SEC Filing | NRG Energy, Inc.

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As filed with the Securities and Exchange Commission on December 11, 1997

Registration No. 333-33397

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

NRG ENERGY, INC.
(Exact Name of Registrant as specified in its charter)

DELAWARE 4911 41-1724239
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)

1221 NICOLLET MALL, SUITE 700
MINNEAPOLIS, MINNESOTA 55403
(612) 373-5300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)

JULIE A. JORGENSEN
CORPORATE SECRETARY
NRG ENERGY, INC.
1221 NICOLLET MALL, SUITE 700
MINNEAPOLIS, MINNESOTA 55403
(612) 373-5300
(Name, address, including zip code, and telephone number, including area
code, of agent for service)

Copy to:
STACY J. KANTER, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 735-3000

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered
on a delayed basis or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------

PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE PRICE(1) FEE
- --------------------------- -------------- -------------- --------------- --------------

7 1/2% Senior Notes due
2007 ...................... $250,000,000 100% $250,000,000 $75,758(2)
- --------------------------- -------------- -------------- --------------- --------------

- -----------------------------------------------------------------------------
(1) Estimated in accordance with Rule 457 (c) of the Securities Act, solely
for the purpose of calculating the registration fee.
(2) Previously paid.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED DECEMBER 11, 1997
PROSPECTUS

[NRG LOGO]

OFFER FOR ALL OUTSTANDING
71/2% SENIOR NOTES DUE 2007
IN EXCHANGE FOR
71/2% SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OF

NRG ENERGY, INC.

THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON FRIDAY, JANUARY 16, 1998,
UNLESS EXTENDED

NRG Energy, Inc., a Delaware corporation ("NRG"), hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (as the same
may be amended or supplemented from time to time, the "Prospectus") and the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange an aggregate principal amount of up to $250,000,000 of
7 1/2% Senior Notes due 2007 which have been registered under the Securities
Act of 1933 (the "New Notes") of NRG for a like principal amount of the
issued and outstanding 7 1/2% Senior Notes due 2007 (the "Old Notes" and,
with the New Notes, the "Notes") of NRG from the holders (the "Holders")
thereof. The terms of the New Notes are identical in all material respects to
the terms of the Old Notes, except for certain transfer restrictions and
registration rights relating to the Old Notes.

The Notes are redeemable at any time, at the option of NRG at a redemption
price equal to the principal amount thereof plus accrued interest plus a
Make-Whole Premium (as defined herein). See "Description of Notes -- Optional
Redemption." Upon a Change of Control (as defined herein), NRG may be
required to purchase the Notes at a redemption price equal to 101% of the
principal amount thereof plus accrued interest. See "Description of Notes --
Change of Control." The Notes are senior unsecured obligations of NRG, which
conducts substantially all of its business through numerous project
subsidiaries and project affiliates. As a result, all existing and future
liabilities of the direct and indirect subsidiaries and affiliates of NRG
will be effectively senior to the Notes. Because substantially all of the
operations of NRG are conducted by its project subsidiaries and project
affiliates, NRG's cash flow and its ability to service its indebtedness,
including its ability to pay the interest on and principal of the Notes when
due, are dependent upon cash dividends and distributions or other transfers
from its project and other subsidiaries and project affiliates to NRG. As of
September 30, 1997, NRG's project subsidiaries and project affiliates had
total assets of $8.1 billion (excluding Pacific Generation Company ("PGC")
assets of $1.2 billion acquired November 4, 1997), total indebtedness of $4.4
billion (excluding PGC indebtedness of $0.7 billion assumed November 4, 1997)
and an aggregate debt-to-total capitalization ratio of approximately 54%. See
"Risk Factors -- Holding Company Structure." The Indenture under which the
Notes will be issued does not restrict the incurrence of additional
indebtedness by NRG or its subsidiaries and affiliates.

For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on
the Old Notes, from June 17, 1997. Accordingly, registered Holders of New
Notes on the relevant record date for the first interest payment date
following the consummation of the Exchange Offer will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from June 17, 1997. Old Notes accepted for exchange
will cease to accrue interest from and after the date of consummation of the
Exchange Offer. Holders of Old Notes whose Old Notes are accepted for
exchange will not receive any payment in respect of accrued interest on such
Old Notes.

The New Notes are being offered hereunder in order to satisfy certain
obligations of NRG contained in the Registration Rights Agreement, dated as
of June 12, 1997 (the "Registration Rights Agreement"), among NRG and the
other signatories thereto. Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission") issued to third
parties, New Notes issued pursuant to the Exchange Offer in exchange for the
Old Notes may be offered for resale, resold and otherwise transferred by
Holders thereof (other than any such Holder which is an "affiliate" of NRG
within the meaning of Rule 405 under the Securities Act of 1933, as amended
(the "Securities Act")), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such Holders' business and such
Holders have no arrangement with any person to participate in the
distribution of such New Notes. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If any Holder is an affiliate of NRG or is engaged
in or intends to engage in or has any arrangement with any person to
participate in the distribution of the New Notes to be acquired pursuant to
the Exchange Offer, such Holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, including the delivery of a
prospectus which contains the information with respect to any selling holder
required by the Securities Act. Each broker-dealer that receives New Notes
for its own account pursuant to the Exchange Offer must represent to NRG that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so representing and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. NRG has
agreed that, starting on the Expiration Date (as defined herein) and ending
on the close of business on the 90th day following the Expiration Date, it
will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."

NRG will not receive any proceeds from this Exchange Offer. NRG has agreed to
bear the expenses of this Exchange Offer. Tenders of Old Notes pursuant to
the Exchange Offer may be withdrawn at any time prior to the Expiration Date.
In the event NRG terminates the Exchange Offer and does not accept for
exchange any Old Notes, NRG will promptly return the Old Notes to the Holders
thereof. See "The Exchange Offer."

Prior to the Exchange Offer, there has been no public market for the Old
Notes or the New Notes. NRG does not intend to list the New Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the New
Notes will develop. To the extent that a market for the New Notes does
develop, the New Notes could trade at a discount from their principal amount.
See "Risk Factors -- Lack of a Public Market for the Notes."

SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN RISKS
WHICH HOLDERS WHO TENDER THEIR OLD NOTES SHOULD CONSIDER IN CONNECTION WITH
THIS EXCHANGE OFFER.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

The date of this Prospectus is December 17, 1997

AVAILABLE INFORMATION

NRG has filed with the Commission a Registration Statement on Form S-1
under the Securities Act with respect to the New Notes offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus
omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information with respect to NRG and the
New Notes offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part thereof. Upon the effectiveness of the Registration
Statement, NRG will become subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Registration Statement (and the exhibits and schedules thereto), as well as
the periodic reports and other information filed by NRG with the Commission,
may be inspected and copied at the Public Reference Section of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at 7 World Trade
Center, 15th Floor, Suite 1300, New York, New York 10048 and Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in
New York, New York and Chicago, Illinois at the prescribed rates. Such
information may also be accessed electronically by means of the Commission's
home page on the Internet (http://www.sec.gov). Any statements contained in
this Prospectus as to the contents of any contract or document filed as an
exhibit to the Registration Statement are not necessarily complete, and each
such statement is qualified in all respects by such reference.

In addition, NRG has agreed to furnish or cause to be furnished to
registered holders (and, at the request thereof, owners of beneficial
interests in the Notes) annual consolidated financial statements of NRG
prepared in accordance with United States generally accepted accounting
principles ("GAAP") (together with notes thereto, a report thereon by an
independent accountant of established national reputation and a management's
discussion and analysis of financial condition and results of operations),
such statements to be so furnished within 120 days after the end of the
fiscal year covered thereby. In addition, NRG will furnish or cause to be
furnished to registered holders (and, at the request thereof owners of
beneficial interests in the Notes) unaudited condensed consolidated balance
sheets and statements of income and cash flows of NRG for each of the first
three fiscal quarters of each fiscal year and the corresponding quarter of
the prior year, such statements to be so furnished within 90 days after the
end of the fiscal quarter covered thereby.

SUMMARY

The following summary is qualified in its entirety by and should be read
in conjunction with the more detailed information and the consolidated
financial statements of NRG, including the notes thereto, appearing elsewhere
in this Prospectus. Unless the context otherwise requires, references herein
to NRG mean NRG Energy, Inc. and its direct and indirect subsidiaries. The
subsidiaries of NRG that are engaged in the acquisition, development and
operation of, and ownership of interests in, power generation and thermal
energy production and transmission facilities and other facilities described
herein are sometimes referred to individually as a "project subsidiary" and
collectively as NRG's "project subsidiaries." In circumstances in which NRG
owns less than a majority of the interests in the joint venture, partnership
or other entity that owns or leases a facility, directly or indirectly, such
joint venture, partnership or other entity is referred to individually as a
"project affiliate" and collectively as the "project affiliates." References
herein to ownership by NRG of interests in a project or facility refer to
ownership by NRG or one of its project subsidiaries of interests in such
project affiliates.

THE COMPANY

NRG is one of the leading participants in the independent power generation
industry. Established in 1989 and wholly-owned by Northern States Power
Company ("NSP"), NRG is principally engaged in the acquisition, development
and operation of, and ownership of interests in, independent power production
and cogeneration facilities, thermal energy production and transmission
facilities and resource recovery facilities. The power generation facilities
in which NRG had interests as of November 21, 1997 (including those under
construction) had a total design capacity of 7,972 megawatts ("MW"), of which
NRG had or will have operational responsibility for 5,062 MW and net
ownership of or leasehold interests in 2,351 MW. In addition, NRG has
substantial interests in district heating and cooling systems and steam
generation and transmission operations; at December 31, 1996, these thermal
businesses had a steam capacity of approximately 3,550 million British
thermal units ("mmBtus"). NRG's refuse-derived fuel ("RDF") plants processed
more than 808,000 tons of municipal solid waste into approximately 644,000
tons of RDF in 1996.

NRG has experienced significant growth in the last three years, expanding
from 33 MW of net ownership interests in power generation facilities as of
December 31, 1993 to 2,351 MW of net ownership interests as of November 21,
1997. This growth resulted primarily from a number of domestic and
international investments and acquisitions, principally the Gladstone Power
Station ("GPS" or "Gladstone") in Australia, the Mitteldeutsche
Braunkohlengesellschaft mbH ("MIBRAG") and Schkopau ("Schkopau") Projects in
Germany, the Minneapolis Energy Center ("MEC"), Pacific Generation Company
("PGC") and NRG Generating (U.S.) Inc. ("NRGG"), all as described below.
NRG's total operating revenues and equity in earnings of projects increased
from $91.1 million and $27.2 million, respectively, in 1994 to $104.5 million
and $32.8 million, respectively, in 1996. In evaluating and acquiring its
project interests, NRG has a flexible, multi-disciplinary team approach that
draws on its facility operations and engineering expertise, fuel procurement
and management skills, environmental experience, labor and government
relations expertise and legal and financial skills.

As of November 21, 1997, NRG had direct and indirect interests in 38 power
generation facilities worldwide (not including those facilities in which NEO
Corporation ("NEO") and the Energy Investors Funds have an interest or the El
Segundo plant of Southern California Edison in which NRG signed an Asset
Purchase Agreement for a 50% interest on November 21, 1997), including
projects under construction. Of these facilities, 22 are located in the
United States (1,275 MW design capacity, with NRG holding 378 MW net
ownership), four are located in Germany (1,160 MW design capacity, with NRG
holding 267 MW net ownership), four are located in Australia (4,106 MW design
capacity, with NRG holding 1,270 MW net ownership), two are located in
Colombia (299 MW design capacity, with NRG holding 16 MW net ownership), and
one is located in each of the Czech Republic (382 MW design capacity, with
NRG holding 214 MW net ownership), Jamaica (74 MW design capacity, with NRG
holding 7 MW net ownership), Peru (155 MW design capacity, with NRG holding 5
MW net ownership), Honduras

(80 MW design capacity, with NRG holding 6 MW net ownership), Canada (110 MW
design capacity, with NRG holding 28 MW net ownership), and Bolivia (218 MW
design capacity with NRG holding 105 MW net ownership). In December 1996, NRG
and Vattenfall AB of Sweden ("Vattenfall") acquired 96.6% of the outstanding
common shares of Compania Boliviana de Energia Electrica SA -- Bolivian Power
Company Limited ("COBEE"), the second largest electric utility company in
Bolivia, which will have a design capacity of 218 MW after a 65 MW expansion
in 1998. In addition, through its wholly-owned project subsidiary, NEO, NRG
had interests on November 21, 1997 in 39 small hydroelectric and landfill
gas-fired power generation facilities located in the United States with total
design capacity of 113 MW, of which NRG has net ownership of 55 MW.

In May 1997, NRG consummated the largest acquisition in its history,
acquiring a 25.37% interest in the assets of a 2,000 MW brown coal fired
thermal power station and adjacent coal mine located in Victoria, Australia
and known as Loy Yang A. The State of Victoria sold the Loy Yang A assets as
part of its privatization program to a partnership formed by affiliates of
NRG and of CMS Generation (a wholly-owned subsidiary of CMS Enterprises),
together with Horizon Energy Investment Limited (an investment vehicle of
Macquarie Bank), for a total price of approximately AUS$4.7 billion (or
US$3.7 billion as of May 12, 1997). While most of the purchase price was
raised through project-financed loans and leveraged leases that are
non-recourse to the sponsors, NRG's equity investment was approximately
US$257 million. NRG funded its investment and related financing costs from a
bridge loan arranged by Salomon Loan Fund Inc (the "Bridge Financing"),
together with an equity investment by NSP and cash on hand.

In June 1997, NRG closed the financing for the refurbishment and expansion
of the Energy Center Kladno plant in Kladno, the Czech Republic ("Kladno").
NRG owns a 34% interest in the existing 28 MW coal-fired project, which also
supplies thermal energy. Non-recourse project financing was provided by a
consortium of Czech banks, the International Finance Corporation, Nissho Iwai
and ABB. This financing will fund the refurbishment of the existing facility
as well as the construction of a new 354 MW expansion project. NRG holds a
57.85% interest in the expansion project, and El Paso Energy International
and Stredoceska Energeticka ("STE"), the regional Czech electric distribution
company, hold the balance. NRG's total equity commitment in this project is
approximately $53 million.

On November 4, 1997, NRG acquired 100% of the outstanding shares of PGC, a
wholly-owned indirect subsidiary of PacifiCorp Company, Inc. for $151.3
million. PGC has ownership interests in 11 projects with a total capacity of
737 MW, of which PGC has operational responsibility for 312 MW and net
ownership interests of 166 MW. In addition, PGC owns a limited partnership
interest in the Energy Investors Funds, through which it owns an allocated
share equal to another 39MW of net ownership interests. One of PGC's projects
is located in Canada and the other ten are broadly distributed throughout the
United States. The three largest projects are gas-fired, but the others are
fueled by coal, hydro, waste wood, refuse-derived fuel and wind. One sells
only steam, while the other ten have power sales agreements with a total of
seven different utilities. PGC serves a variety of roles in these facilities,
ranging from operator/manager of three projects, including its largest asset,
Crockett Cogeneration, to a limited partner in other projects.

In April 1996, NRG acquired a 41.86% equity interest in O'Brien
Environmental Energy, Inc. ("O'Brien"), which emerged from bankruptcy and was
renamed NRG Generating (U.S.) Inc. ("NRGG"). The remaining 58.14% of the
common stock of NRGG continued to be held by the then-existing equity holders
in O'Brien. NRG currently holds 45.21% of the common stock of NRGG and NRG
employees serve as NRG's designees on NRGG's board of directors. NRGG is a
public company and its shares are traded on The NASDAQ SmallCap Market under
the symbol "NRGG." NRGG has interests in three domestic operating projects
with an aggregate capacity of approximately 196 MW. These are: (i) sole
ownership of the 52 MW Newark Boxboard Project, a gas-fired cogeneration
facility that sells electricity to Jersey Central Power and Light Company
("JCP&L") and steam to Newark Boxboard Company; (ii) sole ownership of the
122 MW E.I. du Pont Parlin Project, a gas-fired cogeneration facility that
sells electricity to JCP&L and steam to E.I. du Pont de Nemours and Company;
and (iii) an 83% interest in a

22 MW standby/peak sharing facility which provides electricity and standby
capabilities for the Philadelphia Cogen. In addition, NRGG has a 33.33%
interest in the 150 MW Grays Ferry Project, a gas-fired cogeneration project
which is under construction in Philadelphia, Pennsylvania.

In addition to power generation, NRG has interests in four district
heating and cooling systems, located in Minneapolis, San Francisco,
Pittsburgh and San Diego, that provide steam for heating and chilled water
for cooling. NRG acquired the San Diego facility in June 1997. NRG also owns
or operates two steam transmission facilities and two resource recovery/RDF
facilities, all located in Minnesota. In connection with the PGC acquisition,
NRG also owns interests in two additional resource recovery/RDF facilities
located in Maine.

At any time, NRG has a number of projects under consideration or in
development and is in various stages of negotiations regarding other
potential projects in the United States and abroad. NRG is currently
developing a number of significant domestic and international projects. These
include a 45% interest in the West Java Project, a 400 MW coal-fired project
in Indonesia in partnership with Ansaldo Energia and P.T. Kiani Metra; and a
50% interest in Southern California Edison Company's El Segundo power plant,
a 1020 MW power project in California which NRG and its partner, Destec
Energy, have an agreement to purchase. In addition, NRG and two partners have
filed a plan in federal bankruptcy court to acquire the fossil-fueled
generating assets of Cajun Electric Power Cooperative of Baton Rouge,
Louisiana ("Cajun"). Also, in 1996 NRG purchased, at a substantial discount,
the senior secured debt of Mid-Continent Power Company, Inc. ("MCPC"). On
June 18, 1997, MCPC filed a Chapter 11 petition in federal bankruptcy court
in Tulsa, Oklahoma and concurrently filed a plan of reorganization proposing
to transfer ownership of all of MCPC's assets to NRG in exchange for
forgiveness of debt. On October 24, 1997, the bankruptcy court entered an
order confirming MCPC's plan, which provides for the transfer of MCPC's
assets to a subsidiary of NRG by December 23, 1997. NRG's development partner
is entitled to a 10% interest in the MCPC project, and the bankruptcy court's
confirmation order effectively mandates that NRG may own no more than 50% of
the project. Because of the many complexities inherent in the development,
financing and acquisition of such projects, there can be no assurance that
any of these transactions will be consummated.

NRG's headquarters and principal executive offices are located at 1221
Nicollet Mall, Suite 700, Minneapolis, Minnesota 55403. Its telephone number
is (612) 373-5300.

STRATEGY

NRG intends to continue to grow through a combination of acquisitions and
greenfield development of power generation and thermal energy production and
transmission facilities and related assets in the United States and abroad.
In the United States, NRG's near-term focus will be primarily on the
acquisition of existing power generation capacity and thermal energy
production and transmission facilities, particularly in situations in which
its expertise can be applied to improve the operating and financial
performance of the facilities. NRG is also working with several industrial
companies to develop energy projects that would provide both electricity and
steam for their production facilities. In addition, to the extent that the
replacement of aging power generating capacity or growth in demand creates
the need for new power generation facilities in the United States, NRG
intends to pursue opportunities to participate in the development of such
facilities. NRG is also studying the opportunities that may be created by the
current restructuring of the domestic electric utility industry, particularly
the divestiture by some utility companies of their generating assets.

In the international market, NRG will continue to pursue development and
acquisition opportunities in those countries in which it believes that the
legal, political and economic environment is conducive to increased foreign
investment. NRG intends to continue to capitalize on opportunities created by
the privatization of existing government-owned power generating capacity. In
addition, due to the significant existing demand for new power generating
capacity in the international market, NRG intends to engage in the
development of international "greenfield" projects, which are projects that
are developed, permitted, financed and constructed by the developer.

Although NRG exercises flexibility in structuring its investments in
projects, NRG's goal is to own a 20% to 50% equity interest in, and to have
operating control or influence over, the projects in which it invests. Where
appropriate, NRG will include a local or host country partner, in order to
enhance its knowledge of the region or country and to leverage its human and
financial resources. NRG currently holds no interest in, and has no present
intention of investing in, any nuclear generating facility.

As part of NRG's global tax strategy, NRG intends to maintain its earnings
from foreign investments offshore, for permanent reinvestment in other
foreign projects. For this reason, NRG intends to utilize the cash in its
domestic operations to make the payments with respect to the Notes. This cash
is expected to include payments of interest and principal to be received from
its wholly-owned Dutch subsidiary, NRGenerating International BV ("NRGBV"),
with respect to loans from NRG to that company.

THE EXCHANGE OFFER

The Exchange Offer ............ NRG is offering to exchange up to
$250,000,000 aggregate principal amount of
7-1/2% Senior Notes due 2007 (the "New
Notes") for a like principal amount of its
7-1/2% Senior Notes due 2007 (the "Old
Notes" and, collectively with the New Notes,
the "Notes") that are properly tendered and
accepted. The terms of the New Notes and the
Old Notes are identical in all material
respects, except for certain transfer
restrictions and registration rights
relating to the Old Notes described below
under " -- Summary Description of the New
Notes."

Tenders; Expiration Date;
Withdrawal ................... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on January 16, 1998, or
such later date and time to which it is
extended. The tender of Old Notes pursuant
to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. Any
Old Note not accepted for exchange for any
reason will be returned without expense to
the tendering Holder thereof as promptly as
practicable after the expiration or
termination of the Exchange Offer. See "The
Exchange Offer --Terms of the Exchange
Offer; Period for Tendering Old Notes," and
"--Withdrawal of Tenders."

Procedures for Tendering Old
Notes ........................ Certain brokers, dealers, commercial banks,
trust companies and other nominees who hold
Old Notes through the Depositary Trust
Company (the "Book-Entry Transfer Facility")
must effect tenders by book-entry through
the Book-Entry Transfer Facility's automated
tender offer program ("ATOP"). Tendering
Holders of Old Notes wishing to accept the
Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile together with either certificates
for such Old Notes or, if tendering through
ATOP, a Book-Entry Confirmation (as defined
herein) of such Old Notes into the
Book-Entry Transfer Facility, if such
procedure is available, and any other
required documentation to the exchange agent
(the "Exchange Agent") at the address set
forth herein. Tendering holders of Old Notes
that use ATOP will, by so doing, acknowledge
that they are bound by the terms of the
Letter of Transmittal. See "The Exchange
Offer--Book-Entry Transfer." By executing
the Letter of Transmittal, each Holder will
represent to NRG, among other things, that
(i) the New Notes acquired pursuant to the
Exchange Offer by the Holder and any other
person are being obtained in the ordinary
course of business of the person receiving
such New Notes, (ii) neither the Holder nor
such other person is participating in,
intends to participate in or has an
arrangement or understanding with any person
to participate in the distribution of such
New Notes and (iii) neither the Holder nor
such other person is an "affiliate," as
defined under Rule 405 of the Securities
Act, of NRG. Each broker-dealer that

receives New Notes for its own account in
exchange for Old Notes, where such Old Notes
were acquired by such broker or dealer as a
result of market-making activities or other
trading activities, must represent that it
will deliver a prospectus in connection with
any resale of such New Notes and that it
acquired such Old Notes as a result of
market-making activities or other trading
activities. The Letter of Transmittal states
that by so representing and by delivering a
prospectus, a broker or dealer will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
See "The Exchange Offer -- Procedures for
Tendering Old Notes" and "Plan of
Distribution."

Special Procedures for
Beneficial Owners ............ Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender should
contact such registered Holder promptly and
instruct such registered Holder to tender on
such beneficial owner's behalf. If such
beneficial owner wishes to tender on such
owner's behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering its Old Notes,
either make appropriate arrangements to
register ownership of the Old Notes in such
owner's name or obtain a properly completed
bond power from the registered Holder. The
transfer of registered ownership may take
considerable time. See "The Exchange Offer
-- Procedures for Tendering Old Notes."

Guaranteed Delivery
Procedures ................... Holders of Old Notes who wish to tender
their Old Notes and whose Old Notes are not
immediately available or who can not deliver
their Old Notes or any other documents
required by the Letter of Transmittal to the
Exchange Agent must tender their Old Notes
according to the guaranteed delivery
procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."

Federal Income Tax
Consequences ................. The exchange pursuant to the Exchange Offer
should not result in any income, gain or
loss to the Holders or NRG for federal
income tax purposes. See "Certain Federal
Income Tax Considerations."

Use of Proceeds ............... NRG will not receive any proceeds from this
Exchange Offer.

Exchange Agent ................ Norwest Bank Minnesota, National Association
is serving as the exchange agent (the
"Exchange Agent") in connection with the
Exchange Offer.

CONSEQUENCES OF EXCHANGING OLD NOTES

Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. NRG does not currently
anticipate that it will register Old Notes under the Securities Act. See
"Description of Notes -- Registration Rights." Based on interpretations by
the staff of the Commission issued to third parties, New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by Holders thereof (other than any
such Holder which is an "affiliate" of NRG within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such Holders' business and such
Holders have no arrangement with any person to participate in the
distribution of such New Notes. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If any Holder is an affiliate of NRG or is engaged
in or intends to engage in or has any arrangement or understanding with
respect to the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, such Holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that by so representing and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. NRG has agreed that, starting on the Expiration Date and ending
on the close of business on the 90th day following the Expiration Date, it
will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution." However, to
comply with the securities laws of certain jurisdictions, if applicable, the
New Notes may not be offered or sold unless they have been registered or
qualified for sale in such jurisdictions or an exemption from registration or
qualification is available and is complied with. NRG does not currently
intend to register or qualify the sale of the New Notes in any such
jurisdictions. See "The Exchange Offer -- Consequences of Failure to Exchange
Old Notes."

SUMMARY DESCRIPTION OF THE NEW NOTES

The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes. The New Notes will bear interest from the most
recent date to which interest has been paid on the Old Notes or, if no
interest has been paid on the Old Notes, from June 17, 1997. Accordingly,
registered Holders of New Notes on the relevant record date for the first
interest payment date following the consummation of the Exchange Offer will
receive interest accruing from the most recent date to which interest has
been paid or, if no interest has been paid, from June 17, 1997. Old Notes
accepted for exchange will cease to accrue interest from and after the date
of consummation of the Exchange Offer. Holders of Old Notes whose Old Notes
are accepted for exchange will not receive any payment in respect of interest
on such Old Notes otherwise payable on any interest payment date the record
date for which occurs on or after consummation of the Exchange Offer. In the
event of a registration default under the Registration Rights Agreement, NRG
will pay special interest ("Special Interest") to each Holder of Transfer
Restricted Securities (as defined herein). See "Description of Notes --
Special Interest."

Notes Offered ................. Up to $250,000,000 principal amount of
7-1/2% Senior Notes due 2007.

Maturity Date ................. June 15, 2007.

Interest Payment Dates ........ June 15 and December 15, commencing December
15, 1997.

Ranking ....................... The New Notes will be senior unsecured
obligations of NRG and will rank pari passu
with all other senior unsecured indebtedness
of NRG. See "Description of Notes." All
existing and future liabilities of the
direct and indirect subsidiaries and
affiliates of NRG will be effectively senior
to the Notes.

Ratings ....................... The Old Notes have been assigned ratings of
"BBB-" by Standard & Poor's Ratings Group
and "Baa3" by Moody's Investors Service,
Inc. NRG expects that the New Notes would be
assigned the same ratings as the Old Notes.
See "Ratings."

Optional Redemption ........... The New Notes may be redeemed at the option
of NRG at any time, in whole or in part, on
not less than 30 nor more than 60 days
notice, at a redemption price equal to the
principal amount thereof plus accrued
interest plus a Make-Whole Premium. See
"Description of Notes -- Optional
Redemption."

Sinking Fund .................. None.

Change of Control ............. Upon a Change of Control, each holder of New
Notes will have the right, subject to
certain conditions, to require NRG to
repurchase such holder's New Notes, in whole
or in part, at 101% of the principal amount
thereof, plus accrued interest, if any, to
the date of purchase in accordance with the
procedures set forth in the Indenture
pursuant to which the New Notes will be
issued (the "Indenture"). A Change of
Control will not be deemed to have occurred
if, after giving effect thereto, the Senior
Notes are rated BBB-or better by Standard &
Poor's

Ratings Group and Baa3 or better by Moody's
Investors Service, Inc. See "Description of
Notes -- Change of Control."

Exchange Offer; Registration
Rights ....................... Holders of New Notes (other than as set
forth below) are not entitled to any
registration rights with respect to the New
Notes. Pursuant to the Registration Rights
Agreement, NRG agreed, for the benefit of
the Holders of Old Notes, to file an
Exchange Offer Registration Statement (as
defined). The Registration Statement of
which this Prospectus is a part constitutes
the Exchange Offer Registration Statement.
Under certain circumstances, certain Holders
of Notes (including Holders who may not
participate in the Exchange Offer or who may
not freely resell New Notes received in the
Exchange Offer) may require NRG to file, and
cause to become effective, a shelf
registration statement under the Securities
Act, which would cover resales of Notes by
such Holders. See "Description of Notes --
Registration Rights."

Use of Proceeds ............... NRG will not receive any proceeds from this
Exchange Offer. The net proceeds to NRG from
the offering of the Old Notes (the
"Offering"), after deducting discounts and
expenses, were approximately $246.0 million.
NRG used such net proceeds to repay
outstanding debt under the Bridge Financing
and for other general corporate purposes.
See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial
Condition and Results of Operations --
Liquidity and Capital Resources."

RISK FACTORS

Holders of the Old Notes should consider carefully the information set
forth under the caption "Risk Factors" and all other information set forth in
this Prospectus before making a decision to tender their Old Notes in the
Exchange Offer.

SUMMARY CONSOLIDATED FINANCIAL DATA

The summary consolidated financial data presented below as of December 31,
1993, 1994, 1995 and 1996, and for the years then ended, have been derived
from NRG's audited consolidated financial statements. The summary
consolidated financial data set forth below as of September 30, 1996 and
1997, and for the nine-month periods then ended, and as of December 31, 1992
and for the year then ended, have been derived from NRG's unaudited
consolidated financial statements. Certain financial information for the
years ended December 31, 1993 and 1994 have been reclassified to conform to
the financial presentation for the year ended December 31, 1995. Interim
results and the results for 1992, in the opinion of management of NRG,
include all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the financial information for such periods;
however, such interim results are not necessarily indicative of the results
that may be expected for any other interim period or for a full year. The
following data should be read in conjunction with the Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.

CONSOLIDATED STATEMENTS OF INCOME DATA:

YEAR ENDED DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
---------- --------- --------- --------- ----------
(IN THOUSANDS)

OPERATING REVENUES
Revenues from wholly-owned operations(1) $39,647 $48,529 $63,970 $64,180 $ 71,649
Equity in operating earnings of
unconsolidated affiliates(2)(3) ....... 1,321 2,695 27,155 23,639 32,815
---------- --------- --------- --------- ----------
Total operating revenues ............... 40,968 51,224 91,125 87,819 104,464
OPERATING COSTS AND EXPENSES
Cost of operations--wholly-owned
operations ............................. 22,870 27,122 34,861 32,535 36,562
Depreciation and amortization ........... 5,060 6,475 8,675 8,283 8,378
General, administrative, and development 14,930 11,448 19,993 34,647 39,248
---------- --------- --------- --------- ----------
Total operating costs and expenses .... 42,860 45,045 63,529 75,465 84,188
---------- --------- --------- --------- ----------
OPERATING INCOME (LOSS) .................. (1,892) 6,179 27,596 12,354 20,276
OTHER INCOME (EXPENSE)
Equity in gain from project termination
settlements(4) ......................... -- -- 9,685 29,850 --
Other income (expense), net ............. (1,753) 1,028 1,411 4,896 9,477
Interest expense ........................ (1,662) (2,679) (6,682) (7,089) (15,430)
---------- --------- --------- --------- ----------
Total other income (expense) ........... (3,415) (1,651) 4,414 27,657 (5,953)
---------- --------- --------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES ....... (5,307) 4,528 32,010 40,011 14,323
INCOME (BENEFIT) TAXES(5) ................ (2,187) 1,905 2,472 8,810 (5,655)
---------- --------- --------- --------- ----------
NET INCOME (LOSS) ........................ $(3,120) $ 2,623 $29,538 $31,201 $ 19,978
========== ========= ========= ========= ==========

(RESTUBBED TABLE CONTINUED FROM ABOVE)

NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1996 1997
---------- ----------

OPERATING REVENUES
Revenues from wholly-owned operations(1) $ 52,479 $ 65,081
Equity in operating earnings of
unconsolidated affiliates(2)(3) ....... 19,375 17,759
---------- ----------
Total operating revenues ............... 71,854 82,840
OPERATING COSTS AND EXPENSES
Cost of operations--wholly-owned
operations ............................. 26,858 32,863
Depreciation and amortization ........... 6,300 7,096
General, administrative, and development 26,599 28,402
---------- ----------
Total operating costs and expenses .... 59,757 68,361
---------- ----------
OPERATING INCOME (LOSS) .................. 12,097 14,479
OTHER INCOME (EXPENSE)
Equity in gain from project termination
settlements(4) ......................... -- --
Other income (expense), net ............. 6,117 8,610
Interest expense ........................ (11,303) (19,815)
---------- ----------
Total other income (expense) ........... (5,186) (11,205)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES ....... 6,911 3,274
INCOME (BENEFIT) TAXES(5) ................ (4,358) (11,140)
---------- ----------
NET INCOME (LOSS) ........................ $ 11,269 $ 14,414
========== ==========

- ------------
(1) All of these revenues are from 100% owned operations. In accordance
with its strategy described herein, when NRG does not own 100% of a
project, it owns 50% or less in all cases except COBEE.
(2) NRG accounts for its investments in projects where ownership is
between 20% and 50%, and where there is no effective and legal
control, using the equity method of accounting. COBEE has been
accounted for using the equity method of accounting even though NRG
owned more than a 50% interest in the project. However, NRG did not
have control over the project due to the fact that NRG did not have
the power to elect a majority of the members of the board of
directors of COBEE. NRG was only entitled to appoint four out of the
nine directors. Vattenfall, the other majority holder of COBEE,
appointed three of the other directors, and the remaining two
directors were selected jointly by NRG and Vattenfall. In addition,
on October 30, 1997, NRG sold to Vattenfall part of its interest in
COBEE which resulted in NRG's ownership interest declining from
57.96% to 48.3%. Also as of such date, NRG became entitled to appoint
only three of the nine directors. Vattenfall appoints three directors
and the remaining three are appointed jointly by NRG and Vattenfall.
Equity in earnings of unconsolidated project affiliates includes
NRG's proportionate share of all net income or losses attributable to
project investments accounted for using the equity method.
(3) Includes pretax charges of $5.0 million, $5.0 million and $1.5
million in the years 1994, 1995 and 1996, respectively, to write-down
the carrying value of certain energy projects.
(4) In 1994, NRG and its partner in the Michigan Cogeneration Partners
Limited Partnership agreed to terminate a power sales contract with
Consumers Power Company. The contract related to a 65 MW cogeneration
facility being developed in Michigan. Due to the agreement to
terminate the contract, NRG recorded a one-time pre tax-gain of $9.7
million in 1994.
Equity in gain from project termination settlements in 1995 included
a one-time pre-tax gain of $29.9 million related to the settlement
and termination of the San Joaquin Valley power purchase agreements
with PG&E. See "Business--Independent Power Production and
Cogeneration--Domestic Projects--San Joaquin."
(5) NRG is included in the consolidated federal income tax and state
franchise tax returns of NSP. NRG calculates its tax position on a
separate company basis under a tax sharing agreement with NSP and
receives payment from NSP for tax benefits and pays NSP for tax
liabilities.

CONSOLIDATED BALANCE SHEET DATA:

AS OF DECEMBER 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ----------- ----------- ----------- ------------
(IN THOUSANDS)

Net property, plant and equipment $46,694 $108,934 $107,634 $111,919 $129,649
Net equity investments in
projects ........................ 16,400 20,046 164,863 221,129 365,749
Total assets ..................... 81,091 232,888 376,570 454,589 680,809
Long-term debt, including current
maturities....................... 10,499 93,451(1) 93,339(1) 90,034(1) 212,141(1)
Stockholder's equity ............. 40,267 97,722 234,722 319,764 421,914

(RESTUBBED TABLE CONTINUED FROM ABOVE)

AS OF SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------

Net property, plant and equipment $118,189 $ 164,915
Net equity investments in
projects ........................ 266,504 635,047
Total assets ..................... 586,461 1,066,816
Long-term debt, including current
maturities....................... 213,298(1) 517,738(1)
Stockholder's equity ............. 332,012 481,279

- ------------
(1) Includes debt relating to MEC and NRG San Diego, including current
maturities, which is non-recourse to NRG. As of September 30, 1997
this debt was $77.7 million.

OTHER DATA (UNAUDITED):

AS OF AND FOR THE
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
-------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)

NRG's net power generating capacity(MW) 33 33 992 999 1,326
NRG's net thermal energy generating
capacity:
mmBtus per hour ....................... 695 1,865 1,961 2,318 2,654
MWt equivalent ........................ 204 547 575 679 778
Consolidated EBITDA (1) ................ $1,415 $13,682 $47,367 $55,383 $38,131
Consolidated interest expense........... $1,662 $ 2,679 $ 6,682 $ 7,089 $15,430
Consolidated interest expense coverage
ratio (2) ............................. 0.85x 5.11x 7.09x 7.81x 2.47x
Consolidated debt service (3) .......... $2,562 $ 4,272 $ 9,169 $10,394 $18,323
Consolidated debt service coverage
ratio (4) ............................. 0.55x 3.20x 5.17x 5.33x 2.08x
Consolidated ratio of earnings to fixed
charges(5)............................. (6) 2.32x 2.98x 1.56x(7) 1.75x(8)

(RESTUBBED TABLE CONTINUED FROM ABOVE)

AS OF AND FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1997
---------- ---------

NRG's net power generating capacity(MW) 1,209 2,351
NRG's net thermal energy generating
capacity:
mmBtus per hour ....................... 1,040 2,695
MWt equivalent ........................ 778 789
Consolidated EBITDA (1) ................ $24,514 $30,185
Consolidated interest expense........... $11,303 $19,815
Consolidated interest expense coverage
ratio (2) ............................. 2.17x 1.52x
Consolidated debt service (3) .......... $13,039 $21,730
Consolidated debt service coverage
ratio (4) ............................. 1.88x 1.39x
Consolidated ratio of earnings to fixed
charges(5)............................. 2.19x(8) 1.03x

- ------------
(1) EBITDA equals the sum of income (loss) before income taxes, interest
expense (net of capitalized interest) and depreciation and
amortization expense. EBITDA is a measure of financial performance
not defined under generally accepted accounting principles and should
not be considered in isolation or as a substitute for net income,
cash flows from operations or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity. In addition,
EBITDA may not be comparable to similarly titled measures presented
by other companies and could be misleading unless all companies and
analysts calculate them in the same fashion. Management believes that
some investors consider EBITDA an indicator of a company's ability to
service debt. An increase in EBITDA level implies an improved ability
to service debt, but does not reflect the level of debt service
charges to be covered, which will change with debt levels outstanding
and interest rate charges. See Statements of Cash Flows in the
Consolidated Financial Statements included elsewhere in this
Prospectus.
(2) The interest expense coverage ratio equals EBITDA divided by interest
expense.
(3) Debt service consists of interest expense and principal payments on
long-term debt.
(4) The debt service coverage ratio equals EBITDA divided by debt
service.
(5) The ratio of earnings to fixed charges is calculated by dividing
earnings by fixed charges. For this purpose "earnings" means income
(loss) before income taxes less undistributed equity in operating
earnings of unconsolidated affiliates less equity in gain from
project termination settlements plus cash distributions from project
termination settlements plus fixed charges. "Fixed charges" means
interest expense plus interest capitalized plus amortization of debt
issuance costs plus a reasonable approximation of the interest factor
of rental expense.
(6) Due primarily to the loss incurred in 1992, NRG was unable to fully
cover fixed charges. Earnings did not cover fixed charges by $5,940.
(7) The 1995 ratio of earnings to fixed charges calculations include the
effect of an equity gain and cash distribution from a project
termination settlement. If the project termination had not occurred,
NRG would have been unable to fully cover fixed charges and earnings
would not have covered fixed charges by $9,913.
(8) The 1996 ratio of earnings to fixed charges calculation includes the
effect of a cash distribution from a 1995 project termination
settlement. If the project termination had not occurred, NRG would
have been unable to fully cover fixed charges and earnings would not
have covered fixed charges by $1,497 for the nine months ended
September 30, 1996, and by $3,504 for the year ended December 31,
1996.

SUMMARY PRO FORMA CONDENSED FINANCIAL DATA

The unaudited pro forma condensed financial data set forth below give
effect to (i) the acquisition by NRG of a 25.37% equity interest in Loy Yang
A and the financing thereof and (ii) the offering of the Old Notes (the
"Offering"). The pro forma statement of income data for the year ended
December 31, 1996 and the nine months ended September 30, 1997 give effect to
such transactions as if they had occurred on January 1, 1996. As the Loy Yang
acquisition and the Offering were consummated prior to September 30, 1997, no
pro forma balance sheet data is provided. The pro forma condensed financial
data do not purport to be indicative of the combined financial position or
results of operations of future periods or indicative of the results that
would have occurred had the transactions referred to above been consummated
on the dates indicated. The following data should be read in conjunction
with, and are qualified in their entirety by, the Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.

FOR THE YEAR ENDED DECEMBER 31, 1996

HISTORICAL ADJUSTMENTS (1) PRO FORMA
------------ --------------- -----------
(IN THOUSANDS)

STATEMENT OF INCOME DATA:
Revenues from wholly-owned operations ..... $ 71,649 -- $ 71,649
Equity in earnings (loss) of unconsolidated
affiliates ................................ 32,815 $(18,121)(2) 14,694
Operating costs and expenses ............... (84,188) -- (84,188)
Other income (expense) ..................... 9,477 26,264 (3) 35,741
Interest expense ........................... (15,430) (18,750)(4) (34,180)
Income taxes ............................... 5,655 4,373 (5) 10,028
------------ --------------- -----------
Net Income.................................. $ 19,978 $ (6,234) $ 13,744
============ =============== ===========

- ------------
(1) Adjustments were derived from Loy Yang's audited financial statements
for the fiscal years ended June 30, 1996 and June 30, 1997 to conform
with NRG's December 31, 1996 year-end.

A$000'S
-----------

(2) After-tax net income as shown in the financial statements: 120,054
Change to Depreciation/Amortization Expense.............. (316)
Change to Finance Charges................................ (164,394)
Change to Taxes.......................................... 120,151
Other.................................................... (166,682)
-----------
AFTER-TAX NET INCOME (LOSS) ................................ (91,187)
-----------
NRG'S 25.37%............................................. (23,134)
1996 Average Exchange Rate............................... 0.7833
-----------
NRG US$ NET INCOME (LOSS)..................................... (18,121)
===========

The change in depreciation is due to the increased value in assets offset
by the extension of life on assets from 35 years to 50 years. Amortization
expense is from the capitalized project debt fees paid to acquire the new
project debt.

The change in finance charges is due to the repayment of debt to the
state of Victoria (sale proceeds) netted against the new project debt. The
interest rates are variable but were immediately swapped into fixed rate
debt for a period of five years. The weighted average interest rate during
the first year is 7.91%.

The change to tax expense is due to reversing Loy Yang's original tax
expense in 1996 and booking a deferred tax benefit based on Loy Yang's new
book loss. Approximately the statutory tax rate on the other adjustments.

"Other" is composed of interest expense recorded on the note payable to
the shareholders and the operating & maintenance fee expense paid to the
operator shareholders.

(3) Includes interest income and operating and maintenance fees derived
from the Loy Yang project.

(4) Represents accrued interest on $250 million principal amount of the
Old Notes for twelve months at a rate of 7.5% per annum.

(5) Net tax benefit derived from interest expense on the Old Notes.

AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997

HISTORICAL ADJUSTMENTS (1) PRO FORMA
------------ --------------- -----------
(IN THOUSANDS)

STATEMENT OF INCOME DATA:
Revenues from wholly-owned operations ........... $ 65,081 $ -- $ 65,081
Equity in earnings of unconsolidated affiliates 17,759 (7,945)(2) 9,814
Operating costs and expenses .................... (68,361) -- (68,361)
Other income and (expense) ...................... 8,610 8,525 (3) 17,135
Interest expense ................................ (19,815) (6,883)(4) (26,698)
Income taxes .................................... 11,140 1,605 (5) 12,745
------------ --------------- -----------
Net Income....................................... $ 14,414 $(4,698) $ 9,716
============ =============== ===========

- ------------
(1) Adjustments were derived from Loy Yang's audited financial statements
for the fiscal year ended June 30, 1997.
(2) Represents estimated equity earnings from Loy Yang A through May 12,
1997, based upon historical data (January 1, 1997-May 12, 1997)
adjusted for differences due to acquisition accounting primarily
depreciation charges, finance charges and adjustments to income tax
expense. Equity earnings of Loy Yang A from May 13 until September 30
were $1,393. This amount is included in the Historical column of
Equity in earnings of unconsolidated affiliates.
(3) Includes interest income and operating and maintenance fees derived
from the Loy Yang project.
(4) Represents interest expense on $250 million principal amount of the
Old Notes until May 12 at a rate of 7.5% per annum. Interest of
$7,140 on the Old Notes from May 13 until September 30 is in the
Historical column.
(5) Net tax benefit derived from interest expense on the Old Notes.

RISK FACTORS

Holders of Old Notes should consider carefully the following risk factors
as well as the other information contained in this Prospectus in evaluating
an investment in the New Notes, although the risk factors set forth below
(other than "--Consequences of Failure to Exchange Old Notes") are generally
applicable to the Old Notes as well as the New Notes.

RISKS INVOLVED IN MAKING MINORITY INVESTMENTS IN PROJECTS

NRG conducts its business primarily through direct and indirect
subsidiaries and joint ventures. Most of NRG's current project investments
consist of minority interests in project affiliates (i.e., where NRG
beneficially owns 50% or less of the ownership interests). A substantial
portion of future investments in projects also may take the form of minority
interests. See "Business --Strategy." As a result, NRG's ability to control
the development, construction, acquisition or operation of such projects may
be limited. The Indenture does not contain any limitations on the ability of
NRG to make minority investments.

Although NRG seeks to exert a degree of influence with respect to the
management and operation of projects in which it is a minority investor by
negotiating to receive certain limited governance rights (such as rights to
veto significant actions or to obtain positions on management committees),
NRG may not always succeed in such negotiations. See "Business -- Operating
Arrangements." NRG may be dependent on its co-venturers to construct and
operate such projects. There can be no assurance that such co-venturers would
have the same level of experience, technical expertise, human resources
management and other attributes that NRG possesses. Any such co-venturer may
have conflicts of interest, including those relating to its status as a
provider of goods or services to the project. The approval of co-venturers
also may be required for distributions of funds from projects to NRG.

UNCERTAINTY OF ACCESS TO CAPITAL FOR FUTURE PROJECTS

Any projects that NRG develops in the future and any projects that it may
seek to acquire generally will require substantial capital investment.
Continued access to debt capital from outside sources on acceptable terms is
necessary to assure the success of future projects and acquisitions. NRG's
ability to arrange financing on a substantially non-recourse basis 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 NRG, its partners and in
the local independent power market, the success of current projects, the
perceived quality of new projects and provisions of tax and securities laws
that are conducive to raising capital in this manner. In order to access
capital on a substantially non-recourse basis in the future, NRG may have to
make larger equity investments in, or provide more financial support for, its
project subsidiaries. To date, NRG's equity capital for its projects has been
provided by equity contributions from NSP and, to a lesser extent,
internally-generated cash flow from its projects. There can be no assurance
that NRG will be successful in structuring the financing for its projects on
a substantially non-recourse basis or that NRG will obtain sufficient
additional equity capital from NSP, project cash flow or additional
borrowings by NRG to enable it to fund the equity commitments required for
future projects.

CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES

does not intend to engage in, a distribution of New Notes. If any Holder is
an affiliate of NRG or is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, such Holder (i) could
not rely on the applicable interpretations of the staff of the Commission and
(ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. NRG has agreed that, starting on the
Expiration Date and ending on the close of business on the 90th day following
the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied
with. NRG does not currently intend to register or qualify the sale of the
New Notes in any such jurisdiction. See "The Exchange Offer -- Consequences
of Failure to Exchange Old Notes."

HOLDING COMPANY STRUCTURE; ABILITY TO SERVICE INDEBTEDNESS

The Notes will be exclusively the obligations of NRG and not of any of its
project subsidiaries or project affiliates. As a result, all existing and
future liabilities of the direct and indirect subsidiaries and affiliates of
NRG will be effectively senior to the Notes. Because substantially all of the
operations of NRG are conducted by its project subsidiaries and project
affiliates, NRG's cash flow and its ability to service its indebtedness,
including its ability to pay the interest on and principal of the Notes when
due, are dependent upon cash dividends and distributions or other transfers
from its project and other subsidiaries and project affiliates to NRG. As of
September 30, 1997, NRG's project subsidiaries and project affiliates had
total assets of $8.1 billion (excluding PGC assets of $1.2 billion acquired
November 4, 1997), total indebtedness of $4.4 billion (excluding PGC
indebtedness of $0.7 billion assumed November 4, 1997) and an aggregate
debt-to-total capitalization ratio of approximately 54%. The debt agreements
of NRG's project and other subsidiaries and project affiliates generally
restrict their ability to pay dividends, make distributions or otherwise
transfer funds to NRG. The restrictions in such agreements generally require
that, prior to and after giving effect to the payment of dividends,
distributions or other transfers, (i) such subsidiaries or project affiliates
meet certain financial performance or coverage ratios, (ii) no default or
event of default shall have occurred, and (iii) the subsidiary or project
affiliate proposing to pay the dividend, distribution or other transfer must
provide for the payment of other current or prospective obligations,
including operating expenses, debt service and reserves. See "Business --
Project Financing." NRG's subsidiaries and project affiliates are separate
and distinct legal entities that have no obligation, contingent or otherwise,
to pay any amounts due pursuant to the Notes or to make any funds available
therefor, whether by dividends, loans or other payments, and do not guarantee
the payment of interest on, or principal of, the Notes. NRG owns a minority
interest in most of its international and domestic projects, and therefore is
unable unilaterally to cause dividends or distributions to be made to NRG
from these operations.

Any right of NRG to receive any assets of any of its subsidiaries or
project affiliates upon any liquidation or reorganization of such
subsidiaries or project affiliates (and the consequent right of holders of
the Senior Notes to participate in the distribution of, or to realize
proceeds from, those assets) will be effectively subordinated to the claims
of any such subsidiary's or project affiliate's creditors (including trade
creditors and holders of debt issued by such subsidiary or project
affiliate).

The Indenture imposes no limitations on the ability of subsidiaries or
project affiliates to incur additional indebtedness or to permit contractual
restrictions on the distribution of cash from NRG's subsidiaries or project
affiliates to NRG. As part of NRG's global tax strategy, NRG intends to
maintain its earnings from foreign investments offshore, for permanent
reinvestment in other foreign projects. For this reason, NRG intends to
utilize the cash from its domestic operations including principal and
interest

received from loans made by NRG to its foreign affiliates to make the
payments with respect to the Notes. Although NRG expects that the cash
available from its domestic operations and the repayment of the loans made to
its foreign affiliates will be sufficient to make the payments under the
Notes, there can be no assurance that these funds will be sufficient to make
these payments as and when due. If NRG elects to repatriate earnings from its
foreign operations to make these payments in case of such a shortfall, then
NRG may incur United States taxes (net of any available foreign tax credits)
on the repatriation of such foreign earnings. As a result of these additional
taxes, there can be no assurance that the foreign earnings would be
sufficient to make the payments on the Notes as and when due.

LEVERAGE; ABILITY TO REPAY NOTES

As of September 30, 1997, NRG had total indebtedness of $517.7 million at
the corporate holding company level which results in a total
debt-to-capitalization ratio of 52%; the Indenture imposes no limitations on
the ability of NRG to incur additional indebtedness at this level. The
substantial amount of debt at the level of the corporate holding company and
at the levels of the project subsidiaries and project affiliates presents the
risk that NRG might not generate sufficient cash to service its indebtedness,
including the Notes, or that its leveraged capital structure could limit its
ability to finance the acquisition and development of additional projects, to
compete effectively or to operate successfully under adverse economic
conditions. See "Capitalization," "Selected Consolidated Financial Data" and
"Selected Pro Forma Condensed Financial Data."

In addition, under certain of the instruments governing NRG's debt,
including the credit facility described below and the 7.625% Senior Notes due
2006 (the "1996 Senior Notes"), such debt may be accelerated upon certain
events of default under the Indenture or a change of control of NRG. As a
result, if any such event were to occur, NRG may not have sufficient capital
to fully pay Holders the amount due under the Notes or to redeem any Notes
tendered pursuant to the Change of Control Offer described under "Description
of Notes -- Change of Control." See "Certain Indebtedness."

NRG has entered into a $175 million revolving credit facility with a
syndicate of banks led by ABN AMRO Bank ("ABN AMRO"), which matures on March
17, 2000. It imposes certain requirements on NRG, including requirements as
to the maintenance of (i) a minimum level of consolidated tangible net worth
and (ii) a minimum ratio of consolidated tangible net worth to consolidated
capitalization.

DEPENDENCE ON, AND CONTROL BY, NORTHERN STATES POWER

NSP is NRG's sole stockholder. Since NRG's formation, NSP has provided all
NRG's equity funding for its business and operations. NRG's only other source
of funding has been its borrowings and internally-generated cash flow from
NRG's existing projects and investments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." There can be no assurance that NSP will contribute
additional equity capital to NRG in the future. In the absence of continued
equity contributions, there can be no assurance that NRG will have access to
sufficient capital to fund its obligations with respect to its existing
projects or to undertake new acquisition and development projects.

As NRG's sole stockholder, NSP has the power to control the election of
the directors and all other matters submitted for stockholder approval and
may be deemed to have control over the management and affairs of NRG.
Currently, there are no outside directors on NRG's board of directors. In
circumstances involving a conflict of interest between NSP, as the sole
stockholder (and, with respect to certain projects, a significant customer of
and supplier to NRG, see, "Certain Transactions"), on the one hand, and the
holders of the Notes as creditors of NRG on the other, there can be no
assurance that NSP would not exercise its power to control NRG in a manner
that would benefit NSP to the detriment of the holders of the Notes. NSP has
policies in place, pursuant to applicable law, to ensure that its ratepayers
are protected from affiliate transactions that may be adverse to the
ratepayers' interests. The Indenture imposes no limitations on NRG's ability
to pay dividends or to make other payments to NSP or on NRG's ability to
enter into transactions with NSP or other affiliates of NRG.

In addition, NSP is an important customer of, and supplier to, certain of
NRG's businesses in the United States. See "Certain Transactions -- Operating
Agreements." NRG purchases steam production

services from NSP for its Rock-Tenn and Washco steam transmission lines and
sells RDF to NSP from its Newport resource recovery facility. NRG provides
management, operation and maintenance services for the Elk River resource
recovery facility and disposes of the Elk River facility's RDF ash at NSP's
Becker ash landfill. See "Certain Transactions." The failure of NSP to comply
with its obligations to NRG under the agreements governing such sales and
services could have a material adverse effect on NRG's revenues from these
projects.

RISKS OF DOING BUSINESS OUTSIDE THE UNITED STATES

A key component of NRG's business strategy is the development or
acquisition of projects outside the United States. See "Business --
Strategy." The economic and political conditions in certain countries where
NRG has interests or in which it is or could be exploring development or
acquisition opportunities present risks of delays in permitting and
licensing, construction delays and interruption of business, as well as risks
of war, expropriation, nationalization, renegotiation or nullification of
existing contracts and changes in law or tax policy, that are greater than in
the United States. The uncertainty of the legal environment in certain
foreign countries in which NRG may develop or acquire projects could make it
more difficult to obtain non-recourse project financing on suitable terms and
could impair NRG's ability to enforce its rights under agreements relating to
such projects.

Operations in foreign countries also can present currency exchange,
inflation, convertibility and repatriation risks. See "Business -- Strategy."
In certain countries in which NRG may develop or acquire projects in the
future, economic and monetary conditions and other factors could affect NRG's
ability to convert its earnings to United States dollars or other hard
currencies or to move funds offshore from such countries. Furthermore, the
central bank of any such country may have the authority in certain
circumstances to suspend, restrict or otherwise impose conditions on foreign
exchange transactions or to approve distributions to foreign investors.
Although NRG generally seeks to structure its power purchase agreements and
other project revenue agreements to provide for payments to be made in, or
indexed to, United States dollars or a currency freely convertible into
United States dollars, there can be no assurance that NRG will be able to
achieve this structure in all cases or that a power purchaser or other
customer will be able to obtain sufficient dollars or other hard currency to
pay such obligations.

As part of privatizations or other acquisition opportunities, NRG may make
investments in ancillary businesses not directly related to power generation,
thermal energy production and transmission or resource recovery and in which
NRG management may not have had prior experience. In such cases, NRG's policy
is to attract partners with the necessary expertise. However, no assurance
can be given that such persons will be available as co-venturers in every
case. In addition, as a condition to participating in privatizations and
refurbishments of formerly state-owned businesses, NRG may be required to
undertake transitional obligations relating to union contracts, employment
levels and benefits obligations for employees, which could prevent or delay
the achievement of desirable operating efficiencies and financial
performance.

ACQUISITION AND DEVELOPMENT UNCERTAINTIES

The development projects and acquisitions in which NRG may invest in the
future, including those described herein, may be large and complex, and NRG
may not be able to complete the development or acquisition of any such
project. Development projects and acquisitions require NRG to expend
significant sums for engineering, permitting, legal, financial advisory and
other expenses in preparation for competitive bids that NRG may not win or
before it can be determined whether a project is feasible, economically
attractive or capable of being financed. There can be no assurance that the
projects that NRG pursues, and on which it may spend significant sums, will
prove to be desirable project investments, or that NRG will be able to win
any such competitive bids, obtain new power purchase agreements, overcome any
local opposition, and obtain the necessary agreements, contracts, licenses,
certifications and permits necessary for the successful development of new
projects and acquisition of interests in existing projects. Even if NRG is
successful in the development or acquisition of an interest in a project, NRG
may require substantial additional debt or equity financing for such
projects, which additional financing may not be available on acceptable
terms, if at all. Most acquisition agreements and

power purchase agreements permit the seller or customer, respectively, to
terminate the agreement or impose penalties if the acquisition or operation
of the project (as the case may be) is not achieved by a specified date. NRG
may fail to acquire or develop projects despite having incurred significant
expenses.

COMPETITION

The independent power industry is characterized by numerous strong and
capable competitors, some of which have more extensive developmental or
operating experience, more extensive experience in the acquisition and
development of power generation capacity, larger staffs and greater financial
resources than NRG. Further, in recent years, the domestic independent power
industry has been characterized by strong and increasing competition which
has contributed to a reduction in prices offered by utilities for power
produced by independent power producers and has resulted in lower returns to
project investors. See "Risk Factors -- Effects of Ongoing Changes in the
U.S. Utility Industry" and "Business -- Competition."

Many of NRG's competitors also are seeking attractive acquisition
opportunities, both in the United States and abroad. This competition may
adversely affect NRG's ability to make investments or acquisitions on terms
favorable to NRG. Many foreign and domestic utilities are now engaging in
"competitive bid" solicitations for new capacity demands or acquisitions.

CONSTRUCTION AND START-UP RISKS; INADEQUATE INSURANCE, WARRANTIES AND
PERFORMANCE GUARANTEES

As with any major industrial construction effort, the construction,
expansion or refurbishment of a power generation, thermal energy production
and transmission facility or resource recovery facility involves many risks,
including supply interruptions, work stoppages, labor disputes, weather
interferences, unforeseen engineering, environmental and geological problems
and unanticipated cost overruns. The commencement of operation of such
newly-constructed, expanded or refurbished facilities also involves many
risks, including the breakdown or failure of equipment or processes and test
performance below expected levels of output or efficiency. New plants may
employ recently developed and technologically complex equipment, especially
in the case of newer environmental emission control technology. While
insurance is maintained to protect against certain risks, warranties are
obtained from vendors for limited periods and contractors are obligated to
meet certain performance levels, the proceeds of such insurance, warranties
or performance guarantees may not be adequate to cover lost revenues,
increased expenses or liquidated damages payments. As a result, a project may
operate at a loss and be unable to fund principal and interest payments under
its project financing agreements, which may allow the affected lenders to
accelerate such debt.

In addition, many power and thermal energy purchase agreements permit the
customer to terminate the agreement, retain security posted by the developer
as liquidated damages or change the payments to be made to the project
subsidiary or the project affiliate in the event certain milestones, such as
commencing commercial operation of the project, are not met by specified
dates. In the event such a termination right is exercised, a project may not
commence generating revenues, the default provisions in a financing agreement
may be triggered (rendering such debt immediately due and payable) and the
project may be rendered insolvent as a result.

OPERATING RISKS; INADEQUATE INSURANCE, WARRANTIES AND PERFORMANCE GUARANTEES

The operation of a power generation facility, thermal energy production
and transmission facility, resource recovery facility or mining facility
involves many risks, including the breakdown or failure of generation
equipment or other equipment or processes, labor disputes, fuel interruption
and operating performance below expected levels. Operation below expected
capacity levels may result in lost revenues or increased expenses, including
higher maintenance costs and penalties. As a result, a facility may be unable
to perform its obligations under its purchase agreements, triggering the
default provisions in a financing agreement (rendering such debt immediately
due and payable) and the project may be rendered insolvent as a result.

Certain power purchase agreements of NRG's project subsidiaries or project
affiliates permit the purchaser to terminate the agreement, modify the
payments required under the agreement, recover payments previously made under
the agreement or require such project subsidiaries or project affiliates to
pay liquidated damages under the agreement in certain circumstances. See
"Business -- Independent Power Production and Cogeneration." While insurance
is maintained to protect against certain risks, warranties are obtained from
vendors for limited periods and contractors are obligated to meet certain
performance levels, the proceeds of such insurance, warranties or performance
guarantees may not be adequate to cover lost revenues, increased expenses or
liquidated damages payments. As a result, default provisions in the project
subsidiary's or project affiliate's financing agreements may be triggered,
which might allow the affected lenders to accelerate such debt.

DEPENDENCE ON PROJECT AFFILIATES

Payments under power purchase agreements for domestic projects that
satisfy the requirements for "qualifying facility" status under the Public
Utility Regulatory Policies Act ("PURPA") and that are based upon actual
short-run (as opposed to forecasted long-run) "avoided cost" (or the cost
that would otherwise have been paid for power from the purchasing utility's
highest-cost generating facility, see "Business"), are subject to significant
variations based upon a number of factors outside of the control of the
owners of such facilities, including weather, economic conditions, and the
particular operating profile and generating capacity position of the
purchasing utility. A project affiliate of NRG owns a 50% interest in a joint
venture that owns the Sunnyside waste coal-fired power generation facility in
Carbon County, Utah. The Sunnyside facility has experienced a shortfall in
project cash flow attributable primarily to decreased revenues due to avoided
energy rates being significantly lower than originally forecasted. In the
absence of a restructuring of the project's debt, a debt service reserve
fund, which has been used to make up cash shortfalls, is expected to be
depleted within twelve months. There can be no assurance as to the actions
the partnership which owns the Sunnyside facility may take at that time. See
"Business -- Independent Power Production and Cogeneration -- Sunnyside."

NRG has provided guarantees relating to certain equity and operating
obligations of its project subsidiaries. One example is NRG's guarantee of
the obligations of its project subsidiary that operates the Gladstone
facility for up to AUS$25 million, indexed to the Australian consumer price
index ("ACPI") (US$19.7 million, based on exchange rates and ACPI in effect
at September 30, 1997), under the project subsidiary's operating and
maintenance agreement with the owners of the facility. If NRG were required
to satisfy all these guarantees and other obligations, such event would have
a material adverse effect on NRG's condition, financial and otherwise. See
"Business -- Description of NRG's Projects" and "Business -- Independent
Power Production and Cogeneration -- Gladstone Power Station."

DEPENDENCE ON CERTAIN CUSTOMERS AND PROJECTS

A power generation, thermal energy production and transmission or resource
recovery facility typically relies on a single supplier each for the
provision of fuel, water and other services required for operation of the
facility and on a single customer or a few customers to purchase all of the
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 or supplier to fulfill its contractual obligations to the
facility could have a material adverse effect on such facility's financial
results. As a result, the financial performance of such facilities is
dependent on the continued performance by customers and suppliers of their
obligations under such long-term agreements and, in particular, on the credit
quality of the project's customers. Each of the Rock-Tenn and Newport
projects produced more than ten percent of NRG's net revenues for 1996. See
"Business -- Principal Customers of Operating Subsidiaries." In addition, on
a pro forma basis Loy Yang A would have produced more than ten percent of
NRG's net revenues for 1996.

GOVERNMENTAL REGULATION

NRG is subject to a number of complex and stringent environmental and
other laws and regulations affecting many aspects of its present and future
operations, including the disposal of various forms of

waste and the construction or permitting of new facilities. See "Regulation."
Such laws and regulations generally require NRG to obtain and comply with a
wide variety of licenses, permits and other approvals, and may in some cases
be enforced by both public officials and private individuals. There can be no
assurance that existing laws or regulations will not be revised or that new
laws or regulations will not be adopted or become applicable to NRG which
could have an adverse impact on its operations. There can be no assurance
that NRG will be able to recover all or any increased costs of compliance
from its customers or that its business and financial condition will not be
materially and adversely affected by future changes in environmental laws or
regulations. In addition, regulatory compliance for the construction of new
facilities is a costly and time-consuming process, and intricate and rapidly
changing environmental regulations may require major expenditures for
permitting and create the risk of expensive delays or material impairment of
project value if projects cannot function as planned due to changing
regulatory requirements or local opposition.

PURPA and the Public Utility Holding Company Act of 1935, as amended
("PUHCA"), are two of the laws (including the regulations thereunder) that
affect NRG's operations. PURPA provides to qualifying facilities ("QFs")
certain exemptions from federal and state laws and regulations, including
organizational, rate and financial regulation. PUHCA regulates public utility
holding companies and their subsidiaries. NRG is not and will not be subject
to regulation as a holding company under PUHCA as long as the domestic power
plants it owns are QFs under PURPA or are exempted as exempt wholesale
generators ("EWGs"), and so long as its foreign utility operations are
exempted as EWGs or foreign utility companies or are otherwise exempted under
PUHCA. QF status is conditioned on meeting certain criteria, and could be
jeopardized, for example, by the loss of a steam customer or reduction of
steam purchases below the amount required by PURPA. See "Regulation."

CHANGES IN STATE MUNICIPAL SOLID WASTE ("MSW") FLOW CONTROL LAWS

RDF projects, such as NRG's Newport facility and NSP's Elk River facility,
which is operated by NRG, historically were assured an adequate supply of MSW
through state and local flow control legislation, which directed that MSW be
disposed of in certain facilities. In May 1994, the United States Supreme
Court held that MSW is a commodity in interstate commerce and, accordingly,
that flow control legislation that prohibited shipment of MSW out of state is
unconstitutional. Since this Supreme Court holding, the RDF facilities owned
or operated by NRG have faced increased competition from landfills in
surrounding states. As a result of such competition, MSW processed at the
Newport facility decreased approximately 5% in 1995, from approximately
378,000 tons in 1994 to 360,000 tons in 1995. In 1996, however, due to
assistance from NRG and a reduction of tipping fees under contracts entered
into between haulers and the Ramsey and Washington Counties, waste deliveries
reversed their downward trend. However, in the absence of valid flow control
legislation, there can be no assurance that this improved trend will
continue. See "Business -- Resource Recover Facilities."

EFFECTS OF ONGOING CHANGES IN THE U.S. UTILITY INDUSTRY

The U.S. electric utility industry currently is experiencing increasing
competitive pressures, primarily in wholesale markets, as a result of
consumer demands, technological advances, greater availability of natural gas
and other factors. The Federal Energy Regulatory Commission ("FERC") has
proposed regulatory changes to increase access to the nationwide transmission
grid by utility and non-utility purchasers and sellers of electricity. A
number of states are considering or implementing methods to introduce and
promote retail competition. Proposals have been introduced in Congress to
repeal PURPA and PUHCA, and the FERC has publicly indicated support for the
PUHCA repeal effort. Additionally, some utilities have brought litigation
aimed at forcing the renegotiation or termination of contracts requiring
payments to owners of qualifying facilities based upon past estimates of
avoided cost that are now substantially in excess of market prices. There can
be no assurance that, in the future, utilities, with the approval of state
public utility commissions, will not seek to abrogate their existing power
purchase agreements. See "Regulation."

If the repeal of PURPA or PUHCA occurs, either separately or as part of
legislation designed to encourage the broader introduction of wholesale and
retail competition, the significant competitive

advantages that independent power producers currently enjoy over certain
regulated utility companies would be eliminated or sharply curtailed, and the
ability of regulated utility companies to compete more directly with
independent power companies would be increased. To the extent competitive
pressures increase and the pricing and sale of electricity assumes more
characteristics of a commodity business, the economics of domestic
independent power generation projects may come under increasing pressure, and
the availability of long-term power purchase agreements, which can serve as
the basis for project financings, may decrease. Deregulation may not only
continue to fuel the current trend toward consolidation among domestic
utilities but may also encourage the disaggregation of vertically-integrated
utilities into separate generation, transmission and distribution businesses.
As a result, additional significant competitors could become active in the
independent power industry. In addition, independent power producers may find
it increasingly difficult to negotiate long-term power sales agreements with
solvent utilities, which may affect the profitability and financial stability
of independent power projects.

LACK OF PUBLIC MARKET FOR THE NOTES

The New Notes are being offered to the Holders of the Old Notes. The Old
Notes were issued in June 1997 to a small number of institutional investors
and are eligible for trading in the Private Offering, Resale, and Trading
through Automated Linkages (PORTAL) Market, the National Association of
Securities Dealers' screenbased, automated market for trading of securities
eligible for resale under Rule 144A. The New Notes are new securities for
which there currently is no market. Although the Initial Purchasers (as
defined herein) have informed NRG that they currently intend to make a market
in the New Notes, they are not obligated to do so and any such market making
may be discontinued at any time without notice. NRG does not intend to list
the New Notes or the Old Notes on any securities exchange or to seek approval
for quotation through any automated quotation system. There can be no
assurance as to the development or liquidity of any market for the New Notes
or the Old Notes.

FORWARD-LOOKING STATEMENTS

Certain statements under the captions "Offering Memorandum Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Offering Memorandum
constitute "forward-looking statements." Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of NRG to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions; industry
capacity; demographic changes; competition; changes in technology; changes in
political, social and economic conditions; changes in local laws and
regulations; changes in electricity usage patterns and practices; changes in
fuel pricing, including coal, oil and oil products and natural gas; and
various other factors beyond NRG's control.

EXCHANGE OFFER PROCEDURES

Subject to the conditions set forth under "The Exchange Offer --
Conditions to the Exchange Offer," issuance of the New Notes in exchange for
Old Notes pursuant to the Exchange Offer will be made only after a timely
receipt by NRG of (i) a book-entry confirmation (as defined below) evidencing
the tender of such Old Notes through ATOP or (ii) certificates representing
such Old Notes, a properly completed and duly executed Letter of Transmittal,
with any required signature guarantees, and all other required documents. See
"The Exchange Offer -- Acceptance for Exchange and Issuance of Capital
Securities" and "--Procedures for Tendering Original Capital Securities."
Therefore, holders of the Old Notes desiring to tender such Old Notes in
exchange for New Notes should allow sufficient time to ensure timely
delivery. NRG is under no duty to give notification of defects or
irregularities with respect to the tenders of Old Notes for exchange.

USE OF PROCEEDS

NRG will not receive any proceeds from the issuance of the New Notes
offered pursuant to the Exchange Offer. In consideration for issuing the New
Notes as contemplated in this Prospectus, NRG will receive in exchange Old
Notes in like principal amount, the terms of which are identical in all
material respects to the New Notes except for certain transfer restrictions
and registration rights. The Old Notes surrendered in exchange for New Notes
will be retired and cancelled and cannot be reissued. Accordingly, issuance
of the New Notes will not result in any increase in the indebtedness of NRG.

The net proceeds to NRG from the offering of the Old Notes, after
deducting discounts and expenses, were approximately $246.0 million. NRG used
those net proceeds to repay outstanding debt under the Bridge Financing and
for other general corporate purposes. The Bridge Financing was used for the
acquisition of NRG's interest in the Loy Yang Project. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Certain Indebtedness."

THE EXCHANGE OFFER

TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES

The Old Notes were sold by NRG on June 17, 1997 (the "Closing Date") to
Salomon Brothers Inc, ABN AMRO Chicago Corporation and Chase Securities Inc.
(the "Initial Purchasers") pursuant to a Purchase Agreement, dated June 12,
1997, entered into by and among NRG and the Initial Purchasers (the "Purchase
Agreement"). Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal (which together
constitute the Exchange Offer), NRG will accept for exchange Old Notes which
are properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time on January 16, 1998; provided, however, that if NRG, in
its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended.

As of the date of this Prospectus, $250,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about December 17, 1997, to all
Holders of Old Notes known to NRG. NRG's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions as
set forth under "--Conditions to the Exchange Offer" below.

NRG expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the Holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by NRG. Any
Old Notes not accepted for exchange for any reason will be returned without
expense to the tendering Holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.

Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 or any integral multiple thereof.

NRG expressly reserves the right to amend or terminate the Exchange Offer,
and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "--Conditions to the Exchange Offer." NRG will give
oral or written notice of any extension, amendment, non-acceptance or
termination to the Holders of the Old Notes as promptly as practicable, such
notice in the case of any extension to be issued by means of a press release
or other public announcement no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.

PROCEDURES FOR TENDERING

The tender to NRG of Old Notes by a Holder thereof as set forth below and
the acceptance thereof by NRG will constitute a binding agreement between the
tendering Holder and NRG upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal.
Except as set forth below, a Holder who wishes to tender Old Notes for
exchange pursuant to the Exchange Offer must transmit a properly completed
and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to Norwest Bank Minnesota, National
Association (the "Exchange Agent") at one of the addresses set forth below
under "--Exchange Agent" for receipt on or prior to the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal or (ii) if using ATOP, a
timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
such Old Notes, if such procedure is available, into the Exchange Agent's
account at The Depositary Trust Company (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the
Holder must comply with the guaranteed delivery procedures described below.

THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED
MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTER OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO NRG.

Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact the registered Holder promptly and instruct
such registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's name or obtain a properly
completed bond power from the registered Holder. The transfer of registered
ownership may take considerable time.

Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
as described below (see "--Guaranteed Delivery Procedures") unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered Holder who
has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures of a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be made by a
financial institution (including most banks, savings and loan associations
and brokerage houses) that is a participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program or
the Stock Exchange Medallion Program (collectively, "Eligible Institutions").
If Old Notes are registered in the name of a person other than a signer of
the Letter of Transmittal, the Old Notes surrendered for exchange must be
endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by NRG, duly
executed by the registered Holder with the signature thereon guaranteed by an
Eligible Institution.

All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes will be determined by NRG in
its sole discretion, which determination will be final and binding. NRG
reserves the absolute right to reject any and all tenders of any particular
Old Notes not properly tendered or to not accept any particular Old Note if
acceptance would, in the judgment of NRG or its counsel, be unlawful. NRG
also reserves the absolute right to waive any defects, irregularities or
conditions of the Exchange Offer as to any particular Old Notes either before
or after the Expiration Date (including the right to waive the ineligibility
of any Holder who seeks to tender Old Notes in the Exchange Offer). The
interpretation of the terms and conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including
the Letter of Transmittal and the instructions thereto) by NRG will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes for exchange must be cured within such
reasonable period of time as NRG may determine. None of NRG, the Exchange
Agent or any other person will be under any duty to give notification of any
defect or irregularity with respect to any tender of Old Notes for exchange,
nor will any of them incur any liability for failure to give such
notification.

If the Letter of Transmittal is signed by a person or persons other than
the registered Holder or Holders of Old Notes, such Old Notes must be
endorsed or accompanied by appropriate powers of attorney, in either case
signed exactly as the name or names of the registered Holder or Holders that
appear on the Old Notes.

If the Letter of Transmittal or any Old Note or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
NRG, proper evidence satisfactory to NRG of their authority to so act must be
submitted with the Letter of Transmittal.

By tendering, each Holder, other than a broker-dealer, must acknowledge
that it is not engaged in, and does not intend to engage in, a distribution
of New Notes. If any Holder is an affiliate of NRG, is engaged in or intends
to engage in or has any arrangement with any person to participate in the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such Holder (i) could not rely on the applicable interpretations of the staff
of the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction, including the delivery of a prospectus which contains the
information with respect to any selling holder required by the Securities
Act. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must represent to NRG that it will deliver a prospectus in
connection with any resale of such New Notes and that it acquired such Old
Notes as a result of market-making activities or other trading activities.
See "Plan of Distribution." The Letter of Transmittal states that by so
representing and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.

ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES

Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, NRG will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Conditions to the Exchange Offer" below. For purposes
of the Exchange Offer, NRG will be deemed to have accepted properly tendered
Old Notes for exchange, when, as and if NRG has given oral or written notice
thereof to the Exchange Agent.

For each Old Note accepted for exchange, the Holder of such Old Note will
receive a new Note having a principal amount equal to that of the surrendered
Old Note. Accordingly, registered Holders of New Notes on the relevant record
date for the first interest payment date following the consummation of the
Exchange Offer will receive interest accruing from the most recent date to
which interest has been paid or, if no interest has been paid, from June 17,
1997. Old Notes accepted for exchange will cease to accrue interest from and
after the date of consummation of the Exchange Offer. Holders of Old Notes
whose Old Notes are accepted for exchange will not receive any payment in
respect of accrued interest on such Old Notes otherwise payable on any
interest payment date the record date for which occurs on or after
consummation of the Exchange Offer. In the event of a Registration Default
under and as defined in the Registration Rights Agreement, NRG will pay
Special Interest to each Holder of Transfer Restricted Securities (as defined
herein). See "Description of Notes -- Special Interest."

In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or, if using
ATOP, a timely Book-Entry Confirmation of such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed Letter of Transmittal and all other required documents. If any
tendered Old Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer or if Old Notes are submitted for a greater
principal amount than the Holder desires to exchange, such unaccepted or
non-exchanged Old Notes will be returned without expense to the tendering
Holder thereof (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry procedures described below, such non-exchanged Old
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility) as promptly as practicable after the expiration or termination of
the Exchange Offer.

BOOK-ENTRY TRANSFER

The Exchange Agent will make a request to establish an account with
respect to the Old Notes at the Book-Entry Transfer Facility for purposes of
the Exchange Offer within two business days after the date of this
Prospectus, and any tendering financial institution that is a participant in
the Book-Entry Transfer Facility's systems must make book-entry delivery of
Old Notes by causing the Book-Entry Transfer Facility to transfer such Old
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility
in accordance with the Book-Entry Transfer Facility's ATOP procedures for
transfer.

Such holder of Old Notes using ATOP should transmit its acceptance to the
Book-Entry Transfer Facility on or prior to the Expiration Date (or comply
with the guaranteed delivery procedures set forth below). The Book-Entry
Transfer Facility will verify such acceptance, execute a book-entry transfer
of the tendered Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility and then send to the Exchange Agent confirmation of such
book-entry transfer, including an Agent's Message confirming that the
Book-Entry Transfer Facility has received an express acknowledgement from
such holder that such holder has received and agrees to be bound by this
Letter of Transmittal and that NRG may enforce this Letter of Transmittal
against such Holder (a "Book-Entry Confirmation").

GUARANTEED DELIVERY PROCEDURES

If a registered Holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot
be completed on a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or a facsimile thereof) and Notice
of Guaranteed Delivery, substantially in the form provided by NRG (by
telegram, telex, facsimile transmission, mail or hand delivery), setting
forth the name and address of the Holder of Old Notes and the principal
amount of Old Notes tendered, stating that the tender is being made thereby
and guaranteeing that, within three New York Stock Exchange, Inc. ("NYSE")
trading days after the date of execution of the Notice of Guaranteed
Delivery, the certificates for all physically tendered Old Notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be, and any
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent, and (iii) the certificates
for all physically tendered Old Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required
by the Letter of Transmittal, are received by the Exchange Agent within three
NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.

WITHDRAWAL OF TENDERS

Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.

For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of its addresses set forth below under
"--Exchange Agent" prior to the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the principal amount of such Old Notes), and (iii)
(where certificates for Old Notes have been transmitted) specify the name in
which such Old Notes are registered, if different from that of the
withdrawing Holder. If certificates for Old Notes have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of
such certificates the withdrawing Holder must also submit the serial numbers
of the particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
Holder is an Eligible Institution. If Old Notes have been tendered pursuant
to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by NRG, whose determination shall be final and binding on
all parties. Any Old Note so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any Old
Note which has been tendered for exchange but which is not exchanged for any
reason will be returned to the Holder thereof without cost to such Holder
(or, in the case of Old Notes tendered by book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Old Notes"
above at any time on or prior to the Expiration Date.

CONDITIONS TO THE EXCHANGE OFFER

Notwithstanding any other provision of the Exchange Offer, NRG will not be
required to accept for exchange, or issue New Notes in exchange for, any Old
Notes and may terminate or amend the Exchange Offer if at any time before the
acceptance of such Old Notes for exchange or the exchange of the New Notes
for such Old Notes, any of the following events occur:

(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking
any damages as a result thereof, or (ii) resulting in a material delay in
the ability of NRG to accept for exchange or exchange some or all of the
Old Notes pursuant to the Exchange Offer, or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government or governmental
authority, agency or court, domestic or foreign, that in the reasonable
judgment of NRG might directly or indirectly result in any of the
consequences referred to in clauses (i) or (ii) above or, in the
reasonable judgment of NRG, might result in the Holders of New Notes
having obligations with respect to resales and transfers of New Notes
which are greater than those described in the interpretation of the
Commission referred to on the cover page of this Prospectus, or would
otherwise make it inadvisable to proceed with the Exchange Offer; or

(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of NRG to complete the transactions contemplated by the Exchange
Offer, (iii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any limitation by any
governmental agency or authority which adversely affects the extension of
credit or (iv) a commencement of a war, armed hostilities or other similar
international calamity directly or indirectly involving the United States,
or, in the case of any of the foregoing existing at the time of the
commencement of the Exchange Offer, a material acceleration or worsening
thereof; or

(c) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of NRG and its subsidiaries taken as a whole that, in the
reasonable judgment of NRG, is or may be adverse to NRG, or NRG shall have
become aware of facts that, in the reasonable judgment of NRG, have or may
have adverse significance with respect to the value of the Old Notes or
the New Notes;

which, in the reasonable judgment of NRG in any case, and regardless of the
circumstances (including any action by NRG) giving rise to any such
condition, makes it inadvisable to proceed with the Exchange Offer and/or
with such acceptance for exchange or with such exchange.

The foregoing conditions are for the sole benefit of NRG and may be
asserted by NRG regardless of the circumstances giving rise to any such
condition or may be waived by NRG in whole or in part at any time and from
time to time in its sole discretion. The failure by NRG at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.

In addition, NRG will not accept for exchange any Old Note tendered, and
no New Notes will be issued in exchange for any such Old Note, if at such
time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939.

EXCHANGE AGENT

Norwest Bank Minnesota, National Association has been appointed as the
Exchange Agent of the Exchange Offer. All executed Letters of Transmittal
should be directed to the Exchange Agent at one of the addresses set forth
below. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:

By Registered or Certified Mail: By Hand Delivery:
Norwest Bank Minnesota, National Association Norwest Bank Minnesota National Association
P.O. Box 1517 Northstar East 12th Floor
Minneapolis, Minnesota 55480-1517 608 2nd Avenue
Attention: Corporate Trust Operations Minneapolis, Minnesota 55479-0113
Attention: Corporate Trust Operations

By Overnight Delivery: By Facsimile:
Norwest Bank Minnesota National Association (612) 667-4927
Norwest Center Confirm by Telephone:
6th and Marquette Avenue (612) 667-9764
Minneapolis, Minnesota 55479-0069
Attention: Corporate Trust Operations

DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE
A VALID DELIVERY.

FEES AND EXPENSES

NRG will not make any payment to brokers, dealers or others soliciting
acceptances of the Exchange Offer.

The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by NRG and are estimated in the aggregate to be $400,000.

TRANSFER TAXES

Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer tax in connection therewith, except that Holders who
instruct NRG to register New Notes in the name of, or request that Old Notes
not tendered or not accepted in the Exchange Offer be returned to, a person
other than the registered tendering Holder will be responsible for the
payment of any applicable transfer tax thereon.

CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES

New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may
be offered for resale, resold or otherwise transferred by Holders thereof
(other than any Holder which is an "affiliate" of NRG within the meaning of
Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such Holders' business and
such Holders have no arrangement with any person to participate in the
distribution of such New Notes. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If any Holder is an affiliate of NRG, is engaged
in or intends to engage in or has any arrangement or understanding with
respect to the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, such Holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes must acknowledge that
such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities and that it will deliver
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdiction or an
exemption from registration or qualification is available and is complied
with. NRG does not currently intend to register or qualify the sale of the
New Notes in any such jurisdictions.

CAPITALIZATION

The following table sets forth the unaudited consolidated capitalization
of NRG as of September 30, 1997.

SEPTEMBER 30, 1997
--------------------
(DOLLARS IN
THOUSANDS)
(UNAUDITED)

Long-term debt:
Existing funded debt(1)........................................ $142,738
1996 Senior Notes.............................................. 125,000
1997 Senior Notes ............................................. 250,000
--------------------
Total long-term debt.......................................... 517,738
--------------------
Stockholder's equity:
Common stock; $1 par value; 1,000 shares authorized; 1,000
shares issued and outstanding ................................ 1
Additional paid-in capital(2) ................................. 431,374
Retained earnings ............................................. 80,715
Currency translation adjustments .............................. (30,811)
--------------------
Total stockholder's equity ................................... 481,279
--------------------
Total capitalization ........................................ $999,017
====================

- ------------
(1) Includes $43.3 million of current portion of long-term debt and $77.7
million of debt relating to MEC and NRG San Diego, including current
maturities, which is non-recourse to NRG.
(2) Includes the $60.9 million contribution by NSP in connection with the
acquisition of Loy Yang A.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below as of December
31, 1993, 1994, 1995 and 1996 and for the years then ended, have been derived
from the audited consolidated financial statements of NRG. Certain financial
information for the years ended December 31, 1993 and 1994 have been
reclassified to conform to the financial presentation for the year ended
December 31, 1995. The selected consolidated financial data set forth below
as of September 30, 1996 and 1997, and for the nine-month periods then ended,
and as of December 31, 1992 and for the year then ended, have been derived
from the unaudited consolidated financial statements of NRG. Interim results
and the results for 1992, in the opinion of management of NRG, include all
adjustments (consisting solely of normal recurring adjustments) necessary to
present fairly the financial information for such periods; however, such
interim results are not necessarily indicative of the results that may be
expected for any other interim period or for a full year. The following data
should be read in conjunction with the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.

CONSOLIDATED STATEMENTS OF INCOME DATA:

YEAR ENDED DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
---------- --------- --------- --------- ----------
(IN THOUSANDS)

OPERATING REVENUES
Revenues from wholly-owned operations(1) . $39,647 $48,529 $63,970 $64,180 $ 71,649
Equity in operating earnings of
unconsolidated affiliates(2)(3).......... 1,321 2,695 27,155 23,639 32,815
---------- --------- --------- --------- ----------
Total operating revenues ................ 40,968 51,224 91,125 87,819 104,464
OPERATING COSTS AND EXPENSES
Cost of operations--wholly-owned
operations .............................. 22,870 27,122 34,861 32,535 36,562
Depreciation and amortization ............ 5,060 6,475 8,675 8,283 8,378
General, administrative, and development 14,930 11,448 19,993 34,647 39,248
---------- --------- --------- --------- ----------
Total operating costs and expenses ..... 42,860 45,045 63,529 75,465 84,188
---------- --------- --------- --------- ----------
OPERATING INCOME (LOSS) ................... (1,892) 6,179 27,596 12,354 20,276
OTHER INCOME (EXPENSE)
Equity in gain from project termination
settlements(4) .......................... -- -- 9,685 29,850 --
Other income (expense), net .............. (1,753) 1,028 1,411 4,896 9,477
Interest expense ......................... (1,662) (2,679) (6,682) (7,089) (15,430)
---------- --------- --------- --------- ----------
Total other income (expense) ............ (3,415) (1,651) 4,414 27,657 (5,953)
---------- --------- --------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES ........ (5,307) 4,528 32,010 40,011 14,323
INCOME (BENEFIT)TAXES(5) .................. (2,187) 1,905 2,472 8,810 (5,655)
---------- --------- --------- --------- ----------
NET INCOME (LOSS).......................... $(3,120) $ 2,623 $29,538 $31,201 $ 19,978
========== ========= ========= ========= ==========

(RESTUBBED TABLE CONTINUED FROM ABOVE)

NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1996 1997
---------- ----------

OPERATING REVENUES
Revenues from wholly-owned operations(1) . $ 52,479 $ 65,081
Equity in operating earnings of
unconsolidated affiliates(2)(3).......... 19,375 17,759
---------- ----------
Total operating revenues ................ 71,854 82,840
OPERATING COSTS AND EXPENSES
Cost of operations--wholly-owned
operations .............................. 26,858 32,863
Depreciation and amortization ............ 6,300 7,096
General, administrative, and development 26,599 28,402
---------- ----------
Total operating costs and expenses ..... 59,757 68,361
---------- ----------
OPERATING INCOME (LOSS) ................... 12,097 14,479
OTHER INCOME (EXPENSE)
Equity in gain from project termination
settlements(4) .......................... -- --
Other income (expense), net .............. 6,117 8,610
Interest expense ......................... (11,303) (19,815)
---------- ----------
Total other income (expense) ............ (5,186) (11,205)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES ........ 6,911 3,274
INCOME (BENEFIT)TAXES(5) .................. (4,358) (11,140)
---------- ----------
NET INCOME (LOSS).......................... $ 11,269 $ 14,414
========== ==========

(3) Includes pretax charges of $5.0 million, $5.0 million and $1.5 million
in the years 1994, 1995 and 1996, respectively, to write-down the
carrying value of certain energy projects.
(4) In 1994, NRG and its partner in the Michigan Cogeneration Partners
Limited Partnership agreed to terminate a power sales contract with
Consumers Power Company. The contract related to a 65 MW cogeneration
facility being developed in Michigan. Due to the agreement to terminate
the contract, NRG recorded a one-time pre-tax gain of $9.7 million in
1994.
Equity in gain from project termination settlements in 1995 included a
one-time pre-tax gain of $29.9 million related to the settlement and
termination of the San Joaquin Valley power purchase agreements with
PG&E. See "Business -- Independent Power Production and Cogeneration --
Domestic Projects -- San Joaquin."
(5) NRG is included in the consolidated federal income tax and state
franchise tax returns of NSP. NRG calculates its tax position on a
separate company basis under a tax sharing agreement with NSP and
receives payment from NSP for tax benefits and pays NSP for tax
liabilities.

CONSOLIDATED BALANCE SHEET DATA:

AS OF DECEMBER 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ----------- ----------- ----------- ------------
(IN THOUSANDS)

Net property, plant and equipment . $46,694 $108,934 $107,634 $111,919 $129,649
Net equity investments in projects 16,400 20,046 164,863 221,129 365,749
Total assets........................ 81,091 232,888 376,570 454,589 680,809
Long-term debt, including current
maturities ........................ 10,499 93,451(1) 93,339(1) 90,034(1) 212,141(1)
Stockholder's equity ............... 40,267 97,722 234,722 319,764 421,914

(RESTUBBED TABLE CONTINUED FROM ABOVE)

AS OF SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------

Net property, plant and equipment . $118,109 $ 164,915
Net equity investments in projects 266,504 635,047
Total assets........................ 586,461 1,066,816
Long-term debt, including current
maturities ........................ 213,298(1) 517,738(1)
Stockholder's equity ............... 332,012 481,279

- ------------
(1) Includes debt relating to MEC and NRG San Diego, including current
maturities, which is non-recourse to NRG. As of September 30, 1997 this
debt was $77.7 million.

OTHER DATA (UNAUDITED):

AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
-------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)

NRG's net power generating
capacity (MW).......................... 33 33 992 999 1,326
NRG's net thermal energy generating
capacity:
mmBtus per hour ....................... 695 1,865 1,961 2,318 2,654
MWt ................................... 204 547 575 679 778
Consolidated EBITDA (1) ................ $1,415 $13,682 $47,367 $55,383 $38,131
Consolidated interest expense .......... $1,662 $ 2,679 $ 6,682 $ 7,089 $15,430
Consolidated interest expense coverage
ratio (2) ............................. 0.85x 5.11x 7.09x 7.81x 2.47x
Consolidated debt service (3) .......... $2,562 $ 4,272 $ 9,169 $10,394 $18,323
Consolidated debt service coverage
ratio (4) ............................. 0.55x 3.20x 5.17x 5.33x 2.08x
Consolidated ratio of earnings to fixed
charges (5)............................ (6) 2.32x 2.98x 1.56x(7) 1.75x(8)

(RESTUBBED TABLE CONTINUED FROM ABOVE)

AS OF AND FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1997
---------- ---------

NRG's net power generating
capacity (MW).......................... 1,209 2,351
NRG's net thermal energy generating
capacity:
mmBtus per hour ....................... 1,040 2,695
MWt ................................... 778 789
Consolidated EBITDA (1) ................ $24,514 $30,185
Consolidated interest expense .......... $11,303 $19,815
Consolidated interest expense coverage
ratio (2) ............................. 2.17x 1.52x
Consolidated debt service (3) .......... $13,039 $21,730
Consolidated debt service coverage
ratio (4) ............................. 1.88x 1.39x
Consolidated ratio of earnings to fixed
charges (5)............................ 2.19x(8) 1.03x

(5) The ratio of earnings to fixed charges is calculated by dividing
earnings by fixed charges. For this purpose "earnings" means income
(loss) before income taxes less undistributed equity in operating
earnings of unconsolidated affiliates less equity in gain from project
termination settlements plus cash distributions from project
termination settlements plus fixed charges. "Fixed charges" means
interest expense plus interest capitalized plus amortization of debt
issuance costs plus a reasonable approximation of the interest factor
of rental expense.
(6) Due primarily to the loss incurred in 1992, NRG was unable to fully
cover fixed charges. Earnings did not cover fixed charges by $5,940.
(7) The 1995 ratio of earnings to fixed charges calculation includes the
effect of an equity gain and cash distribution from a project
termination settlement. If the project termination had not occurred,
NRG would have been unable to fully cover fixed charges and earnings
would not have covered fixed charges by $9,913.
(8) The 1996 ratio of earnings to fixed charges calculations include the
effect of a cash distribution from a 1995 project termination
settlement. If the project termination had not occurred, NRG would have
been unable to fully cover fixed charges and earnings would not have
covered fixed charges by $1,497 for the nine months ended September 30,
1996, and by $3,504 for the year ended December 31, 1996.

SELECTED PRO FORMA CONDENSED FINANCIAL DATA

The unaudited pro forma condensed financial data set forth below give
effect to (i) the acquisition by NRG of a 25.37% equity interest in Loy Yang
A and the financing thereof and (ii) the Offering. The pro forma statement of
income data for the year ended December 31, 1996 and the nine months ended
September 30, 1997 gives effect to such transactions as if they had occurred
on January 1, 1996. As the Loy Yang acquisition and the Offering were
consummated prior to September 30, 1997, no pro forma balance sheet data is
provided. The pro forma condensed financial data do not purport to be
indicative of the combined financial position or results of operations of
future periods or indicative of the results that would have occurred had the
transactions referred to above been consummated on the dates indicated. The
following data should be read in conjunction with, and are qualified in their
entirety by, the Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.

FOR THE YEAR ENDED DECEMBER 31, 1996

HISTORICAL ADJUSTMENTS (1) PRO FORMA
------------ --------------- -----------
(IN THOUSANDS)

STATEMENT OF INCOME DATA:
Revenues from wholly-owned operations ..... $ 71,649 -- $ 71,649
Equity in earnings (loss) of unconsolidated
affiliates ................................ 32,815 $ (18,121) (2) 14,694
Operating costs and expenses ............... (84,188) -- (84,188)
Other income (expense) ..................... 9,477 26,264 (3) 35,741
Interest expense ........................... (15,430) (18,750)(4) (34,180)
Income taxes ............................... 5,655 4,373 (5) 10,028
------------ --------------- -----------
Net Income.................................. $ 19,978 $ (6,234) $ 13,744
============ =============== ===========

- ------------
(1) Adjustments were derived from Loy Yang's audited financial statements
for the fiscal years ended June 30, 1996 and June 30, 1997 to conform
with NRG's December 31, 1996 year-end.

A$000'S
-----------

(2) After-tax net income as shown in the financial
statements: 120,054
Change to Depreciation/Amortization Expense............ (316)
Change to Finance Charges.............................. (164,394)
Change to Taxes........................................ 120,151
Other.................................................. (166,682)
-----------
AFTER-TAX NET INCOME (LOSS) ............................... (91,187)
-----------
NRG'S 25.37%........................................... (23,134)
1996 Average Exchange Rate............................. 0.7833
-----------
NRG US$ NET INCOME (LOSS) ................................ (18,121)
===========

"Other" is composed of interest expense recorded on the note payable to
the shareholders and the operating & maintenance fee expense paid to the
operator shareholders.

(3) Includes interest income and operating and maintenance fees derived
from the Loy Yang project.

(4) Represents accrued interest on $250 million principal amount of the Old
Notes for twelve months at a rate of 7.5% per annum.

(5) Net tax benefit derived from interest expense on the Old Notes.

AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997

HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
(IN THOUSANDS)

STATEMENT OF INCOME DATA:
Revenues from wholly-owned operations ........... $ 65,081 $ -- $ 65,081
Equity in earnings of unconsolidated affiliates 17,759 (7,945)(1) 9,814
Operating costs and expenses .................... (68,361) -- (68,361)
Other income and (expense) ...................... 8,610 8,525 (3) 17,135
Interest expense ................................ (19,815) (6,883) (4) (26,698)
Income taxes .................................... 11,140 1,605 (5) 12,745
------------ ------------- -----------
Net Income....................................... $ 14,414 $ (4,698) $ 9,716
============ ============= ===========

- ------------
(1) Adjustments were derived from Loy Yang's audited financial statements
for the fiscal year ended June 30, 1997.
(2) Represents estimated equity earnings from Loy Yang A through May 12,
1997, based upon historical data (January 1, 1997 -- May 12, 1997)
adjusted for differences due to acquisition accounting primarily
depreciation charges, finance charges and adjustments to income tax
expense. Equity earnings of Loy Yang A from May 13 until September 30
were $1,393. This amount is included in the Historical column of Equity
in earnings of unconsolidated affiliates.
(3) Includes interest income and operating and maintenance fees derived
from the Loy Yang project.
(4) Represents interest expense on $250 million principal amount of the Old
Notes until May 12 at a rate of 7.5% per annum. Interest of $7,140 on
the Old Notes from May 13 until September 30 is in the Historical
column.
(5) Net tax benefit derived from interest expense on the Old Notes.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with NRG's
consolidated financial statements appearing elsewhere in this Offering
Memorandum. In addition, as a result of the recent Loy Yang acquisition,
NRG's future results could differ significantly from NRG's historical
results. See "Selected Pro Forma Condensed Financial Data" and "Business."

GENERAL

NRG has developed a complex organizational structure involving foreign
holding companies, corporations, partnerships and joint ventures through
which NRG holds interests in its international projects. These entities are
organized to maximize available cash flows (by reducing and deferring foreign
and U.S. taxes) and to reduce current and deferred taxes. As part of NRG's
global tax strategy, NRG intends to maintain offshore, for permanent
reinvestment in other projects, its dividends and distributions from foreign
investments, except to the limited extent required to make payments of
interest or principal on loans from NRG. Any repatriation of dividends from
foreign investments may result in adverse U.S. income tax consequences.

NRG's policy is to pay for offshore development expenses from available
offshore cash. NRG generally funds offshore investments as equity, which can
come from a variety of sources, including capital infusions from NSP,
borrowings by NRG and internal cash generation. In certain circumstances, a
portion of project equity funding is treated as a loan by NRG to the project
subsidiary or affiliate on market-based interest rate and repayment terms.

In light of NRG's global tax policy as described above, cash flows from
ongoing domestic operations and repayments of principal and interest by
foreign project subsidiaries and project affiliates to NRG are expected to be
the primary source of cash to service NRG's corporate obligations, including
with respect to the Notes. To date, NRG's consolidated operating revenues
from domestic operations have been derived primarily from the production and
transmission of thermal energy (steam and chilled water) and from the
operation of resource recovery facilities that process MSW into RDF. Other
operating revenues arose from fees earned in providing management and
engineering services to a number of operating facilities. NRG's operating
expenses also are largely attributable to domestic activities except for
general, administrative and development expenses, which in 1994, 1995 and
1996 were incurred primarily in pursuit of international investment and
acquisition activities.

NRG accounts for investments in projects where ownership is between 20%
and 50%, and where there is no effective and legal control, using the equity
method of accounting. Under the equity method, NRG's investment in an entity
is recorded on the balance sheet at cost and is adjusted to recognize NRG's
proportional share of all earnings or losses of the entity. Distributions
received reduce the carrying amount of NRG's investment in the entity. For
income statement purposes, NRG records as equity in earnings its proportional
share of net income or losses which are attributable to those projects that
are accounted for using the equity method. Certain reclassifications have
been made to the 1994 financial data included herein to conform to the 1995
and 1996 presentation. These reclassifications had no effect on net income or
stockholder's equity as previously reported.

The costs of developing a project are expensed until the project meets the
major milestones of (1) a signed power purchase agreement or the equivalent
and (2) approval by the Board of Directors of NRG. There were several
projects under development at September 30, 1997 that met NRG's policy for
capitalization of development costs. At September 30, 1997, NRG had $21.1
million in capitalized costs related to Alto Cachopoal ($2.6 million),
Collinsville ($1.9 million), Kladno ($9.5 million), Millenium-Morris ($6.0
million) and West Java ($1.1 million).

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996

For the nine months ended September 30, 1997, NRG had operating revenues
of $82.8 million, compared to operating revenues of $71.8 million for the
nine months ended September 30, 1996, an

increase of 15%. NRG's operating revenues from wholly-owned operations for
the period ended September 30, 1997 were $65.1 million, an increase of $12.6
million, or 24%, over the same period in 1996. The increase was primarily
attributable to increases in MEC sales volume, rates charged to customers and
pass-through fuel costs, management fee and cost reimbursement revenues from
NRG's wholly-owned service subsidiaries, and technical service fees. Revenues
from the RDF business increased $3.1 million, due to increases in MSW
deliveries at the Newport Facility. For the nine months ended September 30,
1997, revenues from wholly-owned operations consisted primarily of revenue
from district heating and cooling (39%), resource recovery activities (32%),
other thermal projects (16%), technical service fees (6%), management fees
(5%), and NEO (2%).

Equity in earnings of unconsolidated project affiliates was $17.8 million
for the nine months ended September 30, 1997 compared to $19.4 million for
the nine months ended September 30, 1996, a decline of 8%. Lower earnings in
MIBRAG, Latin Power and Kladno offset the new revenue sources for NRGG and
COBEE.

Cost of operations in wholly-owned operations was $32.9 million for the
nine months ended September 30, 1997, an increase of $6.0 million, or 22%,
over the same period in 1996. The increase is due primarily to increased MEC
sales volume, service labor costs and fuel costs. Cost of operations as a
percentage of revenues from wholly-owned operations is 50% which is identical
to the same period in 1996.

General, administrative and development costs were $28.4 million for the
nine months ended September 30, 1997, compared to $26.6 million for the nine
months ended September 30, 1996. The $1.8 million increase is due primarily
to increased business development, associated legal, technical, and
accounting expenses, headcount and equipment. General, administrative and
development costs as a percent of revenues from wholly-owned operations
declined from 51% to 44%.

Interest expense for the nine months ended September 30, 1997, as compared
with the same period in 1996, increased by $8.5 million, from $11.3 million
to $19.8 million. This increase was due to the issuance of $250 million
aggregate principal amount of Old Notes at the end of June 1997, an
additional month of interest associated with the issuance of 7.625%, $125
million Senior Notes due 2006; bridge financing, and $0.2 million of interest
on the Company's $175 million revolver.

The Company has recognized an income tax benefit due to domestic income
tax losses and due to the recognition of certain tax credits. The income tax
benefit for the nine months ended September 30, 1997 increased as compared to
the benefit for the nine months ended September 30, 1996 due primarily to
increased tax credits and higher interest expense.

Net income for the nine months ended September 30, 1997, was $14.4
million, an increase of $3.1 million or 28%, compared to net income of $11.3
million in the same period in 1996. This increase was due to the factors
described above.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

For the year ended December 31, 1996, NRG had operating revenues of $104.5
million, compared to operating revenues of $87.8 million in 1995, an increase
of 19%. NRG's operating revenues from wholly-owned operations for the year
ended December 31, 1996 were $71.6 million, an increase of $7.5 million, or
12%, over the prior year. The increase was primarily attributable to
continued expansion of NEO's methane gas business and increased revenues from
MEC. For the year ended December 31, 1996, revenues from wholly-owned
operations consisted primarily of revenue from district heating and cooling
(39%), resource recovery activities (33%), other thermal projects (19%) and
NEO (5%).

Equity in earnings of unconsolidated project affiliates, excluding gains
on project termination settlements, was $32.8 million for the year ended
December 31, 1996, compared to $23.6 million for the year ended December 31,
1995, an increase of 39%. In 1996, new revenue sources from the Schkopau and
NRGG projects provided equity earnings of $6.4 million and $2.3 million,
respectively. Additionally, Latin Power provided $1.6 million of increased
equity earnings in 1996 as compared to 1995 because of the startup of a new
project. These were offset by an expected decrease in equity earnings of $9.2

million for the MIBRAG mining and power generation project, primarily due to
expected decreases in coal and briquette sales. Equity in earnings of
Gladstone was $10.8 million in 1996, down slightly from 1995 earnings of
$11.2 million. Equity in earnings in 1996 and 1995 reflect an investment
write-down of $1.5 million and $5.0 million, respectively, relating to the
enhanced coal project of NRG's wholly-owned subsidiary, Scoria, Inc.
("Scoria"). On December 31, 1996, NRG's investment balance in the Scoria
project was reduced to zero. Scoria Incorporated and Western SynCoal Co., a
subsidiary of Montana Power Co., completed construction in January 1992 of a
demonstration coal conversion plant designed to improve the heating value of
coal by removing moisture, sulfur and ash. The plant, located in Montana, has
the ability to produce 300,000 tons of clean coal annually which, when
burned, produces emissions in compliance with the Clean Air Act. The fuel may
be an alternative to scrubbers for some energy companies. Testing of the
plant ended in August 1993 and commercial operations began at that time.
NRG's net capitalized investment in the Scoria coal project was written down
by $3.5 million in 1994, $5.0 million in 1995 and final write-off of $1.5
million in 1996. The write-downs were due to reductions in expected future
operating cash flows from the project and an overall economic assessment of
the project. On August 31, 1997, Scoria's 50% interest in the project was
liquidated by the project partnership in exchange for a liquidation payment
of $100.

Cost of operations in wholly-owned operations was $36.6 million in 1996,
an increase of $4.1 million, or 12.6%, compared to 1995, due primarily to
increased fuel costs resulting from increased MEC sales volume and per unit
fuel prices. Cost of operations as a percentage of revenues from wholly-owned
operations remained constant at 51% for 1995 and 1996.

General, administrative and development costs were $39.2 million in 1996,
compared to $34.6 million in 1995, an increase of $4.6 million, or 12.9%. The
majority of the increase from 1995 to 1996 was due to additional general and
administrative expenses incurred in the growth and development of NEO
totaling $5.8 million, in contrast with NEO's general and administrative
expenses of $1.8 million for the prior year. Business development expenses
for the year ended December 31, 1996 totaled $19.4 million, as compared with
$17.6 million for the same period in 1995.

Other income, net increased by $4.6 million in 1996 due primarily to
additional interest income earned from investing the proceeds of the 1996
Senior Note Offering, which was completed in January 1996.

The effective tax rate (benefit) for the year ended December 31, 1996 was
(39.5%), as compared to 22% for the same period ended December 31, 1995. The
decrease in the effective tax rate in 1996 was due to a change in NRG's
income sources, with more earnings derived from U.S. operations in 1995,
primarily the $29.9 million pre-tax gain on the disposition of the San
Joaquin power purchase agreements. Because of NRG's intention to reinvest
earnings of foreign operations offshore, no provision was recorded for income
taxes due upon repatriation.

Net income for the year ended December 31, 1996 was $20.0 million, a
decrease of $11.2 million, or 36%, compared to net income of $31.2 million in
1995. This decrease was due to the fact that $29.9 million of that 1995 net
income was attributable to the one-time payment for the buy-out of the San
Joaquin power sales contract in that year, as well as to the other factors
described above.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

For the year ended December 31, 1995, NRG had operating revenues of $87.8
million, compared to operating revenues of $91.1 million in 1994, a decrease
of 4%. NRG's operating revenues from wholly-owned operations for the year
ended December 31, 1995, were $64.2 million, essentially unchanged from $64.0
million in the prior year. Revenues from wholly-owned operations consisted
primarily of revenue from district heating and cooling (39%), resource
recovery activities (36%), other thermal projects (21%) and NEO (1%).

Equity in earnings of unconsolidated project affiliates was $23.6 million
for the year ended December 31, 1995, compared to $27.2 million for the year
ended December 31, 1994, a decrease of 13%. Equity in earnings of $22.2
million from the MIBRAG mining and power generation project increased $2.8
million in 1995 primarily due to increased power and coal sales. Equity in
earnings of

Gladstone was $11.2 million in 1995 as compared to $7.7 million for the prior
year, due to the inclusion of a full year's earnings in 1995 compared to nine
months of the prior year. San Joaquin Cogeneration earnings decreased from
$6.1 million in 1994 to $2.0 million in equity earnings in 1995 because of
the shutdown of the facilities at the end of February 1995, and the
termination of the power purchase agreements with Pacific Gas & Electric
("PG&E"). The Sunnyside waste coal facility acquired in late 1994 experienced
initial operating problems, a six-week shutdown for major repairs and
refurbishments, and a reduction in power revenue due to lower than
anticipated avoided costs of the power purchaser, PacifiCorp, resulting in a
loss of $2.7 million in 1995 equity in earnings. Finally, equity in earnings
in 1995 reflects an investment write-down of $5.0 million related to Scoria
while 1994 equity in earnings reflects investment write-downs of $3.5 million
for Scoria and $1.5 million related to the proposed Louisiana Energy Services
("LES") uranium enrichment facility in which NRG owns a 6.73% interest. NRG's
investment in LES has been reduced to zero.

Cost of operations in wholly-owned operations was $32.5 million in 1995, a
decrease of $2.3 million, or 6.7%, compared to 1994, due primarily to lower
resource recovery landfill charges and reduced district heating fuel costs.
Cost of operations as a percentage of revenues from wholly-owned operations
decreased to 51% in 1995 from 55% in 1994.

General, administrative and development costs were $34.6 million in 1995,
as compared to $20.0 million in 1994, an increase of $14.6 million, or 73.0%.
Business development expenses made up approximately $8.8 million of this
increase. The balance of the increase was attributable to establishing and
maintaining NRG's foreign offices and domestic support functions. In 1995,
NRG aggressively expanded staff and activity in seeking new projects. Project
development activity was redirected and expanded in 1995 as NRG completed its
initial investments in the MIBRAG, Gladstone and Schkopau projects in 1994.
During 1994, some development costs were capitalized in these projects until
financial close was achieved. Conversely, during 1995, NRG expensed the costs
of pursuing a number of projects requiring the payment of significant upfront
fees and expenses, including an investment opportunity that required
expenditure of significant legal fees to submit a competing plan of
reorganization in the bankruptcy court proceeding for O'Brien Energy (in
which NRG acquired a 41.86% interest in 1996). Most of these costs were
expensed because these projects did not meet NRG's requirements for
capitalization.

Equity in gain from project termination settlements in 1995 included a
one-time pre-tax gain of $29.9 million related to the settlement and
termination of the San Joaquin Valley power purchase agreements with PG&E. In
1994, NRG and its partner in the Michigan Cogeneration Partners Limited
Partnership agreed to terminate a power sales contract with Consumers Power
Company. The contract related to a 65 MW cogeneration facility being
developed in Michigan. Due to the agreement to terminate the contract, NRG
recorded a one-time pre-tax gain of $9.7 million in 1994.

Other income, net increased $3.5 million in 1995 due primarily to
additional interest income from project notes receivable and short-term
investments.

The effective tax rate for the year ended December 31, 1995 was 22%, as
compared to 7.7% for the same period ended December 31, 1994. This increase
from 1994 to 1995 was primarily due to the fact that a greater portion of
NRG's income was derived from United States sources in 1995, primarily as a
result of the $29.9 million pre-tax gain on the disposition of the San
Joaquin power purchase agreements. Because of NRG's intent to reinvest
earnings of foreign operations offshore, no provision was recorded for income
taxes that would be due on repatriation.

Net income for the year ended December 31, 1995, was $31.2 million, an
increase of $1.7 million, or 6%, compared to net income of $29.5 million in
1994. This increase was due to the factors described above.

FINANCIAL RESULTS OF INVESTMENTS IN PRINCIPAL PROJECTS

The following sets forth certain information with respect to the results
of investments in principal projects. For a description of these projects,
see "Business -- Description of NRG's Projects."

EQUITY IN EARNINGS
-----------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
(DOLLARS IN MILLIONS)
PERCENTAGE
OWNERSHIP
PROJECT 1994 1995 1996 1996 1997 INTEREST
- -------------- --------- --------- ------- -------- ------- ------------

MIBRAG (1) .... $19.4 $22.2 $13.1 $ 7.6 $ 7.0 33.3
Gladstone ..... 7.7 (2) 11.2 10.8 8.5 8.7 37.5
Schkopau ...... 0.0 0.0 (3) 4.6 4.5 3.8 20.6
Latin Power.... (0.3) 0.0 1.6 1.4 0.1 4 -9
NRGG........... * * 2.3 1.3(5) 2.3 41.9
Scoria......... (3.0) (3.0) (3.3) (2.4) 0 50.0
San Joaquin.... 8.1 -- (4) 2.7 (0.5) (0.8) 45.0
Jackson
Valley........ 1.0 -- 3.3 -- (0.3) 50.0
Sunnyside...... * (2.4) 0.6 0.6 0 50.0
Other.......... (0.7) 0.6 (1.4) (1.6) (3.0)
Write-off (6) (5.0) (5.0) (1.5) -- --

- ------------
* Not owned during this period.
(1) Earnings are expected to decrease in 1997 and 1998 due to mine
refurbishment and reduced coal sales. However, in 1999, coal sales are
expected to increase with the expected startup of the first of two 800
MW generating units being constructed nearby at Lippendorf. Contracts
to supply coal to new Lippendorf facility have been executed as part of
the MIBRAG transaction.
(2) Purchased in March 1994.
(3) Earnings commenced in the first quarter of 1996 when the first unit was
brought on-line.
(4) In June 1995, a power sales contract was terminated and a pre-tax gain
of $29.9 million was recognized by NRG for its share of the termination
settlement.
(5) Purchased in April 1996.
(6) In 1994, 1995 and 1996, NRG recorded a pre-tax charge to write down the
carrying value of certain energy projects. See "--Results of
Operations."

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $27.4 million for the nine
months ended September 30, 1997, as compared to $2.4 million cash used by
operating activities for the same period of 1996, a change of $29.8 million.
The primary differences between the nine months ended September 30, 1997 and
the same period in 1996 were increased net income of $3.1 million,
undistributed equity in operating earnings of affiliates of $5.7, working
capital items of $13.7 million, and an increase in other assets of $4.6
million.

Net cash flow from operating activities was $4.1 million for the year
ended December 31, 1996. Principal components of cash flow from operating
activities were net income of $20.0 million, depreciation and amortization of
$8.4 million and changes in working capital of ($4.3) million. Non-cash
adjustments that reduced cash flow from operating activities consisted
primarily of $17.8 million of undistributed equity in operating earnings of
unconsolidated project affiliates.

Net cash flow used by operating activities was $5.1 million for the year
ended December 31, 1995. Principal components of cash flow from operating
activities were net income of $31.2 million, depreciation and amortization of
$8.3 million and changes in working capital items of $9.0 million. Non-cash
adjustments that reduced cash flow from operating activities consisted
primarily of $29.9 million of undistributed equity in gain from the San
Joaquin project termination settlement.

Net cash flow from operating activities was $12.4 million for the year
ended December 31, 1994. Principal components of cash flow from operating
activities were net income of $29.5 million, depreciation and amortization of
$8.7 million and changes in working capital items of ($6.1) million. Other
adjustments that reduced cash flow from operating activities consisted
primarily of $18.5 million of undistributed equity in operating earnings of
unconsolidated project affiliates and $1.1 million of cash related to
deferred taxes and cash used by changes in other assets.

Net cash used for investing activities for the nine months ended September
30, 1997 was $402.5 million as compared to $70.8 million for the same period
in 1996. The primary reason for the increase was due to $326.9 million being
invested in projects in the nine months ended September 30, 1997 as compared
to $53.4 million in the same period in 1996.

NRG's project investments in the nine months ended September 30, 1997
included $264.3 million in Loy Yang, $6.7 million in NRG San Diego, $23.5
million in Energy Development Limited ("EDL"), $3.7 million in Latin Power,
$2.3 million in Scoria, $1.9 million in NRG Cadillac, $4.5 million in Kladno,
and $16.9 million in capital development costs. NRG also increased its
outstanding notes receivable by $67.0 million. Of this amount $42.9 million
went to international projects (a $9.4 million note to Enfield, $1.7 million
in various international notes, and $31.8 million in notes to COBEE) and
$21.7 went to domestic projects ($15.2 million in notes to NEO, $1.6 million
to MEC, and $4.9 million to Grays Ferry). Capital expenditures totaled $41.1
million for the nine months ended September 30, 1997, as compared to $11.4
million in the same period one year earlier. This amount is primarily
attributable to capital investments in NEO of $21.0 million, in the MEC
Fairview Plant and the MEC Federal Reserve Plant of $3.0 million, and in the
Company's new investments in San Diego Power & Cooling of $6.0 million and
Millennium of $10.3 million. At September 30, 1997, NRG's restricted cash
balance was $0.3 million, while at September 30, 1996, it was $23.6 million.
The decline in restricted cash is due to a change in the market value of the
company's foreign exchange swaps, and the posting of an $8 million letter of
credit which replaced the collateral requirement. The restricted cash balance
charge for the periods ended September 30, 1997 and 1996 impacted cash flow
by $17.3 million and ($13.9) million, respectively. For the period ended
September 30, 1997, NRG received $6.7 million from its sale of a portion of
its investment in COBEE. On October 30, 1997, NRG subsequently received $14.5
million for a sale of an additional portion of its COBEE investment. For the
same period in 1996, NRG received $15.7 million of proceeds related to the
termination of the SJVEP Facilities (as hereinafter defined) power purchase
agreement.

Cash used for investing activities for the year ended December 31, 1996
included $140.6 million in equity investments in projects, $36.6 million in
loans to projects, and $24.6 million in capital expenditures related to
wholly-owned operations. The primary components of NRG's 1996 project
investments include $81.8 million for its investment in COBEE, $28.8 million
for its investment in NRGG and $7.5 million for the purchase of certain
biomass assets from O'Brien (subsequently NRGG). NRG's net increase in loans
to projects of $36.6 million was primarily due to a loan to NRGG of $14.4
million and the purchase of the senior debt of MCPC. NRG made total capital
expenditures in 1996 of $24.6 million. Additionally, cash flows from
investing activities in 1996 included $15.7 million of cash distributed from
SJVEP related to the project termination settlement. The project termination
resulted in a pre-tax gain of $29.9 million in 1995, at which time NRG
received a $14.2 million distribution. All other cash distributions from the
project are included in operating cash flow, while the distributions from
project termination are included as cash flow from investing activities.

Cash used for investing activities for the year ended December 31, 1995
included $25.8 million in equity investments in projects, $35.4 million in
loans to projects, and $11.0 million in capital expenditures related to
wholly-owned operations. In 1995 NRG invested $25.8 million in several
projects, including $11.0 million in the Schkopau project, $4.1 million in
the Latin Power Project, $3.8 million in the Kladno project, and $3.3 million
in the North America Thermal project. In addition, NRG loaned additional
funds of $35.4 million to operating projects, including a $27.9 million loan
to the Schkopau project.

Cash used for investing activities for the year ended December 31, 1994
included $102.1 million in equity investment in projects and $4.4 million in
loans to projects, and $5.8 million in capital expenditures related to
wholly-owned operations. In 1994, NRG invested this $102.1 million in several
projects including, $64.9 million in the Gladstone project, $18.2 million in
the Schkopau project, $11.5 million in the Sunnyside project, and $10.6
million in the MIBRAG project. In addition, NRG provided $13.8 million of
restricted cash deposits to collateralize foreign currency hedging activities
and letters of credit issued in connection with competitive bids.

Net cash provided from financing activities for the nine months ended
September 30, 1997 was $382.0 million as compared to $120.9 million in the
same period of the prior year. The cash provided from

financing activities includes $80.4 million equity investment by NRG's parent
company, NSP, to fund NRG's investment in EDL and Loy Yang. Proceeds from the
issuance of long-term debt were $303.5 million which included $16.9 million
used to finance Millennium, $2.6 million to finance San Diego Power &
Cooling, $38.0 million on the Company's line of credit, and $250.0 million on
the 1997 Senior Notes, all of which was offset by $4.0 million of debt
issuance costs. For the nine months ended September 30, 1996, the Company
received $125.0 million in cash proceeds from the issuance of the 1996 Senior
Notes which was partially offset by $2.4 million in financing costs. For the
balance of 1996, cash flows from financing activities included an $80 million
equity contribution from NSP to NRG for the purchase of COBEE. In 1994, cash
flows from financing included an investment of $103.9 million from NSP. The
proceeds of the capital infusion were used for investment in Gladstone ($64.9
million), Schkopau ($18.2 million), MIBRAG ($10.6 million) and Sunnyside
($11.5 million).

As of September 30, 1997, NRG's consolidated financial statements
contained long-term debt (excluding current maturities) of $474.4 million,
$375 million of which is represented by the 1996 Senior Notes and the Notes.
The 1996 Senior Notes have terms substantially similar to the Notes, except
the maturity date is in January 2006. The $265.0 million increase from the
same period one year earlier is due to $250.0 million from the 1997 Senior
Notes, $2.2 million for San Diego Power & Cooling, $16.9 million for
Millennium less $4.1 million consisting primarily of debt issuance costs. As
of September 30, 1997, annual maturities of long-term debt ranged from $3.9
million to $5.0 million in the five-year period ending December 31, 2001. In
addition, $38.0 million is due under NRG's revolving credit facility. See
"Certain Indebtedness" and "Description of Notes."

NRG is committed to additional equity investments of approximately $226
million for 1997-2001, approximately $49 million of which is committed for
1997, for various international power generation projects. In September 1997,
NRG committed to funding up to $22 million in Millennium on or before the end
of the construction period estimated to be May 1999. In addition, in 1996,
NRG provided a $10 million loan commitment to a wholly-owned project
subsidiary of NRGG in order for the NRGG project subsidiary to fund its
capital contribution to Grays Ferry, a cogeneration project currently under
construction. As of October 31, 1997, NRG lent Grays Ferry $6.3 million as
part of its loan commitment. As part of the 1996 loan agreement, NRG was
granted the option to convert $3 million of the loan into common equity of
NRGG. NRG exercised this option and on November 25, 1997, received 396,255
shares of NRGG's common stock. In addition, NRG has committed to finance
NRGG's investment in projects transferred to NRGG under the Co-Investment
Agreement between NRG and NRGG to the extent funds are not available to NRGG
on comparable terms from other sources. (See Note 13 of Notes to Consolidated
Financial Statements for further discussion of NRG's commitments.) NRG
expects to meet these cash requirements with proceeds from the issuance of
debt or equity, including equity contributions from NSP, and internally
generated cash.

In May 1997, NRG acquired a 25.37% equity interest in Loy Yang A. See
"Business -- Independent Power Production and Cogeneration--International
Projects--Loy Yang Power." In order to finance its equity investment in this
acquisition and related financing costs, NRG borrowed $200 million in
short-term debt pursuant to the Bridge Financing, which it used together with
an investment of $60.9 million from NSP and cash on hand. The net proceeds
from the Offering were used to refinance the Bridge Financing. See "Use of
Proceeds."

In addition to the Loy Yang acquisition, NRG purchased San Diego Power &
Cooling on June 25, 1997. The purchase price was $6.7 million, including a
note from the seller for $2.7 million. In July 1997,

NRG acquired a 50% interest in Cadillac Renewable Energy, a 34 MW steam
turbine power plant located in Cadillac, Michigan for $1.9 million. In
September 1997, NRG Morris Cogen, LLC, (formerly Millennium-Morris), an NRG
affiliate, entered into a Construction and Term Loan Agreement to finance the
construction of a 117 MW cogeneration plant in Morris, Illinois. NRG has
entered into a $22 million equity commitment and a $1.2 million guaranty of
certain obligations of NRG Morris Operation, Inc., an NRG affiliate that will
operate the project.

On November 4, 1997, NRG acquired 100% of the outstanding shares of
Pacific Generation Company for $151.3 million. Pacific Generation has
ownership interests in 11 projects with a total capacity of 737 MW, with
operational responsibility for 312 MW and net ownership interests of 166 MW.
The acquisition was financed primarily through the use of NRG's revolving
credit facility.

On November 21, 1997, a consortium including NRG signed an Asset Sale
Agreement to acquire the El Segundo Generating Station, a 1,020 MW gas-fired
project, from Southern California Edison. NRG and Destec Energy, Inc. are
jointly and severally liable under the agreement for the payment of the
$87.75 million purchase price. Consummation of the transaction is scheduled
for January 1, 1998, but it is contingent on receipt of regulatory approvals
and consents from a number of governmental and private parties. There can be
no assurance that all of these approvals and consents will be received.

NRG has entered into a $175 million revolving credit facility with a
syndicate of banks led by ABN AMRO, which matures on March 17, 2000. Proceeds
from the facility will be used for general corporate purposes, including
letters of credit and interim funding for NRG project investments.

The facility allows for LIBOR and Base rate borrowing depending upon the
days notice required and the term of drawing. The applicable margin is based
upon the rate option selected and the assigned ratings of NRG. Pursuant to
the terms of the agreement, NRG is restricted from creating liens on its
assets, is prohibited from merging except under certain circumstances and
must maintain a specified minimum net worth. Failure to comply with these
restrictive covenants could result in an event of default. Other events of
default include nonpayment of principal or interest, NSP's failure to own
majority of outstanding voting stock of NRG, certain cross-defaults, and
certain events of bankruptcy. As of September 30, 1997, $38.0 million was
outstanding from the revolving credit facility.

As part of NRG's global tax strategy, NRG intends to maintain offshore,
for permanent reinvestment in other foreign projects, earnings from foreign
investments. For this reason, NRG intends to utilize the earnings in its
domestic operations to make the payments of principal and interest on the
Senior Notes. These earnings will include payments of interest and principal
to be received from its wholly-owned Dutch project subsidiary, NRGenerating
International, B.V., with respect to loans from NRG. Although dividends and
management fees to NRG and its subsidiaries from partnerships in which NRG
invests are subject to restrictions in some cases, NRG currently expects that
cash generated internally and funds from borrowings described above will
provide sufficient funds for operating activities. However, there can be no
assurance that available funds will be sufficient for such purposes. Because
substantially all of the operations of NRG are conducted by its project
subsidiaries and project affiliates, NRG's cash flow and its ability to
service its indebtedness, including its ability to pay the interest on and
principal of the Senior Notes when due, are dependent upon cash dividends and
distributions or other transfers from its project and other subsidiaries and
project affiliates to NRG.

IMPACT OF INFLATION, INTEREST RATES, EXCHANGE RATES AND ENERGY PRICES

NRG attempts, whenever practicable, to hedge certain aspects of its
international project investments against the effects of inflation and
fluctuations in interest rates and energy prices. To date, NRG has generally
structured the energy payments of its power purchase agreements to adjust
with the same price indices as contained in its contracts with the fuel
suppliers for the corresponding projects. In some cases, a portion of
revenues is associated with operation and maintenance and is indexed to
adjust with inflation.

In July 1997, NRG changed its policy of hedging foreign currency
denominated investments as they were made, to a policy of hedging foreign
currency denominated cash flows, over a projected 12-month period. As a
result of this change in hedging policy, NRG terminated the seven foreign
currency swap

agreements on July 29, 1997. Such terminations resulted in cash payments to
NRG without any earnings impact. Consistent with prior policies, NRG is not
hedging future earnings and does not speculate in foreign currencies.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," was issued. In addition, in June 1997 SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also issued. As both SFAS No. 130 and No. 131 are effective
for fiscal years beginning after December 15, 1997, NRG's 1998 annual report
to shareholders will include the disclosures required by these new standards.
Management believes the adoption of SFAS No. 130 and SFAS No. 131 will not
have a material effect on NRG's financial statements.

BUSINESS

INTRODUCTION

NRG is one of the leading participants in the independent power generation
industry. Established in 1989 and wholly-owned by Northern States Power
Company ("NSP"), NRG is principally engaged in the acquisition, development
and operation of, and ownership of interests in, independent power production
and cogeneration facilities, thermal energy production and transmission
facilities and resource recovery facilities. The power generation facilities
in which NRG currently has interests (including those under construction and
Loy Yang A) as of November 21, 1997 have a total design capacity of 7,972
megawatts ("MW"), of which NRG has or will have operational responsibility
for 5,062 MW and net ownership of or leasehold interests in 2,351 MW. In
addition, NRG has substantial interests in district heating and cooling
systems and steam generation and transmission operations; as of December 31,
1996, these thermal businesses had a steam capacity of approximately 3,550
million British thermal units ("mmBtus"). NRG's refuse-derived fuel ("RDF")
plants processed more than 808,000 tons of municipal solid waste into
approximately 644,000 tons of RDF in 1996.

STRATEGY

NRG intends to continue to grow through a combination of acquisitions and
greenfield development of power generation and thermal energy production and
transmission facilities and related assets in the United States and abroad.
NRG believes that its facility operations and engineering expertise, fuel and
environmental strategies, labor and government relations expertise and legal
and financial skills give NRG a competitive advantage in the independent
power market. NRG also believes that its policy of meeting or exceeding
applicable environmental regulatory standards and its environmental
compliance record will give it an advantage as regulators continue to impose
increasingly stringent environmental requirements on the operation of power
generation facilities. In addition, NRG continues to have access to technical
and administrative support from NSP on a contract basis to augment its own
expertise. NRG believes the knowledge and expertise it has gained in the
financial and legal restructuring of its existing facilities, as well as its
reputation with respect to environmental compliance and labor relations, can
be effectively employed in the development of both domestic and international
greenfield projects.

In the United States, NRG's near-term focus will be primarily on the
acquisition of existing power generation capacity and thermal energy
production and transmission facilities, particularly in situations in which
its expertise can be applied to improve the operating and financial
performance of the facilities. NRG intends to focus its domestic development
activities primarily on the acquisition or development of facilities in
excess of 100 MW and to pursue smaller projects when it has the opportunity
to combine several smaller projects into a larger transaction. NRG is also
working with several industrial companies to develop energy projects that
would provide both electricity and steam for their production facilities. In
addition, to the extent that the replacement of aging power generating
capacity or growth in demand creates the need for new power generation
facilities in the United States, NRG intends to pursue opportunities to
participate in the development of such facilities. NRG is also studying the
opportunities that may be created by the current restructuring of the
domestic electric utility industry, particularly the divestiture by some
utility companies of their generating assets.

In the international market, NRG will continue to pursue development and
acquisition opportunities in those countries in which it believes that the
legal, political and economic environment is conducive to increased foreign
investment. Once it has developed one project in a country, NRG uses that as
a base to develop other projects in that same country or region, leveraging
its experience and knowledge to enhance its likelihood of success in the
area. NRG intends to continue to capitalize on opportunities created by the
privatization of existing government-owned generating capacity. In addition,
due to the significant existing demand for new power generating capacity in
the international market, NRG intends to engage in the development of
international greenfield projects. NRG intends to focus its international
development activities primarily on the acquisition or development of
facilities with capacity in excess of 100 MW and to pursue smaller projects
when it has the opportunity to combine several smaller projects into a larger
transaction. NRG believes that the global market will continue to provide
attractive

investment opportunities to NRG as the countries that have initiated the
privatization of their power generation capacity and have solicited bids from
private companies to purchase existing facilities or to develop new capacity
continue their privatization programs and other countries begin similar
privatization efforts.

NRG's acquisition and development strategy is based upon the pursuit of
opportunities located in countries that are expected to meet certain
project-specific and market criteria. These criteria include fuel type,
facility size, form of ownership or control, type of transaction
(privatization or greenfield) and committed capacity compared to projected
market demand. The evaluation process also incorporates political and
business climate criteria that include a favorable legal and regulatory
environment, ability to attract financing and economic outlook. NRG's goal is
to focus on countries that provide a combination of need for additional
generation capacity and positive political, business and economic factors.

NRG expects to acquire or develop most domestic and international projects
on a joint venture basis. Where appropriate, NRG will include a local or host
country partner or a partner with substantial experience in or connections to
the area. By doing so, NRG expects to gain a number of advantages, including
technical expertise possessed by others, greater knowledge of and experience
with the political, economic, cultural and social conditions and commercial
practices of the region or country where the project is being developed, and
the ability to leverage NRG's human and financial resources. A local partner
also may, among other things, assist in obtaining financing from local
capital markets as well as building political and community support for the
project. NRG expects such joint ventures will enable it to share the risks
associated with the acquisition and development of larger projects. Joint
acquisition and development of future projects also should further reduce
NRG's financial risk by building a more diversified portfolio of projects.

Although NRG exercises flexibility in structuring its investments in
projects, NRG's goal is to own a 20% to 50% equity interest in, and have
operating control or influence over, the projects in which it invests.
However, NRG may in some instances be willing to modify these targets for a
particular project if it determines that strategic considerations and
anticipated returns, when combined with other factors, such as the ability to
exercise "negative control" (i.e., the ability to control material project
decisions by exercising a veto right) or the ability to exercise oversight
authority in the development or operation of a project, justify an investment
in that project. Alternatively, NRG may consider investments or projects in
which it is the sole or a majority owner or in which it owns less than a 20%
equity interest. See "Risk Factors -- Risks Involved in Making Minority
Investments in Projects."

NRG intends to pursue the acquisition and development of natural gas-fired
power generation facilities where appropriate, to complement its existing and
anticipated future investments in coal and other solid fuel-fired facilities.
NRG currently holds no interest in, and has no present intention of investing
in, any nuclear generating facility.

As part of NRG's global tax strategy, NRG intends to maintain its earnings
from foreign investments offshore, for permanent reinvestment in other
foreign projects. For this reason, NRG intends to utilize the earnings in its
domestic operations to make the payments with respect to the Notes. These
earnings are expected to include payments of interest and principal to be
received from its wholly-owned Dutch subsidiary, NRGenerating International,
B.V. ("NRGBV") with respect to loans from NRG to that company.

COMPETITION

The demand for power in the United States traditionally has been met by
utilities constructing large-scale electric generating plants under
cost-of-service based regulation. The enactment of PURPA in 1978 spawned the
growth of the independent power industry which expanded rapidly in the 1980s.
The initial independent power producers to enter the market were an
entrepreneurial group of cogenerators and small power producers who
recognized the business opportunities offered by PURPA. This initial group of
independent power producers was later joined by larger, better capitalized
companies, such as subsidiaries of fuel supply companies, engineering
companies, equipment manufacturers and affiliates of other industrial
companies. In addition, a number of regulated utilities

created subsidiaries (such as NRG) which compete with the independent power
producers. Some independent power producers specialize in market niches, such
as a specific technology or fuel (for example, gas-fired cogeneration,
waste-to-energy, hydropower, geothermal, wind, solar, wood, coal and
conservation) or a specific region of the country where they believe they
have a market advantage.

Although NRG is one of the leading participants in the independent power
industry, certain other independent power producers and utility affiliates
have significantly larger capital resources available to them on a
stand-alone basis than NRG. NRG's competitors are major international
independent power producers worldwide, which include, among others,
CalEnergy, CMS Generation Co., Cogentrix Energy, Inc., Dominion Energy, Enron
Development Corp., Edison Mission, Inc., National Power plc, PowerGen plc,
Southern Electric International, Inc. and The AES Corporation. Such
competitors compete with NRG with regard to pricing terms, quality of service
and experience.

PENDING ACQUISITIONS AND PROJECTS UNDER DEVELOPMENT

NRG has a number of projects in development and is in various stages of
negotiations for the acquisition of power and steam generating capacity in
the United States and abroad. There can be no assurance that the acquisition
or development of any or all of these projects will in fact be consummated,
or if consummated, that the projects will remain in the form or occur in the
manner described in this Prospectus.

WEST JAVA

A joint venture among NRG, Ansaldo Energia SpA, a major Italian industrial
company ("Ansaldo"), and P.T. Kiani Metra, an Indonesian industrial company
("PTKM"), is developing a 400 MW coal-fired power generation facility in West
Java, Indonesia through P.T. Dayalistrik Pratama ("PTDP"), a limited
liability company created by the joint venturers. Each of NRG and Ansaldo
have an ownership interest of 45% in PTDP and PTKM has an ownership interest
of 10%.

PTDP signed a Power Purchase Agreement (the "PPA") with P.T. PLN (Persero)
("P.T. PLN"), an instrumentality of the Government of Indonesia, on November
13, 1996. Under the PPA, PTDP must close and draw on construction financing
no later than January 12, 1998 or be subject to termination. Furthermore, in
certain circumstances of default the PPA gives P.T. PLN an option to purchase
the project prior to commercial operation at a price designed to give NRG and
its partners a fixed rate of return on their committed equity investments
and, after commercial operation, at a price based on the net present value of
future project cash flows.

PTDP has executed construction contracts pursuant to which Ansaldo will
construct the project for a fixed price on a fixed schedule (subject to
customary adjustments). Ansaldo is liable for liquidated damages in the event
of certain construction delays or defaults. An NRG affiliate will be the
operator of the project pursuant to an 18 year operating and maintenance
agreement, which provides for reimbursement of the actual operating costs and
payment of an annual fee. NRG will guarantee the operator's obligations under
this agreement. In June 1997, PTDP signed a coal supply agreement for the
project and acquired the land for the plant site.

NRG expects that, upon closing of financing, its total committed equity in
PTDP will be approximately $65 million. As of September 15, 1997, NRG has
made capital infusions into PDTP totalling $5.63 million. The total project
cost is approximately $560 million, which is to be financed by a combination
of equity investments, commercial bank debt and capital markets funding. The
project is currently expected to be ready for financial closing by the end of
1997, however, in September 1997 the Government of Indonesia announced that
the project had been "postponed" and there can be no assurance as to when or
whether the Government will allow the project to go forward. If the project
does not go forward, NRG will be required to write-off its investment of
approximately $6 million, which has been capitalized.

ENFIELD

In December 1996, NRG reached agreement with Indeck Energy Services
(Europe) ("Indeck") to take a 50% interest in the Enfield Energy Centre, a
350 MW gas-fired power project in the North London

borough of Enfield. The power station is planned to begin commercial
operations in the end of 1999 and is being jointly developed by NRG and
Indeck. This power station, like Loy Yang A, will not have a long-term power
sales contract, which is no longer available under the current United Kingdom
regulatory system. Instead, it will sell its output to the U.K. grid. NRG
expects that upon closing of financing, its total committed equity in the
Enfield Energy Center will be approximately GBP 17 million.

ESTONIA

On December 20, 1996 representatives of the Estonian Government, the
state-owned Eesti Energia ("EE"), and NRG signed a Development and
Cooperation Agreement ("DCA"). The DCA defines the terms under which the
parties are to establish a plan to develop and refurbish the Balti and Eesti
Power Plants. Pursuant to the DCA, a business plan for the joint project was
submitted in June, 1997. NRG has stated its willingness to invest up to
$67.25 million of equity in this project and to assist the joint project in
obtaining non-recourse debt in an amount necessary to fund the required
capital improvements to the Balti and Eesti Power Plants. Recently the
Estonian government announced that it had rejected the business plan of NRG
and EE. NRG has a policy of expensing all costs until there is a signed
contract and Board of Directors approval. All such costs with respect to
Estonia have been expensed. Discussions are continuing with the Estonian
Government as management continues to evaluate the Estonian situation as well
as other opportunities around the world.

CAJUN

NRG, together with two other parties, and the Chapter 11 trustee has filed
a plan with the United States Bankruptcy Court for the Middle District of
Louisiana, to acquire the fossil generating assets of Cajun Electric Power
Cooperative of Baton Rouge, Louisiana ("Cajun") for approximately $1.1
billion. The NRG consortium has the support of the Chapter 11 trustee and
Cajun's secured creditors. The Court has also received two other competing
plans of reorganization for Cajun. All three plans of reorganization are the
subject of a confirmation hearing which began on December 15, 1996. NRG
expects the confirmation process to conclude in 1997. Under the plan filed
with the Court, NRG would hold a 30% equity interest in Louisiana Generating
LLC, which would acquire Cajun's 1760 MW of non-nuclear generating assets.
NRG's plan of reorganization for Cajun includes an equity investment from NRG
of approximately $55 million.

MCPC

In September 1996, through its subsidiary, Oklahoma Loan Acquisition Corp.
("OLAC"), NRG acquired all right, title and interest in the existing senior
secured debt of Mid-Continent Power Company, Inc. ("MCPC") from Barclays Bank
and The Nippon Credit Bank, at a substantial discount. On June 18, 1997, MCPC
filed a Chapter 11 petition in federal bankruptcy court in Tulsa, Oklahoma,
and concurrently filed a plan of reorganization proposing to transfer
ownership of substantially all of MCPC's assets to OLAC in exchange for
forgiveness of debt. On October 24, 1997, the bankruptcy court entered an
order confirming MCPC's plan which provides for the transfer of MCPC's assets
to a subsidiary of NRG by December 23, 1997. NRG's development partner is
entitled to a 10% interest in the MCPC project, and the bankruptcy court's
confirmation order effectively mandates that NRG may own no more than 50% of
the project. NRG is not obligated to make any further investments in MCPC.
The project is a gas-fired cogeneration plant with a rated capacity of 110
MW, located in Pryor, Oklahoma. The project sells steam to several industrial
customers located in the Mid-America Industrial Park and sells electricity to
two Oklahoma utilities.

EL SEGUNDO

On November 21, 1997, a consortium including NRG signed an Asset Sale
Agreement to acquire the El Segundo Generating Station, a 1,020 MW gas-fired
project, from Southern California Edison. NRG and Destec Energy, Inc. are
jointly and severally liable under the agreement for the payment of the
$87.75 million purchase price. Consummation of the transaction is expected to
occur on or before January 1, 1998, but it is contingent on receipt of
regulatory approvals and consents from a number of governmental and private
parties. There can be no assurance that all of these approvals and consents
will be received.

DESCRIPTION OF NRG'S PROJECTS

NRG owns interests in power generation and thermal generation projects and
other facilities described herein either directly or through project
subsidiaries or project affiliates. Each project is located on a site that is
owned or leased on a long-term basis by NRG, a project subsidiary or a
project affiliate. The ownership or leasehold interest generally is mortgaged
to secure project financing obligations, and, in certain instances, to secure
the project subsidiary's or project affiliate's obligations under its power
purchase agreement.

PROJECT AGREEMENTS

In the past, virtually all of NRG's operating power generation facilities
have sold electricity under long-term power purchase agreements. A facility's
revenue from a power purchase agreement usually consists of two components:
energy payments and capacity payments. Energy payments, which are intended to
cover the variable costs of electric generation (such as fuel costs and
variable operation and maintenance expense), are normally based on a
facility's net electrical output measured in kilowatt hours, with payment
rates either fixed or indexed to the fuel costs of the power purchaser.
Capacity payments, which are generally intended to provide funds for the
fixed costs incurred by the project subsidiary or project affiliate (such as
debt service on the project financing and the equity return), are normally
calculated based on the net electrical output or the declared capacity of a
facility and its availability.

The power purchase agreements for NRG's international projects generally
require that payments under such agreements be made in or indexed to United
States dollars or a currency freely convertible to United States dollars,
such as the Australian dollar or the German mark. NRG currently does not have
political risk or currency convertibility and repatriation risk insurance
coverage with respect to any of its existing project interests (other than
Latin Power project investments). However, where appropriate and if available
at reasonable premiums with respect to future project investments, NRG
intends to procure insurance against currency inconvertibility and
repatriation risks for its equity interests in projects.

A number of the more recent projects in which NRG has acquired or is
acquiring an interest do not have long-term power purchase agreements. For
example, Loy Yang A does not have such agreements because under the new
Australian regulatory scheme, all generators must sell their output to a
grid, where the price is established by a neutral regulator based on the
market prices during each defined period. The same will be true of Enfield,
since the United Kingdom has adopted a similar regulatory scheme. Similarly,
the SJVEP Facilities accepted a buy-out of their long-term contracts, so if
they recommence operations, it is anticipated that they will be merchant
plants. In the case of the Kladno project, where there is a long-term
agreement, the energy price is tied to the market price of electricity rather
than to the costs incurred by the project, so the contract does not provide
the traditional level of certainty and protection. While these "merchant"
projects introduce new risks and uncertainties, and require careful advance
analysis of the local power markets, NRG believes that they are becoming
increasingly accepted in the independent power market.

Generally, NRG's project subsidiaries and project affiliates that own
operating power generation or steam generation facilities purchase fuel under
long-term supply agreements or have ownership interests in the fuel source.
Of the power generation projects in which NRG has an ownership interest, ten
are fueled with coal or waste coal, four are fueled with biomass, three are
fueled with oil, eight are fueled with natural gas, one is fueled with
hydro-power and one is fueled with landfill gas and coal seam methane.
Through NEO, NRG also has interests in 39 small hydroelectric or landfill
gas-fired power generation facilities.

PROJECT FINANCING

As with its existing facilities, NRG expects to finance most of its future
projects with some type of debt as well as equity. Leveraged financing
permits the development of projects with a limited equity base but also
increases the risk that a reduction in revenues could adversely affect a
particular project's ability to meet its debt or lease obligations.

NRG has financed its principal power generation facilities (other than
Schkopau) primarily with non-recourse debt that is repaid solely from the
project's revenues and generally is secured by interests in the physical
assets, major project contracts and agreements, cash accounts and, in certain
cases, the ownership interest, in that project subsidiary. This type of
financing is referred to as "project financing." True project financing is
not available for all projects, including some assets purchased out of
bankruptcy (such as NRGG), some merchant plants, some purchases of minority
stock positions in publicly traded companies (such as EDL) and plants in
certain countries that lack a sufficiently well-developed legal system. But
even in those instances, NRG may be able to finance a smaller proportion of
the total project cost with project financing or may employ debt that is
either raised or supported at the corporate level.

Project financing transactions generally are structured so that all
revenues of a project are deposited directly with a bank or other financial
institution acting as escrow or security deposit agent. These funds then are
payable in a specified order of priority set forth in the financing documents
to ensure that, to the extent available, they are used first to pay operating
expenses, senior debt service and taxes and to fund reserve accounts.
Thereafter, subject to satisfying debt service coverage ratios and certain
other conditions, available funds may be disbursed for management fees or
dividends or, where there are subordinated lenders, to the payment of
subordinated debt service.

In the event of a foreclosure after a default, NRG's project subsidiary or
project affiliate owning the facility would only retain an interest in the
assets, if any, remaining after all debts and obligations were paid. In
addition, the debt of each operating project may reduce the liquidity of
NRG's equity interest in that project because the interest is typically
subject both to a pledge securing the project's debt and to transfer
restrictions set forth in the relevant financing agreements. Also, NRG's
ability to transfer or sell its interest in certain projects is restricted by
certain purchase options or rights of first refusal in favor of its partners
or the project's power and steam purchasers and certain change of control
restrictions in the project financing documents.

These project financing structures are designed to prevent the lenders
from looking to NRG or its other projects for repayment (that is, they are
"non-recourse" to NRG and its other project subsidiaries and project
affiliates not involved in the project), unless NRG or another project
subsidiary or project affiliate expressly agrees to undertake liability. NRG
has agreed to undertake limited financial support for certain of its project
subsidiaries in the form of certain limited obligations and contingent
liabilities. These obligations and contingent liabilities take the form of
guarantees of certain specified obligations, indemnities, capital infusions
and agreements to pay certain debt service deficiencies. To the extent NRG
becomes liable under such guarantees and other agreements in respect of a
particular project, distributions received by NRG from other projects may be
used by NRG to satisfy these obligations. To the extent of these obligations,
creditors of a project financing may have recourse to NRG. The project
financing structures therefore generally are described throughout this
Offering Memorandum as being "substantially non-recourse" to NRG and its
other projects.

NRG's facilities are insured in accordance with covenants in each
project's debt financing agreements (if any) and in accordance with NRG's
risk management policies. Coverage for each facility generally include
workers' compensation, commercial general liability supplemented by primary
and excess umbrella liability, and a master property insurance program
including property, boiler and machinery (at replacement cost) and business
interruption.

OPERATING ARRANGEMENTS

NRG operates each of the projects that it wholly owns or controls. Where
NRG has only a minority interest and is not the operator of a project, NRG
generally seeks the ability to exert a degree of influence with respect to
operation of the project through its joint venture or similar agreement with
its partners.

As a condition to participating in privatizations and refurbishments of
formerly state-owned businesses, NRG may be required to undertake
transitional obligations relating to union contracts, employment levels and
benefits obligations for employees, which could delay the achievement of
desirable operating efficiencies and financial performance.

SUMMARY OF NRG PROJECTS

As of November 21, 1997, NRG had interests in 38 operating power
generation facilities worldwide (not including NEO and Energy Investors Funds
or the El Segundo plant of Southern California Edison in which NRG signed an
Asset Purchase Agreement for a 50% interest on November 21, 1997), including
projects under construction. Of these facilities, 22 are located in the
United States (1,275 MW design capacity, with NRG holding 378 MW net
ownership), four are located in Germany (1,160 MW design capacity, with NRG
holding 267 MW net ownership ), four are located in Australia (4,106 MW
design capacity, with NRG holding 1,270 MW net ownership), and two are
located in Colombia (299 MW design capacity, with NRG holding 16 MW net
ownership), and one is located in each of the Czech Republic (382 MW design
capacity, with NRG holding 214 MW net ownership), Jamaica (74 MW design
capacity, with NRG holding 7 MW net ownership), Peru (155 MW design capacity,
with NRG holding 5 MW net ownership), Honduras (80 MW design capacity, with
NRG holding 6 MW net ownership), Canada (110 MW design capacity, with NRG
holding 28 MW net ownership), and Bolivia (218 MW design capacity, with NRG
holding 126 MW net ownership). In December 1996, NRG and Vattenfall AB of
Sweden acquired 96.6% of the outstanding common shares of Compania Boliviana
de Energia Electrica SA -- Boliviana Power Company Limited ("COBEE"), the
second largest electric utility company in Bolivia, which will have a design
capacity of 218 MW after a 65 MW expansion in 1998. In addition, through its
wholly-owned project subsidiary, NEO Corporation ("NEO"), NRG also had
interests on November 21, 1997 in 39 small hydroelectric and landfill
gas-fired power generation facilities located in the United States with total
design capacity of 113 MW, of which NRG has net ownership of 55 MW.

In addition to power generation, NRG has interests in four district
heating and cooling systems, located in Minneapolis, San Francisco,
Pittsburgh and San Diego, that provide steam for heating and chilled water
for cooling. NRG also owns or operates two steam transmission facilities and
two resource recovery/RDF facilities, all located in Minnesota. In connection
with the PGC acquisition, NRG also owns interests in two additional resource
recovery/RDF facilities in Maine. NRG also owns or leases interests in
lignite mines in Germany estimated to contain reserves of approximately 789
million metric tons and in Australia estimated to contain resources equal to
2 billion tons.

Set forth in the two tables and the text below are descriptions of NRG's
facilities in operation or under construction as of November 21, 1997.

INDEPENDENT POWER PRODUCTION AND COGENERATION FACILITIES(1)

NAME AND LOCATION DESIGN POWER
OF FACILITY CAPACITY(MW)(2) PURCHASER
- ----------------------------------- ------------- ----------------------------

Loy Yang Power(4),
Australia.......................... 2000 Victorian Pool
Gladstone Power Station,
Australia.......................... 1680 QTSC; BSL
Collinsville,
Australia.......................... 189 QTSC
Energy Development Limited,
Australia.......................... 237 Various
Kladno Czech Republic,
existing project................... 28 STE/Industrials
expansion project.................. 354 STE
Schkopau Power Station,
Germany............................ 960 VEAG
MIBRAG mbH(4), (Mumsdorf)
Germany............................ 100 WESAG
MIBRAG mbH(4), (Deuben)
Germany............................ 60 WESAG
MIBRAG mbH(4), (Wahlitz)
Germany............................ 40 WESAG
COBEE,
Bolivia............................ 218 (9) Electropaz/ELF
Latin Power (Mamonal),
Colombia........................... 100 Proelectrica
Latin Power (Termovalle),
Colombia........................... 199 EPSA
Latin Power (ELCOSA), Empresa Nacional de
Honduras .......................... 80 Energia Electrica
Latin Power (Dr. Bird), Jamaica Public Service
Jamaica............................ 74 Company, Ltd.
Latin Power (Aguaytia), Central Peruvian
Peru .............................. 155 Electricity Grid
NRGG (Parlin), Jersey Central
New Jersey......................... 122 Power & Light
Company
NRGG (Newark), Jersey Central
New Jersey......................... 52 Power & Light
Company
NRGG (Grays Ferry), PECO Energy
Pennsylvania....................... 150 Company
NRGG (Philadelphia Cogen), Philadelphia
Pennsylvania....................... 22 Municipal
Authority
Pacific Generation Company (10) ... 737
Camas Power ....................... 25 (12) NA
Crockett Cogeneration ............. 240 PG&E
Curtis-Palmer Hydro ............... 58 NIMO
Kingston Cogeneration.............. 110 Ontario Hydro
Maine Energy Recovery ............. 22 CMP
Penobscot Energy Recovery ......... 22 Bangor Hydroelectric Company
Mt. Poso Cogeneration ............. 50 PG&E
PowerSmith Cogeneration ........... 110 Oklahoma Gas & Electric
WindPower Partners 1987 ........... 50 PG&E
WindPower Partners 1988............ 30 PG&E
Turners Falls ..................... 20 Unitil Power Company(13)
San Joaquin Valley (Madera),
California......................... 23 NA(14)(15)
San Joaquin Valley (Chowchilla II),
California......................... 10 NA(14)(15)
San Joaquin Valley (El Nido),
California......................... 10 NA(14)(15)

(RESTUBBED TABLE CONTINUED FROM ABOVE)

NRG'S TOTAL FACILITY
LATER OF DATE OF PERCENTAGE COST(3)
NAME AND LOCATION ACQUISITION OR DATE OF OWNERSHIP (IN $
OF FACILITY COMMERCIAL OPERATION INTEREST MILLIONS)
- ----------------------------------- ---------------------- ------------ --------------

Loy Yang Power(4),
Australia.......................... 1997 25.37 3,700(5)
Gladstone Power Station,
Australia.......................... 1994 37.50 532.0(6)
Collinsville,
Australia.......................... 1998 50.00 154.0
Energy Development Limited,
Australia.......................... 1997 15.9 Listed company
Kladno Czech Republic,
existing project................... 1994 34.00 NA(7)
expansion project.................. 1999 57.85 401.0
Schkopau Power Station,
Germany............................ 1996 20.55 1,094.0(6)
MIBRAG mbH(4), (Mumsdorf)
Germany............................ 1994 33.33 468.0(4)(8)
MIBRAG mbH(4), (Deuben)
Germany............................ 1994 33.33 (8)
MIBRAG mbH(4), (Wahlitz)
Germany............................ 1994 33.33 (8)
COBEE,
Bolivia............................ 1996 48.30 174.6
Latin Power (Mamonal),
Colombia........................... 1994 6.45 71.0
Latin Power (Termovalle),
Colombia........................... 1998 4.88 145.6
Latin Power (ELCOSA),
Honduras .......................... 1994 7.65 93.0
Latin Power (Dr. Bird),
Jamaica............................ 1995 8.78 98.0
Latin Power (Aguaytia),
Peru .............................. 1998 3.28 256.0
NRGG (Parlin),
New Jersey......................... 1996 45.21 Listed company
NRGG (Newark),
New Jersey......................... 1996 45.21 Listed company
NRGG (Grays Ferry),
Pennsylvania....................... 1996 15.07 Listed company
NRGG (Philadelphia Cogen),
Pennsylvania....................... 1996 37.52 Listed company

Pacific Generation Company (10) ... 1997 100.00 151.3(11)
Camas Power ....................... 1997 100.00
Crockett Cogeneration ............. 1997 24.87
Curtis-Palmer Hydro ............... 1997 8.50
Kingston Cogeneration.............. 1997 25.00
Maine Energy Recovery ............. 1997 16.25
Penobscot Energy Recovery ......... 1997 28.70
Mt. Poso Cogeneration ............. 1997 21.90
PowerSmith Cogeneration ........... 1997 8.75
WindPower Partners 1987 ........... 1997 17.00
WindPower Partners 1988............ 1997 18.54
Turners Falls ..................... 1997 8.90
San Joaquin Valley (Madera),
California......................... 1992 45.00 45.8
San Joaquin Valley (Chowchilla II),
California......................... 1992 45.00
San Joaquin Valley (El Nido),
California......................... 1992 45.00

NAME AND LOCATION DESIGN POWER
OF FACILITY CAPACITY(MW)(2) PURCHASER
- ----------------------------------- ------------- ----------------------------

Jackson Valley Energy Partners,
California(16)..................... 16 PG&E
Sunnyside Cogeneration Associates,
Utah............................... 58 PacifiCorp
Artesia, Southern
California......................... 34 California
Edison

Cadillac Renewable Energy, Consumers
Michigan........................... 34 Energy

Millenium
Millennium, Petrochemicals,
Illinois........................... 117 Inc.

(RESTUBBED TABLE CONTINUED FROM ABOVE)

Jackson Valley Energy Partners,
California(16)..................... 1991 50.00 28.0
Sunnyside Cogeneration Associates,
Utah............................... 1994 50.00 139.4
Artesia,
California......................... 1996 2.96 40.0

Cadillac Renewable Energy,
Michigan........................... 1997 50.00 5.0(17)
Millennium,
Illinois........................... 1998 50.00 91.0

- ------------
(1) Does not include the small hydroelectric and landfill gas-fired power
generation facilities owned by NEO with an aggregate capacity of 72 MW,
of which NEO has net ownership of 35 MW. In addition, NEO has landfill
gas projects under construction with an aggregate capacity of 23.5 MW,
of which NEO has net ownership of 11.8 MW.
(2) Design capacity is without deduction for internally consumed power.
(3) Except as otherwise indicated, total facility cost includes the total
acquisition cost (purchase price plus assumed debt) where NRG has
acquired an interest in an existing facility or the total construction
cost where NRG has acquired an interest in a facility under
construction.
(4) Each of Loy Yang and MIBRAG also owns coal mines which sell coal both
to its respective power plant and to third parties.
(5) Figures based on an acquisition cost of AUS$4.7 billion, converted at
an exchange rate of 0.7767.
(6) Based on exchange rates in effect at the time of acquisition.
(7) The existing Kladno facility was constructed over a number of years in
former Czechoslovakia and no meaningful cost data are available.
(8) This figure represents the total cost for the 3 generation facilities
and the lignite mine reserves owned by MIBRAG. The purchase price
includes a commitment to contribute DM 1 billion of additional capital
made by MIBRAG at the time of the acquisition. In addition to the price
stated above, MIBRAG is required to pay premiums to the German
government based on the quantity of lignite and briquettes sold.
(9) Includes the Zongo 65 MW expansion which will be operational in 1998.
(10) In addition to the projects listed, PGC owns a limited partnership
interest in the Energy Investors Funds through which it owns an
allocated share equal to another 39 MW.
(11) Figure based on total purchase price for PGC, not allocated between
projects. Approxiamtely $18 million of the purchase price is subject to
confirmation by a post-closing audit.
(12) The project does not generate electricity but its steam sales are the
equivalent of 25 MW of electric power.
(13) Operations of the project are currently suspended pursuant to an
agreement with this power purchaser but it retains the right to require
the project to start-up on six months' notice.
(14) Operations suspended following buy-out of power purchase contracts and
pending negotiation of new power purchase agreements or sale of such
facilities.
(15) PG&E has agreed to a buy-out of related power purchase agreements, but
retains a right of first refusal with respect to output of facilities.
(16) Operations were suspended during 1995 and 1996 pursuant to a
restructuring of the power purchase agreement. Operations restarted on
May 1, 1997.
(17) In addition, NRG pays GE Credit Corporation rent under an operating
lease for the facility.

THERMAL ENERGY PRODUCTION AND TRANSMISSION FACILITIES
AND RESOURCE RECOVERY FACILITIES

NAME AND LOCATION THERMAL ENERGY
OF FACILITY DESIGN CAPACITY(1) PURCHASER/MSW SUPPLIER
- -------------------------------- ----------------------------- --------------------------

Thermal Energy Production
and Transmission Facilities
Minneapolis Energy Center (MEC), Steam: 1,323 Approximately 90 steam
Minnesota....................... mmBtu/hr. (388 MWt) customers and 30 chilled
Chilled water: 35,550 water customers
tons/hr.
North American Thermal Pittsburgh: steam-- Approximately 24 customers
Systems (NATS), 240 mmBtu/hr. in Pittsburgh and 210
Pennsylvania; (70 MWt) customers in San Francisco
California...................... chilled water--
10,180 tons/hr.
San Francisco: steam--
490 mmBtu/hr.
(144 MWt)
San Diego Power & Cooling........ Chilled Water: 5,250 tons/hr. Approximately 14 customers
Rock-Tenn Steam: Rock-Tenn Company
Minnesota....................... 430 mmBtu/hr.
(126 MWt)
Washco, 160 mmBtu/hr. Andersen Corporation
Minnesota....................... (47 MWt) Minnesota Correctional
Facility
Grand Forks Air Force Base, 105 mmBtu/hr. Grand Forks Air Force Base
North Dakota.................... (31 MWt)
Energy Center Kladno, 512 mmBtu/hr. City of Kladno
Czech Republic(4) .............. (150 MWt)
Resource Recovery Facilities
Newport, MSW: 1,500 tons/day Ramsey and Washington
Minnesota....................... Counties

Elk River, MSW: 1,500 tons/day Anoka, Hennepin, and
Minnesota(5).................... Sherburne Counties;
Tri-County Solid Waste
Management Commission

(RESTUBBED TABLE CONTINUED FROM ABOVE)

NRG'S TOTAL
PERCENTAGE FACILITY
NAME AND LOCATION DATE OF OWNERSHIP COST(2)
OF FACILITY ACQUISITION INTEREST (IN $ MILLIONS)
- -------------------------------- ------------- ------------ ---------------

Thermal Energy Production
and Transmission Facilities
Minneapolis Energy Center (MEC), 1993 100.00 110.0
Minnesota.......................
North American Thermal 1995 49.40(3) 6.8
Systems (NATS),
Pennsylvania;
California......................
San Diego Power & Cooling........ 1997 100.00 6.7
Rock-Tenn 1992 100.00 14.2
Minnesota.......................
Washco, 1992 100.00 5.2
Minnesota.......................
Grand Forks Air Force Base, 1992 100.00 2.2
North Dakota....................
Energy Center Kladno, 1994 34.00 NA(4)
Czech Republic(4) ..............
Resource Recovery Facilities
Newport, 1993 100.00 17.1
Minnesota.......................

Elk River, NA(6) 0.00 NA(5)
Minnesota(5)....................

- ------------
(1) Thermal production and transmission capacity is based on 1,000 Btus per
pound of steam production or transmission capacity. The unit mmBtu is
equal to one million Btus.
(2) Total facility cost includes the total acquisition cost (purchase price
plus assumed debt).
(3) Includes 0.5% general partnership interests in each of PTLP and SFTLP.
(4) Kladno also is included in the Independent Power Production and
Cogeneration Facilities table on the preceding page.
(5) NRG operates the Elk River resource recovery facility on behalf of NSP.
(6) Not owned during this period.

INDEPENDENT POWER PRODUCTION AND COGENERATION

INTERNATIONAL PROJECTS

LOY YANG POWER

HEP purchased the Loy Yang A assets for a total price of approximately
AUS$4.7 billion (US$3.7 billion, as of May 12, 1997). While most of that
amount was raised through project-financed loans and leveraged leases that
are non-recourse to the sponsors, NRG's equity investment was approximately
US$257 million. NRG provided that amount and related financing costs from the
Bridge Financing, the equity investment by NSP and cash on hand. After the
acquisition, HEP changed its name to "Loy Yang Power" ("Loy Yang").

Loy Yang owns and operates a 2,000 MW brown coal fired thermal power
station (the "Power Station") and the adjacent Loy Yang coal mine (the
"Mine") located in the Latrobe Valley, Victoria, Australia. The Power Station
has four generating units, each with a 500 MW boiler and turbo generator,
which commenced commercial operation between July 1984 and December 1988. In
addition, Loy Yang manages the common infrastructure facilities which are
located on the Loy Yang site, which service not only the Power Station, but
also the adjacent Loy Yang B 1000 MW power station ("Loy Yang B"), a
pulverized dried brown coal ("PDBC") plant, and several other nearby power
stations.

Loy Yang is required by law to sell its entire output of electricity
(subject to certain narrow exemptions, including output used in the Power
Station and the Mine) through the competitive wholesale market for
electricity operated and administered by the Victorian Power Exchange (the
"Pool"). There are two components to the wholesale electricity market in
Victoria. The first is the Pool. The second is the price hedging contracts,
known as Contracts for Differences (or "CFDs"), that are entered into between
electricity sellers and buyers in lieu of traditional power purchase
agreements, which are not available in Victoria because of the Pool system.

Under the Victorian regulatory system, all electricity generated in
Victoria must be sold and purchased through the Pool. All licensed generators
and suppliers, including Loy Yang, are signatories to a pooling and
settlement agreement, which governs the constitution and operation of the
Pool and the calculation of payments due to and from generators and
suppliers. The Pool also provides centralized settlement of accounts and
clearing. Prices for electricity are set by the Pool daily for each half-hour
of the following day based on the bids of the generators and a complex set of
calculations matching supply and demand and taking account of system
stability, security and other costs. Under a new national electricity market,
the grid in Victoria has been interconnected with that of New South Wales and
limited trading is already taking place between those states. Over the long
term, there are plans for the interconnection of the eastern seaboard states
to establish what will be known as a national power pool. There can be no
assurance that NRG's assumptions concerning future market pricing will in
fact be realized under this new system.

In a Pool system, it is not possible for a generator such as Loy Yang to
enter into traditional power purchase agreements. In order to provide a hedge
against Pool price volatility and also to support their financings, most of
the Victorian generators have entered into CFDs with the Victorian
distribution companies, Victorian government entities and industrial users
("customers"). These CFDs are financial hedging instruments which have the
effect of fixing the price for a specified quantity of electricity for a
particular seller and purchaser over a defined period. They establish a
"strike price" for a certain volume of electricity purchased by the user
during a specified period; differences between that "strike price" and

the actual price set by the Pool give rise to "difference payments" between
the parties at the end of the period. Even if Loy Yang is producing less than
its contracted quantity it will still be required to make and will be
entitled to receive difference payments for the amounts set forth in its
CFDs.

Loy Yang's current CFDs with the Victorian distribution companies and
other Victorian government entities in respect of regulated customer load
(which are called its "vesting contracts") cover approximately 73% of Loy
Yang's forecast revenue from generation in the year ending June 30, 1997,
thus providing considerable stability in its income over that period. Loy
Yang also enters into CFDs with its unregulated or "contestable" customers;
these CFDs are known as "hedging contracts" and, together with the vesting
contracts with the regulated customers, they cover approximately 93% of Loy
Yang's forecast load for the year ending June 30, 1997. Each of the vesting
contracts expires at the end of the franchise period (December 31, 2000), by
which time all retail customers will have become "contestable customers" by
operation of law. Loy Yang's hedging contracts are generally for a term of
one to two years, and the volume of load covered will increase as retail
customers progressively become contestable. Loy Yang's goal is to cover 85%
of its forecast load with these hedging contracts.

Loy Yang and the State Electricity Commission of Victoria (the "SECV")
have been issued with a joint mining license for the Mine. Under the terms of
the privatization, Loy Yang is required to mine coal to supply not only its
own Power Station but also the neighboring Loy Yang B, a nearby PDBC plant,
and an additional future power station that could be developed on a nearby
site. This requirement extends to 2027, but may be extended for an additional
30 years at the SECV's option. Loy Yang receives a fixed capacity charge and
a variable energy charge for these services, coupled with a system of
initiatives and penalties. Loy Yang has over 70 years of economically viable
coal supply at current usage rates within its mine license area, even
assuming that it is required to continue supplying coal to the other parties
beyond 2026.

As noted above, Loy Yang also manages certain common infrastructure
facilities located on Loy Yang's site that service not only Loy Yang, but
also Loy Yang B, the PDBC plant, and several other nearby power plants. These
services provided include the supply of high quality water, low quality
water, ash and waste disposal, drainage and steam.

GLADSTONE POWER STATION

Gladstone is a 1,680 MW coal-fired power generation facility located in
Gladstone, Australia. NRG acquired a 37.5% ownership interest in Gladstone
when the facility was privatized in March 1994. The other participants in
this acquisition are subsidiaries or affiliates of Comalco Limited, Marubeni
Corporation, Sumitomo Corporation and Sumitomo Light Metal Industries,
Mitsubishi Corporation and Mitsubishi Materials Corporation, and Yoshida
Kogyo (the "Participants"). NRG Gladstone Operating Services Pty. Ltd.,
another wholly-owned subsidiary of NRG ("NRG Gladstone"), operates the
Gladstone Power Station under an operations and maintenance agreement
expiring in 2011.

Gladstone sells electricity to the Queensland Transmission and Supply
Corporation ("QTSC") and also to the Boyne Smelters Limited located at Boyne
Island, Queensland ("Smelter"). Pursuant to an Interconnection and Power
Pooling Agreement (the "IPPA"), the Participants have the right to
interconnect Gladstone to the QTSC system and QTSC is obligated to accept all
electricity generated by the facility (subject to merit order dispatch), for
an initial term of 35 years. QTSC also has agreed under the IPPA to permit
the Smelter to interconnect to the QTSC system and to provide sufficient
generating capacity on its system in order to provide an uninterrupted supply
of power to the Smelter in most circumstances. The Participants are obligated
to maintain a 35% reserve margin for the Smelter design load, but the QTSC is
obligated to provide capacity support to the Participants to make up any
shortfall between the available capacity from the GPS and the Smelter demand
at any given time.

The QTSC also entered into a 35-year Capacity Purchase Agreement (a "CPA")
with each of the Participants for its percentage of the capacity of
Gladstone, excluding that sold directly to the Smelter. Under the CPAs, the
Participants are paid both a capacity and an energy charge by the QTSC. The
capacity charge is designed to cover the projected fixed costs allocable to
the QTSC, including debt service and an equity return, and is adjusted to
reflect variations in interest rates. A capacity bonus is also

available if the Equivalent Availability Factor exceeds 88% on a rolling
average basis, and damages are payable by the Participants if it is less than
82% on that same basis. As of September 30, 1997, the two-year average
Equivalent Availability Factor was 88.4%. The QTSC also pays an energy
charge, which is intended to cover fuel costs.

The owners of the Smelter ("BSL") have also entered into a Block A PPA
with each Participant, providing for the sale and purchase of such
Participant's percentage share of capacity allocated to the existing Smelter.
BSL has also entered into a Block B PPA with each Participant, providing for
the sale and purchase of such Participant's percentage share of capacity
allocated to the third production line of the Smelter which is currently
being commissioned. The term of each of these PPAs is 35 years. BSL is
obligated to pay to each Participant a demand charge that is intended to
cover the fixed costs of supplying capacity to the existing Smelter and the
Smelter expansion, including debt service and return on equity. BSL also is
obligated to pay an energy charge based on the fuel cost associated with the
production of energy from the facility. NRG anticipates that the Smelter
expansion will result in an increase in Gladstone capacity utilization from
approximately 41% in 1994 to an estimated 70% in 1998.

NRG Gladstone is responsible for operation and maintenance of Gladstone
pursuant to a 17-year Operation and Maintenance Agreement that commenced in
1994. NRG Gladstone is entitled to a base fee of AUS$1.25 million per year
indexed in accordance with Australian CPI (approximately $1.0 million, based
on exchange rates and ACPI in effect at September 30, 1997), and an annual
bonus based on the capacity bonuses to which the Participants are entitled
under the CPAs. NRG Gladstone is obligated to pay liquidated damages for
shortfalls in availability in an amount calculated by reference to the
liquidated damages payable by the Participants under the CPAs and the PPAs.
NRG Gladstone's obligations under the Operation and Maintenance Agreement are
unconditionally guaranteed by NRG, subject to an aggregate liability cap of
AUS$25 million indexed in accordance with ACPI (approximately $19.7 million,
based on exchange rates and ACPI in effect at September 30, 1997).

In the event the Gladstone facility fails to deliver sufficient power for
the Smelter and no back up power is available from the QTSC, molten aluminum
in the Smelter can solidify, resulting in a shutdown of the Smelter for a
substantial period of time. If the failure to deliver power to the Smelter is
caused by the willful default of QTSC or the Participants (but not NRG
Gladstone), the Participants may become liable to pay liquidated damages,
including compensation to BSL for lost profits, which are not capped. QTSC
has agreed to indemnify NRG's project subsidiaries and the other Participants
for any liability to the owners of the Smelter arising as the result of a
willful default by QTSC with regard to its obligations to deliver power to
the Smelter, subject to certain mitigation obligations of NRG's project
subsidiaries and the other Participants. If such failure is due to the
willful default of NRG Gladstone, NRG may become liable, under its guarantee
of NRG Gladstone's obligations, to pay liquidated damages up to AUS$25
million indexed in accordance with ACPI (approximately $19.7 million, based
on exchange rates and ACPI in effect at September 30, 1997). In addition, in
the event NRG Gladstone is terminated for cause under the Operation and
Maintenance Agreement, the other Participants can require a sale of NRG's
equity interest.

Coal costs for operation of Gladstone generally are passed through to QTSC
and BSL via the energy charges under the IPPA and the BSL Power Purchase
Agreements. Until 2005, coal will be supplied to Gladstone by QTSC through
on-sale agreements between QTSC and the Participants. An umbrella coal
haulage agreement between the Participants and Queensland Railways provides
for the transportation of coal by rail from the existing sources and from
future coal sources for 30 years, with rail freight costs generally being
passed through to QTSC and BSL via the energy charge payable to the
Participants. The Participants have arranged for ash disposal from the
facility pursuant to an ash management agreement with the Gladstone Port
Authority, the City of Gladstone and Queensland Railways.

The acquisition of the GPS by the Participants was financed pursuant to an
AUS$625 million (US$443 million at exchange rates in effect at the time)
secured term loan and letter of credit facility provided by a consortium of
international banks arranged by Barclay's Bank plc. The debt is non-recourse
to NRG and the other owners of the Participants.

Queensland is in the process of converting its electricity generation
system in order to participate in the national power pool under development
in Australia. In connection with that conversion, the Participants have
engaged in discussions with BSL and various Queensland governmental entities
regarding a restructuring of the project to make it more compatible with the
new electricity market. Those negotiations are in an intermediary stage, and
NRG expects the restructuring to take several months. Meanwhile, NRG, the
Participants and BSL have agreed on certain principles regarding
restructuring, including the following principles: (a) none of the parties
will be any worse off as a result of the restructuring, taking into account
all risk and financial perspectives; (b) it is preferable to have
restructuring outcomes that are consistent with the operation of the new
electricity market, rather than outcomes that are exceptions; (c) where
opportunities arise in the restructuring, the benefits from superior
management of risk will be recognized; and (d) benefits arising from the
restructuring will be shared equitably after taking into account any
reallocation of risk.

NRG's equity in earnings from its 37.5% interest in the GPS was $7.7
million for the nine months of ownership in 1994. Equity in earnings for the
twelve months ended December 30, 1995, was $11.2 million, and for the same
period in 1996 was $10.8 million. For the nine months ending September 30,
1997, equity in earnings was $8.7 million and for the same period in 1996 was
$8.5 million.

COLLINSVILLE POWER STATION

The Collinsville Power Station ("Collinsville") is a 189 MW coal-fired
power generation facility located in Collinsville, Australia. In March 1996,
NRG acquired a 50% ownership interest in Collinsville when the facility was
privatized by the Queensland State government. NRG's partner in this
acquisition is Transfield Holdings Pty Ltd, an Australian infrastructure
contractor, with which NRG formed an unincorporated joint venture to
refurbish this plant. The operation and maintenance of the facility will be
undertaken by Collinsville Operations Pty Ltd, a 50% owned subsidiary of NRG
which has entered into a technical services agreement with NRG for some
staffing and assistance with certain operational and maintenance functions.

Both NRG and Transfield have entered into an 18-year PPA with the QTSC,
each agreeing to make available and sell to the QTSC its respective
proportion of the capacity of Collinsville. Under the PPA, NRG is paid both a
capacity and an energy charge by the QTSC. The capacity charge is designed to
cover the projected fixed costs allocable to the QTSC, including debt
service, permitted capital costs incurred by NRG in carrying out additional
works on the facility and an equity return. The capacity charge is adjusted
to reflect variations in interest rates. A capacity bonus is also available.
The QTSC also pays NRG an energy charge, which is intended to cover fuel
costs. Further, in accordance with its take-or-pay obligations, the QTSC must
pay NRG its energy charges for an annual minimum quantity of energy in each
year, less energy taken by the QTSC in that relevant year.

As of September 1997, the refurbishment of the Collinsville Project is on
schedule and within the budget. For each day the capacity test of the
facility is delayed past March 1, 1998, NRG and Transfield must pay
liquidated damages to the QTSC. Liquidated damages will also be payable if
the capacity of the power plant is determined to be less than 177.25 MW.
Total liquidated damages which NRG and Transfield can be required to pay to
the QTSC under the PPA are limited to AUS$5 million (indexed in April 1995
dollars).

The refurbishment of the Collinsville Power Station has been financed with
nonrecourse commercial project financed bank debt. NRG has guaranteed to the
QTSC that its Collinsville project subsidiary will satisfy its equity
contribution obligations to the project lenders.This $13.4 million equity
contribution is expected to be made in the second quarter of 1998.

ENERGY DEVELOPMENTS LIMITED

On February 6, 1997, NRG, through its wholly-owned subsidiary NRG Victoria
III Pty Ltd., signed a subscription agreement with EDL to acquire up to 20%
of EDL's common stock at AUS$2.20 (US$1.71 as of May 22, 1997) per share, and
was granted an option to acquire 16.8 million convertible non-voting

preference shares at AUS$2.20 per share. The preference shares do not become
convertible into EDL's common stock unless a takeover bid is made for EDL by
a person who is not an affiliate of the owner of the preference shares and
such person is, or becomes, entitled to purchase more than 35% of EDL's
outstanding common stock. In such event, if EDL fails to comply with an
obligation to appoint directors nominated by the owner of the preference
shares, the preference shares convert at the option of the owner to common
shares of EDL on a share-for-share basis. On February 11, 1997, NRG made an
initial purchase of 7.2% (4.5 million shares) of EDL's common stock for
AUS$9.9 million (US$7.9 million on that date). On September 24, 1997, NRG
purchased an additional 10,109,670 shares of common stock of EDL for an
aggregate purchase price of AUS$22.2 million (US$16.1 million on that date),
bringing NRG's ownership level to 20% of the outstanding shares of EDL.

EDL, an Australian company, is engaged in independent power generation
from landfill gas, coal seam methane, and natural gas (including projects
that utilize the latest combined cycle technology). EDL currently owns
approximately 149 MW of operating projects and operates over 200 MW of
generation capacity across five states and territories of Australia. EDL has
commenced the development of new projects in the United Kingdom, Asia and New
Zealand. EDL is a publicly traded company listed on the Australian Stock
Exchange. Its share price as of December 1, 1997 was AUS$2.60 (US$1.76 as of
September 24, 1997).

SCHKOPAU POWER STATION

In 1993, NRG and PowerGen plc of the United Kingdom each acquired a 50%
interest in a German limited liability company, Saale Energie GmbH ("Saale").
Saale then acquired a 41.1% interest in a 960 MW coal-fired power plant that
was under construction in Schkopau, which is located in the former East
Germany. A German energy company, VEBA Kraftwerke Ruhr AG ("VKR"), owns the
remaining 58.9% interest in Schkopau and operates the plant. The partnership
of Saale and VKR that owns the plant is called Kraftwerk Schkopau GbR ("KS").

The first 425 MW unit of the Schkopau plant began operation in January
1996, the 110 MW turbine went into commercial operation in February 1996, and
the second 425 MW unit came on line in July 1996. Acceptance testing of all
of the individual pieces of equipment has been completed. The plant has
generally experienced good availability since the beginning of commercial
operation and is expected to continue meeting its design reliability and
efficiency requirements.

VKR operates and maintains the Schkopau facility under an operation and
maintenance contract with Kraftwerk Schkopau Betriebsgesellschaft mbH, a
German limited liability company ("KSB"), in which Saale and VKR hold
interests of 44.4% and 55.6% respectively, and which is responsible for the
operation and maintenance of the facility pursuant to certain agreements with
each of Saale and VKR. VKR is paid a management fee for such services made up
of several variable components that will be adjusted according to changes in,
among other things, labor costs, producer prices for light fuel oil and
prices for electricity. Pursuant to the KSB partnership agreement between
Saale and VKR and the Saale shareholders agreement between NRG and PowerGen,
NRG has the right to participate in the oversight of facility operations and
in the approval and oversight of facility budgets and policies.

The plant is fueled by brown coal (lignite) which will be provided under a
long-term contract by MIBRAG's Profen lignite mine. For a description of the
coal supply agreement between MIBRAG and the Schkopau project, see "MIBRAG",
below.

Pursuant to the KS partnership agreement between Saale and VKR, each
partner has been allocated a share of capacity and energy generated by the
facility. Saale sells its allocated 400 MW portion of the plant's capacity
under a 25-year contract with VEAG, a major German utility which controls the
high-voltage transmission of electricity in the former East Germany. VEAG
pays a price that is made up of three components, the first of which is
designed to recover installation and capital costs, the second to recover
operating and other variable costs, and the third to cover fuel supply and
transportation costs. NRG receives 50% of the net profits from these VEAG
payments through its ownership interest in Saale.

The construction of the Schkopau facility was financed through a
combination of capital contributions from Saale and VKR, and borrowings by KS
from VKR and from third party lenders, which are

non-recourse to NRG. Saale financed a portion of its capital contributions
through a line of credit from VKR. Saale's interests in KS and the facility
are pledged as security for, among other obligations, the repayment of these
borrowings by Saale from VKR. As of September 30, 1997, KS had borrowed an
aggregate of DM 1.5 billion (approximately $852.4 million based on exchange
rates in effect as of September 30, 1997) and Saale had borrowed an aggregate
of DM 34.2 million (approximately $19.4 million, based on exchange rates in
effect as of September 30, 1997).

NRG, PowerGen and VKR have also entered into a cooperation agreement
concerning the participation of VKR in the acquisition or construction of
certain large power station projects involving NRG and/or PowerGen in the
Federal Republic of Germany.

Earnings from the Schkopau facility commenced in the first quarter of 1996
when the first unit was brought on-line. Equity in Schkopau earnings was $4.6
million for the year ended December 31, 1996 and $3.8 million for the nine
months ended September 30, 1997.

MIBRAG

In 1994, NRG, Morrison Knudsen Corporation and PowerGen plc each acquired
a 33% interest in a Dutch holding company which then acquired the equity of
Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAG") which owns the coal
mining, power generation and associated operations of MIBRAG, all of which
are located south of Leipzig, Germany. The German government retained a 1%
interest in MIBRAG until December 1996, when each of the three original
investor parties were permitted to purchase one third of that interest. The
investor partners began operating MIBRAG effective January 1, 1994, and the
legal closing occurred August 11, 1994.

MIBRAG is a corporation formed by the German government following the
reunification of East and West Germany, to hold two open-cast brown coal
(lignite) mining operations, a lease on an additional mine, three
lignite-fired industrial cogeneration facilities and briquette manufacturing
and coal dust plants, all located in the former East Germany. In connection
with the acquisition, NRG and its partners agreed to invest (from cash flow
from MIBRAG operations) in excess of DM 1 billion (US$568 million based on
the exchange rate as of September 30, 1997) by December 31, 2004 to modernize
the existing mines and power generation facilities and to develop new
open-pit mines. The German government is obligated to provide certain
guarantees of bank loans to MIBRAG relating to capital improvements to the
Schleenhain mine. MIBRAG also agreed to operate the three power generation
facilities until 2005, to operate the briquette plants in accordance with
market demand until 2005, and to operate the lignite mines until continued
operation of the mines is no longer economically justifiable. In addition,
MIBRAG has made certain employee retention commitments until 2000. Under the
provisions of the sale and purchase agreement, NRG and its partners agreed to
make a deferred payment of DM 40 million to the German government in the year
2009. This obligation will be reduced by certain costs incurred by MIBRAG.
The remaining obligation at September 30, 1997 was DM 22.0 million (or
US$12.5 million based on the exchange rate on September 30, 1997). NRG
expects the entire obligation will be offset by ongoing costs prior to the
year 2009.

MIBRAG's cogeneration operations consist of the 100 MW Mumsdorf facility,
the 60 MW Deuben facility and the 40 MW Wahlitz facility. These facilities
provide power and thermal energy for MIBRAG's coal mining operations and its
briquette manufacturing plants. All power not consumed by MIBRAG's internal
operations is sold under an eight-year power purchase agreement with
Westsachsische Energie Aktiengesellschaft ("WESAG"), a recently privatized
German electric utility. NRG and PowerGen jointly, through Saale, provide
consulting services for a fee for the operation of the MIBRAG steam and power
generation facilities, the associated electrical and thermal transmission and
distribution system and the briquette manufacturing plants, under a power
consultancy agreement with MIBRAG for the life of the facilities. After some
retrofitting was completed by MIBRAG, all three of these cogeneration
facilities now satisfy the current European Union environmental regulations.
MIBRAG leases these cogeneration facilities under a 13-year lease pursuant to
which MIBRAG has operating control of and a 1% interest in the facilities.

MIBRAG's lignite mine operations include Profen, Zwenkau and Schleenhain
(which is under construction but has not yet commenced operations), with
total estimated reserves of 776 million metric tons. Morrison Knudsen, an
international mining company, provides consulting services to mines under a
consultancy agreement with MIBRAG for the life of the mines. In addition to
providing approximately 3 million tons of lignite per year for MIBRAG's three
cogeneration facilities and one briquette facility, output from these mines
supply lignite to the Schkopau power station and other facilities. The total
output of the new Schleenhain mine will be dedicated to the new 1600 MW
Lippendorf power station. MIBRAG is currently supplying coal for the existing
Lippendorf and Thierbach power generation facilities, but they are expected
to close in 1999 when the new Lippendorf facility is scheduled to commence
operations.

In addition to its power generation and coal mining operations, MIBRAG
owns and operates two briquette manufacturing plants and a coal dust plant.
Operations at the Deuben briquette plant were phased out as anticipated in
1996 due to reduced market demand for briquettes. MIBRAG also partially owns
and is the principal customer of a transportation company, an insurance
brokerage firm, a briquette marketer, a waste disposal and management
company, a ground water consulting company and an environmental consulting
company.

MIBRAG is restricted from selling or transferring certain assets without
the consent of the German government, generally for a period ending not
earlier than January 2004. Even if consent is obtained, MIBRAG is obligated
to pay a portion of the proceeds of any sale or transfer of such assets
consummated before January 2004 to the German government.

To the extent liabilities arise with respect to environmental conditions
existing at the time of the acquisition, MIBRAG is indemnified by the German
government, subject to certain limitations. The German government has also
agreed to indemnify MIBRAG in respect of certain liabilities arising from
claims for the restitution of property allocated to MIBRAG.

MIBRAG has entered into several long-term loan agreements with the
Kreditanstalt fur Wiederaufbau ("KfW"), which is the German government
economic development bank. Approximately DM 126.7 million ($72.0 million as
of September 30, 1997) of these loans relate to the construction of the
Wahlitz power station and were assumed as part of the MIBRAG acquisition on
January 1, 1994. In January 1996, MIBRAG borrowed an additional DM 94.5
million ($53.7 million as of September 30, 1997) from KfW and DM 112.5
million ($113.4 million as of September 30, 1997) from a group of private
investors. The proceeds from these loans are being used in respect of the
refurbishment of the Schleenhain mine. These loans are payable out of project
revenues over a period of 13 years and are non-recourse to the three
sponsors. Additional acquisition payments are due to the German government in
the form of premiums based on the quantity of lignite and briquettes sold.
MIBRAG has also borrowed an additional DM 90 million ($51.1 million as of
September 30, 1997) from the KfW to partially finance the modernization and
refurbishment of the Deuben and Mumsdorf plants, particulary the cost of
bringing them into compliance with environmental requirements. This loan is
also non-recourse to the sponsors.

NRG's equity in earnings from its interest in MIBRAG was $19.4 million in
the year ended December 31, 1994 (reflecting a full twelve months of
operations). NRG's equity in earnings in MIBRAG for the twelve months ended
December 31, 1995, was $22.2 million, and for the same period in 1996 was
$13.1 million. Similarly, for the nine months ending September 30, 1997 was
$7.0 million, and for the same period in 1996 was $7.6 million. Earnings from
MIBRAG decreased in 1996 and are expected to continue to decrease in 1997 and
1998 due to mine refurbishments and reduced coal sales. However, in 1999,
coal sales are expected to increase substantially with the scheduled startup
of the first of two 800 MW Lippendorf generating units.

MIBRAG's results of operations, which are reported under German accounting
rules, are adjusted for purposes of NRG's financial statements to reflect
GAAP. Such adjustments include, among others, adjustments for differences in
reporting of depreciation expense, mining reserves, vacation reserves and
maintenance reserves.

The following chart represents the ownership structure of MIBRAG and
Schkopau:

[CHART OF OWNERSHIP STRUCTURE OF MIBRAG AND SCHKOPAU]

COBEE

In December 1996, NRG acquired an interest in Compa|fnia Boliviana de
Energia Electrica S.A. -- Bolivian Power Company Limited ("COBEE"), the
second largest generator of electricity in Bolivia. The acquisition was
consummated through a Netherlands corporation, Tosli Investments B.V.
("Tosli"), which is jointly owned by subsidiaries of NRG (60%) and Vattenfall
AB of Sweden (40%). As of October 30, 1997, the ownership of Tosli changed to
50% for each of NRG and Vattenfall AB due to the sale of 10% of Tosli to
Vattenfall AB from NRG. On December 19, 1996, Tosli completed a successful
tender offer for the shares of COBEE, which were listed on the New York Stock
Exchange, acquiring 96.6% of COBEE's outstanding common shares for a total of
$175 million. COBEE shares were delisted in January 1997.

Tosli financed its acquisition of COBEE in part using the proceeds of a
$49.6 million bridge loan arranged by Morgan Grenfell & Co. Limited, as
administrative agent. The unpaid principal amount of that loan of $30 million
was repaid in full on June 19, 1997 using the proceeds of a loan from NRG to
Tosli. On August 13, 1997, COBEE entered into a Credit Agreement with
Corporacion Andina de Fomento (the "CAF Financing") for $75 million to fund
the completion of the Zongo Project, as described below. Upon funding of the
CAF Financing, COBEE will declare and pay a dividend to Tosli and COBEE's
minority shareholders. The dividend received by Tosli will be used to pay the
amounts due on the NRG loan.

Upon Tosli's acquisition of COBEE, the COBEE board of directors was
reconstituted to include nine members, including four designees of NRG, three
designees of Vattenfall and two outside directors. On October 30, 1997 the
membership of the COBEE board of directors was adjusted to reflect the equal
ownership of COBEE by NRG and Vattenfall. The COBEE board of directors now
consists of three designees of NRG, three designees of Vattenfall and three
directors appointed jointly by NRG and Vattenfall. In addition, in December
1996, the Chief Executive Officer of NRG was elected as chairman of the board
of directors and chief executive officer of COBEE.

COBEE generates and transmits electricity in La Paz and Oruro, Bolivia,
and owns 14 generating facilities representing an installed capacity of
approximately 153 MW. These facilities consist of 136 MW of hydroelectric
capacity and 17 MW of gas peaking capacity. During 1996, COBEE had
electricity sales of $20 million. In 1996, two distribution companies,
Electropaz and ELF, accounted for approximately 69% and 16%, respectively, of
COBEE's revenues. The remaining COBEE revenues are derived from sales on the
spot market.

COBEE has entered into an Electricity Supply Contract with Electropaz
which provides that COBEE shall supply Electropaz with all of the electricity
that COBEE can supply, up to the maximum amount of electricity required by
Electropaz to supply the requirements of its distribution concession. This
Electricity Supply Contract expires in December 2008. COBEE has entered into
a substantially similar contract with ELF. Electropaz and ELF are both
wholly-owned subsidiaries of Ibedrola S.A., a Spanish utility company. All
payments by Electropaz and ELF are in local currency, tied to the value of
the U.S. dollar.

COBEE operates its electric generation business under a 40-year Concession
granted by the Government of Bolivia in 1990, as most recently amended in
March 1995. Under this Concession, COBEE is entitled to earn a return of 9%
after all operating expenses, depreciation, taxes and interest expense,
calculated on its U.S. dollar rate base, consisting of net fixed assets at
historical cost in U.S. dollars and working capital and materials up to
certain limits. The Bolivian Electricity Code also provides for the
adjustment of rates to compensate COBEE for any shortfall or to recapture any
excess in COBEE's actual rate of return during the previous year. COBEE
periodically applies to the Superintendent of Electricity for rate increases
sufficient to provide its 9% rate of return based on COBEE's current
operating results and its projection of future revenues and expenses.

Its Concession also obligates COBEE to expand its hydroelectric generation
capacity. As a result, COBEE has an additional 65 MW of new hydroelectric
facilities under construction in the Zongo Valley. This expansion, which
COBEE refers to as the "Zongo Project," consists of adding new generation
facilities and modernizing existing facilities in the Zongo Valley and
constructing transmission lines to transmit the increased generation
capacity. The Zongo Project is scheduled to be completed in 1998 and is
expected to add a total of 65 MW to COBEE's generating capacity.

Under the terms of the Concession, COBEE also has the right to expand its
facilities in the Miguillas Basin (the "Miguillas Project") which, if
completed, may add up to 200 MW of generation capacity. In accordance with
its obligations under the Concession, in late 1995 COBEE presented to the
Government a technical-economic feasibility study. COBEE fully expects to
proceed with the construction of Miguillas in accordance with a proposal and
schedule submitted to the Bolivian government in December 1996. COBEE's
proposal still awaits regulatory approval from the Superintendent of
Electricity in Bolivia.

There can be no assurance that any or all of the projects under
development by COBEE will be completed.

Equity in earnings from COBEE were $0.1 million for the twelve days ended
December 31, 1996 and $1.3 million for the nine months ended September 30,
1997. Also, on October 30, 1997, NRG recorded the sale of a portion of its
investment in COBEE reducing its ownership to 48.3%.

KLADNO

The Energy Center Kladno project, located in Kladno, the Czech Republic,
consists of two distinct phases. In 1994, NRG acquired an interest in the
existing coal-fired electricity and thermal energy generation facility that
can supply 28 MW of electrical energy and 150 MWt of steam and heated water.
This plant has historically supplied electrical energy to a nearby industrial
complex which includes the Poldi Steel works (which is currently shut down
and undergoing reorganization), and to Stredoceska Energeticka ("STE"), the
local regional electric distribution company. In addition, the existing plant
supplies steam and heated water to the industrial complex and to the City of
Kladno. NRG's interest in the existing project is 34%.

The second phase is the expansion of the existing project by the addition
of 354 MW of new capacity, 282 MW of which will be coal-fired and 72 MW of
which will be gas-fired. As a part of this effort, the existing plant will be
refurbished.

The existing project is owned by a company called Energy Center Kladno
("ECK"), in which NRG owns 34%, El Paso Energy International Company ("El
Paso") owns 19% and local partners own the balance of 47%. The expansion
project is held separately through ECK Generating ("ECKG"), a Czech limited
liability company of which 89% is owned by a Netherlands company called Matra
Powerplant Holding B.V. ("Matra") and 11% is owned by STE. NRG owns 65% of
Matra and El Paso owns the remaining 35%. As a result, NRG has a net
ownership interest in the expansion plant of 57.85%. Each of NRG and El Paso
has granted Nations Energy (a subsidiary of Tucson Electric) an option to
acquire 15% of Matra at any time before May 1998. If Nations Energy does not
exercise its option with NRG, NRG intends to sell down its interest in Matra
until its ownership interest in ECKG is less than 50%. The following charts
represent the ownership structure of ECK and ECKG:

[CHART OF ECK]

ECK has leased all of the existing power generation facilities to ECKG
pursuant to a 40-year lease. NRG, through a wholly-owned subsidiary, has
responsibility for operating both the ECK assets and the new facilities.
During construction ECKG will continue to service ECK's existing customers.
When the new facilities are built ECKG will sell the additional capacity to
STE under a 20 year power sales agreement, at a price tied to STE's cost of
purchasing power from CEZ, the state-owned power generation entity.

Construction of the new facilities started in early 1997, and in May 1997
ECKG signed loan documents to provide financing for the project. Construction
is currently scheduled to be completed in 1999. All project debt is
nonrecourse to NRG.

As of September 30, 1997, the Company has incurred $9.5 million of
development costs for the ECKG project. In addition, the purchase price paid
by NRG for the acquisition of its interest in ECK has been capitalized to
investments in projects.

LATIN POWER

Latin Power is an investment fund that was formed in July 1993 to make
equity investments in independent power projects in Latin America and the
Caribbean. NRG, the International Finance Corporation (a member of the World
Bank Group), Corporation Andina de Fomento (a multilateral institution for
the Andean region headquartered in Caracas, Venezuela) and CMS Generation Co.
(the independent power subsidiary of CMS Energy) are the four lead investors
in Latin Power. Each of the four lead investors has committed $25 million to
Latin Power and has designated Scudder, Stevens & Clark, Inc. ("Scudder") as
the investment manager of the fund.

As of September 30, 1997, NRG had invested $14.7 million of its $25
million commitment in Latin Power portfolio project investments. NRG has also
committed to fund projects in Peru and Colombia, which will be drawn down
during 1997 and 1998. For the balance of the $25 million the Latin Power
project committee recently approved two investments in power generation
facilities in Guatemala and Brazil. NRG's proportional investments in these
projects, which have not yet commenced construction, will be approximately
$1.9 million and $550,000 respectively.

Latin Power generally makes equity investments in private sector
independent power projects located in Latin America and the Caribbean that
sell power under long-term contracts to industrial users or to distribution
and transmission companies. The fund also may invest in transmission,
distribution or related operations. Latin Power currently holds investments
in five projects. The Mamonal project is a 100 MW combined-cycle natural
gas-fired power generation facility plant operating near Cartagena, Colombia.
The facility is owned by K&M Engineering and Consulting, Bank of Boston,
Rockefeller Group and Latin Power, which purchased a limited partnership
interest in the partnership that owns the facility in 1994 for $7.6 million.
Total project debt is $57 million, which is non-recourse to the facility
owners. The Overseas Private Investment Corporation ("OPIC") insurance covers
certain political and currency risks.

In November 1994, Latin Power purchased a 31% interest in the ELCOSA power
generation facility in Puerto Cortes, Honduras. ELCOSA is an oil-fired
facility with 80 MW of generating capacity, which the facility sells pursuant
to a 15-year power purchase agreement to Empresa Nacional de Energia
Electrica. The Honduran government has guaranteed the utility's obligations
under the power purchase agreement. The Multilateral Investment Guarantee
Association is providing insurance for Latin Power's equity investment
against expropriation, political violence and certain currency risks.

In December 1995, Latin Power purchased a 35.1% interest in Jamaica Energy
Partners, which owns the 74 MW Dr. Bird floating diesel-fired power
generation facility. The facility is installed and operating at Old Harbour
on the southern coast of Jamaica near Kingston. Jamaica Public Service
Company, Ltd. has signed a 20-year power purchase agreement with Jamaica
Energy Partners.

In July 1996, Latin Power assumed a 14.5% ownership interest in the
Aguaytia power project in Peru which, when constructed, will be a 155 MW
gas-fired power plant. When completed, Aguaytia will sell its output to the
Peruvian power pool.

In October 1996, Latin Power purchased a 19.5% limited partnership
interest in the 199 MW combined cycle Termovalle project near Cali, Colombia.
Commercial operation of Phase I (130 MW simple cycle) is expected in August
1997 and of Phase II (199 MW combined cycle) in May 1998. Empresa de Energia
del Pacifico (EPSA), a state-owned generation, transmission and distribution
company, has entered into a PPA for 160 MW of generating capacity from the
project. Industrial purchasers in the Cali area have committed to purchase
the remaining power capacity.

In late 1996, NRG expressed an interest in making an additional investment
in Latin Power II, a new Latin Power fund. Assuming NRG formally commits to
the Latin Power II investment, NRG's aggregate commitment in Latin Power from
$25 million to $32.5 million.

NRG's equity in earnings from its interest in Latin Power was $1.6 million
for the year ended December 31, 1996. For the nine months ended September 30,
of 1997, equity in earnings were $0.1 million compared with $1.4 million for
the nine months ended September 30, 1996.

DOMESTIC PROJECTS

PACIFIC GENERATION COMPANY

On November 4, 1997, NRG acquired 100% of the outstanding shares of
Pacific Generation Company ("PGC"), a wholly-owned indirect subsidiary of
PacifiCorp Company, Inc. for $151.3 million and the assumption of debt of
$13.2 million. PGC has ownership interests in 11 projects with a total
capacity of 737 MW, with operational responsibility for 312 MW and net
ownership interests of 166 MW. In addition, PGC owns a 3.1% limited
partnership interest in the Energy Investors Funds, through which it owns an
additional allocated share equal to another 39MW.

One of PGC's projects is located in Canada and the other ten are broadly
distributed throughout the United States. The three largest projects are
gas-fired, but the others are fueled by coal, hydro, waste wood,
refuse-derived fuel and wind. One sells only steam, while the other ten have
power sales agreements with a total of seven different utilities. PGC serves
a variety of roles in these facilities, ranging from operator/manager of
three projects, including its largest asset, Crockett Cogeneration, to a
limited partner in other projects.

Crockett Cogeneration. PGC is the sole general partner in and the operator
of the 240 MW Crockett Cogeneration project ("Crockett"), which commenced
operations in May, 1996. The project sells 240 MW of capacity and electric
power to Pacific Gas & Electric Company under a power purchase agreement
extending to 2026. The agreement provides for a fixed capacity payment and a
variable energy payment based on the market price of gas. A Third Amendment
to this agreement was executed this year, and is awaiting approval by the
CPUC; this amendment resolved certain disputes that had arisen between the
parties relating to: (i) the required level of delivery if Pacific Gas &
Electric Company dispatches the facility at 100% and (ii) the right to
dispatch under principles of economic dispatch. In addition, Crockett
provides up to 450,000 lbs/hr. of steam to the C&H sugar refinery under a
steam sales agreement that does not expire until 2026.

Natural gas is supplied to the Project by Amoco Canada Marketing Corp.
under a fifteen year contract, with performance guaranteed by Amoco Canada
Petroleum Company Ltd. PGC operates the Project under a 15 year contract that
provides for reimbursement of all costs within an approved budget, plus a fee
and the possibility of a performance bonus.

PGC holds the sole one percent general partnership interest in the
Crockett Project, as well as a 23.87 percent limited partnership interest,
which will increase to 56.68 percent after certain conditions of payment to
the other limited partners have been satisfied. Those partners are the Energy
Investors Fund and Tomen Investments. The Crockett Project was financed with
a $278 million construction and term loan facility provided by a commercial
bank syndicate led by ABN-AMRO, which will mature on December 31, 2010.

Kingston Cogeneration. Kingston, the only PGC project located outside of
the United States, is a 110 MW combined cycle gas turbine project in Ontario,
Canada. The Project commenced operation in

1996. It sells power to Ontario Hydro under a 20-year PPA, which provides for
a fixed capacity payment and a variable energy payment, provided the plant
meets certain operating targets. Up to 150,000 lbs/hr. of thermal energy is
sold to Hoechst-Celanese and gas is supplied under a 20-year agreement with
PanCanadian Petroleum Limited.

PGC has a 25% general partnership interest in this project, but it is
operated by AES. The Project was financed with a C$193.6 million construction
and term loan led by Bank of Nova Scotia and Credit Suisse, which will mature
in March 2013.

PowerSmith Cogeneration. The third PGC gas-fired project is PowerSmith
Cogeneration, a 110 MW combined cycle gas turbine project. Smith Cogeneration
is the managing general partner of the project and GE is the operator. The
PowerSmith Project sells its power to Oklahoma Gas and Electric under a
contract expiring in 2004, and its steam to Dayton Tire for the same term.
PGC has a total of 8.75% general and limited partnership interests until
2003, which is then decreased automatically to a 6.25% ownership interest
thereafter.

Maine Energy Recovery Project ("MERC"). MERC is a 680 ton per day
waste-to-energy facility located in Biddeford, Maine. The annual throughput
of municipal solid waste is approximately 200,000 tons and income is received
from the disposal or "tipping" fees paid by communities utilizing this
service. The facility sells its 22 MW output to Central Maine Power under a
20-year PPA, which was restructured in May 1996 to provide for energy-only
rates until 2007, after which all sales will be at market-based capacity and
energy rates. The new PPA also extended its term through 2012.

PGC owns a 16.25% limited partnership interest in MERC with no operating
responsibilities. All of the senior debt on the Project was repaid with funds
received from the renegotiation of the power contract, but there is still
some subordinated debt outstanding to certain partners (including PGC) in the
amount of $14.1 million.

Penobscot Energy Recovery Project (PERC). PERC is an 800 tons per day
waste-to-energy facility located in Orrington, Maine, which began operations
in 1988. The minimum annual throughput is about 175,000 tons under a series
of agreements with Maine communities that pay "tipping" fees for waste
disposal services. The Project's 22 MW electric power output is sold to
Bangor Hydroelectric Company pursuant to a 30-year PPA. PERC, Bangor Hydro
and the affected communities have reached an agreement in principle to
restructure the terms of this PPA and are seeking the approvals required to
do so. If approved, this restructuring is expected to result, among other
things, in a substantial cash payment to PERC from the utility.

PGC owns 28.7 percent of the general and limited partnership interests in
PERC and NRG has become the operator of the Project under the terms of the
acquisition. PERC was financed with $108.6 million of tax-exempt bonds,
supported by a letter of credit from Bankers Trust. It is expected that this
financing would be replaced by bonds issued by the Finance Authority of Maine
as a part of the restructuring of the PPA.

Mt. Poso Cogeneration Facility. Mt. Poso is one of two coal-fired
cogeneration plants owned by PGC. It is a 49.5 MW circulating fluidized bed
facility located near Bakersfield, California. The project sells electricity
to Pacific Gas & Electric under an SO4 contract which extends to 2009.
However, the fixed price period of the agreement terminates on April 1, 1999,
and there can be no assurances concerning the likely income from this project
following that date. The project also supplies up to 45,000 lbs./hr. of steam
to an adjacent oil field owned by the Project for enhanced oil recovery. Coal
has been supplied to the project by ARCO Coal Company and the project
recently negotiated the terms of that contract.

PGC owns a 21.50% general partnership interest in Mt. Poso itself, and in
addition, owns a 47.5% interest in the company that operates the Project,
Pyro-Pacific Operating Company.

Turners Falls Cogeneration. The second PGC coal-fired cogeneration
facility, Turners Falls, is in cold shut-down as a result of a PPA
Termination Agreement entered into in 1996 at the request of the power
purchaser, Unitil Power Company. Turners Falls is a 20.1 MW coal-fired
facility that had been

placed into service in 1989. Under the terms of the PPA Termination
Agreement, Unitil will make monthly payments to Turners Falls until 2009, and
the project must be ready to resume operations on six months notice. PGC owns
an 8.9% limited partnership interest in Turners Falls.

Wind Power Partners. The wind projects consist of one 50 MW project (500
wind turbines) and one 30 MW project (300 wind turbines), both located in
California. PGC has a one percent general partnership interest in each
project, and a 16% and a 17.54% limited partnership interest in them,
respectively. Power is sold from both projects to Pacific Gas & Electric
under 30-year S04 PPAs, but the fixed price periods have already ended for
the first project and will do so for the final increment in 1998. After the
expiration of that period, power is sold at a variable, short-run avoided
cost rate with a reduced capacity payment. PGC also owns half of the $7.6
million senior debt on the 50 MW project and all of the $4.4 million senior
debt on the 30 MW project.

Curtis Palmer Hydroelectric Project. Curtis Palmer is the only
hydroelectric project in the PGC portfolio. It is a 58 MW project located at
two dams on the Hudson River near the town of Corinth, New York. The project
recently entered into a renogotiated power purchase agreement with Niagara
Mohawk Power Corp. for a term that is projected to expire in 2027. PGC has
only an 8.5% limited partnership interest in this project.

Camus Power Boiler. Camas is a 200,000 lbs./hr. wood and natural gas fired
boiler which supplies steam to the Fort James Paper Mill in Camas,
Washington. Under the Steam Sales Agreement, which expires in 2007, Fort
James makes fixed and variable payments to Camas for this supply. The project
does not generate electricity or make any power sales, but its steam sales
are the equivalent of 25 MW of electric power.

PGC owns 100% of the Camas project, but Fort James has an option to buy
the project at various prices determined in accordance with the Agreement
during its term. The project was financed with $15 million of tax-exempt
bonds and $22.8 million in taxable debt, all supported by a letter of credit
from HelebaBank.

NRG GENERATING (U.S.) INC. ("NRGG")

On January 18, 1996, the U.S. Bankruptcy Court for the District of New
Jersey awarded NRG the right to acquire a 41.86% equity interest in O'Brien
Environmental Energy, Inc. ("O'Brien"), which emerged from bankruptcy on
April 30, 1996 and was renamed NRGG. NRG currently holds 45.21% of the common
stock of NRGG. The remaining 54.79% of the common stock continues to be held
publicly. NRGG has interests in three domestic operating projects with an
aggregate capacity of approximately 196 MW. NRGG's principal operating
projects include: (a) the 52 MW Newark Boxboard Project (which is owned 100%
by a wholly-owned project subsidiary of NRGG), a gas-fired cogeneration
facility that sells electricity to JCP&L and steam to Newark Group
Industries, Inc.; (b) the 122 MW E.I. du Pont Parlin Project (which is owned
100% by a wholly-owned project subsidiary of NRGG), a gas-fired cogeneration
facility that sells electricity to JCP&L and steam to E.I. du Pont de Nemours
and Company ("E.I. du Pont"); and (c) an 83% interest in a 22 MW standby/peak
sharing facility which provides electricity and standby capabilities for the
Philadelphia Municipal Authority. In addition, NRGG has a 33.33% interest in
the 150 MW Grays Ferry Project, a gas-fired cogeneration project which is
under construction in Philadelphia, Pennsylvania.

NRG provides NRGG with management and administrative services in
connection with day-to-day operations. NRG employees serve as NRG's designees
on the board of directors of NRGG. NRG and NRGG also entered into a
"Co-Investment Agreement," pursuant to which NRG grants NRGG a right of first
offer to acquire from NRG each energy development project first developed or
acquired by NRG for which a co-investor is required because of federal or
state regulatory restrictions on NRG's ownership. NRG has agreed that, within
the three-year period following the closing date of the acquisition of NRGG,
a minimum of one or more such projects, having an aggregate equity value of
at least $60 million or a minimum power generation capacity of 150 MW, will
be so offered. To facilitate NRGG's ability to acquire projects under the
Co-Investment Agreement, NRG is obligated to provide financing to NRGG to the
extent that NRGG is unable to obtain funds on comparable terms from other
sources.

NRG has also agreed to certain provisions designed to protect the rights
of the holders of the equity in NRGG that is not owned by NRG. These
provisions include super-majority voting requirements with respect to a
merger or sale of all or substantially all of NRGG's assets and certain
additional issuances of NRGG stock, the creation of an independent committee
of the board of directors of NRGG with authority to, among other things,
determine whether NRGG will exercise its right of first offer under the
Co-Investment Agreement and a commitment that, for a seven-year period
following NRG's investment in NRGG, NRG will not remove or vote against the
re-election to NRGG's board of directors of any of the three directors
(appointed by Wexford Management Corp. and the Committee of Equity Security
Holders) who constitute the independent directors committee.

NRGG and NRG have entered into various loan agreements. At December 31,
1996, the loan balance due to NRG was $14,388,000 with a maturity date of
April 30, 2001.

NRGG's shares are traded on The NASDAQ SmallCap Market under the symbol
"NRGG". NRGG's closing share price as of September 30, 1997 was $20.75.

Newark. The 52 MW Newark project, which commenced operation in November
1990, is 100%-owned by NRG Generating (Newark) Cogeneration Inc. ("NRGGN"), a
wholly-owned project subsidiary of NRGG. NRGGN is designed to operate
continuously and to provide up to 75,000 lbs./hr. of steam to a recycled
paper boxboard manufacturing plant owned by Newark Boxboard Company, a
subsidiary of Newark Group Industries, Inc., and 52 MW of electricity to
JCP&L, each under agreements extending into the year 2015. The power contract
provides fixed on-peak and off-peak energy and capacity payments for the base
electrical power and fixed capital, fixed operation and maintenance and
variable operation and maintenance payments for the dispatchable power. The
facility availability in 1996 was in excess of 95%.

Natural gas for the project is supplied and paid for by JCP&L as a part of
its obligations under the terms of the power purchase agreement.

Parlin. The 122 MW Parlin project, which commenced operation in June 1991,
is 100% owned by NRG Generating (Parlin) Cogeneration Inc. ("NRGGP"), a
wholly-owned project subsidiary of NRGG. NRGGP provides up to 120,000
lbs./hr. of steam to a manufacturing plant in Parlin, New Jersey owned by
E.I. du Pont, under an agreement extending until 2021. In addition, the
project sells 41 MW of base electric power and up to 73 MW of dispatchable
power to JCP&L, under an agreement with an initial term until 2011. The power
contract provides fixed on-peak and off-peak energy and capacity payments for
the base electrical power and fixed capital, fixed operation and maintenance
and variable operation and maintenance payments for the dispatchable power.
Finally, the projects sells up to 9 MW of power to NRG Parlin, Inc. ("NPI"),
a wholly-owned subsidiary of NRG Energy, Inc. NPI resells this power at
retail to E.I. du Pont under an agreement extending until 2011. The facility
availability in 1996 was in excess of 95%.

Natural gas for the project is supplied and paid for by JCP&L as part of
its obligations under the terms of the power purchase agreement.

Both the Newark and the Parlin projects are being operated by Power
Operations, Inc., a wholly-owned subsidiary of NRG which assumed the
operations and maintenance responsibilities on December 31, 1996, under a
six-year operating agreement providing for reimbursement of the operator's
costs plus a fee.

Financing for Newark and Parlin. On May 17, 1996, NRGG's wholly-owned
project subsidiaries, NRGGN and NRGGP entered into a Credit Agreement (the
"Credit Agreement") with Credit Suisse. The Credit Agreement established
provisions for a $155,000,000 15-year loan and a $5,000,000 five-year debt
service reserve line of credit. Pursuant to borrowings in May and July of
1996, NRGGN and NRGGP drew the full $155,000,000 available under the Credit
Agreement, which is a joint and several liability of NRGGN and NRGGP and will
be amortized over a 15-year period as specified under the terms of the Credit
Agreement.

Grays Ferry. NRGG has a 33.3% interest in the 150 MW Grays Ferry Project,
which is currently under construction and will, when completed, sell
electricity to PECO Energy Company ("PECO") and

district heating steam to Trigen-Philadelphia Energy Corporation ("Trigen").
The Grays Ferry Project is being constructed by Westinghouse Electric
Corporation ("WEC") pursuant to a fixed price turnkey construction contract.
WEC has also made available $15 million in subordinated debt to the project,
payable semi-annually after commercial operation and to be repaid in full no
later than March 2005. The project is scheduled to go into commercial
operation in December 1997. Once in operation, it will be operated by an
affiliate of Trigen pursuant to a 25-year operating agreement providing for
reimbursement of the operator's costs plus a fee.

PECO will purchase energy and capacity from the project pursuant to two
energy purchase agreements and two capacity purchase agreements, each having
a term of 20 years. Gas for the Project will be provided by Aquila Energy
Marketing Corporation. The gas sales agreement is tailored so that the
project's fuel expenses will track its revenues from sales of electricity. To
the extent the actual cost of fuel exceeds revenues received, a tracking
account has been established which is payable by the project out of
distributable cash flow.

Construction and term loan project financing for the project and certain
letters of credit to support project agreements were provided by The Chase
Manhattan Bank, N.A., as agent. This financing is non-recourse to NRG. The
maturity date for the term loan is the earlier of March 6, 2013 or the
fifteenth anniversary of the term loan conversion date.

NRG has agreed to fund NRGG's $10 million equity obligation for the Grays
Ferry Project. As of October 31, 1997, $6.3 million had been advanced to NRGG
by NRG for the Grays Ferry Project. In addition, on October 28, 1997, NRG
converted $3 million of its loan to NRGG into 396,255 shares of NRGG common
stock. NRG owns 45.21% of the common stock of NRGG.

MILLENNIUM

On September 19, 1997, NRG (Morris) Cogen, LLC ("NRGM"), an NRG affiliate,
entered into a Construction and Term Loan Agreement with The Chase Manhattan
Bank to finance the construction of a 117 MW cogeneration plant in Morris,
Illinois. The project is being developed pursuant to a 25-year Energy
Services Agreement between NRGM and Millennium Petrochemicals Inc.
("Millennium") pursuant to which NRGM will supply all of the external steam
requirements and substantially all of the electricity requirements for
Millennium's polyethylene manufacturing facility in Morris. Millennium has
the right to buy out the cogeneration plant for fair market value at certain
defined points in the contract term. The project is being constructed by
Kiewit Industrial Co. and is projected to be completed by December 1, 1998.
In connection with the financing of this project, NRG has entered into a $22
million equity commitment and a $1.2 million guaranty of certain obligations
of Millennium Operations, Inc., an NRG subsidiary which will operate the
project.

NEO CORPORATION

NEO is a wholly-owned project subsidiary of NRG that was formed to develop
small power generation facilities, ranging in size from 1 to 50 MW, in the
United States. NEO is currently focusing on the development and acquisition
of landfill gas projects and the acquisition of hydroelectric projects.

Through the investment vehicle Northbrook Energy, L.L.C. ("Northbrook"),
NEO presently has a 50% interest in nineteen small operating hydroelectric
projects, ranging in size from 1 MW to 6 MW and having a total capacity of
39.3 MW. As of March 31, 1997, NEO's total investment in these projects is
$4.0 million. NEO also has loaned $3.7 million to Omega Energy Partners,
L.L.C. ("Omega") to fund Omega's 50% equity interest in Northbrook. This loan
is secured by Omega's project ownership interest.

NEO also has a 50% interest in twelve operating landfill gas projects, as
of September 1, 1997, ranging in size from 1 MW to 8.4 MW and having a total
capacity of 40 MW. As of June 30, 1997, NEO's investment in these projects
totals $1.9 million. In addition, NEO has ten landfill gas projects in
varying phases of development: these projects will range in size from 1 MW to
10 MW and will have a total capacity of approximately 60 MW that is expected
to go into commercial operation in 1997 and 1998. NEO expects its total
equity requirements for these development projects to be approximately

$55 million. NEO also has twenty-one other landfill gas projects in
development that it expects to go into commercial operation in 1998. There
can be no assurance that the development of any or all of these projects will
in fact be successfully completed.

On September 24, 1997, certain affiliates of NEO entered into a
Construction, Acquisition and Term Loan Agreement with Lyon Credit
Corporation ("Lyon") for $92 million to fund the construction of the landfill
gas collection system and generation facility for certain NEO landfill gas
projects in development. The construction loan for each project will convert
to a term loan containing a maximum maturity date of ten (10) years. NRG has
agreed to provide Lyon with a guarantee during the construction loan period.
In addition, NRG has agreed to guarantee the monetization and use of the
Section 29 tax credits generated from the landfill gas projects financed by
Lyon through the year 2007.

An important factor in the after tax return of the landfill gas projects
is the eligibility of these projects for Section 29 tax credits. The Section
29 tax credit is available only to projects that produce gas from biomass or
synthetic fuels from coal. Landfill gas is produced from biomass for purposes
of the Section 29 credit. To qualify for the credit, the facility for
producing gas must be placed in service no later than June 30, 1998.

NEO generated after tax losses of $520,000 in 1996, reflecting heavy
development activity. For the nine months ended September 30, 1997, NEO has
generated after tax earnings of $3.6 million as compared to $191,000 for the
same nine month period in 1996.

CADILLAC RENEWABLE ENERGY

In July 1997, NRG, together with its partner, Decker Energy International,
Inc. ("Decker"), acquired a 34 MW wood-fired steam turbine power plant,
located in Cadillac, Wexford County, Michigan ("Cadillac"). NRG and Decker
acquired the facility and certain other assets from Beaver Michigan
Associates Limited Partnership. Electricity from the plant is sold to
Consumers Energy under a long-term power purchase agreement. NRG immediately
assumed operation of the 20-employee plant, now named Cadillac Renewable
Energy, through a wholly-owned subsidiary.

SUNNYSIDE

The Sunnyside facility, located in Carbon County, Utah, is a 58 MW waste
coal-fired facility that utilizes circulating fluidized bed technology. The
Sunnyside facility is owned by Sunnyside Cogeneration Associates ("SCA"), a
Utah joint venture, 50% of which is owned by NRG Sunnyside Inc. and 50% of
which is owned by B&W Sunnyside L.P., an affiliate of Babcock & Wilcox.
Sunnyside Operations Associates, in which affiliates of NRG and Babcock &
Wilcox each hold 50% of the partnership interests, performs operations and
maintenance services on behalf of SCA. As of December 31, 1996, NRG's
investment in SCA was $12.5 million.

PacifiCorp purchases the energy and capacity generated by the Sunnyside
facility pursuant to a power purchase agreement with an initial term expiring
in 2023. PacifiCorp is obligated to pay for energy at prices based on
PacifiCorp's avoided cost. PacifiCorp is obligated to pay for base capacity,
up to 45 MW, at a levelized fixed price, and for additional capacity up to 53
MW, at escalating fixed prices. The Sunnyside facility has experienced a
shortfall in project cash flow attributable primarily to decreased revenues
due to avoided energy rates being significantly lower than originally
forecasted. In addition, higher fuel costs than originally forecasted may be
incurred in the future.

These changes in the economic performance of the Sunnyside project have
caused NRG to explore options for restoring the Sunnyside project to
financial health. In particular, SCA has negotiated with PacifiCorp regarding
a potential restructuring of payments under the power purchase agreement, and
SCA has discussed a restructuring of the project debt with its bondholders.
In the absence of a restructuring of the project's debt, a debt service
reserve fund, which has been used to make up cash shortfalls, is expected to
be depleted at the end of 1997. There can be no assurances that either
PacifiCorp or the bondholders will agree to any restructuring, nor can there
be any assurances as to the actions SCA may take when and if the debt service
reserve fund is depleted.

JACKSON VALLEY

The Jackson Valley cogeneration facility ("Jackson Valley"), located near
Ione, California is a 16 MW fluidized bed power generation facility fueled by
waste lignite. The Jackson Valley facility is owned and operated by Jackson
Valley Energy Partners, L.P., a California limited partnership ("JVEP") in
which NRG owns a 2% general partnership interest and a 48% limited
partnership interest. The remaining 2% general partnership interest and 48%
limited partnership interest are owned by partnerships formed by two
individuals. The facility began operation in 1987 and has had a lifetime
operating availability in excess of 90%. NRG acquired its interest in Jackson
Valley in July 1991.

Jackson Valley has a long-term power sales agreement with PG&E through to
2016. On April 1, 1995, JVEP reached an agreement with PG&E regarding the
partial buy-out of the capacity payments under the PPA. The plant, which had
been idle since that date, restarted operations on May 1, 1997, at which time
the sale of energy to PG&E recommenced under the amended PPA.

In connection with its acquisition of the Jackson Valley facility in July
1991, JVEP also acquired a montan wax manufacturing plant, three mineral
leases and rights to mine lignite on property near the facility. During the
period while the JVEP facility was down, the montan wax plant maintained
production by receiving its power requirements from an auxiliary boiler.
Litigation is pending with respect to defining the nature and extent of
JVEP's rights to waste lignite from one of the several mines that supplies
the project with fuel but recent negotiations appear to favor a settlement.
However, since the plant is currently receiving and will for the forseeable
future receive its waste lignite from several other mines, management
believes that it is unlikely that this litigation will have a material
adverse effect on the JVEP Partnership.

JVEP's acquisition of the power generation facility, the montan wax plant
and the mineral rights was financed partially through the assumption of
indebtedness under a financing facility that was outstanding at the time of
the acquisition. The financing facility, which was restructured in 1995 in
connection with the partial buyout, and the obligations of JVEP under the
PPA, are non-recourse to NRG. The project debt was again restructured in
September 1997, providing additional project capital for permitting,
litigation and restart expenditures.

SAN JOAQUIN

NRG holds a 2% general partnership interest and a 43% limited partnership
interest in San Joaquin Valley Energy Partners I L.P. and San Joaquin Energy
Partners IV L.P. (together, the "SJVEP Partnerships"). The SJVEP Partnerships
separately own the Chowchilla I, Chowchilla II, El Nido and Madera power
generation facilities (the "SJVEP Facilities").

The PPAs with PG&E in respect of the SJVEP Facilities were bought-out by
PG&E as part of its program of trying to end long-term power purchase
agreements that impose above-market costs. The SJVEP contracts and many
others like them were entered into at rates established by the California
Public Utilities Commission in the early 1980's, which by 1995 were
substantially above the market cost of power. PG&E has tried to buy-out a
number of these contracts in order to save money for its ratepayers; the
price of each buy-out has been negotiated based on the savings that PG&E will
realize from terminating that contract. The SJVEP Partnerships agreed to
terminate these power purchase contracts in exchange for the payment by PG&E
of approximately $116 million. NRG received total pre-tax cash distributions
of $41.8 million in 1995 and 1996 after retiring debt on the Facilities and
making appropriate reserves. The project termination agreement resulted in a
pretax gain of $29.9 million in 1995, at which time NRG received a $14.2
million distribution. An additional $15.7 million of cash was received in
1996. PG&E also paid the Facilities' on-going operating expenses during the
time that the buyout was in progress, which accounted for $4.7 million of the
total $29.9 million gain in 1995. The distributions to NRG of $14.2 million
and $15.7 million were included as cash flow from investing activities in
1995 and 1996, respectively, while all other cash distributions from the
project were included in operating cash flow. Litigation is pending regarding
the termination of a bio-fuel supply contract in connection with the buy-out.
Appropriate reserves have been made and management believes that it is
unlikely that this litigation will have a material adverse effect on the
SJVEP Partnerships.

As a result of this buy-out, the SJVEP Facilities have been taken out of
service. On December 31, 1996, a contractor for a NEO project purchased the
mechanical equipment from the Chowchilla I power generation facility. The
SJVEP Partnerships' objective with respect to the other Facilities is to
enter into replacement PPAs for the sale of energy and capacity and to resume
operation by the end of 1997 or to sell the remaining SJVEP Facilities. No
assurance can be given as to whether replacement agreements will be obtained
or, if obtained, whether such agreements will be on terms favorable to the
SJVEP Partnerships, or if purchasers for the SJVEP Facilities can be secured,
or, if secured, whether the terms of their purchases will be favorable to the
SJVEP Partnerships.

STEAM AND CHILLED WATER PRODUCTION, TRANSMISSION AND RELATED SERVICES

MINNEAPOLIS ENERGY CENTER ("MEC")

MEC provides steam and chilled water to customers in downtown Minneapolis,
Minnesota. MEC currently provides 90 customers with 1.5 billion pounds of
steam per year and 30 customers with 37.0 million ton hours of chilled water
per year. NRG, through its wholly-owned project subsidiary NRG Energy Center,
Inc. ("NRG Energy Center"), acquired MEC in August 1993 for approximately
$110 million. MEC's assets include two steam and chilled water plants, three
chilled water plants, two steam plants, six miles of steam and two miles of
chilled water distribution lines. The MEC plants have a combined steam
capacity of 1,323 mmBtus per hour (388 MWt) and cooling capacity of 35,550
tons per hour.

MEC provides steam and chilled water to its customers pursuant to energy
supply agreements which expire at varying dates from December 1997 to March
2017. Historically, MEC has renewed its energy supply agreements as they near
expiration. With minor exceptions, these agreements are standard form
contracts providing for a uniform rate structure consisting of three
components: a demand charge designed to recover MEC's fixed capital costs, a
consumption charge designed to provide a per unit margin, and an operating
charge designed to pass through to customers all fuel, labor, maintenance,
electricity and other operating costs. The demand and consumption charges are
adjusted in accordance with the Consumer Price Index ("CPI") every five
years.

NRG Energy Center's acquisition of MEC was financed pursuant to an $84
million senior secured note facility. The notes are 7.31% fixed rate
obligations due in 2013, with the principal amortized over the life of the
loan and paid quarterly.

On January 9, 1996, two NRG employees were killed in an accident at MEC
that occurred while two steam pipes were being connected. NRG believes that
any liability relating to this accident will be adequately covered by
insurance policies (which contain customary deductibles).

NATS

In August 1995, NRG purchased from Thermal Ventures, Inc. ("TVI"), a 49%
limited partnership interest in each of two district heating and cooling
projects, one in San Francisco (San Francisco Thermal Limited Partnership or
"SFTLP") and the other in Pittsburgh (Pittsburgh Thermal Limited Partnership
or "PTLP"). NRG and TVI then established North American Thermal Systems LLC
("NATS") for the purpose of jointly owning their respective general
partnership interests in these two district heating and cooling companies. In
1996, NRG paid $2.8 million to the owners of TVI and made a capital
contribution of $500,000 to NATS in exchange for the sale of the 1% general
partnership interests in each of PTLP and SFTLP to NATS. NRG and TVI
participate equally in SFTLP and in PTLP and each owns 50% of the membership
interests in NATS. As of September 1997, NRG's investment in PTLP was $4.0
million and NRG's investment in SFTLP was $5.1 million.

PTLP and SFTLP are both regulated utilities that operate under tariffs and
are rate-regulated. PTLP owns and operates a district heating and cooling
system that serves part of downtown Pittsburgh and has peak steam capacity of
240 mmBtus per hour (70 MWt) and 10,180 tons of chilled water per year. PTLP
serves 24 customers with 300 million pounds of steam per year and 21 million
ton hours of chilled water per year. SFTLP is the sole supplier of steam to
downtown San Francisco, which it serves through its

district heating system that has steam capacity of 490 mmBtu per hour (144
MWt). SFTLP serves approximately 210 customers with approximately 700 million
pounds of steam per year that is used primarily for space and domestic
heating and absorption air-conditioning.

NATS is currently considering the acquisition of several other district
heating and cooling companies. NRG has agreed to make additional payments to
the principals of TVI of up to an aggregate of $7 million until January 1,
2003 for reaching performance benchmarks of current and future NATS operating
entities. There is no assurance that NATS will consummate any additional
acquisition.

SAN DIEGO POWER & COOLING

NRG purchased the San Diego Power & Cooling Company ("SDPC") on June 25,
1997. The purchase price was $6.7 million, including a note from the seller
for $2.7 million, payable over 72 months. The remaining amount, with the
exception of a $50,000 contingency, was paid in cash. SDPC serves the cooling
needs of fourteen major customers in the downtown San Diego central business
district through an underground piping system. SDPC's chilled water capacity
is 5,250 tons/hour.

ROCK-TENN

Rock-Tenn process steam operation, which is owned and operated by NRG,
consists of a five-mile closed-loop steam/condensate line that delivers steam
to the Rock-Tenn Company (formerly Waldorf Corporation), a paper manufacturer
in St. Paul, Minnesota and has a peak steam capacity of 430 mmBtus per hour
(126 MWt). Upon settlement of a 1987 dispute between NORENCO Corporation (a
predecessor of NRG) and Waldorf, Waldorf elected to prepay revenues for
future steam service. As of September 30, 1997, deferred revenues remaining
were $5.1 million. Rock-Tenn's corrugated medium operations are on 24 hour a
day, 7 day a week schedule. The corrugated medium operations represent
approximately 40% of normal steam sales.

NRG delivers steam to Rock-Tenn pursuant to a steam sales agreement which
expires in 2007. Under the agreement Rock-Tenn is obligated to purchase its
total energy needs for its St. Paul, Minnesota facility through June 30,
2007. The agreement does not obligate Rock-Tenn to purchase a minimum
quantity of energy. Instead, Rock-Tenn's failure to acquire a certain
quantity of energy during a given contract year triggers an NRG right to
terminate the agreement, unless Rock-Tenn elects to compensate NRG for the
deficit energy usage amount.

All project debt incurred with respect to the Rock-Tenn line has been
repaid. NRG maintains a $1.5 million performance bond with respect to the
Rock-Tenn steam line.

WASHCO

NRG's Washco steam operation consists primarily of two steam lines and a
back-up boiler facility, which were placed in service in 1986. The system has
a peak steam capacity of 160 mmBtus per hour (47 MWt).

Andersen Corporation, a window manufacturer based in Bayport, Minnesota
("Andersen"), purchases approximately 200,000 mmBtus of thermal energy
annually pursuant to a new ten-year agreement that expires in April 2007.
Andersen is obligated to take or pay for an annual quantity of steam equal to
60% of its total of purchased and self-generated steam, on a cost plus fixed
fee basis. The Minnesota Correctional Facility ("MCF"), located at Oak Park
Heights, Minnesota, purchases approximately 130,000 mmBtus of thermal energy
annually pursuant to an agreement that expires in December 2006. MCF
purchases steam based on a fixed facility charge plus an energy charge that
escalates annually in accordance with an NSP coal fuel and labor index.

GRAND FORKS

NRG's Grand Forks boiler plant facility consists of seven boilers located
in Grand Forks, North Dakota that were acquired from NSP in 1990. The system
has a peak steam capacity of 105 mmBtus per hour (31 MWt).

The Grand Forks facility provides approximately 400,000 mmBtus of high
temperature water annually to the Grand Forks Air Force Base pursuant to an
agreement that expires in September 2000. NRG is paid a fixed capacity price
component, a variable price component adjusted annually based on changes in
CPI and a fuel component that is a pass-through of the facility's fuel costs
for high temperature water sold under the agreement.

RESOURCE RECOVERY FACILITIES

RDF projects, such as NRG's Newport facility and NSP's Elk River facility,
historically were assured adequate supply of waste through state and local
flow control legislation, which directed that waste be disposed of in certain
facilities. In May 1994, the United States Supreme Court held that such waste
was a commodity in interstate commerce and, accordingly, that flow control
legislation that prohibited shipment of waste out of state was
unconstitutional. Since this ruling, the RDF facilities owned or operated by
NRG have faced increased competition from landfills in surrounding states. As
a result of such competition, MSW processed at the Newport facility decreased
by approximately 5% in 1995, from approximately 378,000 tons in 1994 to
360,000 tons in 1995. In 1996, however, due to assistance from NRG and a
reduction in tipping fees under contracts entered into between haulers and
Ramsey and Washington Counties (the "Counties"), waste deliveries reversed
their downward trend. In the absence of valid flow control legislation, there
can be no assurance that this improved trend will continue. Various
legislative proposals have been considered, including legislation that would
provide relief to existing RDF facilities. No assurance can be given that
such legislation will be adopted.

NEWPORT

NRG's Newport resource recovery facility, located in Newport, Minnesota,
can process over 1,500 tons of MSW per day, 92% of which is recovered as RDF
or other recyclables and reused in power generation facilities in Red Wing
and Mankato, Minnesota. The Newport facility, which was originally
constructed and operated by NSP, was transferred to NRG in 1994. NRG owns
100% of and operates and maintains the Newport facility.

The construction of the Newport facility was financed through the issuance
by the Counties of tax exempt variable rate resource recovery revenue bonds,
which have subsequently been converted to fixed rate resource recovery
revenue bonds with annual maturities each December through to 2006. The
proceeds of such bond issuance were loaned by the Counties to NSP, which
agreed to pay to the Counties amounts sufficient to pay the debt service on
the bonds. NRG issued a separate note to NSP in an original principal amount
of approximately $10 million as part of the consideration for the purchase of
the facility from NSP. As of September 30, 1997, $19.8 million was
outstanding on the Counties' loan to NSP and $8.4 million was outstanding
under NRG's note to NSP.

Pursuant to service agreements with the Counties, which expire in 2007,
NRG processes a minimum of 280,800 tons of MSW per year and receives service
fees based on the amount of waste processed, pass-through costs and certain
other factors. NRG is also entitled to an operation and maintenance fee,
which is designed to recover fixed costs and to provide NRG a guaranteed
amount for operating and maintaining the facility for the processing of 750
tons per day of MSW, whether or not the Counties deliver such waste for
processing.

To increase MSW flows and improve facility competitiveness, the Counties
reduced tipping fees charged to haulers under long-term delivery contracts.
The tip fee reduction became effective as of June 1, 1996 and is effective
under those contracts until the end of 1998. MSW deliveries for the nine
months ended September 30, 1997 were 16% higher than the same period in 1996.

Minnesota Waste Processors L.L.C. ("Minnesota Waste Processors"), a
limited liability company which is 50% owned by each of NRG and LJP
Enterprises, Inc., collects MSW from several cities in southern Minnesota for
processing at the Newport facility. NRG also uses Minnesota Waste Processors'
primary asset, a large warehouse, as a temporary RDF storage facility to
enable more efficient utilization

of RDF as a feedstock to NSP's Wilmarth generating plant. The $2 million
storage and transfer warehouse owned by Minnesota Waste Processors has been
financed through a loan from NRG to Minnesota Waste Processors. In the event
of a default on such loan, NRG's recourse likely would be limited to
foreclosure on the warehouse.

ELK RIVER

Since 1989, NRG has operated the Elk River resource recovery facility
located in Elk River, Minnesota, which can process over 1,500 tons of MSW per
day, 90% of which is recovered as RDF or other recyclables and reused in
power generation facilities in Elk River and Mankato, Minnesota. NSP owns 85%
of the Elk River facility, and United Power Association owns the remaining
15%.

Pursuant to service agreements between NSP and each of Anoka County,
Hennepin County, Sherburne County in Minnesota and the Tri-County Solid Waste
Management Commission in Minnesota (the "NSP Service Counties"), all of which
expire in 2009, NSP is obligated to process a maximum of 450,000 tons of MSW
per year and is entitled to receive service fees based on the amount of waste
processed, pass-through costs, revenues credited to the NSP Service Counties
and certain other factors. NSP is also entitled to an operation and
maintenance fee, which is designed to recover fixed costs and to provide NSP
a guaranteed amount for operating and maintaining the facility for the
processing of 214,900 tons of waste, whether or not the NSP Service Counties
deliver such waste for processing.

NRG also provides ash storage and disposal for the Elk River facility at
NSP's Becker ash disposal facility, an approved ash deposit site adjacent to
NSP's Sherburne County generating facility near Becker, Minnesota. NRG
operates the Becker facility on behalf of NSP. Pursuant to an ash management
services agreement between NSP and the NSP Service Counties, the NSP Service
Counties pay an ash disposal fee based on the amount of ash disposal,
pass-through costs and certain other factors.

Prior to 1996, NRG managed Elk River and Becker Ash on behalf of NSP under
a cost reimbursement arrangement. NRG did not earn a profit with respect to
providing such services. As of January 1, 1996, NRG entered into an operation
and maintenance agreement with NSP with respect to the Elk River Facilities,
under which NRG receives a base management fee and is reimbursed for costs it
has incurred. The operation and maintenance agreement also provides for a
management incentive fee payable to NRG, based upon the financial performance
of the Elk River Facilities.

In 1996 NRG earned a total management fee of $1.5 million, in addition to
reimbursed expenses. Management fees for the nine months ended September 30,
1997, totalled $776,000 compared to $761,000 for the same period in 1996.

PRINCIPAL CUSTOMERS OF OPERATING SUBSIDIARIES

Customers accounting for more than 10% of NRG's operating revenues (which
exclude equity in earnings of projects) in each of the last two fiscal years
were as follows:

YEAR ENDED
DECEMBER 31,
----------------
1995 1996
------- -------
(IN MILLIONS)

Ramsey and Washington Counties,
Minnesota (Resource Recovery) .. $20.6 $20.8
Rock-Tenn Company (Thermal
Energy).......................... 10.0 10.1

PROPERTIES

In addition to NRG's properties listed under the heading "Business --
Description of NRG's Projects," NRG leases its offices at 1221 Nicollet Mall,
Suite 700, Minneapolis, Minnesota 55403, under a five-year lease that expires
in June 2002.

NRG believes that its facilities and properties have been satisfactorily
maintained, are in good condition, and are suitable for NRG's operations.

LEGAL AND ADMINISTRATIVE PROCEEDINGS

NRG experiences routine litigation in the course of its business.
Management is of the opinion that none of this routine litigation will have a
material adverse effect on the consolidated financial condition of NRG.

EMPLOYEES

At September 30, 1997, NRG employed 850 people, approximately 313 of whom
are employed directly by NRG and approximately 537 of whom are employed by
its wholly-owned subsidiaries. Approximately 550 employees are covered by
collective bargaining agreements.

REGULATION

NRG is subject to a broad range of federal, state and local energy and
environmental laws and regulations applicable to the development, ownership
and operation of its United States and international projects. These laws and
regulations generally require that a wide variety of permits and other
approvals be obtained before construction or operation of a power plant
commences and that, after completion, the facility operate in compliance with
their requirements. NRG strives to comply with the terms of all such laws,
regulations, permits and licenses and believes that all of its operating
plants are in material compliance with all such applicable requirements. No
assurance can be given, however, that in the future all necessary permits and
approvals will be obtained and all applicable statutes and regulations
complied with. In addition, regulatory compliance for the construction of new
facilities is a costly and time-consuming process, and intricate and rapidly
changing environmental regulations may require major expenditures for
permitting and create the risk of expensive delays or material impairment of
project value if projects cannot function as planned due to changing
regulatory requirements or local opposition. Furthermore, there can be no
assurance that existing regulations will not be revised or that new
regulations will not be adopted or become applicable to NRG which could have
an adverse impact on its operations.

In particular, the independent power market in the United States,
Australia and other countries is dependent on the existing regulatory and
ownership structure, and while NRG strives to take advantage of the
opportunities created by such changes, it is impossible to predict the impact
of those changes on NRG's operations. Further, NRG believes that the level of
environmental awareness and enforcement is growing in most countries,
including most of the countries in which NRG intends to develop and operate
new projects. Therefore, based on current trends, NRG believes that the
nature and level of environmental regulation to which it is subject will
become increasingly stringent. NRG's policy is therefore to operate its
projects in accordance with environmental guidelines adopted by the World
Bank and applicable local law.

ENERGY REGULATION IN THE UNITED STATES

The enactment of PURPA in 1978 provided incentives for the development of
Qualifying Facilities or "QFs", which were basically cogeneration facilities
and small power production facilities that utilized certain alternative or
renewable fuels. The passage of the Energy Policy Act in 1992 further
encouraged independent power production by providing certain exemptions from
regulation for EWGs and "foreign utility companies" ("FUCOs").

All of NRG's domestic projects are currently Qualifying Facilities under
PURPA, except for Parlin which is an EWG. These QF projects are as follows:
Sunnyside, Jackson Valley, Artesia, all of the NRGG Facilities (except for
Parlin) and all of the NEO Facilities. QF status conveys two primary
benefits. First, regulations under PURPA exempt Qualifying Facilities from
PUHCA, most provisions of the Federal Power Act and the state laws concerning
rates of electric utilities, and financial and organizational regulations of
electric utilities. Second, FERC's regulations under PURPA require that (1)
electric utilities purchase electricity generated by QFs at a price based on
the purchasing utility's full avoided cost of producing power, (2) the
electric utilities must sell back-up, interruptible, maintenance and
supplemental power to the QF on a non-discriminatory basis, and (3) the
electric utilities must interconnect with any QF in its service territory,
and if required transmit power if they do not purchase it.

NRG endeavors to acquire, develop and operate its domestic plants, monitor
regulatory compliance by such plants and choose its customers in a manner
that minimizes the risk of those plants losing their QF status. However, the
occurrence of events outside NRG's control, such as loss of a cogeneration
plant's steam customer, could jeopardize QF status. While a plant usually
would be able to react in a manner to avoid the loss of QF status by, for
example, replacing the steam customer or finding another use for the steam
which meets PURPA's requirements, there is no certainty that such action, if
possible, would be practicable or economic. In the alternative, NRG could
attempt to avoid regulation under PUHCA by qualifying the project as an EWG,
as is the case with the NRGG Parlin cogeneration facility. However, this
change may not be permitted under the terms of the applicable power purchase
agreement, and even if it were, the plant would then be subject to rate
approval from the FERC.

While it is unlikely that one of NRG's plants would actually lose its
status as a QF and not become an EWG, if that did occur, NRG would in all
likelihood have to cease operation of that plant or sell the

plant to an unaffiliated third party if NRG could not restore QF status after
a reasonable cure period. If it continued to operate, the project subsidiary
holding that plant would lose the exemptions outlined above and would become
an electric utility or EWG. This could result in NRG inadvertently becoming a
"public utility holding company" under PUHCA by owning more than 10% of the
voting securities of an electric utility. Loss of QF status on a retroactive
basis could also lead to, among other things, fines and penalties being levied
against NRG and its project subsidiaries, defaults under the power purchase
agreement and resulting claims by the utility customer for the refund of
previous payments, and defaults under financing agreements.

Currently, Congress is considering proposed legislation that would amend
PURPA by eliminating the requirement that utilities purchase electricity from
QFs at prices based on the purchasing utility's avoided cost. NRG does not
know whether such legislation will be passed or what form it may take. NRG
believes that if any such legislation is passed, it would apply to new
projects only and thus, although potentially impacting NRG's ability to
develop new domestic QF projects, it would not affect NRG's existing QF
projects. There can be no assurance, however, that any legislation passed
would not adversely impact NRG's existing domestic projects.

In any case, NRG anticipates that most of its future domestic development
activities will focus on the development of EWGs rather than QFs. An EWG is
an entity that is exclusively engaged, directly or indirectly, in the
business of owning or operating facilities which are exclusively engaged in
generating and selling electric energy at wholesale. An EWG will not be
regulated under PUHCA, but is subject to FERC and state public utility
commission regulatory reviews, including rate approval.

In its future development and acquisition of domestic projects, NRG may
also be subject to regulation by the FERC if NRG wheels electricity to
purchasers other than the local utility to which the plant is interconnected.
Although wheeling arrangements are generally voluntary, the FERC regulates
the rates, terms and conditions for electricity transmission in interstate
commerce. Currently, none of NRG's projects requires the wheeling of
electricity over power lines owned by others.

If it develops or acquires domestic EWGs rather than QF's in the future,
NRG may also be subject to some regulation by state public utility
commissions ("PUCs"), because EWGs do not enjoy the same statutory and
regulatory exemptions from state regulation as was granted to QF's. In fact,
however, since EWGs are only allowed to sell power at wholesale, their rates
must receive initial approval from the FERC rather than the states. But in
areas outside of rate regulation (such as financial or organizational
regulation), some state utility laws may give their PUCs broad jurisdiction
over non-QF independent power projects that sell power in their service
territories, including EWGs. The actual scope of that jurisdiction over
independent power projects varies significantly from state to state,
depending on the law of that state. In addition, many states are implementing
or considering regulatory initiatives designed to increase competition in the
domestic power generating industry and increase access to electric utilities'
transmission and distribution systems for independent power producers and
electricity consumers. At the same time, electric utility companies
themselves are considering a variety of restructuring proposals, including
mergers, acquisitions and divestitures of one or more lines of business. NRG
believes that the training and experience of many of its employees in the
electric utility industry have prepared it to take advantage of these many
changes in the industry. However, NRG cannot predict the final form or timing
of these changes in the domestic utility industry or the results of these
changes on its operations.

ENVIRONMENTAL REGULATIONS -- UNITED STATES

The construction and operation of power projects are subject to extensive
environmental protection and land use regulation in the United States. These
laws and regulations often require a lengthy and complex process of obtaining
licenses, permits and approvals from federal, state and local agencies. If
such laws and regulations are changed and NRG's facilities are not
grandfathered, extensive modifications to project technologies and facilities
could be required.

Based on current trends, NRG expects that environmental and land use
regulation will continue to be stringent. Accordingly, NRG plans to continue
a strong emphasis on the development and use of "best-available" control
technology, as required under the Clean Air Act and Clean Water Act, to
minimize the environmental impact of its operations.

All of NRG's domestic facilities perform at levels equal to or better than
applicable federal performance standards mandated for such plants under the
Clean Air Act. NRG believes that technology currently installed at NRG's
projects should uniformly meet or exceed reasonably available control
technology (RACT). In addition, all of NRG's current domestic operating
plants are by statute generally exempt from or unaffected by the provision of
the 1990 amendments to the Clean Air Act (the "1990 Amendments"), which
require most power plants to purchase sulphur dioxide allowances. In the
future, the plants NRG expects to develop in the United States will continue
to rely on "clean (low sulfur) coal," sulphur dioxide removal technology or
natural gas technology. Accordingly, NRG believes that the additional costs
of obtaining the number of allowances needed for future projects should not
materially affect NRG's ability to develop such projects.

The 1990 Amendments also provide an extensive new operating permit program
for existing sources. Because all of the existing NRG facilities (with the
exception of the NATS facilities) were permitted under the Prevention of
Significant Deterioration or other New Source Review program, NRG currently
expects that the permitting impact under the 1990 Amendments to be minimal.
NATS currently is evaluating whether any of its facilities will require
modification. NRG anticipates that the costs of applying for and obtaining
operating air permits will not be material. NRG may need to upgrade
continuous emission monitoring systems at some plants, however, and permit
fees will increase operating expenses.

The hazardous air pollutant provisions of the 1990 Amendments presently
exclude electric steam generating facilities, such as NRG's plants. Until
studies of the emissions from such facilities are completed and Congress
either amends the Clean Air Act further or the EPA promulgates regulations in
connection therewith, the nature and extent of federal hazardous air
pollutants emissions restrictions which will be applied to NRG's plants and
other electric steam generating facilities will remain uncertain.

NRG has received notices of violation and fines totaling approximately
$250,000 from the New Jersey Department of Environmental Protection ("NJDEP")
in connection with certain technical and record keeping violations under the
Clean Air Act at the former O'Brien Energy facilities in New Jersey. NRG
detected and voluntarily disclosed these violations to the NJDEP shortly
after NRG's acquisition of its interest in the O'Brien facilities. Because
NRG did not receive any economic advantage from these violations and
disclosed them promptly and voluntarily, NRG has recently filed
administrative proceedings seeking forgiveness of the fines. In addition, NRG
believes that the former operator of these facilities is contractually
responsible for payment of any fines that are assessed, because the
violations occurred during a time when that third-party operator managed the
facilities.

Existing NRG facilities are also subject to a variety of state and federal
regulations governing existing and potential water/wastewater discharges from
the facilities. Generally, federal regulations promulgated through the Clean
Water Act govern overall water/wastewater discharges, through NPDES permits.
Under current provisions of the Clean Water Act, existing permits must be
renewed every five years, at which time permit limits are extensively
reviewed and can be modified to account for changes in regulations. In
addition, the permits have re-opener clauses which the federal government can
use to modify a permit at any time. NRG does not anticipate, however, that
any change in permit limits pursuant to these provisions of the Clean Water
Act would affect significantly the profitability of NRG's facilities.

Congress is considering whether to re-authorize the Clean Water Act, with
reauthorization focusing on toxic discharges, receiving water body biological
monitoring requirements, bioassay requirements, additional controls on
stormwater runoff, and water quality standards and enforcement provisions. It
is uncertain whether the Clean Water Act will become more or less stringent
after re-authorization. If the Clean Water Act becomes more stringent, NRG
facilities may be required to retrofit existing wastewater treatment
facilities for metals removal and to budget for additional monitoring
requirements and toxicity reduction evaluations. NRG does not expect the
impact of these additional expenses to affect significantly the profitability
of the facilities.

There can be no assurance that existing laws and regulations will not be
revised or that new regulations will not be adopted or become applicable to
NRG which could have an adverse impact on its operations.

ENVIRONMENTAL REGULATIONS -- INTERNATIONAL

Although the type of environmental laws and regulations applicable to
independent power producers and developers varies widely from country to
country, many foreign countries have laws and regulations relating to the
protection of the environment and land use which are similar to those found
in the United States. Laws applicable to the construction and operation of
electric power generation facilities in foreign countries generally regulate
discharges and emissions into water and air, and also regulate noise levels.
Air pollution laws in foreign jurisdictions often limit the emissions of
particles, dust, smoke, carbon monoxide, sulfur dioxide, nitrogen oxides and
other pollutants. Water pollution laws in foreign countries generally limit
wastewater discharges into municipal sewer systems and require treatment of
wastewater so that it meets established standards. New projects and
modifications to existing projects are also subject, in many cases, to land
use and zoning restrictions imposed in the foreign country. In addition to
the requirements currently imposed by a particular country, certain lenders
to international development projects may impose their own requirements
relating to the protection of the environment.

NRG believes that the level of environmental awareness and enforcement is
growing in most countries, including most of the countries in which NRG
intends to develop and operate new projects. Therefore, based on current
trends, NRG believes that the nature and level of environmental regulation to
which it is subject will become increasingly stringent. NRG's policy is to
operate its projects at least in accordance with environmental guidelines
adopted by the World Bank and applicable local law.

GERMAN REGULATIONS

Both the Schkopau Power Station and MIBRAG are subject to the energy and
environmental laws and regulations of Germany. German environmental laws
conform to European Union standards. In addition, MIBRAG is governed by
German mining laws and regulations.

ENVIRONMENTAL REGULATIONS

The Schkopau facility is designed to comply with all applicable German
laws and regulations, including, without limitation, environmental and land
use laws and regulations. The power purchase agreement between Saale Energie
and VEAG provides that any future changes in law that may affect the cost of
providing the contracted capacity will lead to adjustment of the price.

In the case of existing power generating facilities located in eastern
Germany, current German environmental laws and regulations are being
phased-in in a manner that provides for a gradual step-up of the
environmental standards applicable to such facilities. All east German power
generating facilities were required to be in full compliance with German
environmental laws and regulations by July 1, 1996. MIBRAG's W|f3hlitz,
Mumsdorf and Deuben facilities have been retrofitted and are presently in
full compliance with these laws and regulations The power purchase agreement
between MIBRAG and WESAG provides that any future changes in the law that may
materially affect the cost of generating power will reopen the price.

ENERGY REGULATIONS

The Schkopau facility and all three power generating facilities of MIBRAG
are permitted to generate and sell energy to their present customers pursuant
to current German energy laws and regulations. Should the Schkopau facility
or any of the MIBRAG power generating facilities wish to sell to additional
customers, this would require further regulatory approval.

The German government currently is considering substantially amending the
German Energy Resources Act of 1936. The bill currently before the German
Parliament will not affect the regulatory status of the Schkopau or MIBRAG
facilities. However, it is not possible at present to determine whether the
bill will be enacted in its current form or whether an amendment, if enacted,
would have an adverse effect on the regulatory status of those facilities.

The current German government has dismissed plans to enact an energy
related tax or other surcharge. However, certain political factions in
Germany and within the European Union continue to press for such a tax or
surcharge. There can be no assurance that such a tax or surcharge will not be
enacted in the future.

MINING REGULATIONS

MIBRAG owns the mining rights to the Profen and Schleenhain mines and
leases mining rights to the Zwenkau mine. MIBRAG currently is operating all
three of its mines in compliance with current German mining regulations.

AUSTRALIAN REGULATIONS

The electricity sector in Queensland is regulated primarily under the
Electricity Act. The Electricity Act was recently amended to provide for
independent generation and the licensing of independent generators by the
Regulator General. Pursuant to the Electricity Act, the State Minister for
Energy and the Regulator General have the authority to promulgate regulations
governing the Queensland electricity industry.

In Victoria, the primary laws providing for the economic regulation of the
Victorian electricity industry are the Electricity Industry Act 1993 (Vic)
and the Office of the Regulator-General Act 1994 (Vic). The ongoing
regulation of the Victorian electricity industry is the responsibility of the
Office of the Regulator-General, an independent regulatory body established
under the Office of the Regulator-General Act.

Environmental management in Victoria is primarily governed by the
Environment Protection Act 1970 (Vic). The primary control instruments under
the EPA are licenses issued by the Environment Protection Authority (the
environmental regulatory agency established under the EPA). The EPA was
amended in 1990 and now provides for severe penalties for company directors,
managers and employees in cases of gross environmental misconduct.

Although discussed in Victoria, it is considered unlikely that a carbon
tax will be introduced in the foreseeable future. Even if one is introduced,
the tax would have to operate at very high levels before it could
significantly affect Loy Yang's competitiveness in the wholesale electricity
market.

MANAGEMENT

The name, age and title of each of the directors and executive officers of
NRG as of November 1, 1997 are as set forth below.

NAME AGE TITLE
- --------------------- ----- --------------------------------------------------

David H. Peterson ... 56 Chairman of the Board, President, Chief Executive
Officer
and Director
Gary R. Johnson ...... 50 Director
Cynthia L. Lesher ... 49 Director
Edward J. McIntyre .. 46 Director
John A. Noer.......... 52 Director
Leonard A. Bluhm .... 51 Executive Vice President and Chief Financial Officer
James J. Bender ...... 40 Vice President and General Counsel
Valorie A. Knudsen .. 41 Vice President, Finance
Craig A. Mataczynski 37 Vice President, U.S. Business Development
Robert McClenachan .. 46 Vice President, International Business Development
Louise T. Routhe .... 41 Vice President, Human Resources and Administration
Ronald J. Will ....... 57 Vice President, Operations and Engineering
Brian B. Bird......... 35 Treasurer
David E. Ripka ....... 48 Controller
Julie A. Jorgensen .. 35 Corporate Secretary

David H. Peterson has been Chairman of the Board of NRG since January
1994, Chief Executive Officer since November 1993, President since 1989 and a
Director since 1989. Mr. Peterson was also Chief Operating Officer of NRG
from June 1992 to November 1993. Prior to joining NRG, Mr. Peterson was Vice
President, Non-Regulated Generation for NSP, and he has served in various
other management positions with NSP during the last 20 years.

Cynthia L. Lesher has been a Director of NRG since July 1996 and became
President of NSP Gas in July 1997. Prior to July 1997, Ms. Lesher was Vice
President-Human Resources of NSP since March 1992 after serving as Director
of Power Supply-Human Resources since 1991. Ms. Lesher became Area Manager,
Electric Utility Operations, in 1990, and previously served as Manager, Metro
Credit, and Manager, Occupational Health and Safety. Prior to joining NSP,
Ms. Lesher was a training and development consultant at the Center for
Continuing Education in Minneapolis. From 1970 to 1977, she held a variety of
positions with Multi Resource Centers, Inc., also in Minneapolis.

Gary R. Johnson has been a Director of NRG since February 1993, Corporate
Secretary of NSP from April 1994 until July 1997 and Vice President and
General Counsel of NSP since October 1991. Prior to October 1991, Mr. Johnson
was Vice President-Law of NSP from December 1988, acting Vice President from
September 1988 and Director of Law from February 1987.

Edward J. McIntyre has been a Director of NRG since May 1992 and Vice
President and Chief Financial Officer of NSP since January 1993. Mr. McIntyre
has also been a director of NSP subsidiaries Viking Gas Transmission Company
since June 1993, Eloigne Company since August 1993 and First Midwest Auto
Park, Inc. since September 1993, and Cenerprise since September 1994, where
he served as Chairman from 1994 to 1996. Mr. McIntyre served as President and
Chief Executive Officer of NSP-Wisconsin, a wholly owned subsidiary of NSP,
from July 1990 to December 1992, and he has served in various other
management positions with NSP during the last 20 years.

John A. Noer has been a director of NRG since June 1997 and President and
CEO of NSP Wisconsin, a wholly owned subsidiary of NSP, since January 1993.
Prior to joining NSP Wisconsin, Mr. Noer was President of Cypress Energy
Partners, a wholly-owned project subsidiary of NRG, from March 1992 to
January 1993. Prior to joining Cypress Energy Partners, Mr. Noer held various
management positions with NSP since joining the company in September 1968.

Leonard A. Bluhm has been Executive Vice President and Chief Financial
Officer of NRG since January 1997. Immediately prior to that, he served as
the first President and Chief Executive Officer of NRGG, of which he is now
Chairman. Mr. Bluhm was Vice President of NRG from January 1993 and Chief
Financial Officer May 1993 until assuming his NRGG position. Mr. Bluhm was
Chief Financial Officer of Cypress Energy Partners, a wholly-owned project
subsidiary of NRG, from April 1992 to January 1993, prior to which he was
Director, International Operations and Manager, Acquisitions and Special
Projects of NRG from 1991. Mr. Bluhm previously served for over 20 years in
various financial positions with NSP.

James J. Bender has been Vice President and General Counsel of NRG since
June 1997. He served as the General Counsel of the Polymers Division of
Allied Signal Inc. from May 1996 until June 1997. From June 1994 to May 1996
Mr. Bender was employed at NRG, acting as Senior Counsel until December 1994
and as Assistant General Counsel and Corporate Secretary from December 1994
to May 1996. Prior to joining NRG in 1994, Mr. Bender was a partner at the
Minneapolis law firm of Leonard, Street and Deinard from April 1993 to June
1994 and he served as Corporate Counsel for Pfizer Inc. from August 1989 to
April 1993.

Valorie A. Knudsen has been Vice President, Finance since April 1996,
prior to which she served as Controller since August 1993. Prior to joining
NRG, Ms. Knudsen served in various managerial accounting positions from
November 1987 to July 1993 with Carlson Companies, Inc., where she was
responsible for various types of accounting and reporting.

Craig A. Mataczynski has been Vice President, U.S. Business Development of
NRG since December 1994. Mr. Mataczynski served as President of NEO
Corporation, NRG's wholly-owned subsidiary that develops small electric
generation projects within the United States, from May 1993 to January 1995.
Prior to joining NRG, Mr. Mataczynski worked for NSP from 1982 to 1994 in
various positions, including Director, Strategy and Development and Director,
Power Supply Finance.

Robert McClenachan has been Vice President, International Business
Development of NRG since September 1995, prior to which he was Managing
Director, Business Development from June 1992 to September 1995. Mr.
McClenachan was also President of NRG Australia, a wholly-owned project
subsidiary of NRG, from April 1993 to October 1995. Prior to joining NRG, Mr.
McClenachan served as Development Director for Bonneville Pacific
Corporation, an independent power production company in Salt Lake City, Utah,
from January 1991 to December 1991, and he worked from 1983 to 1991 in
various positions for Central Vermont Public Service Corporation, including
Vice President, Corporate Development.

Louise T. Routhe has been Vice President, Human Resources and
Administration of NRG since June 1992, prior to which she served as Human
Resources Director from January 1992. Prior to joining NRG, Ms. Routhe was
self-employed as a Human Resources and Management Consultant from December
1990 to January 1992 and worked as Vice President, Human Resources with First
Trust Company, a wholly-owned subsidiary of First Bank System, Inc., from
1987 to 1990. Ms Routhe held various other Human Resources management
positions at First Bank System from 1979 to 1987.

Ronald J. Will has been Vice President, Operations and Engineering of NRG
since March 1994, prior to which he served as Vice President, Operations from
June 1992. Prior to joining NRG, he served as President and Chief Executive
Officer of NRG Thermal, a wholly-owned subsidiary of NRG that provides
customers with thermal services, from February 1991 to June 1993. Prior to
February 1991, Mr. Will served in a variety of positions with Norenco, a
wholly-owned thermal services subsidiary of NRG, including Vice President and
General Manager from August 1989 to February 1991.

Brian B. Bird has been Treasurer of NRG since June 1997, prior to which he
was Director of Corporate Finance for Deluxe Corporation in Shoreview,
Minnesota from September 1994 to May 1997. Mr. Bird was Manager of Finance
for the Minnesota Vikings Professional Football Team from March 1993 to
September 1994. Mr. Bird held several financial management positions with
Northwest Airlines in Minneapolis, Minnesota from 1988 to March 1993.

David E. Ripka has been Controller of NRG since March 3, 1997. Prior to
joining NRG, Mr. Ripka held a variety of positions with NSP for over 20
years, including Assistant Controller and General Manager of Accounting
Operations and Director of Audit Services.

Julie A. Jorgensen has been Corporate Secretary of NRG since October 1997
and Senior Counsel since June 1997. She was Vice President and General
Counsel of NRG from December 1994 until June 1997, prior to which she was
Assistant General Counsel from January 1994 to December 1994 and Counsel from
January 1993 to January 1994. Prior to joining NRG in 1993, Ms. Jorgensen
worked as an associate with Morrison & Foerster, a private law firm in Los
Angeles, California.

EXECUTIVE COMPENSATION AND OTHER INFORMATION

Compensation. The following table sets forth the compensation paid or
awarded to David H. Peterson, Chairman, President and Chief Executive Officer
of NRG, and the other four most highly compensated executive officers of NRG
during the last fiscal year (collectively, the "Named Executives") for
services rendered in all capacities for the last fiscal year.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION
---------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1)
- ----------------------------- ------ --------- -------- -----------------
($) ($) ($)

David H. Peterson
Chairman, President & Chief
Executive Officer ........... 1996 250,000 81,000
Leonard A. Bluhm (3)
Executive Vice President &
CFO ......................... 1996 152,333 53,630
Robert McClenachan
Vice President,
International
Business Development ........ 1996 150,000 36,201 37,410
Ronald J. Will
Vice President, Operations &
Engineering ................. 1996 147,000 38,667
Craig A. Mataczynski
Vice President, U.S.
Business Development ........ 1996 145,000 40,343

(RESTUBBED TABLE CONTINUED FROM ABOVE)

SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION OPTIONS (2)
- ----------------------------- ------------ --------------
(#) ($)

David H. Peterson
Chairman, President & Chief
Executive Officer ........... 3,637
Leonard A. Bluhm (3)
Executive Vice President &
CFO ......................... 105,000(4) 2,712
Robert McClenachan
Vice President,
International
Business Development ........ 2,712
Ronald J. Will
Vice President, Operations &
Engineering ................. 2,712
Craig A. Mataczynski
Vice President, U.S.
Business Development ........ 2,712

- ------------
(1) The amount shown in this column for Mr. McClenachan includes a
relocation and foreign assignment premium bonus ($19,616) and the value
of the personal use of a company-provided automobile ($7,986).
(2) This column consists of the amounts contributed by NRG to the NSP
Retirement Savings Plan ($900) and the Employee Stock Ownership Plan
($1,812.89) for each Named Executive. The column also reflects the
value to Mr. Peterson of the remainder of insurance premiums paid under
the NSP Officer Survivor Benefit Plan by NRG ($925).
(3) Mr. Bluhm's salary and bonus include amounts paid for his service with
NRGG.
(4) These options relate to NRGG common stock. See "Option Grants in Last
Fiscal Year."

The following table sets forth information concerning the exercise of
stock options and stock appreciation rights during fiscal 1996 by each of the
Named Executives and the fiscal year-end value of unexercised options. Prior
to the existence of the NRG Equity Plan, NRG executives participated in the
NSP Executive Stock Option program. The following table reflects the Named
Executive's participation in the NSP Executive Stock Option Program.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION/SAR VALUE (1)
- --------------------------------------------------------------------------------------------
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS/SARS AT FY-END VALUE OF UNEXERCISED IN-THE-MONEY
(#) OPTIONS/SARS AT FY-END ($)(2)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ------------------- ------------------------------------ ---------------------------------

David H. Peterson . 8,415/0 44,213/0
Leonard A. Bluhm .. 2,840/0 18,117/0
0/105,000(3) 0/610,313(3)
Robert McClenachan 859/0 2,048/0
Ronald J. Will ..... 2,723/0 17,839/0

- ------------
(1) These options to acquire NSP Stock were granted to the Named Executives
for services rendered to NRG and its subsidiaries.
(2) NSP's share price on December 31, 1996 was $45.875.
(3) These options relate to NRGG common stock. The options were granted at
an exercise price of $5.4375. The price per share of NRGG common stock
on December 31, 1996 was $11.25. 75,000 of these options were cancelled
in January, 1997. See "Option Grants in Last Fiscal Year."

OPTION GRANTS IN LAST FISCAL YEAR (1)
- ----------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL OPTIONS
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH) DATE
- --------------------------------- ------------ ----------------------- -------------- ------------

LEONARD A. BLUHM................. 105,000(2) 26 5.4375 10/21/2006

(RESTUBBED TABLE CONTINUED FROM ABOVE)

OPTION GRANTS IN LAST FISCAL YEAR (1)
- -----------------------------------------------------
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
FOR OPTION TERM
-------------------

10%
NAME 5% ($)(3) ($)(3)
- --------------------------------- --------- --------
LEONARD A. BLUHM................. 359,100 909,930

- ------------
(1) These options relate to NRGG common stock. Options were granted to Mr.
Bluhm under the NRG Generating (U.S.) Inc. 1996 Stock Option Plan. The
options vest one-third annually on each of the first, second and third
anniversaries of grant.
(2) By agreement with NRGG, options to acquire 75,000 of these shares were
withdrawn in January, 1997.
(3) Amounts set forth in these columns reflect rates of appreciation
required by Securities and Exchange Commission rules and are not
intended to predict the future value of NRGG common stock.

PENSION PLAN TABLE

The following table illustrates the approximate retirement benefits
payable to employees retiring at the normal retirement age of 65 years:

ESTIMATED ANNUAL BENEFITS FOR YEARS OF SERVICE INDICATED
AVERAGE ------------------------------------------------------------
YEARS OF SERVICE
COMPENSATION ------------------------------------------------------------
(4 YEARS) 5 10 15 20 25 30
- -------------- -------- -------- --------- --------- --------- ---------

$ 50,000 ...... $ 3,500 $ 7,000 $ 10,500 $ 14,000 $ 18,000 $ 21,500
100,000 ....... 7,500 15,500 23,000 30,500 38,000 46,000
150,000 ....... 11,500 23,500 35,000 47,000 58,500 70,500
200,000 ....... 16,000 31,500 47,500 63,000 79,000 95,000
250,000 ....... 20,000 40,000 59,500 79,500 99,500 119,500
300,000 ....... 24,000 48,000 72,000 96,000 120,000 144,000
350,000 ....... 28,000 56,000 84,000 112,500 140,500 168,500
400,000 ....... 32,000 64,500 96,500 128,500 160,500 193,000
450,000 ....... 36,000 72,500 108,500 145,000 181,000 217,500
wage base: $62,700

- ------------
After an employee has reached 30 years of service, no additional years are
used in determining pension benefits. The annual compensation used to
calculate the average compensation shown in this table is based on the
participant's base salary for the year (as shown on the Summary Compensation
Table) and bonus compensation paid in that same year (as shown on the Summary
Compensation Table). The benefit amounts shown are amounts computed in the
form of a straight-life annuity. The amounts are not subject to offset for
social security or otherwise.

As of September 30, 1997, each of the Named Executives had the following
credited service: Mr. Peterson, 33.7 years, Mr. Bluhm, 26.3 years, Mr.
McClenachan, 5.3 years, Mr. Will, 37.4 years, Mr. Mataczynski, 15.3 years.

LONG-TERM INCENTIVE PLAN COMPENSATION

The following table sets forth information concerning awards during fiscal
1996 to each of the Named Executives under the NRG Equity Plan.

LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR(1)

PERFORMANCE OR OTHER
NUMBER OF SHARES, UNITS PERIOD UNTIL MATURATION
NAME OR OTHER RIGHTS (#) OR PAYOUT(2)
- -------------------- ----------------------- -----------------------

David H. Peterson ... 5,500(3) 7 years
18,200(4) 7 years
Leonard A. Bluhm .... 1,300(3) 7 years
1,700(4) 7 years
Robert McClenachan .. 3,400(3) 7 years
4,500(4) 7 years
Ronald J. Will....... 3,600(3) 7 years
4,800(4) 7 years
Craig A. 3,800(3) 7 years
Mataczynski......... 5,000(4) 7 years

- ------------
(1) Participants in the NRG Equity Plan are granted Equity Units, each of
which is assigned a "Grant Price" at the discretion of the Chief
Executive Officer and the Compensation Committee of the Board. Equity
Units are valued upon vesting under a formula which takes into account
the Company's cash flow, revenue growth, total debt and equity
investment, among others. The amount of payment (if any) with respect
to an Equity Unit is determined by the extent to which the value of the
Equity Unit exceeds the Grant Price. The NRG Equity Plan does not
contain threshold levels of performance or maximum payment amounts (or
equivalent items).
(2) Equity Units vest annually in 20% increments, beginning on the third
anniversary of the grant date of the Equity Unit. Participants are paid
the value (if any) of Equity Units as soon as practicable following the
end of year in which the Equity Unit vests.
(3) These Equity Units were granted at a Grant Price equal to the valuation
of the Equity Unit on the date of grant. Such Equity Units will have
value to the holders upon any increase in the valuation of the Equity
Unit.
(4) These Equity Units were granted at a premium Grant Price (greater than
the valuation of the Equity Unit on the date of grant). Such Equity
Units will only have value to the holder after the valuation of the
Equity Unit reaches the premium Grant Price.

Compensation of Directors.

Directors receive no compensation for service as directors.

Employment Contracts.

NRG has entered into an employment agreement with Mr. Peterson providing
that Mr. Peterson will be employed as the highest level executive officer of
NRG. The term of the agreement expires June 27, 2000. During the term of the
agreement, Mr. Peterson's base salary will be reviewed at least annually by
the Compensation Committee of the Board for possible increase. The agreement
provides that Mr. Peterson will receive retirement and welfare benefits no
less favorable than those provided to any other officer of NRG. In addition,
the employment agreement provides for participation in a supplemental
executive retirement plan such that the aggregate value of the retirement
benefits that Mr. Peterson and his spouse will receive at the end of the term
of the agreement under all the defined benefit pension plans of NRG and its
affiliates will not be less than the aggregate value of the benefits he would
have received had he continued, through the end of the term of the agreement,
to participate in the NSP Deferred Compensation Plan, the NSP Excess Benefit
Plan and the NSP Pension Plan, including amounts to compensate Mr. Peterson
for the monthly defined benefit payments he would have received during the
term of the employment agreement and prior to the date of his termination of
employment if monthly benefit payments had commenced following the month in
which he first became eligible for early retirement under the NSP Pension
Plan. The employment agreement also provides for certain additional benefits
to be paid upon Mr. Peterson's death. If Mr. Peterson's employment is
terminated by the company without Cause or by Mr. Peterson with Good Reason
(in each case as defined in the

employment agreement), Mr. Peterson will continue to receive his salary,
bonus (at greater of target bonus and actual bonus for the last plan year
prior to termination), incentive compensation (with cash replacing equity
based awards) and benefits under the agreement as if he had remained employed
until the end of the term of the employment agreement and then retired (at
which time he will be treated as eligible for retiree welfare benefits and
other benefits provided to the retired senior executives).

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee is comprised of Ms. Lesher and Mr. McIntyre.
There are no compensation committee interlocks and no insider participation.

OWNERSHIP OF CAPITAL STOCK

Northern States Power Company, 414 Nicollet Mall, Minneapolis, Minnesota
55401, owns all of the outstanding capital stock of NRG.

CERTAIN TRANSACTIONS

The transactions described or referred to below were entered into between
related parties prior to the offering of the Senior Notes and were not the
result of arms-length negotiations. Accordingly, the terms of these
transactions may be more or less favorable to NRG than if they had been
entered into on an arms-length basis.

As NRG's sole stockholder, NSP has the power to control the election of
the directors and all other matters submitted for stockholder approval and
may be deemed to have control over the management and affairs of NRG.
Currently, there are no outside directors on NRG's board of directors. In
circumstances involving a conflict of interest between NSP, as the sole
stockholder and a significant customer of and supplier to NRG, and the
holders of the Senior Notes as creditors of NRG, there can be no assurance
that NSP would not exercise its power to control NRG in a manner that would
benefit NSP to the detriment of the holders of the Senior Notes. NSP has
policies in place, pursuant to applicable law, to ensure that its ratepayers
are protected from affiliate transactions that may be adverse to the
ratepayers' interests. The Indenture imposes no limitations on NRG's ability
to pay dividends or to make other payments to NSP or on NRG's ability to
enter into transactions with NSP or other affiliates of NRG.

OPERATING AGREEMENTS

NRG has two agreements with NSP for the purchase of thermal energy. Under
the terms of the agreements, NSP charges NRG for certain incremental costs
(fuel, labor, plant maintenance and auxiliary power) incurred by NSP to
produce the thermal energy. NRG paid NSP $6 million in 1996, $3.7 million in
1995 and $6.6 million in 1994 under these agreements; NRG has paid $3.5
million under them in the first nine months of 1997.

NRG has a renewable 10-year agreement with NSP, expiring on December 31,
2001, whereby NSP agrees to purchase RDF for use in certain of its boilers
and NRG agrees to pay NSP an incentive fee to use RDF. Under this agreement,
NRG received $1.9 million and $1.7 million from NSP and paid $2.3 million and
$2.2 million to NSP in 1995 and 1994, respectively. In 1996, NRG received
$1.5 million and paid $2.2 million. For the nine months ended September 30,
1997, NRG received $1.3 million and paid $2.3 million.

As of January 1, 1996, NRG entered into an operation and maintenance
agreement with NSP with respect to the Elk River Facilities, under which NRG
receives a base management fee and is reimbursed for costs it has incurred.
The operation and maintenance agreement also provides for a management
incentive fee payable to NRG, based upon the financial performance of the Elk
River Facilities. In 1996 NRG earned a total management fee of $1.5 million,
in addition to reimbursed expenses. Management fees for the nine months ended
September 30, 1997, totalled $776,000 compared to $761,000 for the same
period in 1996.

ADMINISTRATIVE SERVICES AGREEMENT

NRG and NSP have entered into an agreement to provide for the
reimbursement of actual administrative services provided to each other, an
allocation of NSP administrative costs and a working capital fee. Services
provided by NSP to NRG are principally for cash management, accounting,
employee relations and engineering. In addition, NRG employees participate in
certain employee benefit plans of NSP. Also, in 1993 NSP employees assisted
in operating certain NRG facilities for which NRG reimbursed NSP for gross
wages plus an amount to cover employee benefits. During 1995 and 1994, NRG
paid NSP $6.8 million and $6.2 million, respectively, as reimbursement for
the cost of services provided. In 1996, NRG paid $7.2 million and in the
first nine months of 1997, NRG paid $2.8 million for these services.
Allocation is on a direct charge, actual cost basis where possible. When this
is not possible, an allocation is made based upon employee headcounts,
operating revenues and investment in fixed assets. Management believes that
"allocated" costs approximate expenses that would be incurred on a stand
alone basis.

TAX SHARING AGREEMENT

NRG is included in the consolidated federal income tax and state franchise
tax returns of NSP. NRG calculates its tax position on a separate company
basis under a tax sharing agreement with NSP and receives payment from NSP
for tax benefits and pays NSP for tax liabilities.

LONG-TERM DEBT

The construction cost of the Newport facility was financed through tax
exempt variable rate resource recovery revenue bonds issued by the Counties,
which have subsequently been converted to fixed rate resource recovery
revenue bonds with an effective interest rate of 6.57% per annum and annual
maturities each December through 2006. The proceeds of such bond issuance
were loaned by the counties to NSP, which agreed under a loan agreement to
pay to the counties amounts sufficient to pay debt service on the bonds. NRG
issued a separate note to NSP in an original principal amount of
approximately $10 million as part of the consideration for the purchase of
the facility from NSP.

CERTAIN INDEBTEDNESS

NRG has funded investments and intends to fund future investments from
certain outside sources, including those described below.

1996 SENIOR NOTES

On January 29, 1996, NRG issued the 1996 Senior Notes in a transaction
exempt from registration under the Securities Act. The 1996 Senior Notes were
issued to fund some or all of NRG's equity investments in Schkopau and Latin
Power, to pay a portion of the consideration for NRG's acquisition of
interests in Collinsville and in O'Brien (for reorganization as NRGG), to
make equity investments in Kladno and West Java, and for general corporate
purposes, including investments in new projects. The 1996 Senior Notes are
senior unsecured obligations of NRG and rank pari passu with all other senior
unsecured indebtedness of NRG, including the Notes. The 1996 Senior Notes
were assigned ratings of BBB-by S&P's Rating Group and Baa3 by Moody's.
Redemption of the 1996 Senior Notes is not permitted prior to February 1,
2001. However, upon a change of control of NRG, each holder of the 1996
Senior Notes will have the right to require NRG to repurchase such holder's
1996 Senior Notes. Pursuant to the Indenture (the "1996 Indenture") under
which the 1996 Senior Notes were issued, NRG is restricted from creating
liens on its assets, is prohibited from merging except under certain
circumstances and must maintain a specified minimum net worth. Failure to
comply with these restrictive covenants could result in an event of default
under the Indenture. Other events of default include nonpayment of principal
or interest, certain cross-defaults, judgment decrees aggregating over $20
million and certain events of bankruptcy.

REVOLVER

The facility allows for LIBOR and Base rate borrowing depending upon the
days notice required and the term of drawing. The applicable margin is based
upon the rate option selected and the assigned ratings of NRG. Pursuant to
the terms of the agreement, NRG is restricted from creating liens on its
assets, is prohibited from merging except under certain circumstances and
must maintain a specified minimum net worth. Failure to comply with these
restrictive covenants could result in an event of default. Other events of
default include nonpayment of principal or interest, NSP's failure to own
majority of outstanding voting stock of NRG, certain cross-defaults, and
certain events of bankruptcy. At September 30, 1997, the Company had borrowed
$38 million against its revolving credit facility.

DESCRIPTION OF NOTES

GENERAL

The Old Notes were issued, and the New Notes will be issued, under an
Indenture, dated as of June 1, 1997 (the "Indenture"), between NRG and
Norwest Bank Minnesota, National Association, as trustee (the "Trustee"). The
following summaries of the material provisions of the Notes and the Indenture
do not purport to be complete and are subject, and qualified in their
entirety by reference, to all of the provisions of the Notes and the
Indenture, including the definitions of certain terms therein. The
definitions of certain capitalized terms used in the following summary are
set forth below under " -- Certain Definitions." As used in this section,
unless otherwise indicated, "NRG" refers solely to NRG Energy, Inc. and does
not include any of its subsidiaries or affiliates.

The Notes are senior unsecured obligations of NRG, which conducts
substantially all of its business through numerous subsidiaries and
affiliates. As a result, all existing and future liabilities of the direct
and indirect subsidiaries and affiliates of NRG will be effectively senior to
the Notes. The Notes will not be guaranteed by, or otherwise be obligations
of, NRG's project subsidiaries and project affiliates, NRG's other direct and
indirect subsidiaries and affiliates or NSP.

PRINCIPAL, MATURITY AND INTEREST

The Notes are limited in aggregate principal amount to $250,000,000 and
will mature on June 15, 2007. Interest is payable on the Notes semiannually
on June 15 and December 15 of each year, commencing December 15, 1997, until
the principal is paid or made available for payment. Interest on the Notes
will accrue from the most recent date to which interest has been paid or, if
no interest has been paid, from the date of issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.

Payment of principal of the Notes will be made against surrender of such
Notes at the office or agency of the Trustee in the Borough of Manhattan, The
City of New York. Payment of interest on the Notes will be made to the person
in whose name such Notes are registered at the close of business on the June
1 or December 1 immediately preceding the relevant interest payment date. For
so long as the Notes are issued in book-entry form, payments of principal and
interest shall be made in immediately available funds by wire transfer to DTC
or its nominee. If the Notes are issued in certificated form to a Holder (as
defined below) other than DTC, payments of principal and interest shall be
made by check mailed to such Holder at such Holder's registered address or,
upon written application by a Holder of $1,000,000 or more in aggregate
principal amount of Notes to the Trustee in accordance with the terms of the
Indenture, by wire transfer of immediately available funds to an account
maintained by such Holder with a bank. Defaulted interest will be paid in the
same manner to Holders as of a special record date established in accordance
with the Indenture.

All amounts paid by NRG to the Trustee for the payment of principal of,
premium, if any, or interest on any Notes that remain unclaimed at the end of
two years after such payment has become due and payable will be repaid to NRG
and the Holders of such Notes will thereafter look only to NRG for payment
thereof.

OPTIONAL REDEMPTION

NRG at its option, at any time, may redeem the Notes, in whole or in part
(if in part, by lot or by such other method as the Trustee shall deem fair or
appropriate) at the redemption price of 100% of principal amount of such
Notes, plus accrued interest on the principal amount of such Notes, if any,
to the redemption date, plus the applicable Make-Whole Premium.

To determine the applicable Make-Whole Premium for any Note, an
independent investment banking institution of national standing selected by
NRG (the "Investment Banker") will compute, as of the third Business Day
prior to the redemption date, the sum of the present values of all of the
remaining scheduled payments of principal and interest from the redemption
date to maturity on such Note

computed on a semiannual basis by discounting such payments (assuming a
360-day year consisting of twelve 30-day months) using a rate equal to the
Treasury Rate plus 25 basis points. If the sum of these present values of the
remaining payments as computed above exceeds the aggregate unpaid principal
amount of the Note to be redeemed plus any accrued but unpaid interest
thereon, the difference will be payable as a premium upon redemption of such
Note. If the sum is equal to or less than such principal amount plus accrued
interest, there will be no premium payable with respect to such Note.

CERTAIN COVENANTS

RESTRICTIONS ON LIENS

So long as any of the Notes are outstanding, NRG has agreed not to pledge,
mortgage, hypothecate or permit to exist any mortgage, pledge or other lien
upon any property at any time directly owned by NRG to secure any
indebtedness for money borrowed which is incurred, issued, assumed or
guaranteed by NRG ("Indebtedness"), without making effective provisions
whereby the Notes shall be equally and ratably secured with any and all such
Indebtedness and with any other Indebtedness similarly entitled to be equally
and ratably secured; provided, however, that this restriction shall not apply
to or prevent the creation or existence of: (i) liens existing at the
original date of issuance of the Notes; (ii) purchase money liens which do
not exceed the cost or value of the purchased property; (iii) other liens not
to exceed 10% of Consolidated Net Tangible Assets and (iv) liens granted in
connection with extending, renewing, replacing or refinancing in whole or in
part the Indebtedness (including, without limitation, increasing the
principal amount of such Indebtedness) secured by liens described in the
foregoing clauses (i) through (iii).

In the event that NRG shall propose to pledge, mortgage or hypothecate any
property at any time directly owned by it to secure any Indebtedness, other
than as permitted by clauses (i) through (iv) of the previous paragraph, NRG
has agreed to give prior written notice thereof to the Trustee, who shall
give notice to the Holders, and NRG has agreed, prior to or simultaneously
with such pledge, mortgage or hypothecation, effectively to secure all the
Notes equally and ratably with such Indebtedness.

The foregoing covenant does not restrict the ability of NRG's subsidiaries
and affiliates to pledge, mortgage, hypothecate or permit to exist any
mortgage, pledge or lien upon their assets, in connection with project
financings or otherwise.

CONSOLIDATION, MERGER, SALE OF ASSETS

Without the consent of any Holder, NRG may consolidate with or merge into
any other person, or convey, transfer or lease its properties and assets
substantially as an entirety to any person, or permit any person to merge
into or consolidate with NRG, if (i) NRG is the surviving or continuing
corporation or the surviving or continuing corporation or purchaser or lessee
is a corporation incorporated under the laws of the United States of America
or Canada and assumes NRG's obligations under the Notes and under the
Indenture and (ii) immediately before and after such transaction, no Event of
Default (as defined herein) shall have occurred and be continuing.

Except for a sale of the assets of NRG substantially as an entirety as
provided above, and other than assets required to be sold to conform with
governmental regulations, the Indenture provides that NRG may not sell or
otherwise dispose of any assets (other than short-term, readily marketable
investments purchased for cash management purposes with funds not
representing the proceeds of other asset sales) if on a pro forma basis, the
aggregate net book value of all such sales during the most recent 12-month
period would exceed 10% of Consolidated Net Tangible Assets computed as of
the end of the most recent quarter preceding such sale; provided, however,
that any such sales shall be disregarded for purposes of this 10% limitation
if the proceeds are invested in assets in similar or related lines of
business of NRG and, provided further, that NRG may sell or otherwise dispose
of assets in excess of such 10% if the proceeds from such sales or
dispositions, which are not reinvested as provided above, are retained by NRG
as cash or cash equivalents or are used to purchase and retire Notes or 1996
Notes.

CHANGE OF CONTROL

Upon a Change of Control, each Holder shall have the right to require that
NRG repurchase such Holder's Notes at a repurchase price in cash equal to
101% of the principal amount thereof plus accrued interest, if any, to the
date of repurchase. A Change of Control shall not be deemed to have occurred
if, after giving effect thereto, the Notes are rated BBB-or better by
Standard & Poor's Ratings Group and Baa3 or better by Moody's Investors
Service, Inc.

The Change of Control provisions may not be waived by the Trustee or the
Board of Directors, and any modification thereof must be approved by each
Holder. Nevertheless, the Change of Control provisions will not only afford
protection to holders of Notes, including protection against an adverse
effect on the value of the Notes, in the event that NRG or its subsidiaries
and affiliates incur additional Indebtedness, whether through
recapitalizations or otherwise. Moreover, no assurance can be given that NRG
would have sufficient liquidity to effectuate any required repurchase of
Notes upon a Change of Control.

Within 30 days following any Change of Control, NRG will be required to
mail a notice to each Holder (with a copy to the Trustee) stating (1) that a
Change of Control has occurred and that such Holder has the right to require
NRG to repurchase such Holder's Notes at a repurchase price in cash equal to
101% of the principal amount thereof plus accrued interest, if any, to the
date of repurchase (the "Change of Control Offer"); (2) the circumstances and
relevant facts regarding such Change of Control (including information with
respect to pro forma historical income, cash flow and capitalization after
giving effect to such Change of Control); (3) the repurchase date (which
shall be a Business Day and be not earlier than 30 days or later than 60 days
from the date such notice is mailed (the "Repurchase Date"); (4) that
interest on any Senior Note tendered will continue to accrue; (5) that
interest on any Senior Note accepted for payment pursuant to the Change of
Control Offer shall cease to accrue after the Repurchase Date; (6) that
Holders electing to have a Senior Note purchased pursuant to a Change of
Control Offer will be required to surrender the Senior Note, with the form
entitled "Option to Elect Purchase" on the reverse of the Senior Note
completed, to the Trustee at the address specified in the notice prior to the
close of business on the Repurchase Date; (7) that Holders will be entitled
to withdraw their election if the Trustee receives, not later than the close
of business on the third Business Day (or such shorter periods as may be
required by applicable law) preceding the Repurchase Date, a telegram, telex,
facsimile or letter setting forth the name of the Holder, the principal
amount of Notes the Holder delivered for purchase and a statement that such
Holder is withdrawing its election to have such Notes purchased; and (8) that
Holders that elect to have their Notes purchased only in part will be issued
new Notes in a principal amount equal to the unpurchased portion of the Notes
surrendered.

For so long as the Notes are in global form, upon a Change of Control NRG
will be required to deliver to DTC, for re-transmittal to its participants, a
notice substantially to the effect specified in clauses (1) through (5) and
(7) of the previous paragraph. Such notice shall also specify the required
procedures for holders of interests in the Global Notes to tender the Notes
(including the DTC Repayment Option Procedures to the extent applicable).

On the Repurchase Date, NRG shall (i) accept for payment such surrendered
Notes or portions thereof tendered pursuant to the Change of Control and (ii)
deposit with the Trustee money sufficient to pay the purchase price of all
Notes or portions thereof so tendered. NRG will publicly announce the result
of the Change of Control Offer as soon as practicable after the Repurchase
Date.

NRG has agreed to comply with all applicable tender offer rules,
including, without limitation, Rule 14e-1 under the Exchange Act in
connection with a Change of Control Offer.

REPORTING OBLIGATIONS

NRG has agreed to furnish or cause to be furnished to Holders (and, at the
request thereof, beneficial holders of Notes) annual consolidated financial
statements of NRG prepared in accordance with GAAP (together with notes
thereto, a report thereon by an independent accountant of established
national reputation and a management's discussion and analysis of financial
condition and results of operations). In addition, NRG will furnish or cause
to be furnished to Holders (and, at the request thereof,

beneficial holders of Notes) unaudited condensed consolidated comparative
balance sheets and statements of income and cash flows of NRG for each of the
first three fiscal quarters of each fiscal year and the corresponding quarter
of the prior year, such statements to be furnished within 90 days after the
end of the fiscal quarter covered thereby.

CERTAIN DEFINITIONS

"Business Day" means a day which is neither a legal holiday or a day on
which banking institutions (including, without limitation, the Federal
Reserve System) are authorized or required by law or regulation to close in
The City of New York or Minneapolis, Minnesota.

"Change of Control" means the occurrence of one or more of the following
events: (a) NSP (or its successors) ceases to own a majority of NRG's
outstanding voting stock, (b) at any time following the occurrence of the
event described in clause (a) above, a person or group of persons (other than
NSP) becomes the beneficial owner, directly or indirectly, or has the
absolute power to direct the vote of more than 35% of NRG's voting stock or
(c) during any one year period, individuals who at the beginning of such
period constitute NRG's Board of Directors cease to be a majority of the
Board of Directors (unless approved by a majority of the current directors
then in office who were either directors at the beginning of such period or
who were previously so approved). A Change of Control shall be deemed not to
have occurred if, following such an event described above, the Notes are
rated BBB-or better by Standard & Poor's Ratings Group and Baa3 or better by
Moody's Investors Service, Inc.

"Consolidated Net Tangible Assets" means, as of the date of any
determination thereof, the total amount of all assets of NRG determined on a
consolidated basis in accordance with GAAP as of such date less the sum of
(a) the consolidated current liabilities of NRG determined in accordance with
GAAP and (b) assets properly classified as Intangible Assets.

"Holder" means a registered holder of a Senior Note.

"Intangible Assets" means, as of the date of any determination thereof,
with respect to any person, all assets properly classified as intangible
assets in accordance with GAAP.

"Treasury Rate" means, with respect to each Note to be redeemed, a per
annum rate (expressed as a semiannual equivalent and as a decimal and, in the
case of United States Treasury bills, converted to a bond equivalent yield)
determined by the Investment Banker to be the per annum rate equal to the
semiannual yield to maturity of United States Treasury securities maturing on
the Average Life Date (as defined below) of such Note, as determined by
interpolation between the most recent weekly average yields to maturity for
two series of Treasury securities, (A) one maturing as close as possible to,
but earlier than, the Average Life Date of such Note and (B) the other
maturing as close as possible to, but later than, the Average Life Date of
such Note, in each case as published in the most recent H.15(519) (or, if a
weekly average yield to maturity for United States Treasury securities
maturing on the Average Life Date of such Note is reported in the most recent
H.15(519), as published in H.15(519)). "H.15(519)" means "Statistical Release
H.15(519), Selected Interest Rates," or any successor publication, published
by the Board of Governors of the Federal Reserve System. The "most recent
H.15(519)" means the latest H.15(519) which is published prior to the close
of business on the third Business Day prior to the applicable redemption
date. The "Average Life Date" for any Note to be redeemed shall be the date
which follows the redemption date by a period equal to the Remaining Weighted
Average Life of such Note. The "Remaining Weighted Average Life" of such Note
with respect to the redemption of such Note is the number of days equal to
the quotient obtained by dividing (A) the sum of the products obtained by
multiplying (1) the amount of each remaining principal payment on such Note
by (2) the number of days from and including the redemption date, to but
excluding the scheduled payment date of such principal payment by (B) the
unpaid principal amount of such Note.

EVENTS OF DEFAULT

The following constitute Events of Default under the Notes:

(a) failure to pay any interest on any Senior Note when due, which
failure continues for 30 days;

(b) failure to pay principal or premium (including in connection with a
Change of Control) when due;

(c) failure of NRG to perform any other covenant in the Notes or the
Indenture for a period of 30 days after written notice to NRG by the
Trustee or by the Holders of at least 25% in aggregate principal amount of
the Notes;

(d) an event of default occurring under any instrument of NRG under which
there may be issued, or by which there may be secured or evidenced, any
indebtedness for money borrowed that has resulted in the acceleration of
such indebtedness, or any default occurring in payment of any such
indebtedness at final maturity (and after the expiration of any applicable
grace periods), other than (i) indebtedness which is payable solely out of
the property or assets of a partnership, joint venture or similar entity
of which NRG or any of its subsidiaries or affiliates is a participant, or
which is secured by a lien on the property or assets owned or held by such
entity, without further recourse to NRG or (ii) such indebtedness of NRG
not exceeding $20,000,000;

(e) one or more final judgments, decrees or orders of any court,
tribunal, arbitrator, administrative or other governmental body or similar
entity for the payment of money aggregating more than $20,000,000 shall be
rendered against NRG (excluding the amount thereof covered by insurance)
and shall remain undischarged, unvacated and unstayed for more than 90
days, except while being contested in good faith by appropriate
proceedings; and

(f) certain events of bankruptcy, insolvency or reorganization in respect
of NRG.

The Indenture provides that if an Event of Default (other than an Event of
Default based on an event of bankruptcy, insolvency or reorganization of NRG)
shall occur and be continuing, either the Trustee or the Holders of not less
than 25% in aggregate principal amount of the Notes may, by written notice to
NRG (and to the Trustee if given by Holders), declare the principal of all
Notes to be immediately due and payable, but upon certain conditions such
declaration may be annulled and past defaults (except, unless theretofore
cured, a default in payment of principal, premium or interest) may be waived
by the Holders of a majority in aggregate principal amount of Notes then
outstanding. Notwithstanding the foregoing, any Holder shall have the right
to institute suit to enforcement of any overdue payment owing to such Holder
pursuant to the Notes. If an Event of Default due to the bankruptcy,
insolvency or reorganization of NRG occurs, all unpaid principal, premium, if
any, and interest in respect of the Notes will automatically become due and
payable. Pursuant to the Indenture NRG is required to provide an annual
statement of compliance with the terms of the Indenture.

The Holders of a majority in principal amount of the Notes then
outstanding shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee under the
Indenture, provided that the Holders shall have offered to the Trustee
reasonable indemnity against expenses and liabilities. Notwithstanding the
foregoing, the Trustee shall have the right to decline to follow any such
direction if the Trustee and its counsel shall determine that the action
requested is unlawful, would involve the Trustee in personal liability or
will be unduly prejudicial to the interests of Holders not joining in the
giving of such direction.

MODIFICATION OF THE INDENTURE

The Indenture contains provisions permitting NRG and the Trustee, with the
consent of the Holders of not less than a majority in principal amount of the
Notes then outstanding, to modify the Indenture or the rights of the Holders,
except that no such modification may, without the consent of each Holder, (i)
extend the final maturity of any of the Notes or reduce the principal amount
thereof, or reduce the rate or extend the time of payment of interest
thereon, or reduce any amount payable on redemption thereof, or impair or
affect the right of any Holder to institute suit for the payment thereof or
make any change in the covenant regarding a Change of Control or (ii) reduce
the percentage of Notes, the consent of the Holders of which is required for
any such modification.

NRG and the Trustee without the consent of any Holder may amend the
Indenture and the Notes for the purpose of curing any ambiguity, or of
curing, correcting or supplementing any defective provision

100

thereof, or in any manner which NRG and the Trustee may determine is not
inconsistent with the Notes and will not adversely affect the interest of any
Holder.

DEFEASANCE AND COVENANT DEFEASANCE

DEFEASANCE

The Indenture provides that NRG will be deemed to have paid and will be
discharged from any and all obligations in respect of the Notes, on the 123rd
day after the deposit referred to below has been made, and the provisions of
the Indenture will cease to be applicable with respect to the Notes (except
for, among other matters, certain obligations to register the transfer of or
exchange of the Notes, to replace stolen, lost or mutilated Notes, to
maintain paying agencies and to hold funds for payment in trust) if (A) NRG
has deposited with the Trustee, in trust, money and/or U.S. Government
Obligations (as defined in the Indenture) that, through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if
any, and accrued interest on the Notes, at the time such payments are due in
accordance with the terms of the Indenture, (B) NRG has delivered to the
Trustee (i) an opinion of counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
NRG's exercise of its option under the defeasance provisions of the Indenture
and will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, which opinion of counsel must be
based upon a ruling of the Internal Revenue Service to the same effect or a
change in applicable federal income tax law or related treasury regulations
after the date of the Indenture and (ii) an opinion of counsel to the effect
that the defeasance trust does not constitute an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, and after the
passage of 123 days following the deposit, the trust fund will not be subject
to the effect of Section 547 of the U.S. Bankruptcy Code or Section 15 of the
New York Debtor and Creditor Law, (C) immediately after giving effect to such
deposit, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending on
the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any other
agreement or instrument to which NRG is a party or by which NRG is bound and
(D) if at such time the Notes are listed on a national securities exchange,
NRG has delivered to the Trustee an opinion of counsel to the effect that the
Notes will not be delisted as a result of such deposit and discharge.

DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT

The Indenture further provides that the provisions of the Indenture will
cease to be applicable with respect to (i) the covenants described under
"Certain Covenants -- Restrictions on Liens" and "Change of Control" and (ii)
clause (c) under "Events of Default" with respect to such covenants and
clauses (d) and (e) under "--Events of Default" upon the deposit with the
Trustee, in trust, of money and/or U.S. Government Obligations that through
the payment of interest and principal in respect thereof in accordance with
their terms will provide money in an amount sufficient to pay the principal
of, premium, if any, and accrued interest on the Notes, the satisfaction of
the conditions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by NRG to the Trustee of an opinion of counsel to
the effect that, among other things, the Holders of the Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain covenants and Events of Default and
will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred.

DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT

If NRG exercises its option to omit compliance with certain covenants and
provisions of the Indenture with respect to the Notes as described in the
immediately preceding paragraph and the Notes are declared due and payable
because of the occurrence of an Event of Default that remains applicable,

101

the amount of money and/or U.S. Government Obligations on deposit with the
Trustee will be sufficient to pay amounts due on the Notes at the time of
their stated maturity, but may not be sufficient to pay amounts due on the
Notes at the time of acceleration resulting from such Event of Default. NRG
shall remain liable for such payments.

FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER

The Old Notes were initially represented by two Notes in registered,
global form (collectively, the "Old Global Notes"). The New Notes will
initially be represented by a Note in registered, global form (the "New
Global Note" and together with the Old Global Notes, the "Global Notes"). The
Old Global Notes were, and the New Global Note will be, deposited upon
issuance with the Trustee as custodian for DTC and registered in the name of
Cede & Co., DTC's nominee, for credit to any account of a direct or indirect
participant in DTC as described below.

Except as set forth below, the Global Notes may be transferred, in whole
or in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
Senior Notes in certificated forms except in the limited circumstances
described under "--Exchange of Book-Entry Notes for Certificated Notes"
below.

DEPOSITARY PROCEDURES

DTC has advised NRG that DTC is a limited-purpose trust company created to
hold securities for its Participants and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of the Participants. The
Participants include securities brokers and dealers (including the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interest
and transfer of ownership interest of each actual purchase of each security
held by or on behalf of DTC are recorded on the records of the Participants
and Indirect Participants.

DTC has also advised NRG that, pursuant to procedures established by it,
(i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Notes and (ii) ownership of such interests in
the Global Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Notes).

Investors in the Global Notes may hold their interests therein directly
through DTC if they are Participants in such system, or indirectly through
organizations which are Participants in such system. All interests in a
Global Note may be subject to the procedures and requirements of DTC. The
laws of some states require that certain persons take physical delivery in
certificated form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons will be
limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having beneficial interests in a Global Note to pledge
such interest to persons that do not participate in the DTC system, or
otherwise take actions in respect of such interest, may be affected by the
lack of a physical certificate evidencing such interests. For certain other
restrictions on the transferability of the Notes, see "--Exchange of
Book-Entry Notes for Certificated Notes" below.

Except as described below, owners of interests in the Global Notes will
not have Notes registered in their name, will not receive physical delivery
of Notes in certificated form and will not be considered the registered
owners of holders thereof under the Indenture for any purpose.

Payments in respect of the Global Note registered in the name of DTC or
its nominee will be payable by the Trustee to DTC in its capacity as the
registered holder under the Indenture. Under the terms of

102

the Indenture, the Trustee will treat the persons in whose names the Notes,
including the Global Notes, are registered as the owners thereof for the
purpose of receiving such payments and for any and all purposes whatsoever.
Consequently, neither the Trustee nor any agent thereof has or will have any
responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made
on account of beneficial ownership interests in the Global Note or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Note or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants or Indirect
Participants. DTC has advised NRG that its current practice, upon receipt of
any payment in respect of securities such as the Notes, is to credit the
accounts of the relevant Participants with the payment on the payment date,
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee
or NRG. Neither NRG nor the Trustee will be liable for any delay by DTC or
any of its Participants in identifying the beneficial owners of the Notes,
and NRG and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee for all purposes.

DTC has advised NRG that it will take any action permitted to be taken by
a holder of Notes only at the direction of one or more Participants to whose
account with DTC interests in the Global Notes are credited and only in
respect of such portion of the Notes as to which such Participant or
Participants has or have given such direction. However, if there is an Event
of Default under the Declaration, DTC reserves the right to exchange the
Global Notes for Notes in certificated form and to distribute such Notes to
its Participants.

The information in this section concerning DTC and its book-entry system
has been obtained from sources that NRG believes to be reliable, but NRG has
not independently determined the accuracy thereof. NRG will not have any
responsibility for the performance by DTC or its Participants of their
respective obligations under the rules and procedures governing their
operations.

EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES

A Global Note is exchangeable for Notes in registered certificated form if
(i) DTC notifies NRG that it is unwilling or unable to continue as clearing
agency for the Global Note or has ceased to be a clearing agency registered
under the Exchange Act and NRG thereupon fails to appoint a successor
clearing agency within 90 days, (ii) NRG in its sole discretion elects to
cause the issuance of definitive certificated Notes or (iii) there has
occurred and is continuing an Event of Default or any event which after
notice or lapse of time or both would be an Event of Default under the
Indenture. In addition, beneficial interests in a Global Note may be
exchanged for certificated Notes upon request but only upon at least 20 days,
prior written notice given to the Trustee by or on behalf of DTC in
accordance with customary procedures. In all cases certificated Notes
delivered in exchange for any Global Note or beneficial interest therein will
be registered in the names, and issued in denominations of $100,000 and
integral multiples of $1,000 in excess thereof, requested by or on behalf of
the clearing agency (in accordance with its customary procedures).

THE TRUSTEE

Norwest Bank Minnesota, National Association is the Trustee under the
Indenture. NRG and its affiliates also maintain banking and other commercial
relationships with the Trustee and its affiliates in the ordinary course of
business.

GOVERNING LAW

The Indenture and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York.

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REGISTRATION RIGHTS

Holders of New Notes (other than as set forth below) are not entitled to
any registration rights with respect to the New Notes. Pursuant to the
Registration Rights Agreement, Holders of Old Notes are entitled to certain
registration rights. Under the Registration Rights Agreement, NRG has agreed,
for the benefit of the Holders of the Old Notes, that it will, at its cost,
(i) file a registration statement with the Commission with respect to the
Exchange Offer within 60 days after the Closing Date (or if the 60th day is
not a business day, the first business day thereafter) and (ii) use its best
efforts to cause such registration statement to be declared effective under
the Securities Act within 180 days after the Closing Date (or if the 180th
day is not a business day, the first business day thereafter). The
Registration Statement of which this Prospectus is a part constitutes the
Exchange Offer Registration Statement.

In the event that any Holder shall notify NRG that (A) such Holder is not
eligible to participate in the Exchange Offer or (B) such Holder may not
resell the New Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the Exchange
Offer Registration Statement is not appropriate or available for such resales
by such Holder or (C) such Holder is a broker-dealer and holds Old Notes that
are part of an unsold allotment from the original sale of the Old Notes, NRG
will file with the Commission a shelf registration statement (the "Shelf
Registration Statement") to cover resales of Transfer Restricted Securities
by such Holders who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. NRG will use
its best efforts to cause the Shelf Registration Statement, if applicable, to
be declared effective on or prior to 215 days after the date on which NRG
becomes obligated to file the Shelf Registration Statement or receives
certain notices from holders of the Old Notes and will use its best efforts
to keep the Shelf Registration Statement continuously effective until the
earlier of (i) two years after the effective date thereof, (ii) the date on
which all Transfer Restricted Securities registered thereunder are disposed
of in accordance therewith and (iii) one year after the effective date
thereof if such Shelf Registration Statement is filed at the request of an
Initial Purchaser. For purposes of the foregoing, "Transfer Restricted
Securities" means each Old Note until the earliest to occur of (i) the date
on which such Old Note has been exchanged for a New Note in the Exchange
Offer, (ii) the date on which such Old Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iii) the date on which such Old Note is
distributed to the public pursuant to Rule 144 under the Securities Act.

A Holder of Old Notes who sells such Old Notes pursuant to the Shelf
Registration Statement generally would be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by
the provisions of the Registration Rights Agreement that are applicable to
such a Holder (including certain indemnification obligations).

The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration
Rights Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.

SPECIAL INTEREST

In the event that either the Exchange Offer is not consummated or a Shelf
Registration Statement with respect to any Transfer Restricted Securities is
not declared effective on or prior to the 215th day following the date of
original issuance of any Transfer Restricted Securities (or if the 215th day
is not a business day, the first business day thereafter), interest will
accrue (in addition to stated interest on the Securities) from and including
the next day following such 215-day period. In each case such additional
interest (the "Special Interest") will be payable in cash semiannually in
arrears each June 15, and December 15, commencing December 15, 1997, at a
rate per annum equal to 0.25% of the principal amount of such Transfer
Restricted Securities. The aggregate amount of Special Interest payable
pursuant to the above provisions will in no event exceed 0.25% per annum of
the principal amount of any Transfer Restricted Securities. Upon the
consummation of the Exchange Offer or the effectiveness of a Shelf
Registration Statement, after the 215-day period described above, the Special
Interest payable on

104

such Transfer Restricted Securities from the date of such effectiveness or
consummation, as the case may be, will cease to accrue and all accrued and
unpaid Special Interest shall be paid to the holders of such Transfer
Restricted Securities.

In the event that a Shelf Registration Statement is declared effective
pursuant to the preceding paragraph, if the Company fails to keep such
Registration Statement continuously effective for the period required by this
Agreement, then from such time as the Shelf Registration Statement is no
longer effective until the earlier of (i) the date that the Shelf
Registration Statement is again deemed effective, (ii) the date that is the
second anniversary of the Closing Date or (iii) the date as of which all of
the Securities are sold pursuant to the Shelf Registration Statement, Special
Interest shall accrue at a rate per annum equal to 0.25% of the principal
amount of the Securities and shall be payable in cash semiannually in arrears
each June 15 and December 15, commencing December 15, 1997.

The filing and effectiveness of the Registration Statement of which this
Prospectus is a part and the consummation of the Exchange Offer will
eliminate all rights of the Holders of Old Notes eligible to participate in
the Exchange Offer to receive Special Interest that would have been payable
if such actions had not occurred.

105

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following is a discussion of certain United States Federal income tax
considerations associated with the exchange of Old Notes for New Notes and
the ownership and disposition of the New Notes by Holders who acquire the New
Notes pursuant to the Exchange Offer. This discussion is based upon existing
United States Federal income tax law, which is subject to change, possibly
retroactively. This discussion does not describe all relevant aspects of
United States Federal income taxation that may be important to particular
Holders in light of their individual investment circumstances or certain
types of Holders subject to special tax rules (e.g., financial institutions,
insurance companies, broker-dealers, or tax-exempt organizations) or to
persons that hold or will hold the Notes as a position in a "straddle" or as
part of a "hedging" or "conversion" transaction, all of whom may be subject
to tax rules that differ significantly from those described below. In
addition, this discussion does not described any foreign, state, or local tax
considerations. This discussion deals only with Old Notes and New Notes held
by initial purchasers of Old Notes as "capital assets" (generally, property
held for investment) within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code").

For purposes of this discussion, a "U.S. Holder" is (i) an individual
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, (iii) an estate that is subject to
United States federal income taxation without regard to the source of its
income, or (iv) a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
fiduciaries who have the authority to control all substantial decisions of
the trust. For purposes of this discussion, a "Non-U.S. Holder" is any Holder
who is not a U.S. Holder.

PROSPECTIVE HOLDERS OF THE NEW NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE PARTICULAR TAX CONSEQUENCES OF ACQUIRING, OWNING, AND
DISPOSING OF THE NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.

EXCHANGE OFFER

The consummation of the Exchange Offer will not be a taxable event for
United States Federal income tax purposes. Accordingly, a Holder receiving
New Notes pursuant to the terms of the Exchange Offer will have the same
adjusted tax basis and holding period in New Notes, for United States Federal
income tax purposes, as such Holder had in the Old Notes tendered in exchange
therefor.

U.S. HOLDERS

Interest payable on the New Notes will be includible in the income of a
Holder in accordance with such Holder's normal method of accounting. Except
in the case of an Old Note purchased at a discount to its original issue
price, a Holder will recognize capital gain or loss upon the sale or other
disposition of a New Note in an amount equal to the difference between the
amount realized from such disposition and his tax basis in the New Note.
Under recently-enacted legislation, net capital gain (i.e., generally,
capital gain in excess of capital loss) recognized by an individual Holder
upon the disposition of New Notes that have been held for more than 18 months
will generally be subject to tax at a rate not to exceed 20%. Net capital
gain recognized by a Holder upon the disposition of New Notes that have been
held for more than 12 months but for not more than 18 months will continue to
be subject to tax at a rate not to exceed 28% and net capital gain from the
disposition of New Notes that have been held for 12 months or less will
continue to be subject to tax at ordinary income tax rates. In addition,
capital gain recognized by a corporate Holder will continue to be subject to
tax at the ordinary income tax rates applicable to corporations.

In the case of a Holder who has purchased a New Note at a discount to its
original issue price in excess of a statutorily defined de minimis amount and
has not elected to include such discount in income on a current basis, (i)
any gain recognized on the disposition of a New Note will be subject to tax
as ordinary income, rather than capital gain, to the extent of accrued market
discount and (ii) a portion of the interest expense on indebtedness incurred
or maintained to purchase or carry such note may not be deducted until the
note is disposed of in a taxable transaction.

NON-U.S. HOLDERS

Under present United States federal income and estate tax law, assuming
certain certification requirements are satisfied (which include
identification of the beneficial owner of the instrument), and subject to the
discussion of backup withholding below:

106

(a) payments of interest on the New Notes to any Non-U.S. Holder generally
will not be subject to United States federal income or withholding tax,
provided that (1) the Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of NRG
entitled to vote, (2) the Holder is not a controlled foreign corporation that
is related to NRG through stock ownership, and (3) such interest payments are
not effectively connected with the conduct of a United States trade or
business of the Holder;

(b) a Holder who is a Non-U.S. Holder generally will not be subject to the
United States federal income tax on gain realized on the sale, exchange or
other disposition of a New Note, unless (1) such Holder is an individual who
is present in the United States for 183 days or more during the taxable year
and certain other requirements are met, or (2) the gain is effectively
connected with the conduct of a United States trade or business of the
Holder; and

(c) if interest on the New Notes is exempt from withholding of United
States federal income tax under the rules above, the New Notes will not be
included in the estate of a deceased Non-U.S. Holder for United States
federal estate tax purposes.

The certification referred to above may be made on an Internal Revenue
Service ("IRS") Form W-8 or substantially similar substitute form.

BACKUP WITHHOLDING AND INFORMATION REPORTING

A Holder of the New Notes may be subject to information reporting and to
backup withholding at a rate of 31 percent of certain amounts paid to the
Holder unless such Holder (a) is a corporation or comes within certain other
exempt categories and, when required, provides proof of such exemption or (b)
provides a correct taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. Under current regulations,
information reporting and backup withholding do not apply to interest
payments made at an address outside the United States to a Holder of the New
Notes that is not a U.S. Holder if the beneficial owner of the New Notes (a)
provides a statement in which such owner certifies, under penalties of
perjury, that such owner is not a United States person and provides such
owner's name and address or (b) otherwise establishes an exemption; provided
that NRG or its paying agent, as the case may be, does not have actual
knowledge that the Holder is a U.S. Holder.

Under current regulations, payment of the proceeds from the sale of the
New Notes to or through a foreign office of a "broker" (as defined in
applicable Treasury regulations) will not be subject to information reporting
or backup withholding, except that if the broker is a United States person, a
controlled foreign corporation for United States federal income tax purposes
or a foreign person 50 percent or more of whose gross income from all sources
for the three-year period ending with the close of its taxable year preceding
the payment was effectively connected with a United States trade or business,
information reporting (but not backup withholding) may apply to such payments
unless the broker has in its records documentary evidence that the Holder of
the New Notes is not a United States person and certain conditions are met or
the Holder of the New Note otherwise establishes an exemption. Payment of the
proceeds from a sale of the New Notes to or through the United States office
of a broker is subject to information reporting and backup withholding unless
the Holder certifies as to its non-U.S. status under penalties of perjury or
otherwise establishes an exemption.

Any amounts withheld under the backup withholding rules are not additional
tax and may be credited against the U.S. Holder's United States federal
income tax liability, provided that the required information is furnished to
the IRS.

Recently, the Treasury Department promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general,
the final regulations do not significantly alter the substantive withholding
and information reporting requirements described above but unify current
certification procedures and forms and clarify reliance standards. The final
regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules.

107

RATINGS

Standard & Poor's Ratings Group and Moody's Investors Service, Inc. have
given the Old Notes the ratings set forth under "Summary -- Summary
Description of the New Notes." NRG expects that the New Notes would be
assigned the same ratings as the Old Notes. Such ratings reflect only the
views of these organizations, and an explanation of the significance of each
such rating may be obtained from Standard & Poor's Corporation, 25 Broadway,
New York, New York 10004 and Moody's Investors Service, Inc., 99 Church
Street, New York, New York 10007. There is no assurance that such ratings
will continue for any given period of time or that they will not be revised
downward or withdrawn entirely by such rating agencies or either of them if,
in their judgment, circumstances so warrant. A downward change in or
withdrawal of such ratings or either of them may have an adverse effect on
the market price of the Notes.

108

PLAN OF DISTRIBUTION

Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with the resales of New Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. NRG has agreed that, starting on the Expiration
Date and ending on the close of business on the 90th day following the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1997 (90 days from the date of this Prospectus), all
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.

NRG will not receive any proceeds from any sale of New Notes by
broker-dealers or any other persons. New Notes received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to
or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or purchasers of
any such New Notes. Any broker-dealer that resells New Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such New Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. The Letter of Transmittal states that by
representing that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.

For a period of 90 days after the Expiration Date, NRG will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. NRG has agreed to pay all expenses incident to NRG's performance
of, or compliance with, the Registration Rights Agreement and will indemnify
the Holders (including any broker-dealers) and certain parties related to the
Holders against certain liabilities, including liabilities under the
Securities Act.

109

LEGAL MATTERS

Certain legal matters with respect to the validity of the New Notes will
be passed upon for NRG by Skadden, Arps, Slate, Meagher & Flom LLP and by
James J. Bender, Vice President and General Counsel of NRG.

EXPERTS

The consolidated financial statements of NRG as of December 31, 1995 and
1996 and for each of the two years in the period ended December 31, 1996
included in this Prospectus have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

The financial statements of NRG as of December 31, 1994 included in this
Prospectus have been so included in reliance on the report of Deloitte &
Touche LLP, independent auditors, given on the authority of said firm as
experts in auditing and accounting.

The financial statements of Sunshine State Power BV and Sunshine State
Power (No. 2) BV as of December 31, 1996, 1995 and 1994 and for each of the
three years in the period ended December 31, 1996 included in this Prospectus
have been so included in reliance on the reports of Price Waterhouse
Nederland BV, independent accountants, given on the authority of said firm as
experts in auditing and accounting.

The balance sheets as of December 31, 1995 and 1994 of San Joaquin Valley
Energy Partners I, L.P. (the Partnership), and the statements of income,
partners' equity and cash flows for each of the two years in the period ended
December 31, 1995, included in this Prospectus, have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
which report includes an explanatory paragraph disclosing that the
Partnership entered into an agreement during 1995 whereby the Partnership's
power purchase contracts were transferred back to Pacific Gas & Electric,
given on the authority of that firm as experts in accounting and auditing.

The financial statements of Mittledeutsche Braunkohlengesellschaft mbH as
of December 31, 1996, 1995 and 1994 and each of the three years in the period
ended December 31, 1996 included in this Prospectus have been so included in
reliance on the report of Deloitte & Touche GmbH, independent auditors, given
on the authority of said firm as experts in auditing and accounting.

The financial statements of Saale Energie GmbH as of December 31, 1996 and
the year ended December 31, 1996 included in this Prospectus have been so
included in reliance on the report of Deloitte & Touche GmbH, independent
auditors, given on the authority of said firm as experts in auditing and
accounting.

The financial statements of Quiet Life Limited as of June 30, 1997 and of
Loy Yang Power Limited as of June 30, 1996 and for the two years then ended
included in this Prospectus have been so included in reliance on the report
of the Auditor-General of Australia.

The reconciliation to U.S. GAAP of the financial statements of Loy Yang
Power Limited covering the period from February 1, 1995 to June 30, 1995, the
financial year ended June 30, 1996 and the period from July 1, 1996 to May
12, 1997 included in this Prospectus have been so included in reliance on the
report of Arthur Andersen, independent auditors, given on the authority of
said firm as experts in auditing and accounting.

110

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
---------

Audited Financial Statements
Report of Independent Accountants......................................................... F-4
Consolidated Balance Sheets of NRG Energy, Inc. and Subsidiaries as of December 31, 1995
and 1996................................................................................. F-5
Consolidated Statements of Income of NRG Energy, Inc. and Subsidiaries for the years
ended December 31, 1995 and 1996......................................................... F-7
Consolidated Statements of Cash Flows of NRG Energy, Inc. and Subsidiaries for the years
ended December 31, 1995 and 1996......................................................... F-8
Consolidated Statements of Stockholder's Equity of NRG Energy, Inc. and Subsidiaries for
the years ended December 31, 1995 and 1996............................................... F-9
Notes to Consolidated Financial Statements ............................................... F-10
Report of Independent Auditors ........................................................... F-25
Consolidated Balance Sheet of NRG Energy, Inc. and Subsidiaries as of December 31, 1994 .. F-26
Consolidated Statement of Income of NRG Energy, Inc. and Subsidiaries for the year
ended December 31, 1994.................................................................. F-28
Consolidated Statement of Cash Flows of NRG Energy, Inc. and Subsidiaries for the year
ended December 31, 1994.................................................................. F-29
Consolidated Statement of Stockholder's Equity of NRG Energy, Inc. and Subsidiaries for
the year ended December 31, 1994 ........................................................ F-30
Notes to Consolidated Financial Statements ............................................... F-31
Unaudited Financial Statements
Consolidated Balance Sheets of NRG Energy, Inc. and Subsidiaries as of September 30, 1996
and 1997................................................................................. F-42
Consolidated Statements of Income of NRG Energy, Inc. and Subsidiaries for the nine month
periods ended September 30, 1996 and 1997................................................ F-44
Consolidated Statements of Cash Flows of NRG Energy, Inc. and Subsidiaries for the nine
month period ended September 30, 1996 and 1997........................................... F-45
Notes to Consolidated Financial Statements................................................ F-46
Unaudited Pro Forma Combined Financial Statements
Unaudited Pro Forma Consolidated Statement of Income of NRG Energy, Inc. and Subsidiaries
for the year ended December 31, 1996..................................................... F-50
Unaudited Pro Forma Consolidated Statement of Income of NRG Energy, Inc. and Subsidiaries
for the nine month period ended September 30, 1997 ...................................... F-51
Significant Subsidiary Financial Statements
Sunshine State Power BV
-----------------------------------------------------------------------------------------
Auditors Report........................................................................... F-52
Balance Sheet as of December 31, 1996, 1995 and 1994...................................... F-53
Statement of Income for the years ended December 31, 1996, 1995 and 1994 ................. F-54
Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ............. F-55
Notes to Annual Accounts.................................................................. F-56
Sunshine State Power (No. 2) BV
-----------------------------------------------------------------------------------------
Auditors Report........................................................................... F-63
Balance Sheet as of December 31, 1996, 1995 and 1994...................................... F-64

F-1

PAGE
---------
Statement of Income for the years ended December 31, 1996 and 1995 and period ended
December 31, 1994........................................................................ F-65
Statement of Cash Flows for the years ended December 31, 1996 and 1995 and period ended
December 31, 1994........................................................................ F-66
Notes to Annual Accounts.................................................................. F-67
San Joaquin Valley Energy Partners I, L.P.
------------------------------------------
Unaudited Balance Sheet as of December 31, 1996........................................... F-74
Unaudited Statement of Income for the year ended December 31, 1996........................ F-75
Unaudited Statement of Partners' Equity for the year ended December 31, 1996 ............. F-76
Unaudited Statement of Cash Flows for the year ended December 31, 1996.................... F-77
Notes to Unaudited Financial Statements................................................... F-78
Report of Independent Accountants......................................................... F-81
Balance Sheets as of December 31, 1995 and 1994........................................... F-82
Statements of Income for the years ended December 31, 1995 and 1994....................... F-83
Statements of Partners' Equity for the years ended December 31, 1995 and 1994 ............ F-84
Statements of Cash Flows for the years ended December 31, 1995 and 1994 .................. F-85
Notes to Financial Statements............................................................. F-86
Mitteldeutsche Braunkohlengesellschaft mbH
------------------------------------------
Independent Auditors' Report.............................................................. F-92
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 ... F-93
Consolidated Balance Sheets at December 31, 1996, 1995 and 1994........................... F-94
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994..................................................................................... F-96
Consolidated Statements of Changes in Equity for the years ended December 31, 1996, 1995
and 1994................................................................................. F-97
Notes to Consolidated Financial Statements................................................ F-98
Saale Energie GmbH
------------------
Report of Independent Auditors............................................................ F-118
Statement of Operations for the year ended December 31, 1996.............................. F-119
Balance Sheet at December 31, 1996........................................................ F-120
Statement of Cash Flows for the year ended December 31, 1996.............................. F-121
Notes to Financial Statements............................................................. F-122
Statement of Operations for the years ended December 31, 1995 and 1994.................... F-128
Balance Sheet at December 31, 1995 and 1994............................................... F-129
Statements of Cash Flows for the years ended December 31, 1995 and 1994 .................. F-130
Notes to Financial Statements............................................................. F-131
Quiet Life Limited (formerly Loy Yang Power Ltd.)
-------------------------------------------------
Profit and Loss Statement for the year ended 30 June 1997................................. F-134
Balance Sheet as at 30 June 1997.......................................................... F-135
Statement of Cash Flows for the year ended 30 June 1997................................... F-136
Notes to and forming part of the Financial Statements..................................... F-137
Auditor-General's Report ................................................................. F-157
Loy Yang Power Ltd.
-------------------
Profit and Loss Statement for the year ended 30 June 1996 ................................ F-158

F-2

PAGE
---------

Balance Sheet as at 30 June 1996 ......................................................... F-159
Statement of Cash Flows for the year ended 30 June 1996 .................................. F-160
Notes to and forming part of the Financial Statements .................................... F-161
Auditor-General's Report ................................................................. F-178
Report on US GAAP, reconcilliation and prior year audit workpapers ....................... F-180

F-3

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders
NRG Energy, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholder's equity, and of
cash flows present fairly, in all material respects, the financial position
of NRG Energy, Inc. (a wholly-owned subsidiary of Northern States Power
Company) and its subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of NRG'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 audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

Price Waterhouse LLP
Minneapolis, Minnesota
April 8, 1997

F-4

NRG ENERGY, INC.
CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
----------------------
1996 1995
---------- ----------
(THOUSANDS OF DOLLARS)

ASSETS
Current Assets:
Cash and cash equivalents........................................... $ 12,438 $ 7,039
Restricted cash..................................................... 17,688 9,773
Accounts receivable--trade, less allowance for doubtful accounts of
$143 and $103...................................................... 12,061 9,333
Accounts receivable-affiliates...................................... 6,708 4,640
Current portion of notes receivable-affiliates...................... 3,601 5,267
Current portion of notes receivable................................. 5,985 2,791
Inventory........................................................... 2,312 1,811
Prepayments and other current assets................................ 4,644 1,744
---------- ----------
TOTAL CURRENT ASSETS................................................. 65,437 42,398
---------- ----------
Property, Plant and Equipment, at Original Cost:
In service.......................................................... 176,072 170,253
Under construction.................................................. 24,683 5,914
---------- ----------
200,755 176,167
Less accumulated depreciation....................................... (71,106) (64,248)
---------- ----------
Net property, plant and equipment.................................. 129,649 111,919
---------- ----------
Other Assets:
Investments in projects............................................. 365,749 221,129
Capitalized project costs........................................... 9,267 4,185
Notes receivable, less current portion-affiliates................... 58,169 32,389
Notes receivable, less current portion.............................. 9,309 --
Intangible assets, net of accumulated amortization of $5,647 and
$4,127............................................................. 40,476 41,996
Debt issuance costs, net of accumulated amortization of $338 and
$189............................................................... 2,753 573
---------- ----------
Total other assets................................................. 485,723 300,272
---------- ----------
TOTAL ASSETS......................................................... $680,809 $454,589
========== ==========

See accompanying notes.

F-5

NRG ENERGY, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)

DECEMBER 31,
---------------------------
1996 1995
--------------------------
(THOUSANDS OF DOLLARS)

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt............................... $ 4,848 $ 3,762
Accounts payable-trade.......................................... 4,443 6,208
Note payable-affiliates......................................... 3,867 1,185
Accrued income taxes............................................ 1,930 7,366
Accrued property and sales taxes................................ 2,159 1,895
Accrued salaries, benefits and related costs.................... 6,559 5,178
Accrued interest................................................ 4,726 824
Other current liabilities....................................... 4,424 1,578
--------------------------
TOTAL CURRENT LIABILITIES........................................ 32,956 27,996
--------------------------
Long-term debt, less current portion............................ 207,293 86,272
Deferred revenues............................................... 6,340 7,726
Deferred income taxes........................................... 8,606 9,166
Deferred investment tax credits................................. 1,853 2,069
Deferred compensation........................................... 1,847 1,596
--------------------------
TOTAL LIABILITIES................................................ 258,895 134,825
--------------------------
Commitments and Contingencies (Note 13)
Stockholder's Equity:
Common stock; $1 par value; 1,000 shares authorized; 1,000
shares issued and outstanding.................................. 1 1
Additional paid-in capital...................................... 351,013 271,013
Retained earnings............................................... 66,301 46,323
Currency translation adjustments................................ 4,599 2,427
--------------------------
TOTAL STOCKHOLDER'S EQUITY....................................... 421,914 319,764
--------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY....................... $680,809 $454,589
==========================

See accompanying notes.

F-6

NRG ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31,
---------------------------
1996 1995
--------------------------
(THOUSANDS OF DOLLARS)

Operating revenues:
Revenues from wholly-owned operations................... $ 71,649 $64,180
Equity in operating earnings of unconsolidated
affiliates............................................. 32,815 23,639
--------------------------
Total operating revenues................................. 104,464 87,819
--------------------------
Operating costs and expenses:
Cost of wholly-owned operations......................... 36,562 32,535
Depreciation and amortization........................... 8,378 8,283
General, administrative and development expenses ....... 39,248 34,647
--------------------------
Total operating costs and expenses....................... 84,188 75,465
--------------------------
Operating income......................................... 20,276 12,354
Other income (expense):
Equity in gain from project termination settlements .... -- 29,850
Other income, net....................................... 9,477 4,896
Interest expense........................................ (15,430) (7,089)
--------------------------
Total other income (expense)............................. (5,953) 27,657
--------------------------
Income before income taxes............................... 14,323 40,011
--------------------------
Income (benefit) taxes................................... (5,655) 8,810
--------------------------
Net Income............................................... $ 19,978 $31,201
==========================

See accompanying notes.

F-7

NRG ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- ----------
(THOUSANDS OF DOLLARS)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................. $ 19,978 $ 31,201
Adjustments to reconcile net income to net cash provided (used) by
operating activities ................................................
Undistributed equity in operating earnings of unconsolidated
affiliates.......................................................... (17,827) (20,074)
Depreciation and amortization........................................ 8,378 8,283
Deferred income taxes and investment tax credits..................... (776) (2,608)
Cash provided (used) by changes in certain working capital items
Accounts receivable................................................. (2,728) 1,102
Accounts receivable-affiliates...................................... (2,068) (2,889)
Accrued income taxes................................................ (5,436) 9,808
Inventory........................................................... (501) (107)
Prepayments and other current assets................................ (2,900) (571)
Accounts payable-trade.............................................. (1,765) 1,009
Accounts payable-affiliates......................................... 2,682 (3,037)
Accrued property and sales taxes.................................... 264 (396)
Accrued salaried, benefits and related costs........................ 1,381 2,427
Accrued interest.................................................... 3,902 553
Other current liabilities........................................... 2,846 1,094
Cash (used) by changes in other assets and liabilities .............. (1,284) (1,004)
Equity in gain from project termination settlement................... -- (29,850)
----------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES....................... 4,146 (5,059)
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in projects............................................... (140,590) (25,776)
Loans to projects..................................................... (36,617) (35,411)
Capital expenditures.................................................. (24,588) (11,036)
Cash distribution from project termination settlement................. 15,671 14,179
(Increase) decrease in restricted cash................................ (7,915) 4,044
Other, net............................................................ (4,486) (3,104)
----------- ----------
NET CASH USED BY INVESTING ACTIVITIES.................................. (198,525) (57,104)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from parent..................................... 80,000 55,000
Proceeds from issuance of long-term debt.............................. 122,671 --
Principal payments on long-term debt.................................. (2,893) (3,305)
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............................. 199,778 51,695
=========== ==========
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 5,399 (10,468)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................... 7,039 17,507
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... $ 12,438 $ 7,039
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid (net of amount capitalized)............................. $ 11,527 $ 6,536
Income taxes paid..................................................... 1,164 1,447

See accompanying notes.

F-8

NRG ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDER'S
STOCK CAPITAL EARNINGS ADJUSTMENTS EQUITY
-------- ------------ ---------- ------------- ---------------
(THOUSANDS OF DOLLARS)

Balances at December 31, 1994 .... $1 $216,013 $15,122 $ 3,586 $234,722
Net income........................ 31,201 31,201
Capital contributions from
parent........................... 55,000 55,000
Currency translation adjustments . (1,159) (1,159)
-------- ------------ ---------- ------------- ---------------
Balances at December 31, 1995 .... 1 271,013 46,323 2,427 319,764
Net income........................ 19,978 19,978
Capital contributions from
parent........................... 80,000 80,000
Currency translation adjustments . 2,172 2,172
-------- ------------ ---------- ------------- ---------------
Balances at December 31, 1996 .... $1 $351,013 $66,301 $ 4,599 $421,914
======== ============ ========== ============= ===============

See accompanying notes.

F-9

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

NRG Energy, Inc., a Delaware corporation, was incorporated on May 29,
1992, as a wholly-owned subsidiary of Northern States Power Company (NSP).
Beginning in 1989, NRG was doing business through its predecessor companies,
NRG Energy, Inc. and NRG Group, Inc., Minnesota corporations which were
merged into NRG subsequent to its incorporation. NRG and its subsidiaries and
affiliates develop, build, acquire, own and operate nonregulated
energy-related businesses.

2. PRINCIPLES OF CONSOLIDATION

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of NRG and its
subsidiaries (referred to collectively herein as NRG). All significant
intercompany transactions and balances have been eliminated in consolidation.
As discussed in Note 5, NRG has investments in partnerships, joint ventures
and projects for which the equity method of accounting is applied. Earnings
from equity in international investments are recorded net of foreign income
taxes.

Cash Equivalents

Cash equivalents include highly liquid investments (primarily commercial
paper) with a remaining maturity of three months or less at the time of
purchase.

Restricted Cash

Restricted cash consists primarily of cash collateral required in
connection with foreign currency hedging activities (see Note 12) and cash
collateral for letters of credit issued in relation to project development
activities.

Inventory

Inventory is valued at the lower of average cost or market and consists
principally of spare parts and raw materials used to generate steam.

Property, Plant and Equipment

Property, plant and equipment are capitalized at original cost.
Significant additions or improvements extending asset lives are capitalized,
while repairs and maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over the following
estimated useful lives:

Facilities and improvements.......... 20-45 years
Machinery and equipment.............. 7-30 years
Office furnishings and equipment .... 3-5 years

Capitalized Interest

Interest incurred on funds borrowed to finance projects expected to
require more than three months to complete is capitalized. Capitalization of
interest is discontinued when the project is completed and considered
operational. Capitalized interest is amortized using the straight line method
over the useful life of the related project. Capitalized interest was
$364,000 and $253,000 in 1996 and 1995, respectively.

Development Costs and Capitalized Project Costs

F-10

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. PRINCIPLES OF CONSOLIDATION (Continued)

agreement or letter of intent is signed and the project has been approved by
NRG's Board of Directors. Additional costs incurred after this point are
capitalized. When project operations begin, previously capitalized project
costs are reclassified to investment in projects and amortized on a
straight-line basis over the lesser of the life of the project's related
assets or revenue contract period.

Debt Issuance Costs

Costs to issue long-term debt have been capitalized and are being
amortized over the terms of the related debt.

Intangibles

Intangibles consist principally of service agreements and the excess of
the cost of investment in subsidiaries over the underlying fair value of the
net assets acquired and are being amortized using the straight-line method
over 20 years. NRG periodically evaluates the recovery of goodwill and other
intangibles based on an analysis of estimated undiscounted future cash flows.

Service agreement intangibles relate solely to the 1993 acquisition of the
Minneapolis Energy Center. The 20-year amortization period is based on the
remaining term of customer energy service agreements.

Income Taxes

NRG is included in the consolidated tax returns of NSP. NRG calculates its
income tax provision on a separate return basis under a tax sharing agreement
with NSP as discussed in Note 9. Current federal and state income taxes are
payable to or receivable from NSP. NRG records income taxes using the
liability method. Income taxes are deferred on all temporary differences
between pretax financial and taxable income and between the book and tax
bases of assets and liabilities. Deferred taxes are recorded using the tax
rates scheduled by law to be in effect when the temporary differences
reverse. Investment tax credits are deferred and amortized over the estimated
lives of the related property. NRG's policy for income taxes related to
international operations is discussed in Note 9.

Revenue Recognition

Under fixed-price contracts, revenues are recognized as deliveries of
products or services are made. Revenues and related costs under cost
reimbursable contract provisions are recorded as costs are incurred.
Anticipated future losses on contracts are charged against income when
identified.

Deferred revenues relate to a 1988 legal settlement with a major thermal
customer. Settlement proceeds were deferred when received and are reflected
in operating income on a straight-line basis over the life of the related
steam contract which expires in 2001.

Foreign Currency Translation

The local currencies are generally the functional currency of NRG's
foreign operations. Foreign currency denominated assets and liabilities are
translated at end-of-period rates of exchange. The resulting currency
adjustments are accumulated and reported as a separate component of
stockholder's equity. Income, expense and cash flows are translated at
weighted-average rates of exchange for the period.

Exchange gains and losses that result from foreign currency transactions
(e.g., converting cash distributions made in one currency to another
currency) are included in the results of operations as a component of equity
in earnings of unconsolidated affiliates. Through December 31, 1996, NRG has
not experienced any material translation gains or losses from foreign
currency transactions that have occurred since the respective foreign
investment dates.

F-11

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. PRINCIPLES OF CONSOLIDATION (Continued)

Derivative Financial Instruments

NRG's policy is to hedge foreign currency denominated investments as they
are made to preserve their U.S. dollar value, where appropriate hedging
vehicles are available. NRG has entered into currency hedging transactions
through the use of forward foreign currency exchange agreements. Gains and
losses on these agreements offset the effect of foreign currency exchange
rate fluctuations on the valuation of the investments underlying the hedges.
Hedging gains and losses, net of income tax effects, are reported with other
currency translation adjustments as a separate component of stockholder's
equity. NRG is not hedging currency translation adjustments related to future
operating results. NRG does not speculate in foreign currencies. None of
these derivative financial instruments are reflected in NRG's balance sheet.

Use of Estimates

In recording transactions and balances resulting from business operations,
NRG uses estimates based on the best information available. Estimates are
used for such items as plant depreciable lives, tax provisions, uncollectible
accounts and actuarially determined benefit costs. As better information
becomes available (or actual amounts are determinable), the recorded
estimates are revised. Consequently, operating results can be affected by
revisions to prior accounting estimates.

Reclassifications

Certain reclassifications have been made to the 1995 financial statements
to conform to the 1996 presentation. These reclassifications had no effect on
net income or stockholder's equity as previously reported.

3. BUSINESS ACQUISITIONS

In March 1996, a joint venture between NRG and Transfield signed an
18-year power purchase agreement and an agreement for the acquisition and
refurbishment of the 180 MW Collinsville coal-fired power generation facility
in Queensland, Australia. NRG would own a 50% interest and operate the
facility in conjunction with Transfield.

In April 1996, NRG, through bankruptcy proceedings, purchased a 41.86%
interest in O'Brien Environmental Energy, Inc. that has been renamed as NRG
Generating (U.S.) Inc. (NRGG). In addition to an equity interest in NRGG, NRG
acquired certain landfill gas projects in the purchase which were transferred
to NEO and a cogeneration facility.

On December 19, 1996 NRG and Nordic Power Invest AB purchased 96.6% of
Bolivian Power Company Limited. NRG's ownership is 58%, however it is NRG's
intent to reduce its holding to 50% or less.

NEO, a wholly-owned subsidiary, owns a 50% interest in Minnesota Methane
LLC. In 1996, Minnesota Methane LLC acquired a 12 MW project in West Covina,
California and acquired six projects as part of the NRGG acquisition. Of the
projects acquired, four were operating facilities and two were projects under
development and construction. In 1994, NEO acquired a 50% interest in
Northbrook Energy. In 1996, Northbrook Energy acquired seven additional
hydroelectric plants.

The total acquisition investments in these projects through December 31,
1996, including capitalized development costs, was approximately $121.5
million. Earnings from equity interests in these NRG projects acquired in
1996 contributed $2.7 million to NRG's 1996 earnings.

F-12

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY, PLANT AND EQUIPMENT

The major classes of property, plant and equipment at December 31 were as
follows:

1996 1995
---------- ----------
(THOUSANDS OF DOLLARS)

Facilities and equipment, including construction work in
progress of $24,683 and $5,914.................................. $187,014 $163,099
Land and improvements............................................ 10,397 10,397
Office furnishings and equipment................................. 3,344 2,671
---------- ----------
Total property, plant and equipment.............................. 200,755 176,167
Accumulated depreciation......................................... (71,106) (64,248)
---------- ----------
Net property, plant and equipment................................ $129,649 $111,919
========== ==========

5. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD

NRG has investments in various international and domestic energy projects.
The equity method of accounting is applied to such investments in affiliates,
which include joint ventures and partnerships, because the ownership
structure prevents NRG from exercising a controlling influence over operating
and financial policies of the projects. Under this method, equity in pretax
income or losses of domestic partnerships and in the net income or losses of
international projects are reflected as equity in earnings of unconsolidated
affiliates.

A summary of NRG's significant equity-method investments which were in
operation at December 31, 1996 is as follows:

PURCHASED
GEOGRAPHIC ECONOMIC OR PLACED
NAME AREA INTEREST IN SERVICE
- ------------------------------------------------ ----------------- ------------ ---------------------------

MIBRAG Mining and Power Generation .............. Germany 33.3% January 1994
Gladstone Power Station ......................... Australia 37.5% March 1994
Schkopau Power Station........................... Germany 20.6% January and July 1996
Scudder Latin American Trust for Independent
Power Energy Project............................ Latin America 25.0% June 1993
Collinsville Electric Generation ................ Australia 50.0% March 1996
COBEE ........................................... Bolivia 58.0% December 1996
NRG Generating................................... USA 41.9% April 1996
Various Independent Power Production Facilities . USA 45%-50% July 1991-December 1996
Rosebud Syncoal Partnership...................... USA 50.0% August 1993

F-13

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD (Continued)

Summarized financial information for investments in unconsolidated
affiliates accounted for under the equity method as of and for the year ended
December 31, is as follows:

1996 1995
------------ ------------
(THOUSANDS OF DOLLARS)

Operating revenues........... $ 886,947 $ 776,612
Costs and expenses........... 794,255 615,696
------------ ------------
Net income.................. $ 92,692 $ 160,916
============ ============
Current assets............... $ 647,213 $ 757,124
Noncurrent assets............ 3,420,950 2,557,992
------------ ------------
Total assets................ $4,068,163 $3,315,116
============ ============
Current liabilities.......... $ 365,905 $ 290,805
Noncurrent liabilities....... 2,732,922 2,236,919
Equity....................... 969,336 787,392
------------ ------------
Total liabilities and
equity..................... $4,068,163 $3,315,116
============ ============
NRG's share of equity........ $ 365,749 $ 221,129
NRG's share of income........ 32,815 23,639

In June 1995, a power sales contract between a California energy project,
in which NRG is a 45% investor, and an unaffiliated utility company was
terminated. A pretax gain of $29.9 million was recognized by NRG for its
share of the termination settlement.

NRG recorded pretax charges of $1.5 million in 1996 and $5.0 million in
1995 to write down the carrying value of certain energy projects.

6. RELATED PARTY TRANSACTIONS.

Operating Agreements

NRG has two agreements with NSP for the purchase of thermal energy. Under
the terms of the agreements, NSP charges NRG for certain costs (fuel, labor,
plant maintenance, and auxiliary power) incurred by NSP to produce the
thermal energy. NRG paid NSP $6.0 million in 1996 and $3.7 million in 1995
under these agreements.

NRG has a renewable 10-year agreement with NSP, expiring on December 31,
2001, whereby NSP agrees to purchase refuse-derived fuel for use in certain
of its boilers and NRG agrees to pay NSP a burn incentive. NRG has an
agreement expiring in 1997 to sell wood by-product obtained from a thermal
customer to NSP for use as fuel. Under these agreements, NRG received $1.5
million and $1.9 million from NSP, and paid $2.2 million and $2.3 million to
NSP in 1996 and 1995, respectively.

Administrative Services and Other Costs

Allocation is on a direct charge, actual cost basis where possible. When
this is not possible, an allocation is made based upon employee headcounts,
operating revenues and investment in fixed assets. Management believes that
"allocated" costs approximate expenses that would be incurred on a stand
alone basis.

F-14

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. RELATED PARTY TRANSACTIONS. (Continued)

In 1996, NRG and NSP entered into an agreement for NRG to provide
operations and maintenance services for NSP's Elk River resource recovery
facility and Becker ash landfill. During 1996, NSP paid NRG $1.5 million as
reimbursement under this agreement.

7. NOTES RECEIVABLE

Notes receivable consist primarily of fixed and variable rate notes
secured by equity interests in partnerships and joint ventures. The interest
rate on the notes ranged from 7.0% to 12.5% at December 31, 1996 and 1995.

8. LONG-TERM DEBT

Long-term debt consists of the following at December 31:

1996 1995
--------------------------
(THOUSANDS OF DOLLARS)

NRG Energy Center, Inc. Senior Secured Notes Series due
June 15, 2013, 7.31%................................... $ 76,986 $79,326
Note payable to NSP, due December 1, 1995-2006
5.40%-6.75%............................................ 8,405 8,958
NRG Sunnyside, Inc. note payable, due December 31,
1997, 10.00%........................................... 1,750 1,750
NRG Energy Senior Notes, due February 1, 2006, 7.625% .. 125,000 --
--------------------------
212,141 90,034
Less current maturities................................. (4,848) (3,762)
--------------------------
Total.................................................. $207,293 $86,272
==========================

The NRG Energy Center, Inc. notes are secured principally by long-term
assets of the Minneapolis Energy Center (MEC). In accordance with the terms
of the note agreements, MEC is required to maintain compliance with certain
financial covenants primarily related to incurring debt, disposing of MEC
assets, and affiliate transactions. MEC was in compliance with these
covenants at December 31, 1996.

The note payable to NSP relates to long-term debt assumed by NRG in
connection with the transfer of ownership of an RDF processing plant by NSP
to NRG in 1993.

The NRG Sunnyside, Inc. note payable was issued in connection with the
purchase of an equity interest in a waste-coal project in 1994.

The NRG Energy Senior Notes were issued in January 1996, are unsecured and
require semi-annual interest payments on February 1 and August 1.

F-15

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. LONG-TERM DEBT (Continued)

Annual maturities of long-term debt for the years ending after December
31, 1996 are as follows:

(THOUSANDS OF
DOLLARS)

1997......... $ 4,848
1998......... 3,335
1999......... 3,581
2000......... 3,841
2001......... 4,160
Thereafter .. 192,376
--------------------
Total...... $212,141
====================

NRG has revolving-credit agreements which allow for Letters of Credit
which may not exceed $63.9 million. There were $18.4 million and $0
outstanding letters of credit under the credit agreements at December 31,
1996 and 1995, respectively.

9. INCOME TAXES

NRG and its parent, NSP, have entered into a federal and state income tax
sharing agreement relative to the filing of consolidated federal and state
income tax returns. The agreement provides, among other things, that (1) if
NRG, along with its subsidiaries, is in a taxable income position, NRG will
be currently charged with an amount equivalent to its federal and state
income tax computed as if the group had actually filed separate federal and
state returns, and (2) if NRG, along with its subsidiaries, is in a tax loss
position, NRG will be currently reimbursed to the extent its combined losses
are utilized in a consolidated return, and (3) If NRG, along with its
subsidiaries, generates tax credits, NRG will be currently reimbursed to the
extent its tax credits are utilized in a consolidated return.

The provision for income taxes consists of the following:

1996 1995
--------------------------
(THOUSANDS OF DOLLARS)

Current
Federal........................... $ 633 $ 9,965
State............................. 253 3,268
Foreign........................... 616 233
--------------------------
1,502 13,466
Deferred
Federal........................... (3,655) (1,592)
State............................. (1,498) (1,012)
--------------------------
(5,153) (2,604)
Tax credits recognized............. (2,004) (2,052)
--------------------------
Total income tax (benefit)
expense........................... $(5,655) $ 8,810
==========================

F-16

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES (Continued)

The components of the net deferred income tax liability at December 31
were:

1996 1995
--------------------------
(THOUSANDS OF DOLLARS)

Deferred tax liabilities
Differences between book and tax bases of property ...... $16,606 $16,364
Investments in projects.................................. 2,988 1,226
Goodwill................................................. 2,974 444
Other.................................................... 2,646 112
--------------------------
Total deferred tax liabilities.......................... 25,214 18,146
Deferred tax assets
Deferred revenue......................................... 3,043 3,099
Development costs........................................ 5,581 --
Deferred investment tax credits.......................... 766 856
Deferred compensation, accrued vacation and other
reserves................................................ 1,536 1,412
Steam capacity rights.................................... 1,043 1,109
Other.................................................... 4,639 2,504
--------------------------
Total deferred tax assets................................ 16,608 8,980
--------------------------
Net deferred tax liability............................... $ 8,606 $ 9,166
==========================

Rate Reconciliation

At December 31, 1996, the effective income tax rate (benefit) of (39.5)%
differs from the statutory federal income tax rate of 35% primarily due to
the fact that NRG generated a domestic tax loss of $15 million for the year.
For the year ended December 31, 1995, NRG had a domestic tax income of $9.2
million with the change between 1996 and 1995 primarily attributable to a
$29.9 million gain from the sale of a power agreement at SJVEP.

Income before income taxes includes net foreign equity income of $28
million and $32 million in 1996 and 1995, respectively. NRG's management
intends to reinvest the earnings of foreign operations indefinitely.
Accordingly, U.S. income taxes and foreign withholding taxes have not been
provided on the earnings of foreign subsidiary companies. The cumulative
amount of undistributed earnings of foreign subsidiaries upon which no U.S.
income taxes or foreign withholding taxes have been provided is approximately
$87.3 million at December 31, 1996. The additional U.S. income tax and
foreign withholding tax on the unremitted foreign earnings, if repatriated,
would be offset in whole or in part by Foreign tax credits. Thus, it is
impracticable to estimate the amount of tax that might be payable.

10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS

Pension Benefits

NRG participates in NSP's noncontributory, defined benefit pension plan
that covers the majority of all U.S. employees. Benefits are based on a
combination of years of service, the employee's highest average pay for 48
consecutive months, and Social Security benefits. Net annual periodic pension
cost includes the following components:

F-17

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued)

1996 1995
--------------------------
(THOUSANDS OF DOLLARS)

Service cost-benefits earned during the
period........................................ $ 1,115 $ 688
Interest cost on projected benefit obligation . 1,013 525
Actual return on assets........................ (1,983) (1,542)
Net amortization and deferral.................. 1,258 1,147
--------------------------
Net periodic pension cost...................... $ 1,403 $ 818
==========================

NRG's funding policy is to contribute to NSP the full actuarial pension
cost accrued, less future tax benefits to be realized from such costs. Plan
assets consist principally of common stock of public companies, corporate
bonds and U.S. government securities. The funded status of the pension plan
in which NRG employees participate is as follows at December 31, 1996 and
1995:

NSP Plan -- 1996

NRG
TOTAL PORTION
----------- ---------
(THOUSANDS OF DOLLARS)

Actuarial present value of benefit obligation ...................
Vested.......................................................... $ 660,920 $ 6,464
Nonvested....................................................... 147,278 3,422
----------- ---------
Accumulated benefit obligation.................................. $ 808,198 $ 9,886
=========== =========
Projected benefit obligation..................................... $ 993,821 $14,253
Plan assets at fair value........................................ 1,634,696 12,986
----------- ---------
Plan assets (in excess of) less than projected benefit
obligation...................................................... (640,875) 1,267
Unrecognized prior service cost.................................. (19,734) (86)
Unrecognized net actuarial gain (loss)........................... 651,368 256
Unrecognized net transitional asset.............................. 539 --
----------- ---------
Net pension (prepaid) liability recorded....................... $ (8,702) $ 1,437
=========== =========

NSP Plan -- 1995

NRG
TOTAL PORTION
------------ ---------
(THOUSANDS OF DOLLARS)

Actuarial present value of benefit obligation
Vested.......................................................... $ 686,403 $ 3,050
Nonvested....................................................... 155,177 1,520
------------ ---------
Accumulated benefit obligation.................................. $ 841,580 $ 4,570
============ =========
Projected benefit obligation..................................... $1,039,981 $ 8,828
Plan assets at fair value........................................ 1,456,530 6,657
------------ ---------
Plan assets (in excess of) less than projected benefit
obligation...................................................... (416,549) 2,171
Unrecognized prior service cost.................................. (20,805) (91)
Unrecognized net actuarial gain (loss)........................... 452,699 (1,388)
Unrecognized net transitional asset.............................. 615 --
------------ ---------
Net pension liability recorded................................. $ 15,960 $ 692
============ =========

The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% in 1996 and 7% in
1995. The rate of increase in future compensation levels

F-18

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued)

used in determining the actuarial present value of the projected obligation
was 5% in 1996 and in 1995. The assumed long-term rate of return on assets
used for cost determinations was 9% for 1996 and 8% for 1995. Changes in
actuarial assumptions increased 1996 pension costs by $284,000 and are
expected to decrease 1997 costs by $150,000.

Postretirement Health Care

NRG participates in NSP's contributory health and welfare benefit plan
that provides health care and death benefits to the majority of all U.S.
employees after their retirement. The plan is intended to provide for sharing
of costs of retiree health care between NRG and retirees. For employees
retiring after January 1, 1994, a six-year cost-sharing strategy was
implemented with retirees paying 15% of the total cost of health care in
1994, increasing to a total of 40% in 1999.

Postretirement health care benefits for NRG are determined and recorded
under the provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 106 requires the
actuarially determined obligation for postretirement health care and death
benefits to be fully accrued by the date employees attain full eligibility
for such benefits, which is generally when they reach retirement age. In
conjunction with the adoption of SFAS No. 106 in 1993, NRG elected to
amortize on a straight-line basis over 20 years the unrecognized accumulated
postretirement benefit obligation (APBO) of $1.4 million for current and
future retirees.

Plan assets as of December 31, 1996, consisted of investments in equity
mutual funds and cash equivalents. NRG's funding policy is to contribute to
NSP benefits actually paid under the plan. The following table sets forth the
funded status of the health care plan in which NRG employees participate at
December 31, 1996 and 1995:

NSP Plan -- 1996

NRG
TOTAL PORTION
----------- ---------
(THOUSANDS OF DOLLARS)

APBO
Retirees.............................. $ 144,180 $ 323
Fully eligible plan participants ..... 23,438 619
Other active plan participants ....... 101,065 2,269
----------- ---------
Total APBO............................ 268,683 3,211
Plan assets at fair value.............. (15,514) --
----------- ---------
APBO in excess of plan assets.......... 253,169 3,211
Unrecognized net actuarial loss ....... (12,467) (366)
Unrecognized net transition
obligation............................ (172,480) (1,133)
----------- ---------
Net benefit obligation recorded ...... $ 68,222 $ 1,712
=========== =========

F-19

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued)

NSP Plan -- 1995

NRG
TOTAL PORTION
----------- ---------
(THOUSANDS OF DOLLARS)

APBO
Retirees.............................. $ 145,800 $ 67
Fully eligible plan participants ..... 24,400 518
Other active plan participants ....... 116,800 2,239
----------- ---------
Total APBO............................ 287,000 2,824
Plan assets at fair value.............. (11,600) --
----------- ---------
APBO in excess of plan assets.......... 275,400 2,824
Unrecognized net actuarial loss ....... (40,400) (510)
Unrecognized net transition
obligation............................ (183,200) (1,203)
----------- ---------
Net benefit obligation recorded ...... $ 51,800 $ 1,111
=========== =========

The assumed health care cost trend rates used in measuring the APBO at
December 31, 1996 and 1995, were 9.8% and 10.4% for those under age 65, and
7.1% and 7.3% for those over age 65, respectively. The assumed cost trends
are expected to decrease each year until they reach 5.5% for both age groups
in the year 2004, after which they are assumed to remain constant. A 1%
increase in the assumed health care cost trend rate for each year would
increase the APBO by approximately 14% as of December 31, 1996. Service and
interest cost components of the net periodic postretirement cost would
increase by approximately 17% with a similar one percent increase in the
assumed health care cost trend rate. The assumed discount rate used in
determining the APBO was 7.5% for December 31, 1996 and 7% for December 31,
1995, compounded annually. The assumed long-term rate of return on assets
used for cost determinations under SFAS No. 106 was 8% for 1996 and 1995.
Changes in actuarial assumptions had an immaterial impact on 1996 costs and
are not expected to materially impact 1997 costs.

The net annual periodic postretirement benefit cost recorded for 1996 and
1995 consists of the following components:

1996 1995
--------------------------
(THOUSANDS OF DOLLARS)

Service cost-benefits earned during the
year........................................ $257 $171
Interest cost on APBO........................ 233 171
Amortization of transition obligation ....... 70 70
Net amortization and deferral................ 26 --
--------------------------
Net periodic postretirement health care
cost....................................... $586 $412
==========================

NRG Equity Plan

Employees are eligible to participate in the NRG Equity Plan (the Plan), a
long term incentive plan. The Plan grants phantom equity units to employees
based upon performance and job grade. NRG's equity units are valued based
upon NRG's growth and financial performance. The primary financial measures
used in determining the equity units' value are revenue growth, return on
investment and cash flow from operations. The units are awarded to employees
annually at the respective years calculated share price (grant price). The
Plan provides employees with a cash payout for the appreciation in equity
unit value over the vesting period. The Plan has a seven year vesting
schedule with actual payments beginning after the end of the third year and
continuing at 20% each year for the subsequent five years. The Plan includes
a change of control provision, which allow all shares to vest if the
ownership of NRG

F-20

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued)

were to change. Phantom equity units outstanding at December 31, 1996 and
1995 were 1,380,990 and 1,164,090, respectively. The cost of the phantom
equity units is expensed over the vesting period from the date of issuance
($452,000 and $422,000 in 1996 and 1995, respectively).

Deferred Compensation

Certain employees of NRG are eligible to participate in a deferred
compensation program. The employee can elect to defer a portion of their
compensation until retirement. Earnings on the amounts deferred are equal to
the return on the Fixed Income Option of the NSP Retirement Savings Plan.
Earnings will be compounded annually and credited monthly. Payouts begin upon
retirement with payments made over 180 equal monthly installments (or a
minimum of $500 per month until their account balance is zero.)

11. SALES TO SIGNIFICANT CUSTOMERS

NRG and the Ramsey/Washington Resource Recovery Project have a service
agreement for waste disposal which expires in 2006. Approximately 29.1% in
1996 and 32.1% in 1995 of NRG's revenues from wholly-owned operations were
recognized under this contract. In addition, sales to one thermal customer
amounted to 14.1% and 15.6% of revenues from wholly-owned operations in 1996
and 1995, respectively.

12. FINANCIAL INSTRUMENTS

The estimated December 31 fair values of recorded financial instruments
are as follows:

1996 1995
--------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- ---------- --------
(THOUSANDS OF DOLLARS)

Cash and cash equivalents................... $ 12,438 $ 12,438 $ 7,039 $ 7,039
Restricted cash............................. 17,688 17,688 9,773 9,773
Notes receivable, including current
portion.................................... 77,064 77,064 40,447 40,447
Long-term debt, including current portion .. 212,141 200,875 90,034 91,682

For cash, cash equivalents and restricted cash, the carrying amount
approximates fair value because of the short-term maturity of those
instruments. The fair value of notes receivable is based on expected future
cash flows discounted at market interest rates. The fair value of long term
debt is estimated based on the quoted market prices for the same or similar
issues.

Derivatives

NRG has entered into seven forward foreign currency exchange contracts
with counterparties to hedge exposure to currency fluctuations to the extent
permissible by hedge accounting requirements. Pursuant to these contracts,
transactions have been executed that are designed to protect the economic
value in U.S. dollars of NRG's equity investments and retained earnings,
denominated in Australian dollars and German deutsche marks (DM). As of
December 31, 1996, NRG had $132 million of foreign currency denominated
assets that were hedged by forward foreign currency exchange contracts with a
notional value of $123 million. In addition, NRG had approximately $82
million of foreign currency denominated retained earnings from foreign
projects that were hedged by forward foreign currency exchange contracts with
a notional value of $59 million. Because the effects of both currency
translation adjustments to foreign investments and currency hedge instrument
gains and losses are recorded on a

F-21

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. FINANCIAL INSTRUMENTS (Continued)

net basis in stockholders' equity (not earnings), the impact of significant
changes in currency exchange rates on these items would have an immaterial
effect on NRG's financial condition and results of operations. In connection
with the forward foreign currency exchange contracts, cash collateral of $16
million was required at December 31, 1996, which is reflected as restricted
cash on NRG's balance sheet. The forward foreign currency exchange contracts
terminate in 1998 through 2006 and require foreign currency interest payments
by either party during each year of the contract. If the contracts had been
terminated at December 31, 1996, $13.3 million would have been payable by NRG
for currency exchange rate changes to date. Management believes NRG's
exposure to credit risk due to non-performance by the counterparties to its
forward exchange contracts is not significant, based on the investment grade
rating of the counterparties.

13. COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

NRG leases certain of its facilities and equipment under operating leases,
some of which include escalation clauses, expiring on various dates through
2010. Rental expense under these operating leases was $741,000 in 1996 and
$796,000 in 1995. Future minimum lease commitments under these leases for the
years ending after December 31, 1996 are as follows:

(THOUSANDS OF
DOLLARS)

1997......... $ 1,050
1998......... 936
1999......... 956
2000......... 982
2001......... 1,008
Thereafter .. 5,349
--------------------
Total...... $10,281
====================

Capital Commitments -- International

NRG signed a Joint Development Agreement for the acquisition, upgrading,
expansion and development of Energy Center Kladno in Kladno, Czech Republic.
The acquisition of the existing facility is the first phase of a development
project that will include upgrading the existing plant and developing a new
power generation facility. NRG has a $44 million commitment for the
additional facilities.

NRG together with its partners, signed a power contract with PT Perusahaan
Listrik Negara, the state-owned Indonesian electric company, to build, own
and operate a 400 MW coal-fired power station in Cilegon, West Java,
Indonesia. NRG has a $65 million commitment for the facility.

NRG is contractually committed to additional equity investments of $14
million for Scudder Latin American Power I and $7 million to Scudder Latin
American Power II as of December 31, 1996.

NRG reached agreement to purchase a 50% equity interest in the Enfield
Energy Centre, a 350 MW power project located in the North London borough of
Enfield, England. NRG has a $62 million commitment.

NRG and Transfield signed an acquisition agreement for the acquisition and
refurbishment of the 180 MW Collinsville coal-fired power generation facility
in Queensland, Australia. NRG has a $9 million commitment.

F-22

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. COMMITMENTS AND CONTINGENCIES (Continued)

Future capital commitments related to international projects are as
follows:

(MILLIONS OF
DOLLARS)

1997 ...................... $ 37
1998 ...................... 75
1999 ...................... 52
2000 ...................... 29
2001 ...................... 8
-----------------
Total ................... $201
=================

Capital Commitments -- Domestic

In 1996 NRG has provided a $10 million loan commitment to a wholly-owned
subsidiary of NRG Generating (U.S.) Inc. (NRGG). The purpose of the loan is
to allow NRGG to fund its capital contribution to a cogeneration project
currently under construction. NRG anticipates funding the loan in 1997.

Also in 1996, NRG has committed to provide NRGG power generation
investment opportunities in the United States over a period of three years.
The projects must have an aggregate, over the three year term, equity value
of at least $60 million or a minimum of 150 net megawatts. In addition, NRG
has committed to finance these projects to the extent funds are not available
to NRGG on comparable terms from other sources.

Claims and Litigation

In normal course of business, NRG is a party to routine claims and
litigation arising from current and prior operations. NRG is actively
defending these matters and does not believe the outcome of such matters
would materially impact the results of operations or financial position.

14. SEGMENT REPORTING

NRG conducts its business within one industry segment--independent power
generation. Operations in the United States include wholly-owned operations
and investments in various domestic energy projects. International operations
include investments in various international energy projects. See Note 5 for
significant equity method investments.

ASIA OTHER CORPORATE/
1996 U.S. EUROPE PACIFIC AMERICAS OTHER TOTAL
- ------------------------------- --------- --------- --------- ---------- ------------- ---------
(IN THOUSANDS)

Revenues from wholly-owned
operations..................... $ 71,649 $ 71,649
Equity in operating earnings
(losses) of unconsolidated
affiliates..................... 1,473 $ 17,385 $11,155 $ 967 $ 1,835 32,815
--------- --------- --------- ---------- ------------- ---------
Total operating revenues........ 73,122 17,385 11,155 967 1,835 104,464
Net income...................... 28,182 17,385 11,155 967 (37,711)(1) 19,978

Assets reported on a
consolidated basis............. 148,666 42,159 (2) 190,825
Equity investments and loans to
affiliates..................... 130,786 210,587 97,988 50,623 489,984
--------- --------- --------- ---------- ------------- ---------
Total assets.................... 279,452 210,587 97,988 50,623 42,159 680,809

F-23

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. SEGMENT REPORTING (Continued)

ASIA OTHER CORPORATE/
1995 U.S. EUROPE PACIFIC AMERICAS OTHER TOTAL
- ------------------------------- ---------- ---------- --------- ---------- ------------- ---------
(IN THOUSANDS)

Revenues from wholly-owned
operations..................... 64,180 64,180
Equity in operating earnings
(losses) of unconsolidated
affiliates..................... (2,398) 22,143 11,451 29 (7,586) 23,639
---------- ---------- --------- ---------- ------------- ---------
Total operating revenues........ 61,782 22,143 11,451 29 (7,586) 87,819
Net income...................... 50,813 22,143 11,451 29 (53,235)(1) 31,201

Assets reported on a
consolidated basis............. 124,807 21,569 (2) 146,376
Equity investments and loans to
affiliates..................... 118,220 106,809 78,303 4,881 308,213
---------- ---------- --------- ---------- ------------- ---------
Total assets.................... $243,027 $106,809 $78,303 $4,881 $ 21,569 $454,589

(2) Includes cash, debt issuance costs and other items not directly related
to specific asset groups.

15. SUBSEQUENT EVENT

On February 6,1997, NRG signed a subscription agreement with Energy
Developments Limited (EDL) to acquire up to 20% of common stock, and an
additional 15% of preference shares at AUS$2.20 per share. EDL is an
Australian company engaged exclusively in independent power generation from
landfill gas, coal seam methane and natural gas (including latest technology
combined cycle projects). EDL is the largest generator of power from coal
seam methane in the world. The company currently operates over 200 MW of
generation across five states and territories of Australia and has commenced
the development of new projects in the United Kingdom, Asia and New Zealand.
The current equity megawatt ownership held by EDL is approximately I70 MW.
EDL is a publicly traded company with its securities listed on the Australian
Stock Exchange. On February 11, 1997 NRG made an initial purchase of 7.2%
(4.5 million shares) of common stock for AUS$9.9 million (US$7.9 million).

F-24

REPORT OF INDEPENDENT AUDITORS
NRG ENERGY, INC. AND SUBSIDIARIES

To the Board of Directors and Stockholder
NRG Energy, Inc.
Minneapolis, Minnesota

We have audited the accompanying consolidated balance sheet of NRG Energy,
Inc. (the Company) (a wholly-owned subsidiary of Northern States Power
Company) as of December 31, 1994 and the related consolidated statements of
income, stockholder's equity, and cash flows for the year ended December 31,
1994. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. We did not audit the
1994 financial statements of Sunshine State Power BV and Sunshine State Power
(No. 2) BV, the Company's investments in which are accounted for by use of
the equity method. These investments represent 19% of total assets as of
December 31, 1994 and the equity in earnings represents 32% of equity in
earnings of projects for the year ended December 31, 1994. The financial
statements of Sunshine State Power BV and Sunshine State Power (No. 2) BV
were audited by other auditors whose reports have been furnished to us, and
our opinion, insofar as it relates to the amounts included for such entities,
is based solely on the reports of such other auditors.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatements. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, based on our audit and the reports of the other auditors,
such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994, and
the results of its operations and its cash flows for the year ended December
31, 1994, in conformity with generally accepted accounting principles.

Deloitte & Touche LLP

Minneapolis, Minnesota
March 24, 1995

F-25

NRG ENERGY, INC.
CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1994
--------------------
(THOUSANDS OF
DOLLARS)

ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 17,507
Restricted cash.................................................... 13,817
Accounts receivable--trade, less allowance for doubtful accounts
of $185........................................................... 11,576
Accounts receivable--affiliates.................................... 610
Income taxes receivable............................................ 2,442
Current portion of notes receivable................................ 3,115
Inventory.......................................................... 1,704
Prepayments and other current assets............................... 1,173
--------------------
TOTAL CURRENT ASSETS................................................ 51,944
--------------------
Property, Plant and Equipment, at Original Cost:
In service......................................................... 163,438
Under construction................................................. 2,289
--------------------
165,727
Less accumulated depreciation...................................... (58,093)
--------------------
Net property, plant and equipment................................. 107,634
--------------------
Other Assets:
Investments in projects............................................ 164,863
Capitalized project costs.......................................... 3,030
Notes receivable, less current portion-affiliates.................. 3,687
Intangible assets, net of accumulated amortization of $2,549 ...... 44,798
Debt issuance costs, net of accumulated amortization of $148 ...... 614
--------------------
Total other assets................................................ 216,992
--------------------
TOTAL ASSETS........................................................ $376,570
====================

See accompanying notes.

F-26

NRG ENERGY, INC.
CONSOLIDATED BALANCE SHEET -- (CONTINUED)

DECEMBER 31, 1994
--------------------
(THOUSANDS OF
DOLLARS)

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt............................... $ 3,306
Accounts payable--trade......................................... 5,199
Note payable--affiliates........................................ 3,037
Accrued property and sales taxes................................ 2,291
Accrued salaries, benefits and related costs.................... 2,751
Other current liabilities....................................... 11,021
--------------------
TOTAL CURRENT LIABILITIES........................................ 27,605
--------------------
Long-term debt, less current portion............................ 90,033
Deferred revenues............................................... 8,811
Deferred income taxes........................................... 11,519
Deferred investment tax credits................................. 2,324
Deferred compensation........................................... 1,556
--------------------
TOTAL LIABILITIES................................................ 141,848
--------------------
Commitments and Contingencies (Note 13)
Stockholder's Equity:
Common stock; $1 par value; 1,000 shares authorized; 1,000
shares issued and outstanding.................................. 1
Additional paid-in capital...................................... 216,013
Retained earnings............................................... 15,122
Currency translation adjustments................................ 3,586
--------------------
TOTAL STOCKHOLDER'S EQUITY....................................... 234,722
--------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY....................... $376,570
====================

See accompanying notes.

F-27

NRG ENERGY, INC.
CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 1994
----------------------------
(THOUSANDS OF DOLLARS)

Operating revenues:
Revenues from wholly-owned operations................... $63,970
Equity in operating earnings of unconsolidated
affiliates............................................. 27,155
----------------------------
Total operating revenues................................. 91,125
----------------------------
Operating costs and expenses:
Cost of wholly-owned operations......................... 34,861
Depreciation and amortization........................... 8,675
General, administrative and development expenses ....... 19,993
----------------------------
Total operating costs and expenses....................... 63,529
----------------------------
Operating income......................................... 27,596
Other income (expense):
Equity in gain from project termination settlements .... 9,685
Other income, net....................................... 1,411
Interest expense........................................ (6,682)
----------------------------
Total other income ...................................... 4,414
----------------------------
Income before income taxes............................... 32,010
----------------------------
Income taxes............................................. 2,472
----------------------------
Net Income............................................... $29,538
============================

See accompanying notes.

F-28

NRG ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 1994
----------------------------
(THOUSANDS OF DOLLARS)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................. $ 29,538
Adjustments to reconcile net income to net cash provided (used) by
operating activities ................................................
Undistributed equity in operating earnings of unconsolidated
affiliates.......................................................... (18,511)
Depreciation and amortization........................................ 8,675
Deferred income taxes and investment tax credits..................... (523)
Cash (used) provided by changes in certain working capital items:
Accounts receivable--trade.......................................... (2,964)
Accounts receivable--affiliates..................................... 468
Accrued income taxes................................................ (1,892)
Inventory........................................................... (438)
Prepayments and other current assets................................ (205)
Accounts payable--trade............................................. (4,459)
Accounts payable--affiliates........................................ 942
Accrued property and sales taxes.................................... (76)
Accrued salaries, benefits and related costs........................ 1,246
Other current liabilities........................................... 1,240
Cash (used) by changes in other assets and liabilities .............. (615)
----------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES....................... 12,426
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in projects............................................... (102,119)
Loans to projects..................................................... (4,415)
Capital expenditures.................................................. (5,750)
(Increase) decrease in restricted cash................................ (13,817)
Other, net............................................................ 2,255
----------------------------
NET CASH USED BY INVESTING ACTIVITIES.................................. (123,846)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from parent..................................... 103,885
Dividends and other distributions paid to parent...................... (9)
Proceeds from issuance of long-term debt.............................. 2,375
Principal payments on long-term debt.................................. (2,487)
----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............................. 103,764
============================
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (7,656)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................... 25,163
----------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... $ 17,507
============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid (net of amount capitalized)............................. $ 6,808
Income tax benefits received, net of taxes paid....................... (1,939)

See accompanying notes.

F-29

NRG ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY

ADDITIONAL RETAINED CURRENCY TOTAL
COMMON PAID-IN EARNINGS TRANSLATION STOCKHOLDER'S
STOCK CAPITAL (DEFICIT) ADJUSTMENTS EQUITY
-------- ------------ ----------- ------------- ---------------
(THOUSANDS OF DOLLARS)

Balances at December 31, 1993 ....... $1 $112,128 $(14,407) $ 97,722
Net income........................... 29,538 29,538
Dividends and other distributions to
parent.............................. (9) (9)
Capital contributions from parent ... 103,885 103,885
Currency translation adjustments .... $3,586 3,586
-------- ------------ ----------- ------------- ---------------
Balances at December 31, 1994 ....... $1 $216,013 $ 15,122 $3,586 $234,722
======== ============ =========== ============= ===============

See accompanying notes.

F-30

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

NRG Energy, Inc. (the Company), a Delaware Corporation, was incorporated
on May 29, 1992, as a wholly-owned subsidiary of Northern States Power
Company (NSP). Beginning in 1989, the Company was doing business through its
predecessor companies. NRG Energy, Inc. and NRG Group, Inc. Minnesota
corporations which were merged into the Company subsequent to its
incorporation. The Company and its subsidiaries and affiliates develop,
build, acquire, own and operate nonregulated energy-related businesses.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries (referred to collectively herein as NRG).
All significant intercompany transactions have been eliminated. Investments
in partnerships, joint ventures and projects representing ownership of more
than 20%, but not in excess of 50%, are accounted for on the equity method.

Cash equivalents

Cash equivalents include highly liquid investments (primarily commercial
paper) with a remaining maturity of three months or less at the time of
purchase.

Restricted cash

Inventory

Inventory is valued at the lower of average cost or market and consists
principally of spare parts and raw materials used to generate steam.

Property, plant and equipment

Property, plant and equipment are capitalized at original cost.
Depreciation is computed using the straight-line method over the following
estimated useful lives:

Buildings and improvements......... 20-45 years
Machinery and equipment............ 7-30 years
Office furniture and equipment .... 3-5 years

Capitalized interest

Interest incurred on funds borrowed to finance projects expected to
require more than three months to complete is capitalized. Capitalization of
interest is discontinued when the project is completed and considered
operational. Capitalized interest is amortized using the straight-line method
over the useful life of the related project. Capitalized interest was $45,000
in 1994.

Development and capitalized project costs

These costs include professional services, dedicated employee salaries,
permits, and other costs which are incurred incidental to a particular
project. Such costs are expensed as incurred until a sales agreement or
letter of intent is signed, after which time they are capitalized. When
project operations begin, previously capitalized project costs are amortized
on a straight-line basis over the lesser of the life of the project's related
assets or revenue contract period.

F-31

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Debt issuance costs

Costs to issue long-term debt have been capitalized and are being
amortized over the terms of the related debt.

Intangibles

Intangibles consist principally of service agreements and the excess of
the cost of investment in subsidiaries over the underlying fair value of the
net assets acquired and are being amortized using the straight-line method
over 30 years. Intangibles also include patents which are being amortized
using the straight-line method over 17 years. The Company periodically
evaluates the recovery of goodwill and other intangibles based on an analysis
of the estimated undiscounted future cash flows.

Income taxes

The Company is included in the consolidated tax returns of NSP. NRG
calculates its income tax provision on a separate return basis under a tax
sharing arrangement with NSP. Current federal and state income taxes are
payable to or receivable from NSP. NRG records income taxes in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting
for Income Taxes." Under the liability method required by SFAS No.109, income
taxes are deferred on all temporary differences between pretax financial and
taxable income and between the book and tax bases of assets and liabilities.
Deferred taxes are recorded using the tax rates scheduled by law to be in
effect when the temporary differences reverse. Investment tax credits are
deferred and amortized over the estimated lives of the related property.

Revenue recognition

Deferred revenues related to a 1988 legal settlement with a major thermal
customer. Settlement proceeds were deferred when received and are reflected
in operating income on a straight-line basis over the life of the related
steam contract which expires in 2001.

Foreign currency translation

The local currencies are generally the functional currency of NRG's
foreign operations. Foreign currency denominated assets and liabilities are
translated at end-of-period rates of exchange. Income, expense and cash flows
are translated at weighted-average rates of exchange for the period. The
resulting currency translation adjustments are accumulated and reported as a
separate component of stockholder's equity.

Exchange gains and losses that result from foreign currency transactions
(e.g., converting cash distributions made in one currency to another
currency) are included in the results of operations. Through December 31,
1994, NRG has not experienced any material translation gains or losses from
foreign currency transactions.

Derivative financial instruments

NRG's policy is to hedge financial currency denominated investments as
they are made to preserve their U.S. dollar value. NRG has entered into
currency hedging transactions through the use of forward

F-32

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

foreign currency exchange agreements. Gains and losses on these contracts
offset the effect of foreign currency exchange rate fluctuations on the
valuation of the investments underlying the hedges. The effect of hedging
gains and losses, net of income taxes, is reported with other currency
translation adjustments as a separate component of stockholder's equity. The
Company is not hedging currency translation adjustments related to operating
results. NRG does not speculate in foreign currencies.

Accounting change

In 1994, the Company adopted SFAS No. 112, "Employers' Accounting for
Postretirement Benefits." SFAS No. 112 requires the accrual of certain
employee costs (such as injury compensation or severance) to be paid in
future periods. The adoption of this new accounting standard did not have a
material effect on NRG's results of operations or financial condition.

3. BUSINESS ACQUISITIONS

Through its subsidiaries, NRG purchased equity interests during 1994 in
three significant international projects, two in Germany and one in
Australia. One of the investments is a 33% interest in Mitteldeutsche
Braunkohlengesellschaft mbH (MIBRAG), a German corporation. MIBRAG was formed
by the German government to operate mines, electric power plants and other
energy-related facilities. The other German investment is a 50% interest in
Saale Energie GmbH (Saale), also a German corporation. Saale owns a 400
megawatt share of a 900 megawatt power plant currently under construction
near Schkopau, Germany. The Australian investment is a 37.5% interest (held
by wholly-owned NRG subsidiaries Sunshine State Power BV and Sunshine State
Power (No. 2) BV) in a joint venture that acquired a 1,680 megawatt
coal-fired power plant in Gladstone, Queensland, Australia, which is operated
by an NRG subsidiary. The total acquisition investments in these three
projects through 1994, including capitalized developments costs, was
approximately $100 million. Earnings from equity interests in these NRG
international projects acquired in 1994 contributed $25.6 million to NRG's
1994 earnings.

On December 31, 1994, NRG, through a wholly-owned subsidiary, purchased a
50% partnership interest in Sunnyside Cogeneration Associates, a Utah joint
venture (partnership) which owns and operates a 51 megawatt waste coal plant
in Utah. The acquisition investment by NRG was $11.5 million. The waste coal
plant is currently being operated by a 50%-owned NRG partnership.

In August 1993, NRG Energy Center, Inc., a wholly-owned subsidiary of NRG,
acquired the assets of the Minneapolis Energy Center (MEC), a district
heating and cooling system in downtown Minneapolis, Minnesota. The system
uses steam and chilled water generating facilities to heat and cool buildings
for about 90 heating and 30 cooling customers. The acquisition was reflected
in the financial statements under the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed in the acquisition
have been recorded at their fair values. The purchase price was $110 million,
$84 million of which was financed by project debt. The purchase price
primarily included facilities, long-term service agreements and goodwill. The
results of operations of MEC since August 1993 have been included in the
consolidated financial statements.

F-33

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY, PLANT AND EQUIPMENT

The major classes of property, plant and equipment at December 31 were as
follows:

1994
--------------------
(THOUSANDS OF
DOLLARS)

Facilities and equipment, including construction work in progress of $2,289 $153,221
Land and improvements....................................................... 10,397
Office furnishings and equipment............................................ 2,109
--------------------
Total property, plant and equipment ........................................ 165,727
Accumulated depreciation.................................................... (58,093)
--------------------
Net property, plant and equipment........................................... $107,634
====================

5. INVESTMENTS ACCOUNTED FOR BY EQUITY METHOD

A summary of NRG's significant equity-method investments which were in
operation at December 31, 1994 is as follows:

GEOGRAPHIC ECONOMIC PURCHASED OR PLACED
NAME AREA INTEREST IN SERVICE
- ---------------------------------------- ----------------- -------------- --------------------------

Various Independent Power Production
Facilities.............................. U.S.A. 45%-50% July 1991-December 1994
Rosebud Syncoal Partnership.............. U.S.A. 50% August 1993
MIBRAG................................... Europe 33% January 1994
Gladstone Power Station.................. Australia 37.5% March 1994
Schkopau Power Station................... Europe 20.6% Under Construction
Scudder Latin American Trust for
Independent Power Energy Projects ...... Latin America 6.3%-12.5% April-December 1994

Summarized financial information for investments in projects accounted for
under the equity method as of and for the year ended December 31, is as
follows:

1994
--------------------
(THOUSANDS OF
DOLLARS)

Operating revenues............ $ 731,308
Costs and expenses............ 604,428
--------------------
Net income................... $ 126,880
====================
Current assets................ $ 452,651
Noncurrent assets............. 1,787,089
--------------------
Total assets................. $2,239,740
====================
Current liabilities........... $ 159,840
Noncurrent liabilities........ 1,757,057
Equity........................ 322,843
--------------------
Total liabilities and
equity....................... $2,239,740
====================
NRG's share of equity......... $ 164,863
NRG's share of income......... $ 27,155

F-34

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENTS ACCOUNTED FOR BY EQUITY METHOD (Continued)

In July 1994, Michigan Cogeneration Partners Limited Partnership (MCP), a
partnership between subsidiaries of NRG and Cogentrix, Inc., reached an
agreement with Consumers Power Company (Consumers), an electric utility
headquartered in Jackson, Michigan, to terminate the power sales contract
related to a 65 megawatt cogeneration facility being developed by MCP in
Parchment, Michigan. The agreement to terminate the contract required
Consumers to make payment to MCP of $29.8 million. As a result, NRG recorded
in Other Income. A net pretax gain from the termination of this contract of
$9.7 million in 1994.

In 1994, the Company recorded a pretax charge of $5.0 million to write
down the carrying value of two energy projects. The charge was determined
based on estimated discounted future cash flows, and is recorded in Other
Income, Net.

6. RELATED PARTY TRANSACTIONS

Operating Agreements

NRG has two agreements with NSP for the purchase of thermal energy. Under
the terms of the agreements, NSP charges NRG for certain incremental costs
(fuel, labor, plant maintenance, and auxiliary power) incurred by NSP to
produce the thermal energy. NRG paid NSP $6.6 million in 1994 under these
agreements.

NRG has a renewable 10-year agreement with NSP, expiring on December 31,
2001, whereby NSP agrees to purchase refuse-derived fuel for use in certain
of its boilers and NRG agrees to pay NSP a burn incentive. NRG has an
agreement expiring in 2006 to sell wood by-products obtained from a thermal
customer to NSP for use as fuel. Under these agreements, NRG received $1.7
million from NSP and paid $2.2 million to NSP in 1994.

Administrative Services and Other Costs

7. NOTES RECEIVABLE

Notes receivable consist primarily of fixed and variable rate notes
secured by equity interests in partnerships and joint ventures. The weighted
average interest rate on the notes was 11.2% at December 31, 1994.

F-35

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. LONG-TERM DEBT

Long-term debt consists of the following at December 31:

1994
--------------------
(THOUSANDS OF
DOLLARS)

NRG Energy Center, Inc. Senior Secured Notes Series due June
15, 2013, 7.31% ............................................... $81,498
Note payable to NSP, due December 1, 1995-2006, 5.40%-6.75% .... 9,466
NRG Sunnyside Inc. note payable, due December 31, 1997, 10.00% . 2,375
--------------------
93,339
Less current maturities......................................... (3,306)
--------------------
$90,033
====================

The NRG Energy Center, Inc. notes are secured principally by MEC's
long-term assets. In accordance with the terms of the note agreements, the
Company is required to maintain compliance with certain financial covenants
primarily related to incurring debt, disposing of Company assets, and
affiliate transactions. The Company was in compliance with these covenants at
December 31, 1994.

The Note Payable to NSP relates to long-term debt assumed by the Company
in connection with the transfer of ownership of an RDF processing plant by
NSP to the Company during 1993.

The NRG Sunnyside, Inc. note payable was issued in connection with the
purchase of an equity interest in a waste-coal project during 1994.

Annual maturities of long-term debt for the years ending after December
31, 1994 are as follows:

(THOUSANDS OF
DOLLARS)

1995.......... $ 3,306
1996.......... 3,762
1997.......... 3,979
1998.......... 3,335
1999.......... 3,581
Thereafter .. 75,376
--------------------
Total........ $93,339
====================

The Company has a revolving-credit agreement which may not exceed $5.0
million. At December 31, 1994, there were no borrowings under the credit
agreement.

F-36

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES

The provision for income taxes consists of the following:

1994
--------------------
(THOUSANDS OF
DOLLARS)

Current
Federal................. $ 1,694
State................... 737
Foreign................. 219
--------------------
2,650
Deferred
Federal................. 1,280
State................... 369
--------------------
1,649
Tax credits recognized .. (1,827)
--------------------
Total income tax
expense.................. $ 2,472
====================

The components of the net deferred income tax liability at December 31
were:

1994
--------------------
(THOUSANDS OF
DOLLARS)

Deferred tax liabilities
Differences between book and tax bases of property ..... $13,269
Investments in projects.................................. 6,168
Goodwill................................................. 256
Other.................................................... 930
--------------------
Total deferred tax liabilities........................... 20,623
Deferred tax assets
Deferred revenue......................................... 3,645
Development costs........................................ 2,047
Deferred investment tax credits.......................... 978
Deferred compensation, accrued vacation and other
reserves................................................ 992
Steam capacity rights.................................... 1,175
Other.................................................... 267
--------------------
Total deferred tax assets............................... 9,104
--------------------
Net deferred tax liability............................... $11,519
====================

Actual income tax expense recorded differs from the statutory federal
income tax rate of 35% due to state income taxes, varying tax treatment of
foreign income and expenses and tax credits recognized.

Income before income taxes includes foreign income of $25.6 million in
1994. NRG's management intends to reinvest in earnings of foreign operations
indefinitely. Accordingly, U.S. income taxes and foreign withholding taxes
have not been provided on the earnings of foreign subsidiary companies. The
cumulative amount of undistributed pre-tax earnings of foreign subsidiaries
upon which no U.S. income taxes or foreign withholding taxes have been
provided is approximately $25.6 million at December 31, 1994. The additional
U.S. income tax and foreign withholding tax on the unremitted foreign
earnings, if repatriated, would be offset in whole or in part by foreign tax
credits. Thus, it is impracticable to estimate the amount of tax that might
be payable.

F-37

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS

Pension Benefits

NRG participates in NSP's noncontributory, defined benefit pension plan
that covers substantially all employees. Benefits are based on a combination
of year of service, the employee's highest average pay for 48 consecutive
months, and Social Security benefits. Pension costs for NRG are determined
and recorded under the provisions of SFAS No. 87, "Employers' Accounting for
Pensions." Net annual periodic pension cost includes the following
components:

1994
--------------------
(THOUSANDS OF
DOLLARS)

Service cost-benefits earned during the
period....................................... $ 654
Interest cost on projected benefit
obligation................................... 354
Actual return on assets....................... (58)
Net amortization and deferral ................ (262)
--------------------
Net periodic pension cost .................... $ 688
====================

The funded status of the pension plan in which NRG employees participate
is as follows at December 31:

NSP PLAN-1994
--------------------------
TOTAL NSP NRG PORTION
----------- -------------
(THOUSANDS OF DOLLARS)

Actuarial present value of benefit obligation
Vested.............................................. $ 571,254 $ 563
Nonvested........................................... 120,420 1,016
----------- -------------
Accumulated benefit obligation...................... $ 691,674 $1,579
=========== =============
Projected benefit obligation......................... $ 836,957 $4,228
Plan assets at fair value............................ 1,165,584 5,170
----------- -------------
Plan asset in excess of projected benefit
obligation.......................................... (328,627) (942)
Unrecognized prior service costs..................... (21,538) (96)
Unrecognized net actuarial gain ..................... 370,289 1,038
Unrecognized net transitional asset ................. 691 --
----------- -------------
Net pension liability recorded ..................... $ 20,815 $ --
=========== =============

The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8% in 1994. The rate of
increase in future compensation levels used in determining the actuarial
present value of the projected obligation was 5% in 1994. The assumed
long-term rate of return on assets used for cost determinations under SFAS
No. 87 was 8% for 1994. Plan assets consist principally of common stock of
public companies and U.S. Government securities.

Postretirement Health Care

Effective January 1, 1993, NRG adopted the provisions of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS
No. 106 requires the actuarial determined obligation for postretirement
health care and death benefits be fully accrued by the date employees attain
full eligibility for such benefits, which is generally when they reach
retirement age. In conjunction with the adoption of SFAS No. 106, NRG elected
to amortize on a straight-line basis over 20 years the unrecognized
accumulated postretirement benefit obligation (APBO) of $1.4 million for
current and future

F-38

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued)

retirees. This obligation considered 1994 plan design changes not in effect
in 1993, including Medicare integration, increased retiree cost sharing, and
managed indemnity measures.

The following table sets forth the funded status of the health care plan
in which NRG employees participate at December 31:

NSP PLAN-1994
--------------------------
TOTAL NSP NRG PORTION
----------- -------------
(THOUSANDS OF DOLLARS)

APBO
Retirees.............................. $ 132,200 $ 34
Fully eligible plan participants..... 21,500 359
Other active plan participants....... 79,400 1,319
----------- -------------
Total APBO.......................... 233,100 1,712
Plan assets at fair value............ 8,000 --
----------- -------------
APBO in excess of plan assets........ 225,100 1,712
Unrecognized net actuarial gain...... 2,300 265
Unrecognized net transition
obligation........................... (194,000) (1,273)
----------- -------------
Net benefit obligation recorded...... $ 33,400 $ 704
=========== =============

The assumed health care cost trend rates used in measuring the APBO at
December 31, 1994 were 11.0% for those under age 65, and 7.5% for those over
age 65. The assumed cost trends are expected to decrease each year until they
reach 5.5% for both age groups in the year 2004, after which they are assumed
to remain constant. A one percent increase in the assumed health care cost
trend rate for each year would increase the APBO by approximately 13% as of
December 31, 1994. Service and interest cost components of the net periodic
postretirement cost would increase by approximately 16% with a similar one
percent increase in the assumed health care cost trend rate. The assumed
discount rate used in determining the APBO was 8% for December 31, 1994,
compounded annually. The assumed long-term rate of return on assets used for
cost determinations under SFAS No. 106 was 8% for 1994. The net annual
periodic postretirement benefit cost recorded for 1994 consists of the
following components:

1994
--------------------
(THOUSANDS OF
DOLLARS)

Service cost--benefits earned during the year . $140
Interest cost on APBO.......................... 126
Amortization of transition obligation ......... 70
Net amortization and deferral.................. --
--------------------
Net periodic postretirement health care
costs......................................... $336
====================

11. SALES TO SIGNIFICANT CUSTOMERS

NRG and the Ramsey/Washington Resource Recovery Project have a service
agreement for waste disposal which expires in 2006. Approximately 35.5% in
1994 of the Company's operating revenues from wholly-owned operations were
recognized under this contract. In addition, sales to one thermal customer
amounted to 16.6% of operating revenues from wholly-owned operations in 1994.

F-39

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. FINANCIAL INSTRUMENTS

The estimated December 31 fair values of NRG's recorded financial
instruments are as follows:

1994
---------------------------
CARRYING FAIR
AMOUNT VALUE
--------------------------
(THOUSANDS OF DOLLARS)

Cash and cash equivalents................... $17,507 $17,507
Restricted cash............................. 13,817 13,817
Notes receivable, including current
portion.................................... 6,802 6,802
Long-term debt, including current portion .. 93,339 82,694

For cash, cash equivalents and restricted cash, the carrying amount
approximates fair value because of the short-term maturity of those
instruments. The fair value of notes receivable is based on expected future
cash flows discounted at market interest rates. The fair value of long-term
debt is estimated based on the quoted market prices for the same or similar
issues.

NRG has entered into three forward foreign currency exchange contracts
with a counterparty to hedge exposure to currency fluctuations to the extent
permissible by hedge accounting requirements. Pursuant to these contracts,
transactions have been executed that are designed to protect the economic
value in U.S. dollars of NRG's equity investments, denominated in Australian
dollars and German deutsche marks (DM). NRG's forward currency exchange
contracts, in the notional amount of $93 million, hedge approximately $94
million of foreign currency denominated investments at December 31, 1994.
These foreign currency exchange contracts are not reflected in NRG's balance
sheet. The contracts do require cash collateral which was $6.7 million at
December 31, 1994 and is included in restricted cash on NRG's balance sheet.
The contracts terminate in 2004 and require foreign currency interest
payments by either party during each year of the contract. If the contracts
had been terminated at December 31, 1994, $4.3 million would have been
payable by NRG for currency exchange rate changes to date. Management
believes NRG's exposure to credit risk due to nonperformance by the
counterparty to its forward exchange contracts is not significant, based on
the investment grade rating of the counterparty.

13. COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Company has noncancelable operating leases for office space. The
leases require the company to pay certain annual operating costs, including
maintenance, insurance and real estate taxes. Rental expense under these
operating leases was $178 in 1994 (thousands of dollars). Future minimum
lease commitments under these leases for the years ended after December 31,
1994 are as follows:

(THOUSANDS OF
DOLLARS)

1995..... $221
1996..... 246
1997..... 131
--------------------
Total... $598
====================

Financial Guarantees

Certain of the partnerships in which NRG is an equity investor have loan
agreements and debt outstanding which contain restrictive covenants. In the
event that certain covenants are not met, NRG has guaranteed the contribution
of $3.8 million of additional equity. No contributions of additional equity
were necessary during 1994.

F-40

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. COMMITMENTS AND CONTINGENCIES (Continued)

Capital Commitments

NRG is contractually committed to additional equity investments in an
existing German energy project. Such commitments are for approximately DM 36
million in 1995 and DM 35 million in 1996. The 1995 and 1996 commitments
would be approximately $23 million each year, based on exchange rates in
effect at December 31, 1994.

In addition, NRG is contractually committed to additional equity
investments of $20.6 million in the Scudder Latin American Trust for
Independent Power Energy Projects as of December 31, 1994.

14. SEGMENT REPORTING

ASIA OTHER CORPORATE/
1994 U.S. EUROPE PACIFIC AMERICAS OTHER TOTAL
- ------------------------------- ---------- --------- --------- ---------- -------------- ---------
(IN THOUSANDS)

Revenues from wholly-owned
operations..................... $ 63,970 $ 63,970
Equity in operating earnings
(losses) of unconsolidated
affiliates..................... (766) $19,340 $ 8,581 27,155
---------- --------- --------- ---------- -------------- ---------
Total operating revenues........ 63,204 19,340 8,581 91,125
Net income...................... 19,668 19,340 8,581 $(18,051)(1) 29,538
Assets reported on a
consolidated basis............. 122,087 34,380 (2) 156,467
Equity investments and loans to
affiliates..................... 116,073 33,389 70,641 220,103
---------- --------- --------- ---------- -------------- ---------
Total assets.................... $238,160 $33,389 $70,641 $ 34,380 $376,570

- ------------
(1) Includes all expenses not allocated to either consolidated operations
or equity investments. This includes general, administrative and
development expenses as well as other income (net), interest expense
and taxes.
(2) Includes cash, debt issuance costs and other items not directly related
to specific asset groups.

15. SUBSEQUENT EVENT

NRG, through wholly-owned subsidiaries, owns 45% of the San Joaquin Valley
Energy Partnership (SJVEP), which owns four plants located near Fresno,
California with a total capacity of 55 megawatts. Through February 1995, the
plants operated under long-term Standard Offer 4 (SO4) power sales contracts
with Pacific Gas and Electric (PG&E) which expire in 2017. On February 28,
1995, PG&E reached basic agreements with SJVEP to acquire the SO4 contracts.
The parties entered into a bridging agreement to cover the period until all
regulatory approvals are received for the transaction. The bridging agreement
required SJVEP to cease power deliveries to PG&E as of February 28, 1995. The
negotiated agreements will result in cost savings for PG&E customers as well
as economic benefits for SJVEP. The final impact of this transaction on the
financial results of NRG will not be known until the agreements have been
approved and all costs associated with the idling of the facilities are
known. It is expected that a one-time gain from the transaction will be
recorded in the first half of 1995. SJVEP will continue to own and maintain
the facilities and will explore all available options.

F-41

NRG ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

SEPTEMBER 30,
------------------------
1997 1996
------------ ----------
(THOUSANDS OF DOLLARS)

ASSETS
Current Assets:
Cash and cash equivalents ..................................... $ 19,294 $ 54,727
Restricted cash ............................................... 347 23,645
Accounts receivable-trade, less allowance for doubtful
accounts ..................................................... 14,138 12,587
Accounts receivable-affiliates ................................ 4,956 5,361
Current portion of notes receivable--affiliates ............... 11,587 4,109
Current portion of notes receivable ........................... 46,571 1,403
Income taxes receivable ....................................... 14,249 1,500
Inventory ..................................................... 2,624 2,367
Prepayments and other current assets .......................... 4,972 1,149
------------ ----------
TOTAL CURRENT ASSETS ........................................... 118,738 106,848
------------ ----------
Property, plant and equipment, at original cost:
In service .................................................... 215,576 170,673
Under construction ............................................ 26,191 16,916
------------ ----------
241,767 187,589
Less accumulated depreciation ................................. (76,852) (69,400)
------------ ----------
Net property, plant and equipment............................. 164,915 118,189
------------ ----------
Other Assets:
Investments in projects ....................................... 635,047 266,504
Capitalized project costs ..................................... 26,129 5,921
Notes receivable, less current portion--affiliates ........... 75,439 45,363
Intangible assets, net of accumulated amortization ........... 40,098 40,856
Debt issuance costs, net of accumulated amortization ......... 6,450 2,780
------------ ----------
Total other assets ........................................... 783,163 361,424
------------ ----------
TOTAL ASSETS ................................................... $1,066,816 $586,461
============ ==========

See accompanying notes.

F-42

NRG ENERGY, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(UNAUDITED)

SEPTEMBER 30,
-----------------------
1997 1996
------------ ---------
(THOUSANDS OF DOLLARS)

LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term debt ................. $ 43,311 $ 3,892
Accounts payable--trade ........................... 2,841 4,405
Accrued income taxes .............................. 8,586 --
Accrued property and sales taxes .................. 2,961 2,827
Accrued salaries, benefits and related costs ..... 8,991 5,880
Accrued interest .................................. 5,471 2,150
Other current liabilities ......................... 5,587 990
------------ ---------
TOTAL CURRENT LIABILITIES .......................... 77,748 20,144
Long-term debt, less current portion ............... 474,427 209,406
Deferred revenues .................................. 13,597 6,686
Deferred income taxes .............................. 16,042 14,650
Deferred investment tax credits .................... 1,662 1,917
Deferred compensation .............................. 2,061 1,646
------------ ---------
TOTAL LIABILITIES................................... 585,537 254,449
------------ ---------
Stockholder's Equity:
Common stock; $1 par value; 1,000 shares
authorized;
1,000 shares issued and outstanding .............. 1 1
Additional paid-in capital ........................ 431,374 271,013
Retained earnings ................................. 80,715 57,592
Currency translation adjustments .................. (30,811) 3,406
------------ ---------
TOTAL STOCKHOLDER'S EQUITY ......................... 481,279 332,012
------------ ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ........ $1,066,816 $586,461
============ =========

See accompanying notes.

F-43

NRG ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
(THOUSANDS OF DOLLARS)

Operating Revenues:
Revenues from wholly-owned operations ................... $ 65,081 $ 52,479
Equity in operating earnings of unconsolidated
affiliates ............................................. 17,759 19,375
---------- ----------
Total operating revenues ............................... 82,840 71,854
---------- ----------
Operating costs and expenses:
Cost of operations--wholly-owned operations ............. 32,863 26,858
Depreciation and amortization ........................... 7,096 6,300
General, administrative, and development ................ 28,402 26,599
---------- ----------
Total operating costs and expenses ..................... 68,361 59,757
---------- ----------
Operating income ......................................... 14,479 12,097
---------- ----------
Other income (expense):
Other income, net ....................................... 8,610 6,117
Interest expense ........................................ (19,815) (11,303)
---------- ----------
Total other income (expense) ........................... (11,205) (5,186)
---------- ----------
Income before income taxes ............................... 3,274 6,911
---------- ----------
Income taxes (benefits) .................................. (11,140) (4,358)
---------- ----------
Net Income................................................ $ 14,414 $ 11,269
========== ==========

See accompanying notes.

F-44

NRG ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
----------- ----------
(THOUSANDS OF DOLLARS)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................... $ 14,414 $ 11,269
Adjustments to reconcile net income to net cash provided (used)
by operating activities ........................................
Undistributed equity in operating
earnings of unconsolidated affiliates.......................... (2,662) (8,408)
Depreciation and amortization .................................. 7,096 6,300
Deferred income taxes and investment tax credits................ 7,245 5,332
Cash provided (used) by changes in certain working capital
items
Accounts receivable............................................ (14,138) (2,113)
Accounts receivable-affiliates................................. 7,105 (1,862)
Accrued income taxes........................................... 1,777 (11,475)
Inventory...................................................... (312) (556)
Prepayments and other current assets........................... (328) 595
Accounts payable-trade......................................... (1,602) (1,803)
Accrued property and sales taxes............................... 802 932
Accrued salaried, benefits and related costs................... 2,432 (739)
Accrued interest............................................... 745 450
Other current liabilities...................................... 1,163 544
Cash provided (used) by changes in other assets and liabilities 3,711 (868)
----------- ----------
Net cash provided (used) by operating activities ................. 27,448 (2,402)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in projects ......................................... (326,882) (53,403)
Changes in notes receivable ..................................... (59,195) (7,819)
Capital expenditures ............................................ (41,062) (11,422)
Cash from sale of project investment ............................ 6,655 --
Decrease (increase) in restricted cash .......................... 17,341 (13,872)
Cash distribution from project termination settlement .......... -- 15,671
Other, net ...................................................... 594 --
----------- ----------
Net cash used by investing activities ............................ (402,549) (70,845)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from parent ............................... 80,361 --
Proceeds from issuance of long-term debt ........................ 303,511 122,671
Principal payments on long-term debt ............................ (1,915) (1,736)
----------- ----------
Net cash provided by financing activities ........................ 381,957 120,935
----------- ----------
Net increase in cash and cash equivalents ........................ 6,856 47,688
----------- ----------
Cash and cash equivalents at beginning of period ................. 12,438 7,039
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................... $ 19,294 $ 54,727
=========== ==========

See accompanying notes.

F-45

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

NRG Energy, Inc. (the Company), a Delaware Corporation, was incorporated
on May 29, 1992, as a wholly-owned subsidiary of Northern States Power
Company (NSP). Beginning in 1989, the Company was doing business through its
predecessor companies, NRG Energy, Inc. and NRG Group, Inc., Minnesota
corporations which were merged into the Company subsequent to its
incorporation. The Company and its subsidiaries and affiliates develop,
build, acquire, own and operate nonregulated energy-related businesses.

In the opinion of management, the unaudited interim consolidated financial
information of the Company contains all adjustments, consisting of only those
of a recurring nature, necessary to present fairly the Company's financial
position and results of operations. All significant inter-company accounts,
transactions, and profits have been eliminated. These financial statements
are for interim periods and do not include all information normally provided
in annual financial statements and notes thereto for the year ended December
31, 1996 and should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 1996, contained
in the Company's 1996 Annual Report. The results of operation for the interim
periods are not necessarily indicative of the results that may be expected
for the full year.

2. RESTRICTED CASH

Restricted cash consists primarily of cash collateral required in
connection with foreign currency hedging activities and cash collateral for
letters of credit issued in relation to project development activities. At
September 30, 1997, the required levels of restricted cash were lower than
the same period in 1996 due to the change in the market value of the
Company's exchange swaps and the posting of an $8 million letter of credit
which replaced the collateral requirement.

3. PROPERTY, PLANT AND EQUIPMENT

The major classes of property, plant and equipment at September 30 were as
follows:

1997 1996
---------- ----------
(THOUSANDS OF DOLLARS)

Facilities and equipment, including construction work in progress
of $26,191 and $16,916 ............................................ $227,363 $174,221
Land and improvements .............................................. 10,398 10,398
Office furnishings and equipment ................................... 4,006 2,970
---------- ----------
Total property, plant and equipment .............................. 241,767 187,589
Accumulated depreciation ........................................... (76,852) (69,400)
---------- ----------
Net property, plant and equipment ................................ $164,915 $118,189
========== ==========

The primary contributors to the increased facilities and equipment is due
to increased work in process at NEO for the construction of its landfill gas
projects ($32 million), investments in NRG's MEC projects ($5 million),
construction at Millennium ($10 million) and the purchase of San Diego Power
& Cooling ($6 million).

4. BUSINESS ACQUISITIONS

On February 6, 1997, NRG signed a subscription agreement with Energy
Development Limited (EDL) to acquire up to 20% of common stock , and an
additional 15% of preference shares at AUS$2.20

F-46

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

4. BUSINESS ACQUISITIONS (Continued)

per share. EDL is an Australian company engaged exclusively in independent
power generation from landfill gas, coal seam methane and natural gas
(including latest technology combined cycle projects). EDL is the largest
generator of power from coal seam methane in the world. The company currently
operates over 200 MW of generation across five states and territories in of
Australia and has commenced the development of new projects in the United
Kingdom, Asia and New Zealand. On February 11, 1997 NRG made an initial
purchase of 7.2% (4.5 million shares) of common stock for AUS$9.9 million
(US$7.9 million). On September 24, 1997, NRG purchased an additional
10,109,670 shares of common stock of EDL for an aggregate purchase price of
AUS $22.2 million (US $16.1 million on that date), bringing NRG's ownership
level to 20% of the outstanding shares.

On December 19, 1996 NRG and Nordic Power Invest AB purchased 96.6% of
Bolivian Power Company Limited. On October 30, the Company sold a portion of
its investment and reduced its ownership to 48.3%.

In May 1997, the Company acquired a 25.37% interest in Loy Yang A for
approximately $257 million. Loy Yang A is a 2,000 MW brown coal fired thermal
power station and adjacent coal mine located in Victoria, Australia which the
State of Victoria sold as part of its privatization program. The power
station has four generating units, each with a 500 MW boiler and turbo
generator, which commenced commercial operation between July 1984 and
December 1988. In addition, the Company through its Loy Yang affiliate
manages the common infrastructure facilities that are located on the Loy Yang
site, the adjacent Loy Yang B 1,000 MW power station and several other nearby
power stations.

On June 25, 1997, the Company purchased San Diego Power & Cooling. The
purchase price was $6.7 million, including a note from the seller for $2.7
million.

In July 1997, the Company acquired a 50% interest in Cadillac Renewable
Energy, a 34 MW steam turbine power plant located in Cadillac, Michigan for
$1.9 million. Electricity from the plant is sold to Consumers Energy under a
long-term power purchase agreement.

In September 1997, Millennium Cogen, LLC, an NRG affiliate, entered into a
Construction and Term Loan Agreement to finance the construction of a 117 MW
cogeneration plant in Morris, Illinois. The Company has entered into a $22
million equity commitment and a $1.2 million guaranty of certain obligations
of Millennium Operation, Inc., an NRG affiliate that will operate the
project. The Company will have a 50% ownership interest that is estimated to
be operational by December 1998.

F-47

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

5. LONG-TERM DEBT

Long-term debt consists of the following at September 30:

1997 1996
---------- ---------
(THOUSANDS OF
DOLLARS)

NRG Energy, Inc. revolving credit facility, due March 17,
2000......................................................... $ 38,000 $ --
NRG Energy Center, Inc. Senior Secured Notes Series
due June 15, 2013, 7.31% .................................... 75,070 77,591
Note payable to NSP, due December 1, 1995-2006
5.40%-6.75% ................................................. 8,406 8,957
Millennium Cogen, LLC, due May 2004, LIBOR + 1%-1.25% ....... 16,901 --
NRG Sunnyside, Inc. note payable, due December 31, 1997
10.00% ...................................................... 1,750 1,750
NRG San Diego, Inc., due June 25, 2003
8.0% ........................................................ 2,611 --
NRG Energy Senior Notes, due February 1, 2006
7.625% ...................................................... 125,000 125,000
NRG Energy Senior Notes, due 2007
7.5% ........................................................ 250,000 --
---------- ---------
517,738 213,298
Less current maturities ...................................... (43,311) (3,892)
---------- ---------
Total ...................................................... $474,427 $209,406
========== =========

The note payable to NSP relates to long-term debt assumed by the Company
in connection with the transfer of ownership of an RDF processing plant by
NSP to the Company in 1993.

The NRG Sunnyside, Inc. note payable was issued in connection with the
purchase of an equity interest in a waste-coal project in 1994.

The NRG Energy Senior Notes due 2006, were issued in January 1996, are
unsecured and require semi-annual interest payments on February 1 and August
1.

The NRG Energy Center Notes due 2007 were issued in June 1997, are
unsecured and require semi-annual interest payments on June 15 and December
15.

The NRG San Diego, Inc. Note was issued in June 1997 in conjunction with
the acquisition of San Diego Power and Cooling Company.

The NRG Energy revolving credit facility that was issued in March 1997, is
unsecured and will be used for general corporate purposes, including letters
of credit and interim funding for NRG project investments.

The Millennium Cogen Notes represent a construction and term loan
agreement up to $96.0 million which is secured by the projects' asset.
Payment on principal and interest is not required until the end of the term
loan agreement.

F-48

NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

5. LONG-TERM DEBT (Continued)

Annual maturities of long-term debt for the years ending after September
30, 1997 are as follows:

(THOUSANDS OF
DOLLARS)

1997 remaining $ 43,311
1998 ........... 3,903
1999 ........... 4,149
2000 ........... 4,409
2001 ........... 4,728
2002 ........... 5,023
Thereafter ..... 452,215
--------------------
Total ........ $517,738
====================

6. INCOME TAXES

NRG and its parent, NSP, have entered into a federal and state income tax
sharing agreement relative to the filing of consolidated federal and state
income tax returns. The agreement provides, among other things, that (1) if
NRG, along with its subsidiaries, is in a taxable income position, NRG will
be currently charged with an amount equivalent to its federal and state
income tax computed as if the group had actually filed separate federal and
state returns, and (2) if NRG, along with its subsidiaries, is in a tax loss
position, NRG will be currently reimbursed to the extent its combined losses
are utilized in a consolidated return, and (3) if NRG, along with its
subsidiaries, generates tax credits, NRG will be currently reimbursed to the
extent its tax credits are utilized in a consolidated return.

7. ADDITIONAL PAID IN CAPITAL

NSP provided NRG with additional capital contributions of $80 million in
December 1996 (for use in the Cobee acquisition), $20 million in February
1997 (for investment in various projects including EDL), and $60.9 in May
1997 (for the Loy Yang acquisition).

8. SUBSEQUENT EVENTS

On November 4, 1997, the Company acquired 100% of the outstanding shares
of Pacific Generation Company for $151.3 million. Pacific Generation has
ownership interest in 11 projects with a total capacity of 737 MW, with
operations responsibility for 312 MW and net ownership interests of 166 MW.
The acquisition was financed primarily through the use of the Company's
revolving credit facility.

On November 21, 1997, the Company with its 50/50 partner Destec, signed an
Asset Sale Agreement to acquire the El Segundo plant, a 1020 MW facility,
from Southern California Edison for $87.75 million. The financial closing on
the facility is set for the first week of January 1998.

F-49

NRG ENERGY, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
(UNAUDITED)

PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 ADJUSTMENTS (1) 1996
-------------- --------------- --------------
(THOUSANDS OF DOLLARS)

Operating Revenues:
Revenues from wholly-owned operations ...... $ 71,649 $ -- $ 71,649
Equity in operating earnings (losses) of
unconsolidated affiliates .................. 32,815 (18,121) 14,694
-------------- --------------- --------------
Total operating revenues ................... 104,464 (18,121) 86,343
-------------- --------------- --------------
Operating Costs and Expenses:
Cost of operations--wholly-owned operations 36,562 -- 36,562
Depreciation and amortization ............... 8,378 -- 8,378
General, administrative, and development ... 39,248 -- 39,248
-------------- --------------- --------------
Total operating costs and expenses ........ 84,188 84,188
-------------- --------------- --------------
Operating Income ............................. 20,276 (18,121) 2,155
-------------- --------------- --------------
Other Income (Expense):
Other income, net ........................... 9,477 26,264 (2) 35,741
Interest expense ............................ (15,430) (18,750)(3) (34,180)
-------------- --------------- --------------
Total other income (expense) ................. (5,953) (18,750) (24,703)
-------------- --------------- --------------
Income (loss) before Income Taxes ............ 14,323 (10,607) 3,716
-------------- --------------- --------------
Income Taxes ................................. 5,655 4,373 (4) 10,028
-------------- --------------- --------------
Net Income (loss) ............................ $ 19,978 $ (6,234) $ 13,744
============== =============== ==============

- ------------
(1) Adjustments were derived from Loy Yang's audited financial statements
for the fiscal years ended June 30, 1996 and June 30, 1997 to conform
with NRG's December 31, 1996 year-end.

(2) Includes interest income and operating and maintenance fees derived
from the Loy Yang project.

(3) Represents accrued interest on $250 million principal amount of the
Old Notes for twelve months at a rate of 7.5% per annum.

(4) Net tax benefit derived from interest expense on the Old Notes.

F-50

NRG ENERGY, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
(UNAUDITED)

PRO FORMA
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 ADJUSTMENTS (1) 1997
--------------- --------------- ---------------
(THOUSANDS OF DOLLARS)

Operating Revenues:
Revenues from wholly-owned operations ....... $ 65,081 $ -- $ 65,081
Equity in operating earnings of
unconsolidated affiliates ................... 17,759 (7,945 (2) 9,814
--------------- --------------- ---------------
Total operating revenues .................... 82,840 (7,945) 74,895
--------------- --------------- ---------------
Operating Costs and Expenses ..................
Cost of operations--wholly-owned operations . 32,863 -- 32,863
Depreciation and amortization ................ 7,096 -- 7,096
General, administrative, and development .... 28,402 -- 28,402
--------------- --------------- ---------------
Total operating costs and expenses ......... 68,361 -- 68,361
--------------- --------------- ---------------
Operating Income .............................. 14,479 (7,945) 6,534
--------------- --------------- ---------------
Other Income (Expense).........................
Other income, net ............................ 8,610 8,525 (3) 17,135
Interest expense ............................. (19,815) (6,883)(4) (26,698)
--------------- --------------- ---------------
Total other income (expense) .................. (11,205) 1,642 (9,563)
--------------- --------------- ---------------
Income (loss) before Income Taxes ............. 3,274 (6,303) (3,029)
--------------- --------------- ---------------
Income Taxes .................................. 11,140 1,605 (5) 12,745
--------------- --------------- ---------------
Net Income .................................... $ 14,414 $(4,698) $ 9,716
=============== =============== ===============

- ------------
(1) Adjustments were derived from Loy Yang's audited financial statements
for the fiscal year ended June 30, 1997.
(2) Represents estimated equity earnings from Loy Yang project until May
12, 1997 based upon historical data (January 1, 1997-May 12, 1997)
adjusted for differences due to acquisition accounting primarily
depreciation charges, finance charges and adjustments to income tax
expense. Equity earnings of Loy Yang A from May 13 until September 30
were $1,393. This amount is summarized in the Historical column of
Equity in earnings of unconsolidated affiliates.
(3) Includes interest income and operating and maintenance fees derived
from the Loy Yang project.
(4) Represents accrued interest on $250 million principal amount of the Old
Notes until May 12 at a rate of 7.5% per annum. Interest of $7,140 on
the Old Notes from May 13 until September 30 is in the Historical
column.
(5) Net tax benefit derived from expense on the Old Notes.

F-51

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, 1996, 1995 and 1994, and the related statements of income and
of cash flows for each of the years in the three year period ended December
31, 1996. 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, 1996, 1995 and 1994 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 21, 1997
Amsterdam, Netherlands

F-52

SUNSHINE STATE POWER BV
BALANCE SHEET AT DECEMBER 31, 1996, 1995 AND 1994
(BEFORE APPROPRIATION OF THE RESULT FOR THE YEAR)
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)

1996 1995 1994
AUD'000 AUD'000 AUD'000
--------- --------- ---------

ASSETS
FIXED ASSETS
Intangible fixed assets ............ 8,397 8,868 9,338
Tangible fixed assets .............. 165,173 161,355 153,662
--------- --------- ---------
173,570 170,223 163,000
CURRENT ASSETS
Stocks.............................. 3,536 1,851 1,845
Receivables ........................ 4,877 5,835 4,366
Cash and bank balances ............. 11,898 11,460 10,425
--------- --------- ---------
20,311 19,146 16,636
--------- --------- ---------
TOTAL ASSETS ....................... 193,881 189,369 179,636
--------- --------- ---------
SHAREHOLDERS' EQUITY AND
LIABILITIES
SHAREHOLDERS' EQUITY
Issued share capital ............... 30 30 30
Retained earnings .................. 15,014 7,712 --
Result for the year................. 9,133 7,302 7,712
--------- --------- ---------
24,177 15,044 7,742
--------- --------- ---------
Provisions ......................... 14,618 9,309 4,496
Long-term liabilities .............. 146,817 156,097 158,814
Current liabilities ................ 8,269 8,919 8,584
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY
AND LIABILITIES ................... 193,881 189,369 179,636
--------- --------- ---------

The accompanying notes form an integral part of the annual accounts.

F-53

SUNSHINE STATE POWER BV
STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)

1996 1995 1994
AUD'000 AUD'000 AUD'000
--------- --------- ---------

Net turnover
Queensland Transmission & Supply Corporation .. 31,245 33,250 23,725
Boyne Smelters Limited ......................... 21,548 21,378 13,544
--------- --------- ---------
TOTAL ........................................... 52,793 54,628 37,269
Cost of turnover
Non-fuel ....................................... 9,179 8,163 6,803
Fuel ........................................... 14,562 14,851 11,345
--------- --------- ---------
TOTAL ........................................... 23,741 23,014 18,148
--------- --------- ---------
GROSS PROFIT ON TURNOVER ........................ 29,052 31,614 19,121
--------- --------- ---------
Operating expenses ............................. 1,719 3,000 741
Depreciation and amortization expense ......... 6,041 5,539 3,854
--------- --------- ---------
TOTAL EXPENSES .................................. 7,760 8,539 4,595
--------- --------- ---------
NET PROFIT ON TURNOVER .......................... 21,292 23,075 14,526
--------- --------- ---------
Interest expense ................................ 10,233 11,100 6,518
Interest income ................................. (770) (718) (514)
Foreign exchange (gain)/loss .................... (2,527) 744 (2,989)
Disposal of assets loss ......................... 86 --
--------- --------- ---------
NET FINANCIAL EXPENSE ........................... 7,022 11,126 3,015
Result from ordinary operations before taxation 14,270 11,949 11,511
Taxation ........................................ 5,137 4,647 3,799
--------- --------- ---------
NET RESULT ...................................... 9,133 7,302 7,712
--------- --------- ---------

The accompanying notes form an integral part of the annual accounts.

F-54

SUNSHINE STATE POWER BV
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)

1996 1995 1994
AUD'000 AUD'000 AUD'000
--------- ---------- -----------

Cash flows from operating activities
Net result ....................................... 9,133 7,302 7,712
Adjustments to reconcile net result to net cash
provided by operating activities:
Depreciation and amortization ................... 6,041 5,539 3,854
Deferred income taxes ........................... 5,137 4,647 3,799
Foreign exchange loss/(gain) .................... (2,527) 744 (2,989)
Loss on sale of fixed assets..................... 86 --
Changes in operating assets and liabilities:
Stocks .......................................... (1,685) (6) 484
Receivables ..................................... 958 (1,469) (4,338)
Provisions ...................................... 172 166 125
Current liabilities ............................. (1,088) (102) 4,546
--------- ---------- -----------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 16,227 16,821 13,193
--------- ---------- -----------
Cash flows from investing activities
Purchases of tangible fixed assets .............. (9,495) (12,762) (306)
Proceeds from sale of fixed assets .............. 21 -- --
Acquisition of 20% of the Gladstone Power
Station......................................... -- -- (168,332)
--------- ---------- -----------
NET CASH FLOWS USED BY INVESTING ACTIVITIES .... (9,474) (12,762) (168,638)
Cash flows from financing activities
Proceeds (repayments) of notes payable ......... (1,840) 1,014 172,933
Proceeds from issuance of share capital ........ 30
Repayments of long-term debt .................... (4,475) (4,038) (7,093)
--------- ---------- -----------
NET CASH FLOWS (USED) PROVIDED BY FINANCING
ACTIVITIES ....................................... (6,315) (3,024) 165,870
--------- ---------- -----------
NET INCREASE IN CASH AND BANK BALANCES ........... 438 1,035 10,425
--------- ---------- -----------
Cash and bank balances
Beginning of year ................................ 11,460 10,425 --
--------- ---------- -----------
End of year ...................................... 11,898 11,460 10,425
--------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR
INTEREST ......................................... 10,382 11,043 5,617
--------- ---------- -----------

The accompanying notes form an integral part of the annual accounts.

F-55

SUNSHINE STATE POWER BV
NOTES TO THE ANNUAL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)

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, 1996, 1995
and 1994.

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.

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.

F-56

SUNSHINE STATE POWER BV
NOTES TO THE ANNUAL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED)
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)
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
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:

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

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.

F-57

SUNSHINE STATE POWER BV
NOTES TO THE ANNUAL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED)
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)
3. INTANGIBLE FIXED ASSETS

The movements in the intangible fixed assets are summarized as follows:

PROJECT
DEVELOPMENT FINANCING
EXPENDITURES COSTS TOTAL
AUD'000 AUD'000 AUD'000
-------------- ----------- ---------

COST
Balance at December 31, 1993 .............................. -- -- --
Company's share of fixed assets acquired with the
Gladstone Power Station acquisition ...................... 6,984 2,707 9,691
-------------- ----------- ---------
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
ACCUMULATED AMORTIZATION
Balance at December 31, 1993 .............................. -- -- --
Amortization for the year ended 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)
-------------- ----------- ---------
Balance at December 31, 1996 .............................. (549) (745) (1,294)
-------------- ----------- ---------
Net book value at December 31, 1996 ....................... 6,435 1,962 8,397
-------------- ----------- ---------

F-58

SUNSHINE STATE POWER BV
NOTES TO THE ANNUAL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED)
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)

4. TANGIBLE FIXED ASSETS

The movements in the tangible fixed assets are summarized as follows:

OTHER
SITE ROADS GENERATORS, COAL OPERATING
AND SYSTEMS, HANDING FIXED
LAND PREPARATION STACKS PLANT ASSETS TOTAL
--------- ------------- ------------- --------- ----------- ----------
AUD'000 AUD'000 AUD'000 AUD'000 AUD'000 AUD'000

COST
Balance at November 11, 1993 ........... -- -- -- -- -- --
Company's share of assets acquired with
Gladstone Power Station acquisition .. 211 2,443 141,118 6,294 1,613 151,679
Additions ............................. -- -- 7 -- 299 306
--------- ------------- ------------- --------- ----------- ----------
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
--------- ------------- ------------- --------- ----------- ----------
ACCUMULATED DEPRECIATION
Balance at November 11, 1993 ........... -- -- -- -- -- --
Charge for the period .................. -- (53) (2,940) (331) (177) (3,501)
--------- ------------- ------------- --------- ----------- ----------
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)
--------- ------------- ------------- --------- ----------- ----------
Net book value at December 31, 1996 ... 216 2,594 150,226 8,280 1,792 163,108
--------- ------------- ------------- --------- ----------- ----------
Construction in progress at
December 31, 1996 (construction in
progress at December 31, 1995 and 1994
was $6,217 and $5,178, respectively) . 2,065
----------
Net tangible fixed assets at
December 31, 1996 .................... 165,173
----------

5. STOCKS

DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
-------------- -------------- --------------
AUD'000 AUD'000 AUD'000

Coal ................... 2,318 656 774
Fuel oils .............. 154 202 120
Chemicals .............. 12 13 26
Spares and consumables 1,052 980 925
-------------- -------------- --------------
3,536 1,851 1,845
-------------- -------------- --------------

F-59

SUNSHINE STATE POWER BV
NOTES TO THE ANNUAL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED)
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)
6. RECEIVABLES

DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
-------------- -------------- --------------
AUD'000 AUD'000 AUD'000

Trade debtors 4,605 5,501 4,003
Prepayments .. 272 334 363
-------------- -------------- --------------
4,877 5,835 4,366
-------------- -------------- --------------

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, 1996, 1995 and
1994, the restricted cash and bank balances totaled $7,000,000, $7,500,000
and $6,300,000, 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, 1996 and 1995. 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

1996 1995
--------- ---------
AUD'000 AUD'000

Balance at January 1 ................ 7,712 --
Appropriation of prior years result 7,302 7,712
--------- ---------
Balance at December 31 .............. 15,014 7,712
--------- ---------

10. RESULT FOR THE PERIOD

AUD'000

Balance at November 11, 1993 ...................... --
Net result for the period ended 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
---------
Balance at December 31, 1996 ...................... 9,133
---------

F-60

SUNSHINE STATE POWER BV
NOTES TO THE ANNUAL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED)
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)
11. PROVISIONS

EMPLOYEE DEFERRED
PROVISIONS TAX TOTAL
------------ ---------- ---------
AUD'000 AUD'000 AUD'000

Balance at November 11, 1993 ....... -- -- --
Company's share assumed with the
Gladstone Power Station acquisition 572 -- 572
Charged/(released) to income ....... 125 3,799 3,924
------------ ---------- ---------
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
------------ ---------- ---------

Approximately $ 618 (AUD'000) of the employee provisions are current and
expected to be paid during 1997.

12. LONG-TERM LIABILITIES

Secured long-term debt due to third parties

DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
-------------- -------------- --------------
AUD'000 AUD'000 AUD'000

Secured -with banks . 108,821 113,733 118,208
-------------- -------------- --------------

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, 1996.

The bank long-term debt is repayable as follows (in AUD'000):

1997 ..................... 4,913
1998 ..................... 5,437
1999 ..................... 5,975
2000 ..................... 6,600
2001 ..................... 7,275
Thereafter ............... 83,534
--------
113,734
--------

The bank long-term debt is secured by the Company's ownership interest in
the Gladstone Power Station Joint Venture.

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. During 1996, the Company repaid $1,822 and
$18 to NRGenerating International BV and Gunwale BV, respectively. There were
no repayments made during 1995. During 1994, the Company repaid $5,152 and
$53 to NRGenerating International BV and Gunwale BV, respectively.

F-61

SUNSHINE STATE POWER BV
NOTES TO THE ANNUAL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED)
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)

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 $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

DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
-------------- -------------- --------------
AUD'000 AUD'000 AUD'000

Current installments of bank long-term debt 4,913 4,475 4,038
Trade creditors/suppliers ................... 776 1,579 1,370
Accrued coal/rail costs ..................... 1,152 1,712 1,984
Accrued interest ............................ 800 959 901
Other accrued expenses ...................... 628 194 291
-------------- -------------- --------------
8,269 8,919 8,584
-------------- -------------- --------------

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 Ply Ltd, which is ultimately a wholly-owned subsidiary of NRG Energy
Inc. NRG Gladstone Operating Services Ply 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,
1996, 1995 and 1994, the Company paid NRG Gladstone Operating Services Pty
Ltd approximately $288, $331 and $194 (AUD'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 1966 was approximately 471. 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, 1996, 1995 and 1994, none of the
directors received remuneration for their services as directors of the
Company.

F-62

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, 1996, 1995 and 1994, and the related statements of
income and of cash flows for each of the years in the three year period ended
December 31, 1996. 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.

PRICE WATERHOUSE NEDERLAND BV
March 21, 1997
Amsterdam, Netherlands

F-63

SUNSHINE STATE POWER (NO. 2) BV
BALANCE SHEET AT DECEMBER 31, 1996, 1995 AND 1994
(BEFORE APPROPRIATION OF THE RESULT FOR THE YEAR)
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)

1996 1995 1994
AUD'000 AUD'000 AUD'000
--------- --------- ---------

ASSETS
FIXED ASSETS
Intangible fixed assets ............ 7,348 7,759 8,171
Tangible fixed assets............... 144,524 141,183 134,452
--------- --------- ---------
151,872 148,942 142,623
CURRENT ASSETS
Stocks ............................. 3,093 1,620 1,614
Receivables ........................ 4,267 5,106 3,869
Cash and bank balances ............. 10,416 9,953 9,055
--------- --------- ---------
17,776 16,679 14,538
--------- --------- ---------
TOTAL ASSETS ....................... 169,648 165,621 157,161
SHAREHOLDERS' EQUITY AND
LIABILITIES
SHAREHOLDERS' EQUITY
Issued share capital ............... 30 30 30
Retained earnings .................. 13,158 6,748 --
Result for the year ................ 7,950 6,410 6,748
--------- --------- ---------
21,138 13,188 6,778
--------- --------- ---------
Provisions ......................... 12,779 8,155 3,933
Long-term liabilities .............. 128,472 136,515 138,939
Current liabilities ................ 7,259 7,763 7,511
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY AND
LIABILITIES ....................... 169,648 165,621 157,161
========= ========= =========

The accompanying notes form an integral part of the annual accounts.

F-64

SUNSHINE STATE POWER (NO. 2) BV

STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD ENDED DECEMBER 31, 1994
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)

1996 1995 1994
AUD'000 AUD'000 AUD'000
--------- --------- ---------

Net turnover
Queensland Electricity Commission .............. 27,340 29,094 20,759
Boyne Smelters Limited ......................... 18,854 18,706 11,851
--------- --------- ---------
TOTAL ........................................... 46,194 47,800 32,610
Cost of turnover
Non-fuel ....................................... 8,031 7,143 5,953
Fuel ........................................... 12,742 12,995 9,926
--------- --------- ---------
TOTAL ........................................... 20,773 20,138 15,879
--------- --------- ---------
GROSS PROFIT ON TURNOVER ........................ 25,421 27,662 16,731
Operating expenses .............................. 1,509 2,632 646
Depreciation and amortization expense ........... 5,285 4,846 3,373
--------- --------- ---------
TOTAL EXPENSES .................................. 6,794 7,478 4,019
--------- --------- ---------
NET PROFIT ON TURNOVER .......................... 18,627 20,184 12,712
Interest expense ................................ 8,954 9,713 5,704
Interest income ................................. (668) (626) (449)
Foreign exchange (gain)/loss .................... (2,157) 609 (2,614)
Disposal of assets loss ......................... 76 --
--------- --------- ---------
NET FINANCIAL EXPENSE ........................... 6,205 9,696 2,641
--------- --------- ---------
Result from ordinary operations before taxation 12,422 10,488 10,071
Taxation ........................................ 4,472 4,078 3,323
--------- --------- ---------
NET RESULT ...................................... 7,950 6,410 6,748
--------- --------- ---------

The accompanying notes form an integral part of the annual accounts.

F-65

SUNSHINE STATE POWER (NO. 2) BV

STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD ENDED DECEMBER 31, 1994
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)

1996 1995 1994
AUD'000 AUD'000 AUD'000
--------- ---------- -----------

Cash flows from operating activities
Net result ................................................ 7,950 6,410 6,748
Adjustments to reconcile net result to net cash provided
by operating activities:
Depreciation and amortization ............................ 5,285 4,846 3,373
Deferred income taxes .................................... 4,472 4,078 3,323
Foreign exchange loss/(gain) ............................. (2,157) 609 (2,614)
Loss on sale of fixed assets.............................. 76 --
Changes in operating assets and liabilities:
Stocks ................................................... (1,473) (6) 423
Receivables .............................................. 839 (1,237) (3,845)
Provisions ............................................... 152 144 110
Current liabilities ...................................... (886) (131) 3,978
--------- ---------- -----------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES ......... 14,258 14,713 11,496
--------- ---------- -----------
Cash flows from investing activities:
Purchases of tangible fixed assets ....................... (8,308) (11,165) (268)
Proceeds from sale of fixed assets ....................... 17 -- --
--------- ---------- -----------
Acquisition of 20% of the Gladstone Power Station ....... -- -- (147,288)
NET CASH FLOWS USED BY INVESTING ACTIVITIES............... (8,291) (11,165) (147,556)
--------- ---------- -----------
Cash flows from financing activities:
Proceeds (repayments) of notes payable ................... (1,588) 883 151,316
Proceeds from issuance of share capital .................. 30
Repayments of long-term debt ............................. (3,916) (3,533) (6,231)
--------- ---------- -----------
NET CASH FLOWS (USED) BY FINANCING ACTIVITIES ........... (5,504) (2,650) 145,115
--------- ---------- -----------
NET INCREASE IN CASH AND BANK BALANCES .................... 463 898 9,055
--------- ---------- -----------
Cash and bank balances
Beginning of year ......................................... 9,953 9,055 --
--------- ---------- -----------
End of year ............................................... 10,416 9,953 9,055
--------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST ....... 9,084 9,667 4,916
--------- ---------- -----------

The accompanying notes form an integral part of the annual accounts.

F-66

SUNSHINE STATE POWER (NO. 2) BV

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS)

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,
1996 and 1995 and period ended December 31, 1994.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

Unless otherwise stated assets and liabilities are carried at nominal
value.

BASIS OF PREPARATION

FOREIGN CURRENCIES

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.

F-67

SUNSHINE STATE POWER (NO. 2) BV

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (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:

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

STOCKS

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.

F-68

SUNSHINE STATE POWER (NO. 2) BV
NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED)

3. INTANGIBLE FIXED ASSETS

The movements in the intangible fixed assets are summarized as follows:

PROJECT
DEVELOPMENT FINANCING
EXPENDITURES COSTS TOTAL
-------------- ----------- ---------
AUD'000 AUD'000 AUD'000

COST
Balance at February 24, 1994 ...................... -- -- --
Company's share of fixed assets acquired with
Gladstone Power Station acquisition .............. 6,111 2,369 8,480
-------------- ----------- ---------
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
-------------- ----------- ---------
ACCUMULATED AMORTIZATION
Balance at February 24, 1994....................... -- -- --
Amortization for the period ended 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)
-------------- ----------- ---------
Balance at December 31, 1996 ...................... (480) (652) (1,132)
-------------- ----------- ---------
Net book value at December 31, 1996 ............... 5,631 1,717 7,348
-------------- ----------- ---------

F-69

SUNSHINE STATE POWER (NO. 2) BV

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED)

4. TANGIBLE FIXED ASSETS

The movements in the tangible fixed assets are summarized as follows:

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 February 24, 1994 ............. -- -- -- -- -- --
Company's share of assets
acquired with Gladstone Power
Station acquisition ..................... 184 2,138 123,476 5,508 1,411 132,717
Other additions .......................... -- -- 6 -- 262 268
--------- ------------- ------------- ---------- ----------- ----------
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
ACCUMULATED DEPRECIATION
Balance at February 24, 1994 ............. -- -- -- -- --
Charge for the period .................... (46) (2,571) (292) (155) (3,064)
------------- ------------- ---------- ----------- ----------
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)
------------- ------------- ---------- ----------- ----------
Net book value at December 31, 1996 ..... 189 2,270 131,447 7,243 1,568 142,717
Construction in progress at December 31,
1996 (construction in progress at
December 31, 1995 and 1994 was $5,440
and $4,531, respectively) ............... 1,807
----------
Net tangible fixed assets at December 31,
1996 .................................... 144,524
----------

5. STOCKS

DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
-------------- -------------- --------------
AUD'000 AUD'000 AUD'000

Coal ................... 2,028 574 678
Fuel oils .............. 135 177 105
Chemicals .............. 10 11 23
Spares and consumables 920 858 808
-------------- -------------- --------------
3,093 1,620 1,614
-------------- -------------- --------------

F-70

SUNSHINE STATE POWER (NO. 2) BV

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED)

6. RECEIVABLES

DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
-------------- -------------- --------------
AUD'000 AUD'000 AUD'000

Trade debtors 4,030 4,814 3,503
Prepayments .. 237 292 366
-------------- -------------- --------------
4,267 5,106 3,869
-------------- -------------- --------------

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, 1996, 1995 and
1994, the restricted cash and bank balances totaled $6,100,000, $6,500,000
and $5,500,000, 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, 1996 and 1995. 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

1996 1995
--------- ---------
AUD'000 AUD'000

Balance at January 1 ................ 6,748 --
Appropriation of prior years result 6,410 6,748
--------- ---------
Balance at December 31 .............. 13,158 6,748
--------- ---------

10. RESULT FOR THE PERIOD

AUD'000
---------

Balance at February 24, 1994 ...................... --
Net result for the period ended 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
---------
Balance at December 31, 1996 ...................... 7,950
---------

F-71

SUNSHINE STATE POWER (NO. 2) BV

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED)

11. PROVISIONS

EMPLOYEE PROVISIONS DEFERRED TAX TOTAL
------------------- -------------- ---------
AUD'000 AUD'000 AUD'000

Balance at February 24, 1994 .............. -- -- --
Company's share assumed with the Gladstone
Power Station acquisition ................ 500 -- 500
Charged/(released) to income .............. 110 3,323 3,433
------------------- -------------- ---------
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
------------------- -------------- ---------

Approximately $541 (AUD'000) of the employee provisions are current and
expected to be paid during 1997.

12. LONG-TERM LIABILITIES

Secured long-term debt due to third parties

DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
-------------- -------------- --------------
AUD'000 AUD'000 AUD'000

Secured--with banks . 95,218 99,516 103,432
-------------- -------------- --------------

The bank long-term debt is repayable as follows (in AUD'000):

1997 ..................... 4,298
1998 ..................... 4,758
1999 ..................... 5,228
2000 ..................... 5,775
2001 ..................... 6,366
Thereafter ............... 73,091
--------
99,516
--------

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. During 1996, the Company repaid $1,572 and
$16 to NRGenerating International BV and Gunwale BV, respectively. There were
no repayments made during 1995. During 1994, the

F-72

SUNSHINE STATE POWER (NO. 2) BV

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED)

Company repaid $4,533 and $46 to NRGenerating International BV and Gunwale
BV, respectively. 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 $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

DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
-------------- -------------- --------------
AUD'000 AUD'000 AUD'000

Current installments of bank long-term debt 4,298 3,916 3,533
Trade creditors/suppliers ................... 696 1,345 1,199
Accrued coal/rail costs ..................... 1,008 1,498 1,736
Accrued interest ............................ 700 834 788
Other accrued expenses ...................... 557 170 255
-------------- -------------- --------------
7,259 7,763 7,511
-------------- -------------- --------------

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 Ply Ltd, which is ultimately a wholly-owned subsidiary of NRG Energy
Inc. NRG Gladstone Operating Services Ply 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,
1996, 1995 and 1994, the Company paid NRG Gladstone Operating Services Pty
Ltd approximately $252, $289 and $170 (A$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 1996 was approximately 471. 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, 1996, 1995 and 1994, none of the
directors received remuneration for their services as directors of the
Company.

F-73

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)

ASSETS 1996
------------

CURRENT ASSETS:
Cash and cash equivalents ................ $2,270,941
Accounts receivable ...................... 125,319
Fuel inventory ........................... 48,069
Receivable from affiliates ............... 26,299
Prepaid/Other ............................ 82,257
------------
Total current assets .................... 2,552,885
Property, plant, and equipment, net ..... 4,964,030
------------
Total Assets .............................. $7,516,915
============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................... $ 56,983
Accrued liabilities ...................... 1,629,878
------------
Total current liabilities ............... 1,686,861
Commitments and Contingencies (see Note 4)
Partners' equity .......................... 5,830,054
------------
Total liabilities and Partners' equity ... $7,516,915
============

The accompanying notes are an integral part of the financial statements.

F-74

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)

REVENUE: 1996
-------------

Electricity sales........... $ --
Costs and expenses:
Operating .................. 855,601
General and administrative 532,943
-------------
Total costs and expenses . 1,388,544
-------------
Operating loss ............ (1,388,544)
Interest Income ............. 294,168
Other Income (Note 6) ....... 5,309,304
-------------
Total Other Income .......... 5,603,472
-------------
Net Income .................. $ 4,214,928
=============

The accompanying notes are an integral part of the financial statements.

F-75

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENT OF PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)

Partners' equity, December 31, 1995 ........................... $ 52,135,092
Net income for the year ended December 31, 1996 ............... 4,214,928
Partnership distributions for the year ended December 31, 1996 (50,519,966)
--------------
Partners' equity, December 31, 1996 ........................... $ 5,830,054
==============

The accompanying notes are an integral part of the financial statements.

F-76

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)

1996
--------------

Cash flows from operating activities:
Net income....................................... $ 4,214,928
Adjustments to reconcile net income to net cash:
provided by operating activities:
Change in assets and liabilities:
Increase in accounts receivable .............. (63,001)
Decrease in receivable from PG&E ............. 52,050,216
Decrease in inventory ........................ 75,960
Decrease in prepaid/other assets ............. 50,628
Decrease in due from affiliates .............. 2,337
Decrease in accounts payable/book overdraft . (8,610)
Decrease in accrued liabilities .............. (6,689,178)
--------------
Net cash provided by operating activities .. $ 49,633,280
--------------
Cash flows from investing activities:
Sale and maturities of short-term investments .. 3,756,078
--------------
Net cash provided by investing activities .. 3,756,078
--------------
Cash flows from financing activities:
Principal payments on long-term debt ............ (598,451)
Partnership distributions ....................... (50,519,966)
--------------
Net cash used in financing activities ...... (51,118,417)
--------------
Net increase in cash and cash equivalents ....... 2,270,941
Cash and cash equivalents at beginning of year .. --
--------------
Cash and cash equivalents at end of year ........ $ 2,270,941
==============

The accompanying notes are an integral part of the financial statements.

F-77

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND OPERATION:

San Joaquin Valley Energy Partners I, L.P. (Partnership), a California
limited partnership was formed on July 31, 1992, to purchase and operate
three biomass power plant facilities in Madera and Merced Counties,
California.

The Partnership sold electricity to Pacific Gas & Electric (PG&E) until
February 28, 1995, when the plants ceased operations in anticipation of the
transfer of the Partnership's power purchase agreements (PPA's) back to PG&E.

The General Partners are San Joaquin Valley Energy I, Inc., a California
corporation (SJVEI), and Power Partners II, a California general partnership.
The Limited Partners are NRG Jackson Valley II, Inc., a California
corporation (NRG II); Donovan D. Bohn, an individual; and Volkar/Coombs
Partners, a California general partnership (VCP). The Partnership agreement
stipulates that the term of the Partnership shall continue for a period
ending the earlier of December 31, 2030, or the date on which the Partnership
is dissolved by law or by mutual agreement of the Partners.

SJVE I and NRG II are wholly owned subsidiaries of NRG Energy, Inc., a
Delaware corporation.

The Partners of Power Partners II are Power Joint Ventures II, Inc. and
P&W Ventures II, Inc., both California corporations. VH Energy, L.L.C., an
Illinois limited company, and Roland S. Coombs, an individual, are the
Partners of VCP. Patrick J. Volkar is the sole shareholder of Power Joint
Ventures II, Inc., and Roland S. Coombs is the sole shareholder of P&W
Ventures II, Inc., Patrick J. Volkar and Sandra A. Hunt are the members of VH
Energy, L.L.C.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The Partnership financial statements as of and for the year ended December
31, 1996 are unaudited. In the opinion of management, the unaudited financial
statements of the Partnership contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the Partnership's
financial position and results of operations.

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash and cash equivalents
include cash and all investment instruments purchased with a maturity of
three months or less.

The Partnership invests its cash in time deposits and money market
accounts most of which are not federally insured. The Partnership has not
experienced any losses on these deposits. The carrying amounts of cash and
cash equivalents approximates fair value because of the short maturity of
these instruments.

Accounts Receivable

Management believes that there are no uncollectible accounts receivable;
therefore, there is no allowance for doubtful accounts at December 31, 1996.

Fuel Inventory

Fuel inventory consists of unburned fuel char, urban wood waste, wood
chips, nut hulls and other biomass, and is stated at the lower of averaged
cost or market.

F-78

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Property, Plant and Equipment

Property, plant and equipment is stated at cost, reduced to fair value in
1995. Since then depreciation has been suspended and no sales or purchases of
fixed assets have taken place.

Environmental Restoration Costs/Contingencies

The Partnership has reduced its estimate of environmental restoration
costs of its plant sites to $105,060 during the past year based on a current
review of engineering studies performed and the monitoring of plant activity.
(see Note 6.)

Income Taxes

The net income or loss of the Partnership for income tax purposes, along
with any associated tax credits, is included in the tax returns of the
individual partners. Accordingly, no provision has been made for federal or
state income taxes in the accompanying financial statements.

The allocation of taxable income, gains, losses and credits to the
partners is specified in the Partnership agreement.

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
disclosure 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 those estimates.

3. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following at December 31:

1996
------------

Power plants .................. $4,700,000
Land .......................... 264,030
------------
4,964,030
Less accumulated depreciation --
------------
$4,964,030
============

In accordance with SFAS 121, as a result of the PPA transfer, property,
plant and equipment was written to its estimated fair value at December 31,
1995. The recorded amounts for property, plant and equipment at December 31,
1996 are still considered to be fair value.

4. COMMITMENTS AND CONTINGENCIES

The Partnership has entered into contractual agreements to purchase
specified quantities of biomass fuels from various vendors, and the
partnership has agreed to assume a fuel purchase commitment of San Joaquin
Valley Energy Partners IV, L.P. (SJVEP IV). The purchase price of the fuels
is a specified amount above the market cost per bone dry ton. The periods
covered by the contracts range from one to eight years with the longest
expiring in the year 1999.

F-79

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)

4. COMMITMENTS AND CONTINGENCIES (Continued)

Since agreeing to transfer its PPA's back to PG&E, the Partnership has
sought to terminate all of its fuel purchase commitments. Management believes
the Partnership will not incur any additional loss on termination in excess
of amounts already accrued.

The Partnership is party to one minor claim with a former vendor. The
Partnership's liability for such matter is uncertain, however, management
believes that the final resolution of this matter will not have a material
adverse effect on the Partnership's financial position or results of
operations.

5. TRANSACTIONS WITH AFFILIATES:

At December 31, 1996, the receivable from affiliates related through
common ownership consists of:

1996
---------

6. OTHER INCOME

During 1996, based upon updated analysis, the Partnership has re-assessed
its estimated exposure for environmental restoration costs and has concluded
that no remediation will be required. It has, therefore, reduced its accrual
for such charges from $4,850,000 at December 31, 1995 to $105,060 at December
31, 1996. The remaining amount of other income was due primarily to the
settlements of accrued liabilities at favorable terms.

F-80

REPORT OF INDEPENDENT ACCOUNTANTS

To the Management Committee of
San Joaquin Valley Energy Partners I, L.P.

We have audited the accompanying balance sheets of San Joaquin Valley
Energy Partners I, L.P., a California limited partnership (the Partnership)
as of December 31, 1995 and 1994, and the related statements of income,
partners' equity and cash flows for the years then ended. 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 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.
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 referred to above present fairly,
in all material respects, the financial position of San Joaquin Valley Energy
Partners I, L.P. at December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.

As discussed in Note 6 to the financial statements, during 1995, the
Partnership entered into an agreement whereby the Partnership's power
purchase contracts were transferred back to Pacific Gas & Electric.

/s/ Coopers & Lybrand L.L.P.

Sacramento, California
February 29, 1996

F-81

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

BALANCE SHEETS
DECEMBER 31, 1995 AND 1994

1995 1994
------------- -------------

ASSETS
Current assets:
Short-term investments .............................. $ 3,756,078 $ --
Restricted cash...................................... -- 13,710,534
Receivable from PG&E................................. 52,050,216 --
Accounts receivable.................................. 62,318 3,657,340
Fuel inventory....................................... 124,029 1,660,162
Receivable from affiliates........................... 28,636 217,748
Other................................................ 132,885 225,075
------------- -------------
Total current assets................................ 56,154,162 19,470,859
Property, plant, and equipment, net................... 4,964,030 29,519,412
Organization and debt issue costs, net of accumulated
amortization of $828,565 at December 31, 1994 ....... -- 1,753,268
Notes receivable from partners and affiliates ........ -- 1,600,000
------------- -------------
$61,118,192 $52,343,539
============= =============
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Book overdraft....................................... $ 21,473 $ --
Accounts payable..................................... 44,120 1,130,659
Accrued liabilities.................................. 8,319,056 1,608,285
Long-term debt, current portion...................... 184,163 5,455,695
------------- -------------
Total current liabilities........................... 8,568,812 8,194,639
Long-term debt, net of current portion................ 414,288 24,077,127
------------- -------------
Total liabilities................................... 8,983,100 32,271,766
Commitments (Note 7)
Partners' equity...................................... 52,135,092 20,071,773
------------- -------------
$61,118,192 $52,343,539
============= =============

The accompanying notes are an integral part of the financial statements.

F-82

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

1995 1994
------------- -------------

Revenue:
Electricity sales............................... $ 6,107,863 $38,957,267
------------- -------------
Costs and expenses:
Operating....................................... 3,814,238 18,879,930
Depreciation and amortization................... 450,997 2,599,187
General and administrative...................... 198,431 1,134,205
------------- -------------
Total costs and expenses....................... 4,463,666 22,613,322
------------- -------------
Operating income............................... 1,644,197 16,343,945
Other income (expense):
Interest and bank agency fees................... (525,598) (2,702,966)
Interest income................................. 541,537 388,481
Other........................................... 141,900 3,810
------------- -------------
Income before extraordinary item............... 1,802,036 14,033,270
Extraordinary item (Note 6):
Net gain on transfer of power purchase
contracts...................................... 58,468,139 --
------------- -------------
Net income..................................... $60,270,175 $14,033,270
============= =============

The accompanying notes are an integral part of the financial statements.

F-83

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

Partners' equity, December 31, 1993........................... $ 11,484,304
Net income for the year ended December 31, 1994............... 14,033,270
Partnership distributions for the year ended December 31,
1994......................................................... (5,445,801)
--------------
Partners' equity, December 31, 1994........................... 20,071,773
Net income for the year ended December 31, 1995............... 60,270,175
Partnership distributions for the year ended December 31,
1995......................................................... (28,206,856)
--------------
Partners' equity, December 31, 1995........................... $ 52,135,092
==============

The accompanying notes are an integral part of the financial statements.

F-84

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

1995 1994
-------------- --------------

Cash flows from operating activities:
Net income ....................................... $ 60,270,175 $ 14,033,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 450,997 2,599,187
Impairment of assets ........................... 26,861,778 --
Change in assets and liabilities:
Decrease (increase) in accounts receivable ... 3,595,022 (800,190)
Increase in receivable from PG&E .............. (52,050,216) --
Decrease in inventory ......................... 826,682 164,807
Decrease (increase) in other assets .......... 92,190 (1,373)
Decrease (increase) in due from affiliates ... 189,112 (16,642)
Decrease in accounts payable .................. (1,086,539) (1,163,127)
Increase in accrued liabilities ............... 6,416,097 7,968
-------------- --------------
Net cash provided by operating activities ........ 45,565,298 14,823,900
-------------- --------------
Cash flows from investing activities:
Purchases of property, plant and equipment ...... -- (2,065,289)
Purchase of short-term investments ............... (3,756,078) --
-------------- --------------
Net cash used in investing activities ............. (3,756,078) (2,065,289)
-------------- --------------
Cash Flows from financing activities:
Increase in book overdraft ....................... 21,473 --
Decrease (increase) in restricted cash .......... 13,710,534 (1,861,694)
Principal payments on long-term debt ............. (28,934,371) (5,451,116)
Proceeds from note receivable .................... 1,600,000 --
Partnership distributions ........................ (28,206,856) (5,445,801)
-------------- --------------
Net cash used in financing activities ............. (41,809,220) (12,758,611)
-------------- --------------
Net change in cash and cash equivalents .......... -- --
Cash at beginning of period ....................... -- --
Cash and cash equivalents at December 31 ......... $ $
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest ........................................ $ 1,633,204 $ 2,566,348
============== ==============

The accompanying notes are an integral part of the financial statements.

F-85

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATION:

San Joaquin Valley Energy Partners I, L.P. (Partnership), a California
limited partnership, was formed on July 31, 1992, to purchase and operate
three biomass power plant facilities in Madera and Merced Counties,
California.

The General Partners are San Joaquin Valley Energy I, Inc., a California
corporation (SJVE I), and Power Partners II, a California general
partnership. The Limited Partners are NRG Jackson Valley II, Inc., a
California corporation (NRG II); Donovan D. Bohn, an individual; and
Volkar/Coombs Partners, a California general partnership (VCP). The
Partnership agreement stipulates that the term of the Partnership shall
continue for a period ending the earlier of December 31, 2030, or the date on
which the Partnership is dissolved by law or by mutual agreement of the
Partners.

SJVE I and NRG II are wholly owned subsidiaries of NRG Energy, Inc., a
Delaware corporation.

The Partners of Power Partners II are Power Joint Ventures II, Inc., and
P&W Ventures II, Inc., both California corporations. VH Energy, L.L.C., an
Illinois limited liability company, and Roland S. Coombs, an individual, are
the Partners of VCP. Patrick J. Volkar is the sole shareholder of Power Joint
Ventures II, Inc., and Roland S. Coombs is the sole shareholder of P&W
Ventures II, Inc. Patrick J. Volkar and Sandra A. Hunt are the members of VH
Energy, L.L.C.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash and cash equivalents
include cash and all investment instruments purchased with a maturity of
three months or less.

Cash and Restricted Cash

At December 31, 1994, cash balances totalling $13,710,534 were restricted
as to use under the terms of various agreements. There were no such
restrictions at December 31, 1995. The restrictions related to the following:

1994
------------

Receipt account ............. $ 8,076,401
Operating account ........... 572,543
Debt service account ........ 4,650,938
Maintenance reserve account 410,652
------------
$13,710,534
============

The Partnership invests its cash and restricted cash in time deposits,
money market accounts, and short term investment mutual funds, most of which
are not federally insured. The Partnership has not experienced any losses on
these deposits.

Accounts Receivable

Management believes that there are no uncollectible accounts receivable;
therefore, there is no allowance for doubtful accounts at December 31, 1995.

F-86

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

Fuel Inventory

Fuel inventory consists of unburned fuel char, urban wood waste, wood
chips, nut hulls and other biomass, and is stated at the lower of average
cost or market.

At December 31, 1995, the Partnership has entered into commitments to sell
the entire balance of its inventory recorded as of year end.

Property, Plant and Equipment

Property, plant and equipment is stated at cost, reduced to fair value in
1995. Major additions are capitalized, and repairs and maintenance costs are
expensed as incurred. Depreciation of the biomass power plants was calculated
on a straight-line basis over the terms of the respective power purchase
agreements (PPA's). Depreciation on the other assets was calculated on a
straight-line basis over their estimated useful lives, ranging from three to
eight years. Depreciation has been suspended effective February 28, 1995.
Gains or losses from disposals are reflected in current earnings.

Organization and Debt Issue Costs

Organization and debt issue costs were stated at cost, and were being
amortized until 1995 when deemed to be fully impaired and unrealizable, and
consequently were written off in connection with the transfer of PPA's back
to PG&E.

Impairment of Long-Lived Assets

The Partnership has adopted Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed Of (SFAS 121), as of December 31, 1995.
Under SFAS 121, the Partnership's assets have been impaired as a result of
the transfer of power purchase contracts back to PG&E. Accordingly, an
impairment loss of $26,861,778, to reduce the carrying value of the assets to
their fair value, has been included in the net gain on transfer of PPA. Fair
value has been estimated by management using salvage and sales values for
similar plants and related components. The amount the Partnership might
ultimately realize could differ materially in the near term from the amount
assumed in estimating fair value.

Environmental Restoration Costs

The Partnership has estimated the cost of environmental restoration of its
plant sites. Estimated costs relate to evaporation ponds and other plant site
restoration. Total accrued environmental restoration costs total $4,850,000
at December 31, 1995. The amount the Partnership might ultimately incur could
differ materially in the near term from the amount accrued.

Income Taxes

The allocation of taxable income, gains, losses and credits to the
partners is specified in the Partnership agreement.

Estimates

F-87

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

3. NOTES RECEIVABLE FROM PARTNERS AND AFFILIATES:

Notes receivable at December 31 consist of:

1995 1994
----------- -----------

Notes receivable from partners and affiliates, floating
rate interest (weighted average interest rate 6.88% at
December 31, 1994) ........................................ $ -- $1,600,000
=========== ===========

4. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following at December 31:

1995 1994
------------ -------------

Power plants ................. $4,700,000 $32,898,035
Land ......................... 264,030 264,030
Equipment and other .......... -- 932,274
------------ -------------
4,964,030 34,094,339
Less acumulated depreciation -- (4,574,927)
------------ -------------
$4,964,030 $29,519,412
============ =============

In accordance with SFAS 121, as a result of the PPA transfer, property,
plant and equipment has been written down to its estimated fair value at
December 31, 1995.

5. LONG-TERM DEBT:

Long-term debt consists of the following at December 31:

1995 1994
----------- -------------

Note payable to a financial institution, floating-rate
interest (weighted average interest rate 6.88% at
December 31, 1994) ..................................... $ -- $28,746,665
Payable to an unaffiliated partnership, without
interest, payable in annual installments of $142,850
through August 1, 1999; uncollateralized ............... 592,138 695,709
Equipment contracts ..................................... 6,313 90,448
----------- -------------
598,451 29,532,822
Less current portion .................................... (184,163) (5,455,695)
----------- -------------
$ 414,288 $24,077,127
=========== =============

The Partnership entered into interest rate swap agreements with a notional
amount of $28,746,665 at December 31, 1994, to reduce the impact of changes
in interest rates on its floating-rate notes payable. These agreements, which
effectively capped interest rates, involve the exchange of floating-rate for
fixed interest payment obligations and resulted in a weighted average fixed
interest rate of 5.87% at December 31, 1994, on the Partnership's
floating-rate debt.

F-88

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

The aggregate maturities for the long-term debt are as follows:

DECEMBER 31,
- --------------

1996........... $184,163
1997........... 142,850
1998........... 142,850
1999........... 128,588
----------
$598,451
==========

6. POWER PURCHASE CONTRACTS:

The Partnership had agreements (PPA's) to sell Pacific Gas & Electric
(PG&E) all electricity produced by the plants through the years 2019-2020.
The Partnership also received capacity payments throughout the terms of the
PPA's when it operated the plants above specified production levels. The
PPA's provided for guaranteed rates ending in years 1998-2000, after which
the rates were to be based on PG&E's avoided cost as defined by the PPA's.

During 1994 the Partnership entered into a curtailment agreement with PG&E
to limit the output of the power plants during certain off-peak hours. The
Partnership received curtailment payments of $1,968,491 and $8,091,462 during
1995 and 1994 respectively.

During 1995, the Partnership entered into negotiations regarding an
agreement whereby PG&E would compensate the Partnership to transfer back to
PG&E its existing PPA's. Effective February 28, 1995, the Partnership entered
into a bridging agreement with PG&E whereby the Partnership shutdown its
power plants and received payments while a final agreement was being
negotiated to transfer the PPA's back to PG&E. Such bridging payments were
then deducted from the total compensation received for the transfer of the
PPA's.

The final PPA transfer agreement was finalized on July 10, 1995, and
provided for the transfer of all of the Partnership's rights under the
existing PPA's in exchange for total compensation of $99,212,716, $47,162,500
of which was received at closing and through bridging payments, and
$52,050,216 of which was received on March 1, 1996.

A net gain on transfer of PPA's of $58,468,139 has been recognized in
1995, and consists of:

Total consideration from PG&E ......................... $99,212,716
Less:
Impairment of assets ................................. 26,861,778
Operating and maintenance costs during bridging
period .............................................. 1,170,291
Loan, agency and prepayment fees ..................... 1,960,894
Estimated environmental restoration costs ............ 4,850,000
Severance, fuel contract settlement and other costs . 5,901,614
-------------
Net gain on transfer of PPA's ......................... $58,468,139
=============

7. COMMITMENTS:

The Partnership has entered into contractual agreements to purchase
specified quantities of biomass fuels from various vendors, and the
Partnership has agreed to assume a fuel purchase commitment of San Joaquin
Valley Energy Partners IV, L.P. (SJVEP IV). The purchase price of the fuels
is a specified amount above the market cost per bone dry ton. The periods
covered by the contracts range from one to eight years with the longest
expiring in the year 1999. Under these contracts, the Partnership purchased
fuel totaling $--in 1995 and $8,217,550 in 1994.

F-89

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

8. EMPLOYEE BENEFIT PLAN:

The Partnership established a 401(k) retirement savings plan (Plan)
effective January 1, 1994, that covered all employees. The Partnership
contributed approximately $74,000 during 1994 to the Plan. During 1995, the
Plan was terminated at no cost to the Partnership.

9. TRANSACTIONS WITH AFFILIATES:

At December 31, 1995 and 1994, the receivable from affiliates related
through common ownership consists of:

1995 1994
-------- ----------

Due from affiliates relating to the purchase of Biomass fuel
and charges for administration, insurance, and workers'
compensation costs, consisting of:
BioConversion Partners, L.P. ................................. $ 2,648 $ 7,963
San Joaquin Valley Energy Partners IV, L.P. (SJVEP IV) ...... 25,988 37,715
Due from the owners of SJVEP IV relating to interest on notes
receivable .................................................... $ -- $282,221
Due from BioConversion Partners, L.P. relating to the purchase
of unburned fuel .............................................. -- 110,152

The Partnership has an agreement with BioConversion Partners, L.P.,
(BioConversion) to purchase unburned fuel (Char). The sales price of the char
is based on the BTU heat value of the char applied to the average cost per
BTU paid by BioConversion for its biomass fuel. The total amount of char
purchased by the Partnership was $123,417 and $871,951 in 1995 and 1994,
respectively.

The Partnership has an agreement with BioConversion to purchase or sell
excess biomass fuel at cost. The total amount of biomass fuel sold to
BioConversion was $-0-and $182,601 in 1995 and 1994, respectively. The
Partnership purchased excess biomass fuel of $-0-and $138,102 during 1995 and
1994, respectively.

The Partnership has service agreements to provide general and
administrative services to BioConversion and SJVEP IV. The total amount of
management fees earned in 1995 and 1994 was $42,474 and $34,147 respectively.
The Partnership also purchases insurance for BioConversion and SJVEP IV which
is then charged back to each of the entities based upon the fair value of
their plant assets. The total amount of insurance expense charged to
BioConversion was $32,152 and $48,421 and to SJVEP IV was $75,021 and
$112,984 in 1995 and 1994, respectively.

The Partnership incurred approximately $26,000 and $43,000 in 1995 and
1994, respectively, for administration and management services provided by
Jackson Valley Energy Partners, L.P. (JVEP), a partnership affiliated through
common ownership.

F-90

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

The Partnership paid approximately $37,000 in 1994 to a partner for
consulting services, of which approximately $31,000 was paid on behalf of
JVEP. During 1995, the Partnership received payment in full from JVEP for
these services.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts of cash and cash equivalents, short term investments,
receivable from PG&E and book overdraft approximates fair value because of
the short term maturity of these instruments. The carrying amount of
long-term debt is not materially different than its estimated fair value
based on the fair value of debt with similar terms.

F-91

REPORT OF DELOITTE & TOUCHE GMBH, INDEPENDENT AUDITORS

To the Shareholders
MIBRAG mbH
Theissen, Germany

We have audited the accompanying consolidated balance sheets of
Mitteldeutsche Braunkohlengesellschaft mbH and its subsidiaries (MIBRAG or
Group) as of December 31, 1996, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Group'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 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of MIBRAG mbH and subsidiaries as of December 31, 1996, 1995, and 1994, and
the consolidated results of their operations and cash flows for each of the
years in the three-year period ended December 31, 1996, 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. Application of generally accepted accounting principles in the
United States would have affected the results of operations for each of the
years in the three-year period ended December 31, 1996 and stockholders'
equity as of December 31, 1996 and 1995 to the extent summarized in Note C to
the consolidated financial statements.

Halle, Germany
October 24, 1997

DELOITTE & TOUCHE GmbH
Wirtschaftsprufungsgesellschaft

(Roder)

F-92

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS DM)

YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
----------- ----------- ----------

Sales revenue ....................................... 621,439 650,705 813,085
Changes in inventories .............................. (3,719) (9,462) (115)
Capitalized own services............................. 4,249 6,143 2,450
Other operating income............................... 84,904 76,900 38,025
----------- ----------- ----------
Total revenue........................................ 706,873 724,286 853,445
Cost of materials.................................... 138,468 133,670 244,491
Personnel expenses................................... 249,437 251,509 259,012
Depreciation on intangible and tangible fixed
assets.............................................. 201,362 317,457 165,392
Other operating expenses............................. 264,998 229,235 231,820
----------- ----------- ----------
Total operating expenses............................. 854,265 931,871 900,715
Operating income .................................... (147,392) (207,585) (47,270)
----------- ----------- ----------
Income from associated company and from companies in
which participations are held ...................... 5,224 1,252 2,096
Income from long-term investments.................... 7,035 -- --
Interest income (net)................................ 3,906 15,607 10,028
----------- ----------- ----------
Net income from ordinary activities.................. (131,227) (190,726) (35,146)
Property tax ........................................ 825 1,612 1,043
----------- ----------- ----------
Net income .......................................... (132,052) (192,338) (36,189)
=========== =========== ==========
Profit/loss carried foreward ........................ 32 -- --
Withdrawal from capital reserve...................... 137,020 197,338 41,189
Balance sheet profit/loss ........................... 5,000 5,000 5,000

See accompanying Notes to Consolidated Financial Statements

F-93

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS DM)

AT DECEMBER 31,
------------------------------------
NOTE 1996 1995 1994
------ ----------- ----------- ----------

ASSETS
NON-CURRENT ASSETS
Intangible assets
1. Concessions, trade marks, patents and
licenses......................................... B,E 18,368 12,498 2,388
2. Payments on account ........................... B,E -- -- 979
----------- ----------- ----------
18,368 12,498 3,367
Tangible assets
1. Land and landrights ........................... B,E 63,482 56,006 48,819
2. Buildings ..................................... B,E 116,051 107,047 101,354
3. Strip mines ................................... B,E 47,955 47,441 48,412
4. Technical equipment and machinery ............. B,E 367,327 357,082 398,325
5. Factory and office equipment .................. B,E 59,566 49,495 77,649
6. Payments on account and assets under
construction ................................... 40,132 101,726 166,778
----------- ----------- ----------
694,513 717,797 841,337
Financial assets
1. Participations (including associated company) B,F 28,973 19,482 7,050
2. Loans granted to participation ................ B,G 16,867 17,600 2,121
3. Long-term investments ......................... B,H 20,260 -- --
4. Other loans ................................... B,I 94,500 82,208 --
----------- ----------- ----------
160,600 119,290 9,171
TOTAL NON-CURRENT ASSETS ......................... 873,481 849,585 853,875
Overburden........................................ B,J 304,911 306,399 319,932
CURRENT ASSETS
Inventories
1. Raw materials and supplies .................... B 8,359 6,941 6,633
2. Unfinished services ........................... B 170 -- --
3. Finished and trade goods....................... B 1,837 2,239 168
----------- ----------- ----------
10,366 9,180 6,801
Receivables and other assets
1. Trade receivables ............................. B,K 74,397 54,660 63,838
2. Receivables from enterprises in which
participations are held ........................ B 5,513 11,493 473
3. Other assets .................................. B 62,731 84,390 60,406
----------- ----------- ----------
142,641 150,543 124,717
Investments
Other investments................................. B,L 210,289 -- --
Checks, cash-in-hand, bank balances............... B 183,690 405,885 287,792
TOTAL CURRENT ASSETS ............................. 546,986 566,608 419,310
Prepaid expenses.................................. B 6,528 6,760 5,681
----------- ----------- ----------
TOTAL ASSETS ..................................... 1,731,906 1,730,352 1,598,798
=========== =========== ==========

See accompanying Notes to Consolidated Financial Statements

F-94

AT DECEMBER 31,
------------------------------------
NOTE 1996 1995 1994
------- ----------- ----------- ----------

SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Subscribed capital ............................... 60,000 60,000 60,000
Capital reserve .................................. 730,208 778,170 831,547
Balance sheet profit DM 5,000,000 each year
thereof distributed DM 5,000,000 each year ..... -- -- --
Minority interest ................................ (19,007) 28,726 (2)
TOTAL SHAREHOLDERS' EQUITY ....................... 771,201 866,896 891,545
Special item for investment subsidies and
incentives ...................................... B 45,013 40,492 28,104
Provisions
1. Accruals for pensions and similar obligations M 3,621 4,742 3,057
2. Taxation accruals ............................. N 2,600 3,578 2,982
3. Environmental ("Altfasten") and mining
provisions ..................................... B,O 392,058 384,120 366,037
4. Other accruals ................................ P 39,148 45,597 42,649
----------- ----------- ----------
437,425 438,037 414,925
Liabilities
1. Liabilities to banks........................... B,Q,R 325,307 223,033 141,459
2. Downpayments received ......................... B,R 140 -- --
3. Trade payables ................................ B,R 75,737 93,464 61,029
4. Payables to participations .................... B,R 8,615 3,421 1,871
5. Other payables ................................ B,R 68,467 65,006 59,865
----------- ----------- ----------
478,266 384,924 264,224
Deferred income .................................. 1 3 --
----------- ----------- ----------
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES ...... 1,731,906 1,730,352 1,598,798
=========== =========== ==========

See accompanying Notes to Consolidated Financial Statements

F-95

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS DM)

YEAR ENDED
-------------------------------------
1996 1995 1994
----------- ----------- -----------

Cash flows from operating activities:
Net loss for the year .................................... (132,052) (192,338) (36,189)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation on intangible and tangible assets ......... 201,362 317,457 165,392
Planned release of the special line item for investment
subsidies and incentives ............................... (8,979) (8,181) (12,997)
Loss on disposal of fixed assets ........................ 1,997 13,701 21,095
Change in assets and liabilities:
Short-term overburden .................................. 1,512 577 71
Inventories ............................................ (1,186) (2,379) 1,758
Short-term receivables and other assets ................ 7,901 (47,440) (76,236)
Increase in accruals ................................... (612) 23,112 68,597
Short-term liabilities ................................. (15,599) 38,167 124,994
Short-term prepaid expenses ............................ (76) (333) (354)
Deferred income ........................................ (2) 3 --
----------- ----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES .................... 54,266 142,346 256,131
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures ..................................... (239,704) (362,534) (178,608)
Additions to the special item for investment subsidies
and incentives .......................................... 13,499 20,569
Proceeds from disposal of fixed assets ................... 12,451 35,666 1,225
Decrease in long-term overburden ......................... 1,976 10,956 --
Increase in long-term investments (securities) .......... (210,289) -- --
----------- ----------- -----------
CASH USED FOR INVESTING ACTIVITIES ....................... (422,067) (295,343) (177,383)
----------- ----------- -----------
Cash flows from financing activities:
Change in equity:
Dividends paid .......................................... (5,000) (5,000) (5,000)
Investors capital contribution .......................... 43,674 180,189 --
Withdrawal by MI KG investors ........................... (18,257) -- --
Capital contribution due to settlement agreement with
BvS .................................................... 15,941 --
Capital infusion ........................................ 50,000
Increase in long-term liabilities ........................ 108,940 75,033 --
Decrease in long-term receivables ........................ 308 20,868 114,044
----------- ----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES .................... 145,606 271,090 159,044
----------- ----------- -----------

NET DECREASE (PRIOR YEARS: INCREASE) IN CASH ............. (222,195) 118,093 237,792
CASH AT BEGINNING OF YEAR ................................ 405,885 287,792 50,000
----------- ----------- -----------
CASH AT YEAR-END ......................................... 183,690 405,885 287,792
=========== =========== ===========

See accompanying Notes to Consolidated Financial Statements

F-96

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS DM)

SUBSCRIBED CAPITAL MINORITY
CAPITAL RESERVE INTEREST TOTAL
------------ ---------- ---------- ----------

BALANCE AS OF JANUARY 1, 1994..................... 60,000 827,706 0 887,706
Dividends paid ................................... (5,000) (5,000)
MIBRAG's share in the 1994 loss .................. (36,187) (36,187)
Change in minority interest....................... (2) (2)
Contribution by shareholders...................... 54,010 54,010
Land valuations according to section 36 of
DMBilG........................................... (8,982) (8,982)
------------ ---------- ---------- ----------
BALANCE AS OF DECEMBER 31, 1994 .................. 60,000 831,547 (2) 891,545
============ ========== ========== ==========
BALANCE AS OF JANUARY 1, 1995..................... 60,000 831,547 (2) 891,545
Dividends paid ................................... (5,000) (5,000)
MIBRAG mbH's share in the net loss 1995 ......... (48,377) (48,377)
Change in minority interest....................... 28,728 28,728
------------ ---------- ---------- ----------
BALANCE AS OF DECEMBER 31, 1995 .................. 60,000 778,170 28,726 866,896
============ ========== ========== ==========
BALANCE AS OF JANUARY 1, 1996 .................... 60,000 778,170 28,726 866,896
Dividends paid ................................... (5,000) (5,000)
MIBRAG mbH's share in the net loss 1996 ......... (58,904) (58,904)
Change in minority interest ...................... (47,733) (47,733)
Capital contribution--settlement agreement ....... 15,942 15,942
------------ ---------- ---------- ----------
BALANCE AS OF DECEMBER 31, 1996 .................. 60,000 730,208 (19,007) 771,201
============ ========== ========== ==========

See accompanying Notes to Consolidated Financial Statements

F-97

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

NOTE A ORIGINATION AND NATURE OF BUSINESS

ORIGINATION: Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAG" or
"MIBRAG mbH") was created from split-up of MIBRAG AG, previously owned by the
Treuhandanstalt (the German government privatization agency), into three
separate entities. Effective January 1, 1994 a consortium comprised of NRG
Energy, Inc., Morrison Knudsen Corporation, and PowerGen plc. jointly
acquired 99 % of the active mining, power generation and related assets and
liabilities from the Treuhandanstalt through its Dutch holding company
(MIBRAG B.V.). The remaining 1% was transferred on December 18, 1996 from the
German government privatization agency to Lambique Beheer B.V., Amsterdam, a
subsidiary of NRG Energy, Inc., Morrison Knudsen B.V., Amsterdam, and
PowerGen Netherlands B.V., Amsterdam in equal portions (1/3 %) for each
partner.

NATURE OF BUSINESS: The operations of MIBRAG mbH include two open-cast
brown coal mines in Profen and Schleenhain, a lease on a third mine in
Zwenkau, and rights to future mining reserves. The operations also include
over 200 MW of power generation and two coal briquetting plants. A
significant portion of the sales of MIBRAG is made pursuant to long-term coal
and energy supply contracts.

NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of Mitteldeutsche
Braunkohlengesellschaft mbH and subsidiaries have been prepared in accordance
with the German Commercial Code, which represents accounting principles
generally accepted in Germany ("German GAAP"). German GAAP varies 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 each of the years in the three-year
period ended December 31, 1996 and stockholders' equity as of December 31,
1996, 1995 and 1994 to the extent summarized in note C to the consolidated
financial statements. All amounts herein are shown in thousands of Deutsche
Mark ("DM") unless otherwise noted.

PRINCIPLES OF CONSOLIDATION: All material companies in which MIBRAG has
legal or effective control are fully consolidated. In 1996, MIBRAG
consolidated 5 (1995: 4, 1994: 4) domestic subsidiaries, including one
company, GALA, for the first time. For the years ended December 31, 1996,
1995 and 1994 all subsidiaries were consolidated.

One significant investment, MUEG, in which MIBRAG has an ownership
interest of 50% is accounted for in accordance with the equity method. This
investment is referred to as an associated company in these financial
statements.

All other investments in which MIBRAG has an ownership in the range of 20%
to 50% are either not considered to be significant for the presentation of
the consolidated financial statements of MIBRAG or MIBRAG has no significant
influence in these companies. These companies are included at cost and
referred to as participations in these financial statements.

All significant intercompany accounts and transactions have been
eliminated in consolidation.

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 assets and liabilities at the
balance sheet dates and the reported amounts of revenues and expenses during
the reported periods. Actual results could differ from those estimates.

TOTAL COST METHOD: The income statement has been 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.

F-98

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

REVENUE RECOGNITION: Revenue is recognized when title passes or services
are rendered, net of discounts, customer bonuses and rebates granted.

INTANGIBLE ASSETS: Intangible assets are valued at acquisition cost and
are amortized over their respective useful lives (5 to 15 years).

PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment acquired is
recorded on the basis of acquisition or manufacturing cost, including
capitalized mine development costs and subsequently reduced by scheduled
depreciation charges over the assets' useful lives as follows: buildings -- 3
to 25 years, technical facilities and machinery -- 4 to 33 years; and
facilities, factory and office equipment -- 5 to 10 years. Maintenance and
repair costs are expensed as incurred. Depreciation is computed principally
by the straight-line method over the expected useful lives of the assets. The
amortization of mine development costs is provided on the basis of tonnage
mined in relation to total estimated recoverable tonnage. Depreciation on
additions during the first or the second half of the year are estimated using
full-year or half-year rates, respectively. Low value items are expensed in
the year of acquisition. Opportunities for special tax deductible
depreciation are utilized for both book and tax purposes.

INVESTMENTS: The long-term loans and investments are recorded at cost.

OVERBURDEN: Overburden represents the costs of removing the surface above
a coal field subsequent to the initial opening of the field to the extent
that the removal exceeds what is needed for the current years coal
extraction. These are costs incurred in advance in respect of future coal
production. The overburden of the individual mines on the balance sheet dates
were consolidated and valued on an average cost basis.

INVENTORY: Inventories are carried at the lower of average cost or market.
Obsolescence provisions are made to the extent that inventory risks are
determinable.

RECEIVABLES AND OTHER ASSETS: All receivables are valued at cost, taking
into account all known risks. A lump-sum allowance for doubtful accounts is
deducted from the receivables in recognition of the general risk inherent in
the receivables.

CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, checks,
current accounts and time deposits.

INVESTMENT GRANTS: To support the acquisition of certain tangible assets,
investment allowances and subsidies were granted by the federal government
and the German states of Saxony and Saxony-Anhalt. The application,
conditions and payments of investment grants are ruled by German law and
several regulations and statements. Investment allowances and subsidies
received and formally claimed are credited to the special item account. The
special item is amortized into income over the normal operating useful lives
of the underlying assets to which the allowances and subsidies relate.

ENVIRONMENTAL AND MINING PROVISIONS: Accruals for environmental and
mining-related matters are recorded when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated,
based on current law and existing technologies. These accruals are adjusted
periodically as assessment and remediation efforts progress or as additional
technical or legal information becomes available.

LIABILITIES: Liabilities are shown at their repayment amounts.

PER SHARE AMOUNTS: Per share amounts are not disclosed in the financial
statements. MIBRAG is a nonpublic enterprise.

F-99

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES

The MIBRAG consolidated financial statements comply with German GAAP,
which differs in certain significant respects from US GAAP. The significant
differences that affect the consolidated net income and stockholders' equity
of MIBRAG are set out below.

I. APPLICATION OF THE PURCHASE METHOD OF ACCOUNTING

As of December 31, 1993 the predecessor of MIBRAG -- MIBRAG AG was split
into three legal entities:

MIBRAG mbH
MBV GmbH and
Romonta GmbH.

The assets and liabilities of the predecessor company were allocated to
the three newly founded companies according to a split-up plan, which is
required under the applicable German split-up law. Under German GAAP the
assets and liabilities of MIBRAG AG were transferred at book value to the
financial statements of the three successor companies. The transaction
resulted in an shareholders' equity of DM 887.7 million in MIBRAG's opening
balance sheet as of January 1, 1994 according to German GAAP.

The acquisition of 99% of the shares in MIBRAG mbH on January 1, 1994 by
MIBRAG B.V. was accounted for using the purchase method of accounting and the
purchase price adjustments to the historical cost basis have been pushed down
to the US GAAP financial statements of MIBRAG mbH . According to the purchase
agreement the purchase price for 99% of the shares consists of two components
- -a fixed and a variable portion. The variable portion depends on future
coal mined and briquettes sold, while the fixed portion was calculated as
follows:

MILLION DM
------------

Fixed purchase price.................. 290.0
less: assumption of a loan obligation ..... (139.2)
less: investment commitment by MIBRAG B.V. (110.8)
------------
Net fixed acquisition costs .......... 40.0

The estimated fair value of all individual assets acquired and liabilities
assumed at the date of the acquisition amounted to DM 1,570.3 million
(assets) and DM 773 million (liabilities), respectively. The remaining
difference of DM 757.3 million was proportionally allocated to reduce the
value assigned to noncurrent assets, excluding long-term investments,
assuming fixed acquisition costs of DM 40 million.

The variable portions of the acquisition cost were not considered in the
above calculation because the amounts were contingent upon future events,
which were not considered to be reasonably estimable.

II. SUBSEQUENT ADJUSTMENT OF THE US GAAP OPENING BALANCE

As referred to above, the MIBRAG purchase agreement states that MIBRAG
B.V. will pay a total of DM 40 million to the successor of the
Treuhandanstalt (THA), the Bundesanstalt fur vereinigungsbedingte
Sonderaufgaben (BvS) at a future date. This amount is to be reduced by the
amount of certain incremental transportation costs incurred by MIBRAG for
lignite transportation to one of its major customers. For US GAAP purposes,
this liability is reflected as a liability of MIBRAG mbH and results in a
reduction of MIBRAG equity and an increase in liabilities by DM 40 million.

F-100

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)

III. NOTES TO SIGNIFICANT US GAAP ADJUSTMENTS

1. Fixed assets other than financial investments

These adjustments are caused by different book values of fixed assets in
German and US GAAP financial statements. There are four primary reasons for
differences in book values:

o In the US opening balance sheet as of January 1, 1994, according to
purchase accounting, fixed asset balances, other than financial assets,
were adjusted to their fair market values. Related unamortized
investment subsidies were also included in these adjustments as of
January 1, 1994.

o As of January 1, 1994, the assets were reduced by the allocation of the
difference between the net acquisition costs for the MIBRAG shares and
the net fair market value of MIBRAG's assets and liabilities.

o Special accelerated depreciation for tax purposes is recorded in the
German financial statements.

o The depreciation period of long term assets are based upon lives
acceptable for German tax purposes, which differ from the useful lives
for US accounting purposes.

Upon disposal, the above differences also resulted in differing gains or
losses on disposition.

Financial investment in MUEG

For German GAAP purposes, MIBRAG accounted for the investment in MUEG as
of January 1, 1994 using the cost method. Under US GAAP the book value was
increased to account for the equity earnings that were not distributed to
MIBRAG as of that date.

2. Relocation accruals

At January 1, 1994, MIBRAG had made a commitment to relocate the villages
of Grossgrimma, Heuersdorf, Schwerzau and Breunsdorf at a total estimated cost
of DM 273 million. Such amounts were provided for at January 1, 1994.
Deferred costs, which are amortized in accordance with quantities of coal
extracted, were recorded at the same amount.

The German GAAP balance as of January 1, 1994 included provisions for DM
56 million of this total. In accordance with German accounting principles
such reserves and accruals for the relocation of villages can not be accrued
earlier than 2 years prior to the relocation, and some of the relocation
costs are to be expensed as incurred.

3. Investment in power plants

In 1995 and 1996, third party investors paid in DM 216 million into a
MIBRAG subsidiary, MIBRAG Industriekraftwerke GmbH & Co. KG ("MI"). MI runs
three lignite-fired power plants. The investment is structured such that the
third party investors obtain the accelerated depreciation opportunities for
tax purposes while retaining a put option to sell their investments back to
MIBRAG at predetermined prices. The third party investments are considered
additions to equity for German GAAP, while these arrangements are accounted
for as a financing in accordance with US GAAP.

F-101

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)

4. Schkopau transportation credits

The liability to BvS as described in item II above is reduced by the
amount of excess incremental transportation costs, incurred by MIBRAG for
certain lignite shipments. The transportation cost credits are not reflected
in MIBRAG's German financial statements, but reduce the liability to BvS in
the US GAAP balance sheet.

5. Interest capitalization

Interest is expensed in the German financial statements, however interest
expense related to qualified assets is capitalized in the US GAAP financial
statements.

6. Accrued liabilities

Certain mining and other accruals, which were provided for at January 1,
1994 in accordance with US GAAP purchase accounting, were recorded in the
German financial statements in 1994.

7. Receivables/payables at non-market interest rates

Certain accounts receivables or loans payable are recorded in the German
GAAP financial statements at their nominal values. Because these carry
non-market interest rates, such receivables and payables were adjusted to
their market values

8. Overburden

Overburden in the German financial statements includes capitalized
depreciation based upon the historical costs. Because of the purchase
accounting adjustments, a different amount of depreciation is capitalized in
overburden in the US GAAP financial statements. In addition, purchase
accounting adjustments as of January 1, 1994 included the write-down of
overburden on a mine to be closed.

9. Other

Certain costs and income in the German financial statements are
capitalized or deferred for US GAAP purposes, respectively.

10. Unrealized security gains

Unrealized security gains on available-for-sale securities are not
accounted for under German GAAP, but are recorded in a separate componenet of
equity for US GAAP purposes.

F-102

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)

RECONCILIATION TO U.S. GAAP

The following is a summary of the significant adjustments to net income
for the years 1994, 1995 and 1996 and to stockholders' equity at December 31,
1994, 1995 and 1996, which will be required if U.S. GAAP had been applied
instead of German GAAP.

YEAR ENDED DECEMBER 31,
------------------------------------
NOTE 1996 1995 1994
------ ----------- ----------- ----------

Net income as reported in the consolidated income
statement under German GAAP...................... (132,052) (192,338) (36,189)
Adjustments required to conform with U.S. GAAP:
Fixed assets..................................... (1) 143,280 301,385 152,735
Relocation of villages........................... (2) 46,803 21,258 15,897
Investments in power plants...................... (3) 7,208 0 0
Schkopau transportation credits.................. (4) 12,367 0 0
Interest capitalization.......................... (5) 4,549 (52) 1,542
Accrued liabilities.............................. (6) 0 0 21,546
Receivables/payables at non-market interest
rates........................................... (7) (8,728) (9,628) (1,173)
Overburden....................................... (8) (15,201) (1,253) (25,534)
Other............................................ (9) (2,012) (29,417) (749)
----------- ----------- ----------
NET INCOME IN ACCORDANCE WITH U.S. GAAP........... 56,214 89,955 128,075
=========== =========== ==========

F-103

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS DM)

AT DECEMBER 31,
-------------------------------------
NOTE 1996 1995 1994 1/1/1994
------ ----------- ----------- ----------- -----------

Shareholders' equity as in the
consolidated balance sheet under German
GAAP .................................... 771,201 866,896 891,545 887,706
Less minority interest ................... 1 1 0 0
----------- ----------- ----------- -----------
Adjusted shareholders' equity under
German GAAP ............................. 771,202 866,897 891,545 887,706
Adjustments required to conform with U.S.
GAAP:
Long-term asset valuation ............... (1) 34,939 (108,341) (409,726) (562,461)
Relocation of villages .................. (2) (40,333) (87,136) (108,394) (124,291)
Investment in power plants .............. (3) (190,896) (172,689) -- --
Payable to THA/BvS ...................... (4) (27,633) (40,000) (40,000) --
Interest capitalization ................. (5) 6,039 1,490 1,542 --
Accrued liabilities ..................... (6) (30,153) (30,153) (30,153) (51,699)
Receivables/payables at non-market
interest rate .......................... (7) 12,498 21,226 30,854 32,027
Overburden .............................. (8) (211,991) (196,790) (195,537) (170,003)
Other ................................... (9) (3,457) (1,445) 27,972 28,721
Change for the year in net unrealized
securities gains (net of income tax
effects) ............................... (10) 5,853 -- -- --
----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY IN ACCORDANCE WITH
U.S. GAAP ............................... 326,068 253,059 168,103 40,000
=========== =========== =========== ===========

NOTE D CONCENTRATION OF CREDIT RISK AND LONG-TERM COAL SALES AGREEMENTS

MIBRAG mbH markets its coal principally to electric utilities in Germany.
As of December 31, 1996, 1995 and 1994 accounts receivable from electric
utilities totaled DM 74,397, DM 54,660 and DM 63,838, respectively. Credit is
extended based on an evaluation of the customer's financial condition, and
collateral is not generally required. Credit losses are provided for in the
financial statements and consistently have been minimal.

MIBRAG mbH is committed under several long-term contracts to supply raw
brown coal and whirl fine coal to the Schkopau power station and the
Lippendorf power station. Under the terms of the Schkopau Agreement closed
with VEBA Kraftwerke Ruhr AG (VKR), Gelsenkirchen, MIBRAG mbH delivers
annually up to 5.8 million tons of coal commencing 1995. The agreement will
be in effect until 2010 with an option for VKR to extend the agreement for
another 10 years. The price to be paid by the Schkopau power station is a
fixed price adjusted by an annual escalation rate.

The Lippendorf Agreements provide for deliveries of up to 10 million tons
per year from 1999 through 2040 with an option for the MIBRAG customers to
extend for an additional 3 year period. These

F-104

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE D CONCENTRATION OF CREDIT RISK AND LONG-TERM COAL SALES AGREEMENTS
(Continued)

Agreements were closed with Vereinigte Energiewerke AG (VEAG), Berlin, and
Bayernwerk AG, Munich, and replace the agreements on deliveries to the old
power station at Lippendorf. The price to be paid by the Lippendorf power
station is a base-price with escalation and adjustment based on quality of
the coal delivered. The new Lippendorf power station is still under
construction.

A substantial portion of the Company's remaining coal reserves is
dedicated to the production of coal for such agreements.

Sales to the two largest customers comprise, as a percentage of total
sale, 58%, 55% and 65% in 1996, 1995 and 1994, respectively. Sales to the
five largest customers comprise, as a percentage of total sale, 86%, 74% and
75% in 1996, 1995 and 1994, respectively.

NOTE E PROPERTY, PLANT AND EQUIPMENT (INTANGIBLE AND TANGIBLE ASSETS)

The group depreciation charges are as follows: DM 201,362 (1996), DM
317,457 (1995), and DM 165,392 (1994), including normal depreciation,
unplanned depreciation and special tax depreciation in terms of section 4 of
the German tax law, "Fordergebietsgesetz". According to that law certain
tangible assets can be depreciated up to 50 % of the historical costs in the
first five years of acquisition in addition to the normal depreciation.

Composition:

1996
--------------------------------------------------------
NORMAL SPECIAL TAX UNPLANNED
DEPRECIATION DEPRECIATION DEPRECIAITON TOTAL
-------------- -------------- -------------- ---------

a) Intangible assets
Concessions, trade marks,
patents and licenses ......... 2,085 -- -- 2,085
b) Tangible assets
Buildings ..................... 14,810 13,090 1,701 29,601
Strip-mines ................... 985 -- -- 985
Technical equipment and
machinery..................... 63,576 76,765 3,289 143,630
Factory and office equipment . 16,627 8,143 291 25,061
-------------- -------------- -------------- ---------
98,083 97,998 5,281 201,362
============== ============== ============== =========

The unplanned depreciation (DM 5,281) refers to the closed briquette plant
Deuben (DM 4,281), to the former residence Holzberg (DM 556) and to the
repair shop Naunhof (DM 179), which has been replaced by the repair shop
Profen in 1996. Other assets from different locations were unplanned
depreciated to the lower market value as of December 31, 1996 (DM 265).

F-105

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE E PROPERTY, PLANT AND EQUIPMENT (INTANGIBLE AND TANGIBLE ASSETS)
(Continued)

1995
--------------------------------------------------------
NORMAL SPECIAL TAX UNPLANNED
FIXED ASSETS DEPRECIATION DEPRECIATION DEPRECIATION TOTAL
- ---------------------------------- -------------- -------------- -------------- ---------

a) Intangible assets
Concessions, trade marks,
patents and licenses .......... 1,065 -- -- 1,065
b) Tangible assets
Buildings ...................... 10,704 32,661 1,620 44,985
Strip-mines .................... 971 -- -- 971
Technical equipment and
machinery....................... 62,008 142,962 12,603 217,573
Factory and office equipment .. 21,424 31,099 340 52,863
-------------- -------------- -------------- ---------
96,172 206,722 14,563 317,457
============== ============== ============== =========

The unplanned depreciation DM 14,563) refers to machinery and equipment
(DM 8,416), which was shut down at the Schleenhain mine, to the heating pipe
of the Hydrogenation plant Zeitz (DM 5,161), and to other equipment retired
(DM 986).

1994
---------------------------------------------------------
NORMAL
FIXED ASSETS DEPRECIATION SPECIAL DEPRECIATION TOTAL
- ---------------------------------------------- -------------- -------------------- ---------

a) Intangible assets
Concessions, trade marks, patents and
licenses .................................. 615 -- 615
b) Tangible assets
Buildings .................................. 10,298 6,114 16,412
Strip-mines ................................ 1,107 -- 1,107
Technical equipment and machinery ......... 70,679 48,517 119,196
Factory and office equipment ............... 17,483 10,579 28,062
-------------- -------------------- ---------
100,182 65,210 165,392
============== ==================== =========

NOTE F INVESTMENTS IN OTHER GROUP COMPANIES

MIBRAG mbH holds 20 % or more of the voting rights in 8 companies.

One of these companies -- MUEG Mitteldeutsche Umwelt-und Entsorgungs GmbH,
Braunsbedra, (MUEG for short) -has been accounted for using the equity
method based on its audited annual financial statements as of December 31,
1995, 1994, and 1993. The audited financial statement as of December 31, 1996
are not available yet. MUEG was founded in 1990 and coordinates the waste
disposal activities in the Central German brown coal area. The equity value
as of December 31, 1996 is as follows:

DM
--------

Cost and contributions ......................... 12,186
+ Net profit share 1994-1996 ..................... 3,472
. / . Distributed profits share 1994-1996 ............ 3,472
--------
= Carrying amount "at equity" as of 12/31/1996 .. 12,186
========

F-106

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE F INVESTMENTS IN OTHER GROUP COMPANIES (Continued)

The other 7 companies have been accounted for at their historical
acquisition costs, because either MIBRAG mbH is unable to exercise
significant influence over the investees operating and financial policies or
the impact on the consolidated financial statements is not material.

NOTE G LOAN TO FERNWAERME HOHENMOELSEN GMBH

In accordance with the purchase contract dated December 14, 1995, MIBRAG
sold the district heating network assets to the Fernwarme Hohenmolsen GmbH,
effective as of 1 January 1995, at a net sales price of DM 19 million. After
deducting a down payment of DM 1.4 million in 1995, the balance will be
repaid in equal installments over a period of 25 years and an interest rate
of 5 per cent fixed until 1999. After 1999 the interest rate will be adjusted
to the changed market rate at that time.

The fair market value of the loan was as follows:

DEC. 31, 1996 DEC. 31, 1995

DM DM
16,867 17,600

NOTE H LONG-TERM INVESTMENTS

Near year-end of 1996 marketable debt securities with a face value of DM
20 million were acquired. These securities are carried at their costs. The
acquisition cost approximates the fair value for this category of securities
based on quoted market prices as of December 31, 1996. The securities will
not be sold before 1998. Gains due to the accrual of interest of TDM 245 in
1996 are included in interest income. The maturity date will be in the period
within one year through five years.

NOTE I OTHER LOANS

The other loans refer to loans granted to the new investors of a
subsidiary of MIBRAG mbH. In accordance with the first additional clause of
the loan contract dated April 3, 1995 between KfW (Kreditanstalt fur
Wiederaufbau) and MIBRAG mbH, KfW grant MIBRAG mbH a loan of DM 82,208 to
December 30, 2005 at a fixed interest rate of 6.67%. As per agreement the
loan was received on December 29, 1995.

The loans to the new investors of the subsidiary of MIBRAG mbH were
granted at the same conditions as those applicable to the loan between MIBRAG
mbH and KfW.

NOTE J OVERBURDEN

The reconciliation of the overburden costs is as follows:

(IN MILLIONS)
DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
---------------------- ---------------------- ----------------------
TONNAGE VALUE TONNAGE VALUE TONNAGE VALUE
METRIC TONS DM METRIC TONS DM METRIC TONS DM
------------- ------- ------------- ------- ------------- -------

Profen ........ 12.7 113.6 12.8 129.2 14.2 143.5
Schleenhain .. 15.2 140.7 15.2 140.7 17.0 155.0
Zwenkau ....... 5.8 50.6 4.6 38.5 4.4 21.4
------------- ------- ------------- ------- ------------- -------
33.7 304.9 32.6 308.4 35.6 319.9
============= ======= ============= ======= ============= =======

F-107

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE J OVERBURDEN (Continued)

The basis for the determination of the overburden is the total quantity
of partially exposed raw brown coal. The herein included volume of completely
exposed coal can be mined without further removal with the equipment in
place. This part of the immediately extractable overburden balances can be
analyzed as follows:

(IN MILLIOINS)
DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
---------------------- ---------------------- -------------------------
TONNAGE VALUE TONNAGE VALUE TONNAGE
METRIC TONS DM METRIC TONS DM METRIC TONS VALUE DM
------------- ------- ------------- ------- ------------- ----------

Profen ....... 2.5 23.0 2.0 20.1 2.4 24.0
Schleenhain . temporary shut down between 1995 and 1999 0.6 5.8
Zwenkau ...... 0.3 2.0 0.2 1.5 0.2 0.9
------------- ------- ------------- ------- ------------- ----------
2.8 25.0 2.2 21.6 3.2 30.7
============= ======= ============= ======= ============= ==========

NOTE K TRADE RECEIVABLES

Trade receivables were disclosed in the balance sheet, net of allowances,
as follows:

ALLOWANCES (IN DM)

Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
954 514 894

NOTE L SHORT-TERM INVESTMENTS

In 1996 marketable debt securities were acquired at costs of DM 210.3
million. These securities were set up to reinvest the additional liquidity
resulting from the entry of new investors of a subsidiary of MIBRAG mbH.
Realized gains of DM 5.9 million were disclosed in interest income. The
maturity dates of the securities vary from one year to five years.

NOTE M ACCRUALS FOR PENSIONS AND SIMILAR OBLIGATIONS

The provision was mainly raised for briquette benefit claims of active
employees on the basis of the collective agreement of November 9, 1993 in
respect to allowances in kind. Employees entitled must be employees of the
company at the date of retirement. The entitlement elapses with early ending
of the working relationship or on receipt of social plan benefits.

The calculation based on an actuarial valuation of January 10, 1997. The
valuation took into account the entitlement to the redemption value of DM
185.00 per metric ton of briquettes as specified in the collective agreement
and the employees entitled to benefits as of June 30, 1996.

NOTE N TAXATION ACCRUALS

MIBRAG did not accrue for income tax under German GAAP, because of net
operating losses in 1994 through 1996. Deferred tax assets and liabilities
have not been recorded, because there are no significant differences between
the German GAAP financial statement and tax bases of the assets and
liabilities.

For US GAAP accounting purposes mainly due to the application of purchase
accounting and different useful lives for depreciable fixed assets, the
financial values differ significantly from the tax basis.

F-108

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE N TAXATION ACCRUALS (Continued)

Significant components of MIBRAG's deferred tax liabilities and assets at
December 31, 1996, that result from carryforwards and temporary differences
between the US GAAP financial statement basis and tax basis of assets and
liabilities are summarized as follows:

1996
-------

Deferred tax liability
long term assets ................ 32.1
investment subsidies ............ 3.4
unrealized holding gains ........ 7.5
-------
Total deferred liability ........ 43.0
-------
Deferred tax assets
overburden ...................... 118.8
accruals and liabilities ........ 98.0
Net operating loss carryforwards 126.1
Total deferred tax assets ........ 342.9
-------
Net deferred tax asset ........... 299.9
-------
Valuation allowance .............. 299.9
=======
Deferred tax asset/liability .... 0.0
=======

Because all differences in the opening balances between German and US GAAP
are either deductible or taxable for German tax purposes these differences,
which result in a net deductible difference, would be considered to be
temporary in accordance with US GAAP. Because, however, as of the acquisition
date, it was considered more likely than not that the whole deferred tax
asset would not be realizable due to ongoing operating losses in the
foreseeable future, a valuation allowance for the entire net deferred tax
asset was recorded.

For the years 1994 to 1996 it is considered that the probability remains
more likely than not that there will be sufficient future taxable income to
realize the deferred tax asset.

Therefore a valuation allowance of 100% on the net deferred tax asset is
still considered to be necessary as of December 31, 1996.

The German corporation income tax rate on undistributed income is 45%.
This differes from the company's effective tax rate of 0%, because the
company has no taxable income and in the recording of a deferred tax benefit
for net loss carry forewards is prohibited under German GAAP.

Since 1991 land taxation payments have been made in advance based on 0.2 %
of the DM-opening balance sheet values until the land tax values have been
determined. As the total strip mining and surrounding land have been valued
at 0.00 DM/sqm land tax has only been paid where specific assessments have
been made. New assessments have been made for the outstanding payments from
1991 until 1996 taking into account the special tax authorities regulation
"Einheitsbewertung des Grubengelandes bei Braunkohlenbergbau" (dated January
11, 1995), decrees of the new Federal States to the same topic (dated May 21,
1993) and the current tax authorities advises.

At December 31, 1996 the Company had DM 225 million net operating loss
carryforwards, which do not expire and may be applied against future taxable
income.

F-109

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE O ENVIRONMENTAL AND MINING PROVISIONS

The following is a summary of environmental and mining provisions (in DM):

BALANCE AS OF BALANCE AS OF BALANCE AS OF
DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
--------------- --------------- ---------------

1) End-lake provision .................... 287,262 268,357 257,569
2) Provision for environmental pollution 9,975 10,000 10,000
3) Landscaping ........................... 19,420 28,009 23,833
4) Planting .............................. 12,776 16,097 9,601
5) Relocation of villages ................ 62,623 61,657 65,034
--------------- --------------- ---------------
392,056 384,120 366,037
=============== =============== ===============

In 1996 reclassifications were made relating to landscaping (DM 10,488)
and planting (DM 763) that have to be made in connection to end-lake
restoration, so that the provision raised in prior years and in the current
year were allocated to the end-lake provision section.

1) END-LAKE PROVISION

The duty of reclaiming mining fields, to make the area reusable in the
public's interest, follows from the duty specified in section 2 of the
Bundesberggesetz (BBergG) -- Federal Mining Law. In terms thereof a mine
closure plan must be prepared (section 53 BBergG) for termination of above
earth mining. In this plan, the actions must be described to protect third
parties from dangers caused by the mining operation and to ensure the
reusefulness of the earth surface (section 51 BBergG).

The duty of reclaiming of the mining fields applies to MIBRAG in respect
of the Profen and Schleenhain mines. MIBRAG is exempted from this duty in
respect of the Zwenkau mine in terms of section 4 (3) of the operating lease
agreement of 17 December 1993 with MBV, the state-owned company responsible
for reclamation of closed mines in the east German region.

The mining field reclamation of the Profen and Schleenhain mines after the
ceasing of production is planned for 2029-2046 and 2041-2073 respectively. A
legally binding closure plan laying down the principles for action plans in
accordance with the BBergG is normally approved two years in advance to the
commencement of production by the relevant mining department. The liability
to reclaim the area exists from the start of mining activities. The
calculation of the total costs for reclaiming mining fields are estimated on
the bases of current prices.

The total restructuring costs consist mainly of costs for reconstruction
bank reinforcement, dewatering and watering.

F-110

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE O ENVIRONMENTAL AND MINING PROVISIONS (Continued)

The calculation for the respective three years were as follows:

DECEMBER 31, 1996
----------------------------------------------------------------------
TOTAL TOTAL EXTRACTION BALANCE
RESTORATION FIELD AS OF AS OF
COSTS VOLUME DEC. 31, 1996 DEC. 31, 1996
DM T T DM
--------------- ------------- -------------------- -----------------

Profen .......... 246,748 472,100 172,447 90,131
Schleenhain ..... 488,239 810,613 327,293 197,131
--------------- ------------- -------------------- -----------------
734,987 1,282,713 499,740 287,262
=============== ============= ==================== =================

DECEMBER 31, 1995
----------------------------------------------------------------------
TOTAL TOTAL BALANCE
RESTORATION FIELD EXTRACTION AS OF AS OF
COSTS VOLUME DEC. 31, 1995 DEC. 31, 1995
DM T T DM
--------------- ------------- -------------------- -----------------
Profen .......... 222,411 472,100 162,492 76,552
Schleenhain ..... 475,047 810,613 327,293 191,805
--------------- ------------- -------------------- -----------------
697,458 1,282,713 489,785 268,357
=============== ============= ==================== =================

DECEMBER 31, 1994
----------------------------------------------------------------------
TOTAL TOTAL EXTRACTION BALANCE
RESTORATION FIELD AS OF AS OF
COSTS VOLUME DEC. 31, 1994 DEC. 31, 1994
DM T T DM
--------------- ------------- -------------------- -----------------
Profen .......... 219,938 472,100 153,404 71,467
Schleenhain ..... 463,817 810,613 325,250 186,102
--------------- ------------- -------------------- -----------------
683,755 1,282,713 478,654 257,569
=============== ============= ==================== =================

2) PROVISION FOR ENVIRONMENTAL POLLUTION ("ALTLASTEN")

This provision for the clean-up/safeguarding of "Altlasten" is determined
in respect of disposals sites and old locations of MIBRAG mbH in refinement
and mining production areas, on which waste deposits can be found.

The duty for clean-up results from the waste disposal laws of Saxony and
Saxony-Anhalt, in terms of which the subsequent use of the mine area must be
without problems. The obligation to avoid danger results from the general
applicable law of Germany and the individual states. A danger from a policing
point of view occurs when a danger is presented to the surrounding area. The
company has listed areas suspectable of contamination in a land register.

An accrual of DM 10 million which is the ceiling for such costs in
accordance with the purchase and sales agreement with the Treuhandanstalt,
was recorded.

3) LANDSCAPING

In this provision are included costs for reclaiming disposal areas and
leveling of the area outside the embankments. These costs include costs for
continous landscaping as well as closing down landscaping.

F-111

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE O ENVIRONMENTAL AND MINING PROVISIONS (Continued)

The duty results from the "Bundesberggesetz", that states that land must
be made reusable during production and after production has ended (sections
55, 2, 4 BBergG).

The provision for landscaping has been recalculated as of December 31,
1996, 1995, 1994, based on the special strategic plans, recultivation plan
1994/95 of Profen and Schleenhain, the strategic plan of the Zwenkau mine,
internal budget documentation as well as costing documentation.

The strategic plans categorize the disposal areas according to future
usage plans, e.g. agricultural or foresting uses and special uses (roads,
flood areas, recreation etc.). The cost estimation has been prepared by the
recultivation department based on use, technology, period of recultivation,
material-, personnel-and technical expenses utilizing generally used market
prices.

The provision was as follows (in DM):

DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
--------------- --------------- ---------------

Profen ........ 6,886 11,203 8,782
Schleenhain .. 8,645 13,485 13,922
Zweckau ....... 3,889 3,321 1,129
--------------- --------------- ---------------
19,420 28,009 23,833
=============== =============== ===============

4) PLANTING

In this account provision is made for costs in connection with temporary
planting as well as the revegetation of the mining pits after closure.

The duty for planting results from the environmental protection clauses
contained in the general and mine closure strategic plans. Legal basis are
the "Bundesberggesetz" (sections 55 and 66) and the
"Bundesimmissionsschutzgesetz" (Federal Emission Law). The "Bundesberggesetz"
determines that preventative measures must also be taken at the time of
mining and the "Bundesimmissionsschutzgesetz" determines that mines must be
operated in such a way that harmful environmental effects must be prevented,
that can be prevented with available technology.

The quantification results from the surveyed areas, that have been used
for disposal and that have not been finally planted and the border
embankments that have not been planted. Open cast areas have to be planted at
the difference between actual and technically required areas. Via temporary
planting, dust pollution and earth erosion are reduced.

The account's composition at the balance sheet dates was as follows (in
DM):

DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
--------------- --------------- ---------------

Profen ........ 4,335 5,663 4,629
Schleenhain .. 8,441 10,434 4,972
--------------- --------------- ---------------
12,776 16,097 9,601
=============== =============== ===============

5) RELOCATION OF VILLAGES

The provision for relocation of villages is in respect of relocation costs
for the municipalities of Schwerzau, Grossgrimma, Breunsdorf and Heuersdorf,
which is necessary for the expansion of the Profen and Schleenhain mines.

The obligation is based on the agreements that have been reached with the
relevant municipalities. In addition the company has expressed through its
appearance in the public that the relocations will take place at a specified
date, which has created a factual obligation to fulfill.

F-112

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE O ENVIRONMENTAL AND MINING PROVISIONS (Continued)

The calculation of the provision is based on a method that has been
accepted by the taxation authorities in western Germany for the Rhine brown
coal area. This method takes into account the relocation planning costs
infrastructural projects, projected development costs, cemetery relocation,
demolition and landmark preservation. The provision is built up in equal
annual amounts, commencing in the two years before the relocation takes place
and ending in the middle of the relocation year.

For the almost completed town relocations in Schwerzau and Breunsdorf
provisions have been raised for liabilities that will become payable from
1997 through 2000 (namely for landmark protection and for demolition costs).

Composition (in DM):

DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
--------------- --------------- ---------------

Schwerzau .... 1,407 1,892 2,350
Grossgrimma .. 35,248 38,361 37,439
Breunsdorf .. 2,400 1,785 9,500
Heuersdorf .. 23,568 19,619 15,745
--------------- --------------- ---------------
62,623 61,657 65,034
=============== =============== ===============

NOTE P OTHER ACCRUALS

Accrued liabilities are as follows (in DM):

DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
--------------- --------------- ---------------

1) Severance payments ...................... 20,875 18,400 19,600
--------------- --------------- ---------------
2) Personnel expenses
-Employment anniversaries ............... 2,712 3,143 2,114
-Vacation ............................... 377 548 738
-Equalization amount in terms of the Act
on Handicapped Persons.................. 217 266 343
--------------- --------------- ---------------
3,306 3,957 3,195
--------------- --------------- ---------------
3) Remaining accruals ...................... 14,967 23,240 20,054
=============== =============== ===============
39,148 45,597 42,849
=============== =============== ===============

1) SEVERANCE PAYMENTS

The calculation of the provision was based on an average wage rate and an
average employment service period of 25 years. The employees are entitled to
one time severance payment if the company initiates termination or in the
case of retrenchments. The severance payments are limited to DM 36 per
person.

For the period from January 1, 1996 to January 1, 2001 the planned
personnel reductions according to the latest estimates will come up to 671
employees. The amount is reduced by employees which the Treuhandanstalt/BvS
has assumed responsibility for.

2) PERSONNEL EXPENSES

MIBRAG mbH grants awards in recognition of long services in the company,
based on the collective bargaining agreement of January 1, 1992 and the
company agreement of October 1, 1995. The

F-113

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE P OTHER ACCRUALS (Continued)

employees are entitled to financial awards, which increase in proportion to
their employment periods. The valuations of the benefits were based on the
actuarial valuations of January 10, 1997, January 18, 1996 and February 15,
1995, taking into account commercial principles. Since a reduction in the
personnel force is anticipated, the obligation has only been accrued for if
the person has been employed by MIBRAG mbH for at least 10 years.

The liability for vacation arises from the vacation days outstanding at
balance sheet dates, which have been determined for each employee.

3) REMAINING PROVISIONS

Composition (in DM):

DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
--------------- --------------- ---------------

Contingencies:
- -Consulting fees ................................. 781 5,300 --
- -Outstanding invoices ............................ 5,651 4,293 1,220
- -Water usage fees ................................ 1,710 1,564 925
- -Briquette sales returns ......................... 510 1,323 450
- -Inventory fees .................................. 149 345 570
- -Others .......................................... 760 18 5,144
--------------- --------------- ---------------
9,561 12,843 8,309
--------------- --------------- ---------------
Scrapping of fixed assets
Breitenfeld/Profen................................ 1,120 6,471 6,471
Asbestos clean up ................................ 654 856 1,483
Auditing, consulting and year-end accounting
fees............................................. 790 555 1,500
Others ........................................... 2,842 2,515 2,291
--------------- --------------- ---------------
5,406 10,397 11,745
--------------- --------------- ---------------
14,967 23,240 20,054
=============== =============== ===============

NOTE Q LONG-TERM DEBT

Long-term debt consists of the following (in DM):

DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
--------------- --------------- ---------------

KfW-loans ......................... 323,730 221,438 139,230
Norddeutsche Landesbank (Nord LB) 1,577 1,595 2,229
--------------- --------------- ---------------
325,307 223,033 141,459
=============== =============== ===============

Liabilities to KfW-loans refer to three loans from the Kreditanstalt fur
Wiederaufbau, Frankfurt/Main:

- The first loan was granted by contract, dated December 9, 1992, for the
construction of a raw brown coal powered industrial power station with a
circulating "Wirbelschicht" power source in Wahlitz of DM 139,230. The
interest rate has been fixed at 7% p.a. until December 9, 2002, 5%
thereof is borne by the Federal Department of Environmental Affairs, for
the first 5 years. The redemption period is 20 years. The repayments in
40 equal amounts commence from June 30, 1998.

F-114

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE Q LONG-TERM DEBT (Continued)

- On April 3, 1995 MIBRAG mbH as well as a subsidiary closed loan
agreements with Kreditanstalt fur Wiederaufbau (KfW).

- MIBRAG entered into the loan agreement to partially finance the limited
partner capital contribution of the new investors in one subsidiary. The
determination of the final loan amount (DM 103,000) was documented by
the amendments, dated December 21, 1995 and January 15, 1996. The
redemption period is 13 years. In 1996 the loan was fully called up by
MIBRAG mbH, DM 8,500 were redeemed in December 1996, so that the balance
as of December 31,1996 amounted to DM 94,500. The interest rates after
the first redemption of DM 8,500 are as follows:

AMOUNT INTEREST RATE FIXED UNTIL
DM % YEAR
- -------- --------------- -------------

75,424 6.67 2005
10,838 6.82 2005
3,335 6.76 2005
4,903 6.26 2005
- -------- --------------- -------------
94,500
========

The interest rate after 2005 will be adjusted to the market rate at that
time.

- - The second loan contract closed on April 3, 1995 between KfW and a
subsidiary was granted for partially financing of the modernization and
reshaping of both industrial power plants in Deuben and Mumsdorf,
especially for the construction of the flue gas desulferization plants. DM
70,000 have been called up as of January 12, 1996, additional DM 20,000 as
of December 30, 1996. The total loan amount is DM 134,000. The redemption
period is 13 years with the following interest rates:

AMOUNT INTEREST RATE FIXED UNTIL
DM % DATE
- ---------- ---------------------------- ---------------------

70,000 6.8 January 12, 2006
20,000 3-month or 6-month FIBOR December 30, 2010
- ---------- ---------------------------- ---------------------
90,000
==========

The interest rate after January 12, 2006 will be adjusted to the market
rate at that time.

Interest paid for the three loans in 1996, 1995, and 1994 was DM 14.1
million, DM 2.8 million, and DM 1.4 million, respectively.

The loans from the Norddeutsche LB granted for construction purposes in
Draschwitz relate to the relocation of Schwerzau. A 1% annual redemption has
been agreed on. The loan is interest free until 2010. After that the interest
rate amounts to 8% p.a.

F-115

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE R MATURITY PERIODS OF LIABILITIES

The maturity periods of liabilities are as follows (in thousands DM):

LIABILITIES PAYABLES
TO TRADE TO OTHER DOWNPAYMENTS
BANKS * PAYABLES PARTICIPATIONS PAYABLES RECEIVED TOTAL
------------- ---------- -------------- ---------- -------------- ---------

Balance as of Dec. 31,
1994....................... 141,459 61,029 1,871 59,865 -- 264,224
thereof: maturity period .
--up to 1 year .. 2,229 60,928 1,871 59,557 -- 124,585
--1-5 years ..... -- 101 -- 160 -- 261
--more than 5
years ..................... 139,230 -- -- 148 -- 139,378
Balance as of Dec. 31,
1995....................... 223,033 93,464 3,421 65,006 -- 384,924
thereof: maturity period
--up to 1 year .. 8,500 93,212 3,421 64,866 -- 169,999
--1-5 years ..... -- 252 -- -- -- 252
--more than 5
years ..................... 214,533 -- -- 140 -- 214,673
Balance as of Dec. 31,
1996....................... 325,307 75,737 8,615 68,467 140 478,266
thereof: maturity period .
--up to 1 year .. 14,118 73,628 8,615 58,152 140 154,653
--1-5 years ..... 82,910 2,109 -- 2,420 -- 87,439
--more than 5
years ..................... 228,279 -- -- 7,895 -- 236,174

- ------------
* Liabilities to banks are fully secured by mortgages

NOTE S COMMITMENTS AND CONTINGENCIES

(IN DM) AT DECEMBER 31,
------------------------------
1996 1995 1994
--------- --------- --------

Guarantees for indebtedness of
others............................... 86,430 108,405 35,350
Other contractual obligations ....... 163,200 127,000 239,000

The other contractual obligations refer to long term investment projects
in the mines Profen and Schleenhain and in the three power stations.

MIBRAG leases office equipment and railway-carriages, expiring at various
dates. Rental and lease expenses amounted to DM 2,390, DM 2,853 and DM 2,355
in the years ended December 31, 1994, 1995 and 1996, respectively. The future
minimum lease payments under operating leases are as follows: 1997: DM 2,361;
1998: DM 232; 1999: DM 97; and no obligations thereafter. Future rental
expenses for railway-carriages are bound for one year with an option to
extend in the following year. These expenses approximately amount to DM 2
million p.a

NOTE T RELATED PARTY TRANSACTIONS

Between MIBRAG and two subsidiaries of the common parent companies NRG
Energy Inc., Morrison-Knudsen Corp. and PowerGen plc. agreements for
consulting and management services were closed in respect of the mining
operations and the refinement facilities.

These contracts determine certain consultancy services to be provided by
the two subsidiaries Morrison-Knudsen Deutschland GmbH (MKD) and Saale
Energie Service GmbH (SES) to MIBRAG or its subsidiaries.

F-116

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DM)

NOTE T RELATED PARTY TRANSACTIONS (Continued)

MIBRAG is obliged to determine and pay the cost-related renumeration for
these services.

Payments for consultancy services in 1994 were restricted to an amount of
DM 10 million, set by the THA in the purchase agreement. In 1995 and 1996 the
payments were unrestricted.

Expenditures for MIBRAG were as follows (in thousands DM):

1996 1995 1994
-------- -------- -------

MKD ... 18,396 17,655 7,500
SES ... 7,894 8,599 2,500
-------- -------- -------
26,290 26,254 10,000
======== ======== =======

NOTE U SETTLEMENT AGREEMENT

MIBRAG B.V., MIBRAG mbH and BvS, as the former shareholder of the MIBRAG
AG, entered into a settlement agreement on January 23, 1997, which has been
negotiated since January 1, 1994. As a result of the settlement agreement BvS
paid to MIBRAG mbH DM 15.941 million for the undercapitalization of one of
the power plants, which was included in the split-up to MIBRAG on December
31, 1993. The undercapitalization claim was raised by MIBRAG B.V. as the
purchaser of the shares in MIBRAG mbH, because a loan for power plant
financing was called up early in 1993, not in accordance with the loan
contract.

Under German GAAP the settlement of the claim by MIBRAG B.V. to BvS was
accounted for as capital contribution from MIBRAG B.V. to MIBRAG mbH, which
resulted in an increase in the additional paid-in capital by DM 15.941
million.

F-117

[LETTERHEAD OF DELOITTE & TOUCHE]

REPORT OF DELOITTE & TOUCHE GMBH, INDEPENDENT AUDITORS

To the Shareholders
Saale Energie GmbH
Schkopau, Germany

We have audited the accompanying balance sheet of Saale Energie GmbH (SEG)
as of December 31, 1996, and the related statements of operations and of cash
flows for the year 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 generally accepted auditing
standards 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 present fairly,
in all material respects, the financial position of Saale Energie GmbH as of
December 31, 1996, and the results of its operations for the year 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 year ended December 31, 1996 and shareholders' equity as
of December 31, 1996 to the extent summarized in Note C to the financial
statements.

Halle, Germany
October 31, 1997

DELOITTE & TOUCHE GmbH
Wirtschaftsprufungsgesellschaft

(Roder)

F-118

SAALE ENERGIE GMBH

STATEMENT OF OPERATIONS
(IN THOUSANDS DM)

YEAR ENDED
DECEMBER 31,
1996
--------------

Sales revenue ......................................... 161,309
Other operating income................................. 3
--------------
Total revenue ......................................... 161,312
Cost of materials and service purchased ............... 170,897
Depreciation of intangible and tangible fixed assets . 1
Other operating expenses .............................. 1,060
--------------
Total operating expenses .............................. 171,958
Results from operations................................ (10,646 )
--------------
Income from companies in which participations are
held.................................................. 6,581
Interest expense (net) ................................ (3,845)
--------------
Results from ordinary activities ...................... (7,910)
Income tax ............................................ (40)
--------------
Net loss .............................................. (7,870)
==============

See accompanying Notes to Financial Statements

F-119

SAALE ENERGIE GMBH

BALANCE SHEET
(IN THOUSANDS DM)

AT DECEMBER 31,
NOTE 1996
--------- ---------------

ASSETS
Contributions outstanding........... 713
NON-CURRENT ASSETS
FIXED ASSETS
Tangible assets
Factory and office equipment ...... B 2
FINANCIAL ASSETS
1.Subsidiaries...................... B, E 49
2.Participations ................... B, E 200,677
3.Loans granted to participations .. B, F 82,200
---------------
TOTAL NON-CURRENT ASSETS ........... 282,928
CURRENT ASSETS
INVENTORIES
Raw materials and supplies......... B 325
RECEIVABLES AND OTHER ASSETS
1.Trade receivables ................ B, D, G 24,764
2.Other assets...................... B, G 14,549
CHEQUES, CASH-IN-HAND, BANK
BALANCES .......................... B 28,748
---------------
TOTAL CURRENT ASSETS ............... 68,386
---------------
TOTAL ASSETS ........................ 352,027
===============
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' Equity................ H
Subscribed capital.................. 1,000
Capital reserve..................... 48,041
Net loss for the year............... (7,870)
Profit/loss carried foreward ....... (3,513)
---------------
TOTAL SHAREHOLDERS' EQUITY ......... 37,658
PROVISIONS
1.Taxation accruals ................ --
PROVISIONS
Other accruals..................... B 40
LIABILITIES
1.Trade payables.................... B, I 8,836
2.Payables to shareholders.......... B, I 92,084
3.Payables to subsidiaries.......... B, I 4,375
4.Payables to participations ....... B, I 174,885
5.Other payables.................... B, I 34,149
---------------
TOTAL SHAREHOLDERS' EQUITY AND
LIABILITIES ........................ 352,027
===============

See accompanying Notes to Financial Statements

F-120

SAALE ENERGIE GMBH

STATEMENT OF CASH FLOWS
(IN THOUSANDS DM)

YEAR ENDED
DECEMBER 31, 1996
-----------------

Cash flows from operating activities:
Net loss for the year....................................... (7,870)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation on tangible assets and current asset
write-offs................................................ 4
Change in assets and liabilities:
Inventories............................................... 384
Short-term trade receivables ............................. (24,647)
Other assets.............................................. (14,415)
Decrease in accruals...................................... (1,535)
Short-term trade payables................................. 8,218
Interest payable.......................................... 3,583
Other liabilities......................................... 114,597
-----------------
CASH PROVIDED BY OPERATING ACTIVITIES ...................... 78,319
-----------------
Cash flows from investing activities:
Increase in participations.................................. (82,658)
-----------------
CASH USED FOR INVESTING ACTIVITIES ......................... (82,658)
-----------------
Cash flows from financing activities:
Increase in capital reserve................................. 1,600
Increase in other payables.................................. 25,468
Increase in payables to shareholders........................ 4,132
-----------------
CASH PROVIDED BY FINANCING ACTIVITIES....................... 31,200
-----------------
NET INCREASE IN CASH ....................................... 26,861
CASH AT BEGINNING OF YEAR .................................. 1,887
-----------------
CASH AT END OF YEAR ........................................ 28,748
=================

See accompanying Notes to Consolidated Financial Statements

F-121

SAALE ENERGIE GMBH

NOTES TO 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 interest 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 result
of operations for the year ended December 31, 1996 to the extent summarized
in Note C to the financial statements. All amounts herein are shown in
thousands of Deutsche Mark ("DM") unless otherwise stated.

SEG was not required to prepare consolidated financial statements for
1996. SEG owns a 98% share of its subsidiary Saale Energie Service GmbH. The
company is included at cost in SEG's financial statements. Furthermore, SEG
holds a 41.1% share in the Kraftwerk Schkopau 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.

USE OF ESTIMATES: The preparation of financial statement 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 date and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.

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: 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.

ACCRUALS AND LIABILITIES: Accruals have been recorded for known
obligations at the balance sheet date at the amounts of the estimated
liability. Liabilities are valued at the amounts outstanding.

F-122

SAALE ENERGIE GMBH

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 was not required to prepare consolidated financial statements for
1996. If US GAAP had been applied, SEG would be required to prepare
consolidated financial statements including the financial statements of Saale
Energie Service GmbH (SES), its 98% owned subsidiary.

US GAAP financial statements would therefore include the 1996 operating
results of SES, net of minority interest, 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 Kraftwek Schkopau GbR were recorded as
expenses of the period. Parallel, the amounts attributable to the long-term
electricity supply contract were recorded as revenue in the period they were
received. See Note D.

In accordance with US GAAP, these agreements would be considered as
leasing agreements. The use and benefit agreement would be considered as a
capital lease and the long-term sales agreement as it relates to capacity
availability is 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 made by VEAG
under the terms of the agreement amounts to DM875.272, whereas the net
present value of the lease obligation liable to GbR over the minimum period
of 25 years is DM728.240 at December 31, 1996.

3. OUTSTANDING CONTRIBUTIONS BY SHAREHOLDERS'

As of December 31, 1996 contributions from shareholders were outstanding
at DM713, which were not deducted from German shareholders' equity. US GAAP
shareholders' equity has to be reduced by the outstanding contributions.

4. DEFERRED TAXES

Under German GAAP, SEG did not accrue for income tax, because of net
operating losses in 1996. Deferred tax assets and liabilities have not been
recorded, because under German GAAP they are only recognized to the extent
that deferred tax liabilities exceed deferred tax assets. Deferred tax assets
are not recorded for operating loss carryforwards.

For US GAAP accounting purposes, mainly due to the application of lease
accounting, the financial values differ significantly from the tax basis.

F-123

SAALE ENERGIE GMBH

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of SEG's deferred tax liabilities and assets at
December 31, 1996, that result from carryforwards and temporary differences
between the US GAAP financial statement basis and tax basis of assets and
liabilities are summarized as follows:

1996
------

Deferred tax liability
lease accounting ................................ 17.6
investment in GbR ............................... 50.2
------
Total deferred liability ....................... 67.8
------
Deferred tax assets operating loss carryforwards 54.7
------
Net deferred tax liability ....................... 13.1
======

Because all differences in the opening balances between German and US GAAP
are taxable for German tax purposes these differences, which result in a net
taxable difference, would be considered to be temporary in accordance with US
GAAP.

RECONCILIATION TO US GAAP

The following is a summary of the significant adjustments to net income
for the year 1996 which will be required if US GAAP had been applied instead
of German GAAP.

YEAR ENDED
DECEMBER 31,
NOTE 1996
------ --------------

Net loss as reported in the income statement under
German GAAP ...................................... (7,870)
Adjustments required to conform with US GAAP:
Consolidation of SES ............................. (1) (40)
Lease adjustment ................................. (2) 31,536
Deferred taxes ................................... (4) (14,101)
--------------
Net income in accordance with US GAAP ............. 9,525
==============

The following is a summary of the significant adjustments to shareholders'
equity as of December 31, 1996 which will be required if US GAAP had been
applied instead of German GAAP.

YEAR ENDED
DECEMBER 31,
NOTE 1996
------ --------------

Shareholders' equity as reported in the balance sheet
under German GAAP ........................................ 37,658
Adjustments required to conform with US GAAP:
Consolidation of SES ..................................... (1) 3,277
Lease adjustment ......................................... (2) 31,536
Outstanding contributions ................................ (3) (713)
Deferred taxes ........................................... (4) (13,087)
--------------
Shareholders' equity in accordance with US GAAP .......... 58,671
==============

F-124

SAALE ENERGIE GMBH

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE D LONG-TERM SALES AND SERVICE AGREEMENTS

According to a long-term electricity supply contract between SEG and
Vereinigte Energie AG (VEAG), SEG supplies its total available electricity
capacity to VEAG. The contract was closed for a 25 years period starting at
the date of commissioning of the power plant. In terms of the contract VEAG
is obliged to pay on a monthly basis a price that covers (1) the availability
of electrical supply capacity and (2) the operating cost incurred to produce
the electricity. Under the terms of this agreement VEAG has agreed to make
payments of DM2,142.7 million over the period of the agreement (25 years). In
1996 SEG's sales revenues of DM161,309 solely relate to sales made to VEAG.

SEG has a use and benefit agreement with Kraftwerk Schkopau GbR (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 equipment and installations of the power station. In return
SEG has obliged to pay all costs of GbR related to the SEG-power share as
stipulated in the agreement plus profit mark-up plus value added tax. In 1996
the SEG has recorded expenses of DM95,797 related to this agreement.

In order to manage and operate its share in the power plan SEG closed a
contract with Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB) on December
10, 1993. 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.

NOTE E INVESTMENTS IN SUBSIDIARIES AND PARTICIPATIONS

SEG holds a 98% share in Saale Energie Service GmbH (SES). The investment
is accounted for at its historical acquisition cost of DM49. The business of
the company comprises of all activities relating to the supply of management,
maintenance and consulting services in respect of power stations and related
plants, especially for the lignite power stations of the Mitteldeutsche
Braunkohlengesellschaft mbH (MIBRAG) and its subsidiaries.

A 41.1% participation in the Kraftwerk Schkopau GbR (GbR), which is the
owner of the Schkopau power plant, is held by SEG, and is recorded at cost.

SEG's 44.4% share in the Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB)
has been recorded at the historical acquisition cost of DM22. SEG has
assigned its share in KSB to C & L Deutschland Revision AG in security for
VEBA Vereinigte Kraftwerke Ruhr AG (VKR).

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 DM98 million to GbR, of which DM16,440 was drawn during
1996. The balance outstanding at December 31, 1996 was DM82,200. The loan is
unsecured and bears interest at a fixed rate of 7% p.a. The loan has been
granted for an indefinite period and the repayment terms are not fixed.

NOTE G RECEIVABLES AND OTHER ASSETS

The trade receivables of DM25, as reported on December 31, 1996, relate
solely to power supplies to VEAG. The other assets are mainly receivables
from tax authorities.

NOTE H CHANGE IN SHAREHOLDERS' EQUITY

The Shareholders' equity of SEG changed in 1996 solely by the net loss of
1996 (DM7,870) from DM45,528 to DM37,658.

F-125

SAALE ENERGIE GMBH

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE I LIABILITIES

The maturity periods of the liabilities are as follows (in DM):

MATURITY PERIOD MATURITY PERIOD TOTAL BALANCE
OF LESS THAN BETWEEN AS OF
1 YEAR 1 AND 5 YEARS DEC. 31, 1996
--------------- --------------- ---------------

1)Trade payables .............................. 8,836 -- 8,836
2)Payables to shareholding companies ......... 6,387 85,697 92,084
3)Payables to subsidiaries .................... -- 4,375 4,375
4)Payables to companies in which participants
are held ..................................... 174,884 -- 174,884
5)Other liabilities ........................... -- 34,150 34,150
--------------- --------------- ---------------
190,107 124,222 314,329
=============== =============== ===============

2) PowerGen plc., London and NRGenerating B.V., Amsterdam granted a loan
to SEG for the partial funding of its financial requirements at a total
amount of DM148,054. The loans are not collateralized and bear interest at a
fixed rate of 7.5% p.a. The loans are granted for an indefinite period and no
fixed repayment terms have been set.

The loans from shareholding companies comprise as follows (in DM:)

DEC. 31, 1996
---------------

NRGENERATING B.V.
Loan .................. 42,860
Interest .............. 3,169
Miscellaneous credits 59
---------------
46,088
---------------
POWERGEN PLC.
Loan .................. 42,819
Interest .............. 3,167
Miscellaneous credits 10
---------------
45,996
===============
92,084
===============

3) In terms of the loan agreements dated February 7, 1996 and September
25, 1996 SES granted to SEG loans amounting DM6,500 and DM1,000 respectively.
DM3,368 was repaid during 1996. 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, 1996 are interest payable of
DM243. The loans can be called up at any time.

4) The liability as of December 31, 1996 comprises as follows (in DM):

a)Kraftwerk Schkopau GbR (GbR) ....................... 168,912
b)Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB) . 5,973
---------
174,885
=========

a) The payables to GbR comprise of two components. DM110,109 refer to the
fees due for 1996 in terms of the use and benefit agreement dated December
10, 1993 and represent SEG's share in the power plant's expenses. DM58,803
result from SEG's obligation to reimburse its share

F-126

SAALE ENERGIE GMBH

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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).

b) The liability mainly arises from the regulations of 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) VEBA Vereinigte Kraftwerke Ruhr AG (VKR), the other participant of the
GbR, granted a loan up to DM50 million to SEG for purposes of funding the
interest due during the construction period of the power plant. DM8,682 and
DM25,468 has been drawn by SEG during 1995 and 1996 respectively. A variable
interest rate of 3 month LIBOR plus 1.5% p.a. was agreed upon.

NOTE J OTHER FINANCIAL COMMITMENTS

In order to provide the GbR with own funds, the two participants of the
GbR closed on December 10, 1993 a financing agreement. In terms of this
agreement SEG is obliged to contribute DM82 million to the GbR, which is
already fulfilled. SEG is also required to grant a loan of DM98 million in
total to the GbR, of which DM82 million have been called up as of December
31, 1996. The remaining DM16 million can be called up any time.

For financial commitments relating to the leased assets and lease
commitments see note C.

NOTE K RELATED PARTY TRANSACTIONS

SEG has a long-term coal supply agreement with MIBRAG, a company in which
SEG's parent companies each have one-third ownership. Under the terms of this
agreement MIBRAG delivers raw brown coal to the power station in Schkopau
until 2010 at market prices paid by SEG. The annual volume of coal to be
delivered by MIBRAG was not fixed in the agreement.

Additionally, SES, a subsidiary of SEG, and MIBRAG entered into a
consulting and management agreement. This agreement determines certain
consultancy services provided by SES. MIBRAG is obliged to pay the
cost-related remuneration for these services. In 1996 MIBRAG paid DM7,894 to
SES.

F-127

SAALE ENERGIE GMBH

STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS DM)

YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
-------------- --------------

Sales revenue.......................................... 101 --
Other operating income.................................
-------------- --------------
Total revenue.......................................... 101 --
Cost of materials...................................... 1,223 --
Depreciation of intangible and tangible fixed assets .. -- --
Other operating expenses............................... 241 311
-------------- --------------
Total operating expenses............................... 1,464 311
Results from operations................................ (1,363) (311)
-------------- --------------
Income from companies in which participations are
held.................................................. -- --
Interest expense (net)................................. (2,375) 578
-------------- --------------
Results from ordinary activities....................... (3,738) 267
Income tax............................................. -- 40
-------------- --------------
Net loss............................................... (3,738) 227
============== ==============

See accompanying Notes to Financial Statements

F-128

SAALE ENERGIE GMBH

BALANCE SHEET (UNAUDITED)
(IN THOUSANDS DM)

AT DECEMBER 31, AT DECEMBER 31,
NOTE 1995 1994
------- --------------- ---------------

ASSETS
Contributions outstanding................ 713 713
NON-CURRENT ASSETS
Fixed assets
Tangible assets
Factory and office equipment............ B 3 4
Financial assets
1. Subsidiaries.......................... B,D 49 49
2. Participations........................ B,D 136,867 44,682
3. Loans granted to participations ...... B,E 65,760 24,660
--------------- ---------------
TOTAL NON-CURRENT ASSETS................. 202,679 69,395
CURRENT ASSETS
Inventories
Raw materials and supplies.............. B 712 0
Receivables and other assets
1. Trade receivables..................... B,C,F 117 0
2. Other assets.......................... B,F 134 28
Cheques, cash-in-hand, bank balances .... B 1,887 1,246
--------------- ---------------
TOTAL CURRENT ASSETS..................... 2,850 1,274
--------------- ---------------
TOTAL ASSETS.............................. 206,242 71,382
=============== ===============
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Subscribed capital....................... 1,000 1,000
Capital reserve.......................... 48,040 31,125
Net profit/loss for the year............. (3,738) (2)
Profit/Loss carried foreward............. 225 227
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY............... 45,527 32,350
Provisions
Tax accruals............................ 40 40
Other accruals.......................... B 1,535 151
Liabilities
1. Trade payables........................ B,G 618 38
2. Payables to shareholders.............. B,G 87,125 28,348
3. Payables to participations............ B,G 56,212 0
4. Other payables........................ B,G 15,185 10,455
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY AND
LIABILITIES............................... 206,242 71,382
=============== ===============

See accompanying Notes to Financial Statements

F-129

SAALE ENERGIE GMBH

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS DM)

YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
-------------- --------------

Cash flows from operating activities:
Net loss (1994: profit) for the year............................... (3,738) 227
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation on intangible and tangible assets.................... 4
Change in assets and liabilities:
Inventories...................................................... (712) 0
Short-term receivables and other assets.......................... (223) (28)
Increase in accruals............................................. 1,384 191
Short-term payables.............................................. 578 38
Other liabilities................................................ 1,048 456
-------------- --------------
CASH PROVIDED BY OPERATING ACTIVITIES.............................. (1,659) 884
-------------- --------------
Cash flows from investing activities:
Increase in financial investments.................................. (77,074) (69,346)
-------------- --------------
CASH USED FOR INVESTING ACTIVITIES................................. (77,074) (69,346)
-------------- --------------
Cash flows from financing activities:
Additional paid-in capital......................................... 16,915 31,126
Increase in long-term liabilities.................................. 62,459 38,346
-------------- --------------
CASH PROVIDED BY FINANCING ACTIVITIES.............................. 79,374 69,472
-------------- --------------
NET INCREASE IN CASH............................................... 641 1,010
CASH AT BEGINNING OF YEAR.......................................... 1,246 236
-------------- --------------
CASH AT YEAR-END................................................... 1,887 1,246
============== ==============

See accompanying notes to Consolidated Financial Statements

F-130

SAALE ENERGIE GMBH

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(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.

NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SEG was not required to prepare consolidated financial statements for 1994
and 1995. SEG owns a 98% share of its subsidiary Saale Energie Service GmbH.
The company is included at cost in SEG's financial statements. Furthermore,
SEG holds a 41.1% share in the Kraftwerk Schkopau 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.

REVENUE RECOGNITION: Revenue is recognized when title passes or services
are rendered, net of discounts, customer bonuses and rabates 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.

ACCRUALS AND LIABILITIES: Accruals have been recorded for known
obligations at the balance sheet date at the amounts of the estimated
liability. Liabilities are valued at the amounts outstanding.

F-131

SAALE ENERGIE GMBH

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE C LONG-TERM SALES AND SERVICE AGREEMENTS

According to a long-term electricity supply contract between SEG and
Vereinigte Energie AG (VEAG), dated December 7, 1993, SEG supplies its total
available electricity capacity to VEAG. The contract was closed for a 25
years period starting at the date of commissioning of the power plant. In
terms of the contract VEAG is obliged to pay on a monthly basis a price that
covers (1) the availability of electrical supply capacity and (2) the
operating cost incurred to produce the electricity. SEG began to supply such
available capacity in late 1995.

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. 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.

NOTE D INVESTMENTS IN SUBSIDIARIES AND PARTICIPATIONS

SEG holds a 98% share in Saale Energie Service GmbH (SES). The investment
is accounted for at its historical acquisition cost of DM 49. The business of
the company comprises of all activities relating to the supply of management,
maintenance and consulting services in respect of power stations and related
plants, especially for the lignite power stations of the Mitteldeutsche
Braunkohlengesellschaft mbH (MIBRAG) and its subsidiaries.

A 41.1% participation in the Kraftwerk Schkopau GbR (GbR), which is the
owner of the Schkopau power plant, is held by SEG, and is recorded at cost.

SEG's 44.4% share in the Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB)
has been recorded at the historical acquisition cost of DM 22. SEG has
assigned its share in KSB to C & L Deutschland Revision AG in security for
VEBA Vereinigte Kraftwerke Ruhr AG (VKR).

NOTE E 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, of which DM 41,100 was drawn
during 1995 (1994: DM 24,660). The balance outstanding at December 31, 1995
was DM 65,760 (1994: DM 24,660). The loan is unsecured and bears interest at
a fixed rate of 7% p.a. The loan has been granted for an indefinite period
and the repayment terms are not fixed.

NOTE F RECEIVABLES AND OTHER ASSETS

The trade receivables of DM 117, as reported on December 31, 1995 (1994:
DM 0) relate solely to power supplies to VEAG. The other assets are mainly
receivables from tax authorities.

F-132

SAALE ENERGIE GMBH

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE G LIABILITIES

The maturity periods of the liabilities are as follows (in DM):

MATURITY PERIOD MATURITY PERIOD TOTAL BALANCE
OF LESS THAN MORE THAN AS OF
DECEMBER 31, 1995 1 YEAR 1 YEAR DEC. 31, 1995
- ------------------------------------- --------------- --------------- ---------------

1) Trade payables .................... 617 -- 617
2) Payables to shareholding
companies............................ -- 87,126 87,126
3) Payables to companies in which
participations are held.............. 27,800 28,412 56,212
4) Other liabilities ................. 6,504 8,681 15,185
--------------- --------------- ---------------
34,921 124,219 159,140
=============== =============== ===============

MATURITY PERIOD MATURITY PERIOD TOTAL BALANCE
OF LESS THAN MORE THAN AS OF
DECEMBER 31, 1994 1 YEAR 1 YEAR DEC. 31, 1994
- -------------------------------------- --------------- --------------- ---------------

1) Trade payables ..................... 38 -- 38
2) Payables to shareholding companies 28,348 -- 28,348
4) Other liabilities .................. 5,455 5,000 10,455
--------------- --------------- ---------------
33,841 5,000 38,841
=============== =============== ===============

2) PowerGen plc., London and NRGenerating B.V., Amsterdam granted a loan
to SEG for the partial funding of its financial requirements at an total
amount of DM 148,054. The loans are not collateralized and bear interest at a
fixed rate of 7.5% p.a The loans are granted for an indefinite period and no
fixed repayment terms have been set.

The loans from shareholding companies comprise as follows (in DM):

DEC. 31, 1995 DEC. 31, 1994
--------------- ---------------

NRGenerating B.V. 43,603 14,209
PowerGen plc. ..... 43,522 14,138
--------------- ---------------
87,125 28,347
=============== ===============

3) The liability as of December 31,1995 of DM 58,803 result from SEG's
obligation to reimburse its share in the shortfall achieved in the 1995
financial statement of the GbR.

4) The balance is mainly comprised of a loan granted to SEG by VEBA
Vereinigte Kraftwerke Ruhr AG and the outstanding portion of the purchase
price to VKR for the shares in Kraftwerk Schkopau GbR.

VEBA Vereinigte Kraftwerke Ruhr AG (VKR), the other participant of the
GbR, granted a loan up to DM 50 million to SEG for purposes of funding the
interest due during the construction period of the power plant. DM 8,682 has
been drawn by SEG during 1995. A variable interest rate of 3 month LIBOR plus
1.5% p.a. was agreed upon.

The purchase price for 41.1% in the shares of GbR was in total DM 20,000.
The outstanding balance as of December 31, 1995 was DM 5,000, as of December
31,1994 DM 10,000.

NOTE H OTHER FINANCIAL COMMITMENTS

In order to provide the GbR with own funds, the two participants of the
GbR closed on December 10, 1993 a financing agreement. In terms of this
agreement SEG is obliged to contribute DM 82 million to the GbR, which is
already fulfilled. SEG is also required to grant a loan of DM 98 million in
total to the GbR, of which DM 66 million have been called up as of December
31, 1995 (1994: DM 25 million). The remaining amount can be called up any
time.

F-133

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

PROFIT AND LOSS STATEMENT

FOR THE YEAR ENDED 30 JUNE 1997

30 JUNE 1997 30 JUNE 1996
NOTES $ $
------- --------------- --------------

OPERATING REVENUE .............................. 2 459,899,793 574,009,434
--------------- --------------
Operating Profit before Income Tax ............. 3 52,179,438 185,233,791
Income Tax Attributable to Operating Profit ... 5 21,659,694 67,547,498
--------------- --------------
OPERATING PROFIT AFTER INCOME TAX .............. 30,519,744 117,686,293
--------------- --------------
Extraordinary Item--Profit on sale of business . 4 1,335,852,636 0
Income Tax Attributable to Extraordinary Item .. 5 383,195,543 0
--------------- --------------
PROFIT ON EXTRAORDINARY ITEM AFTER INCOME TAX . -- 952,657,093 0
--------------- --------------
OPERATING PROFIT AND EXTRAORDINARY PROFIT AFTER
INCOME TAX .................................... 983,176,837 117,686,293
--------------- --------------
Retained Earnings at Beginning of Period ....... 14 50,618,229 50,618,229
Dividends Paid or Payable....................... 1,033,795,086 117,686,293
--------------- --------------
RETAINED EARNINGS AT END OF PERIOD.............. 14 0 50,618,229
--------------- --------------

This Profit and Loss Statement should be read in conjunction with the Notes
To And Forming Part of the Financial Statements

F-134

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

BALANCE SHEET

AS AT 30 JUNE 1997

30 JUNE 1997 30 JUNE 1996
NOTES $ $
------- -------------- ---------------

CURRENT ASSETS
Cash.......................... 15.1 15 657,800
Receivables................... 6 0 73,048,889
Inventories................... 7 0 3,559,857
Other assets ................. 8 0 1,714,627
-------------- ---------------
TOTAL CURRENT ASSETS 15 78,981,173
NON-CURRENT ASSETS
Receivables................... 6 0 1,574,810
Inventories................... 7 0 13,176,115
Other assets ................. 8 0 5,662,559
Investments................... 9 0 100
Property, plant and
equipment..................... 10 0 3,159,101,974
-------------- ---------------
TOTAL NON-CURRENT ASSETS ...... 0 3,179,515,558
-------------- ---------------
TOTAL ASSETS .................. 15 3,258,496,731
-------------- ---------------
CURRENT LIABILITIES
Creditors and borrowings ..... 11 0 2,039,618,476
Provisions.................... 12 0 9,110,358
-------------- ---------------
TOTAL CURRENT LIABILITIES ..... 0 2,048,728,834
NON-CURRENT LIABILITIES ......
Creditors and borrowings ..... 11 0 1,057,832,534
Provisions.................... 12 0 101,317,119
-------------- ---------------
TOTAL NON-CURRENT LIABILITIES
0 1,159,149,653
-------------- ---------------
TOTAL LIABILITIES ............. 0 3,207,878,487
-------------- ---------------
NET ASSETS .................... 15 50,618,244
-------------- ---------------
EQUITY
Share capital................. 13 15 15
Retained earnings ............ 14 0 50,818,229
-------------- ---------------
TOTAL EQUITY .................. 15 50,618,244
-------------- ---------------

This Balance Sheet should be read in conjunction with the Notes To
And Forming Part of the Financial Statements

F-135

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 1997

30 JUNE 1997 30 JUNE 1996
NOTES $ $
------- --------------- ---------------

CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers.......................... 447,989,416 661,857,250
Payments to suppliers and employees.............. (132,408,127) (252,601,057)
Income tax paid.................................. (484,975,104) 0
--------------- ---------------
NET CASH FLOW (USED IN) PROVIDED BY OPERATING
ACTIVITIES ...................................... 15.2 (179,393,815) 409,256,193
--------------- ---------------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Proceeds from sale of the business............... 15.3 4,484,928,944 0
Cash balance transferred on sale of business .... (22,412,523) 0
Payments to acquire property, plant and
equipment....................................... (14,813,737) (8,356,243)
Proceeds from sale of property, plant and
equipment ...................................... 0 34,091
Proceeds from sale of investments................ 0 223,296
Dividends received............................... 0 127,400
--------------- ---------------
NET CASH FLOW (USED IN) FROM INVESTING
ACTIVITIES....................................... 4,447,702,684 (7,971,456)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Interest and other items of a similar nature
received........................................ 3,063,264 1,907,373
Interest and other costs of finance paid ........ (109,537,439) (115,063,116)
Hedging receipts associated with borrowings ..... 12,007,845 20,764,959
Hedging payments associated with borrowings ..... (19,553,416) (30,861,150)
Buyback of swaps................................. (79,619,663) (7,906,790)
Proceeds from borrowings......................... 1,222,785,627 86,056,400
Repayment of borrowings.......................... (1,129,666,657) (36,221,000)
Repayment of shareholder loan.................... (1,917,491,710) 0
Buyback of borrowings............................ (1,157,854,106) (264,281,672)
Dividends paid................................... (1,095,481,066) (56,000,000)
--------------- ---------------
NET CASH FLOW USED IN FINANCING ACTIVITIES ....... (4,268,346,521) (401,604,996)
--------------- ---------------
NET INCREASE/(DECREASE) IN CASH HELD.............. (37,652) (320,259)
--------------- ---------------
CASH AT BEGINNING OF PERIOD....................... 37,667 357,926
--------------- ---------------
CASH AT END OF PERIOD............................. 15.1 15 37,667
--------------- ---------------

This Statement of Cashflows should be read in conjunction with the Notes To
And Forming Part of the Financial Statements

F-136

QUIET LIFE LIMITED
ACN 065 381 240
(FORMERLY LOY YANG POWER LTD, NAME CHANGED 13 MAY 1997)

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.1 BASIS OF ACCOUNTING

The financial report is a general purpose financial report which has been
prepared in accordance with the requirements of the Corporations Law and
applicable Accounting Standards. Other mandatory professional reporting
requirements (Urgent Issues Group Censensus Views) have also been complied
with.

The report is prepared in accordance with the historical cost convention,
except for certain assets which, as noted, are at valuation. The accounting
policies are consistent with those of the previous year.

1.2 SIGNIFICANT CHANGE IN AFFAIRS

CHANGE OF COMPANY NAME

The company (A.C.N. 065 381 240) changed its name from Loy Yang Power Ltd.
to Quiet Life Limited on 13 May 1997.

SALE OF BUSINESS

On 12 May 1997 the company ceased trading and sold all of its cash,
receivables, inventories, property, plant and equipment, and contract
liabilities and certain creditors (refer note 15.3). All employees were
allocated to the new owner with existing employment conditions. The proceeds
from the sale were used to extinguish all of the company's debt finance, pay
income tax liabilities and to pay a dividend to shareholders equal to the
value of retained earnings.

1.3 PRIOR PERIOD COMPARISONS

Comparative information is reclassified where appropriate, to enhance
comparability.

1.4 PROPERTY, PLANT AND EQUIPMENT

COST AND VALUATION

Property, plant and equipment were carried at cost.

DEPRECIATION AND AMORTISATION

Depreciation or amortisation was provided for all fixed assets other than
freehold land. The majority of assets were depreciated using the straight
line method to write off the cost of assets over their expected service
lives. The expenditure associated with mine development costs was amortised
on a units of production basis. Depreciation or amortisation for all assets
commenced on the first day of the month closest to the in-service date.

Changes in depreciation rates and/or depreciable amounts were dealt with
on a prospective basis.

1.5 RECOVERABLE AMOUNTS

Non-current assets values did not exceed their recoverable amount. Where
carrying values exceeded their recoverable amount, assets were revalued
downwards to the lower value. The expected net cash flows included in
determining the recoverable amounts of non-current assets were discounted to
their present value using a market determined risk adjusted discount rate.

F-137

QUIET LIFE LIMITED
ACN 065 381 240
(FORMERLY LOY YANG POWER LTD, NAME CHANGED 13 MAY 1997)

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

1.6 INVENTORIES

Costs were assigned to inventories using the average cost method.
Inventories were valued at lower of cost and net realisable value. An
estimate of items which are likely to be utilised in the next twelve months
was classified as current.

1.7 ACCOUNTING FOR INCOME TAX

The company was until 12 May 1997 subject to the Victorian State
Government Tax Equivalent System (VTES) pursuant to Section 88 of the State
Owned Enterprises Act 1992. On the 12 May 1997 the company settled its final
VTES liability of $494,975,104. The Department of Treasury and Finance
advised on 12 May 1997 that as "the sale transaction involves the transfer of
ownership of Loy Yang Power's assets the company will effectively become a
"shell" after the transaction. Accordingly, and consistent with this
Department's policy on the non-applicability of a Victorian Tax Equivalent
System to non-trading shell entities. Loy Yang Power will cease to be subject
to a VTES effective from the 12 May 1997 and this Department considers this
to be the final transaction under VTES".

The company has adopted the liability method of tax-effect accounting
whereby income tax is regarded as an expense and is matched with the
accounting profit after allowing for permanent differences.

To the extent that timing differences occur between the time items are
recognised in the accounts and when items are taken into account in
determining taxable income, the net related taxation benefit or liability is
disclosed as a future income tax benefit or a provision for deferred income
tax. These account balances are calculated with reference to the rates of
income tax which are expected to apply when those timing differences reverse.

Future income tax benefits are not brought to account unless realisation
of the asset is assured beyond reasonable doubt. The future income tax
benefit arising from tax losses is only carried forward as an asset when the
benefit is virtually certain of being realised.

1.8 DOUBTFUL DEBTS

The value of estimated doubtful debts was reviewed annually on an
individual debtor basis, and appropriate provision made where necessary.

1.9 NEGOTIABLE SECURITIES

Where interest was paid in advance on negotiable securities the interest
was recognised as an asset and progressively charged to the Profit and Loss
Statement over the applicable interest period. Interest payable in arrears
was progressively charged to the Profit and Loss Statement over the
applicable interest period and recognised as a liability.

Discounts and premiums on face value on the issue of negotiable securities
were recognised as variations of the liability to which they relate. The
variations were amortised over the term of the issue, using the effective
yield method.

Changes in the capital value of the outstanding liability on index linked
securities were recognised as variations in the book value of the liability
and charged to the Profit and Loss Statement.

Any gains or losses arising from the buyback of negotiable securities
issued by the company were charged to the Profit and Loss Statement as
incurred or earned.

F-138

QUIET LIFE LIMITED
ACN 065 381 240
(FORMERLY LOY YANG POWER LTD, NAME CHANGED 13 MAY 1997)

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

1.10 DERIVATIVES

The company was exposed to changes in interest rates and commodity prices
from its activities. It was the company's policy to use derivative financial
instruments to hedge these risks. The company did not enter, hold or issue
derivative financial instruments for trading or speculative purposes.

Derivative financial instruments included forward rate agreements,
futures, options, interest rate swaps and their Treasury Corporation of
Victoria equivalents.

Gains and losses arising from the early termination of general hedges were
amortised over the period of the hedge. The exception to this was bond
futures where gains and losses were amortised over the average term to
maturity of existing fixed.

Gains and losses arising from the early termination of specific hedges
were amortised over the shorter of the period of the borrowing being hedged
or the period of the hedge.

1.11 EMPLOYEE ENTITLEMENTS

WAGES, SALARIES AND LEAVE

Provision was made for employee entitlement benefits accumulated as a
result of employees rendering services up to the sale date. These benefits
included wages and salaries, annual leave and associated oncosts.

Liabilities arising in respect of wages and salaries, annual leave and any
other employee entitlements expected to be settled within twelve months of
the sale date were measured at their nominal amounts. All other employee
entitlement liabilities were measured at the present value of their estimated
future cash outflows to be made in respect of services provided by employees
up to the sale date. In determining the present value of future cash
outflows, the interest rates attaching to Federal Government Guaranteed
Securities which had terms to maturity approximating the terms of the related
liability were used.

Employee entitlement expenses and revenues arising in respect of the
following categories:

o Wages and salaries, non-monetary benefits, annual leave, long service
leave, sick leave and other leave entitlements; and

o other types of employee entitlements,

were charged to the Profit and Loss Statement on a net basis in their
respective categories.

SUPERANNUATION

The company contributed towards the Victorian Electricity Industry (VEI)
Superannuation Fund on behalf of its employees. These contributions were
charged to the Profit and Loss Statement as the liability was recognised
(refer note 17.2).

1.12 PROVISION FOR SITE RESTORATION--POWER STATION AND MINE

Recognition of a liability for the cost of restoring the power station and
mine sites to an acceptable environmental standard at the end of their useful
lives was provided for up until the sale date (refer note 12). This liability
included costs of reclamation, plant closure and dismantling, and waste site
closure.

The liability was recognised on a gradual basis and was calculated by
discounting the estimated future site restoration costs to their net present
value. Annual increments to the liability for each site were charged to the
Profit and Loss Statement over the estimated remaining life of each site.

F-139

QUIET LIFE LIMITED
ACN 065 381 240
(FORMERLY LOY YANG POWER LTD, NAME CHANGED 13 MAY 1997)

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

Expected future payments for site restoration were discounted using
interest rates attaching, as at the reporting date, to Federal Government
Guaranteed Securities with terms to maturity that match, as closely as
possible, the estimated future cash outflows.

Cost estimates were based on the assumption that current legal
requirements and/or technologies could not change significantly over the life
of the power station and mine sites.

Changes in estimates were dealt with on a prospective basis.

The company's obligations for site restoration were transferred to the
purchaser of the company's business.

1.13 CASH

For the purpose of the Statement of Cash Flows, cash includes cash on hand
and in banks, investments in money market instruments and short-term deposits
and securities, net of outstanding overdrafts.

F-140

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
--------------- --------------

2 OPERATING REVENUE COMPRISES
Sales revenue ................................................ 441,012,062 557,499,891
Interest revenue (refer note 24.5 for related party
component)................................................... 3,057,422 1,845,183
Proceeds from the sale of non-current assets.................. 825,741 587,326
Dividend revenue.............................................. 0 127,400
Other revenue................................................. 15,004,568 13,949,634
--------------- --------------
459,899,793 574,009,434
=============== ==============

- ---------------------------------------------------------------------------------------------
3 OPERATING PROFIT BEFORE INCOME TAX
The operating profit before income tax is arrived at after
charging/(crediting) the following items:
DEPRECIATION, AMORTISATION AND DIMINUTION
Plant and equipment........................................... 82,841,704 96,218,635
Development of mine (amortisation) ........................... 1,032,676 1,057,471
Leased plant and equipment (amortisation)..................... 7,488,422 8,678,171
Buildings..................................................... 304,364 320,654
--------------- --------------
TOTAL DEPRECIATION, AMORTISATION AND DIMINUTION .............. 91,667,166 106,274,931
--------------- --------------
AMOUNTS SET ASIDE TO PROVISIONS
Employee entitlements ........................................ 4,926,554 4,492,052
Site restoration--power station............................... 596,917 486,338
Site restoration--mine........................................ 225,033 246,940
--------------- --------------
TOTAL AMOUNT SET ASIDE TO PROVISIONS ......................... 5,747,504 5,225,330
--------------- --------------
FINANCE CHARGES (REFER NOTE 24.5) ............................ 181,865,292 126,710,973
GOVERNMENT MINING ROYALTIES INCURRED ......................... 8,552,827 9,241,836
ENERGY CONSUMPTION LEVY ...................................... 14,419 29,731
SUPERANNUATION CONTRIBUTIONS ................................. 2,320,442 2,697,272
RENTAL OPERATING LEASES ...................................... 247,000 419,000
LOSS (PROFIT) ON SALE OF NON-CURRENT ASSETS .................. 947,326 (50,803)
RESEARCH AND DEVELOPMENT EXPENDITURE ......................... 523,566 518,760

- ---------------------------------------------------------------------------------------------
4 PROFIT ON EXTRAORDINARY ITEM
Profit on sale of business (refer note 15.3).................. 1,335,852,636 0
Applicable income tax ........................................ 383,195,543 0
--------------- --------------
952,657,093 0
--------------- --------------

Disclosure of the net assets and liabilities sold can be found in note 15.3.

F-141

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
--------------- --------------

5 INCOME TAX
5.1 INCOME TAX EXPENSE
The prima facie tax on operating profit differs from the
income tax provided in the accounts as follows:

Prima facie income tax expense on operating profit ............ 18,784,598 66,684,165
Increase in income tax expense due to permanent differences
Depreciation on buildings..................................... 0 448,098
Tax on provisions not carried forward......................... 395,157 620,720
Provisions for restoration--non-deductible.................... 125,468 175,082
Non-deductible expenditure.................................... 2,499,703 0
Entertainment and other non-deductible items ................. 79,411 30,561
Under/(over) provision last year ............................. 211,418 0
Decrease in income tax expense due to permanent differences ...
Tax exempt income............................................. 0 (292,629)
Research and development concession .......................... (58,833) (93,377)
General investment allowance ................................. 0 (25,122)
Depreciation on buildings..................................... (377,218) 0
--------------- --------------
TOTAL INCOME TAX EXPENSE ATTRIBUTABLE TO OPERATING PROFIT ..... 21,658,694 67,547,498
=============== ==============
Prima facie income tax expense on extraordinary item .......... 480,906,949 0
Decrease in income tax expense due to permanent differences ...
Non-assessable income on sale of business .................... (97,711,406) 0
--------------- --------------
TOTAL INCOME TAX EXPENSE ATTRIBUTABLE TO
EXTRAORDINARY ITEM............................................ 383,196,543 0
=============== ==============
Total income tax expense is made up of:
Increase/(decrease) in provision for deferred income tax .... (136,405,995) 85,298,790
Income tax paid............................................... 494,975,104 0
(Increase)/decrease future income tax benefit................. 46,286,128 (17,751,292)
--------------- --------------
404,855,237 67,547,498
=============== ==============
5.2 ANALYSIS OF TAX BALANCES CARRIED FORWARD

CURRENT

Future income tax benefit, balance at end of year ............ 0 1,019,366
Less: provision for deferred income tax, balance at end of
year.......................................................... 0 451,107
--------------- --------------
NET FUTURE INCOME TAX BENEFIT (REFER NOTE 8)................... 0 568,259
=============== ==============
NON-CURRENT
Provision for deferred income tax, balance at end of year ..... 0 135,954,868
Less: future income tax benefit, balance at end of year ...... 0 45,266,762
--------------- --------------
NET PROVISION FOR DEFERRED INCOME TAX (REFER NOTE 12) ........ 0 90,688,126
=============== ==============

F-142

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
-------------- --------------

6 RECEIVABLES
CURRENT
Trade debtors (refer note 24.6 for related party
component)................................................ 0 69,683,560
Other debtors (refer note 24.6 for related party
component)................................................ 0 3,365,329
-------------- --------------
0 73,048,889
============== ==============
NON-CURRENT
Trade debtors (refer note 24.6 for related party
component)................................................ 0 1,574,810
============== ==============

7 INVENTORIES
CURRENT
General purpose and maintenance stocks at cost............. 0 3,559,857
Less: inventory diminution................................. 0 0
-------------- --------------
0 3,559,857
============== ==============
NON-CURRENT
General purpose and maintenance stocks at cost............. 0 13,664,090
Less: inventory diminution................................. 0 487,975
-------------- --------------
0 13,175,115
============== ==============

8 OTHER ASSETS
CURRENT
Prepayments................................................ 0 1,146,368
Future income tax benefit (refer note 5.2)................. 0 568,259
-------------- --------------
0 1,714,627
============== ==============
NON-CURRENT
Unamortised interest rate swap termination losses ......... 0 4,827,954
Unamortised futures termination losses..................... 0 834,605
-------------- --------------
0 5,662,559
============== ==============

9 INVESTMENTS

9.1 NON-CURRENT INVESTMENTS AT COST COMPRISE:
Unlisted shares in associated companies................... 0 100
-------------- --------------
0 100
============== ==============
9.2 NON-CURRENT INVESTMENTS IN UNLISTED ASSOCIATED COMPANIES
PowerWorks Pty. Ltd.
PowerWorks Pty. Ltd.'s principal activity is to promote the
electricity
industry to the public
Ownership interest..................................... 0% 33%
Investment carrying amount............................. 0 100

F-143

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
-------------- ---------------

The above investment comprised an interest in the ordinary
share capital of the associate.

The balance date of the associate is 30 June, and the
associate is incorporated in Australia.

There were no material post-balance day events or
dissimilar accounting policies.

10 PROPERTY, PLANT AND EQUIPMENT

Land at cost................................................ 0 1,588,736
-------------- ---------------
0 1,588,736

Buildings at cost........................................... 0 8,237,289
Less: accumulated depreciation.............................. 0 457,278
-------------- ---------------
0 7,780,011

Plant and equipment at cost................................. 0 2,986,003,023
Less: accumulated depreciation.............................. 0 136,300,056
-------------- ---------------
0 2,849,702,967

Plant and equipment under lease at cost*.................... 0 274,987,931
Less: accumulated amortisation.............................. 0 12,314,861
-------------- ---------------
0 262,673,070
-------------- ---------------

Mine development at cost.................................... 0 38,841,697
Less: accumulated amortisation.............................. 0 1,484,507
-------------- ---------------
0 37,357,190

TOTAL PROPERTY, PLANT AND EQUIPMENT AT COST................. 0 3,309,658,676
TOTAL ACCUMULATED DEPRECIATION/AMORTISATION................. 0 150,556,702
-------------- ---------------
TOTAL WRITTEN DOWN AMOUNT................................... 0 3,159,101,974
============== ===============

* At 30 June 1996 and until [the] 12 May 1997 the company recorded as an
asset plant and equipment which was under lease to either the State
Electricity Commission of Victoria or Generation Victoria. The plant was
operated in accordance with licences approved by the lessor pending a
formal novation of the arrangement. The company's interest in the leased
plant was transferred to the purchasers of the business on 12 May 1997.

F-144

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
--------------- ---------------

11 CREDITORS AND BORROWINGS
CURRENT
Trade creditors (refer note 24.6 for related party component) .... 0 35,137,803
Bank overdraft (refer note 15.1).................................. 0 620,133
Shareholder loan (interest free).................................. 0 1,917,491,710
Interest accrued (refer note 24.6 for related party component) ... 0 23,764,619
Dividend payable (refer note 24.6 for related party component) ... 0 61,686,000
Other loans (refer note 19)....................................... 0 48,889
Other liabilities (refer note 24.6 for related party component
and note 17.1 for Accrued Salaries and Wages).................... 0 869,322
--------------- ---------------
0 2,039,618,478
=============== ===============
NON-CURRENT
Loans (refer note 19)............................................. 0 1,057,832,534
--------------- ---------------
0 1,057,832,534
=============== ===============

12 PROVISIONS

CURRENT
Employee entitlements (refer note 17)............................. 0 7,475,772
Site restoration--mine............................................ 0 140,000
Redundancies (refer note 17)...................................... 0 1,494,586
--------------- ---------------
0 9,110,358
=============== ===============
NON-CURRENT
Employee entitlements (refer note 17)............................. 0 5,926,654
Site restoration--power station................................... 0 3,734,339
Site restoration--mine............................................ 0 968,000
Deferred income tax (refer note 5.2).............................. 0 90,688,128
--------------- ---------------
0 101,317,119
=============== ===============

13 SHARE CAPITAL

AUTHORISED CAPITAL:
500,000,000 Ordinary Shares of $1.00 each......................... 500,000,000 500,000,000
ISSUED AND PAID UP CAPITAL:
15 ordinary shares of $1.00 each, fully paid...................... 15 15

14 RETAINED EARNINGS

Balance at beginning of year...................................... 50,618,229 50,617,937
Transfer from profit and loss..................................... 983,176,837 117,688,293
--------------- ---------------
Total available for appropriation................................. 1,033,795,066 168,304,229
Interim dividend paid............................................. 0 56,000,000
Final dividend paid (1998 Payable)................................ 1,033,795,066 61,686,000
--------------- ---------------
BALANCE AT END OF YEAR ........................................... 0 50,618,229
=============== ===============

F-145

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

15 STATEMENT OF CASH FLOWS

30 JUNE 1997 30 JUNE 1996
$ $
--------------- --------------

15.1 RECONCILIATION OF CASH
Cash at the end of the financial year as shown in the
Statement of Cash Flows is reconciled to the related items
in the Balance Sheet as follows:
CASH
Cash on hand.......................................... 15 7,800
Short term deposits and securities ................... 0 650,000
--------------- --------------
15 657,800
OVERDRAFT
Bank overdraft ....................................... 0 (620,133)
--------------- --------------
0 (620,133)
--------------- --------------
15 37,667
=============== ==============
15.2 RECONCILIATION OF NET CASH FLOWS FROM OPERATING
ACTIVITIES WITH OPERATING PROFIT AFTER INCOME TAX

Operating profit after income tax ..................... 30,619,744 117,686,293
--------------- --------------
NON-CASH REVENUES AND EXPENSES, AND REVENUES AND
EXPENSES ASSOCIATED WITH FINANCING OR INVESTING
ACTIVITIES:
Depreciation and amortisation expense ................. 91,667,166 106,274,931
Income tax expense on operating profit ................ 0 67,547,498
Income tax expense on extraordinary item .............. (383,195,543) 0
Interest revenue received ............................. (3,057,422) (1,845,183)
Finance charges ....................................... 181,865,292 126,710,973
Dividend revenue received ............................. 0 (127,400)
Loss/(profit) on sold and scrapped non-current assets 947,326 (50,803)
--------------- --------------
(111,773,181) 298,510,016
ADJUST FOR MOVEMENTS IN ASSETS AND LIABILITIES
Decrease in operating expenditure accruals ............ (16,467,837) (30,126,579)
Decrease in deferred income tax ....................... (90,688,126) 0
Increase/(decrease) in provisions ..................... 1,581,423 (4,693,920)
Increase/(decrease) in trust funds and deposits ...... 40,956 (711,010)
Decrease in future income tax benefit ................. 568,259 0
Decrease in accounts receivable/accrued revenue ....... 14,356,026 28,954,710
Increase in prepayments ............................... (7,637,788) (136,169)
Decrease/(increase) in inventory ...................... 106,709 (227,148)
--------------- --------------
(98,140,378) (6,940,116)
--------------- --------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES .. (179,393,815) 409,256,193
--------------- --------------

F-146

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

15.3 SALE OF BUSINESS

On 12 May 1997, the Company sold all of its business
operations. Details of the sale are as follows:

30 JUNE 1997 30 JUNE 1996
$ $
--------------- --------------

PROCEEDS FROM SALE OF THE BUSINESS
Cash .............................................. 4,484,928,944 0
--------------- --------------
4,484,928,944 0
--------------- --------------
BOOK VALUE OF NET ASSETS SOLD
Cash .............................................. 22,412,523 0
Receivables ....................................... 60,261,829 0
Inventories ....................................... 16,586,135 0
Other assets ...................................... 8,215,997 0
Property, plant and equipment ..................... 3,083,386,814 0
Creditors and borrowings .......................... (21,034,475) 0
Provisions ........................................ (20,752,516) 0
--------------- --------------
3,149,076,308 0
--------------- --------------
PROFIT ON SALE OF BUSINESS (REFER NOTE 4) ........ 1,335,852,636 0
--------------- --------------
16 EXPENDITURE COMMITMENTS

16.1 CAPITAL EXPENDITURE COMMITMENTS

Outstanding contract commitments for capital expenditure
contracted for at balance date but not provided for comprises
the following:
Payable not later than one year ................... 0 946,000
--------------- --------------
0 946,000
--------------- --------------
16.2 NON-CAPITAL EXPENDITURE COMMITMENTS

Outstanding contract commitments for non-capital expenditure
contracted for at balance date but provided for comprises
the following:
Payable not later than one year ................... 0 6,524,000
Payable greater than one and less than two years . 0 1,566,000
--------------- --------------
0 8,090,000
--------------- --------------
16.3 LEASE EXPENDITURE COMMITMENTS

Outstanding operating lease (non-cancellable) commitments
at balance date but not provided for comprises the following:

Payable not later than one year ................... 0 138,000
Payable greater than one and less than two years . 0 145,000
Payable greater than two and less than five years 0 169,000
--------------- --------------
0 452,000
--------------- --------------

F-147

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

16.4 ASSET SALE OBLIGATIONS

The buyers of the company's business were given certain warranties and
indemnities that may result in part of the sale price being refunded. The
company has been indemnified against these obligations by the State
Electricity Commission of Victoria for the purpose of ensuring that it did
not pay, and is not perceived to pay, a dividend out of its capital. The
indemnity shall in no way limit the company's rights against the Buyers
pursuant to the Asset Sale Agreement.

F-148

QUIETLIFE LIMITED
ACN 065 381 240

(formerly Loy Yang Power Ltd. name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
-------------- --------------

17 EMPLOYEE ENTITLEMENTS
17.1 AGGREGATE EMPLOYEE ENTITLEMENT

Current
Accrued Wages & Salaries (refer note 11) .......................... 0 185,083
Provision Employee Entitlements (refer note 12) ................... 0 7,475,772
Provision Redundancies (refer note 12) ............................ 0 1,494,586

Non current
Provision Employee Entitlements (refer note 12) ................... 0 5,926,654
-------------- --------------
0 15,082,085
-------------- --------------
Accrued Wages and salaries ........................................ 0 185,083
Recreation leave .................................................. 0 6,662,680
Long service leave ................................................ 0 6,739,746
Redundancies ...................................................... 0 1,494,586
-------------- --------------
0 15,082,095
-------------- --------------
The amounts for long service leave were measured at their present
values. The following assumptions were adopted in measuring the
present values of the entitlements which were not expected to be
paid or settled within 12 months of balance date.

Long Service Leave:
Weighted average rates of increase in annual employee entitlements
to settlement of the liabilities ................................. 0 2.9%
Weighted average discount rates ................................... 0 8.7%
Weighted average terms to settlement of the liabilities .......... 0 11 Years

17.2 SUPERANNUATION FUND
All permanent and directly hired casual employees of the company
were entitled to benefits on termination from the Victorian
Electricity Industry Superannuation Fund. All casual and permanent
employees engaged after 3 October 1994 were members of an
accumulation fund. Division D or other external accumulation
funds. All other permanent employees were members of Division B or
C of the Fund which provided defined benefits in the form of
pensions (Division B) or lump sums (Division C).

Both defined benefit schemes are closed to new members. The
company contributed to the Fund at the rate of 9.75%.

The effective date of the most recent detailed valuation of the
Fund was 30 June 1996. The review was undertaken by William M.
Mercer Pty. Ltd. Based on that assessment, the situation for the
company as at 30 June 1996 was:

Present value of employees accured benefits ....................... 0 54,100,000#

F-149

QUIETLIFE LIMITED
ACN 065 381 240

(formerly Loy Yang Power Ltd. name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
-------------- --------------
Net market value of assets held by the fund to meet future benefit
payments .......................................................... 0 54,600,000#

Excess/(deficit) of present value of employees' benefits over
assets held to meet future benefit payments ....................... 0 500,000#

Vested benefits ................................................... 0 49,300,000#

(Vested benefits are those benefits which would have been paid on
voluntary termination from the Fund.)

The Company's obligation in respect of superannuation were
transferred on 12 May 1997 to the purchasers of the business.

Employer contributions to the fund ................................ 1,910,364 2,697,272

Additional contributions to the fund to compensate for differences
between the resignation and retrenchment benefit, in relation to
voluntary retrenchments. .......................................... 244,964 1,228,000

#Note: Asset and benefit figures were unaudited at the time of
signing the 1995/96 report. The last full audit was conducted at
30 June 1995.

18 TREASURY

18.1 DERIVATIVES
The company's derivative products were dealt through Treasury
Corporation of Victoria (TCV). The only derivative products
outstanding as at 30 June 1996 were Interest Rate Swaps. There
were no derivatives outstanding at 30 June 1997.

INTEREST RATE SWAPS

Under these swaps, the company agreed with the counterparty to
exchange, at specified intervals, the difference between the
fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional amount. The notional principal
amounts were not exchanged by the parties.

The maturity profile of these swaps in notional principal terms is:
Later than two years and not later than five years ............. 0 25,000,000
Later than five years ........................................... 0 195,000,000
-------------- --------------
0 220,000,000
-------------- --------------

F-150

QUIETLIFE LIMITED
ACN 065 381 240

(formerly Loy Yang Power Ltd. name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
-------------- --------------
The following table indicates the type of swaps held by the
company and their weighted average interest rates.

Pay-fixed swaps--notional principal amount ........................ 0 220,000,000
Average pay rate--specific cost ................................... 0 12.6%
Average receive rate .............................................. 0 7.6%

F-151

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
-------------- ---------------

19 LOANS (REFER NOTE 24.6)
19.1 LOAN COMPONENTS
CURRENT LOANS (EXCLUDING SHAREHOLDER LOAN)
Premium/(discount) on loans................................. 0 0
Fixed interest loans........................................ 0 48,889
Fixed interest bonds........................................ 0 0
-------------- ---------------
0 48,889
NON-CURRENT LOANS
Premium/(discount) on loans................................. 0 38,899,024
Floating rate notes......................................... 0 249,745,325
Fixed interest bonds........................................ 0 626,695,000
Capital indexed bonds....................................... 0 142,428,804
Fixed interest loans........................................ 0 64,381
-------------- ---------------
0 1,057,832,534
-------------- ---------------
0 1,057,881,423
============== ===============
Liabilities in years of maturity, at face value are:
Not later than one year..................................... 0 48,889
Later than one year and not later than two years ........... 0 353,784,325
Later than two years and not later than five years ......... 0 327,721,000
Later than five years....................................... 0 337,429,000
-------------- ---------------
0 1,018,983,214
Plus unamortised adjustments to face value (refer note
19.2)...................................................... 0 38,899,024
-------------- ---------------
0 1,057,882,238
-------------- ---------------
19.2 ADJUSTMENTS TO FACE VALUE OF LOANS

Current (discount)/premium.................................. 0 0
Non-Current (discount)/premium.............................. 0 38,899,024
-------------- ---------------
0 38,899,024
-------------- ---------------

- -------------------------------------------------------------------------------------------
20 AUDITORS' REMUNERATION
Amounts received, or due and receivable, by the
Auditor-General for auditing the financial statements;
Total amount payable for annual audit fee................... 51,000 52,000

F-152

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
---------------- ----------------

21 DIRECTORS' REMUNERATION

Amounts paid, or due and payable to the directors of the company .. 137,203 161,500

The number of directors of the company whose annual remuneration
(including superannuation contributions, falls within the
following bands:

$ BAND LEVELS DIRECTORS DIRECTORS
- ------------- --------- ---------
$0 -$10,000................................................... 3 0
$20,000 -$29,999................................................... 3 3
$30,000 -$59,999................................................... 1 1

During the year period ended 9 May 1997 the company paid premiums
for the indemnification and insurance of all directors and
officers to the full extent permitted by Corporations Law.

- -------------------------------------------------------------------------------------------------------
22 EXECUTIVES' REMUNERATION

The number of executives whose remuneration falls within the
following bands is set out below:

$ BAND LEVELS EXECUTIVES EXECUTIVES
- ------------- ---------- ----------
$100,000 -$109,999................................................. 1 0
$110,000 -$119,999................................................. 0 2
$120,000 -$129,999................................................. 0 1
$130,000 -$139,999................................................. 1 3
$140,000 -$149,999................................................. 1 0
$150,000 -$159,999................................................. 1 0
$160,000 -$169,999................................................. 1 0
$170,000 -$179,999................................................. 0 0
$190,000 -$199,999................................................. 2 0
$210,000 -$219,999................................................. 0 1
$280,000 -$289,999................................................. 1 0

Total remuneration paid, or due and payable by the company or
related entities by executive officers of the company whose
remuneration exceeds $100,000...................................... 1,386,261 974,040

- -------------------------------------------------------------------------------------------------------

23 SEGMENTS

The company operated entirely in Australia in the production and
sale of electricity and coal.

F-153

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

30 JUNE 1997 30 JUNE 1996
$ $
---------------- ----------------

24 RELATED PARTY DISCLOSURES

24.1 DIRECTORS OF QUIET LIFE
LTD. COMMENCEMENT RESIGNATION

DIRECTORS OF QUIET LIFE LTD. DURING THE FINANCIAL YEAR WERE:

Mr. C. Little.......... 30 January 1995 13 June 1997
Mr. D. Swan............ 30 January 1995 9 May 1997
Mr. J. C. Richards .... 30 January 1995 9 May 1997
Mr. J. S. Grigg........ 1 May 1995 9 May 1997
Mr. G. Brooke.......... 9 May 1997 --
Mr. G. J. Greaves...... 9 May 1997 --
Mr. H. De Jong......... 13 June 1997 --

All directors are non executive.

24.2 TRANSACTIONS WITH DIRECTOR-RELATED ENTITIES

There were no transactions with director-related entities other
than transactions on normal commercial terms with the SECV and
Department of Treasury and Finance (refer Note 24.4 for related
party transactions).

24.3 RESPONSIBLE PERSON AND RELATED PARTIES

The company is a wholly owned subsidiary of the State Electricity
Commission of Victoria; an entity which is 100% controlled by the
Victorian Government. Statutory Corporations and any other
corporate entities owned by the Victorian State government are
related parties.

24.4 RELATED PARTY TRANSACTION CATEGORIES

The following types of related party transactions were transacted
during the year, on normal commercial terms:

Electricity transmission costs
Electricity pool costs
Council rates
Dividends
Auditing services
Brown Coal Royalties
Technical services
Payroll tax
Briquette purchases
Electricity sales revenue
Coal sales revenue
Water purchases and waste water disposals

F-154

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

Land Tax
Land leases
Provision of loan facilities
Gas purchases
Superannuation payments
Victorian equivalent income tax
Vehicle registration charges
In addition there was an interest free loan from the shareholder
(Note 11).

24.5 OPERATING PROFIT AND LOSS TRANSACTIONS WITH RELATED PARTIES

Interest revenue................................... 3,057,422 1,163,621
Interest expense................................... 181,865,292 126,710,973
Dividend Revenue................................... -- 127,400

24.6 RECEIVABLES AND PAYABLES AT BALANCE DATE
AGGREGATE RELATED PARTY RECEIVABLES AT BALANCE
DATE

Current....... 0 57,507,840
Non-current .. 0 1,566,127
--------------- ---------------
0 59,073,967
=============== ===============

AGGREGATE RELATED PARTY PAYABLES AT BALANCE DATE

Current.......................................................... 0 1,994,184,280
Non-current...................................................... 0 1,058,296,080
--------------- ---------------
0 3,052,480,360
=============== ===============

25.0 INTERESTS HELD

There were no interests held in any related party other than
those disclosed as investments in Note 9 (1996 only).

25.1 ANNUAL FINANCIAL STATEMENT CONSOLIDATION ELIMINATION
ENTRIES

During the 1996/97 financial year, transactions were undertaken
with other State Government controlled entities, giving rise to
the need for elimination entries in relation to resultant
account balances.

F-155

QUIET LIFE LIMITED
ACN 065 381 240
(formerly Loy Yang Power Ltd, name changed 13 May 1997)

The aggregate eliminations included within the consolidation
worksheets required to be prepared for input to the State's
Annual Financial Statements are as follows:

INTER INTRA
--------------- ---------------

Assets......................................................... 0 0
Liabilities.................................................... 0 0
Revenues....................................................... 77,830,616 0
Expenses....................................................... 589,378,744 0
Dividends Paid................................................. 1,095,481,066 0
--------------- ---------------
The preparation of prior period comparative information has
not been practicable or relevant for this financial year.

F-156

AUDITOR-GENERAL'S REPORT

AUDIT SCOPE

The accompanying financial statements of Quiet Life Limited (formerly Loy
Yang Power Limited) for the year ended 30 June 1997, comprising a profit and
loss statement, balance sheet, statement of cash flows and notes to the
financial statements, have been audited. The company's directors are
responsible for the preparation and presentation of the financial statements
and the information they contain. An independent audit of these financial
statements has been carried out in order to express an opinion on them to the
members of the company as required by the Corporations Law and Audit Act
1994.

The audit has been conducted in accordance with Australian Auditing
Standards to provide reasonable assurance as to whether the financial
statements are free of material misstatement. The audit procedures included
an examination, on a test basis, of evidence supporting the amounts and other
disclosures in the financial statements, and the evaluation of accounting
policies and significant accounting estimates. These procedures have been
undertaken to form an opinion as to whether, in all material respects, the
financial statements are presented fairly in accordance with the basis on
which the accounts have been prepared, namely applicable Accounting
Standards, other mandatory professional reporting requirements and comply
with the Corporations Law, so as to present a view which is consistent with
my understanding of the company's financial position and the results of its
operations and its cash flows.

The audit opinion expressed on the financial statements has been formed on
the above basis.

AUDIT OPINION

In my opinion, the financial statements of Quiet Life Limited (formerly
Loy Yang Power Limited) are properly drawn up:

(a) so as to give a true and fair view of:

(i) the company's state of affairs as at 30 June 1997 and of its
profit and cash flows for the financial year ended on that
date; and

(ii) the other matters required by Divisions 4, 4A and 4B of Part
3.6 of the Corporations Law to be dealt with in the financial
statements;

(b) in accordance with the Corporations Law; and

/s/ C.A. BARAGWANATH
-----------------------------------
C.A. BARAGWANATH
Auditor-General

MELBOURNE
29/8/1997

F-157

LOY YANG POWER ANNUAL REPORT 1995/96

PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED 30 JUNE 1996

30 JUNE 1996 30 JUNE 1995
NOTES $'000 $'000
------- -------------- --------------

OPERATING REVENUE........................... 2 574,009 244,275
-------------- --------------
Operating Profit before Income Tax.......... 3 185,233 79,579
Income Tax Attributable to Operating
Profit..................................... 4 67,547 29,861
-------------- --------------
OPERATING PROFIT AFTER INCOME TAX........... 117,686 50,618
-------------- --------------
Retained Profits at beginning of year ...... 13 50,618 0
Dividends Paid or Payable................... 117,686 0
-------------- --------------
Retained Profits at End of Year............. 50,618 50,618
-------------- --------------

This Profit and Loss Statement should be read in conjunction with the Notes
to and forming part of the Financial Statements.

F-158

FINANCIAL STATEMENTS 1995/96

BALANCE SHEET AS AT 30 JUNE 1996

30 JUNE 1996 30 JUNE 1995
NOTES $'000 $'000
------- -------------- --------------

CURRENT ASSETS
Cash.......................... 14.1 658 1,015
Receivables................... 5 73,048 100,577
Inventories................... 6 3,560 4,043
Other assets.................. 7 1,715 4,155
-------------- --------------
TOTAL CURRENT ASSETS.......... 78,981 109,790
NON-CURRENT ASSETS
Receivables................... 5 1,575 3,132
Inventories................... 6 13,176 20,101
Other assets.................. 7 5,663 0
Investments................... 8 0 128
Property, plant and
equipment.................... 9 3,159,102 3,245,997
-------------- --------------
TOTAL NON-CURRENT ASSETS ..... 3,179,516 3,269,358
-------------- --------------
TOTAL ASSETS.................. 3,258,497 3,379,148
-------------- --------------
CURRENT LIABILITIES
Creditors and borrowings ..... 10 2,039,619 2,113,681
Provisions.................... 11 9,110 15,060
-------------- --------------
TOTAL CURRENT LIABILITIES .... 2,048,729 2,128,741

NON-CURRENT LIABILITIES
Creditors and borrowings ..... 10 1,057,833 1,164,699
Provisions.................... 11 101,317 35,090
-------------- --------------
TOTAL NON-CURRENT
LIABILITIES.................. 1,159,150 1,199,789
-------------- --------------
TOTAL LIABILITIES............. 3,207,879 3,328,530
-------------- --------------
NET ASSETS.................... 50,618 50,618
-------------- --------------

EQUITY
Share capital................. 12 0 0
Retained earnings............. 13 50,618 50,618
-------------- --------------
TOTAL EQUITY.................. 50,618 50,618
-------------- --------------

This Balance Sheet should be read in conjunction with the Notes to and
forming part of the Financial Statements.

F-159

LOY YANG POWER ANNUAL REPORT 1995/96

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 1996

30 JUNE 1996 30 JUNE 1995
NOTES $'000 $'000
------- -------------- --------------

CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers............................... 661,857 262,004
Payments to suppliers and employees................... (252,601) (98,270)
-------------- --------------
NET CASH FLOW FROM OPERATING ACTIVITIES .............. 14.2 409,256 163,734
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments to acquire property, plant and equipment .... (8,356) (5,447)
Proceeds from sale of property, plant and equipment .. 34 117
Proceeds from sale of investments..................... 223 0
Dividends received.................................... 127 0
Net cash allocated.................................... 0 (629)
-------------- --------------
NET CASH FLOW USED IN INVESTING ACTIVITIES............ (7,972) (5,959)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Interest and other items of a similar nature
received............................................. 1,907 832
Interest and other costs of finance paid.............. (115,063) (70,817)
Hedging receipts associated with borrowings .......... 20,765 10,980
Hedging payments associated with borrowings .......... (30,861) (15,490)
Buyback of swaps...................................... (7,905) 0
Proceeds from borrowings.............................. 86,056 49,706
Repayment of borrowings............................... (36,221) (47,170)
Buyback of borrowings................................. (264,282) (85,458)
Dividends paid........................................ (56,000) 0
-------------- --------------
NET CASH FLOW USED IN FINANCING ACTIVITIES............ (401,604) (157,417)
-------------- --------------
NET INCREASE/(DECREASE) IN CASH HELD.................. (320) 358
-------------- --------------
CASH AT BEGINNING OF YEAR............................. 358 0
-------------- --------------
CASH AT END OF YEAR................................... 14.1 38 358
-------------- --------------

This Statement of Cash Flows should be read in conjunction with the Notes to
and forming part of the Financial Statements.

F-160

FINANCIAL STATEMENTS 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.1 BASIS OF ACCOUNTING

The financial report is a general purpose financial report which has been
prepared in accordance with the requirements of the Corporations Law which
include disclosures required by Schedule S and applicable Accounting
Standards. Other mandatory professional reporting requirements (Urgent Issues
Group Consensus Views) have also been complied with.

1.2 PRIOR PERIOD COMPARISONS

Loy Yang Power Ltd. was incorporated for the twelve months ended 30 June
1995, however the company did not commence trading in its principal
activities until 1 February 1995 when substantially all the assets and
liabilities of the business were vested in the company pursuant to an
Allocation Statement made under the Electricity Industry (Further Amendment)
Act 1994.

As a result, comparative profit and loss and cash flow figures reflect
five months trading from 1 February 1995 to 30 June 1995.

Comparative information is reclassified where appropriate, to enhance
comparability.

1.3 PROPERTY, PLANT AND EQUIPMENT

COST AND VALUATION

Property, plant and equipment are carried at cost.

DEPRECIATION AND AMORTISATION

Depreciation or amortisation is provided for all fixed assets other than
freehold land. The majority of assets are depreciated using the straight line
method to write off the cost of assets over their expected service lives. The
expenditure associated with mine development costs is amortised on a units of
production basis. Depreciation or amortisation for all assets commences on
the first day of the month closest to the in-service date.

Changes in depreciation rates and/or depreciable amounts are dealt with on
a prospective basis.

1.4 RECOVERABLE AMOUNTS

Non-current assets values do not exceed their recoverable amount. Where
carrying values exceed their recoverable amount, assets are revalued
downwards to the lower value. The expected net cash flows included in
determining the recoverable amounts of non-current assets have been
discounted to their present value using a market determined risk adjusted
discount rate.

1.5 INVENTORIES

Costs are assigned to inventories using the average cost method. Inventories
are valued at lower of cost and net realisable value. As estimate of items
which are likely to be utilised in the next twelve months is classified as
current.

F-161

LOY YANG POWER ANNUAL REPORT 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1.6 ACCOUNTING FOR INCOME TAX

Loy Yang Power Ltd. is subject to the Victorian State Government Tax
Equivalent System pursuant to Section 88 of the State Owned Enterprises Act
1992.

Loy Yang Power Ltd. has adopted the liability method of tax-effect
accounting whereby income tax is regarded as an expense and is managed with
the accounting profit after allowing for permanent differences.

To the extent that timing differences occur between the time items are
recognised in the accounts and when these are taken into account in
determining taxable income, the net related taxation benefit or liability is
disclosed as a future income tax benefit or a provision for deferred income
tax. These account balances are calculated with reference to the rates of
income tax which are expected to apply when those timing differences reverse.

1.7 DOUBTFUL DEBTS

The value of estimated doubtful debts is reviewed annually on an individual
debtor basis, and appropriate provision is made where necessary.

1.8 NEGOTIABLE SECURITIES

Where interest is paid in advance on negotiable securities the interest is
recognised as an asset and progressively charged to the Profit and Loss
Statement over the applicable interest period. Interest payable in arrears is
progressively charged to the Profit and Loss Statement over the applicable
interest period and recognised as a liability.

Discounts and premiums on face value on the issue of negotiable securities
are recognised as variations of the liability to which they relate. The
variations are amortised over the term of the issue, using the effective
yield method.

Changes in the capital value of the outstanding liability on index linked
securities are recognised as variations in the book value of the liability
and are charged to the Profit and Loss Statement.

Any gains or losses arising from the buyback of negotiable securities
issued by Loy Yang Power Ltd. are charged to the Profit and Loss Statement as
incurred or earned.

1.9 DERIVATIVES

Loy Yang Power Ltd. is exposed to changes in interest rates and commodity
prices from its activities. It is Loy Yang Power Ltd.'s policy to use
derivative financial instruments to hedge these risks. Loy Yang Power Ltd.
does not enter, hold or issue derivative financial instruments for reading or
speculative purposes.

Derivative financial instruments include forward rate agreements, futures,
options, interest rate swaps and their Treasury Corporation of Victoria
equivalents.

Gains and losses arising from the early termination of general hedges are
amortised over the period of the hedge. The exception to this is bond futures
where gains and losses are amortised over the average term to maturity of
existing fixed debt.

Gains and losses arising from the early termination of specific hedges are
amortised over the shorter of the period of the borrowing being hedged or the
period of the hedge.

F-162

FINANCIAL STATEMENTS 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1.10 EMPLOYEE ENTITLEMENTS

WAGES, SALARIES AND LEAVE

Provision is made for employee entitlement benefits accumulated as a result
of employees rendering services up to the reporting date. These benefits
include wages and salaries, annual leave and associated oncosts.

Liabilities arising in respect of wages and salaries, annual leave and any
other employee entitlements expected to be settled within twelve months of
the reporting date are measured at their nominal amounts. All other employee
entitlement liabilities are measured at the present value of their estimated
future cash outflows to be made in respect of services provided by employees
up to the reporting date. In determining the present value of future cash
outflows, the interest rates attaching to Federal Government Guaranteed
Securities which have terms to maturity approximating the terms of the
related liability are used.

Employee entitlement expenses are revenues arising in respect of the
following categories:

o wages and salaries, non-monetary benefits, annual leave, long service
leave, sick leave and other leave entitlements; and

o other types of employee entitlements;

are charged to the Profit and Loss Statement on a net basis in their
respective categories.

SUPERANNUATION

Loy Yang Power Ltd. contributes towards the Victorian Electricity Industry
(VEI) Superannuation Fund on behalf of its employees. These contributions are
charged to the Profit and Loss Statement as the liability arises (refer note
17.2).

1.11 PROVISION FOR SITE RESTORATION: POWER STATION AND MINE

Recognition of a liability for the cost of restoring the power station and
mine sites to an acceptable environmental standard at the end of their useful
lives has been provided for in these accounts (refer notes 11 and 16). This
liability includes costs of reclamation, plant closure and dismantling, and
waste site closure.

The liability is recognised on a gradual basis and is calculated by
discounting the estimated future site restoration costs to their net present
value. Annual increments to the liability for each site are charged to the
Profit and Loss Statement over the estimated remaining life of each site.

Expected future payments for site restoration are discounted using
interest rates attaching, as at the reporting date, to Federal Government
Guaranteed Securities with terms to maturity that match, as closely as
possible, the estimated future cash outflows.

Cost estimates are based on the assumption that current legal requirements
and/or technologies will not change significantly over the life of the power
station and mine sites.

Changes in estimates are dealt with on a prospective basis.

1.12 CASH

For the purpose of the Statement of Cash Flows, cash includes cash on hand
and in banks, investments in money market instruments and short-term deposits
and securities, net of outstanding overdrafts.

F-163

LOY YANG POWER ANNUAL REPORT 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

2 OPERATING REVENUE COMPRISES

Sales revenue............................................. 557,500 238,468
Interest revenue (refer note 25.5) ....................... 1,845 637
Proceeds from the sale of non-current assets.............. 587 117
Dividend revenue.......................................... 127 0
Other revenue............................................. 13,950 5,053
-------------- --------------
574,009 244,275
============== ==============
- -----------------------------------------------------------------------------------------

3 OPERATING PROFIT

The operating profit before income tax is arrived at
after charging/(crediting) the following items:

DEPRECIATION, AMORTISATION AND DIMINUTION

Plant and equipment....................................... 96,219 40,255
Development of mine (amortisation)........................ 1,058 427
Leased plant and equipment (amortisation)................. 8,678 3,637
Buildings................................................. 320 137
Diminution in value of inventories........................ 0 727
-------------- --------------
TOTAL DEPRECIATION, AMORTISATION AND DIMINUTION .......... 106,275 45,183
============== ==============
AMOUNTS SET ASIDE TO PROVISIONS
Bad and doubtful debts.................................... 0 0
Employee entitlements..................................... 4,492 1,170
Site restoration--power station........................... 486 430
Site restoration--mine ................................... 247 356
-------------- --------------
TOTAL AMOUNT SET ASIDE TO PROVISIONS ..................... 5,225 1,956
============== ==============
INTEREST EXPENSE (REFER NOTE 25.5)........................ 126,711 59,145
GOVERNMENT MINING ROYALTIES INCURRED...................... 9,242 3,654
ENERGY CONSUMPTION LEVY................................... 30 7
SUPERANNUATION CONTRIBUTIONS.............................. 2,697 1,194
RENTAL OPERATING LEASES................................... 419 233
PROFIT/(LOSS) ON SALE OF NON-CURRENT ASSETS............... 51 (16)
RESEARCH AND DEVELOPMENT EXPENDITURE...................... 519 0

F-164

FINANCIAL STATEMENTS 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

4 INCOME TAX
4.1 INCOME TAX EXPENSE
The prima facie tax on operating profit differs from the income tax
provided in the accounts as follows:
Prima facie income tax expense calculated at 36% (1995: 33%) on the
operating profit....................................................... 66,684 26,261
Increase in income tax expense due to permanent differences
Depreciation on buildings............................................. 448 281
Tax on provisions not carried forward................................. 621 280
Provisions for restoration--non-deductible ........................... 175 142
Entertainment and other non-deductible items ......................... 31 444
Decrease in income tax expense due to permanent differences
Tax exempt income..................................................... (293) 0
Research and development concession................................... (94) 0
General investment allowance.......................................... (25) 0
Depreciation on buildings............................................. 0 (328)
Add: Restatement of deferred tax balances due to change in income tax
rate................................................................... 0 1,881
-------------- --------------
TOTAL INCOME TAX EXPENSE ATTRIBUTABLE TO OPERATING PROFIT ............ 67,547 28,961
============== ==============
Total income tax expense is made up of:
Deferred income tax provision......................................... 85,298 51,107
Less: future income tax benefit....................................... 17,751 22,146
-------------- --------------
67,547 28,961
============== ==============
4.2 ANALYSIS OF TAX BALANCES CARRIED FORWARD
CURRENT
Future income tax benefit, balance at end of year...................... 1,019 3,505
Less: provision for deferred income tax, balance at end of year ....... 450 360
-------------- --------------
NET FUTURE INCOME TAX BENEFIT (REFER NOTE 7)........................... 569 3,145
============== ==============
NON-CURRENT
Provision for deferred income tax, balance at end of year ............. 135,955 50,747
Less: future income tax benefit, balance at end of year................ 45,267 25,030
-------------- --------------
NET PROVISION FOR DEFERRED INCOME TAX (REFER NOTE 11) ................. 90,688 25,717
============== ==============
The future income tax benefit will only be obtained if:
a)future assessable income is derived of a nature and of an amount
sufficient to enable the benefit to be realised;
b)the conditions for deductibility imposed by tax legislation continue
to be complied with; and
(c)no changes in tax legislation adversely affect Loy Yang Power Ltd.
in realising the benefit.
- ------------------------------------------------------------------------------------------------------

5 RECEIVABLES
CURRENT
Trade debtors (refer note 25.6)........................................ 69,684 97,843
Other debtors (refer note 25.6)........................................ 3,364 2,734
-------------- --------------
73,048 100,577
============== ==============
NON-CURRENT
Trade debtors (refer note 25.6)........................................ 1,575 3,132
Other debtors (refer note 25.6)........................................ 0 0
-------------- --------------
1,575 3,132
============== ==============

F-165

LOY YANG POWER ANNUAL REPORT 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE, 1996 30 JUNE, 1995
$'000 $'000
--------------- ---------------

6 INVENTORIES
CURRENT
General purpose and maintenance stocks at cost........................ 3,560 4,043
Less: inventory diminution............................................ 0 0
--------------- ---------------
3,560 4,043
=============== ===============
NON-CURRENT
General purpose and maintenance stocks at cost........................ 13,664 20,828
Less: inventory diminution............................................ 488 727
--------------- ---------------
13,176 20,101
--------------- ---------------
A review undertaken during the year identified 57.6 million of items
that should correctly be identified as depreciable spares. This
amount has been transferred to property, plant and equipment.
- -------------------------------------------------------------------------------------------------------

7 OTHER ASSETS
Current
Prepayments........................................................... 1,146 1,010
Future income tax benefit (refer note 4.2)............................ 569 3,145
--------------- ---------------
1,715 4,155
--------------- ---------------
NON-CURRENT
Unamortized interest rate swap termination losses..................... 4,828 0
Unamortized futures termination losses................................ 835 0
--------------- ---------------
5,663 0
--------------- ---------------
- -------------------------------------------------------------------------------------------------------

8 INVESTMENTS
8.1 NON-CURRENT INVESTMENTS AT COST COMPRISE:
Unlisted shares....................................................... 0 128
Unlisted shares in associated companies............................... 0 0
--------------- ---------------
0 128
--------------- ---------------
8.2 NON-CURRENT INVESTMENTS IN UNLISTED ASSOCIATED COMPANIES
PowerWorks Pty. Ltd. .................................................
PowerWorks Pty. Ltd's principal activity is to promote the
electricity industry to the public
Ownership interest.................................................... 33.3% 33.3%
Investment carrying amount............................................ 0.1 0.1

The above investment is held by Loy Yang Power Ltd. and is comprised
of interest in the ordinary share capital of the associate.
The balance date of the associate is 30 June, and the associate is
incorporated in Australia.
There are no material post-balance day events or dissimilar
accounting policies.
During the period, unlisted shares held at cost were sold for
$223,296

F-166

FINANCIAL STATEMENTS 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

9 PROPERTY, PLANT AND EQUIPMENT AT COST
Land at cost........................................................... 1,589 1,589
-------------- --------------
1,589 1,589
Buildings at cost 8,237 8,237
Less: accumulated depreciation......................................... 457 137
-------------- --------------
7,780 8,100
Plant and equipment at cost............................................ 2,986,003 2,966,792
Less: accumulated depreciation......................................... 136,300 40,250
-------------- --------------
2,849,703 2,926,542
Plant and equipment under lease at cost (refer note 15.3) ............. 274,988 274,988
Less: accumulated amortisation......................................... 12,315 3,637
-------------- --------------
262,673 271,351
Mine development at cost............................................... 38,842 38,842
Less: accumulated amortisation......................................... 1,485 427
-------------- --------------
37,357 38,415
Total Fixed Assets at Cost............................................. 3,309,659 3,290,448
Total Accumulated Depreciation/Amortisation............................ 150,557 44,451
-------------- --------------
Total Written Down Amount.............................................. 3,159,102 3,245,997
-------------- --------------
- ------------------------------------------------------------------------------------------------------

10 CREDITORS AND BORROWINGS
CURRENT
Trade creditors (refer note 25.6)...................................... 35,138 61,047
Bank overdraft (refer note 14.1)....................................... 620 657
Shareholder loan*...................................................... 1,917,492 1,917,492
Interest accrued (refer note 25.6)..................................... 23,765 30,819
Dividend payable (refer note 25.6)..................................... 61,686 0
Other loans (refer note 20)............................................ 49 102,091
Other liabilities (refer note 25.6).................................... 869 1,580
-------------- --------------
2,039,619 2,113,681
-------------- --------------
NON-CURRENT
Loans (refer note 20).................................................. 1,057,833 1,164,699
-------------- --------------
1,057,833 1,164,699
-------------- --------------

There are no guarantees or securities over assets with respect to
borrowings.

*In accordance with the Electricity Industry (Further Amendment) Act
1994 section 153F and the Electricity Industry (Amendment) Act 1995
section 153W, the shareholder loan is an amount owing to the State
Electricity Commission of Victoria and, whilst the loan holds a legal
obligation, it holds no interest payable and no term is specified for
repayment. Loy Yang Power Ltd., however, will be making repayments
against the shareholder loan in 1996/97.

F-167

LOY YANG POWER ANNUAL REPORT 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

11 PROVISIONS
CURRENT
Employee entitlements (refer note 17)............ 7,476 7,587
Uninsured losses................................. 0 75
Site restoration--mine (refer note 16)........... 140 60
Redundancies..................................... 1,494 7,338
-------------- --------------
9,110 15,060
-------------- --------------
NON-CURRENT
Employee entitlements (refer note 17)............ 5,927 5,219
Site restoration--power station (refer note 16) . 3,734 3,248
Site restoration--mine (refer note 16)........... 968 906
Deferred income tax (refer note 4.2)............. 90,688 25,717
-------------- --------------
101,317 35,090
-------------- --------------
- --------------------------------------------------------------------------------

12 SHARE CAPITAL
AUTHORISED CAPITAL
500,000,000 Ordinary Shares of $1.00 each ....... 500,000 500,000
ISSUED AND PAID UP CAPITAL
15 ordinary shares of $1.00 each, fully paid .... 0 0
(Balance not shown due to rounding)
- --------------------------------------------------------------------------------

13 RETAINED EARNINGS
Balance at Beginning of Year..................... 50,618 0
Transfer from profit and loss.................... 117,686 50,618
-------------- --------------
Total available for appropriation................ 168,304 50,618
Interim dividend paid............................ 56,000 0
Final dividend payable........................... 61,686 0
-------------- --------------
BALANCE AT END OF YEAR........................... 50,618 50,618
-------------- --------------

F-168

FINANCIAL STATEMENTS 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

14 STATEMENT OF CASH FLOWS

14.1 RECONCILIATION OF CASH
Cash at the end of the financial year as shown in the Statement of
Cash Flows is reconciled to the related items in the Balance Sheet as
follows:

CASH
Cash on hand........................................................... 8 8
Short term deposits and securities..................................... 650 1,007
-------------- --------------
658 1,015
OVERDRAFT
Bank overdraft......................................................... (620) (657)
-------------- --------------
(620) (657)
-------------- --------------
38 358
-------------- --------------
Loy Yang Power Ltd. has a bank overdraft facility of $5 million (1995:
$10 million) arranged with the National Australia Bank. $4.4 million
of the facility is available at 30 June 1996.

14.2 RECONCILIATION OF NET CASH FLOWS FROM OPERATING ACTIVITIES
Operating profit after income tax...................................... 117,686 50,618
-------------- --------------
Non-cash revenues and expenses, and revenues and expenses associated
with financing or investing activities:
Depreciation and amortisation expense.................................. 106,275 44,456
Income tax expense..................................................... 67,547 28,961
Interest revenue received.............................................. (1,845) (912)
Finance charges........................................................ 126,711 59,145
Dividend revenue received.............................................. (127) 0
Loss/(profit) on sold and scrapped non-current assets.................. (51) 16
-------------- --------------
298,510 131,666
ADJUST FOR MOVEMENTS IN ASSETS AND LIABILITIES
Increase/(decrease) in operating expenditure accruals.................. (30,126) 29,572
Increase/(decrease) in provisions...................................... (4,694) (8,343)
Increase/(decrease) in trust funds and deposits........................ (711) 1,308
Decrease/(increase) in accounts receivable/accrued revenue ............ 28,954 (41,753)
Decrease/(increase) in prepayments..................................... (136) 1,474
Decrease/(increase) in inventory....................................... (227) (808)
-------------- --------------
(6,940) (18,550)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. 409,256 163,734
-------------- --------------

F-169

LOY YANG POWER ANNUAL REPORT 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

15 EXPENDITURE COMMITMENTS
15.1 CAPITAL EXPENDITURE COMMITMENTS
Outstanding contract commitments for capital expenditure
contracted for at balance date but not provided for comprises
the following:
Payable not later than one year.................................. 946 596
-------------- --------------
946 596
-------------- --------------
15.2 NON-CAPITAL EXPENDITURE COMMITMENTS
Outstanding contract commitments for non-capital expenditure
contracted for at balance date but not provided for comprises
the following:
Payable not later than one year.................................. 6,524 3,938
Payable greater than one and less than two years................. 1,566 0
-------------- --------------
8,090 3,938
-------------- --------------
15.3 LEASE EXPENDITURE COMMITMENTS
Outstanding operating lease (non-cancellable) commitments at
balance date but not provided for comprises the following:
Payable not later than one year.................................. 138 0
Payable greater than one and less than two years................. 145 0
Payable greater than two and less than five years................ 169 0
-------------- --------------
452 0
-------------- --------------

Loy Yang Power Ltd. holds $263 million of plant disclosed as leased assets in
note 9. The leases for these assets have not yet been novated to Loy Yang
Power Ltd., and they remain with the current lessees being either the State
Electricity Commission of Victoria or Generation Victoria. As a consequence
Loy Yang Power Ltd. has no lease liability in respect to these leases. Loy
Yang Power Ltd. and the State Electricity Commission of Victoria are
progressing issues to achieve their formal novation to Loy Yang Power Ltd.
The lessors have given their conditional consent for Loy Yang Power Ltd. to
use the assets until such time as the leases are formally novated.

Included in the above is a lease relating to an individual asset valued at
$67.7 million (written down value) which has an expiry date of 31 December
1999 unless not renewed by the lessor with effect from 30 June 1996. The
renewal option is yet to be exercised. The lessor's consent for Loy Yang
Power Ltd. to use the asset continues.

- -----------------------------------------------------------------------------

16 SITE RESTORATION COSTS--POWER STATION AND MINE
Provision for site restoration of the power
station and mine sites of $4.8 million has
been provided for in the accounts as at 30
June 1996. The total net present value of
estimated future cash outflows for site
restoration is $26 million.

F-170

FINANCIAL STATEMENTS 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

17 EMPLOYEE ENTITLEMENTS
17.1 AGGREGATE EMPLOYEE ENTITLEMENT
Wages and salaries................................................ 185 219
Recreation leave.................................................. 6,663 6,176
Long service leave................................................ 6,740 6,630
Redundancies...................................................... 1,494 7,338
-------------- --------------
15,082 20,363
-------------- --------------
The amounts for long service leave are measured at their present
values. The following assumptions were adopted in measuring the
present values of the entitlements which are not expected to be
paid or settled within 12 months of balance date.

LONG SERVICE LEAVE
Weighted average rates of increase in annual employee
entitlements to settlement of the liabilities .................... 2.9% 4.0%
Weighted average discount rates .................................. 8.7% 8.8%
Weighted average terms to settlement of the liabilities ......... 11 years 11 years

17.2 SUPERANNUATION FUND
All permanent and directly hired casual employees of Loy Yang
Power Ltd. are entitled to benefits on termination from the
Victorian Electricity Industry Superannuation Fund. All casual
and permanent employees engaged after 3 October 1994 are members
of an accumulation fund, Division D or other external
accumulation funds. All other permanent employees are members of
Division B or C of the Fund which provide defined benefits in the
form of pensions (Division B) or lump sums (Division C). Both
defined benefit schemes are closed to new members. During July
1995 the company contributed to the Fund at the rate of 10% for
the defined benefit schemes, and thereafter at a rate of 9.75%.
Contributions in excess of those required by the Superannuation
Guarantee Charge Act 1992 (6%) are not legally enforceable.

F-171

LOY YANG POWER ANNUAL REPORT 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

17 EMPLOYEE ENTITLEMENTS (CONTINUED)
17.2 SUPERANNUATION FUND (CONTINUED)
The effective date of the most recent detailed valuation of the Fund
was 30 June 1996. The review was undertaken by William M. Mercer Pty
Ltd. Based on that assessment, the situation for the company as at 30
June 1996 was:
Present value of employees accrued benefits............................ 54,100* 45,800
Net market value of assets held by the fund to meet future benefit
payments............................................................... 54,600* 47,500
Excess/(deficit) of present value of employees' benefits over assets
held to meet future benefit payments................................... 500* 1,700
Vested benefits........................................................ 49,300* 45,700

The present value of employees' accrued benefits is equal to the past
membership liability calculated in accordance with Australian
Accounting Standard AAS25 "Financial Reporting by Superannuation
Plans". (Vested benefits are those benefits which would have been paid
on voluntary termination from the Fund.)

Employer contributions to the fund..................................... 2,697 1,194
Additional contributions to the fund to compensate for differences
between the resignation and retrenchment benefit, in relation to
voluntary retrenchments................................................ 1,228 1,140

*Note: Asset and benefit figures are unaudited at the time of signing
this report. The last full audit was conducted at 30 June 1995.
- ------------------------------------------------------------------------------------------------------

18 CONTINGENT EVENTS
18.1 Loy Yang Power Ltd. was allocated its assets and liabilities from
Generation Victoria through an allocation statement in accordance with
the Electricity Industry (Further Amendment) Act 1994. Under section
153B of this Act, the allocation statement may be amended at any time
at the direction of the Victorian Government Treasurer and relevant
Minister.

18.2 Upon the disaggregation of the State Electricity Commission of
Victoria (SECV) on 3 January 1994, Generation Victoria entered into a
contract with the SECV to meet the SECV's obligations under its
contracts for the supply of coal and infrastructure services to the
Loy Yang B Joint Venture in consideration of receipt of all SECV's
revenues under those contracts. Upon the disaggregation of Generation
Victoria on 31 January 1995, Generation Victoria's rights and
obligations were allocated to Loy Yang Power Ltd.

Under the contract Loy Yang Power Ltd. is directly liable to the SECV
to use its "best endeavours", backed by an indemnity in favour of the
SECV for performance of these obligations, subject only to force
majeure relief. A failure by Loy Yang Power Ltd. to use its "best
endeavours" may result in liabilities being imposed on Loy Yang Power
Ltd. At the time of preparation of this report, Loy Yang Power Ltd. is
not aware of any breaches of performance obligations on its part.

The SECV remains the contracting party under the contracts with the
Loy Yang B Joint Venture.

F-172

FINANCIAL STATEMENTS 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

19 TREASURY
19.1 LOY YANG POWER LTD. DERIVATIVES
Loy Yang Power Ltd.'s derivative products are dealt through Treasury
Corporation of Victoria (TCV). The only derivative products
outstanding as at 30 June 1996 were Interest Rate Swaps.

INTEREST RATE SWAPS
Under these swaps, Loy Yang Power Ltd. agrees with the counterpart to
exchange, at specified intervals, the difference between the
fixed-rate and floating-rate interest amounts calculated by reference
to an agreed notional amount. The notional principal amounts are not
exchanged by the parties.

The maturity profile of these swaps in notional principal terms is:
Later than two years and not later than five years.................... 25,000 33,744
Later than five years................................................. 195,000 245,000
-------------- --------------
220,000 278,744
-------------- --------------
The following table indicates the type of swaps held by Loy Yang Power
Ltd. and their weighted average interest rates.
Pay-fixed swaps: notional principal amount............................ 220,000 278,744
Average pay rate: Loy Yang Power Ltd. specific cost................... 12.6% 12.5%
Average receive rate.................................................. 7.6% 7.7%

Loy Yang Power Ltd.'s credit exposures on these swaps is nil as the
counterpart in each case is TCV.

VIC INTEREST RATE FORWARDS & VIC HOTSTOCK FORWARDS

The maturity profile in notional principal amount terms, of these
Interest Rate and Hotstock Forwards is:
Not Later than one year............................................... 0 90,000
-------------- --------------
0 90,000
-------------- --------------

Both Vic Interest Rate Forwards and Vic Hotstock Forwards were created
by TCV for use by their Participating Authorities following the State
Treasurer's instructions that TCV Participating Authorities were to no
longer deal in derivative products directly with the financial markets
from 1 July 1995.

Vic Interest Rate Forwards are similar to Bill Futures except that
there are no initial and variation margins to be paid by either
counterpart. Vic Hotstock Forwards are similar to Bond Futures except
the maturity dates are specific to TCV's physical hotstocks.

F-173

LOY YANG POWER ANNUAL REPORT 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

20 LOANS (refer note 25.6)
20.1 LOAN COMPONENTS
CURRENT LOANS
Premium/(discount) on loans................................. 0 1,782
Fixed interest loans........................................ 49 88
Fixed interest bonds........................................ 0 100,221
-------------- --------------
49 102,091
NON-CURRENT LOANS
Premium/(discount) on loans ................................ 38,899 39,055
Floating rate notes ........................................ 249,745 334,746
Fixed interest bonds ....................................... 626,695 654,895
Capital indexed bonds ...................................... 142,429 135,890
Fixed interest loans ....................................... 65 113
-------------- --------------
1,057,833 1,164,699
-------------- --------------
1,057,882 1,266,790
-------------- --------------
Liabilities in years of maturity, at face value are:
Not later than one year.................................... 49 100,309
Later than one year and not later than two years .......... 353,784 21,249
Later than two years and not later than five years ....... 327,721 813,505
Later than five years...................................... 337,429 290,890
-------------- --------------
1,018,983 1,225,953
-------------- --------------
Plus unamortised adjustments to face value (refer note
20.2)...................................................... 38,899 40,837
-------------- --------------
1,057,882 1,266,790
-------------- --------------
20.2 ADJUSTMENTS TO FACE VALUE OF LOANS
Current (discount)/premium.................................. 0 1,782
Non-Current (discount)/premium.............................. 38,899 39,055
-------------- --------------
38,899 40,837
-------------- --------------

F-174

FINANCIAL STATEMENTS 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

20 LOANS (CONTINUED)
20.3 SECURITY--LOANS
All loan funding for Loy Yang Power Ltd. is arranged via Treasury Corporation of
Victoria (TCV). Legal inability to the end investor for Loy Yang Power Ltd. loans
rests with TCV.
These loans are guaranteed by the State Government of Victoria. In return Loy Yang
Power Ltd. pays a financial accommodation levy to the State Government which increases
the cost of debt to reflect market rates, based on an assessment of credit risk.
For debt novated to TCV, back-to-back loans have been established between Loy Yang
Power Ltd. and TCV. Pursuant to Section 36D of the Treasury Corporation of Victoria
(Debt Centralisation) Act 1993, Loy Yang Power Ltd. will reimburse TCV for all
settlement amounts relating to these loans.
- -------------------------------------------------------------------------------------------------------------

21 AUDITORS' REMUNERATION
Amounts received, or due and receivable, by the Auditor-General for auditing the
financial statements:
Total amount payable for annual audit fee ................................... 52 62
- -------------------------------------------------------------------------------------------------------------

22 DIRECTORS' REMUNERATION
Amounts received, or due and receivable, by the directors of
Loy Yang Power Ltd. ......................................................... 162 56
The number of directors of Loy Yang Power Ltd. whose annual remuneration (including
superannuation contributions) falls within the following bands:

$ Band levels Directors Directors
- --------------------------------------------------------------------------------- ------------- -------------
$30,000 -$39,999 ................................................................ 3 3
$60,000 -$69,999 ................................................................ 1 1
During the year Loy Yang Power Ltd. paid premiums for the indemnification and insurance
of all directors and officers of Loy Yang Power Ltd. to the full extent permitted by
Corporations Law.
The directors have applied ASC Class Order 95/741 in the disclosure of directors'
remuneration.
- ---------------------------------------------------------------------------------------------------------------

23 EXECUTIVES' REMUNERATION
The number of executives of Loy Yang Power Ltd. whose remuneration falls within the
following bands is set out below:

$ BAND LEVELS EXECUTIVES EXECUTIVES
- ------------------------------------------------------------------------------ -------------- --------------

$100,000 -$109,999 ........................................................... 0 1
$110,000 -$119,999 ........................................................... 2 4
$120,000 -$129,999 ........................................................... 1 0
$130,000 -$139,999 ........................................................... 3 1
$200,000 -$209,999 ........................................................... 0 1
$210,000 -$219,999 ........................................................... 1 0

Total remuneration received, or due and receivable, from Loy Yang Power Ltd.
or related entities by executive officers of Loy Yang Power Ltd. whose
remuneration exceeds $100,000: ............................................... 974 890

1994/95 amounts represent annual equivalents.

1995/96 amounts represent 12 months actual.

F-175

LOY YANG POWER ANNUAL REPORT 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

24 SEGMENTS

Loy Yang Power Ltd. operated entirely in Australia in the production and sale
of electricity and coal.

- -----------------------------------------------------------------------------

25 RELATED PARTY DISCLOSURES

25.1 DIRECTORS OF LOY YANG POWER LTD.

Directors of Loy Yang Power Ltd. during the financial year were:

Mr. C. Little
Mr. D. Swan
Mr. J. C. Richards
Mr. J. S. Grigg

All directors are non executive.

25.2 TRANSACTIONS WITH DIRECTOR-RELATED ENTITIES

There were no transactions with director-related entities.

25.3 WHOLLY OWNED GROUP

The wholly owned group comprises the ultimate holding entity of Loy Yang
Power Ltd., the Victorian State Government, and therefore all Victorian State
Government Departments, Statutory Corporations and any other corporate
entities owned by the Victorian State Government are related parties.

25.4 RELATED PARTY TRANSACTION CATEGORIES

The following types of related party transactions were transacted during the
year, on normal commercial terms:

Electricity purchases
Electricity transmission costs
Electricity pool costs
Council rates
Auditing services
Brown Coal Royalties
Technical services
Payroll tax
Briquette purchases
Electricity sales revenue
Coal sales revenue
Water purchases and waste water disposals
Loans from shareholder
Land leases
Provision of loan facilities
Gas purchases
Superannuation payments

F-176

FINANCIAL STATEMENTS 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

30 JUNE 1996 30 JUNE 1995
$'000 $'000
-------------- --------------

25 RELATED PARTY DISCLOSURES (continued)

25.5 OPERATING PROFIT AND LOSS TRANSACTIONS WITH RELATED PARTIES

Interest revenue.............................................................. 1,164 371
Dividend revenue.............................................................. 127 0
Interest expense ............................................................. 126,711 58,707

25.6 RECEIVABLE AND PAYABLES AT BALANCE DATE

AGGREGATE RELATED PARTY RECEIVABLES AT BALANCE DATE

Current ...................................................................... 57,508 99,469
Non-current................................................................... 1,566 3,132
-------------- --------------
59,074 102,601
-------------- --------------
AGGREGATE RELATED PARTY PAYABLES AT BALANCE DATE
Current ...................................................................... 1,994,185 2,097,008
Non-current................................................................... 1,058,296 1,164,997
-------------- --------------
3,052,481 3,262,005
-------------- --------------
25.7 INTERESTS HELD
There are no interests held in any related party other than those disclosed
as investments in note 8.

F-177

LOY YANG POWER ANNUAL REPORT 1995/96

AUDITOR-GENERAL'S REPORT

AUDIT SCOPE

The accompanying financial statements of Loy Yang Power Limited for the year
ended 30 June 1996, comprising a profit and loss statement, balance sheet,
statement of cash flows and notes to the financial statements, have been
audited. The company's directors are responsible for the preparation and
presentation of the financial statements and the information they contain. An
independent audit of these financial statements has been carried out in order
to express an opinion on them to the manager of the company, as required by
the Corporations Law and Audit Act of 1996.

The audit has been conducted in accordance with Australian Auditing Standards
to provide reasonable assurance as to whether the financial statements are
free of material misstatement. The audit procedures included an examination,
on a test basis, of evidence supporting the amounts and other disclosures in
the financial statements, and the evaluation of accounting policies and
significant accounting estimates. These procedures have been undertaken to
form an opinion as to whether, in all material respects, the financial
statements are presented fairly in accordance with the basis on which the
accounts have been prepared, namely applicable Accounting Standards, other
mandatory professional reporting requirements and comply with the
Corporations Law, so as to present a view which is consistent with my
understanding of the company's financial position and the results of its
operations and its cash flows.

The audit opinion expressed in the financial statements has been formed on
the above basis.

AUDIT OPINION

In my opinion, the financial statements of Loy Yang Power Limited are
properly drawn up:

a) so as to give a true and fair view of:

i) the company's state of affairs as at 30 June 1996 and of its profit
and cash flows for the financial year ended on that date; and

ii) the other matters required by Divisions 1, 4A and 4B of Part 3.6 of
the Corporations Law to be dealt with in the financial statements,

b) in accordance with the Corporations Law, and

c) in accordance with applicable Accounting Standards and other mandatory
professional reporting requirements.

/s/ C.A. Baragwanath
C.A. Baragwanath
Auditor-General

Melbourne, 29 August 1996

F-178

[VICTORIAN AUDITOR-GENERAL LETTERHEAD]

AUDITOR-GENERAL'S REPORT

AUDIT SCOPE

The accompanying financial statements of Loy Yang Power Limited for the
financial year ended 30 June 1995, comprising a profit and loss statement,
balance sheet, statement of cash flows and notes to the financial statements,
have been audited. The company's directors are responsible for the
preparation and presentation of the financial statements and the information
they contain. An independent audit of these financial statements has been
carried out in order to express an opinion on them to the members of the
company as required by the Corporations Law and the Audit Act 1994.

The audit has been conducted in accordance with Australian Auditing
Standards to provide reasonable assurance as to whether the financial
statements are free of material misstatement. The audit procedures included
an examination, on a test basis, of evidence supporting the amounts and other
disclosures in the financial statements, and the evaluation of accounting
policies and significant accounting estimates. These procedures have been
undertaken to form an opinion as to whether, in all material respects, the
financial statements are presented fairly in accordance with applicable
Accounting Standards and other mandatory professional reporting requirements
and comply with the Financial Management Act 1994 and the Corporations Law,
so as to present a view which is consistent with my understanding of the
company's financial position and the results of its operations and its cash
flows.

The audit opinion expressed on the financial statements has been formed on
the above basis.

AUDIT OPINION

In my opinion, the financial statements of the Loy Yang Power Limited are
properly drawn up:

(a) so as to give a true and fair view of:
(i) the company's state of affairs as at 30 June 1995 and of its profit
and cash flows for the financial year ended on that date, and
(ii) the other matters required by Divisions 4, 4A and 4B of Part 3.6 of
the Corporations Law to be dealt with in the financial statements.

(b) in accordance with the Financial Management Act 1994 and the Corporations
Law; and

/s/ K. G. Hamilton
------------------
K. G. HAMILTON
Acting
Auditor-General
MELBOURNE
6/9/1995

End of Audited Financial Statements

F-179

[ARTHUR ANDERSEN LETTERHEAD]

10 December 1997

NRG Energy Inc
1221 Nicollet Mall
Suite 700
Minneapolis MN 55403-2445
UNITED STATES OF AMERICA

Dear Sirs/Mesdames

LOY YANG POWER -- REPORT ON US GAAP RECONCILIATION AND PRIOR YEAR AUDIT
WORKPAPERS

At your request, we have performed the agreed-upon procedures set out below
with respect to Loy Yang Power Limited for the period 1 February 1995 to 30
June 1995, the financial year ended 30 June 1996, and the period from 1 July
1996 to 12 May 1997. These financial periods were covered by financial
statements for the financial years ended 30 June 1995 and 30 June 1996 of Loy
Yang Power Limited, and for the financial year ended 30 June 1997 for Quite
Life Limited (formerly Loy Yang Power Limited). Each of these financial
statements was subject to audit by the Victorian Auditor-General's Office.

The procedures performed were as follows:

o We audited the reconciliations of both the operating profit after tax for
each of the financial periods listed above and shareholders equity as at
30 June 1995, 30 June 1996 and 12 May 1997, from Australian generally
accepted accounting principles ("GAAP") to United States ("US") GAAP.

o We reviewed the workpapers of the Victorian Auditor-General's Office for
the purpose of determining whether the audit procedures performed in
support of the audit opinions on the financial statements as described
above were in accordance with US generally accepted auditing standards
("GAAS").

The following statements are made as a result of the performance of these
agreed-upon procedures.

AUDIT OF US GAAP RECONCILIATION

We have audited the reconciliation of operating profit after tax of Loy Yang
Power Limited for the period from 1 February 1995 to 30 June 1995, the
financial year ended 30 June 1996, and the period from 1 July 1996 to 12 May
1997, and of shareholders equity as at 30 June 1995, 30 June 1996 and 12 May
1997, from Australian GAAP to US GAAP, as set out in Schedule 1.

Our audit has been conducted in accordance with Australian Auditing
Standards, which are substantially similar in all material respects to US GAAS,
to provide reasonable assurance of whether the US GAAP reconciliations are free
of material misstatement. Our procedures included the examination of the
audited financial statements for each of the financial period listed above of
Loy Yang Power Limited in order to identify the application of accounting
polices which would be inconsistent with US GAAP, and the examination of the
US GAAP reconciliation including examination, on a test basis, of evidence
supporting the amounts of the reconciling items. These procedures have been
undertaken to form an opinion whether, in all material respects, the US GAAP
reconciliations are presented fairly, and represent an amount of operating
profit after tax and shareholders equity in accordance with US GAAP. The
audit opinion expressed in this report has been formed on the above basis.

F-180

In our opinion, the US GAAP reconciliations of Loy Yang Power Limited are
properly drawn up to give a true and fair view of:

o Operating profit after tax for the period from 1 February 1995 to 30 June
1995, the financial year ended 30 June 1996, and the period from 1 July
1996 to 12 May 1997 under US GAAP; and

o Shareholders equity as at 30 June 1995, 30 June 1996 and 12 May 1997
under US GAAP.

REVIEW OF WORKPAPERS OF THE VICTORIAN AUDITOR-GENERAL'S OFFICE

We have reviewed the workpapers of the Victorian Auditor-General's Office in
support of the audit opinions expressed by the Auditor-General on the
financial statements for the financial years ended 30 June 1995 and 30 June
1996 for Loy Yang Power Limited, and for the financial year ended 30 June
1997 for Quite Life Limited (formerly Loy Yang Power Limited).

Our review has been conducted in accordance with Australian Auditing
Standards which are substantially similar in all material respects to US
GAAS, in order to state whether, on the basis of the procedures described,
anything has come to our attention that would indicate that the audits
performed by the Auditor-General were not performed in accordance with US
GAAS. Our procedures involved the examination of the workpapers of the
Auditor-General for each of the financial statements listed above, and an
assessment of whether the procedures documented therein would constitute an
audit in accordance with US GAAS. As our review does not constitute an audit
made in accordance with Australian auditing standards, we do not express an
opinion on whether the audit has been performed in accordance with US GAAS.

Based on our review however, nothing has come to our attention that causes us
to believe that the audits performed by the Auditor-General on the financial
statements for the financial years ended 30 June 1995 and 30 June 1996 for
Loy Yang Power Limited, and for the financial year ended 30 June 1997 for
Quite Life Limited (formerly Loy Yang Power Limited), have not been performed
in accordance with US GAAS.

This report has been prepared to assist you with your reporting obligations
to the Securities Exchange Commission, and is not to be used for any purpose.

If you have any queries in relation to the above, please do not hesitate to
contact either Mr Michael Perry (613) 9286 8734 or Mr Scott Ward (613) 9286
8194.

Yours faithfully

/s/ Arthur Andersen

Enc

F-181

SCHEDULE 1

LOY YANG POWER LIMITED

US GAAP RECONCILIATION

A$'000 A$'000 A$'000
PERIOD TO YEAR TO PERIOD TO
12 MAY 1997 30 JUNE 1996 30 JUNE 1995
------------- -------------- --------------

Operating profit and extraordinary items under
Australian GAAP ...................................... 983,177 117,686 50,618
Less: Extraordinary gain on sale of business net of
tax................................................... 7 (952,657)
Add: Loss on buy-back of debt securities .............. 7 82,576
------------- -------------- --------------
Operating profit before sale of business under
Australian GAAP....................................... 113,096 117,686 50,618
Add/(less): US GAAP adjustments
Provision for redundancies ........................... 1 (650) (3,740) (5,053)
Pension plan ......................................... 2 1,472 (768) (320)
Tax rate change ...................................... 3 (1,881) 1,881
Revaluation of property, plant & equipment .......... 4 4,435 5,142 2,151
Reclassification of spares ........................... 5 (1,830)
Shareholder loan ..................................... 6 (81,022) (76,311) (32,838)
------------- -------------- --------------
Operating profit before sale of business under US GAAP 57,331 38,298 16,439
============= ============== ==============

A$'000 A$'000 A$'000
AT AT AT
12 MAY 1997 30 JUNE 1996 30 JUNE 1995
------------- -------------- --------------

Shareholders equity under Australian GAAP ............. 0 50,618 50,618
Less: Extraordinary gain on sale of business net of
tax................................................... 7 (952,657)
Add: Dividend paid on sale of business ................ 7 1,033,795
Add: Loss on buy-back of debt securities .............. 7 82,576
-------------
Shareholders equity before sale of business under
Australian GAAP ...................................... 163,714 50,618 50,618
Add/(less): US GAAP adjustments
Provision for redundancies ........................... 1 (9,443) (8,793) (5,053)
Pension plan ......................................... 2 1,792 320 1,088
Dividend payable ..................................... 8 (61,686) 61,686
Tax rate change ...................................... 3 1,881
Revaluation of property, plant & equipment .......... 4 11,728 7,293 2,151
Reclassification of spares ........................... 5 (1,830) (1,830)
Shareholder loan ..................................... 6 61,022 137,334
------------- -------------- --------------
Shareholders equity before sale of business under US
GAAP ................................................. 104,275 170,316 188,019
============= ============== ==============

F-182

LOY YANG POWER LIMITED

US GAAP RECONCILIATION -- FOOTNOTES

1. PROVISION FOR REDUNDANCIES

A provision for labour redundancies was recognised on the
commercialisation of the company on 1 February 1995. In accordance with
Australian GAAP, a provision for redundancies can be recognised where
positions have been identified as being surplus to requirements, provided the
circumstances are such that a constructive liability exists. Under US GAAP, a
provision for redundancies can only be recognised in certain restricted
circumstances. In particular, a provision redundancies involving voluntary
severance offers is restricted to employees who have accepted those offers.
Where the conditions for recognition of a redundancy provision do not exist,
redundancy benefits paid are expensed as incurred.

2. CONTRIBUTIONS TO PENSION PLANS

Under Australian GAAP, contributions made to pension plans are expensed
when due. Under US GAAP, the net periodic pension cost is charged against the
profit and loss account in accordance with US Statement of Financial
Accounting Standards No. 87.

3. RESTATEMENT OF DEFERRED TAX BALANCES FOR TAX RATE CHANGE

The company's deferred tax balances were restated at 30 June 1995
following the increase in the Australian company tax rate from 33% to 36%
announced by the Australian Treasurer in Parliament on 19 May 1995. This
increase was applicable to the company from 1 July 1995. Under Australian
GAAP, such an announcement is normally acceptable as adequate evidence that
the change will occur. Under US GAAP, a change of tax rate is not recognised
until it has been enacted.

4. UPWARD REVALUATIONS OF PROPERTY, PLANT AND EQUIPMENT

Upward revaluations of property, plant and equipment to an amount above
historical cost are permitted under Australian GAAP, which result in an
increase in depreciation expense charged against the profit and loss account.
Since US GAAP does not permit property, plant and equipment to be valued at
an amount above historical cost, the company's depreciation expense has been
restated to reflect historical cost depreciation.

5. CHANGE IN ACCOUNTING POLICY

Under Australian GAAP, a change in accounting policy which resulted in
non-depreciable inventory being classified as depreciable property, plant and
equipment was brought to account through prospective adjustment to
depreciation charged to the profit and loss account. Under US GAAP, a charge
to the profit and loss account made in the period of reclassification,
representing a retrospective adjustment for depreciation charges incurred to
date.

6. SHAREHOLDER LOAN

Under Australian GAAP, non-interest bearing debt is recognised as the
amount of principal due for repayment, and no interest expense is charged to
the profit and loss account. Under US GAAP, a notional interest cost is
recognised through adjusting the carrying value of the debt to the present
value of future obligations for principal repayments.

7. REVERSAL OF RESULT FROM SALE OF BUSINESS

The result from the sale of the business, including the final dividend to
the State Electricity Commission of Victoria, and the loss incurred on the
buy back of debt securities has been reversed in determining the results of
operations and shareholder equity under Australian GAAP.

8. DIVIDEND PAYABLE

Under Australian GAAP, dividends are recognised in the period to which
they relate and provision for dividends payable is made where a constructive
liability exists for the payment of such dividends at year end. Under US
GAAP, a dividends are recognised in the period in which they are declared and
become legally payable.

F-183

9. OTHER US GAAP MATTERS

Amortisation of deferred mine development costs

The expenditure associated with mine development costs is carried forward
to the extent that it is expected to be recouped. Deferred costs are
amortised on a units of production basis over proven coal reserves. This
accounting treatment is consistent with both Australian and US GAAP.

Liability for leased assets

On its commercialisation on 1 February 1995, the company recorded as an
asset plant and equipment under lease to the State Electricity Commission of
Victoria (SECV) and Generation Victoria (GenVic) with a fair value of
A$274.988 million. The plant and equipment was operated in accordance with
licenses approved by the lessor with the consent of the SECV and GenVic
pending formal novation of the lease agreement.

Liability for payments to the SECV and GenVic in relation to the leased
assets was recognised as a component of the non-interest bearing shareholder
loan (refer item 6 above). The amount of this liability was equal to the fair
value of the leased assets on commercialisation of the company. For the
purpose of the US GAAP reconciliation, the profit and loss charges associated
with the financing of the leased assets are included within the notional
interest cost on the shareholder loan.

F-184

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NRG. THE INFORMATION CONTAINED HEREIN IS AS OF THE DATE HEREOF
AND SUBJECT TO CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. DELIVERY OF
THIS PROSPECTUS AT ANY TIME SHALL NOT CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF NRG
SINCE THE DATE HEREOF OR THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN
THE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE NOTES OFFERED HEREBY IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON.

---------------

TABLE OF CONTENTS

PAGE
------

Summary................................. 3
Risk Factors............................ 16
Use of Proceeds ........................ 24
The Exchange Offer ..................... 25
Capitalization ......................... 32
Selected Consolidated Financial Data .. 33
Selected Pro Forma Condensed Financial
Data .................................. 36
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................ 38
Business ............................... 47
Regulation ............................. 81
Management ............................. 86
Ownership of Capital Stock ............. 92
Certain Transactions ................... 93
Certain Indebtedness ................... 95
Description of Notes ................... 96
Certain Federal Income Tax
Considerations ........................ 106
Ratings ................................ 108
Plan of Distribution ................... 109
Legal Matters .......................... 110
Experts ................................ 110
Index to Consolidated Financial
Statements............................. F-1

UNTIL MARCH 18, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO
DELIVER A PROSPECTUS.

$250,000,000

NRG ENERGY INC.

7 1/2% SENIOR NOTES
DUE 2007

[NRG LOGO]

PROSPECTUS

DATED DECEMBER 17, 1997

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following is an estimate of all expenses in connection with the
issuance and distribution of the securities being registered hereby:

SEC Registration Fee.... $ 75,758
Accountants' fees and
expenses................ 100,000
Attorney's fees and
expenses................ 150,000
Printing expenses....... 100,000
Miscellaneous........... 19,242
---------
Total................... $445,000
=========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

As authorized by Section 145 of the General Corporation Law of the State
of Delaware, each director and officer of NRG may be indemnified by NRG
against expenses (including attorney's fees, judgments, fines and amounts
paid in settlement) actually and reasonably incurred in connection with the
defense or settlement of any threatened, pending or completed legal
proceedings in which he is involved by reason of the fact that he is or was a
director or officer of NRG if he acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of NRG and,
with respect to any criminal action or proceeding, if he had no reasonable
cause to believe that his conduct was unlawful. However, if the legal
proceeding is by or in the right of NRG, the director or officer may not be
indemnified in respect of any claim, issue or matter as to which he shall
have been adjudged to be liable for negligence or misconduct in the
performance of his duty to NRG unless a court determines otherwise.

In addition, Article VI of NRG's By-Laws provides that NRG shall indemnify
and hold harmless, to the fullest extent permitted by applicable law, any
person who was or is made or is threatened to be made a party or is otherwise
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "Proceeding") by reason of the fact that
he or she, or a person for whom he or she is the legal representative, is or
was a director, officer, employee or agent of NRG or is or was serving at the
request of NRG as a director, officer, employee or agent of another company
or of a partnership, joint venture, trust, enterprise or non-profit entity,
including service with respect to employee benefit plans, against all
liability and loss suffered and expenses reasonably incurred by such person.
NRG shall be required to indemnify a person in connection with a Proceeding
initiated by such person only if the Proceeding was authorized by the Board
of Directors of NRG.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On June 12, 1997, NRG sold $250,000,000 aggregate principal amount of its
7-1/2% Senior Notes Due 2007 (the "Old Notes") to Salomon Brothers Inc, ABN
AMRO Chicago Corporation and Chase Securities Inc. (the "Initial Purchasers")
for $250,000,000 less the aggregate discount to Initial Purchasers of
$1,625,000. Such transaction was exempt from the registration requirements of
the Securities Act of 1933, in reliance on Section 4(2) of the Securities Act
on the basis that such transactions did not involve a public offering. In
accordance with the agreement pursuant to which the Initial Purchasers
purchased the Old Notes, such Initial Purchasers agreed to offer and sell the
Old Notes only to "qualified institutional buyers" (as defined in Rule 144A
under the Securities Act) and pursuant to offers and sales that occur outside
the United States within the meaning of Regulation S under the Securities
Act.

On January 29, 1996, NRG sold $125,000,000 aggregate principal amount of
its 7.625% Senior Notes Due 2006 (the "1996 Notes") to Bear, Stearns & Co.
Inc. and Merrill Lynch & Co. (the "1996 Note Initial Purchasers") for
$125,000,000 less the aggregate discount to 1996 Note Initial Purchasers of

II-1

$812,500. Such transaction was exempt from the registration requirements of
the Securities Act of 1933, in reliance on Section 4(2) of the Securities Act
on the basis that such transactions did not involve a public offering. In
accordance with the agreement pursuant to which the 1996 Note Initial
Purchasers purchased the 1996 Notes, such 1996 Note Initial Purchasers agreed
to offer and sell the 1996 Notes only to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act), a limited number of
institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3)
or (7) under the Securities Act) and pursuant to offers and sales that occur
outside the United States within the meaning of Regulation S under the
Securities Act.

II-2

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

EXHIBIT
- -----------

3.1 Certificate of Incorporation of NRG.*
3.2 By-Laws of NRG.*
4.1 Indenture, dated as of June 1, 1997, between NRG and Norwest Bank Minnesota, National Association.*
4.2 Form of Exchange Notes.*
4.3 Registration Rights Agreement, dated as of June 12, 1997, by and among NRG, Salomon Brothers Inc, ABN
AMRO Chicago Corporation and Chase Securities Inc.*
5.1 Opinion and consent of Skadden, Arps, Slate, Meagher & Flom LLP as to legality of the Exchange Notes to
be issued by NRG.*
5.2 Opinion of James J. Bender, Vice President and General Counsel of NRG.*
10.1 Employment Contract, dated as of June 28, 1995, between NRG and David H. Peterson.*
10.2 Indenture, dated as of January 31, 1996, between NRG and Norwest Bank Minnesota, National Association,
as Trustee.*
10.3 Revolving Credit Agreement, dated as of March 17, 1997, among NRG, the banks party thereto and ABN AMRO
Bank, N.V. as Agent.*
10.4 Note Agreement, dated August 20, 1993, among NRG Energy Center, Inc. and each of the purchasers named
therein.*
10.5 Master Shelf and Revolving Credit Agreement, dated August 20, 1993 among NRG Energy Center, Inc., The
Prudential Insurance Company of America and each Prudential Affiliate which becomes party thereto.*
10.6 Energy Agreement, dated February 12, 1988 between NRG (formerly known as Norenco Corporation) and
Waldorf Corporation (the "Energy Agreement").*
10.7 First Amendment to the Energy Agreement, dated August 27, 1993.*
10.8 Second Amendment to the Energy Agreement, dated January 31, 1996.*
10.9 Third Amendment to the Energy Agreement, dated August 25, 1997.*
10.10 Construction, Acquisition and Term Loan Agreement, dated September 2, 1997 by and among NEO Landfill
Gas, Inc., as Borrower, the lenders named on the signature pages, Credit Lyonnais New York Branch, as
Construction/Acquisition Agent and Lyon Credit Corporation, as Term Agent.*
10.11 Guaranty, dated September 12, 1997 by NRG in favor of Credit Lyonnais New York Branch as agent for the
Construction/Acquisition Lenders.*
10.12 Construction, Acquisition and Term Loan Agreement, dated September 2, 1997 by and among Minnesota
Methane LLC, as Borrower, the lenders named on the signature pages, Credit Lyonnais New York Branch, as
Construction/Acquisition Agent and Lyon Credit Corporation, as Term Agent.*
10.13 Guaranty, dated September 12, 1997 by NRG in favor of Credit Lyonnais New York Branch as agent for the
Construction/Acquisition Lenders.*
10.14 Non Operating Interest Acquisition Agreement, dated as of September 12, 1997, by and among NRG and NEO
Corporation.*
12.1 Computation of ratio of earnings to fixed charges.*
21 Subsidiaries of NRG.*
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Price Waterhouse Nederland BV.
23.4 Consent of Coopers & Lybrand L.L.P.
23.5 Consent of Deloitte & Touche GmbH (MIBRAG).
23.6 Consent of Deloitte & Touche GmbH (SEG).
23.7 Consent of the Australian Auditor General.*
23.8 Consent of Arthur Andersen LLP.
23.9 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).*
23.10 Consent of James J. Bender (included in Exhibit 5.2).*
24 Power of Attorney of certain officers and directors of NRG.*
25 Form T-1 Statement of Eligibility of Norwest Bank Minnesota, National Association to act as trustee
under the Indenture.*
27 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*

- ------------
* Previously filed.

II-3

ITEM 17. UNDERTAKINGS.

(a) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered herein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by the controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, NRG Energy,
Inc. certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-1 and has duly caused this amendment to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis, in the State of
Minnesota, on the 11th day of December, 1997.

NRG Energy, Inc.
By: /s/ VALORIE A. KNUDSEN
-------------------------------
Valorie A. Knudsen
Vice President, Finance

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated:

Signature Title Date
- ------------------------------- ---------------------------- --------------------

* Chairman of the Board,
------------------------------- President and Chief
David H. Peterson Executive Officer December 11, 1997

*
------------------------------- Executive Vice President and
Leonard A. Bluhm Chief Financial Officer December 11, 1997

*
-------------------------------
Gary R. Johnson Director December 11, 1997

*
-------------------------------
Cynthia L. Lesher Director December 11, 1997

*
-------------------------------
Edward J. McIntyre Director December 11, 1997

*
-------------------------------
John A. Noer Director December 11, 1997

*By:/s/ VALORIE A. KNUDSEN
----------------------------
Attorney-in-fact

II-5

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------

3.1 Certificate of Incorporation of NRG.*
3.2 By-Laws of NRG.*
4.1 Indenture, dated as of June 1, 1997, between NRG and Norwest Bank Minnesota,
National Association.*
4.2 Form of Exchange Notes.*
4.3 Registration Rights Agreement, dated as of June 12, 1997, by and among NRG, Salomon
Brothers Inc, ABN AMRO Chicago Corporation and Chase Securities Inc.*
5.1 Opinion and consent of Skadden, Arps, Slate, Meagher & Flom LLP as to legality of
the Exchange Notes to be issued by NRG.*
5.2 Opinion of James J. Bender, Vice President and General Counsel of NRG.*
10.1 Employment Contract, dated as of June 28, 1995, between NRG and David H. Peterson.*
10.2 Indenture, dated as of January 31, 1996, between NRG and Norwest Bank Minnesota,
National Association, as Trustee.*
10.3 Revolving Credit Agreement, dated as of March 17, 1997, among NRG, the banks party
thereto and ABN AMRO Bank, N.V. as Agent.*
10.4 Note Agreement, dated August 20, 1993, among NRG Energy Center, Inc. and each of the
purchasers named therein.*
10.5 Master Shelf and Revolving Credit Agreement, dated August 20, 1993 among NRG Energy
Center, Inc., The Prudential Insurance Company of America and each Prudential
Affiliate which becomes party thereto.*
10.6 Energy Agreement, dated February 12, 1988 between NRG (formerly known as Norenco
Corporation) and Waldorf Corporation (the "Energy Agreement").*
10.7 First Amendment to the Energy Agreement, dated August 27, 1993.*
10.8 Second Amendment to the Energy Agreement, dated January 31, 1996.*
10.9 Third Amendment to the Energy Agreement, dated August 25, 1997.*
10.10 Construction, Acquisition and Term Loan Agreement, dated September 2, 1997 by and
among NEO Landfill Gas, Inc., as Borrower, the lenders named on the signature pages,
Credit Lyonnais New York Branch, as Construction/Acquisition Agent and Lyon Credit
Corporation, as Term Agent.*
10.11 Guaranty, dated September 12, 1997 by NRG in favor of Credit Lyonnais New York
Branch as agent for the Construction/Acquisition Lenders.*
10.12 Construction, Acquisition and Term Loan Agreement, dated September 2, 1997 by and
among Minnesota Methane LLC, as Borrower, the lenders named on the signature pages,
Credit Lyonnais New York Branch, as Construction/Acquisition Agent and Lyon Credit
Corporation, as Term Agent.*
10.13 Guaranty, dated September 12, 1997 by NRG in favor of Credit Lyonnais New York
Branch as agent for the Construction/Acquisition Lenders.*
10.14 Non Operating Interest Acquisition Agreement, dated as of September 12, 1997, by and
among NRG and NEO Corporation.*
12.1 Computation of ratio of earnings to fixed charges.*
21 Subsidiaries of NRG.*
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Price Waterhouse Nederland BV.
23.4 Consent of Coopers & Lybrand L.L.P.
23.5 Consent of Deloitte & Touche GmbH (MIBRAG).
23.6 Consent of Deloitte & Touche GmbH (SEG).
23.7 Consent of The Australian Auditor General.*
23.8 Consent of Arthur Andersen LLP.
23.9 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).*
23.10 Consent of James J. Bender (included in Exhibit 5.2).*
24 Power of Attorney of certain officers and directors of NRG.*
25 Form T-1 Statement of Eligibility of Norwest Bank Minnesota, National Association to
act as trustee under the Indenture.*
27 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*

- ------------
* Previously filed.


                                                                  EXHIBIT 23.1 

                      CONSENT OF INDEPENDENT ACCOUNTANTS 

   We hereby consent to the use in the Prospectus constituting part of this 
Registration Statement on Form S-1 of our report dated April 8, 1997 relating 
to the financial statements of NRG Energy, Inc. for the two years ended 
December 31, 1996, which appears in such Prospectus. We also consent to the 
reference to us under the heading "Experts" in such Prospectus. 

   
Price Waterhouse LLP 
Minneapolis, Minnesota 
December 10, 1997


                                                                  EXHIBIT 23.2 

                        INDEPENDENT AUDITOR'S CONSENT 

   We consent to the use in this Registration Statement of NRG Energy, Inc. 
on Form S-1 of our report dated March 24, 1995, appearing in the Prospectus, 
which is a part of this Registration Statement, and to the reference to us 
under the heading "Experts" in such Prospectus. 

Deloitte & Touche LLP 
Minneapolis, Minnesota 
December 10, 1997


                                                                  EXHIBIT 23.3 

                      CONSENT OF INDEPENDENT ACCOUNTANTS 

   We hereby consent to the use in the Prospectus constituting part of this 
Registration Statement on Form S-1 of our reports dated March 21, 1997 
relating to the financial statements of Sunshine State Power BV and Sunshine 
State Power (No. 2) BV for the three years ended December 31, 1996, which 
appears in such Prospectus. We also consent to the reference to us under the 
heading "Experts" in such Prospectus. 

   
Price Waterhouse Nederland BV 
Amsterdam, The Netherlands 
December 10, 1997


                                                                  EXHIBIT 23.4 

                      CONSENT OF INDEPENDENT ACCOUNTANTS 

   We consent to the inclusion in this Amendment No. 4 to Registration 
Statement on Form S-1 (File No. 333-33397) of our report dated February 29, 
1996 on our audits of the financial statements of San Joaquin Valley Energy 
Partners I, L.P. for the two years ended December 31, 1995. We also consent to 
the reference of our firm under the caption "Experts." 

                                          /s/ Coopers & Lybrand L.L.P. 

Sacramento, California 
December 11, 1997


                                                                  EXHIBIT 23.5 

FOR MIBRAG                                                   December 11, 1997 

INDEPENDENT AUDITORS' CONSENT 

We consent to the use in this Amendment No. 4 to Registration Statement No. 
333-33397 of NRG Energy, Inc. on Form S-1 of our report dated October 24, 
1997 (relating to the financial statements of Mitteldeutsche 
Braunkohlengesellschaft mbH as of December 31, 1996, 1995 and 1994 and for 
each of the years in the three-year period ended December 31, 1996 presented 
separately herein) appearing in the Prospectus, which is part of this 
Registration Statement. 

We also consent to the reference to us under the heading "Experts" in such 
Prospectus. 

DELOITTE & 
TOUCHE GmbH 
Wirtshaftsprufungsgesellschaft


                                                                  EXHIBIT 23.6 

FOR SAALE ENERGIE GMBH                                       December 11, 1997 

INDEPENDENT AUDITORS' CONSENT 

We consent to the use in this Amendment No. 3 to Registration Statement No. 
333-33397 of NRG Energy, Inc. on Form S-1 of our report dated October 31, 
1997 (relating to the financial statements of Saale Energie GmbH as of and 
for the year ended December 31, 1996 presented separately herein) appearing 
in the Prospectus, which is part of this Registration Statement. 

We also consent to the reference to us under the heading "Experts" in such 
Prospectus. 

DELOITTE & 
TOUCHE GmbH 
Wirschaftsprufungsgesellschaft


                                                                  EXHIBIT 23.8 

INDEPENDENT AUDITORS' CONSENT 

We consent to the use in this Amendment No. 4 to Registration Statement No. 
333-33397 of NRG Energy, Inc. on Form S-1 of our report dated 11 December 
1997 (relating to Loy Yang Power Limited on certain agreed upon procedures 
covering the period from 1 February 1995 to 30 June 1995, the financial year 
ended 30 June 1996, and the period from 1 July 1996 to 12 May 1997) appearing 
in the Prospectus, which is part of this Registration Statement. 

We also consent to the reference to us under the heading "Experts" in such 
prospectus. 

/s/ Arthur Andersen 
Chartered Accountants 

/s/ Michael S. Perry 
Michael S. Perry 
Partner 
December 11, 1997