NRG Energy 8K/A Other Events | NRG 15 Jun 05

EXHIBIT 99.2

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

Unaudited Consolidated Financial Statements
At March 31, 2005 and December 31, 2004
and for the Three Months Ended March 31, 2005
and for the Three Months Ended March 31, 2004

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

INDEX


	Page
Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004		3
Consolidated Statements of Operations for the three months ended March 31, 2005 and March 31, 2004		4
Consolidated Statements of Member’s Equity for the three months ended March 31, 2005 and March 31, 2004		5
Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and March 31, 2004		6
Notes to the unaudited Consolidated Financial Statements		7

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2005			2004
	(Unaudited)			(Audited)
	(In thousands)
ASSETS
Current assets
Cash and cash equivalents	$	29,624		$	19,861
Accounts receivable, net of allowance for doubtful accounts of $13 and $13, respectively		37,127			40,231
Inventory		29,563			33,972
Derivative instruments valuation		1,572			205
Prepayments and other current assets		6,639			8,000

Total current assets		104,525			102,269

Property, Plant and Equipment
In service		945,495			946,057
Under construction		9,149			1,943

Total property, plant and equipment		954,644			948,000
Less accumulated depreciation		(79,520	)		(64,921	)

Net property, plant and equipment		875,124			883,079
Other Assets
Decommissioning fund investments		4,894			4,954
Intangible assets, net of amortization of $16,816 and $13,751, respectively		71,996			81,374
Other assets		871			871

Total assets	$	1,057,410		$	1,072,547

LIABILITIES AND MEMBER’S EQUITY
Current liabilities
Note payable — affiliate	$	1,424		$	1,425
Accounts payable		12,913			5,870
Accounts payable — affiliates		10,383			17,020
Accrued interest — affiliate		2,364			620
Other current liabilities		15,101			18,085

Total current liabilities		42,185			43,020

Other liabilities
Note payable-affiliate		77,270			76,672
Out of market contracts		314,021			318,664
Other long-term obligations		4,262			3,899

Total non-current liabilities		395,553			399,235

Total liabilities		437,738			442,255


Member’s equity		619,672			630,292

Total liabilities and member’s equity	$	1,057,410		$	1,072,547

The accompanying notes are an integral part of these consolidated financial statements.

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Three Months			Three Months
	Ended			Ended
	March 31,			March 31,
	2005			2004
	(In thousands)
Operating Revenues
Revenues	$	117,146		$	95,265
Operating Costs and Expenses
Operating costs		81,287			59,595
Depreciation and amortization		15,142			16,962
General and administrative expenses		2,691			4,341
Reorganization items		—			723
Restructuring charges		10			—

Total operating costs and expenses		99,130			81,621


Operating Income		18,016			13,644
Other income (expense), net
Other income, net		17			85
Interest expense		(2,340	)		(2,350	)

Total other expense, net		(2,323	)		(2,265	)

Income From Continuing Operations Before Income Taxes		15,693			11,379
Income tax expense		6,313			4,578

Net income	$	9,380		$	6,801

The accompanying notes are an integral part of these consolidated financial statements.

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY


					Member’s					Total
	Member’s				Contributions/			Accumulated		Member’s
	Units		Amount		Distributions			Net Income		Equity
	(In thousands except for units)
Balance at December 31, 2003 (audited)		1,000	$	1	$	662,538		$	293	$	662,832
Net loss and comprehensive loss		—		—		—			6,801		6,801

Balance at March 31, 2004 (unaudited)		1,000	$	1	$	662,538		$	7,094	$	669,633


Balance at December 31, 2004 (audited)		1,000	$	1	$	630,291		$	—	$	630,292
Net income and comprehensive income		—		—		—			9,380		9,380
Distribution to member		—		—		(20,000	)		—		(20,000	)

Balance at March 31, 2005 (unaudited)		1,000	$	1	$	610,291		$	9,380	$	619,672

The accompanying notes are an integral part of these consolidated financial statements.

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Three Months			Three Months
	Ended			Ended
	March 31,			March 31,
	2005			2004
	(In thousands)
Cash flows from operating activities
Net income	$	9,380		$	6,801
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		15,142			16,962
Deferred income taxes		6,313			4,578
Amortization of intangibles		3,064			3,492
Amortization of debt discount		598			634
Amortization of out-of-market power contracts		(4,642	)		(5,030	)
Unrealized gain on derivatives		(1,367	)		(351	)
Changes in assets and liabilities
Accounts receivable		3,104			5,804
Inventory		4,409			1,592
Prepayments and other current assets		1,361			722
Accounts payable		7,043			4,024
Accounts payable — affiliates		(6,636	)		10,227
Accrued interest		1,744			1,715
Other current assets and liabilities		—			10,099
Other assets and liabilities		(2,604	)		292

Net cash provided by operating activities		36,909			61,561

Cash flows from investing activities
Capital expenditures		(7,206	)		(22,309	)
Decrease in notes receivable		—			584
Decrease in trust funds		60			—
Decrease in restricted cash		—			99

Net cash used in investing activities		(7,146	)		(21,626	)

Cash flows from financing activities
Distribution to member		(20,000	)		—
Repayment of note payable — affiliate		—			(2,639	)

Net cash used in financing activities		(20,000	)		(2,639	)

Net change in cash and cash equivalents		9,763			37,296
Cash and cash equivalents
Beginning of period		19,861			4,612

End of period	$	29,624		$	41,908

The accompanying notes are an integral part of these consolidated financial statements.

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1—General

NRG South Central Generating LLC, or NRG South Central or the Company, is a wholly owned subsidiary of NRG Energy, Inc., or NRG Energy. NRG South Central owns 100% of Louisiana Generating LLC, or Louisiana Generating; NRG New Roads Holding LLC, or New Roads; NRG Sterlington Power LLC, or Sterlington; Big Cajun I Peaking Power LLC, or Big Cajun Peaking; and NRG Bayou Cove LLC, or Bayou Cove.

NRG South Central was formed for the purpose of financing, acquiring, owning, operating and maintaining through its subsidiaries and affiliates the facilities owned by Louisiana Generating and any other facilities that it or its subsidiaries may acquire in the future.

Note 2—Summary of Significant Accounting Policies


	*Basis of Presentation*

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the Securities and Exchange Commission’s regulations for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The accounting policies we follow are set forth in Note 2 to the Company’s annual financial statements for the year ended December 31, 2004, as filed by NRG Energy, Inc. on Form 8-K on June 15, 2005. The following notes should be read in conjunction with such policies and other disclosures in the annual financial statements. Interim results are not necessarily indicative of results for a full year.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all material adjustments (consisting of normal, recurring accruals) necessary to present fairly our consolidated financial position as of March 31, 2005, the results of our operations, cash flows and member’s equity for the three months ended March 31, 2005 and the three months ended March 31, 2004. Certain prior-year amounts have been reclassified for comparative purposes.


	*Accounting Estimates*

Management of the Company is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.

Note 3—Accounting for Derivative Instruments and Hedging Activity

SFAS No. 133“Accounting for Derivative Instruments and Hedging Activities”as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149 requires the Company to recognize all derivative instruments on the balance sheet as either assets or liabilities and measure them at fair value each reporting period. If certain conditions are met, the Company may be able to designate derivatives as cash flow hedges and defer the effective portion of the change in fair value of the derivatives in Accumulated Other Comprehensive Income (OCI) and subsequently recognize in earnings when the hedged items impact income. The ineffective portion of a cash flow hedge is immediately recognized in income.

For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair value of both the derivatives and the hedged items are recorded in current earnings. The ineffective portion of a hedging derivative instrument’s change in fair values will be immediately recognized in earnings.

For derivatives that are neither designated as cash flow hedges or do not qualify for hedge accounting treatment, the changes in the fair value will be immediately recognized in earnings.

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

SFAS No. 133 applies to the Company’s long-term power sales contracts, long-term gas purchase contracts and other energy related commodities financial instruments used to mitigate variability in earnings due to fluctuations in spot market prices, hedge fuel requirements at generation facilities and protect investments in fuel inventories. At March 31, 2005, the Company had various commodity contracts extending through December 2005 .

Energy and Energy Related Commodities

The Company is exposed to commodity price variability in electricity, emission allowances, natural gas, oil derivatives and coal used to meet fuel requirements. In order to manage these commodity price risks, NRG Power Marketing may enter into transactions for physical delivery of particular commodities for a specific period. Financial instruments are used to hedge physical deliveries, which may take the form of fixed price, floating price or indexed sales or purchases, and options, such as puts, calls, basis transactions and swaps.

During the three months ended March 31, 2005 and 2004, respectively, the Company recognized no gain or loss due to ineffectiveness of commodity cash flow hedges.


	*Interest Rates*

From time to time, the Company may use interest rate hedging instruments to protect it from an increase in the cost of borrowings. At March 31, 2005 and December 31, 2004, respectively, there were no such instruments outstanding.


	*Statement of Operations*

The following table summarizes the effects of SFAS No. 133 on the Company’s statements of operations for the three months ended March 31, 2005, and for the three months ended March 31, 2004, respectively:


	Three Months		Three Months
	Ended		Ended
	March 31,		March 31,
	2005		2004
	(In thousands)
Revenues	$	270	$	352
Cost of operations		(637)		—

Total statement of operations impact before tax	$	907	$	352

For the three months ended March 31, 2005 and 2004, the Company recognized no gain or loss due to the ineffectiveness of commodity cash flow hedges, and no components of NRG South Central’s derivative instruments gains or losses were excluded from the assessment of effectiveness.

The Company’s earnings for the three months ended March 31, 2005 and 2004, were increased by $0.9 million and $0.4 million, respectively, associated with the changes in fair value of energy related derivative instruments not accounted for as hedges in accordance with SFAS No. 133.

Note 4—Commitments and Contingencies


	*Contractual Commitments*


	Power Supply Agreements with the Distribution Cooperatives

During March 2000, Louisiana Generating entered into certain power supply agreements with eleven distribution cooperatives to provide energy, capacity and transmission services. The agreements are standardized into three types, Form A, B, and C. In connection with push down accounting resulting from NRG Energy’s fresh start accounting, certain of the Company’s long-term power supply agreements were determined to be at above or below market rates. As a result, the Company valued these agreements and recognized the fair value of such contracts on the December 6, 2003 balance sheet. The fair value of these contracts that were deemed to be valuable have been included in intangible assets. The fair value of contracts determined to be significantly out-of-market

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

were recorded as noncurrent liabilities. The favorable and unfavorable contract valuation amounts will be amortized as a net increase to revenues over the terms and conditions of each contract. These contracts consist primarily of the long-term power sale agreements the Company has with its cooperative customers and certain others. The gross carrying amount of the unfavorable out-of-market power sales agreements at March 31, 2005 and December 31, 2004 was $342.2 million and $342.2 million, respectively. During the three months ended March 31, 2005, approximately $4.6 million was amortized as an increase to revenues.


	Form A Agreements

Six of the distribution cooperatives entered into Form A power supply agreements. The Form A agreement is an all-requirements power supply agreement which has an initial term of 25 years, commencing on March 31, 2000. After the initial term, the agreement continues on a year-to-year basis, unless terminated by either party giving five years advance notice.

Under the Form A power supply agreement, Louisiana Generating is obligated to supply the distribution cooperative all of the energy and capacity required by the distribution cooperative for service to its retail customers although the distribution cooperative has certain limited rights under which it can purchase energy and capacity from third parties.

The Company must contract for all transmission service required to serve the distribution cooperative and will pass through the costs of transmission service to the cooperative. The Company is required to supply at its cost, without pass through, control area services and ancillary services which transmission providers are not required to provide.

The distribution cooperatives have an option to choose one of two fuel options; all six selected the first option which is a fixed fee through 2004 and determined using a formula which is based on gas prices and the cost of delivered coal for the period thereafter. At the end of the fifteenth year of the contract, the cooperatives may switch to the second fuel option. The second fuel option consists of a pass-through of fuel costs, with a guaranteed coal heat rate and purchased energy costs, excluding the demand component in purchased power. From time to time, Louisiana Generating may offer fixed fuel rates which the cooperative may elect to utilize. The variable operation and maintenance charge is fixed through 2004 and escalates at either approximately 3% per annum or in accordance with actual changes in specified indices as selected by the distribution cooperative. Five of the distribution cooperatives elected the fixed escalation provision and one elected the specified indices provision.


	Form B Agreements

One distribution cooperative selected the Form B Power Supply Agreement. The term of the Form B power supply agreement commences on March 31, 2000, and ends on December 31, 2024. The Form B power supply agreement allows the distribution cooperative the right to elect to limit its purchase obligations to “base supply” or also to purchase “supplemental supply.” Base supply is the distribution cooperative’s ratable share of the generating capacity purchased by Louisiana Generating from Cajun Electric. Supplemental supply is the cooperative’s requirements in excess of the base supply amount. The distribution cooperative, which selected the Form B agreement, also elected to purchase supplemental supply.

For base supply, Louisiana Generating charges the distribution cooperative a demand charge, an energy charge and a fuel charge. The demand charge for each contract year is set forth in the agreement and is subject to increase for environmental legislation or occupational safety and health laws enacted after the effective date of the agreement. Louisiana Generating can increase the demand

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

charge to the extent its cost of providing supplemental supply exceeds $400/MW. The energy charge is fixed through 2004, and decreased slightly for the remainder of the contract term. The fuel charge is a pass-through of fuel and purchased energy costs. The distribution cooperative may elect to be charged based on a guaranteed coal-fired heat rate of 10,600 Btu/kWh, and it may also select fixed fuel factors as set forth in the agreement for each year through 2008. The one distribution cooperative which selected this form of agreement elected to utilize the fixed fuel factors. For the years after 2008, Louisiana Generating will offer additional fixed fuel factors for five-year periods that may be elected. For the years after 2008, the distribution cooperative may also elect to have its charges computed under the pass-through provisions with or without the guaranteed coal-fired heat rate.

At the beginning of year six, Louisiana Generating will establish a rate fund equal to the ratable share of $18 million. The amount of the fund will be approximately $720,000. This fund will be used to offset the energy costs of the Form B distribution cooperatives which elected the fuel pass-through provision of the fuel charge, to the extent the cost of power exceeds $0.04/kWh. Any funds remaining at the end of the term of the power supply agreement will be returned to Louisiana Generating.


	Form C Agreements

Four distribution cooperatives selected the Form C power supply agreement. The Form C power supply agreement is identical to the Form A power supply agreement, except for the following:

The term of the Form C power supply agreement was for four years following the closing date of the acquisition of the Cajun facilities. In October 2003, the Louisiana Public Service Commission approved contract extensions for all four Form C distribution cooperatives for terms of an additional five or ten years.

Louisiana Generating will not offer the distribution cooperatives which select the Form C agreement any new incentive rates, but will continue to honor existing incentive rates. At the end of the term of the agreement, the distribution cooperative is obligated to purchase the specific delivery facilities for a purchase price equal to the depreciated book value.

Louisiana Generating must contract for all transmission services required to serve the distribution cooperative and will pass through the costs of transmission service to the cooperative. Louisiana Generating is required to supply at its cost, without pass-through, control area services and ancillary services which transmission providers are not required to provide.

Included in the amended and restated Form C agreements is a provision for an annual $250,000 Economic Development Contribution to be shared among the four Form C distribution cooperatives, beginning in April 2004 and extending through the end of the contract terms.


	Other Power Supply Agreements

Louisiana Generating assumed Cajun Electric’s rights and obligations under two consecutive long-term power supply agreements with South Western Electric Power Company, or SWEPCO, one agreement with South Mississippi Electric Power Association, or SMEPA, and one agreement with Municipal Energy Agency of Mississippi, or MEAM.

The SWEPCO Operating Reserves and Off-Peak Power Sale Agreement, terminates on December 31, 2007. The agreement requires Louisiana Generating to supply 100 MW of off-peak energy during certain hours of the day to a maximum of 292,000 MWh per year and an additional 100 MW of operating reserve capacity and the associated energy within ten minutes of a phone request during certain hours to a maximum of 43,800 MWh of operating reserve energy per year. The obligation to purchase the 100 MW of off-peak energy is contingent on Louisiana Generating’s ability to deliver operating reserve capacity and energy associated with operating reserve capacity. At Louisiana Generating’s request, it will supply up to 100 MW of nonfirm, on peak capacity and associated energy.

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

The SWEPCO Operating Reserves Capacity and Energy Power Sale Agreement is effective January 1, 2008 through December 31, 2026. The agreement requires Louisiana Generating to provide 50 MW of operating reserve capacity within ten minutes of a phone request. In addition, SWEPCO is granted the right to purchase up to 21,900 MWh/year of operating reserve energy.

The SMEPA Unit Power Sale Agreement is effective through May 31, 2009, unless terminated following certain regulatory changes, changes in fuel costs or destruction of the Cajun facilities. The agreement requires Louisiana Generating to provide 75 MW of capacity and the associated energy from Big Cajun II, Unit 1 and an option for SMEPA to purchase additional capacity and associated energy if Louisiana Generating determines that it is available, in 10 MW increments, up to a total of 200 MW. SMEPA is required to schedule a minimum of 25 MW plus 37% of any additional capacity that is purchased. The capacity charge was fixed through May 31, 2004, and increases for the period from June 1, 2004 to May 31, 2009, including transmission costs to the delivery point and any escalation of expenses. The energy charge is 110% of the incremental fuel cost for Big Cajun II, Unit 1.

The MEAM Power Sale Agreement is effective through May 31, 2010, with an option for MEAM to extend through September 30, 2015, upon five years advance notice. The agreement requires Louisiana Generating to provide 20 MW of firm capacity and associated energy with an option for MEAM to increase the capacity purchased to a total of 30 MW upon five years advance notice. The capacity charge is fixed. The operation and maintenance charge is a fixed amount which escalates at 3.5% per year. There is a transmission charge which varies depending upon the delivery point. The price for energy associated with the firm capacity is 110% of the incremental generating cost to Louisiana Generating and is adjusted to include transmission losses to the delivery point.


	Coal Supply Agreements

Louisiana Generating has a coal supply agreement with Triton Coal. The coal is primarily sourced from Triton Coal’s Buckskin and North Rochelle mines located in the Powder River Basin, Wyoming. In December 2004, Louisiana Generating extended the coal purchase contract though 2007. The agreement establishes a base price per ton for coal supplied by Triton Coal. The base price is subject to adjustment for changes in the level of taxes or other government fees and charges, variations in the caloric value and sulfur content of the coal shipped, and changes in the price of SO2 emission allowances. The base price is based on certain annual weighted average quality specifications, subject to suspension and rejection limits.

In March 2005, NRG Energy entered into an agreement to purchase 23.75 million tons of coal over a period of four years and nine months from Buckskin Mining Company (Buckskin). The coal will be sourced from Buckskin’s mine in the Powder River Basin, Wyoming, and will be used primarily in NRG Energy’s coal-burning generation plants in the South Central region.


	Coal Transportation Agreement

Louisiana Generating’s previous coal transportation agreement with DTE Energy expired March 31, 2005. Total payments under this agreement in 2005 are expected to be $1.5 million. The Company has entered into a new coal transportation agreement with Burlington Northern and Santa Fe Railway and an affiliate of ACT for a term of ten years, from April 1, 2005 through March 31, 2015. This agreement provides for the transportation of all of the coal requirements of Big Cajun II from the mines in Wyoming to Big Cajun II. A related agreement between Louisiana Generating and ACT grants Louisiana Generating the option to require ACT to perform the harbor operations related to the unloading of coal at Big Cajun II. Louisiana Generating has given notice to ACT that it will exercise the option and the transition of harbor services operations to ACT is scheduled for April 1, 2005.


	Transmission and Interconnection Agreements

Louisiana Generating assumed Cajun Electric’s existing transmission agreements with Central Louisiana Electric Company, SWEPCO; and Entergy Services, Inc., acting as agent for Entergy Arkansas, Inc., Entergy Gulf States, Entergy Louisiana, Inc., Entergy Mississippi, Inc., and Entergy New Orleans, Inc. Louisiana Generating also entered into two interconnection and operating agreements with Entergy Gulf States, Inc. on May 1, 2002 and one interconnection and operating agreement with Entergy Gulf States, Inc. on August 26, 2004. The Cajun facilities are connected to the transmission system of Entergy Gulf States, Inc. and power is delivered to the distribution cooperative at various delivery points on the transmission systems of Entergy Gulf States, Inc., Entergy Louisiana Inc., Central Louisiana Electric Company and SWEPCO. Louisiana Generating also assumed from Cajun Electric 20 interchange and sales agreements with utilities and cooperatives, providing access to a 12 state area.

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES


	*Environmental Matters*

The construction and operation of power projects are subject to stringent environmental and safety protection and land use laws and regulation in the United States. These laws and regulations generally require lengthy and complex processes to obtain licenses, permits and approvals from federal, state and local agencies. If such laws and regulations become more stringent and the Company’s facilities are not exempted from coverage, the Company could be required to make extensive modifications to further reduce potential environmental impacts. Also, the Company could be held responsible under environmental and safety laws for the cleanup of pollutants released at its facilities or at off-site locations where it may have sent wastes, even if the release or off-site disposal was conducted in compliance with the law.

The Company and its subsidiaries strive to at least meet the standards of compliance with applicable environmental and safety regulations. Nonetheless, the Company expects that future liability under or compliance with environmental and safety requirements could have a material effect on its operations or competitive position. It is not possible at this time to determine when or to what extent additional facilities or modifications of existing or planned facilities will be required as a result of possible changes to environmental and safety regulations, regulatory interpretations or enforcement policies. In general, future laws and regulations are expected to require the addition of emission control equipment or the imposition of restrictions on the Company’s operations.

The Company establishes accruals where it is probable that it will incur environmental costs under applicable law or contracts and it is possible to reasonably estimate these costs. The Company adjusts the accruals when new remediation or other environmental liability responsibilities are discovered and probable costs become estimable, or when current liability estimates are adjusted to reflect new information or a change in the law.

Under various federal, state and local environmental laws and regulations, a current or previous owner or operator of any facility, including an electric generating facility, may be required to investigate and remediate releases or threatened releases of hazardous or toxic substances or petroleum products located at the facility. We may also be held liable to a governmental entity or to third parties for property damage, personal injury and investigation and remediation costs incurred by the party in connection with any hazardous material releases or threatened releases. These laws, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, impose liability without regard to whether the owner knew of or caused the presence of the hazardous substances, and courts have interpreted liability under such laws to be strict (without fault) and joint and several. The cost of investigation, remediation or removal of any hazardous or toxic substances or petroleum products could be substantial. The Company has not been named as a potentially responsible party with respect to any off-site waste disposal matter.

Liabilities associated with closure, post-closure care and monitoring of the ash ponds owned and operated on site at the Big Cajun II Generating Station are addressed through the use of a trust fund maintained by the Company. The value of the trust fund is approximately $4.9 million at March 31, 2005.

The Louisiana Department of Environmental Quality, or LADEQ, has promulgated State Implementation Plan revisions to bring the Baton Rouge ozone nonattainment area into compliance with applicable National Ambient Air Quality Standards. The Company participated in development of the revisions, which require the reduction of NO(x) emissions at the gas-fired Big Cajun I Power Station and coal-fired Big Cajun II Power Station to 0.1 pounds NO(x) per million Btu heat input and 0.21 pounds NO(x) per million Btu heat input, respectively. This revision of the Louisiana air rules would constitute a change-in-law covered by agreement between the Company and the electric cooperatives (power offtakers) allowing the costs of added combustion controls to be passed through to the cooperatives. The capital cost of combustion controls required at the Big Cajun II Generating Station to meet the state’s NOx regulations will total about $10.0 million each for Units 1 & 2. Unit 3 has already made such changes.


	*Legal Issues*

U.S. Environmental Protection Agency Request for Information under Section 114 of the Clean Air Act and Notice of Violation

On January 27, 2004, Louisiana Generating, LLC and Big Cajun II received a request for information under Section 114 of the federal Clean Air Act from the USEPA Region 6 seeking information primarily relating to physical changes made at Big Cajun II. Louisiana Generating, LLC and Big Cajun II submitted several responses to the USEPA in response to follow-up requests. On February 15, 2005, Louisiana Generating, LLC received a Notice of Violation, or NOV, alleging violations of the New Source Review provisions of the Clean Air Act at Big Cajun II Units 1 and 2 from 1998 through the NOV date. On April 7, 2005 we met with USEPA and the Department of Justice to discuss the NOV. Given the preliminary stage of this NOV process, the Company cannot predict the outcome of the matter at this time.

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

In the Matter of Louisiana Generating, LLC, Adversary Proceeding No. 2002-1095 1-EQ on the Docket of the Louisiana Division of Administrative Law

During 2000, the Louisiana Department of Environmental Quality, or DEQ, issued a Part 70 Air Permit modification to the Company to construct and operate two 120 MW natural gas-fired turbines. The Part 70 Air Permit set emissions limits for the criteria air pollutants, including NOx, based on the application of Best Available Control Technology, or BACT. The BACT limitation for NOx was based on the guarantees of the manufacturer, Siemens-Westinghouse. The Company sought an interim emissions limit to allow Siemens-Westinghouse time to install additional control equipment. To establish the interim limit, DEQ issued a Compliance Order and Notice of Potential Penalty on September 8, 2002, which is, in part, subject to the referenced administrative hearing. DEQ alleged violations related to NOx emissions. The Company denied those allegations and will contest any future penalty assessment, while also seeking an amendment of its limit for NOx. Quarterly status reports are being submitted to an Administrative Law Judge. In late February 2004, the Company timely submitted to the DEQ an amended BACT analysis and an amended Prevention of Significant Deterioration and Title V permit application to amend the NOx limit, which application is pending. The Company may also assert breach of warranty claims against the manufacturer.

Travis Ballou, et. al. v. Ralph Mabey, et. al., No. 03-30343 in the United States Court of Appeals for the Fifth Circuit
Kenneth Austin, et.al v. Ralph Mabey, et. al., No. 00-728-D-1 in the United States District Court for the Middle District of Louisiana

Two lawsuits against the Company are pending in Federal Court involving 39 former employees of Cajun Electric Power Cooperative, Inc. who claim age/race/sex discrimination in failure to hire by the Company. One lawsuit, which included four plaintiffs, was dismissed on summary judgment. The District Court’s summary judgment ruling was affirmed by the U.S. Court of Appeals for the Fifth Circuit on February 10, 2005. On May 9, 2005, the District Court granted six additional motions for summary judgment. In the remaining lawsuit involving 35 plaintiffs, the District Court has now granted the Company’s Motions for Summary Judgment pertaining to nineteen plaintiffs, denied the Company’s Motions for Summary Judgment pertaining to four plaintiffs and is still considering the Company’s Motions for Summary Judgment pertaining to the remaining twelve plaintiffs.

BNSF Railway Company v. Louisiana Generating LLC, Case No. 531992, 19^thJudicial District Court, Parish of East Baton Rouge(filed May 6, 2005)

This lawsuit alleges breach of the coal transportation contract that expired on March 31, 2005. Specifically, the plaintiff alleges the shipment of coal via another carrier in 2004 and the failure to tender a minimum amount of coal during 2003, and further alleges that both actions constituted a breach of the contract. An accrual has been established.

The Company believes that it has valid defenses to the legal proceedings and investigations described above and intends to defend them vigorously. However, litigation is inherently subject to many uncertainties. There can be no assurance that additional litigation will not be filed against the Company or its subsidiaries in the future asserting similar or different legal theories and seeking similar or different types of damages and relief. Unless specified above, the Company is unable to predict the outcome these legal proceedings and investigations may have or reasonably estimate the scope or amount of any associated costs and potential liabilities. An unfavorable outcome in one of more of these proceedings could have a material impact on the Company’s financial position, results of operations or cash flows.

Pursuant to the requirements of Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” and related guidance, the Company records reserves for estimated losses from contingencies when information available indicates that a loss is probable and the amount of the loss is reasonably estimable. Management has assessed each of these matters based on current information and made a judgment concerning its potential outcome, considering the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment may, as a result of facts arising prior to resolution of these matters or other factors, prove inaccurate and investors should be aware that such judgment is made subject to the known uncertainty of litigation.

Note 5—Regulatory Issues

The Company’s assets are located within the franchise territory of Entergy Corporation, or Entergy, a vertically integrated utility. The utility performs the scheduling, reserve and reliability functions that are administered by the Independent System Operators, or ISOs, or Regional Transmission Organizations, or RTOs, in certain other regions of the United States. The Company operates a National Electric Reliability Council, or NERC, certified control areas within the Entergy franchise territory, which is comprised of the Company’s generating assets and its co-op customer loads. Although the reliability functions performed are essentially the same, the primary differences between these markets lie principally in the physical delivery and price discovery mechanisms. In the South Central region, all power sales and purchases are consummated bilaterally between individual counter-parties, and physically

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

delivered either within or across the physical control areas of the transmission owners from the source generator to the sink load. Transacting counter-parties are required to reserve and purchase transmission services from the intervening transmission owners at their Federal Energy Regulatory Commission, or FERC, approved tariff rates. Included with these transmission services are the reserve and ancillary costs. Energy prices in the South Central region are determining and agreed to in bilateral negotiations between representatives of the transacting counter-parties, using market information gleaned by the individual marketing agents arranging the transactions.

In the South Central region, including Entergy’s franchise territory, the present energy market is not a centralized market and does not have an ISO or RTO as is found in the Northeast markets. The Company presently has long-term all requirements contracts with 11 Louisiana Distribution Cooperatives, and long-term contracts with the Municipal Energy Agency of Mississippi, South Mississippi Electric Power Association and Southwestern Electric Power Company. The Distribution Cooperatives serve approximately 300,000 to 350,000 retail customers.

On March 31, 2004, Entergy filed with FERC a proposal to have an independent coordinator of transmission, or ICT, monitor Entergy’s operation of its transmission system, to review the pricing structure for transmission expansion and to oversee a proposed weekly procurement process by which Entergy and other load serving entities could purchase energy. On March 22, 2005, FERC approved the ICT proposal for a two year period, subject to certain conditions. On May 27, 2005 it is expected that Entergy will file its detailed ICT proposal with FERC. On December 17, 2004, FERC ordered that an investigation and evidentiary hearing be held on the issue of whether Entergy is providing access to its transmission system in a just and reasonable manner. On March 22, 2005, FEEC suspended the hearing.

Note 6—Guarantees

In November 2002, the FASB issued FASB Interpretation No. 45, or FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". In connection with the adoption of Fresh Start, all outstanding guarantees were considered new; accordingly, the Company applied the provisions of FIN 45 to all of the guarantees.

The obligations described below update, and should be read in conjunction with, the complete descriptions under “Note 19 — Guarantees” in NRG South Central LLC’s annual financial statement for the year ended December 31, 2004.

On February 4, 2005, NRG Energy redeemed and retired $375.0 million of Second Priority Notes. As a result of the retirement, the joint and several payment and performance guarantee obligations of the following subsidiaries were reduced from $1,725.0 million to $1,350.0 million.


Subsidiary
NRG South Central LLC (Direct)
Louisiana Generating LLC (Indirect)
NRG New Roads Holding LLC (Indirect)
NRG Bayou Cove LLC (Indirect)
Big Cajun II Unit 4 LLC (Indirect)

Note 7—Income Taxes

The Company is included in the consolidated tax return filings as a wholly owned subsidiary of NRG Energy. Reflected in the financial statements and notes below are separate company federal and state tax provisions, as of the earliest period presented, as if the Company had prepared separate filings. The Company’s parent, NRG Energy, does not have a tax allocation agreement with its subsidiaries and prior to January 1, 2003, income taxes were not recorded or allocated to non tax paying entities or entities such as the Company which are treated as disregarded entities for tax purposes. Because the Company is not a party to a tax sharing agreement, current tax expense (benefit) is recorded as a capital contribution from (distribution to) the Company’s parent.

Management believes that it is more likely than not that no benefit will be realized on a substantial portion of the Company’s deferred tax assets. This assessment included consideration of positive and negative evidence, including the Company’s current financial position and results of current operations, projected future taxable income, including projected operating and capital gains

NRG SOUTH CENTRAL GENERATING LLC AND SUBSIDIARIES

and our available tax planning strategies. Therefore, a valuation allowance of $211.2 million was recorded against the net deferred tax assets, including net operating loss carryforwards.

Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of March 31, 2005, will be allocated to intangible assets.

In the first quarter of 2005, the Company utilized $23.6 million of U.S. net operating losses carryforward of $397.4 million which will expire by 2023 if unutilized. There is a net carryforward amount of $373.8 million available at March 31, 2005.

The effective income tax rates of continuing operations differ from the statutory federal income tax rate of 35% as follows:


	Three Months					Three Months
	Ended March 31,					Ended March 31,
	2005					2004
	Amount		Rate			Amount		Rate
	(In thousands)
Income before taxes	$	15,693				$	11,379

Tax at 35%		5,493		35.0	%		3,983		35.0	%
State taxes (net of federal benefit)		816		5.2	%		592		5.2	%
Other		4		0.0	%		3		0.0	%

Income tax expense	$	6,313		40.2	%	$	4,578		40.2	%

Note 8 — Related Party Transactions

Effective January 1, 2005, Corporate charges for allocated overhead was discontinued. For fiscal year 2005 and future years, General and administrative expenses will consist of the Company’s expenses only. For the three months ended March 31, 2004, Corporate overhead charges included in General and administrative expenses totaled $1.6 million. The amounts paid during the three months ended March 31, 2004 reflect an overall increase in corporate level general and administrative expenses. Corporate general, administrative and development expense increased during the three months ended March 31, 2004 due to higher legal fees and increased consulting costs due to NRG Energy’s Sarbanes-Oxley implementation. The method of allocating these costs remained the same from the prior years.

At March 31, 2005 and December 31, 2004, the Company had an accounts payable affiliate balance of $10.4 and $17.0 million, respectively. These balances are settled on a periodic basis and are due from multiple entities which are wholly owned subsidiaries of NRG Energy Inc., the parent company of South Central Generating LLC.

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