As filed with the Securities and Exchange Commission on August 12, 1997 

                                                     Registration No. 333- 

                      SECURITIES AND EXCHANGE COMMISSION 
                            WASHINGTON, D.C. 20549 

                                   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) ------------------- MICHAEL J. YOUNG 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 PRICE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER NOTE (1) FEE - --------------------------- -------------- -------------- ---------------- -------------- 7 1/2% Senior Notes due 2007 ...................... $250,000,000 100% $250,000,000 $75,758 - --------------------------- -------------- -------------- ---------------- --------------
- ----------------------------------------------------------------------------- (1) Estimated in accordance with Rule 457 (c) of the Securities Act, solely for the purpose of calculating the registration fee. 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 AUGUST 12, 1997 PROSPECTUS OFFER FOR ALL OUTSTANDING 7 1/2% SENIOR NOTES DUE 2007 [NRG LOGO] IN EXCHANGE FOR 7 1/2% 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 , , 1997, 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. 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. 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 (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 15 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 , 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. 2 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 or one of its project subsidiaries of interests in a project or facility refer to ownership 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 August 1, 1997 (including those under construction) had a total design capacity of 7,010 megawatts ("MW"), of which NRG had or will have operational responsibility for 4,582 MW and net ownership of or leasehold interests in 2,097 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 net ownership as of December 31, 1993 to 2,097 MW net ownership as of August 1, 1997. This growth resulted primarily from a number of domestic and international investments and acquisitions, principally the Gladstone Power Station in Australia ("GPS" or "Gladstone"), the Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAG") and Schkopau ("Schkopau") Projects in Germany, the Minneapolis Energy Center ("MEC") 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 August 1, 1997, NRG had interests in 26 power generation facilities worldwide (not including those facilities in which NEO Corporation ("NEO") has an interest), including projects under construction. Of these facilities, 11 are located in the United States (531 MW design capacity, with NRG holding 176 MW net ownership), 4 are located in Germany (1,160 MW design capacity, with NRG holding 267 MW net ownership), 4 are located in Australia (4,039 MW design capacity, with NRG holding 1,244 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 5.5 MW net ownership) and Honduras (80 MW design capacity, with NRG holding 6 MW net ownership). In 1996, NRG and Vattenfall AB of Sweden ("Vattenfall") 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 3 company in Bolivia, which will have a design capacity of 218 MW after a 56 MW expansion in 1998. In addition, through its wholly-owned project subsidiary, NEO, NRG had interests on August 1, 1997 in 28 small hydroelectric and landfill gas-fired power generation facilities located in the United States with total design capacity of 72 MW, of which NRG has net ownership of 35 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. 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. In 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"). NRG holds 41.86% of the common stock of NRGG, and NRG employees serve as NRG's designees on the board of directors of NRGG. The remaining 58.14% of the common stock of NRGG remained with the then-existing equity holders in O'Brien and is now publicly traded. NRGG is a public company and its shares are listed in the NASDAQ small cap issues 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 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. 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. 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; a 27.75% interest in the 390 MW Alto Cachapoal greenfield hydroelectric complex in central Chile in partnership with Nordic Power Invest AB and Construtora Andrade Gutierrez S.A.; and a 50% interest in the Enfield Energy Centre, a 350 MW power project under development in Enfield, England. 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 4 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. 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. 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. 5 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 , 1997, 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 ......................... Each Holder 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 herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile together with either certificates for such Old Notes or a Book-Entry Confirmation (as defined herein) of such Old Notes into the Book-Entry Transfer Facility (as defined herein), if such procedure is available, and any other required documentation to the exchange agent (the "Exchange Agent") at the address set forth herein. 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 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 or dealer will not be deemed to admit that it is an "underwriter" within the meaning 6 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. 7 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 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 jurisdictions. See "The Exchange Offer -- Consequences of Failure to Exchange Old Notes." 8 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 New Notes have been assigned ratings of "BBB-" by Standard & Poor's Ratings Group and "Baa3" by Moody's Investors Service, Inc. 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." 9 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. 10 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 March 31, 1996 and 1997, and for the three-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:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ---------- --------- --------- --------- ---------- --------- --------- (IN THOUSANDS) OPERATING REVENUES Revenues from wholly-owned operations(1) .................. $39,647 $48,529 $63,970 $64,180 $ 71,649 $18,662 $21,665 Equity in operating earnings of unconsolidated affiliates(2)(3) 1,321 2,695 27,155 23,639 32,815 5,904 8,492 ---------- --------- --------- --------- ---------- --------- --------- Total operating revenues ...... 40,968 51,224 91,125 87,819 104,464 24,566 30,157 OPERATING COSTS AND EXPENSES Cost of operations--wholly-owned operations ..................... 22,870 27,122 34,861 32,535 36,562 9,700 12,222 Depreciation and amortization .. 5,060 6,475 8,675 8,283 8,378 2,083 2,176 General, administrative, and development .................... 14,930 11,448 19,993 34,647 39,248 10,610 8,833 ---------- --------- --------- --------- ---------- --------- --------- Total operating costs and expenses ...................... 42,860 45,045 63,529 75,465 84,188 22,393 23,231 ---------- --------- --------- --------- ---------- --------- --------- OPERATING INCOME (LOSS) .......... (1,892) 6,179 27,596 12,354 20,276 2,173 6,926 OTHER INCOME (EXPENSE) Equity in gain from project termination settlements ........ -- -- 9,685 29,850 -- -- -- Other income (expense), net .... (1,753) 1,028 1,411 4,896 9,477 1,908 2,018 Interest expense ................ (1,662) (2,679) (6,682) (7,089) (15,430) (3,225) (4,063) ---------- --------- --------- --------- ---------- --------- --------- Total other income (expense) .. (3,415) (1,651) 4,414 27,657 (5,953) (1,317) (2,045) ---------- --------- --------- --------- ---------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES............................. (5,307) 4,528 32,010 40,011 14,323 856 4,881 INCOME (BENEFIT) TAXES(4) ........ (2,187) 1,905 2,472 8,810 (5,655) (1,691) (1,922) ---------- --------- --------- --------- ---------- --------- --------- NET INCOME (LOSS) ................ $(3,120) $ 2,623 $29,538 $31,201 $ 19,978 $ 2,547 $ 6,803 ========== ========= ========= ========= ========== ========= =========
- ------------ (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 and Kladno. (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 and Kladno are also accounted for using the equity method of accounting even though NRG currently owns more than a 50% interest in both projects because NRG intends to sell down below the 50% level. 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 1994, 1995 and 1996, respectively, to write-down the carrying value of certain energy projects. (4) 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. 11 CONSOLIDATED BALANCE SHEET DATA:
AS OF DECEMBER 31, AS OF MARCH 31, ---------------------------------------------------------- ------------------------- 1992 1993 1994 1995 1996 1996 1997 --------- ----------- ----------- ----------- ------------ ------------ ------------ (IN THOUSANDS) Net property, plant and equipment ..... $46,694 $108,934 $107,634 $111,919 $129,649 $111,703 $135,652 Net equity investments in projects .......... 16,400 20,046 164,863 221,129 365,749 207,859 371,132 Long-term debt, including current maturities......... 10,499 93,451(1) 93,339(1) 90,034(1) 212,141(1) 214,465(1) 211,536(1) Stockholder's equity ............ 40,267 97,722 234,722 319,764 421,914 324,600 443,462
- ------------ (1) Includes debt relating to MEC, including current maturities, which is non-recourse to NRG. As of March 31, 1997 this debt was $76.4 million. OTHER DATA (UNAUDITED):
AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, --------------------------------------------------- ---------------------- 1992 1993 1994 1995 1996 1996 1997 -------- --------- --------- ---------- ----------- ----------- ---------- (DOLLARS IN THOUSANDS) NRG's net power generating capacity(MW) ................. 33 33 992 999 1,326 1,021 1,365(1) NRG's net thermal energy generating capacity: mmBtus per hour .............. 695 1,865 1,961 2,318 2,654 2,654 2,654 MWt equivalent ............... 204 547 575 679 822 822 822 Consolidated EBITDA (2) ...... $1,415 $13,682 $47,367 $55,383 $38,131 $6,164 $11,120 Consolidated interest expense . $1,662 $ 2,679 $ 6,682 $ 7,089 $15,430 $3,225 $ 4,063 Consolidated interest expense coverage ratio (3) ........... 0.85x 5.11x 7.09x 7.81x 2.47x 1.91x 2.74x Consolidated debt service (4) $2,562 $ 4,272 $ 9,169 $10,394 $18,323 $3,794 $ 4,668 Consolidated debt service coverage ratio (5) ........... 0.55x 3.20x 5.17x 5.33x 2.08x 1.62x 2.38x Consolidated ratio of earnings to fixed charges(6)........... (7) 2.32x 2.98x 1.56x(9) 1.75x(10) 4.48x(10) (8)
- ------------ (1) Does not include NRG's net power generating capacity in Loy Yang A and Kladno. (2) EBITDA equals the sum of income (loss) before income taxes, interest expense (net of capitalized interest) and depreciation and amortization expense. Management believes that some investors consider EBITDA an accepted indicator of a company's ability to service debt. EBITDA is not a measure of financial performance 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. See Statements of Cash Flows in the Consolidated Financial Statements included elsewhere in this Prospectus. (3) The interest expense coverage ratio equals EBITDA divided by interest expense. (4) Debt service consists of the previous twelve months of interest expense and principal payments on long-term debt. (5) The debt service coverage ratio equals EBITDA divided by debt service. (6) 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 inconsolidated 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 approxmimation of the interest factor of rental expense. (7) 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. (8) Due primarily to undistributed equity earnings exceeding income before income taxes, NRG was unable to fully cover fixed charges. Earnings did not cover fixed charges by $1,832. (9) 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. (10) The 1996 ratio of earnings to fixed charges calcuation 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 $3,504 for 1996 and by $3,635 for the three months ended March 31, 1996. 12 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 three months ended March 31, 1997 give effect to such transactions as if they had occurred at the beginning of the periods presented. The pro forma balance sheet data as of March 31, 1997 gives effect to such transactions as if they had occurred on March 31, 1997. 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 PRO FORMA ------------ -------------- ----------- (IN THOUSANDS) STATEMENT OF INCOME DATA: Revenues from wholly-owned operations ........... $ 71,649 -- $ 71,649 Equity in earnings of unconsolidated affiliates 32,815 $ 15,300 (1) 48,115 Operating costs and expenses .................... (84,188) -- (84,188) Other income (expense) .......................... 9,477 -- 9,477 Interest expense ................................ (15,430) (18,750)(2) (34,180) Income taxes .................................... 5,655 4,373 (3) 10,028 ------------ -------------- ----------- Net Income....................................... $ 19,978 $ 923 $ 20,901 ============ ============== ===========
- ------------ (1) Represents estimated equity earnings from Loy Yang A for twelve months based upon historical data adjusted for certain management assumptions. (2) Represents accrued interest on $250 million principal amount of the Old Notes for twelve months at a rate of 7.5% per annum. (3) Net tax benefit derived from interest expense on the Old Notes. 13 AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
HISTORICAL ADJUSTMENTS PRO FORMA ------------ ------------- ------------ (IN THOUSANDS) STATEMENT OF INCOME DATA: Revenues from wholly-owned operations ........... $ 21,665 -- $ 21,665 Equity in earnings of unconsolidated affiliates 8,492 $ 3,825 (1) 12,317 Operating costs and expenses .................... (23,231) -- (23,231) Other income and (expense) ...................... 2,018 -- 2,018 Interest expense ................................ (4,063) (4,688)(2) (8,751) Income taxes .................................... 1,922 1,093 (3) 3,015 ------------ ------------- ------------ Net Income....................................... $ 6,803 $ 230 $ 7,033 ============ ============= ============ BALANCE SHEET DATA: ASSETS Current assets .................................. $ 69,197 $ 49,100 (4) $ 118,297 Property plant and equipment net ................ 135,652 -- 135,652 Investments in projects and other assets ....... 491,763 261,800 (5) 753,563 ------------ ------------- ------------ Total assets ................................... $696,612 $310,900 $1,007,512 ============ ============= ============ LIABILITIES AND STOCKHOLDER'S EQUITY Long-term and short-term debt ................... $211,536 $250,000 (6) $ 461,536 Other liabilities ............................... 41,614 -- 41,614 Stockholder's equity ............................ 443,462 60,900 (7) 504,362 ------------ ------------- ------------ Total liabilities and stockholder's equity .... $696,612 $310,900 $1,007,512 ============ ============= ============
- ------------ (1) Represents estimated equity earnings for three months from Loy Yang A based upon historical data adjusted for certain management assumptions. (2) Represents interest expense on $250 million principal amount of the Old Notes for three months at a rate of 7.5% per annum. (3) Net tax benefit derived from interest expense on the Old Notes. (4) Represents net cash provided in excess of the amount needed for the investment in Loy Yang A and total financing costs. (5) Net investment in Loy Yang A of $257 million plus total financing costs associated with the Offering and the Bridge Financing to be amortized over the life of the Old Notes. (6) Represents the aggregate principal amount of the Old Notes. (7) Represents equity contribution of $60.9 million by NSP. 14 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. CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE 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 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 The Notes will be exclusively the obligations of NRG and not of any of its project subsidiaries or project affiliates. 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 December 31, 1996, NRG's project subsidiaries and project affiliates had total assets of $4.1 billion, total indebtedness of $1.6 billion and an aggregate debt-to-total capitalization ratio of approximately 63%. The debt agreements of NRG's project and other subsidiaries and project affiliates generally 15 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. LEVERAGE As of March 31, 1997, NRG had total indebtedness of $211.5 million at the corporate holding company level which results in a total debt-to-capitalization ratio of 32%; 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." 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 16 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 Waldorf 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 17 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. 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 18 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. CONSTRUCTION AND START-UP RISKS 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 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. 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 19 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$21.5 million, based on exchange rates and ACPI in effect at March 31, 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 Waldorf 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 20 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. 21 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" within the meaning of the Private Securities Litigation Reform Act of 1995. 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. 22 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." 23 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 , 1997; 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 , 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) 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. 24 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. 25 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. 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 acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." 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. 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 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 financial institution that is a participant in the Book-Entry Transfer Facility's systems may 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 procedures for transfer. However, although delivery of Old Notes may be effected through book-entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, with any required signature guarantees and any other required 26 documents, must, in any case, be transmitted to and received by the Exchange Agent at one of the addresses set forth below under "--Exchange Agent" on or prior to the Expiration Date or pursuant to the guaranteed delivery procedures described below. 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: 27 (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. 28 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 Hand Delivery: By Registered or Certified Mail: Norwest Bank Minnesota National Association Norwest Bank Minnesota, National Association Northstar East 12th Floor P.O. Box 1517 608 2nd Avenue Minneapolis, Minnesota 55480-1517 Minneapolis, Minnesota 55479-0113 Attention: Corporate Trust Operations Attention: Corporate Trust Operations By Overnight Delivery: Norwest Bank Minnesota National Association By Facsimile Norwest Center (612) 667-4927 6th and Marquette Avenue Confirm by Telephone: Minneapolis, Minnesota 55479-0069 (612) 667-9764 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 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 registration requirements of 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 29 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. 30 CAPITALIZATION The following table sets forth the unaudited consolidated capitalization of NRG as of March 31, 1997 and as adjusted to give effect to the equity contribution of $60.9 million from NSP in connection with the acquisition of Loy Yang A and the Offering. See "Use of Proceeds."
MARCH 31, 1997 ------------------------ ACTUAL AS ADJUSTED ---------- ------------- (DOLLARS IN THOUSANDS) (UNAUDITED) Long-term debt: Existing funded debt(1)................................. $211,536 $211,536 Notes .................................................. 250,000 ---------- ------------- Total long-term debt................................... 211,536 461,536 ---------- ------------- Stockholder's equity: Common stock; $1 par value; 1,000 shares authorized; 1,000 shares issued and outstanding ................... 1 1 Additional paid-in capital ............................. 371,013 431,913(2) Retained earnings ...................................... 73,104 73,104 Currency translation adjustments ....................... (656) (656) ---------- ------------- Total stockholder's equity ............................ 443,462 504,362 ---------- ------------- Total capitalization ................................. $654,998 $965,898 ========== ============= - ------------ (1) Includes $4.9 million of current portion of long-term debt and $76.4 million of debt relating to MEC, including current maturities, which is non-recourse to NRG. (2) Reflects the $60.9 million contribution by NSP in connection with the acquisition of Loy Yang A.
31 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 March 31, 1996 and 1997, and for the three-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:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ---------- --------- --------- --------- ---------- --------- --------- (IN THOUSANDS) OPERATING REVENUES Revenues from wholly-owned operations(1) . $39,647 $48,529 $63,970 $64,180 $ 71,649 $18,662 $21,665 Equity in operating earnings of unconsolidated affiliates(2)(3).......... 1,321 2,695 27,155 23,639 32,815 5,904 8,492 ---------- --------- --------- --------- ---------- --------- --------- Total operating revenues ................ 40,968 51,224 91,125 87,819 104,464 24,566 30,157 OPERATING COSTS AND EXPENSES Cost of operations--wholly-owned operations .............................. 22,870 27,122 34,861 32,535 36,562 9,700 12,222 Depreciation and amortization ............ 5,060 6,475 8,675 8,283 8,378 2,083 2,176 General, administrative, and development 14,930 11,448 19,993 34,647 39,248 10,610 8,833 ---------- --------- --------- --------- ---------- --------- --------- Total operating costs and expenses ..... 42,860 45,045 63,529 75,465 84,188 22,393 23,231 ---------- --------- --------- --------- ---------- --------- --------- OPERATING INCOME (LOSS) ................... (1,892) 6,179 27,596 12,354 20,276 2,173 6,926 OTHER INCOME (EXPENSE) Equity in gain from project termination settlements ............................. -- -- 9,685 29,850 -- -- -- Other income (expense), net .............. (1,753) 1,028 1,411 4,896 9,477 1,908 2,018 Interest expense ......................... (1,662) (2,679) (6,682) (7,089) (15,430) (3,225) (4,063) ---------- --------- --------- --------- ---------- --------- --------- Total other income (expense) ............ (3,415) (1,651) 4,414 27,657 (5,953) (1,317) (2,045) ---------- --------- --------- --------- ---------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES ........ (5,307) 4,528 32,010 40,011 14,323 856 4,881 INCOME (BENEFIT) TAXES(4) ................. (2,187) 1,905 2,472 8,810 (5,655) (1,691) (1,922) ---------- --------- --------- --------- ---------- --------- --------- NET INCOME (LOSS).......................... $(3,120) $ 2,623 $29,538 $31,201 $ 19,978 $ 2,547 $ 6,803 ========== ========= ========= ========= ========== ========= =========
- ------------ (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 and Kladno. (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 and Kladno are also accounted for using the equity method of accounting even though NRG currently owns more than a 50% interest in both projects because NRG intends to sell down below the 50% level. 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 1994, 1995 and 1996, respectively, to write-down the carrying value of certain energy projects. (4) 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. 32 CONSOLIDATED BALANCE SHEET DATA:
AS OF DECEMBER 31, AS OF MARCH 31, ---------------------------------------------------------- ------------------------- 1992 1993 1994 1995 1996 1996 1997 --------- ----------- ----------- ----------- ------------ ------------ ------------ (IN THOUSANDS) Net property, plant and equipment . $46,694 $108,934 $107,634 $111,919 $129,649 $111,703 $135,652 Net equity investments in projects 16,400 20,046 164,863 221,129 365,749 207,859 371,132 Long-term debt, including current maturities ........................ 10,499 93,451(1) 93,339(1) 90,034(1) 212,141(1) 214,465(1) 211,536(1) Stockholder's equity ............... 40,267 97,722 234,722 319,764 421,914 324,600 443,462
- ------------ (1) Includes debt relating to MEC, including current maturities, which is non-recourse to NRG. As of March 31, 1997 this debt was $76.4 million. OTHER DATA (UNAUDITED):
AS OF AND FOR THE AS OF AND FOR THE THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------------- ---------------------- 1992 1993 1994 1995 1996 1996 1997 -------- --------- --------- ---------- ----------- ----------- ---------- (DOLLARS IN THOUSANDS) NRG's net power generating capacity (MW).......................... 33 33 992 999 1,326 1,021 1,365(1) NRG's net thermal energy generating capacity: mmBtus per hour ....................... 695 1,865 1,961 2,318 2,654 2,654 2,654 MWt ................................... 204 547 575 679 822 822 822 Consolidated EBITDA (2) ................ $1,415 $13,682 $47,367 $55,383 $38,131 $6,164 $11,120 Consolidated interest expense .......... 1,662 2,679 6,682 7,089 15,430 3,225 4,063 Consolidated interest expense coverage ratio (3) ............................. 0.85x 5.11x 7.09x 7.81x 2.47x 1.91x 2.74x Consolidated debt service (4) .......... $2,562 4,272 9,169 10,394 18,323 3,794 4,668 Consolidated debt service coverage ratio (5) ............................. 0.55x 3.20x 5.17x 5.33x 2.08x 1.62x 2.38x Consolidated ratio of earnings to fixed charges (6)............................ (7) 2.32x 2.98x 1.56x(9) 1.75x(10) 4.48x(10) (8)
- ------------ (1) Does not include NRG's net power generation capacity in Loy Yang A and Kladno. (2) EBITDA equals the sum of income (loss) before income taxes, interest expense (net of capitalized interest) and depreciation and amortization expense. Management believes that some investors consider EBITDA an accepted indicator of a company's ability to service debt. EBITDA is not a measure of financial performance 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. See Statements of Cash Flows in the Consolidated Financial Statements included elsewhere in this Prospectus. (3) The interest expense coverage ratio equals EBITDA divided by interest expense. (4) Debt service consists of the previous twelve months of interest expense and principal payments on long-term debt. (5) The debt service coverage ratio equals EBITDA divided by debt service. (6) 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. (7) 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. (8) Due primarily to undistributed equity earnings exceeding income before income taxes, NRG was unable to fully cover fixed charges. Earnings did not cover fixed charges by $1,832. (9) 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. (10) 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 $3,504 for 1996 and by $3,635 for the three months ended March 31, 1996. 33 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 three months ended March 31, 1997 gives effect to such transactions as if they had occurred at the beginning of the periods presented. The pro forma balance sheet data as of March 31, 1997 gives effect to such transactions as if they had occurred on March 31, 1997. 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 PRO FORMA ------------ -------------- ----------- (IN THOUSANDS) STATEMENT OF INCOME DATA: Revenues from wholly-owned operations ........... $ 71,649 -- $ 71,649 Equity in earnings of unconsolidated affiliates 32,815 $ 15,300 (1) 48,115 Operating costs and expenses .................... (84,188) -- (84,188) Other income (expense) .......................... 9,477 -- 9,477 Interest expense ................................ (15,430) (18,750)(2) (34,180) Income taxes .................................... 5,655 4,373 (3) 10,028 ------------ -------------- ----------- Net Income....................................... $ 19,978 $ 923 $ 20,901 ============ ============== ===========
- ------------ (1) Represents estimated equity earnings from Loy Yang A for twelve months based upon historical data adjusted for certain management assumptions. (2) Represents accrued interest on $250 million principal amount of the Old Notes for twelve months at a rate of 7.5% per annum. (3) Net tax benefit derived from interest expense on the Old Notes. 34 AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
HISTORICAL ADJUSTMENTS PRO FORMA ------------ ------------- ------------ (IN THOUSANDS) STATEMENT OF INCOME DATA: Revenues from wholly-owned operations ........... $ 21,665 -- $ 21,665 Equity in earnings of unconsolidated affiliates 8,492 $ 3,825 (1) 12,317 Operating costs and expenses .................... (23,231) -- (23,231) Other income and (expense) ...................... 2,018 -- 2,018 Interest expense ................................ (4,063) (4,688)(2) (8,751) Income taxes .................................... 1,922 1,093 (3) 3,015 ------------ ------------- ------------ Net Income....................................... $ 6,803 $ 230 $ 7,033 ============ ============= ============ BALANCE SHEET DATA: ASSETS Current assets $ 69,197 $ 49,100 (4) $ 118,297 Property plant and equipment net ................ 135,652 135,652 Investments in projects and other assets ....... 491,763 261,800 (5) 753,563 ------------ ------------- ------------ Total assets .................................. $696,612 $310,900 $1,007,512 ============ ============= ============ LIABILITIES AND STOCKHOLDER'S EQUITY Long-term and short-term debt ................... $211,536 $250,000 (6) $ 461,536 Other liabilities ............................... 41,614 -- 41,614 Stockholder's equity ............................ 443,462 60,900 (7) 504,362 ------------ ------------- ------------ Total liabilities and stockholder's equity ... $696,612 $310,900 $1,007,512 ============ ============= ============
- ------------ (1) Represents estimated equity earnings for three months from Loy Yang A based upon historical data adjusted for certain management assumptions. (2) Represents interest expense on $250 million principal amount of the Old Notes for three months at a rate of 7.5% per annum. (3) Net tax benefit derived from interest expense on the Old Notes. (4) Represents net cash provided in excess of the amount needed for the investment in Loy Yang A and total financing costs. (5) Net investment in Loy Yang A of $257 million plus total financing costs associated with the Offering and the Bridge Financing to be amortized over the life of the Old Notes. (6) Represents the aggregate principal amount of the Old Notes. (7) Represents equity contribution of $60.9 million by NSP. 35 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 March 31, 1997 that met NRG's policy for capitalization of development costs. At March 31, 1997, NRG had a total of $9.6 million in capitalized costs related to Alto Cachopoal ($0.4 million), Collinsville ($1.0 million), Kladno ($6.6 million), Energy Developments Limited ($0.1 million) and West Java ($1.5 million). RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 For the three months ended March 31, 1997, NRG had operating revenues of $30.2 million, compared to operating revenues of $24.6 million for the three months ended March 31, 1996, an 36 increase of 23%. NRG's operating revenues from wholly-owned operations for the period ended March 31, 1997 were $21.7 million, an increase of $3.0 million, or 16%, 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 revenue from NRG wholly-owned service subsidiaries, and reduced gas curtailment at Grand Forks AFB. Revenues from the thermal business increased $2.2 million and the RDF business increased $0.6 million, due to increases in MSW deliveries at the Newport Facility. For the three months ended March 31, 1997, revenues from wholly-owned operations consisted primarily of revenue from district heating and cooling (47%), resource recovery activities (30%), other thermal projects (17%) and NEO (1%). Equity in earnings of unconsolidated project affiliates was $8.5 million for the three months ended March 31, 1997 compared to $5.9 million for the three months ended March 31, 1996, an increase of 44%. New revenue sources from NRGG and COBEE provided equity earnings of $1.8 million and $0.5 million, respectively, for the period ended March 31, 1997. Additionally, new equity investments in Latin Power and NEO contributed an additional $0.5 million in equity income in the first quarter of 1997. Cost of operations in wholly-owned operations was $12.2 million for the three months ended March 31, 1997, an increase of $2.5 million, or 25.8%, over the same period in 1996, 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 increased to 56% from 52% primarily because of higher fuel and labor costs. General, administrative and development costs were $8.8 million for the three months ended March 31, 1997, compared to $10.6 million for the three months ended March 31, 1996, a decrease of $1.8 million, or 17.0%. This decrease was due to a reduction in business development expenses of $2.5 million, from $5.2 million for the three months ended March 31, 1996, to $2.7 million for the three months ended March 31, 1997. This reduction was primarily caused by the large number of projects that reached the milestones that allowed such expenses to be capitalized. Interest expense for the three months ended March 31, 1997, as compared with the same period in 1996, increased by $0.9 million, from $3.2 million to $4.1 million. This increase primarily was due to the issuance of $125 million aggregate principal amount of 7.625% Senior Notes Due 2006 (the "1996 Senior Notes") at the end of January 1996. Therefore, the 1996 Senior Notes were outstanding the entire first three months of 1997 compared to two months in 1996. Net income for the three months ended March 31, 1997, was $6.8 million, an increase of $4.3 million, or 172%, compared to net income of $2.5 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 37 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. 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. 38 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. 39 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 ------------------------------------------- THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------- ------------- PERCENTAGE (DOLLARS IN MILLIONS) OWNERSHIP PROJECT 1994 1995 1996 1996 1997 INTEREST - -------------- --------- --------- --------- ------ ------ ------------ MIBRAG (1) .... $19.4 $22.2 $13.1 $3.5 $2.4 33.3 Gladstone ..... 7.7 (2) 11.2 10.8 2.6 2.9 37.5 Schkopau ...... 0.0 0.0 (3) 6.4 0.4 1.2 20.6 Kladno (4) .... * 0.0 (0.3) 0.1 0.0 34.0 Latin Power .. (0.3) 0.0 1.6 0.5 0.3 4-9 COBEE ......... * * 0.1 (5) 0.0 0.5 58.0 NRGG .......... * * 2.3 * 1.8 14-42 NEO ........... (0.2) (0.1) (0.5) 0.1 0.9 50-100
- ------------ * 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 1994, NRG acquired a 26.5% ownership interest in a 28 MW facility. NRG's ownership interest increased to 34% in May 1997. (5) Based on twelve days of ownership and operation. LIQUIDITY AND CAPITAL RESOURCES Net cash used by operating activities was $2.5 million for the first three months ended March 31, 1997, as compared to $1.3 million for the same period of 1996, an increase of $1.2 million. The primary differences between the first quarter of 1997 and the same period in 1996 were increased net income of $4.3 million and changes in deferred income taxes and investment tax credits of $6.3 million, which were offset by an increase in undistributed equity in operating earnings of $2.2 million and a change in working capital items of $9.7 million. Net cash flow from operating activities was $4.1 million in 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 in 1995. Principal components of cash flow from operating activities were net income of $31.2 million, depreciation and amortization of $8.3 million and changes in working capital items of $9.0 million. Non-cash adjustments that reduced cash flow from operating activities consisted primarily of $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 in 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. 40 Net cash used for investing activities for the three months ended March 31, 1997 was $13.5 million as compared to $65.5 million for the same period in 1996. The high level of invested cash in 1996 was caused by NRG's receipt of the proceeds of the 1996 Senior Notes in January 1996, most of which had not been expended by March 31, 1996. Those proceeds were invested in projects throughout the rest of 1996, and $13.8 million was invested in projects in the first quarter of 1997, as opposed to only $1.6 million in that same period in 1996. NRG's project investments in the first quarter of 1997 included $7.5 million in Energy Developments Limited ("EDL"), $2.0 million in Latin Power, and $2.0 million (including capitalized work in progress) in Kladno. NRG also increased its outstanding loans to international projects (a $4.6 million note to Enfield and $2.2 million in notes related to COBEE) creating a cash flow use of $6.7 million in the first quarter of 1997 as compared to a $1.3 million inflow in the same period in 1996. Capital expenditures increased $6.2 million for the three months ended March 31, 1997, as compared to March 31, 1996. This increase is primarily attributable to capital investments in the MEC Fairview Plant of $4.8 million, with the remaining change substantially attributable to the investment in the MEC Federal Reserve Plant. At March 31, 1997, NRG's restricted cash balance was $10.8 million, while at March 31, 1996, it was $98.0 million, again because the proceeds of the 1996 Senior Notes were received in January 1996 and had not yet been expended. The restricted cash balance change for the periods ended March 31, 1997 and 1996 impacted cash flow by $6.9 million and ($88.2) million, respectively. For the period ended March 31, 1997, NRG received $6.7 million from its sale of a portion of its investment in COBEE. For the same period in 1996, NRG received $25.2 million of proceeds related to the termination of the SJVEP Facilities (as hereinafter defined) power purchase agreement. Cash used for investing activities in 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 the 41.86% 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 and expects to make capital expenditures of approximately $10 million in 1997, $7.7 million of which were made in the three months ended March 31, 1997. 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 in 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 in 1994 included $102.1 million in equity investments 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 flows from financing activities for the quarter ending March 31, 1997 were $19.4 million, which was primarily made up of the $20 million equity investment by NRG's parent company, NSP, to fund NRG's investment in EDL. This was substantially lower than the same period in 1996, which included the $122.7 million in cash proceeds from the issuance of the 1996 Senior Notes and so totalled $122.1 million at March 31, 1996; NRG incurred $2.3 million in financing costs in connection with the 1996 Senior Notes, which NRG is capitalizing and amortizing over the ten-year life of the notes. For the 41 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 investments in Gladstone ($64.9 million), Schkopau ($18.2 million), MIBRAG ($10.6 million) and Sunnyside ($11.5 million). As of March 31, 1997, NRG's consolidated financial statements contained long-term debt (excluding current maturities) of $206.6 million. As of that date, annual maturities of long-term debt ranged from $3.3 million to $4.2 million in the five-year period ending December 31, 2001. See "Certain Indebtedness." NRG is committed to additional equity investments of approximately $214 million for 1997-2001, approximately $49 million of which is committed for 1997, for various international power generation projects. 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. Although no funds have been loaned to date, NRG expects to make a $3.0 million equity contribution loan to NRGG during 1997, which will be offset against NRG's loan commitment. Also in 1996, NRG executed an agreement whereby NRG is obligated to provide NRGG power generation investment opportunities in the United States over a three-year period. These projects, over the three-year term, must have an aggregate equity value of at least $60 million or a minimum of 150 net MW. In addition, NRG has committed to finance NRGG's investment in these projects 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 -- 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." 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. There are no borrowings outstanding under this facility and the full amount remains available. Proceeds from the facility will be used for general corporate purposes, including letters of credit and interim funding for NRG project investments. NRG Energy Center, Inc. ("NRG Energy Center") expects to enter into a master shelf agreement during August 1997, pursuant to which NRG Energy Center may issue $30 million in term notes with maturities no later than June 2017. The master shelf revolving credit facility could also provide for up to $5 million of short-term borrowings. This facility is expected to be recourse only to NRG Energy Center and is intended to provide financing for MEC. 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 42 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. As of March 31, 1997, NRG had $214.7 million of foreign currency denominated assets that were hedged by seven forward foreign currency exchange contracts with a notional value of $177 million, including $83 million of Australian dollar hedges and $94 million of German mark hedges, with maturities ranging from two to ten years. In connection with these forward foreign currency exchange contracts, cash collateral of $9.1 million was required at March 31, 1997. 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. 43 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 August 1997 have a total design capacity of 7,010 megawatts ("MW"), of which NRG has or will have operational responsibility for 4,582 MW and net ownership of or leasehold interests in 2,097, 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 divesture 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 44 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 ownership targets for a particular project if appropriate to maximize value and control risk. NRG may participate in a project that it does not control or operate 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. 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 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 45 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. 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 a construction contract 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 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. 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 reach financial closing by the third quarter of 1997. 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 for which the gas supply facility is under construction in the North London borough of Enfield. The power station is planned to begin commercial operations in the latter half 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. 46 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 $50 million of equity in this project and to endeavor to arrange up to $200 million of non-recourse debt for it. ALTO CACHAPOAL NRG owns a 27.75% interest in the Alto Cachapoal greenfield hydroelectric complex that is under development in central Chile. Alto Cachapoal is a two-stage 390 MW project. In the first 195 MW stage, Alto Cachapoal will sell all of its firm energy to Codelco-El Teniente, the world's largest underground copper mine, pursuant to a 20-year power sales contract. Financial closing for the first stage is expected in 1997. NRG's partners in the Alto Cachapoal facility are Nordic Power Invest AB (27.75%) and Construtora Andrade Gutierrez S.A. (44.5%). CAJUN NRG, together with two other parties, 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, which would acquire Cajun's 1760 MW of non-nuclear generating assets. 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. NRG is currently engaged in discussions with MCPC and its major customers concerning the proposed plan. 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. MILLENIUM NRG Morris Cogen Inc. has signed an agreement with Millenium Petrochemicals Inc. pursuant to which this NRG affiliate will develop, permit, finance, construct, own and operate a 117 MW cogeneration plant at Millenium's Morris, Illinois polyethylene manufacturing factory. The plant would be fueled primarily with natural gas, with process methane gas making up the balance. It would supply all of the factory's steam and electrical needs pursuant to a 25 year contract and would market the excess electrical capacity. Millenium would have the right to buy out the cogeneration plant for fair market value at certain defined points in the contract term. NRG is also pursuing several other energy-related investment opportunities and continues to evaluate other opportunities as they arise. 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 47 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 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 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, three are fueled with biomass, three are fueled with oil, seven 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 28 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 48 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 NRG has interests in 26 operating power generation facilities worldwide (not including NEO). Of these facilities, 11 are located in the United States (531 MW design capacity, with NRG holding 176 MW 49 net ownership), 4 are located in Germany (1,160 MW design capacity, with NRG holding 267 MW net ownership ), 4 are located in Australia (4,039 MW design capacity, with NRG holding 1,244 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 5.5 MW net ownership) and Honduras (80 MW design capacity, with NRG holding 6 MW net ownership). In 1996, NRG and Vattenfall AB 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 56 MW expansion in 1998. In addition, through its wholly-owned project subsidiary, NEO Corporation ("NEO"), NRG also has interests in 28 small hydroelectric and landfill gas-fired power generation facilities located in the United States with total design capacity of 72 MW, of which NRG has net ownership of 35 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. 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. 50 Set forth in the two tables and the text below are descriptions of NRG's facilities in operation or under construction as of August 1, 1997. INDEPENDENT POWER PRODUCTION AND COGENERATION FACILITIES(1)
NRG'S TOTAL FACILITY LATER OF DATE OF PERCENTAGE COST(3) NAME AND LOCATION DESIGN POWER ACQUISITION OR DATE OF OWNERSHIP (IN $ OF FACILITY CAPACITY(MW)(2) PURCHASER COMMERCIAL OPERATION INTEREST MILLIONS) - ---------------------------- ------------- ---------------------- ---------------------- ------------ -------------- Loy Yang Power(4), Australia .................. 2000 Victorian Pool 1997 25.37 3,700(5) Gladstone Power Station, Australia .................. 1680 QTSC; BSL 1994 37.50 532.0(6) Collinsville, Australia .................. 189 QTSC 1998 50.00 154.0 Energy Development Limited, Australia .................. 170 Various 1997 7.20 Listed company Kladno Czech Republic, existing project ........... 28 STE/Industrials 1994 34.00 NA(7) expansion project .......... 354 STE 1997 57.85 401.0 Schkopau Power Station, Germany .................... 960 VEAG 1996 20.55 1,094.0(6) MIBRAG mbH(4), (Mumsdorf) Germany .................... 100 WESAG 1994 33.33 468.0(4)(8) MIBRAG mbH(4), (Deuben) Germany .................... 60 WESAG 1994 33.33 (8) MIBRAG mbH(4), (Wahlitz) Germany .................... 40 WESAG 1994 33.33 (8) COBEE, Bolivia .................... 218(9) Electropaz/ELF 1996 57.96 174.6 Latin Power (Mamonal), Colombia ................... 100 Proelectrica 1994 6.45 71.0 Latin Power (Termovalle), Colombia ................... 199 EPSA 1998 4.88 145.6 Latin Power (ELCOSA), Empresa Nacional de Honduras .................. 80 Energia Electrica 1994 7.65 93.0 Latin Power (Dr. Bird), Jamaica Public Service Jamaica .................... 74 Company, Ltd. 1995 8.78 98.0 Latin Power (Aguaytia), Central Peruvian Peru ...................... 155 Electricity Grid 1998 3.63 256.0 NRGG (Parlin), Jersey Central New Jersey ................. 122 Power & Light 1996 41.86 Listed company Company NRGG (Newark), Jersey Central New Jersey ................. 52 Power & Light 1996 41.86 Listed company Company NRGG (Grays Ferry), PECO Energy Pennsylvania ............... 150 Company 1996 13.95 Listed company NRGG (Philadelphia Water), Philadelphia Pennsylvania ............... 22 Municipal 1996 34.74 Listed company Authority San Joaquin Valley (Madera), California ................. 23 NA(10)(11) 1992 45.00 45.8 San Joaquin Valley (Chowchilla II), California ................. 10 NA(10)(11) 1992 45.00 San Joaquin Valley (El Nido), California ................. 10 NA(10)(11) 1992 45.00 Jackson Valley Energy Partners, California(12) ............. 16 PG&E 1991 50.00 28.0 Sunnyside Cogeneration Associates, Utah ....................... 58 PacifiCorp 1994 50.00 139.4 Artesia, Southern California ................. 34 California 1996 2.96 40.0 Edison Cadillac Renewable Energy, Michigan ................... 34 Consumers 1997 50.00 5.0(13) Power
51 - ------------ (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 56 MW expansion which will be operational in 1998. (10) Operations suspended following buy-out of power purchase contracts and pending negotiation of new power purchase agreements or sale of such facilities. (11) 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. (12) Operations were suspended during 1995 and 1996 pursuant to a restructuring of the power purchase agreement. Operations restarted on May 1, 1997. (13) In addition, NRG pays GE Credit Corporation rent under an operating lease for the facility. 52 THERMAL ENERGY PRODUCTION AND TRANSMISSION FACILITIES AND RESOURCE RECOVERY FACILITIES
NRG'S TOTAL PERCENTAGE FACILITY NAME AND LOCATION THERMAL ENERGY DATE OF OWNERSHIP COST(2) OF FACILITY DESIGN CAPACITY(1) PURCHASER/MSW SUPPLIER ACQUISITION INTEREST (IN $ MILLIONS) - -------------------------- ------------------------------------------------ ------------- ------------ --------------- Thermal Energy Production and Transmission Facilities Minneapolis Energy Center Steam: 1,323 Approximately 90 steam 1993 100.00 110.0 (MEC), mmBtu/hr. (388 MWt) customers and 30 chilled Minnesota ................ Chilled water: 35,550 water customers tons/hr. North American Thermal Pittsburgh: steam-- Approximately 24 customers 1995 49.40(3) 6.8 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 Approximately 14 customers 1997 100.00 6.7 tons/hr. Waldorf, Steam: Waldorf Corporation 1992 100.00 14.2 Minnesota ................ 430 mmBtu/hr. (126 MWt) Washco, 160 mmBtu/hr. Andersen Corporation 1992 100.00 5.2 Minnesota ................ (47 MWt) Minnesota Correctional Facility Grand Forks Air Force 105 mmBtu/hr. Grand Forks Air Force Base 1992 100.00 2.2 Base, (31 MWt) North Dakota ............. Energy Center Kladno, 512 mmBtu/hr. City of Kladno 1994 34.00 NA(4) Czech Republic(4) ....... (150 MWt) Resource Recovery Facilities Newport, MSW: 1,500 tons/day Ramsey and Washington 1993 100.00 17.1 Minnesota ................ Counties Elk River, MSW: 1,500 tons/day Anoka, Hennepin, and NA(6) 0.00 NA(5) Minnesota(5) ............. Sherburne Counties; Tri-County Solid Waste Management Commission
- ------------ (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. 53 INDEPENDENT POWER PRODUCTION AND COGENERATION INTERNATIONAL PROJECTS LOY YANG POWER 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 called Horizon Energy Partnership ("HEP"), 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). NRG has a 25.37% interest in HEP through its wholly-owned project subsidiary, NRGenerating Holdings (No.4) B.V. 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. The Loy Yang Power Station has generally achieved high capacity factor performance since commencing commercial operation, as compared to other brown coal generators in the same region of Australia. In the fiscal years ending June 30, 1995 and 1996, the capacity factor has been 94.3% and 91.2%, respectively, which were the best years of capacity factor performance in the project's history. The Power Station has also improved unit reliability, measured both in terms of trip rate and in terms of equivalent forced outage rate, over the last 5 years. The trip rates (per 1000 service hours) were just 1.2 and 0.7 for the 1995 and 1996 fiscal years, respectively. The equivalent forced outage rates for the same periods were 2.07% and 2.72%. 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. 54 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 55 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 March 31, 1997, the two-year average Equivalent Availability Factor was 84.9%. 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 for BSL. 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 $1.1 million, based on exchange rates and ACPI in effect at March 31, 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 $21.5 million, based on exchange rates and ACPI in effect at March 31, 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 $21.5 million, based on exchange rates and ACPI in effect at March 31, 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 56 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. 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 first quarter of 1997, equity in earnings increased from $2.6 million for the first quarter of 1996 to $2.9 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 July 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. ENERGY DEVELOPMENTS LIMITED On February 6, 1997, NRG, through its wholly-owned subsidiary Hunneric 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 preference shares at AUS$2.20 per share. 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). EDL, an Australian company, is the largest generator of power from coal seam methane in the world and 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 57 170 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 May 22, 1997 was AUS$2.82 (US$2.19 as of May 22, 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 March 31, 1997, KS had borrowed an aggregate of DM 1.46 billion (approximately $869 million, based on exchange rates in effect as of March 31, 1997) and Saale had borrowed an aggregate of DM 34.2 million (approximately $20.4 million, based on exchange rates in effect as of March 31, 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 $6.4 million for the year ended December 31, 1996 and $1.2 million for the three months ended March 31, 1997. 58 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$597 million based on the exchange rate as of March 31,1997) 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 March 31, 1997 was DM 26.7 million (or US$15.9 million based on the exchange rate on March 31, 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. 59 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 ($75.7 million as of March 31, 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 ($56.4 million as of March 31, 1997) from KfW and DM 198.0 million ($118.2 million as of March 31, 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 ($53.7 million as of March 31, 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 $13.0 million. Similarly, equity in earnings for the first quarter of 1997 was $2.4 million, while the first quarter of 1996 had been $3.5 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. 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%). 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. COBEE is currently negotiating 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 closing 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. 60 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. 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 163 MW. These facilities consist of 145 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 56 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 56 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, would add over 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 $0.4 million for the three months ended March 31, 1997. For the period ended March 31, 1997, NRG received $6.7 million from its sale of a portion of its investment in COBEE. NRG intends to sell down its ownership in COBEE to less than 50%. 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 61 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%. 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. As of March 31, 1997, capitalized development costs for the Kladno project were $6.6 million. 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 March 31, 1997, NRG had invested $13.0 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 producers 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 62 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 14.5% ownership 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 committed to make an additional investment in Latin Power II, a new Latin Power fund. This increased its 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 first quarter of 1997, these equity in earnings decreased from $0.6 million from the first quarter of 1996 to $0.3 million. DOMESTIC PROJECTS 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 holds 41.86% of the common stock of NRGG. The remaining 58.14% 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. 63 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 58% 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 is listed under the symbol "NRGG" in the OTC market. NRGG's closing share price as of July 31, 1997 was $16.50. 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 64 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. 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 $3.9 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 eight operating landfill gas projects, as of June 1, 1997, ranging in size from 1 MW to 8.4 MW and having a total capacity of 35 MW. As of March 31, 1997, NEO's investment in these projects totals $2.9 million. In addition, NEO has sixteen landfill gas projects in varying phases of development: these projects will range in size from 1 MW to 11 MW and will have a total capacity of approximately 65 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. 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 three months ended March 31, 1997, NEO has generated after tax earnings of $900,000 as compared to $90,000 for the same three month period in 1996. 65 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 Power under a long-term power purchase agreement. NRG immediately took over operations 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 to restructure 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 within six months. 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 2014. 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. However, since the plant is currently receiving and will for the forseeable future receive 66 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 connection with the partial buyout, and the obligations of JVEP under the PPA, are non-recourse to NRG. 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. 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 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 within two years or to sell those 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. 67 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. NRG Energy Center is in the process of renewing and increasing its $10 million master shelf revolving credit facility, which it expects to have in place by August 1997, pursuant to which NRG Energy Center may issue term notes with maturities no later than June 2013. The master shelf revolving credit facility could also provide for up to $5 million of short-term (i.e., less than one year) borrowings. These facilities are recourse only to NRG Energy Center. 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 Partners or "SFTLP") and the other in Pittsburgh (Pittsburgh Thermal Limited Partners 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 March 1997, NRG's investment in PTLP was $3.8 million and NRG's investment in SFTLP was $3.4 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 and the TVI Joint Venture will consummate any additional acquisition. SAN DIEGO POWER & COOLING NRG purchased the San Diego Power & Cooling Company ("SDPC") on June 25, 1997. 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. WALDORF The Waldorf 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 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 March 31, 1997, deferred revenues remaining were $5.8 million. Waldorf is currently running its corrugated medium operations on a rotational basis in response to poor market conditions. Waldorf anticipates improvement in the market and a return to normal corrugated medium operations in September 1997 when seasonal orders are placed. The corrugated medium operations represent approximately 40% of normal steam sales. 68 All project debt incurred with respect to the Waldorf line has been repaid. NRG maintains a $1.5 million performance bond with respect to the Waldorf 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 1993. 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 69 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 March 31, 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. NRG is in the preliminary stages of negotiations with the Counties relating to the Counties' request that NRG provide price concessions to the Counties under their existing service agreements. 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 three months ended March 31, 1997 were 9% 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 and 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. 70 In 1996 NRG earned a total management fee of $1.5 million, in addition to reimbursed expenses. Management fees for the three months ended March 31, 1997, totalled $266,000 compared to $320,000 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 Waldorf Corporation (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 March 31, 1997, NRG employed 799 people, approximately 302 of whom are employed directly by NRG and approximately 497 of whom are employed by its wholly-owned subsidiaries. Approximately 500 employees are covered by collective bargaining agreements. 71 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. 72 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. 73 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. 74 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. 75 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. 76 MANAGEMENT The name, age and title of each of the directors and executive officers of NRG as of July 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.......... 50 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 36 Vice President, U.S. Business Development Robert McClenachan .. 45 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......... 34 Treasurer David E. Ripka ....... 48 Controller Michael J. Young .... 40 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 since April 1994 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 77 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. Michael J. Young has been Corporate Secretary of NRG since June 1996, and also holds the position of Senior Counsel. Prior to joining NRG in May of 1995, Mr. Young was an attorney at Cargill, Incorporated for five years, and an associate at Lindquist & Vennum for three years. 78 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 SECURITIES ALL OTHER COMPENSATION UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS (2) - ----------------------------- ------ --------- -------- -------------- ------------ -------------- ($) ($) ($) (#) ($) David H. Peterson Chairman, President & Chief Executive Officer ........... 1996 250,000 81,000 3,637 Leonard A. Bluhm (3) Executive Vice President & CFO ......................... 1996 152,333 53,630 105,000(4) 2,712 Robert McClenachan Vice President, International Business Development ........ 1996 150,000 36,201 37,410 2,712 Ronald J. Will Vice President, Operations & Engineering ................. 1996 147,000 38,667 2,712 Craig A. Mataczynski Vice President, U.S. Business Development ........ 1996 145,000 40,343 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 $11.25. 75,000 of these options were cancelled in January, 1997. See "Option Grants in Last Fiscal Year." 79
OPTION GRANTS IN LAST FISCAL YEAR (1) - ---------------------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF NUMBER OF STOCK PRICE APPRECIATION SECURITIES FOR OPTION TERM UNDERLYING % OF TOTAL OPTIONS ------------------ OPTIONS GRANTED TO EMPLOYEES IN EXERCISE PRICE EXPIRATION 10% NAME GRANTED FISCAL YEAR ($/SH) DATE 5% ($)(3) ($)(3) - ---------------- ------------ ----------------------- -------------- ------------ --------- -------- Leonard A. Bluhm........... 105,000(2) 26 5.4375 10/21/2006 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 June 30, 1997, each of the Named Executives had the following credited service: Mr. Peterson, 33.42 years, Mr. Bluhm, 26 years, Mr. McClenachan, 5 years, Mr. Will, 37.17 years, Mr. Mataczynski, 15 years. 80 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. (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 which 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 which 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 81 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. 82 OWNERSHIP OF CAPITAL STOCK Northern States Power Company, 414 Nicollet Mall, Minneapolis, Minnesota 55401, owns all of the outstanding capital stock of NRG. 83 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 $1.2 million under them in the first three 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. In the first quarter of 1997, NRG received $0.6 million and paid $0.5 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 three months ended March 31, 1997, totalled $266,000 compared to $320,000 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 quarter of 1997, NRG paid $1.9 million for these services. 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. 84 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. 85 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 Senior Notes in this Offering. 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 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. MASTER SHELF AGREEMENT NRG Energy Center expects to enter into a master shelf agreement during August 1997, pursuant to which NRG Energy Center may issue $30 million in term notes with maturities no later than June 2017. The master shelf revolving credit facility could also provide for up to $5 million of short-term borrowings. The facility is expected to be recourse only to NRG Energy Center and is intended to provide financing for MEC. 86 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 certain 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 87 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. 88 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, 89 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; 90 (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. 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, subject to certain limitations specified in the Indenture, provided that the Holders shall have offered to the Trustee reasonable indemnity against expenses and liabilities. 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 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. 91 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, 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. 92 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 Old Global Notes were 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 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 93 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 does not take responsibility for 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. 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 94 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 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 95 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. 96 CERTAIN 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 aspects of United States Federal income taxation which 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) under the United States Internal Revenue Code. 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. 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. Such gain or loss will be long-term if the New Note is held for more than one year. 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. PROSPECTIVE HOLDERS OF THE NEW NOTES ARE URGED TO CONSULT THEIR TAXADVISORS CONCERNING THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING SUCH HOLDER'S OLD NOTES FOR THE NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS. 97 RATINGS Standard & Poor's Ratings Group and Moody's Investors Service, Inc. have given the Notes the ratings set forth under "Summary -- The Exchange Offer -- Ratings." 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. 98 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 form 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 acknowledging 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. 99 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. 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. 100 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- Audited Financial Statements Report of Independent Accountants......................................................... F-2 Consolidated Balance Sheets of NRG Energy, Inc. and Subsidiaries as of December 31, 1995 and 1996................................................................................. F-3 Consolidated Statements of Income of NRG Energy, Inc. and Subsidiaries for the years ended December 31, 1995 and 1996......................................................... F-5 Consolidated Statements of Cash Flows of NRG Energy, Inc. and Subsidiaries for the years ended December 31, 1995 and 1996......................................................... F-6 Consolidated Statements of Stockholder's Equity of NRG Energy, Inc. and Subsidiaries for the years ended December 31, 1995 and 1996............................................... F-7 Notes to Consolidated Financial Statements ............................................... F-8 Report of Independent Auditors ........................................................... F-23 Consolidated Balance Sheet of NRG Energy, Inc. and Subsidiaries as of December 31, 1994 .. F-24 Consolidated Statement of Income of NRG Energy, Inc. and Subsidiaries for the year ended December 31, 1994.................................................................. F-26 Consolidated Statement of Cash Flows of NRG Energy, Inc. and Subsidiaries for the year ended December 31, 1994.................................................................. F-27 Consolidated Statement of Stockholder's Equity of NRG Energy, Inc. and Subsidiaries for the year ended December 31, 1994 ........................................................ F-28 Notes to Consolidated Financial Statements ............................................... F-29 Unaudited Financial Statements Consolidated Balance Sheets of NRG Energy, Inc. and Subsidiaries as of March 31, 1996 and 1997..................................................................................... F-40 Consolidated Statements of Income of NRG Energy, Inc. and Subsidiaries for the three month periods ended March 31, 1996 and 1997.............................................. F-42 Consolidated Statements of Cash Flows of NRG Energy, Inc. and Subsidiaries for the three month period ended March 31, 1996 and 1997............................................... F-43 Notes to Consolidated Financial Statements................................................ F-44 Unaudited Pro Forma Combined Financial Statements Unaudited Pro Forma Consolidated Balance Sheet of NRG Energy, Inc. and Subsidiaries as of March 31, 1997........................................................................... F-47 Unaudited Pro Forma Consolidated Statement of Income of NRG Energy, Inc. and Subsidiaries for the year ended December 31, 1996..................................................... F-49 Unaudited Pro Forma Consolidated Statement of Income of NRG Energy, Income of NRG Energy, Inc. and Subsidiaries for the three month period ended March 31, 1997 ................... F-50
F-1 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 NSP) 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-2 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-3 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-4 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-5 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 (used) provided by changes in certain working capital items .... (4,323) 8,993 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-6 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-7 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. 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 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 F-8 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 30 years. NRG periodically evaluates the recovery of goodwill and other intangibles based on an analysis of estimated undiscounted future cash flows. 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. Derivative Financial Instruments As of March 31, 1997, NRG's policy was to hedge foreign currency denominated investments as they were made to preserve their U.S. dollar value, where appropriate hedging vehicles were available F-9 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. PRINCIPLES OF CONSOLIDATION (Continued) AND ECONOMICAL. NRG had entered into 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. None of these derivative financial instruments are reflected in NRG's balance sheet as of March 31, 1997. 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. 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-10 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-11 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 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 cash management, legal, accounting, employee relations and engineering. In addition, NRG employees participate in certain employee benefit plans of NSP as discussed in Note 10. During 1996 and 1995, NRG paid NSP $7.2 million and $6.8 million, respectively, as reimbursement under this agreement. 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. F-12 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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, F-13 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (Continued) 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 ========== =========
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 gain 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. F-14 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (Continued) 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:
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 =========== =========
F-15 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) 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 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. F-16 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued) 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 =========== =========
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. F-17 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued) 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 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. F-18 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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: F-19 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES (Continued)
(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. 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. F-20 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES (Continued) 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. 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) Consolidated operating revenues....................... $ 71,649 $ 71,649 Equity in income (loss) from investments.................... 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 1995 - ------------------------------- Consolidated operating revenues....................... 64,180 64,180 Equity in income (loss) from investments.................... (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
- ------------ (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. F-21 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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-22 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-23 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-24 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-25 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-26 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 .... (6,138) 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-27 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-28 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 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. 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-29 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 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 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-30 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-31 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-32 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 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 cash management, legal, accounting, employee relations and engineering. In addition, NRG employees participate in operating certain employee benefit plans of NSP. During 1994, NRG paid NSP $6.2 million as reimbursement for the cost of services provided. 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-33 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-34 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-35 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-36 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-37 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-38 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 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/ 1994 U.S. EUROPE PACIFIC AMERICAS OTHER TOTAL - ------------------------------- ---------- --------- --------- ---------- -------------- --------- (IN THOUSANDS) Consolidate operating revenues . $ 63,970 $ 63,970 Equity in income (loss) from investments.................... (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-39 NRG ENERGY, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, --------------------- 1997 1996 ---------- ---------- (THOUSANDS OF DOLLARS) ASSETS Current Assets: Cash and cash equivalents ..................................... $ 15,802 $ 62,355 Restricted cash ............................................... 10,787 97,989 Accounts receivable-trade, less allowance for doubtful accounts ..................................................... 11,773 6,849 Accounts receivable-affiliates ................................ 9,465 3,208 Current portion of notes receivable--affiliates ............... 11,379 6,728 Current portion of notes receivable ........................... 4,450 -- Income taxes receivable ....................................... -- 972 Inventory ..................................................... 2,502 1,826 Prepayments and other current assets .......................... 3,039 1,614 ---------- ---------- TOTAL CURRENT ASSETS ........................................... 69,197 181,541 ---------- ---------- Property, Plant and Equipment, at Original Cost: In service .................................................... 183,871 170,385 Under construction ............................................ 24,585 7,269 ---------- ---------- 208,456 177,654 Less accumulated depreciation ................................. (72,804) (65,951) ---------- ---------- Net property, plant and equipment............................. 135,652 111,703 ---------- ---------- Other Assets: Investments in projects ....................................... 371,132 207,859 Capitalized project costs ..................................... 11,468 6,713 Notes receivable, less current portion--affiliates ........... 56,170 32,389 Notes receivable, less current portion ........................ 9,600 -- Intangible assets, net of accumulated amortization ........... 40,555 41,616 Debt issuance costs, net of accumulated amortization ......... 2,838 2,892 ---------- ---------- Total other assets ........................................... 491,763 291,469 ---------- ---------- TOTAL ASSETS ................................................... $696,612 $584,713 ========== ==========
See accompanying notes. F-40 NRG ENERGY, INC. CONSOLIDATED BALANCE SHEETS -- (CONTINUED) (UNAUDITED)
MARCH 31, -------------------- 1997 1996 ---------- --------- (THOUSANDS OF DOLLARS) LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Current portion of long-term debt ................. $ 4,900 $ 3,804 Accounts payable--trade ........................... 2,848 4,280 Accounts payable--affiliate ....................... 45 8,596 Notes payable--affiliates ......................... 2,506 1,185 Accrued income taxes .............................. 170 -- Accrued property and sales taxes .................. 2,842 2,510 Accrued salaries, benefits and related costs ..... 6,343 4,941 Accrued interest .................................. 1,798 2,231 Other current liabilities ......................... 4,030 1,091 ---------- --------- TOTAL CURRENT LIABILITIES .......................... 25,482 28,638 ---------- --------- Long-term debt, less current portion ............... 206,636 210,661 Deferred revenues .................................. 5,994 7,379 Deferred income taxes .............................. 11,273 9,772 Deferred investment tax credits .................... 1,883 2,044 Deferred compensation .............................. 1,882 1,619 ---------- --------- TOTAL LIABILITIES................................... 253,150 260,113 ---------- --------- Stockholder's Equity: Common stock; $1 par value; 1,000 shares authorized; 1,000 shares issued and outstanding .............. 1 1 Additional paid-in capital ........................ 371,013 271,013 Retained earnings ................................. 73,104 48,869 Currency translation adjustments .................. (656) 4,717 ---------- --------- TOTAL STOCKHOLDER'S EQUITY ......................... 443,462 324,600 ---------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ........ $696,612 $584,713 ========== =========
See accompanying notes. F-41 NRG ENERGY, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------- 1997 1996 --------- --------- (THOUSANDS OF DOLLARS) Operating revenues: Revenues from wholly-owned operations ................... $21,665 $18,662 Equity in operating earnings of unconsolidated affiliates ............................................. 8,492 5,904 --------- --------- Total operating revenues ................................. 30,157 24,566 Operating costs and expenses: Cost of operations--wholly-owned operations ............. 12,222 9,700 Depreciation and amortization ........................... 2,176 2,083 General, administrative, and development ................ 8,833 10,610 --------- --------- Total operating costs and expenses ....................... 23,231 22,393 --------- --------- Operating income ......................................... 6,926 2,173 --------- --------- Other income (expense): Other income, net ....................................... 2,018 1,908 Interest expense ........................................ (4,063) (3,225) --------- --------- Total other income (expense) ............................. (2,045) (1,317) --------- --------- Income before income taxes ............................... 4,881 856 --------- --------- Income (benefit) taxes ................................... (1,922) (1,691) --------- --------- Net Income................................................ $ 6,803 $ 2,547 ========= =========
See accompanying notes. F-42 NRG ENERGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, --------------------- 1997 1996 ---------- ---------- (THOUSANDS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES Net income...................................................... $ 6,803 $ 2,547 Adjustments to reconcile net income to net cash provided by operating activities ......................................... Undistributed equity in operating earnings of unconsolidated affiliates........................ (6,713) (4,491) Depreciation and amortization ................................ 2,176 2,083 Deferred income taxes and investment tax credits.............. 2,697 (3,639) Cash provided (used) by changes in certain working capital items........................................................ (7,219) 2,498 Cash (used) by changes in other assets and liabilities ...... (268) (314) ---------- ---------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ............... (2,524) (1,316) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Investments in projects ....................................... (13,815) (1,566) Changes in notes receivable ................................... (6,688) 1,330 Capital expenditures .......................................... (7,735) (1,487) Decrease (increase) in restricted cash ........................ 6,901 (88,216) Cash distribution from project termination settlement ........ -- 25,215 Cash from sale of project investment .......................... 6,724 -- Other, net .................................................... 1,106 (746) ---------- ---------- NET CASH USED BY INVESTING ACTIVITIES .......................... (13,507) (65,470) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions from parent ............................. 20,000 -- Proceeds from issuance of long-term debt ...................... -- 122,671 Principal payments on long-term debt .......................... (605) (569) ---------- ---------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ............... 19,395 122,102 ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... 3,364 55,316 ---------- ---------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............... 12,438 7,039 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................... $ 15,802 $ 62,355 ========== ==========
See accompanying notes. F-43 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 March 31, 1997, the required levels of restricted cash were lower than the same period in 1996 due to primarily to the fact that NRG had just completed its $125 million bond offering in January of 1996. The proceeds from the offering were still held in the form of cash and equivalents pending future project investments. 3. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment at March 31 were as follows:
1997 1996 ---------- ---------- (THOUSANDS OF DOLLARS) Facilities and equipment, including construction work in progress of $24,585 and $7,269 ............................................. $194,499 $164,554 Land and improvements .............................................. 10,397 10,397 Office furnishings and equipment ................................... 3,560 2,703 ---------- ---------- Total property, plant and equipment .............................. 208,456 177,654 Accumulated depreciation ........................................... (72,804) (65,951) ---------- ---------- Net property, plant and equipment ................................ $135,652 $111,703 ========== ==========
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 ($17 million), and investments in NRG's thermal projects ($10 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-44 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 December 19, 1996 NRG and Nordic Power Invest AB purchased 96.6% of Bolivian Power Company Limited. NRG's ownership percentage is 58%, however, it is NRG's intent to reduce its holdings to 50% or less. In April 1996, NRG through bankruptcy proceedings, purchased a 41.86% interest in O'Brien Environmental Energy, Inc., that was renamed 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. The transactions described above, represent the material transactions which occurred between the periods March 31, 1996 and 1997. 5. LONG-TERM DEBT Long-term debt consists of the following at March 31:
1997 1996 ---------- --------- (THOUSANDS OF DOLLARS) NRG Energy Center, Inc. Senior Secured Notes Series due June 15, 2013, 7.31% ............................. $ 76,381 $ 78,758 Note payable to NSP, due December 1, 1995-2006 5.40%-6.75% .......................................... 8,405 8,957 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% ............................................... 125,000 125,000 ---------- --------- 211,536 214,465 Less current maturities ............................... (4,900) (3,804) ---------- --------- Total ............................................... $206,636 $210,661 ========== =========
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 March 31, 1997. 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 were issued in January, are unsecured and require semi-annual interest payments on February 1 and August 1. F-45 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 March 31, 1997 are as follows:
(THOUSANDS OF DOLLARS) 1997 remaining $ 4,244 1998 ........... 3,335 1999 ........... 3,581 2000 ........... 3,841 2001 ........... 4,160 2002 ........... 4,455 Thereafter ..... 187,920 -------------------- Total ........ $211,536 ====================
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 Capital contributions of $100 million between March 31, 1996 and 1997. A contribution of $80 million was made in December of 1996, used primarily for the investment in Cobee, and an additional $20 million was invested in February 1997 for various project investments including EDL. F-46 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NRG ENERGY, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
PRO FORMA MARCH 31, MARCH 31, 1997 ADJUSTMENTS 1997 ----------- ------------- ----------- (THOUSANDS OF DOLLARS) ASSETS Current Assets: Cash and cash equivalents ....................... $ 15,802 $ 49,100 (1)$ 64,902 Restricted cash ................................. 10,787 -- 10,787 Accounts receivable--trade, less allowance for doubtful accounts .............................. 11,773 -- 11,773 Accounts receivable--affiliates ................. 9,465 -- 9,465 Current portion of notes receivable--affiliates 11,379 -- 11,379 Current portion of notes receivables ............ 4,450 -- 4,450 Inventory ....................................... 2,502 -- 2,502 Prepayments and other current assets ............ 3,039 -- 3,039 ----------- ------------- ----------- TOTAL CURRENT ASSETS ............................. 69,197 49,100 118,297 ----------- ------------- ----------- Property, Plant and Equipment, at Original Cost . In service ...................................... 183,871 -- 183,871 Under construction .............................. 24,585 -- 24,585 ----------- ------------- ----------- 208,456 -- 208,456 Less accumulated depreciation ................... (72,804) -- (72,804) ----------- ------------- ----------- Net property, plant and equipment .............. 135,652 -- 135,652 Other Assets Investments in projects ......................... 371,132 257,800 (2) 628,932 Capitalized project costs ....................... 11,468 -- 11,468 Notes receivable, less current portion--affiliates ............................ 56,170 -- 56,170 Notes receivable, less current portion ......... 9,600 -- 9,600 Intangible assets, net of accumulated amortization ................................... 40,555 -- 40,555 Debt issuance costs, net of accumulated amortization ................................... 2,838 4,000 (3) 6,838 ----------- ------------- ----------- Total other assets ............................. 491,763 261,800 753,563 ----------- ------------- ----------- TOTAL ASSETS ..................................... $696,612 $310,900 $1,007,512 =========== ============= ===========
- ------------ (1) Represents net cash provided in excess of the amount needed for the investment in Loy Yang and total financing costs. (2) Net investment in Loy Yang of $257.8 million. (3) Represents total financing costs associated with bond offering and temporary bridge financing, to be amortized over the life of the bonds. F-47 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NRG ENERGY, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
PRO FORMA MARCH 31, MARCH 31, 1997 ADJUSTMENTS 1997 ----------- ------------- ----------- (THOUSANDS OF DOLLARS) LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Current portion of long-term debt ........... $ 4,900 $ -- $ 4,900 Accounts payable--trade ..................... 2,848 -- 2,848 Accounts payable--affiliate ................. 45 -- 45 Notes payable--affiliates ................... 2,506 -- 2,506 Accrued income taxes ........................ 170 -- 170 Accrued property and sales taxes ............ 2,842 -- 2,842 Accrued salaries, benefits and related costs 6,343 -- 6,343 Accrued interest ............................ 1,798 -- 1,798 Other current liabilities ................... 4,030 -- 4,030 ----------- ------------- ----------- TOTAL CURRENT LIABILITIES .................... 25,482 -- 25,482 ----------- ------------- ----------- Long-term debt, less current portion ....... 206,636 250,000 (4) 456,636 Deferred revenues ........................... 5,994 -- 5,994 Deferred income taxes ....................... 11,273 -- 11,273 Deferred investment tax credits ............. 1,883 -- 1,883 Deferred compensation ....................... 1,882 -- 1,882 ----------- ------------- ----------- Total liabilities ............................ 253,150 250,000 503,150 Stockholder's Equity Common stock; $1 par value; 1,000 shares authorized; 1,000 shares issued and outstanding ................................ 1 -- 1 Additional paid-in capital .................. 371,013 60,900 (5) 431,913 Retained earnings ........................... 73,104 -- 73,104 Currency translation adjustments ............ (656) -- (656) ----------- ------------- ----------- Total Stockholder's Equity ................... 443,462 60,900 504,362 ----------- ------------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY .. $696,612 $310,900 $1,007,512 =========== ============= ===========
- ------------ (4) Represents the aggregate principal amount of bonds issued in refinancing. (5) Equity contribution of $60.9 million by NSP. F-48 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NRG ENERGY, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
PRO FORMA DECEMBER 31, DECEMBER 31, 1996 ADJUSTMENTS 1996 -------------- -------------- -------------- (THOUSANDS OF DOLLARS) Operating Revenues: Revenues from wholly-owned operations ....... $ 71,649 $ -- $ 71,649 Equity in operating earnings of unconsolidated affiliates ................... 32,815 15,300 (1) 48,115 -------------- -------------- -------------- Total operating revenues .................... 104,464 15,300 119,764 -------------- -------------- -------------- 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 15,300 35,576 -------------- -------------- -------------- Other Income (Expense): Other income, net ............................ 9,477 -- 9,477 Interest expense ............................. (15,430) (18,750) (2) (34,180) -------------- -------------- -------------- Total other income (expense) .................. (5,953) (18,750) (24,703) -------------- -------------- -------------- Income before Income Taxes .................... 14,323 (3,450) 10,873 -------------- -------------- -------------- Income Taxes .................................. (5,655) (4,373) (3) (10,028) -------------- -------------- -------------- Net Income .................................... $ 19,978 $ 923 $ 20,901 ============== ============== ==============
- ------------ (1) Represents estimated equity earnings from Loy Yang project for twelve months based upon historical data adjusted for certain management assumptions. (2) Amount represents accrued interest on $250 million in bonds for twelve months at a rate of 7.5% per annum. (3) Net tax benefit derived from interest expense on bonds. F-49 NRG ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NRG ENERGY, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
PRO FORMA MARCH 31, MARCH 31, 1997 ADJUSTMENTS 1997 ----------- ------------- ----------- (THOUSANDS OF DOLLARS) Operating Revenues: Revenues from wholly-owned operations ....... $21,665 $ -- $21,665 Equity in operating earnings of unconsolidated affiliates ................... 8,492 3,825 (1) 12,317 ----------- ------------- ----------- Total operating revenues .................... 30,157 3,825 33,982 ----------- ------------- ----------- Operating Costs and Expenses .................. Cost of operations--wholly-owned operations . 12,222 -- 12,222 Depreciation and amortization ................ 2,176 -- 2,176 General, administrative, and development .... 8,833 -- 8,833 ----------- ------------- ----------- Total operating costs and expenses ......... 23,231 -- 23,231 ----------- ------------- ----------- Operating Income .............................. 6,926 3,825 10,751 ----------- ------------- ----------- Other Income (Expense)......................... Other income, net ............................ 2,018 -- 2,018 Interest expense ............................. (4,063) (4,688)(2) (8,751) ----------- ------------- ----------- Total other income (expense) .................. (2,045) (4,688) (6,733) ----------- ------------- ----------- Income before Income Taxes .................... 4,881 (863) 4,018 ----------- ------------- ----------- Income Taxes .................................. (1,922) (1,093)(3) (3,015) ----------- ------------- ----------- Net Income .................................... $ 6,803 $ 230 $ 7,033 =========== ============= ===========
- ------------ (1) Represents estimated equity earnings from Loy Yang project for three months based upon historical data adjusted for certain management assumptions. (2) Amount represents accrued interest on $250 million in bonds for three months at a rate of 7.5% per annum. (3) Net tax benefit derived from expense on bonds. F-50 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............................ 15 Use of Proceeds ........................ 23 The Exchange Offer ..................... 24 Capitalization ......................... 31 Selected Consolidated Financial Data .. 32 Selected Pro Forma Condensed Financial Data .................................. 34 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................ 36 Business ............................... 44 Regulation ............................. 72 Management ............................. 77 Ownership of Capital Stock ............. 83 Certain Transactions ................... 84 Certain Indebtedness ................... 86 Description of Notes ................... 87 Certain Federal Income Tax Considerations ........................ 97 Ratings ................................ 98 Plan of Distribution ................... 99 Legal Matters .......................... 100 Experts ................................ 100 Index to Consolidated Financial Statements............................. F-1
UNTIL , 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 , 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................ 55,000 Attorney's fees and expenses................ 150,000 Printing expenses....... 100,000 Miscellaneous........... 19,242 --------- Total................... $400,000 =========
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.* 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. 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 Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).* 24 Power of Attorney of certain officers and directors of NRG (contained in, and incorporated herein by reference to, Page II-4 of this Registration Statement). 25 Form T-1 Statement of Eligibility of Norwest Bank Minnesota, National Association to act as trustee under the Indenture. 99.1 Form of Letter of Transmittal.* 99.2 Form of Notice of Guaranteed Delivery.* 99.3 Form of Exchange Agent Agreement.*
- ------------ * To be filed by amendment. 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 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 12th day of August, 1997. NRG Energy, Inc. By: /s/ DAVID H. PETERSON -------------------------------- David H. Peterson Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Leonard A. Bluhm and Valorie A. Knudsen his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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 --------- ----- ---- /s/ DAVID H. PETERSON Chairman of the Board, August 12, 1997 - ----------------------- President and Chief David H. Peterson Executive Officer /s/ LEONARD A. BLUHM Executive Vice President and - ----------------------- Chief Financial Officer August 12, 1997 Leonard A. Bluhm /s/ GARY R. JOHNSON - ---------------------- Director August 12, 1997 Gary R. Johnson /s/ CYNTHIA L. LESHER - ----------------------- Director August 12, 1997 Cynthia L. Lesher /s/ EDWARD J. MCINTYRE - ----------------------- Director August 12, 1997 Edward J. McIntyre /s/ JOHN A. NOER - ----------------------- Director August 12, 1997 John A. Noer
II-5 EXHIBIT INDEX
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.* 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. 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 Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).* 24 Power of Attorney of certain officers and directors of NRG (contained in, and incorporated herein by reference to, Page II-4 of this Registration Statement). 25 Form T-1 Statement of Eligibility of Norwest Bank Minnesota, National Association to act as trustee under the Indenture. 99.1 Form of Letter of Transmittal.* 99.2 Form of Notice of Guaranteed Delivery.* 99.3 Form of Exchange Agent Agreement.*
- ------------ * To be filed by amendment. II-6


                          CERTIFICATE OF INCORPORATION
                                       OF
                                NRG ENERGY, INC.

         FIRST. The name of the corporation is NRG Energy, Inc.

         SECOND. The address of the corporation's registered office in the
State of Delaware is 32 Loockerman Square, Suite L-100, Dover, Delaware 19901
(Kent County). The name of its registered agent at such address is
Prentice-Hall Corporation System, Inc.

         THIRD. The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.

         FOURTH. The total number of shares which the corporation shall have
authority to issue is 1,000 shares of capital stock, and the par value of each
such share is $1.00 per share.

         FIFTH. The name and mailing address of the incorporator is Mary Jo
Nasiedlak, 1221 Nicollet Mall, Suite 700, Minneapolis, Minnesota 55403.

         SIXTH. The initial Board of Directors of the corporation is as
follows:

         James T. Doudiet                   Hazel R. O'Leary
         Roland J. Jensen                   David H. Peterson
         Edward J. McIntyre

         SEVENTH. The Board of Directors of the corporation is expressly
authorized to make, alter or repeal by-laws of the corporation, but the
stockholders may make additional by-laws and may alter or repeal any by-law,
whether adopted by them or otherwise.

         EIGHTH. Elections of directors need not be by written ballot except
and to the extent provided in the by-laws of the corporation.

         NINTH. No director shall be personally liable to the corporation or
any of its stockholders for monetary damages for



breach of fiduciary duty as a director, except for liability (a) for any breach
of the director's duty of loyalty to the corporation or its stockholders, (b)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (c) pursuant to Section 174 of the General
Corporation Law of Delaware or (d) for any transaction from which the director
derived an improper personal benefit. Any repeal or modification of this
Article Eighth by the stockholders of the corporation shall not adversely
affect any right or protection of a director of the corporation existing at the
time of such repeal or modification with respect to acts or omissions occurring
prior to such repeal or modification.

         The undersigned incorporator hereby acknowledges that the foregoing
certificate of incorporation is his act and deed and that the facts stated
therein are true.

                                       1



                                    BY-LAWS
                                       OF
                                NRG ENERGY, INC.


                                   ARTICLE I
                                   ---------
                                 Stockholders
                                 ------------

         Section 1.1. Annual Meetings. An annual meeting of stockholders shall
be held for the election of directors at such date, time and place, either
within or without the State of Delaware, as may be designated by resolution of
the Board of Directors from time to time. Any other proper business may be
transacted at the annual meeting.

         Section 1.2. Special Meetings. Special meetings of stockholders for
any purpose or purposes may be called at any time by the Board of Directors, or
by a committee of the Board of Directors which has been duly designated by the
Board of Directors and whose powers and authority, as expressly provided in a
resolution of the Board of Directors, include the power to call such meetings,
but such special meetings may not be called by any other person or persons.

         Section 1.3. Notice of Meetings. Whenever stock-holders are required
or permitted to take any action at a meeting, a written notice of the meeting
shall be given which shall state the place, date and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise provided by law, the certificate of incorporation
or these by-laws, the written notice of any meeting shall be given not less
than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote at such meeting. If mailed, such notice shall be
deemed to be given when deposited in the mail, postage prepaid, directed to the
stockholder at his, her or its address as it appears on the records of the
corporation.

         Section 1.4. Adjournments. Any meeting of stock-holders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned



meeting shall be given to each stockholder of record entitled to vote at the
meeting.

         Section 1.5. Quorum. Except as otherwise provided by law, the
certificate of incorporation or these by-laws, at each meeting of stockholders
the presence in person or by proxy of the holders of shares of stock having a
majority of the votes which could be cast by the holders of all outstanding
shares of stock entitled to vote at the meeting shall be necessary and
sufficient to constitute a quorum. In the absence of a quorum, the stockholders
so present may, by majority vote, adjourn the meeting from time to time in the
manner provided in Section 1.4 of these by-laws until a quorum shall attend.
Shares of its own stock belonging to the corporation or to another corporation,
if a majority of the shares entitled to vote in the election of directors of
such other corporation is held, directly or indirectly, by the corporation,
shall neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing shall not limit the right of the corporation to
vote stock, including but not limited to its own stock, held by it in a
fiduciary capacity.

         Section 1.6. Organization. Meetings of stockholders shall be presided
over by the Chairman of the Board, if any, or in his or her absence by the Vice
Chairman of the Board, if any, or in his or her absence by the President, or in
his or her absence by a Vice President, or in the absence of the foregoing
persons by a chairman designated by the Board of Directors, or in the absence
of such designation by a chairman chosen at the meeting. The Secretary shall
act as secretary of the meeting, but in his or her absence the chairman of the
meeting may appoint any person to act as secretary of the meeting.

         Section 1.7. Voting; Proxies. Except as otherwise provided by the
certificate of incorporation, each stock-holder entitled to vote at any meeting
of stockholders shall be entitled to one vote for each share of stock held by
him, her or it which has voting power upon the matter in question. Each
stockholder entitled to vote at a meeting of stockholders may authorize another
person or persons to act for him, her or it by proxy, but no such proxy shall
be voted or acted upon after three years from its date, unless the proxy
provides for a longer period. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with
an interest sufficient in law to support an irrevocable power. A stockholder
may revoke any proxy which is not irrevocable by attending the meeting and
voting in person or by filing an instrument in writing revoking the proxy or
another duly executed proxy bearing a later date with the Secretary

                                       2



of the corporation. Voting at meetings of stockholders need not be by written
ballot and need not be conducted by inspectors of election unless so determined
by the holders of shares of stock having a majority of the votes which could be
cast by the holders of all outstanding shares of stock entitled to vote thereon
which are present in person or by proxy at such meeting. At all meetings of
stockholders for the election of directors, a plurality of the votes cast shall
be sufficient to elect. All other elections and questions shall, unless
otherwise provided by law, the certificate of incorporation or these by-laws,
be decided by the vote of the holders of shares of stock having a majority of
the votes which could be cast by the holders of all shares of stock entitled to
vote thereon which are present in person or represented by proxy at the
meeting.

         Section 1.8. Fixing Date for Determination of Stockholders of Record.
In order that the corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled
to receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board
of Directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted by the Board
of Directors and which record date: (1) in the case of determination of
stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty nor
less than ten days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action
in writing without a meeting, shall not be more than ten days from the date
upon which the resolution fixing the record date is adopted by the Board of
Directors; and (3) in the case of any other action, shall not be more than
sixty days prior to such other action. If no record date is fixed: (1) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting when no prior action
of the Board of Directors is required by law, shall be the first date on which
a signed written consent setting forth the action taken or proposed to be taken
is delivered to the corporation in accordance with applicable law, or, if prior
action

                                       3



by the Board of Directors is required by law, shall be at the close of business
on the day on which the Board of Directors adopts the resolution taking such
prior action; and (3) the record date for determining stock-holders for any
other purpose shall be at the close of business on the day on which the Board
of Directors adopts the resolution relating thereto. A determination of
stock-holders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned
meeting.

         Section 1.9. List of Stockholders Entitled to Vote. The Secretary
shall prepare and make, at least ten days before every meeting of stockholders,
a complete list of the stockholders entitled to vote at the meeting, arranged
in alphabetical order, and showing the address of each stockholder and the
number of shares registered in the name of each stockholder. Such list shall be
open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or, if
not so specified, at the place where the meeting is to be held. The list shall
also be produced and kept at the time and place of the meeting during the whole
time thereof and may be inspected by any stockholder who is present. Upon the
willful neglect or refusal of the directors to produce such a list at any
meeting for the election of directors, they shall be ineligible for election to
any office at such meeting. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list of
stockholders or the books of the corporation, or to vote in person or by proxy
at any meeting of stockholders.

         Section 1.10. Action By Consent of Stockholders. Unless otherwise
restricted by the certificate of incorpo-ration, any action required or
permitted to be taken at any annual or special meeting of the stockholders may
be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of
the taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.

                                       4



                                   ARTICLE II
                                   ----------
                               Board of Directors
                               ------------------

         Section 2.1. Number; Qualifications. The Board of Directors shall
consist of one or more members, the number thereof to be determined from time
to time by resolution of the Board of Directors. Directors need not be
stockholders.

         Section 2.2. Election; Resignation; Removal; Vacancies. The Board of
Directors shall initially consist of the persons named as directors in the
certificate of incorporation, or a subsequent action of the incorporator, and
each director so elected shall hold office until the first annual meeting of
stockholders or until his or her successor is elected and qualified. At the
first annual meeting of stockholders and at each annual meeting thereafter, the
stockholders shall elect directors, each of whom shall hold office for a term
of one year or until his or her successor is elected and qualified. Any
director may resign at any time upon written notice to the corporation. Any
newly created directorship or any vacancy occurring in the Board of Directors
for any cause may be filled by a majority of the remaining members of the Board
of Directors, although such majority is less than a quorum, or by a plurality
of the votes cast at a meeting of stockholders, and each director so elected
shall hold office until the expiration of the term of office of the director
whom he or she has replaced or until his or her successor is elected and
qualified.

         Section 2.3. Regular Meetings. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware
and at such times as the Board of Directors may from time to time determine,
and if so determined notices thereof need not be given.

         Section 2.4. Special Meetings. Special meetings of the Board of
Directors may be held at any time or place within or without the State of
Delaware whenever called by the President, any Vice President, the Secretary,
or by any member of the Board of Directors. Notice of a special meeting of the
Board of Directors shall be given by the person or persons calling the meeting
at least twenty-four hours before the special meeting.

         Section 2.5. Telephonic Meetings Permitted. Members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting thereof by means of conference telephone or similar
communications equipment in which all persons participating in the meeting can
hear each other, and

                                       5



participation in the meeting pursuant to this by-law shall constitute presence
in person at such meeting.

         Section 2.6. Quorum; Vote Required for Action. At all meetings of the
Board of Directors a majority of the whole Board of Directors shall constitute
a quorum for the transaction of business. Except in cases in which the
certificate of incorporation or these by-laws otherwise provide, the vote of a
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.

         Section 2.7. Organization. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, if any, or in his or her absence by
the Vice Chairman of the Board, if any, or in his or her absence by the
President, or in their absence by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.

         Section 2.8. Informal Action by Directors. Unless otherwise restricted
by the certificate of incorporation or these by-laws, any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board
of Directors or such committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
Board of Directors or such committee.

                                  ARTICLE III
                                  -----------
                                   Committees
                                   ----------

         Section 3.1. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of the committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he, she or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in place of any such absent or disqualified member. Any such
committee, to the extent permitted by law and to the extent provided in the
resolution of the Board of Directors, shall

                                       6



have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation, and may
authorize the seal of the corporation (if any) to be affixed to all papers
which may require it.

         Section 3.2. Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board of Directors may make, alter
and repeal rules for the conduct of its business. In the absence of such rules
each committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article III of these by-laws.

                                   ARTICLE IV
                                   ----------
                                    Officers
                                    --------

         Section 4.1. Executive Officers; Election; Qualifications; Term of
Office; Resignation; Removal; Vacancies. The Board of Directors shall elect a
President and Secretary, and it may, if it so determines, choose a Chairman of
the Board and a Vice Chairman of the Board from among its members. The Board of
Directors may also choose one or more Vice Presidents, one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers. Each such
officer shall hold office until the first meeting of the Board of Directors
after the annual meeting of stockholders next succeeding his or her election,
and until his or her successor is elected and qualified or until his or her
earlier resignation or removal. Any officer may resign at any time upon written
notice to the corporation. The Board of Directors may remove any officer with
or without cause at any time, but such removal shall be without prejudice to
the contractual rights of such officer, if any, with the corporation. Any
number of offices may be held by the same person. Any vacancy occurring in any
office of the corporation by death, resignation, removal or otherwise may be
filled for the unexpired portion of the term by the Board of Directors at any
regular or special meeting.

         Section 4.2. Powers and Duties of Executive Officers. The officers of
the corporation shall have such powers and duties in the management of the
corporation as may be prescribed by the Board of Directors and, to the extent
not so provided, as generally pertain to their respective offices, subject to
the control of the Board of Directors. The Board of Directors may require any
officer, agent or employee to give security for the faithful performance of his
or her duties.

                                       7



                                   ARTICLE V
                                   ---------
                                     Stock
                                     -----

         Section 5.1. Certificates. Every holder of stock shall be entitled to
have a certificate signed by or in the name of the corporation by the Chairman
or a Vice Chairman of the Board of Directors, if any, or the President or a
Vice President, and by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary, of the corporation, certifying the number
of shares owned by him, her or it in the corporation. Any of or all the
signatures on the certificate may be a facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent, or
registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he or she were such officer, transfer
agent, or registrar at the date of issue.

         Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance
of New Certificates. The corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the corporation may require the owner of the
lost, stolen or destroyed certificate, or his, her or its legal representative,
to give the corporation a bond sufficient to indemnify it against any claim
that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.

                                   ARTICLE VI
                                   ----------
                                Indemnification
                                ---------------

         Section 6.1. Right to Indemnification. The corporation shall
indemnify and hold harmless, to the fullest extent permitted by applicable law
as it presently exists or may hereafter be amended, 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 the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation 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

                                       8



suffered and expenses reasonably incurred by such person. The corporation 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
the corporation.

         Section 6.2. Repayment of Expenses. The corporation shall pay the
expenses incurred in defending any proceeding in advance of its final
disposition; provided, however, that the payment of expenses incurred by a
director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the director or officer to repay
all amounts advanced if it should be ultimately determined that the director or
officer is not entitled to be indemnified under this Article or otherwise.

         Section 6.3. Claims. If a claim for indemnification or payment of
expenses under this Article is not paid in full within sixty days after a
written claim therefor has been received by the corporation the claimant may
file suit to recover the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expense of prosecuting such
claim. In any such action the corporation shall have the burden of proving that
the claimant was not entitled to the requested indemnification or payment of
expenses under applicable law.

         Section 6.4. Non-Exclusivity of Rights. The rights conferred on any
person by this Article VI shall not be exclusive of any other rights which such
person may have or hereafter acquire under any statute, provision of the
certificate of incorporation, these by-laws, agreement, vote of stockholders or
disinterested directors or otherwise.

         Section 6.5. Other Indemnification. The corporation's obligation, if
any, to indemnify any person who was or is serving at its request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise or non-profit entity shall be reduced by any amount
such person may collect as indemnification from such other corporation,
partnership, joint venture, trust, enterprise or non-profit entity.

         Section 6.6. Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Article VI shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification.

                                       9



                                  ARTICLE VII
                                  -----------
                                 Miscellaneous
                                 -------------

         Section 7.1. Fiscal Year. The fiscal year of the corporation shall be
determined by resolution of the Board of Directors.

         Section 7.2. Seal. The Board of Directors shall determine whether or
not the corporation shall have a corporate seal. The corporate seal (if any)
shall have the name of the corporation inscribed thereon and shall be in such
form as may be approved from time to time by the Board of Directors.

         Section 7.3. Waiver of Notice of Meetings of Stockholders, Directors
and Committees. Any written waiver of notice, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice.

         Section 7.4. Interested Directors; Quorum. No contract or transaction
between the corporation and one or more of its directors or officers, or
between the corporation and any other corporation, partnership, association, or
other organization in which one or more of its directors or officers are
directors or officers, or have a financial interest, shall be void or voidable
solely for this reason, or solely because the director or officer is present at
or participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his, her or
their votes are counted for such purpose, if: (1) the material facts as to his,
her or their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by this affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(2) the material facts as to his, her or their relationship or interest and as
to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the

                                       10



stockholders; or (3) the contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting
of the Board of Directors or of a committee which authorizes the contract or
transaction. Nothing in this Section 7.4 shall be construed to imply that any
contract or transaction between the corporation and Northern State Power
Company ("NSP"), or between the corporation and any other corporation that is a
direct or indirect wholly-owned subsidiary of NSP, shall be void or voidable,
whether or not such contract or transaction complies with the requirements of
clauses (1), (2) or (3) of the immediately preceding sentence.

         Section 7.5. Form of Records. Any records maintained by the
corporation in the regular course of its business, including its stock ledger,
books of account, and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, microphotographs, or any other information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time. The corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.

         Section 7.6. Amendment of By-laws. These by-laws may be altered or
repealed, and new by-laws made, by the Board of Directors, but the stockholders
may make additional by-laws and may alter and repeal any by-laws whether
adopted by them or otherwise.

                                       11



- -------------------------------------------------------------------------------










                                NRG ENERGY, INC.


                                       to


                            NORWEST BANK MINNESOTA,
                             NATIONAL ASSOCIATION,
                                   as Trustee

                           -------------------------


                                   INDENTURE

                            Dated as of June 1, 1997


                           -------------------------


                                  $250,000,000
                          7 1/2% Senior Notes Due 2007










- -------------------------------------------------------------------------------



                               TABLE OF CONTENTS


                                   ARTICLE I

                                  DEFINITIONS

1.1      Certain Terms Defined..............................................  1

                                   ARTICLE II

                           ISSUE, EXECUTION, FORM AND
                           REGISTRATION OF SECURITIES

2.1      Authentication and Delivery of Securities..........................  9
2.2      Execution of Securities............................................  9
2.3      Certificate of Authentication...................................... 10
2.4      Form, Denomination and Date of Securities; Payments of Interest.... 10
2.5      Global Securities.................................................. 14
2.6      Registration, Registration of Transfer and Exchange................ 15
2.7      Mutilated, Defaced, Destroyed, Lost and Stolen Securities.......... 20
2.8      Cancelation of Securities: Destruction Thereof..................... 22
2.9      Temporary Securities............................................... 22
2.10     Computation of Interest............................................ 22

                                  ARTICLE III

                                  COVENANTS OF
                           THE ISSUER AND THE TRUSTEE

3.1      Payment of Principal and Interest.................................. 23
3.2      Offices for Payments, etc.......................................... 23
3.3      Appointment to Fill Vacancy in Office of Trustee................... 23
3.4      Paying Agents...................................................... 24
3.5      Certificate to Trustee............................................. 24
3.6      Securityholder's Lists............................................. 25
3.7      Reports by the Issuer.............................................. 25
3.8      Limitation on Liens................................................ 26
3.9      Repurchase of Securities Upon a Change of Control.................. 26



                                   ARTICLE IV

                          REMEDIES OF THE TRUSTEE AND
                      SECURITYHOLDERS ON EVENT OF DEFAULT

4.1      Event of Default Defined; Acceleration of Maturity; 
         Waiver of Default.................................................. 28
4.2      Collection of Indebtedness by Trustee; Trustee May Prove Debt...... 31
4.3      Application of Proceeds............................................ 34
4.4      Suits for Enforcement.............................................. 35
4.5      Restoration of Rights on Abandonment of Proceedings................ 35
4.6      Limitations of Suits by Securityholders............................ 36
4.7      Powers and Remedies Cumulative, Delay or Omission Not Waiver
         of Default......................................................... 36
4.8      Control by Securityholders......................................... 37
4.9      Waiver of Past Defaults............................................ 37
4.10     Rights of Holders to Receive Payment............................... 38

                                   ARTICLE V

                             CONCERNING THE TRUSTEE

5.1      Duties and Responsibilities of the Trustee; During Default;
         Prior to Default................................................... 38
5.2      Certain Rights of the Trustee...................................... 39
5.3      Trustee Not Responsible for Recitals, Disposition of 
         Securities or Application of Proceeds Thereof...................... 41
5.4      Trustee and Agents May Hold Securities; Collections, etc........... 41
5.5      Moneys Held by Trustee............................................. 41
5.6      Compensation and Indemnification of Trustee and Its Prior Claim.... 41
5.7      Right of Trustee to Rely on Officers' Certificate, etc............. 42
5.8      Persons Eligible for Appointment as Trustee........................ 42
5.9      Resignation and Removal; Appointment of Successor Trustee.......... 43
5.10     Acceptance of Appointment by Successor Trustee..................... 44
5.11     Merger, Conversion, Consolidation or Succession to 
         Business of Trustee................................................ 45

                                   ARTICLE VI

                                       ii



                         CONCERNING THE SECURITYHOLDERS

6.1      Evidence of Action Taken by Securityholders........................ 46
6.2      Proof of Execution of Instruments and of Holding of 
         Securities Record Date............................................. 46
6.3      Holders to Be Treated as Owners.................................... 46
6.4      Securities Owned by Issuer Deemed Not Outstanding.................. 47
6.5      Right of Revocation of Action Taken................................ 47

                                  ARTICLE VIII

                            SUPPLEMENTAL INDENTURES

7.1      Supplemental Indentures Without Consent of Securityholders......... 48
7.2      Supplemental Indentures With Consent of Securityholders............ 49
7.3      Effect of Supplemental Indenture................................... 50
7.4      Documents to Be Given to Trustee................................... 51
7.5      Notation of Securities in Respect of Supplemental Indentures....... 51

                                 ARTICLE VIIII

                   CONSOLIDATION, MERGER, SALE OR CONVEYANCE

8.1      Covenant Not to Merge, Consolidate, Sell or Transfer Assets 
         Except Under Certain Conditions.................................... 51
8.2      Successor Corporation Substituted.................................. 52
8.3      Opinion of Counsel to Trustee; Officers' Certificate............... 53

                                   ARTICLE IX

                           SATISFACTION AND DISCHARGE
                         OF INDENTURE; UNCLAIMED MONEYS

9.1      Satisfaction and Discharge of Indenture............................ 53
9.2      Application by Trustee of Funds Deposited for Payment 
         of Securities...................................................... 54
9.3      Repayment of Moneys Held by Paying Agent........................... 54
9.4      Return of Moneys Held by Trustee and Paying Agent Unclaimed 
         for Two Years...................................................... 55
9.5      Defeasance and Discharge of Indenture.............................. 55

                                      iii



9.6      Defeasance of Certain Obligations.................................. 57

                                   ARTICLE X

                            MISCELLANEOUS PROVISIONS

10.1     Incorporators, Shareholders, Officers and Directors of Issuer
         Exempt from Individual Liability................................... 58
10.2     Provisions of the Indenture for the Sole Benefit of Parties
         and Securityholders................................................ 58
10.3     Successors and Assigns of Issuer Bound by Indenture................ 59
10.4     Notices and Demands on Issuer, Trustee and Securityholders......... 59
10.5     Officers' Certificates and Opinions of Counsel, Statements
         to Be Contained Therein............................................ 60
10.6     Payments Due on Saturdays, Sundays and Holidays.................... 61
10.7     New York Law to Govern............................................. 61
10.8     Counterparts....................................................... 61
10.9     Effect of Headings................................................. 61

                                   ARTICLE XI

                            REDEMPTION OF SECURITIES

11.1     Right of Optional Redemption Price................................. 62
11.2     Notice of Redemption............................................... 62
11.3     Payment of Securities Called for Redemption........................ 62


EXHIBIT A     FORM OF SECURITY

EXHIBIT B     FORM OF RESTRICTED PERIOD CERTIFICATE

EXHIBIT C     FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE
              144A GLOBAL SECURITY TO RESTRICTED REGULATION S GLOBAL SECURITY

EXHIBIT D     FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE
              144A GLOBAL SECURITY TO UNRESTRICTED REGULATION S GLOBAL SECURITY

                                       iv



EXHIBIT E     FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM
              RESTRICTED REGULATION S GLOBAL SECURITY OR, UNRESTRICTED
              REGULATION S GLOBAL SECURITY TO RULE 144A GLOBAL SECURITY

                                       v



         INDENTURE, dated as of June 1, 1997 between NRG ENERGY, INC., a
Delaware corporation (herein called the "Issuer"), and NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, as trustee (herein called the "Trustee").


                              W I T N E S S E T H:

         WHEREAS, the Issuer has duly authorized the issue of $250,000,000
aggregate principal amount of its 7 1/2% Senior Notes Due 2007 (the
"Securities") and, to provide, among other things, for the authentication,
delivery and administration thereof, the Issuer has duly authorized the
execution and delivery of this Indenture; and

         WHEREAS, all things necessary to make the Securities, when executed by
the Issuer and authenticated and delivered by the Trustee as in this Indenture
provided, the valid, binding and legal obligations of the Issuer, and to
constitute these presents a valid indenture and agreement according to its
terms, have been done;

         NOW, THEREFORE:

         In consideration of the premises and the purchases of the Securities
by the Holders (as defined herein) thereof, the Issuer and the Trustee mutually
covenant and agree for the equal and proportionate benefit of the respective
Holders from time to time of the Securities as follows:


                                   ARTICLE I

                                  DEFINITIONS
                                  -----------

         SECTION 1.1 Certain Terms Defined. The following terms (except as
otherwise expressly provided) for all purposes of this Indenture shall have the
respective meanings specified in this Section. All accounting terms used herein
and not expressly defined shall have the meanings given to them in accordance
with GAAP (as defined herein). The words "herein," "hereof" and "hereunder" and
other words of similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision. The terms defined in this
Article include the plural as well as the singular.



         "Agent Members" has the meaning set forth in Section 2.4(c).

         "Applicable Premium" means, with respect to a Security at any time,
the excess (if any) of (i) the sum of the present values of all of the
remaining scheduled payments of principal of and interest on the Securities
from the applicable redemption date through the Stated Maturity, of such
Security, computed on a semi-annual basis by discounting such payments
(assuming a 360-day year consisting of twelve 30-day months and using a rate
equal to the Treasury Rate plus 25 basis points) over (ii) the aggregate unpaid
principal amount of the Security to be redeemed plus any accrued but unpaid
interest thereon. The Applicable Premium shall be computed as of the third
Business Day prior to the applicable redemption date, and certified, by an
Investment Banker.

         "Board of Directors" means either the Board of Directors of the Issuer
or any committee of such Board duly authorized to act on behalf of such Board.

         "Business Day" means a day which is neither a legal holiday nor 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 the city of Minneapolis, Minnesota.

         "Capital Stock" means, with respect, to any Person, any and all
outstanding shares, interests, participations or other equivalents (however
designated, whether voting or non-voting) of, or interests in (however
designated), the equity of such Person including, without limitation, all
Common Stock and Preferred Stock and partnership and joint venture interests of
such Person.

         "Cedel" has the meaning set forth in Section 2.4(b).

         "Change of Control" means the occurrence of one or more of the
following events: (i) NSP (or its successors) shall cease to own a majority of
the outstanding Voting Stock of the Issuer, (ii) at any time following the
occurrence of the event described in clause (i), a Person or group (as that
term is used in Section 13(d)(3) of the Exchange Act) of Persons (other than
NSP) shall have become the beneficial owner directly or indirectly, or shall
have

                                       2



acquired the absolute power to direct the vote, of more than 35% of the
outstanding Voting Stock of the Issuer or (iii) during any twelve-month period,
individuals who at the beginning of such period constitute the Board of
Directors (together with any new directors whose election or nomination was
approved by a majority of the directors then in office who were either
directors at the beginning of such period or who were previously so approved)
shall cease for any reason to constitute a majority of the Board of Directors.
Notwithstanding the foregoing, a Change of Control shall be deemed not to have
occurred if one or more of the above events occurs or circumstances exist and,
after giving effect thereto, the Securities are rated Investment Grade.

         "Change of Control Offer" has the meaning set forth in Section 3.9(b).

         "Commission" means the Securities and Exchange Commission, as from
time to constituted, created under the Exchange Act, or, if at any time after
the execution of this Indenture such Commission is not existing and performing
the duties now assigned to it under the Trust Indenture Act, then the body (if
any) performing such duties at such time.

         "Common Stock" means, with respect to any Person, Capital Stock of
such Person that does not rank prior, as to the payment of dividends or as to
the distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of any other class of
Capital Stock of such Person.

         "Consolidated Current Assets" and "Consolidated Current Liabilities"
mean such assets and liabilities of the Issuer on a consolidated basis as shall
be determined in accordance with GAAP to constitute current assets and current
liabilities, respectively, provided that inventory shall be valued at the lower
of cost (using the average life method) or market.

         "Consolidated Net Tangible Assets" means, as of the date of
determination thereof, Consolidated Total Assets as of such date less the sum
of (i) Consolidated Current Liabilities and (ii) Intangible Assets.

                                       3



         "Consolidated Total Assets" means, as of the date of any determination
thereof, the total amount of all assets of the Issuer determined on a
consolidated basis in accordance with GAAP.

         "Corporate Trust Office" means the principal office of the Trustee at
which the corporate trust business of the Trustee shall, at any particular
time, be principally administered, which office is, at the date as of which
this Indenture is dated, located at Corporate Trust, Norwest Center, Sixth and
Marquette, Minneapolis, Minnesota 55479-0069.

         "Euroclear" has the meaning set forth in Section 2.4(b).

         "Event of Default" means any event or condition specified as such in
Section 4.1 hereof that shall have continued for the period of time, if any,
therein designated.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "GAAP" means generally accepted accounting principles in the U.S.
applied on a basis consistent with the principles, methods, procedures and
practices employed in the preparation of the Issuer's audited financial
statements, including, without limitation, those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
approved by a significant segment of the accounting profession.

         "Global Security" has the meaning set forth in Section 2.4(c).

         "Holder," "Holder of Securities," "Securityholder" and other similar
terms mean the registered holder of any Security.

         "Indebtedness" has the meaning set forth in Section 3.8.

                                       4



         "Indenture" means this instrument as originally executed and delivered
or, if amended or supplemented as herein provided, as so amended or
supplemented.

         "Initial Purchasers" means Salomon Brothers Inc, ABN AMRO Chicago
Corporation and Chase Securities Inc.

         "Intangible Assets" means, as of the date of determination thereof,
all assets of the Issuer properly classified as intangible assets determined on
a consolidated basis in accordance with GAAP.

         "Interest Payment Date" means, with respect to any Security, the
Stated Maturity of an installment of interest on such Security.

         "Investment Banker" means an independent investment banking
institution of national standing selected by the Issuer.

         "Investment Grade" means, with respect to the Securities, a rating of
Baa3 or higher by Moody's Investors Service, Inc., and a rating of BBB- or
higher by Standard and Poor's Ratings Group (or, if either or both of the
foregoing rating agencies ceases to rate the Securities for reasons beyond the
control of the Issuer, equivalent ratings by one or two (as the case may be)
other nationally recognized statistical rating organizations (as such term is
defined in Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act)); provided that if
either of the foregoing rating agencies shall change its ratings designations
while the Securities are Outstanding, "Investment Grade" shall mean the lowest
ratings designation signifying "investment grade" issued by such agencies (or
higher).

         "Issuer" means NRG Energy, Inc., a Delaware corporation, and, subject
to Article 8 hereof, its successors and assigns.

         "Legend" has the meaning set forth in Section 2.6(d).

         "NSP" means Northern States Power Company, a Minnesota corporation.

         "Officers' Certificate" means a certificate signed on behalf of the
Issuer by the Chairman of the Board

                                       5



of Directors or the President or any Vice President and by the Chief Financial
Officer or the Secretary or any Assistant Secretary or the Treasurer or any
Assistant Treasurer of the Issuer and delivered to the Trustee. Each such
certificate shall include the statements provided for in Section 10.5 hereof,
if and to the extent required thereby.

         "Opinion of Counsel" means an opinion in writing signed by legal
counsel satisfactory to the Trustee, who may be an employee of or counsel to
the Issuer. Each such opinion shall include the statements provided for in
Section 10.5 hereof, if and to the extent required thereby.

         "Original Issue Date" of any Security (or portion thereof) means the
earlier of (a) the date of such Security or (b) the date of any Security (or
portion thereof) in exchange for which such Security was issued (directly or
indirectly) on registration of transfer, exchange or substitution.

         "Outstanding", when used with reference to Securities, shall, subject
to the provisions of Section 6.4 hereof, mean, as of any particular time, all
Securities authenticated and delivered by the Trustee under this Indenture,
except:

         1. Securities theretofore canceled by the Trustee or delivered to the
    Trustee for cancelation, or which shall have been paid pursuant to Section
    2.7 hereof (other than any such Securities in respect of which there shall
    have been presented to the Trustee proof satisfactory to it that such
    Securities are held by a bona fide purchaser in whose hands the Securities
    are valid obligations of the Issuer); and

         2. Securities, or portions thereof, for the payment or redemption of
    which moneys or direct obligations of the United States of America backed
    by its full faith and credit in the necessary amount shall have been
    deposited in trust with the Trustee or with any paying agent (other than
    the Issuer) or shall have been set aside, segregated and held in trust by
    the Issuer (if the Issuer shall act as its own paying agent), provided that
    if such Securities are to be redeemed prior to the maturity thereof, notice
    of such redemption shall have been herein provided, or

                                       6



    provision satisfactory to the Trustee shall have been given as herein
    provided, or provision satisfactory to the Trustee shall have been made for
    giving such notice.

         "Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.

         "Preferred Stock" means, with respect to any Person, any and all
shares, interests, participation or other equivalents (however designated,
whether voting or non-voting) of preferred or preference Capital Stock of such
Person that is outstanding or issued on or after the date of this Indenture.

         "Purchase Agreement" means the Purchase Agreement dated June 12, 1997,
between the Issuer and the Initial Purchasers.

         "Regulation S" has the meaning set forth in Section 2.4(b).

         "Repurchase Date" has the meaning set forth in Section 3.9(b).

         "Responsible Officer", when used with respect to the Trustee, means
any officer of the Trustee assigned by the Trustee to administer its corporate
trust matters.

         "Restricted Regulation S Global Security" has the meaning set forth in
Section 2.4(b).

         "Rule 144A" has the meaning set forth in Section 2.4(b).

         "Rule 144A Global Security" has the meaning set forth in Section
2.4(b).

         "Rule 144A Information" has the meaning specified in Section 3.7.

         "Securities Act" means the Securities Act of 1933, as amended.

                                       7



         "Security" or "Securities" has the meaning set forth in the recitals
above.

         "Securities Register" and "Security Registrar" have the respective
meanings specified in Section 2.6.

         "Stated Maturity" means, with respect to any debt security or any
installment of interest thereon, the date specified in such debt security as
the fixed date on which any principal of such debt security or any such
installment of interest is due and payable.

         "Treasury Rate" means, with respect to any Security 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 and certified by an 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 Security, 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 Security and (B)
the other maturing as close as possible to, but later than, the Average Life
Date of such Security, 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 Security 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) that 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 Security to be redeemed shall
be the date that follows the redemption date by a period equal to the Remaining
Weighted Average Life of such Security. The "Remaining Weighted Average Life"
of such Security with respect to the redemption of such Security 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 Security by (2) the number of days from and including the redemption date,
to but excluding the scheduled payment date of such

                                       8



principal payment by (B) the unpaid principal amount of such Security.

         "Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended.

         "Trustee" means the entity identified as "Trustee" in the first
paragraph hereof until the appointment of a successor trustee pursuant to
Article 5, after which "Trustee" shall mean such successor trustee.

         "Unrestricted Regulation S Global Security" has the meaning set forth
in Section 2.4(b).

         "U.S. Depositary" has the meaning set forth in Section 2.4(b).

         "U.S. Government Obligations" means securities that are (i) direct and
unconditional obligations of the United States of America for the payment of
which its full faith and credit is pledged or (ii) obligations of a Person
controlled or supervised by, and acting as an agency or instrumentality of, the
United States of America, the payment of which is unconditionally guaranteed as
a full faith and credit obligation by the United States of America, which, in
either case, are not callable or redeemable at the option of the issuer
thereof, and shall also include a depository receipt issued by a bank or trust
company subject to federal or state supervision or examination with a combined
capital and surplus of at least $100,000,000, as custodian with respect to any
such U.S. Government Obligations or a specific payment of interest on or
principal of any such U.S. Government Obligation held by such custodian for the
account of the holder of a depository receipt, provided that (except as
required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or the
specific payment of interest on or principal of the U.S. Government Obligation
evidenced by such depository receipt.

         "Voting Stock" means, with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
(or persons fulfilling similar responsibilities) of such Person.

                                       9



         "1996 Senior Notes" means $125,000,000 aggregate principal amount of
7.625% Senior Notes Due 2006 of the Issuer, issued pursuant to an Indenture
dated as of January 31, 1996, between the Issuer and the Trustee.


                                   ARTICLE II

                           ISSUE, EXECUTION, FORM AND
                           REGISTRATION OF SECURITIES
                           --------------------------

         SECTION 2.1 Authentication and Delivery of Securities. Upon the
execution and delivery of this Indenture, or from time to time thereafter,
Securities in an aggregate principal amount not in excess of $250,000,000
(except as otherwise provided in Section 2.7 hereof) may be executed by the
Issuer and delivered to the Trustee for authentication, and the Trustee shall
thereupon authenticate and deliver said Securities to or upon the written order
of the Issuer, signed by both (a) its Chairman of the Board of Directors, or
any Vice Chairman of the Board of Directors, or its President or any Vice
President and (b) by its Chief Financial Officer, or its Secretary or any
Assistant Secretary, or its Treasurer or any Assistant Treasurer without any
further action by the Issuer. The Securities shall be direct, unconditional
obligations of the Issuer and shall rank pari passu without preference among
themselves and equally in priority of payment with all other present and future
unsubordinated, unsecured indebtedness of the Issuer.

         SECTION 2.2 Execution of Securities. The Securities shall be signed on
behalf of the Issuer by both (a) its Chairman of the Board of Directors or any
Vice Chairman of the Board of Directors or its President or any Vice President
and (b) by its Chief Financial Officer or its Secretary or its Assistant
Secretary or its Treasurer or any Assistant Treasurer, under its corporate seal
which may, but need not, be attested. Such signatures may be the manual or
facsimile signatures of the present or any future such officers. The seal of
the Issuer may be in the form of a facsimile thereof and may be impressed,
affixed, imprinted or otherwise reproduced on the Securities. Typographical and
other minor errors or defects in any such reproduction of the seal or any such
signature shall not affect the validity or enforceability of any Security that
has been duly authenticated and delivered by the Trustee.

                                       10



         In case any officer of the Issuer who shall have signed any of the
Securities shall cease to be such officer before the Security so signed shall
be authenticated and delivered by the Trustee or disposed of by the Issuer,
such Security nevertheless may be authenticated and delivered or disposed of as
though the Person who signed such Security had not ceased to be such officer of
the Issuer; and any Security may be signed on behalf of the Issuer by such
Persons as, at the actual date of the execution of such Security, shall be the
proper officers of the Issuer, although at the date of the execution and
delivery of this Indenture any such Person was not such officer.

         SECTION 2.3 Certificate of Authentication. Only such Securities as
shall bear thereon a certificate of authentication substantially in the form
recited in the form of Security attached as Exhibit A hereto, executed by that
Trustee by manual signature of one of its authorized signatories, shall be
entitled to the benefits of this Indenture or be valid or obligatory for any
purpose. Such certificate by the Trustee upon any Security executed by the
Issuer shall be conclusive evidence that the Security so authenticated has been
duly authenticated and delivered hereunder and that the Holder is entitled to
the benefits of this Indenture.

         SECTION 2.4 Form, Denomination and Date of Securities; Payments of
Interest. (a) The Securities and the Trustee's certificate of authentication
shall be substantially in the form set forth in the form of Security attached
as Exhibit A hereto. The Securities shall be numbered, lettered, or otherwise
distinguished in such manner or in accordance with such plans as the officers
of the Issuer executing the same may determine with the approval of the
Trustee.

         Any of the Securities may be issued with appropriate insertions,
omissions, substitutions and variations and may have imprinted or otherwise
reproduced thereon such legend or legends, not inconsistent with the provisions
of this Indenture, as may be required to comply with any law or with any rules
or regulations pursuant thereto, or with the rules of any securities market in
which the Securities are admitted to trading, or to conform to general usage.

         (b) Securities offered and sold in reliance on Regulation S under the
Securities Act ("Regulation S") as

                                       11



provided in the Purchase Agreement shall be issued in the form of a Permanent
Global Security (as defined herein) in definitive, fully registered form
without interest coupons substantially in the form of Security attached as
Exhibit A hereto with such legends as may be applicable thereto in accordance
with such form, which shall be deposited on behalf of the purchasers of the
Securities represented thereby with the Trustee, at the Corporate Trust Office,
as custodian for The Depository Trust Company (hereinafter, the "U.S.
Depositary") and registered in the name of a nominee of the U.S. Depositary,
duly executed by the Issuer and authenticated by the Trustee as hereinafter
provided, for credit to their respective accounts (or to such other accounts as
they may direct) at Morgan Guaranty Trust Company of New York, Brussels office,
as operator of the Euroclear System ("Euroclear") or Cedel, S.A. ("Cedel").
Until the termination of the restricted period (as defined in Regulation S)
with respect to the offer and sale of the Securities, interests in such Global
Security may only be held by the Agent Members (as defined herein) for
Euroclear and Cedel. Until such time as the restricted period shall have
terminated, such Global Security shall be referred to herein as the "Restricted
Regulation S Global Security." After such time as the restricted period shall
have terminated, such Global Security shall be referred to herein as the
"Unrestricted Regulation S Global Security." The aggregate principal amount of
the Restricted Regulation S Global Security and the Unrestricted Regulation S
Global Security may from time to time be increased or decreased by adjustments
made on the records of the Trustee, as custodian for the U.S. Depositary, as
hereinafter provided. The Issuer shall notify the Trustee of the termination of
the restricted Period by furnishing to the Trustee a certificate substantially
in the form of Exhibit B hereto.

         Securities offered and sold in reliance on Rule 144A under the
Securities Act ("Rule 144A") as provided in the Purchase Agreement shall be
issued in the form of a permanent Global Security (the "Rule 144A Global
Security") in definitive fully registered form without interest coupons
substantially in the form of Security attached as Exhibit A hereto with such
legends as may be applicable thereto in accordance with the form of such
Security deposited with the Trustee, at the Corporate Trust Office, as
custodian for the U.S. Depositary, duly executed by the Issuer and
authenticated by the Trustee as hereinaf-

                                       12



ter provided. The aggregate principal amount of the Rule 144A Global Security
may from time to time be increased or decreased by adjustments made on the
records of the Trustee, as custodian for the U.S. Depositary, and the U.S.
Depositary or its nominee, as the case may be, as hereinafter provided.

         (c) (i) This Section 2.4(c)(i) shall apply only to Securities in
global form ("Global Securities") deposited with the U.S. Depositary.

         The Issuer shall execute and the Trustee shall, in accordance with
this Section 2.4(c)(1), authenticate and deliver initially Global Securities
that (a) shall be registered in the name of the U.S. Depositary for such Global
Securities or the nominee of such U.S. Depositary, (b) shall be deposited on
behalf of Agent Members (as defined herein) with the Trustee as custodian for
the U.S. Depositary and (c) shall bear legends substantially to the following
effect:

         "UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
         OF [INSERT NAME AND ADDRESS OF U.S. DEPOSITARY] TO THE ISSUER OR ITS
         AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY
         CERTIFICATE ISSUED IN EXCHANGE FOR THIS CERTIFICATE OR ANY PORTION
         HEREOF IS REGISTERED IN THE NAME OF [INSERT NAME OF U.S. NOMINEE OF
         DEPOSITARY], OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
         REPRESENTATIVE OF [INSERT NAME OF U.S. DEPOSITARY], OR SUCH OTHER NAME
         AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF
         U.S. DEPOSITARY] (AND ANY PAYMENT HEREON IS MADE TO [INSERT NAME OF
         NOMINEE OF U.S. DEPOSITARY]), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF
         FOR VALUE OR OTHERWISE BY OR TO ANY PERSON OTHER THAN [INSERT NAME OF
         U.S. DEPOSITARY OR A NOMINEE THEREOF] IS WRONGFUL INASMUCH AS THE
         REGISTERED OWNER HEREOF, [INSERT NAME OF NOMINEE OF U.S. DEPOSITARY]
         HAS AN INTEREST HEREIN".

         "TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
         WHOLE, BUT NOT IN PART, TO NOMINEES OF [INSERT NAME OF U.S.
         DEPOSITARY] OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND
         TRANSFERS OF PORTIONS OF THIS GLOBAL

                                       13



         SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
         RESTRICTIONS SET FORTH IN SECTION 2.6 OF THE INDENTURE REFERRED TO ON
         THE REVERSE HEREOF".

         Members of, or participants in, a U.S. Depositary ("Agent Members")
shall have no rights under this Indenture with respect to any Global Security
held on their behalf by the U.S. Depositary or under any Global Security, and
the U.S. Depositary may be treated by the Issuer, the Trustee, and any agent of
the Issuer or the Trustee as the absolute owner of such Global Security for all
purposes whatsoever. Notwithstanding the foregoing, nothing herein shall
prevent the Issuer, the Trustee or any agent of the Issuer or the Trustee from
giving effect to any written certification, proxy or other authorization
furnished by the U.S. Depositary or impair, as between the U.S. Depositary and
its Agent Members, the operation of customary practices governing the exercise
of the rights of a holder of any security.

         (c) (ii) This Section 2.4(c)(ii) shall apply only to the Global
Security deposited on behalf of the purchasers of the Securities represented
thereby with the Trustee as custodian for the U.S. Depositary for credit to
their respective accounts (or to such other accounts as they may direct) at
Euroclear or Cedel insofar as interests in the Global Security are held by the
Agent Members for Euroclear or Cedel.

         The provisions of the "Operating Procedures of the Euroclear System"
and the "Terms and Conditions Governing Use of Euroclear" and the "Management
Regulations" and "Instructions to Participants" of Cedel, respectively, shall
be applicable to such Global Security insofar as interests therein are held by
the Agent Members for Euroclear and Cedel. Account holders or participants in
Euroclear and Cedel shall have no rights under this Indenture with respect to
the Global Security, and the nominee of the U.S. Depositary may be treated by
the Issuer and the Trustee and any agent of the Issuer or the Trustee as the
owner of the Global Security for all purposes whatsoever. Notwithstanding the
foregoing, nothing herein shall prevent the Issuer, the Trustee or any agent of
the Issuer or the Trustee from giving effect to any written certification,
proxy or other authorization furnished by the U.S. Depositary or impair, as
between the U.S. Deposi-

                                       14



tary and its Agent Members, the operation of customary practices governing the
exercise of the rights of a holder of any security.

         (d) Each Security shall be dated the date of its authentication and
shall bear interest from the applicable date, and shall be payable on the dates
specified on the face of the form of Security attached as Exhibit A hereto.

         (e) The Person in whose name any Security is registered at the close
of business on the record date specified in the Securities with respect to any
Interest Payment Date shall be entitled to receive the interest, if any,
payable on such Interest Payment Date notwithstanding any transfer or exchange
of such Security subsequent to the record date and prior to such Interest
Payment Date, except if and to the extent the Issuer shall default in the
payment of the interest due on such Interest Payment Date, in which case such
defaulted interest shall be paid to the Persons in whose names Outstanding
Securities are registered at the close of business on a subsequent special
record date, to be established (together with the related payment date) by the
Issuer with the consent of the Trustee. Such special record date shall not be
more than 15 nor less than 10 Business Days prior to the payment date. Not more
than 15 days prior to the special record date, the Issuer (or the Trustee, in
the name of and at the expense of the Issuer) shall mail to Holders a notice
that states the special record date, the related payment date and the amount of
interest to be paid. Notice of the proposed payment of such defaulted interest
and the special record date therefor having been mailed as aforesaid, such
defaulted interest shall be paid to the Persons in whose names the Securities
are registered on such special record date.

         (f) The Securities shall be issuable in the denominations specified in
the form of Security attached as Exhibit A hereto.

         SECTION 2.5 Global Securities. (a) Portions of a Global Security
deposited with the U.S. Depositary pursuant to Section 2.4 shall be transferred
in certificated form to the beneficial owners thereof only if such transfer
complies with Section 2.6 of this Indenture and (i) the U.S. Depositary
notifies the Issuer that it is unwilling or unable to continue as U.S.
Depositary for such

                                       15



Global Security or if at any time such U.S. Depositary ceases to be a "clearing
agency" registered under the Exchange Act and a successor depositary is not
appointed by the Issuer within 90 days of such notice, or (ii) an Event of
Default has occurred and is continuing with respect to the Securities and
payment of principal thereof and interest thereon has been accelerated.

         (b) Portions of any Global Security that are transferable to the
beneficial owners thereof pursuant to this Section 2.5 shall be surrendered by
the U.S. Depositary to the Trustee at its New York office for registration of
transfer, in whole or from time to time in part, without charge and the Trustee
shall authenticate and deliver, upon such registration of transfer of each
portion of such Global Security, an equal aggregate principal amount of
Securities of authorized denominations. Any portion of a Global Security whose
registration is transferred pursuant to this Section 2.5 shall be executed,
authenticated and delivered only in the denominations specified in the form of
Security attached as Exhibit A hereto and registered in such names as the U.S.
Depositary shall direct. Any Security delivered in exchange for a portion of
the Rule 144A Global Security shall bear the Legend regarding transfer
restrictions applicable to the Rule 144A Global Security set forth on the form
of Security attached as Exhibit A hereto. Any Security delivered in exchange
for a portion of the Restricted or Unrestricted Regulation S Global Security
shall bear the Legend regarding transfer restrictions applicable to the
Restricted or Unrestricted Registration S Global Security, as the case may be,
set forth on the form of Security attached as Exhibit A hereto.

         (c) Subject to the provisions of Section 2.4(c) above, the registered
Holder of any Global Security may grant proxies and otherwise authorize any
person, including Agent Members and persons that may hold interests through
Agent Members, to take any action which a Holder is entitled to take under this
Indenture or the Securities.

         (d) In the event of the occurrence of any of the events specified in
paragraph (a) of this Section 2.5, the Issuer shall promptly make available to
the Trustee a reasonable supply of certificated Securities in definitive fully,
registered form without interest coupons.

                                       16



         (e) The Global Security issued and authenticated pursuant to the first
paragraph of Section 2.4(b) (both before and after the expiration of the
restricted period) and the Rule 144A Global Security shall each be assigned
separate securities identification, or "CUSIP," numbers.

         SECTION 2.6 Registration, Registration of Transfer and Exchange. (a)
The Issuer shall keep at each office or agency to be maintained for the purpose
as provided in Section 3.2 hereof a register or registers (collectively
referred to as the "Securities Register") in which, subject to such reasonable
regulations as it may prescribe, it will register or cause to be registered,
the transfer of Securities as provided in this Article. The Trustee is hereby
appointed "Security Registrar" for the purpose of registering Securities and
transfers of Securities as herein provided. If at any time the Trustee shall
not be serving as Security Registrar, at all reasonable times such Securities
Register shall be open for inspection by the Trustee.

         Upon due presentation for registration of transfer of any Security at
each such office or agency, the Issuer shall execute and the Trustee shall
authenticate and deliver in the name of the transferee or transferees a new
Security or Securities in authorized denominations for a like aggregate
principal amount.

         Any Security or Securities may be exchanged for a Security or
Securities in other authorized denominations, in an equal aggregate principal
amount. Securities to be exchanged shall be surrendered at each office or
agency to be maintained by the Issuer for the purpose as provided in Section
3.2 hereof, and the Issuer shall execute and the Trustee shall authenticate and
deliver in exchange therefor the Security or Securities which the
Securityholder making the exchange shall be entitled to receive, bearing
numbers not contemporaneously outstanding.

         All Securities presented for registration of transfer, exchange,
redemption or payment shall (if so required by the Issuer or the Trustee) be
duly endorsed by, or be accompanied by a written instrument or instruments of
transfer in form satisfactory to the Issuer and the Trustee duly executed by,
the Holder or its attorney duly authorized in writing.

                                       17



         The Issuer or Trustee shall not be required to exchange or register a
transfer of (a) any Securities for a period of 15 days next preceding the first
mailing of notice of redemption of Securities to be redeemed or (b) any
Securities selected, called or being called for redemption except, in the case
of any Security where public notice has been given that such Security is to be
redeemed in part, the portion thereof not so to be redeemed.

         All Securities issued upon any registration of transfer or exchange of
Securities shall be valid obligations of the Issuer, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.

         (b) Notwithstanding any provision to the contrary herein, so long as a
Global Security remains outstanding and is held by or on behalf of the U.S.
Depositary, transfers of a Global Security, in whole or in part, shall only be
made (x) in the case of transfers of portions of a Global Security, to
beneficial owners thereof in certificated form, in accordance with Section 2.5,
and (y) in all other cases, in accordance with this Section 2.6(b) (and
subject, in each case, to the provisions of any Legend (as defined herein)
imprinted on such Global Security).

         (i) Transfers of Global Securities as such. Subject to clauses (ii)
    through (vi) of this Section 2.6(b), transfers of a Global Security shall
    be limited to transfers of such Global Security in whole, and not in part,
    to nominees of the U.S. Depositary or to a successor of the U.S. Depositary
    or such successor's nominee.

         (ii) Rule 144A Global Security to Restricted Regulation S Global
    Security. If a holder of a beneficial interest in the Rule 144A Global
    Security deposited with the U.S. Depositary wishes at any time to exchange
    or transfer its interest in such Global Security to a Person who wishes to
    take delivery thereof in the form of an interest in the Restricted
    Regulation S Global Security, such holder may, subject to the rules and
    procedures of the U.S. Depositary, exchange or transfer or cause the
    exchange or transfer of such interest for an equivalent beneficial interest

                                       18



    in the Restricted Regulation S Global Security in accordance with, and
    subject to, this clause (ii). Upon receipt by the Trustee at the Corporate
    Trust Office of (1) instructions given in accordance with the U.S.
    Depositary's procedures from an Agent Member directing the Trustee to
    credit or cause to be credited a beneficial interest in the Restricted
    Regulation S Global Security in an amount equal to the beneficial interest
    in the Rule 144A Global Security to exchanged or transferred, (2) a written
    order given in accordance with the U.S. Depositary's procedures containing
    information regarding the Euroclear or Cedel account to be credited with
    such increase and the name of such account, and (3) a certificate in the
    form of Exhibit C attached hereto given by the holder of such beneficial
    interest stating that the exchange or transfer of such interest has been
    made in compliance with the transfer restrictions applicable to the
    Securities and pursuant to and in accordance with Regulation S, the Trustee
    shall instruct the U.S. Depositary to reduce the Rule 144A Global Security
    by the aggregate principal amount of the beneficial interest in the Rule
    144A Global Security to be so exchanged or transferred and the Trustee
    shall instruct the U.S. Depositary, concurrently with such reduction, to
    increase the principal amount of the Restricted Regulation S Global
    Security by the aggregate principal amount of the beneficial interest in
    the Rule 144A Global Security to be so exchanged or deferred, and to credit
    or cause to be credited to the account or the person specified in such
    instructions (who shall be the Agent Member for Euroclear or Cedel, or
    both, as the case may be) a beneficial interest in the Restricted
    Regulation S Global Security equal to the reduction in the principal amount
    of the Rule 144A Global Security.

         (iii) Rule 144A Global Security to Unrestricted Regulation S Global
    Security. If a holder of a beneficial interest in the Rule 144A Global
    Security deposited with the U.S. Depositary wishes at any time to exchange
    its interest in such Global Security for an interest in the Unrestricted
    Regulation S Global Security, or to transfer its interest in such Global
    Security to a Person who wishes to take delivery thereof in the form of an
    interest in the Unrestricted Regulation S Global Security, such holder may,
    subject

                                       19



    to the rules and procedures of the U.S. Depository, exchange or cause the
    exchange or transfer or cause the transfer of such interest for an
    equivalent beneficial interest in the Unrestricted Regulation S Global
    Security in accordance with, and subject to, this clause (iii). Upon
    receipt by the Trustee at the Corporate Trust Office of (1) instructions
    given in accordance with the U.S. Depository's procedures from an Agent
    Member directing the Trustee to credit or cause to be credited a beneficial
    interest in the Unrestricted Regulation S Global Security in an amount
    equal to the beneficial interest in the Rule 144A Global Security to be
    exchanged or transferred, (2) a written order given in accordance with the
    U.S. Depositary's procedures containing information retarding the
    participant account of the U.S. Depositary and, in the case of a transfer
    pursuant to and in accordance with Regulation S, the Euroclear or Cedel
    account to be credited with such increase and (3) a certificate in the form
    of Exhibit D attached hereto given by the holder of such beneficial
    interest stating that the exchange or transfer of such interest has been
    made in compliance with the transfer restrictions applicable to the
    Securities and (A) in the case of an exchange, that either (x) the Security
    being exchanged is not a "restricted security" as defined in Rule 144 under
    the Securities Act, or (y) the exchange is being made to facilitate a
    contemporaneous transfer that complies with this clause (iii), (B) in the
    case of a transfer pursuant to Regulation S, that the Security is being
    transferred pursuant to and in accordance with Regulation S, (C) in the
    case of a transfer pursuant to Rule 144, that the Security is being
    transferred pursuant to and in accordance with Rule 144 or (D) in the case
    of a transfer pursuant to another exemption from the Securities Act
    (including without limitation Rule 144A), specifying the basis for such
    exemption, the Trustee shall instruct the U.S. Depositary to reduce the
    Rule 144A Global Security by the aggregate principal amount of the
    beneficial interest in the Rule 144A Global Security to be so exchanged or
    transferred and the Trustee shall instruct the U.S. Depositary,
    concurrently with such reduction, to increase the principal amount of the
    Unrestricted Regulation S Global Security by the aggregate principal amount
    of the beneficial interest in the Rule 144A Global Security to be so
    exchanged or

                                       20



    transferred, and to credit or cause to be credited to the account of the
    person specified in such instructions a beneficial interest in the
    Unrestricted Regulation S Global Security equal to the reduction in the
    principal amount of the Rule 144A Global Security.

         (iv) Restricted Regulation S Global Security or Unrestricted
    Regulation S Global Security to Rule 144A Global Security. If a holder of a
    beneficial interest in the Restricted Regulation S Global Security or the
    Unrestricted Regulation S Global Security deposited with the U.S.
    Depositary wishes at any time to exchange or transfer its interest in such
    Restricted Regulation S Global Security or Unrestricted Regulation S Global
    Security to a Person who wishes to take delivery thereof in the form of an
    interest in the Rule 144A Global Security such holder may, subject to the
    rules and procedures of Euroclear or Cedel and the U.S. Depositary, as the
    case may be, exchange or transfer or cause the exchange or transfer of such
    interest for an equivalent beneficial interest in the Rule 144A Global
    Security, in accordance with, and subject to, this clause (iv). Upon
    receipt by the Trustee at the Corporate Trust Office of (1) instructions
    from Euroclear or Cedel or the U.S. Depositary as the case may be,
    directing the Trustee to credit or cause to be credited a beneficial
    interest in the Rule 144A Global Security equal to the beneficial interest
    in the Restricted Regulation S Global Security or the Unrestricted
    Regulation S Global Security to be exchanged or transferred, such
    instructions to contain information regarding the Agent Member's account
    with the U.S. Depositary to be credited with such increase, and, with
    respect to an exchange or transfer of an interest in the Unrestricted
    Regulation S Global Security, information regarding the Agent Member's
    account with the U.S. Depositary to be debited with such decrease, and (2)
    a certificate in the form of Exhibit E attached hereto given by the holder
    of such beneficial interest and stating that the person exchanging or
    transferring such interest in the Restricted Regulation S Global Security
    or the Unrestricted Regulation S Global Security, as the case may be,
    reasonably believes that the person acquiring such interest in the Rule
    144A Global Security is a qualified institutional buyer (as defined in Rule
    144A) and is obtaining such beneficial interest

                                       21



    in a transaction meeting the requirements of Rule 144A, Euroclear or Cedel
    or the Trustee, as the case may be, shall instruct the U.S. Depositary to
    reduce the Restricted Regulation S Global Security or the Unrestricted
    Regulation S Global Security, as the case may be, by the aggregate
    principal amount of the beneficial interest in the Restricted Regulation S
    Global Security or the Unrestricted Regulation S Global Security to be
    exchanged or transferred, and the Trustee shall instruct the U.S.
    Depositary, concurrently with such reduction to increase the principal
    amount of the Rule 144A Global Security by the aggregate principal amount
    of the beneficial interest in the Restricted Regulation S Global Security
    or the Unrestricted Regulation S Global Security, as the case may be, to be
    so exchanged or transferred, and to credit or cause to be credited to the
    account of the person specified in such instructions a beneficial interest
    in the Rule 144A Global Security equal to the reduction in the principal
    amount of the Restricted Regulation S Global Security or the Unrestricted
    Regulation S Global Security, as the case may be.

         (v) Other Exchanges. In the event that a Global Security is exchanged
    for Securities in definitive registered form without interest coupons
    pursuant to Section 2.5 hereof, such Securities may be exchanged or
    transferred for one another only in accordance with such procedures as are
    substantially consistent with the provisions of clauses (ii) through (iv)
    above (including, without limitation, the certification requirements
    intended to insure that such exchanges or transfers comply with Rule 144A,
    Rule 144 or Regulation S under and generally with the Securities Act, as
    the case may be) and as may be from time to time adopted by the Issuer and
    the Trustee.

         (c) Successive registrations and registrations of transfers and
exchanges as aforesaid may be made from time to time as desired, and each such
registration shall be noted on the Security Register. No service charge shall
be made for any registration of transfer or exchange of the Securities, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith and any other amounts
required to be paid by the provisions of the Securities.

                                       22



         (d) If Securities are issued upon the registration of transfer,
exchange or replacement of Securities not bearing the legends required by the
form of Security attached as Exhibit A hereto (collectively, the "Legend"), the
Securities so issued shall bear the Legend. If Securities are issued upon the
registration of transfer, exchange or replacement of Securities bearing the
Legend, or if a request is made to remove the Legend on a Security, the
Securities so issued shall bear the Legend, or the Legend shall not be removed,
as the case may be, unless there is delivered to the Issuer and the Trustee
such satisfactory evidence, which may include an opinion of counsel of
recognized standing licensed to practice law in the State of New York and
experienced in matters involving the Securities Act, as may be reasonably
required by the Issuer that neither the Legend nor the restrictions on transfer
set forth therein are required to ensure that transfers thereof comply with the
provisions of Rule 144A, Rule 144 or Regulation S under the Securities Act or
that such Securities are not "restricted securities" within the meaning of Rule
144 under the Securities Act. Upon provision of such satisfactory evidence, the
Trustee, at the direction of the Issuer, shall authenticate and deliver a
Security that does not bear the Legend. If a Legend is removed from the face of
a Security and the Security is subsequently held by an affiliate of the Issuer,
the Legend shall be reinstated.

         SECTION 2.7 Mutilated, Defaced, Destroyed, Lost and Stolen Securities.
In case any temporary or definitive Security shall become mutilated, defaced or
be apparently destroyed, lost or stolen, the Issuer in its discretion may
execute, and upon the written request any officer of the Issuer, the Trustee
shall authenticate and deliver a new Security, bearing a number not
contemporaneously outstanding, in exchange and substitution for the mutilated
or defaced Security, or in lieu of and substitution for Security so apparently
destroyed, lost or stolen. In every case the applicant for a substitute
Security shall furnish to the Issuer and to the Trustee and any agent of the
Issuer or the Trustee such security or indemnity as may be required by them to
indemnify and defend and to save each of them harmless and, in every case of
destruction, loss or theft, evidence to their satisfaction of the apparent
destruction, loss or theft of such Security and of the ownership thereof.

                                       23



         Upon the issuance of an substitute Security, the Issuer may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in relation thereto and any other expenses (including the
fees and expenses of the Trustee) connected therewith. In case any Security
which has matured or is about to mature, or has been called for redemption in
full, shall become mutilated or defaced or be apparently destroyed, lost or
stolen. the Issuer may, instead of issuing a substitute Security, pay or
authorize the payment of the same (without surrender thereof except in the case
of a mutilated or defaced Security), if the applicant for such payment shall
furnish to the Issuer and to the Trustee and any agent of the Issuer or the
Trustee such security or indemnity as any of them may require to save each of
them harmless from all risks, however remote, and, in every case of apparent
destruction, loss or theft, the applicant shall also furnish to the Issuer and
the Trustee and any agent of the Issuer or the Trustee evidence to their
satisfaction of the apparent destruction, loss or theft of such Security and of
the ownership thereof.

         Every substitute Security issued pursuant to the provisions of this
Section by virtue of the fact that any Security is apparently destroyed, lost
or stolen shall constitute an additional contractual obligation of the Issuer,
whether or not the apparently destroyed, lost or stolen Security shall be at
any time enforceable by anyone and shall be entitled to all the benefits of
(but shall be subject to all the limitations of rights set forth in) this
Indenture equally and proportionately with any and all other Securities duly
authenticated and delivered hereunder. All Securities shall be held and owned
upon the express condition that, to the extent permitted by law, the foregoing
provisions are exclusive with respect to the replacement or payment of
mutilated, defaced, or apparently destroyed, lost or stolen Securities and
shall preclude any and all other rights or remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with respect to the
replacement or payment of negotiable instruments or other securities without
their surrender.

         SECTION 2.8 Cancelation of Securities: Destruction Thereof. All
Securities surrendered for payment, redemption, registration of transfer or
exchange, if surrendered to the Issuer or any agent of the Issuer or the
Trustee, shall be delivered to the Trustee for cancelation

                                       24



or, if surrendered to the Trustee, shall be canceled by it provided all
conditions regarding such cancelation have been met; and no Securities shall be
issued in lieu thereof except as expressly permitted by any of the provisions
of this Indenture. The Trustee shall cancel and dispose of all Securities
surrendered for registration of transfer, exchange, payment or cancelation in
accordance with the Trustee's policy of disposal unless the Issuer instructs
the Trustee in writing to deliver the Securities to the Issuer. If the Issuer
shall acquire any of the Securities, such acquisition shall not operate as a
redemption or satisfaction of the indebtedness represented by such Securities
unless and until the same are delivered to the Trustee for cancelation.

         SECTION 2.9 Temporary Securities. Pending the preparation of
definitive Securities, the Issuer may execute and the Trustee shall
authenticate and deliver temporary Securities (printed, lithographed,
typewritten or otherwise reproduced, in each case in form satisfactory to the
Trustee). Temporary Securities shall be issuable as registered Securities
without coupons, of any authorized denomination, and substantially in the form
of the definitive Securities but with such omissions, insertions and
variations as may be appropriate for temporary Securities, all as may be
determined by the Issuer with the concurrence of the Trustee. Temporary
Securities may contain such reference to any provisions of this Indenture as
may be appropriate. Every temporary Security shall be executed by the Issuer
and be authenticated by the Trustee upon the same conditions and in
substantially the same manner, and with like effect, as the definitive
Securities. Without unreasonable delay the Issuer shall execute and shall
furnish definitive Securities and thereupon temporary Securities may be
surrendered in exchange therefor without charge at each office or agency to be
maintained by the Issuer for the purpose pursuant to Section 3.2 hereof, and
the Trustee shall authenticate and deliver in exchange for such temporary
Securities a like aggregate principal amount of definitive Securities of
authorized denominations. Until so exchanged the temporary Securities shall be
entitled to the same benefits under this Indenture as definitive Securities.

         SECTION 2.10 Computation of Interest. Interest on the Securities shall
be computed on the basis of a 360-day year of twelve 30-day months.

                                       25



                                  ARTICLE III

                                  COVENANTS OF
                           THE ISSUER AND THE TRUSTEE
                           --------------------------

         SECTION 3.1 Payment of Principal and Interest. The Issuer covenants
and agrees that it will duly and punctually pay or cause to be paid the
principal and Change of Control purchase price of, and premium, if any, and
interest on, each of the Securities at the place or places, at the respective
times and in the manner provided in the Securities. Payment of principal and
the Change of Control purchase price of, and premium and interest on the
Securities shall be paid by mailing a check to or upon the written order of the
registered Holders of Securities entitled thereto at their last address as it
appears on the Securities Register or, upon written application to the Trustee
by a Holder of $1,000,000 or more in aggregate principal amount of Securities,
by wire transfer of immediately available funds to an account maintained by
such Holder with a bank or other financial institution; provided, however, that
(subject to the provisions of Section 2.7 hereof) payment of principal and the
Change of Control Price of, and premium, if any, on, any Security may be
conditioned upon presentation for payment of the certificate representing such
Security.

         SECTION 3.2 Offices for Payments, etc. So long as any of the
Securities remain Outstanding, the Issuer shall maintain in the Borough of
Manhattan, The City of New York, the following: (a) an office or agency where
the Securities may be presented for payment, (b) an office or agency where the
Securities may be presented for registration of transfer and for exchange as
in this Indenture provided and (c) an office or agency where notices and
demands to or upon the Issuer in respect of the Securities or of this Indenture
may be served. The Issuer shall give to the Trustee written notice of the
location of any such office or agency and of any change of location thereof.
The Issuer hereby initially designates the Trustee's New York office as such
office or agency. In case the Issuer shall fail to maintain any such office or
agency or shall fail to give such notice of the location or of any change in
the location thereof, presentations and demands may be made and notices may be
served at the Corporate Trust Office.

                                       26



         SECTION 3.3 Appointment to Fill Vacancy in Office of Trustee. The
Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee,
shall appoint, in the manner provided in Section 5.9 hereof, a Trustee, so that
there shall at all times be a Trustee hereunder.

         SECTION 3.4 Paying Agents. The Trustee shall be the principal paying
agent for the Securities. Whenever the Issuer shall appoint a paying agent
other than the Trustee, it shall cause such paying agent to execute and deliver
to the Trustee an instrument in which such agent shall agree with the Trustee,
subject to the provisions of this Section,

         (a) that it will hold all sums received by it as such agent for the
    payment of the principal or Change of Control purchase price of, or premium
    or interest on, the Securities (whether such sums have been paid to it by
    the Issuer or by any other obligor on the Securities) in trust for the
    benefit of the Holders of the Securities or of the Trustee,

         (b) that it will give the Trustee notice of any failure by the Issuer
    (or by any other obligor on the Securities) to make any payment of the
    principal or Change of Control purchase price of, or premium or interest
    on, the Securities when the same shall be due and payable and

         (c) pay any such sums so held in trust by it to the Trustee upon the
    Trustee's written request at any time during the continuance of the failure
    referred to in clause (b) above.

         The Issuer shall, prior to each due date of the principal or Change of
Control purchase price of, and premium, if any, or interest on the Securities,
deposit with the paying agent a sum sufficient to pay such principal, Change of
Control purchase price, premium or interest, and (unless such paying agent is
the Trustee) the Issuer shall promptly notify the Trustee of any failure to
take such action.

         Anything in this Section 3.4 to the contrary notwithstanding, the
Issuer may at any time, for the purpose of obtaining satisfaction and discharge
of this Indenture or for any other reason, pay or cause to be paid

                                       27



to the Trustee all sums held in trust by any paying agent hereunder, as
required by this Section 3.4, such sums to be held by the Trustee upon the
trusts herein contained.

         Anything in this Section to the contrary notwithstanding, the
    agreement to hold sums in trust as provided in this Section 3.4 is subject
    to the provisions of Section 9.3 and Section 9.1 hereof.

         SECTION 3.5 Certificate to Trustee. Issuer shall furnish to the
Trustee on or before March 31 in each year (beginning with March 31, 1998) a
brief certificate from the principal executive, financial or accounting officer
of this Issuer as to his or her knowledge of the Issuer's compliance with all
covenants under this Indenture (such compliance to be determined without regard
to any period of grace or requirement of notice provided under this Indenture).

         SECTION 3.6 Securityholder's Lists. The Issuer shall furnish or cause
to be furnished to the Trustee a list in such form as the Trustee may
reasonably require of the names and addresses of the Holders of the Securities
(a) semiannually not more than 15 days after each record date for the payment
of semi-annual interest on the Securities, as specified in the form of Security
attached as Exhibit A hereto, as of such record date and (b) at other times as
the Trustee may request in writing, within thirty days after receipt by the
Issuer of any such request as of a date not more than 15 days prior to the time
such information is furnished.

         SECTION 3.7 Reports by the Issuer. (a) If the Issuer is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, then the
Issuer shall file with the Trustee and provide Securityholders, within 15 days
after it files them with the Commission, copies of its annual reports and of
the information, documents and other reports (or copies of such portions of any
of the foregoing as the Commission may by rules and regulations prescribe) that
the Issuer is required to file with the Commission pursuant to Section 13 or
15(d) of Exchange Act.

         (b) As long as the Issuer is not subject to Section 13 or 15(d) of the
Exchange Act at any time, upon the request of a Holder or any owner of a
beneficial interest in a Security, the Issuer shall promptly furnish

                                       28



or cause to be furnished "Rule 144A Information" (as defined herein) to such
Holder, or beneficial owner or to a prospective purchaser of such Security
designated by such Holder or beneficial owner in order to permit compliance by
such Holder or beneficial owner with Rule 144A under the Securities Act in
connection with the resale of such Security by such Holder or beneficial owner.
"Rule 144A Information" shall be such information as is specified pursuant to
Rule 144A(d)(4) under the Securities Act (or any successor provision thereto).

         (c) In addition to the requirement to furnish Rule 144A Information as
provided in subsection (b), the Issuer shall furnish or cause to be furnished
to Holders and (upon the requests thereof delivered to the Issuer or the
Trustee) to holders of an interest in any Global Security (i) annual
consolidated comparative financial statements of the Issuer prepared in
accordance with GAAP (together with notes thereto, a repose 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 as soon as reasonably available and in any event
within 120 days after the end of the fiscal year covered thereby and (ii)
unaudited condensed consolidated comparative balance sheets and statements of
income and cash flows of the Issuer for each of the first three fiscal quarters
of each fiscal year and the corresponding quarter and year-to-date period of
the prior year prepared on a basis consistent with the annual financial
statements furnished pursuant to clause (c)(i), such statements to be so
furnished within 90 days after the end of each such quarter.

         SECTION 3.8 Limitation on Liens. So long as any of the Securities are
Outstanding, the Issuer shall not pledge, mortgage or hypothecate, or permit to
exist, any mortgage, pledge or other lien upon any property at any time
directly owned by the Issuer to secure any indebtedness for money borrowed
that is incurred, issued, assumed or guaranteed by the Issuer ("Indebtedness"),
without making effective provisions whereby the Securities 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 Issuance

                                       29



Date of the Securities, (ii) purchase money liens that 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 the Issuer 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, the Issuer shall (prior thereto) give written notice
thereof to the Truster, who shall give notice to the Holders, and the Issuer
shall, prior to or simultaneously with such pledge, mortgage or hypothecation,
effectively secure all the Securities equally and ratably with such
Indebtedness.

         SECTION 3.9 Repurchase of Securities Upon a Change of Control. (a)
Upon a Change of Control, each Holder of the Securities shall have the right to
require that the Issuer repurchase such Holder's Securities at a repurchase
price in cash equal to 101% of the principal amount thereof plus accrued
interest, if any, to the date of repurchase, in accordance with the terms set
forth in subsection (b) below.

         (b) Within 30 days following any Change of Control, the Issuer shall
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 the Issuer to repurchase such Holder's Securities 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 of the Issuer after giving effect to such
    Change of Control);

                                       30



         (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 any Security not tendered for purchase will continue to
    accrue interest;

         (5) that interest on any Security accepted for payment pursuant to the
    Change of Control Offer shall cease to accrue after the repurchase of such
    Security on the Repurchase Date;

         (6) that Holders electing to have a Security purchased pursuant to a
    Change of Control Offer will be required to surrender the Security, with
    the form entitled "Option of Holder to Elect Purchase" on the reverse of
    the Security completed, to the paying agent at the address specified in the
    notice prior to the close of business on the Business Day prior to the
    Repurchase Date;

         (7) that Holders will be entitled to withdraw their election if the
    paying agent 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 transmission or
    letter setting forth the name of the Holder, the principal amount of
    Securities the Holder delivered for purchase, and a statement that such
    Holder is withdrawing its election to have such Securities purchased; and

         (8) that Holders that elect to have their Securities purchased only in
    part will be issued new Securities in a principal amount equal to then
    unpurchased portion of the Securities surrendered.

         (c) Notwithstanding the foregoing, for so long as the Securities are
in the form of Global Securities, the Issuer shall deliver to the U.S.
Depositary within the time periods specified above, for retransmittal to its
Agent Members, a notice substantially to the effect specified in clauses (1)
through (5) and (7) above, which notice shall also specify the required
procedures (furnished by the U.S. Depositary) for holders of interests in the
Global Securities to tender and receive payment of the purchase price

                                       31



for such interests (including the U.S. Depositary's "Repayment Option
Procedures," to the extent applicable), all in accordance with the U.S.
Depositary's rules, regulations and practices.

         (d) On the Repurchase Date, the Issuer shall (i) accept for payment
Securities or portions thereof tendered pursuant to the Change of Control
Offer, (ii) deposit with the Trustee money sufficient without reinvestment to
pay the purchase price of all Securities or portions thereof so tendered and
(iii) deliver or cause to be delivered to the Trustee Securities so accepted
together with an Officers' Certificate identifying the Securities or portions
thereof tendered to the Issuer. The Trustee shall promptly mail to the Holders
of the Securities so accepted payment in an amount equal to the purchase price,
and promptly authenticate and mail to such Holders a new Security in a
principal amount equal to any unpurchased portion of the Security surrendered.
The Issuer will publicly announce the results of the Change of Control Offer on
or as soon as practicable after the Repurchase Date.

         (e) The Issuer shall comply with Rule 14e-1 under the Exchange Act and
any other applicable laws and regulations in the even that a Change of Control
occurs and the Issuer is required to make a Change of Control Offer.


                                   ARTICLE IV

                          REMEDIES OF THE TRUSTEE AND
                      SECURITYHOLDERS ON EVENT OF DEFAULT
                      -----------------------------------

         SECTION 4.1 Event of Default Defined; Acceleration of Maturity; Waiver
of Default. In case of one or more of the following Events of Default (whatever
the reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) shall have occurred and be continuing,
that is to say:

         (a) default in the payment of all or any part of the principal or
    Change of Control purchase price of, or premium, if any, on, any of the
    Securities as and

                                       32



    when the same shall become due and payable either at maturity, upon any
    redemption or required repurchase, by declaration of acceleration or
    otherwise;

         (b) default in the payment of any installment of interest upon any of
    the Securities as and when the same shall become due and payable, and
    continuance of such default for a period of 30 days;

         (c) an event of default, as defined in any instrument of the Issuer
    under which there may be issued, or by which there may be secured or
    evidenced, any Indebtedness of the Issuer 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 such Indebtedness (i) which is
    payable solely out of the property or assets of a partnership, joint
    venture or similar entity of which the Issuer 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 or liability of the Issuer, or (ii) the
    principal of, and interest on, which, when added to the principal of and
    interest on all other such Indebtedness (exclusive of Indebtedness under
    clause (i) above), does not exceed $20,000,000; or

         (d) failure on the part of the Issuer duly to observe or perform any
    other of the covenants or agreements on the part of the Issuer in the
    Securities or in this Indenture and such failure continues for a period of
    30 days after the date on which written notice specifying such failure,
    stating that such notice is a "Notice of Default" hereunder and demanding
    that the Issuer remedy the same, shall have been given by registered or
    certified mail, return receipt requested, to the Issuer by the Trustee, or
    to the Issuer and the Trustee by the Holders of at least 25% in aggregate
    principal amount of the Securities at the time Outstanding; or

         (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 shall be rendered against the Issuer or any
    of its properties in an aggregate amount

                                       33



    in excess of $20,000,000 (excluding the amount thereof covered by
    insurance) and such judgment, decree or order shall remain unvacated,
    undischarged and unstayed for more than 90 consecutive days, except while
    being contested in good faith by appropriate proceedings; or

         (f) a court having jurisdiction in the premises shall enter a decree
    or order for relief in respect of the Issuer in an involuntary case or
    proceeding under any applicable bankruptcy, insolvency, reorganization or
    other similar law now or hereafter in effect, or a decree or order
    adjudging the Issuer a bankrupt or insolvent, or approving as properly
    filed a petition seeking reorganization, arrangement, adjustment, or
    composition of or in respect of the Issuer under any applicable federal or
    state law, or appointing a receiver, liquidator, assignee, custodian,
    trustee, sequestrator or similar official of the Issuer or for any
    substantial part of its property or ordering the winding up or liquidation
    of its affairs, shall have been entered, and such decree or order shall
    remain unstayed and in effect for a period of 90 consecutive days; or

         (g) the Issuer shall commence a voluntary case or proceeding under any
    applicable federal or state bankruptcy, insolvency, reorganization or other
    similar law now or hereafter in effect or of any other case or proceeding
    to be adjudicated a bankrupt or insolvent, or consent to the entry of a
    decree or order for relief in an involuntary case or proceeding under any
    such law, or to the commencement of any bankruptcy or insolvency case or
    proceeding against the Issuer, or the filing by the Issuer of a petition or
    answer or consent seeking reorganization or relief under any such
    applicable federal or state law, or the consent by the Issuer to the filing
    of such petition or to the appointment of or the taking possession by a
    custodian, receiver, liquidator, assignee, trustee, sequestrator or other
    similar official of the Issuer or of any substantial part of its property,
    or the making by the Issuer of an assignment for the benefit of creditors,
    or the taking of action by the Issuer in furtherance of any such action;

                                       34



    then and in each and every such case (other than an Event of Default with
    respect to the Issuer specified in 4.1(f) or 4.1(g) hereof), unless the
    principal of all of the Securities shall have already become due and
    payable, either the Trustee or the Holders of not less than 25% in
    aggregate principal amount of the Securities then Outstanding hereunder, by
    notice in writing to the Issuer (and to the Trustee if given by
    Securityholders), may declare the entire principal of all the Securities
    and the interest accrued thereon to be due and payable immediately, and
    upon any such declaration the same shall become immediately due and
    payable. This provision, however, is subject to the condition that if, at
    any time after the principal of the Securities shall have been so declared
    due and payable, and before any judgment or decree for the payment of the
    moneys due shall have been obtained or entered as hereinafter provided, the
    Issuer shall pay or shall deposit with the Trustee a sum sufficient to pay
    all matured installments of interest upon all the Securities and the
    principal or Change of Control purchase price and premium, if any, of any
    and all Securities that shall have become due otherwise than by
    acceleration (with interest upon such principal and Change of Control
    purchase price and premium, if any, and, to the extent that payment of such
    interest is enforceable under applicable law, on overdue installments of
    interest, at the rate of interest specified in the Securities, to the date
    of such payment or deposit) and such amount as shall be sufficient to cover
    reasonable compensation to the Trustee and each predecessor Trustee, their
    respective agents, attorneys and counsel, and all other reasonable expenses
    and liabilities incurred and all reasonable advances made, by the Trustee
    and each predecessor Trustee except as a result of negligence or bad faith,
    and if any and all Events of Default under the Indenture, other than the
    non-payment of the principal that shall have become due by acceleration,
    shall have been cured, waived or otherwise remedied as provided herein,
    then and in every such case the Holders of a majority in aggregate
    principal amount of the Securities then Outstanding, by written notice to
    the Issuer and to the Trustee, may waive all defaults (except, unless
    theretofore cured, a default in payment of principal of, or Change of
    Control purchase price or premium, if any, or interest on, the Securities)
    and rescind and annul such declaration and its consequences, but no such
    waiver or rescission and annulment shall extend to or shall affect any
    subsequent default or shall impair any right consequent thereon.

                                       35



         If an Event of Default specified in Section 4.1(f) or 4.1(g) hereof
occurs with respect to the Issuer, the principal of and accrued interest on the
Security shall become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Securityholder.

         SECTION 4.2 Collection of Indebtedness by Trustee; Trustee May Prove
Debt. The Issuer covenants that (a) in case default shall be made in the
payment of any installment of interest on any of the Securities when such
interest shall have become due and payable, and such default shall have
continued for a period of 30 days or (b) in case default shall be made in the
payment of all or any part of the principal or Change of Control purchase price
of, or premium, if any, on, any of the Securities when the same shall have
become due and payable, whether upon maturity or upon any redemption or by
declaration or acceleration or otherwise, then upon demand of the Trustee, the
Issuer shall pay to the Trustee for the benefit of the Holders of the
Securities the whole amount that then shall have become due and payable on all
such Securities of principal. Change of Control purchase price, premium or
interest, as the case may be (with interest to the date of such payment upon
the overdue principal, Change of Control purchase price or premium and, to the
extent that payment of such interest is enforceable under applicable law, on
overdue installments of interest at the rate of interest specified in the
Securities); and in addition thereto, such further amount as shall be
sufficient to cover the costs and expenses of collection, including reasonable
compensation to the Trustee and each predecessor Trustee, their respective
agents, attorneys and counsel, and any reasonable expenses and liabilities
incurred, and all reasonable advances made, by the Trustee and each predecessor
Trustee except as a result of its negligence or bad faith.

         Until such demand is made by the Trustee, the Issuer may pay the
principal and Change of Control purchase price of and premium and interest on
the Securities to the registered Holders, whether or not the Securities be
overdue.

         In case the Issuer shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any action or proceedings at law or

                                       36



in equity for the collection of the sums so due and unpaid, and may prosecute
any such action or proceedings to judgment or final decree, and may enforce any
such judgment or final decree against the Issuer or other obligor upon the
Securities and collect in the manner provided by law out of the property of the
Issuer or other obligor upon the Securities, wherever situated, the moneys
adjudged or decreed to be payable.

         In case there shall be pending proceedings relative to the Issuer or
any other obligor upon the Securities under Title 11 of the United States Code
or any other applicable federal or state bankruptcy, insolvency or other
similar law, or in case a receiver, assignee or trustee in bankruptcy or
reorganization, liquidator, custodian, sequestrator or similar official shall
have been appointed for or taken possession of the Issuer or its property or
such other obligor, or in case of any other comparable judicial proceedings
relative to the Issuer or other obligor upon the Securities, or to the
creditors or property of the Issuer or such other obligor, the Trustee,
irrespective of whether the principal of the Securities shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective or
whether the Trustee shall have made any demand pursuant to the provisions of
this Section 4.2, shall be entitled and empowered, by intervention in such
proceedings or otherwise:

         (a) to file and prove a claim or claims for the whole amount of
    principal, Change of Control purchase price, premium and interest owing and
    unpaid in respect of the Securities, and to file such other papers or
    documents as may be necessary or advisable in order to have the claims of
    the Trustee (including any claim for reasonable compensation to the Trustee
    and each predecessor Trustee, and their respective agents, attorneys and
    counsel, and for reimbursement of all reasonable expenses and liabilities
    incurred, and all reasonable advances made, by the Trustee and each
    predecessor Trustee, except as a result of negligence or bad faith) and of
    the Securityholders, allowed in any judicial proceedings relative to the
    Issuer or other obligor upon the Securities, or to the creditors or
    property of the Issuer or such other obligor;

                                       37



         (b) unless prohibited by applicable law and regulations, to vote on
    behalf of the Holders of the Securities in any election of a trustee or a
    standby trustee in arrangement, reorganization, liquidation or other
    bankruptcy or insolvency proceedings or person performing similar functions
    in comparable proceedings; and

         (c) to collect and receive any moneys or other property payable or
    deliverable on any such claims, and to distribute all amounts received with
    respect to the claims of the Securityholders and of the Trustee on their
    behalf; and any trustee, receiver, or liquidator, custodian or other
    similar official is hereby authorized by each of the Securityholders to
    make payments to the Trustee, and, in the event that the Trustee shall
    consent to the making of payments directly to the Securityholders, to pay
    to the Trustee such amounts as shall be sufficient to cover reasonable
    compensation to the Trustee, each predecessor Trustee and their respective
    agents, attorneys and counsel, and all other reasonable expenses and
    liabilities incurred, and all reasonable advances made, by the Trustee and
    each predecessor Trustee except as a result of negligence or bad faith.

         Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or vote for or accept or adopt on behalf of any
Securityholders any plan or reorganization, arrangement, adjustment or
composition affecting the Securities or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Securityholder in
any such proceeding except, as aforesaid, to vote for the election of a trustee
in bankruptcy or similar person.

         All rights of action and of asserting claims under this Indenture, or
under any of the Securities, may be enforced by the Trustee without the
possession of any of the Securities or the production thereof at any trial or
other proceedings relative thereto, and any such action or proceedings
instituted by the Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment, subject to the payment of the
expenses, disbursements and compensation of the Trustee, each predecessor
Trustee and their respective agents and

                                       38



attorneys, shall be for the ratable benefit of the Holders of the Securities.

         In any proceedings brought by the Trustee (and also any proceedings
involving the interpretation of any provision of this Indenture to which the
Trustee shall be a party) the Trustee shall be held to represent all the
Holders of the Securities, and it shall not be necessary to make any Holders of
the Securities parties to any such proceedings.

         SECTION 4.3 Application of Proceeds. Any moneys collected by the
Trustee pursuant to this Article shall be applied in the following order at the
date or dates fixed by the Trustee and, in case of the distribution of such
moneys on account of principal or interest, upon presentation of the several
Securities and stamping (or otherwise noting) thereon the payment, or issuing
Securities in reduced principal amounts in exchange for the presented
Securities if only partially paid, or upon surrender thereof if fully paid:

         FIRST: To the payment of costs and expenses, including reasonable
    compensation to the Trustee and each predecessor Trustee and their
    respective agents and attorneys and of all reasonable expenses and
    liabilities incurred, and all reasonable advances made, by the Trustee and
    each predecessor Trustee except as a result of negligence or bad faith and
    all other amounts due under Section 5.6 hereof;

         SECOND: In case the principal and the Change of Control purchase price
    and premium, if any, of the Securities shall not have become and be then
    due and payable, to the payment of interest in default in the order of the
    maturity of the installments of such interest, with interest (to the extent
    that such interest has been collected by the Trustee) upon the overdue
    installments of interest at the rate of interest specified in the
    Securities, such payments to be made ratably to the persons entitled
    thereto, without discrimination or preference;

         THIRD: In case the principal or the Change of Control purchase price
    of the Securities shall have become and shall be then due and payable, to
    the payment of the whole amount then owing and unpaid upon

                                       39



    all the Securities for principal, Change of Control purchase price,
    premium, and interest, with interest upon the overdue principal, Change of
    Control purchase price, premium, if any, and (to the extent that such
    interest has been collected by the Trustee) upon overdue installments of
    interest at the rate of interest specified in the Securities, and in case
    such moneys shall be insufficient to pay in full the whole amount so due
    and unpaid upon the Securities, then to the payment of such principal,
    Change of Control purchase price, premium and interest, without preference
    or priority of principal, Change of Control purchase price or premium over
    interest, or of interest over principal or Change of Control purchase price
    or premium, or of any installment of interest over any other installment of
    interest, or of any Security over any other Security, ratably to the
    aggregate of such principal and accrued and unpaid interest; and

         FOURTH: To the payment of the remainder, if any, to the Issuer or any
    other Person lawfully entitled thereto.

         The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section 4.3.

         SECTION 4.4 Suits for Enforcement. In case an Event of Default has
occurred, has not been waived and is continuing, the Trustee may in its
discretion proceed to protect and enforce the rights vested in it by this
Indenture by such appropriate judicial proceedings as the Trustee shall deem
most effectual to protect and enforce any of such rights, either at law or in
equity or in bankruptcy or otherwise, whether for the specific enforcement of
any covenant or agreement contained in this Indenture or in aid of the exercise
of any power granted in this Indenture or to enforce any other legal or
equitable right vested in the Trustee by this Indenture or by law.

         SECTION 4.5 Restoration of Rights on Abandonment of Proceedings. In
case the Trustee shall have proceeded to enforce any right under this Indenture
and such proceedings shall have been discontinued or abandoned for any reason,
or shall have been determined adversely to the Trustee, then and in every such
case the Issuer and the

                                       40



Trustee shall be restored respectively to their former positions and rights
hereunder, and all rights, remedies and powers of the Issuer, the Trustee and
the Securityholders shall continue as though no such proceedings had been
taken.

         SECTION 4.6 Limitations of Suits by Securityholders. No Holder of any
Security shall have any right by virtue or by availing of any provision of this
Indenture to institute any action or proceeding at law or in equity or in
bankruptcy or otherwise upon or under or with respect to this Indenture, or for
the appointment of a trustee, receiver, liquidator, custodian or other similar
official or for any other remedy hereunder, unless such Holder previously shall
have given to the Trustee written notice of default and of the continuance
thereof, as hereinbefore provided, and unless also the Holders of not less than
25% in aggregate principal amount of the Securities then Outstanding shall have
made written request upon the Trustee to institute such action or proceedings
in its own name as trustee hereunder and shall have offered to the Trustee such
reasonable indemnity as it may require against the costs, expenses and
liabilities to be incurred therein or thereby and the Trustee for 30 days after
its receipt of such notice, request and offer of indemnity shall have failed to
institute any such action or proceedings and no direction inconsistent with
such written request shall have been given to the Trustee pursuant to Section
4.8 hereof; it being understood and intended, and being expressly covenanted by
the taker and Holder of every Security with every other taker and Holder and
the Trustee, that no one or more Holders of Securities shall have any right in
any manner whatever by virtue or by availing of any provision of this Indenture
to affect, disturb or prejudice the rights of any other Holder of Securities,
or to obtain or seek to obtain priority over or preference to any other such
Holder or to enforce any fight under this indenture, except in the manner
herein provided and for the equal, ratable and common benefit of all Holders of
Securities. For the protection and enforcement of the provisions of this
Section 4.6 each and every Securityholder and the Trustee shall be entitled to
such relief as can be given either at law or in equity.

         SECTION 4.7 Powers and Remedies Cumulative, Delay or Omission Not
Waiver of Default. Except as provided in Section 2.7 hereof, no right or remedy
herein

                                       41



conferred upon or reserved to the Trustee or to the Securityholders is intended
to be exclusive of any other right or remedy, and every right and remedy shall,
to the extent permitted by law, be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.

         No delay or omission of the Trustee or of any Holder of any of the
Securities to exercise as aforesaid any such right or power accruing upon any
Event of Default occurring and continuing as aforesaid shall impair any such
right or power or shall be construed to be a waiver of any such Event of
Default or an acquiescence therein; and, subject to Section 4.6 hereof, every
power and remedy given by this Indenture or by law to the Trustee or to the
Securityholders may be exercised from time to time, and as often as shall be
deemed expedient, by the Trustee or by the Securityholders.

         SECTION 4.8 Control by Securityholders. The Holders of a majority in
aggregate principal amount of the Securities at the time Outstanding shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
on the Trustee by this Indenture; provided that such direction shall not be
otherwise than in accordance with law and the provisions of this Indenture; and
provided further that (subject to the provisions of Section 5.1 hereof) the
Trustee shall have the right to decline to follow any such direction if the
Trustee, being advised by counsel, shall determine that the action or
proceeding so directed may not lawfully be taken or if the Trustee in good
faith by its board of directors, the executive committee, or a trust committee
of directors or Responsible Officers of the Trustee shall determine that the
action or proceedings so directed would involve the Trustee in personal
liability or if the Trustee in good faith shall so determine that the actions
or forbearances specified in or pursuant to such direction shall be unduly
prejudicial to the interests of Holders of the Securities not joining in the
giving of said direction, it being understood that (subject to Section 5.1
hereof) the Trustee shall have no duty to ascertain whether or not such actions
or forbearances are unduly prejudicial to such Holders.

                                       42




         Nothing in this Indenture shall impair the right of the Trustee in its
discretion to take any action deemed proper by the Trustee and which is not
inconsistent with such direction by Securityholders.

         SECTION 4.9 Waiver of Past Defaults. Prior to the declaration of the
maturity of the Securities as provided in Section 4.1 hereof, the Holders of a
majority in aggregate principal amount of the Securities at the time
Outstanding may on behalf of the Holders of all the Securities waive any past
default or Event of Default hereunder and its consequences, except a default
(a) in the payment of principal or Change of Control purchase price of,
premium, if any, or interest on any of the Securities or (b) in respect of a
covenant or provision hereof that cannot be modified or amended without the
consent of the Holder of each Security affected. In the case of any such
waiver, the Issuer, the Trustee and the Holders of the Securities shall be
restored to their former positions and rights hereunder, respectively; but no
such waiver shall extend to any subsequent or other default or impair any right
consequent thereon.

         Upon any such waiver, such default shall cease to exist and be deemed
to have been cured and not to have occurred, and any Event of Default arising
therefrom shall be deemed to have been cured, and not to have occurred for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other default or Event of Default or impair any right consequent
thereon.

         SECTION 4.10 Rights of Holders to Receive Payment. Notwithstanding any
other provision of this Indenture (including, without limitation, Section 4.6
hereof), the right of any Holder to receive, and to institute suit to enforce,
payment of the principal and Change of Control purchase price of, and premium,
if any, and interest on the Securities on or after the respective due dates
expressed in such Securities (including upon redemption and acceleration of the
maturity of the principal of and premium, if any, and interest on the
Securities), shall not be affected or impaired, and shall be absolute and
unconditional.

                                       43



                                   ARTICLE V

                             CONCERNING THE TRUSTEE
                             ----------------------

         SECTION 5.1 Duties and Responsibilities of the Trustee; During
Default; Prior to Default. The Trustee, prior to the occurrence of an Event of
Default and after the curing or waiving of all Events of Default that may have
occurred, undertakes to perform only such duties as are specifically set forth
in this Indenture. In case an Event of Default has occurred (which has not been
cured or waived) the Trustee shall exercise such of the rights and powers
vested in it by this Indenture, and use the same degree of care and skill in
their exercise, as a prudent man would exercise or use under the circumstances
in the conduct of his own affairs.

         No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct, except that

         (a) prior to the occurrence of an Event of Default and after the
curing or waiving of all such Events of Default that may have occurred:

         (i) the duties and obligations of the Trustee shall be determined
    solely by the express provisions of this Indenture, and the Trustee shall
    not be liable except for the performance of such duties and obligations as
    are specifically set forth in this Indenture, and no implied covenants or
    obligations shall be read into this Indenture against the Trustee; and

         (ii) in the absence of bad faith on the part of the Trustee, the
    Trustee may conclusively rely, as to the truth of the statements and the
    correctness of the opinions expressed therein, upon any statements,
    certificates or opinions furnished to the Trustee and conforming to the
    requirements of this Indenture; but in the case of any such statements,
    certificates or opinions which by any provision hereof are specifically
    required to be furnished to the Trustee, the Trustee shall be under a duty
    to

                                       44



    examine the same to determine whether or not they conform to the
    requirements of this Indenture;

         (b) the Trustee shall not be liable for any error of judgment made in
    good faith by a Responsible Officer or Responsible Officers of the Trustee,
    unless it shall be proved that the Trustee was negligent in ascertaining
    the pertinent facts; and

         (c) the Trustee shall not be liable with respect to any action taken
    or omitted to be taken by it in good faith in accordance with the direction
    of the Holders of not less than a majority in principal amount of the
    Securities at the time Outstanding relating to the time, method and place
    of conducting any proceeding for any remedy available to the Trustee, or
    exercising any trust or power conferred upon the Trustee, under this
    Indenture.

         None of the provisions contained in this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur personal financial
liability in the performance of any of its duties or in the exercise of any of
its rights or powers, if there shall be reasonable ground for believing that
the repayment of such funds or adequate indemnity against such liability is not
reasonably assured to it.

         SECTION 5.2 Certain Rights of the Trustee. Subject to Section 5.1
hereof:

         (a) the Trustee may rely and shall be protected in acting or
    refraining from acting upon any resolution, Officers' Certificate or any
    other certificate (including, without limitation, any certificate provided
    to the Trustee pursuant to Section 3.5 hereof), statement, instrument,
    opinion, report, notice, request, consent, order, bond, debenture, note,
    coupon, security or other paper document believed by it to be genuine and
    to have been signed or presented by the proper party or parties;

         (b) any request, direction, order or demand of the Issuer mentioned
    herein shall be sufficiently evidenced by an Officers' Certificate (unless
    other evidence in respect thereof be herein specifically

                                       45



    prescribed) and any resolution of the Board of Directors may be evidenced
    to the Trustee by a copy thereof certified by the Secretary or an Assistant
    Secretary of the Issuer;

         (c) the Trustee may consult with counsel and any advice or Opinion of
    Counsel shall be full and complete authorization and protection in respect
    of any action taken, suffered or omitted to be taken by it hereunder in
    good faith and in accordance with such advice or Opinion of Counsel;

         (d) the Trustee shall be under no obligation to exercise any of the
    trusts or powers vested in it by this Indenture at the request, order or
    direction of any of the Securityholders pursuant to the provisions of this
    Indenture, unless such Securityholders shall have offered to the Trustee
    reasonable security or indemnity against the costs, expenses and
    liabilities that might be incurred therein or thereby;

         (e) the Trustee shall not be liable for any action taken or omitted by
    it in good faith and believed by it to be authorized or within the
    discretion, rights or powers conferred upon it by this Indenture;

         (f) the Trustee shall not be bound to make any investigation into the
    facts or matters stated in any resolution, certificate, statement,
    instrument, opinion, report, notice, request, consent, order, approval,
    appraisal, bond, debenture, note, coupon, security, or other paper or
    document unless requested in writing so to do by the Holders of not less
    than a majority in aggregate principal amount of the Securities then
    Outstanding; provided that, if the payment within a reasonable time to the
    Trustee of the costs, expenses or liabilities likely to be incurred by it
    in the making of such investigation is, in the opinion of the Trustee, not
    reasonably assured by the security afforded to it by the terms of this
    Indenture, the Trustee may require reasonable indemnity against such
    expenses or liabilities as a condition to proceeding; the reasonable
    expenses of every such examination shall be paid by the Issuer, or by the
    Trustee or any predecessor Trustee and repaid by the Issuer upon demand;
    and

                                       46



         (g) the Trustee shall not be bound to make any investigation into the
    facts or matters stated in any resolution, certificate, statement,
    instrument, opinion, report, notice, request, direction, consent, order,
    bond, debenture, note, other evidence of indebtedness or other paper or
    document, but the Trustee, in its discretion, may make such further inquiry
    or investigation into such facts or matters as it may see fit, and, if the
    Trustee shall determine to make such further inquiry or investigation, it
    shall be entitled to examine the books, records and premises of the Issuer,
    personally or by agent or attorney.

         SECTION 5.3 Trustee Not Responsible for Recitals, Disposition of
Securities or Application of Proceeds Thereof. The recitals contained herein
and in the Securities, except the Trustee's certificates of authentication,
shall be taken as the statements of the Issuer, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representation as to the validity or sufficiency of this Indenture or of the
Securities. The Trustee shall not be accountable for the use or application by
the Issuer or any of the Securities or of the proceeds thereof.

         SECTION 5.4 Trustee and Agents May Hold Securities; Collections, etc.
The Trustee or any agent of the Issuer or the Trustee, in its individual or any
other capacity, may become the owner or pledgee of Securities with the same
rights it would have if it were not the Trustee or such agent and may otherwise
deal with the Issuer and receive, collect, hold and retain collections from the
Issuer with the same rights it would have if it were not the Trustee or such
agent.

         SECTION 5.5 Moneys Held by Trustee. Subject to the provisions of
Section 9.4 hereof, all moneys received by the Trustee shall, until used or
applied as herein provided, be held in trust for the purposes for which they
were received, but need not be segregated from other funds except to the extent
required by mandatory provisions of law. Neither the Trustee nor any agent of
the Issuer or the Trustee shall be under any liability for interest on any
moneys received by it hereunder, except as the Issuer and the Trustee otherwise
may agree.

                                       47



         SECTION 5.6 Compensation and Indemnification of Trustee and Its Prior
Claim. The Issuer covenants and agrees to pay to the Trustee from time to time
as shall be agreed upon between the Issuer and the Trustee in writing from time
to time, and the Trustee shall be entitled to reasonable compensation (which
shall not be limited by any provision of law relating to the compensation of a
trustee of an express trust), and the Issuer covenants and agrees to pay or
reimburse the Trustee and each predecessor Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by or on
behalf of it in accordance with any of the provisions of this Indenture
(including the reasonable compensation and expenses and disbursements of its
counsel and of all agents and other persons not regularly in its employ),
except to the extent any such expense, disbursement or advance may arise from
the Trustee's negligence or bad faith. The Issuer also covenants to indemnify
the Trustee and each predecessor Trustee for, and to hold it harmless against,
any and all loss, liability, damage, claims or expense arising out of or in
connection with the acceptance or administration of this Indenture or the
trusts hereunder and its duties hereunder and the performance of its duties
hereunder, including the costs and expenses of defending and investigating any
claim of liability in the premises, except to the extent any such loss,
liability or expense is due to its own negligence or bad faith. The obligations
of the Issuer under this Section 5.6 to compensate and indemnify the Trustee
and each predecessor Trustee and to pay or reimburse the Trustee and each
predecessor Trustee for expenses, disbursements and advances shall constitute
additional indebtedness hereunder and shall survive the satisfaction and
discharge of this Indenture.

         SECTION 5.7 Right of Trustee to Rely on Officers' Certificate, etc.
Subject to Section 5.1 and Section 5.2 hereof, whenever in the administration
of the trusts of this Indenture the Trustee shall deem it necessary or
desirable that a matter be proved or established prior to taking or suffering
or omitting any action hereunder, such matter (unless other evidence in respect
thereof be herein specifically prescribed) may, in the absence of negligence or
bad faith on the part of the Trustee, be deemed to be conclusively proved and
established by an Officers' Certificate delivered to the Trustee.

                                       48



         SECTION 5.8 Persons Eligible for Appointment as Trustee. The Trustee
hereunder shall at all times be a corporation organized and doing business
under the laws of the United States or of a state thereof, having a combined
capital and surplus of at least $500,000,000, and which is authorized under
such laws to exercise corporate trust powers and subject to supervision or
examination by federal or state authority. If such corporation publishes
reports of condition at least annually, pursuant to law or to the requirements
of a federal, state or District of Columbia supervising or examining authority,
then for the purposes of this Section 5.8, the combined capital and surplus of
such corporation shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. No obligor on the
Securities or Person directly or indirectly controlling, controlled by or under
common control with such obligor shall serve as Trustee.

         SECTION 5.9 Resignation and Removal; Appointment of Successor Trustee.
(a) The Trustee may at any time resign by giving written notice of resignation
to the Issuer and by mailing notice thereof by first-class mail to Holders of
Securities at their last addresses as they shall appear on the Securities
Register. Upon receiving such notice of resignation, the Issuer shall promptly
appoint a successor trustee by written instrument in duplicate, executed by
authority of the Board of Directors, one copy of which instrument shall be
delivered to the resigning Trustee and one copy to the successor Trustee. If no
such successor trustee shall have been so appointed and have accepted
appointment within 30 days after the mailing of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee, or any Securityholder who has been a bona
fide Holder of a Security or Securities for at least six months may, on behalf
of himself and all others similarly situated, petition any such court for the
appointment of a successor trustee. Such court may thereupon, after such
notice, if any, as it may deemed proper and prescribe, appoint a successor
trustee.

         (b) In case at any time any of the following shall occur:

         (i) the Trustee shall fail to comply with the provisions of Section
    310(b) of the Trustee Indenture

                                       49



    Act, after written request thereafter by the Issuer or by any
    Securityholder who has been a bona fide Holder of a Security or Securities
    for at least six months;

         (ii) the Trustee shall cease to be eligible in accordance with the
    provisions of Section 5.8 hereof and shall fail to resign after written
    request therefor by the Issuer or by any such Securityholder; or

         (iii) the Trustee shall become incapable of acting, or shall be
    adjusted a bankrupt or insolvent, or a receiver or liquidator of the
    Trustee or of its property shall be appointed, or any public officer shall
    take charge or control of the Trustee or of its property or affairs for the
    purpose of rehabilitation, conservation or liquidation;

then, in any such case, the Issuer may remove the Trustee and appoint a
successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors of the Issuer, one copy of which instrument shall be
delivered to the Trustee so removed and one copy of which shall be delivered to
the successor trustee, or, any Securityholder who has been a bona fide Holder
of a Security or Securities for at least six months may on behalf of himself
and all others similarly situated, petition any court of competent jurisdiction
for the removal of the Trustee and the appointment of a successor trustee. Such
court may thereupon, after such notice, if any, as it may deem proper and
prescribe, remove the Trustee and appoint a successor trustee.

         (c) The Holders of a majority in aggregated principal amount of the
Securities at the time Outstanding may at any time remove the Trustee and
appoint a successor trustee by delivering to the Trustee so removed, to the
successor trustee so appointed and to the Issuer the evidence provided for in
Section 6.1 hereof of the action in that regard taken by the Securityholders.

         (d) Any resignation or removal of the Trustee and any appointment of a
successor trustee pursuant to any of the provisions of this Section 5.9 shall
become effective only upon acceptance of appointment by the successor trustee
as provided in Section 5.10 hereof.

                                       50



         SECTION 5.10 Acceptance of Appointment by Successor Trustee. Any
successor trustee appointed as provided in Section 5.9 hereof shall execute and
deliver to the Issuer and to its predecessor Trustee an instrument accepting
such appointment hereunder, and thereupon the resignation or removal of the
predecessor Trustee shall become effective and such successor trustee, without
any further act, deed or conveyance, shall become vested with all rights,
powers, duties and obligations of its predecessor hereunder, with like effect
as if originally named as trustee herein; but, nevertheless, on the written
request of the Issuer or of the successor trustee, upon payment of its charges
then unpaid, the Trustee ceasing to act shall, subject to Section 9.4 hereof,
pay over the successor trustee all moneys at the time held by it hereunder and
shall execute and deliver an instrument transferring to such successor trustee
all such rights, powers, duties and obligations. Upon request of any such
successor trustee, the Issuer shall execute appropriate instruments in writing
for more fully and certainly vesting in and confirming to such successor such
rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a
prior claim upon all property or funds held or collected by such Trustee to
secure any amounts then due it pursuant to the provisions of Section 5.6
hereof.

         Upon acceptance of appointment by a successor trustee as provided in
this Section 5.10, the Issuer shall mail notice thereof by first-class mail to
the Holders of Securities at their last addresses as they shall appear in the
Securities Register. If the acceptance of appointment is substantially
contemporaneous with the resignation then the notice called for by the
preceding sentence may be combined with the notice called for by Section 5.9
hereof. If the Issuer fails to mail such notice within 10 days after acceptance
of appointment by the successor trustee, the successor trustee shall cause such
notice to be mailed at the expense of the Issuer.

         Notwithstanding replacement of the Trustee pursuant to this Section
5.10, the Issuer's obligations under Section 5.6 hereof shall continue for the
benefit of the retiring Trustee.

         SECTION 5.11 Merger, Conversion, Consolidation or Succession to
Business of Trustee. Any corporation into which the Trustee may be merged or
converted or with which

                                       51



it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to the corporate trust business of the Trustee, shall be
the successor of the Trustee hereunder, provided that such corporation shall be
eligible under the provisions of Section 5.8 hereof, without the execution or
filing of any paper or any further act on the part of any of the parties
hereto, anything herein to the contrary notwithstanding.

         In case at the time such successor to the Trustee shall succeed to the
trusts created by this Indenture, any of the Securities shall have been
authenticated but not delivered, any such successor to the Trustee may adopt
the certificate of authentication of any predecessor Trustee and deliver such
Securities so authenticated and, in case at that time any of the Securities
shall not have been authenticated, any successor to the Trustee may
authenticate such Securities either in the name of any predecessor hereunder or
in the name of the successor trustee, and in such cases such certificate shall
have the full force which it is anywhere in the Securities or in this Indenture
provided that the certificate of the Trustee shall have; provided, that the
fight to adopt the certificate of authentication of any predecessor Trustee or
to authenticate Securities in the name of any predecessor Trustee shall apply
only to its successor or successors by merger, conversion or consolidation.


                                   ARTICLE VI

                         CONCERNING THE SECURITYHOLDERS
                         ------------------------------

         SECTION 6.1 Evidence of Action Taken by Securityholders. Any request,
demand, authorization, direction, notice, consent, waiver or other action
provided by this Indenture to be given or taken by Securityholders may be
embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Securityholders, in person or by agent duly appointed in
writing; and, except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments are delivered to the
Trustee. Proof of execution of any instrument or of a writing appointing any
such agent shall be sufficient for any purpose of this Indenture and (subject
to Section 5.1 and Section 5.2

                                       52



hereof) conclusive in favor of the Trustee and the Issuer, if made in the
manner provided in this Article.

         SECTION 6.2 Proof of Execution of Instruments and of Holding of
Securities Record Date. Subject to Section 5.1 and Section 5.2 hereof, the
execution of any instrument by a Securityholder or his agent or proxy may be
provided in accordance with such reasonable rules and regulations as may be
prescribed by the Trustee or in such manner as shall be satisfactory to the
Trustee. The holding of Securities shall be provided by the Securities Register
or by a certificate of the Security Registrar thereof. The Issuer may set a
record date for purposes of determining the identity of Holders of Securities
entitled to vote or consent to any action referred to in Section 6.1 hereof,
which record date may be set at any time or from time to time by notice to the
Trustee for any date or dates (in the case of any adjournment or
resolicitation) not more than 60 days nor less than five days prior to the
proposed date of such vote or consent, and thereafter, notwithstanding any
other provisions hereof, only Holders of Securities of record on such record
date shall be entitled to so vote or give such consent or to withdraw such vote
or consent.

         SECTION 6.3 Holders to Be Treated as Owners. The Issuer, the Trustee
and any agent of the Issuer or the Trustee may deem and treat the Person in
whose name any Security shall be registered upon the Securities Register as the
absolute owner of such Security (whether or not such Security shall be overdue
and notwithstanding any notation of ownership or other writing thereon) for the
purpose of receiving payment of or on account of the principal and Change of
Control purchase price of, and premium, if any, on and, subject to the
provisions of this Indenture, interest on such Security and for all other
purposes; and neither the Issuer nor the Trustee nor any agent of the Issuer or
the Trustee shall be affected by any notice to the contrary. All such payments
so made to any such Person, or upon his order, shall be valid and to the extent
of the sum or sums so paid, effectual to satisfy and discharge the liability
for moneys payable upon any such Security.

         SECTION 6.4 Securities Owned by Issuer Deemed Not Outstanding. In
determining whether the Holders of the requisite aggregate principal amount of
Securities have concurred in any direction, consent or waiver under this

                                       53



Indenture, Securities that are owned by the Issuer or any other obligor on the
Securities or by any Person directly or indirectly controlling or controlled by
or under direct or indirect common control with the obligor on the Securities
shall be disregarded and deemed not to be Outstanding for the purpose of any
such determination, except that for the purpose of determining whether the
Trustee shall be protected in relying on any such direction, consent or waiver
only Securities that the Trustee knows are so owned shall be so disregarded.
Securities so owned that have been pledged in good faith may be regarded as
Outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgee's right so to act with respect to such Securities and that the pledgee
is not the Issuer or any other obligor upon the Securities or any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Issuer or any other obligor on the Securities. In case
of a dispute as to such right, the advice of counsel shall be full protection
in respect of any decision made by the Trustee in accordance with such advice.
Upon request of the Trustee, the Issuer shall furnish to the Trustee promptly
an Officers' Certificate listing and identifying all Securities, if any, known
by the Issuer to be owned or held by or for the account of any of the
above-described Persons; and, subject to Section 5.1 and Section 5.2 hereof,
the Trustee shall be entitled to accept such Officers' Certificate as
conclusive evidence of the facts therein set forth and of the facts therein set
forth and of the fact that all Securities not listed therein are Outstanding
for the purpose of any such determination.

         SECTION 6.5 Right of Revocation of Action Taken. At any time prior to
(but not after) the evidencing to the Trustee, as provided in Section 6.1
hereof, of the taking of any action by the Holders of the percentage in
aggregate principal amount of the Securities specified in this Indenture in
connection with such action, any Holder of a Security the serial number of
which is shown by the evidence to be included among the serial numbers of the
Securities, the Holders of which have consented to such action may, by filing
written notice at the Corporate Trust Office and upon proof of holding as
provided in this Article, revoke such action so far as concerns such Security.
Except as aforesaid any such action taken by the Holder of any Security shall
be conclusive and binding upon such Holder and upon all future Holders and
owners of such

                                       54



Security and of any Securities issued in exchange or substitution therefor,
irrespective of whether or not any notation in regard thereto is made upon any
such Security. Any action taken by the Holders of the percentage in aggregate
principal amount of the Securities specified in this Indenture in connection
with such action shall be conclusively binding upon the Issuer, the Trustee and
the Holders of all such Securities.


                                  ARTICLE VII

                            SUPPLEMENTAL INDENTURES
                            -----------------------

         SECTION 7.1 Supplemental Indentures Without Consent of
Securityholders. The Issuer, when authorized by a resolution of its Board of
Directors, and the Trustee may from time to time and at any time enter into an
indenture or indentures supplemental hereto for one or more of the following
purposes:

         (a) to convey, transfer, assign, mortgage or pledge to the Trustee as
    security for the Securities any property or assets;

         (b) to evidence the succession of another corporation to the Issuer,
    or successive successions, and the assumption by the successor corporation
    of the covenants, agreements and obligations of the Issuer pursuant to
    Article Eight hereof;

         (c) to add to the covenants of the Issuer such further covenants,
    restrictions, conditions or provisions as the Board of Directors shall
    consider to be for the protection of the Holders of Securities, and to make
    the occurrence, or the occurrence and continuance of a default in any such
    additional covenants, restrictions, conditions or provisions an Event of
    Default permitting the enforcement of all or any of the several remedies
    provided in this Indenture as herein set forth; provided, that in respect
    of any such additional covenant, restriction, condition or provision such
    supplemental indenture may provide for a particular period of grace after
    default (which period may be shorter or longer than that allowed in the
    case of other defaults) or may provide for immediate enforcement upon such
    an Event of Default or

                                       55



    may limit the remedies available to the Trustee upon such an Event of
    Default or may limit the right of the Holders of a majority in aggregate
    principal amount of the Securities to waive such an Event of Default;

         (d) to cure any ambiguity or to cure, correct or supplement any
    defective provision contained herein or in the Securities, or to make such
    other provisions in regard to matters or questions arising under this
    Indenture or under any supplemental indenture as the Board of Directors may
    deem necessary or desirable, and in any case which the Trustee and the
    Issuer shall determine (i) are not inconsistent with this Indenture and the
    Securities and (ii) shall not adversely affect the interests of the Holders
    of the Securities; and

         (e) to modify or supplement this Indenture or any indenture
    supplemental hereto in such manner as to permit the qualification thereof
    under the Trust Indenture Act of any other similar federal statute
    hereafter in effect.

         The Trustee is hereby authorized to join in the execution of any such
supplemental Indenture, to make any further appropriate agreements and
stipulations that may be therein continued and to accept the conveyance,
transfer, assignment, mortgage or pledge of any property thereunder, but the
Trustee shall not be obligated to enter into any such supplemental indenture
that affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise.

         Any supplemental indenture authorized by the provisions of this
Section 7.1 may be executed without the consent of the Holders of any of the
Securities at the time Outstanding, notwithstanding any of the provisions of
Section 7.2 hereof.

         SECTION 7.2 Supplemental Indentures With Consent of Securityholders.
With the consent (evidenced as provided in Article Six hereof) of the Holders
of not less than a majority in aggregate principal amount of the Securities at
the time Outstanding, the Issuer, when authorized by a resolution of its Board
of Directors, and the Trustee may, from time to time and at any time, modify
this Indenture or any indentures supplemental hereto or the rights of the
Holders of the Securities; provided, that no

                                       56



such supplemental indenture shall (a) change the Stated Maturity of the
principal of, or any installment of principal of or interest on, any Security,
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 upon a Change of Control or impair or affect the right of any
Securityholder to institute suit for the payment thereof or make any change to
Section 3.9 hereof that adversely affects the rights of the Holders of the
Securities, in each case without the consent of the Holder of each Security so
affected, or (b) without the consent of the Holders of all Securities then
Outstanding, (i) reduce the aforesaid percentage of Securities, the consent of
the Holders of which is required for any such modification, or the percentage
of Securities, the consent of the Holders of which is required for any waiver
provided for in this Indenture, (ii) change any obligation of the Issuer to
maintain an office or agency in the places and for the purposes specified in
Section 3.2 or (iii) make any change in Section 4.9 or this Section 7.2, except
to increase any percentages or to provide that certain other provisions of this
Indenture cannot be modified or waived without the consent of the Holders of
each Outstanding Security affected thereby.

         Upon the request of the Issuer, accompanied by a copy of a resolution
of the Board of Directors certified by the Secretary or an Assistant Secretary
of the Issuer authorizing the execution of any such supplemental indenture, and
upon the filing with the Trustee of evidence of the consent of Securityholders
and other documents, if any, required by Section 6.1 hereof the Trustee shall
join with the Issuer in the execution of such supplemental indenture unless
such supplemental indenture affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise, in which case the Trustee may in
its discretion, but shall not be obligated to enter into such supplemental
indenture.

         It shall not be necessary for the consent of the Securityholders under
this Section 7.2 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such consent shall approve the
substance thereof.

         Promptly after the execution by the Issuer and the Trustee of any
supplemental indenture pursuant to the

                                       57



provisions of this Section 7.2, the Issuer shall mail a notice thereof by
first-class mail to the Holders of Securities at their addresses as they shall
appear on the Securities Register, setting forth in general terms the substance
of such supplemental indenture. Any failure of the Issuer to mail such notice,
or any defect therein, shall not, however, in any way impair or affect the
validity of any such supplemental indenture.

         SECTION 7.3 Effect of Supplemental Indenture. Upon the execution of
any supplemental indenture pursuant to the provisions hereof, this Indenture
shall be and be deemed to be modified and amended in accordance therewith and
the respective rights, limitations of rights, obligations, duties and
immunities under this Indenture of the Trustee, the Issuer and the Holders of
Securities shall thereafter be determined, exercised and enforced hereunder
subject in all respects to such modifications and amendments, and all the terms
and conditions of any such supplemental indenture shall be and be deemed to be
part of the terms and conditions of this Indenture for any and all) purposes.

         SECTION 7.4 Documents to Be Given to Trustee. The Trustee, subject to
the provisions of Section 5.1 and Section 5.2 hereof, may receive an Officers'
Certificate and an Opinion of Counsel as conclusive evidence that any such
supplemental indenture complies with the applicable provisions of this
Indenture.

         SECTION 7.5 Notation of Securities in Respect of Supplemental
Indentures. Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to the provisions of this Article Seven may
bear a notation in form approved by the Trustee as to any matters provided for
by such supplemental indenture or as to any action taken at any such meeting by
the Issuer or the Trustee shall so determine, new Securities so modified as to
conform, in the opinion of the Trustee and the Board of Directors, to any
modification of this Indenture contained in any such supplemental indenture may
be prepared by the Issuer, authenticated by the Trustee and delivered in
exchange for the Securities then Outstanding.

                                       58



                                 ARTICLE VIII

                   CONSOLIDATION, MERGER, SALE OR CONVEYANCE
                   -----------------------------------------

         SECTION 8.1 Covenant Not to Merge, Consolidate, Sell or Transfer
Assets Except Under Certain Conditions. (a) The Issuer shall not consolidate
with or merge into any other Person, or sell, convey, transfer or lease its
properties and assets substantially as an entirety to any Person, and Issuer
shall not permit any Person to consolidate with or merge into the Issuer,
unless: (i) immediately prior to and immediately following such consolidation,
merger, sale or lease, no Event of Default shall have occurred and be
continuing and (ii) the Issuer is the surviving or continuing corporation, or
the surviving or continuing corporation or corporation that acquires by sale,
conveyance, transfer or lease is incorporated in the United States of America
or Canada and expressly assumes the payment and performance of all obligations
of the Issuer under the Indenture and the Securities.

         (b) Except for the sale of the properties and assets of the Issuer
substantially as an entirety pursuant to subsection (a) above, and other than
assets required to be sold to conform with governmental regulations, the Issuer
shall 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 percent of Consolidated Net Tangible Assets
computed as of the end of the most recent fiscal quarter preceding such sale;
provided, however, that any such sales shall be disregarded for purposes of
this 10 percent limitation if the proceeds are invested in assets in similar or
related lines of business of the Issuer and, provided further, that the Issuer
may sell or otherwise dispose of assets in excess of such 10 percent if the
proceeds from such sales or dispositions, which are not reinvested as provided
above, are retained by the Issuer as cash or cash equivalents or are used by
the Issuer to purchase Securities or 1996 Senior Notes which are then delivered
to the Trustee for cancelation.

         SECTION 8.2 Successor Corporation Substituted. In case of any such
consolidation, merger, sale or trans-

                                       59



fer, and following such an assumption by the successor corporation, such
successor corporation shall succeed to and be substituted for the Issuer, with
the same effect as if it had been named herein.

         Such successor corporation may cause to be signed, and may issue
either in its own name or in the name of the Issuer prior to such succession
any or all of the Securities issuable hereunder that theretofore shall not have
been signed by the Issuer and delivered to the Trustee; and, upon the order of
such successor corporation, instead of the Issuer, and subject to all the
terms, conditions and limitations in this Indenture prescribed, the Trustee
shall authenticate and shall deliver any Securities that previously shall have
been signed and delivered by the officers of the Issuer to the Trustee for
authentication and any Securities that such successor corporation thereafter
shall cause to be signed and delivered to the Trustee for that purpose. All of
the Securities so issued shall in all respects have the same legal rank and
benefit under this Indenture as the Securities theretofore or thereafter issued
in accordance with the terms of this Indenture as though all of such Securities
had been issued at the date of the execution hereof.

         In case of any such consolidation, merger, sale or transfer such
changes in phraseology and form (but not in substance) may be made in the
Securities thereafter to be issued as may be appropriate.

         In the event of any such sale or transfer (other than a transfer by
way of lease) the Issuer or any successor corporation which shall theretofore
have become such in the manner described in this Article 8 shall be discharged
from all obligations and covenants under this Indenture and the Securities and
may be liquidated and dissolved.

         SECTION 8.3 Opinion of Counsel to Trustee; Officers' Certificate. The
Trustee, subject to the provisions of Section 5.1 and Section 5.2 hereof, shall
receive an Officers' Certificate and an Opinion of Counsel as conclusive
evidence that any such consolidation, merger, sale or transfer, and any such
assumption, and any such liquidation or dissolution, complies with the
applicable provisions of this Indenture.

                                       60



                                   ARTICLE IX

                           SATISFACTION AND DISCHARGE
                         OF INDENTURE; UNCLAIMED MONEYS
                         ------------------------------

         SECTION 9.1 Satisfaction and Discharge of Indenture. If at any time
(a) the Issuer shall have paid or caused to be paid the principal and Change of
Control purchase price of and premium, if any, and interest on all the
Securities Outstanding hereunder, as and when the same shall have become due
and payable, or (b) the Issuer shall have delivered to the Trustee for
cancelation all Securities theretofore authenticated (other than any Securities
which shall have been destroyed, lost or stolen and which shall have been
replaced or paid as provided in Section 2.7 hereof) or (c)(i) all such
Securities not theretofore delivered to the Trustee for cancelation shall have
become due and payable, or are by their terms to become due and payable within
one year or are to be called for redemption under arrangements satisfactory to
the Trustee for the giving of notice of redemption, and (ii) the Issuer shall
have irrevocably deposited or caused to be deposited with the Trustee as trust
funds the entire amount in cash (other than moneys repaid by the Trustee or any
paying agent to the Issuer in accordance with Section 9.4 hereof) or U.S.
Government Obligations, maturing as to principal, premium, if any, and interest
in such amounts and at such times as will insure (without reinvestment) the
liability of cash sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay at maturity all such Securities not
theretofore delivered to the Trustee for cancelation, including principal,
premium, if any, and interest due or to become due to such date of maturity as
the case may be, and if, in any such case, the Issuer shall also pay or cause
to be paid all other sums payable hereunder by the Issuer, then this Indenture
shall cease to be of further effect (except as to (i) rights of registration of
transfer and exchange, and the Issuer's right to optional redemption, (ii)
substitution of apparently mutilated, defaced, destroyed, lost or stolen
Securities, (iii) rights of Holders to receive payments of principal thereof
(including any Change of Control purchase price previously accrued) and
premium, if any, and interest thereon, upon the original stated due dates
therefor (but not upon acceleration), (iv) the rights and obligations and
immunities of the Trustee hereunder and (v) the rights of

                                       61



the Securityholders as beneficiaries hereof with respect to the property so
deposited with the Trustee payable to all or any of them), and the Trustee, on
demand of the Issuer accompanied by an Officers' Certificate and an Opinion of
Counsel and at the cost and expense of the Issuer, shall execute proper
instruments acknowledging such satisfaction of and discharging this Indenture;
provided that the rights of Holders of the Securities to receive amounts in
respect of principal of and premium, if any, and interest or the Securities
held by them shall not be delayed longer than required by then applicable
mandatory rules or policies of any securities exchange upon which the
Securities are listed.

         The Issuer agrees to reimburse the Trustee for any costs or expenses
thereafter reasonably and properly incurred and to compensate the Trustee for
any services thereafter reasonably and properly rendered by the Trustee in
connection with this Indenture or the Securities.

         SECTION 9.2 Application by Trustee of Funds Deposited for Payment of
Securities. Subject to Section 9.4 hereof, all moneys deposited with the
Trustee pursuant to Section 9.1 hereof shall be held in trust and applied, by
it to the payment, either directly or through any paying agent (including the
Issuer acting as its own paying agent), to the Holders of the particular
Securities for the payment or redemption of which such moneys have been
deposited with the Trustee, of all sums due and to become due thereon for
principal and Change of Control purchase price, premium, if any, and interest;
but such money need not be segregated from other funds except to the extent
required by law.

         SECTION 9.3 Repayment of Moneys Held by Paying Agent. In connection
with the satisfaction and discharge of this Indenture all moneys then held by
any paying agent under the provisions of this Indenture shall, upon demand of
the Issuer, be repaid to it or paid to the Trustee and thereupon such paying
agent shall be released from all further liability with respect to such moneys.

         SECTION 9.4 Return of Moneys Held by Trustee and Paying Agent
Unclaimed for Two Years. Any moneys deposited with or paid to the Trustee or
any paying agent for the payment of the principal or Change of Control purchase
price of or premium or interest on any Security

                                       62



and not applied but remaining unclaimed for two years after the date upon which
such principal, Change of Control purchase price, premium or interest shall
have become due and payable shall, upon the written request of the Issuer, be
repaid to the Issuer by the Trustee or such paying agent, and the Holder of
such Security shall, unless otherwise required by mandatory provisions of
applicable escheat or abandoned or unclaimed property laws, thereafter look
only to the issuer for any payment which such Holder may be entitled to
collect, and all liability of the Trustee or any paying agent with respect to
such moneys shall thereupon cease.

         SECTION 9.5 Defeasance and Discharge of Indenture. The Issuer will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Securities, or the 23rd day after the deposit referred to in
subparagraph (A) hereof has been made, and the provisions of this Indenture
will no longer be in effect with respect to the Securities (and the Trustee, at
the expense of the Issuer, shall execute proper instruments acknowledging the
same), except as to:

         (a) rights of registration of transfer and exchange, and the Issuer's
    right of optional redemption, (b) substitution of apparently mutilated,
    defaced, destroyed, lost or stolen securities, (c) rights of Holders to
    receive payments of principal (including rights to receive any Change of
    Control purchase price previously accrued) thereof and premium, if any, and
    interest thereon, (d) the rights, obligations and immunities of the Trust
    hereunder, (e) the rights of the Securityholders as beneficiaries hereof
    with respect to the property so deposited with the Trustee payable to all
    or any of them and (f) the obligations of the Issuer to maintain a place of
    payment for the Securities under Section 3.1 hereof;

    provided that the following conditions shall have been satisfied:

              (A) with reference to this Section 9.5 the Issuer has irrevocably
         deposited or caused to be irrevocably deposited with the Trustee (or
         another trustee satisfying the requirements of Section 5.8 hereof) as
         trust funds in trust, specifically pledged as security for, and dedi-

                                       63



         cated solely to, the benefit of the Holders of the Securities, (i)
         money in an amount, or (ii) U.S. Government Obligations which through
         the payment of interest and principal in respect thereof in accordance
         with their terms (without reinvestment) will provide not later than
         one day before the due date of any payment referred to in clause (x)
         or (y) of this subparagraph (A) money in an amount, or (iii) a
         combination thereof, sufficient, in the opinion of a nationally
         recognized firm of independent public accountants expressed in a
         written certification thereof delivered to the Trustee, to pay and
         discharge, after payment of all federal, state and local taxes or
         other charges and assessments in respect thereof payable by the
         Trustee, (x) the principal and Change of Control purchase price of,
         premium, if any, and each installment of principal and interest on the
         Outstanding Securities at the maturity date of such principal or
         installment of principal or interest and (y) any mandatory sinking
         fund payments or analogous payments applicable to the Securities on
         the day on which such payments are due and payable in accordance with
         the terms of this Indenture and the Securities;

              (B) the Issuer 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 the Issuer's
         exercise of its option under this Section 9.5 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
         on (x) a change in applicable federal income tax law or related
         Treasury Regulations after the date of this Indenture or (y) a ruling
         received by the Issuer from the Internal Revenue Service to the same
         effect and (ii) an Opinion of Counsel to the effect that the
         defeasance trust does not constitute an "investment company" under the
         Investment Company Act of 1940, as amended, and after the passage of
         123 days following the deposit, the

                                       64



         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 on a pro
         forma basis, 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 the Issuer is a party or by which the Issuer is bound; and

              (D) if at such time the Securities are listed on a national
         securities exchange, the Issuer has delivered to the Trustee an
         Opinion of Counsel to the effect that the Securities will not be
         delisted as a result of such deposit, defeasance and discharge.

         SECTION 9.6 Defeasance of Certain Obligations. The Issuer may omit to
comply with any term, provision, or condition set forth in this Indenture in
Sections 3.8 and Section 3.9, and Section 4.l(d) (with respect to Sections 3.8
and 3.9) and Sections 4.1(c) and (e) shall be deemed not to be Events of
Default on the 123rd day after the deposit referred to in subparagraph (A)
hereof if:

         (A) with reference to this Section 9.6, the Issuer has irrevocably
    deposited or caused to be irrevocably deposited with the Trustee (or
    another trustee satisfying the requirements of Section 5.6 hereof) as trust
    funds in trust, specifically pledged as security for, and dedicated solely
    to, the benefit of the Holders of the Securities, (i) money in an amount,
    or (ii) U.S. Government Obligations which bought the payment of interest
    and principal in respect thereof in accordance with their terms (without
    reinvestment) will provide not later than one day before the due date of
    any payment referred to in clauses (x) or (y) of this Section 9.6, money in
    an amount, or (iii) a combination thereof, sufficient, in

                                       65



    the opinion of a nationally recognized firm of independent public
    accountants expressed in a certification thereof delivered to the Trustee,
    to pay and discharge, after payment of all federal, state and local taxes
    or other charges and assessments in respect thereof payable by the Trustee,
    (x) the principal and Change of Control purchase price of, premium, if any,
    and each installment of principal and interest on the Outstanding
    Securities at the maturity date of such principal or installment of
    principal or interest and (y) any mandatory sinking fund payments or
    analogous payments applicable to the Securities on the day on which such
    payments are due and payable in accordance with the terms of this Indenture
    and the Securities;

         (B) the Issuer 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 the Issuer's exercise of its
    option under this Section 9.6 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,
    and (ii) an Opinion of Counsel to the effect that the defeasance trust does
    not constitute an "investment company" under 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 on a pro forma
    basis, 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 the Issuer is a party or by which the
    Issuer is bound; and

         (D) if at such time the Securities are listed on a national securities
    exchange, the Issuer has

                                       66



    delivered to the Trustee an Opinion of Counsel to the effect that the
    Securities will not be delisted as a result of such deposit, defeasance and
    discharge.


                                   ARTICLE X

                            MISCELLANEOUS PROVISIONS
                            ------------------------

         SECTION 10.1 Incorporators, Shareholders, Officers and Directors of
Issuer Exempt from Individual Liability. No recourse under or upon any
obligation, covenant or agreement contained in this Indenture, or in any
Security, or because of any indebtedness evidenced thereby, shall be had
against any incorporator, as such, or against any past, present or future
shareholder, officer or director, as such, of the Issuer or of any successor,
either directly or through the Issuer or any successor, under any rule of law,
statute or constitutional provision or by the enforcement of any assessment or
by any legal or equitable proceeding or otherwise, all such liability being
expressly waived and released by the acceptance of the Securities by the
Holders thereof and as part of the consideration for the issue of the
Securities.

         SECTION 10.2 Provisions of the Indenture for the Sole Benefit of
Parties and Securityholders. Nothing in this Indenture or in the Securities,
expressed or implied, shall give or be construed to give to any Person, other
than the parties hereto and their successors and the Holders (and, where
expressly set forth herein, owners of interests in any Global Security), any
legal or equitable right, remedy or claim under this Indenture or under any
covenant or provision herein contained, all such covenants and provisions being
for the sole benefit of the parties hereto and their successors and the Holders
(and, where expressly set forth herein, owners of interests in any Global
Security).

         SECTION 10.3 Successors and Assigns of Issuer Bound by Indenture. All
the covenants, stipulations, promises and agreements in this Indenture
contained by or in behalf of the Issuer shall bind its successors and assigns,
whether so expressed or not.

         SECTION 10.4 Notices and Demands on Issuer, Trustee and
Securityholders. Any notice or demand which by

                                       67



any provision of this Indenture is required or permitted to be given or served
by the Trustee or by the Holders to or on the Issuer may be given or served by
being deposited postage prepaid, first-class mail (except as otherwise
specifically provided herein) addressed (until another address of the Issuer is
filed by the Issuer with the Trustee) to NRG Energy, Inc., 1221 Nicollet Mall,
Suite 700, Minneapolis, Minnesota 55403, Attention: Chief Financial Officer.
Any notice, direction, request or demand by the Issuer or any Securityholder to
or upon the Trustee shall be deemed to have been sufficiently given or made,
for all purposes, if given or made at the Corporate Trust Office or such office
or agency designated for such purpose in Section 3.2 hereof.

         Where this Indenture provides for notice to Holders, such notice shall
be sufficiently given (unless otherwise herein expressly provided) if in
writing and mailed, first-class postage prepaid, to each Holder entitled
thereto, at his last address as it appears in the Securities Register. In any
case where notice to Holders is given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular Holder shall
affect the sufficiency of such notice with respect to other Holders. Where this
Indenture provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance upon such
waiver.

         In case, by reason of the suspension of or irregularities in regular
mail service, it shall be impracticable to mail notice to the Issuer and
Securityholders when such notice is required to be given pursuant to any
provision of this Indenture, then any manner of giving such notice as shall be
satisfactory to the Trustee shall be deemed to be a sufficient giving of such
notice.

         SECTION 10.5 Officers' Certificates and Opinions of Counsel,
Statements to Be Contained Therein. Upon any application or demand by the
Issuer to the Trustee to take any action under any of the provisions of this
Indenture, the Issuer shall furnish to the Trustee an

                                       68



Officers' Certificate stating that all conditions precedent provided for in
this Indenture relating to the proposed action have been complied with and an
Opinion of Counsel stating that in the opinion of such counsel all such
conditions precedent have been complied with, except that in the case of any
such application or demand as to which the furnishing of such documents is
specifically required by any provision of this Indenture relating to such
particular application or demand, no additional certificate or opinion need be
furnished.

         Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or
covenant provided for in this Indenture shall include (a) a statement that the
Person making such certificate or opinion has read such covenant or condition,
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based, (c) a statement that, in the opinion of such
Person, he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant or
condition has been complied with and (d) a statement as to whether or not, in
the opinion of such Person, such condition or covenant has been complied with.

         Any certificate, statement or opinion of an officer of the Issuer may
be based, insofar as it relates to legal matters, upon a certificate or opinion
of or representations by counsel, unless such officer knows that the
certificate or opinion or representations with respect to the matters upon
which his certificate, statement or opinion may be based as aforesaid are
erroneous, or in the exercise of reasonable care should know that the same are
erroneous. Any certificate, statement or Opinion of Counsel may be based,
insofar as it relates to factual matters (information with respect to which is
in the possession of the Issuer) upon the certificate, statement or opinion of
or representations by an officer or officers of the Issuer, unless such counsel
knows that the certificate, statement or opinion or representations with
respect to the matters upon which his certificate, statement or opinion may be
based as aforesaid are erroneous, or in the exercise of reasonable care should
know that the same are erroneous.

                                       69



         Any certificate, statement or opinion of an officer of the Issuer or
of counsel may be based, insofar as it relates to accounting matters, upon a
certificate or opinion of or representations by an accountant or firm of
accountants in the employ of the Issuer, unless such officer or counsel, as the
case may be, knows that the certificate or opinion or representations with
respect to the accounting matters upon which his certificate, statement or
opinion may be based as aforesaid are erroneous, or in the exercise of
reasonable care should know that the same are erroneous.

         Any certificate or opinion of any independent firm of public
accountants or Investment Banker filed with the Trustee shall contain a
statement that such firm is independent.

         SECTION 10.6 Payments Due on Saturdays, Sundays and Holidays. If the
date of maturity of interest on or principal, Change of Control purchase price,
or premium, if any, of the Securities or the date fixed for redemption of any
Security shall not be a Business Day, then payment of interest, principal,
Change of Control purchase price or premium need not be made on such date, but
may be made on the next succeeding Business Day with the same force and effect
as if made on the date of maturity or the date fixed for redemption, and no
interest shall accrue for the period after such date.

         SECTION 10.7 New York Law to Govern. THIS INDENTURE SHALL, PURSUANT TO
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW BE GOVERNED BY THE LAW
OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO THE CHOICE OF LAW PROVISIONS
THEREOF (OTHER THAN SUCH SECTION 5-1401).

         SECTION 10.8 Counterparts. This Indenture may be executed in any
number of counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same agreement.

         SECTION 10.9 Effect of Headings. The Article and Section Headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.

                                       70



                                   ARTICLE XI

                            REDEMPTION OF SECURITIES
                            ------------------------

         SECTION 11.1 Right of Optional Redemption Price. The Issuer at its
option may, at any time, redeem the Securities, in whole or in part, upon
payment of a redemption price equal to the principal amount of the Securities
to be redeemed plus accrued and unpaid interest thereon, if any, plus the
Applicable Premium.

         SECTION 11.2 Notice of Redemption. Notice of redemption to the Holders
of Securities to be redeemed shall be given by the Issuer by mailing notice of
such redemption by first class mail, postage prepaid, at least 30 days and not
more than 60 days prior to the date fixed for redemption to such Holders of
Securities at their last addresses as they shall appear in the Securities
Register. Failure to give notice by mail, or any defect in the notice to the
Holder of any Security designated for redemption as a whole or in part shall
not affect the validity of the proceedings for the redemption of any other
Security.

         The notice of redemption to each Holder shall specify that the
Securities are being redeemed pursuant to this Article 11, the date fixed for
redemption, the place or places of payment, the CUSIP and ISIN numbers (as
applicable), that payment will be made upon presentation and surrender of the
Securities, that interest accrued to the date fixed for redemption will be paid
as specified in this Article and that, on and after said date interest thereon
or on the portions thereof to be redeemed will cease to accrue.

         The notice of redemption of Securities to be redeemed at the option of
the Issuer shall be given by the Issuer or, at the Issuer's request, by the
Trustee in the name and at the expense of the Issuer.

         At least one Business Day prior to the redemption date specified in
the notice of redemption given as provided in this Section 11.2, the Issuer
shall deposit with the Trustee or with one or more paying agents (or, if the
Issuer is acting as its own paying agent, set aside, segregate and hold in
trust as provided in Section 3.4 hereof) an amount of money sufficient to
redeem on the

                                       71



redemption date all the Securities so called for redemption.

         SECTION 11.3 Payment of Securities Called for Redemption. If notice of
redemption has been given as above provided, the Securities shall become due
and payable on the date and at the place stated in such notice at the
redemption price, and on and after said date (unless the Issuer shall default
in the payment of such Securities at the redemption price) interest on the
Securities or portions of Securities so called for redemption shall cease to
accrue and, except as provided in Section 5.5 and Section 9.4 hereof, such
Securities shall cease from and after the date fixed for redemption to be
entitled to any benefit or security under this Indenture, and the Holders
thereof shall have no right in respect of such Securities except the right to
receive the redemption price thereof. On presentation and surrender of such
Securities at a place of payment specified in said notice, said Securities
shall be paid and redeemed by the Issuer at the redemption price; provided,
that any semiannual payment of interest becoming due on the date fixed for
redemption shall be payable to the Holders of such Securities registered as
such on the relevant record date subject to the terms and provisions of Section
2.4 hereof.

         If any Security called for redemption shall not be so paid, upon
surrender thereof for redemption, the principal shall, until paid or duly
provided for, bear interest from the date fixed for redemption at the rate
borne by the Security.

                                       72



IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly
executed and their respective corporate seals to be hereunto affixed and
attested, all as of June 17, 1997.


                                       NRG ENERGY, INC.,
                                         as Issuer


                                       By: /s/JULIE JORGENSEN
                                           ------------------
                                           Name:  Julie Jorgensen
                                           Title: Vice President and 
                                                  General Counsel


Attest:

By: /s/KATHY A. AHNER
    -----------------
    Name: Kathy A. Ahner
    Title: Notary Public


                                       NORWEST BANK MINNESOTA, NATIONAL
                                         ASSOCIATION, as Trustee


                                       By: /s/CURTIS D. SCHWEGMAN
                                           ----------------------
                                           Name:  Curtis D. Schwegman
                                           Title: Assistant Vice President
                                                  Corporate Trust Services


Attest:


By: /s/KATHY A. AHNER
    -----------------
    Name: Kathy A. Ahner
    Title: Notary Public

                                       73



                                                                      EXHIBIT A

                                FORM OF SECURITY

         [INCLUDE IF SECURITY IS A GLOBAL SECURITY DEPOSITED WITH THE U.S.
DEPOSITARY--UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN
EXCHANGE FOR THIS CERTIFICATE OR ANY PORTION HEREOF IS REGISTERED IN THE NAME
OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT
HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON OTHER THAN THE DEPOSITORY TRUST COMPANY
OR CEDE & CO. IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO.,
HAS AN INTEREST HEREIN.

         TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS
GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 2.6 OF THE INDENTURE REFERRED TO ON THE
REVERSE HEREOF.]

         THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER
APPLICABLE SECURITIES LAW. NEITHER THE SENIOR NOTE NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OR IN THE ABSENCE OF SUCH REGISTRATION OR
UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.

         THE HOLDER OF THIS SENIOR NOTE BY ITS ACCEPTANCE THEREOF AGREES TO
OFFER, SELL OR OTHERWISE TRANSFER THIS SENIOR NOTE PRIOR TO THE DATE (THE
"RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF
THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH NRG OR ANY
AFFILIATE OF NRG WAS THE OWNER OF THIS SENIOR NOTE (OR ANY PREDECESSOR OF THIS
SENIOR NOTE) ONLY (A) TO NRG, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH
HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS
SENIOR NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES
ACT ("RULE 144A") TO A PERSON IT REASONABLY BELIEVES IS A "QUALI-

                                      A-1



FIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A OR (D) PURSUANT
TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES
WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, SUBJECT TO THE
RIGHT OF NRG PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE
(D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR
OTHER INFORMATION SATISFACTORY TO EACH OF THE TRUSTEE AND NRG. SUCH HOLDER
FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SENIOR NOTE IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.

                                      A-2



                           [FORM OF FACE OF SECURITY]

                                                                CUSIP 629377AC6


No. [  ]
                                  $ [        ]
                                NRG ENERGY, INC.
                          7-1/2% Senior Notes Due 2007


         NRG Energy, Inc. (the "Issuer"), for value received hereby promises to
pay to Cede & Co. or registered assigns the principal sum of [             ]
Dollars at the Issuer's office or agency for said purpose initially at the
Corporate Trust Office of Norwest Bank Minnesota, National Association (herein
called the "Trustee") at Corporate Trust, Norwest Center, Sixth and Marquette,
Minneapolis, Minnesota 55479-0069 and at the office or agency of the Issuer for
said purpose in the Borough of Manhattan, The City of New York, on June 15,
2007 in such coin or currency of the United States of America as at the time of
payment shall be legal tender for the payment of public and private debts, and
to pay interest, semi-annually in arrears on June 15 and December 15 of each
year, commencing December 15, 1997, on said principal sum in like coin or
currency at the rate per annum set forth above at said offices or agencies from
the most recent interest payment date to which interest on the Securities has
been paid or duly provided for, unless the date hereof is a date to which
interest on the Securities has been paid or duly provided for, in which case
from the date of this Security, or unless no interest has been paid or duly
provided for on the Securities, in which case from June 17, 1997, until payment
of said principal sum has been made or duly provided for. Notwithstanding the
foregoing, if the date hereof is after June 1 or December 1, as the case may
be, and before the following June 1 or December 1, this Security shall bear
interest from such June 15 or December 15; provided, that if the Issuer shall
default in the payment of interest due on such June 15 or December 15, then
this Security shall bear interest from the next preceding June 15 or December
15 to which interest on the Securities has been paid or duly provided for, or,
if no interest has been paid or duly provided for on the Securities, from June
17, 1997.

                                      A-3



         In the event that (i) the Exchange Offer Registration Statement (as
defined in the Registration Rights Agreement between the Issuer and the initial
purchasers of the Securities dated June 12, 1997 (the "Registration Rights
Agreement")) is not filed with the Securities Exchange Commission (the
"Commission") on or prior to the 60th day following the date of original
issuance of the Securities, (ii) the Exchange Offer Registration Statement is
not declared effective prior to the 180th day following the date of original
issuance of the Securities or (iii) the Exchange Offer (as defined in the
Registration Rights Agreement) is not consummated or a Shelf Registration
Statement (as defined in the Registration Rights Agreement) with respect to the
Securities is not declared effective on or prior to the 215th day following the
date of original issuance of the Securities, interest will accrue (in addition
to stated interest on the Securities) from and including the next day following
each of (a) such 60-day period in the case of clause (i) above and (b) such
180-day period in the case of clause (ii) above and (c) such 215-day period in
the case of clause (iii) above. 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 the 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 the Securities. Upon (1) the
filing of the Exchange Offer Registration Statement after the 60-day period
described in clause (i) above, (2) the effectiveness of the Exchange Offer
Registration Statement after the 180-day period described in clause (ii) above
or (3) the consummation of the Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be, after the 215-day period described
in clause (iii) above, the Special Interest payable on the Securities from the
date of such filing, effectiveness or consummation, as the case may be, will
cease to accrue and all accrued and unpaid Special Interest as of the
occurrence of (1), (2) or (3) shall be paid to the holders of the Securities
promptly thereafter. Following the occurrence of (1), (2) or (3) above, the
terms of the Securities shall revert to the original terms set forth in the
preceding paragraph.

         In the event that a Shelf Registration Statement is declared
effective, if the Issuer fails to keep such Registration Statement continuously
effective for the period required by the Registration Rights Agreement, then
such time as the

                                      A-4



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 date set forth on the reverse of
this Security 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. For all purposes this Security, Special Interest
will be treated as interest.

         The interest so payable on any June 15 or December 15 will, except as
otherwise provided in the Indenture referred to on the reverse hereof, be paid
to the Person in whose name this Security is registered at the close of
business on the 1st day of June or the 1st day of December preceding such June
15 or December 15, whether or not such day is a Business Day; provided, that
principal, premium, if any, and interest shall be paid by mailing a check for
such to or upon the written order of the registered Holders of Securities
entitled thereto at their last address as it appears on the Securities Register
or, upon written application to the Trustee by a Holder of $1,000,000 or more
in aggregate principal amount of Securities, by wire transfer of immediately
available funds to an account maintained by such Holder with a bank or other
financial institution. Interest on this Security shall be computed on the basis
of a 360-day year of twelve 30-day months.

         Interest on overdue principal and (to the extent permitted by
applicable law) on overdue installments of interest (including without
limitation during the 30-day period referred to in Section 4.1(b)) shall accrue
at the rate per annum set forth above.

         Reference is made to the further provisions set forth on the reverse
hereof. Such further provisions shall for all purposes have the same effect as
though fully set forth at this place.

                                      A-5



         This Security shall not be entitled to any benefit under the
Indenture, or be valid or obligatory, until the certificate of authentication
hereof shall have been duly signed by the Trustee acting under the Indenture.

         IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly
executed under its corporate seal.

                                       NRG ENERGY, INC.
[Seal]
                                       By:
                                          --------------------------------
                                          Title:


ATTEST:

                                       By:
- --------------------------------          --------------------------------
Name:                                     Title:
Title:


                    TRUSTEE'S CERTIFICATE OF AUTHENTICATION


Dated:

         This is one of the Securities referred to in the within-mentioned
Indenture.

                                       NORWEST BANK MINNESOTA, NATION-
                                       AL ASSOCIATION, as Trustee


                                       --------------------------------
                                            Authorized Signatory

                                      A-6



                              REVERSE OF SECURITY


                                NRG ENERGY, INC.

                          7-1/2% Senior Notes Due 2007


         This Security is one of a duly authorized issue of debt securities of
the Issuer, limited to the aggregate principal amount of $[         ] (except
as otherwise provided in the Indenture mentioned below), issued or to be issued
pursuant to an Indenture dated as of June 1, 1997 (the "Indenture"), duly
executed and delivered by the Issuer to the Trustee. Reference is hereby made
to the Indenture and all indentures supplemental thereto for a description of
the rights, limitations of rights, obligations, duties and immunities
thereunder of the Trustee, the Issuer and the Holders (the words "Holders" or
"Holder" meaning the registered holders or registered holder) of the
Securities. Capitalized terms used herein, but not otherwise defined herein,
shall have the meanings assigned to them in the Indenture.

         In case an Event of Default shall have occurred and be continuing, the
principal of all the Securities may be declared due and payable, in the manner
and with the effect, and subject to the conditions, provided in the Indenture.
The Indenture provides that in certain events such declaration and its
consequences may be waived by the Holders of a majority in aggregate principal
amount of the Securities then Outstanding and that, prior to any such
declaration, such Holders may waive any past default under the Indenture and
its consequences except a default in the payment of principal of or premium, if
any, or interest on any of the Securities. Any such consent or waiver by the
Holder of this Security (unless revoked as provided in the Indenture) shall be
conclusive and binding upon such Holder and upon all future Holders and owners
of this Security and any Security which may be issued in exchange or
substitution hereof, whether or not any notation thereof is made upon this
Security or such other Securities.

         The Indenture permits the Issuer and the Trustee, with the consent of
the Holders of not less than a majority in aggregate principal amount of the
Securities at the time

                                      A-7



Outstanding, evidenced as in the Indenture provided, to modify the Indenture or
any supplemental indentures or the rights of the Holders of the Securities;
provided that no such modification shall (a) change the Stated Maturity of the
principal of, or any installment of principal of or interest on, any Security,
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 the redemption
thereof or impair or affect the rights of any Securityholder to institute suit
for the payment thereof or make any change in Section 3.9 of the Indenture
(which relates to the obligation of the Issuer to offer to purchase the
Securities upon a Change of Control, as described below) which adversely
affects the rights of the Holders of the Securities without the consent of the
Holder of each Security so affected; (b) reduce the aforesaid percentage of
Securities, the consent of the Holders of which is required for any such
modification or the percentage of Securities, the consent of Holders of which
is required for any waiver provided for in the Indenture; (c) change any
obligation of the Issuer to maintain an office or agency for payment of and
transfer and exchange of the Securities; or (d) make certain changes to
provisions relating to waiver or to the provision for supplementing the
Indenture; in each case without consent of the Holders of all Securities then
Outstanding.

         No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Issuer, which
is absolute and unconditional, to pay the principal of and premium, if any, and
interest on this Security at the place, times, and rate, and in the currency,
herein prescribed.

         The Securities are issuable only as registered Securities without
coupons in denominations of $100,000 and any integral multiple of $1,000 in
excess thereof.

         At the office or agency of the Issuer referred to on the face hereof
and in the manner subject to the limitations provided in the Indenture,
Securities may be presented for exchange for a like aggregate principal amount
of Securities of other authorized denominations.

         Upon due presentment for registration of transfer of this Security at
the above-mentioned office or agency of the Issuer, a new Security or
Securities of authorized denominations, for a like aggregate principal amount,
will be issued to the transferee as provided in the Indenture. No service

                                      A-8



charge shall be made for any such transfer, but the Issuer may require payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in relation thereto.

         The Securities may be redeemed in whole or in part (if in part, by lot
or by such other method as the Trustee shall deem fair or appropriate) prior to
Stated Maturity at the option of the Issuer, on any date, upon mailing a notice
of such redemption not less than 30 nor more than 60 days prior to the date
fixed for redemption to the Holders of Securities, all as provided in the
Indenture, at a redemption price equal to the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date of redemption, plus
the Applicable Premium. The Applicable Premium shall be computed by an
independent investment banking institution of national standing selected by the
Issuer and shall equal the excess (if any) of (i) the sum of the present values
of all the remaining scheduled payments of principal and interest from the
redemption date to maturity of the Security computed on a semi-annual basis by
discounting such payments using a rate equal to the Treasury Rate (as defined
in the Indenture) plus 25 basis points over (ii) the aggregate unpaid principal
amount of the Security to be redeemed, plus any accrued but unpaid interest
thereon.

         In the event of a Change of Control (as defined in the Indenture), the
Issuer has the obligation, subject to certain conditions, to offer to purchase
the Securities at 101% of the principal amount thereof plus accrued interest to
the date of purchase in accordance with the procedures set forth in the
Indenture. As further described in the Indenture, a Change of Control will not
be deemed to have occurred if, after giving effect thereto, the Securities are
rated Investment Grade (as defined in the Indenture).

         Subject to payment by the Issuer of a sum sufficient to pay the amount
due on redemption, interest on this Security shall cease to accrue upon the
date duly fixed for redemption of this Security.

         The Issuer, the Trustee, and any authorized agent of the Issuer or the
Trustee, may deem and treat the registered Holder hereof as the absolute owner
of this Security (whether or not this Security shall be overdue and
notwithstanding any notation of ownership or other writing hereon made by
anyone other than the Issuer or the Trustee or any authorized agent of the
Issuer or the Trustee), for the purpose of receiving

                                      A-9



payment of, or on account of, the principal hereof and premium, if any, and,
subject to the provisions on the face hereof, interest hereon and for all other
purposes, and neither the Issuer nor the Trustee nor any authorized agent of
the Issuer or the Trustee shall be affected by any notice to the contrary.

         No recourse shall be had for the payment of the principal of, or
premium, if any, of the interest on this Security, for any claim based hereon,
or otherwise in respect hereof, or based on or in respect of the Indenture or
any indenture supplemental thereto, against any incorporator, shareholder,
officer or director, as such, past, present or future, of the Issuer or of any
successor corporation, either directly or through the Issuer or any successor
corporation, whether by virtue of any constitution, statute or rule of law or
by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.

                                      A-10



                               FORM OF ASSIGNMENT

I or we assign and transfer this Security to:

             (Insert assignee's social security or tax I.D. number)

- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
(Print or type name, address and zip code of assignee)

and irrevocably appoint:

- ---------------------------------------

- -------------------------------------------------------------------------------

Agent to transfer this Security on the books of the Issuer. The Agent may
substitute another to act for him.

Date:                                  Your Signature:
     ------------------------                         -------------------------


                                            -----------------------------------
                                            (Sign exactly as your name appears
                                            on the other side of this Security)

                             *Signature Guarantee:
                                                  -----------------------------

                             *Signatures must be guaranteed by an "eligible
                        guarantor institution" meeting the requirements of the
                        Registrar, which requirements include membership or
                        participation in STAMP or such other "signature
                        guarantee program" as may be determined by the
                        Registrar in addition to, or in substitution for,
                        STAMP, all in accordance with the Securities Exchange
                        Act of 1934.


                   FORM OF OPTION OF HOLDER TO ELECT PURCHASE

         If you wish to have this Security purchased by the Issuer pursuant to
Section 3.9 of the Indenture, check the Box: [ ].

                                      A-11



         If you wish to have a portion of this Security purchased by the Issuer
pursuant to Section 3.9 of the Indenture, state the amount (in original
principal amount):

                       $
                        ------------------------------

Date:                                  Your Signature:
     ------------------------                         -------------------------

(Sign exactly as your name appears on the other side of this
Security)

Signature Guarantee:
                    ----------------------------------

         ------------------------------------------------------------

                                      A-12



                                                                      EXHIBIT B

                     FORM OF RESTRICTED PERIOD CERTIFICATE
                                NRG ENERGY, INC.


                                                                [DATE]

The Depository Trust Company
[Address]

Norwest Bank Minnesota, North America,
  As Trustee
Corporate Trust
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota 55479-0069

     
    Re:  NRG Energy, Inc. 7 1/2% Senior Notes Due 2007
         ---------------------------------------------

Ladies and Gentlemen:

         Reference is hereby made to the Indenture dated as of June 1, 1997
(the "Indenture") from NRG Energy, Inc., to Norwest Bank Minnesota N.A., as
Trustee. Capitalized terms used and not defined herein shall have the meanings
given them in the Indenture.

         This letter is related to U.S. $               principal amount of
Securities represented by the Restricted Regulation S Global Security, held by
the Trustee pursuant to Section 2.4 of the Indenture. We hereby certify that
the offering of the Securities has closed and that the restricted period (as
defined in Regulation S) with respect to the offer and sale of the Securities
has terminated.

                                            NRG ENERGY, INC.


                                            By:
                                               -------------------------------
                                               Name:
                                               Title:

cc:  Euroclear
     CEDEL

                                      B-1



                                                                      EXHIBIT C

                          FORM OF TRANSFER CERTIFICATE
            FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL SECURITY
                   TO RESTRICTED REGULATION S GLOBAL SECURITY
                      (Transfers or exchanges pursuant to
                      Section 2.6(b)(ii) of the Indenture)


Norwest Bank Minnesota, North America,
  as Trustee
Corporate Trust
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota 55479-0069

         Re:  NRG Energy, Inc. 7 1/2% Senior Notes
              Due 2007 (the "Securities")
              ------------------------------------

         Reference is hereby made to the Indenture dated as of June 1, 1997
(the "Indenture") from NRG Energy, Inc. to Norwest Bank Minnesota N.A., as
Trustee. Capitalized terms used but not defined herein shall have the meanings
given to them in the Indenture.

         This letter relates to U.S. $                 principal amount of
Securities which are held in the form of the Rule 144A Global Security (CUSIP
No. 629377AC6) with the U.S. Depository in the name of [insert name of
transferor] (the "Transferor"). The Transferor has requested a transfer or
exchange of such beneficial interest for an interest in the Restricted
Regulation S Global Security (CUSIP No. U66962AB4) to be held by [Euroclear]
[Cedel] (Common Code          ) through the U.S. Depositary.

         In connection with such request and in respect of such Securities, the
Transferor does hereby certify that such transfer or exchange has been effected
in accordance with the transfer restrictions set forth in the Indenture and the
Securities and pursuant to and in accordance with Regulation S under the
Securities Act, and accordingly the Transferor does hereby certify that:

         (1) the offer of the Securities was not made to a person in the United
    States;

         [(2) at the time the buy order was originated, the transferee was
    outside the United States or the Transferor and any person acting on its
    behalf reasonably believed that the transferee was outside the United
    States;]*

                                      C-1



         [(2) the transaction was executed in, on or through the facilities of
    a designated offshore securities market and neither the Transferor nor any
    person acting on its behalf knows that the transaction was pre-arranged
    with a buyer in the United States;]1

         (3) no directed selling efforts have been made in contravention of the
    requirements of Rule 903(b) or 904(b) of Regulation S, as applicable; and

         (4) the transaction is not part of a plan or scheme to evade the
    registration requirements of the Securities Act.

         This certificate and the statements contained herein are made for your
benefit and the benefit of the Issuer and the Initial Purchasers.


                                            [Insert Name of Transferor]


                                            By:
                                               --------------------------------
                                            Name:
                                            Title:

Dated:                       , 199
      -----------------------     -

cc:  NRG Energy, Inc.

- --------------
1   Insert one of these two provisions, which come from the definition of
    "offshore transactions" in Regulation S.

                                      C-2



                                                                      EXHIBIT D

                          FORM OF TRANSFER CERTIFICATE
            FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL SECURITY
                  TO UNRESTRICTED REGULATION S GLOBAL SECURITY
              (Exchanges or transfers Pursuant to ss. 2.6(b)(iii)
                               of the Indenture)


Norwest Bank Minnesota, North America,
  as Trustee
Corporate Trust
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota  55479-0069

         Re:  NRG Energy, Inc. 7 1/2% Senior Notes
              Due 2007 (the "Securities")
              ------------------------------------

         Reference is hereby made to the Indenture as of June 1, 1997 (the
"Indenture") NRG Energy, Inc., to Norwest Bank Minnesota N.A., as Trustee.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Indenture.

         This letter relates to U.S. $                  principal amount of
Securities which are held in the form of the Rule 144A Global Security (CUSIP
No. 629377AC6 with the U.S. Depositary in the name of [insert name of
transferor] (the "Transferor"). The Transferor has requested an exchange or
transfer of such beneficial interest in the Securities for an interest in the
Unrestricted Regulation S Global Security (CUSIP No. U66962AB4).

         In connection with such request and in respect of such Securities, the
Transferor does hereby certify that such exchange or transfer has been effected
in accordance with the transfer restrictions set forth in the Indenture and the
Securities and, (i) with respect to transfers made in reliance on Regulation S
under the Securities Act, the Transferor does hereby certify that:

         (1) the offer of the Securities was not made to a person in the United
    States;

         [(2) at the time the buy order was originated, the transferee was
    outside the United States or the Transferor and any person acting on its
    behalf reasonably believed that the transferee was outside the United
    States;]*

         [(2) the transaction was executed in, on or through the facilities of
    a designated offshore securi-

                                      D-1



    ties market and neither the Transferor nor any person acting on its behalf
    knows that the transaction was pre-arranged with a buyer in the United
    States;]2

         (3) no directed selling efforts have been made in contravention of the
    requirements of Rule 903(b) or 904(b) of Regulation S, as applicable; and

         (4) the transaction is not part of a plan or scheme to evade the
    registration requirements of the United States Securities Act of 1933, as
    amended (the "Securities Act");

(ii) with respect to transfers made in reliance on Rule 144 under the
Securities Act, certify that the Securities are being transferred in a
transaction permitted by Rule 144 under the Securities Act.

(iii) with respect to transfers made in reliance on another exemption from the
Securities Act (including without limitation Rule 144A), the following is the
basis for the exemption;                     , and

(iv) with respect to an exchange, either (x) the Security being exchanged is
not a "restricted security" as defined in Rule 144 under the Securities Act or
(y) the exchange is being made to facilitate a contemporaneous transfer with
Section 2.6(b)(iii) of the Indenture.

         This certificate and the statements contained herein are made for your
benefit and the benefit of the Issuer and the Initial Purchasers.


                                            [Insert Name of Transferor]


                                            By:
                                               --------------------------------
                                            Name:
                                            Title:


- --------------
2   Insert one of these two provisions, which come from the definition of
    "offshore transactions" in Regulation S.

                                      D-2



Dated:                       , 199
      -----------------------     -

cc:  NRG Energy, Inc.

                                      D-3



                                                                      EXHIBIT E

             FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE
          FROM RESTRICTED REGULATION S GLOBAL SECURITY OR UNRESTRICTED
                REGULATION S GLOBAL SECURITY TO RULE 144A GLOBAL
                  SECURITY (Exchanges or transfers Pursuant to
                      Section 2.6(b)(iv) of the Indenture)


Norwest Bank Minnesota, North America,
  as Trustee
Corporate Trust
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota  55479-0069

         Re:  NRG Energy, Inc. 7 1/2% Senior Notes
              Due 2007 (the "Securities")
              ------------------------------------

         Reference is hereby made to the Indenture dated as of June 1, 1997
(the "Indenture") NRG Energy, Inc., to Norwest Bank Minnesota N.A., as Trustee.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Indenture.

         This letter relates to U.S. $                   principal amount of
Securities which are held in the form of the [[Restricted] [Unrestricted]
Regulation S Global Security (CUSIP No. (U66962AB4) with [Euroclear] [Cedel].3
(Common Code     )] through the U.S. Depositary in the name of [insert name of
transferor] (the "Transferor"). The Transferor has requested a transfer or
exchange of such beneficial interest in the Securities for an interest in the
Rule 144A Global Security.

         In connection with such request, and in respect of such Securities,
the Transferor does hereby certify that such Securities are being transferred
or exchanged in accordance with (i) the transfer restrictions set forth in
the Securities and (ii) Rule 144A under the Securities Act to a transferee that
the Transferor reasonably believes is purchasing the Securities for its own
account or an account with respect to which the transferee exercises sole
investment discretion and the transferee and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A, in each case in a
transaction meeting the requirements of Rule 144A and in accordance with any
applicable securities laws of any state of the United States or any other
jurisdiction.

- --------------
3   Select appropriate depositary.

                                      E-1



         This certificate and the statements contained herein are made for your
benefit and the benefit of the Issuer and the Initial Purchasers.


                                            [Insert Name of Transferor]


                                            By:
                                               --------------------------------
                                            Name:
                                            Title:

Dated:                       , 199
      -----------------------     -

cc:  NRG Energy, Inc.

                                      E-2




                                                                    EXHIBIT 4.2




                             FORM OF EXCHANGE NOTE

         [INCLUDE IF SECURITY IS A GLOBAL SECURITY DEPOSITED WITH THE U.S.
DEPOSITARY --UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN
EXCHANGE FOR THIS CERTIFICATE OR ANY PORTION HEREOF IS REGISTERED IN THE NAME
OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT
HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON OTHER THAN THE DEPOSITORY TRUST COMPANY
OR CEDE & CO. IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO.,
HAS AN INTEREST HEREIN.

         TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS
GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 2.6 OF THE INDENTURE REFERRED TO ON THE
REVERSE HEREOF.]



                                       1





                           [FORM OF FACE OF SECURITY]

                                                             CUSIP [          ]


No. [  ]
                                     $ [ ]
                                NRG ENERGY, INC.
                          7-1/2% Senior Notes Due 2007


         NRG Energy, Inc. (the "Issuer"), for value received hereby promises to
pay to Cede & Co. or registered assigns the principal sum of [ ] Dollars at the
Issuer's office or agency for said purpose initially at the Corporate Trust
Office of Norwest Bank Minnesota, National Association (herein called the
"Trustee") at Corporate Trust, Norwest Center, Sixth and Marquette,
Minneapolis, Minnesota 55479-0069 and at the office or agency of the Issuer for
said purpose in the Borough of Manhattan, The City of New York, on June 15,
2007 in such coin or currency of the United States of America as at the time of
payment shall be legal tender for the payment of public and private debts, and
to pay interest, semi-annually in arrears on June 15 and December 15 of each
year, commencing December 15, 1997, on said principal sum in like coin or
currency at the rate per annum set forth above at said offices or agencies from
the most recent interest payment date to which interest on the Securities has
been paid or duly provided for, unless the date hereof is a date to which
interest on the Securities has been paid or duly provided for, in which case
from the date of this Security, or unless no interest has been paid or duly
provided for on the Securities, in which case from June 17, 1997, until payment
of said principal sum has been made or duly provided for. Notwithstanding the
foregoing, if the date hereof is after June 1 or December 1, as the case may
be, and before the following June 1 or December 1, this Security shall bear
interest from such June 15 or December 15; provided, that if the Issuer shall
default in the payment of interest due on such June 15 or December 15, then
this Security shall bear interest from the next preceding June 15 or December
15 to which interest on the Securities has been paid or duly provided for, or,
if no interest has been paid or duly provided for on the Securities, from June
17, 1997.

         The interest so payable on any June 15 or December 15 will, except as
otherwise provided in the Indenture referred to on the reverse hereof, be paid
to the Person in whose name this Security is registered at the close of
business on the 1st day of June or the 1st day of December preceding such June
15 or December 15, whether or not such day is a Business Day; provided, that
principal, premium, if any, and interest shall be paid by mailing a check for
such to or upon the written order of the registered Holders of Securities
entitled thereto at their last address as it appears on the Securities


                                       2





Register or, upon written application to the Trustee by a Holder of $1,000,000
or more in aggregate principal amount of Securities, by wire transfer of
immediately available funds to an account maintained by such Holder with a bank
or other financial institution. Interest on this Security shall be computed on
the basis of a 360-day year of twelve 30- day months.

         Interest on overdue principal and (to the extent permitted by
applicable law) on overdue installments of interest (including without
limitation during the 30-day period referred to in Section 4.1(b)) shall accrue
at the rate per annum set forth above.

         Reference is made to the further provisions set forth on the reverse
hereof. Such further provisions shall for all purposes have the same effect as
though fully set forth at this place.


                                       3





         This Security shall not be entitled to any benefit under the
Indenture, or be valid or obligatory, until the certificate of authentication
hereof shall have been duly signed by the Trustee acting under the Indenture.

         IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly
executed under its corporate seal.

                                        NRG ENERGY, INC.
[Seal]


                                        By:
                                           ----------------------------------
                                            Name:
                                            Title:

ATTEST:



                                        By:
- ----------------------------------         ----------------------------------
Name:                                       Name:
Title:                                      Title:







                    TRUSTEE'S CERTIFICATE OF AUTHENTICATION


Dated:

         This is one of the Securities referred to in the within-mentioned
Indenture.

                                        NORWEST BANK MINNESOTA, 
                                        NATIONAL ASSOCIATION, as Trustee



                                        -------------------------------------
                                        Authorized Signatory



                                       4





                              REVERSE OF SECURITY



                                NRG ENERGY, INC.

                          7-1/2% Senior Notes Due 2007


         This Security is one of a duly authorized issue of debt securities of
the Issuer, limited to the aggregate principal amount of $[ ] (except as
otherwise provided in the Indenture mentioned below), issued or to be issued
pursuant to an Indenture dated as of June 1, 1997 (the "Indenture"), duly
executed and delivered by the Issuer to the Trustee. Reference is hereby made
to the Indenture and all indentures supplemental thereto for a description of
the rights, limitations of rights, obligations, duties and immunities
thereunder of the Trustee, the Issuer and the Holders (the words "Holders" or
"Holder" meaning the registered holders or registered holder) of the
Securities. Capitalized terms used herein, but not otherwise defined herein,
shall have the meanings assigned to them in the Indenture.

         In case an Event of Default shall have occurred and be continuing, the
principal of all the Securities may be declared due and payable, in the manner
and with the effect, and subject to the conditions, provided in the Indenture.
The Indenture provides that in certain events such declaration and its
consequences may be waived by the Holders of a majority in aggregate principal
amount of the Securities then Outstanding and that, prior to any such
declaration, such Holders may waive any past default under the Indenture and
its consequences except a default in the payment of principal of or premium, if
any, or interest on any of the Securities. Any such consent or waiver by the
Holder of this Security (unless revoked as provided in the Indenture) shall be
conclusive and binding upon such Holder and upon all future Holders and owners
of this Security and any Security which may be issued in exchange or
substitution hereof, whether or not any notation thereof is made upon this
Security or such other Securities.

         The Indenture permits the Issuer and the Trustee, with the consent of
the Holders of not less than a majority in aggregate principal amount of the
Securities at the time Outstanding, evidenced as in the Indenture provided, to
modify the Indenture or any supplemental indentures or the rights of the
Holders of the Securities; provided that no such modification shall (a) change
the Stated Maturity of the principal of, or any installment of principal of or
interest on, any Security, 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 the redemption thereof or impair or affect the rights of any
Securityholder to institute suit for the payment thereof or make any change in
Section 3.9 of the Indenture (which relates to the obligation of the Issuer to
offer to purchase the


                                       5





Securities upon a Change of Control, as described below) which adversely
affects the rights of the Holders of the Securities without the consent of the
Holder of each Security so affected; (b) reduce the aforesaid percentage of
Securities, the consent of the Holders of which is required for any such
modification or the percentage of Securities, the consent of Holders of which
is required for any waiver provided for in the Indenture; (c) change any
obligation of the Issuer to maintain an office or agency for payment of and
transfer and exchange of the Securities; or (d) make certain changes to
provisions relating to waiver or to the provision for supplementing the
Indenture; in each case without consent of the Holders of all Securities then
Outstanding.

         No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Issuer, which
is absolute and unconditional, to pay the principal of and premium, if any, and
interest on this Security at the place, times, and rate, and in the currency,
herein prescribed.

         The Securities are issuable only as registered Securities without
coupons in denominations of $100,000 and any integral multiple of $1,000 in
excess thereof.

         At the office or agency of the Issuer referred to on the face hereof
and in the manner subject to the limitations provided in the Indenture,
Securities may be presented for exchange for a like aggregate principal amount
of Securities of other authorized denominations.

         Upon due presentment for registration of transfer of this Security at
the above-mentioned office or agency of the Issuer, a new Security or
Securities of authorized denominations, for a like aggregate principal amount,
will be issued to the transfer- ee as provided in the Indenture. No service
charge shall be made for any such transfer, but the Issuer may require payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in relation thereto.

         The Securities may be redeemed in whole or in part (if in part, by lot
or by such other method as the Trustee shall deem fair or appropriate) prior to
Stated Maturity at the option of the Issuer, on any date, upon mailing a notice
of such redemption not less than 30 nor more than 60 days prior to the date
fixed for redemption to the Holders of Securities, all as provided in the
Indenture, at a redemption price equal to the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date of redemption, plus
the Applicable Premium. The Applicable Premium shall be computed by an
independent investment banking institution of national standing selected by the
Issuer and shall equal the excess (if any) of (i) the sum of the present values
of all the remaining scheduled payments of principal and interest from the
redemption date to maturity of the Security computed on a semi-annual basis by
discounting such payments using a rate equal to the Treasury Rate (as defined
in the Indenture) plus 25 basis points


                                       6





over (ii) the aggregate unpaid principal amount of the Security to be redeemed,
plus any accrued but unpaid interest thereon.

         In the event of a Change of Control (as defined in the Indenture), the
Issuer has the obligation, subject to certain conditions, to offer to purchase
the Securities at 101% of the principal amount thereof plus accrued interest to
the date of purchase in accordance with the procedures set forth in the
Indenture. As further described in the Indenture, a Change of Control will not
be deemed to have occurred if, after giving effect thereto, the Securities are
rated Investment Grade (as defined in the Indenture).

         Subject to payment by the Issuer of a sum sufficient to pay the amount
due on redemption, interest on this Security shall cease to accrue upon the
date duly fixed for redemption of this Security.

         The Issuer, the Trustee, and any authorized agent of the Issuer or the
Trustee, may deem and treat the registered Holder hereof as the absolute owner
of this Security (whether or not this Security shall be overdue and
notwithstanding any notation of ownership or other writing hereon made by
anyone other than the Issuer or the Trustee or any authorized agent of the
Issuer or the Trustee), for the purpose of receiving payment of, or on account
of, the principal hereof and premium, if any, and, subject to the provisions on
the face hereof, interest hereon and for all other purposes, and neither the
Issuer nor the Trustee nor any authorized agent of the Issuer or the Trustee
shall be affected by any notice to the contrary.

         No recourse shall be had for the payment of the principal of, or
premium, if any, of the interest on this Security, for any claim based hereon,
or otherwise in respect hereof, or based on or in respect of the Indenture or
any indenture supplemental thereto, against any incorporator, shareholder,
officer or director, as such, past, present or future, of the Issuer or of any
successor corporation, either directly or through the Issuer or any successor
corporation, whether by virtue of any constitution, statute or rule of law or
by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.


                                       7





                               FORM OF ASSIGNMENT

I or we assign and transfer this Security to:

             (Insert assignee's social security or tax I.D. number)


- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
(Print or type name, address and zip code of assignee)



and irrevocably appoint:


- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------


Agent to transfer this Security on the books of the Issuer. The Agent may
substitute another to act for him.

Date:                         Your Signature:
     ----------------                        ----------------------------------
                                              (Sign exactly as your name ap-
                                              pears on the other side of this
                                              Security)
 

                         *Signature Guarantee:
                                              ---------------------------------


                         *Signatures must be guaranteed by an "eligible
                    guarantor institution" meeting the requirements of the
                    Registrar, which requirements include membership or
                    participation in STAMP or such other "signature guarantee
                    program" as may be determined by the Registrar in addition
                    to, or in substitution for, STAMP, all in accordance with
                    the Securities Exchange Act of 1934.




                                       8




                   FORM OF OPTION OF HOLDER TO ELECT PURCHASE

         If you wish to have this Security purchased by the Issuer pursuant to
Section 3.9 of the Indenture, check the Box: [ ].

         If you wish to have a portion of this Security purchased by the Issuer
pursuant to Section 3.9 of the Indenture, state the amount (in original
principal amount):

                              $
                               ------------------


Date:                                  Your Signature:
     -------------------                              -------------------------

(Sign exactly as your name appears on the other side of this Security)

Signature Guarantee:
                    -----------------------------

                    -----------------------------


                                       9



                                NRG ENERGY, INC.

                   $250,000,000 7 1/2% SENIOR NOTES DUE 2007

                         REGISTRATION RIGHTS AGREEMENT


                                                             New York, New York

                                                                  June 12, 1997

Salomon Brothers Inc
ABN AMRO Chicago Corporation
Chase Securities Inc.
  As Representatives of the Initial Purchasers
In care of Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048

Ladies and Gentlemen:

         NRG Energy, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to certain purchasers (the "Initial Purchasers"), upon the terms
set forth in a Purchase Agreement of even date herewith (the "Purchase
Agreement") its 7 1/2% Senior Notes Due 2007 (the "Securities") (the "Initial
Placement"). As an inducement to the Initial Purchasers to enter into the
Purchase Agreement and in satisfaction of a condition to your obligations
thereunder, the Company agrees with you, (i) for your benefit and the benefit
of the other Initial Purchasers and (ii) for the benefit of the holders from
time to time of the Transfer Restricted Securities (as defined herein)
(including you and the other Initial Purchasers) (each of the foregoing a
"Holder" and together the "Holders"), as follows:

         1. Definitions. Capitalized terms used herein without definition shall
have their respective meanings set forth in the Purchase Agreement. As used in
this Agreement, the following capitalized defined terms shall have the
following meanings:

         "Act" means the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder.



         "Affiliate" of any specified person means any other person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such specified person. For purposes of this definition, control
of a person means the power, direct or indirect, to direct or cause the
direction of the management and policies of such person whether by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.

         "Closing Date" has the meaning set forth in the Purchase Agreement.

         "Commission" means the Securities and Exchange Commission.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder.

         "Exchange Offer Registration Period" means the 30 day period following
the consummation of the Registered Exchange Offer, exclusive of any period
during which any stop order shall be in effect suspending the effectiveness of
the Exchange Offer Registration Statement.

         "Exchange Offer Registration Statement" means a registration statement
of the Company on an appropriate form under the Act with respect to the
Registered Exchange Offer, all amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.

         "Exchanging Dealer" means any Holder (which may include the Initial
Purchasers) which is a broker-dealer, electing to exchange Securities acquired
for its own account as a result of market-making activities or other trading
activities, for New Securities.

         "Final Memorandum" has the meaning set forth in the Purchase
Agreement.

         "Holder" has the meaning set forth in the preamble hereto.

                                       2



         "Indenture" means the Indenture relating to the Securities dated as of
June 1, 1997, between the Company and Norwest Bank Minnesota, National
Association, as trustee, as the same may be amended from time to time in
accordance with the terms thereof.

         "Initial Placement" has the meaning set forth in the preamble hereto.

         "Majority Holders" means the Holders of a majority of the aggregate
principal amount of securities registered under a Registration Statement.

         "Managing Underwriters" means the investment banker or investment
bankers and manager or managers that shall administer an underwritten offering.

         "New Securities" means debt securities of the Company identical in all
material respects to the Securities (except that the cash interest and interest
rate step-up provisions and the transfer restrictions will be modified or
eliminated, as described herein), to be issued under the Indenture or the New
Securities Indenture.

         "Prospectus" means the prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Securities or the New Securities, covered by
such Registration Statement, and all amendments and supplements to the
Prospectus, including post-effective amendments.

         "Registered Exchange Offer" means the proposed offer to the Holders to
issue and deliver to such Holders, in exchange for the Securities, a like
principal amount of the New Securities.

         "Registration Statement" means any Exchange Offer Registration
Statement or Shelf Registration Statement that covers any of the Securities or
the New Securities pursuant to the provisions of this Agreement, amendments and
supplements to such registration statement,

                                       3



including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.

         "Securities" has the meaning set forth in the preamble hereto.

         "Shelf Registration" means a registration effected pursuant to Section
3 hereof.

         "Shelf Registration Period" has the meaning set forth in Section 3(b)
hereof.

         "Shelf Registration Statement" means a "shelf" registration statement
of the Company pursuant to the provisions of Section 3 hereof which covers some
or all of the Securities or New Securities, as applicable, on an appropriate
form under Rule 415 under the Act, or any similar rule that may be adopted by
the Commission, amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.

         "Transfer Restricted Security" means each Security or New Security
until (i) the date on which such Transfer Restricted Security has been
exchanged by a person other than a broker dealer for a New Security in the
Registered Exchange Offer that is freely transferable under the Act, (ii)
following the exchange by a broker dealer in the Registered Exchange Offer of a
Transfer Restricted Security for a New Security, the date on which such New
Security is sold to a purchaser who receives from such broker dealer on or
prior to the date of such sale a copy of the prospectus contained in the
Exchange Offer Registration Statement, (iii) the date on which such Transfer
Restricted Security has been effectively registered under the Act and disposed
of in accordance with the Shelf Registration statement or (iv) the date on
which such Transfer Restricted Security is distributed to the public pursuant
to Rule 144 under the Act or is saleable pursuant to Rule 144(k) under the Act.

         "Trustee" means the trustee with respect to the Securities under the
Indenture.

                                       4



         "Underwriter" means any underwriter of Securities in connection with
an offering thereof under a Shelf Registration Statement.

         2. Registered Exchange Offer; Resales of New Securities by Exchanging
Dealers; Private Exchange. (a) The Company shall prepare and, not later than 60
days following the Closing Date (or if the 60th day is not a business day, the
first business day thereafter), shall file with the Commission the Exchange
Offer Registration Statement with respect to the Registered Exchange Offer. The
Company shall use its best efforts to cause the Exchange Offer Registration
Statement to become effective under the Act within 180 days of the Closing Date
(or if the 180th day is not a business day, the first business day thereafter).

         (b) Upon the effectiveness of the Exchange Offer Registration
Statement, the Company shall promptly commence the Registered Exchange Offer,
it being the objective of such Registered Exchange Offer to enable each Holder
electing to exchange Securities for New Securities (assuming that such Holder
is not an affiliate of the Company within the meaning of the Act, acquires the
New Securities in the ordinary course of such Holder's business and has no
arrangements with any person to participate in the distribution of the New
Securities) to trade such New Securities from and after their receipt without
any limitations or restrictions under the Act and without material restrictions
under the securities laws of a substantial proportion of the several states of
the United States.

         (c) In connection with the Registered Exchange Offer, the Company
shall:

         (i) mail to each Holder a copy of the Prospectus forming part of the
    Exchange Offer Registration Statement, together with an appropriate letter
    of transmittal and related documents;

         (ii) keep the Registered Exchange Offer open for not less than 30 days
    after the date notice thereof is mailed to the Holders (or longer if
    required by applicable law);

                                       5



         (iii) utilize the services of a depositary for the Registered Exchange
    Offer with an address in the Borough of Manhattan, The City of New York;
    and

         (iv) comply in all respects with all applicable laws.

         (d) As soon as practicable after the close of the Registered Exchange
Offer, the Company shall:

         (i) accept for exchange all Securities tendered and not validly
    withdrawn pursuant to the Registered Exchange Offer;

         (ii) deliver to the Trustee for cancellation all Securities so
    accepted for exchange; and

         (iii) cause the Trustee promptly to authenticate and deliver to each
    Holder of Securities New Securities equal in principal amount to the
    Securities of such Holder so accepted for exchange.

         (e) The Initial Purchasers and the Company acknowledge that, pursuant
to interpretations by the Commission's staff of Section 5 of the Act, and in
the absence of an applicable exemption therefrom, each Exchanging Dealer is
required to deliver a Prospectus in connection with a sale of any New
Securities received by such Exchanging Dealer pursuant to the Registered
Exchange Offer in exchange for Securities acquired for its own account as a
result of market-making activities or other trading activities. Accordingly,
the Company shall:

         (i) include the information set forth in Annex A hereto on the cover
    of the Exchange Offer Registration Statement, in Annex B hereto in the
    forepart of the Exchange Offer Registration Statement in a section setting
    forth details of the Exchange Offer, and in Annex C hereto in the
    underwriting or plan of distribution section of the Prospectus forming a
    part of the Exchange Offer Registration Statement, and include the
    information set forth in Annex D hereto in the Letter of Transmittal
    delivered pursuant to the Registered Exchange Offer; and

                                       6



         (ii) use its best efforts to keep the Exchange Offer Registration
    Statement continuously effective under the Act during the Exchange Offer
    Registration Period for delivery by Exchanging Dealers in connection with
    sales of New Securities received pursuant to the Registered Exchange Offer,
    as contemplated by Section 5(h) below.

         (f) In the event that any Initial Purchaser determines that it is not
eligible to participate in the Registered Exchange Offer with respect to the
exchange of Securities constituting any portion of an unsold allotment, at the
request of such Initial Purchaser, the Company shall issue and deliver to such
Initial Purchaser or the party purchasing New Securities registered under a
Shelf Registration Statement as contemplated by Section 3 hereof from such
Initial Purchaser, in exchange for such Securities, a like principal amount of
New Securities. The Company shall seek to cause the CUSIP Service Bureau to
issue the same CUSIP number for such New Securities as for New Securities
issued pursuant to the Registered Exchange Offer.

         3. Shelf Registration. If, (i) because of any change in law or
applicable interpretations thereof by the Commission's staff, the Company
determines upon advice of its outside counsel that it is not permitted to
effect the Registered Exchange Offer as contemplated by Section 2 hereof, or
(ii) if for any other reason the Exchange Offer Registration Statement is not
declared effective within 180 days of the date hereof (or if the 180th day is
not a business day, the first business day thereafter), or (iii) if any Initial
Purchaser so requests with respect to Securities held by it following
consummation of the Registered Exchange Offer, or (iv) if any Holder (other
than an Initial Purchaser) is not eligible to participate in the Registered
Exchange Offer because of any change in law or applicable interpretations of
the staff of the Commission or otherwise or (v) in the case of any Initial
Purchaser that participates in the Registered Exchange Offer or acquires New
Securities pursuant to Section 2(f) hereof, such Initial Purchaser does not
receive freely tradeable New Securities in exchange for Securities (it being
understood that, for purposes of this Section 3, (x) the requirement that an
Initial Purchaser deliver a Prospectus containing the information required by
Items 507 and/or 508 of

                                       7



Regulation S-K under the Act in connection with sales of New Securities
acquired in exchange for such Securities shall result in such New Securities
being not "freely tradeable" but (y) the requirement that an Exchanging Dealer
deliver a Prospectus in connection with sales of New Securities acquired in the
Registered Exchange Offer in exchange for Securities acquired as a result of
market-making activities or other trading activities shall not result in such
New Securities being not "freely tradeable"), the following provisions shall
apply:

         (a) The Company shall as promptly as practicable (but in no event more
than 30 days (or if the 30th day is not a business day, the first business day
thereafter) after so required or requested pursuant to this Section 3), file
with the Commission and thereafter shall use its best efforts to cause to be
declared effective under the Act by the 215th day (or if the 215th day is not a
business day, the first business day thereafter) after the original issuance of
the Securities a Shelf Registration Statement relating to the offer and sale of
the Securities or the New Securities, as applicable, by the Holders from time
to time in accordance with the methods of distribution elected by such Holders
and set forth in such Shelf Registration Statement (such Securities or New
Securities, as applicable, to be sold by Holders under such Shelf Registration
Statement being referred to herein as "Registrable Securities"); provided, that
with respect to New Securities received by an Initial Purchaser in exchange for
Securities constituting any portion of an unsold allotment, the Company may, if
permitted by current interpretations by the Commission's staff, file a
post-effective amendment to the Exchange Offer Registration Statement
containing the information required by Regulation S-K Items 507 and/or 508, as
applicable, in satisfaction of its obligations under this paragraph (a) with
respect thereto, and any such Exchange Offer Registration Statement, as so
amended, shall be referred to herein as, and governed by the provisions herein
applicable to, a Shelf Registration Statement.

         (b) The Company shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the Prospectus
forming part thereof to be usable by Holders for a period of two years from the
date the Shelf Registration Statement is declared effective by the Commission
or until one year

                                       8



after such effective date if such Shelf Registration Statement is filed at the
request of an Initial Purchaser or such shorter period that will terminate when
all the Securities or New Securities, as applicable, covered by the Shelf
Registration Statement have been sold pursuant to the Shelf Registration
Statement (in any such case, such period being called the "Shelf Registration
Period"). The Company shall be deemed not to have used its best efforts to keep
the Shelf Registration Statement effective during the requisite period if it
voluntarily takes any action that would result in Holders of securities covered
thereby not being able to offer and sell such securities during that period,
unless (i) such action is required by applicable law, or (ii) such action is
taken by the Company in good faith and for valid business reasons (not
including avoidance of the Company's obligations hereunder), including the
acquisition or divestiture of assets, so long as the Company promptly
thereafter complies with the requirements of Section 5(k) hereof, if
applicable.

         4. Special Interest. In the event that either (i) the Exchange Offer
Registration Statement is not filed with the Commission on or prior to the 60th
day following the Closing (or if the 60th day is not a business day, the first
business day thereafter), (ii) the Exchange Offer Registration Statement is not
declared effective prior to the 180th day following the Closing Date (or if the
180th day is not a business day, the first business day thereafter) or (iii)
the Registered Exchange Offer is not consummated or a Shelf Registration
Statement with respect to the Securities is not declared effective on or prior
to the 215th day following the date of original issuance of the 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 each of (a) such 60-day period in the case
of clause (i) above and (b) such 180-day period in the case of clause (ii)
above and (c) such 215-day period in the case of clause (iii) above. 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 the
Securities. The aggregate amount of Special Interest payable pursuant to the
above provisions will in no event exceed 0.25% per

                                       9



annum of the principal amount of the Securities. Upon (1) the filing of the
Exchange Offer Registration Statement after the 60-day period described in
clause (i) above, (2) the effectiveness of the Registered Exchange Offer
Registration Statement after the 180-day period described in clause (ii) above
or (3) the consummation of the Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be, after 215-day period described in
clause (iii) above, the Special Interest payable on the Securities from the
date of such filing, effectiveness or consummation, as the case may be, will
cease to accrue and all accrued and unpaid Special Interest as of the
occurrence of (1), (2) or (3) shall be paid to the holders of the 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 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.

         5. Registration Procedures. In connection with any Shelf Registration
Statement and, to the extent applicable, any Exchange Offer Registration
Statement, the following provisions shall apply:

         (a) The Company shall furnish to you and to each Holder named therein,
    prior to the filing thereof with the Commission, a copy of any Shelf
    Registration Statement and any Exchange Offer Registration Statement, and
    each amendment thereof and each amendment or supplement, if any, to the
    Prospectus included therein and shall use its best efforts to reflect in
    each such document, when so filed with the Commission, such comments as you
    or Holder may propose.

                                       10



         (b) The Company shall use its best efforts to ensure that (i) any
    Registration Statement and any amendment thereto and any Prospectus forming
    a part thereof and any amendment or supplement thereto complies in all
    material respects with the Act and the rules and regulations thereunder,
    (ii) any Registration Statement and any amendment thereto does not, when it
    becomes effective, contain an untrue statement of a material fact or omit
    to state a material fact required to be stated therein or necessary to make
    the statements therein not misleading and (iii) any Prospectus forming part
    of any Registration Statement, and any amendment or supplement to such
    Prospectus, does not include an untrue statement of a material fact or omit
    to state a material fact necessary in order to make the statements, in the
    light of the circumstances under which they were made, not misleading.

         (c) (1) The Company shall advise you and, in the case of a Shelf
    Registration Statement, the Holders of securities covered thereby, and, if
    requested by you or any such Holder, confirm such advice in writing:

              (i) when a Registration Statement and any amendment thereto has
         been filed with the Commission and when the Registration Statement or
         any post-effective amendment thereto has become effective; and

              (ii) of any request by the Commission for amendments or
         supplements to the Registration Statement or the Prospectus included
         therein or for additional information.

         (2) The Company shall advise you and, in the case of a Shelf
    Registration Statement, the Holders of securities covered thereby, and, in
    the case of an Exchange Offer Registration Statement, any Exchanging Dealer
    which has provided in writing to the Company a telephone or facsimile
    number and address for notices, and, if requested by you or any such Holder
    or Exchanging Dealer, confirm such advice in writing:

                                       11



              (i) of the issuance by the Commission of any stop order
         suspending the effectiveness of the Registration Statement or the
         initiation of any proceedings for that purpose;

              (ii) of the receipt by the Company of any notification with
         respect to the suspension of the qualification of the securities
         included therein for sale in any jurisdiction or the initiation or
         threatening of any proceeding for such purpose; and

              (iii) of the happening of any event that requires the making of
         any changes in the Registration Statement or the Prospectus so that,
         as of such date, the statements therein are not misleading and do not
         omit to state a material fact required to be stated therein or
         necessary to make the statements therein (in the case of the
         Prospectus, in light of the circumstances under which they were made)
         not misleading (which advice shall be accompanied by an instruction to
         suspend the use of the Prospectus until the requisite changes have
         been made).

         (d) The Company shall use its best efforts to obtain the withdrawal of
    any order suspending the effectiveness of any Registration Statement at the
    earliest possible time.

         (e) The Company shall furnish to each Holder of securities included
    within the coverage of any Shelf Registration Statement, without charge, at
    least one copy of such Shelf Registration Statement and any post-effective
    amendment thereto, including financial statements and schedules, and, if
    the Holder so requests in writing any documents incorporated by reference
    therein and all exhibits (including those incorporated by reference).

         (f) The Company shall, during the Shelf Registration Period, deliver
    to each Holder of securities included within the coverage of any Shelf
    Registration Statement, without charge, as many copies of the Prospectus
    (including each preliminary Prospectus) included in such Shelf Registration
    Statement and any amendment or supplement thereto as such

                                       12



    Holder may reasonably request; and the Company consents to the use of the
    Prospectus or any amendment or supplement thereto by each of the selling
    Holders of securities in connection with the offering and sale of the
    securities covered by such Prospectus or any amendment or supplement
    thereto.

         (g) The Company shall furnish to each Exchanging Dealer which so
    requests, without charge, at least one copy of the Exchange Offer
    Registration Statement and any post-effective amendment thereto, including
    financial statements and schedules, any documents incorporated by reference
    therein, and, if the Exchanging Dealer so requests in writing any documents
    incorporated by reference therein and all exhibits (including those
    incorporated by reference).

         (h) The Company shall, during the Exchange Offer Registration Period,
    promptly deliver to each Exchanging Dealer, without charge, as many copies
    of the Prospectus included in such Exchange Offer Registration Statement
    and any amendment or supplement thereto as such Exchanging Dealer may
    reasonably request for delivery by such Exchanging Dealer in connection
    with a sale of New Securities received by it pursuant to the Registered
    Exchange Offer; and the Company consents to the use of the Prospectus or
    any amendment or supplement thereto by any such Exchanging Dealer, as
    aforesaid.

         (i) In connection with any Shelf Registration Statement, the Company
    shall register or qualify or cooperate with any the Holders of securities
    named therein and such Holders' counsel in connection with the registration
    or qualification of such securities for offer and sale under the securities
    or blue sky laws of such jurisdictions as any such Holder reasonably
    requests in writing and do any and all other acts or things necessary or
    advisable to enable the offer and sale in such jurisdictions of the
    securities covered by such Registration Statement; provided, however, that
    the Company will not be required to qualify generally to do business in any
    jurisdiction where it is not then so qualified or to take any action which
    would subject it to general service

                                       13



    of process or to taxation in any such jurisdiction where it is not then
    so subject.

         (j) Unless the applicable Securities shall be in book-entry only form,
    the Company shall cooperate with the Holders of Securities to facilitate
    the timely preparation and delivery of certificates representing Securities
    to be sold pursuant to any Registration Statement free of any restrictive
    legends and in such denominations and registered in such names as Holders
    may request prior to sales of securities pursuant to such Registration
    Statement.

         (k) Upon the occurrence of any event contemplated by paragraph
    (c)(2)(iii) above, the Company shall promptly prepare a post-effective
    amendment to any Registration Statement or an amendment or supplement to
    the related Prospectus or file any other required document so that, as
    thereafter delivered to purchasers of the securities included therein, the
    Prospectus will not include an untrue statement of a material fact or omit
    to state any material fact necessary to make the statements therein, in the
    light of the circumstances under which they were made, not misleading.

         (l) Not later than the effective date of any such Registration
    Statement hereunder, the Company shall provide a CUSIP number for the
    Securities or New Securities, as the case may be, registered under such
    Registration Statement, and provide the applicable trustee with printed
    certificates for such Securities or New Securities, in a form eligible for
    deposit with The Depository Trust Company.

         (m) The Company shall use its best efforts to comply with all
    applicable rules and regulations of the Commission and shall make generally
    available to its security holders as soon as practicable after the
    effective date of the applicable Registration Statement an earnings
    statement satisfying the provisions of Section 11(a) of the Act.

         (n) The Company shall cause the Indenture to be qualified under the
    Trust Indenture Act in a timely manner.

                                       14



         (o) The Company may require each Holder of securities to be sold
    pursuant to any Shelf Registration Statement to furnish to the Company such
    information regarding the holder and the distribution of such securities as
    the Company may from time to time reasonably require for inclusion in such
    Registration Statement, and the Company may exclude from such registration
    the Securities of any Holder that fails to furnish such information within
    a reasonable time after receiving such request.

         (p) The Company shall, if requested, promptly incorporate in a
    Prospectus supplement or post-effective amendment to a Shelf Registration
    Statement, such information as the Managing Underwriters and Majority
    Holders agree should be included therein and to which the Company does not
    unreasonably object and shall make all required filings of such Prospectus
    supplement or post-effective amendment as soon as notified of the matters
    to be incorporated in such Prospectus supplement or post-effective
    amendment.

         (q) In the case of any Shelf Registration Statement, the Company shall
    enter into such customary agreements (including underwriting agreements)
    and take all other appropriate actions in order to expedite or facilitate
    the registration or the disposition of the Securities, and in connection
    therewith, if an underwriting agreement is entered into, cause the same to
    contain indemnification provisions and procedures no less favorable than
    those set forth in Section 7 (or such other provisions and procedures
    reasonably acceptable to the Company, the Majority Holders and the Managing
    Underwriters, if any) with respect to all parties to be indemnified
    pursuant to Section 7 hereof from Holders of Securities to the Company.

         (r) In the case of any Shelf Registration Statement, the Company shall
    (i) make reasonably available for inspection by the Holders of securities
    to be registered thereunder, any underwriter participating in any
    disposition pursuant to such Registration Statement, and any attorney,
    accountant or other agent retained by the Holders or any such underwriter
    all relevant financial and other re-

                                       15



    cords, pertinent corporate documents and properties of the Company and its
    subsidiaries; (ii) cause the Company's officers, directors and employees to
    supply all relevant information reasonably requested by the Holders or any
    such underwriter, attorney, accountant or agent in connection with any such
    Registration Statement as is customary for similar due diligence
    examinations; provided, however, that any information that is designated in
    writing by the Company, in good faith, as confidential at the time of
    delivery of such information shall be kept confidential by the Holders or
    any such underwriter, attorney, accountant or other agent, unless such
    disclosure is made in connection with a court proceeding or required by
    law, or such information becomes available to the public generally or
    through a third party without an accompanying obligation of
    confidentiality; (iii) make such representations and warranties to the
    Holders of securities registered thereunder and the underwriters, if any,
    in form, substance and scope as are customarily made by issuers to
    underwriters in primary underwritten offerings and covering matters
    including, but not limited to, those set forth in the Purchase Agreement;
    (iv) obtain opinions of counsel to the Company and updates thereof (which
    counsel and opinions (in form, scope and substance) shall be reasonably
    satisfactory to the Managing Underwriters, if any) addressed to each
    selling Holder and the underwriters, if any, covering such matters as are
    customarily covered in opinions requested in underwritten offerings and
    such other matters as may be reasonably requested by such Holders and
    underwriters; (v) obtain "cold comfort" letters and updates thereof from
    the independent certified public accountants of the Company (and, if
    necessary, any other independent certified public accountants of any
    subsidiary of the Company or of any business acquired by the Company for
    which financial statements and financial data are, or are required to be,
    included in the Registration Statement), addressed to each selling Holder
    of securities registered thereunder and the underwriters, if any, in
    customary form and covering matters of the type customarily covered in
    "cold comfort" letters in connection with primary underwritten offerings;
    and (vi) deliver such documents and certificates as may be reasonably
    requested by

                                       16



    the Majority Holders and the Managing Underwriters, if any, including those
    to evidence compliance with Section 5(k) and with any customary conditions
    contained in the underwriting agreement or other agreement entered into by
    the Company. The foregoing actions set forth in clauses (iii), (iv), (v)
    and (vi) of this Section 5(r) shall be performed at (A) the effective date
    of such Registration Statement and each post-effective amendment thereto
    and (B) each closing under any underwriting or similar agreement as and to
    the extent required thereunder.

         6. Registration Expenses. The Company shall bear all expenses incurred
in connection with the performance of its obligations under Sections 2, 3, 4
and 5 hereof and, in the event of any Shelf Registration Statement, will
reimburse the Holders for the reasonable fees and disbursements of one firm or
counsel designated by the Majority Holders to act as counsel for the Holders in
connection therewith, and, in the case of any Exchange Offer Registration
Statement, will reimburse the Initial Purchasers for the reasonable fees and
disbursements of counsel acting in connection therewith.

         7. Indemnification and Contribution. (a) In connection with any
Registration Statement, the Company agrees to indemnify and hold harmless each
Holder of securities covered thereby (including each Initial Purchaser and,
with respect to any Prospectus delivery as contemplated in Section 5(h) hereof,
each Exchanging Dealer), the directors, officers, employees and agents of each
such Holder and each person who controls any such Holder within the meaning of
either the Act or the Exchange Act against any and all losses, claims,
damages or liabilities, joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement as originally filed or in
any amendment thereof, or in any preliminary Prospectus or Prospectus, or in
any amendment thereof or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the

                                       17



statements therein not misleading, and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will
not be liable in any case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any such Holder specifically for inclusion therein; provided further,
that with respect to any untrue statement or omission of material fact made in
the Registration Statement, any amendment thereto or the preliminary
Prospectus, the indemnity agreement contained in this Section 7(a) shall not
inure to the benefit of any Holder from whom the person asserting any such
loss, claim, damage or liability purchased the securities concerned, to the
extent that any such loss, claim, damage or liability of such Holder occurs
under the circumstance where it shall have been determined by a court of
competent jurisdiction by final and nonappealable judgment that (w) the
Company had previously furnished copies of the preliminary Prospectus to the
Holder, (x) delivery of the Prospectus was required to be made to such person,
(y) the untrue statement or omission of a material fact contained in the
preliminary Prospectus was corrected in the Prospectus and (z) there was not
sent or given to such person, at or prior to the written confirmation of the
sale of such securities to such person, a copy of the Prospectus. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.

         The Company also agrees to indemnify or contribute to Losses of, as
provided in Section 7(d), any underwriters of Securities registered under a
Shelf Registration Statement, their officers and directors and each person who
controls such underwriters on substantially the same basis as that of the
indemnification of the Initial Purchaser and the selling Holders provided in
this Section 7(a) and shall, if requested by any Holder, enter into an
underwriting agreement reflecting such agreement, as provided in Section 5(q)
hereof.

                                       18



         (b) Each Holder of securities covered by a Registration Statement
(including each Initial Purchaser and, with respect to any Prospectus delivery
as contemplated in Section 5(h) hereof, each Exchanging Dealer) severally
agrees to indemnify and hold harmless (i) the Company, (ii) each of its
directors, (iii) each of its officers who signs such Registration Statement and
(iv) each person who controls the Company within the meaning of either the Act
or the Exchange Act to the same extent as the foregoing indemnity from the
Company to each such Holder, but only with reference to written information
relating to such Holder furnished to the Company by or on behalf of such Holder
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
any such Holder may otherwise have.

         (c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this Section 7, notify the indemnifying party in writing of the commencement
thereof; but the failure so to notify the indemnifying party (i) will not
relieve it from liability under paragraph (a) or (b) above unless and to the
extent it did not otherwise learn of such action and such failure results in
the forfeiture by the indemnifying party of substantial rights and defenses and
(ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be
entitled to appoint as counsel one firm of attorneys of the indemnifying
party's choice at the indemnifying party's expense to represent the indemnified
party (together with one local counsel in each jurisdiction) in any action for
which indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be reasonably satisfactory to the
indemnified party. Notwithstanding the indemnifying party's election to appoint
counsel to represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel (including local counsel), and
the indemnifying party shall bear the reason-

                                       19



able fees, costs and expenses of such separate counsel (and local counsel) if
(i) the use of counsel chosen by the indemnifying party to represent the
indemnified party would present such counsel with a conflict of interest, (ii)
the actual or potential defendants in, or targets of, any such action include
both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal defenses available to
it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, (iii) the indemnifying party shall
not have employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of the
institution of such action or (iv) the indemnifying party shall authorize the
indemnified party to employ separate counsel at the expense of the indemnifying
party, it being understood that the indemnifying party shall not be liable for
more than one separate firm (in addition to one local counsel in each
jurisdiction) for all indemnified parties in each jurisdiction in which any
claim or action arising out of the same general allegations or circumstances is
brought. An indemnifying party will not, without the prior written consent of
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding. An indemnifying party
will not, without its prior written consent, be liable for any settlement or
compromise or consent to the entry of any judgment.

         (d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 7 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, then each applicable indemnifying party, in
lieu of indemnifying such indemnified party, shall have a joint and several
obligation to contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in
connection with investigating or defending same) (collectively "Losses") to
which such indemnified party may be

                                       20



subject in such proportion as is appropriate to reflect the relative benefits
received by such indemnifying party, on the one hand, and such indemnified
party, on the other hand, from the Initial Placement and the Registration
Statement which resulted in such Losses; provided, however, that in no case
shall any Initial Purchaser or any subsequent Holder of any Security or New
Security be responsible, in the aggregate, for any amount in excess of the
purchase discount or commission applicable to such Security, or in the case of
a New Security, applicable to the Security which was exchangeable into such New
Security, as set forth on the cover page of the Final Memorandum, nor shall any
underwriter be responsible for any amount in excess of the underwriting
discount or commission applicable to the securities purchased by such
underwriter under the Registration Statement which resulted in such Losses. If
the allocation provided by the immediately preceding sentence is unavailable
for any reason, the indemnifying party and the indemnified party shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of such indemnifying party, on
the one hand, and such indemnified party, on the other hand, in connection with
the statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Company shall be
deemed to be equal to the sum of (x) the total net proceeds from the Initial
Placement (before deducting expenses) as set forth on the cover page of the
Final Memorandum and (y) the total amount of additional interest which the
Company was not required to pay as a result of registering the securities
covered by the Registration Statement which resulted in such Losses. Benefits
received by the Initial Purchasers shall be deemed to be equal to the total
purchase discounts and commissions as set forth on the cover page of the Final
Memorandum, and benefits received by any other Holders shall be deemed to be
equal to the value of receiving Securities or New Securities, as applicable,
registered under the Act. Benefits received by any underwriter shall be deemed
to be equal to the total underwriting discounts and commissions, as set forth
on the cover page of the Prospectus forming a part of the Registration
Statement which resulted in such Losses. Relative fault shall be determined by
reference to whether any alleged untrue statement or omission relates to
information provided by the indemnifying party, on the one hand, or by the
indemni-

                                       21



fied party, on the other hand. The parties agree that it would not be just and
equitable if contribution were determined by pro rata allocation or any other
method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 7, each person who controls a Holder within the meaning of either
the Act or the Exchange Act and each director, officer, employee and agent of
such Holder shall have the same rights to contribution as such Holder, and each
person who controls the Company within the meaning of either the Act or the
Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to the applicable
terms and conditions of this paragraph (d).

         (e) The provisions of this Section 7 will remain in full force and
effect, regardless of any investigation made by or on behalf of any Holder or
the Company or any of the officers, directors or controlling persons referred
to in Section 7 hereof, and will survive the sale by a Holder of securities
covered by a Registration Statement.

         8. Miscellaneous.

         (a) No Inconsistent Agreements. The Company has not, as of the date
    hereof, entered into, nor shall it, on or after the date hereof, enter
    into, any agreement with respect to its securities that is inconsistent
    with the rights granted to the Holders herein or otherwise conflicts with
    the provisions hereof.

         (b) Amendments and Waivers. The provisions of this Agreement,
    including the provisions of this sentence, may not be amended, qualified,
    modified or supplemented, and waivers or consents to departures from the
    provisions hereof may not be given, unless the Company has obtained the
    written consent of the Holders of at least a majority of the then outstand-

                                       22



    ing aggregate principal amount of Securities (or, after the consummation of
    any Exchange Offer in accordance with Section 2 hereof, of New Securities);
    provided that, with respect to any matter that directly or indirectly
    affects the rights of any Initial Purchaser hereunder, the Company shall
    obtain the written consent of each such Initial Purchaser against which
    such amendment, qualification, supplement, waiver or consent is to be
    effective. Notwithstanding the foregoing (except the foregoing proviso), a
    waiver or consent to departure from the provisions hereof with respect to a
    matter that relates exclusively to the rights of Holders whose securities
    are being sold pursuant to a Registration Statement and that does not
    directly or indirectly affect the rights of other Holders may be given by
    the Majority Holders, determined on the basis of securities being sold
    rather than registered under such Registration Statement.

         (c) Notices. All notices and other communications provided for or
    permitted hereunder shall be made in writing by hand-delivery, first-class
    mail, telex, telecopier, or air courier guaranteeing overnight delivery:

              (1) if to a Holder, at the most current address given by such
         holder to the Company in accordance with the provisions of this
         Section 8(c), which address initially is, with respect to each Holder,
         the address of such Holder maintained by the Registrar under the
         Indenture, with a copy in like manner to Salomon Brothers Inc;

              (2) if to you, initially at the respective addresses set forth
         in the Purchase Agreement; and

              (3) if to the Company, initially at its address set forth in the
         Purchase Agreement.

         All such notices and communications shall be deemed to have been duly
given when received.

                                       23



         The Initial Purchasers or the Company by notice to the other may
designate additional or different addresses for subsequent notices or
communications.

         (d) Successors and Assigns. This Agreement shall inure to the benefit
    of and be binding upon the successors and assigns of each of the parties,
    including, without the need for an express assignment or any consent by the
    Company thereto, subsequent Holders of Securities and/or New Securities.
    The Company hereby agrees to extend the benefits of this Agreement to any
    Holder of Securities and/or New Securities and any such Holder may
    specifically enforce the provisions of this Agreement as if an original
    party hereto.

         (e) Counterparts. This agreement may be executed in any number of
    counterparts and by the parties hereto in separate counterparts, each of
    which when so executed shall be deemed to be an original and all of which
    taken together shall constitute one and the same agreement.

         (f) Headings. The headings in this agreement are for convenience of
    reference only and shall not limit or otherwise affect the meaning hereof.

         (g) Governing Law. This agreement shall be governed by and construed
    in accordance with the internal laws of the State of New York (without
    regard to the conflict of law provisions thereof).

         (h) Severability. In the event that any one of more of the provisions
    contained herein, or the application thereof in any circumstances, is held
    invalid, illegal or unenforceable in any respect for any reason, the
    validity, legality and enforceability of any such provision in every other
    respect and of the remaining provisions hereof shall not be in any way
    impaired or affected thereby, it being intended that all of the rights and
    privileges of the parties shall be enforceable to the fullest extent
    permitted by law.

         (i) Securities Held by the Company, etc. Whenever the consent or
    approval of Holders of a specified percentage of principal amount of
    Securi-

                                       24



    ties or New Securities is required hereunder, Securities or New Securities,
    as applicable, held by the Company or its Affiliates (other than subsequent
    Holders of Securities or New Securities if such subsequent Holders are
    deemed to be Affiliates solely by reason of their holdings of such
    Securities or New Securities) shall not be counted in determining whether
    such consent or approval was given by the Holders of such required
    percentage.

                                       25



         Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.


                                            NRG ENERGY, INC.

                                            by: /s/ LEONARD A. BLUHM
                                               ---------------------
                                               Name:  Leonard A. Bluhm
                                               Title: Executive V.P. and CFO


The foregoing Agreement is hereby accepted as of the date first above written.

SALOMON BROTHERS INC
ABN AMRO CHICAGO CORPORATION
CHASE SECURITIES INC.


    by:  SALOMON BROTHERS INC


    by: /s/PETER H. KIND
        ----------------
       Name: Peter H. Kind
       Title: Director

                                       26



                                                                        ANNEX A


         Each broker-dealer that receives New Securities 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 Securities. 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 Securities received in exchange for Securities where such
New Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company 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."



                                                                        ANNEX B


         Each broker-dealer that receives New Securities for its own account in
exchange for Securities, where such Securities were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Securities. See "Plan of Distribution."



                                                                        ANNEX C

                              PLAN OF DISTRIBUTION


         Each broker-dealer that receives New Securities 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 Securities. The
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 Securities received in
exchange for Securities where such Securities were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date and ending on the close of business on
the [  ]th 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 , 199 , all dealers effecting
transactions in the New Securities may be required to deliver a prospectus1.

         The Company will not receive any proceeds from any sale of New
Securities by broker-dealers. New Securities 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 Securities 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 the purchasers of any such New
Securities. Any broker-dealer that resells New Securities 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 Securities may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit of any
such resale of New Securities 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 acknowledging 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.

- --------------
1   In addition, the legend required by Item 502(e) of Regulation S-K
    will appear on the back cover page of the Exchange Offer prospectus.



         For a period of [  ] days after the Expiration Date, the Company 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. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Securities) other than commissions or concessions of any brokers
or dealers and will indemnify the holders of the Securities (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.

         [If applicable, add information required by Regulation S-K Items 507
and/or 508.]

                                       2



                                                                        ANNEX D

Rider A
- -------

  [ ]      CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO
           RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND
           10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.

           Name:
                -------------------------------------------
           Address:
                   ----------------------------------------

           ------------------------------------------------

Rider B
- -------

         If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a distribution of
New Securities. If the undersigned is a broker-dealer that will receive New
Securities for its own account in exchange for Securities that were acquired as
a result of market-making activities or other trading activities, it
acknowledges that it will deliver a prospectus in connection with any resale of
such New Securities; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.



                              EMPLOYMENT AGREEMENT

         THIS AGREEMENT by and between NRG Energy, Inc., a Delaware corporation
("NRG"), and David H. Peterson (the "Executive"), ("Agreement") is dated as of
the 28th day of June, 1995.

                                WITNESSETH THAT

         WHEREAS, The Board of Directors of NRG (the "Board") wishes to provide
for the employment of the Executive, and the Executive wishes to serve NRG, in
the capacities and on the terms and conditions set forth in this Agreement:

         NOW THEREFORE, it is hereby agreed as follows:

         1. Term. NRG shall employ the Executive, and the Executive shall serve
NRG, on the terms and conditions set forth in this Agreement, for the five-year
period, (the "Employment Period") commencing on June 28, 1995 (the "Effective
Time") and ending June 27, 2000.

         2. Position and Duties.

            (a) During the term of this Agreement, Executive shall serve as
the highest level executive officer of NRG, with such duties and
responsibilities not inconsistent therewith as may from time to time be
assigned to him by the Board of Directors of NRG. The Executive shall be a
member of the Board on the first day



of the Employment Period, and the Board shall propose the Executive for
re-election to the Board throughout the Employment Period.

            (b) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive shall
devote reasonable attention and time during normal business hours to the
business and affairs of NRG and, to the extent necessary to discharge the
responsibilities assigned to the Executive under this Agreement, use the
Executive's reasonable best efforts to carry out such responsibilities
faithfully and efficiently. It shall not be considered a violation of the
foregoing for the Executive to serve on corporate, industry, civic or
charitable boards or committees, so long as such activities do not
significantly interfere with the performance of the Executive's
responsibilities as an employee of NRG in accordance with this Agreement.

         3. Compensation.

            (a) Base Salary. The Executive's compensation during the
Employment Period shall be determined by the Board upon the recommendation of
the Compensation Committee of the Board, subject to the next sentence and
Section 3 (b). During the Employment Period, the Execu-

                                       2



tive shall receive an annual base salary ("Annual Base Salary") of not less
than his annual base salary from NRG as in effect immediately before the
Effective Time. The Annual Base Salary shall be payable in accordance with
NRG's regular payroll practice for its senior executives, as in effect from
time to time. During the Employment Period, the Annual Base salary shall be
reviewed for possible increase at least annually. Any increase in the Annual
Base Salary shall not limit or reduce any other obligation of NRG under this
Agreement. The Annual Base Salary shall not be reduced after any such increase,
and the term "Annual Base Salary" shall thereafter refer to the Annual Base
Salary as so increased.

            (b) Other Compensation and Benefits.

                (i) Retirement and Welfare Benefits. NRG agrees that during the
         Employment Period it will provide Executive with retirement and
         welfare benefits that, in the aggregate, are no less favorable to him
         than those provided to any other officer of NRG. To the extent that
         Executive's benefits are provided by plans sponsored by Northern
         States Power Company ("NSP"), NRG agrees that Executive shall
         participate in such plans on terms and conditions no less favorable
         than those that apply to officers of NSP. To

                                       3



         the extent that Executive's benefits are provided by plans sponsored
         by NRG, NRG agrees that Executive shall participate in such plans on
         terms and conditions no less favorable than those that apply to any
         other officer of NRG.

                (ii) Incentive Compensation. During the Employment Period, the
         Executive shall participate in short-term incentive compensation plans
         and long-term incentive compensation plans providing him with the
         opportunity to earn, on a year-by-year basis, greater short-term and
         long-term incentive compensation (the "Incentive Compensation") than
         any other NRG officer.

            (c) Additional Benefits.

                (i) Supplemental Retirement Benefits. During the Employment
         Period, the Executive shall participate in a supplemental executive
         retirement plan ("SERP") such that the aggregate value of the
         retirement benefits that he and his spouse will receive at the end of
         the Employment Period under all defined benefit plans of NRG, NSP and
         their affiliates (whether qualified or not) will be not less than the
         aggregate value of the benefits he would have received had he
         continued, through the end of the

                                       4



         Employment Period to participate in the NSP Deferred Compensation
         Plan, the NSP Excess Benefit Plan, and the NSP Pension Plan; provided,
         that benefits under the SERP, shall also include the amount, if any,
         that the NSP Pension Plan's actuaries reasonably estimate is necessary
         to compensate Executive for the monthly defined benefit payments the
         Executive did not receive, but would have received during the term of
         this Agreement and prior to the date of his actual termination of
         employment if monthly benefit payments had commenced at the end of the
         month following the month in which the Executive first became eligible
         for Early Retirement under the NSP Pension Plan. In addition, the SERP
         shall offer the Executive the option to receive his benefits
         thereunder in a single lump sum payment using actuarial assumptions
         that the NSP Pension Plan's actuaries determine are reasonable in the
         aggregate; provided, that such lump sum payment option shall be
         subject to the consent of the Board in its sole discretion and must be
         requested by the Executive not less than twelve months prior to the
         Executive's termination of employment. Finally, if the Executive dies
         while employed, or deemed pursuant to paragraph (a) of section 5 to be
         employed

                                       5



         by NRG, his surviving spouse (or, if, he has no surviving spouse, his
         estate) shall be entitled to receive a benefit equal in value to the
         difference between the pension benefit that the Executive would have
         received if he had retired (rather than died ) on the date of his
         death and received a lump sum pension benefit and the lump sum value
         of the pension payable in the absence of this provision; provided,
         that in the case where the Executive has no surviving spouse, the
         benefit pursuant to this sentence shall be paid in a lump sum; and
         provided, further, that in the case where the Executive has a
         surviving spouse, the benefit pursuant to this sentence shall be paid
         in the form of a single life annuity for her life unless she elects a
         single lump sum payment and the Board, in its sole discretion,
         consents to the lump sum payment. Notwithstanding anything in the
         preceding sentence to the contrary, if despite reasonable efforts NRG
         is unable to obtain insurance on the life of the Executive with a
         death benefit equal to the anticipated after-tax cost to NRG of the
         benefit described in the preceding sentence at an average annual
         premium cost of less than $7,000, then the value of such benefit
         payable to Executive's surviv-

                                       6



         ing spouse or estate shall be reduced so that its after-tax cost to
         NRG does not exceed the amount of insurance on the life of the
         Executive that NRG could obtain at such cost.

                (ii) During the Employment Period, the Company shall provide
         the Executive with life insurance coverage (the "Life Insurance
         Coverage") providing a death benefit to such beneficiary or
         beneficiaries as the Executive may designate of not less than his
         Annual Base Salary. Following the Employment Period, the Company shall
         provide the Executive with a life insurance benefit at least equal to
         the benefit that would have been provided to the executive after
         termination of employment under the Northern States Power Company
         Officer Survivor Benefit Plan as in effect immediately before the
         Effective Time.

            (d) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to receive fringe benefits that are no less favorable to him
than those provided to any other officer of NRG.

         4. Termination of Employment.

            (a) Death or disability. The Executive's employment shall terminate
automatically upon the

                                       7



Executive's death during the Employment Period. NRG shall be entitled to
terminate the Executive's employment because of the Executive's Disability
during the Employment period. "Disability" means that (i) the Executive has
been unable, for a period of 60 consecutive calendar days, to perform the
Executive's duties under this Agreement, as a result of physical or mental
illness or injury, and (ii) a physician selected by NRG or its insurers, and
acceptable to the Executive or the Executive's legal representative, has
determined that the Executive's incapacity is total and permanent. A
termination of the Executive's employment by NRG for Disability shall be
communicated to the Executive by written notice, and shall be effective on the
30th day after such notice is given to the Executive (the "Disability Effective
Date"), unless the Executive returns to full-time performance of the
Executive's duties before the Disability Effective Date.

            (b) By the Company.

                (i) NRG may terminate the Executive's employment during the
         Employment Period for Cause or without Cause. "Cause" means:

                    A. the willful and continued failure of the Executive
              substantially to perform the Executive's duties under this

                                       8



              Agreement, after the Board of NRG delivers to the Executive a
              written demand for substantial performance that specifically
              identifies the manner in which the Board believes that the
              Executive has not substantially performed the Executive's duties;

                    B. the failure to achieve reasonable minimum performance
              goals established by the Board and consistent with NRG's then
              current long-term business plan; or

                    C. illegal conduct or gross misconduct by the Executive, in
              either case that is willful and results in material and
              demonstrable damage to the business of NRG.

No act or failure to act on the part of the Executive shall be considered
"willful" if it is done, or omitted to be done, by the Executive due to
circumstances beyond the Executive's control (which may include, but are not
limited to, the Executive's physical or mental illness or injury).

                (ii) A termination of the Executive's employment for Cause
         shall be effected in accordance with the following procedures. NRG
         shall give the Executive written notice ("Notice of Termination for
         Cause") of its intention to terminate the Executive's employment for
         Cause, setting forth in reasonable detail the specific conduct of the
         Executive that it considers to constitute Cause and the specific

                                       9



         provision(s) of this Agreement on which it relies, and stating the
         date, time and place of the Special Board Meeting for Cause. The
         "Special Board Meeting for Cause" means a meeting of the Board called
         and held specifically for the purpose of considering the Executive's
         termination for Cause, that takes place not less than ten and not more
         than twenty business days after the Executive receives the Notice of
         Termination for Cause. The Executive shall be given an opportunity,
         together with counsel, to be heard at the Special Board Meeting for
         Cause. The Executive's termination for Cause shall be effective when
         and if a resolution is duly adopted at the Special Board Meeting for
         Cause by affirmative vote of a majority of the entire membership of
         the Board, excluding NRG employee directors, stating that in the good
         faith opinion of the Board, the Executive is guilty of the conduct
         described in the Notice of Termination for Cause, and that conduct
         constitutes Cause under this Agreement.

                (iii) A termination of the Executive's employment without Cause
         shall be effective when and if a resolution is duly adopted by

                                       10



         the Board stating that the Executive is terminated without Cause.

            (c) Good Reason.

                (i) The Executive may terminate employment for Good Reason or
         without Good Reason. "Good Reason" means:

                    A. the assignment to the Executive of any duties
              inconsistent in any respect with paragraph (a) of Section 2 of
              this Agreement, or any other action by NRG that results in a
              diminution in the Executive's position, authority, duties or
              responsibilities, unless such action is remedied by NRG promptly
              after receipt of written notice thereof from the Executive;

                    B. any failure by NRG to comply with any provision of
              Section 3 of this Agreement, unless such action is remedied by
              NRG promptly after receipt of written notice thereof from the
              Executive;

                    C. any purported termination of the Executive's employment
              by NRG for a reason or in a manner not expressly permitted by
              this Agreement;

                    D. any failure by NRG to comply with paragraph (c) of
              Section 12 of this Agreement; or

                    E. any other substantial breach of this Agreement by NRG
              that is not remedied by NRG promptly after receipt of written
              notice thereof from the Executive.

                (ii) A termination of employment by the Executive for Good
         Reason shall be effectuated by giving NRG written notice ("Notice of
         Termination for

                                       11



         Good Reason") of the termination, setting forth in reasonable detail
         the specific conduct of NRG that constitutes Good Reason and the
         specific provision(s) of this Agreement on which the Executive relies.
         A termination of employment by the Executive for Good Reason shall be
         effective on the fifth business day following the date when the Notice
         of Termination for Good Reason is given, unless the notice sets forth
         a later date (which date shall in no event be later than 30 days after
         the notice is given).

                (iii) A termination of the Executive's employment by the
         Executive without Good Reason shall be effected by giving NRG written
         notice of the termination.

            (d) No Waiver. The failure to set forth any fact or circumstance in
a Notice of Termination for Cause, a Notice of Termination without Cause or a
Notice of Termination for Good Reason shall not constitute a waiver of the
right to assert, and shall not preclude the party giving notice from asserting,
such fact or circumstance in an attempt to enforce any right under or provision
of this Agreement.

            (e) Date of Termination. The "Date of Termination" means the date
of the Executive's death, the

                                       12





Disability Effective Date, the date on which the termination of the Executive's
employment by JRG for Cause or without Cause or by the Executive for Good
Reason is effective, or the date on which the Executive gives NRG notice of a
termination of employment without Good Reason, as the case may be.

         5. Obligations of NRG upon Termination.

            (a) By NRG Other Than for Cause or Disability; By the Executive
for Good Reason. If, during the Employment Period, NRG terminates the
Executive's employment, other than for Cause or Disability, or the Executive
terminates employment for Good Reason, NRG shall continue to provide the
Executive with the compensation and benefits set forth in Section 3 as if he
had remained employed by NRG pursuant to this Agreement through the end of the
Employment Period and then retired (at which time he will be treated as
eligible for all retiree welfare benefits and other benefits provided to
retired senior executives, as set forth in Section 3(b) and (c)); provided,
that the Incentive Compensation for such period shall be equal to the greater
of the target Incentive Compensation that the Executive would have been
eligible to earn for such period or the Incentive Compensation awarded for the
last complete incentive plan year ending

                                       13



prior to Executive's Termination of Employment; provided, further, that in lieu
of stock-based or equity-based awards, the Executive shall be paid cash equal
to the fair market value at the time of grant, if any, (determined without
regard to any restrictions) of the awards that would otherwise have been
granted; and provided, finally, that during any period when the Executive is
eligible to receive welfare benefits of the type described in paragraph (b) (i)
of Section 3 under another employer-provided plan, the welfare benefits
provided by NRG under this paragraph (a) of Section 5 may be made secondary to
those provided under such other plan. The payments and benefits provided
pursuant to this paragraph (a) of Section 5 are intended as liquidated damages
for a termination of the Executive's employment by NRG other than for Cause or
Disability or for the actions of NRG leading to a termination of the
Executive's employment by the Executive for Good Reason, and shall be the sole
and exclusive remedy therefor.

            (b) Death or Disability. If the Executive's employment is
terminated by reason of the Executive's death or Disability during the
Employment Period, NRG shall pay to the Executive or, in the case of the
Executive's death, to the Executive's designated

                                       14



beneficiaries (or, if there is no such beneficiary, to the Executive's estate
or legal representative), in a lump sum in cash within 30 days after the Date
of Termination, the sum of the following amounts (the "Accrued Obligations"):
(1) any portion of the Executive's Annual Base Salary through the Date of
Termination that has not yet been paid; (2) an amount representing the
Incentive Compensation for the period that includes the Date of Termination,
computed by assuming that the amount of all such incentive Compensation would
be the same as the amount of such Incentive Compensation for the latest
corresponding period ending before the Date of Termination, and multiplying
that amount by a fraction, the numerator of which is the number of days in such
period through the Date of Termination, and the denominator of which is the
total number of days in the relevant period, (3) any compensation previously
deferred by the Executive (together with any accrued interest or earnings
thereon) that has not yet been paid; and (4) any accrued but unpaid Incentive
Compensation and vacation pay; and NRG shall have no further obligations under
this Agreement, except as specified in Section 6 below.

            (c) By NRG for Cause; By the Executive Other than for Good Reason.
If the Executive's employment

                                       15



is terminated by NRG for Cause during the Employment Period, NRG shall pay the
Executive the Annual Base Salary through the Date of Termination and the amount
of any compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon), in each case to the extent not yet paid,
and NRG shall have no further obligations under this Agreement, except as
specified in Section 6 below. If the Executive voluntarily terminates
employment during the Employment Period, other than for Good Reason, NRG shall
pay the Accrued Obligations to the Executive in a lump sum in cash within 30
days of the Date of Termination, and NRG shall have no further obligations
under this Agreement, except as specified in Section 6 below.

         6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by NRG or any of its affiliated companies
for which the Executive may qualify, nor, subject to paragraph (f) of Section
11, shall anything in this Agreement limit or otherwise affect such rights as
the Executive may have under any contract or agreement with NRG or any of its
affiliated companies; provided, however, that Executive waives any rights he
has or may

                                       16



hereafter acquire to participate in or to receive benefits under the NSP
Severance Plan, or any other severance plan, policy or arrangement that is
generally applicable to senior executives of NRG or NSP to the extent those
rights are based on his employment under this agreement or any prior
employment. Vested benefits and other amounts that the Executive is otherwise
entitled to receive under the Incentive Compensation, the Life Insurance
Coverage, or any other plan, policy, practice or program of, or any contract or
agreement with, NRG or any of its affiliated companies on or after the Date of
Termination shall be payable in accordance with the terms of each such plan,
policy, practice, program, contract or agreement, as the case may be, except as
explicitly modified by this Agreement.

         7. Full Settlement. NRG's obligation to make the payments provided for
in, and otherwise to perform its obligations under, this Agreement shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim,
right or action that NRG may have against the Executive or others. In no event
shall the Executive be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Executive under any
of the provisions of this Agreement

                                       17



and, except as specifically provided in paragraph (a) of Section 5 with respect
to benefits described in paragraph (b) (i) of Section 3, such amounts shall not
be reduced, regardless of whether the Executive obtains other employment.

         8. Noncompetition Agreement. During the period of the Executive's
employment by NRG and until the later of (i) one year after the Executive's
Date of Termination or (ii) in the event Section 5(a) applies, the end of the
Employment Period, Executive agrees that he will not, directly or indirectly
own, manage, operate, join, work for, control or participate in the ownership,
management, operation or control of, or be connected in any manner with, any
business (whether in corporate, proprietorship, or partnership form or
otherwise) as a more than 10% owner in such business, or member of a group
controlling such business where such business is engaged in any activity which
competes with the business of NRG as conducted on the Date of Termination of
Executive's employment from NRG or which will compete with any proposed
business activity of NRG in the planning stage on such Date of Termination.
During the period of the Executive's employment by NRG and until the later of
(i) two years after the Executive's Date of Termination or (ii) in the event
Section 5(a)

                                       18



applies, the end of the Employment Period, Executive agrees that he will not,
for his own benefit or for any other person, corporation or other entity (other
than NRG and its subsidiaries or affiliates) call on or solicit any customers
of NRG or any of its subsidiaries or affiliates for any business purpose that
competes with the business of NRG as conducted on the Date of Termination of
Executive's employment from NRG or which will compete with any proposed
business activity of NRG in the planning stage on such Date of Termination.
Executive acknowledges and agrees that the remedy at law for any breach of this
Section 8 will be inadequate and that NRG, in addition to any other relief
available to it, shall be entitled to temporary and permanent injunctive relief
without the necessity of proving actual damage. In the event that the
provisions of this covenant not to compete should ever be judicially determined
to exceed the limitation permitted by applicable law, then the parties hereto
agree that such provisions shall be reformed to set forth the maximum
limitations permitted.

         9. Confidential Information.

            (a) "Confidential Information" as used in this Section means
information that is not generally known and that is proprietary to NRG or that
NRG is obligated to

                                       19



treat as proprietary. This information includes, without limitation:

                (i) trade secret information about NRG, its strategies and its
         products;

                (ii) information concerning NRG's business, as NRG has
         conducted it or as it may be conducted in the future; and

                (iii) information concerning any of NRG's past, current, or
         possible future products or services, including (without limitation)
         information about NRG's research, development, accounting, marketing,
         selling or leasing.

Any information that the Executive reasonably considers Confidential
Information, or that NRG treats as Confidential Information, will be presumed
to be Confidential Information (whether the Executive or others originated it
and regardless of how he obtained it).

            (b) Except as required in his duties with NRG, during the period of
his employment by NRG and until the later of (i) two years after his Date of
Termination or (ii) in the event Section 5(a) applies, the end of the
Employment Period, the Executive will not use or disclose Confidential
Information to any person not authorized by NRG to receive it. When the
Executive's employment with

                                       20



NRG ends, he will promptly turn over to NRG all records and any compositions,
articles, devices, apparatus and other items that disclose, describe or embody
Confidential Information, including all copies, reproductions and specimens of
Confidential Information in his possession, regardless of who prepared them.

            (c) Notwithstanding anything in this Agreement to the contrary,
Executive's obligations under Sections 8 and 9 of this agreement shall not be
limited by the term of this Agreement and shall continue in full force
following the expiration of the term of this Agreement or its earlier
termination, as described in those sections.

         10. Successors.

            (a) This Agreement is personal to the Executive and, without the
prior written consent of NRG, shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.

            (b) This Agreement shall inure to the benefit of and be binding
upon NRG and its successors and assigns.

                                       21



            (c) NRG shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of NRG expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that NRG would have been
required to perform it if no such succession had taken place. As used in this
Agreement, "NRG" shall mean both NRG as defined above and any such successor
that assumes and agrees to perform this Agreement, by operation of law or
otherwise.

         11. Miscellaneous.

            (a) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Minnesota, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified except by a written agreement executed by the parties
hereto or their respective successors and legal representatives.

            (b) All notices and other communications under this Agreement shall
be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage pre-paid,
addressed as follows:

                                       22



If to the Executive:

         David H. Peterson
         10720 Mississippi Boulevard NW
         Coon Rapids, MN 55433

If to NRG:

         NRG Energy, Inc.
         1221 Nicollet Mall, Suite 700
         Minneapolis, MN 55403
         Attention: General Counsel

or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (b) of Section 11. Notices and communications
shall be effective when actually received by the addressee.

            (c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement. If any provision of this Agreement shall be held
invalid or unenforceable in part, the remaining portion of such provision,
together with all other provisions of this Agreement, shall remain valid and
enforceable and continue in full force and effect to the fullest extent
consistent with law.

            (d) Notwithstanding any other provision of this Agreement, NRG may
withhold from amounts payable

                                       23



under this Agreement all federal, state, local and foreign taxes that are
required to be withheld by applicable laws or regulations.

            (e) The Executive's or NRG's failure to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to paragraph (c) of Section 4 of this
agreement) shall not be deemed to be a waiver of such provision or right or of
any other provisions of or right under this agreement.

            (f) The Executive and NRG acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof.

            (g) The rights and benefits of the Executive under this Agreement
may not be anticipated, assigned, alienated or subject to attachment,
garnishment, levy, execution or other legal or equitable process except as
required by law. Any attempt by the Executive to anticipate, alienate, assign,
sell, transfer, pledge, encumber or charge the same shall be void. Payments
hereunder shall not be considered assets of the Executive in the event of
insolvency or bankruptcy.

                                       24



            (h) This Agreement may be executed in several counterparts, each of
which shall be deemed an original, and said counterparts shall constitute but
one and the same instrument.

                                       25



         IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization of its Board of Directors, NRG has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.


                                            /s/DAVID PETERSON
                                          ---------------------
                                             David Peterson


                                       NRG Energy, Inc.

                                       By /s/D.D. ANTONY
                                         ---------------

                                       26



                               NRG ENERGY, INC.

                                      to

                            NORWEST BANK MINNESOTA,
                             NATIONAL ASSOCIATION,
                                  as Trustee


                            ----------------------


                                   INDENTURE

                         Dated as of January 31, 1996

                            ----------------------



                                 $125,000,000

                         7.625% Senior Notes Due 2006




                               TABLE OF CONTENTS

                                                                          Page

                                   ARTICLE I

                                  DEFINITIONS

1.1   Certain Terms Defined................................................. 1

                                  ARTICLE II

                          ISSUE, EXECUTION, FORM AND
                          REGISTRATION OF SECURITIES

2.1  Authentication and Delivery of Securities.............................. 7
2.2  Execution of Securities................................................ 8
2.3  Certificate of Authentication.......................................... 8
2.4  Form, Denomination and Date of Securities; Payments of Interest........ 8
2.5  Global Securities..................................................... 11
2.6  Registration, Registration of Transfer and Exchange................... 12
2.7  Mutilated, Defaced, Destroyed, Lost and Stolen Securities............. 17
2.8  Cancellation of Securities; Destruction Thereof....................... 18
2.9  Temporary Securities.................................................. 18
2.10 Computation of Interest............................................... 19

                                  ARTICLE III

                                 COVENANTS OF
                          THE ISSUER AND THE TRUSTEE

3.1  Payment of Principal and Interest..................................... 19
3.2  Offices for Payments, etc............................................. 19
3.3  Appointment to Fill a Vacancy in Office of Trustee.................... 19
3.4  Paying Agents......................................................... 20
3.5  Certificate to Trustee................................................ 20
3.6  Securityholder's Lists................................................ 20
3.7  Reports by the Issuer................................................. 21
3.8  Limitation on Liens................................................... 21

                                       i



3.9  Net Worth............................................................. 22
3.10 Repurchase of Securities Upon a Change of Control..................... 22

                                  ARTICLE IV

                          REMEDIES OF THE TRUSTEE AND
                      SECURITYHOLDERS ON EVENT OF DEFAULT

4.1  Event of Default Defined; Acceleration of Maturity; Waiver of Default. 23
4.2  Collection of Indebtedness by Trustee; Trustee May Prove Debt......... 26
4.3  Application of Proceeds............................................... 28
4.4  Suits for Enforcement................................................. 28
4.5  Restoration of Rights on Abandonment of Proceedings................... 29
4.6  Limitations of Suits by Securityholders............................... 29
4.7  Powers and Remedies Cumulative; Delay or Omission Not Waiver of
         Default........................................................... 29
4.8  Control by Securityholders............................................ 30
4.9  Waiver of Past Defaults............................................... 30
4.10 Rights of Holders to Receive Payment.................................. 31

                                   ARTICLE V

                            CONCERNING THE TRUSTEE

5.1  Duties and Responsibilities of the Trustee; During Default; Prior to 
         Default........................................................... 31
5.2  Certain Rights of the Trustee......................................... 32
5.3  Trustee Not Responsible for Recitals, Disposition of Securities or 
         Application of Proceeds Thereof................................... 33
5.4  Trustee and Agents May Hold Securities; Collections, etc.............. 33
5.5  Moneys Held by Trustee................................................ 33
5.6  Compensation and Indemnification of Trustee and Its Prior Claim....... 34
5.7  Right of Trustee to Rely on Officers' Certificate, etc................ 34
5.8  Persons Eligible for Appointment as Trustee........................... 34
5.9  Resignation and Removal; Appointment of Successor Trustee............. 34
5.10 Acceptance of Appointment by Successor Trustee........................ 35
5.11 Merger, Conversion, Consolidation or Succession to Business of Trustee 36

                                  ARTICLE VI

                        CONCERNING THE SECURITYHOLDERS

6.1  Evidence of Action Taken by Securityholders........................... 37
6.2  Proof of Execution of Instruments and of Holding of Securities Record 
         Date.............................................................. 37
6.3  Holders to Be Treated as Owners....................................... 37
6.4  Securities Owned by Issuer Deemed Not Outstanding..................... 37
6.5  Right of Revocation of Action Taken................................... 38

                                       ii



                                  ARTICLE VII

                            SUPPLEMENTAL INDENTURES

7.1  Supplemental Indentures Without Consent of Securityholders............ 38
7.2  Supplemental Indentures With Consent of Securityholders............... 39
7.3  Effect of Supplemental Indenture...................................... 40
7.4  Documents to Be Given to Trustee...................................... 40
7.5  Notation of Securities in Respect of Supplemental Indentures.......... 40

                                 ARTICLE VIII

                   CONSOLIDATION, MERGER, SALE OR CONVEYANCE

8.1  Covenant Not to Merge, Consolidate, Sell or Transfer Assets Except
         Under Certain Conditions.......................................... 41
8.2  Successor Corporation Substituted..................................... 41
8.3  Opinion of Counsel to Trustee; Officers' Certificate.................. 42

                                  ARTICLE IX

                          SATISFACTION AND DISCHARGE
                        OF INDENTURE; UNCLAIMED MONEYS

9.1  Satisfaction and Discharge of Indenture............................... 42
9.2  Application by Trustee of Funds Deposited for Payment of Securities... 43
9.3  Repayment of Moneys Held by Paying Agent.............................. 43
9.4  Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two 
         Years............................................................. 43
9.5  Defeasance and Discharge of Indenture................................. 44
9.6  Defeasance of Certain Obligations..................................... 45

                                   ARTICLE X

                           MISCELLANEOUS PROVISIONS

10.1  Incorporators, Shareholders, Officers and Directors of Issuer Exempt
         from Individual Liability......................................... 46
10.2  Provisions of the Indenture for the Sole Benefit of Parties and 
         Securityholders................................................... 46
10.3  Successors and Assigns of Issuer Bound by Indenture.................. 46
10.4  Notices and Demands on Issuer, Trustee and Securityholders........... 47
10.5  Officers' Certificates and Opinions of Counsel; Statements to Be 
         Contained Therein................................................. 47
10.6  Payments Due on Saturdays, Sundays and Holidays...................... 48
10.7  New York Law to Govern............................................... 48
10.8  Counterparts......................................................... 48
10.9  Effect of Headings................................................... 48

                                      iii



                                  ARTICLE XI

                           REDEMPTION OF SECURITIES

11.1  Right of Optional Redemption Price................................... 49
11.2  Notice of Redemption................................................. 49
11.3  Payment of Securities Called for Redemption.......................... 49

                                       iv



EXHIBIT A FORM OF SECURITY
EXHIBIT B FORM OF RESTRICTED PERIOD CERTIFICATE
EXHIBIT C FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE
          FROM RULE 144A GLOBAL SECURITY OR IAI GLOBAL SECURITY TO
          RESTRICTED REGULATION S GLOBAL SECURITY
EXHIBIT D FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE
          FROM RULE 144A GLOBAL SECURITY OR IAI GLOBAL SECURITY TO
          UNRESTRICTED REGULATION S GLOBAL SECURITY
EXHIBIT E FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE
          FROM RESTRICTED REGULATION S GLOBAL SECURITY,
          UNRESTRICTED REGULATION S GLOBAL SECURITY OR IAI GLOBAL
          SECURITY TO RULE 144A GLOBAL SECURITY
EXHIBIT F FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE
          FROM RULE 144A GLOBAL SECURITY, RESTRICTED REGULATION S
          GLOBAL SECURITY OR UNRESTRICTED REGULATION S GLOBAL
          SECURITY TO IAI GLOBAL SECURITY


                                      v






                  INDENTURE, dated as of January 31, 1996 from NRG ENERGY,
INC., a Delaware corporation (herein called the "Issuer"), to NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, as trustee (herein called the "Trustee").


                             W I T N E S S E T H:

                  WHEREAS, the Issuer has duly authorized the issue of
$125,000,000 aggregate principal amount of its 7.625% Senior Notes Due 2006
(the "Securities") and, to provide, among other things, for the
authentication, delivery and administration thereof, the Issuer has duly
authorized the execution and delivery of this Indenture; and

                  WHEREAS, all things necessary to make the Securities, when
executed by the Issuer and authenticated and delivered by the Trustee as in
this Indenture provided, the valid, binding and legal obligations of the
Issuer, and to constitute these presents a valid indenture and agreement
according to its terms, have been done;

                  NOW, THEREFORE:

                  In consideration of the premises and the purchases of the
Securities by the Holders (as defined herein) thereof, the Issuer and the
Trustee mutually covenant and agree for the equal and proportionate benefit of
the respective Holders from time to time of the Securities as follows:

                                   ARTICLE I

                                  DEFINITIONS

                  SECTION 1.1 Certain Terms Defined. The following terms
(except as otherwise expressly provided) for all purposes of this Indenture
shall have the respective meanings specified in this Section. All accounting
terms used herein and not expressly defined shall have the meanings given to
them in accordance with GAAP (as defined herein). The words "herein," "hereof"
and "hereunder" and other words of similar import refer to this Indenture as a
whole and not to any particular Article, Section or other subdivision. The
terms defined in this Article include the plural as well as the singular.

                  "Agent Members" has the meaning set forth in Section 2.4(c).

                  "Applicable Premium" means, with respect to a Security at
any time, the excess (if any) of (i) the sum of the present values of all of
the remaining scheduled payments of principal of and interest on the
Securities from the applicable redemption date through the Stated Maturity of
such Security, computed on a semi-annual basis by discounting such payments
(assuming a 360-day year consisting of twelve 30-day months and using a rate
equal to the Treasury Rate plus 50 basis points) over (ii) the aggregate
unpaid principal amount of the Security to be redeemed plus any accrued but
unpaid interest thereon. The Applicable Premium






shall be computed as of the third Business Day prior to the applicable
redemption date, and certified, by an Investment Banker.

                  "Board of Directors" means either the Board of Directors of
the Issuer or any committee of such Board duly authorized to act on behalf of
such Board.

                  "Business Day" means a day which is neither a legal holiday
nor 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 the city of Minneapolis, Minnesota.

                  "Capital Stock" means, with respect to any Person, any and
all outstanding shares, interests, participations or other equivalents
(however designated, whether voting or non-voting) of, or interests in
(however designated), the equity of such Person including, without limitation,
all Common Stock and Preferred Stock and partnership and joint venture
interests of such Person.

                  "Cedel" has the meaning set forth in Section 2.4(b).

                  "Change of Control" means the occurrence of one or more of
the following events: (i) NSP (or its successors) shall cease to own a
majority of the outstanding Voting Stock of the Issuer, (ii) at any time
following the occurrence of the event described in clause (i), a Person or
group (as that term is used in Section 13(d)(3) of the Exchange Act) of
Persons (other than NSP) shall have become the beneficial owner, directly or
indirectly, or shall have acquired the absolute power to direct the vote, of
more than 35% of the outstanding Voting Stock of the Issuer or (iii) during
any twelve-month period, individuals who at the beginning of such period
constitute the Board of Directors (together with any new directors whose
election or nomination was approved by a majority of the directors then in
office who were either directors at the beginning of such period or who were
previously so approved) shall cease for any reason to constitute a majority of
the Board of Directors. Notwithstanding the foregoing, a Change of Control
shall be deemed not to have occurred if one or more of the above events occurs
or circumstances exist and, after giving effect thereto, the Securities are
rated Investment Grade. For purposes of clause (i), NSP's "successors" shall
be deemed to include the "Company," as that term is defined in the Amended and
Restated Agreement and Plan of Merger dated as of April 28, 1995, as amended
and restated as of July 26, 1995, between NSP and Wisconsin Energy
Corporation, a Wisconsin corporation, if the merger contemplated by such
agreement is consummated substantially in accordance with the terms specified
therein.

                  "Change of Control Offer" has the meaning set forth in
Section 3.10(b) hereof.

                  "Commission" means the Securities and Exchange Commission,
as from time to time constituted, created under the Exchange Act, or, if at
any time after the execution of this Indenture such Commission is not existing
and performing the duties now assigned to it under the Trust Indenture Act,
then the body (if any) performing such duties at such time.

                  "Common Stock" means, with respect to any Person, Capital
Stock of such Person that does not rank prior, as to the payment of dividends
or as to the distribution of assets upon



                                      -2-





any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of any other class of Capital Stock of such Person.

                  "Consolidated Current Assets" and "Consolidated Current
Liabilities" mean such assets and liabilities of the Issuer on a consolidated
basis as shall be determined in accordance with GAAP to constitute current
assets and current liabilities, respectively, provided that inventory shall be
valued at the lower of cost (using the average life method) or market.

                  "Consolidated Net Income" means, for any period, the net
income of the Issuer determined on a consolidated basis in accordance with
GAAP.

                  "Consolidated Net Tangible Assets" means, as of the date of
determination thereof, Consolidated Total Assets as of such date less the sum
of (i) Consolidated Current Liabilities and (ii) Intangible Assets.

                  "Consolidated Tangible Net Worth" means, as of the date of
determination thereof, shareholders' equity of the Issuer determined on a
consolidated basis in accordance with GAAP, less Intangible Assets.

                  "Consolidated Total Assets" means, as of the date of any
determination thereof, the total amount of all assets of the Issuer determined
on a consolidated basis in accordance with GAAP.

                  "Corporate Trust Office" means the principal office of the
Trustee at which the corporate trust business of the Trustee shall, at any
particular time, be principally administered, which office is, at the date as
of which this Indenture is dated, located at Corporate Trust, Norwest Center,
Sixth and Marquette, Minneapolis, Minnesota 55479-0069.

                  "Euroclear" has the meaning set forth in Section 2.4(b).

                  "Event of Default" means any event or condition specified as
such in Section 4.1 hereof that shall have continued for the period of time,
if any, therein designated.

                  "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

                  "GAAP" means generally accepted accounting principles in the
U.S. applied on a basis consistent with the principles, methods, procedures
and practices employed in the preparation of the Issuer's audited financial
statements, including, without limitation, those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as approved by a significant segment of the accounting profession.

                  "Global Security" has the meaning set forth in Section 2.4(c).

                  "Holder," "Holder of Securities," "Securityholder" and other
similar terms mean the registered holder of any Security.

                                      -3-






                  "IAI Global Security" has the meaning set forth in Section
2.4(b).

                  "Indebtedness" has the meaning set forth in Section 3.8.

                  "Indenture" means this instrument as originally executed and
delivered or, if amended or supplemented as herein provided, as so amended or
supplemented.

                  "Initial Purchasers" means Bear, Stearns & Co. Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.

                  "Intangible Assets" means, as of the date of determination
thereof, all assets of the Issuer properly classified as intangible assets
determined on a consolidated basis in accordance with GAAP.

                  "Interest Payment Date" means, with respect to any Security,
the Stated Maturity of an installment of interest on such Security.

                  "Investment Banker" means an independent investment banking
institution of national standing selected by the Issuer.

                  "Investment Grade" means, with respect to the Securities, a
rating of Baa3 or higher by Moody's Investors Service, Inc. and a rating of
BBB- or higher by Standard and Poor's Ratings Group (or, if either or both of
the foregoing rating agencies ceases to rate the Securities for reasons beyond
the control of the Issuer, equivalent ratings by one or two (as the case may
be) other nationally recognized statistical rating organizations (as such term
is defined in Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act); provided that
if either of the foregoing rating agencies shall change its ratings
designations while the Securities are Outstanding, "Investment Grade" shall
mean the lowest ratings designation signifying "investment grade" issued by
such agencies (or higher).

                  "Issuer" means NRG Energy, Inc., a Delaware corporation,
and, subject to Article 8 hereof, its successors and assigns.

                  "Legend" has the meaning set forth in Section 2.6(d).

                  "Minimum Consolidated Tangible Net Worth" means an amount,
as of the date of any determination thereof, equal to the sum of $175 million
plus 25% of Consolidated Net Income for the period from and including April 1,
1996 to such determination date, but which amount shall in no event be less
than $175 million.

                  "NSP" means Northern States Power Company, a Minnesota
corporation.

                  "Officers' Certificate" means a certificate signed on behalf
of the Issuer by the Chairman of the Board of Directors or the President or
any Vice President and by the Chief Financial Officer or the Secretary or any
Assistant Secretary or the Treasurer or any Assistant Treasurer of the Issuer
and delivered to the Trustee. Each such certificate shall include the
statements provided for in Section 10.5 hereof, if and to the extent required
thereby.

                                      -4-






                  "Opinion of Counsel" means an opinion in writing signed by
legal counsel satisfactory to the Trustee, who may be an employee of or
counsel to the Issuer. Each such opinion shall include the statements provided
for in Section 10.5 hereof, if and to the extent required thereby.

                  "Original Issue Date" of any Security (or portion thereof)
means the earlier of (a) the date of such Security or (b) the date of any
Security (or portion thereof) in exchange for which such Security was issued
(directly or indirectly) on registration of transfer, exchange or
substitution.

                  "Outstanding", when used with reference to Securities,
shall, subject to the provisions of Section 6.4 hereof, mean, as of any
particular time, all Securities authenticated and delivered by the Trustee
under this Indenture, except:

                  1. Securities theretofore canceled by the Trustee or
         delivered to the Trustee for cancellation, or which shall have been
         paid pursuant to Section 2.7 hereof (other than any such Securities
         in respect of which there shall have been presented to the Trustee
         proof satisfactory to it that such Securities are held by a bona fide
         purchaser in whose hands the Securities are valid obligations of the
         Issuer); and

                  2. Securities, or portions thereof, for the payment or
         redemption of which moneys or direct obligations of the United States
         of America backed by its full faith and credit in the necessary
         amount shall have been deposited in trust with the Trustee or with
         any paying agent (other than the Issuer) or shall have been set
         aside, segregated and held in trust by the Issuer (if the Issuer
         shall act as its own paying agent), provided that if such Securities
         are to be redeemed prior to the maturity thereof, notice of such
         redemption shall have been herein provided, or provision satisfactory
         to the Trustee shall have been given as herein provided, or provision
         satisfactory to the Trustee shall have been made for giving such
         notice.

                  "Person" means an individual, a corporation, a partnership,
a limited liability company, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.

                  "Preferred Stock" means, with respect to any Person, any and
all shares, interests, participations or other equivalents (however
designated, whether voting or non-voting) of preferred or preference Capital
Stock of such Person that is outstanding or issued on or after the date of
this Indenture.

                  "Purchase Agreement" means the Purchase Agreement dated
January 29, 1996 between the Issuer and the Initial Purchasers.

                  "Regulation S" has the meaning set forth in Section 2.4(b).

                  "Repurchase Date" has the meaning set forth in Section
3.10(b).


                                      -5-





                  "Responsible Officer", when used with respect to the
Trustee, means any officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.

                  "Restricted Regulation S Global Security" has the meaning
set forth in Section 2.4(b). "Rule 144A" has the meaning set forth in Section
2.4(b).

                  "Rule 144A Global Security" has the meaning set forth in
Section 2.4(b).

                  "Rule 144A Information" has the meaning specified in Section
3.7.

                  "Securities Act" means the Securities Act of 1933, as
amended.

                  "Security" or "Securities" has the meaning set forth in the
recitals above.

                  "Securities Register" and "Security Registrar" have the
respective meanings specified in Section 2.6 hereof.

                  "Stated Maturity" means, with respect to any debt security
or any installment of interest thereon, the date specified in such debt
security as the fixed date on which any principal of such debt security or any
such installment of interest is due and payable.

                  "Treasury Rate" means, with respect to any Security 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 and certified by an 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 Security, 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 Security and (B) the other maturing as close as possible to, but later
than, the Average Life Date of such Security, 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 Security
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) that 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 Security to be
redeemed shall be the date that follows the redemption date by a period equal
to the Remaining Weighted Average Life of such Security. The "Remaining
Weighted Average Life" of such Security with respect to the redemption of such
Security 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 Security 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 Security.

                  "Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended.

                                      -6-






                  "Trustee" means the entity identified as "Trustee" in the
first paragraph hereof until the appointment of a successor trustee pursuant
to Article 5, after which "Trustee" shall mean such successor trustee.

                  "Unrestricted Regulation S Global Security" has the meaning
set forth in Section 2.4(b).

                  "U.S. Depositary" has the meaning set forth in Section 2.4(b).

                  "U.S. Government Obligations" means securities that are (i)
direct and unconditional obligations of the United States of America for the
payment of which its full faith and credit is pledged or (ii) obligations of a
Person controlled or supervised by, and acting as an agency or instrumentality
of, the United States of America, the payment of which is unconditionally
guaranteed as a full faith and credit obligation by the United States of
America, which, in either case are not callable or redeemable at the option of
the issuer thereof, and shall also include a depository receipt issued by a
bank or trust company subject to federal or state supervision or examination
with a combined capital and surplus of at least $100,000,000, as custodian
with respect to any such U.S. Government Obligations or a specific payment of
interest on or principal of any such U.S. Government Obligation held by such
custodian for the account of the holder of a depository receipt, provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt
from any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of interest on or principal of the U.S.
Government Obligation evidenced by such depository receipt.

                  "Voting Stock" means, with respect to any Person, Capital
Stock of any class or kind ordinarily having the power to vote for the
election of directors (or persons fulfilling similar responsibilities) of such
Person.


                                  ARTICLE II

                          ISSUE, EXECUTION, FORM AND
                          REGISTRATION OF SECURITIES

                  SECTION 2.1 Authentication and Delivery of Securities. Upon
the execution and delivery of this Indenture, or from time to time thereafter,
Securities in an aggregate principal amount not in excess of $125,000,000
(except as otherwise provided in Section 2.7 hereof) may be executed by the
Issuer and delivered to the Trustee for authentication, and the Trustee shall
thereupon authenticate and deliver said Securities to or upon the written
order of the Issuer, signed by both (a) its Chairman of the Board Directors,
or any Vice Chairman of the Board of Directors, or its President or any Vice
President and (b) by its Chief Financial Officer, or its Secretary or any
Assistant Secretary, or its Treasurer or any Assistant Treasurer without any
further action by the Issuer. The Securities shall be direct, unconditional
obligations of the Issuer and shall rank pari passu without preference among
themselves and equally in priority of payment with all other present and
future unsubordinated, unsecured indebtedness of the Issuer.


                                      -7-





                  SECTION 2.2 Execution of Securities. The Securities shall be
signed on behalf of the Issuer by both (a) its Chairman of the Board of
Directors or any Vice Chairman of the Board of Directors or its President or
any Vice President and (b) by its Chief Financial Officer or its Secretary or
any Assistant Secretary or its Treasurer or any Assistant Treasurer, under its
corporate seal which may, but need not, be attested. Such signatures may be
the manual or facsimile signatures of the present or any future such officers.
The seal of the Issuer may be in the form of a facsimile thereof and may be
impressed, affixed, imprinted or otherwise reproduced on the Securities.
Typographical and other minor errors or defects in any such reproduction of
the seal or any such signature shall not affect the validity or enforceability
of any Security that has been duly authenticated and delivered by the Trustee.

                  In case any officer of the Issuer who shall have signed any
of the Securities shall cease to be such officer before the Security so signed
shall be authenticated and delivered by the Trustee or disposed of by the
Issuer, such Security nevertheless may be authenticated and delivered or
disposed of as though the Person who signed such Security had not ceased to be
such officer of the Issuer; and any Security may be signed on behalf of the
Issuer by such Persons as, at the actual date of the execution of such
Security, shall be the proper officers of the Issuer, although at the date of
the execution and delivery of this Indenture any such Person was not such
officer.

                  SECTION 2.3 Certificate of Authentication. Only such
Securities as shall bear thereon a certificate of authentication substantially
in the form recited in the form of Security attached as Exhibit A hereto,
executed by the Trustee by manual signature of one of its authorized
signatories, shall be entitled to the benefits of this Indenture or be valid
or obligatory for any purpose. Such certificate by the Trustee upon any
Security executed by the Issuer shall be conclusive evidence that the Security
so authenticated has been duly authenticated and delivered hereunder and that
the Holder is entitled to the benefits of this Indenture.

                  SECTION 2.4 Form, Denomination and Date of Securities;
Payments of Interest. (a) The Securities and the Trustee's certificate of
authentication shall be substantially in the form set forth in the form of
Security attached as Exhibit A hereto. The Securities shall be numbered,
lettered, or otherwise distinguished in such manner or in accordance with such
plans as the officers of the Issuer executing the same may determine with the
approval of the Trustee.

                  Any of the Securities may be issued with appropriate
insertions, omissions, substitutions and variations, and may have imprinted or
otherwise reproduced thereon such legend or legends, not inconsistent with the
provisions of this Indenture, as may be required to comply with any law or
with any rules or regulations pursuant thereto, or with the rules of any
securities market in which the Securities are admitted to trading, or to
conform to general usage.

                  (b) Securities offered and sold in reliance on Regulation S
under the Securities Act ("Regulation S") as provided in the Purchase
Agreement shall be issued in the form of a permanent Global Security (as
defined herein) in definitive, fully registered form without interest coupons
substantially in the form of Security attached as Exhibit A hereto with such
legends as may be applicable thereto in accordance with such form, which shall
be deposited on behalf of the purchasers of the Securities represented thereby
with the Trustee at the Corporate Trust Office, as custodian for The
Depository Trust Company (hereinafter, the "U.S. Depositary") and

                                      -8-





registered in the name of a nominee of the U.S. Depositary, duly executed by
the Issuer and authenticated by the Trustee as hereinafter provided, for
credit to their respective accounts (or to such other accounts as they may
direct) at Morgan Guaranty Trust Company of New York, Brussels office, as
operator of the Euroclear System ("Euroclear") or Cedel, S.A. ("Cedel"). Until
the termination of the restricted period (as defined in Regulation S) with
respect to the offer and sale of the Securities, interests in such Global
Security may only be held by the Agent Members (as defined herein) for
Euroclear and Cedel. Until such time as the restricted period shall have
terminated, such Global Security shall be referred to herein as the
"Restricted Regulation S Global Security." After such time as the restricted
period shall have terminated, such Global Security shall be referred to herein
as the "Unrestricted Regulation S Global Security." The aggregate principal
amount of the Restricted Regulation S Global Security and the Unrestricted
Regulation S Global Security may from time to time be increased or decreased
by adjustments made on the records of the Trustee, as custodian for the U.S.
Depositary, as hereinafter provided. The Issuer shall notify the Trustee of
the termination of the restricted period by furnishing to the Trustee a
certificate substantially in the form of Exhibit B hereto.

                  Securities offered and sold in reliance on Rule 144A under
the Securities Act ("Rule 144A") as provided in the Purchase Agreement shall
be issued in the form of a permanent Global Security (the "Rule 144A Global
Security") in definitive fully registered form without interest coupons
substantially in the form of Security attached as Exhibit A hereto with such
legends as may be applicable thereto in accordance with the form of such
Security deposited with the Trustee, at the Corporate Trust Office, as
custodian for the U.S. Depositary, duly executed by the Issuer and
authenticated by the Trustee as hereinafter provided. The aggregate principal
amount of the Rule 144A Global Security may from time to time be increased or
decreased by adjustments made on the records of the Trustee, as custodian for
the U.S. Depositary, and the U.S. Depositary or its nominee, as the case may
be, as hereinafter provided.

                  Securities offered and sold to institutions that are
"accredited investors" within the meaning of Rule 501(a)(1), (2), (3) or (7)
of the Securities Act shall be issued in the form of a permanent Global
Security (the "IAI Global Security") in definitive fully registered form
without interest coupons substantially in the form of Security attached as
Exhibit A hereto with such legends as may be applicable thereto in accordance
with the form of such Security deposited with the Trustee, at the Corporate
Trust Office, as custodian for the U.S. Depositary, duly executed by the
Issuer and authenticated by the Trustee as hereinafter provided. The aggregate
principal amount of the IAI Global Security may from time to time be increased
or decreased by adjustments made on the records of the Trustee, as custodian
for the U.S. Depositary, and the U.S. Depositary or its nominee, as the case
may be, as hereinafter provided.

                  (c) (i) This Section 2.4(c)(i) shall apply only to
Securities in global form ("Global Securities") deposited with the U.S.
Depositary.

                  The Issuer shall execute and the Trustee shall, in
accordance with this Section 2.4(c)(i), authenticate and deliver initially
Global Securities that (a) shall be registered in the name of the U.S.
Depositary for such Global Securities or the nominee of such U.S. Depositary,
(b) shall be deposited on behalf of Agent Members (as defined herein) with the
Trustee as custodian for the U.S. Depositary and (c) shall bear legends
substantially to the following effect:

                                      -9-






                  "UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
                  REPRESENTATIVE OF [INSERT NAME AND ADDRESS OF U.S.
                  DEPOSITARY] TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF
                  TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN
                  EXCHANGE FOR THIS CERTIFICATE OR ANY PORTION HEREOF IS
                  REGISTERED IN THE NAME OF [INSERT NAME OF U.S. NOMINEE OF
                  DEPOSITARY], OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
                  AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF U.S.
                  DEPOSITARY], OR SUCH OTHER NAME AS IS REQUESTED BY AN
                  AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF U.S.
                  DEPOSITARY] (AND ANY PAYMENT HEREON IS MADE TO [INSERT NAME
                  OF NOMINEE OF U.S. DEPOSITARY]), ANY TRANSFER, PLEDGE OR
                  OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
                  OTHER THAN [INSERT NAME OF U.S. DEPOSITARY OR A NOMINEE
                  THEREOF] IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
                  HEREOF, [INSERT NAME OF NOMINEE OF U.S. DEPOSITARY], HAS AN
                  INTEREST HEREIN".

                  "TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
                  TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF [INSERT
                  NAME OF U.S. DEPOSITARY] OR TO A SUCCESSOR THEREOF OR SUCH
                  SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
                  SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE
                  WITH THE RESTRICTIONS SET FORTH IN SECTION 2.6 OF THE
                  INDENTURE REFERRED TO ON THE REVERSE HEREOF".

                  Members of, or participants in, a U.S. Depositary ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Security held on their behalf by the U.S. Depositary or under any Global
Security, and the U.S. Depositary may be treated by the Issuer, the Trustee,
and any agent of the Issuer or the Trustee as the absolute owner of such
Global Security for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Issuer, the Trustee or any agent of the
Issuer or the Trustee from giving effect to any written certification, proxy
or other authorization furnished by the U.S. Depositary or impair, as between
the U.S. Depositary and its Agent Members, the operation of customary
practices governing the exercise of the rights of a holder of any security.

                  (c) (ii) This Section 2.4(c)(ii) shall apply only to the
Global Security deposited on behalf of the purchasers of the Securities
represented thereby with the Trustee as custodian for the U.S. Depositary for
credit to their respective accounts (or to such other accounts as they may
direct) at Euroclear or Cedel insofar as interests in the Global Security are
held by the Agent Members for Euroclear or Cedel.

                  The provisions of the "Operating Procedures of the Euroclear
System" and the "Terms and Conditions Governing Use of Euroclear" and the
"Management Regulations" and "Instructions to Participants" of Cedel,
respectively, shall be applicable to such Global Security insofar as interests
therein are held by the Agent Members for Euroclear and Cedel. Account holders
or participants in Euroclear and Cedel shall have no rights under this
Indenture with

                                     -10-





respect to the Global Security, and the nominee of the U.S. Depositary may be
treated by the Issuer and the Trustee and any agent of the Issuer or the
Trustee as the owner of the Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Issuer, the
Trustee or any agent of the Issuer or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the U.S.
Depositary or impair, as between the U.S. Depositary and its Agent Members,
the operation of customary practices governing the exercise of the rights of a
holder of any security.

                  (d) Each Security shall be dated the date of its
authentication and shall bear interest from the applicable date, and shall be
payable on the dates, specified on the face of the form of Security attached
as Exhibit A hereto.

                  (e) The Person in whose name any Security is registered at
the close of business on the record date specified in the Securities with
respect to any Interest Payment Date shall be entitled to receive the
interest, if any, payable on such Interest Payment Date notwithstanding any
transfer or exchange of such Security subsequent to the record date and prior
to such Interest Payment Date, except if and to the extent the Issuer shall
default in the payment of the interest due on such Interest Payment Date, in
which case such defaulted interest shall be paid to the Persons in whose names
Outstanding Securities are registered at the close of business on a subsequent
special record date, to be established (together with the related payment
date) by the Issuer with the consent of the Trustee. Such special record date
shall not be more than 15 nor less than 10 Business Days prior to the payment
date. Not more than 15 days prior to the special record date, the Issuer (or
the Trustee, in the name of and at the expense of the Issuer) shall mail to
Holders a notice that states the special record date, the related payment date
and the amount of interest to be paid. Notice of the proposed payment of such
defaulted interest and the special record date therefor having been mailed as
aforsaid, such defaulted interest shall be paid to the Persons in whose names
the Securities are registered on such special record date.

                  (f) The Securities shall be issuable in the denominations
specified in the form of Security attached as Exhibit A hereto.

                  SECTION 2.5 Global Securities. (a) Portions of a Global
Security deposited with the U.S. Depositary pursuant to Section 2.4 shall be
transferred in certificated form to the beneficial owners thereof only if such
transfer complies with Section 2.6 of this Indenture and (i) the U.S.
Depositary notifies the Issuer that it is unwilling or unable to continue as
U.S. Depositary for such Global Security or if at any time such U.S.
Depositary ceases to be a "clearing agency" registered under the Exchange Act
and a successor depositary is not appointed by the Issuer within 90 days of
such notice, or (ii) an Event of Default has occurred and is continuing with
respect to the Securities and payment of principal thereof and interest
thereon has been accelerated.

                  (b) Portions of any Global Security that are transferable to
the beneficial owners thereof pursuant to this Section 2.5 shall be
surrendered by the U.S. Depositary to the Trustee at its New York office for
registration of transfer, in whole or from time to time in part, without
charge, and the Trustee shall authenticate and deliver, upon such registration
of transfer of each portion of such Global Security, an equal aggregate
principal amount of Securities of authorized denominations. Any portion of a
Global Security whose registration is transferred pursuant to

                                     -11-





this Section 2.5 shall be executed, authenticated and delivered only in the
denominations specified in the form of Security attached as Exhibit A hereto
and registered in such names as the U.S. Depositary shall direct. Any Security
delivered in exchange for a portion of the Rule 144A Global Security shall
bear the Legend regarding transfer restrictions applicable to the Rule 144A
Global Security set forth on the form of Security attached as Exhibit A
hereto. Any Security delivered in exchange for a portion of the IAI Global
Security shall bear the Legend regarding transfer restrictions set forth on
the form of Security attached as Exhibit A hereto. Any Security delivered in
exchange for a portion of the Restricted or Unrestricted Regulation S Global
Security shall bear the Legend regarding transfer restrictions applicable to
the Restricted or Unrestricted Registration S Global Security, as the case may
be, set forth on the form of Security attached as Exhibit A hereto.

                  (c) Subject to the provisions of Section 2.4(c) above, the
registered Holder of any Global Security may grant proxies and otherwise
authorize any person, including Agent Members and persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Securities.

                  (d) In the event of the occurrence of any of the events
specified in paragraph (a) of this Section 2.5, the Issuer shall promptly make
available to the Trustee a reasonable supply of certificated Securities in
definitive fully registered form without interest coupons.

                  (e) The Global Security issued and authenticated pursuant to
the first paragraph of Section 2.4(b) (both before and after the expiration of
the restricted period), the Rule 144A Global Security and the IAI Global
Security shall each be assigned separate securities identification, or
"CUSIP," numbers.

                  SECTION 2.6 Registration, Registration of Transfer and
Exchange. (a) The Issuer shall keep at each office or agency to be maintained
for the purpose as provided in Section 3.2 hereof a register or registers
(collectively referred to as the "Securities Register") in which, subject to
such reasonable regulations as it may prescribe, it will register or cause to
be registered, and will register or cause to be registered the transfer of,
Securities as in this Article provided. The Trustee is hereby appointed
"Security Registrar" for the purpose of registering Securities and transfers
of Securities as herein provided. If at any time the Trustee shall not be
serving as Security Registrar, at all reasonable times such Securities
Register shall be open for inspection by the Trustee.

                  Upon due presentation for registration of transfer of any
Security at each such office or agency, the Issuer shall execute and the
Trustee shall authenticate and deliver in the name of the transferee or
transferees a new Security or Securities in authorized denominations for a
like aggregate principal amount.

                  Any Security or Securities may be exchanged for a Security
or Securities in other authorized denominations, in an equal aggregate
principal amount. Securities to be exchanged shall be surrendered at each
office or agency to be maintained by the Issuer for the purpose as provided in
Section 3.2 hereof, and the Issuer shall execute and the Trustee shall
authenticate and deliver in exchange therefor the Security or Securities which
the Securityholder making the exchange shall be entitled to receive, bearing
numbers not contemporaneously outstanding.

                                     -12-






                  All Securities presented for registration of transfer,
exchange, redemption or payment shall (if so required by the Issuer or the
Trustee) be duly endorsed by, or be accompanied by a written instrument or
instruments of transfer in form satisfactory to the Issuer and the Trustee
duly executed by, the Holder or its attorney duly authorized in writing.

                  The Issuer or Trustee shall not be required to exchange or
register a transfer of (a) any Securities for a period of 15 days next
preceding the first mailing of notice of redemption of Securities to be
redeemed or (b) any Securities selected, called or being called for redemption
except, in the case of any Security where public notice has been given that
such Security is to be redeemed in part, the portion thereof not so to be
redeemed.

                  All Securities issued upon any registration of transfer or
exchange of Securities shall be valid obligations of the Issuer, evidencing
the same debt, and entitled to the same benefits under this Indenture, as the
Securities surrendered upon such registration of transfer or exchange.

                  (b) Notwithstanding any provision to the contrary herein, so
long as a Global Security remains outstanding and is held by or on behalf of
the U.S. Depositary, transfers of a Global Security, in whole or in part,
shall only be made (x) in the case of transfers of portions of a Global
Security to beneficial owners thereof in certificated form, in accordance with
Section 2.5, and (y) in all other cases, in accordance with this Section
2.6(b) (and subject, in each case, to the provisions of any Legend (as defined
herein) imprinted on such Global Security).

                  (i) Transfers of Global Securities as such. Subject to
         clauses (ii) through (vi) of this Section 2.6(b), transfers of a
         Global Security shall be limited to transfers of such Global Security
         in whole, and not in part, to nominees of the U.S. Depositary or to a
         successor of the U.S. Depositary or such successor's nominee.

                  (ii) Rule 144A Global Security or IAI Global Security to
         Restricted Regulation S Global Security. If a holder of a beneficial
         interest in the Rule 144A Global Security or the IAI Global Security
         deposited with the U.S. Depositary wishes at any time to exchange or
         transfer its interest in such Global Security to a Person who wishes
         to take delivery thereof in the form of an interest in the Restricted
         Regulation S Global Security, such holder may, subject to the rules
         and procedures of the U.S. Depositary, exchange or transfer or cause
         the exchange or transfer of such interest for an equivalent
         beneficial interest in the Restricted Regulation S Global Security in
         accordance with, and subject to, this clause (ii). Upon receipt by
         the Trustee at the Corporate Trust Office of (1) instructions given
         in accordance with the U.S. Depositary's procedures from an Agent
         Member directing the Trustee to credit or cause to be credited a
         beneficial interest in the Restricted Regulation S Global Security in
         an amount equal to the beneficial interest in the Rule 144A Global
         Security or the IAI Global Security, as the case may be, to be
         exchanged or transferred, (2) a written order given in accordance
         with the U.S. Depositary's procedures containing information
         regarding the Euroclear or Cedel account to be credited with such
         increase and the name of such account, and (3) a certificate in the
         form of Exhibit C attached hereto given by the holder of such
         beneficial interest stating that the exchange or transfer of such
         interest has been made in compliance with the transfer restrictions
         applicable to the Securities and pursuant to and in accordance

                                     -13-





         with Regulation S, the Trustee shall instruct the U.S. Depositary to
         reduce the Rule 144A Global Security or the IAI Global Security, as
         the case may be, by the aggregate principal amount of the beneficial
         interest in the Rule 144A Global Security or the IAI Global Security,
         as the case may be, to be so exchanged or transferred and the Trustee
         shall instruct the U.S. Depositary, concurrently with such reduction,
         to increase the principal amount of the Restricted Regulation S
         Global Security by the aggregate principal amount of the beneficial
         interest in the Rule 144A Global Security or the IAI Global Security,
         as the case may be, to be so exchanged or transferred, and to credit
         or cause to be credited to the account of the person specified in
         such instructions (who shall be the Agent Member for Euroclear or
         Cedel, or both, as the case may be) a beneficial interest in the
         Restricted Regulation S Global Security equal to the reduction in the
         principal amount of the Rule 144A Global Security or the IAI Global
         Security, as the case may be.

                  (iii) Rule 144A Global Security or IAI Global Security to
         Unrestricted Regulation S Global Security. If a holder of a
         beneficial interest in the Rule 144A Global Security or the IAI
         Global Security, as the case may be, deposited with the U.S.
         Depositary wishes at any time to exchange its interest in such Global
         Security for an interest in the Unrestricted Regulation S Global
         Security, or to transfer its interest in such Global Security to a
         Person who wishes to take delivery thereof in the form of an interest
         in the Unrestricted Regulation S Global Security, such holder may,
         subject to the rules and procedures of the U.S. Depositary, exchange
         or cause the exchange or transfer or cause the transfer of such
         interest for an equivalent beneficial interest in the Unrestricted
         Regulation S Global Security in accordance with, and subject to, this
         clause (iii). Upon receipt by the Trustee at the Corporate Trust
         Office of (1) instructions given in accordance with the U.S.
         Depositary's procedures from an Agent Member directing the Trustee to
         credit or cause to be credited a beneficial interest in the
         Unrestricted Regulation S Global Security in an amount equal to the
         beneficial interest in the Rule 144A Global Security or the IAI
         Global Security, as the case may be, to be exchanged or transferred,
         (2) a written order given in accordance with the U.S. Depositary's
         procedures containing information regarding the participant account
         of the U.S. Depositary and, in the case of a transfer pursuant to and
         in accordance with Regulation S, the Euroclear or Cedel account to be
         credited with such increase and (3) a certificate in the form of
         Exhibit D attached hereto given by the holder of such beneficial
         interest stating that the exchange or transfer of such interest has
         been made in compliance with the transfer restrictions applicable to
         the Securities and (A) in the case of an exchange, that either (x)
         the Security being exchanged is not a "restricted security" as
         defined in Rule 144 under the Securities Act, or (y) the exchange is
         being made to facilitate a contemporaneous transfer that complies
         with this clause (iii), (B) in the case of a transfer pursuant to
         Regulation S, that the Security is being transferred pursuant to and
         in accordance with Regulation S, (C) in the case of a transfer
         pursuant to Rule 144, that the Security is being transferred pursuant
         to and in accordance with Rule 144 or (D) in the case of a transfer
         pursuant to another exemption from the Securities Act (including
         without limitation Rule 144A), specifying the basis for such
         exemption, the Trustee shall instruct the U.S. Depositary to reduce
         the Rule 144A Global Security or the IAI Global Security, as the case
         may be, by the aggregate principal amount of the beneficial interest
         in the Rule 144A Global Security or the IAI Global Security, as the
         case may be, to be

                                     -14-





         so exchanged or transferred and the Trustee shall instruct the U.S.
         Depositary, concurrently with such reduction, to increase the
         principal amount of the Unrestricted Regulation S Global Security by
         the aggregate principal amount of the beneficial interest in the Rule
         144A Global Security or the IAI Global Security, as the case may be,
         to be so exchanged or transferred, and to credit or cause to be
         credited to the account of the person specified in such instructions
         a beneficial interest in the Unrestricted Regulation S Global
         Security equal to the reduction in the principal amount of the Rule
         144A Global Security or the IAI Global Security, as the case may be.

                  (iv) Restricted Regulation S Global Security, Unrestricted
         Regulation S Global Security or IAI Global Security to Rule 144A
         Global Security. If a holder of a beneficial interest in the
         Restricted Regulation S Global Security, the Unrestricted Regulation
         S Global Security or the IAI Global Security deposited with the U.S.
         Depositary wishes at any time to exchange or transfer its interest in
         such Restricted Regulation S Global Security, Unrestricted Regulation
         S Global Security or IAI Global Security to a Person who wishes to
         take delivery thereof in the form of an interest in the Rule 144A
         Global Security such holder may, subject to the rules and procedures
         of Euroclear or Cedel and the U.S. Depositary, as the case may be,
         exchange or transfer or cause the exchange or transfer of such
         interest for an equivalent beneficial interest in the Rule 144A
         Global Security, in accordance with, and subject to, this clause
         (iv). Upon receipt by the Trustee, at the Corporate Trust Office of
         (1) instructions from Euroclear or Cedel or the U.S. Depositary, as
         the case may be, directing the Trustee to credit or cause to be
         credited a beneficial interest in the Rule 144A Global Security equal
         to the beneficial interest in the Restricted Regulation S Global
         Security, the Unrestricted Regulation S Global Security or the IAI
         Global Security to be exchanged or transferred, such instructions to
         contain information regarding the Agent Member's account with the
         U.S. Depositary to be credited with such increase, and, with respect
         to an exchange or transfer of an interest in the Unrestricted
         Regulation S Global Security, information regarding the Agent
         Member's account with the U.S. Depositary to be debited with such
         decrease, and (2) a certificate in the form of Exhibit E attached
         hereto given by the holder of such beneficial interest and stating
         that the person exchanging or transferring such interest in the
         Restricted Regulation S Global Security, the Unrestricted Regulation
         S Global Security or the IAI Global Security, as the case may be,
         reasonably believes that the person acquiring such interest in the
         Rule 144A Global Security is a qualified institutional buyer (as
         defined in Rule 144A) and is obtaining such beneficial interest in a
         transaction meeting the requirements of Rule 144A, Euroclear or Cedel
         or the Trustee, as the case may be, shall instruct the U.S.
         Depositary to reduce the Restricted Regulation S Global Security, the
         Unrestricted Regulation S Global Security or the IAI Global Security,
         as the case may be, by the aggregate principal amount of the
         beneficial interest in the Restricted Regulation S Global Security,
         the Unrestricted Regulation S Global Security or the IAI Global
         Security to be exchanged or transferred, and the Trustee shall
         instruct the U.S. Depositary, concurrently with such reduction to
         increase the principal amount of the Rule 144A Global Security by the
         aggregate principal amount of the beneficial interest in the
         Restricted Regulation S Global Security, the Unrestricted Regulation
         S Global Security or the IAI Global Security, as the case may be, to
         be so exchanged or transferred, and to credit or cause to be credited
         to the account of the person specified in such instructions a
         beneficial interest in the Rule 144A Global Security equal to the

                                     -15-





         reduction in the principal amount of the Restricted Regulation S
         Global Security, the Unrestricted Regulation S Global Security or the
         IAI Global Security, as the case may be.

                  (v) Rule 144A Global Security, Restricted Regulation S
         Global Security or Unrestricted Regulation S Global Security to IAI
         Global Security. If a holder of a beneficial interest in the Rule
         144A Global Security, the Restricted Regulation S Global Security or
         the Unrestricted Regulation S Global Security deposited with the U.S.
         Depositary wishes at any time to exchange or transfer its interest in
         such Global Security to a Person who wishes to take delivery thereof
         in the form of an interest in the IAI Global Security such holder
         may, subject to the rules and procedures of Euroclear or Cedel and
         the U.S. Depositary, as the case may be, exchange or transfer or
         cause the exchange or transfer of such interest for an equivalent
         beneficial interest in the IAI Global Security, in accordance with,
         and subject to, this clause (v). Upon receipt by the Trustee, at the
         Corporate Trust Office of (1) instructions from Euroclear or Cedel or
         the U.S. Depositary, as the case may be, directing the Trustee to
         credit or cause to be credited a beneficial interest in the IAI
         Global Security equal to the beneficial interest in the Restricted
         Regulation S Global Security, the Unrestricted Regulation S Global
         Security or the Rule 144A Global Security to be exchanged or
         transferred, such instructions to contain information regarding the
         Agent Member's account with the U.S. Depositary to be credited with
         such increase, and, with respect to an exchange or transfer of an
         interest in the Unrestricted Regulation S Global Security,
         information regarding the Agent Member's account with the U.S.
         Depositary to be debited with such decrease, and (2) a certificate in
         the form of Exhibit F attached hereto given by the holder of such
         beneficial interest and stating that the person exchanging or
         transferring such interest reasonably believes that the person
         acquiring such interest in the IAI Global Security is an institution
         that is an "accredited investor" (as defined in Rule 501(a)(1), (2),
         (3) or (7) under the Securities Act) and is obtaining such beneficial
         interest in a transaction exempt from the Securities Act, Euroclear
         or Cedel or the Trustee, as the case may be, shall instruct the U.S.
         Depositary to reduce the Restricted Regulation S Global Security, the
         Unrestricted Regulation S Global Security or the Rule 144A Global
         Security, as the case may be, by the aggregate principal amount of
         the beneficial interest in such Global Securities to be exchanged or
         transferred, and the Trustee shall instruct the U.S. Depositary,
         concurrently with such reduction to increase the principal amount of
         the IAI Global Security by the aggregate principal amount of the
         beneficial interest in the Restricted Regulation S Global Security,
         the Unrestricted Regulation S Global Security or the Rule 144A Global
         Security, as the case may be, to be so exchanged or transferred, and
         to credit or cause to be credited to the account of the person
         specified in such instructions a beneficial interest in the IAI
         Global Security equal to the reduction in the principal amount of the
         Restricted Regulation S Global Security, the Unrestricted Regulation
         S Global Security or the Rule 144A Global Security, as the case may
         be.

                  (vi) Other Exchanges. In the event that a Global Security is
         exchanged for Securities in definitive registered form without
         interest coupons pursuant to Section 2.5 hereof, such Securities may
         be exchanged or transferred for one another only in accordance with
         such procedures as are substantially consistent with the provisions
         of clauses (ii) through (v) above (including, without limitation, the
         certification requirements

                                     -16-





         intended to insure that such exchanges or transfers comply with Rule
         144A, Rule 144 or Regulation S under and generally with the
         Securities Act, as the case may be) and as may be from time to time
         adopted by the Issuer and the Trustee.

                  (c) Successive registrations and registrations of transfers
and exchanges as aforesaid may be made from time to time as desired, and each
such registration shall be noted on the Security Register. No service charge
shall be made for any registration of transfer or exchange of the Securities,
but the Trustee may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection therewith and any other
amounts required to be paid by the provisions of the Securities.

                  (d) If Securities are issued upon the registration of
transfer, exchange or replacement of Securities not bearing the legends
required by the form of Security attached as Exhibit A hereto (collectively,
the "Legend"), the Securities so issued shall bear the Legend. If Securities
are issued upon the registration of transfer, exchange or replacement of
Securities bearing the Legend, or if a request is made to remove the Legend on
a Security, the Securities so issued shall bear the Legend, or the Legend
shall not be removed, as the case may be, unless there is delivered to the
Issuer and the Trustee such satisfactory evidence, which may include an
opinion of counsel of recognized standing licensed to practice law in the
State of New York and experienced in matters involving the Securities Act, as
may be reasonably required by the Issuer that neither the Legend nor the
restrictions on transfer set forth therein are required to ensure that
transfers thereof comply with the provisions of Rule 144A, Rule 144 or
Regulation S under the Securities Act or that such Securities are not
"restricted securities" within the meaning of Rule 144 under the Securities
Act. Upon provision of such satisfactory evidence, the Trustee, at the
direction of the Issuer, shall authenticate and deliver a Security that does
not bear the Legend. If a legend is removed from the face of a Security and
the Security is subsequently held by an affiliate of the Issuer, the Legend
shall be reinstated.

                  SECTION 2.7 Mutilated, Defaced, Destroyed, Lost and Stolen
Securities. In case any temporary or definitive Security shall become
mutilated, defaced or be apparently destroyed, lost or stolen, the Issuer in
its discretion may execute, and upon the written request of any officer of the
Issuer, the Trustee shall authenticate and deliver a new Security, bearing a
number not contemporaneously outstanding, in exchange and substitution for the
mutilated or defaced Security, or in lieu of and substitution for the Security
so apparently destroyed, lost or stolen. In every case the applicant for a
substitute Security shall furnish to the Issuer and to the Trustee and any
agent of the Issuer or the Trustee such security or indemnity as may be
required by them to indemnify and defend and to save each of them harmless
and, in every case of destruction, loss or theft, evidence to their
satisfaction of the apparent destruction, loss or theft of such Security and
of the ownership thereof.

                  Upon the issuance of any substitute Security, the Issuer may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses
(including the fees and expenses of the Trustee) connected therewith. In case
any Security which has matured or is about to mature, or has been called for
redemption in full, shall become mutilated or defaced or be apparently
destroyed, lost or stolen, the Issuer may, instead of issuing a substitute
Security, pay or authorize the payment of the same (without surrender thereof
except in the case of a mutilated or defaced Security),

                                     -17-





if the applicant for such payment shall furnish to the Issuer and to the
Trustee and any agent of the Issuer or the Trustee such security or indemnity
as any of them may require to save each of them harmless from all risks,
however remote, and, in every case of apparent destruction, loss or theft, the
applicant shall also furnish to the Issuer and the Trustee and any agent of
the Issuer or the Trustee evidence to their satisfaction of the apparent
destruction, loss or theft of such Security and of the ownership thereof.

                  Every substitute Security issued pursuant to the provisions
of this Section by virtue of the fact that any Security is apparently
destroyed, lost or stolen shall constitute an additional contractual
obligation of the Issuer, whether or not the apparently destroyed, lost or
stolen Security shall be at any time enforceable by anyone and shall be
entitled to all the benefits of (but shall be subject to all the limitations
of rights set forth in) this Indenture equally and proportionately with any
and all other Securities duly authenticated and delivered hereunder. All
Securities shall be held and owned upon the express condition that, to the
extent permitted by law, the foregoing provisions are exclusive with respect
to the replacement or payment of mutilated, defaced, or apparently destroyed,
lost or stolen Securities and shall preclude any and all other rights or
remedies notwithstanding any law or statute existing or hereafter enacted to
the contrary with respect to the replacement or payment of negotiable
instruments or other securities without their surrender.

                  SECTION 2.8 Cancellation of Securities; Destruction Thereof.
All Securities surrendered for payment, redemption, registration of transfer
or exchange, if surrendered to the Issuer or any agent of the Issuer or the
Trustee, shall be delivered to the Trustee for cancellation or, if surrendered
to the Trustee, shall be canceled by it provided all conditions regarding such
cancellation have been met; and no Securities shall be issued in lieu thereof
except as expressly permitted by any of the provisions of this Indenture. The
Trustee shall cancel and dispose of all Securities surrendered for
registration of transfer, exchange, payment or cancellation in accordance with
the Trustee's policy of disposal unless the Issuer instructs the Trustee in
writing to deliver the Securities to the Issuer. If the Issuer shall acquire
any of the Securities, such acquisition shall not operate as a redemption or
satisfaction of the indebtedness represented by such Securities unless and
until the same are delivered to the Trustee for cancellation.

                  SECTION 2.9 Temporary Securities. Pending the preparation of
definitive Securities, the Issuer may execute and the Trustee shall
authenticate and deliver temporary Securities (printed, lithographed,
typewritten or otherwise reproduced, in each case in form satisfactory to the
Trustee). Temporary Securities shall be issuable as registered Securities
without coupons, of any authorized denomination, and substantially in the form
of the definitive Securities but with such omissions, insertions and
variations as may be appropriate for temporary Securities, all as may be
determined by the Issuer with the concurrence of the Trustee. Temporary
Securities may contain such reference to any provisions of