1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
For the Quarter Ended: MARCH 31, 2001 Commission File Number: 001-15891
NRG ENERGY, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1724239
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
901 Marquette Avenue, Suite 2300
Minneapolis, Minnesota 55402
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 373-5300
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 26, 2001
-------------------------------------- -----------------------------
Class A - Common Stock, $.01 par value 147,604,500 Shares
Common Stock, $.01 par value 50,897,097 Shares
2
INDEX
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PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes
Consolidated Statement of Income 1
Consolidated Balance Sheet 2-3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Financial Statements 6-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 26
Item 6. Exhibits, Financial Statement Schedules, and Reports 27
on Form 8-K
SIGNATURES 28
3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
CONSOLIDATED STATEMENT OF INCOME
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In thousands, except per share amounts) 2001 2000
- ---------------------------------------- -------------------------
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $ 624,262 $ 332,671
Equity (loss) in earnings of unconsolidated affiliates 18,904 (9,644)
-------------------------
Total operating revenues and equity earnings 643,166 323,027
-------------------------
OPERATING COSTS AND EXPENSES
Cost of majority-owned operations 423,859 214,923
Depreciation and amortization 38,092 19,987
General, administrative and development 54,191 25,180
-------------------------
Total operating costs and expenses 516,142 260,090
-------------------------
OPERATING INCOME 127,024 62,937
-------------------------
OTHER INCOME (EXPENSE)
Minority interest in earnings of consolidated subsidiaries (2,059) (1,798)
Other income, net 2,082 1,531
Interest expense (86,992) (52,317)
-------------------------
Total other expense (86,969) (52,584)
-------------------------
INCOME BEFORE INCOME TAXES 40,055 10,353
INCOME TAX EXPENSE 4,877 1,607
-------------------------
NET INCOME $ 35,178 $ 8,746
=========================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 183,925 147,605
EARNINGS PER WEIGHTED AVERAGE COMMON SHARE - BASIC $ 0.19 $ 0.06
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 185,878 147,605
EARNINGS PER WEIGHTED AVERAGE COMMON SHARE - DILUTED $ 0.19 $ 0.06
See notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEET
NRG ENERGY, INC. AND SUBSIDIARIES
MARCH 31, DECEMBER 31,
(In thousands) 2001 2000
- -------------- ------------------------------
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 126,588 $ 95,243
Restricted cash 91,785 12,135
Accounts receivable-trade, less allowance
for doubtful accounts of $34,660 and $21,199 293,945 360,075
Accounts receivable-affiliates 118,787 --
Inventory 213,382 174,864
Current portion of notes receivable 1,690 267
Prepayments and other current assets 93,757 30,074
------------------------------
Total current assets 939,934 672,658
------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
In service 4,494,023 4,106,653
Under construction 1,133,829 206,992
------------------------------
5,627,852 4,313,645
Less accumulated depreciation (305,088) (271,977)
------------------------------
Net property, plant and equipment 5,322,764 4,041,668
------------------------------
OTHER ASSETS
Equity investments in affiliates 909,236 973,261
Capitalized project costs 24,773 10,262
Notes receivable, less current portion 86,517 76,745
Decommissioning fund investments 3,937 3,863
Intangible assets, net of accumulated amortization of $7,738 and $6,770 59,406 61,352
Debt issuance costs, net of accumulated amortization of $14,437 and $6,443 65,130 48,773
Other assets, net of accumulated amortization of $14,681 and $12,809 243,776 90,410
------------------------------
Total other assets 1,392,775 1,264,666
------------------------------
TOTAL ASSETS $ 7,655,473 $ 5,978,992
==============================
See notes to consolidated financial statements.
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5
CONSOLIDATED BALANCE SHEET
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
(In thousands) -------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
CURRENT LIABILITIES
Current portion of long-term debt $ 375,803 $ 146,469
Revolving line of credit 467,000 8,000
Revolving line of credit, non-recourse 40,000 --
Accounts payable-trade 239,559 255,917
Accounts payable-affiliate -- 7,191
Accrued income taxes 31,260 43,870
Accrued property and sales taxes 12,672 10,531
Accrued salaries, benefits and related costs 15,532 24,830
Accrued interest 60,112 51,962
Other current liabilities 50,688 14,220
-------------------------------
Total current liabilities 1,292,626 562,990
===============================
OTHER LIABILITIES
Consolidated project-level, long term, non-recourse debt 2,233,792 2,146,953
Corporate level, long-term, recourse debt 1,775,023 1,503,896
Deferred income taxes 141,175 55,642
Postretirement and other benefit obligations 78,988 83,098
Other long-term obligations and deferred income 167,024 149,640
Minority Interest 36,455 14,685
-------------------------------
Total liabilities 5,725,083 4,516,904
===============================
STOCKHOLDERS' EQUITY
Class A - common stock; $.01 par value; 250,000 shares authorized;
147,605 shares issued and outstanding 1,476 1,476
Common stock; $.01 par value; 550,000 shares authorized;
50,889 shares at March 31, 2001 and 32,396 shares at December 31, 2000
issued and outstanding 509 324
Additional paid-in capital 1,712,945 1,233,833
Retained earnings 405,323 370,145
Accumulated other comprehensive loss (189,863) (143,690)
-------------------------------
Total stockholders' equity 1,930,390 1,462,088
COMMITMENTS AND CONTINGENCIES
===============================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,655,473 $ 5,978,992
===============================
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
Class A Accumulated
Common Common Additional Other Total
------------------------------------- Paid-in Retained Comprehensive Stockholders'
(In thousands) Stock Shares Stock Shares Capital Earnings Income Equity
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 $ 1,476 147,605 -- -- $ 780,438 $ 187,210 $ (75,470) $ 893,654
Net Income 8,746 8,746
Foreign currency translation adjustments (30,280) (30,280)
----------
Comprehensive income (21,534)
=======================================================================================
BALANCES AT MARCH 31, 2000 $ 1,476 147,605 -- -- $ 780,438 $ 195,956 $ (105,750) $ 872,120
=======================================================================================
BALANCES AT DECEMBER 31, 2000 $ 1,476 147,605 $ 324 32,396 $1,233,833 $ 370,145 $ (143,690) $1,462,088
Net Income 35,178 35,178
Foreign currency translation adjustments (66,899) (66,899)
Cumulative effect of SFAS No. 133 (22,631) (22,631)
Current period impact of SFAS No. 133 43,357 43,357
----------
Comprehensive income (10,995)
Issuance of common stock, net 185 18,493 475,032 475,217
Issuance of corporate units 4,080 4,080
=======================================================================================
BALANCES AT MARCH 31, 2001 $ 1,476 147,605 $ 509 50,889 $1,712,945 $ 405,323 $ (189,863) $1,930,390
=======================================================================================
See notes to consolidated financial statements.
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7
CONSOLIDATED STATEMENTS OF CASH FLOWS
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(Thousands of Dollars) 2001 2000
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 35,178 $ 8,746
Adjustments to reconcile net income to net cash (used in)
provided by operating activities
Undistributed equity in (earnings)/losses of unconsolidated
affiliates (17,744) 17,145
Depreciation and amortization 38,092 19,987
Deferred income taxes and investment tax credits 10,429 10,906
Minority interest 2,059 (1,694)
Unrealized gains on energy contracts (20,171) --
Loss on disposition of project 2,274 --
Cash provided (used) by changes in certain working capital items,
net of acquisition effects
Accounts receivable 81,474 4,401
Accounts receivable-affiliates (109,582) --
Inventory (31,475) 10,450
Prepayments and other current assets (1,215) (2,652)
Accounts payable-trade (36,017) 28,778
Accounts payable-affiliates (8,237) (3,202)
Accrued income taxes (12,036) (13,793)
Accrued property and sales taxes 2,141 2,175
Accrued salaries, benefits and related costs (13,856) (4,106)
Accrued interest 2,920 20,289
Other current liabilities 3,676 (5,937)
Cash (used in) provided by changes in other assets and liabilities (4,384) 65,317
- -----------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (76,474) 156,810
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Businesses and assets acquired, net of liabilities assumed (832,725) (1,723,158)
Proceeds from sale of investments 4,063 --
Investments in projects (38,173) (17,933)
Changes in notes receivable (net) 3,540 293
Capital expenditures (177,852) (43,390)
(Increase)/decrease in restricted cash (79,650) 2,456
- -----------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (1,120,797) (1,781,732)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock, net 475,217 --
Proceeds from issuance of corporate units 4,080 --
Proceeds from issuance of long-term debt and term loans 873,141 2,482,853
Net borrowings/(payments) under line of credit agreements 499,000 (36,000)
Principal payments on long-term debt (618,436) (715,491)
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,233,002 1,731,362
- -----------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (4,386) --
NET INCREASE IN CASH AND CASH EQUIVALENTS 31,345 106,440
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 95,243 31,483
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 126,588 $ 137,923
===========================================================================================================
See notes to consolidated financial statements.
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8
NRG ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NRG Energy, Inc. (NRG Energy or the Company) is a leading global energy company
primarily engaged in the acquisition, development, ownership and operation of
power generation facilities and the sale of energy, capacity and related
products.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with SEC regulations for interim financial information and with
the instructions to Form 10-Q. 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 by NRG
Energy are set forth in Note 1 to the company's financial statements in its
Annual Report on Form 10-K for the year ended December 31, 2000 (Form 10-K). The
following notes should be read in conjunction with such policies and other
disclosures in the Form 10-K. Interim results are not necessarily indicative of
results for a full year.
In the opinion of management, the accompanying unaudited interim financial
statements contain all material adjustments necessary to present fairly the
consolidated financial position of NRG Energy as of March 31, 2001 and December
31, 2000, the results of its operations for the three months ended March 31,
2001 and 2000, and its cash flows and stockholders' equity for the three months
ended March 31, 2001 and 2000. Certain prior year amounts have been reclassified
for comparative purposes. These reclassifications had no effect on net income or
stockholders equity as previously reported.
1. BUSINESS DEVELOPMENTS
In January 2001, NRG Energy purchased a 5,633 MW portfolio of operating
projects and projects in construction and advanced development that are
located primarily in the north central and south central United States from
LS Power LLC, for approximately $777 million. Approximately 1,697 MW are
currently in operation or under construction, and NRG Energy expects that
an additional $1,850 million will be required to complete construction of
the projects currently under construction or about to commence
construction. Each facility employs natural gas-fired, combined cycle
technology. Through December 31, 2005, NRG Energy also has the opportunity
to acquire ownership interests in an additional 3,000 MW of generation
projects developed and offered for sale by LS Power and its partners.
In March 2001, NRG Energy purchased from Cogentrix the remaining 430 MW, or
51.37% interest, in a 873 MW operating natural gas-fired combined-cycle
plant in Batesville, Mississippi for $64 million. NRG Energy acquired
48.63% of the plant in January 2001, from LS Power. NRG Energy expects to
expand the capacity of the plant by 292 MW. The expansion is expected to
begin commercial operations in 2002.
During March 2001, NRG Energy increased its ownership interest in Penobscot
Energy Recovery Company (PERC) from 26.12% to 59% for an acquisition cost
of $17.5 million. The increased ownership percentage required NRG Energy to
consolidate the operations of PERC as a consolidated entity.
During May 2001, NRG Energy purchased from Duke Energy North America LLC
for approximately $325 million a 720 MW winter rated/640 MW summer rated
simple-cycle plant. The project is under construction on a greenfield site
near St. Louis, Missouri in Audrain County. The project consists of eight
simple-cycle combustion turbine generators that use natural gas as the
primary fuel. Construction began in May 2000 and the facility is expected
to enter into commercial operation by June 2001.
2. SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATES
NRG Energy has investments in four companies that are considered
significant subsidiaries, as defined by applicable SEC regulations, and
accounts for those investments using the equity method. The following
summarizes the income statements of these unconsolidated entities:
6
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THREE MONTHS ENDED
MARCH 31,
(In thousands) 2001 2000
------------------------
Net sales $ 671,713 $ 185,771
Other income 2,120 696
Costs and expenses:
Cost of sales 610,595 169,521
Interest expense 9,134 6,470
General and administrative 11,733 6,012
Other (263) 195
------------------------
Total costs and expenses 631,199 182,198
------------------------
Income before income taxes 42,634 4,269
Income taxes 2,642 5,801
------------------------
Net (loss) income $ 39,992 $ (1,532)
========================
Company's share of net (loss) income $ 18,121 $ (2,871)
========================
3. SHORT TERM DEBT
NRG Energy has a $500 million revolving credit facility under a commitment
fee arrangement that matures in March 2002. This facility provides
short-term financing in the form of bank loans. At March 31, 2001
NRG Energy had $467 million outstanding under this facility. At March 31,
2001, the weighted average interest rate of such outstanding advances was
6.97% per year.
In January 2001, NRG Energy entered into a bridge credit agreement, with a
final maturity date of December 31, 2001. Approximately $600 million was
borrowed under this facility to partially finance NRG Energy's acquisition
of the LS Power generation assets. In March 2001, the bridge credit
facility was repaid with proceeds from NRG Energy's offering of common
stock and equity units.
As of March 31, 2001, NRG Energy's wholly owned subsidiary, NRG South
Central Generating LLC, had outstanding approximately $40 million under a
project level, non-recourse revolving credit agreement which matures in
March 2002. At March 31, 2001, the weighted average interest rate of such
outstanding advances was 8.0% per year. The maximum amount available under
this facility is $40 million.
4. LONG TERM DEBT
CORPORATE LEVEL - RECOURSE
On March 13, 2001, NRG Energy completed the sale of 11.5 million equity
units for an initial price of $25 per unit. The 11.5 million equity units
sold included 1.5 million units sold pursuant to the underwriters'
over-allotment option. NRG Energy received gross proceeds from the issuance
of $287.5 million. Net proceeds from this issuance were $278.4 million
after deducting underwriting discounts, commissions and estimated offering
expenses. Each equity unit initially consists of a corporate unit
comprising a $25 principal amount of NRG Energy's senior debentures and an
obligation to acquire shares of NRG Energy common stock no later than May
18, 2004 at a price ranging from between $27.00 and $32.94. Approximately
$4.1 million of the gross proceeds has been recorded as additional paid in
capital to reflect the value of the obligation to purchase NRG Energy's
common stock. Interest payments will be payable on the debentures quarterly
in arrears on each February 16, May 16, August 16 and November 16,
commencing May 16, 2001. Interest will be payable initially at an annual
rate of 6.50% of the principal amount of $25 per debenture to, but
excluding, February 17, 2004, or May 18, 2004 if the interest rate is not
reset three business days prior to February 17, 2004 or three business days
prior to May 18, 2004, the debentures will bear interest from February 17,
2004, or May 18, 2004, as applicable, at the reset rate to, but excluding,
May 16, 2006. In addition, original issued discount will accrue on the
debentures. The net proceeds were used in part to reduce amounts
outstanding under NRG Energy's short term bridge credit agreement which was
used to finance in part NRG Energy's acquisition of LS Power generation
assets.
In April 2001, NRG Energy issued $690 million of senior notes in two
tranches. The first tranche of $350 million matures in April 2011 and bears
an interest rate of 7.75%. The second tranche of $340 million matures in
April
7
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2031 and bears an interest rate of 8.625%. Interest on the notes is due
semi-annually each April and October. The net proceeds of the issuance were
used for repayment of short-term indebtedness incurred to fund
acquisitions, for investments, general corporate purposes and to provide
capital for future planned acquisitions.
PROJECT LEVEL - NON-RECOURSE
Upon the acquisition of the LS Power assets, NRG Energy assumed
approximately $326 million of outstanding bonds originally issued to
finance the construction of the Batesville generation plant. In May 1999,
LSP Energy Limited Partnership (Partnership) and LSP Batesville Funding
Corporation (Funding) issued two series of Senior Secured Bonds (Bonds) in
the following total principle amounts: $150 million 7.16% Series A Senior
Secured Bonds due 2014 and $176 million 8.160% Series B Senior Secured
Bonds due 2025. Interest is payable semiannually on each January 15 and
July 15. In March 2000, a registration statement was filed by Partnership
and Funding and became effective. The registration statement was filed to
allow the exchange of the Bonds for two series of debt securities (Exchange
Bonds), which are in all material respects substantially identical to the
Bonds. The Exchange Bonds are secured by substantially all of the personal
property and contract rights of the Partnership and Funding. The Exchange
Bonds are redeemable, at the option of Partnership and Funding, at any time
in whole or from time to time in part, on not less than 30 nor more than 60
days prior notice to the holders of that series of Exchange Bonds, on any
date prior to their maturity at a redemption price equal to 100% of the
outstanding principal amount of the Exchange Bonds being redeemed and a
make whole premium. In no event will the redemption price ever be less than
100% of the principal amount of the Exchange Bonds being redeemed plus
accrued and unpaid interest thereon. Principal payments are payable on each
January 15 and July 15 beginning July 15, 2001. Scheduled maturities are as
follows, in thousands:
2001 $ 4,125
2002 7,575
2003 7,125
2004 7,575
2005 9,600
Thereafter 290,000
--------
Total $326,000
--------
In March 2001, NRG Energy increased its ownership interest in PERC, which
resulted in the consolidation of its equity investment in PERC. As a
result, the assets and liabilities of PERC became part of the assets and
liabilities of NRG Energy. Upon completion of the transaction, NRG Energy
recorded approximately $37.9 million of outstanding Financial Authority of
Maine (FAME) Electric Rate Stabilization Revenue Refunding Bonds Series
1998 (FAME bonds) which were issued on PERC's behalf by FAME in June 1998.
The face amount of the bonds that was initially issued were approximately
$44.9 million and was used to repay the Floating Rate Demand Resource
Revenue Bonds issued by the Town of Orrington, Maine on behalf of PERC. The
FAME bonds are fixed rate bonds with yields ranging from 3.75% to 5.2%. The
weighted average yield on the FAME bonds is approximately 5.1%. The FAME
bonds are subject to mandatory redemption in annual installments of varying
amounts through July 1, 2018. Beginning July 1, 2008 the FAME bonds are
subject to redemption at the option of PERC at a redemption price equal to
102% through June 30, 2009, 101% for the period July 1, 2009 to June 30,
2010 and 100% thereafter, of the principal amount outstanding, plus accrued
interest. The loan agreement with FAME contains certain restrictive
covenants relating to the FAME bonds, which restrict PERC's ability to
incur additional indebtedness, and restricts the ability of the general
partners to sell, assign or transfer their general partner interests. The
bonds are collateralized by liens on substantially all of PERC's assets.
Aggregate principle maturities as of December 31, 2000 for the next five
years and thereafter are as follows, in thousands:
2001 $ 1,535
2002 1,600
2003 1,670
2004 1,735
2005 1,820
Thereafter 29,625
-------
Total $37,985
-------
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GUARANTEES
NRG Energy is directly liable for the obligations of certain of its project
affiliates and other subsidiaries pursuant to guarantees relating to
certain of their indebtedness, equity and operating obligations. In
addition, in connection with the purchase and sale of fuel, emission
credits and power generation products to and from third parties with
respect to the operation of some of NRG Energy's generation facilities in
the United States, NRG Energy may be required to guarantee a portion of the
obligations of certain of its subsidiaries. As of March 31, 2001, NRG
Energy's obligations pursuant to its guarantees of the performance, equity
and indebtedness obligations of its subsidiaries totaled approximately
$514.2 million.
5. FINANCIAL INSTRUMENTS
As of March 31, 2001, NRG Energy had eleven interest rate swap agreements
with notional amounts totaling approximately $918 million, as described
below. NRG Energy also has one foreign currency swap with a notional amount
of approximately $9.2 million or (pound)6.4 million. If the swaps had been
discontinued on March 31, 2001, NRG Energy would have owed the
counter-parties approximately $36 million. Based on the investment grade
rating of the counter-parties, NRG Energy believes that its exposure to
credit risk due to nonperformance by the counter-parties to its hedging
contracts is insignificant.
- NRG Energy entered into a swap agreement effectively converting the
6.96% floating rate on AUD$105 million debt into fixed rate debt.
The swap expires on September 8, 2012.
- A second swap effectively converts a $16 million issue of
non-recourse variable rate debt into fixed rate debt. The swap
expires on September 30, 2002 and is secured by the Camas Power
Boiler assets.
- A third swap converts $177 million of non-recourse variable rate
debt into fixed rate debt. The swap expires on December 17, 2014
and is secured by the Crockett Cogeneration assets.
- A fourth swap converts (pound)188 million of non-recourse variable
rate debt into fixed rate debt. The swap expires on June 30, 2019
and is secured by the Killingholme assets.
- During March 2000, NRG Energy entered into approximately $400
million of forward starting interest rate swaps to partially hedge
the risk of rising interest rates for NRG Energy's corporate debt
issuance. The swaps terminated on April 2, 2001.
- NRG Energy also entered into a foreign currency swap with a
notional amount of approximately (pound)6.4 million or $9.2 million
to hedge or protect foreign currency denominated cash flows. The
swap expires on July 31, 2001.
6. SEGMENT REPORTING
NRG Energy conducts its business within six segments: Independent Power
Generation in North America, Europe, Asia Pacific and Other Americas
regions, and Alternative Energy and Thermal projects. These segments are
distinct components of NRG Energy with separate operating results and
management structures in place. The "Other" category includes operations
that do not meet the threshold for separate disclosure and corporate
charges (primarily interest expense) that have not been allocated to the
operating segments. Segment information for the quarter ended March 31,
2001 and 2000 is as follows:
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FOR THE THREE MONTHS ENDED MARCH 31, 2001
POWER GENERATION
--------------------------------------------------------
(IN THOUSANDS) NORTH ASIA OTHER
-------------- AMERICA EUROPE PACIFIC AMERICAS
------- ------ ------- --------
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $416,268 $ 68,708 $ 88,277 $ 96
Inter-segment Revenues -- -- -- --
Equity in earnings of unconsolidated
Affiliates 12,461 5,986 4,097 2,195
-------- -------- -------- --------
Total operating revenues and
equity earnings 428,729 74,694 92,374 2,291
-------- -------- -------- --------
Net Income $ 37,059 $ 11,968 $ 16,614 $ 944
======== ======== ======== ========
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
------ ------- ----- -----
Operating Revenues and Equity Earnings
Revenues from majority-owned Operations $ 9,886 $ 32,474 $ 7,907 $623,616
Inter-segment Revenues 646 -- -- 646
Equity in earnings of unconsolidated
Affiliates (5,840) 5 -- 18,904
-------- -------- -------- --------
Total operating revenues and
equity earnings 4,692 32,479 7,907 643,166
-------- -------- -------- --------
Net Income (Loss) $ 3,171 $ 2,241 $(36,819) $ 35,178
======== ======== ======== ========
Total assets as of March 31, 2001 for North America, Europe, Asia Pacific
and Other Americas total $5,999 million, $884 million, $626 million and $146
million, respectively.
FOR THE THREE MONTHS ENDED MARCH 31, 2000
POWER GENERATION
-------------------------------------------------------
(IN THOUSANDS) NORTH ASIA OTHER
-------------- AMERICA EUROPE PACIFIC AMERICAS
------- ------ ------- --------
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $263,370 $ 36,622 $ -- $ 71
Inter-segment Revenues -- -- -- --
Equity in earnings of unconsolidated
Affiliates (9,509) 1,865 (1,237) 1,730
-------- --------- -------- --------
Total operating revenues and equity earnings 253,861 38,487 (1,237) 1,801
-------- --------- -------- --------
Net Income 22,827 4,302 (2,417) 967
-------- --------- -------- --------
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
------ ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $ 7,017 $ 21,575 $ 3,716 $332,371
Inter-segment Revenues 300 -- -- 300
Equity in earnings of unconsolidated
Affiliates (2,498) 5 -- (9,644)
-------- --------- -------- --------
Total operating revenues and equity earnings 4,819 21,580 3,716 323,027
-------- --------- -------- --------
Net Income (Loss) 3,373 2,003 (22,309) 8,746
-------- --------- -------- --------
Total assets as of March 31, 2000 for North America, Europe, Asia Pacific
and Other Americas total $3,954 million, $827 million, $394 million and
$119 million, respectively.
7. COMMITMENTS AND CONTINGENCIES
DISPUTED REVENUES
As of March 31, 2001, NRG Energy had approximately $10.5 million of
disputed revenues in respect of certain wholly-owned subsidiaries,
primarily NRG Northeast Generating LLC. NRG Energy is actively pursuing
resolution and/or collection of these amounts. These disputed revenues
relate to the interpretation of certain transmission power
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sales agreements and certain sales to the New York Power Pool and New
England Power Pool, conflicting meter readings, pricing of firm sales and
other power pool reporting issues. These amounts have not been recorded in
the financial statements and will not be recognized as income until
disputes are resolved and collection is assured. As previously disclosed
in its annual report on Form 10-K, NRG Energy had approximately $13.1
million of disputed revenues as of December 31, 2000. During the quarter
ended March 31, 2001, $3.1 million of disputed revenues were resolved, and
$0.5 million of new disputed revenues were added.
CALIFORNIA LIQUIDITY CRISIS
NRG Energy's California generation assets consist primarily of interests in
the Crockett and Mt. Poso facilities and a 50% interest in West Coast Power
LLC. Through the California Power Exchange (PX) and the California
Independent System Operator (ISO), the West Coast Power facilities sell
uncommitted power to Pacific Gas and Electric Company (PG&E), Southern
California Edison Company (SCE) and San Diego Gas and Electric Company
(SDG&E), the three major California investor owned utilities. Crockett, Mt.
Poso and certain of NRG Energy's other California facilities also sell
directly to PG&E and SCE. The liquidity crisis faced by both PG&E and SCE,
as a result of tight electricity supplies, rising wholesale electric prices
and caps on the rates that PG&E and SCE may charge their retail customers,
caused both PG&E and SCE to partially suspend payments to the California PX
and the California ISO. In April 2001, PG&E filed for bankruptcy under
Chapter 11 of the Bankruptcy Code. In March 2001, certain affiliates of
West Coast Power entered into a four year contract with the California
Department of Water Resources (CDWR) pursuant to which the affiliates have
agreed to sell up to 1,000 MW to CDWR for the remainder of 2001 and up to
2,300 MW from January 1, 2002 through December 31, 2004.
NRG Energy's share of the total net amounts owed to all of its California
affiliates by the California PX, the California ISO, and the three major
California utilities is approximately $217 million as of March 31, 2001,
based upon unaudited financial information provided by such affiliates.
This amount consists of NRG Energy's share of total accounts receivables of
approximately $344 million, less approximately $127 million of reserves for
credit issues and contingent revenues. Of the total accounts receivable
amount, approximately $305 million represents NRG Energy's share of the
receivables from the California ISO/PX at the end of March 2001. In
addition to the amounts due from the California ISO/PX, NRG Energy's
affiliates have approximately $39 million of direct exposure to Pacific Gas
and Electric as a result of sales under QF contracts. NRG Energy believes
that the amounts that have been recorded as accounts receivable will
ultimately be collected in full; however, if some form of financial relief
or support is not provided to PG&E and SCE, the collectibility of these
receivables will become more questionable in terms of both timing and
amount. With respect to disputed revenues, these amounts relate to billing
disputes arising in the ordinary course of business and to disputes that
have arisen as a result of the California ISO imposing various revenue caps
on the wholesale price of electricity. None of the disputed revenues will
be recorded until after the particular issue that caused them to be
excluded from the financial statements is resolved. Since the date of the
PG&E bankruptcy filing, PG&E is paying Crockett and Mt. Poso on a current
basis.
The Federal Energy Regulatory Commission (FERC) has jurisdiction over sales
for resale of electricity in the California wholesale power markets. In
March 2001, FERC issued orders that presumptively approved prices up to
$273/MWh during January 2001 and $430/MWh during February 2001. The orders
direct electricity suppliers to either refund a portion of their January
and February sales or justify prices charged above these approved prices.
The orders, if finalized, could require West Coast Power to refund
approximately $45 million in revenues from January and February, of which
NRG Energy's share would be approximately $22.5 million. Dynegy Power
Marketing, Inc., as the power marketer for West Coast Power, has submitted
notice of its intent to submit information justifying each component of the
prices charged.
Various legislative, regulatory and legal remedies to the liquidity crisis
faced by PG&E and SCE have been implemented or are being pursued. Assembly
Bill 1X, which authorizes the California Department of Water Resources to
enter into contracts for the purchase of electric power through January 1,
2003 and to issue revenue bonds to fund such purchases, was signed into law
by the Governor of California on February 1, 2001. On May 11, 2001, the
Governor of California signed SB 31X, which authorizes the issuance of
$13.4 billion in revenue bonds to pay for power for customers of the
state's three investor owned utilities. The bonds will repay the State
general fund for $6.7 billion authorized for power buys since January and
will finance future electricity purchases. Additionally, on March 27, 2001,
the California Public Utilities Commission (PUC) approved an approximately
40% increase in the energy component of the retail electric rates paid by
certain California ratepayers. This increase is in addition to the 9%
increase approved in January and a 10% increase expected to take effect
next year. The
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PUC also ordered the utilities to pay qualifying facilities for power
delivered on a go-forward basis. However, the order did not address
repayment of amounts owed for past deliveries.
The delayed collection of receivables owed to West Coast Power resulted in
a covenant default under its credit agreement. West Coast Power is working
with its lenders to secure their agreement to forebear exercising their
remedies under the credit agreement with respect to such covenant default.
Crockett Cogeneration, a majority owned affiliate of NRG Energy, was
recently notified by its lenders that it is in technical default under its
loan agreement. As a result, NRG Energy has reclassified the long-term
portion of the Crockett debt to current. Defaults under the Crockett and
West Coast Power credit agreements do not trigger defaults under any of NRG
Energy's corporate-level financing facilities.
PENDING ACQUISITIONS
PowerGen Acquisition
In April 2001, NRG Energy announced that it had agreed to acquire
PowerGen's interest in two energy businesses - Saale Energie GmbH (SEG) and
MIBRAG mbH, and had agreed to acquire a third, Csepel I and II, for
approximately $190 million.
By acquiring PowerGen's interest in SEG, NRG Energy has increased its
ownership of the Schkopau power station from 200 to 400 MW. Schkopau is a
960 MW lignite-fueled mid-merit power station commissioned in 1996 and
located near Halle, Germany. It obtains lignite under a long-term contract
from MIBRAG's Profen mine. SEG sells its output from the Schkopau station
to VEAG under a 25-year contract.
NRG Energy has also acquired PowerGen's interest in MIBRAG, an integrated
energy business in eastern Germany, increasing its ownership from 33.3% to
66.7%. However, NRG Energy has granted an option to MIBRAG's other
shareholder, the Washington Group International, Inc. to acquire 16.7% of
NRG Energy's interest, bringing each partner's share to 50%. The Washington
Group exercised its option to acquire the 16.7% interest in April 2001, and
the parties expect to complete the transaction in June via a repurchase of
Shares by MIBRAG.
NRG Energy is also acquiring 100% of the Csepel power generation facilities
in Budapest, Hungary. These power generation facilities, Csepel I, a 116 MW
thermal plant, and Csepel II, a 389 MW gas turbine power station are both
located on Csepel Island in Budapest. Csepel II reached commercial
operation in November 2000 and is the primary facility. The acquisition is
subject to Hungarian regulatory approval and is expected to be completed in
July 2001.
McClain Acquisition
In May 2001, NRG Energy signed an asset purchase agreement with Duke Energy
North America for its 77% interest in the McClain Energy Generating
Facility located in McClain County, Oklahoma. The facility is a 520 MW
winter rated (500 MW summer rated) combined-cycle, natural gas fired
facility. The Oklahoma Municipal Power Authority owns the remaining 23%
interest. The generation facility is in the final stages of construction on
a greenfield site in Newcastle, Oklahoma, south of Oklahoma City.
Construction began in March 2000, with commercial operations expected to
commence during the summer of 2001. NRG Energy will operate the facility.
8. EARNINGS PER SHARE
Diluted earnings per average common share is calculated by dividing net
income by the weighted average shares of common stock outstanding including
stock options outstanding, under NRG Energy's stock option plans considered
to be common stock equivalents. The following table shows the effect of
those stock options on the weighted average number of shares outstanding
used in calculating diluted earnings per average common share.
FOR THE THREE
MONTHS ENDED MARCH 31,
-----------------------
(In thousands) 2001 2000
-----------------------
Weighted Average Number of Common Shares Outstanding 183,925 147,605
Assumed Exercise of Dilutive Stock Options 1,953 --
-----------------------
Potential Weighted Average Diluted Common Shares Outstanding 185,878 147,605
-----------------------
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9. PRO FORMA RESULTS OF OPERATIONS - CAJUN ACQUISITION
During March 2000, NRG Energy completed the acquisition of two fossil
fueled generating plants from Cajun Electric Power Cooperative, Inc. for
approximately $1,056 million. The following information summarizes the pro
forma results of operations as if the acquisition had occurred as of the
beginning of the three-month period ended March 31, 2000. Incremental tax
expense (benefit) is based on a rate of 41.37%. The pro forma information
presented is for informational purposes only and is not necessarily
indicative of future earnings or financial position or of what the earnings
and financial position would have been had the acquisition of the Cajun
Electric Facilities been consummated at the beginning of the respective
period or as of the date for which pro forma financial information is
presented.
Pro Forma
3 Months Ended
(In thousands) March 31, 2000
--------------
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $ 410,077
Equity in earnings of unconsolidated affiliates (9,644)
---------
TOTAL OPERATING REVENUES AND EQUITY EARNINGS 400,433
Total operating costs and expenses 328,198
---------
OPERATING INCOME 72,235
Other expense (70,375)
---------
INCOME BEFORE INCOME TAXES 1,860
Income tax benefit (1,907)
---------
NET INCOME $ 3,767
---------
10. INVENTORY
Inventory, which is stated at the lower of weighted average cost or market,
consisted of:
(In thousands) MARCH 31, 2001 DECEMBER 31, 2000
-------------------------------------
Fuel oil $ 57,253 $ 48,541
Spare parts 92,865 85,136
Coal 39,300 17,439
Kerosene 1,287 1,524
Other 22,677 22,224
------------------------------
TOTAL $213,382 $174,864
------------------------------
11. COMMON STOCK OFFERING
In March 2001, concurrently with the offering of 11.5 million equity units
described above, NRG Energy completed the sale of 18.4 million shares of
common stock for an initial price of $27 per share. The 18.4 million shares
sold included 2.4 million shares sold pursuant to the underwriters'
over-allotment option. NRG Energy received gross proceeds from the issuance
of $496 million. Net proceeds from this issuance were $473.8 million after
deducting underwriting discounts, commissions and estimated offering
expenses. The net proceeds were used in part to reduce amounts outstanding
under NRG Energy's short term bridge credit agreement which was used to
finance in part NRG Energy's acquisition of LS Power generation assets.
12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, NRG Energy adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133), as amended by SFAS No. 137 and SFAS No. 138.
SFAS No. 133 requires NRG Energy to record all derivatives on the balance
sheet at fair value. Changes in the fair value of non-hedge derivatives
will be immediately recognized in earnings. Changes in fair values of
derivatives accounted for as hedges will either be recognized in earnings
as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments or, for forecasted transactions, deferred
and recorded as a
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component of other accumulated comprehensive income until the hedged
transactions occur and are recognized in earnings. The ineffective portion
of a hedging derivative's change in fair value will be immediately
recognized in earnings. NRG Energy also formally assesses both at inception
and at least quarterly thereafter, whether the derivatives that are used in
hedging transactions are highly effective in offsetting the changes in
either the fair value or cash flows of the hedged item. When it is
determined that a derivative ceases to be a highly effective hedge, NRG
Energy discontinues hedge accounting.
The adoption of SFAS No. 133 on January 1, 2001, resulted in an after-tax
unrealized loss of $22.6 million recorded to other accumulated
comprehensive income (OCI). The impact to OCI is related to previously
deferred net losses on derivatives designated as cash flow hedges. During
the first quarter of 2001, NRG Energy recorded an after-tax gain of
approximately $51.0 million in OCI. This gain related to favorable changes
in fair values of the derivatives accounted for as hedges recorded on
January 1, 2001. Also during the first quarter of 2001, NRG Energy
reclassified from OCI into earnings $7.7 million of accumulated net
derivative gains. The net balance in OCI relating to SFAS No. 133 as of
March 31, 2001 was a gain of approximately $20.7 million. Unrealized gains
and losses on derivatives are recorded in other current and long term
assets and liabilities.
NRG Energy's earnings for the first quarter of 2001 were increased by an
unrealized gain of $20.2 million relating to derivative instruments not
accounted for as hedges in accordance with SFAS No. 133 as follows:
Gains/(Losses) in thousands
Equity in earnings of unconsolidated affiliates $ (1,887)
Cost of majority-owned operations 20,742
Other income, net 1,316
---------
Total impact before income tax $ 20,171
=========
SFAS No. 133 applies to NRG Energy's energy and energy related commodities
financial instruments, long-term power sales contracts and long-term gas
purchase contracts used to mitigate variability in earnings due to
fluctuations in spot market prices, hedge fuel requirements at generation
facilities and protect investment in fuel inventories. SFAS No. 133 also
applies to various interest rate swaps used to mitigate the risks
associated with movements in interest rates and foreign exchange contracts
to reduce the effect of fluctuating foreign currencies on foreign
denominated investments and other transactions.
Energy and energy related commodities
NRG Energy is exposed to commodity price variability in electricity,
emission allowances and natural gas, oil and coal used to meet fuel
requirements. In order to manage these commodity price risks, NRG Energy
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. Derivatives designated to be hedges by
NRG Energy are accounted for as cash flow hedges. The effective portion of
the cumulative gain or loss on the derivative instrument is reported as a
component of OCI in shareholders' equity and recognized into earnings in
the same period or periods during which the hedged transaction affects
earnings i.e., when electricity is generated or fuel is consumed. No
ineffectiveness was recognized on commodity cash flow hedges during the
first quarter of 2001. No gains or losses were recognized related to
derivative instruments excluded from the assessment of effectiveness. At
March 31, 2001, NRG Energy had various commodity related contracts
extending through December 2003 and several fixed-price gas and electricity
purchase contracts extending through 2005 to 2018. During the first quarter
of 2001, NRG Energy reclassified from OCI into earnings $7.8 million of
accumulated net derivative gains. NRG Energy expects to reclassify into
earnings in cost of majority-owned operations and equity in earnings of
unconsolidated affiliates during the next twelve months net gains/(losses)
from OCI of approximately $30.0 million and $(7.3) million, respectively.
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NRG Energy generally attempts to balance its fixed-price physical and financial
purchase and sales commitments in terms of contract volumes, and the timing
of performance and delivery obligations. However, within guidelines
established by the board of directors and its Financial Risk Management
Committee, NRG Energy does take certain market positions. These derivatives
do not qualify for hedge accounting and, accordingly, changes in the fair
value are reported in earnings in revenues from majority-owned operations
and cost of majority-owned operations. Furthermore, for various commodity
derivatives considered to be economic hedges, NRG Energy has elected not to
designate them as accounting hedges due to the burdensome documentation
requirements under SFAS No. 133. The changes in fair value of these
derivatives resulted in earnings/(losses) for the first quarter of 2001 of
$20.7 million and $(1.9) million reported in earnings in cost of
majority-owned operations and equity in earnings of unconsolidated
affiliates, respectively.
Interest rates
To manage interest rate risk, NRG Energy has entered into interest rate
swaps that effectively fix the interest payments of certain floating rate
debt instruments. Interest rate swap agreements are accounted for as cash
flow hedges. The effective portion of the cumulative gain or loss on the
derivative instrument is reported as a component of OCI in shareholders'
equity and recognized into earnings as the underlying interest expense is
incurred. No ineffectiveness was recognized on interest rate cash flow
hedges during the first quarter of 2001. During the first quarter of 2001,
NRG Energy reclassified from OCI into earnings $(0.1) million of
accumulated net derivative losses. NRG Energy expects to reclassify into
earnings in interest expense during the next twelve months net losses from
OCI of approximately $(0.9) million.
Foreign currency exchange rates
To preserve the U.S. dollar value of projected foreign currency cash flows,
NRG Energy may hedge, or protect, those cash flows if appropriate foreign
hedging instruments are available. During the first quarter of 2001, NRG
Energy had various foreign currency exchange contracts not designated as
accounting hedges. Accordingly, the changes in fair value of these
derivatives, totalling $1.3 million for the first quarter of 2001, are
reported in earnings in other income, net.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 2001, was $35.2 million, an
increase of $26.4 million compared to $8.7 million in the same period in 2000,
an increase of approximately 302%. This increase was due to the factors
described below.
OPERATING REVENUES
For the quarter ended March 31, 2001, NRG Energy had total revenues and
equity earnings of $643.2 million, compared to $323.0 million for the quarter
ended March 31, 2000, an increase of $320.1 million or approximately 99%. NRG
Energy's revenues from majority-owned operations were $624.3 million, an
increase of $291.6 million or approximately 88%, over the same period in 2000.
The increase of approximately $291.6 million, over the same period in 2000 is
primarily due to increased sales resulting from NRG Energy's recently completed
acquisitions. Subsequent to March 30, 2000, NRG Energy completed the acquisition
of the Cajun Facilities (March 31, 2000) in Louisiana, the Killingholme assets
(March 30, 2000) in the United Kingdom and the Flinders Power facilities
(September 8, 2000) in South Australia. Additionally, NRG Energy has recently
acquired Entrade AG, an energy trading company active in Europe. Each of these
recently completed acquisitions has significantly affected NRG Energy's revenues
from majority-owned operations. In addition, the power generating facilities
that NRG Energy acquired in 1999 also contributed significantly to the increase
in revenues from majority-owned operations for the three months ended March 31,
2001 as compared to the same period in 2000.
Equity in operating earnings of unconsolidated affiliates was $18.9
million for the quarter ended March 31, 2001, compared to a loss of $9.6 million
for the quarter ended March 31, 2000, an increase of $28.5 million or 296%. The
increase is primarily due to NRG Energy's investment in West Coast Power LLC and
NRG Energy's international investments, primarily Loy Yang and MIBRAG, which
have experienced favorable results of operations for the three months ended
March 31, 2001 as compared to the same period in 2000. These increases were
partially offset by increased losses from NEO Corporation. NEO Corporation
derives a significant portion of its net income from Section 29 tax credits. In
addition, the increase in equity in operating earnings of unconsolidated
affiliates decreased by approximately $1.9 million due to the impact of SFAS No.
133 which was adopted on January 1, 2001. This amount reflects the impact of the
mark-to-market of energy related contracts at certain of NRG Energy's
affiliates, primarily Loy Yang.
OPERATING COSTS AND EXPENSES
Cost of majority-owned operations was $423.9 million for the quarter,
net of unrealized gains on energy contracts, an increase of $208.9 million, or
approximately 97%, over the same period in 2000. Cost of majority-owned
operations, as a percentage of operating revenues and equity earnings for the
period, was 65.9% compared to 66.5% for the same period in 2000. The increase of
$208.9 million is primarily a result of increased costs incurred as a result of
NRG Energy's recently completed acquisitions described above, each of which has
significantly affected NRG Energy's cost of majority-owned operations. The
increase in cost of majority owned operations was partially offset by the
recognition of a gain of approximately $20.7 million due to the impact of SFAS
No. 133 which was adopted on January 1, 2001. This amount reflects the impact of
the mark-to-market of certain energy related long-term contracts and short term
positions that NRG Energy and its affiliates have entered into.
Depreciation and amortization costs were $38.1 million for the quarter
ended March 31, 2001, compared to $20.0 million for the quarter ended March 31,
2000, an increase of $18.1 million, or 90.6%. The increase resulted
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primarily from the addition of the Cajun and Killingholme facilities acquired in
March 2000, and the acquisition of the Flinders Power assets in September 2000.
General, administrative and development costs were $54.2 million for
the quarter ended March 31, 2001, compared to $25.2 million for the quarter
ended March 31, 2000. The $29.0 million, or 115% increase, is due primarily to
increased business development, associated legal, technical, and accounting
expenses, employees and equipment resulting from expanded operations and
acquisitions that took place in 2000 and during the first quarter of 2001. As a
percent of total operating revenues and equity earnings, administrative and
general expenses increased to 8.4% from 7.8% during the same period in 2000. NRG
Energy's asset base has grown to approximately $7,655 million at March 31, 2001
compared to approximately $5,294 million at March 31, 2000, an increase of
approximately $2,361 million or 44.6%. NRG Energy expects this trend to continue
as it expands its operations through closure of pending acquisitions and
business development activities.
OTHER (EXPENSE) INCOME
Other expense was $87.0 million for the quarter ended March 31, 2001,
compared to $52.6 million for the same period in 2000, an increase of
approximately $34.4 million or 65.4%. The increase in other expense was
primarily due to an increase in interest expense of approximately $34.7 million.
This increase was partially offset by the recognition of a gain of approximately
$1.3 million recorded as other income, net due to the impact of SFAS No. 133
which was adopted on January 1, 2001. For the quarter ended March 31, 2001,
interest expense was approximately $86.9 million compared to $52.3 million, an
increase of $34.7 million or 66.3%. Interest expense includes both corporate and
project level interest expense. The increase in interest expense of $34.7
million is due to increased corporate and project level debt issued and
outstanding during 2000 as compared to 1999. During 2000, NRG Energy issued
substantial amounts of long and short-term debt at both the corporate level
(recourse debt) and the project level (non-recourse debt) to either directly
finance the acquisition of electric generating facilities or refinance
short-term bridge loans incurred to finance such acquisitions. NRG Energy's
outstanding long-term debt balances have grown to approximately $4,385 million
at March 31, 2001 compared to $1,972 million at December 31, 1999 an increase of
$2,413 million or 122.4%. The growth of such outstanding debt balances has
contributed directly to the growth in interest expense during the quarter ended
March 31, 2001 compared to the same period in 2000.
INCOME TAX
For the quarter ended March 31, 2001, income tax expense was $4.9
million, compared to $1.6 million for the same period in 2000, an increase of
$3.3 million, or 203%. The increase in income tax expense in 2001 compared to
2000 is due primarily to higher domestic taxable income and the impact of SFAS
No. 133 for the first quarter 2001 activity. This increase was partially offset
by additional IRC Section 29 energy credits. For the quarter ended March 31,
2001, NRG Energy's overall effect income tax rate was 12.2%, compared to an
overall effective tax rate of 15.5% for the same period in 2000. NRG Energy's
overall effective income tax rate before recognition of tax credits is 38.8%.
NRG Energy's effective tax rate is lower than the combined federal and Minnesota
statutory rate because of a lower effective rate on foreign earnings.
LIQUIDITY AND CAPITAL RESOURCES
NRG Energy and its majority-owned subsidiaries have obtained cash from
operations, issuance of debt and equity securities, borrowings under credit
facilities, reimbursement by Xcel Energy of tax benefits pursuant to tax sharing
agreements and proceeds from non-recourse project financings. NRG Energy has
used these funds to finance operations, service debt obligations, fund the
acquisition, development and construction of generation facilities, finance
capital expenditures and meet other cash and liquidity needs.
CASH FLOWS
FOR THE QUARTER ENDED
MARCH 31, 2001 MARCH 31, 2000
NET CASH (USED IN) / PROVIDED BY OPERATING ACTIVITIES (IN THOUSANDS) $(76,474) $156,810
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Net cash from operating activities decreased approximately $233.3
million for the following reasons: Net income excluding the approximately $20.7
million gain resulting from the mark-to-market of certain short and long-term
energy contracts in accordance with SFAS No. 133 increased in comparison to the
same period in 2000 thus benefiting operating cash flows in 2001. Depreciation
and amortization expense also increased in comparison to the same period in 2000
also benefiting cash flows from operations. Net cash flows from operating
activities for the three-month period decreased in comparison to the same period
in 2000 due primarily to adverse changes in working capital. Outstanding
accounts receivable balances increased during the period resulting in an adverse
impact on cash flows from operations, these outstanding receivables are
primarily related to NRG Energy's affiliates located in California. For
additional information refer to the discussion under the California Liquidity
Crisis section. In addition, the balances of prepayments also increased
resulting in an adverse impact on cash flows from operations. NRG Energy's
working capital position has also experienced significant reductions in the
outstanding balances of certain payables and accrued expenses primarily accounts
payable-trade, accounts payable-affiliates, accrued salaries, benefits and
related costs and accrued interest. Changes in working capital such as these
also adversely impact cash from operations. NRG Energy also increased its
inventory balances, which also resulted in an adverse impact on cash flows from
operations.
NET CASH (USED IN) INVESTING ACTIVITIES (IN THOUSANDS) $(1,120,797) $(1,781,732)
During the three months ended March 31, 2001, cash used by investing
activities decreased approximately $660.9 million. During the three months ended
March 31, 2001, NRG Energy invested approximately $1,121 million in the
acquisition of newly acquired generating facilities such as the LS Power
acquisition and the Cogentrix buyout, capital expenditures for its existing
facilities and investments in unconsolidated projects. During the same period in
2000, NRG Energy invested approximately $1,782 million in primarily the Cajun
and Killingholme facilities.
NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES (IN THOUSANDS) $1,233,002 $1,731,362
During the three months ended March 31, 2001, NRG Energy generated a
net amount of approximately $1,233 million of cash from financing activities.
These cash flows resulted from the issuance of long and short-term debt
securities and equity securities during the period. During the same period in
2000, NRG Energy generated a net amount of approximately $1,731 million of cash
through its financing activities, primarily through long and short-term debt
issuances. During both periods, NRG Energy used these amounts to finance
recently acquired generating facilities and/or for general corporate purposes.
CAPITAL SOURCES
NRG Energy expects to meet it future financing requirements through a
combination of internally generated cash, corporate and project level short and
long-term debt and equity securities. NRG Energy has generally financed the
acquisition and development of its projects under financing arrangements to be
repaid solely from each of its project's cash flows, which are typically secured
by the plant's physical assets and equity interests in the project company.
During March 2001, NRG Energy completed the sale of 18.4 million shares
of common stock for an initial price of $27 per share. The offering was
completed with all 16 million shares of common stock being sold, including the
over-allotment shares of 2.4 million. NRG Energy received gross proceeds from
the issuance of $496 million. Net proceeds from this issuance were $473.8
million after deducting underwriting discounts, commissions and estimated
offering expenses. The net proceeds were used in part to reduce amounts
outstanding under NRG Energy's short term bridge credit agreement which was used
to finance in part NRG Energy's acquisition of LS Power generation assets.
During March 2001, NRG Energy also completed the sale of 11.5 million
equity units for an initial price of $25 per unit. NRG Energy received gross
proceeds from the issuance of $287.5 million. Net proceeds from this issuance
were $278.4 million after deducting underwriting discounts, commissions and
estimated offering expenses. Each equity unit, initially consisting of corporate
units, comprises a $25 principal amount of NRG Energy's senior debentures and an
obligation to acquire shares of NRG Energy common stock no later than May 18,
2004. The net proceeds were used in part to reduce amounts outstanding under NRG
Energy's short term bridge credit
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agreement which was used to finance in part NRG Energy's acquisition of LS Power
generation assets.
Remaining net proceeds were used for general corporate purposes, such
as the funding of capital expenditures and potential acquisitions, the
development and construction of new facilities and additions to working capital.
During April 2001, NRG Energy completed the sale of $690 million of
Senior Notes. The Senior Notes were issued in two tranches, the first tranche of
$350 million of 7.75% Senior Notes due April 1, 2011 and the second tranche of
$340 million of 8.625% Senior Notes due April 1, 2031. NRG Energy received
approximately $683.3 million in net proceeds after underwriting discounts,
commissions and estimated offering expenses. The net proceeds were used to repay
all amounts outstanding under NRG Energy's revolving credit facility and for
investments, other general corporate purposes and to provide capital for planned
acquisitions.
CAPITAL COMMITMENTS
NRG Energy's capital expenditure program is subject to continuing
review and modification. Actual expenditures may differ significantly depending
upon factors as the success, timing of and level of involvement in projects
under construction. NRG Energy has entered into the following acquisition
agreements.
Audrain Acquisition
During May 2001, NRG Energy purchased from Duke Energy North America
LLC for approximately $325 million a 720 MW winter rated/640 MW summer rated
simple-cycle plant that employs natural gas and has duel-fuel capability. The
project is under construction on a greenfield site near St. Louis, Missouri in
Audrain County. The project consists of eight simple-cycle combustion turbine
generators that use natural gas as the primary fuel. Construction began in May
2000 and the facility is expected to enter into commercial operation by June
2001.
PowerGen Acquisition
In April 2001, NRG Energy announced that it had agreed to acquire
PowerGen's interest in two energy businesses - Saale Energie GmbH (SEG) and
MIBRAG mbH, and had agreed to acquire a third, Csepel I and II, for
approximately $190 million.
By acquiring PowerGen's interest in SEC, NRG Energy has increased its ownership
of the Schkopau power station from 200 to 400 MW. Schkopau is a 960 MW
lignite-fueled mid-merit power station commissioned in 1996 and located near
Halle, Germany. It obtains lignite under a long-term contract from MIBRAG's
Profen mine. SEG sells its output from the Schkopau station to VEAG under a
25-year contract.
NRG Energy has also acquired PowerGen's interest in MIBRAG, an
integrated energy business in eastern Germany, increasing its ownership from
33.3% to 66.7%. However, NRG Energy has granted an option to MIBRAG's other
shareholder, the Washington Group International, Inc. to acquire 16.7% of NRG
Energy's interest, bringing each partner's share to 50%. The Washington Group
exercised its option to acquire the 16.7% interest in April 2001, and the
parties expect to complete the transaction in June via a repurchase of shares
by MIBRAG.
NRG Energy is also acquiring 100% of the Csepel power generation
facilities in Budapest, Hungary. These power generation facilities, Csepel I, a
116 MW thermal plant, and Csepel II, a 389 MW gas turbine power station are both
located on Csepel Island in Budapest. Csepel II reached commercial operation in
November 2000 and is the primary facility. The acquisition is subject to
Hungarian regulatory approval and is expected to be completed by July 2001.
McClain Acquisition
In May 2001, NRG Energy signed an asset purchase agreement with Duke
Energy North America for its 77% interest in the McClain Energy Generating
Facility located in McClain County, Oklahoma. The facility is a 520 MW winter
rated (500 MW summer rated) combined-cycle, natural gas fired facility. The
Oklahoma Municipal Power Authority owns the remaining 23% interest. The
generation facility is in the final stages of
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construction on a greenfield site in Newcastle, Oklahoma, south of Oklahoma
City. Construction began in March 2000, with commercial operations expected to
commence during the summer of 2001. NRG Energy will operate the facility.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, NRG Energy adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133), as amended by SFAS No. 137 and SFAS No. 138. SFAS No.
133 requires NRG Energy to record all derivatives on the balance sheet at fair
value. Changes in the fair value of non-hedge derivatives will be immediately
recognized in earnings. Changes in fair values of derivatives accounted for as
hedges will either be recognized in earnings as offsets to the changes in fair
value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of other
accumulated comprehensive income until the hedged transactions occur and are
recognized in earnings. The ineffective portion of a hedging derivative's change
in fair value will be immediately recognized in earnings. NRG Energy also
formally assesses both at inception and at least quarterly thereafter, whether
the derivatives that are used in hedging transactions are highly effective in
offsetting the changes in either the fair value or cash flows of the hedged
item. When it is determined that a derivative ceases to be a highly effective
hedge, NRG Energy discontinues hedge accounting.
The adoption of SFAS No. 133 on January 1, 2001, resulted in an
after-tax unrealized loss of $22.6 million recorded to other accumulated
comprehensive income (OCI). The impact to OCI is related to previously deferred
net losses on derivatives designated as cash flow hedges. During the first
quarter of 2001, NRG Energy recorded an after-tax gain of approximately $51.0
million in OCI. This gain related to favorable changes in fair values of the
derivatives accounted for as hedges recorded on January 1, 2001. Also during the
first quarter of 2001, NRG Energy reclassified from OCI into earnings $7.7
million of accumulated net derivative gains. The net balance in OCI relating to
SFAS No. 133 as of March 31, 2001 was a gain of approximately $20.7 million.
Unrealized gains and losses on derivatives are recorded in other current and
long term assets and liabilities.
NRG Energy's earnings for the first quarter of 2001 were increased by
an unrealized gain of $20.2 million relating to derivative instruments not
accounted for as hedges in accordance with SFAS No. 133 as follows:
Gains/(Losses) in thousands
Equity in earnings of unconsolidated affiliates $ (1,887)
Cost of majority-owned operations 20,742
Other income, net 1,316
----------
Total impact before income tax $ 20,171
==========
SFAS No. 133 applies to NRG Energy's energy and energy related
commodities financial instruments, long-term power sales contracts and long-term
gas purchase contracts used to mitigate variability in earnings due to
fluctuations in spot market prices, hedge fuel requirements at generation
facilities and protect investment in fuel inventories. SFAS No. 133 also applies
to various interest rate swaps used to mitigate the risks associated with
movements in interest rates and foreign exchange contracts to reduce the effect
of fluctuating foreign currencies on foreign denominated investments and other
transactions.
Energy and energy related commodities
NRG Energy is exposed to commodity price variability in electricity,
emission allowances and natural gas, oil and coal used to meet fuel
requirements. In order to manage these commodity price risks, NRG Energy 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. Derivatives designated to be hedges by NRG Energy are
accounted for as cash flow hedges. The effective portion of the cumulative gain
or loss on the derivative instrument is reported as a component of OCI in
shareholders' equity and recognized into earnings in the same period or periods
during which the hedged transaction affects earnings i.e., when electricity is
generated or fuel is consumed. No ineffectiveness was recognized on commodity
cash flow hedges during the first quarter of 2001. No gains or losses were
recognized related to derivative instruments excluded from the assessment of
effectiveness. At March 31, 2001, NRG Energy had various commodity related
contracts extending through December 2003 and several
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fixed-price gas and electricity purchase contract extending through 2005 to
2018. During the first quarter of 2001, NRG Energy reclassified from OCI into
earnings $7.8 million of accumulated net derivative gains. NRG Energy expects to
reclassify into earnings in cost of majority-owned operations and equity in
earnings of unconsolidated affiliates during the next twelve months net
gains/(losses) from OCI of approximately $30.0 million and $(7.3) million,
respectively.
NRG Energy generally attempts to balance its fixed-price physical and
financial purchase and sales commitments in terms of contract volumes, and the
timing of performance and delivery obligations. However, within guidelines
established by the board of directors and its Financial Risk Management
Committee, NRG Energy does take certain market positions. These derivatives do
not qualify for hedge accounting and, accordingly, changes in the fair value are
reported in earnings in revenues from majority-owned operations and cost of
majority-owned operations. Furthermore, for various commodity derivatives
considered to be economic hedges, NRG Energy has elected not to designate them
as accounting hedges due to the burdensome documentation requirements under SFAS
No. 133. The changes in fair value of these derivatives resulted in
earnings/(losses) for the first quarter of 2001 of $20.7 million and $(1.9)
million reported in earnings in cost of majority-owned operations and equity in
earnings of unconsolidated affiliates, respectively.
Interest rates
To manage interest rate risk, NRG Energy has entered into interest rate
swaps that effectively fix the interest payments of certain floating rate debt
instruments. Interest rate swap agreements are accounted for as cash flow
hedges. The effective portion of the cumulative gain or loss on the derivative
instrument is reported as a component of OCI in shareholders' equity and
recognized into earnings as the underlying interest expense is incurred. No
ineffectiveness was recognized on interest rate cash flow hedges during the
first quarter of 2001. During the first quarter of 2001, NRG Energy reclassified
from OCI into earnings $(0.1) million of accumulated net derivative losses. NRG
Energy expects to reclassify into earnings in interest expense during the next
twelve months net losses from OCI of approximately $(0.9) million.
Foreign currency exchange rates
To preserve the U.S. dollar value of projected foreign currency cash
flows, NRG Energy may hedge, or protect, those cash flows if appropriate foreign
hedging instruments are available. During the first quarter of 2001, NRG Energy
had various foreign currency exchange contracts not designated as accounting
hedges. Accordingly, the changes in fair value of these derivatives, totalling
$1.3 million for the first quarter of 2001, are reported in earnings in other
income, net.
On a going forward basis, NRG Energy expects that the results of its
operations will become significantly more volatile due to the impact of adopting
SFAS No. 133. NRG Energy generally enters into various transactions to hedge and
optimize the value of its investments. However, NRG Energy has taken certain
market positions. Furthermore, for various commodity derivatives considered to
be economic hedges, NRG Energy has elected not to designate them as accounting
hedges due to the burdensome documentation requirements under SFAS No. 133. As a
result, management expects that NRG Energy will experience significant
mark-to-market adjustments that will impact its results of operations depending
upon the movements of the markets in which it operates and has entered into
market positions. Management is unable to determine the impact such volatility
may have on NRG Energy's results of operations and financial position.
OTHER CONTINGENCIES
DISPUTED REVENUES
As of March 31, 2001, NRG Energy had approximately $10.5 million of
disputed revenues in respect of certain wholly-owned subsidiaries, primarily NRG
Northeast Generating LLC. NRG Energy is actively pursuing resolution and/or
collection of these amounts. These disputed revenues relate to the
interpretation of certain transmission power sales agreements and certain sales
to the New York Power Pool and New England Power Pool, conflicting meter
readings, pricing of firm sales and other power pool reporting issues. These
amounts have not been recorded in the financial statements and will not be
recognized as income until disputes are resolved and collection is assured. As
previously disclosed in its annual report on Form 10-K, NRG Energy had
approximately $13.1 million of
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disputed revenues as of December 31, 2000. During the quarter ended March 31,
2001, $3.1 million of disputed revenues were resolved, and $0.5 million of new
disputed revenues were added.
CALIFORNIA LIQUIDITY CRISIS
NRG Energy's California generation assets consist primarily of
interests in the Crockett and Mt. Poso facilities and a 50% interest in West
Coast Power LLC. Through the California Power Exchange (PX) and the California
Independent System Operator (ISO), the West Coast Power facilities sell
uncommitted power to Pacific Gas and Electric Company (PG&E), Southern
California Edison Company (SCE) and San Diego Gas and Electric Company (SDG&E),
the three major California investor owned utilities. Crockett, Mt. Poso and
certain of NRG Energy's other California facilities also sell directly to PG&E
and SCE. The liquidity crisis faced by both PG&E and SCE, as a result of tight
electricity supplies, rising wholesale electric prices and caps on the rates
that PG&E and SCE may charge their retail customers, caused both PG&E and SCE to
partially suspend payments to the California PX and the California ISO. In April
2001, PG&E filed for bankruptcy under Chapter 11 of the Bankruptcy Code. In
March 2001, certain affiliates of West Coast Power entered into a four year
contract with the California Department of Water Resources (CDWR) pursuant to
which the affiliates have agreed to sell up to 1,000 MW to CDWR for the
remainder of 2001 and up to 2,300 MW from January 1, 2002 through December 31,
2004.
NRG Energy's share of the total net amounts owed to all of its
California affiliates by the California PX, the California ISO, and the three
major California utilities is approximately $217 million as of March 31, 2001,
based upon unaudited financial information provided by such affiliates. This
amount consists of NRG Energy's share of total accounts receivables of
approximately $344 million, less approximately $127 million of reserves for
credit issues and contingent revenues. Of the total accounts receivable amount,
approximately $305 million represents NRG Energy's share of the receivables from
the California ISO/PX at the end of March 2001. In addition to the amounts due
from the California ISO/PX, NRG Energy's affiliates have approximately $39
million of direct exposure to Pacific Gas and Electric as a result of sales
under QF contracts. NRG Energy believes that the amounts that have been recorded
as accounts receivable will ultimately be collected in full; however, if some
form of financial relief or support is not provided to PG&E and SCE, the
collectibility of these receivables will become more questionable in terms of
both timing and amount. With respect to disputed revenues, these amounts relate
to billing disputes arising in the ordinary course of business and to disputes
that have arisen as a result of the California ISO imposing various revenue caps
on the wholesale price of electricity. None of the disputed revenues will be
recorded until after the particular issue that caused them to be excluded from
the financial statements is resolved. Since the date of the PG&E bankruptcy
filing, PG&E is paying Crockett and Mt. Poso on a current basis.
The Federal Energy Regulatory Commission (FERC) has jurisdiction over
sales for resale of electricity in the California wholesale power markets. In
March 2001, FERC issued orders that presumptively approved prices up to $273/MWh
during January 2001 and $430/MWh during February 2001. The orders direct
electricity suppliers to either refund a portion of their January and February
sales or justify prices charged above these approved prices. The orders, if
finalized, could require West Coast Power to refund approximately $45 million in
revenues from January and February, of which NRG Energy's share would be
approximately $22.5 million. Dynegy Power Marketing, Inc., as the power marketer
for West Coast Power, has submitted notice of its intent to submit information
justifying each component of the prices charged.
Various legislative, regulatory and legal remedies to the liquidity
crisis faced by PG&E and SCE have been implemented or are being pursued.
Assembly Bill 1X, which authorizes the California Department of Water Resources
to enter into contracts for the purchase of electric power through January 1,
2003 and to issue revenue bonds to fund such purchases, was signed into law by
the Governor of California on February 1, 2001. On May 11, 2001, the Governor of
California signed SB 31X, which authorizes the issuance of $13.4 billion in
revenue bonds to pay for power for customers of the state's three investor owned
utilities. The bonds will repay the State general fund for $6.7 billion
authorized for power buys since January and will finance future electricity
purchases. Additionally, on March 27, 2001, the California Public Utilities
Commission (PUC) approved an approximately 40% increase in the energy component
of the retail electric rates paid by certain California ratepayers. This
increase is in addition to the 9% increase approved in January and a 10%
increase expected to take effect next year. The PUC also ordered the utilities
to pay qualifying facilities for power delivered on a go-forward basis. However,
the order did not address repayment of amounts owed for past deliveries.
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The delayed collection of receivables owed to West Coast Power resulted
in a covenant default under its credit agreement. West Coast Power is working
with its lenders to secure their agreement to forebear exercising their remedies
under the credit agreement with respect to such covenant default. Crockett
Cogeneration, a majority owned affiliate of NRG Energy, was recently notified by
its lenders that it is in technical default under its loan agreement. As a
result, NRG Energy has reclassified the long-term portion of the Crockett debt
to current. Defaults under the Crockett and West Coast Power credit agreements
do not trigger defaults under any of NRG Energy's corporate-level financing
facilities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NRG Energy and its subsidiaries are exposed to market risks, including
changes in commodity prices, interest rates and currency exchange rates as
disclosed in Management's Discussion and Analysis in its annual report on Form
10-K for the year ended December 31, 2000. There have been no material changes,
as of March 31, 2001, to the market risk exposures that affect the quantitative
and qualitative disclosures presented as of December 31, 2000.
FORWARD LOOKING STATEMENTS
Certain statements included in this quarterly report are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. While
NRG Energy believes that the expectations expressed in such forward-looking
statements are reasonable, NRG Energy can give no assurances that these
expectations will prove to have been correct. In addition to any assumptions and
other factors referred to specifically in connection with the forward-looking
statements contained in this Form 10-Q, factors that could cause actual results
to differ materially from those contemplated in any forward-looking statements
include, among others, the following:
- - Economic conditions including inflation rates and monetary or currency
exchange rate fluctuations;
- - Trade, monetary, fiscal, taxation, and environmental policies of
governments, agencies and similar organizations in geographic areas where
NRG Energy has a financial interest;
- - Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their products
and services;
- - Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board, the Securities and Exchange
Commission, the Federal Energy Regulatory Commission and similar entities
with regulatory oversight;
- - Availability or cost of capital such as changes in: interest rates; market
perceptions of the power generation industry, the Company or any of its
subsidiaries; or security ratings;
- - Factors affecting power generation operations such as unusual weather
conditions; catastrophic weather-related damage; unscheduled generation
outages, maintenance or repairs; unanticipated changes to fossil fuel, or
gas supply costs or availability due to higher demand, shortages,
transportation problems or other developments; environmental incidents; or
electric transmission or gas pipeline system constraints;
- - Employee workforce factors including loss or retirement of key executives,
collective bargaining agreements with union employees, or work stoppages;
- - Volatility of energy prices in a deregulated market environment;
- - Increased competition in the power generation industry;
- - Cost and other effects of legal and administrative proceedings,
settlements, investigations and claims;
- - Technological developments that result in competitive disadvantages and
create the potential for impairment of existing assets;
- - Factors associated with various investments including conditions of final
legal closing, partnership actions, competition, operating risks,
dependence on certain suppliers and customers, domestic and foreign
environmental and energy regulations;
- - Limitations on NRG Energy's ability to control the development or operation
of projects in which NRG Energy has less than 100% interest;
- - The lack of operating history at development projects, the lack of NRG
Energy's operating history at the projects not yet owned and the limited
operating history at the remaining projects provide only a limited basis
for management to project the results of future operations;
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- - Risks associated with timely completion of projects under construction,
including obtaining competitive contracts, obtaining regulatory and
permitting approvals, local opposition, construction delays and other
factors beyond NRG Energy's control;
- - The failure to timely satisfy the closing conditions contained in the
definitive agreements for the acquisitions of projects subject to
definitive agreements but not yet closed, many of which are beyond NRG
Energy's control;
- - Factors challenging the successful integration of projects not previously
owned or operated by NRG Energy, including the ability to obtain operating
synergies;
- - Factors associated with operating in foreign countries including: delays in
permitting and licensing, construction delays and interruption of business,
political instability, risk of war, expropriation, nationalization,
renegotiation, or nullification of existing contracts, changes in law, and
the ability to convert foreign currency into United States dollars;
- - Changes in government regulation or the implementation of government
regulations, including pending changes within or outside of California as a
result of the California energy crisis, which could result in NRG Energy's
failure to obtain regulatory approvals required to close project
acquisitions, and which could adversely affect the continued deregulation
of the electric industry;
- - Other business or investment considerations that may be disclosed from time
to time in NRG Energy's Securities and Exchange Commission filings or in
other publicly disseminated written documents, including NRG Energy's
Registration Statement No. 333-52508, as amended, and all supplements
thereto.
NRG Energy undertakes no obligation or publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors that could cause our actual
results to differ materially from those contemplated in any forward-looking
statements included in this Form 10-Q should not be construed as exhaustive.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
FORTISTAR CAPITAL V. NRG ENERGY
In July 1999, Fortistar Capital Inc., a Delaware corporation, filed a
complaint in District Court in Minnesota against NRG Energy asserting claims for
injunctive relief and for damages as a result of NRG Energy's alleged breach of
a confidentiality letter agreement with Fortistar relating to the purchase of
the Oswego facility from Niagara Mohawk Power Corporation (NiMo) and Rochester
Gas and Electric Company.
NRG Energy disputed Fortistar's allegations and has asserted numerous
counterclaims. NRG Energy has counterclaimed against Fortistar for breach of
contract, fraud and negligent misrepresentations and omissions, unfair
competition and breach of the covenant of good faith and fair dealing. NRG
Energy seeks, among other things, dismissal of Fortistar's complaint with
prejudice and rescission of the letter agreement.
A temporary injunction hearing was held on September 27, 1999. The
acquisition of the Oswego facility was closed on October 22, 1999, following
notification to the court of Oswego Power LLC's and Niagara Mohawk Power
Corporation's intention to close on that date. In January 2000, the court denied
Fortistar's request for a temporary injunction. In April and December 2000, NRG
Energy filed summary judgment motions to dispose of the litigation. A hearing on
these motions was held in April 2001 and certain of Fortistar's claims were
dismissed. No trial date has been set in respect of the remaining claims. NRG
Energy intends to continue to vigorously defend the suit and believes
Fortistar's complaint to be without merit.
NEW YORK DEPARTMENT OF ENVIRONMENTAL CONSERVATION NOTICE OF VIOLATION
On May 25, 2000 the New York Department of Environmental Conservation
issued a Notice of Violation to NRG Energy and the prior owner of the Huntley
and Dunkirk facilities relating to physical changes made at those facilities
prior to our assumption of ownership. The Notice of Violation alleges that these
changes represent major modifications undertaken without obtaining the required
permits. Although NRG Energy has a right to indemnification by the previous
owner for fines, penalties, assessments, and related losses resulting from the
previous owner's failure to comply with environmental laws and regulations, if
these facilities did not comply with the applicable permit requirements, NRG
Energy could be required, among other things, to install specified pollution
control technology to further reduce air emissions from the Dunkirk and Huntley
facilities and NRG Energy could become subject to fines and penalties associated
with the current and prior operation of the facilities. NRG Energy is currently
in settlement discussions with the Department of Environmental Conservation and
the State Attorney General's office. On May 14, 2001, NRG Energy received a
Notice of Intent to Sue from the New York Attorney General, notifying NRG Energy
pursuant to section 304 of the Clean Air Act (the "Act") of the State's intent
to file suit against NRG Energy and Niagara Mohawk Power Corporation in federal
district court for violations of the Act, unless a settlement is reached within
60 days. NRG Energy will continue its settlement discussions with the Attorney
General's office and the Department of Environmental Conservation.
CALIFORNIA LITIGATION
On May 2, 2001, certain partially-owned subsidiaries of NRG Energy,
and other power generators and power traders, were named as defendants in a
class action filed in the Superior Court of the States of California for the
County of Los Angeles (Cruz M. Bustamante and Barbara Matthews v. Dynegy, Inc.,
et al.). The complaint alleges that defendants engaged in various
anti-competitive, unlawful, fraudulent and unfair business practices and acts,
and acted with the anti-competitive purpose of using economic and physical
withholding of electricity from the California electric generation market in
order to derive monopoly profits from the sale of their electricity in
California. NRG Energy does not believe that its affiliates named in this
lawsuit engaged in any illegal activities, and NRG Energy's affiliates intend
to vigorously contest these allegations.
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Except as described above and in NRG Energy's Annual Report on Form
10-K for the fiscal years ended December 31, 2000 filed with the Securities and
Exchange Commission, there are no other material legal proceedings pending to
which NRG Energy is a party. There are no material legal proceedings to which an
officer or director is a party or has a material interest adverse to NRG Energy
or its subsidiaries. There are no other material administrative or judicial
proceedings arising under environmental quality statutes pending or known to be
contemplated by governmental agencies to which NRG Energy is or would be a
party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In December 2000, NRG Energy filed a universal shelf registration
statement with the Securities and Exchange Commission. The registration
statement (SEC File No. 333-52508) was declared effective on January 29, 2001.
The registration statement initially allowed NRG Energy to issue up to $1.65
billion of debt securities, preferred stock, common stock, depositary shares,
warrants and convertible securities. In March 2001, NRG Energy increased the
amount of securities issuable under the registration statement to $1.77 billion.
On March 13, 2001, NRG Energy completed the sale of 18.4 million shares
of common stock for an initial price of $27 per share. Credit Suisse First
Boston and Merrill Lynch & Co. acted as Joint Book-Running Managers with
Goldman, Sachs & Co. and Saloman Smith Barney, Senior Co-Managers and ABN AMRO
Rothschild LLC and Banc of America Securities LLC, Co-Managers. The offering was
completed with all 18.4 million shares of common stock being sold, including
over-allotment shares of 2.4 million. NRG Energy received gross proceeds from
the issuance of $496 million. Net proceeds from this issuance were $473.8
million after deducting underwriting discounts, commissions and estimated
offering expenses of approximately $22.2 million. The net proceeds were used in
part to reduce amounts outstanding under NRG Energy's short term bridge credit
agreement which was used to finance in part NRG Energy's acquisition of
LS Power generation assets.
On March 13, 2001, NRG Energy completed the sale of 11.5 million equity
units for an initial price of $25 per unit. Merrill Lynch & Co. and Credit
Suisse First Boston acted as Joint Book-Running Managers. The offering was
completed with all 11.5 million equity units being sold, including
over-allotment units of 1.5 million. NRG Energy received gross proceeds from the
issuance of $287.5 million. Net proceeds from this issuance were $278.4 million
after deducting underwriting discounts, commissions and estimated offering
expenses of approximately $9.1 million. The net proceeds were used in part to
reduce amounts outstanding under NRG Energy's short term bridge credit agreement
which was used to finance in part NRG Energy's acquisition of LS Power
generation assets.
Remaining net proceeds were used for general corporate purposes, such
as the funding of capital expenditures and potential acquisitions, the
development and construction of new facilities and additions to working capital.
On April 2, 2001, NRG Energy completed the sale of $690 million of
Senior Notes. The Senior Notes were issued in two tranches, the first tranche of
$350 million of 7.75% Senior Notes due April 1, 2011 and the second tranche of
$340 million of 8.625% Senior Notes due April 1, 2031. Banc of America
Securities LC and Solomon Smith Barney acted as Joint Book-Running Managers with
ABN AMRO Incorporated and Deutsche Banc Alex. Brown, Senior Co-Managers. NRG
Energy received approximately $683.3 million in net proceeds after underwriting
discounts and commissions and estimated offering expenses. The net proceeds were
used to repay all amounts outstanding under NRG Energy's revolving credit
facility and for investments, other general corporate purposes and to provide
capital for planned acquisitions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During May 2001, NRG Energy's affiliate Crockett Cogeneration became
technically in default of its loan agreements. The default arose as a result of
Crockett not making full payment of its fuel supply billings to BP Amoco because
it was not receiving payment on its energy sales. No default in principal or
interest payment has occurred. Crockett is current in its work-out payment
arrangements with BP Amoco for its prior billings, and is current on new
billings.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
4.20 364-Day Revolving Credit Agreement dated as of March 9, 2001
among NRG Energy, Inc., The Financial Institutions Party
Hereto, and ABN Amco Bank N.V. as agent.
(B) REPORTS ON FORM 8-K:
On February 2, 2001, NRG Energy filed a Form 8-K reporting under Item 5
- Other Events.
NRG Energy reported its financial results for the year ended
December 31, 2000.
On February 12, 2001, NRG Energy filed a Form 8-K reporting under Item
2 - Acquisition or Disposition of Assets.
NRG Energy announced the closing of its acquisition of a 5,633
megawatt portfolio of operating projects and projects in
construction and advanced development from LS Power, LLC and
its partners.
On March 1, 2001, NRG Energy filed a Form 8-K reporting under Item 5 -
Other Events.
NRG Energy filed certain exhibits relating to the offering
of up to $230,000,000 of equity units.
On March 5, 2001, NRG Energy filed a Form 8-K reporting under Item 5-
Other Events.
NRG Energy filed as exhibit 99.1 the audited financial
statements of NRG Energy Inc. for the year ended December 31,
2000.
On March 9, 2001, NRG Energy filed a Form 8-K reporting under Item 7 -
Exhibits.
NRG Energy filed an opinion of Gibson, Dunn & Gutcher LLP
regarding certain tax matters in connection with its From S-3
Registration Statement No. 333-52508.
On March 15, 2001, NRG Energy filed a Form 8-K reporting under Item 5 -
Other Events.
NRG Energy filed certain exhibits under Item 7 - Exhibits in
connection with its Registration Statement No. 333-52508.
On April 3, 2001, NRG Energy filed a Form 8-K reporting under Item 5 -
Other Events.
NRG Energy announced the On March 23, 2001, NRG Energy Inc.
announced its appointment of W. Mark Hart to the position of
Senior Vice President, NRG Energy and President, NRG Europe
and Latin America.
On April 10, 2001, NRG Energy filed a Form 8-K reporting under Item 5 -
Other Events.
On April 5, 2001, NRG Energy completed the offering of
$350,000,000 of its 7.75% Senior Notes due 2011 and
$340,000,000 of its 8.625% Senior Notes due 2031. In
connection with NRG Energy's December 2000 Registration
Statement on Form S-3 (File No. 333-52508), NRG Energy filed
certain exhibits under Item 7 - Exhibits.
On April 30, 2001, NRG Energy filed a Form 8-K reporting under Item 5 -
Other Events.
On April 25, 2001, NRG Energy, Inc. reported its financial
results for the three months ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NRG ENERGY, INC.
----------------
(Registrant)
/s/ Leonard A. Bluhm
--------------------------------
Leonard A. Bluhm
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ William T. Pieper
--------------------------------
William T. Pieper
Controller
(Principal Accounting Officer)
Date: May 15, 2001
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