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

Registration No. 333-33397 

SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549 

AMENDMENT NO. 5
TO 
FORM S-1 
REGISTRATION STATEMENT 
UNDER 
THE SECURITIES ACT OF 1933 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SUBJECT TO COMPLETION, DATED DECEMBER 12, 1997 

PROSPECTUS 

[NRG LOGO]

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

NRG ENERGY, INC. 

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

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

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

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

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

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

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

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

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

The date of this Prospectus is December 17, 1997 

AVAILABLE INFORMATION 

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

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

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 of interests in a project or facility refer to 
ownership by NRG or one of its project subsidiaries of interests in such 
project affiliates. 

THE COMPANY 

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

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

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

3

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

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

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

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

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

4

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

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

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

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

STRATEGY

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

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

5

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

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

6

THE EXCHANGE OFFER 

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

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

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

7

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

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

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

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

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

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

8

CONSEQUENCES OF EXCHANGING OLD NOTES 

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

9

SUMMARY DESCRIPTION OF THE NEW NOTES 

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

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

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

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

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

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

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

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

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

10

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

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

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

RISK FACTORS

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

11

SUMMARY CONSOLIDATED FINANCIAL DATA 

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

CONSOLIDATED STATEMENTS OF INCOME DATA: 

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE) 

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

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

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

12

CONSOLIDATED BALANCE SHEET DATA: 

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE) 

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

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

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

OTHER DATA (UNAUDITED): 

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE) 

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

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

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

13

SUMMARY PRO FORMA CONDENSED FINANCIAL DATA 

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

FOR THE YEAR ENDED DECEMBER 31, 1996 

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

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

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

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

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

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

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

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

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

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

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

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

14

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

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

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

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

15

RISK FACTORS 

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

RISKS INVOLVED IN MAKING MINORITY INVESTMENTS IN PROJECTS 

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

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

UNCERTAINTY OF ACCESS TO CAPITAL FOR FUTURE PROJECTS 

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

CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES 

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 

16

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

HOLDING COMPANY STRUCTURE; ABILITY TO SERVICE INDEBTEDNESS 

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

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

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

17

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

LEVERAGE; ABILITY TO REPAY NOTES 

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

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

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

DEPENDENCE ON, AND CONTROL BY, NORTHERN STATES POWER 

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

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

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

18

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

RISKS OF DOING BUSINESS OUTSIDE THE UNITED STATES 

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

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

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

ACQUISITION AND DEVELOPMENT UNCERTAINTIES 

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

19

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

COMPETITION 

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

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

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

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

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

OPERATING RISKS; INADEQUATE INSURANCE, WARRANTIES AND PERFORMANCE GUARANTEES 

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

20

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

DEPENDENCE ON PROJECT AFFILIATES 

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

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

DEPENDENCE ON CERTAIN CUSTOMERS AND PROJECTS 

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

GOVERNMENTAL REGULATION 

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

21

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

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

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

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

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

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

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

22

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

LACK OF PUBLIC MARKET FOR THE NOTES 

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

FORWARD-LOOKING STATEMENTS 

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

EXCHANGE OFFER PROCEDURES 

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

23

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." 

24

THE EXCHANGE OFFER 

TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES 

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

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

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

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

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

PROCEDURES FOR TENDERING 

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

25

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. 

26

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

ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES 

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

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

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

BOOK-ENTRY TRANSFER 

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

27

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

GUARANTEED DELIVERY PROCEDURES 

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

WITHDRAWAL OF TENDERS 

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

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

28

CONDITIONS TO THE EXCHANGE OFFER 

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

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

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

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

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

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

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

29

EXCHANGE AGENT 

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

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

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

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

FEES AND EXPENSES 

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

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

TRANSFER TAXES 

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

CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES 

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, 

30

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

31

CAPITALIZATION 

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

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

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

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

32

SELECTED CONSOLIDATED FINANCIAL DATA 

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

CONSOLIDATED STATEMENTS OF INCOME DATA: 

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE) 

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

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

- ------------ 
(1)    All of these revenues are from 100% owned operations. In accordance 
with its strategy described herein, when NRG does not own 100% of a 
project, it owns 50% or less in all cases except COBEE. 
(2)    NRG accounts for its investments in projects where ownership is between 
20% and 50%, and where there is no effective and legal control, using 
the equity method of accounting; COBEE has been accounted for using the 
equity method of accounting even though NRG owned more than a 50% 
interest in the project. However, NRG did not have control over the 
project due to the fact that NRG did not have the power to elect a 
majority of the members of the board of directors of COBEE. NRG was 
only entitled to appoint four out of the nine directors. Vattenfall, 
the other majority holder of COBEE, appointed three of the other 
directors, and the remaining two directors were selected jointly by NRG 
and Vattenfall. In addition, on October 30, 1997, NRG sold to 
Vattenfall part of its interest in COBEE which resulted in NRG's 
ownership interest declining from 57.96% to 48.3%. Also as of such 
date, NRG became entitled to appoint only three of the nine directors. 
Vattenfall appoints three directors and the remaining three are 
appointed jointly by NRG and Vattenfall. Equity in earnings of 
unconsolidated project affiliates includes NRG's proportionate share of 
all net income or losses attributable to project investments accounted 
for using the equity method. 

33

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

CONSOLIDATED BALANCE SHEET DATA: 

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE) 

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

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

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

OTHER DATA (UNAUDITED): 

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE) 

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

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

- ------------ 
(1)    EBITDA equals the sum of income (loss) before income taxes, interest 
expense (net of capitalized interest) and depreciation and amortization 
expense. EBITDA is a measure of financial performance not defined under 
generally accepted accounting principles and should not be considered 
in isolation or as a substitute for net income, cash flows from 
operations or other income or cash flow data prepared in accordance 
with generally accepted accounting principles or as a measure of a 
company's profitability or liquidity. In addition, EBITDA may not be 
comparable to similarly titled measures presented by other companies 
and could be misleading unless all companies and analysts calculate 
them in the same fashion. Management believes that some investors 
consider EBITDA an indicator of a company's ability to service debt. An 
increase in EBITDA level implies an improved ability to service debt, 
but does not reflect the level of debt service charges to be covered, 
which will change with debt levels outstanding and interest rate 
charges. See Statements of Cash Flows in the Consolidated Financial 
Statements included elsewhere in this Prospectus. 
(2)    The interest expense coverage ratio equals EBITDA divided by interest 
expense. 
(3)    Debt service consists of the previous twelve months of interest expense 
and principal payments on long-term debt. 
(4)    The debt service coverage ratio equals EBITDA divided by debt service. 

34

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

35

SELECTED PRO FORMA CONDENSED FINANCIAL DATA 

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

FOR THE YEAR ENDED DECEMBER 31, 1996 

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

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

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

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

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

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

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

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

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

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

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

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

36

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

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

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

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

37

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

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

GENERAL 

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

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

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

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

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

RESULTS OF OPERATIONS 

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

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

38

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

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

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

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

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

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

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

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

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

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

39

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

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

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

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

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

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

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

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

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

40

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

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

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

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

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

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

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

41

FINANCIAL RESULTS OF INVESTMENTS IN PRINCIPAL PROJECTS 

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES 

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

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

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

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

42

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

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

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

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

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

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

43

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

On January 29, 1996, NRG issued the 1996 Senior Notes in a transaction 
exempt from registration under the Securities Act. The 1996 Senior Notes were 
issued to fund some or all of NRG's equity investments in Schkopau and Latin 
Power, to pay a portion of the consideration for NRG's acquisition of 
interests in Collinsville and in O'Brien (for reorganization as NRGG), to 
make equity investments in Kladno and West Java, and for general corporate 
purposes, including investments in new projects. The 1996 Senior Notes are 
senior unsecured obligations of NRG and rank pari passu with all other senior 
unsecured indebtedness of NRG, including the Notes. The 1996 Senior Notes 
have terms similar to the Notes. See "Certain Indebtedness" and "Description 
of Notes." 

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

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

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

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

44

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

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

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

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

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

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

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

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

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

45

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

RECENTLY ISSUED ACCOUNTING STANDARDS 

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

46

BUSINESS 

INTRODUCTION 

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

STRATEGY 

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

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

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

47

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

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

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

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

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

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

COMPETITION 

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

48

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

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

PENDING ACQUISITIONS AND PROJECTS UNDER DEVELOPMENT 

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

WEST JAVA 

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

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

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

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

ENFIELD 

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

49

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

ESTONIA 

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

CAJUN 

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

MCPC 

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

EL SEGUNDO 

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

50

DESCRIPTION OF NRG'S PROJECTS 

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

PROJECT AGREEMENTS 

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

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

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

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

PROJECT FINANCING 

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

51

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

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

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

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

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

OPERATING ARRANGEMENTS 

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

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

52

SUMMARY OF NRG PROJECTS 

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

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

53

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

INDEPENDENT POWER PRODUCTION AND COGENERATION FACILITIES(1) 

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE) 

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

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

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

54

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

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

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE)

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

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

Cadillac Renewable Energy, 
Michigan...........................          1997              50.00         5.0(17) 
Millennium, 
Illinois(18).......................          1998              50.00          91.0 

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

(18)   In December 1997, NRG entered into an agreement to transfer this project
to NRGG, subject to certain conditions precedent.

55

THERMAL ENERGY PRODUCTION AND TRANSMISSION FACILITIES 
AND RESOURCE RECOVERY FACILITIES 

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

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE) 

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

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

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

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

56

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. 

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

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

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

57

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

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

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

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

GLADSTONE POWER STATION 

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

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

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

58

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

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

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

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

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

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

59

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

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

COLLINSVILLE POWER STATION 

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

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

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

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

ENERGY DEVELOPMENTS LIMITED 

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

60

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

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

SCHKOPAU POWER STATION 

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

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

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

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

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

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

61

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

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

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

MIBRAG 

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

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

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

62

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

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

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

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

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

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

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

63

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

[CHART OF OWNERSHIP STRUCTURE OF MIBRAG AND SCHKOPAU]

COBEE 

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

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

64

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

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

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

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

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

65

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

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

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

KLADNO 

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

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

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

66

[CHART OF ECK]

67

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

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

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

LATIN POWER 

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

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

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

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

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

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

68

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

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

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

DOMESTIC PROJECTS 

PACIFIC GENERATION COMPANY 

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

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

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

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

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

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

69

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

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

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

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

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

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

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

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

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

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

70

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

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

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

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

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

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

On January 18, 1996, the U.S. Bankruptcy Court for the District of New 
Jersey awarded NRG the right to acquire a 41.86% equity interest in O'Brien 
Environmental Energy, Inc. ("O'Brien"), which emerged from bankruptcy on 
April 30, 1996 and was renamed NRGG. NRG currently holds 45.21% of the common 
stock of NRGG. The remaining 54.79% of the common stock continues to be held 
publicly. NRGG has interests in three domestic operating projects with an 
aggregate capacity of approximately 196 MW. NRGG's principal operating 
projects include: (a) the 52 MW Newark Boxboard Project (which is owned 100% 
by a wholly-owned project subsidiary of NRGG), a gas-fired cogeneration 
facility that sells electricity to JCP&L and steam to Newark Group 
Industries, Inc.; (b) the 122 MW E.I. du Pont Parlin Project (which is owned 
100% by a wholly-owned project subsidiary of NRGG), a gas-fired cogeneration 
facility that sells electricity to JCP&L and steam to E.I. du Pont de Nemours 
and Company ("E.I. du Pont"); and (c) an 83% interest in a 22 MW standby/peak 
sharing facility which provides electricity and standby capabilities for the 
Philadelphia Municipal Authority. In addition, NRGG has a 33.33% interest in 
the 150 MW Grays Ferry Project, a gas-fired cogeneration project which is 
under construction in Philadelphia, Pennsylvania. In December 1997, NRGG
entered into an agreement, subject to certain conditions precedent, to 
acquire NRG's 117 MW Millennium project and to assume certain of NRG's
obligations with respect to such project. See "--Millennium" below.

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

71

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

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

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

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

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

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

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

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

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

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

72

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

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

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

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

MILLENNIUM 

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

NEO CORPORATION 

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

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

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

73

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

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

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

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

CADILLAC RENEWABLE ENERGY 

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

SUNNYSIDE 

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

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

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

74

JACKSON VALLEY 

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

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

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

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

SAN JOAQUIN 

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

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

75

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

STEAM AND CHILLED WATER PRODUCTION, TRANSMISSION AND RELATED SERVICES 

MINNEAPOLIS ENERGY CENTER ("MEC") 

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

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

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

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

NATS 

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

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

76

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

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

SAN DIEGO POWER & COOLING 

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

ROCK-TENN 

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

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

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

WASHCO 

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

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

GRAND FORKS 

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

77

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

RESOURCE RECOVERY FACILITIES 

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

NEWPORT 

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

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

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

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

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

78

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

ELK RIVER 

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

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

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

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

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

PRINCIPAL CUSTOMERS OF OPERATING SUBSIDIARIES 

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

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

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

PROPERTIES 

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

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

79

LEGAL AND ADMINISTRATIVE PROCEEDINGS 

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

EMPLOYEES 

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

80

REGULATION 

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

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

ENERGY REGULATION IN THE UNITED STATES 

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

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

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

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

81           

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

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

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

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

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

ENVIRONMENTAL REGULATIONS -- UNITED STATES 

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

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

82

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

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

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

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

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

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

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

83

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. 

84

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. 

85

MANAGEMENT 

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

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

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

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

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

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

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

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

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

86

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

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

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

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

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

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

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

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

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

87

EXECUTIVE COMPENSATION AND OTHER INFORMATION 

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

SUMMARY COMPENSATION TABLE 

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE) 

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

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

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

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

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

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

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

88

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

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

(RESTUBBED TABLE CONTINUED FROM ABOVE) 

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

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

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

PENSION PLAN TABLE 

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

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

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

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

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

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LONG-TERM INCENTIVE PLAN COMPENSATION 

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

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

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

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

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

Compensation of Directors. 

Directors receive no compensation for service as directors. 

Employment Contracts. 

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

90

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. 

91

OWNERSHIP OF CAPITAL STOCK 

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

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CERTAIN TRANSACTIONS 

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

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

OPERATING AGREEMENTS 

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

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

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

ADMINISTRATIVE SERVICES AGREEMENT 

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

93

TAX SHARING AGREEMENT 

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

LONG-TERM DEBT 

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

94

CERTAIN INDEBTEDNESS 

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

1996 SENIOR NOTES 

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

REVOLVER 

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

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

95

DESCRIPTION OF NOTES 

GENERAL 

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

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

PRINCIPAL, MATURITY AND INTEREST 

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

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

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

OPTIONAL REDEMPTION 

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

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

96

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. 

97

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, 

98

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; 

99

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

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

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

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

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

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

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

MODIFICATION OF THE INDENTURE 

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

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

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

DEFEASANCE AND COVENANT DEFEASANCE 

DEFEASANCE 

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

DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT 

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

DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT 

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

101

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

FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER 

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

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

DEPOSITARY PROCEDURES 

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

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

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

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

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

102

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

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

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

EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES 

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

THE TRUSTEE 

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

GOVERNING LAW 

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

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REGISTRATION RIGHTS 

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

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

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

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

SPECIAL INTEREST 

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

104

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

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

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

105

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS 

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

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

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

EXCHANGE OFFER 

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

U.S. HOLDERS 

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

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

NON-U.S. HOLDERS 

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

106

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

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

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

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

BACKUP WITHHOLDING AND INFORMATION REPORTING 

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

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

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

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

107

RATINGS 

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

108

PLAN OF DISTRIBUTION 

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

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

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

109

LEGAL MATTERS 

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

EXPERTS 

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

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

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

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

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

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

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

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

110

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 

PAGE 
--------- 

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

F-1

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

F-2

PAGE 
--------- 

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

F-3

REPORT OF INDEPENDENT ACCOUNTANTS 

The Board of Directors and Shareholders 
NRG Energy, Inc. 

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

Price Waterhouse LLP 
Minneapolis, Minnesota 
April 8, 1997 

F-4

NRG ENERGY, INC. 
CONSOLIDATED BALANCE SHEETS 

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

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

Intangible assets, net of accumulated amortization of $5,647 and 
$4,127.............................................................    40,476      41,996 
Debt issuance costs, net of accumulated amortization of $338 and 
$189...............................................................     2,753         573 
---------- ---------- 
Total other assets.................................................   485,723     300,272 
---------- ---------- 
TOTAL ASSETS.........................................................  $680,809    $454,589 
========== ========== 

See accompanying notes.

F-5

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

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

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

See accompanying notes.

F-6

NRG ENERGY, INC. 
CONSOLIDATED STATEMENTS OF INCOME 

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

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

See accompanying notes.

F-7

NRG ENERGY, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 

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

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

See accompanying notes.

F-8

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

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

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

See accompanying notes.

F-9

NRG ENERGY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

1. ORGANIZATION 

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

2. PRINCIPLES OF CONSOLIDATION 

Principles of Consolidation and Basis of Presentation 

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

Cash Equivalents 

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

Restricted Cash 

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

Inventory 

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

Property, Plant and Equipment 

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

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

Capitalized Interest 

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

Development Costs and Capitalized Project Costs 

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-10

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

2. PRINCIPLES OF CONSOLIDATION  (Continued) 

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

Debt Issuance Costs 

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

Intangibles 

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

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

Income Taxes 

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

Revenue Recognition 

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

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

Foreign Currency Translation 

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

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

F-11

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

2. PRINCIPLES OF CONSOLIDATION  (Continued) 

Derivative Financial Instruments 

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

Use of Estimates 

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

Reclassifications 

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

3. BUSINESS ACQUISITIONS 

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

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

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

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

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

F-12

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

4. PROPERTY, PLANT AND EQUIPMENT 

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

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

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

5. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD 

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

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

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

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

F-13           

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

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

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

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

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

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

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

6. RELATED PARTY TRANSACTIONS. 

Operating Agreements 

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

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

Administrative Services and Other Costs 

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. 

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

F-14

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

6. RELATED PARTY TRANSACTIONS.  (Continued) 

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

7. NOTES RECEIVABLE 

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

8. LONG-TERM DEBT 

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

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

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

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

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

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

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

F-15

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

8. LONG-TERM DEBT  (Continued) 

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

(THOUSANDS OF 
DOLLARS) 

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

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

9. INCOME TAXES 

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

The provision for income taxes consists of the following: 

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

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

F-16

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

9. INCOME TAXES  (Continued) 

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

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

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

Rate Reconciliation 

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

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

10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS 

Pension Benefits 

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

F-17

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

10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS  (Continued) 

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

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

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

NSP Plan -- 1996 

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

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

NSP Plan -- 1995 

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

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

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

F-18

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

10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS  (Continued) 

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

Postretirement Health Care 

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

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

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

NSP Plan -- 1996 

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

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

F-19

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

10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS  (Continued) 

NSP Plan -- 1995 

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

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

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

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

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

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

NRG Equity Plan 

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

F-20

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

10. BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFITS  (Continued) 

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

Deferred Compensation 

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

11. SALES TO SIGNIFICANT CUSTOMERS 

NRG and the Ramsey/Washington Resource Recovery Project have a service 
agreement for waste disposal which expires in 2006. Approximately 29.1% in 
1996 and 32.1% in 1995 of NRG's revenues from wholly-owned operations were 
recognized under this contract. In addition, sales to one thermal customer 
amounted to 14.1% and 15.6% of revenues from wholly-owned operations in 1996 
and 1995, respectively. 

12. FINANCIAL INSTRUMENTS 

The estimated December 31 fair values of recorded financial instruments 
are as follows: 

1996                  1995 
--------------------- -------------------- 
CARRYING     FAIR     CARRYING     FAIR 
AMOUNT      VALUE     AMOUNT     VALUE 
---------- ---------  ---------- -------- 
(THOUSANDS OF DOLLARS) 

Cash and cash equivalents...................  $ 12,438   $ 12,438    $ 7,039   $ 7,039 
Restricted cash.............................    17,688     17,688      9,773     9,773 
Notes receivable, including current 
portion....................................    77,064     77,064     40,447    40,447 
Long-term debt, including current portion ..   212,141    200,875     90,034    91,682 

For cash, cash equivalents and restricted cash, the carrying amount 
approximates fair value because of the short-term maturity of those 
instruments. The fair value of notes receivable is based on expected future 
cash flows discounted at market interest rates. The fair value of long term 
debt is estimated based on the quoted market prices for the same or similar 
issues. 

Derivatives 

NRG has entered into seven forward foreign currency exchange contracts 
with counterparties to hedge exposure to currency fluctuations to the extent 
permissible by hedge accounting requirements. Pursuant to these contracts, 
transactions have been executed that are designed to protect the economic 
value in U.S. dollars of NRG's equity investments and retained earnings, 
denominated in Australian dollars and German deutsche marks (DM). As of 
December 31, 1996, NRG had $132 million of foreign currency denominated 
assets that were hedged by forward foreign currency exchange contracts with a 
notional value of $123 million. In addition, NRG had approximately $82 
million of foreign currency denominated retained earnings from foreign 
projects that were hedged by forward foreign currency exchange contracts with 
a notional value of $59 million. Because the effects of both currency 
translation adjustments to foreign investments and currency hedge instrument 
gains and losses are recorded on a 

F-21

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

12. FINANCIAL INSTRUMENTS  (Continued) 

net basis in stockholders' equity (not earnings), the impact of significant 
changes in currency exchange rates on these items would have an immaterial 
effect on NRG's financial condition and results of operations. In connection 
with the forward foreign currency exchange contracts, cash collateral of $16 
million was required at December 31, 1996, which is reflected as restricted 
cash on NRG's balance sheet. The forward foreign currency exchange contracts 
terminate in 1998 through 2006 and require foreign currency interest payments 
by either party during each year of the contract. If the contracts had been 
terminated at December 31, 1996, $13.3 million would have been payable by NRG 
for currency exchange rate changes to date. Management believes NRG's 
exposure to credit risk due to non-performance by the counterparties to its 
forward exchange contracts is not significant, based on the investment grade 
rating of the counterparties. 

13. COMMITMENTS AND CONTINGENCIES 

Operating Lease Commitments 

NRG leases certain of its facilities and equipment under operating leases, 
some of which include escalation clauses, expiring on various dates through 
2010. Rental expense under these operating leases was $741,000 in 1996 and 
$796,000 in 1995. Future minimum lease commitments under these leases for the 
years ending after December 31, 1996 are as follows: 

(THOUSANDS OF 
DOLLARS) 

1997.........        $ 1,050 
1998.........            936 
1999.........            956 
2000.........            982 
2001.........          1,008 
Thereafter ..          5,349 
-------------------- 
Total......        $10,281 
==================== 

Capital Commitments -- International 

NRG signed a Joint Development Agreement for the acquisition, upgrading, 
expansion and development of Energy Center Kladno in Kladno, Czech Republic. 
The acquisition of the existing facility is the first phase of a development 
project that will include upgrading the existing plant and developing a new 
power generation facility. NRG has a $44 million commitment for the 
additional facilities. 

NRG together with its partners, signed a power contract with PT Perusahaan 
Listrik Negara, the state-owned Indonesian electric company, to build, own 
and operate a 400 MW coal-fired power station in Cilegon, West Java, 
Indonesia. NRG has a $65 million commitment for the facility. 

NRG is contractually committed to additional equity investments of $14 
million for Scudder Latin American Power I and $7 million to Scudder Latin 
American Power II as of December 31, 1996. 

NRG reached agreement to purchase a 50% equity interest in the Enfield 
Energy Centre, a 350 MW power project located in the North London borough of 
Enfield, England. NRG has a $62 million commitment. 

NRG and Transfield signed an acquisition agreement for the acquisition and 
refurbishment of the 180 MW Collinsville coal-fired power generation facility 
in Queensland, Australia. NRG has a $9 million commitment. 

F-22

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

13. COMMITMENTS AND CONTINGENCIES  (Continued) 

Future capital commitments related to international projects are as 
follows: 

(MILLIONS OF 
DOLLARS) 

1997 ......................       $ 37 
1998 ......................         75 
1999 ......................         52 
2000 ......................         29 
2001 ......................          8 
----------------- 
Total ...................       $201 
================= 

Capital Commitments -- Domestic 

In 1996 NRG has provided a $10 million loan commitment to a wholly-owned 
subsidiary of NRG Generating (U.S.) Inc. (NRGG). The purpose of the loan is 
to allow NRGG to fund its capital contribution to a cogeneration project 
currently under construction. NRG anticipates funding the loan in 1997. 

Also in 1996, NRG has committed to provide NRGG power generation 
investment opportunities in the United States over a period of three years. 
The projects must have an aggregate, over the three year term, equity value 
of at least $60 million or a minimum of 150 net megawatts. In addition, NRG 
has committed to finance these projects to the extent funds are not available 
to NRGG on comparable terms from other sources. 

Claims and Litigation 

In normal course of business, NRG is a party to routine claims and 
litigation arising from current and prior operations. NRG is actively 
defending these matters and does not believe the outcome of such matters 
would materially impact the results of operations or financial position. 

14. SEGMENT REPORTING 

NRG conducts its business within one industry segment--independent power 
generation. Operations in the United States include wholly-owned operations 
and investments in various domestic energy projects. International operations 
include investments in various international energy projects. See Note 5 for 
significant equity method investments. 

ASIA      OTHER      CORPORATE/ 
1996                                U.S.     EUROPE    PACIFIC    AMERICAS      OTHER        TOTAL 
- -------------------------------  --------- ---------  --------- ----------  ------------- --------- 
(IN THOUSANDS) 

Revenues from wholly-owned 
operations.....................  $ 71,649                                                 $ 71,649 
Equity in operating earnings 
(losses) of unconsolidated 
affiliates.....................     1,473  $ 17,385   $11,155    $   967      $  1,835      32,815 
--------- ---------  --------- ----------  ------------- --------- 
Total operating revenues........    73,122    17,385    11,155        967         1,835     104,464 
Net income......................    28,182    17,385    11,155        967       (37,711)(1)  19,978 

Assets reported on a 
consolidated basis.............   148,666                                       42,159 (2) 190,825 
Equity investments and loans to 
affiliates.....................   130,786   210,587    97,988     50,623                   489,984 
--------- ---------  --------- ----------  ------------- --------- 
Total assets....................   279,452   210,587    97,988     50,623        42,159     680,809 

F-23

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

14. SEGMENT REPORTING  (Continued) 

ASIA      OTHER      CORPORATE/ 
1995                                U.S.       EUROPE    PACIFIC    AMERICAS      OTHER        TOTAL 
- -------------------------------  ---------- ----------  --------- ----------  ------------- --------- 
(IN THOUSANDS) 

Revenues from wholly-owned 
operations.....................    64,180                                                     64,180 
Equity in operating earnings 
(losses) of unconsolidated 
affiliates.....................    (2,398)     22,143    11,451         29        (7,586)     23,639 
---------- ----------  --------- ----------  ------------- --------- 
Total operating revenues........    61,782      22,143    11,451         29        (7,586)     87,819 
Net income......................    50,813      22,143    11,451         29       (53,235)(1)  31,201 

Assets reported on a 
consolidated basis.............   124,807                                         21,569 (2) 146,376 
Equity investments and loans to 
affiliates.....................   118,220     106,809    78,303      4,881                   308,213 
---------- ----------  --------- ----------  ------------- --------- 
Total assets....................  $243,027    $106,809   $78,303     $4,881      $ 21,569    $454,589 

- ------------ 
(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 

On February 6,1997, NRG signed a subscription agreement with Energy 
Developments Limited (EDL) to acquire up to 20% of common stock, and an 
additional 15% of preference shares at AUS$2.20 per share. EDL is an 
Australian company engaged exclusively in independent power generation from 
landfill gas, coal seam methane and natural gas (including latest technology 
combined cycle projects). EDL is the largest generator of power from coal 
seam methane in the world. The company currently operates over 200 MW of 
generation across five states and territories of Australia and has commenced 
the development of new projects in the United Kingdom, Asia and New Zealand. 
The current equity megawatt ownership held by EDL is approximately I70 MW. 
EDL is a publicly traded company with its securities listed on the Australian 
Stock Exchange. On February 11, 1997 NRG made an initial purchase of 7.2% 
(4.5 million shares) of common stock for AUS$9.9 million (US$7.9 million). 

F-24

REPORT OF INDEPENDENT AUDITORS 
NRG ENERGY, INC. AND SUBSIDIARIES 

To the Board of Directors and Stockholder 
NRG Energy, Inc. 
Minneapolis, Minnesota 

We have audited the accompanying consolidated balance sheet of NRG Energy, 
Inc. (the Company) (a wholly-owned subsidiary of Northern States Power 
Company) as of December 31, 1994 and the related consolidated statements of 
income, stockholder's equity, and cash flows for the year ended December 31, 
1994. These consolidated financial statements are the responsibility of the 
Company's management. Our responsibility is to express an opinion on these 
consolidated financial statements based on our audit. We did not audit the 
1994 financial statements of Sunshine State Power BV and Sunshine State Power 
(No. 2) BV, the Company's investments in which are accounted for by use of 
the equity method. These investments represent 19% of total assets as of 
December 31, 1994 and the equity in earnings represents 32% of equity in 
earnings of projects for the year ended December 31, 1994. The financial 
statements of Sunshine State Power BV and Sunshine State Power (No. 2) BV 
were audited by other auditors whose reports have been furnished to us, and 
our opinion, insofar as it relates to the amounts included for such entities, 
is based solely on the reports of such other auditors. 

We conducted our audit in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the consolidated financial 
statements are free from material misstatements. An audit includes examining, 
on a test basis, evidence supporting the amounts and disclosures in the 
consolidated financial statements. An audit also includes assessing the 
accounting principles used and significant estimates made by management, as 
well as evaluating the overall consolidated financial statement presentation. 
We believe that our audit provides a reasonable basis for our opinion. 

In our opinion, based on our audit and the reports of the other auditors, 
such consolidated financial statements present fairly, in all material 
respects, the financial position of the Company as of December 31, 1994, and 
the results of its operations and its cash flows for the year ended December 
31, 1994, in conformity with generally accepted accounting principles. 

Deloitte & Touche LLP 

Minneapolis, Minnesota 
March 24, 1995 

F-25

NRG ENERGY, INC. 
CONSOLIDATED BALANCE SHEET 

DECEMBER 31, 1994 
-------------------- 
(THOUSANDS OF 
DOLLARS) 

ASSETS 
Current Assets: 
Cash and cash equivalents..........................................       $ 17,507 
Restricted cash....................................................         13,817 
Accounts receivable--trade, less allowance for doubtful accounts 
of $185...........................................................         11,576 
Accounts receivable--affiliates....................................            610 
Income taxes receivable............................................          2,442 
Current portion of notes receivable................................          3,115 
Inventory..........................................................          1,704 
Prepayments and other current assets...............................          1,173 
-------------------- 
TOTAL CURRENT ASSETS................................................         51,944 
-------------------- 
Property, Plant and Equipment, at Original Cost: 
In service.........................................................        163,438 
Under construction.................................................          2,289 
-------------------- 
165,727 
Less accumulated depreciation......................................        (58,093) 
-------------------- 
Net property, plant and equipment.................................        107,634 
-------------------- 
Other Assets: 
Investments in projects............................................        164,863 
Capitalized project costs..........................................          3,030 
Notes receivable, less current portion-affiliates..................          3,687 
Intangible assets, net of accumulated amortization of $2,549 ......         44,798 
Debt issuance costs, net of accumulated amortization of $148 ......            614 
-------------------- 
Total other assets................................................        216,992 
-------------------- 
TOTAL ASSETS........................................................       $376,570 
==================== 

See accompanying notes.

F-26

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

DECEMBER 31, 1994 
-------------------- 
(THOUSANDS OF 
DOLLARS) 

LIABILITIES AND STOCKHOLDER'S EQUITY 
Current liabilities: 
Current portion of long-term debt...............................       $  3,306 
Accounts payable--trade.........................................          5,199 
Note payable--affiliates........................................          3,037 
Accrued property and sales taxes................................          2,291 
Accrued salaries, benefits and related costs....................          2,751 
Other current liabilities.......................................         11,021 
-------------------- 
TOTAL CURRENT LIABILITIES........................................         27,605 
-------------------- 
Long-term debt, less current portion............................         90,033 
Deferred revenues...............................................          8,811 
Deferred income taxes...........................................         11,519 
Deferred investment tax credits.................................          2,324 
Deferred compensation...........................................          1,556 
-------------------- 
TOTAL LIABILITIES................................................        141,848 
-------------------- 
Commitments and Contingencies (Note 13) 
Stockholder's Equity: 
Common stock; $1 par value; 1,000 shares authorized; 1,000 
shares issued and outstanding..................................              1 
Additional paid-in capital......................................        216,013 
Retained earnings...............................................         15,122 
Currency translation adjustments................................          3,586 
-------------------- 
TOTAL STOCKHOLDER'S EQUITY.......................................        234,722 
-------------------- 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.......................       $376,570 
==================== 

See accompanying notes.

F-27

NRG ENERGY, INC. 
CONSOLIDATED STATEMENT OF INCOME 

YEAR ENDED DECEMBER 31, 1994 
---------------------------- 
(THOUSANDS OF DOLLARS) 

Operating revenues: 
Revenues from wholly-owned operations...................            $63,970 
Equity in operating earnings of unconsolidated 
affiliates.............................................             27,155 
---------------------------- 
Total operating revenues.................................             91,125 
---------------------------- 
Operating costs and expenses: 
Cost of wholly-owned operations.........................             34,861 
Depreciation and amortization...........................              8,675 
General, administrative and development expenses .......             19,993 
---------------------------- 
Total operating costs and expenses.......................             63,529 
---------------------------- 
Operating income.........................................             27,596 
Other income (expense): 
Equity in gain from project termination settlements ....              9,685 
Other income, net.......................................              1,411 
Interest expense........................................             (6,682) 
---------------------------- 
Total other income ......................................              4,414 
---------------------------- 
Income before income taxes...............................             32,010 
---------------------------- 
Income taxes.............................................              2,472 
---------------------------- 
Net Income...............................................            $29,538 
============================ 

See accompanying notes.

F-28

NRG ENERGY, INC. 
CONSOLIDATED STATEMENT OF CASH FLOWS 

YEAR ENDED DECEMBER 31, 1994 
---------------------------- 
(THOUSANDS OF DOLLARS) 

CASH FLOWS FROM OPERATING ACTIVITIES 
Net income.............................................................           $  29,538 
Adjustments to reconcile net income to net cash provided (used) by 
operating activities ................................................ 
Undistributed equity in operating earnings of unconsolidated 
affiliates..........................................................             (18,511) 
Depreciation and amortization........................................               8,675 
Deferred income taxes and investment tax credits.....................                (523) 
Cash (used) provided by changes in certain working capital items: 
Accounts receivable--trade..........................................              (2,964) 
Accounts receivable--affiliates.....................................                 468 
Accrued income taxes................................................              (1,892) 
Inventory...........................................................                (438) 
Prepayments and other current assets................................                (205) 
Accounts payable--trade.............................................              (4,459) 
Accounts payable--affiliates........................................                 942 
Accrued property and sales taxes....................................                 (76) 
Accrued salaries, benefits and related costs........................               1,246 
Other current liabilities...........................................               1,240 
Cash (used) by changes in other assets and liabilities ..............                (615) 
---------------------------- 
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.......................              12,426 
---------------------------- 
CASH FLOWS FROM INVESTING ACTIVITIES 
Investments in projects...............................................            (102,119) 
Loans to projects.....................................................              (4,415) 
Capital expenditures..................................................              (5,750) 
(Increase) decrease in restricted cash................................             (13,817) 
Other, net............................................................               2,255 
---------------------------- 
NET CASH USED BY INVESTING ACTIVITIES..................................            (123,846) 
CASH FLOWS FROM FINANCING ACTIVITIES 
Capital contributions from parent.....................................             103,885 
Dividends and other distributions paid to parent......................                  (9) 
Proceeds from issuance of long-term debt..............................               2,375 
Principal payments on long-term debt..................................              (2,487) 
---------------------------- 
NET CASH PROVIDED BY FINANCING ACTIVITIES..............................             103,764 
============================ 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................              (7,656) 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.........................              25,163 
---------------------------- 
CASH AND CASH EQUIVALENTS AT END OF YEAR...............................           $  17,507 
============================ 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 
Interest paid (net of amount capitalized).............................           $   6,808 
Income tax benefits received, net of taxes paid.......................              (1,939) 

See accompanying notes.

F-29

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

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

Balances at December 31, 1993 .......    $1       $112,128     $(14,407)                    $ 97,722 
Net income...........................                            29,538                       29,538 
Dividends and other distributions to 
parent..............................                                (9)                          (9) 
Capital contributions from parent ...              103,885                                   103,885 
Currency translation adjustments ....                                        $3,586            3,586 
-------- ------------  ----------- -------------  --------------- 
Balances at December 31, 1994 .......    $1       $216,013     $ 15,122      $3,586         $234,722 
======== ============  =========== =============  =============== 

See accompanying notes.

F-30

NRG ENERGY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

1. ORGANIZATION AND BASIS OF PRESENTATION 

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

Principles of consolidation 

The accompanying consolidated financial statements include the accounts of 
the Company and its subsidiaries (referred to collectively herein as NRG). 
All significant intercompany transactions have been eliminated. Investments 
in partnerships, joint ventures and projects representing ownership of more 
than 20%, but not in excess of 50%, are accounted for on the equity method. 

Cash equivalents 

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

Restricted cash 

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-31

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued) 

Debt issuance costs 

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

Intangibles 

Intangibles consist principally of service agreements and the excess of 
the cost of investment in subsidiaries over the underlying fair value of the 
net assets acquired and are being amortized using the straight-line method 
over 30 years. Intangibles also include patents which are being amortized 
using the straight-line method over 17 years. The Company periodically 
evaluates the recovery of goodwill and other intangibles based on an analysis 
of the estimated undiscounted future cash flows. 

Income taxes 

The Company is included in the consolidated tax returns of NSP. NRG 
calculates its income tax provision on a separate return basis under a tax 
sharing arrangement with NSP. Current federal and state income taxes are 
payable to or receivable from NSP. NRG records income taxes in accordance 
with Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting 
for Income Taxes." Under the liability method required by SFAS No.109, income 
taxes are deferred on all temporary differences between pretax financial and 
taxable income and between the book and tax bases of assets and liabilities. 
Deferred taxes are recorded using the tax rates scheduled by law to be in 
effect when the temporary differences reverse. Investment tax credits are 
deferred and amortized over the estimated lives of the related property. 

Revenue recognition 

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-32

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued) 

foreign currency exchange agreements. Gains and losses on these contracts 
offset the effect of foreign currency exchange rate fluctuations on the 
valuation of the investments underlying the hedges. The effect of hedging 
gains and losses, net of income taxes, is reported with other currency 
translation adjustments as a separate component of stockholder's equity. The 
Company is not hedging currency translation adjustments related to operating 
results. NRG does not speculate in foreign currencies. 

Accounting change 

In 1994, the Company adopted SFAS No. 112, "Employers' Accounting for 
Postretirement Benefits." SFAS No. 112 requires the accrual of certain 
employee costs (such as injury compensation or severance) to be paid in 
future periods. The adoption of this new accounting standard did not have a 
material effect on NRG's results of operations or financial condition. 

3. BUSINESS ACQUISITIONS 

Through its subsidiaries, NRG purchased equity interests during 1994 in 
three significant international projects, two in Germany and one in 
Australia. One of the investments is a 33% interest in Mitteldeutsche 
Braunkohlengesellschaft mbH (MIBRAG), a German corporation. MIBRAG was formed 
by the German government to operate mines, electric power plants and other 
energy-related facilities. The other German investment is a 50% interest in 
Saale Energie GmbH (Saale), also a German corporation. Saale owns a 400 
megawatt share of a 900 megawatt power plant currently under construction 
near Schkopau, Germany. The Australian investment is a 37.5% interest (held 
by wholly-owned NRG subsidiaries Sunshine State Power BV and Sunshine State 
Power (No. 2) BV) in a joint venture that acquired a 1,680 megawatt 
coal-fired power plant in Gladstone, Queensland, Australia, which is operated 
by an NRG subsidiary. The total acquisition investments in these three 
projects through 1994, including capitalized developments costs, was 
approximately $100 million. Earnings from equity interests in these NRG 
international projects acquired in 1994 contributed $25.6 million to NRG's 
1994 earnings. 

On December 31, 1994, NRG, through a wholly-owned subsidiary, purchased a 
50% partnership interest in Sunnyside Cogeneration Associates, a Utah joint 
venture (partnership) which owns and operates a 51 megawatt waste coal plant 
in Utah. The acquisition investment by NRG was $11.5 million. The waste coal 
plant is currently being operated by a 50%-owned NRG partnership. 

In August 1993, NRG Energy Center, Inc., a wholly-owned subsidiary of NRG, 
acquired the assets of the Minneapolis Energy Center (MEC), a district 
heating and cooling system in downtown Minneapolis, Minnesota. The system 
uses steam and chilled water generating facilities to heat and cool buildings 
for about 90 heating and 30 cooling customers. The acquisition was reflected 
in the financial statements under the purchase method of accounting. 
Accordingly, the assets acquired and liabilities assumed in the acquisition 
have been recorded at their fair values. The purchase price was $110 million, 
$84 million of which was financed by project debt. The purchase price 
primarily included facilities, long-term service agreements and goodwill. The 
results of operations of MEC since August 1993 have been included in the 
consolidated financial statements. 

F-33

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

4. PROPERTY, PLANT AND EQUIPMENT 

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

1994 
-------------------- 
(THOUSANDS OF 
DOLLARS) 

Facilities and equipment, including construction work in progress of $2,289        $153,221 
Land and improvements.......................................................         10,397 
Office furnishings and equipment............................................          2,109 
-------------------- 
Total property, plant and equipment ........................................        165,727 
Accumulated depreciation....................................................        (58,093) 
-------------------- 
Net property, plant and equipment...........................................       $107,634 
==================== 

5. INVESTMENTS ACCOUNTED FOR BY EQUITY METHOD 

A summary of NRG's significant equity-method investments which were in 
operation at December 31, 1994 is as follows: 

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

Various Independent Power Production 
Facilities..............................       U.S.A.          45%-50%       July 1991-December 1994 
Rosebud Syncoal Partnership..............       U.S.A.            50%               August 1993 
MIBRAG...................................       Europe            33%              January 1994 
Gladstone Power Station..................     Australia          37.5%              March 1994 
Schkopau Power Station...................       Europe           20.6%          Under Construction 
Scudder Latin American Trust for 
Independent Power Energy Projects ......   Latin America      6.3%-12.5%       April-December 1994 

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

1994 
-------------------- 
(THOUSANDS OF 
DOLLARS) 

Operating revenues............      $  731,308 
Costs and expenses............         604,428 
-------------------- 
Net income...................      $  126,880 
==================== 
Current assets................      $  452,651 
Noncurrent assets.............       1,787,089 
-------------------- 
Total assets.................      $2,239,740 
==================== 
Current liabilities...........      $  159,840 
Noncurrent liabilities........       1,757,057 
Equity........................         322,843 
-------------------- 
Total liabilities and 
equity.......................      $2,239,740 
==================== 
NRG's share of equity.........      $  164,863 
NRG's share of income.........      $   27,155 

F-34

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

5. INVESTMENTS ACCOUNTED FOR BY EQUITY METHOD  (Continued) 

In July 1994, Michigan Cogeneration Partners Limited Partnership (MCP), a 
partnership between subsidiaries of NRG and Cogentrix, Inc., reached an 
agreement with Consumers Power Company (Consumers), an electric utility 
headquartered in Jackson, Michigan, to terminate the power sales contract 
related to a 65 megawatt cogeneration facility being developed by MCP in 
Parchment, Michigan. The agreement to terminate the contract required 
Consumers to make payment to MCP of $29.8 million. As a result, NRG recorded 
in Other Income. A net pretax gain from the termination of this contract of 
$9.7 million in 1994. 

In 1994, the Company recorded a pretax charge of $5.0 million to write 
down the carrying value of two energy projects. The charge was determined 
based on estimated discounted future cash flows, and is recorded in Other 
Income, Net. 

6. RELATED PARTY TRANSACTIONS 

Operating Agreements 

NRG has two agreements with NSP for the purchase of thermal energy. Under 
the terms of the agreements, NSP charges NRG for certain incremental costs 
(fuel, labor, plant maintenance, and auxiliary power) incurred by NSP to 
produce the thermal energy. NRG paid NSP $6.6 million in 1994 under these 
agreements. 

NRG has a renewable 10-year agreement with NSP, expiring on December 31, 
2001, whereby NSP agrees to purchase refuse-derived fuel for use in certain 
of its boilers and NRG agrees to pay NSP a burn incentive. NRG has an 
agreement expiring in 2006 to sell wood by-products obtained from a thermal 
customer to NSP for use as fuel. Under these agreements, NRG received $1.7 
million from NSP and paid $2.2 million to NSP in 1994. 

Administrative Services and Other Costs 

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. 

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

7. NOTES RECEIVABLE 

Notes receivable consist primarily of fixed and variable rate notes 
secured by equity interests in partnerships and joint ventures. The weighted 
average interest rate on the notes was 11.2% at December 31, 1994. 

F-35

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

8. LONG-TERM DEBT 

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

1994 
-------------------- 
(THOUSANDS OF 
DOLLARS) 

NRG Energy Center, Inc. Senior Secured Notes Series due June 
15, 2013, 7.31% ...............................................        $81,498 
Note payable to NSP, due December 1, 1995-2006, 5.40%-6.75% ....          9,466 
NRG Sunnyside Inc. note payable, due December 31, 1997, 10.00% .          2,375 
-------------------- 
93,339 
Less current maturities.........................................         (3,306) 
-------------------- 
$90,033 
==================== 

The NRG Energy Center, Inc. notes are secured principally by MEC's 
long-term assets. In accordance with the terms of the note agreements, the 
Company is required to maintain compliance with certain financial covenants 
primarily related to incurring debt, disposing of Company assets, and 
affiliate transactions. The Company was in compliance with these covenants at 
December 31, 1994. 

The Note Payable to NSP relates to long-term debt assumed by the Company 
in connection with the transfer of ownership of an RDF processing plant by 
NSP to the Company during 1993. 

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

Annual maturities of long-term debt for the years ending after December 
31, 1994 are as follows: 

(THOUSANDS OF 
DOLLARS) 

1995..........        $ 3,306 
1996..........          3,762 
1997..........          3,979 
1998..........          3,335 
1999..........          3,581 
Thereafter  ..         75,376 
-------------------- 
Total........        $93,339 
==================== 

The Company has a revolving-credit agreement which may not exceed $5.0 
million. At December 31, 1994, there were no borrowings under the credit 
agreement. 

F-36

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

9. INCOME TAXES 

The provision for income taxes consists of the following: 

1994 
-------------------- 
(THOUSANDS OF 
DOLLARS) 

Current 
Federal.................        $ 1,694 
State...................            737 
Foreign.................            219 
-------------------- 
2,650 
Deferred 
Federal.................          1,280 
State...................            369 
-------------------- 
1,649 
Tax credits recognized ..         (1,827) 
-------------------- 
Total income tax 
expense..................        $ 2,472 
==================== 

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

1994 
-------------------- 
(THOUSANDS OF 
DOLLARS) 

Deferred tax liabilities 
Differences between book and tax bases of property  .....        $13,269 
Investments in projects..................................          6,168 
Goodwill.................................................            256 
Other....................................................            930 
-------------------- 
Total deferred tax liabilities...........................         20,623 
Deferred tax assets 
Deferred revenue.........................................          3,645 
Development costs........................................          2,047 
Deferred investment tax credits..........................            978 
Deferred compensation, accrued vacation and other 
reserves................................................            992 
Steam capacity rights....................................          1,175 
Other....................................................            267 
-------------------- 
Total deferred tax assets...............................          9,104 
-------------------- 
Net deferred tax liability...............................        $11,519 
==================== 

Actual income tax expense recorded differs from the statutory federal 
income tax rate of 35% due to state income taxes, varying tax treatment of 
foreign income and expenses and tax credits recognized. 

Income before income taxes includes foreign income of $25.6 million in 
1994. NRG's management intends to reinvest in earnings of foreign operations 
indefinitely. Accordingly, U.S. income taxes and foreign withholding taxes 
have not been provided on the earnings of foreign subsidiary companies. The 
cumulative amount of undistributed pre-tax earnings of foreign subsidiaries 
upon which no U.S. income taxes or foreign withholding taxes have been 
provided is approximately $25.6 million at December 31, 1994. The additional 
U.S. income tax and foreign withholding tax on the unremitted foreign 
earnings, if repatriated, would be offset in whole or in part by foreign tax 
credits. Thus, it is impracticable to estimate the amount of tax that might 
be payable. 

F-37

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

10. BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS 

Pension Benefits 

NRG participates in NSP's noncontributory, defined benefit pension plan 
that covers substantially all employees. Benefits are based on a combination 
of year of service, the employee's highest average pay for 48 consecutive 
months, and Social Security benefits. Pension costs for NRG are determined 
and recorded under the provisions of SFAS No. 87, "Employers' Accounting for 
Pensions." Net annual periodic pension cost includes the following 
components: 

1994 
-------------------- 
(THOUSANDS OF 
DOLLARS) 

Service cost-benefits earned during the 
period.......................................         $ 654 
Interest cost on projected benefit 
obligation...................................           354 
Actual return on assets.......................           (58) 
Net amortization and deferral ................          (262) 
-------------------- 
Net periodic pension cost ....................         $ 688 
==================== 

The funded status of the pension plan in which NRG employees participate 
is as follows at December 31: 

NSP PLAN-1994 
-------------------------- 
TOTAL NSP    NRG PORTION 
----------- ------------- 
(THOUSANDS OF DOLLARS) 

Actuarial present value of benefit obligation 
Vested..............................................  $  571,254     $  563 
Nonvested...........................................     120,420      1,016 
----------- ------------- 
Accumulated benefit obligation......................  $  691,674     $1,579 
=========== ============= 
Projected benefit obligation.........................  $  836,957     $4,228 
Plan assets at fair value............................   1,165,584      5,170 
----------- ------------- 
Plan asset in excess of projected benefit 
obligation..........................................    (328,627)      (942) 
Unrecognized prior service costs.....................     (21,538)       (96) 
Unrecognized net actuarial gain .....................     370,289      1,038 
Unrecognized net transitional asset .................         691         -- 
----------- ------------- 
Net pension liability recorded .....................  $   20,815     $   -- 
=========== ============= 

The weighted-average discount rate used in determining the actuarial 
present value of the projected benefit obligation was 8% in 1994. The rate of 
increase in future compensation levels used in determining the actuarial 
present value of the projected obligation was 5% in 1994. The assumed 
long-term rate of return on assets used for cost determinations under SFAS 
No. 87 was 8% for 1994. Plan assets consist principally of common stock of 
public companies and U.S. Government securities. 

Postretirement Health Care 

Effective January 1, 1993, NRG adopted the provisions of SFAS No. 106, 
"Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS 
No. 106 requires the actuarial determined obligation for postretirement 
health care and death benefits be fully accrued by the date employees attain 
full eligibility for such benefits, which is generally when they reach 
retirement age. In conjunction with the adoption of SFAS No. 106, NRG elected 
to amortize on a straight-line basis over 20 years the unrecognized 
accumulated postretirement benefit obligation (APBO) of $1.4 million for 
current and future 

F-38

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

10. BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS  (Continued) 

retirees. This obligation considered 1994 plan design changes not in effect 
in 1993, including Medicare integration, increased retiree cost sharing, and 
managed indemnity measures. 

The following table sets forth the funded status of the health care plan 
in which NRG employees participate at December 31: 

NSP PLAN-1994 
-------------------------- 
TOTAL NSP    NRG PORTION 
----------- ------------- 
(THOUSANDS OF DOLLARS) 

APBO 
Retirees..............................  $ 132,200      $    34 
Fully eligible plan participants.....     21,500          359 
Other active plan participants.......     79,400        1,319 
----------- ------------- 
Total APBO..........................    233,100        1,712 
Plan assets at fair value............      8,000           -- 
----------- ------------- 
APBO in excess of plan assets........    225,100        1,712 
Unrecognized net actuarial gain......      2,300          265 
Unrecognized net transition 
obligation...........................   (194,000)      (1,273) 
----------- ------------- 
Net benefit obligation recorded......  $  33,400      $   704 
=========== ============= 

The assumed health care cost trend rates used in measuring the APBO at 
December 31, 1994 were 11.0% for those under age 65, and 7.5% for those over 
age 65. The assumed cost trends are expected to decrease each year until they 
reach 5.5% for both age groups in the year 2004, after which they are assumed 
to remain constant. A one percent increase in the assumed health care cost 
trend rate for each year would increase the APBO by approximately 13% as of 
December 31, 1994. Service and interest cost components of the net periodic 
postretirement cost would increase by approximately 16% with a similar one 
percent increase in the assumed health care cost trend rate. The assumed 
discount rate used in determining the APBO was 8% for December 31, 1994, 
compounded annually. The assumed long-term rate of return on assets used for 
cost determinations under SFAS No. 106 was 8% for 1994. The net annual 
periodic postretirement benefit cost recorded for 1994 consists of the 
following components: 

1994 
-------------------- 
(THOUSANDS OF 
DOLLARS) 

Service cost--benefits earned during the year .         $140 
Interest cost on APBO..........................          126 
Amortization of transition obligation .........           70 
Net amortization and deferral..................           -- 
-------------------- 
Net periodic postretirement health care 
costs.........................................         $336 
==================== 

11. SALES TO SIGNIFICANT CUSTOMERS 

NRG and the Ramsey/Washington Resource Recovery Project have a service 
agreement for waste disposal which expires in 2006. Approximately 35.5% in 
1994 of the Company's operating revenues from wholly-owned operations were 
recognized under this contract. In addition, sales to one thermal customer 
amounted to 16.6% of operating revenues from wholly-owned operations in 1994. 

F-39

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

12. FINANCIAL INSTRUMENTS 

The estimated December 31 fair values of NRG's recorded financial 
instruments are as follows: 

1994 
--------------------------- 
CARRYING        FAIR 
AMOUNT         VALUE 
-------------------------- 
(THOUSANDS OF DOLLARS) 

Cash and cash equivalents...................    $17,507       $17,507 
Restricted cash.............................     13,817        13,817 
Notes receivable, including current 
portion....................................      6,802         6,802 
Long-term debt, including current portion ..     93,339        82,694 

For cash, cash equivalents and restricted cash, the carrying amount 
approximates fair value because of the short-term maturity of those 
instruments. The fair value of notes receivable is based on expected future 
cash flows discounted at market interest rates. The fair value of long-term 
debt is estimated based on the quoted market prices for the same or similar 
issues. 

NRG has entered into three forward foreign currency exchange contracts 
with a counterparty to hedge exposure to currency fluctuations to the extent 
permissible by hedge accounting requirements. Pursuant to these contracts, 
transactions have been executed that are designed to protect the economic 
value in U.S. dollars of NRG's equity investments, denominated in Australian 
dollars and German deutsche marks (DM). NRG's forward currency exchange 
contracts, in the notional amount of $93 million, hedge approximately $94 
million of foreign currency denominated investments at December 31, 1994. 
These foreign currency exchange contracts are not reflected in NRG's balance 
sheet. The contracts do require cash collateral which was $6.7 million at 
December 31, 1994 and is included in restricted cash on NRG's balance sheet. 
The contracts terminate in 2004 and require foreign currency interest 
payments by either party during each year of the contract. If the contracts 
had been terminated at December 31, 1994, $4.3 million would have been 
payable by NRG for currency exchange rate changes to date. Management 
believes NRG's exposure to credit risk due to nonperformance by the 
counterparty to its forward exchange contracts is not significant, based on 
the investment grade rating of the counterparty. 

13. COMMITMENTS AND CONTINGENCIES 

Operating Lease Commitments 

The Company has noncancelable operating leases for office space. The 
leases require the company to pay certain annual operating costs, including 
maintenance, insurance and real estate taxes. Rental expense under these 
operating leases was $178 in 1994 (thousands of dollars). Future minimum 
lease commitments under these leases for the years ended after December 31, 
1994 are as follows: 

(THOUSANDS OF 
DOLLARS) 

1995.....         $221 
1996.....          246 
1997.....          131 
-------------------- 
Total...         $598 
==================== 

Financial Guarantees 

Certain of the partnerships in which NRG is an equity investor have loan 
agreements and debt outstanding which contain restrictive covenants. In the 
event that certain covenants are not met, NRG has guaranteed the contribution 
of $3.8 million of additional equity. No contributions of additional equity 
were necessary during 1994. 

F-40

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

13. COMMITMENTS AND CONTINGENCIES  (Continued) 

Capital Commitments 

NRG is contractually committed to additional equity investments in an 
existing German energy project. Such commitments are for approximately DM 36 
million in 1995 and DM 35 million in 1996. The 1995 and 1996 commitments 
would be approximately $23 million each year, based on exchange rates in 
effect at December 31, 1994. 

In addition, NRG is contractually committed to additional equity 
investments of $20.6 million in the Scudder Latin American Trust for 
Independent Power Energy Projects as of December 31, 1994. 

14. SEGMENT REPORTING 

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) 

Revenues from wholly-owned 
operations.....................  $ 63,970                                                   $ 63,970 
Equity in operating earnings 
(losses) of unconsolidated 
affiliates.....................      (766)   $19,340   $ 8,581                                27,155 
---------- ---------  --------- ----------  -------------- --------- 
Total operating revenues........    63,204     19,340     8,581                                91,125 
Net income......................    19,668     19,340     8,581                 $(18,051)(1)   29,538 
Assets reported on a 
consolidated basis.............   122,087                                        34,380 (2)  156,467 
Equity investments and loans to 
affiliates.....................   116,073     33,389    70,641                               220,103 
---------- ---------  --------- ----------  -------------- --------- 
Total assets....................  $238,160    $33,389   $70,641                 $ 34,380     $376,570 

- ------------ 
(1)    Includes all expenses not allocated to either consolidated operations 
or equity investments. This includes general, administrative and 
development expenses as well as other income (net), interest expense 
and taxes. 
(2)    Includes cash, debt issuance costs and other items not directly related 
to specific asset groups. 

15. SUBSEQUENT EVENT 

NRG, through wholly-owned subsidiaries, owns 45% of the San Joaquin Valley 
Energy Partnership (SJVEP), which owns four plants located near Fresno, 
California with a total capacity of 55 megawatts. Through February 1995, the 
plants operated under long-term Standard Offer 4 (SO4) power sales contracts 
with Pacific Gas and Electric (PG&E) which expire in 2017. On February 28, 
1995, PG&E reached basic agreements with SJVEP to acquire the SO4 contracts. 
The parties entered into a bridging agreement to cover the period until all 
regulatory approvals are received for the transaction. The bridging agreement 
required SJVEP to cease power deliveries to PG&E as of February 28, 1995. The 
negotiated agreements will result in cost savings for PG&E customers as well 
as economic benefits for SJVEP. The final impact of this transaction on the 
financial results of NRG will not be known until the agreements have been 
approved and all costs associated with the idling of the facilities are 
known. It is expected that a one-time gain from the transaction will be 
recorded in the first half of 1995. SJVEP will continue to own and maintain 
the facilities and will explore all available options. 

F-41

NRG ENERGY, INC. 
CONSOLIDATED BALANCE SHEETS 
(UNAUDITED) 

SEPTEMBER 30, 
------------------------ 
1997         1996 
------------ ---------- 
(THOUSANDS OF DOLLARS) 

ASSETS 
Current Assets: 
Cash and cash equivalents .....................................  $   19,294    $ 54,727 
Restricted cash ...............................................         347      23,645 
Accounts receivable-trade, less allowance for doubtful 
accounts .....................................................      14,138      12,587 
Accounts receivable-affiliates ................................       4,956       5,361 
Current portion of notes receivable--affiliates ...............      11,587       4,109 
Current portion of notes receivable ...........................      46,571       1,403 
Income taxes receivable .......................................      14,249       1,500 
Inventory .....................................................       2,624       2,367 
Prepayments and other current assets ..........................       4,972       1,149 
------------ ---------- 
TOTAL CURRENT ASSETS ...........................................     118,738     106,848 
------------ ---------- 
Property, plant and equipment, at original cost: 
In service ....................................................     215,576     170,673 
Under construction ............................................      26,191      16,916 
------------ ---------- 
241,767     187,589 
Less accumulated depreciation .................................     (76,852)    (69,400) 
------------ ---------- 
Net property, plant and equipment.............................     164,915     118,189 
------------ ---------- 
Other Assets: 
Investments in projects .......................................     635,047     266,504 
Capitalized project costs .....................................      26,129       5,921 
Notes receivable, less current portion--affiliates  ...........      75,439      45,363 
Intangible assets, net of accumulated amortization  ...........      40,098      40,856 
Debt issuance costs, net of accumulated amortization  .........       6,450       2,780 
------------ ---------- 
Total other assets ...........................................     783,163     361,424 
------------ ---------- 
TOTAL ASSETS ...................................................  $1,066,816    $586,461 
============ ========== 

See accompanying notes.

F-42

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

SEPTEMBER 30, 
----------------------- 
1997        1996 
------------ --------- 
(THOUSANDS OF DOLLARS) 

LIABILITIES AND STOCKHOLDER'S EQUITY 
Current Liabilities: 
Current portion of long-term debt .................  $   43,311   $  3,892 
Accounts payable--trade ...........................       2,841      4,405 
Accrued income taxes ..............................       8,586         -- 
Accrued property and sales taxes ..................       2,961      2,827 
Accrued salaries, benefits and related costs  .....       8,991      5,880 
Accrued interest ..................................       5,471      2,150 
Other current liabilities .........................       5,587        990 
------------ --------- 
TOTAL CURRENT LIABILITIES ..........................      77,748     20,144 
Long-term debt, less current portion ...............     474,427    209,406 
Deferred revenues ..................................      13,597      6,686 
Deferred income taxes ..............................      16,042     14,650 
Deferred investment tax credits ....................       1,662      1,917 
Deferred compensation ..............................       2,061      1,646 
------------ --------- 
TOTAL LIABILITIES...................................     585,537    254,449 
------------ --------- 
Stockholder's Equity: 
Common stock; $1 par value; 1,000 shares 
authorized; 
1,000 shares issued and outstanding ..............           1          1 
Additional paid-in capital ........................     431,374    271,013 
Retained earnings .................................      80,715     57,592 
Currency translation adjustments ..................     (30,811)     3,406 
------------ --------- 
TOTAL STOCKHOLDER'S EQUITY .........................     481,279    332,012 
------------ --------- 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY  ........  $1,066,816   $586,461 
============ ========= 

See accompanying notes.

F-43

NRG ENERGY, INC. 
CONSOLIDATED STATEMENTS OF INCOME 
(UNAUDITED) 

NINE MONTHS ENDED 
SEPTEMBER 30, 
---------------------- 
1997        1996 
---------- ---------- 
(THOUSANDS OF DOLLARS) 

Operating Revenues: 
Revenues from wholly-owned operations ...................  $ 65,081    $ 52,479 
Equity in operating earnings of unconsolidated 
affiliates .............................................    17,759      19,375 
---------- ---------- 
Total operating revenues ...............................    82,840      71,854 
---------- ---------- 
Operating costs and expenses: 
Cost of operations--wholly-owned operations .............    32,863      26,858 
Depreciation and amortization ...........................     7,096       6,300 
General, administrative, and development ................    28,402      26,599 
---------- ---------- 
Total operating costs and expenses .....................    68,361      59,757 
---------- ---------- 
Operating income .........................................    14,479      12,097 
---------- ---------- 
Other income (expense): 
Other income, net .......................................     8,610       6,117 
Interest expense ........................................   (19,815)    (11,303) 
---------- ---------- 
Total other income (expense) ...........................   (11,205)     (5,186) 
---------- ---------- 
Income before income taxes ...............................     3,274       6,911 
---------- ---------- 
Income taxes (benefits) ..................................   (11,140)     (4,358) 
---------- ---------- 
Net Income................................................  $ 14,414    $ 11,269 
========== ========== 

See accompanying notes.

F-44

NRG ENERGY, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED) 

NINE MONTHS ENDED 
SEPTEMBER 30, 
----------------------- 
1997        1996 
----------- ---------- 
(THOUSANDS OF DOLLARS) 

CASH FLOWS FROM OPERATING ACTIVITIES 
Net income.......................................................  $  14,414    $ 11,269 
Adjustments to reconcile net income to net cash provided (used) 
by operating activities ........................................ 
Undistributed equity in operating 
earnings of unconsolidated affiliates..........................     (2,662)     (8,408) 
Depreciation and amortization ..................................      7,096       6,300 
Deferred income taxes and investment tax credits................      7,245       5,332 
Cash provided (used) by changes in certain working capital 
items 
Accounts receivable............................................    (14,138)     (2,113) 
Accounts receivable-affiliates.................................      7,105      (1,862) 
Accrued income taxes...........................................      1,777     (11,475) 
Inventory......................................................       (312)       (556) 
Prepayments and other current assets...........................       (328)        595 
Accounts payable-trade.........................................     (1,602)     (1,803) 
Accrued property and sales taxes...............................        802         932 
Accrued salaried, benefits and related costs...................      2,432        (739) 
Accrued interest...............................................        745         450 
Other current liabilities......................................      1,163         544 
Cash provided (used) by changes in other assets and liabilities       3,711        (868) 
----------- ---------- 
Net cash provided (used) by operating activities .................     27,448      (2,402) 
----------- ---------- 
CASH FLOWS FROM INVESTING ACTIVITIES 
Investments in projects .........................................   (326,882)    (53,403) 
Changes in notes receivable .....................................    (59,195)     (7,819) 
Capital expenditures ............................................    (41,062)    (11,422) 
Cash from sale of project investment ............................      6,655          -- 
Decrease (increase) in restricted cash ..........................     17,341     (13,872) 
Cash distribution from project termination settlement  ..........         --      15,671 
Other, net ......................................................        594          -- 
----------- ---------- 
Net cash used by investing activities ............................   (402,549)    (70,845) 
----------- ---------- 
CASH FLOWS FROM FINANCING ACTIVITIES 
Capital contributions from parent ...............................     80,361          -- 
Proceeds from issuance of long-term debt ........................    303,511     122,671 
Principal payments on long-term debt ............................     (1,915)     (1,736) 
----------- ---------- 
Net cash provided by financing activities ........................    381,957     120,935 
----------- ---------- 
Net increase in cash and cash equivalents ........................      6,856      47,688 
----------- ---------- 
Cash and cash equivalents at beginning of period .................     12,438       7,039 
----------- ---------- 
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................  $  19,294    $ 54,727 
=========== ========== 

See accompanying notes.

F-45

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

1. ORGANIZATION AND BASIS OF PRESENTATION 

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

In the opinion of management, the unaudited interim consolidated financial 
information of the Company contains all adjustments, consisting of only those 
of a recurring nature, necessary to present fairly the Company's financial 
position and results of operations. All significant inter-company accounts, 
transactions, and profits have been eliminated. These financial statements 
are for interim periods and do not include all information normally provided 
in annual financial statements and notes thereto for the year ended December 
31, 1996 and should be read in conjunction with the consolidated financial 
statements and notes thereto for the year ended December 31, 1996, contained 
in the Company's 1996 Annual Report. The results of operation for the interim 
periods are not necessarily indicative of the results that may be expected 
for the full year. 

2. RESTRICTED CASH 

Restricted cash consists primarily of cash collateral required in 
connection with foreign currency hedging activities and cash collateral for 
letters of credit issued in relation to project development activities. At 
September 30, 1997, the required levels of restricted cash were lower than 
the same period in 1996 due to the change in the market value of the 
Company's exchange swaps and the posting of an $8 million letter of credit 
which replaced the collateral requirement. 

3. PROPERTY, PLANT AND EQUIPMENT 

The major classes of property, plant and equipment at September 30 were as 
follows: 

1997        1996 
---------- ---------- 
(THOUSANDS OF DOLLARS) 

Facilities and equipment, including construction work in progress 
of $26,191 and $16,916 ............................................  $227,363    $174,221 
Land and improvements ..............................................    10,398      10,398 
Office furnishings and equipment ...................................     4,006       2,970 
---------- ---------- 
Total property, plant and equipment ..............................   241,767     187,589 
Accumulated depreciation ...........................................   (76,852)    (69,400) 
---------- ---------- 
Net property, plant and equipment ................................  $164,915    $118,189 
========== ========== 

The primary contributors to the increased facilities and equipment is due 
to increased work in process at NEO for the construction of its landfill gas 
projects ($32 million), investments in NRG's MEC projects ($5 million), 
construction at Millennium ($10 million) and the purchase of San Diego Power 
& Cooling ($6 million). 

4. BUSINESS ACQUISITIONS 

On February 6, 1997, NRG signed a subscription agreement with Energy 
Development Limited (EDL) to acquire up to 20% of common stock , and an 
additional 15% of preference shares at AUS$2.20 

F-46

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

4. BUSINESS ACQUISITIONS  (Continued) 

per share. EDL is an Australian company engaged exclusively in independent 
power generation from landfill gas, coal seam methane and natural gas 
(including latest technology combined cycle projects). EDL is the largest 
generator of power from coal seam methane in the world. The company currently 
operates over 200 MW of generation across five states and territories in of 
Australia and has commenced the development of new projects in the United 
Kingdom, Asia and New Zealand. On February 11, 1997 NRG made an initial 
purchase of 7.2% (4.5 million shares) of common stock for AUS$9.9 million 
(US$7.9 million). On September 24, 1997, NRG purchased an additional 
10,109,670 shares of common stock of EDL for an aggregate purchase price of 
AUS $22.2 million (US $16.1 million on that date), bringing NRG's ownership 
level to 20% of the outstanding shares. 

On December 19, 1996 NRG and Nordic Power Invest AB purchased 96.6% of 
Bolivian Power Company Limited. On October 30, the Company sold a portion of 
its investment and reduced its ownership to 48.3%. 

In May 1997, the Company acquired a 25.37% interest in Loy Yang A for 
approximately $257 million. Loy Yang A is a 2,000 MW brown coal fired thermal 
power station and adjacent coal mine located in Victoria, Australia which the 
State of Victoria sold as part of its privatization program. The power 
station has four generating units, each with a 500 MW boiler and turbo 
generator, which commenced commercial operation between July 1984 and 
December 1988. In addition, the Company through its Loy Yang affiliate 
manages the common infrastructure facilities that are located on the Loy Yang 
site, the adjacent Loy Yang B 1,000 MW power station and several other nearby 
power stations. 

On June 25, 1997, the Company purchased San Diego Power & Cooling. The 
purchase price was $6.7 million, including a note from the seller for $2.7 
million. 

In July 1997, the Company acquired a 50% interest in Cadillac Renewable 
Energy, a 34 MW steam turbine power plant located in Cadillac, Michigan for 
$1.9 million. Electricity from the plant is sold to Consumers Energy under a 
long-term power purchase agreement. 

In September 1997, Millennium Cogen, LLC, an NRG affiliate, entered into a 
Construction and Term Loan Agreement to finance the construction of a 117 MW 
cogeneration plant in Morris, Illinois. The Company has entered into a $22 
million equity commitment and a $1.2 million guaranty of certain obligations 
of Millennium Operation, Inc., an NRG affiliate that will operate the 
project. The Company will have a 50% ownership interest that is estimated to 
be operational by December 1998. 

F-47

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

5. LONG-TERM DEBT 

Long-term debt consists of the following at September 30: 

1997       1996 
---------- --------- 
(THOUSANDS OF 
DOLLARS) 

NRG Energy, Inc. revolving credit facility, due March 17, 
2000.........................................................  $ 38,000   $     -- 
NRG Energy Center, Inc. Senior Secured Notes Series 
due June 15, 2013, 7.31% ....................................    75,070     77,591 
Note payable to NSP, due December 1, 1995-2006 
5.40%-6.75% .................................................     8,406      8,957 
Millennium Cogen, LLC, due May 2004, LIBOR + 1%-1.25%  .......    16,901         -- 
NRG Sunnyside, Inc. note payable, due December 31, 1997 
10.00% ......................................................     1,750      1,750 
NRG San Diego, Inc., due June 25, 2003 
8.0% ........................................................     2,611         -- 
NRG Energy Senior Notes, due February 1, 2006 
7.625% ......................................................   125,000    125,000 
NRG Energy Senior Notes, due 2007 
7.5% ........................................................   250,000         -- 
---------- --------- 
517,738    213,298 
Less current maturities ......................................   (43,311)    (3,892) 
---------- --------- 
Total ......................................................  $474,427   $209,406 
========== ========= 

The 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 September 30, 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 due 2006, were issued in January 1996, are 
unsecured and require semi-annual interest payments on February 1 and August 
1. 

The NRG Energy Center Notes due 2007 were issued in June 1997, are 
unsecured and require semi-annual interest payments on June 15 and December 
15. 

The NRG San Diego, Inc. Note was issued in June 1997 in conjunction with 
the acquisition of San Diego Power and Cooling Company. 

The NRG Energy revolving credit facility that was issued in March 1997, is 
unsecured and will be used for general corporate purposes, including letters 
of credit and interim funding for NRG project investments. 

The Millennium Cogen Notes represent a construction and term loan 
agreement up to $96.0 million which is secured by the projects' asset. 
Payment on principal and interest is not required until the end of the term 
loan agreement. 

F-48

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

5. LONG-TERM DEBT  (Continued) 

Annual maturities of long-term debt for the years ending after September 
30, 1997 are as follows: 

(THOUSANDS OF 
DOLLARS) 

1997 remaining         $ 43,311 
1998 ...........          3,903 
1999 ...........          4,149 
2000 ...........          4,409 
2001 ...........          4,728 
2002 ...........          5,023 
Thereafter .....        452,215 
-------------------- 
Total ........       $517,738 
==================== 

6. INCOME TAXES 

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

7. ADDITIONAL PAID IN CAPITAL 

NSP provided NRG with additional capital contributions of $80 million in 
December 1996 (for use in the Cobee acquisition), $20 million in February 
1997 (for investment in various projects including EDL), and $60.9 in May 
1997 (for the Loy Yang acquisition). 

8. SUBSEQUENT EVENTS 

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

On November 21, 1997, the Company with its 50/50 partner Destec, signed an 
Asset Sale Agreement to acquire the El Segundo plant, a 1020 MW facility, 
from Southern California Edison for $87.75 million. The financial closing on 
the facility is set for the first week of January 1998. 

F-49

NRG ENERGY, INC. AND SUBSIDIARIES 
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (CONTINUED) 
(UNAUDITED) 

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

PRO FORMA 
YEAR ENDED                      YEAR ENDED 
DECEMBER 31,                    DECEMBER 31, 
1996       ADJUSTMENTS (1)      1996 
-------------- ---------------  -------------- 
(THOUSANDS OF DOLLARS) 

Operating Revenues: 
Revenues from wholly-owned operations  ......    $ 71,649        $     --        $ 71,649 
Equity in operating earnings (losses) of 
unconsolidated affiliates ..................      32,815         (18,121)         14,694 
-------------- ---------------  -------------- 
Total operating revenues ...................     104,464         (18,121)         86,343 
-------------- ---------------  -------------- 
Operating Costs and Expenses: 
Cost of operations--wholly-owned operations        36,562              --          36,562 
Depreciation and amortization ...............       8,378              --           8,378 
General, administrative, and development  ...      39,248              --          39,248 
-------------- ---------------  -------------- 
Total operating costs and expenses  ........      84,188                          84,188 
-------------- ---------------  -------------- 
Operating Income .............................      20,276         (18,121)          2,155 
-------------- ---------------  -------------- 
Other Income (Expense): 
Other income, net ...........................       9,477          26,264 (2)      35,741 
Interest expense ............................     (15,430)        (18,750)(3)     (34,180) 
-------------- ---------------  -------------- 
Total other income (expense) .................      (5,953)        (18,750)        (24,703) 
-------------- ---------------  -------------- 
Income (loss) before Income Taxes ............      14,323         (10,607)          3,716 
-------------- ---------------  -------------- 
Income Taxes .................................       5,655           4,373 (4)      10,028 
-------------- ---------------  -------------- 
Net Income (loss) ............................    $ 19,978        $ (6,234)       $ 13,744 
============== ===============  ============== 

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

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

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

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

F-50

NRG ENERGY, INC. AND SUBSIDIARIES 
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (CONTINUED) 
(UNAUDITED) 

PRO FORMA 
NINE MONTHS                      NINE MONTHS 
ENDED                            ENDED 
SEPTEMBER 30,                    SEPTEMBER 30, 
1997       ADJUSTMENTS (1)       1997 
--------------- ---------------  --------------- 
(THOUSANDS OF DOLLARS) 

Operating Revenues: 
Revenues from wholly-owned operations  .......     $ 65,081         $    --         $ 65,081 
Equity in operating earnings of 
unconsolidated affiliates ...................       17,759          (7,945 (2)        9,814 
--------------- ---------------  --------------- 
Total operating revenues ....................       82,840          (7,945)          74,895 
--------------- ---------------  --------------- 
Operating Costs and Expenses .................. 
Cost of operations--wholly-owned operations  .       32,863              --           32,863 
Depreciation and amortization ................        7,096              --            7,096 
General, administrative, and development  ....       28,402              --           28,402 
--------------- ---------------  --------------- 
Total operating costs and expenses  .........       68,361              --           68,361 
--------------- ---------------  --------------- 
Operating Income ..............................       14,479          (7,945)           6,534 
--------------- ---------------  --------------- 
Other Income (Expense)......................... 
Other income, net ............................        8,610           8,525 (3)       17,135 
Interest expense .............................      (19,815)         (6,883)(4)      (26,698) 
--------------- ---------------  --------------- 
Total other income (expense) ..................      (11,205)          1,642           (9,563) 
--------------- ---------------  --------------- 
Income (loss) before Income Taxes .............        3,274          (6,303)          (3,029) 
--------------- ---------------  --------------- 
Income Taxes ..................................       11,140           1,605 (5)       12,745 
--------------- ---------------  --------------- 
Net Income ....................................     $ 14,414         $(4,698)        $  9,716 
=============== ===============  =============== 

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

F-51

TO THE SHAREHOLDERS OF SUNSHINE STATE POWER BV 

AUDITORS' REPORT 

We have audited the accompanying balance sheet of Sunshine State Power BV as 
of December 31, 1996, 1995 and 1994, and the related statements of income and 
of cash flows for each of the years in the three year period ended December 
31, 1996. These financial statements are the responsibility of the Company's 
management. Our responsibility is to express an opinion on these financial 
statements based on our audits. 

We conducted our audits in accordance with auditing standards generally 
accepted in the United States of America. Those standards require that we 
plan and perform the audit to obtain reasonable assurance about whether the 
financial statements are free of material misstatement. An audit includes 
examining, on a test basis, evidence supporting the amounts and disclosures 
in the financial statements. An audit also includes assessing the accounting 
principles used and significant estimates made by management, as well as 
evaluating the overall financial statement presentation. We believe that our 
audits provide a reasonable basis for our opinion. 

In our opinion, the financial statements give a true and fair view of the 
financial position of the company as of December 31, 1996, 1995 and 1994 and 
of the results for the years then ended in accordance with accounting 
principles generally accepted in the Netherlands and comply with the 
financial reporting requirements included in Part 9, Book 2 of the 
Netherlands Civil Code. 

PRICE WATERHOUSE NEDERLAND BV 
March 21, 1997 
Amsterdam, Netherlands 

F-52

SUNSHINE STATE POWER BV 
BALANCE SHEET AT DECEMBER 31, 1996, 1995 AND 1994 
(BEFORE APPROPRIATION OF THE RESULT FOR THE YEAR) 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 

1996      1995       1994 
AUD'000    AUD'000   AUD'000 
--------- ---------  --------- 

ASSETS 
FIXED ASSETS 
Intangible fixed assets ............    8,397      8,868     9,338 
Tangible fixed assets ..............  165,173    161,355   153,662 
--------- ---------  --------- 
173,570    170,223   163,000 
CURRENT ASSETS 
Stocks..............................    3,536      1,851     1,845 
Receivables ........................    4,877      5,835     4,366 
Cash and bank balances .............   11,898     11,460    10,425 
--------- ---------  --------- 
20,311     19,146    16,636 
--------- ---------  --------- 
TOTAL ASSETS .......................  193,881    189,369   179,636 
--------- ---------  --------- 
SHAREHOLDERS' EQUITY AND 
LIABILITIES 
SHAREHOLDERS' EQUITY 
Issued share capital ...............       30         30        30 
Retained earnings ..................   15,014      7,712        -- 
Result for the year.................    9,133      7,302     7,712 
--------- ---------  --------- 
24,177     15,044     7,742 
--------- ---------  --------- 
Provisions .........................   14,618      9,309     4,496 
Long-term liabilities ..............  146,817    156,097   158,814 
Current liabilities ................    8,269      8,919     8,584 
--------- ---------  --------- 
TOTAL SHAREHOLDERS' EQUITY 
AND LIABILITIES ...................  193,881    189,369   179,636 
--------- ---------  --------- 

The accompanying notes form an integral part of the annual accounts.

F-53

SUNSHINE STATE POWER BV 
STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 

1996      1995       1994 
AUD'000    AUD'000   AUD'000 
--------- ---------  --------- 

Net turnover 
Queensland Transmission & Supply Corporation  ..   31,245    33,250     23,725 
Boyne Smelters Limited .........................   21,548    21,378     13,544 
--------- ---------  --------- 
TOTAL ...........................................   52,793    54,628     37,269 
Cost of turnover 
Non-fuel .......................................    9,179     8,163      6,803 
Fuel ...........................................   14,562    14,851     11,345 
--------- ---------  --------- 
TOTAL ...........................................   23,741    23,014     18,148 
--------- ---------  --------- 
GROSS PROFIT ON TURNOVER ........................   29,052    31,614     19,121 
--------- ---------  --------- 
Operating expenses .............................    1,719     3,000        741 
Depreciation and amortization expense  .........    6,041     5,539      3,854 
--------- ---------  --------- 
TOTAL EXPENSES ..................................    7,760     8,539      4,595 
--------- ---------  --------- 
NET PROFIT ON TURNOVER ..........................   21,292    23,075     14,526 
--------- ---------  --------- 
Interest expense ................................   10,233    11,100      6,518 
Interest income .................................     (770)     (718)      (514) 
Foreign exchange (gain)/loss ....................   (2,527)      744     (2,989) 
Disposal of assets loss .........................       86        -- 
--------- ---------  --------- 
NET FINANCIAL EXPENSE ...........................    7,022    11,126      3,015 
Result from ordinary operations before taxation     14,270    11,949     11,511 
Taxation ........................................    5,137     4,647      3,799 
--------- ---------  --------- 
NET RESULT ......................................    9,133     7,302      7,712 
--------- ---------  --------- 

The accompanying notes form an integral part of the annual accounts.

F-54

SUNSHINE STATE POWER BV 
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 

1996       1995        1994 
AUD'000    AUD'000     AUD'000 
--------- ----------  ----------- 

Cash flows from operating activities 
Net result .......................................    9,133      7,302        7,712 
Adjustments to reconcile net result to net cash 
provided by operating activities: 
Depreciation and amortization ...................    6,041      5,539        3,854 
Deferred income taxes ...........................    5,137      4,647        3,799 
Foreign exchange loss/(gain) ....................   (2,527)       744       (2,989) 
Loss on sale of fixed assets.....................       86         -- 
Changes in operating assets and liabilities: 
Stocks ..........................................   (1,685)        (6)         484 
Receivables .....................................      958     (1,469)      (4,338) 
Provisions ......................................      172        166          125 
Current liabilities .............................   (1,088)      (102)       4,546 
--------- ----------  ----------- 
NET CASH FLOWS PROVIDED BY OPERATING  ACTIVITIES     16,227     16,821       13,193 
--------- ----------  ----------- 
Cash flows from investing activities 
Purchases of tangible fixed assets ..............   (9,495)   (12,762)        (306) 
Proceeds from sale of fixed assets ..............       21         --           -- 
Acquisition of 20% of the Gladstone Power 
Station.........................................       --         --     (168,332) 
--------- ----------  ----------- 
NET CASH FLOWS USED BY INVESTING  ACTIVITIES  ....   (9,474)   (12,762)    (168,638) 
Cash flows from financing activities 
Proceeds (repayments) of notes payable  .........   (1,840)     1,014      172,933 
Proceeds from issuance of share capital  ........                               30 
Repayments of long-term debt ....................   (4,475)    (4,038)      (7,093) 
--------- ----------  ----------- 
NET CASH FLOWS (USED) PROVIDED BY  FINANCING 
ACTIVITIES .......................................   (6,315)    (3,024)     165,870 
--------- ----------  ----------- 
NET INCREASE IN CASH AND BANK BALANCES ...........      438      1,035       10,425 
--------- ----------  ----------- 
Cash and bank balances 
Beginning of year ................................   11,460     10,425           -- 
--------- ----------  ----------- 
End of year ......................................   11,898     11,460       10,425 
--------- ----------  ----------- 
SUPPLEMENTAL DISCLOSURE OF CASH PAID  FOR 
INTEREST .........................................   10,382     11,043        5,617 
--------- ----------  ----------- 

The accompanying notes form an integral part of the annual accounts.

F-55

SUNSHINE STATE POWER BV 
NOTES TO THE ANNUAL ACCOUNTS 
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 

1. GENERAL 

ACTIVITIES 

Sunshine State Power BV (the Company) was incorporated on November 11, 
1993. The Company's principal operating activity is the ownership of 20% of 
the Gladstone Power Station Joint Venture. The Gladstone Power Station Joint 
Venture owns and operates the Gladstone Power Station located in Queensland, 
Australia which it acquired on March 30, 1994. The Gladstone Power Station 
Joint Venture is an unincorporated joint venture and therefore not a separate 
legal entity. Accordingly, the Gladstone Power Station Joint Venture owners 
act as tenants in common owning their proportionate shares of the 
unincorporated joint venture's assets, liabilities and results of operations. 
The accounts have been prepared for the years ended December 31, 1996, 1995 
and 1994. 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

GENERAL 

Unless otherwise stated assets and liabilities are carried at nominal 
value. 

BASIS OF PREPARATION 

The Company's financial statements have been prepared in accordance with 
generally accepted accounting principles in the Netherlands (Netherland GAAP) 
which may differ in certain respects from generally accepted accounting 
principles in the United States (US GAAP). With regard to the Company's 
balance sheet and statement of income, there are no material differences 
between Netherlands GAAP and US GAAP. With regard to the Company's statement 
of cash flows, under US GAAP the foreign exchange loss/(gain) would be 
classified under the cash flows from financing activities section as US GAAP 
requires that such items be netted with the related cash flow item. 

FOREIGN CURRENCIES 

Assets and liabilities at year-end and transactions during the period 
denominated in a foreign currency are translated into the Company's local 
currency (Australian $) at the exchange rates ruling at year-end and at the 
time of the transaction, respectively. Exchange adjustments are taken to the 
statement of income. 

INTANGIBLE FIXED ASSETS 

Project Development Expenditures -Project development expenditures 
represent the Company's share of project development expenditures incurred by 
the Gladstone Power Station Joint Venture to organize the acquisition of the 
Gladstone Power Station and operate it subsequent to the acquisition. 

Capitalized development expenditures are being amortized over the term of 
the Gladstone Power Station Power sales agreements (35 years), commencing 
from the date the investment in the project was consummated. The carrying 
values of capitalized development expenditures and the amortization periods 
are reviewed annually and any necessary write down is charged against income. 
Research expenditures and expenditures on development of existing projects 
are charged against income in the year in which they are incurred. 

Financing Costs -Financing costs represent the Company's share of the 
costs incurred by the Gladstone Power Station Joint Venture to acquire the 
long-term debt used to finance the acquisition of the Gladstone Power 
Station. Capitalized financing costs are being amortized over a ten year 
period, which represents the timeframe until the Company expects the 
long-term debt will be refinanced. 

F-56

SUNSHINE STATE POWER BV 
NOTES TO THE ANNUAL ACCOUNTS 
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED) 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 
TANGIBLE FIXED ASSETS 

All tangible fixed assets are stated at cost. The Company has not had any 
revaluations performed on its tangible fixed assets. Tangible fixed assets, 
with the exception of land, are depreciated over their estimated useful lives 
or over the life of the power purchase agreement by the straight line method. 
Ordinary maintenance and repairs are expensed as incurred; replacements and 
improvements are capitalized. 

The estimated useful lives are: 

Site roads and preparation ........           35 years 
Generators, systems, stacks, etc. .           35 years 
Coal handling plant ...............       10 -35 years 
Other operating fixed assets ......        3 -10 years 

STOCKS 

Stocks are carried at the lower of cost (principally by the FIFO method or 
another method which approximates FIFO) and net realizable value. In valuing 
stocks, appropriate allowance is made for obsolete or slow-moving items. 

TRADE DEBTORS 

Trade debtors are stated at nominal value. 

PROVISIONS 

Employee Provisions -Provisions are made for amounts expected to be paid 
to the operator of the Gladstone Power Station in respect of its employees 
for the pro rata entitlements for long service and annual leave. These 
amounts are accrued at actual pay rates having regard to experience of 
employee's departure and period of service. The provisions are divided into 
current (expected to be paid in the ensuing twelve months) and non-current 
portions. 

Deferred Tax -Provisions for deferred taxes have been set up where items 
entering into the determination of accounting profit for one period are 
recognized for taxation purposes in another. The principal difference arises 
in connection with the depreciation of fixed assets. In calculating the 
provision, current tax rates are applied. During 1995, Australian income tax 
rates increased from 33% to 36%. In 1995, the prior year deferred tax balance 
was increased to reflect the increase in tax rates with the adjustment being 
recorded in taxation in the statement of income. 

COMPANY INCOME TAX 

Company income tax is based upon the results reported in the statement of 
income as adjusted for permanent differences. Current Australian tax rates 
are applied. 

F-57

SUNSHINE STATE POWER BV 
NOTES TO THE ANNUAL ACCOUNTS 
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED) 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 
3. INTANGIBLE FIXED ASSETS 

The movements in the intangible fixed assets are summarized as follows: 

PROJECT 
DEVELOPMENT    FINANCING 
EXPENDITURES      COSTS      TOTAL 
AUD'000       AUD'000    AUD'000 
-------------- -----------  --------- 

COST 
Balance at December 31, 1993 ..............................         --            --          -- 
Company's share of fixed assets acquired with the 
Gladstone Power Station acquisition ......................      6,984         2,707       9,691 
-------------- -----------  --------- 
Balance at December 31, 1994 ..............................      6,984         2,707       9,691 
Additions for the year ended December 31, 1995  ...........         --            --          -- 
-------------- -----------  --------- 
Balance at December 31, 1995 ..............................      6,984         2,707       9,691 
Additions for the year ended December 31, 1996  ...........         --            --          -- 
-------------- -----------  --------- 
Balance at December 31, 1996 ..............................      6,984         2,707       9,691 
ACCUMULATED AMORTIZATION 
Balance at December 31, 1993 ..............................         --            --          -- 
Amortization for the year ended December 31, 1994  ........       (150)         (203)       (353) 
Amortization for the year ended December 31, 1995  ........       (199)         (271)       (470) 
Amortization for the year ended December 31, 1996  ........       (200)         (271)       (471) 
-------------- -----------  --------- 
Balance at December 31, 1996 ..............................       (549)         (745)     (1,294) 
-------------- -----------  --------- 
Net book value at December 31, 1996 .......................      6,435         1,962       8,397 
-------------- -----------  --------- 

F-58

SUNSHINE STATE POWER BV 
NOTES TO THE ANNUAL ACCOUNTS 
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED) 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 

4. TANGIBLE FIXED ASSETS 

The movements in the tangible fixed assets are summarized as follows: 

OTHER 
SITE ROADS    GENERATORS,     COAL     OPERATING 
AND         SYSTEMS,     HANDING     FIXED 
LAND     PREPARATION      STACKS       PLANT      ASSETS      TOTAL 
--------- -------------  ------------- ---------  ----------- ---------- 
AUD'000      AUD'000       AUD'000      AUD'000    AUD'000     AUD'000 

COST 
Balance at November 11, 1993 ...........     --            --             --          --         --           -- 
Company's share of assets acquired with 
Gladstone Power Station acquisition  ..    211         2,443        141,118       6,294      1,613      151,679 
Additions .............................     --            --              7          --        299          306 
--------- -------------  ------------- ---------  ----------- ---------- 
Balance at December 31, 1994 ...........    211         2,443        141,125       6,294      1,912      151,985 
Additions .............................     --           146          8,943       2,036        721       11,846 
Disposals .............................     --            --             (1)         --        (10)         (11) 
--------- -------------  ------------- ---------  ----------- ---------- 
Balance at December 31, 1995 ...........    211         2,589        150,067       8,330      2,623      163,820 
Additions .............................      5           209         11,988       1,334        111       13,647 
Disposals .............................     --            --            (88)         --        (19)        (107) 
--------- -------------  ------------- ---------  ----------- ---------- 
Balance at December 31, 1996 ...........    216         2,798        161,967       9,664      2,715      177,360 
--------- -------------  ------------- ---------  ----------- ---------- 
ACCUMULATED DEPRECIATION 
Balance at November 11, 1993 ...........     --            --             --          --         --           -- 
Charge for the period ..................     --           (53)        (2,940)       (331)      (177)      (3,501) 
--------- -------------  ------------- ---------  ----------- ---------- 
Balance at December 31, 1994 ...........     --           (53)        (2,940)       (331)      (177)      (3,501) 
Charge for the year ....................     --           (72)        (4,304)       (452)      (353)      (5,181) 
--------- -------------  ------------- ---------  ----------- ---------- 
Balance at December 31, 1995 ...........     --          (125)        (7,244)       (783)      (530)      (8,682) 
Charge for the year ....................     --           (79)        (4,497)       (601)      (393)      (5,570) 
--------- -------------  ------------- ---------  ----------- ---------- 
Balance at December 31, 1996 ...........     --          (204)       (11,741)     (1,384)      (923)     (14,252) 
--------- -------------  ------------- ---------  ----------- ---------- 
Net book value at December 31, 1996  ...    216         2,594        150,226       8,280      1,792      163,108 
--------- -------------  ------------- ---------  ----------- ---------- 
Construction in progress at 
December 31, 1996 (construction in 
progress at December 31, 1995 and 1994 
was $6,217 and $5,178, respectively)  .                                                                   2,065 
---------- 
Net tangible fixed assets at 
December 31, 1996 ....................                                                                 165,173 
---------- 

5. STOCKS 

DECEMBER 31,    DECEMBER 31,   DECEMBER 31, 
1996            1995           1994 
-------------- --------------  -------------- 
AUD'000        AUD'000         AUD'000 

Coal ...................      2,318            656             774 
Fuel oils ..............        154            202             120 
Chemicals ..............         12             13              26 
Spares and consumables        1,052            980             925 
-------------- --------------  -------------- 
3,536          1,851           1,845 
-------------- --------------  -------------- 

F-59

SUNSHINE STATE POWER BV 
NOTES TO THE ANNUAL ACCOUNTS 
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED) 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 
6. RECEIVABLES 

DECEMBER 31,    DECEMBER 31,   DECEMBER 31, 
1996            1995           1994 
-------------- --------------  -------------- 
AUD'000        AUD'000         AUD'000 

Trade debtors        4,605          5,501           4,003 
Prepayments  ..        272            334             363 
-------------- --------------  -------------- 
4,877          5,835           4,366 
-------------- --------------  -------------- 

All receivables are due in less than one year. 

7. CASH AND BANK BALANCES 

All cash and bank balances are held by banks and include investments with 
maturities of three months or less which are readily convertible to cash. The 
Company's long-term debt agreement places restrictions on the amount of cash 
and bank balances which must be maintained. At December 31, 1996, 1995 and 
1994, the restricted cash and bank balances totaled $7,000,000, $7,500,000 
and $6,300,000, respectively. 

8. ISSUED SHARE CAPITAL 

The authorized share capital consists of 2 000 shares each having a 
nominal value of 30 Australian dollars (40 Dutch Guilders), of which 1 000 
shares have been issued and fully paid up at December 31, 1996 and 1995. The 
Company's shares are owned by NRGenerating International BV (990) and Gunwale 
BV (10). Both NRGenerating International BV and Gunwale BV are wholly owned 
by NRG Energy, Inc., which is incorporated in the United States of America. 

9. RETAINED EARNINGS 

1996      1995 
--------- --------- 
AUD'000    AUD'000 

Balance at January 1 ................    7,712        -- 
Appropriation of prior years result      7,302     7,712 
--------- --------- 
Balance at December 31 ..............   15,014     7,712 
--------- --------- 

10. RESULT FOR THE PERIOD 

AUD'000 

Balance at November 11, 1993 ......................       -- 
Net result for the period ended December 31, 1994      7,712 
1994 net result appropriated to retained earnings     (7,712) 
Net result for the year ended December 31, 1995  ..    7,302 
1995 net result appropriated to retained earnings     (7,302) 
Net result for the year ended December 31, 1996  ..    9,133 
--------- 
Balance at December 31, 1996 ......................    9,133 
--------- 

F-60

SUNSHINE STATE POWER BV 
NOTES TO THE ANNUAL ACCOUNTS 
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED) 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 
11. PROVISIONS 

EMPLOYEE     DEFERRED 
PROVISIONS      TAX       TOTAL 
------------ ----------  --------- 
AUD'000     AUD'000    AUD'000 

Balance at November 11, 1993  .......        --           --         -- 
Company's share assumed with the 
Gladstone Power Station acquisition        572           --        572 
Charged/(released) to income  .......       125        3,799      3,924 
------------ ----------  --------- 
Balance at December 31, 1994  .......       697        3,799      4,496 
Charged/(released) to income  .......       166        4,647      4,813 
------------ ----------  --------- 
Balance at December 31, 1995  .......       863        8,446      9,309 
Charged/(released) to income  .......       172        5,137      5,309 
------------ ----------  --------- 
Balance at December 31, 1996  .......     1,035       13,583     14,618 
------------ ----------  --------- 

Approximately $ 618 (AUD'000) of the employee provisions are current and 
expected to be paid during 1997. 

12. LONG-TERM LIABILITIES 

Secured long-term debt due to third parties 

DECEMBER 31,    DECEMBER 31,   DECEMBER 31, 
1996            1995           1994 
-------------- --------------  -------------- 
AUD'000        AUD'000         AUD'000 

Secured -with banks  .     108,821        113,733         118,208 
-------------- --------------  -------------- 

Current installments of bank long-term debt are included under current 
liabilities. The interest rate for long-term debt is variable based on an 
average of the bid rates quoted by the banks plus a margin of 1.4% at 
December 31, 1996. 

The bank long-term debt is repayable as follows (in AUD'000): 

1997  .....................  4,913 
1998  .....................   5,437 
1999  .....................   5,975 
2000  .....................   6,600 
2001  .....................   7,275 
Thereafter  ...............  83,534 
-------- 
113,734 
-------- 

The bank long-term debt is secured by the Company's ownership interest in 
the Gladstone Power Station Joint Venture. 

Unsecured Subordinated Notes Payable (AUD'000) 

On March 25, 1994 the Company received loans from NRGenerating 
International BV and Gunwale BV, the primary shareholders of the Company, in 
the amounts of $ 48,312 and $488 respectively. The notes payable are 
subordinated to all other liabilities of the Company, bear no interest and 
are to be repaid in U.S. dollars. During 1996, the Company repaid $1,822 and 
$18 to NRGenerating International BV and Gunwale BV, respectively. There were 
no repayments made during 1995. During 1994, the Company repaid $5,152 and 
$53 to NRGenerating International BV and Gunwale BV, respectively. 

F-61

SUNSHINE STATE POWER BV 
NOTES TO THE ANNUAL ACCOUNTS 
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -- (CONTINUED) 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 

Repayments on the notes payable are at the discretion of the Company, unless 
certain events of termination occur, as defined, and then the entire balance 
of the notes becomes due. The note balances, as adjusted for current period 
activity and foreign exchange fluctuations, were $37,616 and $380 to 
NRGenerating International BV and Gunwale BV at December 31, 1996, 
respectively and $41,940 and $424 to NRGenerating International BV and 
Gunwale BV at December 31, 1995, respectively. 

13. CURRENT LIABILITIES 

DECEMBER 31,    DECEMBER 31,   DECEMBER 31, 
1996            1995           1994 
-------------- --------------  -------------- 
AUD'000        AUD'000         AUD'000 

Current installments of bank long-term debt        4,913          4,475           4,038 
Trade creditors/suppliers ...................        776          1,579           1,370 
Accrued coal/rail costs .....................      1,152          1,712           1,984 
Accrued interest ............................        800            959             901 
Other accrued expenses ......................        628            194             291 
-------------- --------------  -------------- 
8,269          8,919           8,584 
-------------- --------------  -------------- 

14. RELATED PARTIES 

An affiliate of the Company, Sunshine State Power (No. 2) BV owns 17.5% of 
the Gladstone Power Station Joint Venture. Sunshine State Power (No. 2) BV is 
owned by the owners of the Company. 

The Gladstone Power Station is operated by NRG Gladstone Operating 
Services Ply Ltd, which is ultimately a wholly-owned subsidiary of NRG Energy 
Inc. NRG Gladstone Operating Services Ply Ltd operates the Gladstone Power 
Station under the terms of the Operation and Maintenance Agreement with the 
Gladstone Power Station Joint Venture. During the periods ended December 31, 
1996, 1995 and 1994, the Company paid NRG Gladstone Operating Services Pty 
Ltd approximately $288, $331 and $194 (AUD'000) respectively in operators 
fees under the terms of the Operation and Maintenance Agreement. 

15. NUMBER OF EMPLOYEES 

The average number of persons employed at the Gladstone Power Station 
during 1966 was approximately 471. These individuals are primarily employed 
in the operations and maintenance areas of the station. The Company is 
responsible for 20% of the related costs for these employees. The Company 
itself has no employees. 

16. REMUNERATION OF DIRECTORS 

During the periods ended December 31, 1996, 1995 and 1994, none of the 
directors received remuneration for their services as directors of the 
Company. 

F-62

TO THE SHAREHOLDERS OF SUNSHINE STATE POWER (NO. 2) BV 
AUDITORS' REPORT 

We have audited the accompanying balance sheet of Sunshine State Power (No. 
2) BV as of December 31, 1996, 1995 and 1994, and the related statements of 
income and of cash flows for each of the years in the three year period ended 
December 31, 1996. These financial statements are the responsibility of the 
Company's management. Our responsibility is to express an opinion on these 
financial statements based on our audits. 

We conducted our audits in accordance with auditing standards generally 
accepted in the United States of America. Those standards require that we 
plan and perform the audit to obtain reasonable assurance about whether the 
financial statements are free of material misstatement. An audit includes 
examining, on a test basis, evidence supporting the amounts and disclosures 
in the financial statements. An audit also includes assessing the accounting 
principles used and significant estimates made by management, as well as 
evaluating the overall financial statement presentation. We believe that our 
audits provide a reasonable basis for our opinion. 

In our opinion, the financial statements give a true and fair view of the 
financial position of the company as of December 31, 1996, 1995 and 1994 and 
of the results for the years then ended in accordance with accounting 
principles generally accepted in the Netherlands and comply with the 
financial reporting requirements included in Part 9, Book 2 of the 
Netherlands Civil Code. 

PRICE WATERHOUSE NEDERLAND BV 
March 21, 1997 
Amsterdam, Netherlands 

F-63

SUNSHINE STATE POWER (NO. 2) BV 
BALANCE SHEET AT DECEMBER 31, 1996, 1995 AND 1994 
(BEFORE APPROPRIATION OF THE RESULT FOR THE YEAR) 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 

1996      1995       1994 
AUD'000    AUD'000   AUD'000 
--------- ---------  --------- 

ASSETS 
FIXED ASSETS 
Intangible fixed assets ............    7,348      7,759     8,171 
Tangible fixed assets...............  144,524    141,183   134,452 
--------- ---------  --------- 
151,872    148,942   142,623 
CURRENT ASSETS 
Stocks .............................    3,093      1,620     1,614 
Receivables ........................    4,267      5,106     3,869 
Cash and bank balances .............   10,416      9,953     9,055 
--------- ---------  --------- 
17,776     16,679    14,538 
--------- ---------  --------- 
TOTAL ASSETS .......................  169,648    165,621   157,161 
SHAREHOLDERS' EQUITY AND 
LIABILITIES 
SHAREHOLDERS' EQUITY 
Issued share capital ...............       30         30        30 
Retained earnings ..................   13,158      6,748        -- 
Result for the year ................    7,950      6,410     6,748 
--------- ---------  --------- 
21,138     13,188     6,778 
--------- ---------  --------- 
Provisions .........................   12,779      8,155     3,933 
Long-term liabilities ..............  128,472    136,515   138,939 
Current liabilities ................    7,259      7,763     7,511 
--------- ---------  --------- 
TOTAL SHAREHOLDERS' EQUITY AND 
LIABILITIES .......................  169,648    165,621   157,161 
========= =========  ========= 

The accompanying notes form an integral part of the annual accounts.

F-64

SUNSHINE STATE POWER (NO. 2) BV 

STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 
AND PERIOD ENDED DECEMBER 31, 1994 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 

1996      1995       1994 
AUD'000    AUD'000   AUD'000 
--------- ---------  --------- 

Net turnover 
Queensland Electricity Commission ..............   27,340    29,094     20,759 
Boyne Smelters Limited .........................   18,854    18,706     11,851 
--------- ---------  --------- 
TOTAL ...........................................   46,194    47,800     32,610 
Cost of turnover 
Non-fuel .......................................    8,031     7,143      5,953 
Fuel ...........................................   12,742    12,995      9,926 
--------- ---------  --------- 
TOTAL ...........................................   20,773    20,138     15,879 
--------- ---------  --------- 
GROSS PROFIT ON TURNOVER ........................   25,421    27,662     16,731 
Operating expenses ..............................    1,509     2,632        646 
Depreciation and amortization expense ...........    5,285     4,846      3,373 
--------- ---------  --------- 
TOTAL EXPENSES ..................................    6,794     7,478      4,019 
--------- ---------  --------- 
NET PROFIT ON TURNOVER ..........................   18,627    20,184     12,712 
Interest expense ................................    8,954     9,713      5,704 
Interest income .................................     (668)     (626)      (449) 
Foreign exchange (gain)/loss ....................   (2,157)      609     (2,614) 
Disposal of assets loss .........................       76        -- 
--------- ---------  --------- 
NET FINANCIAL EXPENSE ...........................    6,205     9,696      2,641 
--------- ---------  --------- 
Result from ordinary operations before taxation     12,422    10,488     10,071 
Taxation ........................................    4,472     4,078      3,323 
--------- ---------  --------- 
NET RESULT ......................................    7,950     6,410      6,748 
--------- ---------  --------- 

The accompanying notes form an integral part of the annual accounts.

F-65

SUNSHINE STATE POWER (NO. 2) BV 

STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 
AND PERIOD ENDED DECEMBER 31, 1994 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 

1996       1995        1994 
AUD'000    AUD'000     AUD'000 
--------- ----------  ----------- 

Cash flows from operating activities 
Net result ................................................    7,950      6,410        6,748 
Adjustments to reconcile net result to net cash provided 
by operating activities: 
Depreciation and amortization ............................    5,285      4,846        3,373 
Deferred income taxes ....................................    4,472      4,078        3,323 
Foreign exchange loss/(gain) .............................   (2,157)       609       (2,614) 
Loss on sale of fixed assets..............................       76         -- 
Changes in operating assets and liabilities: 
Stocks ...................................................   (1,473)        (6)         423 
Receivables ..............................................      839     (1,237)      (3,845) 
Provisions ...............................................      152        144          110 
Current liabilities ......................................     (886)      (131)       3,978 
--------- ----------  ----------- 
NET CASH FLOWS PROVIDED BY OPERATING  ACTIVITIES  .........   14,258     14,713       11,496 
--------- ----------  ----------- 
Cash flows from investing activities: 
Purchases of tangible fixed assets .......................   (8,308)   (11,165)        (268) 
Proceeds from sale of fixed assets .......................       17         --           -- 
--------- ----------  ----------- 
Acquisition of 20% of the Gladstone Power Station  .......       --         --     (147,288) 
NET CASH FLOWS USED BY INVESTING  ACTIVITIES...............   (8,291)   (11,165)    (147,556) 
--------- ----------  ----------- 
Cash flows from financing activities: 
Proceeds (repayments) of notes payable ...................   (1,588)       883      151,316 
Proceeds from issuance of share capital ..................                               30 
Repayments of long-term debt .............................   (3,916)    (3,533)      (6,231) 
--------- ----------  ----------- 
NET CASH FLOWS (USED) BY FINANCING  ACTIVITIES  ...........   (5,504)    (2,650)     145,115 
--------- ----------  ----------- 
NET INCREASE IN CASH AND BANK BALANCES ....................      463        898        9,055 
--------- ----------  ----------- 
Cash and bank balances 
Beginning of year .........................................    9,953      9,055           -- 
--------- ----------  ----------- 
End of year ...............................................   10,416      9,953        9,055 
--------- ----------  ----------- 
SUPPLEMENTAL DISCLOSURE OF CASH PAID  FOR INTEREST  .......    9,084      9,667        4,916 
--------- ----------  ----------- 

The accompanying notes form an integral part of the annual accounts.

F-66

SUNSHINE STATE POWER (NO. 2) BV 

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 
(AMOUNTS EXPRESSED IN THOUSANDS OF AUSTRALIAN DOLLARS) 

1.  GENERAL 

ACTIVITIES 

Sunshine State Power (No. 2) BV (the Company) was incorporated on February 
24, 1994. The Company's principal operating activity is the ownership of 
17.5% of the Gladstone Power Station Joint Venture. The Gladstone Power 
Station Joint Venture owns and operates the Gladstone Power Station located 
in Queensland, Australia, which it acquired on March 30, 1994. The Gladstone 
Power Station Joint Venture is an unincorporated joint venture and therefore 
not a separate legal entity. Accordingly, the Gladstone Power Station Joint 
Venture owners act as tenants in common owning their proportionate shares of 
the unincorporated joint venture's assets, liabilities and results of 
operations. The accounts have been prepared for the years ended December 31, 
1996 and 1995 and period ended December 31, 1994. 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

GENERAL 

Unless otherwise stated assets and liabilities are carried at nominal 
value. 

BASIS OF PREPARATION 

The Company's financial statements have been prepared in accordance with 
generally accepted accounting principles in the Netherlands (Netherland GAAP) 
which may differ in certain respects from generally accepted accounting 
principles in the United States (US GAAP). With regard to the Company's 
balance sheet and statement of income, there are no material differences 
between Netherlands GAAP and US GAAP. With regard to the Company's statement 
of cash flows, under US GAAP the foreign exchange loss/(gain) would be 
classified under the cash flows from financing activities section as US GAAP 
requires that such items be netted with the related cash flow item. 

FOREIGN CURRENCIES 

Assets and liabilities at year-end and transactions during the period 
denominated in a foreign currency are translated into the Company's local 
currency (Australian $) at the exchange rates ruling at year-end and at the 
time of the transaction, respectively. Exchange adjustments are taken to the 
statement of income. 

INTANGIBLE FIXED ASSETS 

Project development expenditures -Project development expenditures 
represent the Company's share of project development expenditures incurred by 
the Gladstone Power Station Joint Venture to organize the acquisition of the 
Gladstone Power Station and operate it subsequent to the acquisition. 

Capitalized development expenditures are being amortized over the term of 
the Gladstone Power Station Power sales agreements (35 years), commencing 
from the date the investment in the project was consummated. The carrying 
values of capitalized development expenditures and the amortization periods 
are reviewed annually and any necessary write down is charged against income. 
Research expenditures and expenditures on development of existing projects 
are charged against income in the year in which they are incurred. 

F-67

SUNSHINE STATE POWER (NO. 2) BV 

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED) 

Financing costs -Financing costs represent the Company's share of the 
costs incurred by the Gladstone Power Station Joint Venture to acquire the 
long-term debt used to finance the acquisition of the Gladstone Power 
Station. Capitalized financing costs are being amortized over a ten year 
period, which represents the timeframe until the Company expects the 
long-term debt will be refinanced. 

TANGIBLE FIXED ASSETS 

All tangible fixed assets are stated at cost. The Company has not had any 
revaluations performed on its tangible fixed assets. Tangible fixed assets, 
with the exception of land, are depreciated over their estimated useful lives 
by the straight line method. Ordinary maintenance and repairs are expensed as 
incurred; replacements and improvements are capitalized. 

The estimated useful lives are: 

Site roads and preparation ............          35 years 
Generators, systems, stacks, etc.  ....           35 years 
Coal handling plant ...................       10 -35 years 
Other operating fixed assets ..........        3 -10 years 

STOCKS 

Stocks are carried at the lower of cost (principally by the FIFO method or 
another method which approximates FIFO) and net realizable value. In valuing 
stocks, appropriate allowance is made for obsolete or slow-moving items. 

TRADE DEBTORS 

Trade debtors are stated at nominal value. 

PROVISIONS 

Employee provisions -Provisions are made for amounts expected to be paid 
to the operator of the Gladstone Power Station in respect of its employees 
for the pro rata entitlements for long service and annual leave. These 
amounts are accrued at actual pay rates having regard to experience of 
employee's departure and period of service. The provisions are divided into 
current (expected to be paid in the ensuing twelve months) and non-current 
portions. 

Deferred tax -Provisions for deferred taxes have been set up where items 
entering into the determination of accounting profit for one period are 
recognized for taxation purposes in another. The principal difference arises 
in connection with the depreciation of fixed assets. In calculating the 
provision, current tax rates are applied. During 1995 Australian income tax 
rates increased from 33% to 36%. In 1995 the prior year deferred tax balance 
was increased to reflect the increase in tax rates with the adjustment being 
recorded in taxation in the statement of income. 

COMPANY INCOME TAX 

Company income tax is based upon the results reported in the statement of 
income as adjusted for permanent differences. Current Australian tax rates 
are applied. 

F-68

SUNSHINE STATE POWER (NO. 2) BV 
NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED) 

3. INTANGIBLE FIXED ASSETS 

The movements in the intangible fixed assets are summarized as follows: 

PROJECT 
DEVELOPMENT    FINANCING 
EXPENDITURES      COSTS      TOTAL 
-------------- -----------  --------- 
AUD'000       AUD'000    AUD'000 

COST 
Balance at February 24, 1994 ......................         --            --          -- 
Company's share of fixed assets acquired with 
Gladstone Power Station acquisition ..............      6,111         2,369       8,480 
-------------- -----------  --------- 
Balance at December 31, 1994 ......................      6,111         2,369       8,480 
Additions for the year ended December 31, 1995  ...         --            --          -- 
-------------- -----------  --------- 
Balance at December 31, 1995 ......................      6,111         2,369       8,480 
Additions for the year ended December 31, 1996  ...         --            --          -- 
Balance at December 31, 1996 ......................      6,111         2,369       8,480 
-------------- -----------  --------- 
ACCUMULATED AMORTIZATION 
Balance at February 24, 1994.......................         --            --          -- 
Amortization for the period ended December 31, 
1994 .............................................       (131)         (178)       (309) 
Amortization for the year ended December 31, 1995         (175)         (237)       (412) 
Amortization for the year ended December 31, 1996         (174)         (237)       (411) 
-------------- -----------  --------- 
Balance at December 31, 1996 ......................       (480)         (652)     (1,132) 
-------------- -----------  --------- 
Net book value at December 31, 1996 ...............      5,631         1,717       7,348 
-------------- -----------  --------- 

F-69

SUNSHINE STATE POWER (NO. 2) BV 

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED) 

4.  TANGIBLE FIXED ASSETS 

The movements in the tangible fixed assets are summarized as follows: 

OTHER 
SITE ROADS    GENERATORS,      COAL     OPERATING 
AND         SYSTEMS,     HANDLING     FIXED 
LAND     PREPARATION      STACKS       PLANT       ASSETS      TOTAL 
--------- -------------  ------------- ----------  ----------- ---------- 
AUD'000      AUD'000       AUD'000      AUD'000     AUD'000     AUD'000 

COST 
Balance at February 24, 1994 .............     --            --             --           --         --         -- 
Company's share of assets 
acquired with Gladstone Power 
Station acquisition .....................    184         2,138        123,476        5,508      1,411      132,717 
Other additions ..........................     --            --              6           --        262          268 
--------- -------------  ------------- ----------  ----------- ---------- 
Balance at December 31, 1994 .............    184         2,138        123,482        5,508      1,673      132,985 
Additions ................................     --           128          7,827        1,781        631       10,367 
Disposals ................................                   --             (1)          --         (9)         (10) 
--------- -------------  ------------- ----------  ----------- ---------- 
Balance at December 31, 1995 .............    184         2,266        131,308        7,289      2,295      143,342 
Additions ................................      5           182         10,489        1,168         97       11,941 
Disposals ................................     --            --            (77)          --        (16)         (93) 
--------- -------------  ------------- ----------  ----------- ---------- 
Balance at December 31, 1996 .............    189         2,448        141,720        8,457      2,376      155,190 
ACCUMULATED DEPRECIATION 
Balance at February 24, 1994 .............                   --             --           --         --           -- 
Charge for the period ....................                  (46)        (2,571)        (292)      (155)      (3,064) 
-------------  ------------- ----------  ----------- ---------- 
Balance at December 31, 1994 .............                  (46)        (2,571)        (292)      (155)      (3,064) 
Charge for the year ......................                  (63)        (3,767)        (396)      (309)      (4,535) 
-------------  ------------- ----------  ----------- ---------- 
Balance at December 31, 1995 .............                 (109)        (6,338)        (688)      (464)      (7,599) 
Charge for the year ......................                  (69)        (3,935)        (526)      (344)      (4,874) 
-------------  ------------- ----------  ----------- ---------- 
Balance at December 31, 1996 .............                 (178)       (10,273)      (1,214)      (808)     (12,473) 
-------------  ------------- ----------  ----------- ---------- 
Net book value at December 31, 1996  .....    189         2,270        131,447        7,243      1,568      142,717 
Construction in progress at December 31, 
1996 (construction in progress at 
December 31, 1995 and 1994 was $5,440 
and $4,531, respectively) ...............                                                                    1,807 
---------- 
Net tangible fixed assets at December 31, 
1996 ....................................                                                                  144,524 
---------- 

5. STOCKS 

DECEMBER 31,    DECEMBER 31,   DECEMBER 31, 
1996            1995           1994 
-------------- --------------  -------------- 
AUD'000        AUD'000         AUD'000 

Coal ...................      2,028            574             678 
Fuel oils ..............        135            177             105 
Chemicals ..............         10             11              23 
Spares and consumables          920            858             808 
-------------- --------------  -------------- 
3,093          1,620           1,614 
-------------- --------------  -------------- 

F-70

SUNSHINE STATE POWER (NO. 2) BV 

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED) 

6. RECEIVABLES 

DECEMBER 31,    DECEMBER 31,   DECEMBER 31, 
1996            1995           1994 
-------------- --------------  -------------- 
AUD'000        AUD'000         AUD'000 

Trade debtors        4,030          4,814           3,503 
Prepayments  ..        237            292             366 
-------------- --------------  -------------- 
4,267          5,106           3,869 
-------------- --------------  -------------- 

All receivables are due in less than one year. 

7. CASH AND BANK BALANCES 

All cash and bank balances are held by banks and include investments with 
maturities of three months or less which are readily convertible to cash. The 
Company's long-term debt agreement places restrictions on the amount of cash 
and bank balances which must be maintained. At December 31, 1996, 1995 and 
1994, the restricted cash and bank balances totaled $6,100,000, $6,500,000 
and $5,500,000, respectively. 

8. ISSUED SHARE CAPITAL 

The authorized share capital consists of 2,000 shares each having a 
nominal value of 75 Australian dollars (100 Dutch Guilders), of which 400 
shares have been issued and fully paid up at December 31, 1996 and 1995. The 
Company's shares are owned by NRGenerating International BV (396) and Gunwale 
BV (4). Both NRGenerating International BV and Gunwale BV are wholly owned by 
NRG Energy, Inc., which is incorporated in the United States of America. 

9.  RETAINED EARNINGS 

1996      1995 
--------- --------- 
AUD'000    AUD'000 

Balance at January 1 ................    6,748        -- 
Appropriation of prior years result      6,410     6,748 
--------- --------- 
Balance at December 31 ..............   13,158     6,748 
--------- --------- 

10.  RESULT FOR THE PERIOD 

AUD'000 
--------- 

Balance at February 24, 1994 ......................       -- 
Net result for the period ended December 31, 1994      6,748 
1994 net result appropriated to retained earnings     (6,748) 
Net result for the year ended December 31, 1995  ..    6,410 
1995 net result appropriated to retained earnings     (6,410) 
Net result for the year ended December 31, 1996  ..    7,950 
--------- 
Balance at December 31, 1996 ......................    7,950 
--------- 

F-71

SUNSHINE STATE POWER (NO. 2) BV 

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED) 

11. PROVISIONS 

EMPLOYEE PROVISIONS   DEFERRED TAX    TOTAL 
------------------- --------------  --------- 
AUD'000           AUD'000      AUD'000 

Balance at February 24, 1994 ..............          --                  --           -- 
Company's share assumed with the Gladstone 
Power Station acquisition ................         500                  --          500 
Charged/(released) to income ..............         110               3,323        3,433 
------------------- --------------  --------- 
Balance at December 31, 1994 ..............         610               3,323        3,933 
Charged/(released) to income ..............         144               4,078        4,222 
------------------- --------------  --------- 
Balance at December 31, 1995 ..............         754               7,401        8,155 
Charged/(released) to income ..............         152               4,472        4,624 
------------------- --------------  --------- 
Balance at December 31, 1996 ..............         906              11,873       12,779 
------------------- --------------  --------- 

Approximately $541 (AUD'000) of the employee provisions are current and 
expected to be paid during 1997. 

12. LONG-TERM LIABILITIES 

Secured long-term debt due to third parties 

DECEMBER 31,    DECEMBER 31,   DECEMBER 31, 
1996            1995           1994 
-------------- --------------  -------------- 
AUD'000        AUD'000         AUD'000 

Secured--with banks  .     95,218          99,516         103,432 
-------------- --------------  -------------- 

Current installments of bank long-term debt are included under current 
liabilities. The interest rate for long-term debt is variable based on an 
average of the bid rates quoted by the banks plus a margin of 1.4% at 
December 31, 1996. 

The bank long-term debt is repayable as follows (in AUD'000): 

1997  .....................  4,298 
1998  .....................   4,758 
1999  .....................   5,228 
2000  .....................   5,775 
2001  .....................   6,366 
Thereafter  ...............  73,091 
-------- 
99,516 
-------- 

The bank long-term debt is secured by the Company's ownership interest in 
the Gladstone Power Station Joint Venture. 

Unsecured subordinated note payable (AUD'000) 

On March 25, 1994 the Company received loans from NRGenerating 
International BV and Gunwale BV, the primary shareholders of the Company, in 
the amount of $42,273 and $427, respectively. The notes payable are 
subordinated to all other liabilities of the Company, bear no interest and 
are to be repaid in US dollars. During 1996, the Company repaid $1,572 and 
$16 to NRGenerating International BV and Gunwale BV, respectively. There were 
no repayments made during 1995. During 1994, the 

F-72

SUNSHINE STATE POWER (NO. 2) BV 

NOTES TO THE ANNUAL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 
AND 1995 AND PERIOD ENDED DECEMBER 31, 1994 -- (CONTINUED) 

Company repaid $4,533 and $46 to NRGenerating International BV and Gunwale 
BV, respectively. Repayments on the notes payable are at the discretion of 
the Company, unless certain events of termination occur, as defined, and then 
the entire balance of the notes becomes due. The note balances, as adjusted 
for current period activity and foreign exchange fluctuations, were $32,922 
and $332 to NRGenerating International BV and Gunwale BV at December 31, 1996 
respectively and $36,629 and $370 to NRGenerating International BV and 
Gunwale BV at December 31, 1995, respectively. 

13. CURRENT LIABILITIES 

DECEMBER 31,    DECEMBER 31,   DECEMBER 31, 
1996            1995           1994 
-------------- --------------  -------------- 
AUD'000        AUD'000         AUD'000 

Current installments of bank long-term debt        4,298          3,916           3,533 
Trade creditors/suppliers ...................        696          1,345           1,199 
Accrued coal/rail costs .....................      1,008          1,498           1,736 
Accrued interest ............................        700            834             788 
Other accrued expenses ......................        557            170             255 
-------------- --------------  -------------- 
7,259          7,763           7,511 
-------------- --------------  -------------- 

14.  RELATED PARTIES 

An affiliate of the Company, Sunshine State Power BV owns 20% of the 
Gladstone Power Station Joint Venture. Sunshine State Power BV is owned by 
the owners of the Company. 

The Gladstone Power Station is operated by NRG Gladstone Operating 
Services Ply Ltd, which is ultimately a wholly-owned subsidiary of NRG Energy 
Inc. NRG Gladstone Operating Services Ply Ltd operates the Gladstone Power 
Station under the terms of the Operation and Maintenance Agreement with the 
Gladstone Power Station Joint Venture. During the periods ended December 31, 
1996, 1995 and 1994, the Company paid NRG Gladstone Operating Services Pty 
Ltd approximately $252, $289 and $170 (A$S'000) respectively in operators 
fees under the terms of the Operation and Maintenance Agreement. 

15.  NUMBER OF EMPLOYEES 

The average number of persons employed at the Gladstone Power Station 
during 1996 was approximately 471. These individuals are primarily employed 
in the operations and maintenance areas of the station. The Company is 
responsible for 17.5% of the related costs for these employees. The Company 
itself has no employees. 

16.  REMUNERATION OF DIRECTORS 

During the periods ended December 31, 1996, 1995 and 1994, none of the 
directors received remuneration for their services as directors of the 
Company. 

F-73

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

BALANCE SHEET 
DECEMBER 31, 1996 
(UNAUDITED) 

ASSETS                       1996 
------------ 

CURRENT ASSETS: 
Cash and cash equivalents ................  $2,270,941 
Accounts receivable ......................     125,319 
Fuel inventory ...........................      48,069 
Receivable from affiliates ...............      26,299 
Prepaid/Other ............................      82,257 
------------ 
Total current assets ....................   2,552,885 
Property, plant, and equipment, net  .....   4,964,030 
------------ 
Total Assets ..............................  $7,516,915 
============ 
LIABILITIES AND PARTNERS' EQUITY 
CURRENT LIABILITIES: 
Accounts payable .........................  $   56,983 
Accrued liabilities ......................   1,629,878 
------------ 
Total current liabilities ...............   1,686,861 
Commitments and Contingencies (see Note 4) 
Partners' equity ..........................   5,830,054 
------------ 
Total liabilities and Partners' equity  ...  $7,516,915 
============ 

The accompanying notes are an integral part of the financial statements.

F-74

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

STATEMENT OF INCOME 

FOR THE YEAR ENDED DECEMBER 31, 1996 
(UNAUDITED) 

REVENUE:                          1996 
------------- 

Electricity sales...........  $        -- 
Costs and expenses: 
Operating ..................      855,601 
General and administrative        532,943 
------------- 
Total costs and expenses  .    1,388,544 
------------- 
Operating loss ............   (1,388,544) 
Interest Income .............      294,168 
Other Income (Note 6) .......    5,309,304 
------------- 
Total Other Income ..........    5,603,472 
------------- 
Net Income ..................  $ 4,214,928 
============= 

The accompanying notes are an integral part of the financial statements.

F-75

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

STATEMENT OF PARTNERS' EQUITY 
FOR THE YEAR ENDED DECEMBER 31, 1996 
(UNAUDITED) 

Partners' equity, December 31, 1995 ........................... $ 52,135,092 
Net income for the year ended December 31, 1996 ...............     4,214,928 
Partnership distributions for the year ended December 31, 1996    (50,519,966) 
-------------- 
Partners' equity, December 31, 1996 ...........................  $  5,830,054 
============== 

The accompanying notes are an integral part of the financial statements.

F-76

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

STATEMENT OF CASH FLOWS 

FOR THE YEAR ENDED DECEMBER 31, 1996 
(UNAUDITED) 

1996 
-------------- 

Cash flows from operating activities: 
Net income.......................................  $  4,214,928 
Adjustments to reconcile net income to net cash: 
provided by operating activities: 
Change in assets and liabilities: 
Increase in accounts receivable ..............       (63,001) 
Decrease in receivable from PG&E .............    52,050,216 
Decrease in inventory ........................        75,960 
Decrease in prepaid/other assets .............        50,628 
Decrease in due from affiliates ..............         2,337 
Decrease in accounts payable/book overdraft  .        (8,610) 
Decrease in accrued liabilities ..............    (6,689,178) 
-------------- 
Net cash provided by operating activities  ..  $ 49,633,280 
-------------- 
Cash flows from investing activities: 
Sale and maturities of short-term investments  ..     3,756,078 
-------------- 
Net cash provided by investing activities  ..     3,756,078 
-------------- 
Cash flows from financing activities: 
Principal payments on long-term debt ............      (598,451) 
Partnership distributions .......................   (50,519,966) 
-------------- 
Net cash used in financing activities  ......   (51,118,417) 
-------------- 
Net increase in cash and cash equivalents  .......     2,270,941 
Cash and cash equivalents at beginning of year  ..            -- 
-------------- 
Cash and cash equivalents at end of year  ........  $  2,270,941 
============== 

The accompanying notes are an integral part of the financial statements. 

F-77

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 
NOTES TO FINANCIAL STATEMENTS 
(UNAUDITED) 

1. ORGANIZATION AND OPERATION: 

San Joaquin Valley Energy Partners I, L.P. (Partnership), a California 
limited partnership was formed on July 31, 1992, to purchase and operate 
three biomass power plant facilities in Madera and Merced Counties, 
California. 

The Partnership sold electricity to Pacific Gas & Electric (PG&E) until 
February 28, 1995, when the plants ceased operations in anticipation of the 
transfer of the Partnership's power purchase agreements (PPA's) back to PG&E. 

The General Partners are San Joaquin Valley Energy I, Inc., a California 
corporation (SJVEI), and Power Partners II, a California general partnership. 
The Limited Partners are NRG Jackson Valley II, Inc., a California 
corporation (NRG II); Donovan D. Bohn, an individual; and Volkar/Coombs 
Partners, a California general partnership (VCP). The Partnership agreement 
stipulates that the term of the Partnership shall continue for a period 
ending the earlier of December 31, 2030, or the date on which the Partnership 
is dissolved by law or by mutual agreement of the Partners. 

SJVE I and NRG II are wholly owned subsidiaries of NRG Energy, Inc., a 
Delaware corporation. 

The Partners of Power Partners II are Power Joint Ventures II, Inc. and 
P&W Ventures II, Inc., both California corporations. VH Energy, L.L.C., an 
Illinois limited company, and Roland S. Coombs, an individual, are the 
Partners of VCP. Patrick J. Volkar is the sole shareholder of Power Joint 
Ventures II, Inc., and Roland S. Coombs is the sole shareholder of P&W 
Ventures II, Inc., Patrick J. Volkar and Sandra A. Hunt are the members of VH 
Energy, L.L.C. 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 

Basis of Presentation 

The Partnership financial statements as of and for the year ended December 
31, 1996 are unaudited. In the opinion of management, the unaudited financial 
statements of the Partnership contain all adjustments, consisting only of 
normal recurring accruals, necessary to present fairly the Partnership's 
financial position and results of operations. 

Cash and Cash Equivalents 

For purposes of the statement of cash flows, cash and cash equivalents 
include cash and all investment instruments purchased with a maturity of 
three months or less. 

The Partnership invests its cash in time deposits and money market 
accounts most of which are not federally insured. The Partnership has not 
experienced any losses on these deposits. The carrying amounts of cash and 
cash equivalents approximates fair value because of the short maturity of 
these instruments. 

Accounts Receivable 

Management believes that there are no uncollectible accounts receivable; 
therefore, there is no allowance for doubtful accounts at December 31, 1996. 

Fuel Inventory 

Fuel inventory consists of unburned fuel char, urban wood waste, wood 
chips, nut hulls and other biomass, and is stated at the lower of averaged 
cost or market. 

F-78

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 
NOTES TO FINANCIAL STATEMENTS--CONTINUED 
(UNAUDITED) 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (Continued) 

Property, Plant and Equipment 

Property, plant and equipment is stated at cost, reduced to fair value in 
1995. Since then depreciation has been suspended and no sales or purchases of 
fixed assets have taken place. 

Environmental Restoration Costs/Contingencies 

The Partnership has reduced its estimate of environmental restoration 
costs of its plant sites to $105,060 during the past year based on a current 
review of engineering studies performed and the monitoring of plant activity. 
(see Note 6.) 

Income Taxes 

The net income or loss of the Partnership for income tax purposes, along 
with any associated tax credits, is included in the tax returns of the 
individual partners. Accordingly, no provision has been made for federal or 
state income taxes in the accompanying financial statements. 

The allocation of taxable income, gains, losses and credits to the 
partners is specified in the Partnership agreement. 

Estimates 

The preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates and 
assumptions that affect the reported amounts of assets and liabilities and 
disclosure of contingent assets and liabilities at the date of the financial 
statements and the reported amounts of revenues and expenses during the 
reporting period. Actual results could differ from those estimates. 

3. PROPERTY, PLANT AND EQUIPMENT: 

Property, plant and equipment consist of the following at December 31: 

1996 
------------ 

Power plants ..................  $4,700,000 
Land ..........................     264,030 
------------ 
4,964,030 
Less accumulated depreciation            -- 
------------ 
$4,964,030 
============ 

In accordance with SFAS 121, as a result of the PPA transfer, property, 
plant and equipment was written to its estimated fair value at December 31, 
1995. The recorded amounts for property, plant and equipment at December 31, 
1996 are still considered to be fair value. 

4. COMMITMENTS AND CONTINGENCIES 

The Partnership has entered into contractual agreements to purchase 
specified quantities of biomass fuels from various vendors, and the 
partnership has agreed to assume a fuel purchase commitment of San Joaquin 
Valley Energy Partners IV, L.P. (SJVEP IV). The purchase price of the fuels 
is a specified amount above the market cost per bone dry ton. The periods 
covered by the contracts range from one to eight years with the longest 
expiring in the year 1999. 

F-79

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 
NOTES TO FINANCIAL STATEMENTS--CONTINUED 
(UNAUDITED) 

4. COMMITMENTS AND CONTINGENCIES  (Continued) 

Since agreeing to transfer its PPA's back to PG&E, the Partnership has 
sought to terminate all of its fuel purchase commitments. Management believes 
the Partnership will not incur any additional loss on termination in excess 
of amounts already accrued. 

The Partnership is party to one minor claim with a former vendor. The 
Partnership's liability for such matter is uncertain, however, management 
believes that the final resolution of this matter will not have a material 
adverse effect on the Partnership's financial position or results of 
operations. 

5. TRANSACTIONS WITH AFFILIATES: 

At December 31, 1996, the receivable from affiliates related through 
common ownership consists of: 

1996 
--------- 

Due from affiliates relating to the purchase of Biomass fuel 
and charges for administration, insurance, and workers' 
compensation costs, consisting of: 
BioConversion Partners, L.P. ..................................  $14,828 
San Joaquin Valley Energy partners IV, L.P. (SJVEP IV)  .......   11,471 

6. OTHER INCOME 

During 1996, based upon updated analysis, the Partnership has re-assessed 
its estimated exposure for environmental restoration costs and has concluded 
that no remediation will be required. It has, therefore, reduced its accrual 
for such charges from $4,850,000 at December 31, 1995 to $105,060 at December 
31, 1996. The remaining amount of other income was due primarily to the 
settlements of accrued liabilities at favorable terms. 

F-80

REPORT OF INDEPENDENT ACCOUNTANTS 

To the Management Committee of 
San Joaquin Valley Energy Partners I, L.P. 

We have audited the accompanying balance sheets of San Joaquin Valley 
Energy Partners I, L.P., a California limited partnership (the Partnership) 
as of December 31, 1995 and 1994, and the related statements of income, 
partners' equity and cash flows for the years then ended. These financial 
statements are the responsibility of the Partnership's management. Our 
responsibility is to express an opinion on these financial statements based 
on our audits. 

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audits to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide a 
reasonable basis for our opinion. 

In our opinion, the financial statements referred to above present fairly, 
in all material respects, the financial position of San Joaquin Valley Energy 
Partners I, L.P. at December 31, 1995 and 1994, and the results of its 
operations and its cash flows for the years then ended, in conformity with 
generally accepted accounting principles. 

As discussed in Note 6 to the financial statements, during 1995, the 
Partnership entered into an agreement whereby the Partnership's power 
purchase contracts were transferred back to Pacific Gas & Electric. 

/s/ Coopers & Lybrand L.L.P. 

Sacramento, California 
February 29, 1996 

F-81

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

BALANCE SHEETS 
DECEMBER 31, 1995 AND 1994 

1995          1994 
------------- ------------- 

ASSETS 
Current assets: 
Short-term investments ..............................  $ 3,756,078    $        -- 
Restricted cash......................................           --     13,710,534 
Receivable from PG&E.................................   52,050,216             -- 
Accounts receivable..................................       62,318      3,657,340 
Fuel inventory.......................................      124,029      1,660,162 
Receivable from affiliates...........................       28,636        217,748 
Other................................................      132,885        225,075 
------------- ------------- 
Total current assets................................   56,154,162     19,470,859 
Property, plant, and equipment, net...................    4,964,030     29,519,412 
Organization and debt issue costs, net of accumulated 
amortization of $828,565 at December 31, 1994 .......           --      1,753,268 
Notes receivable from partners and affiliates ........           --      1,600,000 

------------- ------------- 
$61,118,192    $52,343,539 
============= ============= 
LIABILITIES AND PARTNERS' EQUITY 
Current liabilities: 
Book overdraft.......................................  $    21,473    $        -- 
Accounts payable.....................................       44,120      1,130,659 
Accrued liabilities..................................    8,319,056      1,608,285 
Long-term debt, current portion......................      184,163      5,455,695 
------------- ------------- 
Total current liabilities...........................    8,568,812      8,194,639 
Long-term debt, net of current portion................      414,288     24,077,127 
------------- ------------- 
Total liabilities...................................    8,983,100     32,271,766 
Commitments (Note 7) 
Partners' equity......................................   52,135,092     20,071,773 
------------- ------------- 
$61,118,192    $52,343,539 
============= ============= 

The accompanying notes are an integral part of the financial statements.

F-82

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

STATEMENTS OF INCOME 
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 

1995          1994 
------------- ------------- 

Revenue: 
Electricity sales...............................  $ 6,107,863    $38,957,267 
------------- ------------- 
Costs and expenses: 
Operating.......................................    3,814,238     18,879,930 
Depreciation and amortization...................      450,997      2,599,187 
General and administrative......................      198,431      1,134,205 
------------- ------------- 
Total costs and expenses.......................    4,463,666     22,613,322 
------------- ------------- 
Operating income...............................    1,644,197     16,343,945 
Other income (expense): 
Interest and bank agency fees...................     (525,598)    (2,702,966) 
Interest income.................................      541,537        388,481 
Other...........................................      141,900          3,810 
------------- ------------- 
Income before extraordinary item...............    1,802,036     14,033,270 
Extraordinary item (Note 6): 
Net gain on transfer of power purchase 
contracts......................................   58,468,139             -- 
------------- ------------- 
Net income.....................................  $60,270,175    $14,033,270 
============= ============= 

The accompanying notes are an integral part of the financial statements.

F-83

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

STATEMENTS OF PARTNERS' EQUITY 
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 

Partners' equity, December 31, 1993........................... $  11,484,304 
Net income for the year ended December 31, 1994...............    14,033,270 
Partnership distributions for the year ended December 31, 
1994.........................................................    (5,445,801) 
-------------- 
Partners' equity, December 31, 1994...........................    20,071,773 
Net income for the year ended December 31, 1995...............    60,270,175 
Partnership distributions for the year ended December 31, 
1995.........................................................   (28,206,856) 
-------------- 
Partners' equity, December 31, 1995...........................  $ 52,135,092 
============== 

The accompanying notes are an integral part of the financial statements.

F-84

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

STATEMENTS OF CASH FLOWS 
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 

1995            1994 
-------------- -------------- 

Cash flows from operating activities: 
Net income .......................................  $ 60,270,175    $ 14,033,270 
Adjustments to reconcile net income to net cash 
provided by operating activities: 
Depreciation and amortization ..................       450,997       2,599,187 
Impairment of assets ...........................    26,861,778              -- 
Change in assets and liabilities: 
Decrease (increase) in accounts receivable  ...     3,595,022        (800,190) 
Increase in receivable from PG&E ..............   (52,050,216)             -- 
Decrease in inventory .........................       826,682         164,807 
Decrease (increase) in other assets  ..........        92,190          (1,373) 
Decrease (increase) in due from affiliates  ...       189,112         (16,642) 
Decrease in accounts payable ..................    (1,086,539)     (1,163,127) 
Increase in accrued liabilities ...............     6,416,097           7,968 
-------------- -------------- 
Net cash provided by operating activities  ........    45,565,298      14,823,900 
-------------- -------------- 
Cash flows from investing activities: 
Purchases of property, plant and equipment  ......            --      (2,065,289) 
Purchase of short-term investments ...............    (3,756,078)             -- 
-------------- -------------- 
Net cash used in investing activities .............    (3,756,078)     (2,065,289) 
-------------- -------------- 
Cash Flows from financing activities: 
Increase in book overdraft .......................        21,473              -- 
Decrease (increase) in restricted cash  ..........    13,710,534      (1,861,694) 
Principal payments on long-term debt .............   (28,934,371)     (5,451,116) 
Proceeds from note receivable ....................     1,600,000              -- 
Partnership distributions ........................   (28,206,856)     (5,445,801) 
-------------- -------------- 
Net cash used in financing activities .............   (41,809,220)    (12,758,611) 
-------------- -------------- 
Net change in cash and cash equivalents  ..........            --              -- 
Cash at beginning of period .......................            --              -- 
Cash and cash equivalents at December 31  .........  $               $ 
============== ============== 
Supplemental disclosures of cash flow information: 
Cash paid during period for: 
Interest ........................................  $  1,633,204    $  2,566,348 
============== ============== 

The accompanying notes are an integral part of the financial statements.

F-85

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

NOTES TO FINANCIAL STATEMENTS 

1. ORGANIZATION AND OPERATION: 

San Joaquin Valley Energy Partners I, L.P. (Partnership), a California 
limited partnership, was formed on July 31, 1992, to purchase and operate 
three biomass power plant facilities in Madera and Merced Counties, 
California. 

The Partnership sold electricity to Pacific Gas & Electric (PG&E) until 
February 28, 1995, when the plants ceased operations in anticipation of the 
transfer of the Partnership's power purchase agreements (PPA's) back to PG&E. 

The General Partners are San Joaquin Valley Energy I, Inc., a California 
corporation (SJVE I), and Power Partners II, a California general 
partnership. The Limited Partners are NRG Jackson Valley II, Inc., a 
California corporation (NRG II); Donovan D. Bohn, an individual; and 
Volkar/Coombs Partners, a California general partnership (VCP). The 
Partnership agreement stipulates that the term of the Partnership shall 
continue for a period ending the earlier of December 31, 2030, or the date on 
which the Partnership is dissolved by law or by mutual agreement of the 
Partners. 

SJVE I and NRG II are wholly owned subsidiaries of NRG Energy, Inc., a 
Delaware corporation. 

The Partners of Power Partners II are Power Joint Ventures II, Inc., and 
P&W Ventures II, Inc., both California corporations. VH Energy, L.L.C., an 
Illinois limited liability company, and Roland S. Coombs, an individual, are 
the Partners of VCP. Patrick J. Volkar is the sole shareholder of Power Joint 
Ventures II, Inc., and Roland S. Coombs is the sole shareholder of P&W 
Ventures II, Inc. Patrick J. Volkar and Sandra A. Hunt are the members of VH 
Energy, L.L.C. 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 

Cash and Cash Equivalents 

For purposes of the statement of cash flows, cash and cash equivalents 
include cash and all investment instruments purchased with a maturity of 
three months or less. 

Cash and Restricted Cash 

At December 31, 1994, cash balances totalling $13,710,534 were restricted 
as to use under the terms of various agreements. There were no such 
restrictions at December 31, 1995. The restrictions related to the following: 

1994 
------------ 

Receipt account .............  $ 8,076,401 
Operating account ...........      572,543 
Debt service account ........    4,650,938 
Maintenance reserve account        410,652 
------------ 
$13,710,534 
============ 

The Partnership invests its cash and restricted cash in time deposits, 
money market accounts, and short term investment mutual funds, most of which 
are not federally insured. The Partnership has not experienced any losses on 
these deposits. 

Accounts Receivable 

Management believes that there are no uncollectible accounts receivable; 
therefore, there is no allowance for doubtful accounts at December 31, 1995. 

F-86

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

NOTES TO FINANCIAL STATEMENTS -- CONTINUED 

Fuel Inventory 

Fuel inventory consists of unburned fuel char, urban wood waste, wood 
chips, nut hulls and other biomass, and is stated at the lower of average 
cost or market. 

At December 31, 1995, the Partnership has entered into commitments to sell 
the entire balance of its inventory recorded as of year end. 

Property, Plant and Equipment 

Property, plant and equipment is stated at cost, reduced to fair value in 
1995. Major additions are capitalized, and repairs and maintenance costs are 
expensed as incurred. Depreciation of the biomass power plants was calculated 
on a straight-line basis over the terms of the respective power purchase 
agreements (PPA's). Depreciation on the other assets was calculated on a 
straight-line basis over their estimated useful lives, ranging from three to 
eight years. Depreciation has been suspended effective February 28, 1995. 
Gains or losses from disposals are reflected in current earnings. 

Organization and Debt Issue Costs 

Organization and debt issue costs were stated at cost, and were being 
amortized until 1995 when deemed to be fully impaired and unrealizable, and 
consequently were written off in connection with the transfer of PPA's back 
to PG&E. 

Impairment of Long-Lived Assets 

The Partnership has adopted Statement of Financial Accounting Standards 
No. 121, Accounting for the Impairment of Long-lived Assets and for 
Long-lived Assets to Be Disposed Of (SFAS 121), as of December 31, 1995. 
Under SFAS 121, the Partnership's assets have been impaired as a result of 
the transfer of power purchase contracts back to PG&E. Accordingly, an 
impairment loss of $26,861,778, to reduce the carrying value of the assets to 
their fair value, has been included in the net gain on transfer of PPA. Fair 
value has been estimated by management using salvage and sales values for 
similar plants and related components. The amount the Partnership might 
ultimately realize could differ materially in the near term from the amount 
assumed in estimating fair value. 

Environmental Restoration Costs 

The Partnership has estimated the cost of environmental restoration of its 
plant sites. Estimated costs relate to evaporation ponds and other plant site 
restoration. Total accrued environmental restoration costs total $4,850,000 
at December 31, 1995. The amount the Partnership might ultimately incur could 
differ materially in the near term from the amount accrued. 

Income Taxes 

The net income or loss of the Partnership for income tax purposes, along 
with any associated tax credits, is included in the tax returns of the 
individual partners. Accordingly, no provision has been made for federal or 
state income taxes in the accompanying financial statements. 

The allocation of taxable income, gains, losses and credits to the 
partners is specified in the Partnership agreement. 

Estimates 

The preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates and 
assumptions that affect the reported amounts of assets and liabilities and 
disclosure of contingent assets and liabilities at the date of the financial 
statements and the reported amounts of revenues and expenses during the 
reporting period. Actual results could differ from those estimates. 

F-87

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

NOTES TO FINANCIAL STATEMENTS -- CONTINUED 

3. NOTES RECEIVABLE FROM PARTNERS AND AFFILIATES: 

Notes receivable at December 31 consist of: 

1995        1994 
----------- ----------- 

Notes receivable from partners and affiliates, floating 
rate interest (weighted average interest rate 6.88% at 
December 31, 1994) ........................................     $ --     $1,600,000 
=========== =========== 

4. PROPERTY, PLANT AND EQUIPMENT: 

Property, plant and equipment consist of the following at December 31: 

1995          1994 
------------ ------------- 

Power plants .................  $4,700,000    $32,898,035 
Land .........................     264,030        264,030 
Equipment and other ..........          --        932,274 
------------ ------------- 
4,964,030     34,094,339 
Less acumulated depreciation            --     (4,574,927) 
------------ ------------- 
$4,964,030    $29,519,412 
============ ============= 

In accordance with SFAS 121, as a result of the PPA transfer, property, 
plant and equipment has been written down to its estimated fair value at 
December 31, 1995. 

5. LONG-TERM DEBT: 

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

1995         1994 
----------- ------------- 

Note payable to a financial institution, floating-rate 
interest (weighted average interest rate 6.88% at 
December 31, 1994) .....................................  $      --    $28,746,665 
Payable to an unaffiliated partnership, without 
interest, payable in annual installments of $142,850 
through August 1, 1999; uncollateralized ...............    592,138        695,709 
Equipment contracts .....................................      6,313         90,448 
----------- ------------- 
598,451     29,532,822 
Less current portion ....................................   (184,163)    (5,455,695) 
----------- ------------- 
$ 414,288    $24,077,127 
=========== ============= 

The Partnership entered into interest rate swap agreements with a notional 
amount of $28,746,665 at December 31, 1994, to reduce the impact of changes 
in interest rates on its floating-rate notes payable. These agreements, which 
effectively capped interest rates, involve the exchange of floating-rate for 
fixed interest payment obligations and resulted in a weighted average fixed 
interest rate of 5.87% at December 31, 1994, on the Partnership's 
floating-rate debt. 

F-88

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

NOTES TO FINANCIAL STATEMENTS -- CONTINUED 

The aggregate maturities for the long-term debt are as follows: 

DECEMBER 31, 
- -------------- 

1996...........  $184,163 
1997...........   142,850 
1998...........   142,850 
1999...........   128,588 
---------- 
$598,451 
========== 

6. POWER PURCHASE CONTRACTS: 

The Partnership had agreements (PPA's) to sell Pacific Gas & Electric 
(PG&E) all electricity produced by the plants through the years 2019-2020. 
The Partnership also received capacity payments throughout the terms of the 
PPA's when it operated the plants above specified production levels. The 
PPA's provided for guaranteed rates ending in years 1998-2000, after which 
the rates were to be based on PG&E's avoided cost as defined by the PPA's. 

During 1994 the Partnership entered into a curtailment agreement with PG&E 
to limit the output of the power plants during certain off-peak hours. The 
Partnership received curtailment payments of $1,968,491 and $8,091,462 during 
1995 and 1994 respectively. 

During 1995, the Partnership entered into negotiations regarding an 
agreement whereby PG&E would compensate the Partnership to transfer back to 
PG&E its existing PPA's. Effective February 28, 1995, the Partnership entered 
into a bridging agreement with PG&E whereby the Partnership shutdown its 
power plants and received payments while a final agreement was being 
negotiated to transfer the PPA's back to PG&E. Such bridging payments were 
then deducted from the total compensation received for the transfer of the 
PPA's. 

The final PPA transfer agreement was finalized on July 10, 1995, and 
provided for the transfer of all of the Partnership's rights under the 
existing PPA's in exchange for total compensation of $99,212,716, $47,162,500 
of which was received at closing and through bridging payments, and 
$52,050,216 of which was received on March 1, 1996. 

A net gain on transfer of PPA's of $58,468,139 has been recognized in 
1995, and consists of: 

Total consideration from PG&E ......................... $99,212,716 
Less: 
Impairment of assets .................................   26,861,778 
Operating and maintenance costs during bridging 
period ..............................................    1,170,291 
Loan, agency and prepayment fees .....................    1,960,894 
Estimated environmental restoration costs ............    4,850,000 
Severance, fuel contract settlement and other costs  .    5,901,614 
------------- 
Net gain on transfer of PPA's .........................  $58,468,139 
============= 

7. COMMITMENTS: 

The Partnership has entered into contractual agreements to purchase 
specified quantities of biomass fuels from various vendors, and the 
Partnership has agreed to assume a fuel purchase commitment of San Joaquin 
Valley Energy Partners IV, L.P. (SJVEP IV). The purchase price of the fuels 
is a specified amount above the market cost per bone dry ton. The periods 
covered by the contracts range from one to eight years with the longest 
expiring in the year 1999. Under these contracts, the Partnership purchased 
fuel totaling $--in 1995 and $8,217,550 in 1994. 

F-89

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

NOTES TO FINANCIAL STATEMENTS -- CONTINUED 

Since agreeing to transfer its PPA's back to PG&E, the Partnership has 
sought to terminate all of its fuel purchase commitments. Management believes 
the Partnership will not incur any additional loss on termination. 

8. EMPLOYEE BENEFIT PLAN: 

The Partnership established a 401(k) retirement savings plan (Plan) 
effective January 1, 1994, that covered all employees. The Partnership 
contributed approximately $74,000 during 1994 to the Plan. During 1995, the 
Plan was terminated at no cost to the Partnership. 

9. TRANSACTIONS WITH AFFILIATES: 

At December 31, 1995 and 1994, the receivable from affiliates related 
through common ownership consists of: 

1995       1994 
-------- ---------- 

Due from affiliates relating to the purchase of Biomass fuel 
and charges for administration, insurance, and workers' 
compensation costs, consisting of: 
BioConversion Partners, L.P. .................................  $ 2,648   $  7,963 
San Joaquin Valley Energy Partners IV, L.P. (SJVEP IV)  ......   25,988     37,715 
Due from the owners of SJVEP IV relating to interest on notes 
receivable ....................................................  $    --   $282,221 
Due from BioConversion Partners, L.P. relating to the purchase 
of unburned fuel ..............................................       --    110,152 

The Partnership has an agreement with BioConversion Partners, L.P., 
(BioConversion) to purchase unburned fuel (Char). The sales price of the char 
is based on the BTU heat value of the char applied to the average cost per 
BTU paid by BioConversion for its biomass fuel. The total amount of char 
purchased by the Partnership was $123,417 and $871,951 in 1995 and 1994, 
respectively. 

The Partnership has an agreement with BioConversion to purchase or sell 
excess biomass fuel at cost. The total amount of biomass fuel sold to 
BioConversion was $-0-and $182,601 in 1995 and 1994, respectively. The 
Partnership purchased excess biomass fuel of $-0-and $138,102 during 1995 and 
1994, respectively. 

The Partnership has service agreements to provide general and 
administrative services to BioConversion and SJVEP IV. The total amount of 
management fees earned in 1995 and 1994 was $42,474 and $34,147 respectively. 
The Partnership also purchases insurance for BioConversion and SJVEP IV which 
is then charged back to each of the entities based upon the fair value of 
their plant assets. The total amount of insurance expense charged to 
BioConversion was $32,152 and $48,421 and to SJVEP IV was $75,021 and 
$112,984 in 1995 and 1994, respectively. 

The Partnership incurred approximately $26,000 and $43,000 in 1995 and 
1994, respectively, for administration and management services provided by 
Jackson Valley Energy Partners, L.P. (JVEP), a partnership affiliated through 
common ownership. 

F-90

SAN JOAQUIN VALLEY ENERGY PARTNERS I, L.P. 
(A CALIFORNIA LIMITED PARTNERSHIP) 

NOTES TO FINANCIAL STATEMENTS -- CONTINUED 

The Partnership paid approximately $37,000 in 1994 to a partner for 
consulting services, of which approximately $31,000 was paid on behalf of 
JVEP. During 1995, the Partnership received payment in full from JVEP for 
these services. 

10. FAIR VALUE OF FINANCIAL INSTRUMENTS: 

The carrying amounts of cash and cash equivalents, short term investments, 
receivable from PG&E and book overdraft approximates fair value because of 
the short term maturity of these instruments. The carrying amount of 
long-term debt is not materially different than its estimated fair value 
based on the fair value of debt with similar terms. 

F-91

REPORT OF DELOITTE & TOUCHE GMBH, INDEPENDENT AUDITORS 

To the Shareholders 
MIBRAG mbH 
Theissen, Germany 

We have audited the accompanying consolidated balance sheets of 
Mitteldeutsche Braunkohlengesellschaft mbH and its subsidiaries (MIBRAG or 
Group) as of December 31, 1996, 1995 and 1994, and the related consolidated 
statements of income, shareholders' equity, and cash flows for each of the 
years in the three-year period ended December 31, 1996. These financial 
statements are the responsibility of the Group's management. Our 
responsibility is to express an opinion on these financial statements based 
on our audits. 

We conducted our audits in accordance with generally accepted auditing 
standards in Germany and the United States of America. Those standards 
require that we plan and perform the audit to obtain reasonable assurance 
about whether the financial statements are free of material misstatement. An 
audit includes examining, on a test basis, evidence supporting the amounts 
and disclosures in the financial statements. An audit also includes assessing 
the accounting principles used and significant estimates made by management, 
as well as evaluating the overall financial statement presentation. We 
believe that our audits provide a reasonable basis for our opinion. 

In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the consolidated financial position 
of MIBRAG mbH and subsidiaries as of December 31, 1996, 1995, and 1994, and 
the consolidated results of their operations and cash flows for each of the 
years in the three-year period ended December 31, 1996, in conformity with 
accounting principles generally accepted in Germany. 

Generally accepted accounting principles in Germany vary in certain 
significant respects from generally accepted accounting principles in the 
United States. Application of generally accepted accounting principles in the 
United States would have affected the results of operations for each of the 
years in the three-year period ended December 31, 1996 and stockholders' 
equity as of December 31, 1996 and 1995 to the extent summarized in Note C to 
the consolidated financial statements. 

Halle, Germany 
October 24, 1997 

DELOITTE & TOUCHE GmbH 
Wirtschaftsprufungsgesellschaft 

(Roder) 

F-92

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

CONSOLIDATED STATEMENTS OF INCOME 
(IN THOUSANDS DM) 

YEAR ENDED DECEMBER 31, 
------------------------------------ 
1996        1995        1994 
----------- -----------  ---------- 

Sales revenue .......................................    621,439     650,705     813,085 
Changes in inventories ..............................     (3,719)     (9,462)       (115) 
Capitalized own services.............................      4,249       6,143       2,450 
Other operating income...............................     84,904      76,900      38,025 
----------- -----------  ---------- 
Total revenue........................................    706,873     724,286     853,445 
Cost of materials....................................    138,468     133,670     244,491 
Personnel expenses...................................    249,437     251,509     259,012 
Depreciation on intangible and tangible fixed 
assets..............................................    201,362     317,457     165,392 
Other operating expenses.............................    264,998     229,235     231,820 
----------- -----------  ---------- 
Total operating expenses.............................    854,265     931,871     900,715 
Operating income ....................................   (147,392)   (207,585)    (47,270) 
----------- -----------  ---------- 
Income from associated company and from companies in 
which participations are held ......................      5,224       1,252       2,096 
Income from long-term investments....................      7,035          --          -- 
Interest income (net)................................      3,906      15,607      10,028 
----------- -----------  ---------- 
Net income from ordinary activities..................   (131,227)   (190,726)    (35,146) 
Property tax ........................................        825       1,612       1,043 
----------- -----------  ---------- 
Net income ..........................................   (132,052)   (192,338)    (36,189) 
=========== ===========  ========== 
Profit/loss carried foreward ........................         32          --          -- 
Withdrawal from capital reserve......................    137,020     197,338      41,189 
Balance sheet profit/loss ...........................      5,000       5,000       5,000 

See accompanying Notes to Consolidated Financial Statements

F-93

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

CONSOLIDATED BALANCE SHEETS 
(IN THOUSANDS DM) 

AT DECEMBER 31, 
------------------------------------ 
NOTE      1996         1995        1994 
------ -----------  ----------- ---------- 

ASSETS 
NON-CURRENT ASSETS 
Intangible assets 
1. Concessions, trade marks, patents and 
licenses.........................................  B,E         18,368      12,498       2,388 
2. Payments on account ...........................  B,E             --          --         979 
-----------  ----------- ---------- 
18,368      12,498       3,367 
Tangible assets 
1. Land and landrights ...........................  B,E         63,482      56,006      48,819 
2. Buildings .....................................  B,E        116,051     107,047     101,354 
3. Strip mines ...................................  B,E         47,955      47,441      48,412 
4. Technical equipment and machinery .............  B,E        367,327     357,082     398,325 
5. Factory and office equipment ..................  B,E         59,566      49,495      77,649 
6. Payments on account and assets under 
construction ...................................              40,132     101,726     166,778 
-----------  ----------- ---------- 
694,513     717,797     841,337 
Financial assets 
1. Participations (including associated company)    B,F         28,973      19,482       7,050 
2. Loans granted to participation ................  B,G         16,867      17,600       2,121 
3. Long-term investments .........................  B,H         20,260          --          -- 
4. Other loans ...................................  B,I         94,500      82,208          -- 
-----------  ----------- ---------- 
160,600     119,290       9,171 
TOTAL NON-CURRENT ASSETS .........................             873,481     849,585     853,875 
Overburden........................................  B,J        304,911     306,399     319,932 
CURRENT ASSETS 
Inventories 
1. Raw materials and supplies ....................  B            8,359       6,941       6,633 
2. Unfinished services ...........................  B              170          --          -- 
3. Finished and trade goods.......................  B            1,837       2,239         168 
-----------  ----------- ---------- 
10,366       9,180       6,801 
Receivables and other assets 
1. Trade receivables .............................  B,K         74,397      54,660      63,838 
2. Receivables from enterprises in which 
participations are held ........................  B            5,513      11,493         473 
3. Other assets ..................................  B           62,731      84,390      60,406 
-----------  ----------- ---------- 
142,641     150,543     124,717 
Investments 
Other investments.................................  B,L        210,289          --          -- 
Checks, cash-in-hand, bank balances...............  B          183,690     405,885     287,792 
TOTAL CURRENT ASSETS .............................             546,986     566,608     419,310 
Prepaid expenses..................................  B            6,528       6,760       5,681 
-----------  ----------- ---------- 
TOTAL ASSETS .....................................           1,731,906   1,730,352   1,598,798 
===========  =========== ========== 

See accompanying Notes to Consolidated Financial Statements

F-94

AT DECEMBER 31, 
------------------------------------ 
NOTE      1996         1995        1994 
------- -----------  ----------- ---------- 

SHAREHOLDERS' EQUITY AND LIABILITIES 
SHAREHOLDERS' EQUITY 
Subscribed capital ...............................               60,000      60,000      60,000 
Capital reserve ..................................              730,208     778,170     831,547 
Balance sheet profit DM 5,000,000 each year 
thereof distributed DM 5,000,000 each year  .....                   --          --          -- 
Minority interest ................................              (19,007)     28,726          (2) 
TOTAL SHAREHOLDERS' EQUITY .......................              771,201     866,896     891,545 
Special item for investment subsidies and 
incentives ......................................  B            45,013      40,492      28,104 
Provisions 
1. Accruals for pensions and similar obligations    M             3,621       4,742       3,057 
2. Taxation accruals .............................  N             2,600       3,578       2,982 
3. Environmental ("Altfasten") and mining 
provisions .....................................  B,O         392,058     384,120     366,037 
4. Other accruals ................................  P            39,148      45,597      42,649 
-----------  ----------- ---------- 
437,425     438,037     414,925 
Liabilities 
1. Liabilities to banks...........................  B,Q,R       325,307     223,033     141,459 
2. Downpayments received .........................  B,R             140          --          -- 
3. Trade payables ................................  B,R          75,737      93,464      61,029 
4. Payables to participations ....................  B,R           8,615       3,421       1,871 
5. Other payables ................................  B,R          68,467      65,006      59,865 
-----------  ----------- ---------- 
478,266     384,924     264,224 
Deferred income ..................................                    1           3          -- 
-----------  ----------- ---------- 
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES  ......            1,731,906   1,730,352   1,598,798 
===========  =========== ========== 

See accompanying Notes to Consolidated Financial Statements

F-95

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

CONSOLIDATED STATEMENTS OF CASH FLOWS 
(IN THOUSANDS DM) 

YEAR ENDED 
------------------------------------- 
1996        1995         1994 
----------- -----------  ----------- 

Cash flows from operating activities: 
Net loss for the year ....................................   (132,052)   (192,338)     (36,189) 
Adjustments to reconcile net loss to net cash provided by 
operating activities: 
Depreciation on intangible and tangible assets  .........    201,362     317,457      165,392 
Planned release of the special line item for investment 
subsidies and incentives ...............................     (8,979)     (8,181)     (12,997) 
Loss on disposal of fixed assets ........................      1,997      13,701       21,095 
Change in assets and liabilities: 
Short-term overburden ..................................      1,512         577           71 
Inventories ............................................     (1,186)     (2,379)       1,758 
Short-term receivables and other assets ................      7,901     (47,440)     (76,236) 
Increase in accruals ...................................       (612)     23,112       68,597 
Short-term liabilities .................................    (15,599)     38,167      124,994 
Short-term prepaid expenses ............................        (76)       (333)        (354) 
Deferred income ........................................         (2)          3           -- 
----------- -----------  ----------- 
CASH PROVIDED BY OPERATING ACTIVITIES ....................     54,266     142,346      256,131 
----------- -----------  ----------- 
Cash flows from investing activities: 
Capital expenditures .....................................   (239,704)   (362,534)    (178,608) 
Additions to the special item for investment subsidies 
and incentives ..........................................     13,499      20,569 
Proceeds from disposal of fixed assets ...................     12,451      35,666        1,225 
Decrease in long-term overburden .........................      1,976      10,956           -- 
Increase in long-term investments (securities)  ..........   (210,289)         --           -- 
----------- -----------  ----------- 
CASH USED FOR INVESTING ACTIVITIES .......................   (422,067)   (295,343)    (177,383) 
----------- -----------  ----------- 
Cash flows from financing activities: 
Change in equity: 
Dividends paid ..........................................     (5,000)     (5,000)      (5,000) 
Investors capital contribution ..........................     43,674     180,189           -- 
Withdrawal by MI KG investors ...........................    (18,257)         --           -- 
Capital contribution due to settlement agreement with 
BvS ....................................................     15,941          -- 
Capital infusion ........................................                              50,000 
Increase in long-term liabilities ........................    108,940      75,033           -- 
Decrease in long-term receivables ........................        308      20,868      114,044 
----------- -----------  ----------- 
CASH PROVIDED BY FINANCING ACTIVITIES ....................    145,606     271,090      159,044 
----------- -----------  ----------- 

NET DECREASE (PRIOR YEARS: INCREASE) IN CASH .............   (222,195)    118,093      237,792 
CASH AT BEGINNING OF YEAR ................................    405,885     287,792       50,000 
----------- -----------  ----------- 
CASH AT YEAR-END .........................................    183,690     405,885      287,792 
=========== ===========  =========== 

See accompanying Notes to Consolidated Financial Statements

F-96

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 
(IN THOUSANDS DM) 

SUBSCRIBED    CAPITAL    MINORITY 
CAPITAL     RESERVE    INTEREST     TOTAL 
------------ ----------  ---------- ---------- 

BALANCE AS OF JANUARY 1, 1994.....................    60,000      827,706           0    887,706 
Dividends paid ...................................                 (5,000)                (5,000) 
MIBRAG's share in the 1994 loss ..................                (36,187)               (36,187) 
Change in minority interest.......................                                 (2)        (2) 
Contribution by shareholders......................                 54,010                 54,010 
Land valuations according to section 36 of 
DMBilG...........................................                 (8,982)                (8,982) 
------------ ----------  ---------- ---------- 
BALANCE AS OF DECEMBER 31, 1994 ..................    60,000      831,547          (2)   891,545 
============ ==========  ========== ========== 
BALANCE AS OF JANUARY 1, 1995.....................    60,000      831,547          (2)   891,545 
Dividends paid ...................................                 (5,000)                (5,000) 
MIBRAG mbH's share in the net loss 1995  .........                (48,377)               (48,377) 
Change in minority interest.......................                             28,728     28,728 
------------ ----------  ---------- ---------- 
BALANCE AS OF DECEMBER 31, 1995 ..................    60,000      778,170      28,726    866,896 
============ ==========  ========== ========== 
BALANCE AS OF JANUARY 1, 1996 ....................    60,000      778,170      28,726    866,896 
Dividends paid ...................................                 (5,000)                (5,000) 
MIBRAG mbH's share in the net loss 1996  .........                (58,904)               (58,904) 
Change in minority interest ......................                            (47,733)   (47,733) 
Capital contribution--settlement agreement .......                 15,942                 15,942 
------------ ----------  ---------- ---------- 
BALANCE AS OF DECEMBER 31, 1996 ..................    60,000      730,208     (19,007)   771,201 
============ ==========  ========== ========== 

See accompanying Notes to Consolidated Financial Statements

F-97

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(IN THOUSANDS OF DM) 

NOTE A ORIGINATION AND NATURE OF BUSINESS 

ORIGINATION: Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAG" or 
"MIBRAG mbH") was created from split-up of MIBRAG AG, previously owned by the 
Treuhandanstalt (the German government privatization agency), into three 
separate entities. Effective January 1, 1994 a consortium comprised of NRG 
Energy, Inc., Morrison Knudsen Corporation, and PowerGen plc. jointly 
acquired 99 % of the active mining, power generation and related assets and 
liabilities from the Treuhandanstalt through its Dutch holding company 
(MIBRAG B.V.). The remaining 1% was transferred on December 18, 1996 from the 
German government privatization agency to Lambique Beheer B.V., Amsterdam, a 
subsidiary of NRG Energy, Inc., Morrison Knudsen B.V., Amsterdam, and 
PowerGen Netherlands B.V., Amsterdam in equal portions (1/3 %) for each 
partner. 

NATURE OF BUSINESS: The operations of MIBRAG mbH include two open-cast 
brown coal mines in Profen and Schleenhain, a lease on a third mine in 
Zwenkau, and rights to future mining reserves. The operations also include 
over 200 MW of power generation and two coal briquetting plants. A 
significant portion of the sales of MIBRAG is made pursuant to long-term coal 
and energy supply contracts. 

NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

The consolidated financial statements of Mitteldeutsche 
Braunkohlengesellschaft mbH and subsidiaries have been prepared in accordance 
with the German Commercial Code, which represents accounting principles 
generally accepted in Germany ("German GAAP"). German GAAP varies in certain 
significant respects from accounting principles generally accepted in the 
United States of America ("US GAAP"). Application of US GAAP would have 
affected the results of operations for each of the years in the three-year 
period ended December 31, 1996 and stockholders' equity as of December 31, 
1996, 1995 and 1994 to the extent summarized in note C to the consolidated 
financial statements. All amounts herein are shown in thousands of Deutsche 
Mark ("DM") unless otherwise noted. 

PRINCIPLES OF CONSOLIDATION: All material companies in which MIBRAG has 
legal or effective control are fully consolidated. In 1996, MIBRAG 
consolidated 5 (1995: 4, 1994: 4) domestic subsidiaries, including one 
company, GALA, for the first time. For the years ended December 31, 1996, 
1995 and 1994 all subsidiaries were consolidated. 

One significant investment, MUEG, in which MIBRAG has an ownership 
interest of 50% is accounted for in accordance with the equity method. This 
investment is referred to as an associated company in these financial 
statements. 

All other investments in which MIBRAG has an ownership in the range of 20% 
to 50% are either not considered to be significant for the presentation of 
the consolidated financial statements of MIBRAG or MIBRAG has no significant 
influence in these companies. These companies are included at cost and 
referred to as participations in these financial statements. 

All significant intercompany accounts and transactions have been 
eliminated in consolidation. 

USE OF ESTIMATES: The preparation of financial statements in conformity 
with generally accepted accounting principles necessarily requires management 
to make estimates and assumptions that affect the reported amounts of assets 
and liabilities and disclosure of contingent assets and liabilities at the 
balance sheet dates and the reported amounts of revenues and expenses during 
the reported periods. Actual results could differ from those estimates. 

TOTAL COST METHOD: The income statement has been presented according to 
the total cost (or type of expenditure) format as commonly used in Germany. 
According to this format, production and all other expenses incurred during 
the period are classified by type of expenses. 

F-98

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued) 

REVENUE RECOGNITION: Revenue is recognized when title passes or services 
are rendered, net of discounts, customer bonuses and rebates granted. 

INTANGIBLE ASSETS: Intangible assets are valued at acquisition cost and 
are amortized over their respective useful lives (5 to 15 years). 

PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment acquired is 
recorded on the basis of acquisition or manufacturing cost, including 
capitalized mine development costs and subsequently reduced by scheduled 
depreciation charges over the assets' useful lives as follows: buildings -- 3 
to 25 years, technical facilities and machinery -- 4 to 33 years; and 
facilities, factory and office equipment -- 5 to 10 years. Maintenance and 
repair costs are expensed as incurred. Depreciation is computed principally 
by the straight-line method over the expected useful lives of the assets. The 
amortization of mine development costs is provided on the basis of tonnage 
mined in relation to total estimated recoverable tonnage. Depreciation on 
additions during the first or the second half of the year are estimated using 
full-year or half-year rates, respectively. Low value items are expensed in 
the year of acquisition. Opportunities for special tax deductible 
depreciation are utilized for both book and tax purposes. 

INVESTMENTS: The long-term loans and investments are recorded at cost. 

OVERBURDEN: Overburden represents the costs of removing the surface above 
a coal field subsequent to the initial opening of the field to the extent 
that the removal exceeds what is needed for the current years coal 
extraction. These are costs incurred in advance in respect of future coal 
production. The overburden of the individual mines on the balance sheet dates 
were consolidated and valued on an average cost basis. 

INVENTORY: Inventories are carried at the lower of average cost or market. 
Obsolescence provisions are made to the extent that inventory risks are 
determinable. 

RECEIVABLES AND OTHER ASSETS: All receivables are valued at cost, taking 
into account all known risks. A lump-sum allowance for doubtful accounts is 
deducted from the receivables in recognition of the general risk inherent in 
the receivables. 

CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, checks, 
current accounts and time deposits. 

INVESTMENT GRANTS: To support the acquisition of certain tangible assets, 
investment allowances and subsidies were granted by the federal government 
and the German states of Saxony and Saxony-Anhalt. The application, 
conditions and payments of investment grants are ruled by German law and 
several regulations and statements. Investment allowances and subsidies 
received and formally claimed are credited to the special item account. The 
special item is amortized into income over the normal operating useful lives 
of the underlying assets to which the allowances and subsidies relate. 

ENVIRONMENTAL AND MINING PROVISIONS: Accruals for environmental and 
mining-related matters are recorded when it is probable that a liability has 
been incurred and the amount of the liability can be reasonably estimated, 
based on current law and existing technologies. These accruals are adjusted 
periodically as assessment and remediation efforts progress or as additional 
technical or legal information becomes available. 

LIABILITIES: Liabilities are shown at their repayment amounts. 

PER SHARE AMOUNTS: Per share amounts are not disclosed in the financial 
statements. MIBRAG is a nonpublic enterprise. 

F-99

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY 
ACCEPTED ACCOUNTING PRINCIPLES 

The MIBRAG consolidated financial statements comply with German GAAP, 
which differs in certain significant respects from US GAAP. The significant 
differences that affect the consolidated net income and stockholders' equity 
of MIBRAG are set out below. 

I. APPLICATION OF THE PURCHASE METHOD OF ACCOUNTING 

As of December 31, 1993 the predecessor of MIBRAG -- MIBRAG AG was split 
into three legal entities: 

MIBRAG mbH 
MBV GmbH and 
Romonta GmbH. 

The assets and liabilities of the predecessor company were allocated to 
the three newly founded companies according to a split-up plan, which is 
required under the applicable German split-up law. Under German GAAP the 
assets and liabilities of MIBRAG AG were transferred at book value to the 
financial statements of the three successor companies. The transaction 
resulted in an shareholders' equity of DM 887.7 million in MIBRAG's opening 
balance sheet as of January 1, 1994 according to German GAAP. 

The acquisition of 99% of the shares in MIBRAG mbH on January 1, 1994 by 
MIBRAG B.V. was accounted for using the purchase method of accounting and the 
purchase price adjustments to the historical cost basis have been pushed down 
to the US GAAP financial statements of MIBRAG mbH . According to the purchase 
agreement the purchase price for 99% of the shares consists of two components 
- -a fixed and a variable portion. The variable portion depends on future 
coal mined and briquettes sold, while the fixed portion was calculated as 
follows: 

MILLION DM 
------------ 

Fixed purchase price..................     290.0 
less: assumption of a loan obligation  .....    (139.2) 
less: investment commitment by MIBRAG B.V.      (110.8) 
------------ 
Net fixed acquisition costs ..........      40.0 

The estimated fair value of all individual assets acquired and liabilities 
assumed at the date of the acquisition amounted to DM 1,570.3 million 
(assets) and DM 773 million (liabilities), respectively. The remaining 
difference of DM 757.3 million was proportionally allocated to reduce the 
value assigned to noncurrent assets, excluding long-term investments, 
assuming fixed acquisition costs of DM 40 million. 

The variable portions of the acquisition cost were not considered in the 
above calculation because the amounts were contingent upon future events, 
which were not considered to be reasonably estimable. 

II. SUBSEQUENT ADJUSTMENT OF THE US GAAP OPENING BALANCE 

As referred to above, the MIBRAG purchase agreement states that MIBRAG 
B.V. will pay a total of DM 40 million to the successor of the 
Treuhandanstalt (THA), the Bundesanstalt fur vereinigungsbedingte 
Sonderaufgaben (BvS) at a future date. This amount is to be reduced by the 
amount of certain incremental transportation costs incurred by MIBRAG for 
lignite transportation to one of its major customers. For US GAAP purposes, 
this liability is reflected as a liability of MIBRAG mbH and results in a 
reduction of MIBRAG equity and an increase in liabilities by DM 40 million. 

F-100

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY 
ACCEPTED ACCOUNTING PRINCIPLES  (Continued) 

III. NOTES TO SIGNIFICANT US GAAP ADJUSTMENTS 

1. Fixed assets other than financial investments 

These adjustments are caused by different book values of fixed assets in 
German and US GAAP financial statements. There are four primary reasons for 
differences in book values: 

o  In the US opening balance sheet as of January 1, 1994, according to 
purchase accounting, fixed asset balances, other than financial assets, 
were adjusted to their fair market values. Related unamortized 
investment subsidies were also included in these adjustments as of 
January 1, 1994. 

o  As of January 1, 1994, the assets were reduced by the allocation of the 
difference between the net acquisition costs for the MIBRAG shares and 
the net fair market value of MIBRAG's assets and liabilities. 

o  Special accelerated depreciation for tax purposes is recorded in the 
German financial statements. 

o  The depreciation period of long term assets are based upon lives 
acceptable for German tax purposes, which differ from the useful lives 
for US accounting purposes. 

Upon disposal, the above differences also resulted in differing gains or 
losses on disposition. 

Financial investment in MUEG 

For German GAAP purposes, MIBRAG accounted for the investment in MUEG as 
of January 1, 1994 using the cost method. Under US GAAP the book value was 
increased to account for the equity earnings that were not distributed to 
MIBRAG as of that date. 

2. Relocation accruals 

At January 1, 1994, MIBRAG had made a commitment to relocate the villages 
of Grossgrimma, Heuersdorf, Schwerzau and Breunsdorf at a total estimated cost 
of DM 273 million. Such amounts were provided for at January 1, 1994. 
Deferred costs, which are amortized in accordance with quantities of coal 
extracted, were recorded at the same amount. 

The German GAAP balance as of January 1, 1994 included provisions for DM 
56 million of this total. In accordance with German accounting principles 
such reserves and accruals for the relocation of villages can not be accrued 
earlier than 2 years prior to the relocation, and some of the relocation 
costs are to be expensed as incurred. 

3. Investment in power plants 

In 1995 and 1996, third party investors paid in DM 216 million into a 
MIBRAG subsidiary, MIBRAG Industriekraftwerke GmbH & Co. KG ("MI"). MI runs 
three lignite-fired power plants. The investment is structured such that the 
third party investors obtain the accelerated depreciation opportunities for 
tax purposes while retaining a put option to sell their investments back to 
MIBRAG at predetermined prices. The third party investments are considered 
additions to equity for German GAAP, while these arrangements are accounted 
for as a financing in accordance with US GAAP. 

F-101

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY 
ACCEPTED ACCOUNTING PRINCIPLES  (Continued) 

4. Schkopau transportation credits 

The liability to BvS as described in item II above is reduced by the 
amount of excess incremental transportation costs, incurred by MIBRAG for 
certain lignite shipments. The transportation cost credits are not reflected 
in MIBRAG's German financial statements, but reduce the liability to BvS in 
the US GAAP balance sheet. 

5. Interest capitalization 

Interest is expensed in the German financial statements, however interest 
expense related to qualified assets is capitalized in the US GAAP financial 
statements. 

6. Accrued liabilities 

Certain mining and other accruals, which were provided for at January 1, 
1994 in accordance with US GAAP purchase accounting, were recorded in the 
German financial statements in 1994. 

7. Receivables/payables at non-market interest rates 

Certain accounts receivables or loans payable are recorded in the German 
GAAP financial statements at their nominal values. Because these carry 
non-market interest rates, such receivables and payables were adjusted to 
their market values 

8. Overburden 

Overburden in the German financial statements includes capitalized 
depreciation based upon the historical costs. Because of the purchase 
accounting adjustments, a different amount of depreciation is capitalized in 
overburden in the US GAAP financial statements. In addition, purchase 
accounting adjustments as of January 1, 1994 included the write-down of 
overburden on a mine to be closed. 

9. Other 

Certain costs and income in the German financial statements are 
capitalized or deferred for US GAAP purposes, respectively. 

10. Unrealized security gains 

Unrealized security gains on available-for-sale securities are not 
accounted for under German GAAP, but are recorded in a separate componenet of 
equity for US GAAP purposes. 

F-102

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY 
ACCEPTED ACCOUNTING PRINCIPLES  (Continued) 

RECONCILIATION TO U.S. GAAP 

The following is a summary of the significant adjustments to net income 
for the years 1994, 1995 and 1996 and to stockholders' equity at December 31, 
1994, 1995 and 1996, which will be required if U.S. GAAP had been applied 
instead of German GAAP. 

YEAR ENDED DECEMBER 31, 
------------------------------------ 
NOTE      1996         1995        1994 
------ -----------  ----------- ---------- 

Net income as reported in the consolidated income 
statement under German GAAP......................          (132,052)    (192,338)   (36,189) 
Adjustments required to conform with U.S. GAAP: 
Fixed assets.....................................   (1)     143,280      301,385    152,735 
Relocation of villages...........................   (2)      46,803       21,258     15,897 
Investments in power plants......................   (3)       7,208            0          0 
Schkopau transportation credits..................   (4)      12,367            0          0 
Interest capitalization..........................   (5)       4,549          (52)     1,542 
Accrued liabilities..............................   (6)           0            0     21,546 
Receivables/payables at non-market interest 
rates...........................................   (7)      (8,728)      (9,628)    (1,173) 
Overburden.......................................   (8)     (15,201)      (1,253)   (25,534) 
Other............................................   (9)      (2,012)     (29,417)      (749) 
-----------  ----------- ---------- 
NET INCOME IN ACCORDANCE WITH U.S. GAAP...........            56,214       89,955    128,075 
===========  =========== ========== 

F-103

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY 
ACCEPTED ACCOUNTING PRINCIPLES  (Continued) 

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(IN THOUSANDS DM) 

AT DECEMBER 31, 
------------------------------------- 
NOTE      1996         1995        1994       1/1/1994 
------ -----------  ----------- -----------  ----------- 

Shareholders' equity as in the 
consolidated balance sheet under German 
GAAP ....................................           771,201      866,896     891,545      887,706 
Less minority interest ...................                 1            1           0            0 
-----------  ----------- -----------  ----------- 
Adjusted shareholders' equity under 
German GAAP .............................           771,202      866,897     891,545      887,706 
Adjustments required to conform with U.S. 
GAAP: 
Long-term asset valuation ...............    (1)     34,939     (108,341)   (409,726)    (562,461) 
Relocation of villages ..................    (2)    (40,333)     (87,136)   (108,394)    (124,291) 
Investment in power plants ..............    (3)   (190,896)    (172,689)         --           -- 
Payable to THA/BvS ......................    (4)    (27,633)     (40,000)    (40,000)          -- 
Interest capitalization .................    (5)      6,039        1,490       1,542           -- 
Accrued liabilities .....................    (6)    (30,153)     (30,153)    (30,153)     (51,699) 
Receivables/payables at non-market 
interest rate ..........................    (7)     12,498       21,226      30,854       32,027 
Overburden ..............................    (8)   (211,991)    (196,790)   (195,537)    (170,003) 
Other ...................................    (9)     (3,457)      (1,445)     27,972       28,721 
Change for the year in net unrealized 
securities gains (net of income tax 
effects) ...............................   (10)      5,853           --          --           -- 
-----------  ----------- -----------  ----------- 
SHAREHOLDERS' EQUITY IN ACCORDANCE WITH 
U.S. GAAP ...............................           326,068      253,059     168,103       40,000 
===========  =========== ===========  =========== 

NOTE D CONCENTRATION OF CREDIT RISK AND LONG-TERM COAL SALES AGREEMENTS 

MIBRAG mbH markets its coal principally to electric utilities in Germany. 
As of December 31, 1996, 1995 and 1994 accounts receivable from electric 
utilities totaled DM 74,397, DM 54,660 and DM 63,838, respectively. Credit is 
extended based on an evaluation of the customer's financial condition, and 
collateral is not generally required. Credit losses are provided for in the 
financial statements and consistently have been minimal. 

MIBRAG mbH is committed under several long-term contracts to supply raw 
brown coal and whirl fine coal to the Schkopau power station and the 
Lippendorf power station. Under the terms of the Schkopau Agreement closed 
with VEBA Kraftwerke Ruhr AG (VKR), Gelsenkirchen, MIBRAG mbH delivers 
annually up to 5.8 million tons of coal commencing 1995. The agreement will 
be in effect until 2010 with an option for VKR to extend the agreement for 
another 10 years. The price to be paid by the Schkopau power station is a 
fixed price adjusted by an annual escalation rate. 

The Lippendorf Agreements provide for deliveries of up to 10 million tons 
per year from 1999 through 2040 with an option for the MIBRAG customers to 
extend for an additional 3 year period. These 

F-104

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE D CONCENTRATION OF CREDIT RISK AND LONG-TERM COAL SALES AGREEMENTS 
(Continued) 

Agreements were closed with Vereinigte Energiewerke AG (VEAG), Berlin, and 
Bayernwerk AG, Munich, and replace the agreements on deliveries to the old 
power station at Lippendorf. The price to be paid by the Lippendorf power 
station is a base-price with escalation and adjustment based on quality of 
the coal delivered. The new Lippendorf power station is still under 
construction. 

A substantial portion of the Company's remaining coal reserves is 
dedicated to the production of coal for such agreements. 

Sales to the two largest customers comprise, as a percentage of total 
sale, 58%, 55% and 65% in 1996, 1995 and 1994, respectively. Sales to the 
five largest customers comprise, as a percentage of total sale, 86%, 74% and 
75% in 1996, 1995 and 1994, respectively. 

NOTE E PROPERTY, PLANT AND EQUIPMENT (INTANGIBLE AND TANGIBLE ASSETS) 

The group depreciation charges are as follows: DM 201,362 (1996), DM 
317,457 (1995), and DM 165,392 (1994), including normal depreciation, 
unplanned depreciation and special tax depreciation in terms of section 4 of 
the German tax law, "Fordergebietsgesetz". According to that law certain 
tangible assets can be depreciated up to 50 % of the historical costs in the 
first five years of acquisition in addition to the normal depreciation. 

Composition: 

1996 
-------------------------------------------------------- 
NORMAL       SPECIAL TAX      UNPLANNED 
DEPRECIATION    DEPRECIATION   DEPRECIAITON     TOTAL 
-------------- --------------  -------------- --------- 

a) Intangible assets 
Concessions, trade marks, 
patents and licenses .........      2,085              --             --         2,085 
b) Tangible assets 
Buildings .....................     14,810          13,090          1,701        29,601 
Strip-mines ...................        985              --             --           985 
Technical equipment and 
machinery.....................     63,576          76,765          3,289       143,630 
Factory and office equipment  .     16,627           8,143            291        25,061 
-------------- --------------  -------------- --------- 
98,083          97,998          5,281       201,362 
============== ==============  ============== ========= 

The unplanned depreciation (DM 5,281) refers to the closed briquette plant 
Deuben (DM 4,281), to the former residence Holzberg (DM 556) and to the 
repair shop Naunhof (DM 179), which has been replaced by the repair shop 
Profen in 1996. Other assets from different locations were unplanned 
depreciated to the lower market value as of December 31, 1996 (DM 265). 

F-105

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE E PROPERTY, PLANT AND EQUIPMENT (INTANGIBLE AND TANGIBLE ASSETS) 
(Continued) 

1995 
-------------------------------------------------------- 
NORMAL       SPECIAL TAX      UNPLANNED 
FIXED ASSETS                         DEPRECIATION    DEPRECIATION   DEPRECIATION     TOTAL 
- ----------------------------------  -------------- --------------  -------------- --------- 

a) Intangible assets 
Concessions, trade marks, 
patents and licenses ..........      1,065              --             --         1,065 
b) Tangible assets 
Buildings ......................     10,704          32,661          1,620        44,985 
Strip-mines ....................        971              --             --           971 
Technical equipment and 
machinery.......................     62,008         142,962         12,603       217,573 
Factory and office equipment  ..     21,424          31,099            340        52,863 
-------------- --------------  -------------- --------- 
96,172         206,722         14,563       317,457 
============== ==============  ============== ========= 

The unplanned depreciation DM 14,563) refers to machinery and equipment 
(DM 8,416), which was shut down at the Schleenhain mine, to the heating pipe 
of the Hydrogenation plant Zeitz (DM 5,161), and to other equipment retired 
(DM 986). 

1994 
--------------------------------------------------------- 
NORMAL 
FIXED ASSETS                                     DEPRECIATION   SPECIAL DEPRECIATION   TOTAL 
- ----------------------------------------------  -------------- --------------------  --------- 

a) Intangible assets 
Concessions, trade marks, patents and 
licenses ..................................         615                --             615 
b) Tangible assets 
Buildings ..................................      10,298             6,114          16,412 
Strip-mines ................................       1,107                --           1,107 
Technical equipment and machinery  .........      70,679            48,517         119,196 
Factory and office equipment ...............      17,483            10,579          28,062 
-------------- --------------------  --------- 
100,182            65,210         165,392 
============== ====================  ========= 

NOTE F INVESTMENTS IN OTHER GROUP COMPANIES 

MIBRAG mbH holds 20 % or more of the voting rights in 8 companies. 

One of these companies -- MUEG Mitteldeutsche Umwelt-und Entsorgungs GmbH, 
Braunsbedra, (MUEG for short) -has been accounted for using the equity 
method based on its audited annual financial statements as of December 31, 
1995, 1994, and 1993. The audited financial statement as of December 31, 1996 
are not available yet. MUEG was founded in 1990 and coordinates the waste 
disposal activities in the Central German brown coal area. The equity value 
as of December 31, 1996 is as follows: 

DM 
-------- 

Cost and contributions .........................  12,186 
+    Net profit share 1994-1996 .....................   3,472 
. / .   Distributed profits share 1994-1996 ............   3,472 
-------- 
=    Carrying amount "at equity" as of 12/31/1996  ..  12,186 
======== 

F-106

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE F INVESTMENTS IN OTHER GROUP COMPANIES  (Continued) 

The other 7 companies have been accounted for at their historical 
acquisition costs, because either MIBRAG mbH is unable to exercise 
significant influence over the investees operating and financial policies or 
the impact on the consolidated financial statements is not material. 

NOTE G LOAN TO FERNWAERME HOHENMOELSEN GMBH 

In accordance with the purchase contract dated December 14, 1995, MIBRAG 
sold the district heating network assets to the Fernwarme Hohenmolsen GmbH, 
effective as of 1 January 1995, at a net sales price of DM 19 million. After 
deducting a down payment of DM 1.4 million in 1995, the balance will be 
repaid in equal installments over a period of 25 years and an interest rate 
of 5 per cent fixed until 1999. After 1999 the interest rate will be adjusted 
to the changed market rate at that time. 

The fair market value of the loan was as follows: 

DEC. 31, 1996    DEC. 31, 1995 

DM               DM 
16,867           17,600 

NOTE H LONG-TERM INVESTMENTS 

Near year-end of 1996 marketable debt securities with a face value of DM 
20 million were acquired. These securities are carried at their costs. The 
acquisition cost approximates the fair value for this category of securities 
based on quoted market prices as of December 31, 1996. The securities will 
not be sold before 1998. Gains due to the accrual of interest of TDM 245 in 
1996 are included in interest income. The maturity date will be in the period 
within one year through five years. 

NOTE I OTHER LOANS 

The other loans refer to loans granted to the new investors of a 
subsidiary of MIBRAG mbH. In accordance with the first additional clause of 
the loan contract dated April 3, 1995 between KfW (Kreditanstalt fur 
Wiederaufbau) and MIBRAG mbH, KfW grant MIBRAG mbH a loan of DM 82,208 to 
December 30, 2005 at a fixed interest rate of 6.67%. As per agreement the 
loan was received on December 29, 1995. 

The loans to the new investors of the subsidiary of MIBRAG mbH were 
granted at the same conditions as those applicable to the loan between MIBRAG 
mbH and KfW. 

NOTE J OVERBURDEN 

The reconciliation of the overburden costs is as follows: 

(IN MILLIONS) 
DEC. 31, 1996          DEC. 31, 1995           DEC. 31, 1994 
---------------------- ---------------------- ---------------------- 
TONNAGE      VALUE     TONNAGE      VALUE     TONNAGE      VALUE 
METRIC TONS     DM     METRIC TONS     DM     METRIC TONS     DM 
------------- -------  ------------- -------  ------------- ------- 

Profen ........      12.7       113.6       12.8       129.2       14.2       143.5 
Schleenhain  ..      15.2       140.7       15.2       140.7       17.0       155.0 
Zwenkau .......       5.8        50.6        4.6        38.5        4.4        21.4 
------------- -------  ------------- -------  ------------- ------- 
33.7       304.9       32.6       308.4       35.6       319.9 
============= =======  ============= =======  ============= ======= 

F-107

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE J OVERBURDEN  (Continued) 

The basis for the determination of the overburden is the total quantity 
of partially exposed raw brown coal. The herein included volume of completely 
exposed coal can be mined without further removal with the equipment in 
place. This part of the immediately extractable overburden balances can be 
analyzed as follows: 

(IN MILLIOINS) 
DEC. 31, 1996          DEC. 31, 1995            DEC. 31, 1994 
---------------------- ---------------------- ------------------------- 
TONNAGE      VALUE     TONNAGE      VALUE     TONNAGE 
METRIC TONS     DM     METRIC TONS     DM     METRIC TONS    VALUE DM 
------------- -------  ------------- -------  ------------- ---------- 

Profen .......      2.5        23.0        2.0        20.1        2.4          24.0 
Schleenhain  . temporary shut down between 1995 and 1999          0.6           5.8 
Zwenkau ......      0.3         2.0        0.2         1.5        0.2           0.9 
------------- -------  ------------- -------  ------------- ---------- 
2.8        25.0        2.2        21.6        3.2          30.7 
============= =======  ============= =======  ============= ========== 

NOTE K TRADE RECEIVABLES 

Trade receivables were disclosed in the balance sheet, net of allowances, 
as follows: 

ALLOWANCES (IN DM) 

Dec. 31, 1996      Dec. 31, 1995      Dec. 31, 1994 
954               514                894 

NOTE L SHORT-TERM INVESTMENTS 

In 1996 marketable debt securities were acquired at costs of DM 210.3 
million. These securities were set up to reinvest the additional liquidity 
resulting from the entry of new investors of a subsidiary of MIBRAG mbH. 
Realized gains of DM 5.9 million were disclosed in interest income. The 
maturity dates of the securities vary from one year to five years. 

NOTE M ACCRUALS FOR PENSIONS AND SIMILAR OBLIGATIONS 

The provision was mainly raised for briquette benefit claims of active 
employees on the basis of the collective agreement of November 9, 1993 in 
respect to allowances in kind. Employees entitled must be employees of the 
company at the date of retirement. The entitlement elapses with early ending 
of the working relationship or on receipt of social plan benefits. 

The calculation based on an actuarial valuation of January 10, 1997. The 
valuation took into account the entitlement to the redemption value of DM 
185.00 per metric ton of briquettes as specified in the collective agreement 
and the employees entitled to benefits as of June 30, 1996. 

NOTE N TAXATION ACCRUALS 

MIBRAG did not accrue for income tax under German GAAP, because of net 
operating losses in 1994 through 1996. Deferred tax assets and liabilities 
have not been recorded, because there are no significant differences between 
the German GAAP financial statement and tax bases of the assets and 
liabilities. 

For US GAAP accounting purposes mainly due to the application of purchase 
accounting and different useful lives for depreciable fixed assets, the 
financial values differ significantly from the tax basis. 

F-108

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE N TAXATION ACCRUALS  (Continued) 

Significant components of MIBRAG's deferred tax liabilities and assets at 
December 31, 1996, that result from carryforwards and temporary differences 
between the US GAAP financial statement basis and tax basis of assets and 
liabilities are summarized as follows: 

1996 
------- 

Deferred tax liability 
long term assets ................   32.1 
investment subsidies ............    3.4 
unrealized holding gains ........    7.5 
------- 
Total deferred liability ........   43.0 
------- 
Deferred tax assets 
overburden ......................  118.8 
accruals and liabilities ........   98.0 
Net operating loss carryforwards   126.1 
Total deferred tax assets ........  342.9 
------- 
Net deferred tax asset ...........  299.9 
------- 
Valuation allowance ..............  299.9 
======= 
Deferred tax asset/liability  ....    0.0 
======= 

Because all differences in the opening balances between German and US GAAP 
are either deductible or taxable for German tax purposes these differences, 
which result in a net deductible difference, would be considered to be 
temporary in accordance with US GAAP. Because, however, as of the acquisition 
date, it was considered more likely than not that the whole deferred tax 
asset would not be realizable due to ongoing operating losses in the 
foreseeable future, a valuation allowance for the entire net deferred tax 
asset was recorded. 

For the years 1994 to 1996 it is considered that the probability remains 
more likely than not that there will be sufficient future taxable income to 
realize the deferred tax asset. 

Therefore a valuation allowance of 100% on the net deferred tax asset is 
still considered to be necessary as of December 31, 1996. 

The German corporation income tax rate on undistributed income is 45%. 
This differes from the company's effective tax rate of 0%, because the 
company has no taxable income and in the recording of a deferred tax benefit 
for net loss carry forewards is prohibited under German GAAP. 

Since 1991 land taxation payments have been made in advance based on 0.2 % 
of the DM-opening balance sheet values until the land tax values have been 
determined. As the total strip mining and surrounding land have been valued 
at 0.00 DM/sqm land tax has only been paid where specific assessments have 
been made. New assessments have been made for the outstanding payments from 
1991 until 1996 taking into account the special tax authorities regulation 
"Einheitsbewertung des Grubengelandes bei Braunkohlenbergbau" (dated January 
11, 1995), decrees of the new Federal States to the same topic (dated May 21, 
1993) and the current tax authorities advises. 

At December 31, 1996 the Company had DM 225 million net operating loss 
carryforwards, which do not expire and may be applied against future taxable 
income. 

F-109

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE O ENVIRONMENTAL AND MINING PROVISIONS 

The following is a summary of environmental and mining provisions (in DM): 

BALANCE AS OF    BALANCE AS OF   BALANCE AS OF 
DEC. 31, 1996    DEC. 31, 1995   DEC. 31, 1994 
--------------- ---------------  --------------- 

1) End-lake provision ....................     287,262          268,357         257,569 
2) Provision for environmental pollution         9,975           10,000          10,000 
3) Landscaping ...........................      19,420           28,009          23,833 
4) Planting ..............................      12,776           16,097           9,601 
5) Relocation of villages ................      62,623           61,657          65,034 
--------------- ---------------  --------------- 
392,056          384,120         366,037 
=============== ===============  =============== 

In 1996 reclassifications were made relating to landscaping (DM 10,488) 
and planting (DM 763) that have to be made in connection to end-lake 
restoration, so that the provision raised in prior years and in the current 
year were allocated to the end-lake provision section. 

1) END-LAKE PROVISION 

The duty of reclaiming mining fields, to make the area reusable in the 
public's interest, follows from the duty specified in section 2 of the 
Bundesberggesetz (BBergG) -- Federal Mining Law. In terms thereof a mine 
closure plan must be prepared (section 53 BBergG) for termination of above 
earth mining. In this plan, the actions must be described to protect third 
parties from dangers caused by the mining operation and to ensure the 
reusefulness of the earth surface (section 51 BBergG). 

The duty of reclaiming of the mining fields applies to MIBRAG in respect 
of the Profen and Schleenhain mines. MIBRAG is exempted from this duty in 
respect of the Zwenkau mine in terms of section 4 (3) of the operating lease 
agreement of 17 December 1993 with MBV, the state-owned company responsible 
for reclamation of closed mines in the east German region. 

The mining field reclamation of the Profen and Schleenhain mines after the 
ceasing of production is planned for 2029-2046 and 2041-2073 respectively. A 
legally binding closure plan laying down the principles for action plans in 
accordance with the BBergG is normally approved two years in advance to the 
commencement of production by the relevant mining department. The liability 
to reclaim the area exists from the start of mining activities. The 
calculation of the total costs for reclaiming mining fields are estimated on 
the bases of current prices. 

The total restructuring costs consist mainly of costs for reconstruction 
bank reinforcement, dewatering and watering. 

F-110

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE O ENVIRONMENTAL AND MINING PROVISIONS  (Continued) 

The calculation for the respective three years were as follows: 

DECEMBER 31, 1996 
---------------------------------------------------------------------- 
TOTAL           TOTAL          EXTRACTION            BALANCE 
RESTORATION        FIELD             AS OF               AS OF 
COSTS          VOLUME         DEC. 31, 1996       DEC. 31, 1996 
DM              T                 T                  DM 
--------------- -------------  -------------------- ----------------- 

Profen ..........  246,748             472,100          172,447              90,131 
Schleenhain .....  488,239             810,613          327,293             197,131 
--------------- -------------  -------------------- ----------------- 
734,987           1,282,713          499,740             287,262 
=============== =============  ==================== ================= 

DECEMBER 31, 1995 
---------------------------------------------------------------------- 
TOTAL           TOTAL                                BALANCE 
RESTORATION        FIELD       EXTRACTION AS OF          AS OF 
COSTS          VOLUME         DEC. 31, 1995       DEC. 31, 1995 
DM              T                 T                  DM 
--------------- -------------  -------------------- ----------------- 
Profen ..........  222,411             472,100          162,492              76,552 
Schleenhain .....  475,047             810,613          327,293             191,805 
--------------- -------------  -------------------- ----------------- 
697,458           1,282,713          489,785             268,357 
=============== =============  ==================== ================= 

DECEMBER 31, 1994 
---------------------------------------------------------------------- 
TOTAL           TOTAL          EXTRACTION            BALANCE 
RESTORATION        FIELD             AS OF               AS OF 
COSTS          VOLUME         DEC. 31, 1994       DEC. 31, 1994 
DM              T                 T                  DM 
--------------- -------------  -------------------- ----------------- 
Profen ..........  219,938             472,100          153,404              71,467 
Schleenhain .....  463,817             810,613          325,250             186,102 
--------------- -------------  -------------------- ----------------- 
683,755           1,282,713          478,654             257,569 
=============== =============  ==================== ================= 

2) PROVISION FOR ENVIRONMENTAL POLLUTION ("ALTLASTEN") 

This provision for the clean-up/safeguarding of "Altlasten" is determined 
in respect of disposals sites and old locations of MIBRAG mbH in refinement 
and mining production areas, on which waste deposits can be found. 

The duty for clean-up results from the waste disposal laws of Saxony and 
Saxony-Anhalt, in terms of which the subsequent use of the mine area must be 
without problems. The obligation to avoid danger results from the general 
applicable law of Germany and the individual states. A danger from a policing 
point of view occurs when a danger is presented to the surrounding area. The 
company has listed areas suspectable of contamination in a land register. 

An accrual of DM 10 million which is the ceiling for such costs in 
accordance with the purchase and sales agreement with the Treuhandanstalt, 
was recorded. 

3) LANDSCAPING 

In this provision are included costs for reclaiming disposal areas and 
leveling of the area outside the embankments. These costs include costs for 
continous landscaping as well as closing down landscaping. 

F-111

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE O ENVIRONMENTAL AND MINING PROVISIONS  (Continued) 

The duty results from the "Bundesberggesetz", that states that land must 
be made reusable during production and after production has ended (sections 
55, 2, 4 BBergG). 

The provision for landscaping has been recalculated as of December 31, 
1996, 1995, 1994, based on the special strategic plans, recultivation plan 
1994/95 of Profen and Schleenhain, the strategic plan of the Zwenkau mine, 
internal budget documentation as well as costing documentation. 

The strategic plans categorize the disposal areas according to future 
usage plans, e.g. agricultural or foresting uses and special uses (roads, 
flood areas, recreation etc.). The cost estimation has been prepared by the 
recultivation department based on use, technology, period of recultivation, 
material-, personnel-and technical expenses utilizing generally used market 
prices. 

The provision was as follows (in DM): 

DEC. 31, 1996    DEC. 31, 1995   DEC. 31, 1994 
--------------- ---------------  --------------- 

Profen ........       6,886          11,203            8,782 
Schleenhain  ..       8,645          13,485           13,922 
Zweckau .......       3,889           3,321            1,129 
--------------- ---------------  --------------- 
19,420          28,009           23,833 
=============== ===============  =============== 

4) PLANTING 

In this account provision is made for costs in connection with temporary 
planting as well as the revegetation of the mining pits after closure. 

The duty for planting results from the environmental protection clauses 
contained in the general and mine closure strategic plans. Legal basis are 
the "Bundesberggesetz" (sections 55 and 66) and the 
"Bundesimmissionsschutzgesetz" (Federal Emission Law). The "Bundesberggesetz" 
determines that preventative measures must also be taken at the time of 
mining and the "Bundesimmissionsschutzgesetz" determines that mines must be 
operated in such a way that harmful environmental effects must be prevented, 
that can be prevented with available technology. 

The quantification results from the surveyed areas, that have been used 
for disposal and that have not been finally planted and the border 
embankments that have not been planted. Open cast areas have to be planted at 
the difference between actual and technically required areas. Via temporary 
planting, dust pollution and earth erosion are reduced. 

The account's composition at the balance sheet dates was as follows (in 
DM): 

DEC. 31, 1996    DEC. 31, 1995   DEC. 31, 1994 
--------------- ---------------  --------------- 

Profen ........       4,335           5,663           4,629 
Schleenhain  ..       8,441          10,434           4,972 
--------------- ---------------  --------------- 
12,776          16,097           9,601 
=============== ===============  =============== 

5) RELOCATION OF VILLAGES 

The provision for relocation of villages is in respect of relocation costs 
for the municipalities of Schwerzau, Grossgrimma, Breunsdorf and Heuersdorf, 
which is necessary for the expansion of the Profen and Schleenhain mines. 

The obligation is based on the agreements that have been reached with the 
relevant municipalities. In addition the company has expressed through its 
appearance in the public that the relocations will take place at a specified 
date, which has created a factual obligation to fulfill. 

F-112

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE O ENVIRONMENTAL AND MINING PROVISIONS  (Continued) 

The calculation of the provision is based on a method that has been 
accepted by the taxation authorities in western Germany for the Rhine brown 
coal area. This method takes into account the relocation planning costs 
infrastructural projects, projected development costs, cemetery relocation, 
demolition and landmark preservation. The provision is built up in equal 
annual amounts, commencing in the two years before the relocation takes place 
and ending in the middle of the relocation year. 

For the almost completed town relocations in Schwerzau and Breunsdorf 
provisions have been raised for liabilities that will become payable from 
1997 through 2000 (namely for landmark protection and for demolition costs). 

Composition (in DM): 

DEC. 31, 1996    DEC. 31, 1995   DEC. 31, 1994 
--------------- ---------------  --------------- 

Schwerzau ....       1,407           1,892            2,350 
Grossgrimma  ..     35,248          38,361           37,439 
Breunsdorf  ..       2,400           1,785            9,500 
Heuersdorf  ..      23,568          19,619           15,745 
--------------- ---------------  --------------- 
62,623          61,657           65,034 
=============== ===============  =============== 

NOTE P OTHER ACCRUALS 

Accrued liabilities are as follows (in DM): 

DEC. 31, 1996    DEC. 31, 1995   DEC. 31, 1994 
--------------- ---------------  --------------- 

1) Severance payments ......................      20,875          18,400           19,600 
--------------- ---------------  --------------- 
2) Personnel expenses 
-Employment anniversaries ...............       2,712           3,143            2,114 
-Vacation ...............................         377             548              738 
-Equalization amount in terms of the Act 
on Handicapped Persons..................         217             266              343 
--------------- ---------------  --------------- 
3,306           3,957            3,195 
--------------- ---------------  --------------- 
3) Remaining accruals ......................      14,967          23,240           20,054 
=============== ===============  =============== 
39,148          45,597           42,849 
=============== ===============  =============== 

1) SEVERANCE PAYMENTS 

The calculation of the provision was based on an average wage rate and an 
average employment service period of 25 years. The employees are entitled to 
one time severance payment if the company initiates termination or in the 
case of retrenchments. The severance payments are limited to DM 36 per 
person. 

For the period from January 1, 1996 to January 1, 2001 the planned 
personnel reductions according to the latest estimates will come up to 671 
employees. The amount is reduced by employees which the Treuhandanstalt/BvS 
has assumed responsibility for. 

2) PERSONNEL EXPENSES 

MIBRAG mbH grants awards in recognition of long services in the company, 
based on the collective bargaining agreement of January 1, 1992 and the 
company agreement of October 1, 1995. The 

F-113

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE P OTHER ACCRUALS  (Continued) 

employees are entitled to financial awards, which increase in proportion to 
their employment periods. The valuations of the benefits were based on the 
actuarial valuations of January 10, 1997, January 18, 1996 and February 15, 
1995, taking into account commercial principles. Since a reduction in the 
personnel force is anticipated, the obligation has only been accrued for if 
the person has been employed by MIBRAG mbH for at least 10 years. 

The liability for vacation arises from the vacation days outstanding at 
balance sheet dates, which have been determined for each employee. 

3) REMAINING PROVISIONS 

Composition (in DM): 

DEC. 31, 1996    DEC. 31, 1995   DEC. 31, 1994 
--------------- ---------------  --------------- 

Contingencies: 
- -Consulting fees .................................         781           5,300               -- 
- -Outstanding invoices ............................       5,651           4,293            1,220 
- -Water usage fees ................................       1,710           1,564              925 
- -Briquette sales returns .........................         510           1,323              450 
- -Inventory fees ..................................         149             345              570 
- -Others ..........................................         760              18            5,144 
--------------- ---------------  --------------- 
9,561          12,843            8,309 
--------------- ---------------  --------------- 
Scrapping of fixed assets 
Breitenfeld/Profen................................       1,120           6,471            6,471 
Asbestos clean up ................................         654             856            1,483 
Auditing, consulting and year-end accounting 
fees.............................................         790             555            1,500 
Others ...........................................       2,842           2,515            2,291 
--------------- ---------------  --------------- 
5,406          10,397           11,745 
--------------- ---------------  --------------- 
14,967          23,240           20,054 
=============== ===============  =============== 

NOTE Q LONG-TERM DEBT 

Long-term debt consists of the following (in DM): 

DEC. 31, 1996    DEC. 31, 1995   DEC. 31, 1994 
--------------- ---------------  --------------- 

KfW-loans .........................     323,730          221,438         139,230 
Norddeutsche Landesbank (Nord LB)         1,577            1,595           2,229 
--------------- ---------------  --------------- 
325,307          223,033         141,459 
=============== ===============  =============== 

Liabilities to KfW-loans refer to three loans from the Kreditanstalt fur 
Wiederaufbau, Frankfurt/Main: 

- The first loan was granted by contract, dated December 9, 1992, for the 
construction of a raw brown coal powered industrial power station with a 
circulating "Wirbelschicht" power source in Wahlitz of DM 139,230. The 
interest rate has been fixed at 7% p.a. until December 9, 2002, 5% 
thereof is borne by the Federal Department of Environmental Affairs, for 
the first 5 years. The redemption period is 20 years. The repayments in 
40 equal amounts commence from June 30, 1998. 

F-114

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE Q LONG-TERM DEBT  (Continued) 

- On April 3, 1995 MIBRAG mbH as well as a subsidiary closed loan 
agreements with Kreditanstalt fur Wiederaufbau (KfW). 

- MIBRAG entered into the loan agreement to partially finance the limited 
partner capital contribution of the new investors in one subsidiary. The 
determination of the final loan amount (DM 103,000) was documented by 
the amendments, dated December 21, 1995 and January 15, 1996. The 
redemption period is 13 years. In 1996 the loan was fully called up by 
MIBRAG mbH, DM 8,500 were redeemed in December 1996, so that the balance 
as of December 31,1996 amounted to DM 94,500. The interest rates after 
the first redemption of DM 8,500 are as follows: 

AMOUNT    INTEREST RATE    FIXED UNTIL 
DM            %             YEAR 
- --------  --------------- ------------- 

75,424         6.67           2005 
10,838         6.82           2005 
3,335         6.76           2005 
4,903         6.26           2005 
- --------  --------------- ------------- 
94,500 
======== 

The interest rate after 2005 will be adjusted to the market rate at that 
time. 

- - The second loan contract closed on April 3, 1995 between KfW and a 
subsidiary was granted for partially financing of the modernization and 
reshaping of both industrial power plants in Deuben and Mumsdorf, 
especially for the construction of the flue gas desulferization plants. DM 
70,000 have been called up as of January 12, 1996, additional DM 20,000 as 
of December 30, 1996. The total loan amount is DM 134,000. The redemption 
period is 13 years with the following interest rates: 

AMOUNT           INTEREST RATE              FIXED UNTIL 
DM                   %                       DATE 
- ----------  ---------------------------- --------------------- 

70,000                6.8                January 12, 2006 
20,000     3-month or 6-month FIBOR      December 30, 2010 
- ----------  ---------------------------- --------------------- 
90,000 
========== 

The interest rate after January 12, 2006 will be adjusted to the market 
rate at that time. 

Interest paid for the three loans in 1996, 1995, and 1994 was DM 14.1 
million, DM 2.8 million, and DM 1.4 million, respectively. 

The loans from the Norddeutsche LB granted for construction purposes in 
Draschwitz relate to the relocation of Schwerzau. A 1% annual redemption has 
been agreed on. The loan is interest free until 2010. After that the interest 
rate amounts to 8% p.a. 

F-115

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE R MATURITY PERIODS OF LIABILITIES 

The maturity periods of liabilities are as follows (in thousands DM): 

LIABILITIES                 PAYABLES 
TO         TRADE          TO          OTHER     DOWNPAYMENTS 
BANKS *      PAYABLES  PARTICIPATIONS   PAYABLES     RECEIVED       TOTAL 
------------- ----------  -------------- ----------  -------------- --------- 

Balance as of Dec. 31, 
1994.......................    141,459       61,029        1,871        59,865          --        264,224 
thereof: maturity period  . 
--up to 1 year  ..      2,229       60,928        1,871        59,557          --        124,585 
--1-5 years  .....         --          101           --           160          --            261 
--more than 5 
years .....................    139,230           --           --           148          --        139,378 
Balance as of Dec. 31, 
1995.......................    223,033       93,464        3,421        65,006          --        384,924 
thereof: maturity period 
--up to 1 year  ..      8,500       93,212        3,421        64,866          --        169,999 
--1-5 years  .....         --          252           --            --          --            252 
--more than 5 
years .....................    214,533           --           --           140          --        214,673 
Balance as of Dec. 31, 
1996.......................    325,307       75,737        8,615        68,467         140        478,266 
thereof: maturity period  . 
--up to 1 year  ..     14,118       73,628        8,615        58,152         140        154,653 
--1-5 years  .....     82,910        2,109           --         2,420          --         87,439 
--more than 5 
years .....................    228,279           --           --         7,895          --        236,174 

- ------------ 
*      Liabilities to banks are fully secured by mortgages 

NOTE S COMMITMENTS AND CONTINGENCIES 

(IN DM)                                      AT DECEMBER 31, 
------------------------------ 
1996      1995      1994 
--------- ---------  -------- 

Guarantees for indebtedness of 
others...............................   86,430    108,405    35,350 
Other contractual obligations  .......  163,200    127,000   239,000 

The other contractual obligations refer to long term investment projects 
in the mines Profen and Schleenhain and in the three power stations. 

MIBRAG leases office equipment and railway-carriages, expiring at various 
dates. Rental and lease expenses amounted to DM 2,390, DM 2,853 and DM 2,355 
in the years ended December 31, 1994, 1995 and 1996, respectively. The future 
minimum lease payments under operating leases are as follows: 1997: DM 2,361; 
1998: DM 232; 1999: DM 97; and no obligations thereafter. Future rental 
expenses for railway-carriages are bound for one year with an option to 
extend in the following year. These expenses approximately amount to DM 2 
million p.a 

NOTE T RELATED PARTY TRANSACTIONS 

Between MIBRAG and two subsidiaries of the common parent companies NRG 
Energy Inc., Morrison-Knudsen Corp. and PowerGen plc. agreements for 
consulting and management services were closed in respect of the mining 
operations and the refinement facilities. 

These contracts determine certain consultancy services to be provided by 
the two subsidiaries Morrison-Knudsen Deutschland GmbH (MKD) and Saale 
Energie Service GmbH (SES) to MIBRAG or its subsidiaries. 

F-116

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 
(IN THOUSANDS OF DM) 

NOTE T RELATED PARTY TRANSACTIONS  (Continued) 

MIBRAG is obliged to determine and pay the cost-related renumeration for 
these services. 

Payments for consultancy services in 1994 were restricted to an amount of 
DM 10 million, set by the THA in the purchase agreement. In 1995 and 1996 the 
payments were unrestricted. 

Expenditures for MIBRAG were as follows (in thousands DM): 

1996      1995     1994 
-------- --------  ------- 

MKD ...  18,396    17,655    7,500 
SES ...   7,894     8,599    2,500 
-------- --------  ------- 
26,290    26,254   10,000 
======== ========  ======= 

NOTE U SETTLEMENT AGREEMENT 

MIBRAG B.V., MIBRAG mbH and BvS, as the former shareholder of the MIBRAG 
AG, entered into a settlement agreement on January 23, 1997, which has been 
negotiated since January 1, 1994. As a result of the settlement agreement BvS 
paid to MIBRAG mbH DM 15.941 million for the undercapitalization of one of 
the power plants, which was included in the split-up to MIBRAG on December 
31, 1993. The undercapitalization claim was raised by MIBRAG B.V. as the 
purchaser of the shares in MIBRAG mbH, because a loan for power plant 
financing was called up early in 1993, not in accordance with the loan 
contract. 

Under German GAAP the settlement of the claim by MIBRAG B.V. to BvS was 
accounted for as capital contribution from MIBRAG B.V. to MIBRAG mbH, which 
resulted in an increase in the additional paid-in capital by DM 15.941 
million. 

F-117

[LETTERHEAD OF DELOITTE & TOUCHE] 

REPORT OF DELOITTE & TOUCHE GMBH, INDEPENDENT AUDITORS 

To the Shareholders 
Saale Energie GmbH 
Schkopau, Germany 

We have audited the accompanying balance sheet of Saale Energie GmbH (SEG) 
as of December 31, 1996, and the related statements of operations and of cash 
flows for the year then ended. These financial statements are the 
responsibility of SEG's management. Our responsibility is to express an 
opinion on these financial statements based on our audit. 

We conducted our audit in accordance with generally accepted auditing 
standards in Germany and the United States of America. Those standards 
require that we plan and perform the audit to obtain reasonable assurance 
about whether the financial statements are free of material misstatement. An 
audit includes examining, on a test basis, evidence supporting the amounts 
and disclosures in the financial statements. An audit also includes assessing 
the accounting principles used and significant estimates made by management, 
as well as evaluating the overall financial statement presentation. We 
believe that our audit provides a reasonable basis for our opinion. 

In our opinion, the financial statements referred to above present fairly, 
in all material respects, the financial position of Saale Energie GmbH as of 
December 31, 1996, and the results of its operations for the year then ended, 
in conformity with accounting principles generally accepted in Germany. 

Generally accepted accounting principles in Germany vary in certain 
significant respects from generally accepted accounting principles in the 
United States of America. Application of generally accepted accounting 
principles in the United States of America would have affected the results of 
operations for the year ended December 31, 1996 and shareholders' equity as 
of December 31, 1996 to the extent summarized in Note C to the financial 
statements. 

Halle, Germany 
October 31, 1997 

DELOITTE & TOUCHE GmbH 
Wirtschaftsprufungsgesellschaft 

(Roder) 

F-118

SAALE ENERGIE GMBH 

STATEMENT OF OPERATIONS 
(IN THOUSANDS DM) 

YEAR ENDED 
DECEMBER 31, 
1996 
-------------- 

Sales revenue .........................................     161,309 
Other operating income.................................           3 
-------------- 
Total revenue .........................................     161,312 
Cost of materials and service purchased ...............     170,897 
Depreciation of intangible and tangible fixed assets  .           1 
Other operating expenses ..............................       1,060 
-------------- 
Total operating expenses ..............................     171,958 
Results from operations................................     (10,646 ) 
-------------- 
Income from companies in which participations are 
held..................................................       6,581 
Interest expense (net) ................................      (3,845) 
-------------- 
Results from ordinary activities ......................      (7,910) 
Income tax ............................................         (40) 
-------------- 
Net loss ..............................................      (7,870) 
============== 

See accompanying Notes to Financial Statements

F-119

SAALE ENERGIE GMBH

BALANCE SHEET 
(IN THOUSANDS DM) 

AT DECEMBER 31, 
NOTE         1996 
--------- --------------- 

ASSETS 
Contributions outstanding...........                    713 
NON-CURRENT ASSETS 
FIXED ASSETS 
Tangible assets 
Factory and office equipment ...... B                    2 
FINANCIAL ASSETS 
1.Subsidiaries...................... B, E                49 
2.Participations ................... B, E           200,677 
3.Loans granted to participations .. B, F            82,200 
--------------- 
TOTAL NON-CURRENT ASSETS ...........                282,928 
CURRENT ASSETS 
INVENTORIES 
Raw materials and supplies......... B                  325 
RECEIVABLES AND OTHER ASSETS 
1.Trade receivables ................ B, D, G         24,764 
2.Other assets...................... B, G            14,549 
CHEQUES, CASH-IN-HAND, BANK 
BALANCES .......................... B               28,748 
--------------- 
TOTAL CURRENT ASSETS ...............                 68,386 
--------------- 
TOTAL ASSETS ........................                352,027 
=============== 
SHAREHOLDERS' EQUITY AND LIABILITIES 
Shareholders' Equity................ H 
Subscribed capital..................                  1,000 
Capital reserve.....................                 48,041 
Net loss for the year...............                 (7,870) 
Profit/loss carried foreward .......                 (3,513) 
--------------- 
TOTAL SHAREHOLDERS' EQUITY .........                 37,658 
PROVISIONS 
1.Taxation accruals ................                     -- 
PROVISIONS 
Other accruals..................... B                   40 
LIABILITIES 
1.Trade payables.................... B, I             8,836 
2.Payables to shareholders.......... B, I            92,084 
3.Payables to subsidiaries.......... B, I             4,375 
4.Payables to participations ....... B, I           174,885 
5.Other payables.................... B, I            34,149 
--------------- 
TOTAL SHAREHOLDERS' EQUITY AND 
LIABILITIES ........................                352,027 
=============== 

See accompanying Notes to Financial Statements

F-120

SAALE ENERGIE GMBH 

STATEMENT OF CASH FLOWS 
(IN THOUSANDS DM) 

YEAR ENDED 
DECEMBER 31, 1996 
----------------- 

Cash flows from operating activities: 
Net loss for the year.......................................       (7,870) 
Adjustments to reconcile net loss to net cash provided by 
operating activities: 
Depreciation on tangible assets and current asset 
write-offs................................................            4 
Change in assets and liabilities: 
Inventories...............................................          384 
Short-term trade receivables .............................      (24,647) 
Other assets..............................................      (14,415) 
Decrease in accruals......................................       (1,535) 
Short-term trade payables.................................        8,218 
Interest payable..........................................        3,583 
Other liabilities.........................................      114,597 
----------------- 
CASH PROVIDED BY OPERATING ACTIVITIES ......................       78,319 
----------------- 
Cash flows from investing activities: 
Increase in participations..................................      (82,658) 
----------------- 
CASH USED FOR INVESTING ACTIVITIES .........................      (82,658) 
----------------- 
Cash flows from financing activities: 
Increase in capital reserve.................................        1,600 
Increase in other payables..................................       25,468 
Increase in payables to shareholders........................        4,132 
----------------- 
CASH PROVIDED BY FINANCING ACTIVITIES.......................       31,200 
----------------- 
NET INCREASE IN CASH .......................................       26,861 
CASH AT BEGINNING OF YEAR ..................................        1,887 
----------------- 
CASH AT END OF YEAR ........................................       28,748 
================= 

See accompanying Notes to Consolidated Financial Statements

F-121

SAALE ENERGIE GMBH 

NOTES TO FINANCIAL STATEMENTS 
(IN THOUSANDS DM) 

NOTE A ORIGINATION AND NATURE OF BUSINESS 

ORIGINATION According to the Articles of Association, Saale Energie Gmbh 
("SEG") was established on November 11, 1993. The company's shares are held 
at 50% by NRGenerating International B.V., Amsterdam and at 50% by PowerGen 
Holdings B.V., Rotterdam. 

NATURE OF BUSINESS: The operations of SEG include all activities relating 
to the direct and indirect acquisition, ownership, administration and 
operation of power generating facilities located in Schkopau, including the 
purchase of fuel and the sale of energy produced in the facilities. The 
business of the company further constitutes all activities relating to the 
supply of management, maintenance and consulting services in respect of power 
stations and related plants. The company is authorized to take all other 
actions and engage in all other businesses which appear to be necessary and 
useful in order to carry into effect the purpose of the company. In 
particular it is authorized to hold, acquire and create subsidiaries, 
branches, companies and interest in other enterprises. 

NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

The financial statements of SEG have been prepared in accordance with the 
German Commercial Code, which represents accounting principles generally 
accepted in Germany ("German GAAP"). German GAAP vary in certain significant 
respects from accounting principles generally accepted in the United States 
of America ("US GAAP"). Application of US GAAP would have affected the result 
of operations for the year ended December 31, 1996 to the extent summarized 
in Note C to the financial statements. All amounts herein are shown in 
thousands of Deutsche Mark ("DM") unless otherwise stated. 

SEG was not required to prepare consolidated financial statements for 
1996. SEG owns a 98% share of its subsidiary Saale Energie Service GmbH. The 
company is included at cost in SEG's financial statements. Furthermore, SEG 
holds a 41.1% share in the Kraftwerk Schkopau GbR and a 44.4% share in the 
Kraftwerk Schkopau Betriebsgesellschaft mbH. These companies are included at 
cost and referred to as participations in these financial statements. 

USE OF ESTIMATES: The preparation of financial statement in conformity 
with generally accepted accounting principles necessarily requires management 
to make estimates and assumptions that affect the reported amounts of assets 
and liabilities and disclosure of contingent assets and liabilities at the 
balance sheet date and the reported amounts of revenues and expenses during 
the reported period. Actual results could differ from those estimates. 

TOTAL COST METHOD: The income statement has been presented according to 
the total cost (or type of expenditure) format as commonly used in Germany. 
According to this format, production and all other expenses incurred during 
the period are classified by type of expenses. 

REVENUE RECOGNITION: Revenue is recognized when title passes or services 
are rendered, net of discounts, customer bonuses and rebates granted. 

FIXED ASSETS: Fixed tangible assets are recorded on the basis of 
acquisition or manufacturing cost and subsequently reduced by scheduled 
depreciation charges over the assets' useful lives. 

FINANCIAL ASSETS: Inventories are accounted for at historical purchase 
cost. 

RECEIVABLES AND OTHER ASSETS: All receivables are recorded at nominal 
value. No provision for doubtful accounts has been recorded. 

BANK BALANCES: Bank balances include current accounts. 

ACCRUALS AND LIABILITIES: Accruals have been recorded for known 
obligations at the balance sheet date at the amounts of the estimated 
liability. Liabilities are valued at the amounts outstanding. 

F-122

SAALE ENERGIE GMBH 

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY 
ACCEPTED ACCOUNTING PRINCIPLES 

SEG's financial statements comply with German GAAP, which differs in 
certain significant respects from US GAAP. The differences that would have a 
significant effect on net income and shareholders' equity are set out below. 

1. CONSOLIDATION 

SEG was not required to prepare consolidated financial statements for 
1996. If US GAAP had been applied, SEG would be required to prepare 
consolidated financial statements including the financial statements of Saale 
Energie Service GmbH (SES), its 98% owned subsidiary. 

US GAAP financial statements would therefore include the 1996 operating 
results of SES, net of minority interest, and would exclude the dividend 
income received by SEG. 

2. ACCOUNTING FOR LONG TERM SERVICE AND SUPPLY AGREEMENTS 

For German GAAP purposes the amounts billed to SEG resulting from the use 
and benefit agreement between SEG and Kraftwek Schkopau GbR were recorded as 
expenses of the period. Parallel, the amounts attributable to the long-term 
electricity supply contract were recorded as revenue in the period they were 
received. See Note D. 

In accordance with US GAAP, these agreements would be considered as 
leasing agreements. The use and benefit agreement would be considered as a 
capital lease and the long-term sales agreement as it relates to capacity 
availability is treated as a direct financing lease arrangement. The revenues 
and expenses recorded based upon current billings would be replaced by the 
amortization of unearned direct finance lease income and interest expense on 
lease obligations in accordance with US GAAP. 

The net present value of the minimum lease payments to be made by VEAG 
under the terms of the agreement amounts to DM875.272, whereas the net 
present value of the lease obligation liable to GbR over the minimum period 
of 25 years is DM728.240 at December 31, 1996. 

3. OUTSTANDING CONTRIBUTIONS BY SHAREHOLDERS' 

As of December 31, 1996 contributions from shareholders were outstanding 
at DM713, which were not deducted from German shareholders' equity. US GAAP 
shareholders' equity has to be reduced by the outstanding contributions. 

4. DEFERRED TAXES 

Under German GAAP, SEG did not accrue for income tax, because of net 
operating losses in 1996. Deferred tax assets and liabilities have not been 
recorded, because under German GAAP they are only recognized to the extent 
that deferred tax liabilities exceed deferred tax assets. Deferred tax assets 
are not recorded for operating loss carryforwards. 

For US GAAP accounting purposes, mainly due to the application of lease 
accounting, the financial values differ significantly from the tax basis. 

F-123

SAALE ENERGIE GMBH 

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 

Significant components of SEG's deferred tax liabilities and assets at 
December 31, 1996, that result from carryforwards and temporary differences 
between the US GAAP financial statement basis and tax basis of assets and 
liabilities are summarized as follows: 

1996 
------ 

Deferred tax liability 
lease accounting ................................  17.6 
investment in GbR ...............................  50.2 
------ 
Total deferred liability .......................  67.8 
------ 
Deferred tax assets operating loss carryforwards    54.7 
------ 
Net deferred tax liability .......................  13.1 
====== 

Because all differences in the opening balances between German and US GAAP 
are taxable for German tax purposes these differences, which result in a net 
taxable difference, would be considered to be temporary in accordance with US 
GAAP. 

RECONCILIATION TO US GAAP 

The following is a summary of the significant adjustments to net income 
for the year 1996 which will be required if US GAAP had been applied instead 
of German GAAP. 

YEAR ENDED 
DECEMBER 31, 
NOTE        1996 
------ -------------- 

Net loss as reported in the income statement under 
German GAAP ......................................             (7,870) 
Adjustments required to conform with US GAAP: 
Consolidation of SES .............................   (1)          (40) 
Lease adjustment .................................   (2)       31,536 
Deferred taxes ...................................   (4)      (14,101) 
-------------- 
Net income in accordance with US GAAP .............              9,525 
============== 

The following is a summary of the significant adjustments to shareholders' 
equity as of December 31, 1996 which will be required if US GAAP had been 
applied instead of German GAAP. 

YEAR ENDED 
DECEMBER 31, 
NOTE        1996 
------ -------------- 

Shareholders' equity as reported in the balance sheet 
under German GAAP ........................................             37,658 
Adjustments required to conform with US GAAP: 
Consolidation of SES .....................................   (1)        3,277 
Lease adjustment .........................................   (2)       31,536 
Outstanding contributions ................................   (3)         (713) 
Deferred taxes ...........................................   (4)      (13,087) 
-------------- 
Shareholders' equity in accordance with US GAAP  ..........             58,671 
============== 

F-124

SAALE ENERGIE GMBH 

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 

NOTE D LONG-TERM SALES AND SERVICE AGREEMENTS 

According to a long-term electricity supply contract between SEG and 
Vereinigte Energie AG (VEAG), SEG supplies its total available electricity 
capacity to VEAG. The contract was closed for a 25 years period starting at 
the date of commissioning of the power plant. In terms of the contract VEAG 
is obliged to pay on a monthly basis a price that covers (1) the availability 
of electrical supply capacity and (2) the operating cost incurred to produce 
the electricity. Under the terms of this agreement VEAG has agreed to make 
payments of DM2,142.7 million over the period of the agreement (25 years). In 
1996 SEG's sales revenues of DM161,309 solely relate to sales made to VEAG. 

SEG has a use and benefit agreement with Kraftwerk Schkopau GbR (GbR), 
under which GbR grants SEG a notional share of 400 MW (power share) in the 
total net capacity of the power station for its sole use. The SEG power share 
encompasses all equipment and installations of the power station. In return 
SEG has obliged to pay all costs of GbR related to the SEG-power share as 
stipulated in the agreement plus profit mark-up plus value added tax. In 1996 
the SEG has recorded expenses of DM95,797 related to this agreement. 

In order to manage and operate its share in the power plan SEG closed a 
contract with Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB) on December 
10, 1993. In terms of this contract, SEG commissions KSB with the conversion 
of coal using its power share of 400 MW of the Schkopau power plant, and KSB 
accepts responsibility for all costs of operating and maintaining the power 
plant. In terms of the contract SEG is obliged to pay for KSB's services. 

NOTE E INVESTMENTS IN SUBSIDIARIES AND PARTICIPATIONS 

SEG holds a 98% share in Saale Energie Service GmbH (SES). The investment 
is accounted for at its historical acquisition cost of DM49. The business of 
the company comprises of all activities relating to the supply of management, 
maintenance and consulting services in respect of power stations and related 
plants, especially for the lignite power stations of the Mitteldeutsche 
Braunkohlengesellschaft mbH (MIBRAG) and its subsidiaries. 

A 41.1% participation in the Kraftwerk Schkopau GbR (GbR), which is the 
owner of the Schkopau power plant, is held by SEG, and is recorded at cost. 

SEG's 44.4% share in the Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB) 
has been recorded at the historical acquisition cost of DM22. SEG has 
assigned its share in KSB to C & L Deutschland Revision AG in security for 
VEBA Vereinigte Kraftwerke Ruhr AG (VKR). 

NOTE F LOAN TO KRAFTWERK SCHKOPAU GBR 

In terms of the loan agreement between the participants of the GbR, SEG 
has granted a loan of DM98 million to GbR, of which DM16,440 was drawn during 
1996. The balance outstanding at December 31, 1996 was DM82,200. The loan is 
unsecured and bears interest at a fixed rate of 7% p.a. The loan has been 
granted for an indefinite period and the repayment terms are not fixed. 

NOTE G RECEIVABLES AND OTHER ASSETS 

The trade receivables of DM25, as reported on December 31, 1996, relate 
solely to power supplies to VEAG. The other assets are mainly receivables 
from tax authorities. 

NOTE H CHANGE IN SHAREHOLDERS' EQUITY 

The Shareholders' equity of SEG changed in 1996 solely by the net loss of 
1996 (DM7,870) from DM45,528 to DM37,658. 

F-125

SAALE ENERGIE GMBH 

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 

NOTE I LIABILITIES 

The maturity periods of the liabilities are as follows (in DM): 

MATURITY PERIOD  MATURITY PERIOD  TOTAL BALANCE 
OF LESS THAN       BETWEEN          AS OF 
1 YEAR       1 AND 5 YEARS   DEC. 31, 1996 
--------------- ---------------  --------------- 

1)Trade payables ..............................       8,836               --           8,836 
2)Payables to shareholding companies  .........       6,387           85,697          92,084 
3)Payables to subsidiaries ....................          --            4,375           4,375 
4)Payables to companies in which participants 
are held .....................................     174,884               --         174,884 
5)Other liabilities ...........................          --           34,150          34,150 
--------------- ---------------  --------------- 
190,107          124,222         314,329 
=============== ===============  =============== 

2) PowerGen plc., London and NRGenerating B.V., Amsterdam granted a loan 
to SEG for the partial funding of its financial requirements at a total 
amount of DM148,054. The loans are not collateralized and bear interest at a 
fixed rate of 7.5% p.a. The loans are granted for an indefinite period and no 
fixed repayment terms have been set. 

The loans from shareholding companies comprise as follows (in DM:) 

DEC. 31, 1996 
--------------- 

NRGENERATING B.V. 
Loan ..................      42,860 
Interest ..............       3,169 
Miscellaneous credits            59 
--------------- 
46,088 
--------------- 
POWERGEN PLC. 
Loan ..................      42,819 
Interest ..............       3,167 
Miscellaneous credits            10 
--------------- 
45,996 
=============== 
92,084 
=============== 

3) In terms of the loan agreements dated February 7, 1996 and September 
25, 1996 SES granted to SEG loans amounting DM6,500 and DM1,000 respectively. 
DM3,368 was repaid during 1996. The unsecured loans bear interest at a 
variable rate equal to the German Central Bank's discount rate plus 2% p.a. 
Included in the balance as of December 31, 1996 are interest payable of 
DM243. The loans can be called up at any time. 

4) The liability as of December 31, 1996 comprises as follows (in DM): 

a)Kraftwerk Schkopau GbR (GbR) ....................... 168,912 
b)Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB)  .   5,973 
--------- 
174,885 
========= 

a) The payables to GbR comprise of two components. DM110,109 refer to the 
fees due for 1996 in terms of the use and benefit agreement dated December 
10, 1993 and represent SEG's share in the power plant's expenses. DM58,803 
result from SEG's obligation to reimburse its share 

F-126

SAALE ENERGIE GMBH 

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 

in the shortfall achieved in the 1995 financial statement of the GbR as 
well as the shortfall achieved in 1996 up to the commissioning date of the 
power plant (March 31). 

b) The liability mainly arises from the regulations of the coal 
conversion contract, closed on December 10, 1993 between SEG and KSB. In 
terms of this contract SEG commissions KSB with the conversion of coal 
using its power share of 400 MW of the Schkopau power plant, and KSB 
accepts responsibility for all costs of operating and maintaining the 
power plant. In terms of the contract SEG is obliged to pay for KSB's 
services. 

5) VEBA Vereinigte Kraftwerke Ruhr AG (VKR), the other participant of the 
GbR, granted a loan up to DM50 million to SEG for purposes of funding the 
interest due during the construction period of the power plant. DM8,682 and 
DM25,468 has been drawn by SEG during 1995 and 1996 respectively. A variable 
interest rate of 3 month LIBOR plus 1.5% p.a. was agreed upon. 

NOTE J OTHER FINANCIAL COMMITMENTS 

In order to provide the GbR with own funds, the two participants of the 
GbR closed on December 10, 1993 a financing agreement. In terms of this 
agreement SEG is obliged to contribute DM82 million to the GbR, which is 
already fulfilled. SEG is also required to grant a loan of DM98 million in 
total to the GbR, of which DM82 million have been called up as of December 
31, 1996. The remaining DM16 million can be called up any time. 

For financial commitments relating to the leased assets and lease 
commitments see note C. 

NOTE K RELATED PARTY TRANSACTIONS 

SEG has a long-term coal supply agreement with MIBRAG, a company in which 
SEG's parent companies each have one-third ownership. Under the terms of this 
agreement MIBRAG delivers raw brown coal to the power station in Schkopau 
until 2010 at market prices paid by SEG. The annual volume of coal to be 
delivered by MIBRAG was not fixed in the agreement. 

Additionally, SES, a subsidiary of SEG, and MIBRAG entered into a 
consulting and management agreement. This agreement determines certain 
consultancy services provided by SES. MIBRAG is obliged to pay the 
cost-related remuneration for these services. In 1996 MIBRAG paid DM7,894 to 
SES. 

F-127

SAALE ENERGIE GMBH 

STATEMENT OF OPERATIONS (UNAUDITED) 
(IN THOUSANDS DM) 

YEAR ENDED      YEAR ENDED 
DECEMBER 31,    DECEMBER 31, 
1995            1994 
-------------- -------------- 

Sales revenue..........................................        101             -- 
Other operating income................................. 
-------------- -------------- 
Total revenue..........................................        101             -- 
Cost of materials......................................      1,223             -- 
Depreciation of intangible and tangible fixed assets ..         --             -- 
Other operating expenses...............................        241            311 
-------------- -------------- 
Total operating expenses...............................      1,464            311 
Results from operations................................     (1,363)          (311) 
-------------- -------------- 
Income from companies in which participations are 
held..................................................         --             -- 
Interest expense (net).................................     (2,375)           578 
-------------- -------------- 
Results from ordinary activities.......................     (3,738)           267 
Income tax.............................................         --             40 
-------------- -------------- 
Net loss...............................................     (3,738)           227 
============== ============== 

See accompanying Notes to Financial Statements

F-128

SAALE ENERGIE GMBH 

BALANCE SHEET (UNAUDITED) 
(IN THOUSANDS DM) 

AT DECEMBER 31, AT DECEMBER 31, 
NOTE        1995             1994 
------- ---------------  --------------- 

ASSETS 
Contributions outstanding................                   713             713 
NON-CURRENT ASSETS 
Fixed assets 
Tangible assets 
Factory and office equipment............  B                  3               4 
Financial assets 
1. Subsidiaries..........................  B,D               49              49 
2. Participations........................  B,D          136,867          44,682 
3. Loans granted to participations ......  B,E           65,760          24,660 
---------------  --------------- 
TOTAL NON-CURRENT ASSETS.................               202,679          69,395 
CURRENT ASSETS 
Inventories 
Raw materials and supplies..............  B                712               0 
Receivables and other assets 
1. Trade receivables.....................  B,C,F            117               0 
2. Other assets..........................  B,F              134              28 
Cheques, cash-in-hand, bank balances ....  B              1,887           1,246 
---------------  --------------- 
TOTAL CURRENT ASSETS.....................                 2,850           1,274 
---------------  --------------- 
TOTAL ASSETS..............................               206,242          71,382 
===============  =============== 
SHAREHOLDERS' EQUITY AND LIABILITIES 
SHAREHOLDERS' EQUITY 
Subscribed capital.......................                 1,000           1,000 
Capital reserve..........................                48,040          31,125 
Net profit/loss for the year.............                (3,738)             (2) 
Profit/Loss carried foreward.............                   225             227 
---------------  --------------- 
TOTAL SHAREHOLDERS' EQUITY...............                45,527          32,350 
Provisions 
Tax accruals............................                    40              40 
Other accruals..........................  B              1,535             151 
Liabilities 
1. Trade payables........................  B,G              618              38 
2. Payables to shareholders..............  B,G           87,125          28,348 
3. Payables to participations............  B,G           56,212               0 
4. Other payables........................  B,G           15,185          10,455 
---------------  --------------- 
TOTAL SHAREHOLDERS' EQUITY AND 
LIABILITIES...............................               206,242          71,382 
===============  =============== 

See accompanying Notes to Financial Statements

F-129

SAALE ENERGIE GMBH 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 
(IN THOUSANDS DM) 

YEAR ENDED      YEAR ENDED 
DECEMBER 31,    DECEMBER 31, 
1995            1994 
-------------- -------------- 

Cash flows from operating activities: 
Net loss (1994: profit) for the year...............................      (3,738)           227 
Adjustments to reconcile net loss to net cash provided by 
operating activities: 
Depreciation on intangible and tangible assets....................           4 
Change in assets and liabilities: 
Inventories......................................................        (712)             0 
Short-term receivables and other assets..........................        (223)           (28) 
Increase in accruals.............................................       1,384            191 
Short-term payables..............................................         578             38 
Other liabilities................................................       1,048            456 
-------------- -------------- 
CASH PROVIDED BY OPERATING ACTIVITIES..............................      (1,659)           884 
-------------- -------------- 
Cash flows from investing activities: 
Increase in financial investments..................................     (77,074)       (69,346) 
-------------- -------------- 
CASH USED FOR INVESTING ACTIVITIES.................................     (77,074)       (69,346) 
-------------- -------------- 
Cash flows from financing activities: 
Additional paid-in capital.........................................      16,915         31,126 
Increase in long-term liabilities..................................      62,459         38,346 
-------------- -------------- 
CASH PROVIDED BY FINANCING ACTIVITIES..............................      79,374         69,472 
-------------- -------------- 
NET INCREASE IN CASH...............................................         641          1,010 
CASH AT BEGINNING OF YEAR..........................................       1,246            236 
-------------- -------------- 
CASH AT YEAR-END...................................................       1,887          1,246 
============== ============== 

See accompanying notes to Consolidated Financial Statements

F-130

SAALE ENERGIE GMBH 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 
(IN THOUSANDS DM) 

NOTE A ORIGINATION AND NATURE OF BUSINESS 

ORIGINATION: According to the Articles of Association, Saale Energie GmbH 
("SEG") was established on November 11, 1993. The company's shares are held 
at 50% by NRGenerating International B.V., Amsterdam and at 50% by PowerGen 
Holdings B.V., Rotterdam. 

NATURE OF BUSINESS: The operations of SEG include all activities relating 
to the direct and indirect acquisition, ownership, administration and 
operation of power generating facilities located in Schkopau, including the 
purchase of fuel and the sale of energy produced in the facilities. The 
business of the company further constitutes all activities relating to the 
supply of management, maintenance and consulting services in respect of power 
stations and related plants. The company is authorized to take all other 
actions and engage in all other businesses which appear to be necessary and 
useful in order to carry into effect the purpose of the company. In 
particular it is authorized to hold, acquire and create subsidiaries, 
branches, companies and interest in other enterprises. 

NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

The financial statements of SEG have been prepared in accordance with the 
German Commercial Code, which represents accounting principles generally 
accepted in Germany ("German GAAP"). German GAAP vary in certain significant 
respects from accounting principles generally accepted in the United States 
of America ("US GAAP"). 

SEG was not required to prepare consolidated financial statements for 1994 
and 1995. SEG owns a 98% share of its subsidiary Saale Energie Service GmbH. 
The company is included at cost in SEG's financial statements. Furthermore, 
SEG holds a 41.1% share in the Kraftwerk Schkopau GbR and a 44.4% share in 
the Kraftwerk Schkopau Betriebsgesellschaft mbH. These companies are included 
at cost and referred to as participations in these financial statements. 

USE OF ESTIMATES: The preparation of financial statement in conformity 
with generally accepted accounting principles necessarily requires management 
to make estimates and assumptions that affect the reported amounts of assets 
and liabilities and disclosure of contingent assets and liabilities at the 
balance sheet date and the reported amounts of revenues and expenses during 
the reported period. Actual results could differ from those estimates. 

TOTAL COST METHOD: The income statement has been presented according to 
the total cost (or type of expenditure) format as commonly used in Germany. 
According to this format, production and all other expenses incurred during 
the period are classified by type of expenses. 

REVENUE RECOGNITION: Revenue is recognized when title passes or services 
are rendered, net of discounts, customer bonuses and rabates granted. 

FIXED ASSETS: Fixed tangible assets are recorded on the basis of 
acquisition or manufacturing cost and subsequently reduced by scheduled 
depreciation charges over the assets' useful lives. 

FINANCIAL ASSETS: The long-term loans and investments are recorded at 
cost. 

INVENTORIES: Inventories are accounted for at historical purchase cost. 

RECEIVABLES AND OTHER ASSETS: All receivables are recorded at nominal 
value. No provision for doubtful accounts has been recorded. 

BANK BALANCES: Bank balances include current accounts. 

ACCRUALS AND LIABILITIES: Accruals have been recorded for known 
obligations at the balance sheet date at the amounts of the estimated 
liability. Liabilities are valued at the amounts outstanding. 

F-131

SAALE ENERGIE GMBH 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 

NOTE C LONG-TERM SALES AND SERVICE AGREEMENTS 

According to a long-term electricity supply contract between SEG and 
Vereinigte Energie AG (VEAG), dated December 7, 1993, SEG supplies its total 
available electricity capacity to VEAG. The contract was closed for a 25 
years period starting at the date of commissioning of the power plant. In 
terms of the contract VEAG is obliged to pay on a monthly basis a price that 
covers (1) the availability of electrical supply capacity and (2) the 
operating cost incurred to produce the electricity. SEG began to supply such 
available capacity in late 1995. 

SEG has a use and benefit agreement with Kraftwerk Schkopau GbR (GbR), 
under which GbR grants SEG a notional share of 400 MW (power share) in the 
total net capacity of the power station for its sole use. The SEG power share 
encompasses all equipment and installations of the power station. 

In order to manage and operate its share in the power plant SEG closed a 
contract with Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB) on December 
10, 1993. In terms of this contract, SEG commissions KSB with the conversion 
of coal using its power share of 400 MW of the Schkopau power plant, and KSB 
accepts responsibility for all costs of operating and maintaining the power 
plant. In terms of the contract SEG is obliged to pay for KSB's services. 

NOTE D INVESTMENTS IN SUBSIDIARIES AND PARTICIPATIONS 

SEG holds a 98% share in Saale Energie Service GmbH (SES). The investment 
is accounted for at its historical acquisition cost of DM 49. The business of 
the company comprises of all activities relating to the supply of management, 
maintenance and consulting services in respect of power stations and related 
plants, especially for the lignite power stations of the Mitteldeutsche 
Braunkohlengesellschaft mbH (MIBRAG) and its subsidiaries. 

A 41.1% participation in the Kraftwerk Schkopau GbR (GbR), which is the 
owner of the Schkopau power plant, is held by SEG, and is recorded at cost. 

SEG's 44.4% share in the Kraftwerk Schkopau Betriebsgesellschaft mbH (KSB) 
has been recorded at the historical acquisition cost of DM 22. SEG has 
assigned its share in KSB to C & L Deutschland Revision AG in security for 
VEBA Vereinigte Kraftwerke Ruhr AG (VKR). 

NOTE E LOAN TO KRAFTWERK SCHKOPAU GBR 

In terms of the loan agreement between the participants of the GbR, SEG 
has granted a loan of DM 98 million to GbR, of which DM 41,100 was drawn 
during 1995 (1994: DM 24,660). The balance outstanding at December 31, 1995 
was DM 65,760 (1994: DM 24,660). The loan is unsecured and bears interest at 
a fixed rate of 7% p.a. The loan has been granted for an indefinite period 
and the repayment terms are not fixed. 

NOTE F RECEIVABLES AND OTHER ASSETS 

The trade receivables of DM 117, as reported on December 31, 1995 (1994: 
DM 0) relate solely to power supplies to VEAG. The other assets are mainly 
receivables from tax authorities. 

F-132

SAALE ENERGIE GMBH 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 

NOTE G LIABILITIES 

The maturity periods of the liabilities are as follows (in DM): 

MATURITY PERIOD  MATURITY PERIOD  TOTAL BALANCE 
OF LESS THAN      MORE THAN         AS OF 
DECEMBER 31, 1995                           1 YEAR          1 YEAR       DEC. 31, 1995 
- -------------------------------------  --------------- ---------------  --------------- 

1) Trade payables ....................         617               --             617 
2) Payables to shareholding 
companies............................          --           87,126          87,126 
3) Payables to companies in which 
participations are held..............      27,800           28,412          56,212 
4) Other liabilities .................       6,504            8,681          15,185 
--------------- ---------------  --------------- 
34,921          124,219         159,140 
=============== ===============  =============== 

MATURITY PERIOD  MATURITY PERIOD  TOTAL BALANCE 
OF LESS THAN      MORE THAN         AS OF 
DECEMBER 31, 1994                            1 YEAR          1 YEAR       DEC. 31, 1994 
- --------------------------------------  --------------- ---------------  --------------- 

1) Trade payables .....................          38              --               38 
2) Payables to shareholding companies        28,348              --           28,348 
4) Other liabilities ..................       5,455           5,000           10,455 
--------------- ---------------  --------------- 
33,841           5,000           38,841 
=============== ===============  =============== 

2) PowerGen plc., London and NRGenerating B.V., Amsterdam granted a loan 
to SEG for the partial funding of its financial requirements at an total 
amount of DM 148,054. The loans are not collateralized and bear interest at a 
fixed rate of 7.5% p.a The loans are granted for an indefinite period and no 
fixed repayment terms have been set. 

The loans from shareholding companies comprise as follows (in DM): 

DEC. 31, 1995    DEC. 31, 1994 
--------------- --------------- 

NRGenerating B.V.        43,603          14,209 
PowerGen plc. .....      43,522          14,138 
--------------- --------------- 
87,125          28,347 
=============== =============== 

3) The liability as of December 31,1995 of DM 58,803 result from SEG's 
obligation to reimburse its share in the shortfall achieved in the 1995 
financial statement of the GbR. 

4) The balance is mainly comprised of a loan granted to SEG by VEBA 
Vereinigte Kraftwerke Ruhr AG and the outstanding portion of the purchase 
price to VKR for the shares in Kraftwerk Schkopau GbR. 

VEBA Vereinigte Kraftwerke Ruhr AG (VKR), the other participant of the 
GbR, granted a loan up to DM 50 million to SEG for purposes of funding the 
interest due during the construction period of the power plant. DM 8,682 has 
been drawn by SEG during 1995. A variable interest rate of 3 month LIBOR plus 
1.5% p.a. was agreed upon. 

The purchase price for 41.1% in the shares of GbR was in total DM 20,000. 
The outstanding balance as of December 31, 1995 was DM 5,000, as of December 
31,1994 DM 10,000. 

NOTE H OTHER FINANCIAL COMMITMENTS 

In order to provide the GbR with own funds, the two participants of the 
GbR closed on December 10, 1993 a financing agreement. In terms of this 
agreement SEG is obliged to contribute DM 82 million to the GbR, which is 
already fulfilled. SEG is also required to grant a loan of DM 98 million in 
total to the GbR, of which DM 66 million have been called up as of December 
31, 1995 (1994: DM 25 million). The remaining amount can be called up any 
time. 

F-133

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

PROFIT AND LOSS STATEMENT 

FOR THE YEAR ENDED 30 JUNE 1997 

30 JUNE 1997    30 JUNE 1996 
NOTES          $               $ 
------- ---------------  -------------- 

OPERATING REVENUE ..............................     2       459,899,793    574,009,434 
---------------  -------------- 
Operating Profit before Income Tax .............     3        52,179,438    185,233,791 
Income Tax Attributable to Operating Profit  ...     5        21,659,694     67,547,498 
---------------  -------------- 
OPERATING PROFIT AFTER INCOME TAX ..............              30,519,744    117,686,293 
---------------  -------------- 
Extraordinary Item--Profit on sale of business .     4     1,335,852,636              0 
Income Tax Attributable to Extraordinary Item ..     5       383,195,543              0 
---------------  -------------- 
PROFIT ON EXTRAORDINARY ITEM AFTER INCOME TAX  .    --       952,657,093              0 
---------------  -------------- 
OPERATING PROFIT AND EXTRAORDINARY PROFIT AFTER 
INCOME TAX ....................................             983,176,837    117,686,293 
---------------  -------------- 
Retained Earnings at Beginning of Period .......    14        50,618,229     50,618,229 
Dividends Paid or Payable.......................           1,033,795,086    117,686,293 
---------------  -------------- 
RETAINED EARNINGS AT END OF PERIOD..............    14                 0     50,618,229 
---------------  -------------- 

This Profit and Loss Statement should be read in conjunction with the Notes 
To And Forming Part of the Financial Statements 

F-134

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

BALANCE SHEET 

AS AT 30 JUNE 1997 

30 JUNE 1997    30 JUNE 1996 
NOTES         $               $ 
------- --------------  --------------- 

CURRENT ASSETS 
Cash..........................   15.1         15              657,800 
Receivables...................      6          0           73,048,889 
Inventories...................      7          0            3,559,857 
Other assets .................      8          0            1,714,627 
--------------  --------------- 
TOTAL CURRENT ASSETS                           15           78,981,173 
NON-CURRENT ASSETS 
Receivables...................      6          0            1,574,810 
Inventories...................      7          0           13,176,115 
Other assets .................      8          0            5,662,559 
Investments...................      9          0                  100 
Property, plant and 
equipment.....................     10          0        3,159,101,974 
--------------  --------------- 
TOTAL NON-CURRENT ASSETS ......                 0        3,179,515,558 
--------------  --------------- 
TOTAL ASSETS ..................                15        3,258,496,731 
--------------  --------------- 
CURRENT LIABILITIES 
Creditors and borrowings .....     11          0        2,039,618,476 
Provisions....................     12          0            9,110,358 
--------------  --------------- 
TOTAL CURRENT LIABILITIES .....                 0        2,048,728,834 
NON-CURRENT LIABILITIES  ...... 
Creditors and borrowings .....     11          0        1,057,832,534 
Provisions....................     12          0          101,317,119 
--------------  --------------- 
TOTAL NON-CURRENT LIABILITIES 
0        1,159,149,653 
--------------  --------------- 
TOTAL LIABILITIES .............                 0        3,207,878,487 
--------------  --------------- 
NET ASSETS ....................                15           50,618,244 
--------------  --------------- 
EQUITY 
Share capital.................     13         15                   15 
Retained earnings ............     14          0           50,818,229 
--------------  --------------- 
TOTAL EQUITY ..................                15           50,618,244 
--------------  --------------- 

This Balance Sheet should be read in conjunction with the Notes To
And Forming Part of the Financial Statements

F-135

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

STATEMENT OF CASH FLOWS 

FOR THE YEAR ENDED 30 JUNE 1997 

30 JUNE 1997     30 JUNE 1996 
NOTES          $               $ 
------- ---------------  --------------- 

CASH FLOWS FROM OPERATING ACTIVITIES 
Receipts from customers..........................             447,989,416     661,857,250 
Payments to suppliers and employees..............            (132,408,127)   (252,601,057) 
Income tax paid..................................            (484,975,104)              0 
---------------  --------------- 
NET CASH FLOW (USED IN) PROVIDED BY OPERATING 
ACTIVITIES ......................................   15.2     (179,393,815)    409,256,193 
---------------  --------------- 
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES 
Proceeds from sale of the business...............   15.3    4,484,928,944               0 
Cash balance transferred on sale of business ....             (22,412,523)              0 
Payments to acquire property, plant and 
equipment.......................................             (14,813,737)     (8,356,243) 
Proceeds from sale of property, plant and 
equipment ......................................                       0          34,091 
Proceeds from sale of investments................                       0         223,296 
Dividends received...............................                       0         127,400 
---------------  --------------- 
NET CASH FLOW (USED IN) FROM INVESTING 
ACTIVITIES.......................................           4,447,702,684      (7,971,456) 
---------------  --------------- 
CASH FLOWS FROM FINANCING ACTIVITIES 
Interest and other items of a similar nature 
received........................................               3,063,264       1,907,373 
Interest and other costs of finance paid ........            (109,537,439)   (115,063,116) 
Hedging receipts associated with borrowings .....              12,007,845      20,764,959 
Hedging payments associated with borrowings .....             (19,553,416)    (30,861,150) 
Buyback of swaps.................................             (79,619,663)     (7,906,790) 
Proceeds from borrowings.........................           1,222,785,627      86,056,400 
Repayment of borrowings..........................          (1,129,666,657)    (36,221,000) 
Repayment of shareholder loan....................          (1,917,491,710)              0 
Buyback of borrowings............................          (1,157,854,106)   (264,281,672) 
Dividends paid...................................          (1,095,481,066)    (56,000,000) 
---------------  --------------- 
NET CASH FLOW USED IN FINANCING ACTIVITIES .......          (4,268,346,521)   (401,604,996) 
---------------  --------------- 
NET INCREASE/(DECREASE) IN CASH HELD..............                 (37,652)       (320,259) 
---------------  --------------- 
CASH AT BEGINNING OF PERIOD.......................                  37,667         357,926 
---------------  --------------- 
CASH AT END OF PERIOD.............................   15.1               15          37,667 
---------------  --------------- 

This Statement of Cashflows should be read in conjunction with the Notes To
And Forming Part of the Financial Statements

F-136

QUIET LIFE LIMITED 
ACN 065 381 240 
(FORMERLY LOY YANG POWER LTD, NAME CHANGED 13 MAY 1997) 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS 

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

1.1 BASIS OF ACCOUNTING 

The financial report is a general purpose financial report which has been 
prepared in accordance with the requirements of the Corporations Law and 
applicable Accounting Standards. Other mandatory professional reporting 
requirements (Urgent Issues Group Censensus Views) have also been complied 
with. 

The report is prepared in accordance with the historical cost convention, 
except for certain assets which, as noted, are at valuation. The accounting 
policies are consistent with those of the previous year. 

1.2 SIGNIFICANT CHANGE IN AFFAIRS 

CHANGE OF COMPANY NAME 

The company (A.C.N. 065 381 240) changed its name from Loy Yang Power Ltd. 
to Quiet Life Limited on 13 May 1997. 

SALE OF BUSINESS 

On 12 May 1997 the company ceased trading and sold all of its cash, 
receivables, inventories, property, plant and equipment, and contract 
liabilities and certain creditors (refer note 15.3). All employees were 
allocated to the new owner with existing employment conditions. The proceeds 
from the sale were used to extinguish all of the company's debt finance, pay 
income tax liabilities and to pay a dividend to shareholders equal to the 
value of retained earnings. 

1.3 PRIOR PERIOD COMPARISONS 

Comparative information is reclassified where appropriate, to enhance 
comparability. 

1.4 PROPERTY, PLANT AND EQUIPMENT 

COST AND VALUATION 

Property, plant and equipment were carried at cost. 

DEPRECIATION AND AMORTISATION 

Depreciation or amortisation was provided for all fixed assets other than 
freehold land. The majority of assets were depreciated using the straight 
line method to write off the cost of assets over their expected service 
lives. The expenditure associated with mine development costs was amortised 
on a units of production basis. Depreciation or amortisation for all assets 
commenced on the first day of the month closest to the in-service date. 

Changes in depreciation rates and/or depreciable amounts were dealt with 
on a prospective basis. 

1.5 RECOVERABLE AMOUNTS 

Non-current assets values did not exceed their recoverable amount. Where 
carrying values exceeded their recoverable amount, assets were revalued 
downwards to the lower value. The expected net cash flows included in 
determining the recoverable amounts of non-current assets were discounted to 
their present value using a market determined risk adjusted discount rate. 

F-137

QUIET LIFE LIMITED 
ACN 065 381 240 
(FORMERLY LOY YANG POWER LTD, NAME CHANGED 13 MAY 1997) 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

1.6 INVENTORIES 

Costs were assigned to inventories using the average cost method. 
Inventories were valued at lower of cost and net realisable value. An 
estimate of items which are likely to be utilised in the next twelve months 
was classified as current. 

1.7 ACCOUNTING FOR INCOME TAX 

The company was until 12 May 1997 subject to the Victorian State 
Government Tax Equivalent System (VTES) pursuant to Section 88 of the State 
Owned Enterprises Act 1992. On the 12 May 1997 the company settled its final 
VTES liability of $494,975,104. The Department of Treasury and Finance 
advised on 12 May 1997 that as "the sale transaction involves the transfer of 
ownership of Loy Yang Power's assets the company will effectively become a 
"shell" after the transaction. Accordingly, and consistent with this 
Department's policy on the non-applicability of a Victorian Tax Equivalent 
System to non-trading shell entities. Loy Yang Power will cease to be subject 
to a VTES effective from the 12 May 1997 and this Department considers this 
to be the final transaction under VTES". 

The company has adopted the liability method of tax-effect accounting 
whereby income tax is regarded as an expense and is matched with the 
accounting profit after allowing for permanent differences. 

To the extent that timing differences occur between the time items are 
recognised in the accounts and when items are taken into account in 
determining taxable income, the net related taxation benefit or liability is 
disclosed as a future income tax benefit or a provision for deferred income 
tax. These account balances are calculated with reference to the rates of 
income tax which are expected to apply when those timing differences reverse. 

Future income tax benefits are not brought to account unless realisation 
of the asset is assured beyond reasonable doubt. The future income tax 
benefit arising from tax losses is only carried forward as an asset when the 
benefit is virtually certain of being realised. 

1.8 DOUBTFUL DEBTS 

The value of estimated doubtful debts was reviewed annually on an 
individual debtor basis, and appropriate provision made where necessary. 

1.9 NEGOTIABLE SECURITIES 

Where interest was paid in advance on negotiable securities the interest 
was recognised as an asset and progressively charged to the Profit and Loss 
Statement over the applicable interest period. Interest payable in arrears 
was progressively charged to the Profit and Loss Statement over the 
applicable interest period and recognised as a liability. 

Discounts and premiums on face value on the issue of negotiable securities 
were recognised as variations of the liability to which they relate. The 
variations were amortised over the term of the issue, using the effective 
yield method. 

Changes in the capital value of the outstanding liability on index linked 
securities were recognised as variations in the book value of the liability 
and charged to the Profit and Loss Statement. 

Any gains or losses arising from the buyback of negotiable securities 
issued by the company were charged to the Profit and Loss Statement as 
incurred or earned. 

F-138

QUIET LIFE LIMITED 
ACN 065 381 240 
(FORMERLY LOY YANG POWER LTD, NAME CHANGED 13 MAY 1997) 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

1.10 DERIVATIVES 

The company was exposed to changes in interest rates and commodity prices 
from its activities. It was the company's policy to use derivative financial 
instruments to hedge these risks. The company did not enter, hold or issue 
derivative financial instruments for trading or speculative purposes. 

Derivative financial instruments included forward rate agreements, 
futures, options, interest rate swaps and their Treasury Corporation of 
Victoria equivalents. 

Gains and losses arising from the early termination of general hedges were 
amortised over the period of the hedge. The exception to this was bond 
futures where gains and losses were amortised over the average term to 
maturity of existing fixed. 

Gains and losses arising from the early termination of specific hedges 
were amortised over the shorter of the period of the borrowing being hedged 
or the period of the hedge. 

1.11 EMPLOYEE ENTITLEMENTS 

WAGES, SALARIES AND LEAVE 

Provision was made for employee entitlement benefits accumulated as a 
result of employees rendering services up to the sale date. These benefits 
included wages and salaries, annual leave and associated oncosts. 

Liabilities arising in respect of wages and salaries, annual leave and any 
other employee entitlements expected to be settled within twelve months of 
the sale date were measured at their nominal amounts. All other employee 
entitlement liabilities were measured at the present value of their estimated 
future cash outflows to be made in respect of services provided by employees 
up to the sale date. In determining the present value of future cash 
outflows, the interest rates attaching to Federal Government Guaranteed 
Securities which had terms to maturity approximating the terms of the related 
liability were used. 

Employee entitlement expenses and revenues arising in respect of the 
following categories: 

o      Wages and salaries, non-monetary benefits, annual leave, long service 
leave, sick leave and other leave entitlements; and 

o      other types of employee entitlements, 

were charged to the Profit and Loss Statement on a net basis in their 
respective categories. 

SUPERANNUATION 

The company contributed towards the Victorian Electricity Industry (VEI) 
Superannuation Fund on behalf of its employees. These contributions were 
charged to the Profit and Loss Statement as the liability was recognised 
(refer note 17.2). 

1.12 PROVISION FOR SITE RESTORATION--POWER STATION AND MINE 

Recognition of a liability for the cost of restoring the power station and 
mine sites to an acceptable environmental standard at the end of their useful 
lives was provided for up until the sale date (refer note 12). This liability 
included costs of reclamation, plant closure and dismantling, and waste site 
closure. 

The liability was recognised on a gradual basis and was calculated by 
discounting the estimated future site restoration costs to their net present 
value. Annual increments to the liability for each site were charged to the 
Profit and Loss Statement over the estimated remaining life of each site. 

F-139

QUIET LIFE LIMITED 
ACN 065 381 240 
(FORMERLY LOY YANG POWER LTD, NAME CHANGED 13 MAY 1997) 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

Expected future payments for site restoration were discounted using 
interest rates attaching, as at the reporting date, to Federal Government 
Guaranteed Securities with terms to maturity that match, as closely as 
possible, the estimated future cash outflows. 

Cost estimates were based on the assumption that current legal 
requirements and/or technologies could not change significantly over the life 
of the power station and mine sites. 

Changes in estimates were dealt with on a prospective basis. 

The company's obligations for site restoration were transferred to the 
purchaser of the company's business. 

1.13 CASH 

For the purpose of the Statement of Cash Flows, cash includes cash on hand 
and in banks, investments in money market instruments and short-term deposits 
and securities, net of outstanding overdrafts. 

F-140

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

30 JUNE 1997    30 JUNE 1996 
$               $ 
--------------- -------------- 

2 OPERATING REVENUE COMPRISES 
Sales revenue ................................................    441,012,062    557,499,891 
Interest revenue (refer note 24.5 for related party 
component)...................................................      3,057,422      1,845,183 
Proceeds from the sale of non-current assets..................        825,741        587,326 
Dividend revenue..............................................              0        127,400 
Other revenue.................................................     15,004,568     13,949,634 
--------------- -------------- 
459,899,793    574,009,434 
=============== ============== 

- ---------------------------------------------------------------------------------------------
3 OPERATING PROFIT BEFORE INCOME TAX 
The operating profit before income tax is arrived at after 
charging/(crediting) the following items: 
DEPRECIATION, AMORTISATION AND DIMINUTION 
Plant and equipment...........................................     82,841,704     96,218,635 
Development of mine (amortisation) ...........................      1,032,676      1,057,471 
Leased plant and equipment (amortisation).....................      7,488,422      8,678,171 
Buildings.....................................................        304,364        320,654 
--------------- -------------- 
TOTAL DEPRECIATION, AMORTISATION AND DIMINUTION ..............     91,667,166    106,274,931 
--------------- -------------- 
AMOUNTS SET ASIDE TO PROVISIONS 
Employee entitlements ........................................      4,926,554      4,492,052 
Site restoration--power station...............................        596,917        486,338 
Site restoration--mine........................................        225,033        246,940 
--------------- -------------- 
TOTAL AMOUNT SET ASIDE TO PROVISIONS .........................      5,747,504      5,225,330 
--------------- -------------- 
FINANCE CHARGES (REFER NOTE 24.5) ............................    181,865,292    126,710,973 
GOVERNMENT MINING ROYALTIES INCURRED .........................      8,552,827      9,241,836 
ENERGY CONSUMPTION LEVY ......................................         14,419         29,731 
SUPERANNUATION CONTRIBUTIONS .................................      2,320,442      2,697,272 
RENTAL OPERATING LEASES ......................................        247,000        419,000 
LOSS (PROFIT) ON SALE OF NON-CURRENT ASSETS ..................        947,326        (50,803) 
RESEARCH AND DEVELOPMENT EXPENDITURE .........................        523,566        518,760 

- ---------------------------------------------------------------------------------------------
4 PROFIT ON EXTRAORDINARY ITEM 
Profit on sale of business (refer note 15.3)..................  1,335,852,636              0 
Applicable income tax ........................................    383,195,543              0 
--------------- -------------- 
952,657,093              0 
--------------- -------------- 

Disclosure of the net assets and liabilities sold can be found in note 15.3. 

F-141

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

30 JUNE 1997    30 JUNE 1996 
$               $ 
--------------- -------------- 

5 INCOME TAX 
5.1 INCOME TAX EXPENSE 
The prima facie tax on operating profit differs from the 
income tax provided in the accounts as follows: 

Prima facie income tax expense on operating profit ............     18,784,598     66,684,165 
Increase in income tax expense due to permanent differences 
Depreciation on buildings.....................................              0        448,098 
Tax on provisions not carried forward.........................        395,157        620,720 
Provisions for restoration--non-deductible....................        125,468        175,082 
Non-deductible expenditure....................................      2,499,703              0 
Entertainment and other non-deductible items .................         79,411         30,561 
Under/(over) provision last year .............................        211,418              0 
Decrease in income tax expense due to permanent differences ... 
Tax exempt income.............................................              0       (292,629) 
Research and development concession ..........................        (58,833)       (93,377) 
General investment allowance .................................              0        (25,122) 
Depreciation on buildings.....................................       (377,218)             0 
--------------- -------------- 
TOTAL INCOME TAX EXPENSE ATTRIBUTABLE TO OPERATING PROFIT .....     21,658,694     67,547,498 
=============== ============== 
Prima facie income tax expense on extraordinary item ..........    480,906,949              0 
Decrease in income tax expense due to permanent differences ... 
Non-assessable income on sale of business ....................    (97,711,406)             0 
--------------- -------------- 
TOTAL INCOME TAX EXPENSE ATTRIBUTABLE TO 
EXTRAORDINARY ITEM............................................    383,196,543              0 
=============== ============== 
Total income tax expense is made up of: 
Increase/(decrease) in provision for deferred income tax  ....   (136,405,995)    85,298,790 
Income tax paid...............................................    494,975,104              0 
(Increase)/decrease future income tax benefit.................     46,286,128    (17,751,292) 
--------------- -------------- 
404,855,237     67,547,498 
=============== ============== 
5.2 ANALYSIS OF TAX BALANCES CARRIED FORWARD 

CURRENT 

Future income tax benefit, balance at end of year  ............              0      1,019,366 
Less: provision for deferred income tax, balance at end of 
year..........................................................              0        451,107 
--------------- -------------- 
NET FUTURE INCOME TAX BENEFIT (REFER NOTE 8)...................              0        568,259 
=============== ============== 
NON-CURRENT 
Provision for deferred income tax, balance at end of year .....              0    135,954,868 
Less: future income tax benefit, balance at end of year  ......              0     45,266,762 
--------------- -------------- 
NET PROVISION FOR DEFERRED INCOME TAX (REFER NOTE 12)  ........              0     90,688,126 
=============== ============== 

F-142

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

30 JUNE 1997    30 JUNE 1996 
$              $ 
-------------- -------------- 

6 RECEIVABLES 
CURRENT 
Trade debtors (refer note 24.6 for related party 
component)................................................        0          69,683,560 
Other debtors (refer note 24.6 for related party 
component)................................................        0           3,365,329 
-------------- -------------- 
0          73,048,889 
============== ============== 
NON-CURRENT 
Trade debtors (refer note 24.6 for related party 
component)................................................        0           1,574,810 
============== ============== 

7 INVENTORIES 
CURRENT 
General purpose and maintenance stocks at cost.............        0           3,559,857 
Less: inventory diminution.................................        0                   0 
-------------- -------------- 
0           3,559,857 
============== ============== 
NON-CURRENT 
General purpose and maintenance stocks at cost.............        0          13,664,090 
Less: inventory diminution.................................        0             487,975 
-------------- -------------- 
0          13,175,115 
============== ============== 

8 OTHER ASSETS 
CURRENT 
Prepayments................................................        0           1,146,368 
Future income tax benefit (refer note 5.2).................        0             568,259 
-------------- -------------- 
0           1,714,627 
============== ============== 
NON-CURRENT 
Unamortised interest rate swap termination losses .........        0           4,827,954 
Unamortised futures termination losses.....................        0             834,605 
-------------- -------------- 
0           5,662,559 
============== ============== 

9 INVESTMENTS 

9.1 NON-CURRENT INVESTMENTS AT COST COMPRISE: 
Unlisted shares in associated companies...................        0                 100 
-------------- -------------- 
0                 100 
============== ============== 
9.2 NON-CURRENT INVESTMENTS IN UNLISTED ASSOCIATED COMPANIES 
PowerWorks Pty. Ltd. 
PowerWorks Pty. Ltd.'s principal activity is to promote the 
electricity 
industry to the public 
Ownership interest.....................................        0%                 33% 
Investment carrying amount.............................        0                 100 

F-143

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

30 JUNE 1997    30 JUNE 1996 
$               $ 
-------------- --------------- 

The above investment comprised an interest in the ordinary 
share capital of the associate. 

The balance date of the associate is 30 June, and the 
associate is incorporated in Australia. 

There were no material post-balance day events or 
dissimilar accounting policies. 

10 PROPERTY, PLANT AND EQUIPMENT 

Land at cost................................................        0             1,588,736 
-------------- --------------- 
0             1,588,736 

Buildings at cost...........................................        0             8,237,289 
Less: accumulated depreciation..............................        0               457,278 
-------------- --------------- 
0             7,780,011 

Plant and equipment at cost.................................        0         2,986,003,023 
Less: accumulated depreciation..............................        0           136,300,056 
-------------- --------------- 
0         2,849,702,967 

Plant and equipment under lease at cost*....................        0           274,987,931 
Less: accumulated amortisation..............................        0            12,314,861 
-------------- --------------- 
0           262,673,070 
-------------- --------------- 

Mine development at cost....................................        0            38,841,697 
Less: accumulated amortisation..............................        0             1,484,507 
-------------- --------------- 
0            37,357,190 

TOTAL PROPERTY, PLANT AND EQUIPMENT AT COST.................        0         3,309,658,676 
TOTAL ACCUMULATED DEPRECIATION/AMORTISATION.................        0           150,556,702 
-------------- --------------- 
TOTAL WRITTEN DOWN AMOUNT...................................        0         3,159,101,974 
============== =============== 

*     At 30 June 1996 and until [the] 12 May 1997 the company recorded as an 
asset plant and equipment which was under lease to either the State 
Electricity Commission of Victoria or Generation Victoria. The plant was 
operated in accordance with licences approved by the lessor pending a 
formal novation of the arrangement. The company's interest in the leased 
plant was transferred to the purchasers of the business on 12 May 1997. 

F-144

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

30 JUNE 1997    30 JUNE 1996 
$                $ 
--------------- --------------- 

11 CREDITORS AND BORROWINGS 
CURRENT 
Trade creditors (refer note 24.6 for related party component) ....              0       35,137,803 
Bank overdraft (refer note 15.1)..................................              0          620,133 
Shareholder loan (interest free)..................................              0    1,917,491,710 
Interest accrued (refer note 24.6 for related party component) ...              0       23,764,619 
Dividend payable (refer note 24.6 for related party component) ...              0       61,686,000 
Other loans (refer note 19).......................................              0           48,889 
Other liabilities (refer note 24.6 for related party component 
and note 17.1 for Accrued Salaries and Wages)....................              0          869,322 
--------------- --------------- 
0    2,039,618,478 
=============== =============== 
NON-CURRENT 
Loans (refer note 19).............................................              0    1,057,832,534 
--------------- --------------- 
0    1,057,832,534 
=============== =============== 

12 PROVISIONS 

CURRENT 
Employee entitlements (refer note 17).............................              0        7,475,772 
Site restoration--mine............................................              0          140,000 
Redundancies (refer note 17)......................................              0        1,494,586 
--------------- --------------- 
0        9,110,358 
=============== =============== 
NON-CURRENT 
Employee entitlements (refer note 17).............................              0        5,926,654 
Site restoration--power station...................................              0        3,734,339 
Site restoration--mine............................................              0          968,000 
Deferred income tax (refer note 5.2)..............................              0       90,688,128 
--------------- --------------- 
0      101,317,119 
=============== =============== 

13 SHARE CAPITAL 

AUTHORISED CAPITAL: 
500,000,000 Ordinary Shares of $1.00 each.........................    500,000,000      500,000,000 
ISSUED AND PAID UP CAPITAL: 
15 ordinary shares of $1.00 each, fully paid......................             15               15 

14 RETAINED EARNINGS 

Balance at beginning of year......................................     50,618,229       50,617,937 
Transfer from profit and loss.....................................    983,176,837      117,688,293 
--------------- --------------- 
Total available for appropriation.................................  1,033,795,066      168,304,229 
Interim dividend paid.............................................              0       56,000,000 
Final dividend paid (1998 Payable)................................  1,033,795,066       61,686,000 
--------------- --------------- 
BALANCE AT END OF YEAR ...........................................              0       50,618,229 
=============== =============== 

F-145

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

15 STATEMENT OF CASH FLOWS 

30 JUNE 1997    30 JUNE 1996 
$               $ 
--------------- -------------- 

15.1 RECONCILIATION OF CASH 
Cash at the end of the financial year as shown in the 
Statement of Cash Flows is reconciled to the related items 
in the Balance Sheet as follows: 
CASH 
Cash on hand..........................................             15          7,800 
Short term deposits and securities ...................              0        650,000 
--------------- -------------- 
15        657,800 
OVERDRAFT 
Bank overdraft .......................................              0       (620,133) 
--------------- -------------- 
0       (620,133) 
--------------- -------------- 
15         37,667 
=============== ============== 
15.2 RECONCILIATION OF NET CASH FLOWS FROM OPERATING 
ACTIVITIES WITH OPERATING PROFIT AFTER INCOME TAX 

Operating profit after income tax .....................     30,619,744    117,686,293 
--------------- -------------- 
NON-CASH REVENUES AND EXPENSES, AND REVENUES AND 
EXPENSES ASSOCIATED WITH FINANCING OR INVESTING 
ACTIVITIES: 
Depreciation and amortisation expense .................     91,667,166    106,274,931 
Income tax expense on operating profit ................              0     67,547,498 
Income tax expense on extraordinary item ..............   (383,195,543)             0 
Interest revenue received .............................     (3,057,422)    (1,845,183) 
Finance charges .......................................    181,865,292    126,710,973 
Dividend revenue received .............................              0       (127,400) 
Loss/(profit) on sold and scrapped non-current assets          947,326        (50,803) 
--------------- -------------- 
(111,773,181)   298,510,016 
ADJUST FOR MOVEMENTS IN ASSETS AND LIABILITIES 
Decrease in operating expenditure accruals ............    (16,467,837)   (30,126,579) 
Decrease in deferred income tax .......................    (90,688,126)             0 
Increase/(decrease) in provisions .....................      1,581,423     (4,693,920) 
Increase/(decrease) in trust funds and deposits  ......         40,956       (711,010) 
Decrease in future income tax benefit .................        568,259              0 
Decrease in accounts receivable/accrued revenue .......     14,356,026     28,954,710 
Increase in prepayments ...............................     (7,637,788)      (136,169) 
Decrease/(increase) in inventory ......................        106,709       (227,148) 
--------------- -------------- 
(98,140,378)    (6,940,116) 
--------------- -------------- 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES  ..   (179,393,815)   409,256,193 
--------------- -------------- 

F-146

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

15.3 SALE OF BUSINESS 

On 12 May 1997, the Company sold all of its business 
operations. Details of the sale are as follows: 

30 JUNE 1997    30 JUNE 1996 
$               $ 
--------------- -------------- 

PROCEEDS FROM SALE OF THE BUSINESS 
Cash ..............................................  4,484,928,944             0 
--------------- -------------- 
4,484,928,944             0 
--------------- -------------- 
BOOK VALUE OF NET ASSETS SOLD 
Cash ..............................................     22,412,523             0 
Receivables .......................................     60,261,829             0 
Inventories .......................................     16,586,135             0 
Other assets ......................................      8,215,997             0 
Property, plant and equipment .....................  3,083,386,814             0 
Creditors and borrowings ..........................    (21,034,475)            0 
Provisions ........................................    (20,752,516)            0 
--------------- -------------- 
3,149,076,308             0 
--------------- -------------- 
PROFIT ON SALE OF BUSINESS (REFER NOTE 4)  ........  1,335,852,636             0 
--------------- -------------- 
16 EXPENDITURE COMMITMENTS 

16.1 CAPITAL EXPENDITURE COMMITMENTS 

Outstanding contract commitments for capital expenditure 
contracted for at balance date but not provided for comprises 
the following: 
Payable not later than one year ...................              0       946,000 
--------------- -------------- 
0       946,000 
--------------- -------------- 
16.2 NON-CAPITAL EXPENDITURE COMMITMENTS 

Outstanding contract commitments for non-capital expenditure 
contracted for at balance date but provided for comprises 
the following: 
Payable not later than one year ...................              0     6,524,000 
Payable greater than one and less than two years  .              0     1,566,000 
--------------- -------------- 
0     8,090,000 
--------------- -------------- 
16.3 LEASE EXPENDITURE COMMITMENTS 

Outstanding operating lease (non-cancellable) commitments 
at balance date but not provided for comprises the following: 

Payable not later than one year ...................              0       138,000 
Payable greater than one and less than two years  .              0       145,000 
Payable greater than two and less than five years                0       169,000 
--------------- -------------- 
0       452,000 
--------------- -------------- 

F-147

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

16.4 ASSET SALE OBLIGATIONS 

The buyers of the company's business were given certain warranties and 
indemnities that may result in part of the sale price being refunded. The 
company has been indemnified against these obligations by the State 
Electricity Commission of Victoria for the purpose of ensuring that it did 
not pay, and is not perceived to pay, a dividend out of its capital. The 
indemnity shall in no way limit the company's rights against the Buyers 
pursuant to the Asset Sale Agreement. 

F-148

QUIETLIFE LIMITED 
ACN 065 381 240 

(formerly Loy Yang Power Ltd. name changed 13 May 1997) 

30 JUNE 1997    30 JUNE 1996 
$              $ 
-------------- -------------- 

17 EMPLOYEE ENTITLEMENTS 
17.1 AGGREGATE EMPLOYEE ENTITLEMENT 

Current 
Accrued Wages & Salaries (refer note 11) ..........................        0             185,083 
Provision Employee Entitlements (refer note 12) ...................        0           7,475,772 
Provision Redundancies (refer note 12) ............................        0           1,494,586 

Non current 
Provision Employee Entitlements (refer note 12) ...................        0           5,926,654 
-------------- -------------- 
0          15,082,085 
-------------- -------------- 
Accrued Wages and salaries ........................................        0             185,083 
Recreation leave ..................................................        0           6,662,680 
Long service leave ................................................        0           6,739,746 
Redundancies ......................................................        0           1,494,586 
-------------- -------------- 
0          15,082,095 
-------------- -------------- 
The amounts for long service leave were measured at their present 
values. The following assumptions were adopted in measuring the 
present values of the entitlements which were not expected to be 
paid or settled within 12 months of balance date. 

Long Service Leave: 
Weighted average rates of increase in annual employee entitlements 
to settlement of the liabilities .................................        0                 2.9% 
Weighted average discount rates ...................................        0                 8.7% 
Weighted average terms to settlement of the liabilities  ..........        0             11 Years 

17.2 SUPERANNUATION FUND 
All permanent and directly hired casual employees of the company 
were entitled to benefits on termination from the Victorian 
Electricity Industry Superannuation Fund. All casual and permanent 
employees engaged after 3 October 1994 were members of an 
accumulation fund. Division D or other external accumulation 
funds. All other permanent employees were members of Division B or 
C of the Fund which provided defined benefits in the form of 
pensions (Division B) or lump sums (Division C). 

Both defined benefit schemes are closed to new members. The 
company contributed to the Fund at the rate of 9.75%. 

The effective date of the most recent detailed valuation of the 
Fund was 30 June 1996. The review was undertaken by William M. 
Mercer Pty. Ltd. Based on that assessment, the situation for the 
company as at 30 June 1996 was: 

Present value of employees accured benefits .......................        0          54,100,000# 

F-149

QUIETLIFE LIMITED 
ACN 065 381 240 

(formerly Loy Yang Power Ltd. name changed 13 May 1997) 

30 JUNE 1997    30 JUNE 1996 
$              $ 
-------------- -------------- 
Net market value of assets held by the fund to meet future benefit 
payments ..........................................................            0      54,600,000# 

Excess/(deficit) of present value of employees' benefits over 
assets held to meet future benefit payments .......................            0         500,000# 

Vested benefits ...................................................            0      49,300,000# 

The present value of employees' accrued benefits is equal to the 
past membership liability calculated in accordance with Australian 
Accounting Standard AAS25 "Financial Reporting by Superannuation 
Plans". 

(Vested benefits are those benefits which would have been paid on 
voluntary termination from the Fund.) 

The Company's obligation in respect of superannuation were 
transferred on 12 May 1997 to the purchasers of the business. 

Employer contributions to the fund ................................    1,910,364       2,697,272 

Additional contributions to the fund to compensate for differences 
between the resignation and retrenchment benefit, in relation to 
voluntary retrenchments. ..........................................      244,964       1,228,000 

#Note: Asset and benefit figures were unaudited at the time of 
signing the 1995/96 report. The last full audit was conducted at 
30 June 1995. 

18 TREASURY 

18.1 DERIVATIVES 
The company's derivative products were dealt through Treasury 
Corporation of Victoria (TCV). The only derivative products 
outstanding as at 30 June 1996 were Interest Rate Swaps. There 
were no derivatives outstanding at 30 June 1997. 

INTEREST RATE SWAPS 

Under these swaps, the company agreed with the counterparty to 
exchange, at specified intervals, the difference between the 
fixed-rate and floating-rate interest amounts calculated by 
reference to an agreed notional amount. The notional principal 
amounts were not exchanged by the parties. 

The maturity profile of these swaps in notional principal terms is: 
Later than two years and not later than five years  .............            0      25,000,000 
Later than five years ...........................................            0     195,000,000 
-------------- -------------- 
0     220,000,000 
-------------- -------------- 

F-150

QUIETLIFE LIMITED 
ACN 065 381 240 

(formerly Loy Yang Power Ltd. name changed 13 May 1997) 

30 JUNE 1997    30 JUNE 1996 
$              $ 
-------------- -------------- 
The following table indicates the type of swaps held by the 
company and their weighted average interest rates. 

Pay-fixed swaps--notional principal amount ........................        0         220,000,000 
Average pay rate--specific cost ...................................        0                12.6% 
Average receive rate ..............................................        0                 7.6% 

F-151

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

30 JUNE 1997    30 JUNE 1996 
$               $ 
-------------- --------------- 

19  LOANS (REFER NOTE 24.6) 
19.1 LOAN COMPONENTS 
CURRENT LOANS (EXCLUDING SHAREHOLDER LOAN) 
Premium/(discount) on loans.................................          0                   0 
Fixed interest loans........................................          0              48,889 
Fixed interest bonds........................................          0                   0 
-------------- --------------- 
0              48,889 
NON-CURRENT LOANS 
Premium/(discount) on loans.................................          0          38,899,024 
Floating rate notes.........................................          0         249,745,325 
Fixed interest bonds........................................          0         626,695,000 
Capital indexed bonds.......................................          0         142,428,804 
Fixed interest loans........................................          0              64,381 
-------------- --------------- 
0       1,057,832,534 
-------------- --------------- 
0       1,057,881,423 
============== =============== 
Liabilities in years of maturity, at face value are: 
Not later than one year.....................................          0              48,889 
Later than one year and not later than two years ...........          0         353,784,325 
Later than two years and not later than five years .........          0         327,721,000 
Later than five years.......................................          0         337,429,000 
-------------- --------------- 
0       1,018,983,214 
Plus unamortised adjustments to face value (refer note 
19.2)......................................................          0          38,899,024 
-------------- --------------- 
0       1,057,882,238 
-------------- --------------- 
19.2 ADJUSTMENTS TO FACE VALUE OF LOANS 

Current (discount)/premium..................................          0                   0 
Non-Current (discount)/premium..............................          0          38,899,024 
-------------- --------------- 
0          38,899,024 
-------------- --------------- 

- -------------------------------------------------------------------------------------------
20 AUDITORS' REMUNERATION 
Amounts received, or due and receivable, by the 
Auditor-General for auditing the financial statements; 
Total amount payable for annual audit fee...................     51,000              52,000 

F-152

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

30 JUNE 1997      30 JUNE 1996 
$                $ 
---------------- ---------------- 

21 DIRECTORS' REMUNERATION 

Amounts paid, or due and payable to the directors of the company ..      137,203          161,500 

The number of directors of the company whose annual remuneration 
(including superannuation contributions, falls within the 
following bands: 

$ BAND LEVELS                                                           DIRECTORS        DIRECTORS 
- -------------                                                           ---------        --------- 
$0 -$10,000...................................................         3                0 
$20,000 -$29,999...................................................         3                3 
$30,000 -$59,999...................................................         1                1 

During the year period ended 9 May 1997 the company paid premiums 
for the indemnification and insurance of all directors and 
officers to the full extent permitted by Corporations Law. 

- ------------------------------------------------------------------------------------------------------- 
22 EXECUTIVES' REMUNERATION 

The number of executives whose remuneration falls within the 
following bands is set out below: 

$ BAND LEVELS                                                          EXECUTIVES        EXECUTIVES 
- -------------                                                          ----------        ----------   
$100,000 -$109,999.................................................             1               0 
$110,000 -$119,999.................................................             0               2 
$120,000 -$129,999.................................................             0               1 
$130,000 -$139,999.................................................             1               3 
$140,000 -$149,999.................................................             1               0 
$150,000 -$159,999.................................................             1               0 
$160,000 -$169,999.................................................             1               0 
$170,000 -$179,999.................................................             0               0 
$190,000 -$199,999.................................................             2               0 
$210,000 -$219,999.................................................             0               1 
$280,000 -$289,999.................................................             1               0 

Total remuneration paid, or due and payable by the company or 
related entities by executive officers of the company whose 
remuneration exceeds $100,000......................................     1,386,261         974,040 

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

23 SEGMENTS 

The company operated entirely in Australia in the production and 
sale of electricity and coal. 

F-153

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

30 JUNE 1997      30 JUNE 1996 
$                $ 
---------------- ---------------- 

24   RELATED PARTY DISCLOSURES 

24.1 DIRECTORS OF QUIET LIFE 
LTD.                           COMMENCEMENT       RESIGNATION 

DIRECTORS OF QUIET LIFE LTD. DURING THE FINANCIAL YEAR WERE: 

Mr. C. Little..........     30 January 1995     13 June 1997 
Mr. D. Swan............      30 January 1995       9 May 1997 
Mr. J. C. Richards ....      30 January 1995       9 May 1997 
Mr. J. S. Grigg........           1 May 1995       9 May 1997 
Mr. G. Brooke..........           9 May 1997        -- 
Mr. G. J. Greaves......           9 May 1997        -- 
Mr. H. De Jong.........         13 June 1997        -- 

All directors are non executive. 

24.2 TRANSACTIONS WITH DIRECTOR-RELATED ENTITIES 

There were no transactions with director-related entities other 
than transactions on normal commercial terms with the SECV and 
Department of Treasury and Finance (refer Note 24.4 for related 
party transactions). 

24.3 RESPONSIBLE PERSON AND RELATED PARTIES 

The company is a wholly owned subsidiary of the State Electricity 
Commission of Victoria; an entity which is 100% controlled by the 
Victorian Government. Statutory Corporations and any other 
corporate entities owned by the Victorian State government are 
related parties. 

24.4 RELATED PARTY TRANSACTION CATEGORIES 

The following types of related party transactions were transacted 
during the year, on normal commercial terms: 

Electricity transmission costs 
Electricity pool costs 
Council rates 
Dividends 
Auditing services 
Brown Coal Royalties 
Technical services 
Payroll tax 
Briquette purchases 
Electricity sales revenue 
Coal sales revenue 
Water purchases and waste water disposals 

F-154

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

Land Tax 
Land leases 
Provision of loan facilities 
Gas purchases 
Superannuation payments 
Victorian equivalent income tax 
Vehicle registration charges 
In addition there was an interest free loan from the shareholder 
(Note 11). 

24.5 OPERATING PROFIT AND LOSS TRANSACTIONS WITH RELATED PARTIES 

Interest revenue...................................     3,057,422        1,163,621 
Interest expense...................................   181,865,292      126,710,973 
Dividend Revenue...................................            --          127,400 

24.6 RECEIVABLES AND PAYABLES AT BALANCE DATE 
AGGREGATE RELATED PARTY RECEIVABLES AT BALANCE 
DATE 

Current.......        0           57,507,840 
Non-current ..        0            1,566,127 
--------------- --------------- 
0           59,073,967 
=============== =============== 

AGGREGATE RELATED PARTY PAYABLES AT BALANCE DATE

Current..........................................................        0          1,994,184,280 
Non-current......................................................        0          1,058,296,080 
--------------- --------------- 
0          3,052,480,360 
=============== =============== 

25.0 INTERESTS HELD 

There were no interests held in any related party other than 
those disclosed as investments in Note 9 (1996 only). 

25.1 ANNUAL FINANCIAL STATEMENT CONSOLIDATION ELIMINATION 
ENTRIES 

During the 1996/97 financial year, transactions were undertaken 
with other State Government controlled entities, giving rise to 
the need for elimination entries in relation to resultant 
account balances. 

F-155

QUIET LIFE LIMITED 
ACN 065 381 240 
(formerly Loy Yang Power Ltd, name changed 13 May 1997) 

The aggregate eliminations included within the consolidation 
worksheets required to be prepared for input to the State's 
Annual Financial Statements are as follows: 

INTER            INTRA 
--------------- --------------- 

Assets.........................................................              0          0 
Liabilities....................................................              0          0 
Revenues.......................................................     77,830,616          0 
Expenses.......................................................    589,378,744          0 
Dividends Paid.................................................  1,095,481,066          0 
--------------- --------------- 
The preparation of prior period comparative information has 
not been practicable or relevant for this financial year. 

F-156

AUDITOR-GENERAL'S REPORT 

AUDIT SCOPE 

The accompanying financial statements of Quiet Life Limited (formerly Loy 
Yang Power Limited) for the year ended 30 June 1997, comprising a profit and 
loss statement, balance sheet, statement of cash flows and notes to the 
financial statements, have been audited. The company's directors are 
responsible for the preparation and presentation of the financial statements 
and the information they contain. An independent audit of these financial 
statements has been carried out in order to express an opinion on them to the 
members of the company as required by the Corporations Law and Audit Act 
1994. 

The audit has been conducted in accordance with Australian Auditing 
Standards to provide reasonable assurance as to whether the financial 
statements are free of material misstatement. The audit procedures included 
an examination, on a test basis, of evidence supporting the amounts and other 
disclosures in the financial statements, and the evaluation of accounting 
policies and significant accounting estimates. These procedures have been 
undertaken to form an opinion as to whether, in all material respects, the 
financial statements are presented fairly in accordance with the basis on 
which the accounts have been prepared, namely applicable Accounting 
Standards, other mandatory professional reporting requirements and comply 
with the Corporations Law, so as to present a view which is consistent with 
my understanding of the company's financial position and the results of its 
operations and its cash flows. 

The audit opinion expressed on the financial statements has been formed on 
the above basis. 

AUDIT OPINION 

In my opinion, the financial statements of Quiet Life Limited (formerly 
Loy Yang Power Limited) are properly drawn up: 

(a) so as to give a true and fair view of: 

(i)      the company's state of affairs as at 30 June 1997 and of its 
profit and cash flows for the financial year ended on that 
date; and 

(ii)     the other matters required by Divisions 4, 4A and 4B of Part 
3.6 of the Corporations Law to be dealt with in the financial 
statements; 

(b) in accordance with the Corporations Law; and 

(c) in accordance with applicable Accounting Standards and other mandatory 
professional reporting requirements. 

/s/ C.A. BARAGWANATH 
----------------------------------- 
C.A. BARAGWANATH 
Auditor-General 

MELBOURNE 
29/8/1997 

F-157

LOY YANG POWER ANNUAL REPORT 1995/96 

PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED 30 JUNE 1996 

30 JUNE 1996   30 JUNE 1995 
NOTES       $'000           $'000 
------- --------------  -------------- 

OPERATING REVENUE...........................     2       574,009         244,275 
--------------  -------------- 
Operating Profit before Income Tax..........     3       185,233          79,579 
Income Tax Attributable to Operating 
Profit.....................................     4        67,547          29,861 
--------------  -------------- 
OPERATING PROFIT AFTER INCOME TAX...........             117,686          50,618 
--------------  -------------- 
Retained Profits at beginning of year ......    13        50,618               0 
Dividends Paid or Payable...................             117,686               0 
--------------  -------------- 
Retained Profits at End of Year.............              50,618          50,618 
--------------  -------------- 

This Profit and Loss Statement should be read in conjunction with the Notes 
to and forming part of the Financial Statements. 

F-158

FINANCIAL STATEMENTS 1995/96 

BALANCE SHEET AS AT 30 JUNE 1996 

30 JUNE 1996   30 JUNE 1995 
NOTES       $'000           $'000 
------- --------------  -------------- 

CURRENT ASSETS 
Cash..........................   14.1           658           1,015 
Receivables...................      5        73,048         100,577 
Inventories...................      6         3,560           4,043 
Other assets..................      7         1,715           4,155 
--------------  -------------- 
TOTAL CURRENT ASSETS..........               78,981         109,790 
NON-CURRENT ASSETS 
Receivables...................      5         1,575           3,132 
Inventories...................      6        13,176          20,101 
Other assets..................      7         5,663               0 
Investments...................      8             0             128 
Property, plant and 
equipment....................      9     3,159,102       3,245,997 
--------------  -------------- 
TOTAL NON-CURRENT ASSETS .....            3,179,516       3,269,358 
--------------  -------------- 
TOTAL ASSETS..................            3,258,497       3,379,148 
--------------  -------------- 
CURRENT LIABILITIES 
Creditors and borrowings .....     10     2,039,619       2,113,681 
Provisions....................     11         9,110          15,060 
--------------  -------------- 
TOTAL CURRENT LIABILITIES ....            2,048,729       2,128,741 

NON-CURRENT LIABILITIES 
Creditors and borrowings .....     10     1,057,833       1,164,699 
Provisions....................     11       101,317          35,090 
--------------  -------------- 
TOTAL NON-CURRENT 
LIABILITIES..................            1,159,150       1,199,789 
--------------  -------------- 
TOTAL LIABILITIES.............            3,207,879       3,328,530 
--------------  -------------- 
NET ASSETS....................               50,618          50,618 
--------------  -------------- 

EQUITY 
Share capital.................     12             0               0 
Retained earnings.............     13        50,618          50,618 
--------------  -------------- 
TOTAL EQUITY..................               50,618          50,618 
--------------  -------------- 

This Balance Sheet should be read in conjunction with the Notes to and 
forming part of the Financial Statements. 

F-159

LOY YANG POWER ANNUAL REPORT 1995/96 

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 1996 

30 JUNE 1996   30 JUNE 1995 
NOTES       $'000           $'000 
------- --------------  -------------- 

CASH FLOWS FROM OPERATING ACTIVITIES 
Receipts from customers...............................              661,857        262,004 
Payments to suppliers and employees...................             (252,601)       (98,270) 
--------------  -------------- 
NET CASH FLOW FROM OPERATING ACTIVITIES ..............   14.2       409,256        163,734 
--------------  -------------- 
CASH FLOWS FROM INVESTING ACTIVITIES 
Payments to acquire property, plant and equipment ....               (8,356)        (5,447) 
Proceeds from sale of property, plant and equipment ..                   34            117 
Proceeds from sale of investments.....................                  223              0 
Dividends received....................................                  127              0 
Net cash allocated....................................                    0           (629) 
--------------  -------------- 
NET CASH FLOW USED IN INVESTING ACTIVITIES............               (7,972)        (5,959) 
--------------  -------------- 
CASH FLOWS FROM FINANCING ACTIVITIES 
Interest and other items of a similar nature 
received.............................................                1,907            832 
Interest and other costs of finance paid..............             (115,063)       (70,817) 
Hedging receipts associated with borrowings ..........               20,765         10,980 
Hedging payments associated with borrowings ..........              (30,861)       (15,490) 
Buyback of swaps......................................               (7,905)             0 
Proceeds from borrowings..............................               86,056         49,706 
Repayment of borrowings...............................              (36,221)       (47,170) 
Buyback of borrowings.................................             (264,282)       (85,458) 
Dividends paid........................................              (56,000)             0 
--------------  -------------- 
NET CASH FLOW USED IN FINANCING ACTIVITIES............             (401,604)      (157,417) 
--------------  -------------- 
NET INCREASE/(DECREASE) IN CASH HELD..................                 (320)           358 
--------------  -------------- 
CASH AT BEGINNING OF YEAR.............................                  358              0 
--------------  -------------- 
CASH AT END OF YEAR...................................   14.1            38            358 
--------------  -------------- 

This Statement of Cash Flows should be read in conjunction with the Notes to
and forming part of the Financial Statements.

F-160

FINANCIAL STATEMENTS 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS 

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

1.1 BASIS OF ACCOUNTING 

The financial report is a general purpose financial report which has been 
prepared in accordance with the requirements of the Corporations Law which 
include disclosures required by Schedule S and applicable Accounting 
Standards. Other mandatory professional reporting requirements (Urgent Issues 
Group Consensus Views) have also been complied with. 

The report is prepared in accordance with the historical cost convention, 
except for certain assets which, as noted, are at valuation. The accounting 
policies are consistent with those of the previous year. 

1.2 PRIOR PERIOD COMPARISONS 

Loy Yang Power Ltd. was incorporated for the twelve months ended 30 June 
1995, however the company did not commence trading in its principal 
activities until 1 February 1995 when substantially all the assets and 
liabilities of the business were vested in the company pursuant to an 
Allocation Statement made under the Electricity Industry (Further Amendment) 
Act 1994. 

As a result, comparative profit and loss and cash flow figures reflect 
five months trading from 1 February 1995 to 30 June 1995. 

Comparative information is reclassified where appropriate, to enhance 
comparability. 

1.3 PROPERTY, PLANT AND EQUIPMENT 

COST AND VALUATION 

Property, plant and equipment are carried at cost. 

DEPRECIATION AND AMORTISATION 

Depreciation or amortisation is provided for all fixed assets other than 
freehold land. The majority of assets are depreciated using the straight line 
method to write off the cost of assets over their expected service lives. The 
expenditure associated with mine development costs is amortised on a units of 
production basis. Depreciation or amortisation for all assets commences on 
the first day of the month closest to the in-service date. 

Changes in depreciation rates and/or depreciable amounts are dealt with on 
a prospective basis. 

1.4 RECOVERABLE AMOUNTS 

Non-current assets values do not exceed their recoverable amount. Where 
carrying values exceed their recoverable amount, assets are revalued 
downwards to the lower value. The expected net cash flows included in 
determining the recoverable amounts of non-current assets have been 
discounted to their present value using a market determined risk adjusted 
discount rate. 

1.5 INVENTORIES 

Costs are assigned to inventories using the average cost method. Inventories 
are valued at lower of cost and net realisable value. As estimate of items 
which are likely to be utilised in the next twelve months is classified as 
current. 

F-161

LOY YANG POWER ANNUAL REPORT 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 

1.6 ACCOUNTING FOR INCOME TAX 

Loy Yang Power Ltd. is subject to the Victorian State Government Tax 
Equivalent System pursuant to Section 88 of the State Owned Enterprises Act 
1992. 

Loy Yang Power Ltd. has adopted the liability method of tax-effect 
accounting whereby income tax is regarded as an expense and is managed with 
the accounting profit after allowing for permanent differences. 

To the extent that timing differences occur between the time items are 
recognised in the accounts and when these are taken into account in 
determining taxable income, the net related taxation benefit or liability is 
disclosed as a future income tax benefit or a provision for deferred income 
tax. These account balances are calculated with reference to the rates of 
income tax which are expected to apply when those timing differences reverse. 

Future income tax benefits are not brought to account unless realisation 
of the asset is assured beyond reasonable doubt. The future income tax 
benefit arising from tax losses is only carried forward as an asset when the 
benefit is virtually certain of being realised. 

1.7 DOUBTFUL DEBTS 

The value of estimated doubtful debts is reviewed annually on an individual 
debtor basis, and appropriate provision is made where necessary. 

1.8 NEGOTIABLE SECURITIES 

Where interest is paid in advance on negotiable securities the interest is 
recognised as an asset and progressively charged to the Profit and Loss 
Statement over the applicable interest period. Interest payable in arrears is 
progressively charged to the Profit and Loss Statement over the applicable 
interest period and recognised as a liability. 

Discounts and premiums on face value on the issue of negotiable securities 
are recognised as variations of the liability to which they relate. The 
variations are amortised over the term of the issue, using the effective 
yield method. 

Changes in the capital value of the outstanding liability on index linked 
securities are recognised as variations in the book value of the liability 
and are charged to the Profit and Loss Statement. 

Any gains or losses arising from the buyback of negotiable securities 
issued by Loy Yang Power Ltd. are charged to the Profit and Loss Statement as 
incurred or earned. 

1.9 DERIVATIVES 

Loy Yang Power Ltd. is exposed to changes in interest rates and commodity 
prices from its activities. It is Loy Yang Power Ltd.'s policy to use 
derivative financial instruments to hedge these risks. Loy Yang Power Ltd. 
does not enter, hold or issue derivative financial instruments for reading or 
speculative purposes. 

Derivative financial instruments include forward rate agreements, futures, 
options, interest rate swaps and their Treasury Corporation of Victoria 
equivalents. 

Gains and losses arising from the early termination of general hedges are 
amortised over the period of the hedge. The exception to this is bond futures 
where gains and losses are amortised over the average term to maturity of 
existing fixed debt. 

Gains and losses arising from the early termination of specific hedges are 
amortised over the shorter of the period of the borrowing being hedged or the 
period of the hedge. 

F-162

FINANCIAL STATEMENTS 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 

1.10 EMPLOYEE ENTITLEMENTS 

WAGES, SALARIES AND LEAVE 

Provision is made for employee entitlement benefits accumulated as a result 
of employees rendering services up to the reporting date. These benefits 
include wages and salaries, annual leave and associated oncosts. 

Liabilities arising in respect of wages and salaries, annual leave and any 
other employee entitlements expected to be settled within twelve months of 
the reporting date are measured at their nominal amounts. All other employee 
entitlement liabilities are measured at the present value of their estimated 
future cash outflows to be made in respect of services provided by employees 
up to the reporting date. In determining the present value of future cash 
outflows, the interest rates attaching to Federal Government Guaranteed 
Securities which have terms to maturity approximating the terms of the 
related liability are used. 

Employee entitlement expenses are revenues arising in respect of the 
following categories: 

o  wages and salaries, non-monetary benefits, annual leave, long service 
leave, sick leave and other leave entitlements; and 

o  other types of employee entitlements; 

are charged to the Profit and Loss Statement on a net basis in their 
respective categories. 

SUPERANNUATION 

Loy Yang Power Ltd. contributes towards the Victorian Electricity Industry 
(VEI) Superannuation Fund on behalf of its employees. These contributions are 
charged to the Profit and Loss Statement as the liability arises (refer note 
17.2). 

1.11 PROVISION FOR SITE RESTORATION: POWER STATION AND MINE 

Recognition of a liability for the cost of restoring the power station and 
mine sites to an acceptable environmental standard at the end of their useful 
lives has been provided for in these accounts (refer notes 11 and 16). This 
liability includes costs of reclamation, plant closure and dismantling, and 
waste site closure. 

The liability is recognised on a gradual basis and is calculated by 
discounting the estimated future site restoration costs to their net present 
value. Annual increments to the liability for each site are charged to the 
Profit and Loss Statement over the estimated remaining life of each site. 

Expected future payments for site restoration are discounted using 
interest rates attaching, as at the reporting date, to Federal Government 
Guaranteed Securities with terms to maturity that match, as closely as 
possible, the estimated future cash outflows. 

Cost estimates are based on the assumption that current legal requirements 
and/or technologies will not change significantly over the life of the power 
station and mine sites. 

Changes in estimates are dealt with on a prospective basis. 

1.12 CASH 

For the purpose of the Statement of Cash Flows, cash includes cash on hand 
and in banks, investments in money market instruments and short-term deposits 
and securities, net of outstanding overdrafts. 

F-163

LOY YANG POWER ANNUAL REPORT 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

2 OPERATING REVENUE COMPRISES 

Sales revenue.............................................     557,500        238,468 
Interest revenue (refer note 25.5) .......................       1,845            637 
Proceeds from the sale of non-current assets..............         587            117 
Dividend revenue..........................................         127              0 
Other revenue.............................................      13,950          5,053 
-------------- -------------- 
574,009        244,275 
============== ============== 
- ----------------------------------------------------------------------------------------- 

3 OPERATING PROFIT 

The operating profit before income tax is arrived at 
after charging/(crediting) the following items: 

DEPRECIATION, AMORTISATION AND DIMINUTION 

Plant and equipment.......................................      96,219         40,255 
Development of mine (amortisation)........................       1,058            427 
Leased plant and equipment (amortisation).................       8,678          3,637 
Buildings.................................................         320            137 
Diminution in value of inventories........................           0            727 
-------------- -------------- 
TOTAL DEPRECIATION, AMORTISATION AND DIMINUTION ..........     106,275         45,183 
============== ============== 
AMOUNTS SET ASIDE TO PROVISIONS 
Bad and doubtful debts....................................           0              0 
Employee entitlements.....................................       4,492          1,170 
Site restoration--power station...........................         486            430 
Site restoration--mine ...................................         247            356 
-------------- -------------- 
TOTAL AMOUNT SET ASIDE TO PROVISIONS .....................       5,225          1,956 
============== ============== 
INTEREST EXPENSE (REFER NOTE 25.5)........................     126,711         59,145 
GOVERNMENT MINING ROYALTIES INCURRED......................       9,242          3,654 
ENERGY CONSUMPTION LEVY...................................          30              7 
SUPERANNUATION CONTRIBUTIONS..............................       2,697          1,194 
RENTAL OPERATING LEASES...................................         419            233 
PROFIT/(LOSS) ON SALE OF NON-CURRENT ASSETS...............          51            (16) 
RESEARCH AND DEVELOPMENT EXPENDITURE......................         519              0 

F-164

FINANCIAL STATEMENTS 1995/96

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

4 INCOME TAX 
4.1 INCOME TAX EXPENSE 
The prima facie tax on operating profit differs from the income tax 
provided in the accounts as follows: 
Prima facie income tax expense calculated at 36% (1995: 33%) on the 
operating profit.......................................................      66,684         26,261 
Increase in income tax expense due to permanent differences 
Depreciation on buildings.............................................         448            281 
Tax on provisions not carried forward.................................         621            280 
Provisions for restoration--non-deductible ...........................         175            142 
Entertainment and other non-deductible items .........................          31            444 
Decrease in income tax expense due to permanent differences 
Tax exempt income.....................................................        (293)             0 
Research and development concession...................................         (94)             0 
General investment allowance..........................................         (25)             0 
Depreciation on buildings.............................................           0           (328) 
Add: Restatement of deferred tax balances due to change in income tax 
rate...................................................................           0          1,881 
-------------- -------------- 
TOTAL INCOME TAX EXPENSE ATTRIBUTABLE TO OPERATING PROFIT  ............      67,547         28,961 
============== ============== 
Total income tax expense is made up of: 
Deferred income tax provision.........................................      85,298         51,107 
Less: future income tax benefit.......................................      17,751         22,146 
-------------- -------------- 
67,547         28,961 
============== ============== 
4.2 ANALYSIS OF TAX BALANCES CARRIED FORWARD 
CURRENT 
Future income tax benefit, balance at end of year......................       1,019          3,505 
Less: provision for deferred income tax, balance at end of year .......         450            360 
-------------- -------------- 
NET FUTURE INCOME TAX BENEFIT (REFER NOTE 7)...........................         569          3,145 
============== ============== 
NON-CURRENT 
Provision for deferred income tax, balance at end of year .............     135,955         50,747 
Less: future income tax benefit, balance at end of year................      45,267         25,030 
-------------- -------------- 
NET PROVISION FOR DEFERRED INCOME TAX (REFER NOTE 11) .................      90,688         25,717 
============== ============== 
The future income tax benefit will only be obtained if: 
a)future assessable income is derived of a nature and of an amount 
sufficient to enable the benefit to be realised; 
b)the conditions for deductibility imposed by tax legislation continue 
to be complied with; and 
(c)no changes in tax legislation adversely affect Loy Yang Power Ltd. 
in realising the benefit. 
- ------------------------------------------------------------------------------------------------------ 

5 RECEIVABLES 
CURRENT 
Trade debtors (refer note 25.6)........................................      69,684         97,843 
Other debtors (refer note 25.6)........................................       3,364          2,734 
-------------- -------------- 
73,048        100,577 
============== ============== 
NON-CURRENT 
Trade debtors (refer note 25.6)........................................       1,575          3,132 
Other debtors (refer note 25.6)........................................           0              0 
-------------- -------------- 
1,575          3,132 
============== ============== 

F-165

LOY YANG POWER ANNUAL REPORT 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE, 1996    30 JUNE, 1995 
$'000            $'000 
--------------- --------------- 

6 INVENTORIES 
CURRENT 
General purpose and maintenance stocks at cost........................       3,560           4,043 
Less: inventory diminution............................................           0               0 
--------------- --------------- 
3,560           4,043 
=============== =============== 
NON-CURRENT 
General purpose and maintenance stocks at cost........................      13,664          20,828 
Less: inventory diminution............................................         488             727 
--------------- --------------- 
13,176          20,101 
--------------- --------------- 
A review undertaken during the year identified 57.6 million of items 
that should correctly be identified as depreciable spares. This 
amount has been transferred to property, plant and equipment. 
- ------------------------------------------------------------------------------------------------------- 

7 OTHER ASSETS 
Current 
Prepayments...........................................................       1,146           1,010 
Future income tax benefit (refer note 4.2)............................         569           3,145 
--------------- --------------- 
1,715           4,155 
--------------- --------------- 
NON-CURRENT 
Unamortized interest rate swap termination losses.....................       4,828               0 
Unamortized futures termination losses................................         835               0 
--------------- --------------- 
5,663               0 
--------------- --------------- 
- ------------------------------------------------------------------------------------------------------- 

8 INVESTMENTS 
8.1 NON-CURRENT INVESTMENTS AT COST COMPRISE: 
Unlisted shares.......................................................           0             128 
Unlisted shares in associated companies...............................           0               0 
--------------- --------------- 
0             128 
--------------- --------------- 
8.2 NON-CURRENT INVESTMENTS IN UNLISTED ASSOCIATED COMPANIES 
PowerWorks Pty. Ltd. ................................................. 
PowerWorks Pty. Ltd's principal activity is to promote the 
electricity industry to the public 
Ownership interest....................................................        33.3%           33.3% 
Investment carrying amount............................................         0.1             0.1 

The above investment is held by Loy Yang Power Ltd. and is comprised 
of interest in the ordinary share capital of the associate. 
The balance date of the associate is 30 June, and the associate is 
incorporated in Australia. 
There are no material post-balance day events or dissimilar 
accounting policies. 
During the period, unlisted shares held at cost were sold for 
$223,296 

F-166

FINANCIAL STATEMENTS 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

9 PROPERTY, PLANT AND EQUIPMENT AT COST 
Land at cost...........................................................        1,589          1,589 
-------------- -------------- 
1,589          1,589 
Buildings at cost                                                              8,237          8,237 
Less: accumulated depreciation.........................................          457            137 
-------------- -------------- 
7,780          8,100 
Plant and equipment at cost............................................    2,986,003      2,966,792 
Less: accumulated depreciation.........................................      136,300         40,250 
-------------- -------------- 
2,849,703      2,926,542 
Plant and equipment under lease at cost (refer note 15.3) .............      274,988        274,988 
Less: accumulated amortisation.........................................       12,315          3,637 
-------------- -------------- 
262,673        271,351 
Mine development at cost...............................................       38,842         38,842 
Less: accumulated amortisation.........................................        1,485            427 
-------------- -------------- 
37,357         38,415 
Total Fixed Assets at Cost.............................................    3,309,659      3,290,448 
Total Accumulated Depreciation/Amortisation............................      150,557         44,451 
-------------- -------------- 
Total Written Down Amount..............................................    3,159,102      3,245,997 
-------------- -------------- 
- ------------------------------------------------------------------------------------------------------ 

10 CREDITORS AND BORROWINGS 
CURRENT 
Trade creditors (refer note 25.6)......................................       35,138         61,047 
Bank overdraft (refer note 14.1).......................................          620            657 
Shareholder loan*......................................................    1,917,492      1,917,492 
Interest accrued (refer note 25.6).....................................       23,765         30,819 
Dividend payable (refer note 25.6).....................................       61,686              0 
Other loans (refer note 20)............................................           49        102,091 
Other liabilities (refer note 25.6)....................................          869          1,580 
-------------- -------------- 
2,039,619      2,113,681 
-------------- -------------- 
NON-CURRENT 
Loans (refer note 20)..................................................    1,057,833      1,164,699 
-------------- -------------- 
1,057,833      1,164,699 
-------------- -------------- 

There are no guarantees or securities over assets with respect to 
borrowings. 

*In accordance with the Electricity Industry (Further Amendment) Act 
1994 section 153F and the Electricity Industry (Amendment) Act 1995 
section 153W, the shareholder loan is an amount owing to the State 
Electricity Commission of Victoria and, whilst the loan holds a legal 
obligation, it holds no interest payable and no term is specified for 
repayment. Loy Yang Power Ltd., however, will be making repayments 
against the shareholder loan in 1996/97. 

F-167

LOY YANG POWER ANNUAL REPORT 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

11 PROVISIONS 
CURRENT 
Employee entitlements (refer note 17)............       7,476          7,587 
Uninsured losses.................................           0             75 
Site restoration--mine (refer note 16)...........         140             60 
Redundancies.....................................       1,494          7,338 
-------------- -------------- 
9,110         15,060 
-------------- -------------- 
NON-CURRENT 
Employee entitlements (refer note 17)............       5,927          5,219 
Site restoration--power station (refer note 16) .       3,734          3,248 
Site restoration--mine (refer note 16)...........         968            906 
Deferred income tax (refer note 4.2).............      90,688         25,717 
-------------- -------------- 
101,317         35,090 
-------------- -------------- 
- -------------------------------------------------------------------------------- 

12 SHARE CAPITAL 
AUTHORISED CAPITAL 
500,000,000 Ordinary Shares of $1.00 each .......     500,000        500,000 
ISSUED AND PAID UP CAPITAL 
15 ordinary shares of $1.00 each, fully paid ....           0              0 
(Balance not shown due to rounding) 
- -------------------------------------------------------------------------------- 

13 RETAINED EARNINGS 
Balance at Beginning of Year.....................      50,618              0 
Transfer from profit and loss....................     117,686         50,618 
-------------- -------------- 
Total available for appropriation................     168,304         50,618 
Interim dividend paid............................      56,000              0 
Final dividend payable...........................      61,686              0 
-------------- -------------- 
BALANCE AT END OF YEAR...........................      50,618         50,618 
-------------- -------------- 

F-168

FINANCIAL STATEMENTS 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

14 STATEMENT OF CASH FLOWS 

14.1 RECONCILIATION OF CASH 
Cash at the end of the financial year as shown in the Statement of 
Cash Flows is reconciled to the related items in the Balance Sheet as 
follows: 

CASH 
Cash on hand...........................................................           8              8 
Short term deposits and securities.....................................         650          1,007 
-------------- -------------- 
658          1,015 
OVERDRAFT 
Bank overdraft.........................................................        (620)          (657) 
-------------- -------------- 
(620)          (657) 
-------------- -------------- 
38            358 
-------------- -------------- 
Loy Yang Power Ltd. has a bank overdraft facility of $5 million (1995: 
$10 million) arranged with the National Australia Bank. $4.4 million 
of the facility is available at 30 June 1996. 

14.2 RECONCILIATION OF NET CASH FLOWS FROM OPERATING ACTIVITIES 
Operating profit after income tax......................................     117,686         50,618 
-------------- -------------- 
Non-cash revenues and expenses, and revenues and expenses associated 
with financing or investing activities: 
Depreciation and amortisation expense..................................     106,275         44,456 
Income tax expense.....................................................      67,547         28,961 
Interest revenue received..............................................      (1,845)          (912) 
Finance charges........................................................     126,711         59,145 
Dividend revenue received..............................................        (127)             0 
Loss/(profit) on sold and scrapped non-current assets..................         (51)            16 
-------------- -------------- 
298,510        131,666 
ADJUST FOR MOVEMENTS IN ASSETS AND LIABILITIES 
Increase/(decrease) in operating expenditure accruals..................     (30,126)        29,572 
Increase/(decrease) in provisions......................................      (4,694)        (8,343) 
Increase/(decrease) in trust funds and deposits........................        (711)         1,308 
Decrease/(increase) in accounts receivable/accrued revenue ............      28,954        (41,753) 
Decrease/(increase) in prepayments.....................................        (136)         1,474 
Decrease/(increase) in inventory.......................................        (227)          (808) 
-------------- -------------- 
(6,940)       (18,550) 
-------------- -------------- 
NET CASH PROVIDED BY OPERATING ACTIVITIES..............................     409,256        163,734 
-------------- -------------- 

F-169

LOY YANG POWER ANNUAL REPORT 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

15 EXPENDITURE COMMITMENTS 
15.1 CAPITAL EXPENDITURE COMMITMENTS 
Outstanding contract commitments for capital expenditure 
contracted for at balance date but not provided for comprises 
the following: 
Payable not later than one year..................................        946            596 
-------------- -------------- 
946            596 
-------------- -------------- 
15.2 NON-CAPITAL EXPENDITURE COMMITMENTS 
Outstanding contract commitments for non-capital expenditure 
contracted for at balance date but not provided for comprises 
the following: 
Payable not later than one year..................................      6,524          3,938 
Payable greater than one and less than two years.................      1,566              0 
-------------- -------------- 
8,090          3,938 
-------------- -------------- 
15.3 LEASE EXPENDITURE COMMITMENTS 
Outstanding operating lease (non-cancellable) commitments at 
balance date but not provided for comprises the following: 
Payable not later than one year..................................        138              0 
Payable greater than one and less than two years.................        145              0 
Payable greater than two and less than five years................        169              0 
-------------- -------------- 
452              0 
-------------- -------------- 

Loy Yang Power Ltd. holds $263 million of plant disclosed as leased assets in 
note 9. The leases for these assets have not yet been novated to Loy Yang 
Power Ltd., and they remain with the current lessees being either the State 
Electricity Commission of Victoria or Generation Victoria. As a consequence 
Loy Yang Power Ltd. has no lease liability in respect to these leases. Loy 
Yang Power Ltd. and the State Electricity Commission of Victoria are 
progressing issues to achieve their formal novation to Loy Yang Power Ltd. 
The lessors have given their conditional consent for Loy Yang Power Ltd. to 
use the assets until such time as the leases are formally novated. 

Included in the above is a lease relating to an individual asset valued at 
$67.7 million (written down value) which has an expiry date of 31 December 
1999 unless not renewed by the lessor with effect from 30 June 1996. The 
renewal option is yet to be exercised. The lessor's consent for Loy Yang 
Power Ltd. to use the asset continues. 

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

16 SITE RESTORATION COSTS--POWER STATION AND MINE 
Provision for site restoration of the power 
station and mine sites of $4.8 million has 
been provided for in the accounts as at 30 
June 1996. The total net present value of 
estimated future cash outflows for site 
restoration is $26 million. 

F-170

FINANCIAL STATEMENTS 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

17 EMPLOYEE ENTITLEMENTS 
17.1 AGGREGATE EMPLOYEE ENTITLEMENT 
Wages and salaries................................................        185             219 
Recreation leave..................................................      6,663           6,176 
Long service leave................................................      6,740           6,630 
Redundancies......................................................      1,494           7,338 
-------------- -------------- 
15,082          20,363 
-------------- -------------- 
The amounts for long service leave are measured at their present 
values. The following assumptions were adopted in measuring the 
present values of the entitlements which are not expected to be 
paid or settled within 12 months of balance date. 

LONG SERVICE LEAVE 
Weighted average rates of increase in annual employee 
entitlements to settlement of the liabilities ....................      2.9%            4.0% 
Weighted average discount rates ..................................      8.7%            8.8% 
Weighted average terms to settlement of the liabilities  .........    11 years        11 years 

17.2 SUPERANNUATION FUND 
All permanent and directly hired casual employees of Loy Yang 
Power Ltd. are entitled to benefits on termination from the 
Victorian Electricity Industry Superannuation Fund. All casual 
and permanent employees engaged after 3 October 1994 are members 
of an accumulation fund, Division D or other external 
accumulation funds. All other permanent employees are members of 
Division B or C of the Fund which provide defined benefits in the 
form of pensions (Division B) or lump sums (Division C). Both 
defined benefit schemes are closed to new members. During July 
1995 the company contributed to the Fund at the rate of 10% for 
the defined benefit schemes, and thereafter at a rate of 9.75%. 
Contributions in excess of those required by the Superannuation 
Guarantee Charge Act 1992 (6%) are not legally enforceable. 

F-171

LOY YANG POWER ANNUAL REPORT 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

17 EMPLOYEE ENTITLEMENTS (CONTINUED) 
17.2 SUPERANNUATION FUND (CONTINUED) 
The effective date of the most recent detailed valuation of the Fund 
was 30 June 1996. The review was undertaken by William M. Mercer Pty 
Ltd. Based on that assessment, the situation for the company as at 30 
June 1996 was: 
Present value of employees accrued benefits............................     54,100*         45,800 
Net market value of assets held by the fund to meet future benefit 
payments...............................................................     54,600*         47,500 
Excess/(deficit) of present value of employees' benefits over assets 
held to meet future benefit payments...................................        500*          1,700 
Vested benefits........................................................     49,300*         45,700 

The present value of employees' accrued benefits is equal to the past 
membership liability calculated in accordance with Australian 
Accounting Standard AAS25 "Financial Reporting by Superannuation 
Plans". (Vested benefits are those benefits which would have been paid 
on voluntary termination from the Fund.) 

Employer contributions to the fund.....................................      2,697           1,194 
Additional contributions to the fund to compensate for differences 
between the resignation and retrenchment benefit, in relation to 
voluntary retrenchments................................................      1,228           1,140 

*Note: Asset and benefit figures are unaudited at the time of signing 
this report. The last full audit was conducted at 30 June 1995. 
- ------------------------------------------------------------------------------------------------------ 

18 CONTINGENT EVENTS 
18.1 Loy Yang Power Ltd. was allocated its assets and liabilities from 
Generation Victoria through an allocation statement in accordance with 
the Electricity Industry (Further Amendment) Act 1994. Under section 
153B of this Act, the allocation statement may be amended at any time 
at the direction of the Victorian Government Treasurer and relevant 
Minister. 

18.2 Upon the disaggregation of the State Electricity Commission of 
Victoria (SECV) on 3 January 1994, Generation Victoria entered into a 
contract with the SECV to meet the SECV's obligations under its 
contracts for the supply of coal and infrastructure services to the 
Loy Yang B Joint Venture in consideration of receipt of all SECV's 
revenues under those contracts. Upon the disaggregation of Generation 
Victoria on 31 January 1995, Generation Victoria's rights and 
obligations were allocated to Loy Yang Power Ltd. 

Under the contract Loy Yang Power Ltd. is directly liable to the SECV 
to use its "best endeavours", backed by an indemnity in favour of the 
SECV for performance of these obligations, subject only to force 
majeure relief. A failure by Loy Yang Power Ltd. to use its "best 
endeavours" may result in liabilities being imposed on Loy Yang Power 
Ltd. At the time of preparation of this report, Loy Yang Power Ltd. is 
not aware of any breaches of performance obligations on its part. 

The SECV remains the contracting party under the contracts with the 
Loy Yang B Joint Venture. 

F-172

FINANCIAL STATEMENTS 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

19 TREASURY 
19.1 LOY YANG POWER LTD. DERIVATIVES 
Loy Yang Power Ltd.'s derivative products are dealt through Treasury 
Corporation of Victoria (TCV). The only derivative products 
outstanding as at 30 June 1996 were Interest Rate Swaps. 

INTEREST RATE SWAPS 
Under these swaps, Loy Yang Power Ltd. agrees with the counterpart to 
exchange, at specified intervals, the difference between the 
fixed-rate and floating-rate interest amounts calculated by reference 
to an agreed notional amount. The notional principal amounts are not 
exchanged by the parties. 

The maturity profile of these swaps in notional principal terms is: 
Later than two years and not later than five years....................      25,000         33,744 
Later than five years.................................................     195,000        245,000 
-------------- -------------- 
220,000        278,744 
-------------- -------------- 
The following table indicates the type of swaps held by Loy Yang Power 
Ltd. and their weighted average interest rates. 
Pay-fixed swaps: notional principal amount............................     220,000        278,744 
Average pay rate: Loy Yang Power Ltd. specific cost...................        12.6%          12.5% 
Average receive rate..................................................         7.6%           7.7% 

Loy Yang Power Ltd.'s credit exposures on these swaps is nil as the 
counterpart in each case is TCV. 

VIC INTEREST RATE FORWARDS & VIC HOTSTOCK FORWARDS 

The maturity profile in notional principal amount terms, of these 
Interest Rate and Hotstock Forwards is: 
Not Later than one year...............................................           0         90,000 
-------------- -------------- 
0         90,000 
-------------- -------------- 

Both Vic Interest Rate Forwards and Vic Hotstock Forwards were created 
by TCV for use by their Participating Authorities following the State 
Treasurer's instructions that TCV Participating Authorities were to no 
longer deal in derivative products directly with the financial markets 
from 1 July 1995. 

Vic Interest Rate Forwards are similar to Bill Futures except that 
there are no initial and variation margins to be paid by either 
counterpart. Vic Hotstock Forwards are similar to Bond Futures except 
the maturity dates are specific to TCV's physical hotstocks. 

F-173

LOY YANG POWER ANNUAL REPORT 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

20 LOANS (refer note 25.6) 
20.1 LOAN COMPONENTS 
CURRENT LOANS 
Premium/(discount) on loans.................................            0          1,782 
Fixed interest loans........................................           49             88 
Fixed interest bonds........................................            0        100,221 
-------------- -------------- 
49        102,091 
NON-CURRENT LOANS 
Premium/(discount) on loans ................................       38,899         39,055 
Floating rate notes ........................................      249,745        334,746 
Fixed interest bonds .......................................      626,695        654,895 
Capital indexed bonds ......................................      142,429        135,890 
Fixed interest loans .......................................           65            113 
-------------- -------------- 
1,057,833      1,164,699 
-------------- -------------- 
1,057,882      1,266,790 
-------------- -------------- 
Liabilities in years of maturity, at face value are: 
Not later than one year....................................           49        100,309 
Later than one year and not later than two years ..........      353,784         21,249 
Later than two years and not later than five years  .......      327,721        813,505 
Later than five years......................................      337,429        290,890 
-------------- -------------- 
1,018,983      1,225,953 
-------------- -------------- 
Plus unamortised adjustments to face value (refer note 
20.2)......................................................       38,899         40,837 
-------------- -------------- 
1,057,882      1,266,790 
-------------- -------------- 
20.2 ADJUSTMENTS TO FACE VALUE OF LOANS 
Current (discount)/premium..................................            0          1,782 
Non-Current (discount)/premium..............................       38,899         39,055 
-------------- -------------- 
38,899         40,837 
-------------- -------------- 

F-174

FINANCIAL STATEMENTS 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

20 LOANS (CONTINUED) 
20.3 SECURITY--LOANS 
All loan funding for Loy Yang Power Ltd. is arranged via Treasury Corporation of 
Victoria (TCV). Legal inability to the end investor for Loy Yang Power Ltd. loans 
rests with TCV. 
These loans are guaranteed by the State Government of Victoria. In return Loy Yang 
Power Ltd. pays a financial accommodation levy to the State Government which increases 
the cost of debt to reflect market rates, based on an assessment of credit risk. 
For debt novated to TCV, back-to-back loans have been established between Loy Yang 
Power Ltd. and TCV. Pursuant to Section 36D of the Treasury Corporation of Victoria 
(Debt Centralisation) Act 1993, Loy Yang Power Ltd. will reimburse TCV for all 
settlement amounts relating to these loans. 
- ------------------------------------------------------------------------------------------------------------- 

21 AUDITORS' REMUNERATION 
Amounts received, or due and receivable, by the Auditor-General for auditing the 
financial statements: 
Total amount payable for annual audit fee ...................................         52             62 
- ------------------------------------------------------------------------------------------------------------- 

22 DIRECTORS' REMUNERATION 
Amounts received, or due and receivable, by the directors of 
Loy Yang Power Ltd. .........................................................        162             56 
The number of directors of Loy Yang Power Ltd. whose annual remuneration (including 
superannuation contributions) falls within the following bands: 

$ Band levels                                                                       Directors      Directors 
- ---------------------------------------------------------------------------------  ------------- ------------- 
$30,000 -$39,999 ................................................................        3              3 
$60,000 -$69,999 ................................................................        1              1 
During the year Loy Yang Power Ltd. paid premiums for the indemnification and insurance 
of all directors and officers of Loy Yang Power Ltd. to the full extent permitted by 
Corporations Law. 
The directors have applied ASC Class Order 95/741 in the disclosure of directors' 
remuneration. 
- --------------------------------------------------------------------------------------------------------------- 

23 EXECUTIVES' REMUNERATION 
The number of executives of Loy Yang Power Ltd. whose remuneration falls within the 
following bands is set out below: 

$ BAND LEVELS                                                                    EXECUTIVES      EXECUTIVES 
- ------------------------------------------------------------------------------  -------------- -------------- 

$100,000 -$109,999 ...........................................................          0              1 
$110,000 -$119,999 ...........................................................          2              4 
$120,000 -$129,999 ...........................................................          1              0 
$130,000 -$139,999 ...........................................................          3              1 
$200,000 -$209,999 ...........................................................          0              1 
$210,000 -$219,999 ...........................................................          1              0 

Total remuneration received, or due and receivable, from Loy Yang Power Ltd. 
or related entities by executive officers of Loy Yang Power Ltd. whose 
remuneration exceeds $100,000: ...............................................        974            890 

1994/95 amounts represent annual equivalents. 

1995/96 amounts represent 12 months actual. 

F-175

LOY YANG POWER ANNUAL REPORT 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

24 SEGMENTS 

Loy Yang Power Ltd. operated entirely in Australia in the production and sale 
of electricity and coal. 

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

25 RELATED PARTY DISCLOSURES 

25.1 DIRECTORS OF LOY YANG POWER LTD. 

Directors of Loy Yang Power Ltd. during the financial year were: 

Mr. C. Little 
Mr. D. Swan 
Mr. J. C. Richards 
Mr. J. S. Grigg 

All directors are non executive. 

25.2 TRANSACTIONS WITH DIRECTOR-RELATED ENTITIES 

There were no transactions with director-related entities. 

25.3 WHOLLY OWNED GROUP 

The wholly owned group comprises the ultimate holding entity of Loy Yang 
Power Ltd., the Victorian State Government, and therefore all Victorian State 
Government Departments, Statutory Corporations and any other corporate 
entities owned by the Victorian State Government are related parties. 

25.4 RELATED PARTY TRANSACTION CATEGORIES 

The following types of related party transactions were transacted during the 
year, on normal commercial terms: 

Electricity purchases 
Electricity transmission costs 
Electricity pool costs 
Council rates 
Auditing services 
Brown Coal Royalties 
Technical services 
Payroll tax 
Briquette purchases 
Electricity sales revenue 
Coal sales revenue 
Water purchases and waste water disposals 
Loans from shareholder 
Land leases 
Provision of loan facilities 
Gas purchases 
Superannuation payments 

F-176

FINANCIAL STATEMENTS 1995/96 

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED) 

30 JUNE 1996    30 JUNE 1995 
$'000          $'000 
-------------- -------------- 

25 RELATED PARTY DISCLOSURES (continued) 

25.5 OPERATING PROFIT AND LOSS TRANSACTIONS WITH RELATED PARTIES 

Interest revenue..............................................................        1,164            371 
Dividend revenue..............................................................          127              0 
Interest expense .............................................................      126,711         58,707 

25.6 RECEIVABLE AND PAYABLES AT BALANCE DATE 

AGGREGATE RELATED PARTY RECEIVABLES AT BALANCE DATE 

Current ......................................................................       57,508         99,469 
Non-current...................................................................        1,566          3,132 
-------------- -------------- 
59,074        102,601 
-------------- -------------- 
AGGREGATE RELATED PARTY PAYABLES AT BALANCE DATE 
Current ......................................................................    1,994,185      2,097,008 
Non-current...................................................................    1,058,296      1,164,997 
-------------- -------------- 
3,052,481      3,262,005 
-------------- -------------- 
25.7 INTERESTS HELD 
There are no interests held in any related party other than those disclosed 
as investments in note 8. 

F-177

LOY YANG POWER ANNUAL REPORT 1995/96 

AUDITOR-GENERAL'S REPORT 

AUDIT SCOPE 

The accompanying financial statements of Loy Yang Power Limited for the year 
ended 30 June 1996, comprising a profit and loss statement, balance sheet, 
statement of cash flows and notes to the financial statements, have been 
audited. The company's directors are responsible for the preparation and 
presentation of the financial statements and the information they contain. An 
independent audit of these financial statements has been carried out in order 
to express an opinion on them to the manager of the company, as required by 
the Corporations Law and Audit Act of 1996. 

The audit has been conducted in accordance with Australian Auditing Standards 
to provide reasonable assurance as to whether the financial statements are 
free of material misstatement. The audit procedures included an examination, 
on a test basis, of evidence supporting the amounts and other disclosures in 
the financial statements, and the evaluation of accounting policies and 
significant accounting estimates. These procedures have been undertaken to 
form an opinion as to whether, in all material respects, the financial 
statements are presented fairly in accordance with the basis on which the 
accounts have been prepared, namely applicable Accounting Standards, other 
mandatory professional reporting requirements and comply with the 
Corporations Law, so as to present a view which is consistent with my 
understanding of the company's financial position and the results of its 
operations and its cash flows. 

The audit opinion expressed in the financial statements has been formed on 
the above basis. 

AUDIT OPINION 

In my opinion, the financial statements of Loy Yang Power Limited are 
properly drawn up: 

a)     so as to give a true and fair view of: 

i)      the company's state of affairs as at 30 June 1996 and of its profit 
and cash flows for the financial year ended on that date; and 

ii)     the other matters required by Divisions 1, 4A and 4B of Part 3.6 of 
the Corporations Law to be dealt with in the financial statements, 

b)     in accordance with the Corporations Law, and 

c)     in accordance with applicable Accounting Standards and other mandatory 
professional reporting requirements. 

/s/ C.A. Baragwanath 
C.A. Baragwanath 
Auditor-General 

Melbourne, 29 August 1996 

F-178

[VICTORIAN AUDITOR-GENERAL LETTERHEAD] 

AUDITOR-GENERAL'S REPORT 

AUDIT SCOPE 

The accompanying financial statements of Loy Yang Power Limited for the 
financial year ended 30 June 1995, comprising a profit and loss statement, 
balance sheet, statement of cash flows and notes to the financial statements, 
have been audited. The company's directors are responsible for the 
preparation and presentation of the financial statements and the information 
they contain. An independent audit of these financial statements has been 
carried out in order to express an opinion on them to the members of the 
company as required by the Corporations Law and the Audit Act 1994. 

The audit has been conducted in accordance with Australian Auditing 
Standards to provide reasonable assurance as to whether the financial 
statements are free of material misstatement. The audit procedures included 
an examination, on a test basis, of evidence supporting the amounts and other 
disclosures in the financial statements, and the evaluation of accounting 
policies and significant accounting estimates. These procedures have been 
undertaken to form an opinion as to whether, in all material respects, the 
financial statements are presented fairly in accordance with applicable 
Accounting Standards and other mandatory professional reporting requirements 
and comply with the Financial Management Act 1994 and the Corporations Law, 
so as to present a view which is consistent with my understanding of the 
company's financial position and the results of its operations and its cash 
flows. 

The audit opinion expressed on the financial statements has been formed on 
the above basis. 

AUDIT OPINION 

In my opinion, the financial statements of the Loy Yang Power Limited are 
properly drawn up: 

(a) so as to give a true and fair view of: 
(i)  the company's state of affairs as at 30 June 1995 and of its profit 
and cash flows for the financial year ended on that date, and 
(ii) the other matters required by Divisions 4, 4A and 4B of Part 3.6 of 
the Corporations Law to be dealt with in the financial statements. 

(b) in accordance with the Financial Management Act 1994 and the Corporations 
Law; and 

(c) in accordance with applicable Accounting Standards and other mandatory 
professional reporting requirements. 

/s/ K. G. Hamilton 
------------------ 
K. G. HAMILTON 
Acting 
Auditor-General 
MELBOURNE 
6/9/1995 

End of Audited Financial Statements 

F-179

[ARTHUR ANDERSEN LETTERHEAD] 

11 December 1997 

NRG Energy Inc 
1221 Nicollet Mall 
Suite 700 
Minneapolis MN 55403-2445 
UNITED STATES OF AMERICA 

Dear Sirs/Mesdames 

LOY YANG POWER -- REPORT ON US GAAP RECONCILIATION AND PRIOR YEAR AUDIT 
WORKPAPERS 

At your request, we have performed the agreed-upon procedures set out below 
with respect to Loy Yang Power Limited for the period 1 February 1995 to 30 
June 1995, the financial year ended 30 June 1996, and the period from 1 July 
1996 to 12 May 1997. These financial periods were covered by financial 
statements for the financial years ended 30 June 1995 and 30 June 1996 of Loy 
Yang Power Limited, and for the financial year ended 30 June 1997 for Quite 
Life Limited (formerly Loy Yang Power Limited). Each of these financial 
statements was subject to audit by the Victorian Auditor-General's Office. 

The procedures performed were as follows: 

o  We audited the reconciliations of both the operating profit after tax for 
each of the financial periods listed above and shareholders equity as at 
30 June 1995, 30 June 1996 and 12 May 1997, from Australian generally 
accepted accounting principles ("GAAP") to United States ("US") GAAP. 

o  We reviewed the workpapers of the Victorian Auditor-General's Office for 
the purpose of determining whether the audit procedures performed in 
support of the audit opinions on the financial statements as described 
above were in accordance with US generally accepted auditing standards 
("GAAS"). 

The following statements are made as a result of the performance of these 
agreed-upon procedures. 

AUDIT OF US GAAP RECONCILIATION 

We have audited the reconciliation of operating profit after tax of Loy Yang 
Power Limited for the period from 1 February 1995 to 30 June 1995, the 
financial year ended 30 June 1996, and the period from 1 July 1996 to 12 May 
1997, and of shareholders equity as at 30 June 1995, 30 June 1996 and 12 May 
1997, from Australian GAAP to US GAAP, as set out in Schedule 1. 

Our audit has been conducted in accordance with Australian Auditing 
Standards, which are substantially similar in all material respects to US GAAS,
to provide reasonable assurance of whether the US GAAP reconciliations are free
of material misstatement. Our procedures included the examination of the 
audited financial statements for each of the financial period listed above of 
Loy Yang Power Limited in order to identify the application of accounting 
polices which would be inconsistent with US GAAP, and the examination of the 
US GAAP reconciliation including examination, on a test basis, of evidence
supporting the amounts of the reconciling items. These procedures have been
undertaken to form an opinion whether, in all material respects, the US GAAP 
reconciliations are presented fairly, and represent an amount of operating 
profit after tax and shareholders equity in accordance with US GAAP. The 
audit opinion expressed in this report has been formed on the above basis. 

F-180

In our opinion, the US GAAP reconciliations of Loy Yang Power Limited are 
properly drawn up to give a true and fair view of: 

o   Operating profit after tax for the period from 1 February 1995 to 30 June 
1995, the financial year ended 30 June 1996, and the period from 1 July 
1996 to 12 May 1997 under US GAAP; and 

o   Shareholders equity as at 30 June 1995, 30 June 1996 and 12 May 1997 
under US GAAP. 

REVIEW OF WORKPAPERS OF THE VICTORIAN AUDITOR-GENERAL'S OFFICE 

We have reviewed the workpapers of the Victorian Auditor-General's Office in 
support of the audit opinions expressed by the Auditor-General on the 
financial statements for the financial years ended 30 June 1995 and 30 June 
1996 for Loy Yang Power Limited, and for the financial year ended 30 June 
1997 for Quite Life Limited (formerly Loy Yang Power Limited). 

Our review has been conducted in accordance with Australian Auditing 
Standards which are substantially similar in all material respects to US 
GAAS, in order to state whether, on the basis of the procedures described, 
anything has come to our attention that would indicate that the audits 
performed by the Auditor-General were not performed in accordance with US 
GAAS. Our procedures involved the examination of the workpapers of the 
Auditor-General for each of the financial statements listed above, and an 
assessment of whether the procedures documented therein would constitute an 
audit in accordance with US GAAS. As our review does not constitute an audit 
made in accordance with Australian auditing standards, we do not express an 
opinion on whether the audit has been performed in accordance with US GAAS. 

Based on our review however, nothing has come to our attention that causes us 
to believe that the audits performed by the Auditor-General on the financial 
statements for the financial years ended 30 June 1995 and 30 June 1996 for 
Loy Yang Power Limited, and for the financial year ended 30 June 1997 for 
Quite Life Limited (formerly Loy Yang Power Limited), have not been performed 
in accordance with US GAAS. 

This report has been prepared to assist you with your reporting obligations 
to the Securities Exchange Commission, and is not to be used for any other
purpose. 

If you have any queries in relation to the above, please do not hesitate to 
contact either Mr Michael Perry (613) 9286 8734 or Mr Scott Ward (613) 9286 
8194. 

Yours faithfully 

/s/ Arthur Andersen 

Enc 

F-181

SCHEDULE 1 

LOY YANG POWER LIMITED 

US GAAP RECONCILIATION 

A$'000         A$'000          A$'000 
PERIOD TO       YEAR TO       PERIOD TO 
12 MAY 1997   30 JUNE 1996    30 JUNE 1995 
-------------  -------------- -------------- 

Operating profit and extraordinary items under 
Australian GAAP ......................................         983,177        117,686         50,618 
Less: Extraordinary gain on sale of business net of 
tax...................................................  7     (952,657) 
Add: Loss on buy-back of debt securities ..............  7       82,576 
-------------  -------------- -------------- 
Operating profit before sale of business under 
Australian GAAP.......................................         113,096        117,686         50,618 
Add/(less): US GAAP adjustments 
Provision for redundancies ...........................  1         (650)        (3,740)        (5,053) 
Pension plan .........................................  2        1,472           (768)          (320) 
Tax rate change ......................................  3                      (1,881)         1,881 
Revaluation of property, plant & equipment  ..........  4        4,435          5,142          2,151 
Reclassification of spares ...........................  5                      (1,830) 
Shareholder loan .....................................  6      (81,022)       (76,311)       (32,838) 
-------------  -------------- -------------- 
Operating profit before sale of business under US GAAP           57,331         38,298         16,439 
=============  ============== ============== 

A$'000         A$'000          A$'000 
AT             AT              AT 
12 MAY 1997   30 JUNE 1996    30 JUNE 1995 
-------------  -------------- -------------- 

Shareholders equity under Australian GAAP .............                0        50,618         50,618 
Less: Extraordinary gain on sale of business net of 
tax...................................................  7      (952,657) 
Add: Dividend paid on sale of business ................  7     1,033,795 
Add: Loss on buy-back of debt securities ..............  7        82,576 
------------- 
Shareholders equity before sale of business under 
Australian GAAP ......................................          163,714        50,618         50,618 
Add/(less): US GAAP adjustments 
Provision for redundancies ...........................  1        (9,443)       (8,793)        (5,053) 
Pension plan .........................................  2         1,792           320          1,088 
Dividend payable .....................................  8       (61,686)       61,686 
Tax rate change ......................................  3                                      1,881 
Revaluation of property, plant & equipment  ..........  4        11,728         7,293          2,151 
Reclassification of spares ...........................  5        (1,830)       (1,830) 
Shareholder loan .....................................  6                      61,022        137,334 
-------------  -------------- -------------- 
Shareholders equity before sale of business under US 
GAAP .................................................          104,275       170,316        188,019 
=============  ============== ============== 

F-182

LOY YANG POWER LIMITED 

US GAAP RECONCILIATION -- FOOTNOTES 

1. PROVISION FOR REDUNDANCIES 

A provision for labour redundancies was recognised on the 
commercialisation of the company on 1 February 1995. In accordance with 
Australian GAAP, a provision for redundancies can be recognised where 
positions have been identified as being surplus to requirements, provided the 
circumstances are such that a constructive liability exists. Under US GAAP, a 
provision for redundancies can only be recognised in certain restricted 
circumstances. In particular, a provision redundancies involving voluntary 
severance offers is restricted to employees who have accepted those offers. 
Where the conditions for recognition of a redundancy provision do not exist, 
redundancy benefits paid are expensed as incurred. 

2. CONTRIBUTIONS TO PENSION PLANS 

Under Australian GAAP, contributions made to pension plans are expensed 
when due. Under US GAAP, the net periodic pension cost is charged against the 
profit and loss account in accordance with US Statement of Financial 
Accounting Standards No. 87. 

3. RESTATEMENT OF DEFERRED TAX BALANCES FOR TAX RATE CHANGE 

The company's deferred tax balances were restated at 30 June 1995 
following the increase in the Australian company tax rate from 33% to 36% 
announced by the Australian Treasurer in Parliament on 19 May 1995. This 
increase was applicable to the company from 1 July 1995. Under Australian 
GAAP, such an announcement is normally acceptable as adequate evidence that 
the change will occur. Under US GAAP, a change of tax rate is not recognised 
until it has been enacted. 

4. UPWARD REVALUATIONS OF PROPERTY, PLANT AND EQUIPMENT 

Upward revaluations of property, plant and equipment to an amount above 
historical cost are permitted under Australian GAAP, which result in an 
increase in depreciation expense charged against the profit and loss account. 
Since US GAAP does not permit property, plant and equipment to be valued at 
an amount above historical cost, the company's depreciation expense has been 
restated to reflect historical cost depreciation. 

5. CHANGE IN ACCOUNTING POLICY 

Under Australian GAAP, a change in accounting policy which resulted in 
non-depreciable inventory being classified as depreciable property, plant and 
equipment was brought to account through prospective adjustment to 
depreciation charged to the profit and loss account. Under US GAAP, a charge 
to the profit and loss account made in the period of reclassification, 
representing a retrospective adjustment for depreciation charges incurred to 
date. 

6. SHAREHOLDER LOAN 

Under Australian GAAP, non-interest bearing debt is recognised as the 
amount of principal due for repayment, and no interest expense is charged to 
the profit and loss account. Under US GAAP, a notional interest cost is 
recognised through adjusting the carrying value of the debt to the present 
value of future obligations for principal repayments. 

7. REVERSAL OF RESULT FROM SALE OF BUSINESS 

The result from the sale of the business, including the final dividend to 
the State Electricity Commission of Victoria, and the loss incurred on the 
buy back of debt securities has been reversed in determining the results of 
operations and shareholder equity under Australian GAAP. 

8. DIVIDEND PAYABLE 

Under Australian GAAP, dividends are recognised in the period to which 
they relate and provision for dividends payable is made where a constructive 
liability exists for the payment of such dividends at year end. Under US 
GAAP, a dividends are recognised in the period in which they are declared and 
become legally payable. 

F-183

9. OTHER US GAAP MATTERS 

Amortisation of deferred mine development costs 

The expenditure associated with mine development costs is carried forward 
to the extent that it is expected to be recouped. Deferred costs are 
amortised on a units of production basis over proven coal reserves. This 
accounting treatment is consistent with both Australian and US GAAP. 

Liability for leased assets 

On its commercialisation on 1 February 1995, the company recorded as an 
asset plant and equipment under lease to the State Electricity Commission of 
Victoria (SECV) and Generation Victoria (GenVic) with a fair value of 
A$274.988 million. The plant and equipment was operated in accordance with 
licenses approved by the lessor with the consent of the SECV and GenVic 
pending formal novation of the lease agreement. 

Liability for payments to the SECV and GenVic in relation to the leased 
assets was recognised as a component of the non-interest bearing shareholder 
loan (refer item 6 above). The amount of this liability was equal to the fair 
value of the leased assets on commercialisation of the company. For the 
purpose of the US GAAP reconciliation, the profit and loss charges associated 
with the financing of the leased assets are included within the notional 
interest cost on the shareholder loan. 

F-184

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY 
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS 
PROSPECTUS IN CONNECTION WITH THIS OFFERING, AND, IF GIVEN OR MADE, SUCH 
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN 
AUTHORIZED BY NRG. THE INFORMATION CONTAINED HEREIN IS AS OF THE DATE HEREOF 
AND SUBJECT TO CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. DELIVERY OF 
THIS PROSPECTUS AT ANY TIME SHALL NOT CREATE ANY IMPLICATION THAT THERE HAS 
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF NRG 
SINCE THE DATE HEREOF OR THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS 
OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN 
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN 
THE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A 
SOLICITATION OF AN OFFER TO BUY ANY OF THE NOTES OFFERED HEREBY IN ANY 
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO 
SUCH PERSON. 

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

TABLE OF CONTENTS 

PAGE 
------ 

Summary.................................     3 
Risk Factors............................    16 
Use of Proceeds ........................    24 
The Exchange Offer .....................    25 
Capitalization .........................    32 
Selected Consolidated Financial Data  ..    33 
Selected Pro Forma Condensed Financial 
Data ..................................    36 

Management's Discussion and Analysis of 
Financial Condition and Results of 
Operations ............................    38 
Business ...............................    47 
Regulation .............................    81 
Management .............................    86 
Ownership of Capital Stock .............    92 
Certain Transactions ...................    93 
Certain Indebtedness ...................    95 
Description of Notes ...................    96 
Certain Federal Income Tax 
Considerations ........................   106 
Ratings ................................   108 
Plan of Distribution ...................   109 
Legal Matters ..........................   110 
Experts ................................   110 
Index to Consolidated Financial 
Statements.............................   F-1 

UNTIL MARCH 18, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, 
WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO 
DELIVER A PROSPECTUS. 

$250,000,000 

NRG ENERGY INC. 

7 1/2% SENIOR NOTES 
DUE 2007 

[NRG LOGO]

PROSPECTUS 

DATED DECEMBER 17, 1997 

PART II 

INFORMATION NOT REQUIRED IN THE PROSPECTUS 

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. 

The following is an estimate of all expenses in connection with the 
issuance and distribution of the securities being registered hereby: 

SEC Registration Fee....  $ 75,758 
Accountants' fees and 
expenses................   100,000 
Attorney's fees and 
expenses................   150,000 
Printing expenses.......   100,000 
Miscellaneous...........    19,242 
--------- 
Total...................  $445,000 
========= 

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. 

As authorized by Section 145 of the General Corporation Law of the State 
of Delaware, each director and officer of NRG may be indemnified by NRG 
against expenses (including attorney's fees, judgments, fines and amounts 
paid in settlement) actually and reasonably incurred in connection with the 
defense or settlement of any threatened, pending or completed legal 
proceedings in which he is involved by reason of the fact that he is or was a 
director or officer of NRG if he acted in good faith and in a manner that he 
reasonably believed to be in or not opposed to the best interests of NRG and, 
with respect to any criminal action or proceeding, if he had no reasonable 
cause to believe that his conduct was unlawful. However, if the legal 
proceeding is by or in the right of NRG, the director or officer may not be 
indemnified in respect of any claim, issue or matter as to which he shall 
have been adjudged to be liable for negligence or misconduct in the 
performance of his duty to NRG unless a court determines otherwise. 

In addition, Article VI of NRG's By-Laws provides that NRG shall indemnify 
and hold harmless, to the fullest extent permitted by applicable law, any 
person who was or is made or is threatened to be made a party or is otherwise 
involved in any action, suit or proceeding, whether civil, criminal, 
administrative or investigative (a "Proceeding") by reason of the fact that 
he or she, or a person for whom he or she is the legal representative, is or 
was a director, officer, employee or agent of NRG or is or was serving at the 
request of NRG as a director, officer, employee or agent of another company 
or of a partnership, joint venture, trust, enterprise or non-profit entity, 
including service with respect to employee benefit plans, against all 
liability and loss suffered and expenses reasonably incurred by such person. 
NRG shall be required to indemnify a person in connection with a Proceeding 
initiated by such person only if the Proceeding was authorized by the Board 
of Directors of NRG. 

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. 

On June 12, 1997, NRG sold $250,000,000 aggregate principal amount of its 
7-1/2% Senior Notes Due 2007 (the "Old Notes") to Salomon Brothers Inc, ABN 
AMRO Chicago Corporation and Chase Securities Inc. (the "Initial Purchasers") 
for $250,000,000 less the aggregate discount to Initial Purchasers of 
$1,625,000. Such transaction was exempt from the registration requirements of 
the Securities Act of 1933, in reliance on Section 4(2) of the Securities Act 
on the basis that such transactions did not involve a public offering. In 
accordance with the agreement pursuant to which the Initial Purchasers 
purchased the Old Notes, such Initial Purchasers agreed to offer and sell the 
Old Notes only to "qualified institutional buyers" (as defined in Rule 144A 
under the Securities Act) and pursuant to offers and sales that occur outside 
the United States within the meaning of Regulation S under the Securities 
Act. 

On January 29, 1996, NRG sold $125,000,000 aggregate principal amount of 
its 7.625% Senior Notes Due 2006 (the "1996 Notes") to Bear, Stearns & Co. 
Inc. and Merrill Lynch & Co. (the "1996 Note Initial Purchasers") for 
$125,000,000 less the aggregate discount to 1996 Note Initial Purchasers of 

II-1

$812,500. Such transaction was exempt from the registration requirements of 
the Securities Act of 1933, in reliance on Section 4(2) of the Securities Act 
on the basis that such transactions did not involve a public offering. In 
accordance with the agreement pursuant to which the 1996 Note Initial 
Purchasers purchased the 1996 Notes, such 1996 Note Initial Purchasers agreed 
to offer and sell the 1996 Notes only to "qualified institutional buyers" (as 
defined in Rule 144A under the Securities Act), a limited number of 
institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) 
or (7) under the Securities Act) and pursuant to offers and sales that occur 
outside the United States within the meaning of Regulation S under the 
Securities Act. 

II-2

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. 

EXHIBIT 
- ----------- 

3.1         Certificate of Incorporation of NRG.* 
3.2         By-Laws of NRG.* 
4.1         Indenture, dated as of June 1, 1997, between NRG and Norwest Bank Minnesota, National Association.* 
4.2         Form of Exchange Notes.* 
4.3         Registration Rights Agreement, dated as of June 12, 1997, by and among NRG, Salomon Brothers Inc, ABN 
AMRO Chicago Corporation and Chase Securities Inc.* 
5.1         Opinion and consent of Skadden, Arps, Slate, Meagher & Flom LLP as to legality of the Exchange Notes to 
be issued by NRG.* 
5.2         Opinion of James J. Bender, Vice President and General Counsel of NRG.* 
10.1        Employment Contract, dated as of June 28, 1995, between NRG and David H. Peterson.* 
10.2        Indenture, dated as of January 31, 1996, between NRG and Norwest Bank Minnesota, National Association, 
as Trustee.* 
10.3        Revolving Credit Agreement, dated as of March 17, 1997, among NRG, the banks party thereto and ABN AMRO 
Bank, N.V. as Agent.* 
10.4        Note Agreement, dated August 20, 1993, among NRG Energy Center, Inc. and each of the purchasers named 
therein.* 
10.5        Master Shelf and Revolving Credit Agreement, dated August 20, 1993 among NRG Energy Center, Inc., The 
Prudential Insurance Company of America and each Prudential Affiliate which becomes party thereto.* 
10.6        Energy Agreement, dated February 12, 1988 between NRG (formerly known as Norenco Corporation) and 
Waldorf Corporation (the "Energy Agreement").* 
10.7        First Amendment to the Energy Agreement, dated August 27, 1993.* 
10.8        Second Amendment to the Energy Agreement, dated January 31, 1996.* 
10.9        Third Amendment to the Energy Agreement, dated August 25, 1997.* 
10.10       Construction, Acquisition and Term Loan Agreement, dated September 2, 1997 by and among NEO Landfill 
Gas, Inc., as Borrower, the lenders named on the signature pages, Credit Lyonnais New York Branch, as 
Construction/Acquisition Agent and Lyon Credit Corporation, as Term Agent.* 
10.11       Guaranty, dated September 12, 1997 by NRG in favor of Credit Lyonnais New York Branch as agent for the 
Construction/Acquisition Lenders.* 
10.12       Construction, Acquisition and Term Loan Agreement, dated September 2, 1997 by and among Minnesota 
Methane LLC, as Borrower, the lenders named on the signature pages, Credit Lyonnais New York Branch, as 
Construction/Acquisition Agent and Lyon Credit Corporation, as Term Agent.* 
10.13       Guaranty, dated September 12, 1997 by NRG in favor of Credit Lyonnais New York Branch as agent for the 
Construction/Acquisition Lenders.* 
10.14       Non Operating Interest Acquisition Agreement, dated as of September 12, 1997, by and among NRG and NEO 
Corporation.* 
12.1        Computation of ratio of earnings to fixed charges.* 
21          Subsidiaries of NRG.* 
23.1        Consent of Price Waterhouse LLP.*
23.2        Consent of Deloitte & Touche LLP.*
23.3        Consent of Price Waterhouse Nederland BV.*
23.4        Consent of Coopers & Lybrand L.L.P.*
23.5        Consent of Deloitte & Touche GmbH (MIBRAG).*
23.6        Consent of Deloitte & Touche GmbH (SEG).*
23.7        Consent of the Australian Auditor General.* 
23.8        Consent of Arthur Andersen LLP.* 
23.9        Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).* 
23.10       Consent of James J. Bender (included in Exhibit 5.2).* 
24          Power of Attorney of certain officers and directors of NRG.* 
25          Form T-1 Statement of Eligibility of Norwest Bank Minnesota, National Association to act as trustee 
under the Indenture.* 
27          Financial Data Schedule.* 
99.1        Form of Letter of Transmittal.* 
99.2        Form of Notice of Guaranteed Delivery.* 

- ------------ 
* Previously filed. 

II-3

ITEM 17. UNDERTAKINGS. 

(a) The undersigned registrant hereby undertakes that: 

(1)  For purposes of determining any liability under the Securities Act 
of 1933, the information omitted from the form of prospectus filed as part 
of this registration statement in reliance upon Rule 430A and contained in 
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or 
(4) or 497(h) under the Securities Act shall be deemed to be part of this 
registration statement as of the time it was declared effective. 

(2)  For the purpose of determining any liability under the Securities 
Act of 1933, each post-effective amendment that contains a form of 
prospectus shall be deemed to be a new registration statement relating to 
the securities offered herein, and the offering of such securities at that 
time shall be deemed to be the initial bona fide offering thereof. 

(b) Insofar as indemnification for liabilities arising under the 
Securities Act of 1933 may be permitted to directors, officers and 
controlling persons of the Registrant pursuant to the foregoing provisions, 
or otherwise, the Registrant has been advised that in the opinion of the 
Securities and Exchange Commission such indemnification is against public 
policy as expressed in the Act and is, therefore, unenforceable. In the event 
that a claim for indemnification against such liabilities (other than the 
payment by the Registrant of expenses incurred or paid by a director, officer 
or controlling person of the Registrant in the successful defense of any 
action, suit or proceeding) is asserted by such director, officer or 
controlling person in connection with the securities being registered, the 
Registrant will, unless in the opinion of its counsel the matter has been 
settled by the controlling precedent, submit to a court of appropriate 
jurisdiction the question whether such indemnification by it is against 
public policy as expressed in the Act and will be governed by the final 
adjudication of such issue. 

II-4

SIGNATURES 

Pursuant to the requirements of the Securities Act of 1933, NRG Energy, 
Inc. certifies that it has reasonable grounds to believe that it meets all of 
the requirements for filing on Form S-1 and has duly caused this amendment to 
the registration statement to be signed on its behalf by the undersigned, 
thereunto duly authorized, in the City of Minneapolis, in the State of 
Minnesota, on the 12th day of December, 1997. 

NRG Energy, Inc. 
By: /s/ Leonard A. Bluhm
------------------------------- 
Leonard A. Bluhm
Executive Vice President and
Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this 
Registration Statement has been signed by the following persons in the 
capacities indicated on the dates indicated: 

Signature                                       Title                 Date 
- -------------------------------   ----------------------------  -------------------- 

*                 Chairman of the Board, 
-------------------------------  President and Chief 
David H. Peterson                Executive Officer                December 12, 1997 

/s/ Leonard A. Bluhm
-------------------------------  Executive Vice President and 
Leonard A. Bluhm                 Chief Financial Officer          December 12, 1997 

* 
------------------------------- 
Gary R. Johnson                  Director                         December 12, 1997 

* 
------------------------------- 
Cynthia L. Lesher                Director                         December 12, 1997 

* 
------------------------------- 
Edward J. McIntyre               Director                         December 12, 1997 

* 
------------------------------- 
John A. Noer                     Director                         December 12, 1997 

*By:/s/ Leonard A. Bluhm
---------------------------- 
Attorney-in-fact 

II-5

EXHIBIT INDEX 

EXHIBIT NO.                                         DESCRIPTION                                        PAGE NO. 
-----------                                         -----------                                        -------- 

3.1       Certificate of Incorporation of NRG.* 
3.2       By-Laws of NRG.* 
4.1       Indenture, dated as of June 1, 1997, between NRG and Norwest Bank Minnesota, 
National Association.* 
4.2       Form of Exchange Notes.* 
4.3       Registration Rights Agreement, dated as of June 12, 1997, by and among NRG, Salomon 
Brothers Inc, ABN AMRO Chicago Corporation and Chase Securities Inc.* 
5.1       Opinion and consent of Skadden, Arps, Slate, Meagher & Flom LLP as to legality of 
the Exchange Notes to be issued by NRG.* 
5.2       Opinion of James J. Bender, Vice President and General Counsel of NRG.* 
10.1       Employment Contract, dated as of June 28, 1995, between NRG and David H. Peterson.* 
10.2       Indenture, dated as of January 31, 1996, between NRG and Norwest Bank Minnesota, 
National Association, as Trustee.* 
10.3       Revolving Credit Agreement, dated as of March 17, 1997, among NRG, the banks party 
thereto and ABN AMRO Bank, N.V. as Agent.* 
10.4       Note Agreement, dated August 20, 1993, among NRG Energy Center, Inc. and each of the 
purchasers named therein.* 
10.5       Master Shelf and Revolving Credit Agreement, dated August 20, 1993 among NRG Energy 
Center, Inc., The Prudential Insurance Company of America and each Prudential 
Affiliate which becomes party thereto.* 
10.6       Energy Agreement, dated February 12, 1988 between NRG (formerly known as Norenco 
Corporation) and Waldorf Corporation (the "Energy Agreement").* 
10.7       First Amendment to the Energy Agreement, dated August 27, 1993.* 
10.8       Second Amendment to the Energy Agreement, dated January 31, 1996.* 
10.9       Third Amendment to the Energy Agreement, dated August 25, 1997.* 
10.10      Construction, Acquisition and Term Loan Agreement, dated September 2, 1997 by and 
among NEO Landfill Gas, Inc., as Borrower, the lenders named on the signature pages, 
Credit Lyonnais New York Branch, as Construction/Acquisition Agent and Lyon Credit 
Corporation, as Term Agent.* 
10.11      Guaranty, dated September 12, 1997 by NRG in favor of Credit Lyonnais New York 
Branch as agent for the Construction/Acquisition Lenders.* 
10.12      Construction, Acquisition and Term Loan Agreement, dated September 2, 1997 by and 
among Minnesota Methane LLC, as Borrower, the lenders named on the signature pages, 
Credit Lyonnais New York Branch, as Construction/Acquisition Agent and Lyon Credit 
Corporation, as Term Agent.* 
10.13      Guaranty, dated September 12, 1997 by NRG in favor of Credit Lyonnais New York 
Branch as agent for the Construction/Acquisition Lenders.* 
10.14      Non Operating Interest Acquisition Agreement, dated as of September 12, 1997, by and 
among NRG and NEO Corporation.* 
12.1       Computation of ratio of earnings to fixed charges.* 
21         Subsidiaries of NRG.* 
23.1       Consent of Price Waterhouse LLP.*
23.2       Consent of Deloitte & Touche LLP.*
23.3       Consent of Price Waterhouse Nederland BV.*
23.4       Consent of Coopers & Lybrand L.L.P.*
23.5       Consent of Deloitte & Touche GmbH (MIBRAG).*
23.6       Consent of Deloitte & Touche GmbH (SEG).*
23.7       Consent of The Australian Auditor General.* 
23.8       Consent of Arthur Andersen LLP.*
23.9       Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).* 
23.10      Consent of James J. Bender (included in Exhibit 5.2).* 
24         Power of Attorney of certain officers and directors of NRG.* 
25         Form T-1 Statement of Eligibility of Norwest Bank Minnesota, National Association to 
act as trustee under the Indenture.* 
27         Financial Data Schedule.* 
99.1       Form of Letter of Transmittal.* 
99.2       Form of Notice of Guaranteed Delivery.* 

- ------------ 
* Previously filed.