EXHIBIT 99.5
INDIAN RIVER POWER LLC
FINANCIAL STATEMENTS
At December 31, 2004 and 2003,
and for the Year Ended December 31, 2004,
the Period from December 6, 2003 to December 31, 2003,
the Period from January 1, 2003 to December 5, 2003 and
for the Year Ended December 31, 2002
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INDIAN RIVER POWER LLC
INDEX
Page | ||||
Reports of Independent Registered Public Accounting Firms | 3 | |||
Balance Sheets at December 31, 2004 and 2003 | 6 | |||
Statements of Operations for the year ended December 31, 2004, the period from December 6, 2003 to December 31, 2003, the period from January 1, 2003 to December 5, 2003 and for the year ended December 31, 2002 | 7 | |||
Statements of Member’s Equity for the year ended December 31, 2004, the period from December 6, 2003 to December 31, 2003, the period from January 1, 2003 to December 5, 2003 and for the year ended December 31, 2002 | 8 | |||
Statements of Cash Flows for the year ended December 31, 2004, the period from December 6, 2003 to December 31, 2003, the period from January 1, 2003 to December 5, 2003 and for the year ended December 31, 2002 | 9 | |||
Notes to Financial Statements | 10 |
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member of
Indian River Power LLC
We have audited the accompanying balance sheet of Indian River Power LLC as of December 31, 2004, and the related statements of operations, member’s equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Indian River Power LLC as of December 31, 2004, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/S/ KPMG LLP | ||||
KPMG LLP | ||||
Philadelphia, Pennsylvania | ||||
May 27, 2005 |
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member of
Indian River Power LLC
In our opinion, the accompanying balance sheet and the related statements of operations, of member’s equity and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Indian River Power LLC (“Reorganized Company”) at December 31, 2003, and the results of its operations and its cash flows for the period from December 6, 2003 to December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Notes 1 and 2 to the financial statements, on May 14, 2003 NRG Energy, Inc. and certain of its subsidiaries, excluding the Company, filed a petition with the United States Bankruptcy Court for the Southern District of New York for reorganization under the provisions of Chapter 11 of the Bankruptcy Code. NRG Energy, Inc.’s Plan of Reorganized was substantially consummated on December 5, 2003, and Reorganized NRG emerged from bankruptcy. The impact of NRG Energy, Inc.’s emergence from bankruptcy and fresh start accounting was applied to the Company on December 5, 2003 under push down accounting methodology.
/s/ PRICEWATERHOUSECOOPERS LLP | ||||
PricewaterhouseCoopers LLP | ||||
Minneapolis, Minnesota | ||||
March 10, 2004 |
4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member of
Indian River Power LLC
In our opinion, the accompanying statements of operations, of member’s equity and comprehensive income, and of cash flows present fairly, in all material respects, the results of operations and cash flows of Indian River Power LLC (“Predecessor Company”) for the period from January 1, 2003 to December 5, 2003 and for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 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 our opinion.
As discussed in Notes 1 and 2 to the financial statements, on May 14, 2003 NRG Energy, Inc. and certain of its subsidiaries, excluding the Company, filed a petition with the United States Bankruptcy Court for the Southern District of New York for reorganization under the provisions of Chapter 11 of the Bankruptcy Code. NRG Energy, Inc.’s Plan of Reorganization was substantially consummated on December 5, 2003, and Reorganized NRG emerged from bankruptcy. The impact of NRG Energy, Inc.’s emergence from bankruptcy and fresh start accounting was applied to the Company on December 5, 2003 under push down accounting methodology.
/s/ PRICEWATERHOUSECOOPERS LLP | ||||
PricewaterhouseCoopers LLP | ||||
Minneapolis, Minnesota | ||||
March 10, 2004 |
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INDIAN RIVER POWER LLC
BALANCE SHEETS
Reorganized Company | ||||||||
December 31, | December 31, | |||||||
2004 | 2003 | |||||||
(In thousands of dollars) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $0 | $ | 1,160 | $ | — | ||||
Accounts receivable — affiliates | 6,330 | — | ||||||
Inventory | 16,320 | 13,702 | ||||||
Prepayments and other current assets | 1,510 | 1,171 | ||||||
Total current assets | 25,320 | 14,873 | ||||||
Property, plant and equipment, net of accumulated depreciation of $18,538 and $1,080, respectively | 385,097 | 395,021 | ||||||
Intangible assets, net of accumulated amortization of $2,913 and $0, respectively | 51,325 | 57,531 | ||||||
Other assets | 6,738 | 6,668 | ||||||
Total assets | $ | 468,480 | $ | 474,093 | ||||
LIABILITIES AND MEMBER’S EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable — trade | $ | 4 | $ | 3 | ||||
Accounts payable — affiliates | — | 59,734 | ||||||
Accrued expenses | 125 | 142 | ||||||
Current deferred income tax | — | 44 | ||||||
Other current liabilities | — | 40 | ||||||
Total current liabilities | 129 | 59,963 | ||||||
Deferred income tax | 22,160 | 15,144 | ||||||
Other long-term obligations | 4,531 | 4,256 | ||||||
Total liabilities | 26,820 | 79,363 | ||||||
Commitments and contingencies | ||||||||
Member’s equity | 441,660 | 394,730 | ||||||
Total liabilities and member’s equity | $ | 468,480 | $ | 474,093 | ||||
The accompanying notes are an integral part of these financial statements.
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INDIAN RIVER POWER LLC
STATEMENTS OF OPERATIONS
Reorganized Company | Predecessor Company | |||||||||||||||
For the | For the | |||||||||||||||
Period from | Period from | |||||||||||||||
For the Year | December 6, | January 1, | For the Year | |||||||||||||
Ended | 2003 to | 2003 to | Ended | |||||||||||||
December 31, | December 31, | December 5, | December 31, | |||||||||||||
2004 | 2003 | 2003 | 2002 | |||||||||||||
(In thousands of dollars) | ||||||||||||||||
Revenues | $ | 165,479 | $ | 4,925 | $ | 136,361 | $ | 200,170 | ||||||||
Operating costs | 123,575 | 4,882 | 90,717 | 76,265 | ||||||||||||
Depreciation | 17,538 | 1,080 | 22,972 | 23,097 | ||||||||||||
General and administrative expenses | 8,571 | 942 | 1,872 | 2,242 | ||||||||||||
Income (loss) from operations | 15,795 | (1,979 | ) | 20,800 | 98,566 | |||||||||||
Interest expense | — | (667 | ) | (14,303 | ) | (10,830 | ) | |||||||||
Other income, net | 1,264 | 6 | 143 | 90 | ||||||||||||
Income (loss) before income taxes | 17,059 | (2,640 | ) | 6,640 | 87,826 | |||||||||||
Income tax expense (benefit) | 6,972 | (1,078 | ) | 2,712 | 34,926 | |||||||||||
Net income (loss) | $ | 10,087 | $ | (1,562 | ) | $ | 3,928 | $ | 52,900 | |||||||
The accompanying notes are an integral part of these financial statements.
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INDIAN RIVER POWER LLC
STATEMENTS OF MEMBER’S EQUITY
Member | Accumulated | Total | ||||||||||||||||||
Member | Contributions/ | Net Income | Member’s | |||||||||||||||||
Units | Amount | Distributions | (Loss) | Equity | ||||||||||||||||
(In thousands of dollars) | ||||||||||||||||||||
Balances at December 31, 2001 (Predecessor Company) | 1,000 | $ | 1 | $ | 192,300 | $ | 31,657 | $ | 223,958 | |||||||||||
Contribution from member | — | — | 1,222 | — | 1,222 | |||||||||||||||
Net income | — | — | — | 52,900 | 52,900 | |||||||||||||||
Balances at December 31, 2002 (Predecessor Company) | 1,000 | 1 | 193,522 | 84,557 | 278,080 | |||||||||||||||
Net income | — | — | — | 3,928 | 3,928 | |||||||||||||||
Distribution to member | — | — | (16,971 | ) | — | (16,971 | ) | |||||||||||||
Balances at December 5, 2003 (Predecessor Company) | 1,000 | $ | 1 | $ | 176,551 | $ | 88,485 | $ | 265,037 | |||||||||||
Push down accounting adjustment | — | — | (34,978 | ) | (88,485 | ) | (123,463 | ) | ||||||||||||
Balances at December 6, 2003 (Reorganized Company) | 1,000 | $ | 1 | $ | 141,573 | $ | — | $ | 141,574 | |||||||||||
Contribution from member | — | — | 254,718 | — | 254,718 | |||||||||||||||
Net loss | — | — | — | (1,562 | ) | (1,562 | ) | |||||||||||||
Balances at December 31, 2003 (Reorganized Company) | 1,000 | $ | 1 | $ | 396,291 | $ | (1,562 | ) | $ | 394,730 | ||||||||||
Contribution from member | — | — | 36,843 | — | 36,843 | |||||||||||||||
Net income | — | — | — | 10,087 | 10,087 | |||||||||||||||
Balances at December 31, 2004 (Reorganized Company) | 1,000 | $ | 1 | $ | 433,134 | $ | 8,525 | $ | 441,660 | |||||||||||
The accompanying notes are an integral part of these financial statements.
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INDIAN RIVER POWER LLC
STATEMENTS OF CASH FLOWS
Reorganized Company | Predecessor Company | |||||||||||||||
For the | For the | |||||||||||||||
Period from | Period from | |||||||||||||||
For the Year | December 6, | January 1, | For the Year | |||||||||||||
Ended | 2003 to | 2003 to | Ended | |||||||||||||
December 31, | December 31 | December 5, | December 31, | |||||||||||||
2004 | 2003 | 2003 | 2002 | |||||||||||||
(In thousands of dollars) | ||||||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income (loss) | $ | 10,087 | $ | (1,562 | ) | $ | 3,928 | $ | 52,900 | |||||||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities Depreciation | 17,538 | 1,080 | 22,972 | 23,097 | ||||||||||||
Amortization of intangibles | 2,913 | — | — | — | ||||||||||||
Amortization of debt issuance costs | — | — | 1,243 | 1,815 | ||||||||||||
Amortization of out-of-market contracts | — | — | — | (89,251 | ) | |||||||||||
Loss on disposal of assets | 1,243 | — | — | — | ||||||||||||
Deferred income taxes | 6,972 | (1,078 | ) | 2,712 | 34,926 | |||||||||||
Changes in assets and liabilities Accounts receivable | (1,160 | ) | — | 10,550 | (1,977 | ) | ||||||||||
Accounts receivable — affiliates | (6,330 | ) | 3,736 | (3,736 | ) | — | ||||||||||
Inventory | (2,618 | ) | (2,302 | ) | 7,099 | 3,082 | ||||||||||
Prepayments and other current assets | (339 | ) | 193 | 7,519 | (7,965 | ) | ||||||||||
Other assets | (70 | ) | (5 | ) | (6,663 | ) | — | |||||||||
Accounts payable — trade | 1 | — | 3 | — | ||||||||||||
Accounts payable — affiliates | (59,734 | ) | 59,734 | (14,901 | ) | (873 | ) | |||||||||
Accrued interest | — | (2,497 | ) | 2,457 | (1,966 | ) | ||||||||||
Changes in other assets and liabilities | 3,511 | 70 | (1,222 | ) | (6,771 | ) | ||||||||||
Net cash (used in) provided by operating activities | (27,986 | ) | 57,369 | 31,961 | 7,017 | |||||||||||
Cash flows from investing activities | ||||||||||||||||
Capital expenditures | (8,857 | ) | (1,101 | ) | (11,955 | ) | (4,917 | ) | ||||||||
Net cash used in investing activities | (8,857 | ) | (1,101 | ) | (11,955 | ) | (4,917 | ) | ||||||||
Cash flows from financing activities | ||||||||||||||||
Bank overdraft | — | — | (1,028 | ) | 1,028 | |||||||||||
Payments on debt | — | (310,986 | ) | (2,007 | ) | (4,350 | ) | |||||||||
Contribution from member | 36,843 | 254,718 | — | 1,222 | ||||||||||||
Distribution to member | — | — | (16,971 | ) | — | |||||||||||
Net cash provided by (used in) financing activities | 36,843 | (56,268 | ) | (20,006 | ) | (2,100 | ) | |||||||||
Net change in cash and cash equivalents | — | — | — | — | ||||||||||||
Cash and cash equivalents | ||||||||||||||||
Beginning of period | — | — | — | — | ||||||||||||
End of period | $ | — | $ | — | $ | — | $ | — | ||||||||
Supplemental disclosures of cash flow information | ||||||||||||||||
Cash paid for interest | $ | — | $ | 3,132 | $ | 10,603 | $ | 14,375 |
The accompanying notes are an integral part of these financial statements.
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INDIAN RIVER POWER LLC
NOTES TO FINANCIAL STATEMENTS
1. Organization
Indian River Power LLC, or the Company, is an indirect wholly owned subsidiary of NRG Energy, Inc., or NRG Energy. NRG Mid Atlantic Generating LLC, or Mid Atlantic Gen, owns 100% of the Company. Mid Atlantic Gen is a wholly owned subsidiary of NRG Energy.
From May 14 to December 23, 2003, NRG Energy and a number of its subsidiaries, excluding Mid Atlantic Gen, undertook a comprehensive reorganization and restructuring under chapter 11 of the United States Bankruptcy Code.
2. Summary of Significant Accounting Policies
Basis of Presentation
For financial reporting purposes, close of business on December 5, 2003, represents the date of NRG Energy’s emergence from bankruptcy. The accompanying financial statements reflect the impact of NRG Energy’s emergence from bankruptcy effective December 5, 2003. As used herein, the following terms refer to the Company and its operations:
“Predecessor Company” | The Company, prior to NRG Energy’s emergence from bankruptcy | |
The Company’s operations prior to December 6, 2003 | ||
“Reorganized Company” | The Company, after NRG Energy’s emergence from bankruptcy | |
The Company’s operations, December 6, 2003 — December 31, 2004 |
NRG Energy Fresh Start Reporting/Push Down Accounting
In accordance with SOP 90-7, certain companies qualify for fresh start reporting in connection with their emergence from bankruptcy. Fresh start reporting is appropriate on the emergence from chapter 11 if the reorganization value of the assets of the emerging entity immediately before the date of confirmation is less than the total of all post-petition liabilities and allowed claims, and if the holders of existing voting shares immediately before confirmation receive less than 50 percent of the voting shares of the emerging entity. NRG Energy met these requirements and adopted Fresh Start reporting resulting in the creation of a new reporting entity designated as Reorganized NRG. Under push down accounting, the Company’s equity fair value was allocated to the Company’s assets and liabilities based on their estimated fair values as of December 5, 2003, as further described in Note 3.
The bankruptcy court issued a confirmation order approving NRG Energy’s plan of reorganization on November 24, 2003. Under the requirements of SOP 90-7, the Fresh Start date is determined to be the confirmation date unless significant uncertainties exist regarding the effectiveness of the bankruptcy order. NRG Energy’s plan of reorganization required completion of the Xcel Energy settlement agreement prior to emergence from bankruptcy. The Xcel Energy settlement agreement was entered into on December 5, 2003. NRG Energy believes this settlement agreement was a significant contingency and thus delayed the Fresh Start date until the Xcel Energy settlement agreement was finalized on December 5, 2003.
Under the requirements of Fresh Start, NRG Energy adjusted its assets and liabilities, other than deferred income taxes, to their estimated fair values as of December 5, 2003. As a result of marking the assets and liabilities to their estimated fair values, NRG Energy determined that there was a negative reorganization value that was reallocated back to the tangible and intangible assets. Deferred taxes were determined in accordance with Statement of Financial Accounting Standards, or SFAS No. 109, “Accounting for Income Taxes". The net effect of all Fresh Start adjustments resulted in a gain of $3.9 billion (comprised of a $4.1 billion gain from continuing operations and a $0.2 billion loss from discontinued operations), which is reflected in NRG Energy’s Predecessor Company results for the period from January 1, 2003 to December 5, 2003. The application of the Fresh Start provisions of SOP 90-7 and push down accounting created a new reporting entity having no retained earnings or accumulated deficit.
As part of the bankruptcy process, NRG Energy engaged an independent financial advisor to assist in the determination of its reorganized enterprise value. The fair value calculation was based on management’s forecast of expected cash flows from NRG Energy’s core assets. Management’s forecast incorporated forward commodity market prices obtained from a third party consulting
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INDIAN RIVER POWER LLC
firm. A discounted cash flow calculation was used to develop the enterprise value of Reorganized NRG, determined in part by calculating the weighted average cost of capital of the Reorganized NRG. The Discounted Cash Flow, or DCF, valuation methodology equates the value of an asset or business to the present value of expected future economic benefits to be generated by that asset or business. The DCF methodology is a “forward looking” approach that discounts expected future economic benefits by a theoretical or observed discount rate. The independent financial advisor prepared a 30-year cash flow forecast using a discount rate of approximately 11%. The resulting reorganization enterprise value as included in the Disclosure Statement ranged from $5.5 billion to $5.7 billion. The independent financial advisor then subtracted NRG Energy’s project level debt and made several other adjustments to reflect the values of assets held for sale, excess cash and collateral requirements to estimate a range of Reorganized NRG equity value of between $2.2 billion and $2.6 billion.
In constructing the Fresh Start balance sheet upon emergence from bankruptcy, NRG Energy used a reorganization equity value of approximately $2.4 billion, as NRG Energy believed this value to be the best indication of the value of the ownership distributed to the new equity owners. The reorganization value of approximately $9.1 billion was determined by adding the reorganized equity value of $2.4 billion, $3.7 billion of interest bearing debt and other liabilities of $3.0 billion. The reorganization value represents the fair value of an entity before liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after restructuring. This value is consistent with the voting creditors and Court’s approval of NRG Energy’s Plan of Reorganization.
Due to the adoption of Fresh Start upon NRG Energy’s emergence from bankruptcy and the impact of push down accounting, the Reorganized Company’s statement of operations and statement of cash flows have not been prepared on a consistent basis with the Predecessor Company’s financial statements and are therefore not comparable to the financial statements prior to the application of Fresh Start.
Inventory
Inventory consists of fuel oil, spare parts and coal and is valued at the lower of weighted average cost or market.
Property, Plant and Equipment
The Company’s property, plant and equipment are stated at cost; however, impairment adjustments are recorded whenever events or changes in circumstances indicate carrying values may not be recoverable. On December 5, 2003, the Company recorded adjustments to the property, plant and equipment to reflect such items at fair value in accordance with fresh start reporting. A new cost basis was established with these adjustments. Significant additions or improvements extending asset lives are capitalized, while repairs and maintenance that do not improve or extend the life of the respective asset, are charged to expense as incurred. Depreciation is calculated using the straight-line method over the following estimated useful lives of the assets. The assets and related accumulated depreciation amounts are adjusted for asset retirements and disposals, with the resulting gain or loss included in operations.
Facilities and equipment | 4 to 35 years |
Asset Impairment
Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances indicate carrying values may not be recoverable. Such reviews are performed in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. An impairment loss is recognized if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured by the difference between an asset’s carrying amount and fair value. Fair values are determined by a variety of valuation methods, including appraisals, sales prices of similar assets and present value techniques.
Intangible Assets
Intangible assets represent contractual rights held by the Company. Intangible assets are amortized over their economic useful life and reviewed for impairment whenever events or change in circumstances indicate carrying values may not be recoverable.
Intangible assets consist of the fair value of emission allowances. Emission allowance related amounts are amortized as additional fuel expense based upon the actual level of emissions from the respective plant through 2023. Intangible assets are reviewed for impairment on a periodic basis.
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INDIAN RIVER POWER LLC
Fair Value of Financial Instruments
The carrying amount of accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments.
Income Taxes
The Company has been organized as a limited liability company. Therefore, federal and state income taxes are assessed at the member level. However, a provision for federal and state income taxes has been reflected in the accompanying financial statements (see Note 13 — Income Taxes). As a result of the Company being included in the NRG Energy consolidated tax return and tax payments, federal and state taxes payable resulting from the tax provision are reflected as a contribution by member in the statement of member’s equity and balance sheet.
Deferred income taxes are recognized for the tax consequences in future years of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. A valuation allowance is recorded to reduce deferred tax assets to the amount more likely than not to be realized.
Comprehensive Income
For all periods, net income is equal to comprehensive income as there were no additional items impacting comprehensive income for each of the periods presented.
Revenue Recognition
Revenues from the sale of electricity are recorded based upon the output delivered and capacity provided at rates specified under contract terms or prevailing market rates. Electric energy revenue is recognized upon transmission to the customer. Revenues and related costs under cost reimbursable contract provisions are recorded as costs are incurred.
In certain markets which are operated/controlled by an independent system operator, or ISO, and in which the Company has entered into a netting agreement with the ISO, which results in the Company receiving a netted invoice, the Company records purchased energy as an offset against revenues received upon the sale of such energy. Disputed revenues are not recorded in the financial statements until disputes are resolved and collection is assured.
Power Marketing Activities
The Company has entered into an agreement with a marketing affiliate for the sale of energy, capacity and ancillary services produced and for the procurement and management of fuel and emissions credit allowances, which enables the affiliate to engage in forward sales and economic hedges to manage the Company’s electricity price exposure. See Note 10 — Related Party Transactions.
Credit Risk
Credit risk relates to the risk of loss resulting from non-performance or non-payment by counter-parties pursuant to the terms of their contractual obligations. NRG Energy monitors and manages its credit risk through credit policies which include an (i) established credit approval process, (ii) daily monitoring of counter-party credit limits, (iii) the use of credit mitigation measures such as margin, collateral, credit derivatives or prepayment arrangements, (iv) the use of payment netting agreements and (v) the use of master netting agreements that allow for the netting of positive and negative exposures of various contracts associated with a single counter-party. Risk surrounding counter-party performance and credit could ultimately impact the amount and timing of expected cash flows. NRG Energy has credit protection within various agreements to call on additional collateral support if necessary.
Additionally, the Company has concentrations of suppliers and customers among electric utilities, energy marketing and trading companies and regional transmission operators. These concentrations of counter-parties may impact the Company’s overall exposure to credit risk, either positively or negatively, in that counter-parties may be similarly affected by changes in economic, regulatory and other conditions.
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INDIAN RIVER POWER LLC
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.
In recording transactions and balances resulting from business operations, the Company uses estimates based on the best information available. Estimates are used for such items as plant depreciable lives, uncollectible accounts and the valuation of long-term energy commodities contracts, among others. In addition, estimates are used to test long-lived assets for impairment and to determine fair value of impaired assets. 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.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs- an amendment of ARB No. 43, Chapter 4”. This statement amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”, and requires that idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criteria of “so abnormal” established by Accounting Research Bulletin No. 43. SFAS No.151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently in the process of evaluating the potential impact that the adoption of this statement will have on the Company’s financial position and results of operations.
In December 2004, the FASB issued two FASB Staff Positions, or FSPs, regarding the accounting implications of the American Jobs Creation Act of 2004 related to (1) the deduction for qualified domestic production activities (FSP FAS 109-1) and (2) the one-time tax benefit for the repatriation of foreign earnings (FSP FAS 109-2). In FSP FAS 109-1, “Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”,the Board decided that the deduction for qualified domestic production activities should be accounted for as a special deduction under FASB Statement No. 109, “Accounting for Income Taxes”and rejected an alternative view to treat it as a rate reduction. Accordingly, any benefit from the deduction should be reported in the period in which the deduction is claimed on the tax return. FSP FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”,addresses the appropriate point at which a company should reflect in its financial statements the effects of the one-time tax benefit on the repatriation of foreign earnings. Because of the proximity of the Act’s enactment date to many companies’ year-ends, its temporary nature, and the fact that numerous provisions of the Act are sufficiently complex and ambiguous, the Board decided that absent additional clarifying regulations, companies may not be in a position to assess the impact of the Act on their plans for repatriation or reinvestment of foreign earnings. Therefore, the Board provided companies with a practical exception to FAS 109’s requirements by providing them additional time to determine the amount of earnings, if any, that they intend to repatriate under the Act’s beneficial provisions. The Board confirmed, however, that upon deciding that some amount of earnings will be repatriated, a company must record in that period the associated tax liability, thereby making it clear that a company cannot avoid recognizing a tax liability when it has decided that some portion of its foreign earnings will be repatriated. The Company is currently in the process of evaluating the potential impact that the adoption of FSP FAS 109-1 will have on our consolidated financial position and results of operations. The Company does not believe that the potential adoption of FSP 109-2 will have a material impact on our consolidated financial position and results of operation.
In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47 (FIN 47) to Financial Accounting Standard No. 143 (SFAS No. 143) governing the application of Asset Retirement Obligations. FIN 47 clarifies that the term “conditional asset retirement obligation” as used in SFAS 143. SFAS No. 143 refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional but there may remain some uncertainty as to the timing and/or method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred — generally upon acquisition, construction, or development and/or through the normal operation of the asset. SFAS No. 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN 47 clarifies when the company would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15, 2005 and we are currently evaluating the impact of this guidance.
3. Emergence from Bankruptcy and Fresh Start Reporting
In accordance with the requirements of SFAS No. 141 “Business Combinations”, and push down accounting, the Company’s fair value of $141.6 million, as of Fresh Start date, was allocated to the Company’s assets and liabilities based on their individual estimated fair values. A third party was used to complete an independent appraisal of the Company’s tangible assets, intangible assets and contracts.
The determination of the fair value of the Company’s assets and liabilities was based on a number of estimates and assumptions, which are inherently subject to significant uncertainties and contingencies.
Due to the adoption of Fresh Start reporting as of December 5, 2003, the Reorganized Company’s statements of operations and cash flows have not been prepared on a consistent basis with the Predecessor Company’s financial statements and are not comparable in certain respects to the financial statements prior to the application of Fresh Start.
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INDIAN RIVER POWER LLC
The effects of the push down accounting adjustments on the Company’s condensed consolidated balance sheet as of December 5, 2003 were as follows:
Predecessor | Reorganized | |||||||||||
Company | Company | |||||||||||
December 5, | Push Down | December 6, | ||||||||||
2003 | Adjustments | 2003 | ||||||||||
(in thousands) | ||||||||||||
Current Assets | $ | 18,475 | $ | (1,975 | ) | $ | 16,500 | |||||
Non-current Assets | 663,890 | (204,696 | ) | 459,194 | ||||||||
Total Assets | $ | 682,365 | $ | (206,671 | ) | $ | 475,694 | |||||
Current Liabilities | $ | 313,622 | $ | 44 | $ | 313,666 | ||||||
Non-current Liabilities | 103,706 | (83,252 | ) | 20,454 | ||||||||
417,328 | (83,208 | ) | 334,120 | |||||||||
Member’s Equity | 265,037 | (123,463 | ) | 141,574 | ||||||||
Total Liabilities and Member’s Equity | $ | 682,365 | $ | (206,671 | ) | $ | 475,694 | |||||
4. Inventory
Reorganized Company | ||||||||
December 31, | December 31, | |||||||
2004 | 2003 | |||||||
(In thousands of dollars) | ||||||||
Fuel oil | $ | 321 | $ | 378 | ||||
Spare parts | 3,774 | 3,557 | ||||||
Coal | 12,225 | 9,767 | ||||||
Total inventory | $ | 16,320 | $ | 13,702 | ||||
5. Property, Plant and Equipment
Average | ||||||||||||||||
Remaining | Reorganized Company | |||||||||||||||
Useful | December 31, | December 31, | Depreciable | |||||||||||||
Life | 2004 | 2003 | Lives | |||||||||||||
(In thousands of dollars) | ||||||||||||||||
Facilities and equipment | 21 years | $ | 397,254 | $ | 380,330 | 4-35 years | ||||||||||
Land and improvements | 5,696 | 5,696 | ||||||||||||||
Construction in progress | 685 | 10,075 | ||||||||||||||
Total property, plant and equipment | 403,635 | 396,101 | ||||||||||||||
Accumulated depreciation | (18,538 | ) | (1,080 | ) | ||||||||||||
Property, plant and equipment, net | $ | 385,097 | $ | 395,021 | ||||||||||||
6. Asset Retirement Obligations
Effective January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations". SFAS No. 143 requires an entity to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred. Upon initial recognition of a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Retirement obligations associated with long-lived assets included within the scope of SFAS No. 143 are those for which a legal obligation exists under enacted laws, statutes and written or oral contracts, including obligations arising under the doctrine of promissory estoppel.
The Company identified an asset retirement obligation related to ash disposal site closure. The adoption of SFAS No. 143 resulted in recording a $1.4 million increase to property, plant and equipment and a $1.7 million increase to other long-term obligations. The cumulative effect of adopting SFAS No. 143 was recorded as a $0.2 million increase to depreciation expense and a $0.3 million increase to operating costs in the period from January 1, 2003 to December 5, 2003, as the Company considered the cumulative effect to be immaterial.
The following represents the balances of the asset retirement obligation at January 1, 2003, and the accretion of the asset retirement obligation for the period from January 1, 2003 to December 5, 2003, the period from December 6, 2003 to December 31, 2003 and the year ended December 31, 2004. As a result of adopting Fresh Start, the Company revalued its asset retirement obligations on December 6, 2003. The Company recorded an additional asset retirement obligation of $2.2 million in connection with push down accounting. This amount results from a change in the discount rate used between the date of adoption and fresh start reporting as of December 5, 2003, equal to 500 to 600 basis points.
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INDIAN RIVER POWER LLC
Reorganized Company | ||||||||||||||||||||
Accretion | ||||||||||||||||||||
for Period | Accretion | |||||||||||||||||||
Beginning | December 6, | Ending | for the Year | Ending | ||||||||||||||||
Balance | 2003 to | Balance | Ended | Balance | ||||||||||||||||
December 6, | December 31, | December 31, | December 31, | December 31, | ||||||||||||||||
2003 | 2003 | 2003 | 2004 | 2004 | ||||||||||||||||
(In thousands of dollars) | ||||||||||||||||||||
Landfill closure obligation | $ | 4,198 | $ | 24 | $ | 4,222 | $ | 294 | $ | 4,516 |
Predecessor Company | ||||||||||||||||
Accretion | ||||||||||||||||
Beginning | for Period | Adjustment | Ending | |||||||||||||
Balance | Ended | for Fresh | Balance | |||||||||||||
January 1, | December 5, | Start | December 5, | |||||||||||||
2003 | 2003 | Reporting | 2003 | |||||||||||||
(In thousands of dollars) | ||||||||||||||||
Landfill closure obligation | $ | 1,732 | $ | 233 | $ | 2,233 | $ | 4,198 |
7. Intangible Assets
Upon the adoption of Fresh Start and application of push down accounting, the Company established intangible assets for plant emissions allowances. These intangible assets are amortized over their lives based on a units of production basis. Emission allowances are amortized as additional fuel expense based upon the actual level of emissions from the plant facilities through 2023. Aggregate amortization expense for the year ended December 31, 2004 and period from December 6, 2003 through December 31, 2003 was approximately $2.9 million and $0 million, respectively. The annual amortization expense for each of the five succeeding years is expected to approximate $2.3 million in 2005 and 2006, $2.4 million in years three and four and $2.3 million in year five. Intangible assets were also reduced by $3.3 million related to a true-up of certain tax evaluations.
Intangible assets consisted of the following:
Emission Allowances | ||||
(In Thousands of Dollars) | ||||
Balance at December 31, 2003 | $ | 57,531 | ||
Amortization | (2,913 | ) | ||
Other adjustments | (3,293 | ) | ||
Balance at December 31, 2004 | $ | 51,325 | ||
Predecessor Company
The Company had no intangible assets prior to December 5, 2003.
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INDIAN RIVER POWER LLC
8. Out of Market Contracts
On June 22, 2001, Mid Atlantic Gen purchased 1,081 megawatts (MW) of interests in power generation plants from a subsidiary of Conectiv. Other liabilities, in the purchase price allocation, included $144.4 million associated with out-of-market contracts. The $144.4 million was comprised of three out-of-market contracts, two of which were less than one year in duration from the acquisition date and the third contract was in effect through 2005. Upon the acquisition, the Company assumed the remaining obligations under these agreements. The long-term agreement required the Company to deliver 500 MW of electrical energy around the clock at a specified price through 2005. The out-of-market contract liability was amortized into revenue based on the terms of the power purchase agreements. Accordingly, the Company recognized $89.3 million in revenues associated with the amortization of the long-term and short-term power purchase agreements during the year ended December 31, 2002.
On November 8, 2002, Conectiv provided NRG Energy with a Notice of Termination of Transaction under the Master Power Purchase and Sale Agreement, or Master PPA, dated June 21, 2001, to terminate the long-term power purchase agreement. As a result of the cancellation, the Company lost approximately $383 million in future contracted revenues that would have been provided under the terms of the contract. In conjunction with the terms of the Master PPA, the Company received from Conectiv a termination payment in the amount of $955,000 which was recorded as revenue in 2002. As a result of the contract termination in 2002, the remaining unamortized balance of $44.3 million was brought into income as revenue.
9. Sales to Significant Customers
The Company derives revenues from four significant customers:
Reorganized Company | Predecessor Company | |||||||||||||||
For the | For the | |||||||||||||||
Period | Period | |||||||||||||||
For the Year | December 6, | January 1, | For the Year | |||||||||||||
Ended | 2003 to | 2003 to | Ended | |||||||||||||
December 31, | December 31, | December 5, | December 31, | |||||||||||||
2004 | 2003 | 2003 | 2002 | |||||||||||||
(Percent of total revenues) | ||||||||||||||||
Sales to: | ||||||||||||||||
Atlantic City Electric, dba Conectiv | 38.0 | % | 45.0 | % | 78.0 | % | 95.0 | % | ||||||||
Jersey Central Power & Light | 17.0 | % | — | % | — | % | — | % | ||||||||
Rockland Electric | 15.0 | % | 16.0 | % | — | % | — | % | ||||||||
PJM Interconnection | 14.0 | % | 39.0 | % | 13.0 | % | — | % |
10. Related Party Transactions
On June 22, 2001, the Company entered into energy marketing services agreements with NRG Power Marketing Inc., or NRG Power Marketing, a wholly owned subsidiary of NRG Energy. The agreements are effective for consecutive one-year terms until terminated by either party upon 90 days written notice before the end of any such term. Under the agreement, NRG Power Marketing and its wholly owned subsidiary, NJ Energy Sales, will (i) have the exclusive right to manage, purchase and sell all power not otherwise sold or committed to by the Company, (ii) procure and provide to the Company all fuel required to operate its facilities and (iii) market, sell and purchase all emission credits owned, earned or acquired by the Company. In addition, NRG Power Marketing will have the exclusive right and obligation to effect the direction of the power output from the facilities.
Under the agreement, NRG Power Marketing pays to the Company gross receipts generated through sales, less costs incurred by NRG Power Marketing relative to its providing services (e.g. transmission and delivery costs, fuel costs, taxes, employee labor, contract services, etc.). The Company incurred no fees related to this energy marketing services agreement with NRG Power Marketing.
On June 22, 2001, the Company entered into an operation and maintenance agreement with a subsidiary of NRG Operating Services, Inc., or NRG Operating Services, a wholly owned subsidiary of NRG Energy. The agreement is effective for five years, with the option to extend beyond five years. Under the agreement, the NRG Operating Services company operator operates and maintains the Company’s facility, including (i) coordinating fuel delivery, unloading and inventory, (ii) managing facility spare parts, (iii)
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INDIAN RIVER POWER LLC
meeting external performance standards for transmission of electricity, (iv) providing operating and maintenance consulting and (v) cooperating with and assisting in performing the obligations under agreements related to facilities.
Under the agreement, the operator charges an annual fee, and in addition, will be reimbursed for usual and customary costs related to providing the services including plant labor and other operating costs. A demobilization payment will be made if the Company elects not to renew the agreement. There are also incentive fees and penalties based on performance under the approved operating budget, the heat rate and safety. These costs are reflected in operating costs in the statements of operations.
For the year ended December 31, 2004, the period from December 6, 2003 to December 31, 2003, the period from January 1, 2003 to December 5, 2003 and the year ended December 31, 2002, the Company incurred operating costs billed from NRG Operating Services totaling $44.5 million, $2.9 million, $43.0 million and $43.0 million, respectively.
On June 22, 2001, the Company entered into an agreement with NRG Energy for corporate support and services. The agreement is perpetual in term, unless terminated in writing. Under the agreement, NRG Energy will provide services, as requested, in areas such as human resources, accounting, finance, treasury, tax, office administration, information technology, engineering, construction management, environmental, legal and safety. Under the agreement, NRG Energy is paid for personnel time as well as out-of-pocket costs. These costs are reflected in general and administrative expenses in the statements of operations. For the year ended December 31, 2004, the period from December 6, 2003 to December 31, 2003, the period from January 1, 2003 to December 5, 2003 and the year ended December 31, 2002, the Company incurred expenses of $5.5 million, $0.7 million, $0.2 million and $0.1 million, respectively. The amounts paid for the year ended December 31, 2004 reflect an overall increase in corporate level general and administrative expenses. Corporate general, administrative and development expenses increase in 2004 due to higher legal fees, increased audit costs 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 December 31, 2004, the Company had an accounts receivable — affiliates balance of $6.3 million. At December 31, 2003, the Company had an accounts payable — affiliate balance of $59.7 million. These balances are settled on a periodic basis and are due to or due from multiple entities which are wholly owned subsidiaries of NRG Energy Inc. Indian River is an indirect wholly owned subsidiary of NRG Energy Inc., the parent company of Mid Atlantic Generating LLC. Mid Atlantic Generating LLC is the parent company of Indian River Power LLC.
11. Commitments and Contingencies
Environmental Matters
Significant amounts of ash are disposed at landfills owned and operated by the Company. The Company maintains financial assurance to cover costs associated with closure, post-closure care and monitoring activities. In accordance with certain regulations established by the Delaware Department of Natural Resources and Environmental Control, the Company has funded a trust in the amount of $6.7 million. The amounts contained in this fund will be dispensed as authorized by the Delaware Department of Natural Resources and Environmental Control. This amount is recorded in other noncurrent assets on the balance sheet.
The Company estimates that it will incur capital expenditures of approximately $25.0 million during the years 2005 through 2010 related to resolving environmental concerns at the Indian River Generating Station. These concerns include the expected closure of the existing ash landfill, the construction of a new ash landfill nearby, the addition of controls to reduce NOx emissions, fuel yard modifications and electrostatic precipitator refurbishments to reduce opacity.
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". In connection with push down accounting, all outstanding guarantees were considered new; accordingly, the Company applied the provisions of FIN 45 to all of the guarantees.
On December 23, 2003, the Company’s ultimate parent, NRG Energy, issued $1.25 billion of 8% Second Priority Notes, due and payable on December 15, 2013. On January 28, 2004, NRG Energy also issued $475.0 million of Second Priority Notes, under the same terms and indenture as its December 23, 2003 offering.
NRG Energy’s payment obligations under the notes and all related Parity Lien Obligations are guaranteed on an unconditional basis by certain of NRG Energy’s current and future restricted subsidiaries (other than certain excluded project subsidiaries, foreign subsidiaries and certain other subsidiaries), of which the Company is one. The notes are jointly and severally guaranteed by each of the guarantors. The subsidiary guarantees of the notes are secured, on a second priority basis, equally and ratably with any future
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INDIAN RIVER POWER LLC
parity lien debt, by security interests in all of the assets of the guarantors, except certain excluded assets, subject to liens securing parity lien debt and other permitted prior liens.
On December 24, 2004, NRG Energy’s credit facility was amended and restated, or the Amended Credit Facility, whereby NRG Energy repaid outstanding amounts and issued a $450.0 million, seven-year senior secured term loan facility, a $350.0 million funded letter of credit facility, and a three-year revolving credit facility in an amount up to $150.0 million. The Amended Credit Facility is secured by, among other things, first-priority perfected security interests in all of the property and assets owned at any time or acquired by NRG Energy and certain of NRG’s current and future subsidiaries, including the Company.
The Company’s obligations pursuant to its guarantees of the performance, equity and indebtedness obligations were as follows:
Guarantee/ | ||||||||||||||||
Maximum | Expiration | |||||||||||||||
Exposure | Nature of Guarantee | Date | Triggering Event | |||||||||||||
(In thousands | ||||||||||||||||
of dollars) | ||||||||||||||||
Project/Subsidiary | ||||||||||||||||
NRG Energy Second Priority Notes due 2013 | $ | 1,725,000 | Obligations under credit agreement | 2013 | Nonperformance | |||||||||||
NRG Energy Amended and Restated Credit Agreement | $ | 800,000 | Obligations under credit agreement | 2011 | Nonperformance |
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 obligation of the Company was reduced from $1,725.0 million to $1,350.0 million.
12. Regulatory Issues
On January 25, 2005, FERC issued an order approving the Pennsylvania, Jersey, Maryland Interconnection, or PJM, proposal to increase the compensation for generators which are located in load pockets and are mitigated at least 80% of their running time. Specifically, when the generators would be subject to mitigation, the generator would have the option of recovering their variable costs plus $40 or a negotiated rate with PJM, based on the facility’s going forward costs. If the generator declines both options, it could file for an alternative rate with FERC. Some of the Company’s facilities located in PJM are impacted by the change. The revisions to the cost capping rule could impact the revenues earned by several of the Company’s facilities. In the order, FERC also substantially revised the exemption facilities built after 1996 had from the capping mitigation rule. Under the order the exemption for facilities located in original PJM territory now applies only if the facility was constructed after April 1, 1999. If construction of the facility began after September 30 2003, the exemption would not apply. This limitation to the post 1996 exemption will probably reduce the energy clearing price, or ECP, because units will be subject to the cost capping rule and therefore will be unable to set the ECP.
13. Income Taxes
The Company is included in the consolidated income tax return filings of NRG Energy. Reflected in the financial statements and notes below are federal and state income tax provisions, as if the Company had prepared separate filings. The Company’s ultimate parent, NRG Energy, does not have a tax allocation agreement with its subsidiaries. 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.
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INDIAN RIVER POWER LLC
The provision (benefit) for income taxes consists of the following:
Reorganized Company | Predecessor Company | |||||||||||||||
For the | For the | |||||||||||||||
Period from | Period from | |||||||||||||||
For the Year | December 6, | January 1, | For the Year | |||||||||||||
Ended | 2003 to | 2003 to | Ended | |||||||||||||
December 31, | December 31, | December 5, | December 31, | |||||||||||||
2004 | 2003 | 2003 | 2002 | |||||||||||||
(In thousands of dollars) | ||||||||||||||||
Current | ||||||||||||||||
Federal | $ | — | $ | — | $ | — | $ | — | ||||||||
State | — | — | — | — | ||||||||||||
— | — | — | — | |||||||||||||
Deferred | ||||||||||||||||
Federal | 5,436 | (841 | ) | 2,115 | 27,231 | |||||||||||
State | 1,536 | (237 | ) | 597 | 7,695 | |||||||||||
6,972 | (1,078 | ) | 2,712 | 34,926 | ||||||||||||
Total income tax expense (benefit) | $ | 6,972 | $ | (1,078 | ) | $ | 2,712 | $ | 34,926 | |||||||
Effective tax rate | 40.9 | % | 40.8 | % | 40.8 | % | 39.8 | % |
The pre-tax net income (loss) was as follows:
Reorganized Company | Predecessor Company | |||||||||||||||
For the | For the | |||||||||||||||
Period from | Period from | |||||||||||||||
For the Year | December 6, | January 1, | For the Year | |||||||||||||
Ended | 2003 to | 2003 to | Ended | |||||||||||||
December 31, | December 31, | December 5, | December 31, | |||||||||||||
2004 | 2003 | 2003 | 2002 | |||||||||||||
(In thousands of dollars) | ||||||||||||||||
U.S | $ | 17,059 | $ | (2,640 | ) | $ | 6,640 | $ | 87,826 |
The components of the net deferred income tax liability were:
Reorganized Company | ||||||||
December 31, | December 31, | |||||||
2004 | 2003 | |||||||
(In thousands of dollars) | ||||||||
Deferred tax liabilities | ||||||||
Property | $ | 26,736 | $ | — | ||||
Emissions credits | 18,752 | 23,501 | ||||||
Other | 774 | 562 | ||||||
Total deferred tax liabilities | 46,262 | 24,063 | ||||||
Deferred tax assets | ||||||||
Difference between book and tax basis of contracts | 1,539 | — | ||||||
Property | — | 5,985 | ||||||
Asset retirement obligation | 1,845 | 1,725 | ||||||
Domestic tax loss carryforwards | 20,281 | 733 | ||||||
Other | 437 | 432 | ||||||
Total deferred tax assets | 24,102 | 8,875 | ||||||
Net deferred tax liability | $ | 22,160 | $ | 15,188 | ||||
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INDIAN RIVER POWER LLC
The net deferred tax liability consists of:
Reorganized Company | ||||||||
December 31, | December 31, | |||||||
2004 | 2003 | |||||||
(In thousands of dollars) | ||||||||
Current deferred tax liability | $ | — | $ | 44 | ||||
Noncurrent deferred tax liability | 22,160 | 15,144 | ||||||
Net deferred tax liability | $ | 22,160 | $ | 15,188 | ||||
In assessing the realizabilty of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of taxable income in future periods. Management considers both positive and negative evidence, projected operating income and capital gains, and available tax planning strategies in making this assessment. Based upon projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these net deferred tax assets as of December 31, 2004. There is a net carryforward amount of $49.6 million available at December 31, 2004 which will expire by 2023 if unutilized.
In connection with the Company’s emergence from bankruptcy, the 2003 net operating loss carryforward was effectively increased as a result of the Company’s election in 2004 to reduce the tax basis of property on a going forward basis. This election was made in 2004 in connection with tax planning strategies for future periods and accordingly was recorded subsequent to the period ended December 31, 2003.
In 2004, the Company utilized $41.3 million of U.S. net operating losses carryforward of $90.9 million. There is a net carryforward amount of $49.6 million available at December 31, 2004, which will expire by 2023 if unutilized.
The effective income tax rates of continuing operations differ from the statutory federal income tax rate of 35% as follows:
Reorganized Company | Predecessor Company | |||||||||||||||||||||||||||||||
For the | For the | |||||||||||||||||||||||||||||||
Period from | Period from | |||||||||||||||||||||||||||||||
For the Year | December 6, | January 1, | For the Year | |||||||||||||||||||||||||||||
Ended | 2003 to | 2003 to | Ended | |||||||||||||||||||||||||||||
December 31, | December 31, | December 5, | December 31, | |||||||||||||||||||||||||||||
2004 | 2003 | 2003 | 2002 | |||||||||||||||||||||||||||||
(In thousands of dollars) | ||||||||||||||||||||||||||||||||
Income (loss) before taxes | $ | 17,059 | $ | (2,640 | ) | $ | 6,640 | $ | 87,826 | |||||||||||||||||||||||
Tax at 35% | 5,970 | 35.0 | % | (924 | ) | 35.0 | % | 2,324 | 35.0 | % | 30,739 | 35.0 | % | |||||||||||||||||||
State taxes (net of federal benefit) | 1,037 | 5.9 | % | (155 | ) | 5.8 | % | 389 | 5.8 | % | 5,002 | 5.7 | % | |||||||||||||||||||
Other | (35 | ) | — | % | 1 | — | % | (1 | ) | — | % | (815 | ) | (0.9 | )% | |||||||||||||||||
Income tax (benefit) expense | $ | 6,972 | 40.9 | % | $ | (1,078 | ) | 40.8 | % | $ | 2,712 | 40.8 | % | $ | 34,926 | 39.8 | % | |||||||||||||||
Income tax expense for all periods reflect the federal and state tax and there are no special tax credits.
14. Long-Term Debt
On June 22, 2001, the Company’s parent borrowed approximately $420.9 million under a five-year term loan agreement (the “Agreement”) to finance, in part, the acquisition of certain generating facilities from Conectiv. The parent loaned the proceeds from the debt to its subsidiaries. The amount loaned by the parent to the Company was $317.3 million. On December 23, 2003, NRG Energy issued $1.25 billion in Second Priority Notes, due and payable on December 15, 2003. On the same date, NRG Energy also entered into a new credit facility for up to $1.45 billion. Proceeds of the December 23, 2003, Second Priority Note issuance and the new credit facility were used among other things, for repayment of secured debt held by the Company. The Company used proceeds of $254.7 million from a capital contribution from its parent and payables to affiliates to pay the outstanding principal of $311 million and accrued interest of $2.5 million.
The debt provided for a variable interest rate at either the higher of the Prime rate or the Federal Funds rate plus 0.5%, or the London Interbank Offered Rate (“LIBOR”) of interest. During the period from December 6, 2003 to December 31, 2003 and the period from January 1, 2003 to December 5, 2003, the weighted average interest rate for amounts outstanding under the Agreement was 4.375% and 4.506%, respectively. For the year ended December 31, 2002, the weighted average interest rate was 3.30%.
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