EXHIBIT 99.8
NRG INTERNATIONAL LLC
CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2004 and December 31, 2003, and for
NRG INTERNATIONAL LLC
INDEX
Page(s) | ||||
Consolidated Financial Statements (Unaudited) | ||||
Unaudited Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 | 2 | |||
Unaudited Consolidated Statements of Operations for the three months ended June 30, 2004 and 2003 and for the six months ended June 30, 2004 and 2003 | 3 | |||
Unaudited Consolidated Statements of Member’s Equity for the three and six months ended June 30, 2004 and 2003 | 4 | |||
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 | 5 | |||
Notes to Unaudited Consolidated Financial Statements | 6-25 |
1
NRG INTERNATIONAL LLC
CONSOLIDATED BALANCE SHEETS
Reorganized Company | ||||||||||
June 30, | December 31, | |||||||||
2004 | 2003 | |||||||||
(In thousands of dollars) | ||||||||||
ASSETS | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 136,072 | $ | 127,020 | ||||||
Restricted cash | 55,308 | 45,874 | ||||||||
Accounts receivable | 49,960 | 40,309 | ||||||||
Accounts receivable — affiliates | 6,285 | 5,404 | ||||||||
Current portion of notes receivable | 122,703 | 64,720 | ||||||||
Inventory | 17,000 | 17,900 | ||||||||
Prepayments and other current assets | 4,469 | 3,790 | ||||||||
Current deferred income tax | 700 | 754 | ||||||||
Current assets — discontinued operations | — | 12,615 | ||||||||
Total current assets | 392,497 | 318,386 | ||||||||
Property, plant and equipment, net of accumulated depreciation of $13,002 and $1,467 respectively | 418,810 | 458,224 | ||||||||
Equity investments in affiliates | 311,491 | 332,617 | ||||||||
Notes receivable, less current portion | 361,330 | 444,052 | ||||||||
Notes receivable — affiliate | 107,851 | 111,913 | ||||||||
Derivative instruments valuation | 46,070 | 59,907 | ||||||||
Other assets | 3,118 | 4,450 | ||||||||
Noncurrent assets — discontinued operations | — | 47,476 | ||||||||
Total assets | $ | 1,641,167 | $ | 1,777,025 | ||||||
LIABILITIES AND MEMBER’S EQUITY | ||||||||||
Current liabilities | ||||||||||
Current portion of long-term debt | $ | 62,100 | $ | 75,944 | ||||||
Notes payable — affiliate | 10,664 | 10,664 | ||||||||
Accounts payable | 27,253 | 30,271 | ||||||||
Accounts payable — affiliate | 3,909 | 2,976 | ||||||||
Accrued income tax | 7,938 | 18,673 | ||||||||
Accrued liabilities | 5,565 | 4,471 | ||||||||
Other current liabilities | 293 | 1,839 | ||||||||
Current liabilities — discontinued operations | — | 62,993 | ||||||||
Total current liabilities | 117,722 | 207,831 | ||||||||
Other liabilities | ||||||||||
Long-term debt | 224,800 | 266,526 | ||||||||
Long-term debt — affiliates | 193,889 | 198,300 | ||||||||
Deferred income taxes | 159,724 | 165,883 | ||||||||
Postretirement and other benefit obligations | 10,527 | 14,016 | ||||||||
Derivative instruments valuation | 101,209 | 112,047 | ||||||||
Other long-term obligations | 18,877 | 14,959 | ||||||||
Noncurrent liabilities — discontinued operations | — | 3,729 | ||||||||
Total liabilities | 826,748 | 983,291 | ||||||||
Commitments and contingencies | ||||||||||
Member’s equity | 814,419 | 793,734 | ||||||||
Total liabilities and member’s equity | $ | 1,641,167 | $ | 1,777,025 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
NRG INTERNATIONAL LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
Reorganized | Predecessor | Reorganized | Predecessor | ||||||||||||||
Company | Company | Company | Company | ||||||||||||||
For the Three Months | For the Six Months | ||||||||||||||||
Ended June 30, | Ended June 30 | ||||||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||||||
Revenues | $ | 70,062 | $ | 68,557 | $ | 167,344 | $ | 146,511 | |||||||||
Operating costs | 64,610 | 59,442 | 131,010 | 122,728 | |||||||||||||
Depreciation and amortization | 6,891 | 4,769 | 12,019 | 8,487 | |||||||||||||
General and administrative expenses | 1,850 | 2,195 | 5,265 | 3,822 | |||||||||||||
Income (loss) from operations | (3,289 | ) | 2,151 | 19,050 | 11,474 | ||||||||||||
Equity in earnings of unconsolidated affiliates | 19,412 | 9,131 | 30,066 | 25,855 | |||||||||||||
Write downs and gains/(losses) on sales of equity method investments | 705 | (133,938 | ) | (1,268 | ) | (131,518 | ) | ||||||||||
Other income, net | 2,881 | 1,384 | 4,640 | 2,977 | |||||||||||||
Interest expense | (3,430 | ) | (2,099 | ) | (5,619 | ) | (4,013 | ) | |||||||||
Income (loss) from continuing operations before income taxes | 16,279 | (123,371 | ) | 46,869 | (95,225 | ) | |||||||||||
Income tax expense | 589 | 727 | 7,450 | 4,487 | |||||||||||||
Income (loss) from continuing operations | 15,690 | (124,098 | ) | 39,419 | (99,712 | ) | |||||||||||
Income on discontinued operations, net of income taxes | 9,475 | 2,702 | 7,517 | 205,227 | |||||||||||||
Net income (loss) | $ | 25,165 | $ | (121,396 | ) | $ | 46,936 | $ | 105,515 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
NRG INTERNATIONAL LLC
CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY
Accumulated | ||||||||||||||||||||||||
Member | Member | Accumulated | Other | Total | ||||||||||||||||||||
Contributions/ | Net Income | Comprehensive | Member’s | |||||||||||||||||||||
Units | Amount | Distributions | (Loss) | Income (Loss) | Equity | |||||||||||||||||||
Balances at March 31, 2003 (Predecessor Company) | 1,000 | $ | 1 | $ | 942,795 | $ | (152,820 | ) | $ | (64,999 | ) | $ | 724,977 | |||||||||||
Net Loss | (121,396 | ) | (121,396 | ) | ||||||||||||||||||||
Foreign currency translation adjustments and other | 64,554 | 64,554 | ||||||||||||||||||||||
Impact of SFAS No. 133 for the three months ended June 30, 2003, net of taxes of $5.4 million | 23,074 | 23,074 | ||||||||||||||||||||||
Comprehensive loss | (33,768 | ) | ||||||||||||||||||||||
Contribution from member | 7,641 | 7,641 | ||||||||||||||||||||||
Balances at June 30, 2003 (Predecessor Company) | 1,000 | $ | 1 | $ | 950,436 | $ | (274,216 | ) | $ | 22,629 | $ | 698,850 | ||||||||||||
Balances at March 31, 2004 (Reorganized Company) | 1,000 | $ | 1 | $ | 771,256 | $ | 25,035 | $ | 23,621 | $ | 819,913 | |||||||||||||
Net Income | 25,165 | 25,165 | ||||||||||||||||||||||
Foreign currency translation adjustments and other | (30,325 | ) | (30,325 | ) | ||||||||||||||||||||
Impact of SFAS No. 133 for the three months ended June 30, 2004, net of taxes of $1.5 million | (334 | ) | (334 | ) | ||||||||||||||||||||
Comprehensive loss | (5,494 | ) | ||||||||||||||||||||||
Balances at June 30, 2004 (Reorganized Company) | 1,000 | $ | 1 | $ | 771,256 | $ | 50,200 | $ | (7,038 | ) | $ | 814,419 | ||||||||||||
Balances at December 31, 2002 (Predecessor Company) | 1,000 | $ | 1 | $ | 1,085,689 | $ | (379,731 | ) | $ | (55,350 | ) | $ | 650,609 | |||||||||||
Net Income | 105,515 | 105,515 | ||||||||||||||||||||||
Foreign currency translation adjustments and other | 89,445 | 89,445 | ||||||||||||||||||||||
Impact of SFAS No. 133 for the six months ended June 30, 2003, net of taxes of $16.1 million | (11,466 | ) | (11,466 | ) | ||||||||||||||||||||
Comprehensive income | 183,494 | |||||||||||||||||||||||
Contribution from member | 7,641 | 7,641 | ||||||||||||||||||||||
Distribution to member | (142,894 | ) | (142,894 | ) | ||||||||||||||||||||
Balances at June 30, 2003 (Predecessor Company) | 1,000 | $ | 1 | $ | 950,436 | $ | (274,216 | ) | $ | 22,629 | $ | 698,850 | ||||||||||||
Balances at December 31, 2003 (Reorganized Company) | 1,000 | $ | 1 | $ | 771,256 | $ | 3,264 | $ | 19,213 | $ | 793,734 | |||||||||||||
Net Income | 46,936 | 46,936 | ||||||||||||||||||||||
Foreign currency translation adjustments and other | (32,714 | ) | (32,714 | ) | ||||||||||||||||||||
Impact of SFAS No. 133 for the six months ended June 30, 2004, net of taxes of $2.8 million | 6,463 | 6,463 | ||||||||||||||||||||||
Comprehensive income | 20,685 | |||||||||||||||||||||||
Balances at June 30, 2004 (Reorganized Company) | 1,000 | $ | 1 | $ | 771,256 | $ | 50,200 | $ | (7,038 | ) | $ | 814,419 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
NRG INTERNATIONAL LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reorganized | Predecessor | ||||||||||
Company | Company | ||||||||||
For the Six Months Ended | |||||||||||
June 30, | |||||||||||
2004 | 2003 | ||||||||||
Cash flows from operating activities | |||||||||||
Net income | $ | 46,936 | $ | 105,515 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
Distributions less than equity earnings of unconsolidated affiliates | (19,252 | ) | (27,813 | ) | |||||||
Write downs and losses on sales of equity method investments | 1,268 | 131,517 | |||||||||
Depreciation and amortization | 12,019 | 12,678 | |||||||||
Unrealized (gains)/losses on derivatives | 1,418 | (8,063 | ) | ||||||||
Unrealized exchange (gains)/losses | (98 | ) | 65 | ||||||||
Deferred income taxes | (894 | ) | 20,982 | ||||||||
Minority interest | (43 | ) | (1,024 | ) | |||||||
Gain on sale of discontinued operations | (10,280 | ) | (200,738 | ) | |||||||
Amortization of out of market power contracts | 19,070 | 8,652 | |||||||||
Changes in assets and liabilities | |||||||||||
Accounts receivable | (11,249 | ) | (34,219 | ) | |||||||
Inventory | (298 | ) | (1,743 | ) | |||||||
Prepayments and other current assets | 385 | (10,689 | ) | ||||||||
Accounts payable | (3,357 | ) | 29,098 | ||||||||
Accrued interest | (3,406 | ) | (216 | ) | |||||||
Accrued income taxes | (10,292 | ) | (1,991 | ) | |||||||
Accrued liabilities | 8,143 | (12,171 | ) | ||||||||
Other liabilities | — | 61,832 | |||||||||
Net cash provided by operating activities | 30,070 | 71,672 | |||||||||
Cash flows from investing activities | |||||||||||
Investments in affiliates | — | (119 | ) | ||||||||
Capital expenditures | (5,872 | ) | (31,714 | ) | |||||||
Proceeds from sale of investments | 25,092 | 38,400 | |||||||||
Decrease in note receivable | 11,770 | 63,677 | |||||||||
Proceeds from sale of discontinued operations | 1,159 | — | |||||||||
Increase in restricted cash | (13,405 | ) | (10,036 | ) | |||||||
Net cash provided by investing activities | 18,744 | 60,208 | |||||||||
Cash flows from financing activities | |||||||||||
Proceeds from issuance of debt | 14,311 | 10,966 | |||||||||
Contribution from member | — | 7,641 | |||||||||
Principal payments on long-term debt | (48,294 | ) | (67,525 | ) | |||||||
Distribution to member | — | (142,894 | ) | ||||||||
Net cash used in financing activities | (33,983 | ) | (191,812 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | (6,501 | ) | (75,366 | ) | |||||||
Change in cash from discontinued operations | 722 | 17,898 | |||||||||
Net change in cash and cash equivalents | 9,052 | (117,400 | ) | ||||||||
Cash and cash equivalents | |||||||||||
Beginning of period | 127,020 | 192,862 | |||||||||
End of period | $ | 136,072 | $ | 75,462 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
NRG INTERNATIONAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Organization |
NRG International LLC (the “Company”), a Delaware company incorporated on October 12, 1992, and converted to a limited liability company in November 2002, is a directly held, wholly owned subsidiary of NRG Energy, Inc. (“NRG Energy”).
The Company was formed for the purpose of financing, acquiring, owning, operating and maintaining, through its subsidiaries and affiliates, the power generation facilities owned by Flinders Power in Australia and Saale Energie GmbH in Germany. Flinders is a 760 MW power station and coal mine which sells electricity into the South Australian market. Saale Energie GmbH owns a 400 MW coal powered power station located in Halle Germany and sells output to Vattenfall Europe A.G. (“VEAG”) under a power purchase agreement
At June 30, 2004, the Company owned total interests in seven power projects in five countries having an aggregate generation capacity of approximately 2,075 MW in various international markets, including Australia, Europe and Latin America.
Recent Developments |
On May 14, 2003, NRG Energy and 25 of its direct and indirect wholly owned subsidiaries commenced voluntary petitions under Chapter 11 of the bankruptcy code in the United States Bankruptcy Court for the Southern District of New York. During the bankruptcy proceedings, NRG Energy continued to conduct business and manage the companies as debtors in possession pursuant to sections 1107(a) and 1108 of the bankruptcy code. The Company was not part of these Chapter 11 cases or any of the subsequent bankruptcy filings. On November 24, 2003, the bankruptcy court entered an order confirming NRG Energy’s Plan of Reorganization and the plan became effective on December 5, 2003. In connection with NRG Energy’s emergence from bankruptcy, NRG Energy adopted fresh start accounting in accordance with AICPA Statement of Position 90-7,Financial Reporting by Entities in Reorganization Under the Bankruptcy Code(“SOP 90-7”) on December 5, 2003. NRG Energy’s fresh start accounting was applied to the Company on a push down accounting basis with the financial impact recorded as an adjustment to the December 6, 2003 member’s equity.
2. | Summary of Significant Accounting Policies |
Basis of Presentation |
As used in these unaudited interim consolidated financial statements, “Predecessor Company” refers to the Company prior to NRG Energy’s emergence from bankruptcy. “Reorganized Company” refers to the Company after NRG Energy’s emergence from bankruptcy.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the Securities and Exchange Commission’s (“SEC”) regulations for interim consolidated financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accounting policies followed are set forth in Note 2 to the Company’s annual audited consolidated financial statements for the year ended December 31, 2003. The following notes should be read in conjunction with such policies and other disclosures. 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 necessary to present fairly the Company’s consolidated financial position as of June 30, 2004 and December 31, 2003, the results of its operations and member’s equity for the three and six months ended June 30, 2004 and 2003 and the cash flows for the six months ended June 30, 2004 and 2003. Certain prior-year amounts have been reclassified for comparative purposes.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Comparability of Financial Information |
Due to the adoption of push down accounting as of December 5, 2003, the Reorganized Company’s consolidated balance sheet, 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 not comparable in certain respects to the financial statements prior to the application of push down accounting. A black line has been drawn on the accompanying consolidated financial statements (excluding the balance sheet) to separate and distinguish between the Reorganized Company and the Predecessor Company.
3. | Discontinued Operations |
Statement of Financial Accounting Standards (“SFAS”) No. 144 requires that discontinued operations be valued on an asset-by-asset basis at the lower of carrying amount or fair value less costs to sell. In applying those provisions, the Company’s management considered cash flow analyses and offers related to those assets and businesses. This amount is included in income on discontinued operations, net of income taxes in the accompanying consolidated statements of operations. In accordance with the provisions of SFAS No. 144, assets held for sale will not be depreciated commencing with their classification as such.
The Company has classified certain business operations, and gains (losses) recognized on sale, as discontinued operations for projects that were sold or have met the required criteria for such classification. The financial results for all these businesses have been accounted for as discontinued operations. Accordingly, current period operating results and prior periods have been restated to report the operations as discontinued.
For the three and six months ended June 30, 2004 discontinued operations included Hsin Yu. For the three and six months ended June 30, 2003, discontinued operations included Hsin Yu, Killingholme, Cahua and Energia Pacasmayo projects.
Summarized results of operations of discontinued operations were as follows:
Reorganized | Predecessor | Reorganized | Predecessor | |||||||||||||
Company | Company | Company | Company | |||||||||||||
For the | For the | |||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(In thousands of dollars) | ||||||||||||||||
Operating revenues | $ | — | $ | 19,259 | $ | 8,266 | $ | 57,225 | ||||||||
Operating and other expenses | 805 | 16,054 | 11,113 | 51,664 | ||||||||||||
Pre-tax income/(loss) from operations of discontinued components | (805 | ) | 3,205 | (2,847 | ) | 5,561 | ||||||||||
Income tax expense/(benefit) | — | 660 | (84 | ) | 511 | |||||||||||
Income/(loss) from operations of discontinued components | (805 | ) | 2,545 | (2,763 | ) | 5,050 | ||||||||||
Disposal of discontinued components — gain, net of income tax expense | 10,280 | 157 | 10,280 | 200,177 | ||||||||||||
Net income on discontinued operations | $ | 9,475 | $ | 2,702 | $ | 7,517 | $ | 205,227 | ||||||||
The assets and liabilities of the discontinued operations are reported in the balance sheets as of December 31, 2003 as discontinued operations. All projects have been sold as of June 30, 2004. The major
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
classes of assets and liabilities are presented in the following table and were included in the Power Generation Other International segment.
Reorganized Company | ||||||||
June 30, | December 31, | |||||||
2004 | 2003 | |||||||
(In thousands of dollars) | ||||||||
Cash | $ | — | $ | 721 | ||||
Receivables, net | — | 5,121 | ||||||
Inventory | — | 2,784 | ||||||
Other current assets | — | 3,989 | ||||||
Current assets — discontinued operations | $ | — | $ | 12,615 | ||||
Property, plant and equipment, net | $ | — | $ | 39,838 | ||||
Other noncurrent assets | — | 7,638 | ||||||
Noncurrent assets — discontinued operations | $ | — | $ | 47,476 | ||||
Current portion of long-term debt | $ | — | $ | 40,820 | ||||
Accounts payable — trade | — | 16,401 | ||||||
Accrued interest | — | — | ||||||
Other current liabilities | — | 5,772 | ||||||
Current liabilities — discontinued operations | $ | — | $ | 62,993 | ||||
Other long-term obligations | — | 3,729 | ||||||
Noncurrent liabilities — discontinued operations | $ | — | $ | 3,729 | ||||
Hsin Yu — During the second quarter 2004, the Company entered into an agreement to sell its interest in the Hsin Yu power generating facility (located in Taipei, Taiwan) to a minority interest shareholder, Asia Pacific Energy Development Company Ltd. The sale reached financial close in May 2004 and resulted in cash proceeds of $1.0 million and a gain of approximately $10.3 million resulting from the negative equity in the project. In addition, although the Company has no continuing involvement in the project, the Company retained the prospect of receiving $1.0 million in additional proceeds upon final closing of Phase II of the project.
Killingholme — During third quarter 2002, the Company recorded an impairment charge of $477.9 million. In January 2003, the Company completed the sale of its interest in the Killingholme project to its lenders for a nominal value and forgiveness of outstanding debt with a carrying value of approximately $360.1 million at December 31, 2002. The sale of the Company’s interest in the Killingholme project and the release of debt obligations resulted in a gain on sale in the first quarter of 2003 of approximately $201.0 million. The gain results from the write-down of the project’s assets in the third quarter of 2002 below the carrying value of the related debt.
Peru Projects — In November 2003, the Company completed the sale of the Cahua and Pacasmayo projects (Peruvian Assets) resulting in net cash proceeds of approximately $16.2 million and a loss of $36.9 million.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. | Write Downs and (Gains)/ Losses on Sales of Equity Method Investments |
Write downs and (gains)/losses on sales of equity method investments recorded in operating expenses in the consolidated statement of operations includes the following:
Reorganized | Predecessor | Reorganized | Predecessor | ||||||||||||||
Company | Company | Company | Company | ||||||||||||||
For the | For the | ||||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||||
June 30 | June 30 | ||||||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||||||
(In thousands of dollars) | |||||||||||||||||
Kondapalli | $ | — | $ | (1,812 | ) | $ | — | $ | (517 | ) | |||||||
ECKG | — | (4,223 | ) | — | (7,938 | ) | |||||||||||
Loy Yang | (705 | ) | 139,973 | 1,268 | 139,973 | ||||||||||||
Total write downs and (gains)/losses on sales of equity method investments | $ | (705 | ) | $ | 133,938 | $ | 1,268 | $ | 131,518 | ||||||||
Lanco Kondapalli Power Pty Lty, or Kondapalli, — In the fourth quarter of 2002, the Company wrote down its investment in Kondapalli by $12.7 million due to recent estimates of sales value, which indicated an impairment of its book value that was considered to be other than temporary. On January 30, 2003, the Company signed a sales agreement with the Genting Group of Malaysia (“Genting”) to sell its 30% interest in Kondapalli, and a 74% interest in Eastern Generation Services (India) Pvt Ltd (the “O&M company”). Kondapalli is based in Hyderabad, Andhra Pradesh, India, and is the owner of a 368 MW natural gas fired combined cycle gas turbine. In the first quarter of 2003, the Company wrote down the investment in Kondapalli by $1.3 million based on the sales agreement. The sale closed on May 30, 2003 resulting in net cash proceeds of approximately $24.0 million and a gain of approximately $1.8 million, resulting in a net gain of $0.5 million. The gain resulted from incurring lower selling costs than estimated as part of the first quarter impairment.
ECKG — In September 2002, the Company announced that an agreement had been reached to sell its 44.5% interest in the ECKG power station in connection with the Csepel power generating facilities, and its interest in Entrade, an electricity trading business, to Atel, an independent energy group headquartered in Switzerland. The transaction closed in January 2003 and the Company received the final consideration adjustment in the second quarter of 2003. The sale resulted in cash proceeds of $65.3 million, including $46.8 million which was applied against notes receivable.
Loy Yang — The Company recorded an impairment charge of $111.4 million during 2002 and an additional impairment charge of $140.0 million during the second quarter of 2003 based on a third party market evaluation and bids received in response to marketing Loy Yang for possible sale. During the first quarter of 2004, the Company wrote down its investment in Loy Yang by $2.0 million due to recent estimates of the expected sales proceeds. In April 2004, the Company completed the sale of its 25% interest in Loy Yang to Great Energy Alliance Corporation, which resulted in net cash proceeds of $26.7 million and a loss of $1.3 million for the six months ended June 30, 2004.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. | Inventory |
Inventory, which is valued at the lower of weighted average cost or market, consists of:
Reorganized Company | |||||||||
June 30, | December 31, | ||||||||
2004 | 2003 | ||||||||
(In thousands of dollars) | |||||||||
Fuel oil | $ | 739 | $ | 504 | |||||
Coal | 9,601 | 10,726 | |||||||
Spare parts | 6,660 | 6,670 | |||||||
Total inventory | $ | 17,000 | $ | 17,900 | |||||
6. | Notes Receivable |
Notes receivable consists primarily of fixed and variable rate notes secured by equity interests in partnerships and joint ventures. The notes receivable are as follows:
Reorganized Company | |||||||||
June 30, | December 31, | ||||||||
2004 | 2003 | ||||||||
(In thousands of dollars) | |||||||||
Notes receivables | |||||||||
Termo Rio 19.5% | $ | 57,323 | $ | 57,323 | |||||
Notes receivable — nonaffiliates | 57,323 | 57,323 | |||||||
Saale Energie GmbH, indefinite maturity date, 4.75%-7.79% | 107,829 | 111,892 | |||||||
Other | 22 | 21 | |||||||
Notes receivable — affiliates | 107,851 | 111,913 | |||||||
Other | |||||||||
Saale Energie GmbH, due August 31, 2021, 13.88% (direct financing lease) | 426,710 | 451,449 | |||||||
Subtotal | 591,884 | 620,685 | |||||||
Less: Current maturities | 122,703 | 64,720 | |||||||
Total | $ | 469,181 | $ | 555,965 | |||||
The increase in current maturities at June 30, 2004 is due to the reclass of the Termo Rio Note Receivable to current.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. | Property, Plant and Equipment |
The major classes of property, plant and equipment were as follows:
Reorganized Company | |||||||||
June 30, | December 31, | ||||||||
2004 | 2003 | ||||||||
(In thousands of dollars) | |||||||||
Facilities and equipment | $ | 377,206 | $ | 323,837 | |||||
Land and improvements | 13,045 | 15,717 | |||||||
Office furnishings and equipment | 3,053 | 2,081 | |||||||
Construction work in progress | 38,508 | 118,056 | |||||||
Total property, plant and equipment | 431,812 | 459,691 | |||||||
Accumulated depreciation | (13,002 | ) | (1,467 | ) | |||||
Property, plant and equipment, net | $ | 418,810 | $ | 458,224 | |||||
8. | Investments Accounted for by the Equity Method |
The Company had investments in various international energy projects. The equity method of accounting is applied to such investments in affiliates, which included joint ventures and partnerships, because the Company has significant influence over operating and financial policies of the projects. Under this method, equity in net income or losses of these projects, is reflected as equity in earnings of unconsolidated affiliates.
A summary of certain of the Company’s more significant equity method investments, which were in operation at June 30, 2004, is as follows:
Name | Geographic Area | Economic Interest | ||||||
Gladstone Power Station | Australia | 38% | ||||||
MIBRAG GmbH | Europe | 50% | ||||||
Enfield | Europe | 25% | ||||||
Scudder LA Power Fund I | Latin America | 25% |
In addition the Company had a 30% economic interest in Kondapalli, which was purchased in 2001 and sold in 2003; and a 25% economic interest in Loy Yang Power A purchased in 1997 and sold in 2004.
Summarized financial information for investments in unconsolidated affiliates accounted for under the equity method is as follows:
Results of Operations:
For the | For the | |||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(In thousands of dollars) | ||||||||||||||||
Operating revenues | $ | 162,949 | $ | 205,278 | $ | 351,096 | $ | 421,530 | ||||||||
Operating income | $ | 139,384 | $ | 169,047 | 304,692 | 363,630 | ||||||||||
Net income | $ | 23,565 | $ | 36,531 | $ | 46,404 | $ | 57,900 |
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Position:
June 30, | December 31, | ||||||||
2004 | 2003 | ||||||||
(In thousands of dollars) | |||||||||
Current assets | $ | 263,484 | $ | 369,800 | |||||
Other assets | 1,681,479 | 4,621,844 | |||||||
Total assets | 1,944,963 | 4,991,644 | |||||||
Current liabilities | 67,774 | 779,580 | |||||||
Other liabilities | 1,323,116 | 3,524,886 | |||||||
Equity | 554,073 | 687,178 | |||||||
Total liabilities and equity | $ | 1,944,963 | $ | 4,991,644 | |||||
The Company’s share of equity | $ | 228,921 | $ | 287,320 | |||||
The Company’s share of carrying value | 311,491 | 332,617 | |||||||
The Company’s share of net income (YTD) | 30,066 | 1,707 |
The Company has ownership in two companies that were considered significant as of June 30, 2004, as defined by applicable SEC regulations, which are accounted for as equity method investments.
The following tables summarize financial information for Mibrag GmbH, of which the Company owns a 50% interest, including interests owned by the Company and other parties for the periods shown below:
Results of Operations:
For the | For the | |||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(In thousands of dollars) | ||||||||||||||||
Operating revenues | $ | 101,376 | $ | 97,098 | $ | 211,800 | $ | 188,430 | ||||||||
Costs and expenses | 11,468 | 8,402 | 31,128 | 22,824 | ||||||||||||
Net income | 11,008 | 13,920 | 23,072 | 28,930 |
Financial Position:
June 30, | December 31, | ||||||||
2004 | 2003 | ||||||||
(In thousands of dollars) | |||||||||
Current assets | $ | 171,517 | $ | 164,780 | |||||
Other assets | 1,169,023 | 1,206,934 | |||||||
Total assets | $ | 1,340,540 | $ | 1,371,714 | |||||
Current liabilities | $ | 22,025 | $ | 23,198 | |||||
Other liabilities | 981,489 | 1,031,606 | |||||||
Equity | 337,026 | 316,910 | |||||||
Total liabilities and equity | $ | 1,340,540 | $ | 1,371,714 | |||||
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables summarize financial information for the Company’s 37.5% interest in, and revenue and costs directly attributable to the Company’s investment in Gladstone Power Station unincorporated joint venture.
Results of Operations:
For the | For the | |||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(In thousands of dollars) | ||||||||||||||||
Operating revenues | $ | 21,564 | $ | 17,773 | $ | 45,359 | $ | 34,879 | ||||||||
Operating income | 6,371 | 4,913 | 12,432 | 9,767 | ||||||||||||
Net income | 3,513 | 2,445 | 6,700 | 4,879 |
Financial Position:
June 30, | December 31, | ||||||||
2004 | 2003 | ||||||||
(In thousands of dollars) | |||||||||
Current assets | $ | 31,919 | $ | 34,484 | |||||
Other assets | 197,036 | 215,472 | |||||||
Total assets | $ | 228,955 | $ | 249,956 | |||||
Current liabilities | $ | 8,395 | $ | 22,970 | |||||
Other liabilities | 139,974 | 146,864 | |||||||
Equity | 80,586 | 80,122 | |||||||
Total liabilities and equity | $ | 228,955 | $ | 249,956 | |||||
9. | Asset Retirement Obligation |
SFAS No. 143,Accounting for Asset Retirement Obligations, 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 had previously recorded its asset retirement obligation and, as a result, the adoption of SFAS No. 143 on January 1, 2003 had no financial statement impact.
Upon the acquisition of Flinders Power in August 2000 (primarily the Northern Power Station, the Playford Power Station and the Leigh Creek mining operation), the Company recognized an obligation in the amount of $3.7 million as part of its opening balance sheet under purchase accounting related to an obligation to decommission these facilities at the end of their useful lives. Subsequently, the obligation has grown to $5.8 million at December 31, 2002, through periodic recognition of accretion expense.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following represents the balances of the asset retirement obligation as of December 31, 2003 and related accretion for the six months ended June 30, 2004, which is included in other long-term obligations in the consolidated balance sheet.
Beginning | Accretion for | Ending | ||||||||||
Balance | Six Months | Balance | ||||||||||
December 31, | Ended June 30, | June 30, | ||||||||||
2003 | 2004 | 2004 | ||||||||||
(In thousands of dollars) | ||||||||||||
Australia | $ | 9,438 | $ | 526 | $ | 9,964 |
10. | Derivative Instruments and Hedging Activity |
SFAS No. 133,“Accounting For Derivative Instruments and Hedging Activities”, as amended, requires the Company to record all derivatives on the consolidated balance sheet as assets or liabilities at fair value. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives are recorded in Accumulated Other Comprehensive Income (“OCI”) and subsequently recognized in earnings when the hedged items impact 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. Changes in the fair value of non-hedge derivatives will be immediately recognized in earnings.
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. SFAS No. 133 also applies to various interest rate financial instruments used to mitigate the risks associated with movements in interest rates, foreign exchange contracts used to reduce the effect of fluctuating foreign currencies on foreign denominated investments and other transactions.
Accumulated Other Comprehensive Income (OCI) |
The following table summarizes the effects of SFAS No. 133 on the Company’s OCI balance for the three months ended June 30, 2004:
Energy | Interest | Foreign | ||||||||||||||
Gains (Losses) | Commodities | Rate | Currency | Total | ||||||||||||
(In thousands of dollars) | ||||||||||||||||
Accumulated OCI balance at March 31, 2004 | $ | 5,654 | $ | (1,304 | ) | $ | 296 | $ | 4,646 | |||||||
Unwound from OCI during period | — | — | — | — | ||||||||||||
Due to unwinding of previously deferred amounts | (2,753 | ) | 191 | (296 | ) | (2,858 | ) | |||||||||
Mark-to market of hedge contracts | 265 | 2,259 | — | 2,524 | ||||||||||||
Accumulated OCI balance at June 30, 2004 | $ | 3,166 | $ | 1,146 | $ | — | $ | 4,312 | ||||||||
Gains (Losses) expected to unwind from OCI during next 12 months | $ | 2,224 | $ | (230 | ) | $ | — | $ | 1,994 |
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the effects of SFAS No. 133 on the Company’s OCI balance for the six months ended June 30, 2004:
Energy | Interest | Foreign | ||||||||||||||||
Gains (Losses) | Commodities | Rate | Currency | Total | ||||||||||||||
(In thousands of dollars) | ||||||||||||||||||
Accumulated OCI balance at December 31, 2003 | $ | (2,319 | ) | $ | 43 | $ | 125 | $ | (2,151 | ) | ||||||||
Unwound from OCI during period | — | |||||||||||||||||
Due to unwinding of previously deferred amounts | (1,729 | ) | 202 | (296 | ) | (1,823 | ) | |||||||||||
Mark-to market of hedge contracts | 7,214 | 901 | 171 | 8,286 | ||||||||||||||
Accumulated OCI balance at June 30, 2004 | $ | 3,166 | $ | 1,146 | $ | — | $ | 4,312 | ||||||||||
Gains (Losses) expected to unwind from OCI during next 12 months | $ | 2,224 | $ | (230 | ) | $ | — | $ | 1,994 |
Gains of $2.8 million and $1.8 million were reclassified from OCI to current period earnings during the three and six months ended June 30, 2004, respectively, due to the unwinding of previously deferred amounts. These amounts are recorded on the same line in the statement of operations in which the hedged items are recorded. Also during the three and six months ended June 30, 2004, the Company recorded gains in OCI of approximately $2.5 million and $8.3 million, respectively, related to changes in the fair values of derivatives accounted for as hedges.
The net balance in OCI relating to SFAS No. 133 at June 30, 2004, was an unrecognized gain of approximately $4.3 million. The Company expects $2.0 million of deferred net gains on derivative instruments accumulated in OCI to be recognized in earnings during the next twelve months.
Statement of Operations |
The following table summarizes the pre-tax effects of nonhedge derivatives and derivatives that no longer qualify as hedges on the Company’s statement of operations for the three months ended June 30, 2004:
Reorganized NRG | ||||||||||||
Energy | Interest | |||||||||||
Commodities | Rate | Total | ||||||||||
(In thousands of dollars) | ||||||||||||
Revenue from majority-owned subsidiaries | $ | 1,057 | $ | — | $ | 1,057 | ||||||
Equity in earnings of unconsolidated subsidiaries | 9,733 | 560 | 10,293 | |||||||||
Total statement of operations impact before tax | $ | 10,790 | $ | 560 | $ | 11,350 | ||||||
The following table summarizes the pre-tax effects of nonhedge derivatives and derivatives that no longer qualify as hedges on the Company’s statement of operations for the six months ended June 30, 2004:
Reorganized NRG | ||||||||||||
Energy | Interest | |||||||||||
Commodities | Rate | Total | ||||||||||
(In thousands of dollars) | ||||||||||||
Revenue from majority-owned subsidiaries | $ | 1,654 | $ | — | $ | 1,654 | ||||||
Equity in earnings of unconsolidated subsidiaries | 8,506 | 629 | 9,135 | |||||||||
Total statement of operations impact before tax | $ | 10,160 | $ | 629 | $ | 10,789 | ||||||
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the pre-tax effects of nonhedge derivatives and derivatives that no longer qualify as hedges on the Company’s statement of operations for the three months ended June 30, 2003:
Predecessor NRG | ||||||||||||
Energy | Interest | |||||||||||
Commodities | Rate | Total | ||||||||||
(In thousands of dollars) | ||||||||||||
Revenue from majority owned subsidiaries | $ | — | $ | — | $ | — | ||||||
Equity in earnings of unconsolidated subsidiaries | 2,187 | (29 | ) | 2,158 | ||||||||
Cost of operations | 3,759 | — | 3,759 | |||||||||
Total statement of operations impact before tax | $ | 5,946 | $ | (29 | ) | $ | 5,917 | |||||
The following table summarizes the pre-tax effects of nonhedge derivatives and derivatives that no longer qualify as hedges on the Company’s statement of operations for the six months ended June 30, 2003:
Predecessor NRG | ||||||||||||
Energy | Interest | |||||||||||
Commodities | Rate | Total | ||||||||||
(In thousands of dollars) | ||||||||||||
Equity in earnings of unconsolidated subsidiaries | $ | 3,731 | $ | (289 | ) | $ | 3,442 | |||||
Cost of operations | (5,298 | ) | — | (5,298 | ) | |||||||
Total statement of operations impact before tax | $ | (1,567 | ) | $ | (289 | ) | $ | (1,856 | ) | |||
Energy Related Commodities |
The Company is exposed to commodity price variability in electricity and natural gas, oil and coal used to meet fuel requirements. In order to manage these commodity price risks, the Company enters into financial instruments, 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. Certain of these transactions have been designated as cash flow hedges. The Company has accounted for these derivatives by recording the effective portion of the cumulative gain or loss on the derivative instrument as a component of OCI in member’s equity. The Company recognized deferred gains and losses into earnings in the same period or periods during which the hedged transaction affects earnings. Such reclassifications are included on the same line of the statement of operations in which the hedged item is recorded.
No ineffectiveness was recognized on commodity cash flow hedges during the three and six months ended June 30, 2004 and 2003.
The Company’s pre-tax earnings for the three and six months ended June 30, 2004 and 2003, were affected by an unrealized gain of $10.8 million and $10.2 million, respectively, associated with changes in the fair value of energy related derivative instruments not accounted for as hedges in accordance with SFAS No. 133.
The Company’s pre-tax earnings for the three and six months ended June 30, 2003, were affected by an unrealized gain of $5.9 million and an unrealized loss of $1.6 million, respectively, associated with changes in the fair value of energy related derivative instruments not accounted for as hedges in accordance with SFAS No. 133.
During the three and six months ended June 30, 2004, the Company reclassified gains of $2.8 million and $1.7 million, respectively, from OCI to current-period earnings and expects to reclassify an additional $2.2 million of deferred gains to earnings during the next twelve months on energy related derivative instruments accounted for as hedges.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At June 30, 2004, the Company had hedge and nonhedge energy related commodities financial instruments extending through September 2018.
Interest Rates |
To manage interest rate risk, the Company has entered into interest-rate swap agreements that fix the interest payments of certain floating rate debt issuances. The qualifying swap agreements are accounted for as cash flow hedges. The effective portion of the cash flow hedges’ cumulative gains/losses are reported as a component of OCI in member’s equity. These gains/losses are recognized in earnings as the hedged interest expense is incurred. The reclassification from OCI is included on the same line of the statement of operations in which the hedged item appears.
No ineffectiveness was recognized on interest rate swaps that qualify as hedges during the three and six months ended June 30, 2004.
During the three and six months ended June 30, 2004, pre-tax earnings were increased by an unrealized gain of $0.6 million and $0.6 million, respectively, associated with the changes in the fair value of the interest rate derivative instruments not accounted for as hedges in accordance with SFAS No. 133. The Company’s pre-tax earnings for the three and six months ended June 30, 2003, were decreased by an unrealized loss of $0 and $0.3 million, respectively, associated with changes in the fair value of interest rate derivative instruments not accounted for as hedges in accordance with SFAS No. 133.
During the three and six months ended June 30, 2004, the Company reclassified losses of $0.2 million from OCI to current-period earnings and expect to reclassify approximately $0.2 million of deferred losses to earnings during the next twelve months associated with interest rate swaps accounted for as hedges.
At June 30, 2004, the Company had interest rate derivatives instruments extending through December 2017.
Foreign Currency Exchange Rates |
To preserve the U.S. dollar value of projected foreign currency cash flows, the Company may hedge, or protect those cash flows if appropriate foreign hedging instruments are available.
No ineffectiveness was recognized on foreign currency cash flow hedges during the three and six months ended June 30, 2004.
During the three and six months ended June 30, 2004, the Company reclassified gains of $0.3 million from OCI to current-period earnings and the Company does not expect to reclassify any deferred gains/losses to earnings during the next twelve months on foreign currency swaps accounted for as hedges.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. | Long-Term Debt and Capital Leases |
Long-term debt and capital leases consist of the following:
Reorganized Company | |||||||||||||||||||||||||
June 30, 2004 | December 31, 2003 | ||||||||||||||||||||||||
Stated | Effective | Fair Value | Fair Value | ||||||||||||||||||||||
Rate | Rate | Principal | Adjustment | Principal | Adjustment | ||||||||||||||||||||
Percent | (In thousands of dollars) | ||||||||||||||||||||||||
Flinders Power Partnership September 2012 | (1) | 6% | $ | 184,356 | $ | 9,533 | $ | 187,668 | $ | 10,632 | |||||||||||||||
NRG International Inc. | — | (2 | ) | 10,664 | — | 10,664 | — | ||||||||||||||||||
Long-term debt — affiliates | 195,020 | 9,533 | 198,332 | 10,632 | |||||||||||||||||||||
Saale Energie GmbH, Schkopau capital lease, due 2021 | 11% | 11% | 286,900 | — | 342,470 | — | |||||||||||||||||||
Long-term debt — nonaffiliates | 286,900 | — | 342,470 | — | |||||||||||||||||||||
481,920 | 9,533 | 540,802 | 10,632 | ||||||||||||||||||||||
Less: Current maturities | 72,764 | — | 86,608 | — | |||||||||||||||||||||
$ | 409,156 | $ | 9,533 | $ | 454,194 | $ | 10,632 | ||||||||||||||||||
(1) | Rate is at 6-month LIBOR plus .5%. |
(2) | Non interest bearing |
At June 30, 2004, the Company has timely made scheduled payments on interest and/or principal on all of its debt and was not in default under any of the Company’s debt instruments.
In December 2003, the Company entered into a note payable in the amount of $10.7 million with NRGenerating Holdings No. 21 BV, an indirect wholly owned subsidiary of NRG Energy and an affiliate of the Company, in connection with the sale of the Company’s 100% ownership interest in Sterling Luxembourg (No. 4) S.a.a.L. (see Note 16 — Related Party Transactions). The note is payable on demand.
Project Financings |
Flinders Power |
In September 2000, Flinders Power Finance Pty Ltd (“Flinders Finance”) an indirect wholly owned subsidiary of NRG Energy and an affiliate of the Company, entered into a twelve-year AUD$150 million cash advance facility (US$81.4 million at September 2000). At June 30, 2004 and December 31, 2003, there remains AUD$127.0 million (US$88.8 million) and AUD$135.0 million (US$101.6 million) outstanding under this facility, respectively. The interest has a fixed margin and variable base component. At June 30, 2004 and December 31, 2003, the interest rates were 7.50% and 7.53%, respectively. Ordinarily, interest is paid semi-annually at the end of June and December. Principal payments commence in 2006 and the facility will be fully paid in 2012.
In March 2002, Flinders Finance entered into a ten-year AUD$165 million (US$85.4 million at March 2002) floating rate loan facility for the purpose of refurbishing the Flinders Playford generating station. At June 30, 2004 and December 31, 2003, the Company had drawn AUD$136.6 million (US$95.5 million) and AUD$114.3 million (US$86.0 million), respectively, of this facility. The interest rate has a fixed margin and variable base component. The interest rates at June 30, 2004 and December 31, 2003, were 7.00% and 7.03%, respectively. Ordinarily interest is paid semi-annually, at the end of June and December. Principal payments for the refurbishment facility commence in 2005. Upon the Company’s downgrades in 2002, there existed a
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
potential default under these facility agreements related to the funding of reserve accounts. On May 13, 2003, Flinders Finance and its lenders entered into a Second Supplemental Deed, which resolved these potential defaults. As part of the terms of that Second Supplemental Deed, part of the refurbishment facility was voluntarily cancelled by Flinders Finance so as to reduce the total available commitment from AUD$165 million to AUD$137 million (US$103.1 million).
In addition, Flinders Finance has an AUD$20 million (US$15 million) working capital facility, of which AUD$11.2 million (US$8.2 million) is reserved as support for potential calls on performance guarantees. Nothing has been drawn under this facility at June 30, 2004 and December 31, 2003.
All drawn funds under the above mentioned facilities and bank loans are lent to Flinders Power by Flinders Finance through project loan agreements. The terms and conditions are identical to the agreements with the third parties.
Saale Energie GmbH |
In connection with the purchase of PowerGen’s (third party owner) interest in Saale Energie GmbH, the Company has recognized a nonrecourse capital lease on the consolidated balance sheet in the amount of $286.9 million and $342.5 million, as of June 30, 2004 and December 31, 2003, respectively. The capital lease obligation is recorded at the net present value of the minimum lease obligation payable over the lease’s remaining period of 19 years. In addition, a direct financing lease was recorded in notes receivable in the amount of approximately $426.7 million and $451.4 million as of June 30, 2004 and December 31, 2003, respectively.
12. | Segment Reporting |
The Company conducts its business within two reportable operating segments — Power Generation Australia and Power Generation — Europe. These reportable segments are distinct components with separate operating results and management structures in place. Segment information for the three and six months ended June 30, 2004 and 2003 is as follows.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the three months ended June 30, 2004:
Reorganized Company | ||||||||||||
Power Generation | ||||||||||||
Australia | Europe | Total | ||||||||||
(In thousands of dollars) | ||||||||||||
Operations | ||||||||||||
Operating revenues | $ | 29,271 | $ | 40,791 | $ | 70,062 | ||||||
Operating costs | 32,354 | 32,256 | 64,610 | |||||||||
Depreciation and amortization | 6,868 | 23 | 6,891 | |||||||||
General and administrative expenses | 701 | 1,149 | 1,850 | |||||||||
Other income | 1,405 | 1,476 | 2,881 | |||||||||
Interest (expense) | (2,546 | ) | (884 | ) | (3,430 | ) | ||||||
Equity in earnings in unconsolidated affiliates | 3,534 | 15,878 | 19,412 | |||||||||
Write downs and gains/(losses) on sales of equity method investments | 705 | — | 705 | |||||||||
Income tax expense (benefit) | (3,250 | ) | 3,839 | 589 | ||||||||
Net income (loss) from continuing operations | (4,304 | ) | 19,994 | 15,690 | ||||||||
Net income from discontinued operations | — | 9,475 | 9,475 | |||||||||
Net income (loss) | (4,304 | ) | 29,469 | 25,165 | ||||||||
Balance sheet | ||||||||||||
Investment in projects | $ | 98,874 | $ | 212,617 | $ | 311,491 | ||||||
Total assets | 654,879 | 986,288 | 1,641,167 |
For the three months ended June 30, 2003:
Predecessor Company | ||||||||||||
Power Generation | ||||||||||||
Australia | Europe | Total | ||||||||||
(In thousands of dollars) | ||||||||||||
Operations | ||||||||||||
Operating revenues | $ | 34,537 | $ | 34,020 | $ | 68,557 | ||||||
Operating costs | 33,481 | 25,961 | 59,442 | |||||||||
Depreciation and amortization | 4,729 | 40 | 4,769 | |||||||||
General and administrative expenses | 653 | 1,542 | 2,195 | |||||||||
Other income | 519 | 865 | 1,384 | |||||||||
Interest (expense) | (1,855 | ) | (244 | ) | (2,099 | ) | ||||||
Equity in earnings in unconsolidated affiliates | 346 | 8,785 | 9,131 | |||||||||
Write downs and gains/(losses) on sales of equity method investments | (139,973 | ) | 6,035 | (133,938 | ) | |||||||
Income tax expense (benefit) | (1,706 | ) | 2,433 | 727 | ||||||||
Net income/(loss) from continuing operations | (143,583 | ) | 19,485 | (124,098 | ) | |||||||
Net income from discontinued operations | — | 2,702 | 2,702 | |||||||||
Net income/(loss) | (143,583 | ) | 22,187 | (121,396 | ) |
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the six months ended June 30, 2004:
Reorganized Company | ||||||||||||
Power Generation | ||||||||||||
Australia | Europe | Total | ||||||||||
(In thousands of dollars) | ||||||||||||
Operations | ||||||||||||
Operating revenues | $ | 100,025 | $ | 67,319 | $ | 167,344 | ||||||
Operating costs | 79,587 | 51,423 | 131,010 | |||||||||
Depreciation and amortization | 12,011 | 8 | 12,019 | |||||||||
General and administrative expenses | 1,718 | 3,547 | 5,265 | |||||||||
Other income | 1,641 | 2,999 | 4,640 | |||||||||
Interest (expense) | (4,451 | ) | (1,168 | ) | (5,619 | ) | ||||||
Equity in earnings in unconsolidated affiliates | 6,706 | 23,360 | 30,066 | |||||||||
Write downs and losses on sales of equity method investments | (1,268 | ) | — | (1,268 | ) | |||||||
Income tax expense | 118 | 7,332 | 7,450 | |||||||||
Net income from continuing operations | 9,219 | 30,200 | 39,419 | |||||||||
Net income from discontinued operations | — | 7,517 | 7,517 | |||||||||
Net income | 9,219 | 37,717 | 46,936 | |||||||||
Balance sheet | ||||||||||||
Investment in projects | $ | 98,874 | $ | 212,617 | $ | 311,491 | ||||||
Total assets | 654,879 | 986,288 | 1,641,167 |
For the six months ended June 30, 2003:
Predecessor Company | ||||||||||||
Power Generation | ||||||||||||
Australia | Europe | Total | ||||||||||
(In thousands of dollars) | ||||||||||||
Operations | ||||||||||||
Operating revenues | $ | 82,669 | $ | 63,842 | $ | 146,511 | ||||||
Operating costs | 73,088 | 49,640 | 122,728 | |||||||||
Depreciation and amortization | 8,413 | 74 | 8,487 | |||||||||
General and administrative expenses | 851 | 2,971 | 3,822 | |||||||||
Other income | 2,299 | 678 | 2,977 | |||||||||
Interest expense | (424 | ) | (3,589 | ) | (4,013 | ) | ||||||
Equity in earnings in unconsolidated affiliates | 7,473 | 18,382 | 25,855 | |||||||||
Write downs and gains/(losses) on sales of equity method investments | (139,973 | ) | 8,455 | (131,518 | ) | |||||||
Income tax expense (benefit) | (1,129 | ) | 5,616 | 4,487 | ||||||||
Net income (loss) from continuing operations | (129,179 | ) | 29,467 | (99,712 | ) | |||||||
Net income from discontinued operations | — | 205,227 | 205,227 | |||||||||
Net income | (129,179 | ) | 234,694 | 105,515 |
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. | Income Taxes |
Segments of the Company are included in the consolidated tax return filings as a wholly owned subsidiary of NRG Energy. Reflected in the financial statements and note below are separate company federal, state, and international tax provisions as if the company had prepared separate filings. An income tax provision has been established on the accompanying financial statements as of the earliest period presented in order to reflect income taxes as if the Company filed its own tax return. The Company’s parent, NRG Energy, does not have a tax allocation agreement with its subsidiaries nor has it historically pushed down or allocated income taxes to non tax paying entities or entities such as the Company which are treated as disregarded entities for tax purposes.
The Company operates in various international jurisdictions through its subsidiaries and affiliates and incurs income tax liabilities (assets) under the applicable local tax laws and regulations.
Income taxes for the six months ended June 30, 2004, was a tax expense of $7.5 million compared to a tax expense of $4.5 million for the same period in 2003. The tax expense for the six months ended June 30, 2004 and 2003, includes only international taxes. U.S. deferred tax assets from net operating loss carryforwards and other timing differences are offset in full by a valuation allowance resulting in no net U.S. tax expense.
Income taxes for the three months ended June 30, 2004 was a tax expense of $0.7 million compared to a tax expense of $0.8 million for the same period in 2003. The tax expense for the three months ended June 30, 2004 and 2003, includes only international taxes. U.S. deferred tax assets from net operating loss carryforwards and other timing differences are offset in full by a valuation allowance resulting in no net U.S. tax expense.
The tax expense for the three and six months ended June 30, 2004, is due to current and deferred taxes payable on the earnings in certain international jurisdictions including withholding taxes on certain types of earnings. Due to the uncertainty of realization of deferred tax assets related to net operating losses and other temporary differences, the U.S. and foreign deferred tax assets of $94.7 million at June 30, 2004, were offset by a valuation allowance of $6.4 million in accordance with SFAS No. 109. The Company’s deferred tax liabilities at June 30, 2004, were $247.3 million resulting in net deferred tax liabilities of $159.0 million. For 2003, the tax expense is due to current and deferred taxes payable on earnings under the local income tax laws and regulations in certain international jurisdictions including withholding taxes on certain types of earnings. The Company’s deferred tax assets at December 31, 2003, were $366.5 million offset by a valuation allowance of $156.5 million. The Company’s deferred tax liabilities at December 31, 2003, were $375.1 million resulting in net deferred tax liabilities of $165.1 million.
The effective income tax rate for the period ended June 30, 2004 and 2003, differs from the statutory federal income tax rate of 35% primarily due to lower tax rates in foreign jurisdictions.
As of June 30, 2004, the valuation allowance against U.S. and foreign net operating loss carryforwards was $4.9 million and the valuation allowance against other deferred tax assets was $1.5 million. As of December 31, 2003, a valuation allowance of $155.0 million was provided to account for potential limitations on utilization of U.S. and foreign net operating loss carryforwards, and a valuation allowance of $1.5 million was provided for other deferred tax assets. Net operating loss carryforwards for foreign purposes have no expiration date.
As of June 30, 2004, NRG Energy’s management intends to indefinitely reinvest the earnings of foreign operations except to the extent the earnings are not subject to current U.S. income taxes. Accordingly, U.S. income taxes and foreign withholding taxes have not been provided on a cumulative amount of losses of $340.5 million at June 30, 2004, and $387.5 million at December 31, 2003.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. | Commitments and Contingencies |
Legal Issues |
Matra Powerplant Holding B.V. |
Matra Powerplant Holding B.V. (“Matra”) is presently involved in a dispute with the Dutch tax commissioner. For the tax years from 1998 until 2001, NRGenerating International B.V. indirectly (through Kladno Power (No. 2) B.V. and Entrade Holdings B.V.) held 50% of the issued and outstanding shares in the capital of Matra. The shareholders of Matra granted interest-free loans to Matra in reliance upon a favorable tax ruling granted to NRGenerating International B.V. in 1994.
The tax commissioner now has asserted that the loans constitute capital contributions (so-called shareholders’ loans) and thereby has challenged the imputed interest deductions of Matra in the subsequent years.
Accordingly, the tax commissioner has issued the following statutory notices of deficiency (“SND”) and tax assessments (“TA”):
1998 SND | Corporate Income Tax 35% | EUR518,723 | ||
1998 SND | Capital Duty 1% | EUR615,179 | ||
2001 TA | Corporate Income Tax 35% | EUR1,702,349 |
The Company has filed appeals against the SND and TA. For the 1998 corporate income tax SND, the tax commissioner has to prove that a new fact justifies the SND. This is not required for the 1998 capital duty SND or the 2001 corporate income TA. At this time, the Company cannot estimate the likelihood of success regarding these claims.
Threatened claims against the Company’s subsidiaries relating to the funding of several projects, realized by way of (informal) capitalization |
The Dutch tax commissioner has asserted that the capitalization of some of the Company’s subsidiaries was basically intended to avoid capital duty in The Netherlands, which could constitute abuse of law (“fraus legis”). In the Company’s correspondence with the tax commissioner, the Company made clear that there were other substantial commercial reasons to use these specific structures, including avoidance of currency exchange gains and/or capital duty in Luxembourg and/or other reasons.
The tax commissioner has not yet responded to the Company’s latest response sent to the commission on May 21, 2001.
The threatened respective amounts of capital duty are:
(a) NRGenerating International B.V.: AUD $3,784,670, AUD $1,569,366, UK pounds 1,080,000 and UK pounds 155,294; | |
(b) NRGenerating Holdings (No. 15) B.V.: UK pounds 900,000; and | |
(c) NRGenerating Holdings (No. 20) B.V.: US$1. |
No prediction of the likelihood of an unfavorable outcome can be made at this time.
NRGenerating Holdings (No. 4) B.V. and Gunwale B.V. |
In the years 1999 and 2000, Gunwale B.V. was part of a transaction intended to recapitalize NRGenerating Holdings (No. 4) B.V. The Company has asserted that these transactions were structured so as to mitigate currency exchange risk and for other substantial commercial reasons. The tax commissioner has
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
issued statutory notices of deficiency for both NRGenerating Holdings (No. 4) B.V. and Gunwale B.V., arguing that asserted exemptions do not apply and that duty should have been paid under prevailing law. The threatened amount of capital duty due would amount to approximately EUR 235,943 for the year 1999 and EUR 1,325,334 for the year 2000.
Objections to these notices have been filed by Dutch counsel for the buyer, Grant Energy Alliance Corporation, of NRGenerating Holdings (No. 4) B.V. and Gunwale B.V.
Although both companies were sold in April 2004 as part of the sale of Loy Yang, and therefore are no longer held by any of the Company’s affiliates, under the share sale agreement, the Company still could become indirectly liable for the subject capital duty, should the buyer exercise a put-option for a predetermined price respective to the shares in Gunwale B.V.
Matra Powerplant Holding B.V. |
The Dutch tax commissioner appears to have treated Matra’s taxable income for 1999 in a manner inconsistent with the commissioner’s treatment of Matra’s taxable income for 1998 and 2001, as referenced above. In the event the commissioner were to later assert that it clearly erred in its 1999 treatment, the commissioner could issue a new SND, subject to demonstrating that the taxpayer should have been aware of this error and the existence of a new fact to support the new SND. Should the tax commissioner issue a new SND for 1999, the Company believes the assessment could exceed US$1.2 million.
Flinders Refurbishment Project |
Flinders Power Partnership (“Flinders”) is engaged in a dispute with Alstom Power Limited (“Alstom”), the contractor engaged to provide turnkey refurbishment of the Playford B Power Station. Flinders assert that, pursuant to the Turnkey Refurbishment Contract, Alstom owes Flinders substantial liquidated damages for failing to timely achieve certain project completion milestones. Flinders has set-off some AUD$13 million of those liquidated damage amounts against Alstom’s progress invoices, and asserts a further claim for liquidated damages, availability guarantee payments and other items totaling some additional AUD$23 million. Alstom disputed Flinders’ entitlement to liquidated damages and commenced court proceedings, asserting that Flinders owes it approximately AUD$25 million beyond what Flinders has already paid. By mutual agreement, those proceedings have been adjourned while the parties attempt to mediate the dispute. No prediction of the likelihood of an unfavorable outcome can be made at this time.
Contractual Commitments |
Flinders Power |
Upon the acquisition of Flinders Power in August 2000, the South Australian Government assigned money losing contracts with Osborne Power Plant (“OCPL”) to Flinders Power. The Osborne plant has a nameplate capacity of 180 MW, notionally comprising baseload capacity of 134 MW, surplus baseload capacity of 7 MW and peaking capacity of 39 MW. Under its power purchase agreement with the owner of the OCPL, Flinders Power purchases electricity from OCPL and bids that electricity into the National Electricity Market (“NEM”). Under a separate gas sale agreement, Flinders Power also supplies OCPL with gas. Flinders Power is supplied with that gas under a contract with Terra Gas Trader (“TGT”). These contracts are derivatives that do not qualify for hedge accounting treatment in accordance with SFAS No. 133. See Note 10 — Derivative Instruments and Hedging Activities.
TGT is owned by Tarong Energy (a Queensland Government owned corporation). Both Flinders Power’s purchases of electricity from OCPL and supply of gas to OCPL are at a loss. These contracts are accounted for as derivatives and reflected accordingly in the consolidated financial statements of the Company.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. | Guarantees |
In November 2002, the FASB issued FASB Interpretation No. (“FIN”) 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of the guarantee for the obligations the guarantor has undertaken in issuing the guarantee.
In connection with the application of push down accounting, all outstanding guarantees were considered new; accordingly, the Company applied the provisions of FIN 45 to all of those guarantees. Each guarantee was reviewed for the requirement to recognize a liability at inception. As a result, the Company was not required to record any liabilities.
On December 23, 2003, the Company’s 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 guarantees on an unconditional basis by each of NRG Energy’s current and future restricted 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 parity lien debt, by security interest in all of the assets of the guarantors, except certain excluded assets, subject to liens securing parity lien debt and other permitted prior liens.
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) | ||||||||||||
NRG Energy Second Priority Notes due 2013 | $ | 1,753,000 | Obligations under credit agreement | 2013 | Nonperformance |
16. | Related Party Transactions |
In December 2003, the Company sold 100% of its outstanding shares of Sterling Luxembourg (No. 4) S.a.r.L. (“Sterling”) which held an interest in Itiquira S.A., COBEE, Flinders Finance and several dormant holding companies. Fifty percent of the total outstanding shares of Sterling were sold to NRG Latin America, Inc., a wholly owned subsidiary of NRG Energy and an affiliate of the Company, for $3 million, satisfied through a reduction of NRG Latin America, Inc.’s receivable from the Company. The remaining 50% of the total outstanding shares were sold to NRG Energy for $3 million, which consisted of a dividend distribution of one dollar, plus settlement of a payable to NRG Energy of $3 million. As part of this transfer of assets to affiliates, the Company entered into a note payable in the amount of $10.7 million with NRGenerating Holdings No. 21 BV, an indirect wholly owned subsidiary of NRG Energy and an affiliate of the Company. See Note 11 — Long Term Debt and Capital Leases.
In accordance with SFAS No. 141,Business Combinations, because the transfer was between entities under common control, the provisions of APB Opinion No. 16,Business Combinations, applied. Therefore all activity related to the entities that were sold was removed from the financial statements of NRG International LLC as presented herein.
25