1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997. ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO________. COMMISSION FILE NO. 333-33397 NRG ENERGY, INC. ---------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 41-1724239 -------- ---------- (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1221 NICOLLET MALL, SUITE 700 MINNEAPOLIS, MINNESOTA 55403 ---------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (612) 373-5300 -------------- (REGISTRANT'S 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: None Indicated by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. Yes X No --- --- As of June 29, 1998, there were 1,000 shares of common stock, $1.00 par value, outstanding, all of which were owned by Northern States Power Company. No other voting or non-voting common equity is held by non-affiliates of the Registrant. The Registrant meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. Documents Incorporated by Reference: None 2 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on June 29, 1998. NRG ENERGY, INC. By: /s/ Leonard A. Bluhm ---------------------------------- Leonard A. Bluhm Executive Vice President and Chief Financial Officer 3 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15 (d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. An annual report has been sent to security holders and was supplementally filed with the Commission. Such annual report to security holders shall not be deemed "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934. No proxy material will be sent to security holders. 52
1 Halle, May 14, 1998 Saale Energie GmbH, Schkopau Report on the audit of the financial statements for the years ended December 31, 1997 and 1996 in accordance with German GAAP and on the audit of the respective US GAAP reconciliation Copy no. (7) 2 SAALE ENERGIE GmbH INDEX TO THE FINANCIAL STATEMENTS Page Report of the Independent Auditors 1 Annual Financial Statements Statement of Income for the year 1997 and 1996 2 Balance Sheet as of December 31, 1997 and 1996 3 Statement of Cash Flows for the year 1997 and 1996 4 Notes to the Financial Statements 5 3 INDEPENDENT AUDITORS' REPORT To the Shareholders of Saale Energie GmbH Schkopau, Germany We have audited the accompanying balance sheet of Saale Energie GmbH (SEG) as of December 31, 1997 and 1996, and the related statements of income and cash flows for the years in the two-year period then ended. These financial statements are the responsibility of SEG's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Germany and the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above fairly present, in all material respects, the financial position of Saale Energie GmbH as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the two-year period then ended, in conformity with accounting principles generally accepted in Germany. Generally accepted accounting principles in Germany vary in certain significant respects from generally accepted accounting principles in the United States of America. Application of generally accepted accounting principles in the United States of America would have affected the results of operations for the two-year period ended December 31, 1997 and shareholders' equity as of December 31, 1997 and 1996 to the extent summarized in Note C to the financial statements. Halle, Germany May 14, 1998 1 4 SAALE ENERGIE GmbH STATEMENT OF INCOME (In Thousands DM) See accompanying Notes to the Financial Statements 2
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, NOTES 1997 1996 --------------- ---------------- ---------------- Sales D 224,502 161,309 Other operating income 21 3 ---------------- ---------------- Total revenue 224,523 161,312 Cost of materials D/K 225,669 170,897 Depreciation of tangible fixed assets 1 1 Other operating expenses 1,122 1,060 ---------------- ---------------- Total operating expenses 226,792 171,958 ---------------- ---------------- Result of operations -2,269 -10,646 Income from companies in which participations are held 7,162 6,581 Interest expense (net) I -3,152 -3,845 ---------------- ---------------- Results of ordinary activities 1,741 -7,910 Taxes on income 0 -40 ---------------- ---------------- Net profit for the year 1,741 -7,870 ================ ================ 5 SAALE ENERGIE GmbH BALANCE SHEET (In Thousands DM) See accompanying Notes to the Financial Statements 3
AT AT DECEMBER 31, DECEMBER 31, NOTES 1997 1996 ----------- ---------------- ----------------- ASSETS Outstanding contributions 713 713 NON-CURRENT ASSETS Fixed assets Tangible assets Factory and office equipment B 1 2 Financial assets 1. Shares in affiliated companies B, E 49 49 2. Participations B, E 200,677 200,677 3. Loans to participations B, F 82,200 82,200 --------------- --------------- TOTAL NON-CURRENT ASSETS 282,927 282,928 CURRENT ASSETS Inventories Raw materials and supplies B 714 325 Receivables and other assets 1. Trade receivables B, D, G 18,860 24,764 2. Other assets B, G 3,541 14,549 Bank balances B 16,522 28,748 --------------- --------------- TOTAL CURRENT ASSETS 39,637 68,386 --------------- --------------- TOTAL ASSETS 323,277 352,027 =============== =============== SHAREHOLDERS' EQUITY AND LIABILITIES SHAREHOLDERS' EQUITY H Subscribed capital 1,000 1,000 Capital reserve 48,041 48,041 Net income for the year -11,383 -7,870 Accumulated losses brought forward 1,741 -3,513 --------------- --------------- TOTAL SHAREHOLDERS' EQUITY 39,399 37,658 Accruals Other accruals B 80 40 Liabilities 1. Trade payables B, I 3,541 8,836 2. Payables to shareholding companies B, I 69 92,084 3. Payables to affiliated companies B, I 3,140 4,375 4. Payables to participations B, I 234,837 174,884 5. Other payables B, I 42,211 34,150 --------------- --------------- TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 323,277 352,027 =============== =============== 6 SAALE ENERGIE GmbH STATEMENT OF CASH FLOWS (In Thousands DM) 4
YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------- -------------------- Cash generated by operations: Net income for the year 1,741 -7,870 Adjustments to reconcile the net profit to the cash generated by operations: Depreciation on tangible assets and current asset write-offs 1 4 Change in assets and liabilities: Inventories -389 384 Short-term trade receivables 5,904 -24,647 Other assets 11,009 -14,415 Accruals 40 -1,535 Short-term trade payables -5,295 8,218 Interest payable 0 3,583 Other liabilities 65,579 114,597 ----------------- ----------------- CASH RETAINED FROM OPERATING ACTIVITIES 78,590 78,319 ----------------- ----------------- Cash flows from investing activities: Capital expenditures 0 -82,658 ----------------- ----------------- CASH UTILIZED IN INVESTING ACTIVITIES 0 -82,658 ----------------- ----------------- Cash flows from financing activities: Repayment of loans 0 34,568 Proceeds from loans -90,816 -3,368 ----------------- ----------------- CASH UTILIZED IN FINANCING ACTIVITIES -90,816 31,200 ----------------- ----------------- NET DECREASE IN CASH -12,226 26,861 CASH AT BEGINNING OF YEAR 28,748 1,887 ----------------- ----------------- CASH AT END OF YEAR 16,522 28,748 ================= ================= 7 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) NOTE A ORIGINATION AND NATURE OF BUSINESS ORIGINATION: According to the Articles of Association, Saale Energie GmbH ("SEG") was established on November 11, 1993. The Company's shares are held at 50 % by NRGenerating International B.V., Amsterdam and at 50 % by PowerGen Holdings B.V., Rotterdam. NATURE OF BUSINESS: The operations of SEG include all activities relating to the direct and indirect acquisition, ownership, administration and operation of power generating facilities located in Schkopau, including the purchase of fuel and the sale of energy produced in the facilities. The business of the Company further constitutes all activities relating to the supply of management, maintenance and consulting services in respect of power stations and related plants. The Company is authorized to take all other actions and engage in all other businesses which appear to be necessary and useful in order to carry into effect the purpose of the Company. In particular it is authorized to hold, acquire and create subsidiaries, branches, companies and interests in other enterprises. NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of SEG have been prepared in accordance with the German Commercial Code, which represents accounting principles generally accepted in Germany ("German GAAP"). German GAAP vary in certain significant respects from accounting principles generally accepted in the United States of America ("US GAAP"). Application of US GAAP would have affected the results of operations for the year ended December 31, 1997 to the extent summarized in Note C to the financial statements. All amounts herein are shown in thousands of Deutsche Mark ("TDM") unless otherwise stated. SEG is exempt from the to duty prepare consolidated financial statements in terms of section 291 of the German Commercial Code. SEG owns a 98 % share of its affiliated company (subsidiary) Saale Energie Service GmbH ("SES"). The investment in SES is included at cost in SEG's financial statements. Furthermore, SEG holds a 41.1 % share in the Kraftwerk Schkopau GbR ("GbR") and a 44.4 % share in the Kraftwerk Schkopau Betriebsgesellschaft mbH. These companies are included at cost and referred to as participations in these financial statements. 5 8 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) USE OF ESTIMATES: The preparation of 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 liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. TOTAL COST METHOD: The statement of operations is presented according to the total cost (or type of expenditure) format as commonly used in Germany. According to this format, production and all other expenses incurred during the period are classified by type of expenses. REVENUE RECOGNITION: Revenue is recognized when title passes or services are rendered, net of discounts, customer bonuses and rebates granted. FIXED ASSETS: Fixed tangible assets are recorded on the basis of acquisition or manufacturing cost and subsequently reduced by scheduled depreciation charges over the assets' useful lives. FINANCIAL ASSETS: The long-term loans and investments are recorded at cost. INVENTORIES: Inventories are accounted for at historical purchase cost. RECEIVABLES AND OTHER ASSETS: All receivables are recorded at nominal value. No provision for doubtful accounts has been recorded. BANK BALANCES: Bank balances include current accounts and fixed deposits. ACCRUALS AND LIABILITIES: Accruals have been recorded for known obligations at the balance sheet date at the amounts of the estimated liabilities. Liabilities are valued at the amounts outstanding. 6 9 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES SEG's financial statements comply with German GAAP, which differs in certain significant respects from US GAAP. The differences that would have a significant effect on net income and shareholders' equity are set out below. 1. Consolidation SEG is not required to prepare consolidated financial statements in terms of section 291 of the German Commercial Code. If US GAAP is applied, SEG would be required to prepare consolidated financial statements, which would include the financial statements of SES. US GAAP financial statements would therefore include the current year's operating results of SES, net of minority interests, and would exclude the dividend income received by SEG. 2. Accounting for long term service and supply agreements For German GAAP purposes the amounts billed to SEG resulting from the use and benefit agreement between SEG and GbR were recorded as expenses of the period. Parallel, the amounts attributable to the long-term electricity supply contract with the Company's sole customer were recorded as revenue in the period they were invoiced. See Note D. In accordance with US GAAP, these agreements would be considered as leasing agreements. The use and benefit agreement would be considered a capital lease and the long-term sales agreement, as it relates to capacity availability, would be treated as a direct financing lease arrangement. The revenues and expenses recorded based upon current billings would be replaced by the amortization of unearned direct finance lease income and interest expense on lease obligations in accordance with US GAAP. The net present value of the minimum lease payments to be received by SEG under the terms of the agreement amounts to TDM 850,722, whereas the net present value of the lease obligation payable by SEG over the minimum period of 25 years is TDM 635,541 as of December 31, 1997. 7 10 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) 3. Outstanding contributions from the shareholders As of December 31, 1997 outstanding contributions from shareholders amounted to TDM 713, which were not deducted from shareholders' equity in the German financial statements. The shareholders' equity for US GAAP purposes has to be reduced by the outstanding contributions. 4. Deferred taxes Under German GAAP, SEG did not accrue for income tax, because the accumulated tax losses of prior years exceed the net profit for the 1997 financial year. Deferred tax assets and liabilities have not been recorded, because under German GAAP, they are only required to be recognized to the extent that the deferred tax liabilities exceed the deferred tax assets. Deferred tax assets are not recorded for accumulated tax losses brought forward. For purposes of US GAAP accounting the financial values differ significantly from the tax basis mainly due to the application of lease accounting. Significant components of SEG's deferred tax liabilities and assets as of December 31, 1997, that would have resulted from accumulated tax losses and temporary differences between the US GAAP financial statement basis and tax basis of assets and liabilities are summarized as follows: 8
December 31, December 31, 1997 1996 ----------- ------------ Deferred tax liability lease accounting 109,539 82,155 ----------- ------------ Total deferred liability 109,539 82,155 ----------- ------------ Deferred tax assets accumulated tax losses 51,457 54,787 investment in GbR 4,443 14,282 ----------- ------------ Total deferred asset 55,900 69,069 =========== ============ Net deferred tax liability 53,639 13,087 =========== ============ 11 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) RECONCILIATION TO US GAAP The following is a summary of the significant adjustments to net income for the year which would have been be required if US GAAP had been applied instead of German GAAP. 9
Year ended Year ended December 31, December 31, Notes 1997 1996 -------- ------------ ------------ Net income as reported in the statement of income under German GAAP 1,741 -7,870 Adjustments required to conform with US GAAP: Consolidation of SES (1) -1,578 -40 Lease adjustment (2) 71,766 31,536 Deferred taxes (4) -40,552 -14,101 ----------- ----------- Net profit in accordance with US GAAP 31,377 9,525 =========== =========== 12 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) The following is a summary of the significant adjustments to shareholders' equity as of December 31, 1997 which would have been required if US GAAP had been applied instead of German GAAP. NOTE D LONG-TERM SALES AND SERVICE AGREEMENTS According to the long-term electricity supply contract between SEG and its major customer, SEG supplies its total available electricity capacity to this customer. The contract has a term of 25 years starting at the date of commissioning of the power plant. The customer is obliged to pay on a monthly basis a price that covers (1) the availability of power supply capacity and (2) the operating costs incurred to produce the electricity. The customer has agreed to make minimum payments of DM 2,142.7 million over the period of the agreement (25 years). In 1997, SEG's sales of TDM 224,502 solely relate to sales made to this customer. SEG closed a use and benefit agreement with Kraftwerk Schkopau GbR under which GbR grants SEG a notional share of 400 MW (power share) in the total net capacity of the power station for its sole use. The SEG power share encompasses all plant and equipment of the power station. In return SEG is obliged to pay all costs of the GbR related to the SEG-power share as stipulated in the agreement plus a profit margin plus value added tax. During 1997, SEG was billed TDM 139,294 by GbR. 10
December 31, December 31, Notes 1997 1996 -------- ------------ ------------ Shareholders' equity as reported in the balance sheet under German GAAP 39,399 37,659 Adjustments required to conform with US GAAP: Consolidation of SES (1) 1,699 3,277 Lease adjustment (2) 103,302 31,536 Outstanding contributions (3) -713 -713 Deferred taxes (4) -53,639 -13,087 ----------- ----------- Shareholders' equity in accordance with US GAAP 90,048 58,672 =========== =========== 13 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) In order to manage and operate its share in the power plant SEG closed a contract with Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB) on December 10, 1993. SEG commissions KSB with the conversion of coal using its power share of 400 MW of the Schkopau power plant, and KSB accepts responsibility for all costs of operating and maintaining the power plant. In terms of the contract SEG is obliged to pay for KSB's services. The management fees levied by the KSB for 1997 amounted to TDM 54,713. NOTE E INVESTMENTS IN SUBSIDIARIES AND PARTICIPATIONS SEG holds a 98 % share in Saale Energie Services GmbH (SES). The investment is accounted for at its historical acquisition cost of TDM 49. The business of the company consists of all activities relating to the supply of management, maintenance and consulting services in respect of power stations and related plants, especially for the power stations of the Mitteldeutsche Braunkohlengesellschaft mbH (MIBRAG) and its affiliated companies. A 41.1 % participation in the GbR, which owns the Schkopau power plant, is held by SEG at the historical cost value of TDM 200,655. SEG's 44.4 % share in the Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB) has been recorded at the historical acquisition cost of TDM 22 (p.y. TDM 22). SEG has assigned its share in KSB to C & L Deutschland Revision AG in security for the other partner in the GbR. NOTE F LOAN TO KRAFTWERK SCHKOPAU GBR In terms of the loan agreement between the participants of the GbR, SEG has granted a loan of DM 98 million to GbR. The balance outstanding at December 31, 1997 was TDM 82,200. The loan is unsecured and bears interest at a fixed rate of 7 % p.a.. The interest on the loan for 1997 of TDM 5,754 was set-off from the payables to the GbR (see NOTE I). The loan has been granted for an indefinite period and the repayment terms are not fixed. 11 14 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) NOTE G RECEIVABLES AND OTHER ASSETS The trade receivables of TDM 18,860, as reported on December 31, 1997, relates to power supplied to the Company's sole customer. The other assets are mainly receivables from tax authorities. Included in the receivables from the tax authorties are receivables relating to the refundable corporation tax of TDM 1,260 arising from the dividends paid by SES. NOTE H CHANGE IN SHAREHOLDERS' EQUITY Shareholders' equity of SEG changed in 1997 solely by the net profit for 1997 of TDM 1,741 from TDM 37,658 to TDM 39,399. NOTE I LIABILITIES The maturity periods of the liabilities are as follows (in TDM): 12
Total balance as Maturity period Maturity Maturity Total balance of of less than period between period more as of Dec. 31, 1997 1 year 1 and 5 years than 5 years Dec. 31, 1996 ------------- ----------- ----------- ----------- ----------- 1) Trade payables 3,541 3,541 - - 8,836 2) Payables to shareholding companies 69 69 - - 92,084 3) Payables to affiliated companies 3,140 - 3,140 - 4,375 4) Payables to companies in which participa- tions are held 234,837 63,473 162,408 8,956 174,884 5) Other liabilities 42,211 - 42,211 - 34,150 ------------- ----------- ----------- ----------- ----------- 283,798 67,083 207,759 8,956 314,329 ============= =========== =========== =========== =========== 15 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) 2) PowerGen plc., London and NRGenerating B.V., Amsterdam granted loans to SEG for the partial funding of its financial requirements for a total amount of TDM 148,054. The loans were not collateralized and bore interest at a fixed rate of 7.5 % p.a.. The loans were repaid during 1997 except for sundry interest free credits remaining of TDM 69 in total. TDM 5,412 interest was charged by the shareholding companies during 1997. The loans from shareholding companies comprise of the following (in TDM): 3) In terms of the loan agreements dated February 7, 1996 and September 25, 1996 SES granted to SEG loans amounting TDM 6,500 and TDM 1,000 respectively. The unsecured loans bear interest at a variable rate equal to the German Central Bank's discount rate plus 2 % p.a.. Included in the balance as of December 31, 1997 is interest payable of TDM 215. The net dividend paid by SES to SEG during 1997 of TDM 2,150 (after withholding taxes of TDM 790) was deducted from the oustanding loan balance. The loans can be called up at any time. 4) The liability as of December 31, 1997 comprises of the following (in TDM):
December 31, December 31, 1997 1996 ------------ ------------ NRGenerating B.V. 59 46,088 PowerGen plc. 10 45,996 ------------ ------------ 69 92,084 ============ ============ 13
December 31, 1997 December 31, 1996 ----------------- ----------------- a) Kraftwerk Schkopau GbR (GbR) 230,111 168,912 b) Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB) 4,726 5,972 ----------- ------------- 234,837 174,884 =========== ============= 16 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) a) The payables to GbR comprise of two components: TDM 188,275 refer to the fees due for the current year relate to the use and benefit agreement dated December 10, 1993 and represent SEG's share in the power plant's expenses. The gross fee payable of TDM 160,188 (including value added taxation) was reduced by the interest on the GbR loans (TDM 5,754), the share in the 1996 profit of the GbR (TDM 2,959) as well as cash calls by the GbR (TDM 73,309). TDM 41,837 results from SEG's obligation to reimburse its share in the shortfall achieved in the 1995 financial statement of the GbR as well as the shortfall achieved in 1996 up to the commissioning date of the power plant (March 31). TDM 16,966 was repaid during 1997. The payables to the GbR are interest free. b) The liability mainly arises from the coal conversion contract, closed on December 10, 1993 between SEG and KSB. In terms of this contract SEG commissions KSB with the conversion of coal using its power share of 400 MW of the Schkopau power plant, and KSB accepts responsibility for all costs of operating and maintaining the power plant. In terms of the contract, SEG is obliged to pay for KSB's services. 5) The other owner of the GbR, granted a loan of up to TDM 50 million to SEG for purposes of funding the interest due during the construction period of the power plant. TDM 6,061, TDM 8,682 and TDM 25,468 were drawn by SEG during 1995, 1996 and 1997 respectively. A variable interest rate of 3 months LIBOR plus 2 % p.a. was charged during 1997. NOTE J OTHER FINANCIAL COMMITMENTS For financial commitments relating to the leased assets and lease commitments see note C. 14 17 SAALE ENERGIE GMBH NOTES TO THE FINANCIAL STATEMENTS (IN THOUSANDS DM) NOTE K RELATED PARTY TRANSACTIONS SEG and MIBRAG, a related company with common shareholders NRG Energy Inc. and PowerGen plc., closed a long-term coal supply agreement. Under the terms of this agreement MIBRAG delivers lignite to the power station in Schkopau until 2010 at market price. The annual volume of coal to be delivered by MIBRAG was not fixed in the agreement. The lignite purchased by SEG from MIBRAG during the financial year amounted to TDM 32,052. In addition, SES and MIBRAG entered into a consulting and management agreement. This agreement determines certain consultancy services to be provided by SES. In 1997 MIBRAG was billed TDM 4,548 by SES. 15
1 EXHIBIT 99.3 TO THE SHAREHOLDERS OF SUNSHINE STATE POWER BV AUDITORS' REPORT We have audited the accompanying balance sheet of Sunshine State Power BV as of December 31, 1997, 1996 and 1995, and the related statements of income and of cash flows for each of the three years ended December 31, 1997. 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 in accordance with auditing standards generally accepted in the United States of America. 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, the financial statements give a true and fair view of the financial position of the Company as of December 31, 1997, 1996 and 1995 and of the results for the years then ended in accordance with accounting principles generally accepted in the Netherlands and comply with the financial reporting requirements included in Part 9, Book 2 of the Netherlands Civil Code. PRICE WATERHOUSE NEDERLAND BV March 27, 1998 Amsterdam, Netherlands 1 2 SUNSHINE STATE POWER BV BALANCE SHEET AT DECEMBER 31, 1997, 1996 AND 1995 The accompanying notes form an integral part of the annual accounts. 2
1997 1996 1995 AUD'000 AUD'000 AUD'000 ------- ------- ------- ASSETS FIXED ASSETS Intangible fixed assets ..................... 7,926 8,397 8,868 Tangible fixed assets ....................... 161,545 165,173 161,355 ------- ------- ------- 169,471 173,570 170,223 CURRENT ASSETS Stocks ...................................... 2,254 3,536 1,851 Receivables ................................. 4,470 4,877 5,835 Cash and bank balances ...................... 10,885 11,898 11,460 ------- ------- ------- 17,609 20,311 19,146 ------- ------- ------- TOTAL ASSETS ................................ 187,080 193,881 189,369 ------- ------- ------- SHAREHOLDERS' EQUITY AND LIABILITIES SHAREHOLDERS' EQUITY Issued share capital ........................ 30 30 30 Retained earnings ........................... 24,147 15,014 7,712 Result for the year ......................... 2,433 9,133 7,302 ------- ------- ------- 26,610 24,177 15,044 ------- ------- ------- Provisions .................................. 16,195 14,618 9,309 Long-term liabilities ....................... 135,435 146,817 156,097 Current liabilities ......................... 8,840 8,269 8,919 ------- ------- ------- TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES .. 187,080 193,881 189,369 ------- ------- ------- 3 SUNSHINE STATE POWER BV STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 The accompanying notes form an integral part of the annual accounts. 3
1997 1996 1995 AUD'000 AUD'000 AUD'000 ------- ------- ------- Net turnover Queensland Transmission & Supply Corporation .... 24,105 31,245 33,250 Boyne Smelters Limited .......................... 31,386 21,548 21,378 ------- ------- ------- TOTAL ............................................ 55,491 52,793 54,628 Cost of turnover Non-fuel ........................................ 8,864 9,179 8,163 Fuel ............................................ 19,972 14,562 14,851 ------- ------- ------- TOTAL ............................................ 28,836 23,741 23,014 GROSS PROFIT ON TURNOVER ......................... 26,655 29,052 31,614 ------- ------- ------- Operating expenses .............................. 2,484 1,719 3,000 Depreciation and amortization expense ........... 6,328 6,041 5,539 ------- ------- ------- TOTAL EXPENSES ................................... 8,812 7,760 8,539 ------- ------- ------- NET PROFIT ON TURNOVER ........................... 17,843 21,292 23,075 ------- ------- ------- Interest expense ................................. 7,831 10,233 11,100 Interest income .................................. (667) (770) (718) Foreign exchange (gain)/loss ..................... 6,951 (2,527) 744 Disposal of assets (gain)/loss ................... (73) 86 - ------- ------- ------- NET FINANCIAL EXPENSE ............................ 14,042 7,022 11,126 ------- ------- ------- Result from ordinary operations before taxation .. 3,801 14,270 11,949 Taxation ......................................... 1,368 5,137 4,647 ------- ------- ------- NET RESULT ....................................... 2,433 9,133 7,302 -------- ------- ------- 4 SUNSHINE STATE POWER BV STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 The accompanying notes form an integral part of the annual accounts. 4
1997 1996 1995 AUD'000 AUD'000 AUD'000 -------- ------- -------- Cash flows from operating activities Net result ....................................... 2,433 9,133 7,302 Adjustments to reconcile net result to net cash provided by operating activities: Depreciation and amortization ................... 6,328 6,041 5,539 Deferred income taxes ........................... 1,368 5,137 4,647 Foreign exchange loss/(gain) .................... 6,951 (2,527) 744 (Gain)/Loss on sale of fixed assets ............. (73) 86 - Changes in operating assets and liabilities: Stocks .......................................... 1,282 (1,685) (6) Receivables ..................................... 407 958 (1,469) Provisions ...................................... 209 172 166 Current liabilities ............................. 48 (1,088) (102) -------- ------- -------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES .. 18,953 16,227 16,821 -------- ------- -------- Cash flows from investing activities Purchases of tangible fixed assets .............. (2,251) (9,495) (12,762) Proceeds from sale of fixed assets .............. 94 21 - -------- ------- -------- NET CASH FLOWS USED BY INVESTING ACTIVITIES ...... (2,157) (9,474) (12,762) -------- ------- -------- Cash flows from financing activities Proceeds (repayments) of notes payable .......... (12,896) (1,840) 1,014 Repayments of long-term debt .................... (4,913) (4,475) (4,038) -------- ------- -------- NET CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES ....................................... (17,809) (6,315) (3,024) -------- ------- -------- NET (DECREASE)/INCREASE IN CASH AND BANK BALANCES ......................................... (1,013) 438 1,035 -------- ------- -------- Cash and bank balances Beginning of year ............................... 11,898 11,460 10,425 -------- ------- -------- End of year ..................................... 10,885 11,898 11,460 -------- ------- -------- SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST ..................................... 8,072 10,382 11,043 -------- ------- -------- 5 SUNSHINE STATE POWER BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. GENERAL ACTIVITIES Sunshine State Power BV (the Company) was incorporated on November 11, 1993. The Company's principal operating activity is the ownership of 20% of the Gladstone Power Station Joint Venture. The Gladstone Power Station Joint Venture owns and operates the Gladstone Power Station located in Queensland, Australia which it acquired on March 30, 1994. The Gladstone Power Station Joint Venture is an unincorporated joint venture and therefore not a separate legal entity. Accordingly, the Gladstone Power Station Joint Venture owners act as tenants in common owning their proportionate shares of the unincorporated joint venture's assets, liabilities and results, of operations. The accounts have been prepared for the years ended December 31, 1997, 1996 and 1995. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL Unless otherwise stated assets and liabilities are carried at nominal value. BASIS OF PREPARATION The Company's financial statements have been prepared in accordance with generally accepted accounting principles in the Netherlands (Netherland GAAP) which may differ in certain respects from generally accepted accounting principles in the United States (US GAAP). With regard to the Company's balance sheet and statement of income, there are no material differences between Netherlands GAAP and US GAAP. With regard to the Company's statement of cash flows, under US GAAP the foreign exchange loss/(gain) would be classified under the cash flows from financing activities section as US GAAP requires that such items be netted with the related cash flow item. FOREIGN CURRENCIES Assets and liabilities at year-end and transactions during the period denominated in a foreign currency are translated into the Company's local currency (Australian $) at the exchange rates ruling at year-end and at the time of the transaction, respectively. Exchange adjustments are taken to the statement of income. INTANGIBLE FIXED ASSETS Project Development Expenditures - Project development expenditures represent the Company's share of project development expenditures incurred by the Gladstone Power Station Joint Venture to organize the acquisition of the Gladstone Power Station and operate it subsequent to the acquisition. Capitalized development expenditures are being amortized over the term of the Gladstone Power Station Power sales agreements (35 years), commencing from the date the investment in the project was consummated. The carrying values of capitalized development expenditures and the amortization periods are reviewed annually and any necessary write down is charged against income. Research expenditures and expenditures on development of existing projects are charged against income in the year in which they are incurred. 5 6 SUNSHINE STATE POWER BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED) Financing Costs - Financing costs represent the Company's share of the costs incurred by the Gladstone Power Station Joint Venture to acquire the long-term debt used to finance the acquisition of the Gladstone Power Station. Capitalized financing costs are being amortized over a ten year period, which represents the timeframe until the Company expects the long-term debt will be refinanced. TANGIBLE FIXED ASSETS All tangible fixed assets are stated at cost. The Company has not had any reevaluations performed on its tangible fixed assets. Tangible fixed assets, with the exception of land, are depreciated over their estimated useful lives or over the life of the power purchase agreement by the straight line method. Ordinary maintenance and repairs are expensed as incurred; replacements and improvements are capitalized. The estimated useful lives are: STOCKS Stocks are carried at the lower of cost (principally by the FIFO method or another method which approximates FIFO) and net realizable value. In valuing stocks, appropriate allowance is made for obsolete or slow-moving items. TRADE DEBTORS Trade debtors are stated at nominal value. PROVISIONS Employee Provisions - Provisions are made for amounts expected to be paid to the operator of the Gladstone Power Station in respect of its employees for the pro rata entitlements for long service and annual leave. These amounts are accrued at actual pay rates having regard to experience of employee's departure and period of service. The provisions are divided into current (expected to be paid in the ensuing twelve months) and non-current portions. Deferred Tax - Provisions for deferred taxes have been set up where items entering into the determination of accounting profit for one period are recognized for taxation purposes in another. The principal difference arises in connection with the depreciation of fixed assets. In calculating the provision, current tax rates are applied. During 1995, Australian income tax rates increased from 33% to 36%. In 1995, the prior year deferred tax balance was increased to reflect the increase in tax rates with the adjustment being recorded in taxation in the statement of income. COMPANY INCOME TAX Company income tax is based upon the results reported in the statement of income as adjusted for permanent differences. Current Australian tax rates are applied. 6
Site roads and preparation ............... 35 years Generators, systems, stacks, etc. ........ 35 years Coal handling plant ...................... 10-35 years Other operating fixed assets ............. 3-10 years 7 SUNSHINE STATE POWER BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED) 3. INTANGIBLE FIXED ASSETS The movements in the intangible fixed assets are summarized as follows: 4. TANGIBLE FIXED ASSETS The movements in the tangible fixed assets are summarized as follows:
PROJECT DEVELOPMENT FINANCING EXPENDITURES COSTS TOTAL ------------ --------- ------ AUD'000 AUD'000 AUD'000 COST Balance at December 31, 1994 ....................... 6,984 2,707 9,691 Additions for the year ended December 31, 1995 ..... - - - ------------ --------- ------- Balance at December 31, 1995 ....................... 6,984 2,707 9,691 Additions for the year ended December 31, 1996 ..... - - - ------------ --------- ------- Balance at December 31, 1996 ....................... 6,984 2,707 9,691 Additions for the year ended December 31, 1997 ..... - - - ------------ --------- ------- Balance at December 31, 1997 ....................... 6,984 2,707 9,691 ACCUMULATED AMORTIZATION Balance at December 31, 1994 ....................... (150) (203) (353) Amortization for the year ended December 31, 1995 .. (199) (271) (470) Amortization for the year ended December 31, 1996 .. (200) (271) (471) Amortization for the year ended December 31, 1997 .. (200) (271) (471) ------------ --------- ------- Balance at December 31, 1997 ....................... (749) (1,016) (1,765) ------------ --------- ------- Net book value at December 31, 1997 ................ 6,235 1,691 7,926 ------------ --------- ------- 7
OTHER SITE ROADS GENERATORS COAL OPERATING AND SYSTEMS, HANDLING FIXED LAND PREPARATION STACKS PLANT ASSETS TOTAL ---- ----------- ---------- -------- --------- ----- AUD'000 AUD'000 AUD'000 AUD'000 AUD'000 AUD'000 COST Balance at December 31, 1994 ...... 211 2,443 141,125 6,294 1,912 151,985 Additions ......................... - 146 8,943 2,036 721 11,846 Disposals ......................... - - (1) - (10) (11) ------- ------- ------- -------- -------- ------- Balance at December 31, 1995 ...... 211 2,589 150,067 8,330 2,623 163,820 Additions ......................... 5 209 11,988 1,334 111 13,647 Disposals ......................... - - (88) - (19) (107) ------- ------- ------- -------- -------- ------- Balance at December 31, 1996 ...... 216 2,798 161,967 9,664 2,715 177,360 Additions ......................... - 48 3,810 44 263 4,165 Disposals ......................... - (12) (3) - (6) (21) ------- ------- ------- -------- -------- ------- Balance at December 31, 1997 ...... 216 2,834 165,774 9,708 2,972 181,504 ------- ------- ------- -------- -------- ------- 8 SUNSHINE STATE POWER BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) 5. STOCKS
OTHER SITE ROADS GENERATORS COAL OPERATING AND SYSTEMS, HANDLING FIXED LAND PREPARATION STACKS PLANT ASSETS TOTAL -------------- ------------ ------------- -------------- ------------- -------------- AUD'000 AUD'000 AUD'000 AUD'000 AUD'000 AUD'000 ACCUMULATED DEPRECIATION Balance at December 31, 1994 ...... - (53) (2,940) (331) (177) (3,501) Charge for the year ............... - (72) (4,304) (452) (353) (5,181) -------------- ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1995 ...... - (125) (7,244) (783) (530) (8,682) Charge for the year ............... - (79) (4,497) (601) (393) (5,570) -------------- ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1996 ...... - (204) (11,741) (1,384) (923) (14,252) Charge for the year ............... - (129) (4,795) (676) (258) (5,858) -------------- ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1997 ...... - (333) (16,536) (2,060) (1,181) (20,110) Net book value at December 31, 1997 ............................. 216 2,501 149,238 7,648 1,791 161,394 -------------- ------------- ------------- ------------- ------------- ------------- Construction in progress at December 31, 1997 (construction in progress at December 31, 1996 and 1995 was $2,065 and $6,217, respectively) .................... 151 ------------- Net tangible fixed assets at December 31, 1997 ................ 161,545 ------------- 6. RECEIVABLES
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ---- ---- ---- AUD'000 AUD'000 AUD'000 Coal .................... 1,046 2,318 656 Fuel oils ............... 146 154 202 Chemicals ............... 5 12 13 Spares and consumables .. 1,057 1,052 980 --------- --------- --------- 2,254 3,536 1,851 --------- --------- --------- All receivables are due in less than one year. 8
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ---- ---- ---- AUD'000 AUD'000 AUD'000 Trade debtors ........... 4,249 4,605 5,501 Prepayments ............. 221 272 334 --------- --------- --------- 4,470 4,877 5,835 --------- --------- --------- 9 SUNSHINE STATE POWER BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) 7. CASH AND BANK BALANCES All cash and bank balances are held by banks and include investments with maturities of three months or less which are readily convertible to cash. The Company's long-term debt agreement places restrictions on the amount of cash and bank balances which must be maintained. At December 31, 1997, 1996 and 1995, the restricted cash and bank balances totaled $6,200,000, $7,000,000 and $7,500,000, respectively. 8. ISSUED SHARE CAPITAL The authorized share capital consists of 2,000 shares each having a nominal value of 30 Australian dollars (40 Dutch Guilders), of which 1,000 shares have been issued and fully paid up at December 31, 1997 and 1996. The Company's shares are owned by NRGenerating International BV (990) and Gunwale BV (10). Both NRGenerating International BV and Gunwale BV are wholly owned by NRG Energy, Inc., which is incorporated in the United States of America. 9. RETAINED EARNINGS 10. RESULT FOR THE PERIOD
1997 1996 ---- ---- AUD'000 AUD'000 Balance at January 1 ............................ 15,014 7,712 Appropriation of prior years result ............. 9,133 7,302 ------- ------- Balance at December 31 .......................... 24,147 15,014 ------- ------- 9
AUD'000 ------- Balance at December 31, 1994 ................................ 7,712 1994 net result appropriated to retained earnings ........... (7,712) Net result for the year ended December 31, 1995 ............. 7,302 1995 net result appropriated to retained earnings ........... (7,302) Net result for the year ended December 31, 1996 ............. 9,133 1996 net result appropriated to retained earnings ........... (9,133) Net result for the year ended December 31, 1997 ............. 2,433 ------- Balance at December 31, 1997 ................................ 2,433 ------- 10 SUNSHINE STATE POWER BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) 11. PROVISIONS Approximately $710 (AUD'000) of the employee provisions are current and expected to be paid during 1998. 12. LONG-TERM LIABILITIES Secured long-term debt due to third parties
EMPLOYEE DEFERRED PROVISIONS TAX TOTAL ---------- --- ----- AUD'000 AUD'000 AUD'000 Balance at December 31, 1994 ............. 697 3,799 4,496 Charged/(released) to income ............. 166 4,647 4,813 ------- ------- ------- Balance at December 31, 1995 ............. 863 8,446 9,309 Charged/(released) to income ............. 172 5,137 5,309 ------- ------- ------- Balance at December 31, 1996 ............. 1,035 13,583 14,618 Charged/(released) to income ............. 209 1,368 1,577 ------- ------- ------- Balance at December 31, 1997 ............. 1,244 14,951 16,195 ------- ------- ------- Current installments of bank long-term debt are included under current liabilities. The interest rate for long-term debt is variable based on an average of the bid rates quoted by the banks plus a margin of 1.4% at December 31, 1997. The bank long-term debt is repayable as follows (in AUD'000):
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ---- ---- ---- AUD'000 AUD'000 AUD'000 Secured - with banks ........ 103,383 108,821 113,733 The bank long-term debt is secured by the Company's ownership interest in the Gladstone Power Station Joint Venture. 10
1998 ....................................................... 5,437 1999 ....................................................... 5,975 2000 ....................................................... 6,600 2001 ....................................................... 7,275 2002 ....................................................... 8,012 Thereafter ................................................. 75,522 ------ 108,821 ------- 11 SUNSHINE STATE POWER BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) Unsecured Subordinated Notes Payable (AUD'000) On March 25,1994 the Company received loans from NRGenerating International BV and Gunwale BV, the primary shareholders of the Company, in the amounts of $48,312 and $488 respectively. The notes payable are subordinated to all other liabilities of the Company, bear no interest and are to be repaid in U.S. dollars. The Company repaid $12,767 and $129 to NRGenerating International BV and Gunwale BV, respectively, during 1997 and repaid $1,822 and $18 to NRGenerating International BV and Gunwale BV respectively during 1996. There were no repayments made during 1995. Repayments on the notes payable are at the discretion of the Company, unless certain events of termination occur, as defined, and then the entire balance of the notes becomes due. The note balances, as adjusted for current period activity and foreign exchange fluctuations, were $31,733 and $319 to NRGenerating International BV and Gunwale BV at December 31, 1997, respectively, $37,616 and $380 to NRGenerating International BV and Gunwale BV at December 31, 1996, respectively, and $41,940 and $424 to NRGenerating International BV and Gunwale BV at December 31, 1995, respectively. 13. CURRENT LIABILITIES 14. RELATED PARTIES An affiliate of the Company, Sunshine State Power (No. 2) BV owns 17.5% of the Gladstone Power Station Joint Venture. Sunshine State Power (No. 2) BV is owned by the owners of the Company. The Gladstone Power Station is operated by NRG Gladstone Operating Services Pty Ltd, which is ultimately a wholly-owned subsidiary of NRG Energy Inc. NRG Gladstone Operating Services Pty Ltd operates the Gladstone Power Station under the terms of the Operation and Maintenance Agreement with the Gladstone Power Station Joint Venture. During the periods ended December 31, 1997, 1996 and 1995, the Company paid NRG Gladstone Operating Services Pty Ltd approximately $298, $288 and $331 (AUD'000) respectively in operators fees under the terms of the Operation and Maintenance Agreement. 11
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ---- ---- ---- AUD'000 AUD'000 AUD'000 Current installments of bank long-term debt .. 5,437 4,913 4,475 Trade creditors/suppliers .................... 945 776 1,579 Accrued coal/rail costs ...................... 1,633 1,152 1,712 Accrued interest ............................. 559 800 959 Other accrued expenses ....................... 266 628 194 --------- --------- --------- 8,840 8,269 8,919 --------- --------- --------- 12 SUNSHINE STATE POWER BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) 15. NUMBER OF EMPLOYEES The average number of persons employed at the Gladstone Power Station during 1997 was approximately 453. These individuals are primarily employed in the operations and maintenance areas of the station. The Company is responsible for 20% of the related costs for these employees. The Company itself has no employees. 16. REMUNERATION OF DIRECTORS During the periods ended December 31, 1997, 1996 and 1995, none of the directors received remuneration for their services as directors of the Company. 12 13 TO THE SHAREHOLDERS OF SUNSHINE STATE POWER (NO. 2) BV AUDITORS' REPORT We have audited the accompanying balance sheet of Sunshine State Power (No. 2) BV as of December 31, 1997, 1996 and 1995, and the related statements of income and of cash flows for each of the three years ended December 31, 1997. 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 in accordance with auditing standards generally accepted in the United States of America. 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, the financial statements give a true and fair view of the financial position of the Company as of December 31, 1997, 1996 and 1995 and of the results for the years then ended in accordance with accounting principles generally accepted in the Netherlands and comply with the financial reporting requirements included in Part 9, Book 2 of the Netherlands Civil Code. PRICE WATERHOUSE NEDERLAND BV March 27, 1998 Amsterdam, Netherlands 13 14 SUNSHINE STATE POWER (NO. 2) BV BALANCE SHEET AT DECEMBER 31, 1997, 1996 AND 1995 The accompanying notes form an integral part of the annual accounts. 14
1997 1996 1995 AUD'000 AUD'000 AUD'000 ------- ------- ------- ASSETS FIXED ASSETS Intangible fixed assets ..................... 6,937 7,348 7,759 Tangible fixed assets ....................... 141,349 144,524 141,183 ------- ------- ------- 148,286 151,872 148,942 CURRENT ASSETS Stocks ...................................... 1,972 3,093 1,620 Receivables ................................. 3,910 4,267 5,106 Cash and bank balances ...................... 9,535 10,416 9,953 ------- ------- ------- 15,417 17,776 16,679 ------- ------- ------- TOTAL ASSETS ................................ 163,703 169,648 165,621 ------- ------- ------- SHAREHOLDERS' EOUITY AND LIABILITIES SHAREHOLDERS' EQUITY Issued share capital ........................ 30 30 30 Retained earnings ........................... 21,108 13,158 6,748 Result for the year ......................... 2,139 7,950 6,410 ------- ------- ------- 23,277 21,138 13,188 ------- ------- ------- Provisions .................................. 14,164 12,779 8,155 Long-term liabilities ....................... 118,545 128,472 136,515 Current liabilities ......................... 7,717 7,259 7,763 ------- ------- ------- TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES .. 163,703 169,648 165,621 ======= ======= ======= 15 SUNSHINE STATE POWER (NO. 2) BV STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 The accompanying notes form an integral part of the annual accounts. 15
1997 1996 1995 AUD'000 AUD'000 AUD'000 ------- ------- ------- Net turnover Queensland Electricity Commission ............... 21,092 27,340 29,094 Boyne Smelters Limited .......................... 27,462 18,854 18,706 ------ ------ ------ TOTAL ............................................ 48,554 46,194 47,800 Cost of turnover Non-fuel ........................................ 7,756 8,031 7,143 Fuel ............................................ 17,475 12,742 12,995 ------ ------ ------ TOTAL ............................................ 25,231 20,773 20,138 ------ ------ ------ GROSS PROFIT ON TURNOVER ......................... 23,323 25,421 27,662 Operating expenses .............................. 2,144 1,509 2,632 Depreciation and amortization expense ........... 5,537 5,285 4,846 ------ ------ ------ TOTAL EXPENSES ................................... 7,681 6,794 7,478 ------ ------ ------ NET PROFIT ON TURNOVER ........................... 15,642 18,627 20,184 ------ ------ ------ Interest expense ................................. 6,852 8,954 9,713 Interest income .................................. (584) (668) (626) Foreign exchange (gain)/loss ..................... 6,096 (2,157) 609 Disposal of assets (gain)/loss ................... (64) 76 - ------ ------ ------ NET FINANCIAL EXPENSE ............................ 12,300 6,205 9,696 ------ ------ ------ Result from ordinary operations before taxation .. 3,342 12,422 10,488 Taxation ......................................... 1,203 4,472 4,078 ------ ------ ------ NET RESULT ....................................... 2,139 7,950 6,410 ------ ------ ------ 16 SUNSHINE STATE POWER (NO. 2) BV STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 The accompanying notes form an integral part of the annual accounts. 16
1997 1996 1995 AUD'000 AUD'000 AUD'000 -------- ------- -------- Cash flows from operating activities Net result ................................................ 2,139 7,950 6,410 Adjustments to reconcile net result to net cash provided by operating activities: Depreciation and amortization ............................ 5,537 5,285 4,846 Deferred income taxes .................................... 1,203 4,472 4,078 Foreign exchange loss/(gain) ............................. 6,096 (2,157) 609 Gain/loss on sale of fixed assets ........................ (64) 76 - Changes in operating assets and liabilities: Stocks ................................................... 1,121 (1,473) (6) Receivables .............................................. 357 839 (1,237) Provisions ............................................... 182 152 144 Current liabilities ...................................... (3) (886) (131) -------- ------- -------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES ........... 16,568 14,258 14,713 -------- ------- -------- Cash flows from investing activities: Purchases of tangible fixed assets ....................... (1,969) (8,308) (11,165) Proceeds from sale of fixed assets ....................... 83 17 - -------- ------- -------- NET CASH FLOWS USED BY INVESTING ACTIVITIES ............... (1,886) (8,291) (11,165) -------- ------- -------- Cash flows from financing activities: Proceeds (repayments) of notes payable ................... (11,265) (1,588) 883 Repayments of long-term debt ............................. (4,298) (3,916) (3,533) -------- ------- -------- NET CASH FLOWS (USED) BY FINANCING ACTIVITIES ............. (15,563) (5,504) (2,650) -------- ------- -------- NET INCREASE IN CASH AND BANK BALANCES .................... (881) 463 898 -------- ------- -------- Cash and bank balances Beginning of year ........................................ 10,416 9,953 9,055 -------- ------- -------- End of year .............................................. 9,535 10,416 9,953 -------- ------- -------- SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST ................................................. 7,063 9,084 9,667 -------- ------- -------- 17 SUNSHINE STATE POWER (NO. 2) BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. GENERAL ACTIVITIES Sunshine State Power (No. 2) BV (the Company) was incorporated on February 24, 1994. The Company's principal operating activity is the ownership of 17.5% of the Gladstone Power Station Joint Venture. The Gladstone Power Station Joint Venture owns and operates the Gladstone Power Station located in Queensland, Australia, which it acquired on March 30, 1994. The Gladstone Power Station Joint Venture is an unincorporated joint venture and therefore not a separate legal entity. Accordingly, the Gladstone Power Station Joint Venture owners act as tenants in common owning their proportionate shares of the unincorporated joint venture's assets, liabilities and results of operations. The accounts have been prepared for the years ended December 31, 1997, 1996 and 1995. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL Unless otherwise stated assets and liabilities are carried at nominal value. BASIS OF PREPARATION The Company's financial statements have been prepared in accordance with generally accepted accounting principles in the Netherlands (Netherland GAAP) which may differ in certain respects from generally accepted accounting principles in the United States (US GAAP). With regard to the Company's balance sheet and statement of income, there are no material differences between Netherlands GAAP and US GAAP. With regard to the Company's statement of cash flows, under US GAAP the foreign exchange loss/(gain) would be classified under the cash flows from financing activities section as US GAAP requires that such items be netted with the related cash flow item. FOREIGN CURRENCIES Assets and liabilities at year-end and transactions during the period denominated in a foreign currency are translated into the Company's local currency (Australian $) at the exchange rates ruling at year-end and at the time of the transaction, respectively. Exchange adjustments are taken to the statement of income. INTANGIBLE FIXED ASSETS Project Development Expenditures - Project development expenditures represent the Company's share of project development expenditures incurred by the Gladstone Power Station Joint Venture to organize the acquisition of the Gladstone Power Station and operate it subsequent to the acquisition. Capitalized development expenditures are being amortized over the term of the Gladstone Power Station Power sales agreements (35 years), commencing from the date the investment in the project was consummated. The carrying values of capitalized development expenditures and the amortization periods are reviewed annually and any necessary write down is charged against income. Research expenditures and expenditures on development of existing projects are charged against income in the year in which they are incurred. 17 18 SUNSHINE STATE POWER (NO. 2) BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) Financing Costs - Financing costs represent the Company's share of the costs incurred by the Gladstone Power Station Joint Venture to acquire the long-term debt used to finance the acquisition of the Gladstone Power Station. Capitalized financing costs are being amortized over a ten year period, which represents the timeframe until the Company expects the long-term debt will be refinanced. TANGIBLE FIXED ASSETS All tangible fixed assets are stated at cost. The Company has not had any revaluations performed on its tangible fixed assets. Tangible fixed assets, with the exception of land, are depreciated over their estimated useful lives by the straight line method. Ordinary maintenance and repairs are expensed as incurred; replacements and improvements are capitalized. The estimated useful lives are: STOCKS Stocks are carried at the lower of cost (principally by the FIFO method or another method which approximates FIFO) and net realizable value. In valuing stocks, appropriate allowance is made for obsolete or slow-moving items. TRADE DEBTORS Trade debtors are stated at nominal value. PROVISIONS Employee Provisions - Provisions are made for amounts expected to be paid to the operator of the Gladstone Power Station in respect of its employees for the pro rata entitlements for long service and annual leave. These amounts are accrued at actual pay rates having regard to experience of employee's departure and period of service. The provisions are divided into current (expected to be paid in the ensuing twelve months) and non-current portions. Deferred Tax - Provisions for deferred taxes have been set up where items entering into the determination of accounting profit for one period are recognized for taxation purposes in another. The principal difference arises in connection with the depreciation of fixed assets. In calculating the provision, current tax rates are applied. During 1995 Australian income tax rates increased from 33% to 36%. In 1995 the prior year deferred tax balance was increased to reflect the increase in tax rates with the adjustment being recorded in taxation in the statement of income. COMPANY INCOME TAX Company income tax is based upon the results reported in the statement of income as adjusted for permanent differences. Current Australian tax rates are applied. 18
Site roads and preparation ................ 35 years Generators, systems, stacks, etc. ......... 35 years Coal handling plant ....................... 10-35 years Other operating fixed assets .............. 3-10 years 19 SUNSHINE STATE POWER (NO. 2) BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) 3. INTANGIBLE FIXED ASSETS The movements in the intangible fixed assets are summarized as follows: 19
PROJECT DEVELOPMENT FINANCING EXPENDITURES COSTS TOTAL ------------ ---------- -------- AUD'000 AUD'000 AUD'000 COST Balance at December 31, 1994 ....................... 6,111 2,369 8,480 Additions for the year ended December 31, 1995 ..... - - - ---------- ---------- ---------- Balance at December 31, 1995 ....................... 6,111 2,369 8,480 Additions for the year ended December 31, 1996 ..... - - - ---------- ---------- ---------- Balance at December 31, 1996 ....................... 6,111 2,369 8,480 Additions for the year ended December 31, 1997 ..... - - - ---------- ---------- ---------- Balance at December 31, 1997 ....................... 6,111 2,369 8,480 ACCUMULATED AMORTIZATION Balance at December 31, 1994 ....................... (131) (178) (309) Amortization for the year ended December 31, 1995 .. (175) (237) (412) Amortization for the year ended December 31, 1996 .. (174) (237) (411) Amortization for the year ended December 31, 1997 .. (175) (236) (411) ---------- ---------- ---------- Balance at December 31, 1997 ....................... (655) (888) (1,543) ---------- ---------- ---------- Net book value at December 31, 1997 ................ 5,456 1,481 6,937 ---------- ---------- ---------- 20 SUNSHINE STATE POWER (NO. 2) BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) 4. TANGIBLE FIXED ASSETS The movements in the tangible fixed assets are summarized as follows: 20
OTHER SITE ROADS GENERATORS COAL OPERATING AND SYSTEMS, HANDLING FIXED LAND PREPARATION STACKS PLANT ASSETS TOTAL ------- ------------ -------- --------- --------- -------- AUD'000 AUD'000 AUD'000 AUD'000 AUD'000 AUD'000 COST Balance at December 31, 1994 .... 184 2,138 123,482 5,508 1,673 132,985 Additions ....................... - 128 7,827 1,781 631 10,367 Disposals ....................... - - (1) - (9) (10) ---------- ---------- ---------- ------- ------- -------- Balance at December 31, 1995 .... 184 2,266 131,308 7,289 2,295 143,342 Additions ....................... 5 182 10,489 1,168 97 11,941 Disposals ....................... - - (77) - (16) (93) ---------- ---------- ---------- ------- ------- -------- Balance at December 31, 1996 .... 189 2,448 141,720 8,457 2,376 155,190 Additions ....................... - 42 3,334 38 230 3,644 Disposals ....................... - (10) (3) - (6) (19) ---------- ---------- ---------- ------- ------- -------- Balance at December 31, 1997 .... 189 2,480 145,051 8,495 2,600 158,815 ---------- ---------- ---------- ------- ------- -------- ACCUMULATED DEPRECIATION Balance at December 31, 1994 .... - (46) (2,571) (292) (155) (3,064) Charge for the year ............. - (63) (3,767) (396) (309) (4,535) ---------- ---------- ---------- ------- ------- -------- Balance at December 31, 1995 .... - (109) (6,338) (688) (464) (7,599) Charge for the year ............. - (69) (3,935) (526) (344) (4,874) ---------- ---------- ---------- ------- ------- -------- Balance at December 31, 1996 .... - (178) (10,273) (1,214) (808) (12,473) Charge for the year ............. - (114) (4,195) (591) (225) (5,125) ---------- ---------- ---------- ------- ------- -------- Balance at December 31, 1997 .... - (292) (14,468) (1,805) (1,033) (17,598) Net book value at December 31, 1997 ........................... 189 2,188 130,583 6,690 1,567 141,217 ---------- ---------- ---------- ------- ------- -------- Construction in progress at December 31, 1997 (construction in progress at December 31, 1996 and 1995 was $1,807 and $5,440, respectively) .................. 132 -------- Net tangible fixed assets at December 31, 1997 .............. 141,349 -------- 21 SUNSHINE STATE POWER (NO. 2) BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) 5. STOCKS 6. RECEIVABLES
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ---- ---- ---- AUD'000 AUD'000 AUD'000 Coal .................... 915 2,028 574 Fuel oils ............... 128 135 177 Chemicals ............... 4 10 11 Spares and consumables .. 925 920 858 -------- --------- --------- 1,972 3,093 1,620 -------- --------- --------- All receivables are due in less than one year. 7. CASH AND BANK BALANCES All cash and bank balances are held by banks and include investments with maturities of three months or less which are readily convertible to cash. The Company's long-term debt agreement places restrictions on the amount of cash and bank balances which must be maintained. At December 31, 1997, 1996 and 1995, the restricted cash and bank balances totaled $5,425,000, $6,100,000 and $6,500,000, respectively. 8. ISSUED SHARE CAPITAL The authorized share capital consists of 2,000 shares each having a nominal value of 75 Australian dollars (100 Dutch Guilders), of which 400 shares have been issued and fully paid up at December 31, 1997 and 1996. The Company's shares are owned by NRGenerating International BV (396) and Gunwale BV (4). Both NRGenerating International BV and Gunwale BV are wholly owned by NRG Energy, Inc., which is incorporated in the United States of America. 9. RETAINED EARNINGS
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ---- ---- ---- AUD'000 AUD'000 AUD'000 Trade debtors ........... 3,717 4,030 4,814 Prepayments ............. 193 237 292 -------- ------- ------- 3,910 4,267 5,106 -------- ------- ------- 21
1997 1996 ---- ---- AUD'000 AUD'000 Balance at January 1 ......................... 13,158 6,748 Appropriation of prior years result .......... 7,950 6,410 ------- ------- Balance at December 31 ....................... 21,108 13,158 ------- ------- 22 SUNSHINE STATE POWER (NO. 2) BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) 10. RESULT FOR THE PERIOD 11. PROVISIONS
AUD'000 ------- Balance at December 31, 1994 ............................... 6,748 1994 net result appropriated to retained earnings .......... (6,748) Net result for the year ended December 31, 1995 ............ 6,410 1995 net result appropriated to retained earnings .......... (6,410) Net result for the year ended December 31, 1996 ............ 7,950 1996 net result appropriated to retained earnings .......... (7,950) Net result for the year ended December 31, 1997 ............ 2,139 ------- Balance at December 31, 1997 ............................... 2,139 ------- Approximately $621 (AUD'000) of the employee provisions are current and expected to be paid during 1998. 12. LONG-TERM LIABILITIES Secured long-term debt due to third parties
EMPLOYEE DEFERRED PROVISIONS TAX TOTAL ---------- -------- ------- AUD'000 AUD'000 AUD'000 Balance at December 31, 1994 ............ 610 3,323 3,933 Charged/(released) to income ............ 144 4,078 4,222 --------- --------- ------- Balance at December 31, 1995 ............ 754 7,401 8,155 Charged/(released) to income ............ 152 4,472 4,624 --------- --------- ------- Balance at December 31, 1996 ............ 906 11,873 12,779 Charged/(released) to income ............ 182 1,203 1,385 --------- --------- ------- Balance at December 31, 1997 ............ 1,088 13,076 14,164 --------- --------- ------- Current installments of bank long-term debt are included under current liabilities. The interest rate for long-term debt is variable based on an average of the bid rates quoted by the banks plus a margin of 1.4% at December 31, 1997. 22
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ---- ---- ---- AUD'000 AUD'000 AUD'000 Secured - with banks .... 90,460 95,218 99,516 23 SUNSHINE STATE POWER (NO. 2) BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) The bank long-term debt is repayable as follows (in AUD'000): The bank long-term debt is secured by the Company's ownership interest in the Gladstone Power Station Joint Venture. Unsecured Subordinated Note Payable (AUD'000) On March 25,1994 the Company received loans from NRGenerating International BV and Gunwale BV, the primary shareholders of the Company, in the amount of $42,273 and $427, respectively. The notes payable are subordinated to all other liabilities of the Company, bear no interest and are to be repaid in US dollars. The Company repaid $11,152 and $113 to NRGenerating International BV and Gunwale BV, respectively during 1997 and $1,572 and $16 to NRGenerating International BV and Gunwale BV respectively during 1996. There were no repayments made during 1995. Repayments on the notes payable are at the discretion of the Company, unless certain events of termination occur, as defined, and then the entire balance of the notes becomes due. The note balances, as adjusted for current period activity and foreign exchange fluctuations, were $27,806 and $279 to NRGenerating International BV and Gunwale BV at December 31, 1997 respectively, $32,922 and $332 to NRGenerating International BV and Gunwale BV at December 31, 1996, respectively, and $36,629 and $370 to NRGenerating International BV and Gunwale BV at December 31, 1995, respectively. 13. CURRENT LIABILITIES
1998 ............................................ 4,758 1999 ............................................ 5,228 2000 ............................................ 5,775 2001 ............................................ 6,366 2002 ............................................ 7,011 Thereafter ...................................... 66,080 ------ 95,218 ====== 23
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ---- ---- ---- AUD'000 AUD'000 AUD'000 Current installments of bank long-term debt .. 4,758 4,298 3,916 Trade creditors/suppliers .................... 826 696 1,345 Accrued coal/rail costs ...................... 1,429 1,008 1,498 Accrued interest ............................. 489 700 834 Other accrued expenses ....................... 215 557 170 -------- -------- -------- 7,717 7,259 7,763 -------- -------- -------- 24 SUNSHINE STATE POWER (NO. 2) BV NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995-- (CONTINUED) 14. RELATED PARTIES An affiliate of the Company, Sunshine State Power BV owns 20% of the Gladstone Power Station Joint Venture. Sunshine State Power BV is owned by the owners of the Company. The Gladstone Power Station is operated by NRG Gladstone Operating Services Pty Ltd, which is ultimately a wholly-owned subsidiary of NRG Energy Inc. NRG Gladstone Operating Services Pty Ltd operates the Gladstone Power Station under the terms of the Operation and Maintenance Agreement with the Gladstone Power Station Joint Venture. During the periods ended December 31,1997,1996 and 1995, the Company paid NRG Gladstone Operating Services Pty Ltd approximately $260, $252 and $289 (A$S'000) respectively in operators fees under the terms of the Operation and Maintenance Agreement. 15. NUMBER OF EMPLOYEES The average number of persons employed at the Gladstone Power Station during 1997 was approximately 453. These individuals are primarily employed in the operations and maintenance areas of the station. The Company is responsible for 17.5% of the related costs for these employees. The Company itself has no employees. 16. REMUNERATION OF DIRECTORS During the periods ended December 31, 1997, 1996 and 1995, none of the directors received remuneration for their services as directors of the Company. 24