PPAs with the Grays Ferry Partnership relating to the Grays Ferry Project are no longer effective and PECO's refusal to pay the electricity rates set forth in the agreement based on its allegations that the Pennsylvania Public Utility Commission has denied cost recovery of the PPAs in retail electric rates. The Grays Ferry Partnership's complaint against PECO asserts claims which include breach of contract, fraud, breach of implied covenant of good faith, conversion, breach of fiduciary duties and tortious interference with contract. The Plaintiffs are seeking to enjoin PECO from terminating the PPAs and to compel PECO to pay the rates set forth therein. The Plaintiffs also are seeking actual and punitive damages and attorneys' fees and costs. On April 22, 1998, the court allowed the Grays Ferry Partnership to file an amended complaint to discontinue the suit against the Pennsylvania Public Utility Commission without prejudice. On May 5, 1998, the Grays Ferry Partnership obtained a preliminary injunction pending the outcome of the litigation enjoining PECO from terminating the PPAs and ordering PECO to comply with the terms of the PPAs. The Court of Common Pleas in Philadelphia also ordered PECO to abide by all of the terms and conditions of the PPAs and pay the rates set forth in the agreements. The Plaintiffs were required to post a bond in the amount of $50 in connection with the preliminary injunction. On May 8, 1998, PECO filed a notice of appeal and a motion to stay the preliminary injunction order. On May 13, 1998, the Grays Ferry Partnership filed an emergency petition for contempt to compel PECO to pay the amounts due and owing under the PPAs. On May 20, 1998, the Court of Common Pleas granted the motion for civil contempt and ordered PECO to pay $50 for each day that PECO failed to comply with the court's order. The power purchaser, in response to the preliminary injunction, has made all past due payments and continues to make payments to the Grays Ferry Partnership according to the terms of the PPAs, in each case under protest. On August 10, 1998, Chase filed an unopposed petition to intervene as a co-plaintiff in the litigation, which was entered on August 26, 1998. Chase's complaint, filed on September 4, 1998, asserted claims against PECO in connection with Chase's roles as lender and agent of other lenders under the Grays Ferry Project financing credit agreement. On March 9, 1999 the Court of Common Pleas issued an order for partial summary judgment in favor of the Grays Ferry Partnership, ruling that PECO's attempted termination of the Grays Ferry PPAs was improper. Trial is set for March 29, 1999 to determine damages owed to the Grays Ferry Partnership, as well as to decide the remaining claims such as fraud, conversion, breach of the implied covenant of good faith and breach of fiduciary duties. 30 The Company is subject from time to time to various other claims that arise in the normal course of business, and management believes that the outcome of any such matters as currently may be pending (either individually or in the aggregate) will not have a material adverse effect on the business or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. As previously reported by the registrant, on September 14, 1998, NRG Energy sent a letter to David H. Peterson, the Company's Chairman, requesting that he call a special meeting of the Company's stockholders to consider the removal of Robert T. Sherman, Jr. from the Company's Board of Directors. On such date NRG Energy also filed preliminary solicitation materials with the SEC pursuant to Section 14(a) of the Exchange Act, as amended, relating to a proposed solicitation of proxies and consents from the Company's stockholders to remove Mr. Sherman from the Company's Board (the "Proxy Solicitation"). On October 8, 1998, NRG Energy filed definitive solicitation materials with the SEC relating to the Proxy Solicitation. On October 26, 1998, NRG Energy delivered to the Company's registered agent consents of the holders of more than 50% of the Company's outstanding Common Stock in favor of Mr. Sherman's removal from the Company's Board of Directors. The following persons continued to serve as directors of the Company immediately following the delivery of the consents: David H. Peterson, Julie A. Jorgensen, Lawrence I. Littman, Craig A. Mataczynski, Spyros S. Skouras, Jr., Charles J. Thayer and Ronald J. Will. At a Board of Directors meeting on October 27, 1998, by the affirmative vote of a majority of such directors, Michael O'Sullivan was appointed to fill the vacancy created by the removal of Mr. Sherman from the Board. At a Special Meeting of the Company's stockholders held on November 12, 1998, the stockholders approved the removal of Mr. Sherman as a director of the Company, with the holders of 5,314,119 shares, or 77.73% of the outstanding shares, voting in favor of such removal; the holders of 85,626 shares, or 1.25% of the outstanding shares, voting against; and 9,139 abstentions. Continuing as directors were Mr. Peterson, Ms. Jorgensen, Mr. Littman, Mr. Mataczynski, Mr. Skouras, Mr. Thayer and Mr. Will. On the same day, the Company's Board of Directors also confirmed the appointment of Michael O'Sullivan to fill the vacancy on the Board of Directors created by the removal of Mr. Sherman. 31 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS ITEM 5 PLEASE SEE THE SELECTED DEFINITIONS THAT IMMEDIATELY PRECEDE ITEM 1. The Company's Common Stock has been quoted and traded on the Nasdaq National Market under the symbol "CGCA" since July 1998 and under the symbol "NRGG" from November 1997 to July 1998. From March 1997 to November 1997, the Company's Common Stock was quoted and traded under the symbol "NRGG" on the Nasdaq SmallCap Market. Prior to March 1997, 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. The high and low sales prices of the Common Stock for the period from March 1997 to December 1998 are shown in the table below. Such prices may have reflected inter-dealer prices, without retail mark-ups, mark downs or commissions, and may not necessarily represent actual transactions.
COGENAMERICA COMMON STOCK PRICE PER SHARE ----------------------------------------------------------------------------------------------------------------- PRICE PER 1998 SHARE ($) PRICE PER 1997 SHARE ($) ------------------------------------ ----------------------------------- PERIOD LOW HIGH LOW HIGH ---------------------------------------- ------------------ ----------------- ----------------- ----------------- First Quarter ...................... 15.125 19.531 11.250 13.750 Second Quarter...................... 13.313 18.250 11.125 16.000 Third Quarter....................... 7.250 15.000 14.250 21.000 Fourth Quarter...................... 7.625 10.000 18.000 22.375
As of March 2, 1999, the Company had approximately 465 holders of record of its Common Stock, not including beneficial owners whose shares are held by banks, brokers and nominees. The Company did not pay any cash dividends during fiscal 1998 or 1997. 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. Moreover, as a holding company, the Company's ability to pay any dividends in the future will depend largely on the ability of its operating subsidiaries and project entities to pay cash dividends or other cash distributions, which dividends or other cash distributions may be materially limited by the terms of credit agreements or other material contracts to which such operating subsidiaries or project entities may be parties. Two of the Company's principal operating subsidiaries, CogenAmerica Newark and CogenAmerica 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 32 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. Morris LLC (the owner of the Morris Project) is party to a Construction and Term Loan Agreement which prohibits the payment of distributions or the return of capital to Morris LLC's members or the authorization to make any other distribution, payment or delivery of property or cash to its members as such, or redeem, retire, purchase or otherwise acquire any membership interests, units or other equity interests of Morris LLC, or any options or rights thereto, or the setting aside of funds for any of such purposes, except upon the satisfaction of certain conditions which include (i) the acceptance and commercial operation of the facility and conversion of the project's construction loan to term loans, (ii) the absence of any default or event of default under various financing and project documents, and the absence of the possibility that default will occur as a result of such disbursement, (iii) the full prior funding of various accounts required to be maintained by Morris LLC under the Construction and Term Loan Agreement, and (iv) the maintenance of a required debt service coverage ratio. The Company and CogenAmerica Funding also are parties to a Supplemental Loan Agreement with NRG Energy which prohibits CogenAmerica Funding (which owns 100% of the membership interests of Morris LLC) from paying any distributions or dividends unless, among other things, the principal and interest then outstanding does not exceed a prescribed maximum amount and is not projected to exceed the maximum amount prescribed for the next two interest and principal payment dates. The Company is the borrower under the MeesPierson Credit Agreement, which prohibits the payment of dividends by the Company without prior written consent unless the Company provides not less than 30 days prior to the proposed date of payment of such dividend a letter of credit (in the form and upon the terms provided in the MeesPierson Credit Agreement) and a certificate signed by the chief financial officer of the Company that, after giving effect to such dividend payment, no default or event of default (as defined in therein) would occur or reasonably be anticipated to occur, and/or be continuing. The Grays Ferry Partnership (the owner of the Grays Ferry Project) is party to a credit agreement, dated March 1, 1996 with Chase which prohibits the Grays Ferry Partnership from making distributions unless i) the loan under the agreement has converted to a term loan, ii) a specified debt service coverage ratio is met, iii) no event of default has occurred and is continuing, and iv) the distribution would not trigger an event of default. In addition, due to the ongoing litigation between the Grays Ferry Partnership and PECO, Chase will not allow any distributions to partners pursuant to Chase's rights under such credit agreement. See Item 3. "Legal Proceedings." CogenAmerica and CogenAmerica Pryor are parties to a loan agreement, dated October 9, 1998, with NRG Energy as lender, which prohibits the payment of distributions unless i) CogenAmerica Pryor has sufficient unencumbered funds to cover two payments of a specified interest payment obligation, ii) no event of default has occurred and is continuing, and iii) after giving effect to the proposed distribution, no event of default would occur or reasonably be anticipated to occur and/or be continuing. 33 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 YEAR ENDED YEAR ENDED YEAR ENDED ENDED -------------------------------------- (DOLLARS IN THOUSANDS, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30 JUNE 30, JUNE 30, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 (1) 1996 1995 1994 ------------- ------------ ------------ --------- --------- ---------- STATEMENT OF OPERATIONS DATA: Revenues: Energy ................................ $ 52,216 $ 43,210 $ 21,669 $ 66,623 $ 74,455 $ 62,647 Equipment sales and services .......... 19,342 19,415 15,607 25,344 19,639 24,304 Rental ................................ 2,438 2,179 1,062 1,895 2,362 5,372 Development fees and other ............ -- -- 1,578 2,685 5,791 14,266 --------- --------- --------- --------- --------- --------- Total ............................... 73,996 64,804 39,916 96,547 102,247 106,589 Income (loss) before extraordinary item.. 8,002 23,352 4,780 (17,713) (40,919) (16,501) Net income (loss) ....................... 8,002 23,352(4) 6,423 (17,713) (40,919) (16,501) Basic earnings (loss) per share (2): Before extraordinary item ............. $ 1.17 $ 3.59 $ 0.75 $ (4.24) $ (11.02) $ (4.45) Extraordinary item .................... -- -- 0.25 -- -- -- --------- --------- --------- --------- --------- --------- $ 1.17 $ 3.59 $ 1.00 $ (4.24) $ (11.02) $ (4.45) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted earnings (loss) per share (2) Before extraordinary item ............. $ 1.15 $ 3.48 $ 0.74 $ (4.24) $ (11.02) $ (4.45) Extraordinary item .................... -- -- 0.25 -- -- -- --------- --------- --------- --------- --------- --------- $ 1.15 $ 3.48 $ 0.99 $ (4.24) $ (11.02) $ (4.45) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA: Total assets ............................ $ 318,674 $ 227,894 $ 173,624 $ 178,162 $ 189,748 $ 237,816 Long-term debt, net of current maturities Loans due NRG Energy .................. 36,123 4,439 14,388 96,929 -- -- Nonrecourse long-term debt ............ 189,848 143,697 143,972 60,415 3,405 3 60,310 Recourse long-term debt ............... 45,225 46,323 6,339 6,374 -- 7,073 Total ............................... 271,196 194,459 164,699 163,718 3,405 3 67,383
(1) Effective July 1, 1996, the Company changed its year end from June 30 to December 31. (2) Net income (loss) per share has been restated for all periods presented to reflect the common shares issued under the terms of the Plan. (3) Excludes $60,310 of long-term project financing which was included in current liabilities due to default under the debt agreement. (4) Reflects a net tax benefit of $20,454 resulting from reduction of a tax valuation allowance. (See Note 16) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDING NOTES THERETO. CERTAIN OF THE STATEMENTS MADE IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR FROM ANY RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION, THOSE DISCUSSED IN "RISK FACTORS" HEREIN. SEE "ITEM 1. BUSINESS -- RISK FACTORS - -- RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS." 34 FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS ITEM 7, PLEASE SEE THE SELECTED DEFINITIONS THAT IMMEDIATELY PRECEDE ITEM 1. EFFECTIVE JULY 1, 1996, THE COMPANY CHANGED ITS YEAR END FROM JUNE 30 TO DECEMBER 31. AS A RESULT, AS USED HEREIN, "1996" REFERS TO THE 12-MONTH PERIOD ENDED JUNE 30, 1996; THE "1996 TRANSITION PERIOD" REFERS TO THE 6-MONTH PERIOD ENDED DECEMBER 31, 1996; "1997" AND "1998" REFER TO THE 12-MONTH PERIODS ENDED DECEMBER 31, 1997, AND 1998, RESPECTIVELY. ALL DOLLAR AMOUNTS, EXCEPT PER SHARE AMOUNTS, SET FORTH IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE IN THOUSANDS. GENERAL CogenAmerica is an independent power producer pursuing "inside-the-fence" cogeneration projects in the U.S. The Company is engaged primarily in the business of developing, owning and managing the operation of cogeneration projects which produce electricity and thermal energy for sale under long-term contracts with industrial and commercial users and public utilities. The Company is currently focusing on natural gas-fired cogeneration projects with long-term contracts for substantially all of the output of such projects. The Company's strategy is to develop, acquire and manage the operation of such cogeneration projects and to provide U.S. industrial facilities and utilities with reliable and competitively priced energy from its power projects. CogenAmerica has substantial expertise in the development and operation of power projects. The Company's current project portfolio consists of: (i) a 122 MW cogeneration facility in Parlin, New Jersey, which began commercial operation in June 1991 and is owned through its wholly-owned subsidiary, CogenAmerica Parlin; (ii) a 58 MW cogeneration facility in Newark, New Jersey, which began commercial operation in November 1990 and is owned through its wholly-owned subsidiary, CogenAmerica Newark; (iii) a 117 MW cogeneration facility in Morris, Illinois, which began commercial operation in November 1998 and is owned through its wholly-owned subsidiary, CogenAmerica Morris. See "Business --Products and Services -- Energy Segment -- Morris Project"; (iv) a 110 MW cogeneration facility in Pryor, Oklahoma, which had been in commercial operation prior to acquisition by the Company in October 1998, and is owned through the Company's wholly-owned subsidiary, Oklahoma Loan Acquisition Corporation; (v) two standby/peak shaving facilities with an aggregate capacity of 22 MW in Philadelphia, Pennsylvania, which began commercial operation in September 1993, the principal project agreements of which are held by O'Brien (Philadelphia) Cogeneration, Inc., an 83%-owned subsidiary of the Company; and (vi) a one-third partnership interest in a 150 MW cogeneration facility located at Grays Ferry in Philadelphia, Pennsylvania, which began operation in January 1998. 35 Each of the projects is currently producing revenues under long-term power sales agreements that expire at various times. See the chart under "Business -- General" which summarizes certain contractual arrangements and other information concerning each of the Company's power projects. Energy and capacity payment rates are generally negotiated during the development phase of a cogeneration project and are finalized prior to securing project financing and the start of a plant's commercial operation. Pricing provisions of each of the Company's project power sales agreements contain unique features. As a result, different rates exist for each plant and customer pursuant to the applicable power sales agreement. However, in general, revenues for each of the Company's cogeneration projects consist of two components: energy payments and capacity payments. Energy payments are based on the power plant's actual net electrical output, expressed in kilowatt-hours of energy, purchased by the customer. Capacity payments are based on the net electrical output the power plant is capable of producing (or portion thereof) and which the customer has contracted to have available for purchase. Energy payments are made for each kilowatt-hour of energy delivered, while capacity payments, under certain circumstances, are made whether or not any electricity is actually delivered. The projects' energy and capacity payments are generally based on scheduled prices and/or base prices subject to periodic indexing mechanisms, as specified in the power sales agreements. In general terms, energy and capacity payments are intended to recover the variable and fixed costs of operating the plant, respectively, plus a return. A power plant may be characterized as one or more of the following: a "base-load" facility, a "dispatchable" facility, a combination "base-load/dispatchable" facility or a "merchant" facility. Such characterization depends upon the manner in which the plant will be used and the requirements of the related power sales agreement(s). A "base-load" facility generally means that the plant is operated continuously to produce a fixed amount of energy and capacity for one or more customers. A "dispatchable" facility generally means that the customer(s) purchased the right to a fixed amount of available capacity, which must be produced if and when requested by the customer(s). A combination "base-load/dispatchable" facility is a plant that operates in both modes, with a portion of the plant's capacity designated as base-load and the remainder available for dispatch. A "merchant" facility generally refers to a plant that operates and sells its output to various customers at prevailing market prices rather than pursuant to a long-term power sales agreement. Under a power sales agreement with JCP&L extending into 2011, CogenAmerica Parlin has committed 114 MW of the Parlin facility's generating capacity to JCP&L, of which 41 MW are committed as base capacity and 73 MW as dispatchable capacity. JCP&L must purchase energy from the base capacity whenever such energy is available from the Parlin facility. Energy from the dispatchable capacity is purchased by JCP&L only when requested (dispatched) by JCP&L. The Parlin PPA provides for curtailment by JCP&L under such typical conditions as emergencies, inspection and maintenance. In addition, JCP&L may also reduce base capacity during periods of low load on the PJM by up to 600 hours in any calendar year, of which 400 may be during on-peak periods, but only when all PJM member utilities are required to reduce generation to minimum levels and PJM has requested JCP&L to reduce or interrupt external 36 generation purchases. During 1998, JCP&L's curtailment was ten hours. The Parlin PPA also provides for an annual average heat rate adjustment that will increase or decrease JCP&L's payments to CogenAmerica Parlin, depending upon whether the average heat rate of the Parlin Project is below or above average 9,500 Btu per kWh (higher heating value). The actual adjustment is calculated by applying a ratio based on this differential to a fuel cost calculation. For the year ended December 31, 1998 this heat rate adjustment was $92. CogenAmerica Newark has a power sales agreement with JCP&L extending through 2015 whereby it has committed to sell all of the Newark facility's generating capacity to JCP&L, up to a maximum of 58 MW per hour. The Newark Project is effectively a base-load unit and JCP&L must purchase the energy whenever such energy is available from the Newark facility. Under the terms of the Newark PPA, JCP&L, in its sole discretion, is allowed to curtail production at the facility for 700 hours per year provided that the duration of each curtailment is a minimum of six hours and all curtailments occur only during Saturdays, Sundays and Holidays. Since contract inception in 1996, JCP&L has fully utilized this curtailment option annually and the Company expects JCP&L will continue to do so in future years. JCP&L may also disconnect from CogenAmerica Newark for emergencies, inspections and maintenance for up to 400 hours per year if all PJM member utilities are required to reduce generation to minimum levels and JCP&L has been requested by PJM to reduce or interrupt external generation purchases. During 1998, JCP&L's curtailment for these purposes was nine hours. The Newark PPA provides for an annual average heat rate adjustment that will increase or decrease JCP&L's payments to CogenAmerica Newark depending upon whether the average heat rate of the Newark Project is above or below 9,750 Btu per kWh (higher heating value). The actual adjustment is calculated by applying a ratio based upon this differential to a fuel cost calculation. For the year ended December 31, 1998 this heat rate adjustment reduced CogenAmerica Newark revenues by $684. Morris LLC has an ESA with Equistar through 2023 to provide base-load power and steam. Equistar has agreed to purchase the entire requirements of Equistar's plant (subject to certain exceptions) for electricity up to the full electric output of two of the three combustion turbines at the Morris Project. In addition, the Morris Project has an arrangement with the local utility to provide standby power. Each combustion turbine at the Morris facility has a nominal rating of 39 MW. The Morris Project designed redundancy into the energy production capability of the facility in order to meet Equistar's demand. The cost of installing and maintaining the reserve capacity was taken into account when the energy services agreement was negotiated. CogenAmerica Morris is permitted to arrange for the sale to third parties of interruptible capacity and/or energy from the third turbine and to the extent available, any excess power from the two turbines required to supply Equistar with its actual requirements. CogenAmerica Morris is in the process of contracting with a third-party power marketer for the sale of this excess capacity/energy. CogenAmerica Pryor has a power sales agreement with OG&E through 2008 to provide 110 MW of dispatchable capacity, with a maximum dispatch of 1,500 hours per year. The facility also sells electricity to PSO when not dispatched by OG&E. The Pryor Project purchases natural gas from Dynegy and Aquila. Under the terms of the agreement with PSO, the pricing of energy sales is indexed to a market fuel rate. Under terms of the agreement with OG&E, energy sales are linked to the average cost of fuel. 37 The power sales agreements for the Parlin, Newark, and Morris projects are structured to avoid or minimize the impact on the Company's revenues from fluctuations in fuel costs. Since the power sales agreements were amended in April 1996, JCP&L is responsible for the supply and transportation of natural gas required to operate the Parlin and Newark plants. Thus, revenues from the Parlin and Newark plants exclude any amounts attributable to recovery of fuel costs. Prior to the contract amendments, Parlin and Newark cost of revenues included fuel and related costs and contract provisions for delayed recovery of such costs in revenues caused variability in the projects' gross profit. Under the terms of the Morris ESA with Equistar, Equistar is the fuel manager and all of the costs of supplying the fuel are effectively a pass-through to Equistar. As a result, although fuel costs are included in the Morris Project revenues and costs of revenues, the Company has minimized any impact on gross profit from fluctuations in the price of natural gas purchases and supply for the Morris Project. The Grays Ferry Project has a gas sales agreement with Aquila providing for the purchase of natural gas to meet the power plant's requirements. For the period from commercial operations in January 1998 until the end of the year 2000, the partnership has purchased a natural gas collar with a cap in order to limit the volatility of natural gas purchases. Beginning in 2001, the price for natural gas supplied by Aquila is indexed to a market electricity rate. During 1998, the Company also sold and rented power generation equipment and provided related services in the U.S. and international markets under the names OES and PUMA. As previously announced, the Company has determined that its equipment sales, rental and service segment, which accounted for $21,780, $21,594, $16,669 and $27,239 of revenues in 1998, 1997, the 1996 transition period and 1996, respectively, is no longer a part of its strategic plan. Accordingly, on November 5, 1998 the Company sold OES, a wholly-owned subsidiary of the Company, in a stock transaction to an unrelated third party for $2,000. The Company is currently pursuing alternatives for the disposition of its remaining equipment sales, rental and service business operated by PUMA. The Company expects that the disposition of PUMA will not have a material adverse effect on the Company's results of operations or financial condition. Although OES was sold in 1998, the equipment sales, rental and service segment has not been reported as a discontinued operation in the financial statements because specific plans regarding the timing and manner of ultimate disposition of PUMA are still under consideration. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 REVENUES Energy revenues for 1998 of $52,216 increased from revenues of $43,210 for 1997. Energy revenues primarily reflect billings associated with the Parlin, Newark, Morris and Pryor Projects and the Company's PWD Project. The increase in energy revenues was primarily attributable to the acquisition of the Pryor Project in October 1998, and commencement of Morris operations in November 1998. Energy revenues in 1997 were negatively impacted by a routine, scheduled major maintenance outage at the Newark Project in the second quarter of 1997. 38
PROJECT ENERGY REVENUES YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1998 1997 ------------------ ----------------- COGENERATION PROJECTS Parlin $ 21,527 $ 21,685 Newark 17,541 17,319 Morris 5,779 -- Pryor 3,235 -- STANDBY/PEAK SHAVING FACILITIES PWD 4,134 4,206 ------------- ------------- $ 52,216 $ 43,210 ------------- ------------- ------------- -------------
Equipment sales and services revenues for 1998 of $19,342 decreased from revenues of $19,415 for 1997. The decrease was attributable to the sale of OES in November 1998. OES accounted for revenues of $5,625 and $6,115 in 1998 and 1997, respectively. Rental revenues for 1998 of $2,438 increased from revenues of $2,179 for 1997. The increases were due primarily to higher sales volume due to ice storms in the northeastern U.S. and Canada. OES rental revenues were $2,391 and $2,179 in 1998 and 1997, respectively. COSTS AND EXPENSES Cost of energy revenues for 1998 of $23,462 increased from $14,841 for 1997. The increase was primarily the result of commencement of Morris operations, the Pryor acquisition and depreciation associated with equipment capitalized at the Parlin and Newark facilities in 1998. Cost of equipment sales and services for 1998 of $16,929 decreased from $17,037 for 1997. The decrease was primarily due to the sale of OES. Cost of rental revenues for 1998 of $1,954 increased from $1,817 for 1997. The increases were primarily due to increased sales volume due to ice storms in the northeastern U.S. and Canada. Gross profit for 1998 of $31,651 increased from $31,109 for 1997. The increase is primarily attributable to expansion of the Newark Project's rated capacity from 52 MW to 58 MW and the addition of the Morris and Pryor operations. The gross profit margin in 1998 was 42.8% as compared to 48.0% in 1997. This decrease was due primarily to the addition of the Morris and Pryor Projects which have lower operating margins than the Newark and Parlin Projects. It is expected that competition will continue to put pressure on these margins in the future as new projects are added. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") for 1998 of $9,415 decreased from $9,479 in 1997. The decrease is primarily due to lower insurance costs, offset by higher legal expenses. 39 INTEREST AND OTHER INCOME Interest and other income for 1998 of $1,715 increased from $1,205 for 1997. The increase is primarily attributable to a gain on the sale of OES. EQUITY IN EARNINGS OF AFFILIATES Equity in earnings of affiliates for 1998 was $4,784 compared to $105 for 1997. The increase was attributable to earnings from the Grays Ferry Project, which commenced operations in January 1998. The earnings of the Grays Ferry Project reflect the contract price of electricity under the terms of the PPAs. The electric power purchaser has asserted that such PPAs are not effective and that the power purchaser is not obligated to pay the rates set forth in the agreements. The Company and the Grays Ferry Partnership are in litigation with the power purchaser over that issue. For additional information see "Item 3. -- Legal Proceedings." INTEREST AND DEBT EXPENSE Interest and debt expense for 1998 of $15,855 increased from $14,768 for 1997. The increase is primarily attributable to debt issued to acquire the Pryor Project, borrowings under the Supplemental Loan Agreement for the Morris Project, and higher interest rates due to default rate interest. INCOME TAXES During the 1997 fourth quarter, the Company reduced the valuation allowance established for tax benefits attributable to net operating loss carryforwards and other deferred tax assets, resulting in recognition of most remaining operating loss carryforwards in 1997 fourth quarter earnings. Consequently, beginning with the 1998 first quarter, income taxes are generally charged against pre-tax earnings without any reduction for operating loss carryforwards that continue to be utilized in reducing income taxes currently payable. Prior to the 1997 fourth quarter, net operating loss carryforwards were recognized each period as a reduction of income tax expense based on pre-tax income. The higher income tax expense in 1998 was due to the above-mentioned reduction in the valuation allowance in 1997. NET INCOME AND EARNINGS PER SHARE Net income for 1998 was $8,002, or diluted earnings per share of $1.15, compared to net income of $23,352 for 1997, or diluted earnings per share of $3.48. Net income and earnings per share for 1998 were lower than the prior year primarily due to the combined effects of the increase in income tax expense as a result of the income tax benefit recognized in 1997, earnings from the Grays Ferry Project which commenced operations in January 1998 and the one-time asset impairment charge recorded in 1997. COMPARISON OF 1997, THE 1996 TRANSITION PERIOD AND 1996 REVENUES Energy revenues for 1997, the 1996 transition period and 1996 were $43,210, $21,669 and $66,623, respectively. Energy revenues primarily reflect billings associated with the Parlin, Newark and PWD Projects. 40
PROJECT ENERGY REVENUES YEAR ENDED SIX MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1996 1996 ------------------ ---------------------- --------------- COGENERATION PROJECTS Parlin $ 21,685 $ 10,327 $ 34,867 Newark 17,319 9,259 26,820 STANDBY/PEAK SHAVING FACILITIES PWD 4,206 2,083 4,936 -------------- ------------- ------------- $ 43,210 $ 21,669 $ 66,623 -------------- ------------- ------------- -------------- ------------- -------------
The revenues at the Parlin and Newark Projects have been affected by the terms of their PPAs, which were renegotiated effective April 30, 1996 to make JCP&L responsible for supplying the natural gas at no cost to the projects. Previously, revenues from the Parlin and Newark Projects had reflected the impact of unit fuel cost fluctuations on the energy rate calculation under the Parlin and Newark PPAs. The increase in energy revenues for 1997 as compared to the 1996 transition period was primarily due to only six months of revenues reported in the 1996 transition period. The decrease in energy revenues for the 1996 transition period as compared to 1996 was primarily due to only six months of revenues reported in the 1996 transition period and to the amended PPAs affecting both the Parlin and Newark Projects. Parlin's 1996 revenues were negatively impacted by a voluntary curtailment of electric output during the first and second quarters in order to maintain the correct ratio of thermal to electric production after DuPont, the steam host, significantly decreased its steam demand by moving a business segment overseas. In addition, Parlin's 1996 revenues were affected by a decrease in the energy rate under the previous PPA, which rate was adjusted quarterly based on, in part, the average cost of fuel over the preceding year. Equipment sales and service revenues for 1997, the 1996 transition period and 1996 were $19,415, $15,607 and $25,344, respectively, which principally reflect the operations of OES, PUMA and American Hydrotherm Corporation ("American Hydrotherm"). American Hydrotherm was sold in December 1996. Revenues increased for 1997 as compared to the 1996 transition period primarily due to only six months of revenues reported in the 1996 transition period and due to higher sales volumes. Revenues decreased for the 1996 transition period as compared to 1996 primarily due to only six months of revenues reported in the 1996 transition period, offset in part by the inclusion of nine months of revenues in the period from the operations of PUMA. PUMA changed its fiscal year end from March 31 to a calendar year end effective on December 31, 1996. OES equipment sales and service revenues for 1997, the 1996 transition period and 1996 were $6,115, $1,575 and $5,232, respectively. Rental revenues for 1997, for the 1996 transition period and 1996 were $2,179, $1,062 and $1,895, respectively. The fluctuations were primarily due to only six months of revenues reported in the 1996 transition period. There were no development fees and other revenues for 1997. Development fees and other revenues for the 1996 transition period and 1996 were $1,578 and $2,685, respectively. 41 Revenues decreased for the 1996 transition period as compared to 1996 primarily due to only six months of revenues reported in the 1996 transition period. COSTS AND EXPENSES Cost of energy revenues for 1997, the 1996 transition period and 1996 were $14,841, $7,229 and $45,663, respectively. Cost of energy revenues increased for 1997 primarily due to only six months of costs reported in the 1996 transition period. Cost of energy revenues decreased for the 1996 transition period as compared to 1996 primarily due to only six months of costs reported in the 1996 transition period and the result of the amended PPAs in which JCP&L began assuming the cost of fuel for the Parlin and Newark facilities. Cost of equipment sales and service for 1997, for the 1996 transition period and 1996 were $17,037, $12,365 and $22,153, respectively. The 1997 increase was primarily due to only six months of costs reported in the 1996 transition period, except for the operations of PUMA which included nine months of costs for the 1996 transition period, and to the recording of $190 of inventory write-downs in the fourth quarter. Cost of equipment sales and service decreased for the 1996 transition period as compared to 1996 primarily due to only six months of costs reported in the 1996 transition period. Cost of rental revenues for 1997, for the 1996 transition period and 1996 were $1,817, $834 and $1,406, respectively. The fluctuations were primarily due to only six months of costs reported in the 1996 transition period. There were no development fee expenses and other costs for 1997. Cost of development fees and other for the 1996 transition period and 1996 were $1,559 and $2,531, respectively. These costs consist principally of costs associated with the sale of various projects either under development or in operation. The Company's gross profit was $31,109, $17,929, and $24,794 for 1997, for the 1996 transition period and for 1996, respectively. The higher gross margin for 1997 is due to only six months of operations included in the 1996 transition period. The gross margin for the 1996 transition period decreased from 1996 due to only six months of operations included in the 1996 transition period and to fluctuations in the recovery of fuel costs through energy revenues under the Parlin and Newark Project PPAs in effect until April 30, 1996. PROVISION FOR IMPAIRED ASSETS During the 1997 fourth quarter, the Company recorded provisions for impaired assets in the aggregate amount of $5,274 for various asset disposals, write-offs and write-downs. The impairment charge reduced identifiable assets of the energy segment and the equipment sales, rental and service segment by approximately $697 and $2,161, respectively, and corporate assets by $2,416. The components of the charge were as follows: 42
EQUIPMENT SALES, RENTAL & SERVICE ENERGY CORPORATE TOTAL ------------- ------ --------- ------- Assets disposed Equipment held for sale $ 62 $ -- $ 1,491 $1,553 Property, plant and equipment Write-offs 551 326 146 1,023 Equipment sold or scrapped -- -- 779 779 Project development costs -- 371 -- 371 Other 72 -- -- 72 ------------- ------ --------- ------- 685 697 2,416 3,797 ------------- ------ --------- ------- Assets held and used Investment in PoweRent 500 -- -- 500 Property, plant and equipment 976 -- -- 976 ------------- ------ --------- ------- 1,476 -- -- 1,476 ------------- ------ --------- ------- $ 2,161 $ 697 $ 2,416 $5,274 ------------- ------ --------- ------- ------------- ------ --------- -------
To improve liquidity, in fiscal 1994 the Company initiated efforts to liquidate specific power generation equipment that was not in use in an operating project, rented to a customer or critical to the completion of projects in development. These assets, consisting mainly of gas and steam turbines, were written down in fiscal 1994 and 1995 to liquidation values determined by independent appraisal, reclassified on the balance sheet as "equipment held for sale" and no longer depreciated. The $3,228 carrying value of the equipment at June 30, 1995 was reduced to $2,628 and $1,598 at December 31, 1996 and September 30, 1997, respectively, through periodic sales. In the 1997 fourth quarter, due to lack of interest by potential buyers, the remaining equipment was scrapped resulting in an impairment charge of $1,553. Impairment charges for property, plant and equipment disposals totaled $1,801, comprised of losses of $779 from disposal of other power generating equipment, and write-offs of $1,023 for equipment that was determined to be non-useable or could not be located during asset counts and inspections performed at OES and the PWD Project. The asset counts and inspections were undertaken as part of the overall review performed to determine whether OES and PWD Project operations should be continued. In addition, the PWD Project asset counts were required in order to pledge the equipment as security for a new corporate revolving credit facility which the Company entered into with Meespierson Capital Corp. Prior to the 1997 fourth quarter, physical counts of the equipment were last performed in fiscal 1995 during the period of bankruptcy reorganization. The asset impairment charge also included $371 to write-off capitalized project development costs related to certain development projects that were terminated. During the 1997 fourth quarter, the Company completed a thorough review of its business operations and market opportunities to determine whether operations of the PWD Project and the equipment sales, rental and service businesses should be continued. The board of directors determined that the PWD Project should be retained and that the equipment sales, rental and service segment should be exited. The equipment sales, rental and service segment has not been reported as a discontinued operation 43 because of uncertainties about the expected timing and manner of disposal. However, management performed an impairment review of the segment's long-lived assets as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Based on an analysis of estimated future cash flows, the carrying value of OES' generator equipment was determined to be impaired. Consequently, a provision of $976 was recorded to write-down the assets to their estimated fair value as determined by management based on sales values of similar equipment. Management also evaluated the carrying value of its 50% investment in PoweRent. Due to PoweRent's low earnings capacity, combined with the expectation of exiting this business in the near term, the investment was determined to be permanently impaired. The carrying value of the investment was written down by $500 based on discussions with potential buyers and management's estimate of the investment value. During the year ended June 30, 1996, unrecoverable project development costs of $180 were written off. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses for 1997, the 1996 transition period and 1996 were $9,479, $6,149 and $12,612, respectively. SG&A increased for 1997 primarily due to only six months of costs reported in the 1996 transition period, except for the operations of PUMA which included nine months of costs for the 1996 transition period, and due to the recording of $914 in the fourth quarter for various staffing and relocation costs and other reserves. SG&A decreased for the 1996 transition period as compared to 1996 primarily due to only six months of costs reported in the 1996 transition period. 1996 includes a $3,100 cost incurred to terminate an interest rate swap agreement in connection with the Parlin nonrecourse project debt refinancing. INTEREST AND OTHER INCOME Interest and other income for 1997, the 1996 transition period and 1996 were $1,205, $251 and $508, respectively. Interest and other income increased for 1997 primarily due to only six months of income reported in the 1996 transition period, the settlement of a legal suit, and the sale of a development project in Pakistan, offset in part by fees paid to Wexford Management LLC under a Liquidating Asset Management Agreement entered into in connection with its emergence from bankruptcy and the sale of unused equipment. Interest and other income for the 1996 transition period was positively impacted by interest income earned on escrow account balances established in connection with the nonrecourse financing on the Parlin and Newark facilities. REORGANIZATION COSTS Reorganization costs represent all costs incurred after filing bankruptcy that relate to the Company's reorganization and restructuring efforts. Reorganization costs for 1996 were $12,101 and consist primarily of professional and administrative fees and expenses. INTEREST AND DEBT EXPENSE Interest and debt expense for 1997, the 1996 transition period and 1996 were $14,768, $7,681 and $18,646, respectively. Interest and debt expense increased for 1997 as compared to 44 the 1996 transition period primarily due to only six months of expense reported in the 1996 transition period. Interest and debt expense decreased for the 1996 transition period as compared to 1996 primarily due to only six months of expenses reported in the 1996 transition period and to the refinancing of the Parlin and Newark Projects. 1996 interest and debt expense includes post-petition interest on prepetition liabilities of $6,487. 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 Parlin and Newark Projects which were refinanced during the year (see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources"). EXTRAORDINARY ITEM In the 1996 transition period, 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 1997, the 1996 transition period and 1996, the Company recorded an income tax benefit of $20,454, $268 and $463, respectively. The benefit for 1997 was attributable to the reduction of a deferred tax asset valuation reserve previously established for net operating losses incurred by the Company from 1992 to 1996. The income tax benefit for the 1996 transition period and for 1996 was attributable to the utilization of state net operating loss carryforwards. NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE Net income for 1997 was $23,352 compared to net income for the 1996 transition period of $6,423 and a net loss for 1996 of $17,713. The basic earnings per share for 1997 was $3.59 compared to basic earnings per share for the 1996 transition period of $1.00 and basic losses per share for 1996 of $4.24. The increase in 1997 net income and earnings per share was primarily due to the income tax benefit recognized upon reduction of the deferred tax asset valuation reserve, less the impairment provision to write-down and write-off certain assets. Net income and earnings per share for the 1996 transition period increased from the net loss in 1996 primarily due to the non-recurring bankruptcy reorganization costs incurred in 1996. LIQUIDITY AND CAPITAL RESOURCES The development, construction and operation of cogeneration projects and other power generation facilities requires significant capital. Historically, the Company has employed substantial leverage at both the project and parent company level to finance its capital requirements. Debt financing at the project level is typically nonrecourse to the parent. Nonrecourse project financing agreements usually require initial equity investments at the project level. The Company has financed such equity investments through cash generated from operations and other borrowings, including borrowings at the parent level. Almost all of the Company's operations are conducted through subsidiaries and other affiliates. As a result, the Company depends almost entirely upon their earnings and cash flow to service consolidated indebtedness, including indebtedness of the parent, CogenAmerica. The 45 nonrecourse project financing agreements of certain subsidiaries and other affiliates generally restrict their ability to pay dividends, make distributions or otherwise transfer funds to the parent prior to the payment of other obligations, including operating expenses, debt service and reserves. At December 31, 1998, consolidated long-term indebtedness (including current maturities) totals $285,096, consisting of nonrecourse project borrowings in the aggregate amount of $197,908, project borrowings with recourse to the parent of $21,775, $25,000 outstanding under a revolving credit facility and borrowings from NRG Energy of $40,413. Of the total long-term indebtedness, borrowings with recourse to the parent totaled $87,188 at December 31, 1998, consisting of borrowings under the revolving credit facility and from NRG Energy, and a guarantee by the parent of $21,775 of the Parlin and Newark project borrowings. NRG Energy also has provided a corporate guarantee of $3,000, of certain pre-existing liabilities of Parlin and Newark as of May 23, 1996. At December 31, 1998, cash and cash equivalents totaled $3,568 and restricted cash totaled $12,135. The restricted cash primarily represents escrow funds required by the terms of credit agreements for the Newark, Parlin and Morris projects. Cash provided by operating activities was $17,571, $16,989 and $1,056 for 1998, 1997 and the 1996 transition period, respectively. In 1996 cash used by operating activities was $8,050. Cash provided by operations in 1998 increased from 1997 primarily due to higher depreciation and amortization expense. Cash provided by operating activities in 1997 increased from the 1996 transition period due to only six months of operations included in the 1996 transition period and improved working capital cash management. Cash used by operating activities in 1996 resulted from the net loss incurred during the period the Company emerged from bankruptcy. Cash used by investing activities was $74,274, $14,484 and $776 in 1998, 1997 and the 1996 transition period, respectively. During 1996 cash provided by investing activities was $1,604. Cash used by investing activities in 1998 primarily represents capital expenditures of $73,406 to complete construction of the Morris project and upgrade other facilities, and net deposits of $3,578 into restricted cash accounts as required by certain credit agreements. These uses of cash were offset by proceeds of $2,686 from the sale of OES and other assets. Cash used by investing activities in 1997 primarily represents capital expenditures of $5,858 for the Newark and Parlin Project improvements and an equity contribution of $10,000 to the Grays Ferry Partnership. These uses of cash were reduced by collection of notes receivable of $1,175 and proceeds of $552 from the sale of certain assets. Cash used by investing activities for the 1996 transition period primarily resulted from expenditures of $1,315 for capital improvements and project development activities, less net withdrawals from restricted cash accounts. Cash provided by investing activities in 1996 primarily reflected $7,500 proceeds from the sale of certain subsidiaries in connection with the Company's bankruptcy plan, less $1,783 for capital expenditures and project development activities and less $5,156 for net deposits into restricted cash accounts. 46 Cash provided by (used in) financing activities was $56,827, $(2,248), $(2,115) and $7,385 for 1998, 1997, the 1996 transition period and 1996. During 1998, proceeds from long-term debt totaled $67,771, consisting of construction loan draws of $54,450, and $12,027 of loans from NRG Energy related to the Morris project. Repayments of long-term debt totaled $10,142. 1998 Non-cash investing and financing activities include $23,890 for acquisition of the Pryor Project and $6,230 of capital expenditures for the Morris Project included in liabilities. The Company evaluates current and forecasted cash flow as a basis for financing operating requirements and capital expenditures. Management believes there is sufficient liquidity from cash flow from operations and working capital to finance recurring capital expenditures and to fund working capital requirements, including scheduled debt service, for the next twelve months. In May 1996, the Company's wholly-owned subsidiaries CogenAmerica Newark and CogenAmerica Parlin entered into a credit agreement (the "Newark and Parlin Credit Agreement") which established provisions for a $155,000 fifteen-year loan and a $5,000 five-year debt service reserve line of credit. The loan is secured by all of CogenAmerica Newark's and CogenAmerica Parlin's assets and a pledge of the capital stock of such subsidiaries. The Company has guaranteed repayment of UP TO $21,775 of the amount outstanding under the Credit Agreement. The interest rate on the outstanding principal is variable based on, at the option of CogenAmerica Newark and CogenAmerica Parlin, LIBOR plus a 1.125% margin or a defined base rate plus a 0.375% margin, with nominal margin increases in the sixth and eleventh year. For any quarterly period where the debt service coverage ratio is in excess of 1.4:1, both margins are reduced by 0.125%. Concurrently with the Newark and Parlin Credit Agreement, CogenAmerica Newark and CogenAmerica Parlin entered into an interest rate swap agreement with respect to 50% of the principal amount outstanding under the Credit Agreement. This interest rate swap agreement fixes the interest rate on such principal amount ($77,500 at December 31, 1998) at 6.9% plus the margin. At December 31, 1998, the principal amount outstanding under the credit agreement was $134,927. The Company used the proceeds of the loan under the Newark and Parlin Credit Agreement to repay certain preexisting obligations of the Company including $87,291 of indebtedness to NRG Energy. NRG Energy provided the Company loans of which $40,413, $4,439, $14,388 and $101,679 was outstanding at December 31, 1998, 1997, 1996 and June 30, 1996, respectively. CogenAmerica Schuylkill, a wholly-owned subsidiary of the Company, owns a one-third partnership interest in the Grays Ferry Project which commenced operation in January 1998. In March 1996, the Grays Ferry Partnership entered into a credit agreement with Chase to finance the project. The credit agreement obligated each of the project's three partners to make a $10,000 capital contribution prior to the commercial operation of the facility. The Company made its required capital contribution in 1997. NRG Energy entered into a loan commitment to provide CogenAmerica Schuylkill the funding, if needed, for the CogenAmerica Schuylkill capital contribution obligation to the Grays Ferry Partnership. Prior to December 31, 1997, CogenAmerica Schuylkill had borrowed $10,000 from NRG Energy under this loan agreement, of which $1,900 remained outstanding to NRG Energy at December 31, 1998. 47 In connection with its acquisition of the Morris Project, CogenAmerica Funding, a wholly-owned subsidiary of the Company, assumed all of the obligations of NRG Energy to provide future equity contributions to the project, which obligations are limited to the lesser of 20% of the total project cost or $22,000. NRG Energy has guaranteed to the Morris Project's lenders that CogenAmerica Funding will make these future equity contributions, and the Company has guaranteed to NRG Energy the obligation of CogenAmerica Funding to make these future equity contributions (which guarantee is secured by a second priority lien on the Company's interest in the Morris Project). In addition, NRG Energy has committed in a Supplemental Loan Agreement between the Company, CogenAmerica Funding and NRG Energy to loan CogenAmerica Funding and the Company (as co-borrowers) the full amount of such equity contributions by CogenAmerica Funding, subject to certain conditions precedent, at CogenAmerica Funding's option. Any such loan will be secured by a second priority lien on all of the membership interests of the project and will be recourse to CogenAmerica Funding and the Company. Effective November 30, 1998 the Company and NRG Energy agreed to a First Amendment to the Supplemental Loan Agreement that allowed the Company to contribute the $22,000 of equity in installments to match the construction draw payments. At December 31, 1998, $12,027 had been drawn and contributed as equity. Subsequent to year end, additional draws and equity fundings have been made and as of March 26, 1999, the entire $22,000 had been drawn and contributed as equity. The Supplemental Loan Agreement calls for an interest rate of prime plus 1.5%. Effective with the First Amendment the interest rate was changed to prime plus 3.5% until the possible event of default related to the Grays Ferry Project has been eliminated. This additional interest rate resulted in an additional $35 of interest expense for the Morris Project in 1998. On February 16, 1999 NRG Energy agreed to reduce the interest rate under the loan back to prime plus 1.5%. This adjustment was made effective January 1, 1999. At December 31, 1998, $12,027 was due NRG Energy under the Supplemental Loan Agreement. On December 17, 1997, the Company entered into the MeesPierson Credit Agreement providing for a $30,000 reducing revolving credit facility. The facility is secured by the assets and cash flows of the PWD Project as well as the distributable cash flows of the Parlin and Newark Projects, and the Grays Ferry Partnership. On December 19, 1997 the Company borrowed $25,000 under this facility. The proceeds were used to repay $16,949 to NRG Energy, to repay $6,551 of obligations of the PWD Project and $1,500 for general corporate purposes. The MeesPierson Credit Agreement includes cross default provisions that cause defaults to occur in the event certain defaults or other adverse events occur under certain other instruments or agreements (including financing and other project documents) to which the Company or one or more of its subsidiaries or other entities in which it owns an ownership interest is a party. The actions taken by the power purchaser of the Grays Ferry Project have resulted in a cross default under the MeesPierson Credit Agreement. Repayment of the MeesPierson Credit Agreement has not been accelerated and the lender has waived such default and the Company has agreed not to draw any additional amounts under the MeesPierson Credit Agreement. On August 14, 1998 the lender agreed to continue the waiver on the default until July 1, 1999 by imposing a 2.0% increase in the interest rate effective October 1, 1998. This additional interest rate increased interest expense by $126 for the year ended December 31, 1998. On February 12, 1999 the lender agreed to a permanent waiver of the Grays Ferry Project cross default and eliminated the 2.0% increase in the interest rate effective January 1, 1999. The Company also reduced the size of the facility to $25,000. The repayment of the $25,000 is due in full on December 17, 2000. The Company's principal credit agreements (including the Newark and Parlin Credit Agreement) include cross-default provisions that generally permit its lenders to accelerate the 48 indebtedness owed thereunder, to decline to make available any additional amounts for borrowing thereunder, and to exercise certain other remedies in respect of any collateral securing such indebtedness in the event certain defaults or other adverse events occur under certain other instruments or agreements (including financing and other project documents) to which the Company or one or more of its subsidiaries or other entities in which it owns an ownership interest is a party. As a result, a default under one such other instrument or agreement could have a material adverse effect on the Company by causing one or more cross-defaults to occur under one or more of the Company's principal credit agreements, potentially having one or more of the effects set forth above and otherwise adversely affecting the Company's liquidity and capital position. During 1998 the Company incurred approximately $1,001 of third-party costs related to a capital markets financing transaction expected to be completed during 1999. These costs have been deferred and are included in the balance sheet as "Deferred financing costs, net." If the Company elects to pursue an alternative financing, such as through the commercial bank market, or if the financing currently contemplated for the capital markets is indefinitely delayed or discontinued, it will have to expense the financing costs that have been deferred. On October 9, 1998, CogenAmerica Pryor, a wholly-owned subsidiary of CogenAmerica, acquired from MCPC the entire interest in a 110 MW cogeneration project, the Pryor project, located in the Mid-America Industrial Park, in Pryor, Oklahoma. CogenAmerica Pryor acquired the Pryor Project by purchasing from MCPC all of the issued and outstanding stock of OLAC for a cash purchase price of approximately $23,900. NRG Energy has loaned the Company and CogenAmerica Pryor approximately $23,900 to finance the acquisition. The loan is a six-year term facility calling for principal and interest payments on a quarterly basis, based on project cash flows. The interest rate on the note relating to such loan was initially set at prime rate plus 3.5% and such rate reduces by two percentage points upon the occurrence of certain events related to elimination of default risk under the loan. On February 16, 1999 NRG Energy agreed to reduce the interest rate under the loan to prime plus 1.5%. This adjustment was made effective January 1, 1999. SALE OF OES On November 5, 1998 the Company sold OES, a wholly-owned subsidiary of the Company, in a stock transaction to an unrelated third party. The sales price was $2,000 and the Company recorded a gain on the sale. The Company recorded revenue from OES of $8,343 for fiscal 1998. This transaction did not have a material impact on the Company's results of operations or financial position. YEAR 2000 The Year 2000 issue refers generally to the data structure problem that may prevent systems from properly recognizing dates after the year 1999. The Year 2000 issue affects information technology ("IT") systems, such as computer programs and various types of electronic equipment that process date information by using only two digits rather than four digits to define the applicable year, and thus may recognize a date using "00" as the year 1900 rather than the year 2000. The issue also affects some non-IT systems, such as devices which rely on a microcontroller to process date information. The Year 2000 issue could result in system failures or miscalculations, causing disruptions of a company's operations. Moreover, even if a company's 49 systems are Year 2000 compliant, a problem may exist to the extent that the data that such systems process is not. The following discussion contains forward-looking statements reflecting management's current assessment and estimates with respect to the Company's Year 2000 compliance efforts and the impact of Year 2000 issues on the Company's business and operations. Various factors, many of which are beyond the control of the Company, could cause actual plans and results to differ materially from those contemplated by such assessments, estimates and forward-looking statements. Some of these factors include, but are not limited to, representations by the Company's vendors and counterparties, technological advances, economic considerations and consumer perceptions. The Company's Year 2000 compliance program is an ongoing process involving continual evaluation and may be subject to change in response to new developments. THE COMPANY'S STATE OF READINESS The Company has implemented a Year 2000 compliance program designed to ensure that the Company's computer systems and applications will function properly beyond 1999. The Company believes that it has allocated adequate resources for this purpose and expects its Year 2000 conversions to be completed on a timely basis. In light of its compliance efforts, the Company does not believe that the Year 2000 issue will materially adversely affect operations or results of operations, and does not expect implementation to have a material impact on the Company's financial statements. However, there can be no assurance that the Company's systems will be Year 2000 compliant prior to December 31, 1999, or that the failure of any such system will not have a material adverse effect on the Company's business, operating results and financial condition. In addition, to the extent the Year 2000 problem has a material adverse effect on the business, operations or financial condition of third parties with whom the Company has material relationships, such as vendors, suppliers and customers, the Year 2000 problem could have a material adverse effect on the Company's business, results of operations and financial condition. IT SYSTEMS. The Company has reviewed and continues to review all of its IT systems as they relate to the Year 2000 issue. The Company's accounting system has been upgraded to alleviate any potential Year 2000 issues. The Company outsources its human resource and payroll systems and is in the process of working with the outside vendor to identify and correct any potential Year 2000 issues. This process is expected to be complete and any changes implemented by December 31, 1999. The Company's billing systems are either provided by the customer or are performed internally on microcomputer systems. In these cases, the collection of data is the most important feature and any impact from a Year 2000 issue is expected to be immaterial. NON-IT SYSTEMS. As indicated above, the Company is dependent upon some of its customers for billing data related to the amount of electricity and steam sold and delivered during the month. For the most part, the collection of this data is done mechanically rather than electronically. Only data storage is managed electronically. The collection of this data also occurs within the control systems of the Company's various facilities. The Company has requested that the control system vendors audit their software to identify any potential Year 2000 issues and provide recommendations for alleviating any potential problems. This process has been completed for all of the Company's facilities and the various solutions have been implemented. The Company does not believe that any further upgrades, if necessary, will be material to its financial condition or results of operation. 50 YEAR 2000 ISSUES RELATING TO THIRD PARTIES. As described above, the Company, in some cases, is dependent upon certain customers to provide billing data. However, the Company also captures and processes this data as a redundancy. The Company's control systems have been upgraded as described above and the Company does not believe that any loss of data will occur due to a Year 2000 issue. In addition, the Company's third parties are major utilities and sophisticated industrial concerns who are participants in sophisticated Year 2000 readiness programs. The Company has participated in numerous vendor surveys to determine the readiness of various Company systems for any potential Year 2000 issues. In addition, the Company has obtained written disclosure from a number of vendors relating to their Year 2000 preparedness. COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES The Company's costs to review and assess the Year 2000 issue have not been material. The Company believes that its future costs to implement Year 2000 solutions will also be immaterial to the financial statements. THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES The Company believes that its most likely Year 2000 worst case scenario would be the loss of billing data to utilities and industrial companies which purchase the Company's electricity and steam. This billing information, as explained above, is also captured by the Company's control systems at its various facilities. THE COMPANY'S CONTINGENCY PLANS As described above, the contingency plan for the loss of billing data is to use the data provided by the Company's internal control systems which are in the process of being upgraded to eliminate any Year 2000 issues. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. The Company adopted the statement in 1998. The adoption had no affect on the Company's results of operations, cash flows or financial position. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic area and major customers. As required, the Company adopted the disclosure requirements for annual financial statements in 1998. The interim reporting requirements will be adopted beginning with the Company's quarterly report on Form 10-Q for the quarter ending March 31, 1999. In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-5, "Reporting the Costs of Start-Up Activities," which is effective for financial statements for fiscal years beginning after December 15, 1998. For the 51 purposes of this SOP, start-up activities are broadly defined as those one-time activities related to opening a new facility, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, or commencing some new operation. Start-up activities are also defined to include activities related to organizing a new entity. The Company assessed the impact and adopted SOP 98-5 as of December 31, 1998, and determined it to be immaterial to the consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is required to be adopted for fiscal years beginning after June 15, 1999 (fiscal year 2000 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are to be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is the type of hedge transaction. Management has not yet determined the impact that adoption of SFAS No. 133 will have on its earnings or financial position, but it may increase earnings volatility. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's market risk is primarily impacted by changes in interest rates and changes in natural gas prices. The Company's strategy is to mitigate fuel supply price risk at the facilities through the use of several methods. At the Newark and Parlin Projects, the customer is responsible for natural gas supply and delivery. The customer is the fuel manager at the Morris Project with all costs of supplying gas treated as pass-through to the customer. The Pryor Project bases sales prices of energy on the weighted average cost of fuel. The Gray's Ferry Project has obtained fuel supply contracts to limit risk of fluctuating fuel prices. The Company does not hold or issue derivative instruments to hedge future fuel price fluctuations. The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates, including debt obligations and interest rate swaps. For debt obligations the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by contractual maturity dates. The information is presented in U.S. dollar equivalents, which is the reporting currency. The instrument's actual cash flows are denominated in both U.S. dollars ($US) and British Sterling (L), as indicated in parentheses. 52
Expected Maturity Date -------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 Thereafter Total Fair Value (US$ Equivalent) -------------------------------------------------------------------------------------- Liabilities - ---------------------------- Long-Term Debt: Variable Rate ($US) $ 13,901 $ 39,958 $ 22,401 $ 19,861 $ 19,148 $169,415 $284,684 $284,684 Average Interest Rate 7.94% 8.19% 8.29% 7.98% 8.15% 6.63% 7.24% Fixed Rate (UK Sterling) $ 25 $ 28 $ 31 $ 34 $ 38 $ 256 $ 412 $ 412 Average Interest Rate 10.27% 10.27% 10.27% 10.27% 10.27% 10.27% 10.27% -------------------------------------------------------------------------------------- Interest Rate Derivatives - ---------------------------- Variable to Fixed ($US) $ 4,805 $ 4,301 $ 5,231 $ 5,464 $ 4,650 $ 43,013 $ 67,464 $ 6,060 Average Pay Rate 6.90% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90% Average Receive Rate 6.13% 6.13% 6.13% 6.13% 6.13% 6.13% 6.13%
The average interest on debt outstanding was 7.71% during 1998. For additional information concerning the Company's debt obligations, please see Notes 9 and 10 to the Company's Consolidated Financial Statements. 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-24 immediately following the signature page of this Annual Report on 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, 1998 and 1997 .................................... F-2 Consolidated Statements of Operations for the years ended December 31, 1998, December 31, 1997, the six months ended December 31, 1996 and the year ended June 30, 1996 ............................................................................. F-3 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1998, December 31, 1997, the six months ended December 31, 1996 and the year ended June 30, 1996 ........................................................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, December 31, 1997, the six months ended December 31, 1996 and the year ended June 30, 1996 ........................................................... F-5 Notes to Consolidated Financial Statements ......................................... F-6 through F-28
See item 14(a)(2) for the audited financial statements of the Grays Ferry Partnership and the Independent Accountants Report thereon. 53 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. None. 54 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing under the heading "Proposal One: Election of Directors" and the subheadings "Executive Officers of CogenAmerica" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement relating to the annual meeting of shareholders of the Company, scheduled to be held on May 20, 1999, is incorporated herein by references. ITEM 11. EXECUTIVE COMPENSATION The information appearing under the headings "Report of the Compensation Committee on Executive Compensation," "Performance Graph," "Executive and Director Compensation," and "Related Party Transactions" in the 1999 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing under the heading "Security Ownership of Certain Beneficial Owners and Management" in the 1999 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing under the subheading "Compensation Committee Interlocks and Insider Participation" and the heading "Related Party Transactions" in the 1999 Proxy Statement is incorporated herein by reference. 55 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-24 immediately following the signature page of this Annual Report on Report on Form 10-K. Index to Consolidated Financial Statements Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997 Consolidated Statements of Operations for the years ended December 31, 1998, December 31, 1997, the six months ended December 31, 1996 and for the year ended June 30, 1996 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1998, December 31, 1997, the six months ended December 31, 1996 and for the year ended June 30, 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, December 31, 1997, the six months ended December 31, 1996 and for the year ended June 30, 1996 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES Financial Statements for the years ended December 31, 1998 and 1997 and Independent Accountants Report for the Grays Ferry Cogeneration Partnership 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. 3. EXHIBITS The "Index to Exhibits" following the Consolidated Financial Statements of the Company and its subsidiaries is incorporated herein by reference. 56 (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, 1998: 1. Current Report on Form 8-K dated November 12, 1998 reporting information under Item 5. 2. Current Report on Form 8-K dated October 26, 1998 reporting information under Item 5. 3. Current Report on Form 8-K dated October 8, 1998 reporting information under Items 2 and 7. 57 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. COGENERATION CORPORATION OF AMERICA Date: March 26, 1999 /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, as amended, 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/ JULIE A. JORGENSEN Interim President and March 26, 1999 - ------------------------------------ By: Julie A. Jorgensen Chief Executive Officer and Director /s/ TIMOTHY P. HUNSTAD Vice President and March 26, 1999 - ------------------------------------ By: Timothy P. Hunstad Chief Financial Officer (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) /s/ DAVID H. PETERSON Chairman of the Board of Directors March 26, 1999 - ------------------------------------ By: David H. Peterson /s/ LAWRENCE I. LITTMAN Director March 26, 1999 - ------------------------------------ By: Lawrence I. Littman /s/ CRAIG A. MATACZYNSKI Director March 26, 1999 - ------------------------------------ By: Craig A. Mataczynski /s/ MICHAEL A. O'SULLIVAN Director March 26, 1999 - ------------------------------------ By: Michael A. O'Sullivan /s/ SPYROS S. SKOURAS, JR. Director March 26, 1999 - ------------------------------------ By: Spyros S. Skouras, Jr. /s/ CHARLES J. THAYER Director March 26, 1999 - ------------------------------------ By: Charles J. Thayer /s/ RONALD J. WILL Director March 26, 1999 - ------------------------------------ By: Ronald J. Will
58 COGENERATION CORPORATION OF AMERICA CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Cogeneration Corporation of America In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Cogeneration Corporation of America and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998 and 1997, the six months ended December 31, 1996, and the year ended June 30, 1996, 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. As discussed in Note 1 to the consolidated financial statements, on April 30, 1996, the Company, formerly known as O'Brien Environmental Energy, Inc., was reorganized and emerged from bankruptcy. PricewaterhouseCoopers LLP Minneapolis, Minnesota March 19, 1998 F-1
COGENERATION CORPORATION OF AMERICA CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) DECEMBER 31, DECEMBER 31, 1998 1997 ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 3,568 $ 3,444 Restricted cash and cash equivalents 12,135 8,527 Accounts receivable, net 14,326 11,099 Receivables from related parties 130 87 Notes receivable -- 27 Inventories 2,683 2,134 Other current assets 640 1,022 ---------------- ---------------- Total current assets 33,482 26,340 Property, plant and equipment, net 244,040 127,574 Projects under development -- 46,376 Investments in equity affiliates 18,179 13,381 Deferred financing costs, net 6,503 5,643 Deferred tax assets, net -- 7,996 Other assets 16,470 584 ---------------- ---------------- Total assets $ 318,674 $ 227,894 ---------------- ---------------- ---------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of loans and payables due NRG Energy $ 7,020 $ 2,864 Current portion of nonrecourse long-term debt 8,060 7,106 Current portion of recourse long-term debt 1,550 1,914 Short-term borrowings 1,887 1,313 Accounts payable 8,800 5,136 Prepetition liabilities 803 775 Other current liabilities 4,227 3,083 ---------------- ---------------- Total current liabilities 32,347 22,191 Loans due NRG Energy 36,123 4,439 Nonrecourse long-term debt 189,848 143,697 Recourse long-term debt 45,225 46,323 Deferred tax liabilities, net 2,793 -- Other liabilities 8,525 15,446 ---------------- ---------------- Total liabilities 314,861 232,096 Stockholders' equity (deficit): Common stock, par value $.01, 50,000,000 shares authorized; 6,871,069 and 6,836,769 shares issues and outstanding, respectively 68 68 Additional paid-in capital 65,715 65,715 Accumulated deficit (61,590) (69,592) Accumulated other comprehensive income (loss) (380) (393) ---------------- ---------------- Total stockholders' equity (deficit) 3,813 (4,202) ---------------- ---------------- Total liabilities and stockholders' equity (deficit) $ 318,674 $ 227,894 ---------------- ---------------- ---------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-2
COGENERATION CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF OPERATIONS - ----------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Six Months Year Ended Year Ended Ended Year Ended December 31, December 31, December 31, June 30, 1998 1997 1996 1996 -------------- ------------- ------------- ------------- Energy revenues $ 52,216 $ 43,210 $ 21,669 $ 66,623 Equipment sales and services 19,342 19,415 15,607 25,344 Rental revenues 2,438 2,179 1,062 1,895 Development fees and other -- -- 1,578 2,685 -------------- ------------- ------------- ------------- 73,996 64,804 39,916 96,547 Cost of energy revenues 23,462 14,841 7,229 45,663 Cost of equipment sales and services 16,929 17,037 12,365 22,153 Cost of rental revenues 1,954 1,817 834 1,406 Cost of development fees and other -- -- 1,559 2,531 -------------- ------------- ------------- ------------- 42,345 33,695 21,987 71,753 -------------- ------------- ------------- ------------- Gross profit 31,651 31,109 17,929 24,794 Selling, general and administrative expenses 9,415 9,479 6,149 12,612 Provision for impaired assets -- 5,274 -- 180 -------------- ------------- ------------- ------------- Income (loss) from operations 22,236 16,356 11,780 12,002 Interest and other income 1,715 1,205 251 508 Reorganization costs -- -- -- (12,101) Interest and debt expense (15,855) (14,768) (7,681) (18,646) Equity in earnings of affiliates 4,784 105 162 61 -------------- ------------- ------------- ------------- Income (loss) before income taxes 12,880 2,898 4,512 (18,176) Provision for income taxes (benefit) 4,878 (20,454) (268) (463) -------------- ------------- ------------- ------------- Income (loss) before extraordinary item 8,002 23,352 4,780 (17,713) Extraordinary item, net of income taxes -- -- 1,643 -- -------------- ------------- ------------- ------------- Net income (loss) $ 8,002 $ 23,352 $ 6,423 $ (17,713) -------------- ------------- ------------- ------------- Basic earnings (loss) per share: Before extraordinary item $ 1.17 $ 3.59 $ 0.75 $ (4.24) Extraordinary item -- -- 0.25 -- -------------- ------------- ------------- ------------- $ 1.17 $ 3.59 $ 1.00 $ (4.24) -------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- Diluted earnings (loss) per share: Before extraordinary item $ 1.15 $ 3.48 $ 0.74 $ (4.24) Extraordinary item - - 0.25 - -------------- ------------- ------------- ------------- $ 1.15 $ 3.48 $ 0.99 $ (4.24) -------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- Weighted average shares outstanding Basic 6,837 6,511 6,430 4,182 -------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- Diluted 6,966 6,725 6,463 4,182 -------------- ------------- ------------- ------------- -------------- ------------- ------------- -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-3
COGENERATION CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) ACCUMULATED ADDITIONAL ACCUMU- OTHER COM- TOTAL COMMON PREFERRED PAID-IN LATED PREHENSIVE STOCKHOLDERS' STOCK STOCK CAPITAL DEFICIT INCOME (LOSS) EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1995 $ 169 $ -- $41,353 $(81,654) $ (626) $(40,758) Net loss -- -- -- (17,713) -- (17,713) Currency translation adjustment -- -- -- -- (223) (223) ------ Comprehensive Income (Loss) (17,936) Plan of reorganization: Purchase of common stock by NRG Energy 27 -- 21,151 -- -- 21,178 Exchange class A and B common stock for new common shares, retire treasury shares (132) -- 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) -------- ---------- ---------- ---------- ------- --------- Balance, June 30, 1996 64 -- 62,515 (99,367) (785) (37,573) Net income -- -- -- 6,423 -- 6,423 Currency translation adjustment -- -- -- -- 433 433 --------- Comprehensive Income (Loss) 6,856 Payment received on treasury stock resulting from reorganization -- -- 105 -- -- 105 Issue restricted stock -- -- 99 -- -- 99 -------- ---------- ---------- ---------- ------- --------- Balance, December 31, 1996 64 -- 62,719 (92,944) (352) (30,513) Net income -- -- -- 23,352 -- 23,352 Currency translation adjustment -- -- -- -- (41) (41) --------- Comprehensive Income (Loss) 23,311 NRG Energy conversion of stock option 4 -- 2,996 -- -- 3,000 -------- ---------- ---------- ---------- ------- --------- Balance, December 31, 1997 68 -- 65,715 (69,592) (393) (4,202) Net income -- -- -- 8,002 -- 8,002 Currency translation adjustment -- -- -- -- 13 13 --------- Comprehensive Income (Loss) 8,015 -------- ---------- ---------- ---------- ------- --------- Balance, December 31, 1998 $ 68 $ -- $65,715 $(61,590) $(380) $ 3,813 -------- ---------- ---------- ---------- ------- --------- -------- ---------- ---------- ---------- ------- ---------
F-4
COGENERATION CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) SIX MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1998 1997 1996 1996 --------- --------- --------- --------- Cash flows from operating activities: Net income (loss) $ 8,002 $ 23,352 $ 6,423 $ (17,713) 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 9,791 7,840 4,869 9,441 Deferred tax (benefit) expense 3,589 (21,400) (778) (904) Provision for impaired assets -- 5,274 -- 180 Gain on disposition of property and equipment -- 756 59 -- Equity in earnings of affiliates (4,784) -- -- -- (Gain) on disposal of business (807) -- -- -- Bankruptcy professional fees accrued -- -- -- 432 Other, net -- (212) 148 (216) Changes in operating assets and liabilities: Accounts receivable (3,453) 772 (1,011) 730 Inventories (931) 621 (13) 615 Receivables from related parties (43) 97 275 223 Other assets 416 178 (277) -- Payables to related parties (135) -- -- -- Accounts payable and other current liabilities 5,926 (289) (6,996) (838) --------- --------- --------- --------- Net cash provided by (used in) operating activities 17,571 16,989 1,056 (8,050) --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures and project development costs (73,406) (5,858) (1,315) (1,783) Proceeds from sale of property and equipment 686 552 104 -- Proceeds from sale of subsidiaries and projects 2,000 -- -- 7,500 Investment in equity affiliates -- (10,000) -- -- Collections on notes receivable 24 1,175 10 816 Withdrawals from (deposits into) restricted cash accounts - net (3,578) (353) 545 (5,156) Other, net -- -- (120) 227 --------- --------- --------- --------- Net cash (used in) provided by investing activities (74,274) (14,484) (776) 1,604 --------- --------- --------- --------- Cash flows from financing activities: Proceeds from long-term debt 55,744 24,582 95,000 60,226 Proceeds from NRG Energy loans 12,027 10,000 -- 128,078 Repayments of NRG Energy loans -- (16,949) (86,035) (26,398) Repayments of long-term debt (10,142) (16,857) (6,098) (92,816) NRG Energy capital contribution -- -- -- 21,178 Net (repayments) proceeds of short-term borrowings 574 (1,072) 595 193 Payments on prepetition liabilities -- (1,762) (4,660) (73,483) Deferred financing costs (1,376) (190) (1,121) (4,579) Payment received on treasury stock resulting from reorganization -- -- 105 -- Issuance of restricted stock -- -- 99 -- Redemption of and dividends on preferred shares -- -- -- (5,014) --------- --------- --------- --------- Net cash (used in) provided by financing activities 56,827 (2,248) (2,115) 7,385 --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents 124 257 (1,835) 939 Cash and cash equivalents at beginning of year 3,444 3,187 5,022 4,083 --------- --------- --------- --------- Cash and cash equivalents at end of year $ 3,568 $ 3,444 $ 3,187 $ 5,022 --------- --------- --------- --------- --------- --------- --------- --------- Supplemental disclosure of cash flow information: Non-cash investing and financing activities: Acquisition of subsidiary financed with long-term debt from NRG Energy $ 23,890 $ -- $ -- $ -- Capital expenditures included in other liabilities 6,230 15,446 -- -- Conversion of NRG Energy debt to common stock -- 3,000 -- -- Interest paid 18,160 15,887 12,472 18,926 Income taxes paid 2,024 1,477 495 110
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-5 FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN THESE NOTES TO FINANCIAL STATEMENTS, PLEASE SEE THE SELECTED DEFINITIONS THAT IMMEDIATELY PRECEDE ITEM 1. 1. Business and Emergence from Bankruptcy Cogeneration Corporation of America ("CogenAmerica" or the "Company"), formerly known as NRG Generating (U.S.) Inc., is an independent power producer pursuing "inside-the-fence" cogeneration projects in the U.S. The Company is engaged primarily in the business of developing, owning and managing the operation of cogeneration projects which produce electricity and thermal energy for sale under long-term contracts with industrial and commercial users and public utilities. The Company is currently focusing on natural gas-fired cogeneration projects with long-term contracts for substantially all of the output of such projects. In addition, the Company sells and rents power generation and standby/peak shaving equipment and services. On April 30, 1996, O'Brien Environmental Energy, Inc. ("O'Brien"), the formerly named parent company, emerged from bankruptcy pursuant to the Plan submitted by NRG Energy, Inc. ("NRG Energy"), the O'Brien Official Committee of Equity Security Holders and Wexford Management Corporation ("Wexford") and approved by the U.S. Bankruptcy Court for the District of New Jersey (the "Court"). The Plan 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. O'Brien was renamed on the April 30, 1996 closing date to NRG Generating (U.S.) Inc. O'Brien 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. On April 30, 1996, NRG Energy funded approximately $107,418 in accordance with the Plan and O'Brien's existing Class A and Class B common stock was canceled and became exchangeable for 3,764,457 (58.14%) shares of new common stock. The NRG Energy funding was comprised of: $71,240 advanced under the terms of three loan agreements; $21,178 to purchase 2,710,357 (41.86%) of new common stock; $7,500 for the purchase of ten wholly-owned subsidiaries of O'Brien; and $7,500 deposited with the Company's stock transfer agent representing a cash distribution of approximately $0.44 per share by NRG Energy to O'Brien's Class A and Class B common stockholders. On April 30, 1996 the Company also issued 49,574 shares of series A, 13.5% cumulative preferred stock to Wexford in satisfaction of $4,957 of prepetition unsecured claims allowed by the Court. The preferred shares were redeemed by the Company in May 1996 for $4,957 plus $57 in dividends. The funds received from NRG Energy were disbursed according to the Plan's 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 and are classified on the balance sheet as F-6 "prepetition liabilities." An escrow fund has been established to fully reserve the remaining disputed claims submitted to the Court. Any remaining escrow funds resulting from the Court disallowing any disputed claims will be disbursed pro rata to all reinstated creditor claimholders as additional post-petition interest. In accordance with the Plan, on April 30, 1996 the Company and Wexford entered into a Liquidating Asset Management Agreement whereby Wexford agreed to assist the Company with the possible liquidation of certain specified assets consisting of (a) the Company's equipment sales, rental and services business operated by its subsidiaries OES and PUMA, (b) the PWD Project, (c) certain unused equipment, and (d) American Hydrotherm Corporation ("American Hydrotherm") and two other related subsidiaries. During 1996 and 1997, the unused equipment, American Hydrotherm and the two other related subsidiaries were sold or otherwise disposed. In the fourth quarter of 1997, the board of directors decided to retain the PWD Project and determined that the equipment sales, rental and services business is not a part of the Company's strategic plan for the future and would be disposed. Consistent with the board of directors' determination to exit this business, OES was sold in November 1998 (see Note 6) and possible alternatives for the disposition of PUMA continued to be pursued. In accordance with the agreement and as approved by the Court, the Company paid Wexford $1,219, and $281 in compensation for services during the year ended December 31, 1997 and six months ended December 31, 1996. 2. Summary of Significant Accounting Policies BASIS OF PRESENTATION The consolidated financial statements include the accounts of all majority-owned subsidiaries and all significant intercompany balances and transactions have been eliminated. Investments in companies, partnerships and projects that are more than 20% but less than majority-owned are accounted for by the equity method. Effective July 1, 1996, the Company changed its year end from June 30 to December 31. The Company filed a transition Report on Form 10-K for the period July 1, to December 31, 1996. The periods presented in the Company's consolidated statements of operations, stockholders' equity (deficit) and of cash flows are for the twelve months ended December 31, 1998 and 1997, the six months ended December 31, 1996 and the twelve months ended June 30, 1996. The twelve months ended June 30, 1996 are sometimes referred to in these Notes to Consolidated Financial Statements as fiscal 1996. 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 AND PREPETITION LIABILITIES Expenses incurred after filing bankruptcy related to the Company's reorganization and restructuring efforts have been presented in the consolidated statement of operations as reorganization costs. Liabilities which remain subject to the bankruptcy proceeding are classified on the balance sheet as prepetition liabilities and include provisions for post-petition interest. F-7 REVENUE RECOGNITION Energy revenues from cogeneration projects are recognized as electricity and steam are delivered. Revenue from sales and rental of power generation equipment are recognized upon shipment or over the term of the rental. Development fee revenue is generally recognized on a cost recovery basis as cash is received (without future lending provisions). CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. 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. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost less accumulated depreciation. When assets are disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are included in results of operations. The cost of property, plant and equipment, net of estimated salvage value is depreciated using the straight-line method over the useful lives of the assets which range from five to thirty years. It is reasonably possible that the estimated useful lives or salvage values could differ materially in the near term from the amounts assumed in arriving at current depreciation expense. These estimates are affected by such factors as the Company's overhaul, repair and maintenance activities, the ability of the Company to continue selling electricity and steam to customers under existing long-term contracts, changes in estimated prices of electricity and steam as well as alternative sources of energy and changes in the regulatory environment. Cost of maintenance and repairs is charged to expense as incurred. Betterments and improvements are capitalized. During the years ended December 31, 1998 and 1997, the Company capitalized interest in connection with the construction of power plants of $4,465 and $744, respectively. No interest was capitalized during the six months ended December 31, 1996 or the year ended June 30, 1996. PROJECT DEVELOPMENT COSTS Project development costs consist of fees, licenses, permits, site testing, bids and other charges, including employee costs, incurred incidental to specific projects under development. Project development costs are expensed 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 debt, which is comparable to results using the effective interest method. Interest expense includes amortization of $516, $407, $199, and $1,480 for the years ended December 31, 1998 and 1997, the six months ended December 31, 1996 and the year ended June 30, 1996, respectively. Accumulated amortization was $1,101 and $585 at December 31, 1998 and 1997, respectively. OTHER ASSETS Other assets include $16,470 (net of accumulated amortization of $110) at December 31, 1998 for F-8 capitalized project development costs related to the Morris Project. The capitalized project development costs are amortized by the straight-line method over the 25-year life of the project. NONRECOURSE LONG-TERM DEBT Nonrecourse long-term debt consists of project financing for which the repayment obligation is limited to specific project subsidiaries. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards ("SFAS") No. 109. SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of other assets and liabilities. 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 has entered into an interest rate swap agreement to reduce the impact of changes in interest rates on certain of its variable rate long-term debt. The differentials paid or received under the swap agreement are accrued and recorded as adjustments to interest expense. FOREIGN CURRENCY TRANSLATION The accounts of foreign subsidiaries have been translated in accordance with SFAS No. 52, whereby assets and liabilities are translated at rates of exchange existing at the balance sheet date and revenues and expenses are translated at the average rates of exchange for the period. CONCENTRATION OF CREDIT RISK The Company primarily sells electricity and steam to industrial and commercial users and public utilities under long-term agreements. The Company also sells, rents and services power generation 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. RECLASSIFICATIONS Certain reclassifications have been made to conform prior years' data to the current presentation. These reclassifications had no impact on previously reported net income or stockholders' equity (deficit). 3. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. The Company adopted the statement in 1998 and displays comprehensive income on its consolidated statement of stockholders' equity (deficit). The Company's comprehensive income is comprised of net income and foreign currency translation adjustments. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public companies report F-9 information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued tot he public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. The Company adopted the disclosure requirements for annual financial statements in 1998. The interim reporting requirements will be adopted beginning with the Company's quarterly report on Form 10-Q for the quarter ending March 31, 1999. In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-5, "Reporting the Costs of Start-Up Activities," which is effective for financial statements for fiscal years beginning after December 15, 1998. For purposes of this SOP, start-up activities are broadly defined as those one-time activities related to opening a new facility, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, or commencing some new operation. Start-up activities are also defined to include activities related to organizing a new entity. The Company assessed the impact and adopted SOP 98-5 as of December 31, 1998, and determined it to be immaterial to the consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is required to be adopted for fiscal years beginning after June 15, 1999 (fiscal year 2000 for the Company). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are to be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is the type of hedge transaction. Management has not yet determined the impact that adoption of SFAS No. 133 will have on its earnings or financial position, but it may increase earnings volatility. 4. Restricted Cash and Cash Equivalents Cash and cash equivalents that are not fully available for use in operations are classified as restricted. Restricted cash and cash equivalents relate primarily to debt service reserve accounts required by the nonrecourse project debt agreements for CogenAmerica Newark, CogenAmerica Parlin and CogenAmerica Morris and to bankruptcy escrow accounts. Restricted cash and cash equivalents consist of the following:
DECEMBER 31, DECEMBER 31, 1998 1997 ----------- ----------- Bankruptcy escrow accounts $ 803 $ 770 Debt service reserve accounts 11,332 7,757 ----------- ----------- $ 12,135 $ 8,527 ----------- ----------- ----------- -----------
F-10 5. Property, Plant and Equipment Property, plant and equipment consists of the following:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------- ------------- Plant and equipment $ 291,098 $ 169,839 Furniture and fixtures 297 687 Land, buildings and improvements 464 1,528 Other equipment -- 37 ------------- ------------- 291,859 172,091 Accumulated depreciation and amortization (47,819) (44,517) ------------- ------------- $ 244,040 $ 127,574 ------------- ------------- ------------- -------------
Depreciation expense was $8,581, $7,320, $3,626 and $7,858, for the years ended December 31, 1998, 1997, the six months ended December 31, 1996, and the year ended June 30, 1996, respectively. Plant and equipment relates primarily to the Newark, Parlin, Morris and Pryor cogeneration projects and the PWD Project standby facility. The Newark Project consists of a 58 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 Project is a qualifying facility as defined in the Public Utility Regulatory Policies Act of 1978. The Parlin Project consists of a 122 MW cogeneration power plant in Parlin, New Jersey which commenced operations in June 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. Parlin relinquished its claim to QF 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. The Morris Project consists of a 117 MW cogeneration power plant in Morris, Illinois which commenced operations in November 1998 and is supplying electricity and steam pursuant to 25 year supply contracts. The Morris Project is a qualifying facility as defined in the Public Utility Regulatory Policies Act of 1978. The Pryor Project was acquired in October 1998 and consists of a 110 MW cogeneration power plant in Pryor, Oklahoma. The Pryor Project sells 110 MW of capacity and varying amounts of energy to Oklahoma Gas and Electric Company under a contract through 2007 and steam to a number of industrial users under contracts with various termination dates ranging from 1998 and 2007. In addition, the Pryor Project sells varying amounts of energy to the Public Service of Oklahoma at its avoided cost. The Pryor Project is a qualifying facility as defined in the Public Utility Regulatory Policies Act of 1978. The PWD Project is a 22 MW standby/peak shaving facility in Philadelphia, Pennsylvania which commenced operations in September 1993 and is supplying electricity pursuant to 20-year supply contracts. The Company owns an 83% interest in this project. F-11 6. Acquisitions and Divestitures PRYOR PROJECT On October 9, 1998, CogenAmerica Pryor, a wholly-owned subsidiary of CogenAmerica, acquired from Mid Continent Power Company, L.L.C. ("MCPC") all of the issued and outstanding stock of Oklahoma Loan Acquisition Corporation ("OLAC"), the owner of the Pryor Project. MCPC is owned 50% by NRG Energy and 50% by parties affiliated with Decker Energy International, Inc. The purchase price was approximately $23,900, including related acquisition costs, and was financed with borrowings from NRG Energy (See Note 10). The acquisition was accounted for by the purchase method. Accordingly, the operating results of OLAC have been included in the Company's consolidated financial statements since the date of acquisition. The following unaudited pro forma consolidated financial information assumes the acquisition had occurred on January 1 of each year:
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- Revenues $86,784 $74,943 Net Income $ 7,158 $19,955 Earnings per share: Basic $ 1.05 $ 3.06 Diluted $ 1.03 $ 2.97
The pro forma consolidated results are not indicative of the actual results that would have occurred had the acquisition been completed as of the beginning of each period presented, nor are they necessarily indicative of results that will be obtained in the future. MORRIS PROJECT On December 29, 1997, CogenAmerica Funding, a wholly-owned subsidiary of the Company, acquired all of the issued and outstanding stock of Morris LLC from NRG Energy for a purchase price of $5,000. At the date of acquisition, Morris LLC had no operations, but was developing and constructing the 117 MW cogeneration facility referred to as the Morris Project. As part of the acquisition, the Company assumed all of the rights and obligations held by NRG Energy related to the development, construction and financing of the Morris Project, including those under the engineering, procurement and construction contract, the construction and term loan agreement (see Note 10), the power purchase agreement and various other project agreements and documents. The acquisition was accounted for by the purchase method. The purchase price was capitalized and included in "projects under development" on the balance sheet as of December 31, 1997. During 1998 the capitalized cost was reclassified to "other assets" and are being amortized over the 25-year life of the Morris Project. OES In November 1998, the Company sold OES, a wholly-owned subsidiary of the Company, in a stock transaction to an unrelated third party. The sales price was $2,000 and the Company recorded a pre-tax gain of approximately $800 on the sale. F-12 7. Investments in Equity Affiliates Investments in equity affiliates consist of the following:
DECEMBER 31, DECEMBER 31, 1998 1997 ----------- ----------- Grays Ferry (33% owned) $ 17,603 $ 12,845 PoweRent Limited (50% owned) 576 536 ----------- ----------- $ 18,179 $ 13,381 ----------- ----------- ----------- -----------
GRAYS FERRY CogenAmerica Schuylkill, a wholly-owned subsidiary of the Company, has a one-third partnership interest in the Grays Ferry Partnership. The other partners are affiliates of PECO Energy Company and Trigen Energy Corporation ("Trigen"). Grays Ferry has constructed a 150 MW cogeneration facility located in Philadelphia which began commercial operations in January 1998. Grays Ferry has a 25-year contract to supply all the steam produced by the project to an affiliate of Trigen through 2022 and two 20-year contracts ("PPAs") to supply all of the electricity produced by the project to PECO through 2017. The Company accounts for its investment in the Grays Ferry Partnership by the equity method. The Company's equity in earnings of the partnership was $4,758 in 1998. Grays Ferry commenced commercial operation in January 1998 and therefore had no earnings prior to 1998. The Company and the Grays Ferry Partnership are in litigation with PECO Energy Company over the validity of the PPAs (see Note 8). Summarized financial information of Grays Ferry for 1998 is presented below: Net revenues $78,126 Current Assets $ 33,393 Cost of sales $39,274 Noncurrent assets $150,771 Operating income $26,304 Current Liabilities $133,426 Partnership net income $15,295 Nonwarrant liabilities $ --
POWERENT LIMITED PoweRent Limited ("PoweRent") is a 50% owned United Kingdom company that sells and rents power generation equipment. The Company accounts for its investment by the equity method. In 1997 the Company recorded a charge of $500 to reduce the carrying value of its investment in PoweRent (see Note 14). 8. Contingencies In March 1998 PECO asserted that its PPAs with the Grays Ferry Partnership are not effective based on an alleged denial of cost recovery by the Pennsylvania Public Utility Commission. PECO claims that it is not obligated to pay the rates set forth in the agreements. PECO has further taken the position that, in any event, its total liability under each of the two PPAs is limited to $25,000 ($50,000 in the aggregate) by the terms of such agreements. The Company and the Grays Ferry Partnership are in litigation with PECO over its obligations under such agreements. They are seeking actual and punitive damages plus attorneys' fees and costs. After initially refusing to pay the rates set forth in the PPAs and making payments for the electricity purchased from the Grays Ferry Project at substantially lower rates, PECO was ordered by the court in which the litigation is pending to comply with the PPAs pending the outcome F-13 of the litigation. Following the court order, PECO resumed paying under protest the full contract rates and, as of December 31, 1998, has paid all amounts due under the applicable PPAs. Through December 31, 1998, the Grays Ferry Partnership has recorded revenue of approximately $34,500 from PECO, which PECO claims it was not obligated to pay. On March 9, 1999 the court issued an order for partial summary judgment in favor of the Grays Ferry Partnership, ruling that PECO's attempted termination of the Grays Ferry PPAs was improper. A trial date of March 29, 1999 has been established to determine damages owed to the Grays Ferry Partnership and to decide the remaining litigated claims. Due to PECO's actions, the Grays Ferry Partnership defaulted in the payment of certain interest due under its principal credit agreement, which default has since been cured, and the Grays Ferry Partnership continues to be in default under other provisions of such credit agreement. As a result of such continuing default, the lenders under the credit agreement have the ability generally to prevent the Grays Ferry Partnership from distributing or otherwise disbursing cash held or generated by the Grays Ferry Project. These rights, if exercised by the lenders, could prevent the Grays Ferry Partnership from meeting its obligations to suppliers and others and from disbursing or otherwise distributing cash to its partners during the pendency of the litigation. Any of these actions by the Grays Ferry Partnership's lenders could materially disrupt the Grays Ferry Partnership's relations with its suppliers and could have other potentially material adverse effects on its operations and profitability and, ultimately, on the Company's earnings and financial position. While the Grays Ferry Partnership's lenders have allowed the partnership to meet its obligations to suppliers, the partnership received a notice of default from the lenders on June 22, 1998, for the failure to timely convert the loan used for construction purposes to a term loan. This failure occurred due to the event of default created by the alleged termination of the PPAs by PECO and due to the inability of the Grays Ferry Partnership to declare either provisional or final acceptance of the Grays Ferry Project due to the existence of certain unresolved issues between the Grays Ferry Partnership and Westinghouse Electric Corporation ("Westinghouse") regarding completion and testing of the Grays Ferry Project. These issues between the partnership and Westinghouse are the subject of an ongoing arbitration proceeding. Until there is a satisfactory resolution of the litigation with PECO, the lenders will not allow distributions for the payment of subordinated fees, payments to the subordinated debt lender or equity distributions to the partners. In lieu of making these payments, the Grays Ferry Partnership will be required to apply such amounts to the repayment of the loan. The Company further expects that at the time the litigation is resolved the loan will be restructured. Although the Company does not believe it likely PECO's position ultimately will be sustained, the Company believes that upon such event the Grays Ferry Partnership would cease to be economically viable as currently structured and the Company's earnings and financial position could be materially adversely effected in various respects. Such effects could include, without limitation, a material adjustment to the value of the Company's investment in the Grays Ferry Project, the loss of future income and cash flows form the project and other material costs which would not be recovered. In January 1999 the Morris facility experienced two unscheduled outages which resulted in service and business interruptions to Equistar. The Company, Equistar and NRG Energy, as provider of construction management services and operation and maintenance services, are currently investigating the matter and are examining their respective rights and obligations with respect to each other and with respect to potentially responsible third parties, including insurers. The Company's investigation and discussions with Equistar are continuing. The Company does not believe that there will be a material adverse impact on the financial statements, however, no assurance can be given as to the ultimate outcome of this matter. 9. Short-Term Borrowings Short-term borrowings consist of amounts owed financial institutions under lines of credit, primarily in F-14 the United Kingdom. The Company has aggregate lines of credit of approximately $2,000 of which approximately $1,887, and $1,313 was outstanding at December 31, 1998 and 1997, respectively. The respective weighted average interest rates on short-term borrowings as of December 31, 1998 and 1997, respectively, were approximately 9.7% and 10.0%. 10. Long-Term Debt Long-term debt consists of the following:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------- ------------- Notes payable, due in monthly installments of principal plus interest at 10.27% maturing in 2008 $ 413 $ 733 Capital lease obligations 38 - MeesPierson Credit Agreement 25,000 25,000 Morris Project financing (nonrecourse) 84,305 29,855 Newark / Parlin financing (nonrecourse) 113,152 120,710 Newark / Parlin financing (recourse) 21,775 22,742 ------------- ------------- 244,683 199,040 Less amounts classified as current (9,610) (9,020) ------------- ------------- $ 235,073 $ 190,020 ------------- ------------- ------------- -------------
Aggregate amounts of long-term debt maturing during each of the next five years are $9,610, $33,603, $12,283, $13,689 and $12,406 in 1999, 2000, 2001, 2002 and 2003 respectively. The credit agreements for the MeesPierson, Morris, and Newark / Parlin long-term debt, include cross-default provisions. As a result, a default under one such instrument or agreement could have a material adverse effect on the Company's liquidity and capital position. MEESPIERSON CREDIT AGREEMENT On December 17, 1997, the Company and MeesPierson Capital Corp. entered into a $30,000, three-year reducing, revolving credit facility (however, the Company has agreed to not increase its borrowings above the $25,000 currently outstanding). The $30,000 facility reduces by $2,500 on each of the first and second anniversaries of the agreement and repayment of the outstanding balance is due on December 17, 2000. Interest is variable based on, at the Company's option, LIBOR plus a margin ranging from 1.50% to 1.875% or the prime rate plus a margin ranging from 0.75% to 1.125%. The interest rate margin is dependent upon the Company's debt service coverage ratio. The interest rate resets based on the borrowing period selected, generally one to six months, and was 9.1875% at December 31, 1998. The credit facility includes cross default provisions that cause defaults to occur in the event certain defaults or other adverse events occur under certain other instruments or agreements (including financing and other project documents) to which the Company or one or more of its subsidiaries or other entities in which it owns an interest is a party. The actions taken by the power purchaser of the Grays Ferry Project have resulted in a cross default under the MeesPierson Credit Agreement. Repayment of the MeesPierson Credit Agreement has not been accelerated and the lender has waived such default and the Company has agreed not to draw any additional amounts under the MeesPierson Credit Agreement. On August 14, 1998 the lender agreed to continue the waiver on the default until July 1, 1999 by imposing a 2.0% increase in the interest rate effective October 1, 1998. On February 12, 1999 the lender agreed to a permanent waiver of the Grays Ferry Project cross default and eliminated the 2.0% increase in the interest rate effective January 1, 1999. The Company also reduced F-15 the size of the facility to $25,000. Commitment fees of 0.375% accrue on the unused facility. Borrowings are secured by the assets, capital stock and cash flows of the PWD Project as well as the distributable cash flows of the Newark and Parlin Projects and the Grays Ferry Partnership, as permitted by primary lenders of each project. The MeesPierson Credit Agreement specifies that the Company maintain certain covenants with which the Company is in compliance at December 31, 1998. The Company may under certain circumstances be limited in its ability to make restricted payments, as defined, which include dividends and certain purchases and investments, incur additional indebtedness and engage in certain transactions. MORRIS PROJECT FINANCING On September 15, 1997, Morris LLC (which was at that time an affiliate of NRG Energy) entered into a $91,000 construction and term loan agreement (the "Agreement") to provide nonrecourse project financing for a major portion of the Morris Project. The Company assumed the Agreement in December 1997 upon acquiring Morris LLC. The Agreement provides $85,600 of 20-month construction loan commitments and $5,400 in letter of credit commitments (the "LOC Commitment"). Upon satisfaction of all completion criteria as set forth in the Agreement, the construction loan is due and payable or, if certain criteria are satisfied, may be converted to a five year term loan based on a 25-year amortization with a balloon payment at maturity. At December 31, 1998 and 1997, $84,305 and $29,855, respectively were outstanding under the construction loan and no amounts were pledged under the LOC Commitment. Interest on the construction loan is variable based on, at the Company's option, either the base rate, as defined in the Agreement, or LIBOR plus 0.75%. The interest rate resets based on the Company's selection of the borrowing period ranging from one to six months. The interest rate was 6.0% at December 31, 1998. Borrowings are secured by CogenAmerica Funding's ownership interest in Morris LLC, its cash flows, dividends and any other property that CogenAmerica Funding may be entitled to as owner of Morris LLC. The Agreement specifies that the Company maintain certain covenants with which the Company is in compliance at December 31, 1998. The Company may under certain circumstances be limited in its ability to make restricted payments, as defined, which include dividends and certain purchases and investments, incur additional indebtedness and engage in certain transactions. NEWARK AND PARLIN FINANCING On May 17, 1996, CogenAmerica Newark and CogenAmerica Parlin entered into the Newark and Parlin Credit Agreement with provisions for a $155,000 fifteen-year nonrecourse term loan and a $5,000 five-year debt service reserve line of credit. On May 23, 1996, CogenAmerica Newark borrowed $60,000 in the form of a temporary term loan under the Newark and Parlin Credit Agreement. On July 11, 1996, an additional $95,000 was borrowed and the aggregate borrowings were converted into a $155,000 fifteen-year nonrecourse term loan (the "Term Loan") which is a joint and several liability of CogenAmerica Newark and CogenAmerica Parlin. The Term Loan is amortized by quarterly principal payments ranging from 1.275% to 1.825% through the fourteenth year and 3.075% in the fifteenth year. The interest rate on the outstanding principal is variable based on, at the Company's option, LIBOR plus a 1.125% margin or a defined base rate plus a 0.375% margin. For any quarterly period where the debt service coverage ratio is in excess of 1.4:1, both margins are reduced by 0.125%. The interest rate resets based on the borrowing period selected, generally one to three months. The interest rate was 6.3125% at December 31, 1998. Nominal margin increases for both the LIBOR and the defined base rate will occur in year six and eleven of the Newark and Parlin Credit Agreement. Upon entering into F-16 the Newark and Parlin Credit Agreement, CogenAmerica Newark and CogenAmerica Parlin entered into an interest rate swap agreement with the lender which fixes the interest rate on 50% of the principal amount outstanding under the Term Loan at 6.9% plus the margin in effect as described above. No amounts were outstanding on the debt service reserve line of credit at December 31, 1998 and 1997. The line carries a commitment fee of 1.125% on the undrawn amount. CogenAmerica Newark and CogenAmerica Parlin are required to maintain debt service reserve accounts with the lender to provide for future debt service, capital improvements and major maintenance. At December 31, 1998 and 1997 these balances totaled $11,249 and $7,757, respectively, and earned interest at 3.25%. These balances are recorded as restricted cash and cash equivalents in the accompanying financial statements. The Term Loan is secured by all CogenAmerica Newark and CogenAmerica Parlin assets and a pledge of CogenAmerica Newark's and CogenAmerica Parlin's capital stock. CogenAmerica has guaranteed repayment of up to $25,000 of the Term Loan based on the principal balance of the loan, and also guaranteed payment by CogenAmerica Newark and CogenAmerica Parlin of all income and franchise taxes when due. The Company's guarantee is reduced proportionate to the outstanding principal as payments are made on the debt. The balance of this guarantee was $21,775 as of December 31, 1998. As an inducement to obtain the $60,000 temporary term loan, effective May 23, 1996, NRG Energy guaranteed payment of pre-existing liabilities of CogenAmerica Newark and CogenAmerica Parlin up to $5,000. The maximum guarantee is reduced as certain defined milestones are reached and eliminated no later than May 23, 2001. At December 31, 1998, the guarantee amount was $3,000. The Newark and Parlin Credit Agreement specifies that the Company maintain certain covenants with which the Company is in compliance at December 31, 1998. The Company may under certain circumstances be limited in its ability to make restricted payments, as defined, which include dividends and certain purchases and investments, incur additional indebtedness and engage in certain transactions. 11. Loans and Payables Due NRG Energy Amounts owed to NRG Energy are comprised as follows:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ----------- Long-term debt: Note due April 30, 2001 bearing interest at 9.5% $ 2,539 $ 2,539 Grays Ferry note due July 1, 2005 bearing interest at 9.3125% 1,900 1,900 Pryor note due September 30, 2004 bearing interest at 11.25% 23,947 -- Morris note due December 31, 2004 bearing interest at 11.25% 12,027 -- ------------ ----------- 40,413 4,439 Less current portion (4,290) -- ------------ ----------- $ 36,123 $ 4,439 ------------ ----------- ------------ ----------- F-17 DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ----------- Current maturities of loans and accounts payable: Current Maturities: Morris note $ 2,104 $ -- Pryor note 2,186 -- Accounts payable: Accrued interest -- 821 Management services, operations and other 2,730 2,043 ------------ ----------- $ 7,020 $ 2,864 ------------ ----------- ------------ -----------
Aggregate amounts of long-term debt due NRG Energy maturing during each of the next five years are $4,290, $6,355, $10,118, $6,171, and $6,742 in 1999, 2000, 2001, 2002 and 2003, respectively. Interest expense related to loans due NRG Energy was $1,249, $1,327, $648 and $1,098 for the years ended December 31, 1998 and 1997, the six months ended December 31, 1996 and the year ended June 30, 1996, respectively. MORRIS NOTE In connection with its acquisition of the Morris Project, CogenAmerica Funding, a wholly-owned subsidiary of the Company, assumed all of the obligations of NRG Energy to provide future equity contributions to the project, which obligations are limited ot the lesser of 20% of the total project cost or $22,000. NRG Energy has guaranteed to the Morris Project's lenders that CogenAmerica Funding will make these future equity contributions, and the Company has guaranteed to NRG Energy the obligation of CogenAmerica Funding to make these future equity contributions (which guarantee is secured by a second priority lien on the Company's interest in the Morris Project). In addition, NRG Energy has committed in a Supplemental Loan Agreement between the Company, CogenAmerica Funding and NRG Energy to loan CogenAmerica Funding and the Company (as co-borrowers) the full amount of such equity contributions by CogenAmerica Funding, subject to certain conditions precedent, at CogenAmerica Funding's option. Any such loan will be secured by a second priority lien on all of the membership interests of the project and will be recourse to CogenAmerica Funding and the Company. Effective November 30, 1998 the Company and NRG Energy agreed to a First Amendment to Supplemental Loan Agreement that allowed the Company to contribute the $22,000 of equity in installments to match the construction draw payments. At December 31, 1998, $12,027 had been drawn and contributed as equity. Subsequent to year end additional draws and equity fundings have been made and as of March 26, 1999, the entire $22,000 had been drawn and contributed as equity. The Supplemental Loan Agreement calls for an interest rate of prime plus 1.5%. Effective with the First Amendment the interest rate was increased to prime plus 3.5% pending elimination of the possible event of default under the MeesPierson Credit Agreement related to the Grays Ferry Project. On February 23, 1999 the Company reached agreement with NRG Energy that the possible event of default under the MeesPierson Credit Agreement had been eliminated. As a result, NRG Energy reduced the interest rate by 2% effective as of January 1, 1999. PRYOR NOTE On September 30, 1998, NRG Energy loaned the Company and CogenAmerica Pryor $23,947 to finance the acquisition of the Pryor Project. The loan is a six-year term facility calling for principal and interest payments on a quarterly basis, based on project cash flows. The interest rate on the note was set at prime plus 3.5%, reducing by 2% upon elimination of the possible event of default under the MeesPierson Credit Agreement related to the Grays Ferry Project. On February 23, 1999 the Company reached agreement with NRG Energy that the possible event of default under the F-18 MeesPierson Credit Agreement had been eliminated. As a result, NRG Energy reduced the interest rate by 2% effective as of January 1, 1999. 12. Stockholders' Equity NRG ENERGY STOCK OPTION During 1997 NRG Energy made loans aggregating $10,000 to CogenAmerica Schuylkill to provide funding for CogenAmerica Schuylkill's equity contribution obligation to Grays Ferry. Pursuant to a stock option right approved by the bankruptcy court and included in the loan commitment agreement, in October 1997 NRG Energy converted $3,000 of the borrowings into 396,255 shares of the Company's common stock. Following exercise of the option, NRG Energy's ownership interest in the Company increased to 45.21%. EARNINGS PER SHARE Basic earnings per share ("EPS") includes no dilution and is computed by dividing net income (loss) by the weighted average shares of common stock outstanding. Diluted EPS is computed by dividing net income (loss) by the weighted average shares of common stock and dilutive common stock equivalents outstanding. The Company's dilutive common stock equivalents result from stock options and are computed using the treasury stock method. The following table reconciles the numerators and denominators of the basic and diluted EPS computations for the years ended December 31, 1998 and 1997, and the six months ended December 31, 1996. The dilutive stock options became outstanding subsequent to June 30, 1996. Accordingly, there was no difference in basic and diluted EPS for the year ended June 30, 1996.
YEAR ENDED YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------------------- --------------------------------- --------------------------------- INCOME SHARES EPS INCOME SHARES EPS INCOME SHARES EPS (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) Income before extraordinary item: Basic EPS $8,002 6,837 $1.17 $ 23,352 6,511 $ 3.59 $ 4,780 6,430 $ 0.75 Effect of dilutive stock options -- 129 33 214 -- 33 ------ ------ -------- ------- ------- ------- Diluted EPS $8,002 6,966 $1.15 $ 23,385 6,725 $ 3.48 $ 4,780 6,463 $ 0.74 ------ ------ -------- ------- ------- ------- ------ ------ -------- ------- ------- -------
Options to purchase 147,000 shares of common stock at prices ranging from $11.58 - - $18.38 were outstanding at December 31, 1998 but were not included in the 1998 computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. STOCK OPTIONS The Company has reserved 1,000,000 shares of common stock for issuance under its 1996, 1997 and 1998 stock option plans. The plans provide for nonqualified and incentive stock options to be granted to directors, officers, key employees and others who make a significant contribution to the Company as determined by the Board at an exercise price not less than the fair market value of the common stock at the date of grant. 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 first three anniversaries of the grant. Following a "change of control" all options granted under the stock option plans may become immediately exercisable. F-19 Option transactions under these plans are summarized as follows:
WEIGHTED AVERAGE NUMBER OF SHARES OPTION PRICE ---------------- ---------------- Outstanding at June 30, 1996 -- Granted 399,000 $ 5.46 ------------- --------- Outstanding at December 31, 1996 399,000 5.46 Granted 305,000 13.19 Canceled (75,000) 5.44 ------------- --------- Outstanding at December 31, 1997 629,000 9.21 Granted 62,000 17.18 Canceled (173,000) 11.50 ------------- --------- Outstanding at December 31, 1998 518,000 $ 9.40 ------------- --------- ------------- ---------
The following table summarizes the stock options outstanding and exercisable at December 31, 1998:
OUTSTANDING EXERCISABLE --------------------------------------------------------- ----------------------------------- WEIGHTED-AVERAGE EXERCISE NUMBER OF CONTRACTUAL LIFE WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE PRICE RANGE OPTIONS REMAINING EXERCISE PRICE OPTIONS EXERCISE PRICE $5.44-$6.58 321,000 7.8 years $ 5.46 216,000 $ 5.47 $11.58-$16.47 152,000 8.7 years 15.07 68,333 13.97 $18.38 45,000 9.2 YEARS 18.38 -- -- ----------- --------- ---------- ----------- ---------- 518,000 8.2 years $ 9.40 284,333 $ 7.51 ----------- --------- ---------- ----------- ---------- ----------- --------- ---------- ----------- ----------
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans. Had the Company's compensation costs been determined based on the fair value of the awards at the option grant dates consistent with the accounting provisions of SFAS 123 "Accounting for Stock Based Compensation," the Company's net income and EPS for the years ended December 31, 1998 and 1997, and the six months ended December 31, 1996 would have been adjusted to the pro-forma amounts indicated below:
YEAR ENDED YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- ----------------- Net Income As reported $ 8,002 $ 23,352 $ 6,423 Pro-forma 7,365 22,695 6,362 EPS (Diluted) As reported $ 1.15 $ 3.48 $ 0.99 Pro-forma 1.06 3.38 0.98
The estimated weighted average fair value of stock options granted during the years ended December 31, 1998 and 1997 and the six months ended December 31, 1996 were $6.44, $6.24 and $2.30 per option, respectively. The fair values were estimated on the grant dates utilizing the Black-Scholes option-pricing model and the following assumptions: F-20
YEAR ENDED YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- ----------------- Risk free interest rates 5.5 - 5.6% 6.2 - 6.6% 5.8 - 6.1% Expected life 6 years 6 years 6 years Expected volatility 25.0% 36.7% 30.0% Expected dividends -- -- --
13. Extraordinary Item During the six months ended December 31, 1996, the Company negotiated a buyout of a subsidiary's capital lease obligation resulting in an extraordinary gain of $1,643 (net of $124 of state income taxes). 14. Provision for Impaired Assets During the 1997 fourth quarter, the Company recorded provisions for impaired assets in the aggregate amount of $5,274 for various asset disposals, write-offs and write-downs. The impairment charge reduced identifiable assets of the energy segment and the equipment sales, rental and service segment by approximately $697 and $2,161, respectively, and corporate assets by $2,416. The components of the charge were as follows:
EQUIPMENT SALES, RENTAL & SERVICE ENERGY CORPORATE TOTAL ------------- ------ --------- ------ Assets disposed Equipment held for sale $ 62 $ -- $ 1,491 $1,553 Property, plant and equipment Write-offs 551 326 146 1,023 Equipment sold or scrapped -- -- 779 779 Project development costs -- 371 -- 371 Other 72 -- -- 72 ------------- ------ --------- ------ 685 697 2,416 3,797 ------------- ------ --------- ------ Assets held and used Investment in PoweRent 500 -- -- 500 Property, plant and equipment 976 -- -- 976 ------------- ------ --------- ------ 1,476 -- -- 1,476 ------------- ------ --------- ------ $ 2,161 $ 697 $ 2,416 $5,274 ------------- ------ --------- ------ ------------- ------ --------- ------
To improve liquidity, in fiscal 1994 the Company initiated efforts to liquidate specific power generation equipment that was not in use in an operating project, rented to a customer or critical to the completion of projects in development. These assets, consisting mainly of gas and steam turbines, were written down in fiscal 1994 and 1995 to liquidation values determined by independent appraisal, reclassified on the balance sheet as "equipment held for sale" and no longer depreciated. The $3,228 carrying value of the equipment at June 30, 1995 was reduced to $2,628 and $1,598 at December 31, 1996 and September 30, 1997, respectively, through periodic sales. In the 1997 fourth quarter, the remaining equipment included in the balance sheet caption "equipment held for sale" was scrapped due to lack of interest by potential buyers, resulting in an impairment charge of $1,553. F-21 Impairment charges for property, plant and equipment disposals totaled $1,801, comprised of losses of $779 from disposal of other power generating equipment, and write-offs of $1,023 for equipment that was determined to be non-useable or could not be located during asset counts and inspections performed at OES and the PWD Project. The asset impairment charge also included $371 to write-off capitalized project development costs related to certain development projects that were terminated. During the 1997 fourth quarter, the Company completed a thorough review of its business operations and market opportunities to determine whether operations of the PWD Project and the equipment sales, rental and service businesses should be continued. The board of directors determined that the PWD Project should be retained and that the equipment sales, rental and service segment should be exited. The equipment sales, rental and service segment has not been reported as a discontinued operation because of uncertainties about the expected timing and manner of disposal. However, management performed an impairment review of the segment's long-lived assets as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Based on an analysis of estimated future cash flows, the carrying value of OES' generator equipment was determined to be impaired. Consequently, a provision of $976 was recorded to write-down the assets to their estimated fair value as determined by management based on sales values of similar equipment. Management also evaluated the carrying value of its 50% investment in PoweRent. Due to PoweRent's low earnings capacity, combined with the expectation of exiting this business in the near term, the investment was determined to be permanently impaired. The carrying value of the investment was written down by $500 based on discussions with potential buyers and management's estimate of the investment value. During the year ended June 30, 1996 unrecoverable project development costs of $180 were written off. 15. Disclosures about Fair Value of Financial Instruments At December 31, 1998 and 1997, the carrying amounts and fair values of the Company's financial instruments are as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------------- ------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Assets: Cash and cash equivalents $ 3,568 $ 3,568 $ 3,444 $ 3,444 Restricted cash and cash equivalents 12,135 12,135 8,527 8,527 Notes receivable -- -- 27 27 Liabilities: Short-term borrowings 1,887 1,887 1,313 1,313 Long-term debt 244,683 244,683 199,040 199,040 Loans and payables due NRG Energy 43,143 43,143 7,303 7,303 Interest rate swap -- 6,060 -- 2,691
The carrying amounts of cash and cash 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 estimated based on interest rates F-22 available to the Company for issuance of debt with similar terms and remaining maturities. The fair value of the interest rate swap is 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. 16. Income Taxes Income (loss) before income taxes and extraordinary item consists of the following:
SIX MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1998 1997 1996 1996 -------------- ------------- ------------- ------------- United States $ 12,834 $ 2,758 $ 4,195 $ (18,054) Foreign 46 140 317 (122) -------------- ------------- ------------- ------------- $ 12,880 $ 2,898 $ 4,512 $ (18,176) -------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- The income tax provision (benefit) consists of: Current income taxes: Federal $ 287 $ -- $ 803 $ -- State 1,002 946 570 792 -------------- ------------- ------------- ------------- 1,289 946 1,373 792 -------------- ------------- ------------- ------------- Deferred income taxes: Federal 3,721 (20,400) (2,292) (493) State (132) (1,000) 651 (762) -------------- ------------- ------------- ------------- 3,589 (21,400) (1,641) (1,255) -------------- ------------- ------------- ------------- Income tax provision (benefit) excluding extraordinary item $ 4,878 $ (20,454) $ (268) $ (463) -------------- ------------- ------------- ------------- -------------- ------------- ------------- -------------
Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are comprised of the following:
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------- ------------- ------------- Deferred income tax liabilities: Property, plant & equipment $ (23,609) $ (18,925) $ (18,445) ------------- ------------- ------------- Total deferred tax liabilities (23,609) (18,925) (18,445) ------------- ------------- ------------- Deferred income tax assets: Net operating loss carryforwards 22,756 27,525 26,502 Alternative minimum tax credits 446 159 183 Investment tax credits 1,172 1,427 1,622 Miscellaneous 4,377 5,040 5,571
F-23 Valuation allowance (7,935) (7,230) (28,837) ------------- ------------- ------------- Total deferred tax assets 20,816 26,921 5,041 ------------- ------------- ------------- Net deferred tax assets (liabilities) $ (2,793) $ 7,996 $ (13,404) ------------- ------------- ------------- ------------- ------------- -------------
The difference between tax expense (benefit) calculated at the U.S. federal statutory tax rate and the recorded tax expense (benefit) on pre-tax income before extraordinary item is reconciled below:
SIX MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1998 1997 1996 1996 -------------- ------------- ------------- ------------- Income tax expense (benefit) at the federal statutory rate $ 4,508 $ 985 $ 1,534 $ (6,180) State income taxes (benefit) 628 (36) 806 252 Current benefit of state operating loss carryforwards (176) (353) (655) (232) State operating losses with no current tax benefit 114 1,182 -- 3,204 Other increase (decrease) in valuation allowance 192 (22,232) (1,630) (544) Reorganization costs -- -- -- 2,636 Other (388) -- (323) 401 -------------- ------------- ------------- ------------- Total income tax provision (benefit) $ 4,878 $ (20,454) $ (268) $ (463) -------------- ------------- ------------- ------------- -------------- ------------- ------------- -------------
At December 31, 1998, the Company has federal net operating loss carryforwards available to offset future regular taxable income and investment tax credit carryforwards available to offset future federal income taxes payable. These carryforwards expire as follows:
FEDERAL NET OPERATING LOSS INVESTMENT TAX DECEMBER 31, CARRYFORWARDS CREDIT CARRYFORWARDS ----------- ------------------ --------------------- 1999 $ -- $ 240 2000 -- 409 2001 -- 82 2002 -- 174 2003 -- 52 2004 -- 215 2005 9,213 -- 2006 4,545 -- 2007 15,089 -- 2008 10,682 -- 2009 6,358 -- 2010 9,031 -- ----------- ---------- Total $ 54,918 $ 1,172 ----------- ---------- ----------- ----------
The Company has $52,875 of state and local net operating loss carryforwards available to offset future years' state and local taxable income. These carryforwards will expire starting in 1999 and will continue to expire through 2012. The Company also has foreign net operating loss carryforwards of F-24 approximately $2,051. The net operating loss carryforward for alternative minimum tax purposes is approximately $23,621 at December 31, 1998. A valuation allowance was recorded in prior years to reserve primarily for deferred tax assets that were not expected to be recovered through future reversal of existing temporary differences. In management's judgment, realization of the reserved tax benefits did not meet the "more likely than not" recognition criteria of SFAS No. 109 due to the Company's history of operating losses and projections of future taxable income. At December 31, 1997, the valuation allowance was reduced to $7,230 based on management's evaluation of the weight of available evidence about the likelihood of realizing the deferred tax assets. Positive factors contributing to the decision to reduce the valuation allowance included the sustained period of profitability since emergence from bankruptcy and improved outlooks for future earnings. The remaining valuation allowance at December 31, 1998 reserves a portion of the state operating loss carryforwards and certain other temporary differences and all of the investment tax credit, capital loss, and foreign operating loss carryforwards. Under the Plan, NRG Energy acquired a 41.86% equity interest in the Company. This acquisition, along with other shifts in shareholders' stock holdings, amounted to a more than 50% change in ownership in the Company over a three year period. Under the general net operating loss and tax credit carryover rules, utilization of these 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. During the year ended of December 31, 1998, the Company did not undergo a subsequent ownership change in the two year period following the bankruptcy protected change. 17. Transactions with Related Parties NRG Energy provides management, administrative, operation and maintenance services and certain other services to the Company. Selling, general and administrative expenses include $217, $562, $479 and $129 for reimbursement of services provided by NRG Energy under the terms of a management services agreement for the year ended December 31, 1998 and 1997, the six months ended December 31, 1996 and the year ended June 30, 1996. Effective January 1, 1997, Power Operation, Inc., a wholly-owned subsidiary of the Company providing operations and maintenance for the Newark and Parlin facilities under long-term contracts, was sold to NRG Energy. The amount expensed by the Company for these services was $427 and $350 in 1998 and 1997, respectively. Beginning in 1997, the Parlin Project sells up to 9 MW of power to NPI, a wholly-owned subsidiary of NRG Energy. NPI resells this power at retail to a customer of the Company under an agreement extending until 2021. Total sales to NPI were $1,313 and $1,300 in 1998 and 1997, respectively. On December 10, 1997 CogenAmerica purchased 100% of the equity interest in the Morris Project from NRG Energy. NRG Energy is the construction manager for the project and received $1,200 in fees and expense reimbursements for these services in 1998. NRG Energy, though a wholly-owned subsidiary is also the operator of the project under a long-term agreement. NRG Energy was paid $1,100 for these services during the construction start up and two months of operation in 1998. (See Note 6.) On October 9, 1998 a wholly-owned subsidiary of the Company purchased 100% of the equity interest of the Pryor Project from NRG Energy. In conjunction with the acquisition, NRG Energy financed the F-25 purchase with a loan of $23,900. (See Note 6.) 18. Segment Information and Major Customers The Company is engaged principally in developing, owning and managing cogeneration projects and the sale, rental and service of cogeneration related equipment. The Company has classified its operations into the following segments: energy and equipment sales, rental and service. The energy segment consists of cogeneration and standby/peak shaving projects. The equipment sales, rental and service segment consists of PUMA, the Company's wholly owned subsidiary based in the United Kingdom and OES until its sale in November 1998. Summarized information about the Company's operations in each industry segment are as follows:
YEAR ENDED DECEMBER 31, 1998 EQUIPMENT SALES, RENTAL & ENERGY SERVICE OTHER TOTAL ----------------- ----------------- ---------------- ------------- Revenues $ 52,216 $ 21,780 $ -- $ 73,996 Depreciation & amortization 8,424 267 -- 8,691 Other cost of revenues 15,038 18,616 -- 33,654 -------------- ------------- ------------- ------------- Gross profit 28,754 2,897 -- 31,651 Selling, general & administrative expenses 4,852 2,206 2,357 9,415 -------------- ------------- ------------- ------------- Income (loss) from operations 23,902 691 (2,357) 22,236 Interest & other income 497 30 1,189 1,715 Reorganization cost -- -- -- -- Interest & debt expense (14,071) (352) (1,433) (15,855) Equity in earnings of affiliates 4,758 26 -- 4,784 -------------- ------------- ------------- ------------- Income (loss) before taxes $ 15,086 $ 395 $ (2,601) $ 12,880 -------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- Identifiable assets $ 304,834 $ 7,885 $ 5,955 $ 318,674 Capital expenditures 86,949 389 26 87,364
YEAR ENDED DECEMBER 31, 1997 EQUIPMENT SALES, RENTAL & ENERGY SERVICE OTHER TOTAL ----------------- ----------------- ---------------- -------------- Revenues $ 43,210 $ 21,594 $ -- $ 64,804 Depreciation & amortization 6,788 498 -- 7,286 Other cost of revenues 8,053 18,356 -- 26,409 -------------- ------------- ------------- ------------- Gross profit 28,369 2,740 -- 31,109 Selling, general & administrative expenses 3,579 3,318 2,582 9,479 Provision for impaired assets 697 2,161 2,416 5,274 -------------- ------------- ------------- ------------- Income (loss) from operations 24,093 (2,739) (4,998) 16,356 Interest & other income 436 125 749 1,310 Interest & debt expense (13,112) (280) (1,376) (14,768) -------------- ------------- ------------- ------------- Income (loss) before taxes $ 11,417 $ (2,894) $ (5,625) $ 2,898 -------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- Identifiable assets $ 206,337 $ 8,332 $ 13,225 $ 227,894 Capital expenditures 5,115 432 168 5,715
F-26
SIX MONTHS ENDED DECEMBER 31, 1996 EQUIPMENT SALES, RENTAL & ENERGY SERVICE OTHER TOTAL ----------------- ----------------- ---------------- -------------- Revenues $ 23,247 $ 16,669 $ -- $ 39,916 Depreciation & amortization 3,272 333 -- 3,605 Other cost of revenues 5,516 12,866 -- 18,382 -------------- ------------- ------------- ------------- Gross profit 14,459 3,470 -- 17,929 Selling, general & administrative expenses 2,323 2,452 1,374 6,149 -------------- ------------- ------------- ------------- Income (loss) from operations 12,136 1,018 (1,374) 11,780 Interest & other income 197 359 (143) 413 Interest & debt expense (6,014) (461) (1,206) (7,681) -------------- ------------- ------------- ------------- Income (loss) before taxes $ 6,319 $ 916 $ (2,723) $ 4,512 -------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- Identifiable assets $ 141,583 $ 15,790 $ 16,251 $ 173,624 Capital expenditures 1,189 31 2 1,222
YEAR ENDED JUNE 30, 1996 EQUIPMENT SALES, RENTAL & ENERGY SERVICE OTHER TOTAL ----------------- ----------------- ---------------- --------------- Revenues $ 69,308 $ 27,239 $ -- $ 96,547 Depreciation & amortization 7,025 756 -- 7,781 Other cost of revenues 41,169 22,803 -- 63,972 -------------- ------------- ------------- ------------- Gross profit 21,114 3,680 -- 24,794 Selling, general & administrative expenses 4,149 4,434 4,029 12,612 Provision for impaired assets 180 -- -- 180 -------------- ------------- ------------- ------------- Income (loss) from operations 16,785 (754) (4,029) 12,002 Interest & other income 236 333 -- 569 Reorganization cost -- -- (12,101) (12,101) Interest & debt expense (9,392) (1,119) (8,135) (18,646) -------------- ------------- ------------- ------------- Income (loss) before taxes $ 7,629 $ (1,540) $ (24,265) $ (18,176) -------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- Identifiable assets $ 133,774 $ 17,293 $ 27,095 $ 178,162 Capital expenditures 273 7 19 299
Information with respect to the Company's foreign and domestic operations is:
SIX MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1998 1997 1996 1996 -------------- ------------- ------------- ------------- Revenues: United States $ 60,279 $ 51,504 $ 27,937 $ 82,917 United Kingdom 13,717 13,300 11,979 13,630 -------------- ------------- ------------- ------------- $ 73,996 $ 64,804 $ 39,916 $ 96,547 -------------- ------------- ------------- ------------- -------------- ------------- ------------- -------------
F-27 Identifiable assets: United States $ 310,789 $ 221,752 $ 164,631 $ 169,657 United Kingdom 7,885 6,142 8,993 8,505 -------------- ------------- ------------- ------------- $ 318,674 $ 227,894 $ 173,624 $ 178,162 -------------- ------------- ------------- ------------- -------------- ------------- ------------- -------------
Revenues from one energy customer accounted for 50%, 57%, 46% and 62% for the years ended December 31, 1998 and 1997, the six months ended December 31, 1996, and the year ended June 30, 1996, respectively. 19. Minority Interest OPCI, a subsidiary of the Company, is 17% owned by an unrelated private investor. OPCI is required to make quarterly distributions to the minority owner of 17% of its net earnings. These distributions totaled $247, $244, $125 and $227 for the years ended December 31, 1998 and 1997, the six months ended December 31, 1996, and fiscal 1996, respectively, and are recorded as interest expense in the consolidated statement of operations. The 17% minority interest is redeemable by the Company at its option for a price equal to 17% of the present value of the projected income stream of OPCI. The Company is obligated upon certain events of default to redeem the minority interest at 60% of the Company's redemption price. The Company's redemption price at December 31, 1998 was approximately $2,400. There are currently no events of default. F-28 - -------------------------------------------------------------------------------- GRAYS FERRY COGENERATION PARTNERSHIP FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITORS' REPORT To the Partners of Grays Ferry Cogeneration Partnership: We have audited the accompanying balance sheets of Grays Ferry Cogeneration Partnership (the "Partnership"), as of December 31, 1998 and 1997, and the related statements of changes in partners' capital, and cash flows for the years then ended, and the related statement of income for the period from January 9, 1998 (date of commercial operation) to December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 1998 and 1997, and its cash flows for the years then ended, and the results of its operations for the period from January 9, 1998 (date of commercial operation) to December 31, 1998 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 2 to the financial statements, PECO Energy has taken action to terminate its power purchase agreements with the Partnership. As a consequence, the Project Lender has determined that the Partnership is in default. These actions raise substantial doubt about the Partnership's ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 2. The financial statements do not include any adjustment that might result from the outcome of these uncertainties, other than the classification of the Project debt as current. Deloitte & Touche LLP Philadelphia, Pennsylvania January 26, 1999 (except Note 9, as to which the date is March 10, 1999)
GRAYS FERRY COGENERATION PARTNERSHIP BALANCE SHEETS DECEMBER 31, 1998 AND 1997 - ----------------------------------------------------------------------------------------------------- ASSETS 1998 1997 CURRENT ASSETS: Cash and cash equivalents $ 18,628,423 $ 6,441,729 Accounts receivable - related parties 10,678,770 2,630,093 Accounts receivable - other 1,805,350 Inventory 2,163,444 1,020,469 Prepaid expenses 116,976 ------------- -------------- Total current assets 33,392,963 10,092,291 PROPERTY, PLANT AND EQUIPMENT: Construction work-in-progress 144,328,197 Plant in service 151,297,117 ------------- -------------- Total property, plant and equipment 151,297,117 144,328,197 Accumulated depreciation (7,402,171) ------------- -------------- Property, plant and equipment - net 143,894,946 144,328,197 OTHER ASSETS (Net of accumulated amortization of $426,949 in 1998) 6,875,906 6,544,595 ------------- -------------- TOTAL ASSETS $ 184,163,815 $ 160,965,083 ------------- -------------- ------------- -------------- LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Construction loan (Notes 2 and 6) $ 94,324,049 $ 113,000,000 Subordinated debt (Note 6) 15,000,000 Accounts payable and accrued liabilities - related parties 3,503,417 558,759 Accounts payable and accrued liabilities - other 15,017,152 6,381,865 Retainage payable 5,581,729 5,581,729 ------------- -------------- Total liabilities 133,426,347 125,522,353 PARTNERS' CAPITAL 50,737,468 35,442,730 ------------- -------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 184,163,815 $ 160,965,083 ------------- -------------- ------------- --------------
See notes to financial statements. -2- GRAYS FERRY COGENERATION PARTNERSHIP STATEMENT OF INCOME PERIOD FROM JANUARY 9, 1998 (DATE OF COMMERCIAL OPERATION) TO DECEMBER 31, 1998 - ----------------------------------------------------------------------------------------------------- REVENUES FROM RELATED PARTIES: Electric energy sales $50,776,226 Steam sales 14,741,775 Capacity fees: Electric 9,531,900 Steam 3,075,988 ----------- Total revenues 78,125,889 ----------- OPERATING EXPENSES: Fuel and consumables: Related party 2,531,844 Other 32,394,334 Operation and maintenance: Related parties 1,527,916 Other 2,819,680 General and administrative: Related parties 2,772,641 Other 2,373,432 Depreciation 7,402,171 ----------- Total operating expenses 51,822,018 ----------- INCOME FROM OPERATIONS 26,303,871 ----------- OTHER INCOME (EXPENSE): Interest income 665,765 Interest expense (11,674,898) ----------- Total other expense (11,009,133) ----------- NET INCOME $15,294,738 ----------- -----------
See notes to financial statements. -3- GRAYS FERRY COGENERATION PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------------------------------------------- Adwin CogenAmerica Trigen Total (Schuylkill) Schuylkill (Schuylkill) Partners' Cogeneration, Inc. Inc. Cogeneration, Inc. Capital BALANCE, JANUARY 1, 1996 $ 2,784,214 $ 2,658,516 $ 5,442,730 Capital contributions $10,000,000 10,000,000 10,000,000 30,000,000 ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1997 12,784,214 12,658,516 10,000,000 35,442,730 Net income for period 5,098,246 5,098,246 5,098,246 15,294,738 ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1998 $17,882,460 $17,756,762 $15,098,246 $50,737,468 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. -4-
GRAYS FERRY COGENERATION PARTNERSHIP STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------------------------------------------------- 1998 1997 OPERATING ACTIVITIES: Net income $15,294,738 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,402,171 Amortization of other asset 426,949 Changes in assets and liabilities which provided (used) cash: Accounts receivable - related parties (8,048,677) Accounts receivable - other (1,805,350) Prepaid assets (116,976) Inventories (1,142,975) Accounts payable and accrued expenses - related parties 3,503,417 Accounts payable and accrued expenses - other 15,017,152 Other assets (758,260) ------------ Net cash provided by operating activities 29,772,189 ------------ INVESTING ACTIVITIES: Construction expenditures $(6,968,920) $(74,253,351) Decrease in other construction related expenses (2,439,849) Decrease in construction related accruals - related parties (558,759) Decrease in construction related accruals - other (6,381,865) (4,812,728) ------------- ------------- Net cash used in investing activities (13,909,544) (81,505,928) ------------- ------------- FINANCING ACTIVITIES: Proceeds from borrowings under construction loan agreement and subordinated debt 15,000,000 57,900,000 Repayment of construction loan agreement (18,675,951) Partners' capital contributions 30,000,000 ------------- ------------- Net cash (used in) provided by financing activities (3,675,951) 87,900,000 ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 12,186,694 6,394,072 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,441,729 47,657 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $18,628,423 $ 6,441,729 ------------- ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the year for interest, net of amounts capitalized in 1997 $ 7,770,075 $ -- ------------- ------------- ------------- -------------
See notes to financial statements. -5- GRAYS FERRY COGENERATION PARTNERSHIP NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 - -------------------------------------------------------------------------------- 1. ORGANIZATION OF PARTNERSHIP Grays Ferry Cogeneration Partnership, (the "Partnership") was organized on October 29, 1991 as a Pennsylvania general partnership for the sole purpose of developing, owning, constructing and operating a 150 megawatt gas and oil fired qualifying cogeneration facility (the "Project") at the Schuylkill Station of the Trigen-Philadelphia Energy Corporation ("TPEC") in Philadelphia, Pennsylvania. For the period from October 29, 1991 (date of inception) through January 8, 1998, the Partnership was considered a development stage entity as its sole activity was construction of the Facility. Pursuant to 20-year electricity and 25-year steam purchase agreements between the Partnership and its two customers, sales of electricity and steam began in January 9, 1998, the date of Commercial Operation. The Partnership's date of Commercial Operation of January 9, 1998 was chosen because it was the date its customers started paying it for electricity and steam sold to them under its 20-year electricity purchase agreements and its 25-year steam purchase agreements. The Partnership believes the date should have been December 30, 1997 and is litigating this issue as part of the litigation described in Note 2. The Partnership's original general partners are Adwin Equipment Company, a wholly owned subsidiary of Eastern Pennsylvania Development Company, which is a wholly owned subsidiary of PECO Energy Company ("PECO") and O'Brien (Schuylkill) Cogeneration, Inc., ("O'Brien"), a wholly owned subsidiary of O'Brien Environmental Energy, Inc. Subsequent to the original Partnership formation, Adwin (Schuylkill) Cogeneration, Inc. ("Adwin"), a wholly owned subsidiary of Adwin Equipment Company, was assigned all rights, responsibilities, and obligations of the Partnership previously held by Adwin Equipment Company. Trigen (Schuylkill) Cogeneration, Inc. ("Trigen"), a wholly owned subsidiary of Trigen Energy Corporation and an affiliate of TPEC, Philadelphia Thermal Development Corporation, ("PTDC"), and Philadelphia United Power Corporation, ("PUPCO"), joined the Partnership as an equal partner as of March 1, 1996. In a reorganization plan, approximately 40% of the capital stock of O'Brien Environmental Energy, Inc. was acquired by NRG Energy, Inc., and the Company was renamed NRG Generating (U.S.) Inc. As a result of this reorganization, O'Brien became known as NRGG (Schuylkill) Cogeneration, Inc. ("NRGG"). During 1998, NRGG was renamed CogenAmerica Schuylkill, Inc. ("Cogen"). The three general partners are equal partners, with net operating profits and losses and distributions to be allocated equally to the partners, subject to the terms and provisions as stated in the Amended and Restated Partnership Agreement. 2. CONTINUATION OF BUSINESS The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed below, PECO has taken action to terminate its power purchase agreements with the Partnership. As a consequence, the Project Lender has determined that the -6- Partnership is in default. These actions raise substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of these uncertainties, other than the classification of the Project debt as current. ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACT - Although the Partnership began Commercial Operation on January 9, 1998, the Partnership has not yet accepted care, custody or control of the Project from Westinghouse Electric Corporation (the "Contractor") due to the Partnership's concerns over design and construction issues. This issue is in arbitration. PECO - In March 1998, the Partnership received notice from PECO that PECO believes its power purchase agreements with the Partnership are no longer effective. PECO has refused to pay the rates set forth in the agreements based on its allegations that the Pennsylvania Public Utilities Commission (the "PPUC") has denied cost recovery of the power purchase agreements in retail electric rates. On March 9, 1998, the Partnership, along with Trigen, NRGG and TPEC (collectively "Plaintiffs") filed suit against PECO, Adwin and the PPUC (collectively "Defendants") in United States District Court for the District of Pennsylvania. The suit sought to enjoin PECO from terminating the power purchase agreements and to compel PECO to pay the rates set forth in the agreements. In addition, the Plaintiffs sought actual damages, punitive damages, attorneys' fees and costs. On March 19, 1998, the federal district court dismissed the lawsuit for lack of subject matter jurisdiction. On April 9, 1998, the Plaintiffs filed suit against the Defendants in the Court of Common Pleas (the "Court") for Philadelphia County in the State of Pennsylvania. Preliminary injunctive relief against PECO in the form of specific performance of the electric sale agreements, including payments according to the contract terms, was granted by the Court on May 6, 1998. A $50,000 bond required by the Court was posted by the Plaintiffs on May 7, 1998. On May 8, 1998, PECO sought a stay of the May 6 Order which was denied on May 20, 1998. Also on May 20, 1998, the Court issued a separate order adjudging PECO to be in civil contempt of the May 6 Order. A coercive sanction of $50,000 per day, or portion thereof, for nonpayment of all sums owing by PECO in accordance to the contract terms was included in the May 20, 1998 Order. An emergency application of stay by PECO of the May 6 Order was denied on May 22, 1998. As a result, PECO complied with the May 6 Order on May 22, 1998. CONSTRUCTION LOAN DEFAULT - On March 17, 1998 the Partnership received a notice of default from the Project Lender stating that PECO's determination that the power purchase agreements are no longer in effect constitutes a Material Adverse Effect as defined under the credit agreement. In addition, the Subordinate Credit Commitment (the "Subordinate Debt") contains cross-default provisions; accordingly upon notice of default from the Project Lender, the Partnership was in default on its Subordinate Debt. As of the date of this report, the default has not been waived; accordingly, the Partnership's long-term debt has been reclassified as current in the Partnership's balance sheet (see Note 6). The Project Lender has also restricted the Partnership's ability to make distributions to related parties for certain transactions, along with distributions to the Partners of Partnership earnings. In addition, the interest rate charged under the credit agreement increased to prime plus 2.00%, and the interest on the Subordinate Debt increased to prime plus 3.5% (9.75% and 11.25%, respectively, at December 31, 1998), the penalty interest rates. Management intends to vigorously pursue enforcement of the power purchase agreements, which if successful, should result in a cure of the construction loan and Subordinate Debt default. -7- 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) CAPITALIZED PROJECT COSTS - Construction of the Project was originally scheduled to be completed on or about December 8, 1997 (see Notes 1 and 5), at an estimated cost of $158,000,000. $128,000,000 was provided from the proceeds of the credit agreements (see Note 6), and $30,000,000 was provided from partners' capital contributions (see Note 7). The remainder has been financed through accounts and retainage payable. Capitalized Project costs include costs incurred in the development and construction of the gas and oil fired 150-megawatt cogeneration facility. The majority of these costs represent expenditures made under the Engineering, Procurement, and Construction contract between the Partnership and the Contractor. Other costs represent expenditures for legal, consulting, engineering and financing activities relating to the Project. All costs related to the design and construction of the Project up to the date of Commercial Operation on January 9, 1998, have been capitalized as construction work-in-progress when incurred and now are classified as plant in service, except deferred financing fees which are included in other assets. Substantially all of the property, plant and equipment is being depreciated over 20 years, the life of the Project's electric and contingent capacity sales agreements (see Note 4). (b) REVENUE RECOGNITION - The Partnership's primary source of revenues is from the sale of steam to TPEC and the sale of electricity generated by the Project to PECO. Pursuant to the Steam Sales Agreement, TPEC is obligated to purchase all of its steam requirements from the Project as defined in the agreement. Under the provisions of the Power Purchase Agreements, PECO has agreed to purchase, or accept delivery of, the net electric output from the Project, up to the lesser of 150 megawatts or the amount of electric output for which the Federal Energy Regulatory Commission ("FERC") has certified the Project. (c) SEGMENT REPORTING - The Partnership currently operates the Project, which produces two forms of salable energy from one generation process. Revenues from each of the two forms are disclosed on the statement of income. (d) INVENTORY - Inventory, which is recorded on the first-in, first-out basis, consists of the following at December 31:
1998 1997 Fuel $ 1,532,987 $ 1,020,469 Spare Parts 630,457 ----------- ----------- $ 2,163,444 $ 1,020,469 ----------- ----------- ----------- -----------
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS - The amounts reported in the balance sheets for accounts receivable, accounts payable and debt approximate fair value. (f) ACCOUNTING FOR INCOME TAXES - The Partnership is not a taxpaying entity for income tax purposes. Taxable income or loss from the Partnership is reportable by the Partners on their respective income tax returns. Accordingly, there is no recognition of income taxes in the financial statements. (g) INTEREST RATE HEDGING - The Partnership entered into interest rate swap agreements in order to hedge against future increases in interest rates. For swap contracts that effectively hedge interest -8- rate exposures, the net cash amounts paid or received on the contract are accrued and recognized as an adjustment to interest expense over the period of the contract. (h) USE OF ESTIMATES - The preparation of the Partnership's financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the amounts of expenses during the reporting periods. Actual results could differ from those estimates. (i) RECLASSIFICATIONS - Certain amounts in the 1997 financial statements have been reclassified to conform to current year presentation. (j) CASH AND CASH EQUIVALENTS - The Partnership classifies all investments with terms to maturity of less than three months upon purchase as cash and cash equivalents. Cash and cash equivalents at December 31, 1998 consist primarily of a money market investment account, which is carried at market, which approximates cost. (k) DEFERRED FINANCING COSTS - Deferred financing costs of $6,544,596 are amortized over the life of the credit agreements and are included in other assets. (l) REAL ESTATE TAXES - The Partnership has accrued real estate taxes as required in the Facility Lease (see Note 4). The Partnership has made its best estimate of its anticipated real estate taxes, but has not yet been billed by its local taxing authority. However, management does not believe that actual taxes due will be materially different than the amounts currently accrued. 4. RELATED PARTY AGREEMENTS AND TRANSACTIONS FACILITY LEASE - The Project is located at 2600 Christian Street, Philadelphia, Pennsylvania, on the site of TPEC's Schuylkill Station and PECO's Schuylkill Station, which is owned by PECO. The Partnership has leased a portion of the land which TPEC has leased from PECO. The lease agreement with TPEC commenced on the date construction began, March 8, 1996, and will terminate 25 years from the date of Commercial Operation. The Partnership is obligated to pay TPEC $1 per year as rent. The Partnership is required to pay any increase in taxes, assessments and fees assessed against the site or the Facility during the lease term. DOCK FACILITY SERVICE AGREEMENT - The Partnership has an agreement with PTDC and TPEC, an affiliate of PTDC, for fuel oil transportation and storage services. The Partnership pays operating fees based on the number of barrels received at, or delivered to, the dock as well as a storage fee for barrels stored for use by the Project. These fees are adjusted annually based on the Consumer Price Index ("CPI"). During 1998 and 1997, the Partnership incurred costs associated with these services of $199,640 and $100,923, respectively, of which $12,862 and $100,923 is included in accounts payable at December 31, 1998 and 1997, respectively. The entrance to the Schuylkill Station of TPEC, which is also the entrance to the Project, was upgraded in 1997. The Partnership had previously agreed to reimburse TPEC for its share of the cost which amounted to $250,000. OPERATIONS AND MAINTENANCE AGREEMENT - PUPCO, a Delaware corporation, an affiliate of TPEC, manages and performs all operation and maintenance of the Project subsequent to the Commercial Operation date in accordance with a 25-year agreement. Prior to Commercial Operation, PUPCO was reimbursed for certain costs incurred during mobilization and received a monthly fee of $25,000 limited to $150,000 in total monthly fees. After Commercial Operation begins, the Partnership is required to pay PUPCO an annual operating fee of $600,000 as detailed in the agreement. A portion of the -9- operating fee, $400,000, is adjusted annually based on changes in the CPI. As an additional fee, PUPCO will receive 30% of all payments received by the Partnership pursuant to the Contingent Capacity Purchase Addendum (Phase 1). The Partnership was billed by PUPCO annual operating fees of $600,000 and a capacity fee of $757,416, and reimbursable expenses of $1,647,658 for 1998, of which $1,497,003 was included in accounts payable at December 31, 1998. Included in those billings were $29,192 and $32,851 of fees and reimbursable expenses, respectively, which were capitalized as construction cost. STEAM SALE AGREEMENT - The Partnership has a 25-year agreement with TPEC in which the Partnership sells all of the steam produced by the plant to TPEC. The price for low- and high-pressure steam is determined based on a function of weighted average fuel price, CPI and the City of Philadelphia Tariff Water and Sewer Rates. The agreement requires TPEC to pay for a minimum of 3.3 Mlbs on an annual basis upon Commercial Operation. During 1998 and 1997, $18,113,962 and $851,182, respectively, was billed by the Partnership to TPEC for steam produced and capacity charges. Of the amounts billed in 1998 and 1997, $296,199 and $851,182, respectively, were capitalized as a reduction of construction costs as such sales occurred as a result of plant testing. Accounts receivable as of December 31, 1998 and 1997 include $3,985,346 and $851,182, respectively, due from TPEC for these billings. ELECTRIC AND CONTINGENT CAPACITY SALES AGREEMENTS - The Partnership has two 20-year electric sale agreements with PECO, commencing at the Commercial Operation date, whereby the Partnership supplies PECO with electric output at costs defined by the agreements. The terms of agreements require PECO to purchase or accept delivery of the net electric output from the power plant of the lesser of 150 megawatts or the amount of electric output for which the FERC has certified the power plant. The two parties also entered into a 20-year Contingent Capacity Purchase Addendum which requires PECO to purchase electric capacity from the Partnership. The addendum term commenced on the date of Commercial Operation. During 1998 and 1997, $61,932,981 and $1,778,911, respectively, was billed by the Partnership to PECO for electricity produced and capacity charges. Of the amounts billed in 1998 and 1997, $1,624,855 and $1,778,911, respectively, were applied as a reduction of construction costs as such sales occurred as a result of plant testing. Accounts receivable as of December 31, 1998 and 1997 include $6,693,424 and $1,778,911, respectively, due from PECO for these billings. As a result of the Project, PECO was required to construct an interconnection between its facility and the Partnership's facility. The costs associated with the interconnection, $2,355,426, were reimbursed to PECO by the Partnership during 1997. Other amounts paid to PECO during 1997 for reimbursement of expenses were $6,000 for the Partnership's portion of a joint thermal modeling study. STEAM VENTURE AGREEMENT - On September 17, 1993, TPEC, PUPCO and the Partnership entered into an Amended and Restated Steam Venture Agreement for the purpose of the Partnership designing, constructing, starting-up, and testing and owning a cogeneration facility, with the assistance of the other two participants. The agreement required the Partnership to pay PUPCO quarterly fees of $150,000 up to Commercial Operation. Amounts billed in 1997 were capitalized as construction costs; however, $252,635 was in accounts payable at December 31, 1997. After Commercial Operation commenced, PUPCO receives annual fees of $1,200,000 payable in monthly installments. Two-thirds of the annual fee is subject to an escalation of 3% per annum. During 1998 the Partnership was billed $1,200,000 by PUPCO under this agreement, of which $25,806 was capitalized as construction cost. Accounts payable at December 31, 1998, include $1,200,000 related to these billings. In addition, during 1997, the Partnership incurred PUPCO mobilization fees of $150,000. FUEL MANAGEMENT AGREEMENT - During 1998, the Partnership had an agreement with Exelon Corporation, a subsidiary of PECO, for fuel management services. Under the terms of the agreement, the Partnership was to pay Exelon a fee based on the amount of natural gas and liquid fuels delivered to -10- the Project. During 1998, the Partnership incurred costs associated with these services of $176,480, of which $4,474 was capitalized as construction costs and $176,480 was included in accounts payable at December 31, 1998. CONSTRUCTION MANAGEMENT - NRGG received fees and reimbursed expenses for management services provided to the Project and for acting as the Partnership's representative to administer all third-party contracts during the construction phase. The arrangement commenced on March 8, 1996 and ceased upon Commercial Operation. During 1998, NRGG billed the Partnership fees and reimbursed expenses of $56,250 and $214,795, respectively, all of which was capitalized as construction cost. Accounts payable at December 31, 1997 included $205,201 of such fees and expenses. MANAGEMENT SERVICES AND OTHER - In accordance with the Partnership agreement, the Partnership is required to pay it's Managing Partner $150,000 per year for providing management services to the Partnership. NRGG acted as Managing Partner through November 15, 1998 and billed the Partnership fees and reimbursable expenses of $131,250 and $36,719, respectively of which $118,750 was included in accounts payable at December 31, 1998. Of these fees, $3,387 was capitalized as construction cost. Effective November 15, 1998, Trigen became the Managing Partner and billed the Partnership fees of $18,750 for the year ended December 31, 1998, all of which was included in accounts payable as of December 31, 1998. In addition, the Partnership purchases demineralized water from Trigen. For the year ended December 31, 1998, the Partnership purchased $2,206,869 of demineralized water from Trigen of which $46,671 was capitalized as a construction cost prior to commercial operation and $498,322 was included in accounts payable as of December 31, 1998. 5. OTHER SIGNIFICANT CONTRACTS GAS SUPPLY AGREEMENT - The Partnership has a Gas Sales Agreement with Aquila Energy Marketing Corporation ("Aquila"), a Delaware corporation, providing for the purchase of natural gas to meet the power plant's requirements. The purchase of gas as stated in the agreement is divided into two tiers based on quantity purchased. The price of the first tier, for daily purchases up to 32,000 million British Thermal units (MMBtu) is based on the gas spot market plus a premium. The second tier, for daily purchases above the initial 32,000 MMBtu, is also based on the gas spot market plus a premium. The premium on second tier gas purchases is subject to annual negotiations effective for years beginning January 1, 1999 and after. In addition, beginning in 2001 the price of both tiers is indexed based on the electricity rate received by the Project. The agreement also has a pricing provision for winter quantity gas delivered to certain redelivery points as defined in the agreement. The initial term of the Gas Sales Agreement is 192 months from the initial delivery and may be extended for one-year renewal periods unless terminated by either party. During 1998, the Partnership purchased $14,691,090 of gas under this agreement. GAS TRANSPORTATION ARRANGEMENTS - The Partnership and the Philadelphia Authority for Industrial Development ("PAID") entered into a Service Agreement dated January 28, 1996, whereby PAID agreed to deliver non-interruptible local gas service to the Project for up to 50,000 Dekatherms ("Dth") per day from the date of Commercial Operation via an established agreement with Philadelphia Gas Works ("PGW"). The agreement between the Partnership and PAID is for a period of 25 years and may be extended at the mutual agreement of the two parties. The Partnership is committed to purchase transportation services for a minimum annual quantity based in part, on steam sales to Trigen. In addition, TPEC permanently released capacity of 15,000 Dth to the Partnership beginning November 1, 1997. TPEC retained first refusal privileges on this released capacity in the event that the Partnership does not require the additional capacity. During 1998, the Partnership purchased $3,187,640 of transportation services under these agreements. -11- ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACT - The Partnership has a $116,300,000 engineering, procurement and construction contract (the "EPC") with the Contractor. The contract guaranteed that the Project would be provisionally completed by December 8, 1997, the projected date of Commercial Operation. Provisions of the contract included rebates to the Partnership of $70,000 a day should the Contractor fail to complete the Project on schedule as well as bonus payments to the Contractor should the Project be completed prior to schedule. The contract was not completed on time. As such, a rebate in the amount of $1,722,000 has been recorded in accounts receivable at December 31, 1998. The Partnership believes this accrual is based on a conservative estimate. Currently, the Partnership and the Contractor are in arbitration over the completion of the EPC contract (see Note 2). Provisional acceptance of the Project has not yet occurred. COMBUSTION TURBINE PARTS SUPPLY AND REPAIR AND SCHEDULED OUTAGE SERVICES AGREEMENT - The Partnership entered into a combustion turbine parts supply and repair and scheduled outage services agreement with Westinghouse Electric Corporation as of August 29, 1997. The agreement requires the Partnership to purchase from the Contractor parts and miscellaneous hardware for the gas turbine comprising a portion of the Project, repair of parts for the gas turbine comprising a portion of the Project, and scheduled outage services and technical field assistance for unscheduled outages as defined in the agreement. 6. CREDIT AGREEMENTS On March 1, 1996 the Partnership entered into a $125,000,000 Credit Agreement (the "Agreement") to provide construction and term loan financing for the purpose of financing a major portion of the Project facility. The Agreement provides the Partnership with $113,000,000 of construction loan commitments (the "Construction Loan") which are convertible to term loan commitments (the "Term Loan") after completion of certain criteria as stated in the Agreement, $7,000,000 in letter of credit commitments (the "LOC Commitment"), and $5,000,000 in working capital loan commitments (the "WC Loan"). Upon completion of the Project, the Construction Loan is due and payable or may be converted to a 15-year Term Loan, payable in quarterly installments through the year 2013. The Term Loan is available only to repay the Construction Loan. Substantially all of the Partnership's assets have been pledged as collateral under the Agreement. The Partnership had $94,324,049 outstanding under the Construction Loan at December 31, 1998. The Partnership has pledged $5,000,000 under its LOC Commitment for outstanding letters of credit as of December 31, 1998. Interest on balances outstanding under the Construction Loan and the WC Loan prior to conversion of Construction Loan to Term Loan, is based on either the base rate, as defined in the Agreement, or LIBOR plus 1.1% as elected by the Partnership at the time of borrowing, and was 6.66% at December 31, 1998. Interest on balances outstanding under the Term Loan and the WC Loan, subsequent to conversion of Construction Loan to Term Loan, is based on the rates as noted during the Construction Loan period and is subject to an increase in the percentage as defined in the Agreement. Interest on letters of credit outstanding under the LOC Commitment is currently 1.1%, and is subject to periodic increases during the term of the Agreement. The LOC Commitment also is subject to a fee of 0.125%, due quarterly. The Agreement provides for commitment fees of 0.375% on the unused Construction Loan, WC Loan and LOC Commitment. To protect the Project Lender from the uncertainty of interest rate changes during the term of the loan, the Partnership entered into an agreement (the "Swap Agreement") with Chase Manhattan Bank -12- (the "Counterparty"), a participating bank in the Loan Agreement on March 1, 1996. Under the Swap Agreement, the Partnership agreed to swap interest payments with the Counterparty. Effective December 8, 1997, the Partnership is obligated to make fixed interest payments at a rate of 7.18% from effective date of December 8, 1997 through termination date of December 8, 2012 on a balance of $56,500,000 at December 8, 1997 and decreasing in accordance with the Swap Agreement. The Counterparty is obligated to make variable interest payments based on a three-month LIBOR, which was 5.2% at December 31, 1998, on the same balance. The Partnership also has a Subordinate Credit Commitment with the Project's Contractor. The Contractor agreed to lend the Partnership $15,000,000 to provide additional funding for the construction of the Project. The funds are available after the Construction Loan commitments described above have been exhausted and the Partners have made their equity contribution of $30,000,000 to be used for the continuation of the Project's construction. The term of the Subordinate Debt is nine years and interest on the Subordinate Debt will be calculated using the prime rate for the first four years and prime rate plus 1.5% for the remaining years. During 1998, the Partnership borrowed the full $15,000,000 available under the Subordinate Debt. During 1998, the Partnership received a notice of default from the Project Lender. Such default resulted in a cross-default on the Partnership's Subordinate Debt. See Note 2. 7. CAPITAL CONTRIBUTIONS During 1997, the Construction Loan (see Note 6) was fully utilized. Each of the Partners made an equity contribution of $10,000,000. The last contributions were made December 29, 1997. 8. NEW ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 (SOP 98-5), REPORTING ON THE COSTS OF START-UP ACTIVITIES. This statement, which requires that costs related to start-up activities generally be expensed as incurred, is effective for fiscal years beginning after December 25, 1998. At this time, the Partnership has not determined the impact the adoption of this standard will have on the Partnership's financial statements. In July 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, ("SFAS No. 133") ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities, is effective for fiscal years beginning after June 15, 1999. At this time, the Partnership has not determined the impact the adoption of this standard will have on the Partnership's financial statements. -13- 9. SUBSEQUENT EVENTS On February 28, 1999, the 20 year agreement with Exelon for fuel management services was terminated by mutual consent among the parties. On March 10, 1999, the Court of Common Pleas granted the Partnership's motion for partial summary judgement effectively deciding the issue of liability on the contract claim against PECO and in favor of the Partnership in the matter discussed in Note 2. The trial will now be limited to the amount of damages PECO must pay the Partnership and the counts of fraud, conversion, breach of the implied covenant of good faith and fair dealing and breach of fiduciary duties. The trial is scheduled to begin March 29, 1999. ****** -14- CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form, S-8 (No. 333-38603) of Cogeneration Corporation of America of our report, dated January 26, 1999 (except for Note 9, as to which the date is March 10, 1999), on the financial statements for the years ended December 31, 1998 and 1997 of Grays Ferry Cogeneration Partnership appearing in this Form 10-K. /s/ Deloitte & Touche LLP - -------------------------- Deloitte & Touche LLP Philadelphia, Pennsylvania March 25, 1999 INDEX TO EXHIBITS PERIODIC REPORTS, PROXY STATEMENTS AND OTHER INFORMATION FILED BY COGENAMERICA WITH THE SEC PURSUANT TO THE INFORMATIONAL REQUIREMENTS OF THE EXCHANGE ACT MAY BE INSPECTED AND COPIED AT THE SEC'S PUBLIC REFERENCE ROOM, 450 FIFTH STREET, N.W., WASHINGTON, D.C. 20549, AND THE PUBLIC MAY OBTAIN INFORMATION ON THE OPERATION OF THE PUBLIC REFERENCE ROOM BY CALLING THE SEC AT 1-800-SEC-0330. THE SEC ALSO MAINTAINS AN INTERNET SITE (HTTP://WWW.SEC.GOV) THAT MAKES AVAILABLE REPORTS, PROXY STATEMENTS AND OTHER INFORMATION REGARDING COGENAMERICA. THE COMPANY'S SEC FILE NUMBER REFERENCE IS COMMISSION FILE NO. 1-9208.
EXHIBIT NO. DESCRIPTION - ---------- ------------ 2.1 Composite Fourth Amended and Restated Plan of Reorganization for O'Brien Environmental Energy, Inc. (currently Cogeneration Corporation of America) (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") filed as Exhibit 2.1 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 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 (Commission File No. 1-9208) 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 (Commission File No. 1-9208) 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 filed as Exhibit 2.4 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 2.5 Stock Purchase Agreement dated September 10, 1998 between the Company and MCPC LLC filed as Exhibit 2.1 to the Company's Current Report on 8-K dated October 9, 1998 (Commission File No. 1-9208) and incorporated herein by this reference. 3.1 Amended and Restated Certificate of Incorporation of the Company filed as Exhibit 3.1 to Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (Commission File No. 1-9208) and incorporated herein by this reference. 3.2 Restated Bylaws of the Company filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by reference. 10.1 Co-Investment Agreement dated April 30, 1996 between the Company and NRG Energy filed as Exhibit 10.1 to Amendment No. 1 to the Company's Annual Report on
60 Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.2.1 Chapter 11 Financing Agreement dated August 30, 1995 between the Company and NRG Energy filed as Exhibit 10.2.1 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.2.2 Letter Agreement dated February 20, 1996 between the Company and NRG Energy amending the Chapter 11 Financing Agreement filed as Exhibit 10.2.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.2.3 Letter Agreement dated April 30, 1996 between the Company and NRG Energy further amending the Chapter 11 Financing Agreement filed as Exhibit 10.2.3 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.3 Liquidating Asset Management Agreement dated April 30, 1996 between the Company and Wexford filed as Exhibit 10.3 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.4 Management Services Agreement dated as of January 31, 1996 between the Company and NRG Energy filed as Exhibit 10.4 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.5.1 Loan Agreement dated April 30, 1996 between the Company and NRG Energy filed as Exhibit 10.5.1 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.5.2 Note dated April 30, 1996 from the Company to NRG Energy in the principal amount of $45,000,000 filed as Exhibit 10.5.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.6.1 Supplemental Loan Agreement dated April 30, 1996 between NRG Energy and the Company filed as Exhibit 10.6.1 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.6.2 Note dated April 30, 1996 from the Company to NRG Energy in the principal amount of $15,855,545.25 filed as Exhibit 10.6.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.7.1 NRG Newark Cogen Loan Agreement dated April 30, 1996 between NRG Energy and the Company filed as Exhibit 10.7.1 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.7.2 Note dated April 30, 1996 from the Company to NRG Energy in the principal amount of $24,000,000 filed as Exhibit 10.7.2 to Amendment No. 1 to the Company's Annual
61 Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.8.1 Credit Agreement dated May 17, 1996 between NRG Generating (Newark) Cogeneration Inc. (currently CogenAmerica Newark Inc.), NRG Generating (Parlin) Cogeneration Inc. (currently CogenAmerica Parlin Inc.), Credit Suisse, Greenwich Funding Corporation and any Purchasing Lender, as Lenders thereunder filed as Exhibit 10.8.1 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.8.2 Amendment No. 1 to the Credit Agreement dated June 28, 1996 between NRG Generating (Newark) Cogeneration Inc., NRG Generating (Parlin) Cogeneration Inc. and Credit Suisse, Greenwich Funding Corporation and any Purchase Lender (as defined therein) filed as Exhibit 10.8.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.8.3 Stock Pledge Agreement dated June 28, 1996 between the Company as Pledgor and Credit Suisse filed as Exhibit 10.8.3 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 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 (as defined therein) filed as Exhibit 10.8.4 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 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 (as defined therein) filed as Exhibit 10.8.5 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.8.6 Tax Indemnification Agreement dated June 28, 1996 between the Company, NRG Generating (Newark) Cogeneration Inc., NRG Generating (Parlin) Cogeneration Inc. and Credit Suisse filed as Exhibit 10.8.6 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.8.7 Assignment and Security Agreement dated June 28, 1996 between NRG Generating (Parlin) Cogeneration Inc. and Credit Suisse filed as Exhibit 10.8.7 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.8.8 Amended and Restated Leasehold Mortgage, Assignment of Leases and Rents and Security Agreement dated June 28, 1996 between NRG Generating (Newark) Cogeneration Inc. and Credit Suisse filed as Exhibit 10.8.8 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference.
62 10.8.9 Leasehold Mortgage, Assignment of Leases and Rents and Security Agreement dated June 28, 1996 between NRG Generating (Parlin) Cogeneration Inc. and Credit Suisse filed as Exhibit 10.8.9 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.8.10 Interest Rate Swap Agreement dated August 2, 1996 between NRG Generating (Newark) Cogeneration Inc., NRG Generation (Parlin) Cogeneration, Inc. and Credit Suisse filed as Exhibit 10.8.10 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.9 Loan Agreement dated March 8, 1996 between O'Brien (Schuylkill) Cogeneration Inc. (currently CogenAmerica Schuylkill Inc.) and NRG Energy in connection with the Grays Ferry Partnership filed as Exhibit 10.9.1 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.10 Loan Agreement between the Company and PECO Energy Company ("PECO") filed as Exhibit 10.10.6 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 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 Exhibit 10.3.11 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 filed as Exhibit 10.11.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.11.3 Second Amendment to Power Purchase Agreement dated March 1, 1988 between the Company and JCP&L filed as Exhibit 10.11.3 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.11.4 Letter Agreement dated April 30, 1996 between O'Brien (Newark) Cogeneration, Inc. (currently CogenAmerica Newark Inc.), O'Brien (Parlin) Cogeneration, Inc. (currently CogenAmerica Parlin Inc.) and JCP&L filed as Exhibit 10.11.4 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.11.5 Third Amendment to Power Purchase Agreement dated April 30, 1996 between O'Brien (Newark) Cogeneration, Inc. and JCP&L filed as Exhibit 10.11.5 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.12 Transmission Service and Interconnection Agreement dated November 17, 1987 between O'Brien Energy Systems, Inc. (currently Cogeneration Corporation of America) and Public Service Electric and Gas Company filed as Exhibit 10.14 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year
63 ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.13.1 Steam Purchase Agreement dated October 3, 1986 between O'Brien Cogeneration IV, Inc. (currently CogenAmerica Newark Inc.) and Newark Boxboard Co. filed as Exhibit 10.15.1 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.13.2 Amendment to Steam Purchase Agreement dated March 15, 1988 between O'Brien Cogeneration IV, Inc. and Newark Boxboard Co. filed as Exhibit 10.15.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.13.3 Amendment to Steam Purchase Agreement dated July 18, 1988 between O'Brien (Newark) Cogeneration, Inc. and Newark Group Industries, Inc. filed as Exhibit 10.15.3 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.14.1 Agreement for Purchase and Sale of Electric Power dated October 20, 1986 between the Company and JCP&L and filed Exhibit 10.3.12 to the Company's Registration Statement (File No. 33-11789) and incorporated herein by this reference. 10.14.2 First Amendment to Agreement for Purchase and Sale Electric Power dated June 11, 1991 between the Company and JCP&L filed as Exhibit 10.17.2 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.14.3 Amended and Restated Agreement for Purchase and Sale of Electric Power dated April 30, 1996 between O'Brien (Parlin) Cogeneration, Inc. and JCP&L filed as Exhibit 10.17.3 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.14.4 Letter Agreement dated April 30, 1996 between O'Brien (Parlin) Cogeneration, Inc. and JCP&L filed as Exhibit 10.17.4 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.15.1 Steam Purchase Contract dated December 8, 1986 between the Company and E.I. du Pont de Nemours ("E.I. du Pont") and Company filed as Exhibit 10.20.1 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.15.2 Amendment No. 1 to Steam Purchase Contract dated January 12, 1988 between the Company and E.I. du Pont filed as Exhibit 10.20.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.15.3 Letter Agreement dated July 25, 1988 between the Company and E.I. du Pont filed as Exhibit 10.20.3 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference.
64 10.15.4 Amendment No. 3 to Steam Purchase Agreement dated December 12, 1988 between the Company and E.I. du Pont filed as Exhibit 10.20.4 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.15.5 Amendment No. 4 to Steam Purchase Contract dated July 14, 1989 between the Company and E.I. du Pont filed as Exhibit 10.20.5 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.15.6 Amendment No. 5 to Steam Purchase Contract dated February 16, 1993 between the Company and E.I. du Pont filed as Exhibit 10.20.6 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.16.1 Electricity Purchase Contract dated January 18, 1988 between the Company and E.I. du Pont filed as Exhibit 10.21.1 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.16.2 Electricity Purchase Contract dated April 30, 1996 between O'Brien (Parlin) Cogeneration, Inc. and NRG Parlin Inc. filed as Exhibit 10.21.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.16.3 Assignment of Electricity Purchase Contract dated April 30, 1996 between O'Brien (Parlin) Cogeneration, Inc., NRG Parlin, Inc. and E.I. du Pont filed as Exhibit 10.21.3 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.17 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. and Trigen-Schuylkill Cogeneration, Inc. ("Trigen-Schuylkill") filed as Exhibit 10.23 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.18.1 Acquisition Agreement dated March 1, 1996 between Adwin Schuylkill, O'Brien (Schuylkill) Cogeneration, Inc. and Trigen-Schuylkill filed as Exhibit 10.24.1 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.18.2 Side Agreement dated March 1, 1996 between Adwin Schuylkill, O'Brien (Schuylkill) Cogeneration, Inc. and Trigen-Schuylkill filed as Exhibit 10.24.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.19.1 Contingent Capacity Purchase Addendum to the Agreement for Purchase of Electric Output (Phase I) dated September 17, 1993 between PECO and Grays Ferry filed as Exhibit 10.25.1 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference.
65 10.19.2 Contingent Capacity Purchase Addendum to the Agreement for Purchase of Electric Output (Phase II) dated September 17, 1993 between PECO and Grays Ferry filed as Exhibit 10.25.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.19.3 Amendment Agreement dated January 31, 1994 between PECO and Grays Ferry filed as Exhibit 10.25.3 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.19.4 Agreement for Purchase of Electric Output (Phase I) dated July 28, 1992 between PECO and Grays Ferry filed as Exhibit 10.25.4 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.19.5 Agreement for Purchase of Electric Output (Phase II) dated July 28, 1992 between PECO and Grays Ferry filed as Exhibit 10.25.5 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.20.1 Amended and Restated Steam Purchase Agreement dated September 17, 1993 among Philadelphia Thermal Energy Corporation ("PTEC"), Adwin Equipment Company ("Adwin"), the Company and Grays Ferry filed as Exhibit 10.26.1 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.20.2 Amended and Restated Steam Venture Agreement dated September 17, 1993 among PTEC, Philadelphia United Power Corporation ("PUPCO"), Adwin and the Company filed as Exhibit 10.26.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.21.1 Amended and Restated Project Services and Development Agreement dated September 17, 1993 by and between PUPCO and Grays Ferry filed as Exhibit 10.27.1 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.21.2 Consent to Assignment of Agreement dated March 1, 1996 between PUPCO, Grays Ferry and The Chase Manhattan Bank, N.A. ("Chase") filed as Exhibit 10.27.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.22 Amended and Restated Site lease, dated September 17, 1993 between PTEC and Grays Ferry filed as Exhibit 10.28 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.23.1 NRG Generating (Newark) Cogeneration Inc./Power Operations, Inc. Operating and Maintenance Agreement dated November 8, 1996 between NRG Generating (Newark) Cogeneration Inc. and Power Operations, Inc. filed as Exhibit 10.25.1 to the Company's
66 Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.23.2 NRG Generating (Parlin) Cogeneration Inc./Power Operations, Inc. Operating and Maintenance Agreement dated December 31, 1996 between NRG Generating (Parlin) Cogeneration Inc. and Power Operations, Inc. filed as Exhibit 10.25.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.23.3 Guarantee of Operator's Obligations by the Company dated November 8, 1996 relative to NRG Generating (Newark) Cogeneration Inc. filed as Exhibit 10.25.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.23.4 Indemnification Agreement dated March 21, 1997 between NRG Generating (Newark) Cogeneration Inc., NRG Generating (Parlin) Cogeneration Inc., NRG Energy and Credit Suisse First Boston filed as Exhibit 10.25.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.23.5 Stock Purchase Agreement dated January 1, 1997 between NRG Energy and the Company filed as Exhibit 10.25.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.23.6 Guarantee of Operator's Obligations by NRG Energy dated March 21, 1997 between NRG Generating (Newark) Cogeneration Inc. and NRG Generating (Parlin) Cogeneration Inc. filed as Exhibit 10.25.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.23.7 Consent to Assignment of Operating Guaranty Agreement dated March 21, 1997 between NRG Generating (Newark) Cogeneration Inc., NRG Generating (Parlin) Cogeneration Inc., NRG Energy and Credit Suisse First Boston filed as Exhibit 10.25.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.24.1 Credit Agreement dated December 17, 1997 between the Company, MeesPierson Capital Corp. and the Lenders (as defined therein) filed as Exhibit 10.26.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.24.2 Promissory Note dated December 17, 1997 from the Company to MeesPierson Capital Corp. in the principal amount of $30,000,000 filed as Exhibit 10.26.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.24.3 Pledge Agreement dated December 17, 1997, between the Company and MeesPierson Capital Corp. filed as Exhibit 10.26.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.24.4 Guarantee dated as of December 17, 1997, made by O'Brien (Philadelphia) Cogeneration Inc. in favor of MeesPierson Capital Corp. filed as Exhibit 10.26.4 to the
67 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.24.5 General Security Agreement dated as of December 17, 1997, between O'Brien (Philadelphia) Cogeneration Inc. and MeesPierson Capital Corp. filed as Exhibit 10.26.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.24.6 General Security Agreement dated as of December 17, 1997, by the Company in favor of MeesPierson Capital Corp. filed as Exhibit 10.26.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.24.7 General Security Agreement dated as of December 17, 1997, by O'Brien Energy Services Company in favor of MeesPierson Capital Corp. filed as Exhibit 10.26.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.24.8 Subordination Agreement dated as of December 10, 1997, among MeesPierson Capital Corp., the Senior Lenders, the Company and NRG Energy filed as Exhibit 10.26.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.24.9 Subordination Agreement dated as of December 17, 1997 among MeesPierson Capital Corp., the Senior Lenders, O'Brien (Philadelphia) Cogeneration Inc. and O'Brien Energy Services Company filed as Exhibit 10.26.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.24.10 First Amendment to Credit Agreement dated as of February 12, 1999 between the Company and MeesPierson Capital Corp. 10.25.1 Membership Interest Purchase Agreement dated December 10, 1997 between NRG Energy, NRGG Funding Inc. (currently CogenAmerica Funding Inc.) and the Company filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 30, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.2 Equity Commitment Agreement dated September 15, 1997 between NRG Energy and Chase filed as Exhibit 10.27.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.3 Assignment and Assumption Agreement dated December 10, 1997 between NRG Energy and NRGG Funding Inc. filed as Exhibit 10.27.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.4 Equity Commitment Guaranty, dated as of December 10, 1997 by NRG Energy in favor of Chase and NRG (Morris) Cogen, LLC (currently CogenAmerica Morris LLC) filed as Exhibit 10.27.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference.
68 10.25.5 Amendment and Consent, dated as of December 10, 1997 among NRG (Morris) Cogen, LLC and the banks (the "Banks") party to the Credit Agreement, dated as of September 15, 1997, among NRG (Morris) Cogen, LLC, the Banks and Chase filed as Exhibit 10.27.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.6 Construction Services Agreement dated August 29, 1997 between NRG (Morris) Cogen, LLC and NRG Energy filed as Exhibit 10.27.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.7 First Amendment to Construction Services Agreement dated December 10, 1997 between NRG (Morris) Cogen, LLC and NRG Energy filed as Exhibit 10.27.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.8 Construction and Term Loan Agreement dated September 15, 1997 between NRG (Morris) Cogen, LLC, Chase and the Banks filed as Exhibit 10.27.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.9 Consent and Amendment, dated as of December 10, 1997, among NRG (Morris) Cogen, LLC, the Banks and Chase filed as Exhibit 10.27.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.10 Pledge and Security Agreement, dated as of December 10, 1997 by NRGG Funding Inc. and NRG Morris, Inc. (currently CogenAmerica Morris Inc.) in favor of Chase filed as Exhibit 10.27.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.11 Supplemental Loan Agreement, dated as of December 10, 1997 between NRG Energy, the Company and NRGG Funding Inc. filed as Exhibit 10.27.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.12 Subordination Agreement, dated as of December 10, 1997 between Chase and NRG Energy filed as Exhibit 10.27.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.13 Subordinated Pledge and Security Agreement, dated as of December 10, 1997 by NRGG Funding Inc. and NRG Morris, Inc. to NRG Energy filed as Exhibit 10.27.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.14 Operation and Maintenance Agreement dated September 19, 1997 between NRG (Morris) Cogen, LLC and NRG Morris Operations Inc. filed as Exhibit 10.27.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.15 First Amendment to Operation and Maintenance Agreement dated December 10, 1997 between NRG (Morris) Cogen, LLC and NRG Morris Operations Inc filed as Exhibit
69 10.27.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.16 Assignment, Assumption and Consent, dated as of December 30, 1997 among NRG Energy, NRGG Funding Inc., the Company and Equistar Chemicals, LP a successor in interest to Millennium Petrochemicals, Inc. filed as Exhibit 10.27.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.17 Limited Guaranty dated September 19, 1997 by NRG Energy for the benefit of NRG (Morris) Cogen, LLC filed as Exhibit 10.27.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.18 First Amendment to Limited Guaranty, dated as of the 10th day of December, 1997 that amends the Limited Guaranty made by NRG Energy for the benefit of NRG (Morris) Cogen, LLC dated September 19, 1997 filed as Exhibit 10.27.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.25.19 First Amendment to Loan Agreement dated as of November 30, 1998 between the Company, CogenAmerica Funding Inc., and NRG Energy. 10.26 Lease dated July 18, 1988 between Newark Group Industries, Inc. and O'Brien (Newark) Cogeneration, Inc. filed as Exhibit 10.29 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.27 Ground Lease dated January 2, 1987 between E.I. Du Pont and Company and O'Brien Energy Systems, Inc. filed as Exhibit 10.30 to Amendment No. 2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.28.1* NRG Generating (U.S.) Inc. 1996 Stock Option Plan ("1996 Plan") dated September 20, 1996 and filed as Appendix A to the Company's Proxy Statement dated October 28, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.28.2* Form of 1996 Plan Incentive Stock Option Agreement filed as Exhibit 10.31.2 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.28.3* Form of 1996 Plan Employee Nonqualified Stock Option Agreement filed as Exhibit 10.31.3 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference. 10.28.4* Form of 1996 Plan Nonemployee Director Nonqualified Stock Option Agreement filed as Exhibit 10.31.4 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (Commission File No. 1-9208) and incorporated herein by this reference.
- --------------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to Item 14(c) of Form 10-K. 70 10.29.1* NRG Generating (U.S.) Inc. 1997 Stock Option Plan ("1997 Plan") dated May 1, 1997 and filed as an Appendix to the Company's Proxy Statement dated April 24, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.29.2* Form of 1997 Plan Incentive Stock Option Agreement filed as Exhibit 10.31.2 to the Company's Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.29.3* Form of 1997 Plan Employee Nonqualified Stock Option Agreement filed as Exhibit 10.31.3 to the Company's Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.29.4* Form of 1997 Plan Nonemployee Director Nonqualified Stock Option Agreement filed as Exhibit 10.31.4 to the Company's Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.30* Employment Agreement dated March 28, 1997 between the Company and Robert T. Sherman, Jr., and filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.31* Employment Agreement dated August 28, 1997 between the Company and Richard Stone filed as Exhibit 10.33 in the Compay's Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.32 Confidentiality Agreement dated October 3, 1997 between the Company and NRG Energy filed as Exhibit 10.35 in the Company's Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 1-9208) and incorporated herein by this reference. 10.33* Settlement Agreement and Mutual Release dated December 1, 1998 between the Company, Robert T. Sherman, and NRG Energy. 10.34 Loan Agreement dated as of October 9, 1998 between NRG Energy, the Company, CogenAmerica Pryor Inc. and Oklahoma Loan Acquisition Corporation. 10.35.1* NRG Generating (U.S.) Inc. 1998 Stock Option Plan ("1998 Plan") dated May 20, 1998 and filed as an Appendix to the Company's Proxy Statement dated April 27, 1998 (Commission File No. 1-9208) and incorporated herein by this reference. 10.35.2* Form of 1998 Plan Incentive Stock Option Agreement. 10.35.3* Form of 1998 Plan Employee Nonqualified Stock Option Agreement. 10.35.4* Form of 1998 Plan Nonemployee Director Nonqualified Stock Option Agreement. 10.35.5* Form of 1998 Plan Nonemployee Nonqualified Stock Option Agreement. 21 List of Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP. 27 Financial Data Schedule.
71 EX-10.24-10 2 EXHIBIT 10.24.10 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FIRST AMENDMENT TO CREDIT AGREEMENT DATED AS OF FEBRUARY 12, 1999 BETWEEN COGENERATION CORPORATION OF AMERICA (f/k/a NRG GENERATING (U.S.), INC.), AS BORROWER AND MEESPIERSON CAPITAL CORP., AS ARRANGER, LENDER, AGENT AND SECURITY TRUSTEE - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made as of the 12th day of February, 1999, between Cogeneration Corporation of America (f/k/a NRG Generating (U.S.), Inc.), as the Borrower, and MeesPierson Capital Corp., as the Arranger, the Lender, the Agent and the Security Trustee (in such collective capacity, "MPCC"), and amends and is supplemental to that certain Credit Agreement, dated as of December 17, 1997, between the Borrower, and MPCC (the "Credit Agreement"). WITNESSETH: WHEREAS, the Borrower and the Lender desire to amend the Credit Agreement; and NOW, THEREFORE, in consideration of the premises and such other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by the Borrower and MPCC, it is hereby agreed as follows: 1. RULES OF CONSTRUCTION; DEFINITIONS. Capitalized terms not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. 2. AMENDMENTS TO THE CREDIT AGREEMENT. (a) Subject to the terms and conditions of this Amendment, Section 9.1(f) of the Credit Agreement is hereby amended and supplemented by inserting the following at the end of the Section: ; PROVIDED, HOWEVER, no Event of Default arises under this Section 9.1(f) as the result of either (i) the purported termination by PECO of the Grays Ferry Power Purchase Agreements, (ii) the subsequent declaration of an event of default under that certain Credit Agreement (the "CHASE FACILITY"), dated as of March 1, 1996, among Grays Ferry, the financial institutions party thereto and The Chase Manhattan Bank, as agent for such financial institutions, or (iii) by reason of or due to acceleration of the indebtedness under the Chase Facility and/or enforcement of the lender's rights under the Chase Facility and/or any other actions taken by PECO Energy Company or any other person or entity under or allegedly as allowed by the Grays Ferry Power Purchase Agreements and/or any other action taken by the lenders or any other person or entity under or as allowed by the Chase Facility and/or events or circumstances that result directly or indirectly from, are directly or indirectly due to or are directly or indirectly caused by any or all of the above, including without limitation action, events or circumstances which with the passing of time, or both, would or could otherwise constitute an Event of Default under the Credit Agreement. (b) The Credit Agreement is hereby further amended by substituting the Schedule 2 attached hereto as Annex A in place of the existing Schedule 2. 4. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents that this Amendment has been duly authorized, executed and delivered by Borrower pursuant to its corporate powers and constitutes the legal, valid and binding obligation of Borrower. After giving effect to the amendment set forth above in Section 2(a) above, as of the date hereof no Event of Default has occurred and is in effect, and each representation and warranty set forth in Section 2 of the Credit Agreement is hereby restated and affirmed as true and correct as of the date hereof. 5. CONDITIONS PRECEDENT. The effectiveness of this Amendment shall be subject to the conditions precedent that the Agent shall have received the following, each in form and substance satisfactory to the Agent: (a) this Amendment executed by each party hereto; and (b) a fee in the amount of $187,500.00; and (c) a written instruction from the Borrower to the Agent canceling the undrawn commitment under the Facility 6. CONFIRMATION OF CREDIT AGREEMENT. Except as herein expressly amended, the Credit Agreement is ratified and confirmed in all respects and shall remain in full force and effect in accordance with its terms. Each reference in the Credit Agreement to "this Agreement" shall mean the Credit Agreement as amended by this Amendment, and as hereinafter amended or restated. 7. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ITS CONFLICT OF LAW RULES. 8. COUNTERPARTS. This Amendment may be executed in counterparts which, taken together, shall constitute a single document. 9. MODIFICATIONS IN WRITING. No amendment, modifications, supplement, termination or waiver of this Amendment shall be effective unless the same shall be in writing and otherwise made in accordance with Section 17.5 of the Credit Agreement. 10. EFFECTIVENESS. This amendment shall be effective as of January 1, 1999. Any payment of interest in excess of the non-default rate made by the Borrower during the month of January 1999 shall be applied towards the fee described in Section 5(b) hereof. 2 IN WITNESS WHEREOF, each of the Borrower and MPCC caused this Amendment to be executed by its duly authorized officer as of the 12th day of February, 1999. COGENERATION CORPORATION OF AMERICA, as Borrower By: /s/ Timothy P. Hunstad -------------------------------------------- Name: Timothy P. Hunstad Title: V.P. and Chief Financial Officer MEESPIERSON CAPITAL CORP., as Arranger, Lender, Agent and Security Trustee By: /s/ Hendrik Vroege -------------------------------------------- Name: Hendrik Vroege Title: Managing Director By: /s/ Eugene Oliva -------------------------------------------- Name: Eugene Oliva Title: Assistant Vice President 3 EX-10.25-19 3 EXHIBIT 10.25.19 FIRST AMENDMENT TO LOAN AGREEMENT This FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment"), made and entered into as of November 30, 1998, is by and between Cogeneration Corporation of America, formerly known as NRG Generating (U.S.) Inc., a Delaware corporation ("CogenAmerica"), and CogenAmerica Funding Inc., formerly known as NRGG Funding Inc., a Delaware corporation (each a "Borrower" and collectively, the "Borrowers"), and NRG Energy, Inc., a Delaware corporation (the "Lender"). RECITALS 1. The Lender and the Borrowers entered into a Supplemental Loan Agreement dated as of December 10, 1997 (the "Loan Agreement"); and 2. The Borrowers desire to amend certain provisions of the Loan Agreement, and the Lender has agreed to make such amendments, subject to the terms and conditions set forth in this Amendment. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows: SECTION 1. CAPITALIZED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Loan Agreement, unless the context shall otherwise require. For purposes of the Loan Agreement, CogenAmerica shall continue to be referred to as "NRGG" and CogenAmerica Funding Inc. shall continue to be referred to as "Funding". SECTION 2. AMENDMENTS. The Loan Agreement is hereby amended as follows: 2.1 DEFINITIONS (a) The definitions of "Base Rate", "Funding Date," "Notes," "NRG Equity Guaranty" and "NRGG Equity Guaranty" contained in Section 1.01 of the Loan Agreement are amended to read in their entireties as follows: "Base Rate" means (a) a rate per annum equal to the Prime Rate for that date PLUS one and one-half percent (1.5%) PLUS two percent (2%) during the period commencing on October 30, 1998 until such time as the Borrowers have provided the Lender with evidence, reasonably satisfactory to the Lender, that (i) the "Possible Event of Default" (as defined in the MeesPierson Waiver Letter) has been absolutely and irrevocably waived by the lenders party to the MeesPierson Credit Agreement or has been cured by NRGG, (ii) no "Event of Default" as defined in the MeesPierson Credit Agreement (nor any event or circumstance which with the giving of notice or the passage of time, or both, would constitute an "Event of Default") has occurred and is then continuing, whether or not any temporary or contingent waiver may be in effect with respect to such "Event of Default," and (iii) the "Margin" (as defined under the MeesPierson Credit Agreement) has been reduced by the lenders party to the MeesPierson Credit Agreement to the rate in effect immediately prior to October 1, 1998 and (b) for any date not falling within the period described in clause (a), a rate per annum equal to the Prime Rate for that date PLUS one and one-half percent (1.5%). "Funding Date" shall mean any date upon which the Lender makes a Loan to the Borrowers pursuant to the terms of this Agreement. "Note" means the joint and several Note of the Borrowers substantially in the form attached hereto as Exhibit A. "NRC Equity Guaranty" shall have the meaning assigned thereto in Section 2.03. "NRGG Equity Guaranty" shall have the meaning assigned thereto in Section 2.02. (b) Section 1.01 of the Loan Agreement is further amended by adding thereto the following definitions of "Amount Advanced," "Initial Funding Date," "MeesPierson Credit Agreement," "MeesPierson Waiver Letter," "NRG Morris Inc." and "Prime Rate" in correct alphabetical order: "Amount Advanced" shall mean the aggregate amount of all Loan advances made by the Lender under this Loan Agreement, and shall not be reduced by any principal payment made by the Borrowers to the Lender. "Initial Funding Date" shall mean October 30, 1998. "MeesPierson Credit Agreement" shall mean that certain Credit Agreement dated December 17,1997 entered into by and among NRGG and MeesPierson Capital Corp. and the other lenders party thereto. "MeesPierson Waiver Letter" shall mean that certain waiver letter between NRGG and MeesPierson Capital Corp. dated as of August 14,1998, under the MeesPierson Credit Agreement. "NRG Morris Inc." shall mean CogenAmerica Morris Inc., formerly known as NRG Morris Inc., a Delaware corporation. "Prime Rate" shall mean at the time any determination thereof is to be made, the fluctuating interest rate per annum announced from time to time by The Chase Manhattan Bank, New York, New York, as its "Prime Rate" (or, if otherwise denominated, such bank's reference rate for interest rate calculations on general commercial loans), which rate is not necessarily the lowest or best rate which such bank may at any time and from time to time charge any of its customers. 2.2 LOAN. Section 2.01 of the Loan Agreement is amended to read in its entirety as follows: Section 2.01 LOAN. Subject to the terms and conditions hereof, the Lender agrees to make one or more loans to the Borrowers, each on a Funding Date prior to March 31, 1999, in an aggregate principal amount with respect to all such loans not to exceed $22,000,000 (individually or collectively, as the context may require, the "Loan"). Amounts paid on the Loan may not be reborrowed. 2.3 MATURITY. Section 2.04 of the Loan Agreement is amended to read in its entirety as follows: Section 2.04 MATURITY. The Loan shall mature in its entirety on December 31, 2004. 2.4 AMORTIZATION Article 2 of the Loan Agreement is amended to add new Section 2.05(e) as follows: (e) If on any payment date set forth on the Amortization Schedule the Amount Advanced is less than $22,000,000, then the principal payment date shall be reduced to the amount equal to (i) the principal payment set forth on the Amortization Schedule multiplied by (ii) the ratio of (A) the Amount Advanced to (B) $22,000,000. 2.5 CONDITIONS PRECEDENT. Article 3 of the Loan Agreement is amended by adding new Section 3.02 as follows: SECTION 3.02. CONDITIONS TO ADDITIONAL LOANS AFTER THE INITIAL FUNDING DATE. The obligation of the Lender on any Funding Date after the Initial Funding Date to make any additional Loan is subject to the satisfaction, or waiver by the Lender, immediately prior to or concurrent with the making of such Loan (or at such other time specified below), of the following conditions: (a) RESOLUTIONS; NOTICE OF BORROWING. The Lender shall have received from the Borrowers a copy of the resolutions of the Board of Directors of each Borrower authorizing the requested borrowing, certified as true and accurate by the Secretary or Assistant Secretary of each Borrower, and, at least three Business Days prior to the Funding Date, the signed notice of borrowing specified in Section 2.07, in form and substance satisfactory to the Lender. The notice of borrowing shall include (i) an acknowledgment by the Borrowers of the outstanding amounts of principal of and accrued interest on the Note and (ii) a certification from each Borrower that all conditions precedent to funding have been satisfied. (b) OPINION OF COUNSEL. The Lender shall have received an opinion of counsel to the Borrowers and to NRG Morris Inc. in form and substance satisfactory to the Lender. (c) REPRESENTATIONS TRUE; NO DEFAULT. Each representation and warranty of the Borrowers hereunder and under the Pledge Agreement and the other Credit Documents shall be accurate and complete in all material respects as of each Funding Date and no Default or Event of Default shall have occurred hereunder. (d) FEES AND EXPENSES. The Borrowers shall have paid to the Lender the fees and expenses set forth in Section 9.04 and all reasonable costs and expenses incurred by the Lender in connection with the making of any Loan on any Funding Date, including the reasonable fees and disbursements of counsel to the Lender. 2.6 ARTICLE 6. (a) The opening paragraph of Article 6 of the Loan Agreement is amended to read in its entirety as follows: The Borrowers hereby covenant and undertake with the Lender that, from the date hereof and so long as any principal, interest or other moneys are owing in respect of this Agreement, under the Note or under any of the Security Documents or so long as the fall amount of the Loan has not been drawn pursuant to Section 2.01: (b) Article 6 of the Loan Agreement is further amended to add new Section 6.01(s) as follows: (s) Promptly upon obtaining knowledge thereof (and in any event within five (5) days thereof), inform the Lender of the occurrence of (i) any event which would constitute an "Event of Default" under and as defined in the MeesPierson Credit Agreement or of any event which, with the giving of notice or lapse of time, or both, would constitute an "Event" of Default" thereunder, (ii) receipt of any notice from MeesPierson Capital Corp. that (A) an "Event of Default" has occurred under the MeesPierson Credit Agreement, (B) an event which, with the giving of notice or lapse of time, or both, would constitute an "Event of Default" thereunder has occurred, or (C) any waiver or forbearance of any "Event of Default" thereunder has expired or been terminated, (iii) receipt by NRGG of any agreement or notice from MeesPierson Capital Corp., or from any other lender party to the MeesPierson Credit Agreement, waiving any term, condition, representation or covenant applicable to NRGG under the MeesPierson Credit Agreement or any of the other agreements, documents or instruments executed and delivered in connection therewith, or of the covenants described therein, or consenting to any modification of the obligations or duties of NRGG with respect to the same, and (iv) any change in the status or terms of the financial accommodations extended under the MeesPierson Credit Agreement, including without limitation, any change with respect to or affecting the MeesPierson Waiver Letter. 2.7 ACCELERATION. Section 7.02 of the Loan Agreement is amended to read in its entirety as follows: SECTION 7.02. ACCELERATION. If an Event of Default (other than an Event of Default specified in Section 7.01(5) or (6) with respect to a Borrower) occurs and is continuing, the Lender by notice to a Borrower may declare the principal of and accrued interest on the Loan to be due and payable and may terminate any obligation of the Lender to make any Loans pursuant to Article 2 or any Section thereof. Upon such declaration, all outstanding principal of and accrued interest on the Loan shall be due and payable immediately. If an Event of Default specified in Section 7.01(5) or (6) with respect to a Borrower occurs, the principal of and interest on the Loans shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Lender and, unless the Lender otherwise elects, any obligation of the Lender to make any Loans pursuant to Article 2 or any Section thereof shall terminate. The Lender by notice to a Borrower may rescind an acceleration or any termination of obligation to extend credit and the consequences of either such action. No such rescission shall affect any subsequent Default or impair any right consequent thereto. 2.8 FUNDING DATE. All references to "Funding Date" in Sections 5(i) (Insurance), 5(1) (ERISA), 6.01(p) (Maintenance of Insurance). 7.03 (Default and Remedies) and 7.04 (Other Remedies) shall be amended to refer to "Initial Funding Date". 2.9 FEES. Sections 9.04(a) and (b) of the Loan Agreement are amended by deleting the term "Funding Date" as it appears therein and inserting in lieu thereof the term "Initial Funding Date". 2.10 AMENDED NOTE. Exhibit A to the Loan Agreement is hereby amended to read as set forth on EXHIBIT A-1 attached to this Amendment which is made a part of the Loan Agreement as Exhibit A thereto. SECTION 3. EFFECTIVENESS OF AMENDMENTS. The amendments contained in this Amendment shall become effective upon delivery by the Borrowers of, and compliance by the Borrowers with, the following: 3.1 This Amendment and the promissory note in the form of EXHIBIT A-1 hereto (the "Amended Note") each duly executed by the Borrowers. 3.2 A copy of the resolutions of the Board of Directors of each Borrower authorizing the execution, delivery and performance of this Amendment and the Amended Note certified as true and accurate by its Secretary or Assistant Secretary, along with a copy of the Bylaws of each Borrower and a certification by such Secretary or Assistant Secretary (i) certifying that the Bylaws of such Borrower delivered therewith are true and accurate, and (ii) identifying each officer of such Borrower authorized to execute this Amendment, the Amended Note and any other instrument or agreement executed by such Borrower in connection with this Amendment (collectively, the "Amendment Documents"), and certifying as to specimens of such officer's signature and such officer's incumbency in such offices as such officer holds. 3.3 Certified copies of all documents evidencing any necessary corporate action, consent or governmental or regulatory approval (if any) with respect to this Amendment, including without limitation, the consent of the lenders to the MeesPierson Credit Agreement and MeesPierson Capital Corp. as "Agent" pursuant to the terms and conditions of that certain Subordination Agreement dated as of December 10, 1997, made by the Lender in favor of MeesPierson Capital Corp. and the lenders party to the MeesPierson Credit Agreement and the consent of The Chase Manhattan Bank as Collateral Agent pursuant to the terms and conditions of that certain Subordination Agreement dated as of December 12, 1997 made by the Lender in favor of The Chase Manhattan Bank as Collateral Agent. 3.4 An opinion of counsel to the Borrowers and to NRG Morris Inc., addressed to the Lender and dated the date of execution and delivery of this Amendment, covering the matters set forth in EXHIBIT B hereto, duly executed by said counsel. 3.5 A good standing certificate for the Borrowers from the State of Delaware and from all other States in which the Borrowers are doing business issued in each case as of a date satisfactory to the Lender. 3.6 A certificate of a responsible officer of each Borrower certifying as to the matters set forth in Section 4.1 below. 3.7 The Borrowers shall have satisfied such other conditions as specified by the Lender, including payment of all unpaid legal fees and expenses incurred by the Lender through the date of this Amendment in connection with the Loan Agreement and the Amendment Documents. SECTION 4. REPRESENTATIONS, WARRANTIES, AUTHORITY, NO ADVERSE CLAIM. 4.1 REASSERTION OF REPRESENTATIONS AND WARRANTIES, NO DEFAULT. The Borrowers hereby represent that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Loan Agreement are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Loan Agreement, and (b) there will exist no Default or Event of Default under the Loan Agreement as amended by this Amendment which is not subject to a written waiver executed by the Lender or with respect to which the Lender has not agreed in writing to forbear. 4.2 AUTHORITY, NO CONFLICT, NO CONSENT REQUIRED. Each Borrower represents and warrants that such Borrower has the power and legal right and authority to enter into the Amendment Documents and has duly authorized as appropriate the execution and delivery of the Amendment Documents and other agreements and documents executed and delivered by such Borrower in connection herewith or therewith by proper corporate action, and none of the Amendment Documents nor the agreements contained herein or therein contravene or constitute a default under any agreement, instrument or indenture to which such Borrower is a party or a signatory or a provision of such Borrower's Certificate of Incorporation, Bylaws or any other agreement or requirement of law, or result in the imposition of any lien or encumbrance on any of its property under any agreement binding on or applicable to such Borrower or any of its property except, if any, in favor of the Lender. Each Borrower represents and warrants that no consent, approval or authorization of or registration or declaration with any Person, including but not limited to any governmental authority, is required in connection with the execution and delivery by such Borrower of the Amendment Documents or other agreements and documents executed and delivered by such Borrower in connection therewith or the performance of obligations of such Borrower therein described, except for those which such Borrower has obtained or provided and as to which such Borrower has delivered certified copies of documents evidencing each such action to the Lender. 4.3 NO ADVERSE CLAIM. The Borrowers warrant, acknowledge and agree that no events have been taken place and no circumstances exist at the date hereof which would give either Borrower a basis to assert a defense, offset or counterclaim to any claim of the Lender with respect to the Borrowers' obligations under the Loan Agreement as amended by this Amendment. 4.4. MEESPIERSON CREDIT AGREEMENT. The Borrowers represent and warrant that they have delivered to the Lender true and correct copies of all material documents in connection with the MeesPierson Credit Agreement and the obligations thereunder, including, without limitation, all waiver and forbearance agreements, and that such documents and agreements, in the respective forms delivered to the Lender, embody the entire agreements and understandings between the parties thereto with respect to the matters therein and remain in full force and effect without supplement, amendment or other modification. SECTION 5. AFFIRMATION OF LOAN AGREEMENT, FURTHER REFERENCES, AFFIRMATION OF SECURITY INTEREST. The Lender and the Borrowers each acknowledge and affirm that the Loan Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Loan Agreement, except as amended by this Amendment, shall remain unmodified and in full force and effect. All references in any document or instrument to the Loan Agreement are hereby amended and shall refer to the Loan Agreement as amended by this Amendment. The Borrowers confirm to the Lender that the Borrowers' obligations under the Loan Agreement, as amended by this Amendment are and continue to be secured by the security interest granted by Funding and NRG Morris Inc. in favor of the Lender under that certain Subordinated Pledge and Security Agreement dated as of December 10, 1997, and all of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrowers under such documents and any and all other documents and agreements entered into with respect to the obligations under the Loan Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Borrowers. Funding hereby ratifies and reaffirms all terms, conditions and provisions of the Assignment and Assumption Agreement. NRGG hereby ratifies and reaffirms all terms, conditions and provisions of the NRGG Equity Guaranty. SECTION 6. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Amendment and the Amended Note, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and has merged into this Amendment all prior oral and written agreements on the same subjects by and between the parties hereto, including without limitation, that certain Note of the Borrowers dated October 30, 1998 in the principal amount of $8,902,750.59 and payable to the order of the Lender and that certain loan request made by the Borrowers by letter dated October 30, 1998, with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof. SECTION 7. SEVERABILITY. Whenever possible, each provision of this Amendment and the other Amendment Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction. SECTION 8. SUCCESSORS. The Amendment Documents shall be binding upon the Borrowers and the Lender and their respective successors and assigns, and shall inure to the benefit of the Borrowers and the Lender and the successors and assigns of the Lender. SECTION 9. LEGAL EXPENSES. The Borrowers agree to reimburse the Lender, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorneys' fees and legal expenses of Dorsey & Whitney LLP, special counsel for the Lender) incurred in connection with the Loan Agreement, including in connection with the negotiation, preparation and execution of the Amendment Documents and all other documents negotiated, prepared and executed in connection with the Amendment Documents, and in enforcing the obligations of the Borrower under the Amendment Documents, and to pay and save the Lender harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of the Amendment Documents, which obligations of the Borrowers shall be joint and several and shall survive any termination of the Loan Agreement. SECTION 10. HEADINGS. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment, SECTION 11. COUNTERPARTS. The Amendment Documents may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original provided that all such counterparts shall be regarded as one and the same document, and either party to the Amendment Documents may execute any such agreement by executing a counterpart of such agreement. SECTION 11 GOVERNING LAW. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES THEREOF. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. BORROWER: COGENERATION CORPORATION OF AMERICA, formerly known as NRG Generating (U.S.) Inc. By: /s/ Timothy P. Hunstad -------------------------------- Title: VP & CFO -------------------------------- BORROWER: COGENAMERICA FUNDING INC., formerly known as NRGG Funding Inc. By: /s/ Timothy P. Hunstad -------------------------------- Title: VP & CFO -------------------------------- LENDER: NRG ENERGY, INC. By: Brian Bird -------------------------------- Title: Treasurer ------------------------------ EXHIBIT A-1 TO FIRST AMENDMENT EXHIBIT A November 30, 1998 AMENDED AND RESTATED NOTE FOR VALUE RECEIVED, the undersigned, COGENERATION CORPORATION OF AMERICA, formerly known as NRG Generating (U.S.) Inc., a Delaware corporation ("NRGG"), and CogenAmerica Funding Inc., formerly known as NRGG Funding Inc., a Delaware corporation ("Funding"), hereby jointly, severally and unconditionally promise to pay to the order of NRG ENERGY, INC. a Delaware corporation, or registered assigns (the "Lender"), at the office of the Lender at 1221 Nicollet Mall, Suite 700, Minneapolis, MN 53403 or by wire transfer in accordance with such instructions as the Lender may require, in lawful money of the United States of America and in immediately available funds, the principal amount of up to $22,000,000 or, if less, the aggregate unpaid principal amount of the Loan made by the Lender pursuant to Section 2.01 of the Loan Agreement referred to below (in either case, to be paid together with any accrued interest not required to be paid currently in cash), which sum shall be due and payable in such amounts and on such dates as are set forth in the Supplemental Loan Agreement, dated as of December 10, 1997 among NRGG and Funding (each a "Borrower" and collectively the "Borrowers") and the Lender (as the same may be supplemented or amended from time to time, the "Loan Agreement"; terms defined therein being used herein as so defined). The undersigned further agree to pay interest at said office or to such account, in like money, from October 30, 1998 on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in Section 2.06 of the Loan Agreement. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive diligence, presentment, demand, protest and notice of any kind whatsoever. The nonexercise of the holder of this Note of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. This note is the Note referred to in the Loan Agreement, which Loan Agreement, among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events, for optional and mandatory prepayment of the principal hereof prior to the maturity hereof and for the amendment or waiver of certain provisions of the Loan Agreement, all upon the terms and conditions therein specified. This Note amends and restates that certain Note of the Borrowers dated October 30, 1998 in the principal amount of $8,902,750.59 and evidences unpaid principal in such amount and an accrued and unpaid interest thereon. This Note shall be construed in accordance with and governed by the laws of the State of Minnesota and any applicable laws of the United States of America. THIS NOTE MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH THE TERMS OF THE LOAN AGREEMENT. TRANSFERS OF THIS NOTE MUST BE RECORDED IN THE REGISTER MAINTAINED BY THE LENDER PURSUANT TO THE TERMS OF THE LOAN AGREEMENT. THIS NOTE IS SUBJECT TO THE SUBORDINATION AGREEMENT, DATED AS OF DECEMBER 10,1997, AMONG NRGG, THE LENDER AND MEESPIERSON CAPITAL CORP., UNDER WHICH THIS NOTE AND NRGG'S OBLIGATIONS HEREUNDER ARE SUBORDINATED IN THE MANNER SET FORTH THEREIN TO THE PRIOR PAYMENT OF CERTAIN OBLIGATIONS TO THE HOLDERS OF SENIOR INDEBTEDNESS AS DEFINED THEREIN. THIS NOTE IS FURTHER SUBJECT TO THE SUBORDINATION PROVISIONS SET FOR THE IN THE SUBORDINATION AGREEMENT, DATED AS OF DECEMBER 10, 1997, BETWEEN THE LENDER AND THE CHASE MANHATTAN BANK IN ITS CAPACITY AS COLLATERAL AGENT. A COPY OF THAT SUBORDINATION AGREEMENT IS ON FILE WITH NRGG, FUNDING AND COGENAMERICA MORRIS INC., FORMERLY KNOWN AS NRG MORRIS INC., AND IS AVAILABLE FOR INSPECTION AT THEIR RESPECTIVE OFFICES. COGENERATION CORPORATION OF AMERICA ------------------------------------------- Timothy P. Hunstad Vice President and Chief Financial Officer COGENAMERICA FUNDING INC. ------------------------------------------- Timothy P. Hunstad Vice President and Chief Financial Officer EXHIBIT B TO FIRST AMENDMENT MATTERS TO BE COVERED BY OPINION OF COUNSEL TO THE BORROWERS The opinion of counsel to the Borrowers and to NRG Morris Inc. (the Borrowers and NRG Morris Inc. from time to time being referred to, collectively, as the "Loan Parties") and which is called for by Article 3 of the Supplemental Loan Agreement, as amended by the First Amendment to Loan Agreement dated November 30, 1998 (as amended, the "Loan Agreement") shall be addressed to the Lender and dated the date upon which all other conditions to effectiveness of the First Amendment to Loan Agreement are satisfied. It shall be satisfactory in form and substance to the Lender and shall cover the matters set forth below, subject to such assumptions, exceptions and qualifications as may be acceptable to the Lender and counsel to the Lender. For purposes of the opinion of counsel the term "Transaction Documents" shall mean the Loan Agreement, the Amended and Restated Note of the Borrowers dated November 30, 1998 in the principal amount of $22,000,000, the Pledge Agreement (as such term and other capitalized terms used herein and not otherwise defined herein are defined in the Loan Agreement), the Security Documents and all agreements, instruments and documents executed and delivered by the Borrowers or either of them in connection with the Loan Agreement, the Equity Commitment Guaranty dated as of December 10, 1997 made by NRGG in favor of the Lender and the Assignment and Assumption Agreement dated as of December 10, 1997 between the Lender and Funding. (i) Each Loan Party is a corporation duly incorporated and validly existing and in good standing under the laws of the State of Delaware and has and had at the time of entry into the Transaction Documents all requisite corporate power and authority to carry on its business as now conducted, to enter into the Transaction Documents executed by it and to perform all of its obligations under each and all of the foregoing. Each Loan Party is duly qualified and in good standing as a corporation in the State of Delaware and as a foreign corporation in all of the jurisdictions in which the character of the properties owned or leased by it or the business conducted by it makes such qualification necessary and the failure to so qualify would permanently preclude the Borrower from enforcing its rights with respect to any material asset or expose the Borrower to material liability. (ii) The execution, delivery and performance by each Loan Party of the Transaction Documents have been duly authorized by all necessary corporate action by such Loan Party. (iii) The Transaction Documents constitute the legal, valid and binding obligations of each Loan Party executing the same, enforceable against such Loan Party in accordance with their respective terms. (iv) The execution, delivery and performance by each Loan Party of the Transaction Documents executed by it did not and will not (i) violate any provision of any law, statute, rule or regulation or, to the best knowledge of such counsel, any order, writ judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to such Loan Party, (ii) violate or contravene any provision of the Certificate of Incorporation or bylaws of such Loan Party, or (iii) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement lease or instrument known to such counsel to which such Loan Party is a party or by which it or any of its properties may be bound or result in the creation of any Lien thereunder. (v) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority was or is required on the part of any Loan Party to authorize, or was or is required in connection with the execution, delivery either performance of, or the legality, validity, binding effect or enforceability of, the Transaction Documents, except for any necessary filing or recordation of or with respect to any of the Security Documents. (vi) The best knowledge of such counsel, there are no actions, suits or proceedings pending or threatened against or affecting any Loan Party or any of its properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which (i) challenge the legality, validity or enforceability of the Transaction Documents, or (ii) if determined adversely to a Loan Party, would have a material adverse effect on the business, operations, property or condition (financial or otherwise) of such Loan Party and its Subsidiaries as a consolidated enterprise or on the ability of such Loan Party to perform its obligations under the Transaction Documents. (vii) The Pledge Agreement creates the lien it purports to create upon the properties and interests specifically described therein. The descriptions of properties and interests in the Security Documents and any related financing statements are adequate for the purpose of such instruments and for perfection of the liens of the Lender. The filing of the Uniform Commercial Code financing statements executed by Funding and by NRG Morris Inc. and filed in [describe filing office] on [state dates of filings] perfected the Liens created under the Pledge Agreement and such Liens continue to be perfected on the date hereof. EX-10.33 4 EXHIBIT 10.33 SETTLEMENT AGREEMENT AND MUTUAL RELEASE This Settlement Agreement is made and entered into effective December 1, 1998, by and among Robert T. Sherman ("Sherman"), Cogeneration Corporation of America ("Cogen") and NRG Energy, Inc. ("NRG"). WHEREAS disputes have arisen between the undersigned parties; and WHEREAS each undersigned party has determined independently that it is desirable and beneficial for it or him to settle, compromise and resolve the disputes in the manner and on the terms and conditions set forth herein; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby expressly acknowledged, the undersigned Sherman, Cogen and NRG agree as follows: 1. Cogen and NRG, for themselves, and for all of their respective predecessor and successor firms, subsidiaries and affiliates, which as to NRG includes Northern States Power Company ("NSP"), and for all of their respective present and former officers, directors, partners, principals, employees, attorneys, assigns, agents, representatives and anyone claiming to act on behalf of Cogen and/or NRG (hereinafter referred to collectively as the "Cogen and NRG Releasors"), remise, release and forever discharge Sherman and all and each of his present and former attorneys, agents, assigns, representatives, family members, heirs, executors and administrators (hereinafter referred to collectively as the "Sherman Releasees"), both individually and in their representative capacities, of and from any and all actions, causes of action, liabilities, suits, debts, sums of money, accounts, bonds, bills, covenants, contracts, controversies, agreements, promises, damages, judgments, claims and demands whatsoever, state or federal, in law or in equity, whether known or unknown, asserted or unasserted, suspected or unsuspected, which the Cogen and NRG Releasors, any or all of them, may now have or hereafter have or claim to have against the Sherman Releasees, any or all of them, for, upon, or by reason of any matter, event, cause or thing arising or which may have arisen at any time up to the date of this Agreement. 2. Sherman does for himself and for all of his present and former attorneys, agents, representatives, family members, heirs, executors, administrators and anyone acting or claiming to act on his behalf (hereinafter referred to collectively as the "Sherman Releasors"), remise, release and forever discharge Cogen and NRG, and their respective predecessor and successor firms, subsidiaries and affiliated companies, which as to NRG includes NSP, all and each of their respective present and former officers, directors, partners, principals, employees, attorneys, assigns, agents and representatives, both individually and in their representative capacities (hereinafter referred to collectively as the "Cogen and NRG Releasees"), of and from any and all actions, causes of action, liabilities, suits, debts, sums of money, accounts, bonds, bills, covenants, contracts, controversies, agreements, promises, damages, judgments, claims and demands whatsoever, state or federal, in law or in equity, whether known or unknown, asserted or unasserted, suspected or unsuspected, which the Sherman Releasors, any or all of them, may now have or hereafter have or claim to have against the Cogen and NRG Releasees, any or all of them, for, upon, or by reason of any matter, event, cause or thing arising or which may have arisen at any time up to the date of this Agreement. The sole exception to the above release is that it does not release any claim Sherman may have for indemnification under applicable law or Cogen's Bylaws or Articles of Incorporation for a claim made against Sherman based upon action taken by Sherman in his capacity as an officer, director, or employee of Cogen. This release includes, but is not limited to, any and all claims arising from Sherman's employment with Cogen and the termination of that employment, including claims under the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities, the Employee Retirement Income Security Act, the Minnesota Human Rights Act, and any other local, state or federal discrimination act or ordinance, claims arising out of Minnesota Statute Section 181.932, et seq., claims for breach of contract, claims for libel or slander, claims for assault or battery, claims for infliction of emotional distress whether intentional or negligent, claims for tortious interference with prospective contractual relations, claims of negligence (including negligent hiring, negligent supervision and negligent retention), claims that Sherman has been unlawfully discharged or in any other respect unfairly treated during his employment with Cogen and any and all claims in and arising out of the civil actions referred to in paragraphs 4 and 5 of this Agreement. 3. It is the intention of the undersigned parties that the releases contained in Paragraphs 1 and 2 herein shall be effective as a full and final accord and satisfaction, and as a bar to all actions, causes of action, obligations, costs, expenses, attorneys' fees, damages, losses, claims, liabilities and demands of whatsoever nature, character or kind, known or unknown, suspected or unsuspected. The undersigned parties, hereby acknowledge that they are aware that they or their attorneys may hereafter discover claims or facts in addition to or different from those that they now know or believe to exist with respect to the subject matter of this Settlement Agreement and Mutual Release but that it is their intention hereby fully, finally and forever to settle and release all of the disputes and differences, known or unknown, suspected or unsuspected, which do now exist, may hereafter exist, or may heretofore have existed, and without regard to the subsequent discovery or existence of different or additional facts. 4. The lawsuit styled ROBERT T. SHERMAN, JR. VS. NRG ENERGY, INC., et al., Civil File No. 99-CV-2358, in the United States District Court, District of Minnesota, Fourth Division (the "Minnesota Action"), shall be dismissed with prejudice and on the merits, with each party to bear its, his or her own attorneys' fees, costs and disbursements. Counsel for each of the parties to the Minnesota Action shall sign and file a joint stipulation for dismissal of the Minnesota Action promptly after expiration of the rescission period described in paragraph 18 of this Settlement Agreement and Mutual Release. 5. The lawsuit styled NRG ENERGY, INC. V. ROBERT T. SHERMAN, C.A. No. 16731NC, in the Court of Chancery of the State of Delaware, in and for New Castle County (the "Delaware Action"), shall be dismissed without prejudice by NRG, with each party to bear its or his own attorneys fees, costs and disbursements, and NRG hereby covenants and agrees not to sue Sherman in the future to obtain the relief requested in the Delaware Action. Counsel for NRG in the Delaware Action shall file a Notice of Dismissal of the Delaware Action promptly after expiration of the rescission period described in paragraph 18 of this Settlement Agreement and Mutual Release. 6. Sherman shall receive his current Base Salary, in the amount of Eighteen Thousand Three Hundred Thirty-Three and Thirty-Three Hundredths Dollars ($18,333.33) per month, and employee health benefits, as described in paragraph 7 of Sherman's Employment Agreement with Cogen dated March 28,1997 (the "Sherman Employment Agreement"), through December 31, 1998. Sherman shall not be entitled to receive any other compensation, including compensation in the form of salary, bonus or benefits, from Cogen, whether under the Sherman Employment Agreement or otherwise, except as expressly provided for in this paragraph and in Paragraphs 7 and 10 herein. Nor shall Sherman perform any services on behalf of Cogen except as expressly provided for in this Agreement or as agreed to in writing by Cogen and Sherman prior to their performance. Sherman shall be entitled to receive notice and continuation of his rights under COBRA, as provided for in the statute, for continuation of particular insurance benefits. 7. Upon expiration of the rescission period described in paragraph I 8 of this Agreement, Cogen shall pay Sherman the sum of Four Hundred and Six Thousand Dollars ($406,000.00) which shall include payment for Sherman's outstanding shares of stock as described in Paragraph 8 of this Agreement. In addition, upon expiration of the rescission period described in Paragraph 18 of this Agreement, NRG shall pay Sherman the sum of One Hundred Thirty Thousand Dollars ($130,000.00). These two payments together constitute the "Settlement Payments." The Settlement Payments shall be allocated as follows: PAYABLE BY COGEN: a. The sum of $82,500 as payment for Sherman's outstanding shares of stock. This sum is not subject to withholding or Form 1099 tax reporting. b. The sum of $70,000 as payment for emotional distress, general damages, and settlement of any and all other claims. This sum is not subject to withholding but shall be reported on Form 1099. c. The sum of $253,500 (prior to withholding) as settlement of severance and any and all claims under the Sherman Employment Agreement or arising out of the employment relationship. This sum is subject to withholding and will be reported on Form W-2. TOTAL: $406,000 PAYABLE BY NRG: The sum of $130,000 as payment for emotional distress, general damages, and settlement of any and all other claims. This sum is not subject to withholding but will be reported on Form 1099. Sherman shall sign all tax withholding and other forms required by Cogen and NRG under applicable law. Except for items (a) and (b) above, all amounts paid to Sherman by Cogen under this paragraph are payments on account of wages and are, therefore, subject to withholding obligations under state and federal law, and only the net amount after applicable withholdings shall be paid to Sherman. If it is determined by any federal or state tax authority that any amount that may be paid to Sherman under this Settlement Agreement but is treated by Cogen and/or NRG as not subject to information reporting, or treated as a payment other than taxable wages, was in fact subject to such reporting and/or was taxable wages, and if as a consequence Cogen and/or NRG is held responsible for the employee's portion of any penalties, interest or taxes, Sherman shall immediately upon Cogen and/or NRG's demand therefor and reasonable proof of Cogen and/or NRG's actual payment of the same, indemnify and hold Cogen and/or NRG harmless for the employee's portion of all such penalties, interest and taxes. 8. Sherman represents and warrants that he is the record and beneficial owner of five thousand five hundred (5,500) shares of Cogen stock, that such stock has not been pledged or encumbered in any way, and that he can sell and convey such stock free and clear of any lien of encumbrance. Sherman further represents and warrants that he has no record or beneficial ownership or interest in any other Cogen stock with the sole exception of stock options granted to him pursuant to the Sherman Employment Agreement, pursuant to which his options to purchase thirty five thousand (35,000) shares, and only thirty five thousand (35,000) shares, have vested. Contemporaneously with the payment of the sum provided for in paragraph 7 herein, Sherman shall deliver and convey legal title to, and all beneficial interest in, free and clear of any lien or encumbrance, all of the Cogen stock he owns, that is five thousand five hundred (5,500) shares, to Cogen. In connection with his conveyance of this Cogen stock, Sherman shall execute all documents reasonably requested by Cogen to effect such conveyance, including stock powers. 9. While NRG owns 20% or more of the outstanding shares of Cogen or its successors, but in no event for a period of time in excess of 10 years, Sherman shall not acquire, directly or indirectly, or otherwise become the beneficial owner of any common stock of Cogen (or any successor to Cogen by merger or otherwise) or any security or other right which is convertible, exchangeable or exercisable, with or without consideration into common stock of Cogen (or any successor to Cogen by merger or otherwise), with the sole exception that he may exercise some or all of his vested options to purchase thirty five thousand (35,000) shares of Cogen stock, provided that he contemporaneously sells or conveys all legal and beneficial interest in such stock to Cogen for fair market value. If Cogen does not purchase such stock within five (5) business days, Sherman may sell such shares to one or more third parties, provided that such sale is completed and such stock is sold within twenty (20) business days of Sherman's exercise of his option or options. For purposes of this Agreement, "fair market value" shall mean the average, for the ten trading days prior to the date on which Sherman's exercise his options, of the closing sale price of the shares of Cogen stock (or in the event no sale takes place on any day, the average of the closing bid and asked quotations for the shares of Cogen stock on such day) on the National Association of Securities Dealers Automatic Quotation System ("NASDAQ") or any comparable system. The parties expressly acknowledge and agree that Sherman shall maintain the right to exercise his vested options to purchase up to thirty five thousand (35,000) shares of Cogen stock for ninety (90) calendar days after December 31, 1998. The parties also expressly acknowledge and agree that Sherman's vested stock options total thirty five thousand (35,000) and that he will not acquire any further options to purchase Cogen stock pursuant to any agreement with Cogen, any Cogen stock option plan, or otherwise except as provided in this paragraph 9. 10. Sherman agrees to serve as an independent contractor consultant for Cogen during the period from January 1, 1999 through December 31, 2001. In this capacity, Sherman will consult with Cogen, or its representatives, for up to ten (10) days per calendar year. In consideration for Sherman serving as a consultant to Cogen, Cogen shall pay Sherman Twenty Thousand Dollars ($20,000) upon expiration of the rescission period described in paragraph 18 of this Agreement; Twenty Thousand Dollars ($20,000) on the date which is one year after the first Twenty Thousand Dollar ($20,000) payment; and Twenty Thousand Dollars ($20,000) on the date which is two years after the first Twenty Thousand Dollar ($20,000) payment. If Cogen requires additional consulting services from Sherman during this period, Sherman shall provide such services as are mutually agreeable in consideration for payments in the amount of Two Thousand Five Hundred Dollars ($2,500) per day. Sherman shall be reimbursed by Cogen for reasonable expenses which he incurs in performing consulting services under this paragraph. Cogen shall report such payment to applicable state and federal tax agencies. Sherman understands that he is not an employee of Cogen for purposes of providing services under this paragraph, and that, as such, he is not eligible to have benefits in any employee health or welfare benefit plan, or any other benefits from Cogen. 11. Cogen and Sherman will issue a joint statement, in the form attached hereto as Exhibit A, promptly after expiration of the rescission period described in paragraph 18 and completion of the filings required by paragraphs 4 and 5 of this Settlement Agreement and Mutual Release. 12. Sherman shall have the right, at his sole option, to purchase or transfer the lease of the Chevrolet Tahoe vehicle presently being used by Sherman pursuant to Cogen's lease of the vehicle. If Sherman elects to purchase or transfer the lease of the vehicle, he shall advise Cogen in writing of his decision to do so by January 25,1999. If Sherman has not advised Cogen in writing of his decision to purchase or transfer the lease of the vehicle by January 25, 1999, his right to do so shall expire, he shall have no further right to possess or use the vehicle, and he shall return the vehicle and keys to the vehicle to Cogen on or before January 25, 1999. 13. NRG shall contribute a total of Thirty Thousand Dollars ($30,000) to a bona fide Section 501(c)(3) qualified organization for environmental education, either in one lump sum or in annual increments of Ten Thousand Dollars ($10,000) beginning December 31, 1999. Sherman shall have the right to determine whether such sum shall be paid as a lump sum or in annual increments. This 501(c)(3) qualified organization shall be established by Sherman and if not, the contribution shall be made to a bona fide 501(c)(3) qualified organization or charitable organization as determined by the mutual agreement of the parties. 14. Cogen and NRG agree that their respective directors and officers will not make any statement to any third party disparaging Sherman and Sherman agrees that he will not make any statement to any third party disparaging Cogen or NRG, or any of their respective present or former directors or officers. 15. Cogen, NRG, and Sherman agree to maintain the terms of this Settlement Agreement and Mutual Release in confidence and not to disclose such terms to any third party, other than their respective attorneys and accountants, and as to Sherman, his spouse, except as required by applicable law or regulation. 16. Sherman will return to Cogen all of its records, correspondence, and documents in his possession, if any, at the time he signs this Settlement Agreement and Mutual Release. Cogen acknowledges that Sherman is not obligated to return strictly personal files now in his possession that were at one time stored at Cogen's offices. Sherman will also return to Cogen all property of Cogen, including Sherman's corporate credit cards and air travel card, if any, at the time it signs this Agreement. Cogen will return to Sherman all of his property in its possession, if any, at the time it signs this Agreement. 17. Sherman has been advised by Cogen and NRG that he should consult with an attorney prior to executing this Agreement, and that he has twenty-one (21) days from the date on which he received this Agreement to consider whether or not he wishes to sign it. Sherman acknowledges that he has had the opportunity to review this Agreement with his attorney before signing it, that he has the right to sign this Agreement before the twenty-one (21) days period expires and that if he so chooses, he does so of his own free will and not of duress. She further acknowledges that the date on which he received this Agreement is accurately set forth on the last page of this Agreement. 18. Sherman may rescind this Severance Agreement and Release within 15 calendar days of signing it. To be effective, the rescission must be in writing and delivered to Cogen and NRG in care of Julie A. Jorgensen, Interim CEO and President, Cogeneration Corporation of America, One Carlson Parkway, Suite 240, Minneapolis, Minnesota 55447-4454, either by hand or by mail within the fifteen (15) day period. If sent by mail, the rescission must be: a. Postmarked within the fifteen (15) day period; b. Properly addressed to Cogen; and c. Sent by certified mail, return receipt requested. If the Agreement is rescinded by Sherman all of its provisions shall immediately become null and void. 19. Noting in this Settlement Agreement and Mutual Release is intended to be, nor will be deemed to be, an admission of liability by any party that it or he has violated any state or federal statute, local ordinance, or principle of common law, or that it or he has engaged in any wrongdoing. 20. The parties agree that this Agreement will not be assignable by either party unless other party agrees in writing. 21. In case any one or more of the provisions of this Agreement should be invalid, illegal, or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions contained in this Agreement will not in any way be affected or unpaired thereby. 22. This Agreement will be construed and intend in accordance with the laws of the State of Minnesota. 23. Each party to this Agreement acknowledges that this Agreement was the result of mediation pursuant to the Minnesota Civil Mediation Act. Each party specifically acknowledges and agrees that this Agreement is binding upon all parties and that the parties were advised by the mediator that (a) the mediator has no duty to protect the parties' interests or provide them with information about their legal rights; (b) signing a mediated settlement agreement may adversely affect the parties' legal rights; and (c) the parties should consult an attorney before signing a mediated settlement agreement if they are uncertain of their rights. 24. This Agreement contains the entire understanding between Cogen and NRG on the one hand, the Sherman on the other hand, and supersedes all oral agreements and negotiations between the parties on this subject. Any amendments, modifications or waivers of the provisions of this Agreement shall be valid only when they have been reduced to writing and duly signed by the parties. The terms of this Paragraph shall not be deemed to have been waived by oral agreement, course of performance or by any other means other than a written agreement expressly providing for such waiver. 25. No breach of any provision hereof can be waived by any undersigned party unless in writing. Waiver of any one breach or alleged breach by an undersigned party shall not be deemed to be a waiver of any other breach of the same or any other provision hereof. 26. Sherman and Cogen acknowledge that Exhibit B hereto contains a list of projects known by Sherman to be projects which Cogen is developing as of December 31, 1998. This is the list of projects referred to in Paragraph 15 of the Sherman Employment Agreement, the provisions of which shall survive, notwithstanding any provision of this Settlement Agreement and Mutual Release. 27. Nothing contained in this Settlement Agreement and Mutual Release shall be construed to release any party hereto or any other person with respect to the covenants, undertakings, and agreements of such party contained in this document. 28. Each of the undersigned and its and his counsel has reviewed and revised this Settlement Agreement and Mutual Release, and the rule of construction that any ambiguities are to be resolved against the drafting party shall not apply to the interpretation of these documents. 29. Each of the undersigned parties acknowledges and represents that it and he has been represented by counsel in connection with its and his consideration and execution of this Settlement Agreement and Mutual Release. Each undersigned party further represents and declares that in executing this document it or he has relied solely upon its or his own judgment, belief and knowledge, and the advice and recommendation of its or his own independently selected counsel, concerning the nature, extent and duration of its or his rights and claims, and that it or he has not been influenced to any extent whatsoever in executing this document, or the exhibits hereto, by any representations or statements except those expressly contained or referred to herein. 30. This Settlement Agreement may be executed in counterparts, each of which shall be deemed an original and shall be deemed duly executed upon the signing of the counterparts by the parties. COGENERATIN CORPORATION OF AMERICA Date Signed: 1/18/99 By: /s/ Julie Jorgensen ---------- -------------------------------------- Its President and CEO --------------------------------- NRG ENERGY Date Signed: 1/19/99 By: James J. Bender ---------- -------------------------------------- Its Vice President & General Counsel --------------------------------- ROBERT T. SHERMAN, JR. Date Received: 1/13/99 By: Robert T. Sherman, Jr. ---------- -------------------------------------- Date Signed: 1/13/99 Its ---------- --------------------------------- [COGEN AMERICA LETTERHEAD] CogenAmerica and Robert T. Sherman, Jr., its Chief Executive Officer, announced today that they have agree upon terms under which Mr. Sherman will step down as President and CEO and provide consulting services to the Company. The Company and NRG Energy, Inc., owner of 45.4% of the Company's stock, had previously announced that Mr. Sherman's employment had been terminated for expenditures incurred in connection with the solicitation of proxies on behalf of the Company without authorization from the Company's Board of Directors. After an investigation by the Company's Board of Directors, it was determined that these expenditures were approved by the Independent Directors Committee and were within Mr. Sherman's authority as established by the Board of Directors. Further, the Company acknowledged that any media accounts accusing Mr. Sherman of mismanagement were inaccurate. Julie Jorgensen, interim President and CEO of the Company, said "Bob Sherman and CogenAmerica have reached an amicable resolution of all issues between them. Mr. Sherman acted within the authority bestowed on him by the Company's Board of Directors. Bob has agreed to remain a consultant to the Company in the transition to a new CEO, and we are glad to have his help." David Peterson, Chairman, CEO and President of NRG Energy also stated that: "We are pleased that our investigation has shown that Bob Sherman's actions were authorized, and that his matter has been resolved to the satisfaction of all concerned." In a joint statement, Mr. Sherman said "I am proud of my accomplishments at CogenAmerica, and will continue to assist the Company in achieving a smooth transition to new leadership. I am especially pleased that CogenAmerica, NRG Energy and I could rise above our differences and resolve our differences quickly and amicably." EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS NEWS RELEASE CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE RISK THAT PROJECT DEVELOPMENT EFFORTS WILL NOT RESULT IN THE ADDITION OF NEW PROJECTS, THE RISK THAT THE ACTUAL OPERATING RESULTS OF ANY PROJECT OR OF CGCA WILL NOT EQUAL OR EXCEED THE RESULTS EXPECTED, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S SEC REPORTS, INCLUDING THE REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997. EXHIBIT NO. A ----- EX-10.34 5 EXHIBIT 10.34 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LOAN AGREEMENT DATED AS OF OCTOBER 9, 1998 BETWEEN NRG ENERGY, INC. as Lender, and COGENERATION CORPORATION OF AMERICA and COGENAMERICA PRYOR INC. as Borrowers, and OKLAHOMA LOAN ACQUISITION CORPORATION as Guarantor. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- THIS LOAN AGREEMENT, dated as of October 9,1998, is among Cogeneration Corporation of America, a Delaware Corporation ("CogenAmerica") and CogenAmerica Pryor Inc., a Delaware corporation ("OLAC Holding"), as Borrowers, Oklahoma Loan Acquisition Corporation, a Delaware corporation, ("OLAC"), as Guarantor, and NRG Energy, Inc., a Delaware corporation, as Lender (the "Lender"). W I T N E S S E T H: WHEREAS, CogenAmerica and OLAC Holding (each, a "Borrower" and collectively, the "Borrowers") wish to jointly and severally borrow up to $23,947,140 to meet their joint and several obligation to fund the purchase of all of the outstanding stock of OLAC (which owns all of the assets of a power generation facility located near Pryor, Oklahoma known as the Mid-Continent Power Company (the "MCPC Facility")) pursuant to a stock purchase agreement dated September 10, 1998 between CogenAmerica and Mid-Continent Power Company, L.L.C., a Delaware limited liability company ("Seller"), as supplemented by that certain letter agreement dated October 9, 1998, among the Seller, CogenAmerica and the Lender (the "Stock Purchase Letter Supplement" and collectively with the Stock Purchase Agreement, the "Stock Purchase Agreement"); and WHEREAS, the sole members of the Seller are NRG Energy, Inc., Decker Energy International, Inc. and WP Power Company LLC; and WHEREAS, the Lender agrees to lend such amount to the Borrowers on the terms and conditions set forth below; NOW, THEREFORE, the Borrowers, the Guarantor and the Lender agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. DEFINED TERMS. As used in this Agreement, the terms defined in the caption hereto shall have the meanings set forth therein, and the following terms have the following meanings: "Affiliate" of any specified person means (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any Person who is a director or officer (a) of such Person, (b) of any Subsidiary of such Person or (c) of any Person described in clause (i) above. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. 1 "Agreement" means this Loan Agreement, as amended, supplemented or modified from time to time. "Amortization Schedule" shall have the meaning assigned thereto in Section 2.05(b). "Bankruptcy Law" shall mean any applicable liquidation, dissolution, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization, readjustment of debt or similar laws affecting the rights and remedies of creditors generally, as in effect from time to time. "Base Rate" means, for any date, a rate per annum equal to the Prime Rate for that date plus three and one-half percent (3.5%), provided that such percentage shall be reduced by two percent (2.0%) at such time that the Borrowers have provided the Lender with evidence, reasonably acceptable to Lender, that (a) the "Possible Event of Default" (as defined in the MeesPierson Waiver) has been absolutely and irrevocably waived by the MeesPierson Lenders, or has been cured by CogenAmerica, (b) no "Event of Default", as defined under the MeesPierson Credit Agreement (nor any event or circumstance which with the giving of notice or the passage of time, or both, would constitute an Event of Default), has occurred and is then continuing, whether or not any temporary or contingent waiver may be in effect with respect to such or Event of Default, and (c) the "Margin" (as defined under the MeesPierson Credit Agreement) has been reduced by the MeesPierson Lenders to the percentage in effect immediately prior to October 1, 1998. "Borrower" and "Borrowers" mean the parties named as such in this Agreement until one or more successors replace the Borrowers, and thereafter such successor(s). "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in New York City, New York or Minneapolis, Minnesota are authorized or required by law to close. "Calculation Period" shall have the meaning assigned thereto in Section 6.02(i). "Certification Date" shall have the meaning assigned thereto in Section 6.02(i). "Closing Date" means the date this Agreement is executed and delivered by each party hereto. "Co-Investment Agreement" shall mean that certain Co-Investment Agreement between Lender and NRG Generating (U.S.) Inc. (now known as Cogeneration Corporation of America) dated as of April 30, 1996. "Code" means the Internal Revenue Code of 1986, as amended. "Cogen Entity" and "Cogen Entities" means, individually or collectively, as the context may require, CogenAmerica, OLAC Holding and OLAC. 2 "Collateral" shall mean all assets of OLAC, OLAC Holding and CogenAmerica in which the Lender is granted a security interest or other Lien under the Security Documents. "Credit Documents" means the collective reference to this Agreement, the Note, the Stock Purchase Agreement, the Guaranty and the Security Documents. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Distribution Payment Date" shall have the meaning assigned thereto in Section 6.02(i). "Distributions" shall mean dividends or other payments of any kind, whether in cash, in kind, or in securities or other property. "Dollars" and "$" means dollars in lawful currency of the United States of America. "Earnest Money Note" shall mean that certain Promissory Note dated September 10, 1998, made payable by CogenAmerica to the Lender in the original principal amount of $2,500,000. "Environmental Approval" shall have the meaning assigned thereto in Section 5(u)(ii). "Environmental Claim" shall have the meaning assigned thereto in Section 5(u). "Environmental Laws" shall have the meaning assigned thereto in Section 5(u). "ERISA" means the Employment Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means a trade or business (whether or not incorporated) which is under common control with any of the Cogen Entities within the meaning of Sections 414(b), (c), (m) or (o) of the Code. "Event of Default" shall have the meaning assigned thereto in Section 7.01. "Existing NRG Loan" shall mean the loan previously extended by the Lender to CogenAmerica and NRGG Funding, Inc. pursuant to that certain loan agreement dated as of December 10, 1997 by and among such parties (the "Existing NRG Loan Agreement.") "Funding Date" means the date not later than the closing date for the purchase and sale of stock under the Stock Purchase Agreement, upon which the Borrowers shall request that the Loan be made available. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time. 3 "Good Faith Contest" means the contest of an item if the item is diligently contested in good faith by appropriate proceedings timely instituted and (i) adequate cash reserves (or at the applicable entity's option, bonds or other security reasonably satisfactory to the Lender) are established with respect to the contested item, and (ii) during the period of such contest, the enforcement of any contested item is effectively stayed. "Governmental Authority" means the United States Federal Government, any state or other political subdivision thereof, including any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to such government. "Guarantor" means the party named as such in the opening paragraph of this Agreement. "Guaranty" shall have the meaning assigned to such term in Section 3.01(c) hereof. "Highest Lawful Rate" shall have the meaning assigned thereto in Section 9.09. "Indemnified Liabilities" shall have the meaning assigned thereto in Section 9.04. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery thereof or the completion of such services, except trade payables, (v) all obligations on account of principal of such Person as lessee under capitalized leases, (vi) all indebtedness of other Persons secured by a lien on any asset of such Person, whether or not such indebtedness is assumed by such Person; PROVIDED that the amount of such indebtedness shall be the lesser of (a) the fair market value of such asset at such date of determination and (b) the amount of such indebtedness, and (vii) all indebtedness of other Persons guaranteed by such Person to the extent such indebtedness is guaranteed by such Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, PROVIDED that the amount outstanding at any time of any indebtedness issued with original issue discount is the face amount of such indebtedness less the remaining unamortized portion of the original issue discount of such indebtedness at such time as determined in conformity with GAAP; and PROVIDED FURTHER that Indebtedness shall not include any liability for current or deferred federal, state, local or other taxes, or any trade payables; PROVIDED, HOWEVER, in the case of the CogenAmerica, "Indebtedness" shall not include (i) any Lien granted by the CogenAmerica on any equity interest of CogenAmerica in any of its Subsidiaries (other than OLAC or OLAC Holding) as security for any debt of such Subsidiary in respect of any energy project acquired or developed after the date hereof or any debt with respect to such Subsidiary's project or project owner in respect of any such project, or (ii) subject to the limitations set forth 4 herein, any equity funding commitment made or guaranteed by CogenAmerica regardless of whether such equity funding commitment is assigned or otherwise pledged as security for any debt of any Subsidiary in respect of any energy project acquired or developed after the date hereof or any debt with respect to such Subsidiary's project or project owner in respect of any energy project acquired or developed after the date hereof. For purposes of calculating the amount of any Indebtedness hereunder, there shall be no double-counting of direct obligations, guarantees and reimbursement obligations for letter of credit. "Interest Payment Date" means each principal reduction date set forth on Schedule B hereto, and, for periods after the last date reflected thereon, the last day of each calendar quarter. "Investments" in any Person means (i) any loan, extension of credit or advance to such Person, (ii) any purchase or other acquisition of any capital stock, warrants, rights, options, obligations or other securities of such Person, or (iii) any capital contribution to such Person. "Lender" means the party named in this Agreement until one or more successors replace it, and thereafter means the successor or successors. "Lien" shall mean any mortgage, pledge, hypothecation, assignment, a mandatory deposit arrangement with any party owning indebtedness of any Cogen Entity, encumbrance, lien (statutory or other), or preference, priority or other security agreement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same effect at any of the foregoing and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law. "Loan" shall have the meaning assigned thereto in Section 2.01. "Material Adverse Effect" means a material adverse effect on (i) the ability of any Cogen Entity to perform its obligations to the Lender under this Agreement, the Note or any of the Credit Documents to which it is a party or (ii) the business, property, assets, liabilities, operations or condition (financial or otherwise) of any Cogen Entity and their respective Subsidiaries, taken as a whole. "Material Governmental Approvals" means all Governmental Approvals which are required under applicable law in connection with the operation, maintenance, ownership or leasing of the facility other than such Governmental Approvals as are immaterial in nature. "Maturity Date" shall have the meaning assigned thereto in Section 2.04. "MCPC Facility" shall have the meaning assigned thereto in the first recital hereto. "MeesPierson Credit Agreement" shall have the meaning assigned thereto in Section 8.01 hereof. 5 "MeesPierson Lenders" shall have the meaning assigned thereto in Section 8.01 hereof. "MeesPierson Obligations" shall have the meaning assigned thereto in Section 8.01 hereof. "MeesPierson Waiver" shall mean that certain waiver letter issued by MeesPierson Capital Corp to CogenAmerica dated August 14, 1998 and acknowledged and agreed to by CogenAmerica and O'Brien (Philadelphia) Cogeneration Inc. relating to certain potential events of default under the MeesPierson Credit Agreement, a true and correct copy of which waiver is attached hereto as Exhibit B. "Note" means the joint and several Note of the Borrowers substantially in the form attached hereto as Exhibit A. "Obligations" shall mean all obligations, liabilities and indebtedness of every nature of any of the Cogen Entities from time to time owing to the Lender under this Agreement and/or any other Credit Documents, each whether now existing or hereafter incurred, each whether direct or indirect, contingent or liquidated, owed jointly, severally or jointly and severally, and including, without limitation, (i) all principal, interest and fees due hereunder or thereunder, (ii) any amounts (including, without limitation, insurance premiums, licensing fees, recording and filing fees and taxes) which the Lender expends on behalf of either Borrower because such Borrower fails to make such payment require under the terms of any Credit Documents, and (iii) all amounts required to by paid under any indemnification or similar provision. "Permitted Liens" means any Liens that are: (a) Liens for taxes, or other governmental levies and assessments that (i) do not arise under ERISA or Environmental Laws and (ii) are not yet due or which are subject to a Good Faith Contest; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not past due for a period of more than ninety (90) days or which are subject to Good Faith Contest; (c) pledges or deposits in connection with workmen's compensation unemployment insurance and other social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions (including landmarking and zoning restrictions, royalties, leasehold and fee interest covenants and other similar encumbrances incurred or imposed in the ordinary course of business which are not of the nature of a Lien for security purposes and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of either Borrower; (f) liens for purchase money obligations permitted by Section 6.02(c) hereof, provided that any such lien encumbers only the asset so purchased; (g) liens arising from legal proceedings, as long as such proceedings are being contested in a Good Faith Contest and so long as execution is stayed on all judgments resulting from any such proceedings; (h) liens arising on the title insurance policies to be delivered in connection with the MeesPierson Credit Agreement; (i) liens securing permitted secured indebtedness of CogenAmerica as permitted under this Agreement, including without limitation pledges by CogenAmerica of its equity interest in any Subsidiary (other than OLAC 6 Holding or OLAC) or in any electrical cogeneration project(s) (other than the MCPC Facility) hereafter owned and/or operated, in whole or in part, by CogenAmerica or any Subsidiary of CogenAmerica (other than OLAC or OLAC Holding) as security for such indebtedness; and (j) any Liens in favor of the Lender, including, without limitation, the Lien on the shares of stock of O'Brien Schuykill owned by CogenAmerica pursuant to that certain NRG Subordinated Stock Pledge Agreement dated as of March 1, 1996 among the Lender, CogenAmerica, O'Brien Schuykill and The Chase Manhattan Bank. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agent or political subdivision thereof or any other entity. "Plan" means any employee benefit plan covered by Title IV of ERISA. "Pledge Agreements" shall have the meaning assigned thereto in Section 3.01(b). "Pledged Stock" means the capital stock and other ownership interests of OLAC and OLAC Holding respectively pledged to the Lender by the Borrowers pursuant to the Pledge Agreements. "Prime Rate" shall mean at the time any determination thereof is to be made, the fluctuating interest rate per annum announced from time to time by The Chase Manhattan Bank, New York, New York, as its "Prime Rate" (or, if otherwise denominated, such bank's reference rate for interest rate calculations on general commercial loans), which rate is not necessarily the lowest or best rate which such bank may at any time and from time to time charge any of its customers. "Project Agreement" means any agreements, contracts or leases of any kind whatsoever pursuant to which OLAC is entitled directly, indirectly, by assignment or otherwise to receive payments in respect of the MCPC Facility or has granted any interest therein to any Person, and shall further mean, any of (a) that certain Electrical Interconnection and Wheeling Agreement dated July 21, 1989, between Public Service Company of Oklahoma and Mid-Continent Power Corporation, (b) Natural Gas Sales Agreement dated October 31, 1997, between Natural Gas Clearinghouse and Mid-Continent Power Company, L.L.C., and (c) any future agreements or contracts in replacement thereof or of a similar nature thereto, all of the foregoing as heretofore and hereafter amended. "Projected EBIDA" shall mean for the Calculation Period, the projected after-tax net income of OLAC, plus projected interest expense, depreciation, amortization and other noncash charges for such period, all as determined in accordance with GAAP, consistently applied; PROVIDED that (i) such calculation shall assume the timely payment of all scheduled crises and other obligations of OLAC, and (ii) the projected amount of after-tax net income shall further assume and be reduced by the making of adequate reserves for anticipated maintenance expenses of the MCPC Facility during the twelve (12) month period commencing on the Certification Date. 7 "PURPA" means the Public Utility Regulatory Policies Act of 1978, as amended from time to time, and all rules and regulations adopted thereunder. "Register" shall have the meaning assigned thereto in Section 2.11(b). "Security Documents" shall have the meaning assigned in Section 3.01(b). "Stock Purchase Agreement" shall have the meaning ascribed thereto in the first recital hereto. "Stock Purchase Letter Supplement" Stock Purchase Letter Supplement shall have the meaning ascribed thereto in the first recital hereto. "Subsidiary" of any Person means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of capital stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person or (ii) one or more Subsidiaries of such Person. "Uniform Commercial Code" means the Minnesota Uniform Commercial Code as in effect from time to time. SECTION 1.02. RULES OF CONSTRUCTION. Unless the context otherwise requires: a term has the meaning assigned to it; "or" is not exclusive; "including" means including without limitation; words in the singular include the plural and words in the plural include the singular; unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the Note or any certificate or other document made or delivered pursuant hereto; and the words "hereof', "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, Section, schedule and exhibit references are to this Agreement unless otherwise specified. ARTICLE 2 8 LOAN SECTION 2.01. LOAN. Subject to the terms and conditions hereof, the Lender agrees to make a loan in Dollars to the Borrowers on the Funding Date, in an aggregate principal amount of $23,947,140 (if drawn upon, the "Loan"). SECTION 2.02. USE OF PROCEEDS; MANNER OF FUNDING. The proceeds of the Loan shall be used exclusively to refinance and satisfy in full the outstanding indebtedness owing under the Earnest Money Note and to make payments to Lender in accordance with and in satisfaction of the obligations of CogenAmerica under the Stock Purchase Agreement. The proceeds of the Loan shall be transferred directly to an account of Lender pursuant to Section 2.07. SECTION 2.03. DEEMED BORROWING. If any amount becomes due and owing under the Stock Purchase Agreement, the Lender may elect, in its sole discretion, to fund the Loan in the manner contemplated by Section 2.02, without receiving a notice of borrowing pursuant to Section 2.07. In such cases, notice of borrowing shall be deemed to have been given in advance of the closing date under the Stock Purchase Agreement. Such a deemed borrowing shall be in addition to and shall not affect the remedies of the Lender hereunder, or under the other Credit Documents or the remedies of Lender under the Stock Purchase Agreement. SECTION 2.04. MATURITY. The Loan will mature on the date that is six years following the Funding Date (the "Maturity Date"). SECTION 2.05. OPTIONAL AND MANDATORY PREPAYMENTS; REPAYMENTS OF LOAN. (a) The Borrowers may at any time and from time to time prepay the Loan, in whole or in part, without premium or penalty, upon at least five days irrevocable notice to the Lender. If such notice is given, the Borrowers shall make such prepayment, and the payment amount specified in such notice shall be due and payable, on the date specified therein. (b) The Borrowers shall pay, in reduction of the principal amount of the Loan then outstanding, the principal amounts set forth on the amortization schedule attached hereto as Exhibit C (the "Amortization Schedule") on the dates specified on the Amortization Schedule. (c) The Note shall be subject to mandatory prepayment as contemplated by Section 2.5(iv) of the Co-Investment Agreement. (d) Accrued interest on the amount of any prepayments shall be paid on the date of such date of prepayment. SECTION 2.06. INTEREST RATE AND PAYMENT DATES. The Loan shall bear interest for the period from and including the date the Loan is made to, but excluding, the Maturity Date thereof on the unpaid principal thereof at a rate per annum equal to the Base Rate. 9 If all or a portion of (i) the principal amount of the Loan or (ii) any interest payable thereon shall not be paid when due, whether at the stated maturity (including, without limitation, amortization payments as required by Section 2.05(b)), by acceleration or otherwise, the Loan shall, without limiting the rights of the Lender under Article 7, bear interest at a rate per annum which is 2.00% above the Base Rate from the date of such non-payment until paid in full (as well after as before judgment). Interest shall be payable in arrears on each Interest Payment Date. SECTION 2.07. NOTICE OF LOAN. The Loan shall be made upon written notice, by way of a notice of borrowing executed by an officer of each of the Borrowers, given by telecopy, mail, or personal service, delivered to the Lender at its office at 1221 Nicollet Mall, Minneapolis, Minnesota (Attn: Treasurer) at least three Business Days prior to the day on which the Loan to be made and such notice shall specify that the Loan is requested and state the amount thereof (subject to the provisions of this Article 2) and shall specify that the proceeds of the Loan shall be deposited by the Lender into such account of Lender as Lender selects. SECTION 2.08. COMPUTATION OF INTEREST AND FEES. Interest in respect of the Loan shall be calculated on the basis of a 365 (or 366, as the case may be) day year for the actual days elapsed. SECTION 2.09. TREATMENT OF PAYMENTS. Whenever any payment received by the Lender under this Agreement or the Note is insufficient to pay in full all amounts then due and payable to the Lender under this Agreement or the Note, such payment shall be applied by the Lender in the following order: FIRST, to the payment of fees, expenses and other amounts due and payable to the Lender under and in connection with this Agreement and the other Credit Documents, including the payment of all expenses due and payable under Section 9.04 hereof, but excluding interest and principal on the Loan; SECOND, to the payment of interest then due and payable on the Loan; and THIRD, to the payment of the principal amount of the Loan which is then due and payable. All payments (including prepayments) to be made by the Borrowers on account of principal, interest, fees and other Obligations shall be made without set-off or counterclaim and shall be made to the Lender, for the account of the Lender at its office located at 1221 Nicollet Mall, Minneapolis, Minnesota (or by wire transfer to: LaSalle National Bank, Chicago, Illinois; ABA No.: 071-000-505; Account No.: 5800-07-6852; Recipient: NRG Energy, Inc.), in lawful money of the United States of America and in immediately available funds. If any payment hereunder would become due and payable on a day other than a Business Day, such payment shall become due and payable the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. SECTION 2.10. INDEMNITY. The Borrowers agree jointly and severally to indemnify the Lender and to hold the Lender harmless from any loss or expense (but without duplication of any 10 amounts payable as default interest and excluding lost profits; PROVIDED, for the avoidance of doubt that interest and/or default interest accruing prior to payment in full of the Loan shall not be deemed to be "lost profits") which the Lender may sustain or incur as a consequence of default by the Borrowers in making any prepayment after Borrowers have given a notice in accordance with Section 2.05. Any amounts payable hereunder shall be due within thirty (30) days following receipt by the Borrowers of a certificate signed by an officer of the Lender showing in reasonable detail the calculation of such costs and expenses, which certificate shall constitute prima facie evidence of such amounts. This covenant shall survive termination of this Agreement and repayment of the Loan; PROVIDED, that the Borrowers shall not be liable to the Lender for any costs or expense incurred more than ninety (90) days prior to the delivery of the applicable certificate pursuant to this Section 2.10. SECTION 2.11. REPAYMENT OF THE LOAN; EVIDENCE OF DEBT. Each Borrower hereby jointly and severally, and unconditionally promises to pay to the Lender the then unpaid principal amount of the Loan, interest thereon and all other Obligations in accordance with the terms hereof, the terms of the Note, and the terms of the other Credit Documents, as applicable; and each of the undersigned is primarily liable for all such Obligations as co-maker; and neither is merely an "accommodation party." Each Borrower hereby waives all defenses based upon the status of an accommodation party. Each Borrower hereby further agrees, jointly and severally and unconditionally, to pay interest on the unpaid principal amount of the Loan from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in Section 2.06. The Lender shall maintain a Register (the "Register") in which shall be recorded (i) the amount of the Loan made hereunder, (ii) the amount of any principal or interest due and payable or to become due and payable from Borrowers to the Lender hereunder and (iii) the amount of any sum received by the Lender hereunder from Borrowers. The entries made in the Register to the extent permitted by applicable law, shall be PRIMA FACIE evidence of the existence and amounts of the obligations of Borrowers therein recorded; PROVIDED, HOWEVER that the failure of the Lender to maintain the Register, or any error therein, shall not in any manner affect the obligation of Borrowers to repay (with applicable interest) the Loan made to Borrowers by the Lender in accordance with the terms of this Agreement. SECTION 2.12. PURCHASE PRICE/NOTE ADJUSTMENT. The Lender and Borrower acknowledge and agree that the "Purchase Price" for the acquisition of the equity interests of OLAC under the Stock Purchase Agreement and the Note shall be subject to adjustment in accordance with the terms set forth in the Stock Purchase Letter Supplement. ARTICLE 3 CONDITIONS PRECEDENT 11 SECTION 3.01. CONDITIONS TO LOAN. The obligation of the Lender to make the Loan on the Funding Date is subject to the satisfaction, or waiver by the Lender, immediately prior to or concurrently with the making of the Loan, of the following conditions: (a) NOTE. The Lender shall have received the Note conforming to the requirements hereof and executed by a duly authorized officer of each Borrower. (b) SECURITY DOCUMENTS. The Lender shall have received the Pledge Agreements dated as of even date herewith respectively entered into by CogenAmerica and OLAC Holding, as pledgors, in favor of the Lender (the "Pledge Agreements"), and the other documents, instruments and agreements referenced therein or to be delivered in connection therewith (the Pledge Agreements, and all such documents, instruments and agreements being collectively referred to as the "Security Documents") conforming to the requirements hereof or the Security Documents, executed by a duly authorized officer of each Cogen Entity, as applicable, and otherwise in form and substance acceptable to the Lender. (c) GUARANTY. The Lender shall have received a guaranty dated as of even date herewith, duly executed and delivered by OLAC, in form and substance acceptable to the Lender. (d) LIEN SEARCHES. The Lender shall have received UCC and state and federal tax lien searches with respect to each of the Cogen Entities from all applicable filing offices in the States of Delaware, Minnesota and Oklahoma. (e) OPINION OF COUNSEL. The Lender shall have received the opinion of counsel to the Cogen Entities in form and substance satisfactory to the Lender. (f) PURCHASE. CogenAmerica and OLAC Holding shall have consummated the Purchase of the stock of OLAC in accordance with the Stock Purchase Agreement. (g) REPRESENTATIONS TRUE; NO DEFAULT. Each representation and warranty of each of the Cogen Entities hereunder and under the Pledge Agreements and the other Credit Documents, which shall be affirmed pursuant to officers certificates of the Chief Executive and Chief Financial Officers of each of the Cogen Entities as of the Funding Date, shall continue to be accurate and complete in all material respects and no Default or Event of Default shall have occurred hereunder. (h) FEES AND EXPENSES. The Borrowers shall have paid to the Lender the fees and expenses set forth in Section 9.04. (i) CORPORATE AUTHORIZATIONS. Each of the Cogen Entities shall deliver to the Lender a copy of the duly adopted Board of Director resolutions of each of such entities authorizing the transactions contemplated by the Stock Purchase Agreement and the other Credit Documents, and which resolutions shall otherwise be in form and substance acceptable to the Lender, each duly certified as true and correct as of the Funding Date by the corporate secretary of each of the 12 Cogen Entities, as applicable, and accompanied by (a) certified copies of their respective organizational documents and (b) certificates of good standing from their respective states of incorporation and from each state in which they qualified to do business (provided that with respect to CogenAmerica, such certificates only from the states of Delaware and Minnesota and as to OLAC from the States of Delaware and Oklahoma). ARTICLE 4 SECURITY INTEREST To secure the Obligations of the Borrowers hereunder and the other obligations described therein, CogenAmerica and OLAC Holding have executed the Pledge Agreements and the other Security Documents granting the Lender a first priority Lien in all of the Collateral, as applicable. ARTICLE 5 REPRESENTATIONS AND WARRANTIES In order to induce the Lender to enter into this Agreement and to make the Loan available, each Cogen Entity hereby represents and warrants to the Lender (which representations and warranties shall survive the execution and delivery of this Agreement and the Note and the drawdown of the Loan hereunder) that, as of the Funding Date: (a) DUE ORGANIZATION AND POWER. Each Cogen Entity is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and is properly qualified to do business and in good standing in every jurisdiction where the failure to maintain such qualification or good standing could reasonably be expected to result in a Material Adverse Effect. Each Cogen Entity has full power to carry on its business as now being conducted and has complied with all statutory, regulatory and other requirements relative to such business and such agreements, except where non-compliance could not reasonably be expected to result in a Material Adverse Effect. Each Cogen Entity has full power and authority to enter into and perform its obligations under the Credit Documents to which it is a party. (b) CAPITALIZATION. The authorized capital stock or other equity interests of OLAC and OLAC Holding are held as set forth on Schedule 5(b) and except as set forth thereon, no other shares of the capital stock or other equity interests of either OLAC or OLAC Holding are issued and outstanding. All of the issued and outstanding shares of capital stock of OLAC and OLAC Holding are duly authorized and validly issued, fully paid, nonassessable, and free and clear of all Liens (other than Permitted Liens), and such shares were issued in compliance with all applicable state, federal and foreign laws concerning the issuance of securities. There are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition of shares of capital stock or other securities or equity interests of OLAC or OLAC Holding. CogenAmerica is the sole owner of 13 100% of the outstanding equity interests of OLAC Holding, and OLAC Holding is the owner of 100% of the outstanding equity interests of OLAC, each free and clear of all Liens. (c) AUTHORIZATION AND CONSENTS. All necessary corporate action has been taken to authorize, and all necessary consents and authorities have been obtained and remain in full force and effect to permit, each Cogen Entity to enter into and perform its respective obligations under the Credit Documents to which it is a party and to borrow and repay the Loan. No further consents or authorities are necessary for the repayment of the Loan or any part thereof, including, without limitation, any consent or approval of, or notice to, or other action with or by, any Governmental Authority, regulatory body or any other Person which has not been made or obtained and is in full force and effect. (d) BINDING OBLIGATIONS. Each Credit Document constitutes or when executed and delivered, will constitute the legal, valid and binding obligations of each Cogen Entity to the extent it is a party, enforceable against such parties in accordance with their respective terms, except to the extent that such enforcement may be limited by equitable principles, principles of public policy or applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors' rights. (e) NO VIOLATION. The execution and delivery of, and the performance of the provisions of, each Credit Document to which it is or will be a party by each Cogen Entity do not contravene any applicable law or regulation existing at the date hereof, any Governmental Approval or any contractual restriction binding on such party or the certificate of incorporation or by-laws (or equivalent instruments) thereof. (f) LITIGATION. Except as set forth on Schedule 5(f), no action, suit or proceeding is pending or, to any Cogen Entity's knowledge, threatened against any Cogen Entity before any court, board of arbitration or administrative agency which could reasonably be expected to result in any Material Adverse Effect. There is no injunction, writ, preliminary restraining order or any order of any nature issued by an arbitrator or other Governmental Authority directing that any material aspect of the transactions provided for in this Agreement not be consummated as herein or therein provided. (g) NO DEFAULT. None of the Cogen Entities is in default under any material agreement by which it is bound, or is in default in respect of any financial commitment or obligation, in either case the default of which could reasonably be expected to result in a Material Adverse Effect. (h) PROJECT AGREEMENTS. Upon the Funding Date: (i) Each Material Governmental Approval required in connection with the MCPC Facility has been obtained, is validly issued, is in full force and effect, is not subject to appeal by any Person, and, to the knowledge of the Cogen Entities, is free from conditions or requirements compliance with which could reasonably be expected to result in a Material Adverse Effect. 14 There is no proceeding pending or, to the knowledge of Cogen Entities, threatened which is reasonably likely to result in the rescission, revocation, material modification, suspension, determination of invalidity or limitation of effectiveness of any Material Governmental Approval. To the knowledge of the Cogen Entities, the information set forth in each application and other written material submitted by or on behalf of any of the Cogen Entities to the applicable Governmental Authority in connection with such Material Governmental Approval was accurate and complete in all material respects at the time such application or other written material was submitted. Each of the Cogen Entities complies in all material respects with all covenants, conditions, restrictions and reservations in the Material Governmental Approvals relating to the MCPC Facility and the Project Agreements applicable thereto and all laws applicable thereto, except to the extent any noncompliance could not reasonably be expected to result in a Material Adverse Effect; (ii) Each Project Agreement is a legal, valid and binding agreement enforceable in accordance with its terms, except to the extent enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights and subject to general equitable principles; (iii) All representations and warranties set forth in each Project Agreement by OLAC or its predecessors which is a party thereto are true and correct in all material respects (the determination of such material truth and correctness to be made by the Lender in good faith) as though made as of the date hereof, except to the extent any such representation or warranty relates to a prior date; and (iv) The facilities of OLAC will be able to be operated on a safe and commercially sound basis in compliance with all Governmental Approvals and applicable Project Agreements and laws, so that the performance and facility guarantees and specifications provided for in the applicable Project Agreements and Governmental Approvals can be substantially met during the term of this Agreement and OLAC can duly and punctually meet its obligations under the applicable Project Agreements and Governmental Approvals in accordance with the terms thereof, except to the extent any inadvertent noncompliance with such Governmental Approvals and Project Agreements could not reasonably be expected to have a Material Adverse Effect; provided, however, that such inadvertent noncompliance must be remedied or cured within 30 days of OLAC obtaining knowledge thereof. OLAC has adequate inventories and spare parts to operate the MCPC Facility in accordance with the Project Agreements, Governmental Approvals and applicable law. 15 (i) INSURANCE. Schedule 5(i) (which shall be updated by the Cogen Entities and provided to the Lender not less often than annually) sets forth a complete and accurate description of all material policies of insurance that will be in effect as of the Funding Date with respect to the MCPC Facility. To the knowledge of the Cogen Entities, such policies are with companies rated "A-" or better by Best's Insurance Guide and Key Rating or other insurance companies of recognized responsibility satisfactory to the Lender and the coverages provided by such policies are in amounts and cover such risks as are usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which OLAC operates. (j) FINANCIAL INFORMATION. Except as otherwise disclosed in writing to the Lender on or prior to the date hereof, all financial statements, information and other data furnished by any of the Cogen Entities to the Lender are complete and correct, such financial statements have been prepared in accordance with GAAP (except, in the case of interim financial statements, for the absence of footnotes) and accurately and fairly present the financial condition of the parties covered thereby as of the respective dates thereof and the results of the operations thereof for the period or respective periods covered by such financial statements and since such date or dates, there has been no Material Adverse Effect as to any of such parties and none thereof has any contingent obligations, liabilities for taxes or other outstanding financial obligations which are material in the aggregate except as disclosed in such statements, information and data. (k) TAX RETURNS. Each Cogen Entity has filed all material tax returns required to be filed thereby and has paid all taxes payable thereby which have become due, other than those not yet delinquent or the nonpayment of which would not have a Material Adverse Effect on such Party and except for those taxes the amount or validity of which is currently being contested in a Good Faith Contest. (l) ERISA. The execution and delivery of the Credit Documents and the consummation of the transactions hereunder will not involve any prohibited transaction within the meaning of ERISA or Section 4975 of the Code and no condition exists or event or transaction has occurred in connection with any Plan maintained or contributed to by any Cogen Entity or any ERISA Affiliate resulting from the failure of any thereof to comply with ERISA insofar as ERISA applies hereto which is reasonably likely to result in such party or any ERISA Affiliate incurring any liability, fine or penalty which individually or in the aggregate would have a Material Adverse Effect. Prior to the Funding Date, the Cogen Entities have delivered to the Lender a list of all Plans to which any Cogen Entity or any ERISA Affiliate is a "party in interest" (within the meaning of Section 2(14) of ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of the Code). (m) MARGIN REGULATIONS. None of the Cogen Entities is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation G, T, U, or X of the Board of Governors of the Federal Reserve System) and no proceeds of any Loan will be used in a manner which would violate or result in a violation of, such Regulation, G, T, U, or X. 16 (n) INVESTMENT COMPANY ACT. None of the Cogen Entities is an "investment company" nor a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (o) SECURITY INTERESTS. Except for the consents set forth on Schedule 5(o), no consents are required to create a first priority perfected Lien in any of the Collateral under and as described in the Security Documents, and the Liens created in favor of the Lender under the Security Documents are valid and perfected, first priority Liens (subject only to Permitted Liens) superior and prior to the rights of all Persons (except those rights of the holders of Permitted Liens), whether the property subject to the security interests is now owned by the party granting such security interest or is hereafter acquired. The Security Documents (including Uniform Commercial Code financing statements) have been filed, recorded and/or registered in each office and in each jurisdiction where required to create and perfect the lien and security interest described above. The chief executive office and chief place of business of each of Cogen Entity and the office in which the records relating to the earnings and other receivables of each such party are kept is located, as of the date hereof, at the locations set forth on Schedule 5(o) for such party. Such locations are the sole offices or places of business maintained by each such party as of the date hereof. To the knowledge of the Cogen Entities, no such party has transacted any business during the five year period prior to the date of this Agreement under any name other than those set forth on Schedule 5(o). (p) BUSINESS OF PROJECT ENTITIES. Neither OLAC Holding nor OLAC has engaged in any business other than the operation of the MCPC Facility nor is any such party a party to any contract, operating lease, agreement or commitment which, either individually, or in the aggregate is material to the operation of the MCPC Facility other than the Project Agreements applicable thereto. (q) QUALIFYING COGENERATION MCPC FACILITY STATUS. All necessary filings have been made to establish and maintain "qualifying facility" status under PURPA for the MCPC Facility, provided that the Cogen Entities will promptly file a recertification certificate with the Federal Energy Regulatory Commission. The MCPC Facility is owned and will be operated in the manner contemplated by the certificate conferring upon it "qualifying facility" status. (r) TITLE TO AND SUFFICIENCY OF ASSETS. Except as set forth on Schedule 5(r), CogenAmerica had good, valid and sufficient title to the Pledged Stock of OLAC Holding and each of OLAC Holding and OLAC has good, valid and sufficient title to its assets and properties and as to each of such Cogen Entities, such Pledged Stock, assets and properties are free and clear of all liens other than Permitted Liens of OLAC Holding and OLAC. Each Cogen Entity has good, marketable, indefeasible and insurable title in fee simple (or its equivalent under applicable law) to the real property owned by it. None of the real property owned or leased by any Cogen Entity is located within any federal, state or municipal flood plain. All leases necessary for the conduct of the business of each Cogen Entity as presently conducted and as proposed to be conducted are valid and subsisting and are in full force and effect. Each Cogen Entity enjoys peaceful and undisturbed possession under all material leases to which they are parties. The services to be performed, the materials to be supplied and the easements, licenses 17 and other rights granted or to be granted to OLAC pursuant to the Project Agreements and Governmental Approvals applicable thereto provide or will provide such party with all rights and property interests required to enable such party to obtain all services, materials or rights (including access) required for the operation and maintenance of the MCPC Facility, including such party's full and prompt performance of its obligations, and full and timely satisfaction of all conditions precedent to the performance by others of their obligations under such Project Agreements and Governmental Approvals. (s) LABOR MATTERS. There are no strikes or other material labor disputes or grievances, charges or complaints with respect to any employee or group of employees pending or, to the knowledge of any Cogen Entity, threatened against any Cogen Entity. (t) TRANSACTIONS WITH AFFILIATES. Set forth on Schedule 5(t) is a true, accurate and complete description of all transactions between or among OLAC and OLAC Holding and between or among each of them and any Affiliate of any such party (other than the Lender) which required or which will require in the case of OLAC or OLAC Holding the payment by such party of an aggregate amount equal to or greater than $100,000 during any twelve-month period. (u) ENVIRONMENTAL MATTERS AND CLAIMS. (i) OLAC is in compliance with all applicable United States federal, state and local laws, regulations, rules and orders relating to pollution prevention or protection of the environment or exposure to Materials of Environmental Concern (including, without limitation, ambient air, surface water, ground water, navigable waters, waters of the contiguous zone, ocean waters and international waters), including, without limitation, laws, regulations, rules and orders (collectively, the "Environmental Laws") relating to (A) emissions, discharges, releases or threatened releases of substances defined as "hazardous substances," "hazardous materials," "contaminants," "pollutants," "hazardous wastes" or "toxic substances" in (1) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act, 42 U.S.C. Section 9601 ET SEQ., (2) the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 ET SEQ., (3) the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ., (4) the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251 ET SEQ., (5) the Clean Air Act, 33 U.S.C. Section 7401 ET SEQ., (6) the Toxic Substances Control Act, 15 U.S.C. Section 2601 ET SEQ. or (7) the Safe Drinking Water Act, 42 U.S.C. Section 300f ET SEQ. (collectively, "Materials of Environmental Concern"), or (B) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern, all except to the extent the failure to comply with Environmental Laws could not reasonably be expected to have a Material Adverse Effect; 18 (ii) OLAC has all permits, licenses, approvals, consents or other authorizations required under applicable Environmental Laws (collectively, the "Environmental Approvals") and is in compliance with all Environmental Approvals required to operate its business as then being conducted, all except to the extent the failure to maintain or comply with an Environmental Approval could not reasonably be expected to have a Material Adverse Effect; (iii) OLAC has not received any notice of any claim, action, cause of action, investigation or demand by any person, entity, enterprise or government, or any political subdivision, intergovernmental body or agency, department or instrumentality thereof, alleging potential liability for, or a requirement to incur, material investigatory costs, cleanup costs, response and/or remedial costs (whether incurred by governmental entity or otherwise), natural resources damages, property damages, personal injuries, attorneys' fees and expenses, or fines or penalties, in each case arising out of, based on or resulting from (A) the presence, or release or threat of release into the environment, of any Materials of Environmental Concern at any location, whether or not owned by such person, or (B) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law or Environmental Approval, and in each case which could reasonably be expected to have Material Adverse Effect ("Environmental Claim") (other than Environmental Claims that have been fully and finally adjudicated or otherwise determined and all fines, penalties and other costs, if any, payable by OLAC in respect thereof have been paid in full or which are fully covered by insurance (including permitted deductibles)); (iv) there are no circumstances that may prevent or interfere with such compliance in the future, except to the extent the same could not reasonably be expected to have a Material Adverse Effect; (v) no Materials of Environmental Concern are currently located at, in, or under or about or are being released from any of the properties on which the MCPC Facility is located (or any other property with respect to which any of OLAC has or may have liability either contractually or by operation of law) in a manner which violates any applicable Environmental Law, or for which cleanup or corrective action of any kind is required under any applicable Environmental Law where such violation, cleanup or corrective action could reasonably be expected to have a Material Adverse Effect; and (vi) no notice of violation, Lien, complaint, suit, order or other notice with respect to the environmental condition of any of the properties on which the MCPC Facility is located (or any other property with respect to which 19 OLAC has or may have liability either contractually or by operation of law) is outstanding or, to such Person's knowledge, threatened against any such party which could reasonably be expected to result in a Material Adverse Effect. (v) THIRD PARTY FINANCING EFFORTS. The Borrowers have made good faith and reasonable efforts to obtain third party financing of the purchase price for the MCPC Facility under the Stock Purchase Agreement on terms comparable to those provided under this Loan Agreement and the related Credit Documents; such financing has been requested from at least three independent sources; and the Borrowers have been unable to obtain said financing on such comparable terms. (w) DUE DILIGENCE. In connection with the transactions contemplated by the Stock Purchase Agreement and the Credit Documents, CogenAmerica has conducted reasonably prudent due diligence under the circumstances of such transactions. To the extent the representations and warranties in this Article 5 specifically relating to (i) the MCPC Facility, including those concerning the Project Agreements or Environmental Approvals, Environmental Claims or Environmental Laws specifically relating to the MCPC Facility, or (ii) the assets and properties of OLAC are untrue or incorrect as of the Funding Date due to facts, circumstances, conditions or events that existed on or occurred prior to the date hereof, and as of the date hereof, (A) none of the Cogen Entities was aware of such facts, circumstances, conditions or events, and (B) the Lender knew or reasonably should have known of such facts, circumstances, conditions or events, the same shall not be considered to be, and shall not be, a breach of representation or warranty or of the Agreement. ARTICLE 6 COVENANTS Each of the Cogen Entities hereby jointly and severally covenant and undertake with the Lender that, from the date hereof and so long as any Obligations are owing: SECTION 6.01. Each of the Cogen Entities will: 20 (a) PERFORMANCE OF CREDIT DOCUMENTS. Duly perform and observe, and procure the observance and performance by all parties thereto (other than the Lender) of the terms of the Credit Documents; (b) NOTICE OF DEFAULT, ETC. Promptly upon obtaining knowledge thereof (and in any event within ten (10) days thereof), inform the Lender of the occurrence of (i) any Event of Default or of any event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, (ii) any litigation or governmental proceeding pending or threatened against it or against any Affiliate of any Cogen Entity which could reasonably be expected to have a Material Adverse Effect, and (iii) any other event or condition which is reasonably likely to have a Material Adverse Effect on its ability to perform its obligations under the Credit Documents; (c) OBTAIN CONSENTS. Obtain every consent and do all other acts and things which may from time to time be necessary or advisable for the continued due performance of all obligations of each Cogen Entity under the Credit Documents; (d) FINANCIAL INFORMATION. At the expense of the Cogen Entities, deliver to the Lender: (i) as soon as available but not later than 105 days after the end of each fiscal year of the Cogen Entities complete copies of the consolidated financial reports of the Cogen Entities, all in reasonable detail, which shall include at least the consolidated balance sheet of such entity and its Subsidiaries as of the end of such year and the related consolidated statements of income and sources and uses of funds for such year, which shall be audited reports, certified without qualification, and shall be prepared by an accounting firm reasonably acceptable to the Lender; (ii) as soon as available but not less than 60 days after the end of each of the first three quarters of each fiscal year of the Cogen Entities, a quarterly interim consolidated balance sheet of the Cogen Entities and their Subsidiaries and the related consolidated profit and loss statements and sources and uses of funds, all in reasonable detail, unaudited, but certified to be true and complete by the chief financial officer of CogenAmerica; (iii) within 30 days of the filing thereof, copies of all registration statements and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) and other material filings which any Cogen Entity shall have filed with the Securities and Exchange Commission or any similar governmental authority; (iv) promptly upon the mailing thereof to the shareholders of any Cogen Entity, copies of all financial statements, reports, proxy statements and 21 other communications provided to the shareholders of any Cogen Entity; and (v) such other statements (including, without limitation, monthly consolidated statements of operating revenues and expenses), operating logs for the MCPC Facility, lists of assets and accounts, budgets, forecasts, reports and other financial information with respect to the business of any Cogen Entity as the Lender may from time to time reasonably request, certified to be true and complete by the chief financial officer of CogenAmerica; (e) CORPORATE EXISTENCE. Do or cause to be done all things necessary to: (a) preserve and keep in full force and effect its corporate existence; and (b) preserve and keep in full force and effect all licenses, franchises, permits and assets necessary to the conduct of its business, except, in the case of clause (b) only, where the failure to do so could not reasonably be expected to result in a Material Adverse Effect; (f) BOOKS AND RECORDS. Keep proper and accurate books of record and account in accordance with GAAP; (g) TAXES AND ASSESSMENTS. Pay and discharge all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or property prior to the date upon which penalties attach thereto; provided, however, that it shall not be required to pay and discharge, or cause to be paid and discharged, any such tax, assessment, charge or levy so long as the legality thereof shall be contested in good faith and by appropriate proceedings or other acts and it shall set aside on its books adequate reserves with respect thereto; (h) INSPECTION. Allow any representative or representatives designated by the Lender, subject to applicable laws and regulations, to visit and inspect any of its properties, and, on the reasonable request thereof, to examine (at a location where normally kept) its books of account, records, reports and other papers and to discuss its affairs, finances and accounts with its officers, at reasonable times and upon reasonable prior notice; (i) COMPLIANCE WITH STATUTES, ETC. Do or cause to be done all things necessary to comply in all material respects with all material laws, and the rules and regulations thereunder, applicable to either Borrower, including, without limitation, those laws, rules and regulations relating to employee benefit plans and environmental matters; (j) ENVIRONMENTAL MATTERS. Promptly upon the occurrence of any of the following conditions, provide to the Lender a certificate of an officer thereof, specifying in detail the nature of such condition and its proposed response or the response of its Affiliates: (i) its receipt or the receipt by OLAC of any written communication whatsoever that alleges that such person is not in compliance with any applicable Environmental Law or Environmental Approval, if such 22 noncompliance could reasonably be expected to have a Material Adverse Effect, (ii) knowledge by it that there exists any Environmental Claim pending or threatened against any such person, which could reasonably be expected to have a Material Adverse Effect, or (iii) any release, emission, discharge or disposal of any Material of Environmental Concern that could form the basis of any Environmental Claim against it under applicable Environmental Law, if such Environmental Claim could reasonably be expected to have a Material Adverse Effect; and upon the written request by the Lender, it will submit to the Lender at reasonable intervals, a report providing an update of the status of any issue or claim identified in any notice or certificate required pursuant to this subsection; (k) ERISA. Forthwith upon learning of the occurrence of any material liability of either Borrower or any ERISA Affiliate pursuant to ERISA in connection with the termination of any Plan or withdrawal or partial withdrawal of any multi-employer plan (as defined in ERISA) or of a failure to satisfy the minimum funding standards of Section 412 of the Code or Part 3 of Title I of ERISA by any Plan for which any Cogen Entity or any ERISA Affiliate is plan administrator (as defined in ERISA), furnish or cause to be furnished to the Lender written notice thereof; (l) MAINTENANCE OF PROPERTIES, ETC. Preserve and maintain good and marketable title to all of its properties and assets which are necessary in the conduct of its business in good working order and condition, ordinary wear and tear excepted, subject to no Liens other than Permitted Liens and without limiting the foregoing, shall operate and maintain the MCPC Facility and all related improvements and equipment in accordance with good utility industry practices; (m) [intentionally omitted]; (n) PERFORMANCE OF PROJECT AGREEMENTS. Each Cogen Entity shall (i) perform and observe all of its covenants and agreements contained in the Governmental Approvals and any of the Project Agreements to which it is a party, unless the failure to perform or observe such covenants and agreements could not reasonably be expected to result in a Material Adverse Effect, (ii) preserve, protect and defend its rights contained in the Governmental Approvals and any of the Project Agreements to which it is a party, unless the failure to preserve, protect or defend such rights could not reasonably be expected to result in a Material Adverse Effect and (iii) maintain in full force and effect each of the Project Agreements to which it is a party and all contracts, permits and Governmental Approvals relating thereto which are necessary for the maintenance and operation of its facilities; 23 (o) OPERATING LOGS. OLAC shall, at its sole cost and expense, (i) maintain daily operating logs showing, among other things, the electrical and steam output of its facilities and the fuel consumption of its facilities, (ii) keep maintenance and repair reports in sufficient detail to indicate the nature and date of all work done, (iii) maintain a current operating manual and complete set of plans, accounting records and specifications reflecting all alterations and (iv) maintain all other records, logs and other materials required by the relevant Project Agreements or any Governmental Approval; (p) MAINTENANCE OF INSURANCE. Maintain or cause to be maintained with insurance companies rated "A-" or better by Best's Insurance Guide and Key Ratings or other insurance companies of recognized responsibility reasonably satisfactory to the Lender, insurance in such amounts and covering such risks as are usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which OLAC operates, and in any event the insurance coverages shall not be less than the insurance coverages set forth on Schedule 5(i) except with the prior written consent of the Lender, which will not be unreasonably withheld. The Cogen Entities shall, upon the request of the Lender, promptly provide a schedule indicating the policies maintained by each Cogen Entity, coverage limits of liability, effective dates of coverage, insurance carrier names and policy numbers. Within fourteen (14) days after the Funding Date, the Cogen Entities shall cause the Lender to be named as an "additional insured," and "certificate holder" with respect to all insurance policies of the Borrowers and the liability insurance of OLAC, and as "lender loss payee" and "mortgagee" on all applicable insurance policies in respect of OLAC and the MCPC Facility, for the account of the Lender. Evidence of payment of premiums for such insurance policies shall be delivered to the Lender at least thirty (30) days prior to the expiration thereof and such insurance policies shall be delivered to the Lender promptly upon its request therefor; (q) USE OF PROCEEDS. Use the proceeds of the Loan only as set forth in Section 2.02; (r) ADDITIONAL DOCUMENTS; FILINGS AND RECORDINGS. Execute and deliver from time to time as reasonably requested by the Lender, at the expense of the Cogen Entities, such other documents in connection with the rights and remedies provided for by the Security Documents, as applicable, which are necessary to consummate the transactions contemplated therein. Each Cogen Entity shall, at its own expense, take all reasonable actions that have been or shall be requested by the Lender to establish, maintain, protect, perfect and continue the perfection of the security interests of the Lender created by the Security Documents including the execution of such instruments, and providing such other information as may be required to enable the Lender to effect any such action. Without limiting the generality of the foregoing, each Cogen Entity shall execute or cause to be executed and shall file or cause to be filed such financing statements, continuation statements, fixture filings, assignments, mortgages or deed of trust in all places necessary or advisable (in the opinion of counsel for the Lender) to establish, maintain and perfect such security interests and in all other places that the Lender shall reasonably request. SECTION 6.02. Each Cogen Entity shall not, and CogenAmerica shall not permit either OLAC Holding or OLAC (or any subsidiaries of OLAC Holding or OLAC) to, directly or indirectly, without the prior written consent of the Lender: 24 (a) LIENS. Create, assume or permit to exist, any mortgage, pledge, lien, security interest, charge, or other encumbrance whatsoever upon the assets of OLAC and/or OLAC Holding (except for Permitted Liens) or upon the Collateral; (b) CAPITAL EXPENDITURES. Make any capital expenditures (excluding ordinary or scheduled maintenance) in any calendar year, exceeding $1,000,000 other than those funded by CogenAmerica and made to improve the MCPC Facility; (c) INDEBTEDNESS. Incur any Indebtedness except (i) Indebtedness existing as of the Closing Date, or (ii) so long as no Event of Default occurs and is continuing: (A) if non-recourse to each of the Cogen Entities, Indebtedness of any Subsidiary of the Borrowers (other than OLAC Holding and OLAC) which is formed after the Funding Date; (B) Indebtedness of Subsidiaries of the Borrowers (other than OLAC Holding and OLAC) of up to $1,000,000 during each calendar year; (C) unsecured Indebtedness of any Cogen Entity, if subordinated, pursuant to a subordination agreement, to the obligations of each of the Cogen Entities under the Credit Documents, the terms of any such Indebtedness to be acceptable to the Lender; (D) Indebtedness of any Subsidiary of any Cogen Entity (other than OLAC Holding and OLAC) if non-recourse to each of the Cogen Entities, under interest rate swap agreements to hedge interest rate exposure for permitted non-recourse financings; (E) Indebtedness owing by CogenAmerica under the MeesPierson Credit Agreement as in effect as of the date hereof; and (F) indebtedness, if any, owing by CogenAmerica under the Existing NRG Loan Agreement. (d) CHANGE IN BUSINESS. Materially change the nature of its business or commence any business materially different from its current business; (e) ISSUANCE, SALE OR PLEDGE OF SHARES. Issue any new shares of capital stock of, or other equity interest in, either OLAC Holding or OLAC, nor sell, assign, transfer, pledge or otherwise convey or dispose of any of the shares or direct or indirect interest (including by way of spin-off, installment sale or otherwise) of the capital stock of or other equity interests in either OLAC Holding or OLAC; (f) SALE OF ASSETS. Sell, or otherwise dispose of, the assets of either OLAC Holding or OLAC or any other asset (including by way of spin-off, installment sale or otherwise) which is substantial in relation to its assets taken as a whole, except for sales and dispositions of obsolete, worn or replaced property not used or useful in a Borrower's or any Subsidiary's business; (g) CHANGES IN OFFICES OR NAMES. Change the location of the chief executive office of any Cogen Entity, the office of the chief place of business any such parties, the office of such parties in which the records relating to the earnings or insurances of or relating to the MCPC Facility are kept unless the Lender shall have received thirty (30) days prior written notice of such change; (h) FUNDAMENTAL CHANGES. Consolidate with, or merge into, any corporation or other entity, or merge any corporation or other entity into any Cogen Entity or liquidate, windup or 25 dissolve (or suffer any liquidation or dissolution of itself or discontinue its business or operations in any respect); (i) LIMITATION ON DIVIDENDS. Directly or indirectly declare or pay any dividend or make any Distribution on its capital stock or to members, as the case may be, or redeem, retire, purchase or otherwise acquire, directly or indirectly, any ownership or other equity interest of either Borrower now or hereafter outstanding (or any options or rights issued with respect thereto), or set aside any funds for any of the foregoing purposes (except as otherwise contemplated by this Section 6.02(i)); PROVIDED, HOWEVER, that Distributions may be paid by OLAC to OLAC Holding, OLAC Holding to CogenAmerica and by CogenAmerica to its shareholders upon the satisfaction of the following conditions: (i) not less than thirty (30) days prior to the proposed date of payment of such Distribution (the "Distribution Payment Date"), each Cogen Entity shall have respectively delivered to the Lender a certificate (the date of such certificate hereinafter referred to as the "Certification Date") signed by the chief financial officer and chief executive officer of such Cogen Entity stating and demonstrating (with appropriate analysis and documentation attached thereto) that (A) at no time during the six (6) month period commencing on the Certification Date (the "Calculation Period") will the sum of the then unencumbered (and unreserved) cash of OLAC plus its Projected EBIDA for such Calculation Period be less than the sum of the scheduled principal and interest payments due on the Loan for the next two (2) Interest Payment Dates, and (B) no Default or Event of Default has occurred and is then continuing, and after giving effect to such proposed Distribution, no Default or Event of Default would occur or reasonably be anticipated to occur and/or be continuing; and (ii) the certifications set forth in the above-referenced certificates remain true and correct as of the Distribution Payment Date. Distributions may be made to CogenAmerica if the certificates contemplated above are delivered and no Default or Event of Default has occurred and is continuing as of the Distribution Payment Date; (j) AMENDMENT, TERMINATION, ETC. OF PROJECT AGREEMENTS. Terminate, cancel or suspend, or permit or consent to any termination, cancellation or suspension of, or enter into or consent to or permit the assignment of the rights or obligations of any party to, any of the Project Agreements or Governmental Approvals. Each of the Cogen Entities shall not, directly or indirectly amend, modify, supplement or waive, or permit or consent to the amendment, modification, supplement or waiver of, any of the provisions of, or give any consent under, any of the Project Agreements without (i) first submitting to the Lender a copy of such proposed amendment, modification, supplement, waiver or consent and (ii) obtaining the express prior written consent of the Lender, PROVIDED that no such consent shall be required with respect to any proposed amendment, modification, supplement, waiver or consent (A) that does not pertain to 26 the Project Agreements described in Schedule 6.020) and (B) if in the reasonable judgment of the Lender, such proposed amendment, modification, supplement, waiver or consent would not reasonably be expected to result in a Material Adverse Effect; (k) FISCAL YEAR. Change its fiscal year; (l) TRANSACTIONS WITH AFFILIATES. Enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate except for transactions contemplated by the April 30, 1996 Management Services Agreement between CogenAmerica and the Lender, and other transactions entered into by CogenAmerica with any Affiliate (excluding OLAC Holding and OLAC) in the ordinary course of business and pursuant to the reasonable requirements of business and upon fair and reasonable terms no less favorable than would be obtained in an comparable arm's length transaction with a Person not an Affiliate; and (m) INVESTMENTS. Make any Investments other than Investments made by CogenAmerica when no Default or Event of Default exists hereunder or would be created thereby. (n) AMENDMENTS TO MEESPIERSON FINANCING. Make any amendment or modification to or take any other action under the MeesPierson Credit Agreement and related financing documents that would (a) increase the maximum principal amount of advances which at any time may be outstanding thereunder in excess of $30,000,000, (b) increase the stated interest rate on the loans thereunder (except as currently contemplated by the MeesPierson Waiver), or (c) extend or shorten the stated termination or maturity date of any such indebtedness. ARTICLE 7 DEFAULTS AND REMEDIES SECTION 7.01. EVENTS OF DEFAULT. An "Event of Default" shall arise upon the occurrence of any one or more of the following: (a) Any Cogen Entity fails to make any payment of interest or any other amount (other than those specified in (b) below) with respect to the Loan when the same becomes due and payable and such failure continues for a period of 30 days; (b) Any Cogen Entity fails to make any payment of the principal of the Loan when the same become due and payable and such failure continues for a period of 30 days; (c) Any representation or warranty made by any Cogen Entity herein or in the Credit Documents fails to be accurate or complete in any material respect, or any Cogen Entity fails to comply with any of its respective covenants or agreements contained herein or the Credit Documents (other than those referred to in (a) or (b) above) and such failure continues for 30 days after the notice specified below; 27 (d) An event occurs which entitles the holders of Indebtedness aggregating in excess of $2,000,000 of any Cogen Entity or any Subsidiary of any Cogen Entity to accelerate such Indebtedness; (e) Any Cogen Entity or any Subsidiary of any Cogen Entity pursuant to or within the meaning of any Bankruptcy Law; (i) commences a voluntary case; (ii) consents to the entry of an order for relief against it in an involuntary case; (iii) consents to the appointment of a custodian of it or for any substantial part of its property; (iv) makes a general assignment for the benefit of its creditors; or or takes any action comparable to the foregoing under any foreign laws relating to insolvency; (f) A court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against any Cogen Entity or any Subsidiary of any Cogen Entity in an involuntary case; (ii) appoints a custodian of any Cogen Entity or any Subsidiary of any Cogen Entity or for any substantial part of its property; or (iii) orders the winding up or liquidation of any Cogen Entity or any Subsidiary of any Cogen Entity; or any similar relief is granted under any foreign laws and the order or decree remains unstayed and in effect for 60 days; (g) Any judgment or decree for payment of money in excess of $2,000,000 or its foreign currency equivalent at the time is entered against any Cogen Entity or any Subsidiary of any Cogen Entity and is not discharged and either (a) an enforcement proceeding has been commenced by any creditor upon such judgment or decree or (b) there is a period of 60 days following the entry of such judgment or decree during which such judgment or decree is not discharged, waived or the execution thereof stayed; (h) This Agreement or any other Credit Document shall cease, for any reason, to be in full force and effect or any Cogen Entity or any Subsidiary of any Cogen Entity shall so assert in writing; 28 (i) Any "Event of Default" shall occur under the Existing NRG Loan Agreement; or (j) OLAC shall revoke, breach or anticipatorily repudiate the Guaranty or any term or provision therein or assert or threaten any defense, right of set off or counterclaim against the enforcement thereof., the Guaranty or any term or provision therein. The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any Administrative or governmental body. A Default under clause (c) is not an Event of Default until the Lender notifies any Cogen Entity of the Default and the Cogen Entities do not cure such Default within the time specified after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". SECTION 7.02. ACCELERATION. If an Event of Default (other than an Event of Default specified in Section 7.01(e) or (f) with respect to any Cogen Entity occurs and is continuing, the Lender by notice to any Cogen Entity may declare the principal of and accrued interest on the Loan (together with all other Obligations) to be due and payable. Upon such a declaration, such Obligations shall be due and payable immediately. If an Event of Default specified in Section 7.01 (e) or (f) with respect to any Cogen Entity occurs, the Obligations shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Lender. The Lender by notice to any Cogen Entity may rescind an acceleration and its consequences. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 7.03. DEFAULT AND REMEDIES. If, following the Funding Date, and so long as there shall remain outstanding any Obligations hereunder, an Event of Default occurs and is continuing, the Lender shall have all of the remedies of a secured party under the Uniform Commercial Code, including, without limitation, the right to notify OLAC and/or OLAC Holding to pay directly to the Lender any amount payable to any Cogen Entity in respect of the Pledged Stock. In addition to and not in derogation of any or all of the rights and remedies granted hereunder to the Lender or otherwise available to the Lender under applicable law, following the Funding Date and such an Event of Default, so long as there shall remain any outstanding Indebtedness hereunder, the Lender shall have the further right and power, at its sole option, to sell, or otherwise dispose of, the Collateral (other than Collateral consisting of cash), or any part thereof, at any one or more public or private sales as permitted by applicable law, and for that purpose the Lender may take immediate and exclusive possession of such Collateral, or any part thereof, to the extent capable of possession. To the fullest extent permitted by law, each Cogen Entity irrevocably and expressly waives any right to receive any notice of sale or notice of any other disposition of all or any part of the Collateral that does not consist of cash, except that to the extent may be entitled by 29 applicable law to any notice of sale or other disposition of such Collateral, each Cogen Entity agrees that if such notice is mailed, postage prepaid, to any Cogen Entity at such party's address hereinafter specified not less than five (5) days before the time of the sale or other disposition contemplated therein, such notice shall conclusively be deemed commercially reasonable and shall fully satisfy any requirement for giving of said notice. The Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place which it was so adjourned. The proceeds realized upon any such disposition, after deduction for the expenses of retaking, holding, preparing for sale, selling or the like and reasonable attorneys' fees, legal expenses and costs incurred by the Lender, shall be applied in accordance with Section 7.06. The remedies of the Lender hereunder or under any Credit Documents are Cumulative and the exercise of any one or more of the remedies provided herein, or under the Uniform Commercial Code or other applicable law, shall not be construed as a waiver of any other rights or remedies of the Lender so long as any part of the Obligations remain unsatisfied or unperformed. The making of this Agreement shall not waive or impair any other security the Lender may have or hereafter acquire for the payment or performance of the Obligations, nor shall the making of any such additional security waive or impair this Agreement; but the Lender may resort to any security it may have in the order it may be deemed proper. SECTION 7.04. OTHER REMEDIES. If, following the Funding Date, and so long as there shall remain outstanding Obligations, an Event of Default occurs and is continuing, the Lender may pursue any available remedy to collect the payment of all outstanding Obligations or to enforce the performance of any provision of the Note, this Agreement, or any other Credit Document. The Lender may maintain a proceeding even if it does not possess the Note or does not produce it in the proceeding. A delay or omission by the Lender in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 7.05. WAIVER OF PAST DEFAULTS. The Lender by notice to any Cogen Entity may waive an existing Default and its consequences (subject to any limitations expressly set forth in such waiver). When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. SECTION 7.06. PRIORITIES. If the Lender collects any money or property pursuant to this Article 7, it shall pay out the money or property in the following order: FIRST: to itself in accordance with the priority set forth in Section 2.09 until all Obligations have been indefeasibly satisfied in full; and SECOND: to the extent of any excess, to the Borrowers. 30 SECTION 7.07. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Agreement a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. SECTION 7.08. WAIVER OF STAY OR EXTENSION Laws. Each Cogen Entity (to the extent permitted by applicable law) shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Agreement; and each Cogen Entity (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Lender, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 8 SUBORDINATION; WAIVERS SECTION 8.01. SUBORDINATION. The Indebtedness evidenced by the Note is subordinate in certain respects to the Indebtedness (the "MeesPierson Obligations") under and as that term is defined in that certain Credit Agreement dated December 17, 1997 (the "MeesPierson Credit Agreement") entered into by and among CogenAmerica, MeesPierson Capital Corporation and the other Lenders party thereto (collectively the "MeesPierson Lenders"), to the extent and in the manner provided in that certain Subordination Agreement by and between those parties and the Lender dated as of October 9, 1998. Each Cogen Entity shall cause all other Indebtedness incurred by it to be subordinated on terms and conditions satisfactory to the Lender, to the prior payment in full of the Note and that each such subordination is for the benefit of and enforceable by the holders of the Note. Each Cogen Entity acknowledges and agrees that the terms of any subordination agreement contemplated in this paragraph define the relative rights of its creditors between such creditors and in no way affect the obligations of any Cogen Entity to the Lender. SECTION 8.02. WAIVER OF CONTRIBUTION, SUBROGATION, OTHER RIGHTS. Each Cogen Entity hereby agrees that, from the date of this Agreement until the Obligations and the MeesPierson Obligations have each been indefeasibly paid in full, or this Agreement has been earlier terminated, it will not exercise any rights which it may have or acquire, at law or in equity, by way of contribution, subrogation, indemnity or similar principles as a result of payments made by any Cogen Entity to the Lender hereunder. Each Cogen Entity expressly acknowledges that it will benefit directly from the Loan hereunder and that each of the Obligations are intended to be direct obligations and not a guarantee or in the nature of a guarantee. If, notwithstanding the express intention of the parties to the contrary, all or any portion of the Obligations of any Cogen Entity are deemed a guarantee or in the nature of a guarantee, then each Cogen Entity hereby agrees that, from the date of this Agreement until the Obligations and the MeesPierson 31 Obligations have each been indefeasibly paid in full, or this Agreement has been earlier terminated, it will not exercise any suretyship, accommodation party, guarantor and similar defenses and rights arising under any of the Credit Documents as a result of the Loan hereunder, and any such party shall be and remain liable for any deficiency remaining after foreclosure of any Lien under any of the Security Documents, whether or not the liability of the primary party obligated thereunder or any other obligor for such deficiency is discharged Pursuant to statute or judicial decision, nor shall the Lender be required to martial assets or remedies or first to resort for payment of the Obligations to the primary obligor therefor or other parties or first to enforce, realize upon or exhaust any Collateral for the Obligations, before seeking collection of the Obligations from or enforcing any other rights or remedies against such deemed surety, guarantor or accommodation party. This Section 8.02 shall inure to the benefit of the Lender and to the benefit of the MeesPiersn Lenders. ARTICLE 9 MISCELLANEOUS SECTION 9.01. AMENDMENTS. Except as otherwise expressly set forth in this Agreement, neither this Agreement nor any terms hereof may be amended, supplemented or modified except in writing signed by the Lender, the Borrowers and the Guarantor. SECTION 9.02. NOTICES. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy or telex, if one is listed), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or three Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when sent, confirmation of receipt received, or in the case of telex notice, when sent, answer back received, address as follows, or to such other address as may be hereafter notified by the respective parties hereto and any further holders of the Note: If to CogenAmerica: Cogeneration Corporation of America One Carlson Parkway, Suite 240 Minneapolis, MN 55447-4454 Attention: President and Chief Executive Officer Telephone: (612) 745-7900 Telecopier: (612) 745-7901 With a copy to: Troutman Sanders NationsBank Plaza, Suite 5200 600 Peachtree Street N.E. Atlanta, Georgia 30308 Attention: M. Stuart Sutherland Telephone: (404) 885-3000 Telecopier: (404) 885-3900 32 if to OLAC: Oklahoma Loan Acquisition Corporation One Carlson Parkway, Suite 240 Minneapolis, MN 55447-4454 Attention: President and Chief Executive Officer Telephone: (612) 745-7900 Telecopier: (612) 745-7901 With a copy to: Troutman Sanders NationsBank Plaza, Suite 5200 600 Peachtree Street N.E. Atlanta, Georgia 30308 Attention: M. Stuart Sutherland Telephone: (404) 885-3000 Telecopier: (404) 885-3900 If to OLAC Holding: CogenAmerica Pryor Inc. One Carlson Parkway, Suite 240 Minneapolis, MN 55447-4454 Attention: President and Chief Executive Officer Telephone: (612) 745-7900 Telecopier: (612) 745-7901 With a copy to: Troutman Sanders NationsBank Plaza, Suite 5200 600 Peachtree Street N.E. Atlanta, Georgia 30308 Attention: M. Stuart Sutherland Telephone: (404) 885-3000 Telecopier: (404) 885-3900 If to Lender: NRG Energy, Inc. 1221 Nicollet Mall, Suite 700 Minneapolis, MN 55403 Attention: Treasurer Telephone: (612) 373-5300 Telecopier: (612) 373-5430 With a copy to: NRG Energy, Inc. Legal Department 1221 Nicollet Mall, Suite 700 Minneapolis, MN 55403 Attention: Vice President and General Counsel Telephone: (612) 373-5300 Telecopier: (612) 373-5392 33 PROVIDED that any notice, request or demand to or upon the Lender pursuant to Section 2.05 shall not be effective until received. SECTION 9.03. NO WAIVER: CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of the Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise or any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. SECTION 9.04. PAYMENT OF EXPENSES AND TAXES. The Borrowers jointly and severally agree (a) to pay the Lender on the Funding Date a fee in the amount of $ 100,000; (b) to pay the Lender on the Funding Date and on each anniversary of the Funding Date the amount of $50,000 in respect of expenses incurred in connection with the development, preparation and the execution and general administration of the Credit Documents and in addition, to pay or reimburse the Lender for all its reasonable costs and expenses incurred in connection with any amendment, supplement or modification to the Credit Documents, including the reasonable fees and disbursements of counsel to the Lender, (c) to pay or reimburse the Lender for all its costs and expenses incurred in connection with, and to pay, indemnify, and hold the Lender harmless from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever arising out of or in connection with the enforcement or preservation of any rights under any Credit Document, including reasonable fees and disbursements of counsel to the Lender incurred in connection with the foregoing, (d) to pay, indemnify, and to hold the Lender harmless from any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other similar taxes (other than withholding taxes), if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, any Credit Document and any such other documents, and (e) to pay, indemnify, and hold the Lender and its respective Affiliates, officers and directors harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever including reasonable fees and disbursements of counsel) which may be incurred by or asserted against the Lender or such Affiliates, officers or directors arising out of or in connection with any investigation, litigation or proceeding related to this Agreement, the other Credit Documents, the proceeds of the Loan and the transactions contemplated by or in respect of such use of proceeds, or any of the other transactions contemplated hereby, whether or not the Lender or such Affiliates, officers or directors is a party thereto, including any of the foregoing relating to the violation of, noncompliance with or liability under, any environmental law or regulation applicable to the operations of any Cogen Entity or any Subsidiary of any Cogen Entity or any of the facilities and properties owned, leased or operated by any Cogen Entity or any Subsidiary of any Cogen Entity (all the foregoing, collectively, the "Indemnified Liabilities"); PROVIDED that the Borrowers shall have no obligation hereunder with respect to indemnified liabilities of the Lender or any of its respective Affiliates, officers and directors arising from (i) the gross negligence or willful misconduct of the Lender or 34 its directors or officers or (ii) legal proceedings commenced against the Lender by any security holder or creditor thereof arising out of and based upon rights afforded any such security holder or creditor solely in its capacity as such. The agreements in this Section 9.04 shall survive repayment of the Note and all other documents payable hereunder. SECTION 9.05. SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND ASSIGNMENTS. This Agreement shall be binding upon and inure to the benefit of the Cogen Entities, the Lender, all future holders of the Note and the Loan, and their respective successors and assigns, except that no Cogen Entity may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Lender. SECTION 9.06. COUNTERPARTS. This Agreements may be executed by one or more of the parties to this Agreement on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. SECTION 9.07. GOVERNING LAW; NO THIRD PARTY RIGHTS. This Agreement and the Note and the rights and obligations of the parties under this Agreement and the Note shall be governed by, and construed and interpreted in accordance with, the law of the State of Minnesota and applicable laws of the United States of America. This Agreement is solely for the benefit of the parties hereto and their respective successors and assigns, and, except as expressly provided in Section 8.02, no other Person shall have any right, benefit, priority or interest under, or because of the existence of, this Agreement. SECTION 9.08. SUBMISSION TO JURISDICTION; WAIVERS. (a) Each party to this Agreement hereby irrevocably and unconditionally; (i) submits for itself and its property in any legal action or proceedings relating to this Agreement or any of the other Credit Documents, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of Minnesota, the courts of the United States of America for Minnesota and appellate courts from any thereof; (ii) consents that any such action or proceeding may be brought in such courts, and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (iii) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such party at its address set forth in Section 9.02; and 35 (iv) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. (b) EACH PARTY HERETO UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN PARAGRAPH (A) ABOVE AND ANY COUNTERCLAIM THEREIN. SECTION 9.09. INTEREST. Each provision in this Agreement and each other Credit Document is expressly limited so that in no event whatsoever shall the amount paid, or otherwise agreed to be paid, by the Borrowers for the use, forbearance or detention of the money to be loaned under this Agreement or any other Credit Document or otherwise (including any sums paid as required by any covenant or obligation contained herein or in any other Credit Document which is for the use, forbearance or detention of such money), exceed that amount of money which would cause the effective rate of interest to exceed the highest lawful rate permitted by applicable law (the "Highest Lawful Rate"), and all amounts owed under this Agreement and each other Credit Document shall be held to be subject to reduction to the effect that such amounts so paid or agreed to be paid which are for the use, forbearance or detention of money under this Agreement or such Credit Document shall in no event exceed that amount of money which would cause the effective rate of interest to exceed the Highest Lawful Rate. Notwithstanding any provision in this Agreement or any other Credit Document to the contrary, if the maturity of the Loan or the obligations in respect of the other Credit Documents are accelerated for any reason, or in the event of any prepayment of all or any portion of the Loan or the obligations in respect of the other Credit Documents by the Borrowers or in any other event, earned interest on the Loan and such other obligations of the Borrowers may never exceed the Highest Lawful Rate, and any unearned interests otherwise payable on the Loan or the obligations in respect of the other Credit Documents that is in excess of the Highest Lawful Rate shall be canceled automatically as of the date of such acceleration or prepayment or other such event and (if theretofore paid) shall, at the option of the holder of the Loan or such other obligations, be either refunded to the Borrowers or credited on the Principal of the Loan. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the Highest Lawful Rate, the Borrowers and the Lender shall, to the maximum extent permitted by applicable law, amortize, prorate, allocate and spread, in equal parts during the period of the actual term of this Agreement, all interest at any time contracted for, charged, received or reserved in connection with this Agreement. SECTION 9.10. JOINT AND SEVERAL LIABILITY. Notwithstanding any term or provision contained in this Agreement or any other Credit Document to the contrary, each and every covenant, agreement and other obligation each Cogen Entity under pursuant to any of the Credit Documents to the extent it is a party thereto, shall constitute a joint and several duty, liability and obligation of each Cogen Entity, as applicable. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.] 36 IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. BORROWERS: COGENERATION CORPORATION OF AMERICA By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- COGENERATION PRYOR INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- GUARANTOR: OKLAHOMA LOAN ACQUISITION CORPORATION By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- LENDER: NRG ENERGY, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- 37 EX-10.35-2 6 EXHIBIT 10.35.2 NRG GENERATING (U.S.) INC. 1998 STOCK OPTION PLAN GRANT OF INCENTIVE STOCK OPTION DATE OF GRANT: ______________________ THIS GRANT, dated as of the date of grant first stated above (the "Date of Grant"), is delivered by NRG Generating (U.S.) Inc. (the "Company") to _____________________ ("Grantee"), who is an Employee of the Company or a Subsidiary. WHEREAS, the Board of Directors of the Company (the "Board") on April 20, 1998 adopted the NRG Generating (U.S.) Inc. 1998 Stock Option Plan (the "Plan") to be effective as of that date, and the shareholders of the Company approved the Plan on May 21, 1998. WHEREAS, the Plan provides for the granting of Incentive Stock Options by the Committee to directors, officers and key employees of the Company (excluding officers and directors who are not employees) to purchase shares of the Common Stock of the Company (the "Stock"), in accordance with the terms and provisions thereof; and WHEREAS, the Committee considers Grantee to be a person who is eligible for a grant of Incentive Stock Options under the Plan, and has determined that it would be in the best interest of the Company to grant the Incentive Stock Options documented herein. NOW THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Committee, hereby grants to Grantee, as of the Date of Grant, an option to purchase up to __________ shares of Stock at a price of $___________ per share, its Fair Market Value as of the Date of Grant. The shares of stock purchasable upon exercise of the Option are hereinafter sometimes referred to as the "Option Shares." The Option is intended by the parties hereto to be, and shall be treated as, an Incentive Stock Option under Code Section 422. 2. INSTALLMENT EXERCISE. Subject to such further limitations as are provided herein, the Option shall become exercisable in three (3) installments, Grantee having the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Option, on and after the following dates, in cumulative fashion: (i) on and after the first anniversary of the Date of Grant up to one-third (ignoring fractional shares) of the total number of Option Shares; (ii) on and after the second anniversary of the Date of Grant, up to an additional one-third (ignoring fractional shares) of the total number of Option Shares; and (iii) on and after the third anniversary of the Date of Grant, the remaining Option Shares. Exhibit 10.35.2 3. TERMINATION OF OPTION. (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of ten (10) years from the Date of Grant (the "Option Term"). (b) Upon the occurrence of Grantee's ceasing for any reason to be employed by the Company, the Option, to the extent not previously exercised, shall terminate and become null and void immediately upon the Separation Date, except in a case where the termination of Grantee's employment is by reason of retirement, Disability or death or otherwise as follows. Upon a termination of Grantee's employment by reason of Disability or death, all unexercised portions of the Option shall become immediately exercisable and the Option may be exercised during the period beginning upon such termination and ending one year after such date. [In the event of any other termination, the Option may be exercised within the three-month period following the date of retirement, but only to the extent that the Option was outstanding and exercisable upon the date of such retirement. In no event, however, shall any such period extend beyond the Option Term.] (c) In the event of Grantee's death, the Option may be exercised by Grantee's legal representative(s) as and to the extent that the Option would otherwise have been exercisable by Grantee, subject to the provisions of Section 3(b) hereof. (d) A transfer of Grantee's employment between the Company and its Parents or Subsidiaries shall not be deemed to be a termination of Grantee's employment. (e) Notwithstanding any other provisions set forth herein or in the Plan, if Grantee shall: (i) commit any act of malfeasance or wrongdoing affecting the Company, its Parents or Subsidiaries, (ii) breach any covenant not to compete, or employment contract, with the Company, its Parents or Subsidiaries, or (iii) engage in conduct that would warrant Grantee's discharge for cause (excluding general dissatisfaction with the performance of Grantee's duties, but including any act of disloyalty or any conduct clearly tending to bring discredit upon the Company, its Parents or Subsidiaries), any unexercised portion of the Option shall immediately terminate and be void. 4. EXERCISE OF OPTIONS. (a) Grantee may exercise the Option with respect to all or any part of the number of Option Shares that are exercisable hereunder by giving the Secretary of the Company written notice of intent to exercise. The notice of exercise shall specify the number of Option Shares as to which the Option is to be exercised and date of exercise thereof, which date shall be at least five (5) days after the signing of such notice unless an earlier time shall have been mutually agreed upon. (b) Full payment (in U.S. dollars) by Grantee of the Option Price for Option Shares purchased shall be made on or before the exercise date specified in the notice of exercise in cash, or as the Company may otherwise permit as further set forth in the Plan. On the exercise date specified in Grantee's notice or as soon thereafter as is practicable, the Company shall cause to be delivered to Grantee, a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Stock or reacquired Stock, as the Company may elect) upon full payment for such Option Shares. The obligation of the Company to deliver Stock shall, however, be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the Option or the Option Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Option or the issuance or purchase of Stock thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. Exhibit 10.35.2 2 (c) If Grantee fails to pay for any of the Option Shares specified in such notice or fails to accept delivery thereof, Grantee's right to purchase such Option Shares may be terminated by the Company or the exercise of the Option may be ignored, as the Committee in its sole discretion may determine. The date specified in Grantee's notice as the date of exercise shall be deemed the date of exercise of the Option, provided that payment in full for the Option Shares to be purchased upon such exercise shall have been received by such date. 5. ADJUSTMENT OF AND CHANGES IN STOCK. In the event of a reorganization, recapitalization, change of shares, stock split, spin-off, stock dividend, reclassification, subdivision, or combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure of shares of capital stock of the Company, the Committee shall appropriately adjust the number and kind of shares of Stock subject to the Option and such option price; provided, however, that no such adjustment shall give Grantee any additional benefits under the Option. In the event of any Corporate Transaction or an event giving rise to a Change in Control, the Option shall be fully vested, nonforfeitable and become exercisable as of the date of the Change in Control or Corporate Transaction or as otherwise determined in accordance with Section 5.5(c) of the Plan. However, in the case of a Corporate Transaction, the Committee may determine that the Option will not be so accelerated if and to the extent (i) such Option is either to be assumed by the successor or parent thereof or to be replaced with a comparable Option to purchase shares of the capital stock of the successor corporation or parent thereof, or (ii) such Option is to be replaced with a cash incentive program of the successor corporation that preserves the option spread existing at the time of the Corporate Transaction and provides for subsequent payment in accordance with the same vesting schedule applicable to such Option. In the event of a Corporate Transaction described in clauses (i) or (ii) of Section 5.5(b) of the Plan, the Committee may, upon no less than 60 days notice to the optionee (an "Acceleration Notice") determine that such optionee's Options will terminate as of the effective date of such Corporate Transaction, in which event such Options shall be fully vested, nonforfeitable and become exercisable immediately as of the date of such Acceleration Notice. In the event of a Change in Control or Corporate Transaction described in clauses (a)(i), (a)(ii) and (b)(iii) of Section 5.5 of the Plan or in the event the Acceleration Notice is not timely given, the Option shall remain exercisable for the remaining term of the Option notwithstanding the provisions of Article V of the Plan, subject to any limitations thereto which may be applicable to Incentive Stock Options. In the event of a Corporate Transaction described in clauses (a)(iii), (b)(i) or (b)(ii) of Section 5.5 of the Plan, which is preceded by a timely Acceleration Notice, the Option shall terminate as of the effective date of the Corporate Transaction described therein. In no event shall the Option be exercised after the expiration of the Option Term. 6. FAIR MARKET VALUE. As used herein, the term "Fair Market Value" shall mean: (a) If the Common Stock is listed on any established stock exchange or a national market system, including, without limitation, the Nasdaq National Market, its fair market value shall be the closing selling price for such stock on the principal securities exchange or national market system on which the Common Stock is at the time listed for trading. If there are no sales of Common Stock on that date, then the closing selling price for the Common Stock on the next preceding day for which such closing selling price is quoted shall be determinative of fair market value; or (b) If the Common Stock is not traded on an exchange or a national market system, its fair market value shall be determined in good faith by the Committee, possibly based upon, but not limited to, a fair market value concept averaged over the twenty (20) trading days (or five (5) trading days if the Common Stock is traded on the Nasdaq Exhibit 10.35.2 3 SmallCap Market or a similar market system) preceding the Date of Grant or other relevant date, and such determination shall be conclusive and binding on all persons. In no event shall the Fair Market Value equal less than the par value of the Common Stock. 7. NO RIGHTS AS SHAREHOLDERS. Grantee shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to him or her. 8. NON-TRANSFERABILITY OF OPTION. During Grantee's lifetime, this Option shall be exercisable only by Grantee or his or her guardian or legal representative. 9. EMPLOYMENT NOT AFFECTED. The grant of the Option hereunder shall not be construed as conferring on Grantee any right to continued employment, and Grantee's employment may be terminated without regard to the effect which such action might have upon him as a holder of this Option. 10. AMENDMENT OF OPTION. The Option may be amended by the Committee at any time (i) if the Committee determines, in its sole discretion, that amendment is necessary or advisable in light of any addition to or change in the Code or in the regulations issued thereunder, or any federal or state securities law or other law of regulation, which change occurs after the Date of Grant and by its terms applies to the Option; or (ii) other than in the circumstances described in clause (i), with the consent of Grantee. 11. NOTICE. Any notice to the Company provided for in this instrument shall be addressed to it in care of its Secretary at its executive offices and any notice to Grantee shall be addressed to Grantee at the current address shown on the payroll records of the Employer. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid. 12. INCORPORATION OF PLAN BY REFERENCE. The Option is granted pursuant to the Plan, the terms and definitions of which are incorporated herein by reference, and the Option shall in all respects by interpreted in accordance with the Plan. 13. GOVERNING LAW. To the extent that federal law shall not be held to have preempted local law, this Option shall be governed by the laws of the State of Delaware. If any provision of the Option shall be held invalid or unenforceable, the remaining provisions hereof shall continue in full force and effect. Exhibit 10.35.2 4 IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Grant of Incentive Stock Option, and Grantee has placed his or her signature hereon, effective as of the Date of Grant. NRG GENERATING (U.S.) INC. By: --------------------------------------- Timothy P. Hunstad Vice President and Chief Financial Officer GRANTEE Signature --------------------------------- Name: ------------------------------------- (Print) Address: --------------------------------- --------------------------------- --------------------------------- Exhibit 10.35.2 5 EX-10.35-3 7 EXHIBIT 10.35.3 NRG GENERATING (U.S.) INC. 1998 STOCK OPTION PLAN GRANT OF EMPLOYEE NONQUALIFIED STOCK OPTION DATE OF GRANT: ______________________ THIS GRANT, dated as of the date of grant first stated above (the "Date of Grant"), is delivered by NRG Generating (U.S.) Inc. (the "Company") to _____________________ (the "Grantee"), who is an Employee of the Company or a Subsidiary. WHEREAS, the Board of Directors of the Company (the "Board") on April 20, 1998, adopted the NRG Generating (U.S.) Inc. 1998 Stock Option Plan (the "Plan") effective as of that date; WHEREAS, the Plan provides for the granting of Nonqualified Stock Options by the Committee to directors of the Company, officers and key employees of the Company and its Subsidiaries and certain other individuals who have the capability of making or who have made a substantial contribution to the Company to purchase shares of the Common Stock of the Company (the "Stock"), in accordance with the terms and provisions thereof; and WHEREAS, the Committee considers Grantee to be a person who is eligible for a grant of Nonqualified Stock Options under the Plan, and has determined that it would be in the best interest of the Company to grant the Nonqualified Stock Options documented herein. NOW THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Committee, hereby grants to Grantee, as of the Date of Grant, an option to purchase up to __________ shares of Stock at a price of $___________ per share. The shares of stock purchasable upon exercise of the Option are hereinafter sometimes referred to as the "Option Shares." The Option is intended by the parties hereto to be, and shall be treated as, a Nonqualified Stock Option which is not subject to the provisions of Code Section 422. 2. INSTALLMENT EXERCISE. Subject to such further limitations as are provided herein, the Option shall become exercisable in three (3) installments, Grantee having the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Option, on and after the following dates, in cumulative fashion: (i) on and after the first anniversary of the Date of Grant up to one-third (ignoring fractional shares) of the total number of Option Shares; (ii) on and after the second anniversary of the Date of Grant, up to an additional one-third (ignoring fractional shares) of the total number of Option Shares; and (iii) on and after the third anniversary of the Date of Grant, the remaining Option Shares. Exhibit 10.35.3 3. TERMINATION OF OPTION. (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of ten (10) years from the Date of Grant (the "Option Term"). (b) Upon the occurrence of Grantee's ceasing for any reason to be employed by the Company, the Option, to the extent not previously exercised, shall terminate and become null and void, subject to the further provisions of this Section 3(b), which shall apply based upon the circumstances of such termination of employment. Upon termination of Grantee's employment by reason of Disability or death, all unexercised portions of the Option shall become immediately exercisable and the Option may be exercised during the period beginning upon such termination and ending one year after such date. In the event of any other termination of Grantee's employment, the Option may be exercised during the three-month period following the date of termination, but only to the extent that the Option was outstanding and exercisable on the date of such termination. In no event, however, shall any such period extend beyond the Option Term. (c) In the event of Grantee's death, the Option may be exercised by Grantee's legal representative(s) as and to the extent that the Option would otherwise have been exercisable by Grantee, subject to the provisions of Section 3(b) hereof. (d) A transfer of Grantee's employment between the Company, its Parents, Subsidiaries or affiliates, shall not be deemed to be a termination of Grantee's employment. (e) Notwithstanding any other provisions set forth herein or in the Plan, if Grantee shall: (i) commit any act of malfeasance or wrongdoing affecting the Company, its Parents or Subsidiaries, (ii) breach any covenant not to compete, or employment contract, with the Company, its Parents or Subsidiaries, or (iii) engage in conduct that would warrant Grantee's discharge for cause (excluding general dissatisfaction with the performance of Grantee's duties, but including any act of disloyalty or any conduct clearly tending to bring discredit upon the Company, its Parents or Subsidiaries), any unexercised portion of the Option shall immediately terminate and be void. 4. EXERCISE OF OPTIONS. (a) Grantee may exercise the Option with respect to all or any part of the number of Option Shares that are exercisable hereunder by giving the Secretary of the Company written notice of intent to exercise. The notice of exercise shall specify the number of Option Shares as to which the Option is to be exercised and date of exercise thereof, which date shall be at least five (5) days after the signing of such notice unless an earlier time shall have been mutually agreed upon. (b) Full payment (in U.S. dollars) by Grantee of the Option Price for Option Shares purchased shall be made on or before the exercise date specified in the notice of exercise in cash or as the Company may otherwise permit as further set forth in the Plan. On the exercise date specified in Grantee's notice or as soon thereafter as is practicable, the Company shall cause to be delivered to Grantee, a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Stock or reacquired Stock, as the Company may elect) upon full payment for such Option Shares. The obligation of the Company to deliver Stock shall, however, be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the Option or the Option Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Option or the issuance or purchase of Stock thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. Exhibit 10.35.3 2 (c) If Grantee fails to pay for any of the Option Shares specified in such notice or fails to accept delivery thereof, Grantee's right to purchase such Option Shares may be terminated by the Company or the exercise of the Option may be ignored, as the Committee in its sole discretion may determine. The date specified in Grantee's notice as the date of exercise shall be deemed the date of exercise of the Option, provided that payment in full for the Option Shares to be purchased upon such exercise shall have been received by such date. 5. ADJUSTMENT OF AND CHANGES IN STOCK. In the event of a reorganization, recapitalization, change of shares, stock split, spin-off, stock dividend, reclassification, subdivision, or combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure of shares of capital stock of the Company, the Committee shall appropriately adjust the number and kind of shares of Stock subject to the Option and such option price; provided, however, that no such adjustment shall give Grantee any additional benefits under the Option. In the event of any Corporate Transaction or an event giving rise to a Change in Control, the Option shall be fully vested, nonforfeitable and become exercisable as of the date of the Change in Control or Corporate Transaction or as otherwise determined in accordance with Section 5.5(c) of the Plan. However, in the case of a Corporate Transaction, the Committee may determine that the Option will not be so accelerated if and to the extent (i) such Option is either to be assumed by the successor or parent thereof or to be replaced with a comparable Option to purchase shares of the capital stock of the successor corporation or parent thereof, or (ii) such Option is to be replaced with a cash incentive program of the successor corporation that preserves the option spread existing at the time of the Corporate Transaction and provides for subsequent payment in accordance with the same vesting schedule applicable to such Option. In the event of a Corporate Transaction described in clauses (i) or (ii) of Section 5.5(b) of the Plan, the Committee may, upon no less than 60 days notice to the optionee (an "Acceleration Notice") determine that such optionee's Options will terminate as of the effective date of such Corporate Transaction, in which event such Options shall be fully vested, nonforfeitable and become exercisable immediately as of the date of such Acceleration Notice. In the event of a Change in Control or Corporate Transaction described in clauses (a)(i), (a)(ii) and (b)(iii) of Section 5.5 of the Plan or in the event the Acceleration Notice is not timely given, the Option shall remain exercisable for the remaining term of the Option notwithstanding the provisions of Article V of the Plan, subject to any limitations thereto which may be applicable to Incentive Stock Options. In the event of a Corporate Transaction described in clauses (a)(iii), (b)(i) or (b)(ii) of Section 5.5 of the Plan, which is preceded by a timely Acceleration Notice, the Option shall terminate as of the effective date of the Corporate Transaction described therein. In no event shall the Option be exercised after the expiration of the Option Term. 6. NO RIGHTS AS SHAREHOLDERS. Grantee shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to him or her. 7. NON-TRANSFERABILITY OF OPTION. During Grantee's lifetime, this Option shall be exercisable only by Grantee or his or her guardian or legal representative. 8. EMPLOYMENT NOT AFFECTED. The grant of the Option hereunder shall not be construed as conferring on Grantee any right to continued employment, and Grantee's employment may be terminated without regard to the effect which such action might have upon him as a holder of this Option. 9. AMENDMENT OF OPTION. The Option may be amended by the Committee at any time (i) if the Committee determines, in its sole discretion, that amendment is necessary or advisable in light of any addition to or change in the Code or in the regulations issued thereunder, or any federal or state securities law or other law of regulation, which change occurs after the Date of Grant and by Exhibit 10.35.3 3 its terms applies to the Option; or (ii) other than in the circumstances described in clause (i), with the consent of Grantee. 10. NOTICE. Any notice to the Company provided for in this instrument shall be addressed to it in care of its Secretary at its executive offices and any notice to Grantee shall be addressed to Grantee at the current address shown on the payroll records of the Employer. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid. 11. INCORPORATION OF PLAN BY REFERENCE. The Option is granted pursuant to the Plan, the terms and definitions of which are incorporated herein by reference, and the Option shall in all respects by interpreted in accordance with the Plan. 12. GOVERNING LAW. To the extent that federal law shall not be held to have preempted local law, this Option shall be governed by the laws of the State of Delaware. If any provision of the Option shall be held invalid or unenforceable, the remaining provisions hereof shall continue in full force and effect. Exhibit 10.35.3 4 IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Grant of Nonqualified Stock Option, and Grantee has placed his or her signature hereon, effective as of the Date of Grant. NRG GENERATING (U.S.) INC. By: -------------------------------------- Timothy P. Hunstad Vice President and Chief Financial Officer GRANTEE Signature --------------------------------- Name: ------------------------------------ (Print) Address: --------------------------------- --------------------------------- --------------------------------- Exhibit 10.35.3 5 EX-10.35-4 8 EXHIBIT 10.35.4 NRG GENERATING (U.S.) INC. 1998 STOCK OPTION PLAN GRANT OF NONEMPLOYEE DIRECTOR NONQUALIFIED STOCK OPTION DATE OF GRANT: ______________________ THIS GRANT, dated as of the date of grant first stated above (the "Date of Grant"), is delivered by NRG Generating (U.S.) Inc. (the "Company") to _____________________ (the "Grantee"), who is a director of the Company who is not an Employee of the Company or a Subsidiary. WHEREAS, the Board of Directors of the Company (the "Board") on April 20, 1998 adopted the NRG Generating (U.S.) Inc. 1998 Stock Option Plan (the "Plan") effective as of that date; WHEREAS, the Plan provides for the granting of Nonqualified Stock Options by the Committee to directors of the Company to purchase shares of the Common Stock of the Company (the "Stock"), in accordance with the terms and provisions thereof; and WHEREAS, the Committee considers Grantee to be a person who is eligible for a grant of Nonqualified Stock Options under the Plan, and has determined that it would be in the best interest of the Company to grant the Nonqualified Stock Options documented herein. NOW THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Committee, hereby grants to Grantee, as of the Date of Grant, an option to purchase up to __________ shares of Stock at a price of $___________ per share. The shares of stock purchasable upon exercise of the Option are hereinafter sometimes referred to as the "Option Shares." The Option is intended by the parties hereto to be, and shall be treated as, a Nonqualified Stock Option which is not subject to the provisions of Code Section 422. 2. INSTALLMENT EXERCISE. Subject to such further limitations as are provided herein, the Option shall become exercisable in three (3) installments, Grantee having the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Option, on and after the following dates, in cumulative fashion: (i) on and after the first anniversary of the Date of Grant up to one-third (ignoring fractional shares) of the total number of Option Shares; (ii) on and after the second anniversary of the Date of Grant, up to an additional one-third (ignoring fractional shares) of the total number of Option Shares; and Exhibit 10.35.4 (iii) on and after the third anniversary of the Date of Grant, the remaining Option Shares. 3. TERMINATION OF OPTION. (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of ten (10) years from the Date of Grant (the "Option Term"). (b) When the Grantee ceases to be a director of the Company, the Option, to the extent not previously exercised, shall terminate and become null and void immediately upon the Separation Date, except in a case where the Grantee's service as a director of the Company ceases by reason of Disability or death or otherwise as follows. If the Grantee ceases to be a director of the Company by reason of Disability or death, all unexercised portions of the Option shall become immediately exercisable and the Option may be exercised during the period beginning upon such termination and ending one year after such date. In no event, however, shall any such period extend beyond the Option Term. If the Participant's service as a director of the Company terminates for any other reason prior to the exercise of all portions of the Option, the Participant shall have the right within three (3) months of his Separation Date, but not beyond the expiration date of the Option, to exercise such unexercised portions of the Option. (c) In the event of Grantee's death, the Option may be exercised by Grantee's legal representative(s) as and to the extent that the Option would otherwise have been exercisable by Grantee, subject to the provisions of Section 3(b) hereof. (d) Notwithstanding any other provisions set forth herein or in the Plan, if Grantee shall: (i) commit any act of malfeasance or wrongdoing affecting the Company, its Parents or Subsidiaries, or (ii) engage in conduct that would warrant Grantee's removal for cause (excluding general dissatisfaction with the performance of Grantee's duties, but including any act of disloyalty or any conduct clearly tending to bring discredit upon the Company, its Parents or Subsidiaries), any unexercised portion of the Option shall immediately terminate and be void. 4. EXERCISE OF OPTIONS. (a) Grantee may exercise the Option with respect to all or any part of the number of Option Shares that are exercisable hereunder by giving the Secretary of the Company written notice of intent to exercise. The notice of exercise shall specify the number of Option Shares as to which the Option is to be exercised and date of exercise thereof, which date shall be at least five (5) days after the signing of such notice unless an earlier time shall have been mutually agreed upon. (b) Full payment (in U.S. dollars) by Grantee of the Option Price for Option Shares purchased shall be made on or before the exercise date specified in the notice of exercise in cash or as the Company may otherwise permit as further set forth in the Plan. On the exercise date specified in Grantee's notice or as soon thereafter as is practicable, the Company shall cause to be delivered to Grantee, a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Stock or reacquired Stock, as the Company may elect) upon full payment for such Option Shares. The obligation of the Company to deliver Stock shall, however, be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the Option or the Option Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Option or the issuance or purchase of Stock thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. (c) If Grantee fails to pay for any of the Option Shares specified in such notice or fails to accept delivery thereof, Grantee's right to purchase such Exhibit 10.35.4 2 Option Shares may be terminated by the Company or the exercise of the Option may be ignored, as the Committee in its sole discretion may determine. The date specified in Grantee's notice as the date of exercise shall be deemed the date of exercise of the Option, provided that payment in full for the Option Shares to be purchased upon such exercise shall have been received by such date. 5. ADJUSTMENT OF AND CHANGES IN STOCK. In the event of a reorganization, recapitalization, change of shares, stock split, spin-off, stock dividend, reclassification, subdivision, or combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure of shares of capital stock of the Company, the Committee shall appropriately adjust the number and kind of shares of Stock subject to the Option and such option price; provided, however, that no such adjustment shall give Grantee any additional benefits under the Option. In the event of any Corporate Transaction or an event giving rise to a Change in Control, the Option shall be fully vested, nonforfeitable and become exercisable as of the date of the Change in Control or Corporate Transaction or as otherwise determined in accordance with Section 5.5(c) of the Plan. However, in the case of a Corporate Transaction, the Committee may determine that the Option will not be so accelerated if and to the extent (i) such Option is either to be assumed by the successor or parent thereof or to be replaced with a comparable Option to purchase shares of the capital stock of the successor corporation or parent thereof, or (ii) such Option is to be replaced with a cash incentive program of the successor corporation that preserves the option spread existing at the time of the Corporate Transaction and provides for subsequent payment in accordance with the same vesting schedule applicable to such Option. In the event of a Corporate Transaction described in clauses (i) or (ii) of Section 5.5(b) of the Plan, the Committee may, upon no less than 60 days notice to the optionee (an "Acceleration Notice") determine that such optionee's Options will terminate as of the effective date of such Corporate Transaction, in which event such Options shall be fully vested, nonforfeitable and become exercisable immediately as of the date of such Acceleration Notice. In the event of a Change in Control or Corporate Transaction described in clauses (a)(i), (a)(ii) and (b)(iii) of Section 5.5 of the Plan or in the event the Acceleration Notice is not timely given, the Option shall remain exercisable for the remaining term of the Option notwithstanding the provisions of Article V of the Plan, subject to any limitations thereto which may be applicable to Incentive Stock Options. In the event of a Corporate Transaction described in clauses (a)(i)(iii), b(i) or (b)(ii) of Section 5.5 of the Plan, which is preceded by a timely Acceleration Notice, the Option shall terminate as of the effective date of the Corporate Transaction described therein. In no event shall the Option be exercised after the expiration of the Option Term. 6. NO RIGHTS AS SHAREHOLDERS. Grantee shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to him or her. 7. NON-TRANSFERABILITY OF OPTION. During Grantee's lifetime, this Option shall be exercisable only by Grantee or his or her guardian or legal representative. 8. AMENDMENT OF OPTION. The Option may be amended by the Committee at any time (i) if the Committee determines, in its sole discretion, that amendment is necessary or advisable in light of any addition to or change in the Code or in the regulations issued thereunder, or any federal or state securities law or other law of regulation, which change occurs after the Date of Grant and by its terms applies to the Option; or (ii) other than in the circumstances described in clause (i), with the consent of Grantee. Exhibit 10.35.4 3 9. NOTICE. Any notice to the Company provided for in this instrument shall be addressed to it in care of its Secretary at its executive offices and any notice to Grantee shall be addressed to Grantee at the address below. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid. 10. INCORPORATION OF PLAN BY REFERENCE. The Option is granted pursuant to the Plan, the terms and definitions of which are incorporated herein by reference, and the Option shall in all respects by interpreted in accordance with the Plan. 11. GOVERNING LAW. To the extent that federal law shall not be held to have preempted local law, this Option shall be governed by the laws of the State of Delaware. If any provision of the Option shall be held invalid or unenforceable, the remaining provisions hereof shall continue in full force and effect. Exhibit 10.35.4 4 IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Grant of Nonqualified Stock Option, and Grantee has placed his or her signature hereon, effective as of the Date of Grant. NRG GENERATING (U.S.) INC. By: -------------------------------------- Timothy P. Hunstad Vice President and Chief Financial Officer GRANTEE Signature --------------------------------- Name: ------------------------------------ (Print) Address: ---------------------------------- ---------------------------------- ---------------------------------- Exhibit 10.35.4 5 EX-10.35-5 9 EXHIBIT 10.35.5 NRG GENERATING (U.S.) INC. 1998 STOCK OPTION PLAN GRANT OF NONEMPLOYEE NONQUALIFIED STOCK OPTION DATE OF GRANT: ______________________ THIS GRANT, dated as of the date of grant first stated above (the "Date of Grant"), is delivered by NRG Generating (U.S.) Inc. (the "Company") to _____________________ (the "Grantee"). WHEREAS, the Board of Directors of the Company (the "Board") on April 20, 1998, adopted the NRG Generating (U.S.) Inc. 1998 Stock Option Plan (the "Plan") effective as of that date; WHEREAS, the Plan provides for the granting of Nonqualified Stock Options by the Committee to directors of the Company, officers and key employees of the Company and its Subsidiaries and certain other individuals who have the capability of making or who have made a substantial contribution to the Company to purchase shares of the Common Stock of the Company (the "Stock"), in accordance with the terms and provisions thereof; and WHEREAS, the Committee considers Grantee to be a person who is eligible for a grant of Nonqualified Stock Options under the Plan, and has determined that it would be in the best interest of the Company to grant the Nonqualified Stock Options documented herein. NOW THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Committee, hereby grants to Grantee, as of the Date of Grant, an option to purchase up to __________ shares of Stock at a price of $___________ per share. The shares of stock purchasable upon exercise of the Option are hereinafter sometimes referred to as the "Option Shares." The Option is intended by the parties hereto to be, and shall be treated as, a Nonqualified Stock Option which is not subject to the provisions of Code Section 422. [2. INSTALLMENT EXERCISE. Subject to such further limitations as are provided herein, the Option shall become exercisable in three (3) installments, Grantee having the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Option, on and after the following dates, in cumulative fashion: (i) on and after the first anniversary of the Date of Grant up to one-third (ignoring fractional shares) of the total number of Option Shares; (ii) on and after the second anniversary of the Date of Grant, up to an additional one-third (ignoring fractional shares) of the total number of Option Shares; and (iii) on and after the third anniversary of the Date of Grant, the remaining Option Shares.] Exhibit 10.35.5 3. TERMINATION OF OPTION. (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of ten (10) years from the Date of Grant (the "Option Term"). [ (b) Upon the occurrence of Grantee's ceasing for any reason to be providing service to the Company, its Parents, Subsidiaries or affiliates, the Option, to the extent not previously exercised, shall terminate and become null and void immediately upon the Separation Date, except in a case where the termination of Grantee's services is by reason of retirement, Disability or death or otherwise as follows. Upon a termination of Grantee's services by reason of Disability or death, all unexercised portions of the Option shall become immediately exercisable and the Option may be exercised during the period beginning upon such termination and ending one year after such date. Upon termination of Grantee's services, the Option may be exercised during the three-month period following the date of retirement, but only to the extent that the Option was outstanding and exercisable on the date of such retirement. In no event, however, shall any such period extend beyond the Option Term.] (c) In the event of Grantee's death, the Option may be exercised by Grantee's legal representative(s) as and to the extent that the Option would otherwise have been exercisable by Grantee, subject to the provisions of Section 3(b) hereof. (d) Notwithstanding any other provisions set forth herein or in the Plan, if Grantee shall: (i) commit any act of malfeasance or wrongdoing affecting the Company, its Parents, its Subsidiaries, (ii) breach any covenant not to compete, or employment contract, with the Company, its Parents, Subsidiaries or affiliates, or (iii) engage in conduct that would warrant Grantee's discharge for cause if he were an employee of the Company (excluding general dissatisfaction with the performance of Grantee's duties, but including any act of disloyalty or any conduct clearly tending to bring discredit upon the Company, its Parents, Subsidiaries or affiliates), any unexercised portion of the Option shall immediately terminate and be void. 4. EXERCISE OF OPTIONS. (a) Grantee may exercise the Option with respect to all or any part of the number of Option Shares that are exercisable hereunder by giving the Secretary of the Company written notice of intent to exercise. The notice of exercise shall specify the number of Option Shares as to which the Option is to be exercised and date of exercise thereof, which date shall be at least five (5) days after the signing of such notice unless an earlier time shall have been mutually agreed upon. (b) Full payment (in U.S. dollars) by Grantee of the Option Price for Option Shares purchased shall be made on or before the exercise date specified in the notice of exercise in cash or as the Company may otherwise permit as further set forth in the Plan. On the exercise date specified in Grantee's notice or as soon thereafter as is practicable, the Company shall cause to be delivered to Grantee, a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Stock or reacquired Stock, as the Company may elect) upon full payment for such Option Shares. The obligation of the Company to deliver Stock shall, however, be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the Option or the Option Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Option or the issuance or purchase of Stock thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. (c) If Grantee fails to pay for any of the Option Shares specified in such notice or fails to accept delivery thereof, Grantee's right to purchase such Option Shares may be terminated by the Company Exhibit 10.35.5 2 or the exercise of the Option may be ignored, as the Committee in its sole discretion may determine. The date specified in Grantee's notice as the date of exercise shall be deemed the date of exercise of the Option, provided that payment in full for the Option Shares to be purchased upon such exercise shall have been received by such date. 5. ADJUSTMENT OF AND CHANGES IN STOCK. In the event of a reorganization, recapitalization, change of shares, stock split, spin-off, stock dividend, reclassification, subdivision, or combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure of shares of capital stock of the Company, the Committee shall appropriately adjust the number and kind of shares of Stock subject to the Option and such option price; provided, however, that no such adjustment shall give Grantee any additional benefits under the Option. [In the event of any Corporate Transaction or an event giving rise to a Change in Control, the Option shall be fully vested, nonforfeitable and become exercisable as of the date of the Change in Control or Corporate Transaction or as otherwise determined in accordance with Section 5.5(c) of the Plan. However, in the case of a Corporate Transaction, the Committee may determine that the Option will not be so accelerated if and to the extent (i) such Option is either to be assumed by the successor or parent thereof or to be replaced with a comparable Option to purchase shares of the capital stock of the successor corporation or parent thereof, or (ii) such Option is to be replaced with a cash incentive program of the successor corporation that preserves the option spread existing at the time of the Corporate Transaction and provides for subsequent payment in accordance with the same vesting schedule applicable to such Option. In the event of a Corporate Transaction described in clauses (i) or (ii) of Section 5.5(b) of the Plan, the Committee may, upon no less than 60 days notice to the optionee (an "Acceleration Notice") determine that such optionee's Options will terminate as of the effective date of such Corporate Transaction, in which event such Options shall be fully vested, nonforfeitable and become exercisable immediately as of the date of such Acceleration Notice. In the event of a Change in Control or Corporate Transaction described in clauses (a)(i), (a)(ii) and (b)(iii) of Section 5.5 of the Plan or in the event the Acceleration Notice is not timely given, the Option shall remain exercisable for the remaining term of the Option notwithstanding the provisions of Article V of the Plan, subject to any limitations thereto which may be applicable to Incentive Stock Options. In the event of a Corporate Transaction described in clauses (a)(iii), (b)(i) or (b)(ii) of Section 5.5 of the Plan, which is preceded by a timely Acceleration Notice, the Option shall terminate as of the effective date of the Corporate Transaction described therein. In no event shall the Option be exercised after the expiration of the Option Term.] 6. NO RIGHTS AS SHAREHOLDERS. Grantee shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to him or her. 7. NON-TRANSFERABILITY OF OPTION. During Grantee's lifetime, this Option shall be exercisable only by Grantee or his or her guardian or legal representative. 8. EMPLOYMENT NOT AFFECTED. The grant of the Option hereunder shall not be construed as conferring on Grantee any right to continue providing services to the Company, and Grantee's provision of services to the Company may be terminated without regard to the effect which such action might have upon him as a holder of this Option. Exhibit 10.35.5 3 9. AMENDMENT OF OPTION. The Option may be amended by the Committee at any time (i) if the Committee determines, in its sole discretion, that amendment is necessary or advisable in light of any addition to or change in the Code or in the regulations issued thereunder, or any federal or state securities law or other law of regulation, which change occurs after the Date of Grant and by its terms applies to the Option; or (ii) other than in the circumstances described in clause (i), with the consent of Grantee. 10. NOTICE. Any notice to the Company provided for in this instrument shall be addressed to it in care of its Secretary at its executive offices and any notice to Grantee shall be addressed to Grantee at the current address shown on the payroll records of the Employer. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid. 11. INCORPORATION OF PLAN BY REFERENCE. The Option is granted pursuant to the Plan, the terms and definitions of which are incorporated herein by reference, and the Option shall in all respects by interpreted in accordance with the Plan. 12. GOVERNING LAW. To the extent that federal law shall not be held to have preempted local law, this Option shall be governed by the laws of the State of Delaware. If any provision of the Option shall be held invalid or unenforceable, the remaining provisions hereof shall continue in full force and effect. Exhibit 10.35.5 4 IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Grant of Nonqualified Stock Option, and Grantee has placed his or her signature hereon, effective as of the Date of Grant. NRG GENERATING (U.S.) INC. By: --------------------------------------- Timothy P. Hunstad Vice President and Chief Financial Officer GRANTEE Signature --------------------------------- Name: ------------------------------------- (Print) Address: ---------------------------------- ---------------------------------- ---------------------------------- Exhibit 10.35.5 5 EX-21 10 EXHIBIT 21 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES OF REGISTRANT (MAJORITY OR WHOLLY OWNED UNLESS OTHERWISE INDICATED)
Name of Subsidiary State of Incorporation - ------------------ ---------------------- CogenAmerica Newark Inc. Delaware CogenAmerica Parlin Inc. Delaware O'Brien (Philadelphia) Cogeneration, Inc. Delaware NRG Generating Ltd. United Kingdom PoweRent* 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 Philadelphia Biogas Supply, Inc. Delaware CogenAmerica Parlin Supply Corporation Delaware CogenAmerica Newark Supply Corporation Delaware Grays Ferry Cogeneration Partnership* Pennsylvania CogenAmerica Schuylkill Inc. Delaware Grays Ferry Services Partnership Pennsylvania CogenAmerica Funding Inc. Delaware CogenAmerica Morris, Inc. Delaware CogenAmerica Morris LLC Delaware CogenAmerica Asia, Inc. Delaware Power Service Company Delaware O'Brien Fuels, Inc. Delaware SDN Power, Inc. Delaware CogenAmerica Pryor Inc. Delaware Oklahoma Loan Acquisition Corporation Delaware
* The Company owns 50% or less of the equity interest in these subsidiaries. 72 EX-23.1 11 EX-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-38603) of Cogeneration Corporation of America of our report dated March 19, 1999 appearing in this Form 10-K. PricewaterhouseCoopers LLP Minneapolis, Minnesota March 25, 1999 73 EX-27 12 EX-27
5 12-MOS DEC-31-1998 DEC-31-1998 15,703 0 14,326 0 2,683 33,482 244,040 0 318,674 32,347 0 68 0 0 3,745 318,674 73,996 73,996 42,345 42,345 7,700 0 15,855 12,880 4,878 8,002 0 0 0 8,002 1.17 1.15
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