SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): MARCH 15, 2002
------------------------------
RELIANT ENERGY, INCORPORATED
(Exact name of registrant as specified in its charter)
TEXAS 1-3187 74-0694415
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 207-3000
------------------------------
ITEM 5. OTHER EVENTS.
ANNOUNCEMENT OF 2001 RESULTS
On March 15, 2002, Reliant Energy, Incorporated ("Reliant Energy" and, together
with its subsidiaries, the "Company") reported fourth quarter 2001 and year 2001
earnings. For additional information regarding Reliant Energy's fourth quarter
2001 earnings and its year 2001 earnings, please refer to Reliant Energy's press
release attached to this report as Exhibit 99.1 (the "Press Release"), which
Press Release, other than the information therein under the caption "Outlook for
2002," is incorporated by reference herein. Reliant Energy also announced
changes to its second and third quarter 2001 earnings. For additional
information regarding these restated earnings, please see the Press Release
under the caption "Restatement of Earnings for Second and Third Quarters of
2001" as well as "Restatement of Second and Third Quarter Results" below.
RESTATEMENT OF SECOND AND THIRD QUARTER RESULTS
The Company is providing information concerning a required restatement of its
Quarterly Reports on Form 10-Q ("Interim Financial Statements") for the quarters
ended June 30, 2001 and September 30, 2001. As a result, the previously issued
financial statements for these periods should not be relied upon.
Background. In early 2001, the Company's forecasts indicated a substantial
increase in earnings as a result of price volatility in the California power
markets. The Company did not believe that the early 2001 price levels were
sustainable over subsequent years. As a result, the Company determined that its
key financial metrics would be improved if it entered into physical delivery
contracts with end-user customers in which the Company would sell power at a
levelized price over the 2001-2003 or longer time frame. The result of this type
of transaction would have provided the end-user with a favorable price in 2001
and provided the Company with a favorable price in subsequent years. This energy
marketing approach would have advantages for both parties to the long-term
contracts. The Company would have reduced the variability of future cash flows
and the end-user would have reduced pricing volatility. The Company had been in
negotiations with a large end-user customer over precisely such an arrangement
since late 2000. By late Spring 2001, it became clear that a final agreement
with that customer was unlikely. At this point, the Company began to look for
similar deals with other end user customers, a process that evolved into the
structured transactions discussed below.
Discussion of Accounting Restatement. On February 5, 2002, the Company announced
that it was restating its earnings for the second and third quarters of 2001. As
more fully described below, the restatement relates to a correction in
accounting treatment for a series of four structured transactions that were
inappropriately accounted for as cash flow hedges for the period of May 2001
through September 2001.
During the May 2001 through September 2001 time frame, the Company entered into
a series of four structured transactions that were intended to increase future
cash flow and earnings and to increase certainty associated with future cash
flow and earnings, albeit at the expense of 2001 cash flow and earnings. It was
contemplated that the structured transactions would qualify for hedge accounting
under the Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended ("SFAS No. 133"). The
transactions were recorded in the Company's cash flow hedge accounting records
and were, in effect, overlaid on existing contracts entered into as hedges. In
general, each structured transaction involved a series of forward contracts to
buy and sell an energy commodity in 2001 and to buy and sell an energy commodity
in 2002 or 2003. Each series of contracts in a structure were executed
contemporaneously with the same counterparty and were for the same commodities,
quantities and locations. The contracts in each structure were offsetting in
terms of physical attributes. In two of the four structured transactions, a
series of contracts were entered into with the same counterparty to mitigate
credit exposure (the "credit mitigation contracts"). These credit mitigation
contracts mirrored the cash flows and terms from the other contracts in the
structure, except for an upfront demand payment made to the counterparty in
these two transactions. In addition, in contemplation of one of the structured
transactions, in August 2001, the Company entered into forward contracts with a
different counterparty to buy and sell natural gas, a portion of which was
inappropriately recorded in the fourth quarter of 2001. The counterparties to
all of the structured transactions were independent third parties that are
regularly engaged in the energy trading business.
While each contract in each structure was not at market at inception, the
contracts were intended to be at market in total, so the structure had little or
no fair value at inception. Under the original accounting treatment, however,
the Company recorded each applicable contract in its hedge accounting records on
an individual basis, resulting in the recognition of a non-trading derivative
asset or liability on the balance sheet with an offsetting entry in accumulated
other comprehensive income at inception for each contract. Such accounting
treatment resulted in a net loss being recorded in 2001 and ultimately would
result in income being recorded for 2002
2
and 2003 related to these four structured transactions. In this situation, the
recognition of other comprehensive income was in error, because the fair value
of each contract in each structure resulted not from changes in the fair value
of any anticipated transaction, but rather from the fact that the individual
contracts were not at market at inception.
Having further reviewed the transactions, the Company now believes the contracts
should have been accounted for as a unit within each structured transaction
rather than separately and that, viewed as such, they did not qualify as cash
flow hedges under SFAS No. 133. Consequently, these contracts should have been
accounted for as derivatives with changes in fair value recognized through the
income statement.
As a result, the Company's Interim Financial Statements and related disclosures
as of June 30, 2001 and September 30, 2001 and for the three months ended June
30, 2001 and September 30, 2001, will be restated from amounts previously
reported to appropriately account for the transactions as described above.
Therefore, the Company will report an increase in net income as compared to
earnings shown in previously issued Interim Financial Statements filed on Form
10-Q for the quarters ended June 30, 2001 and September 30, 2001 of $42 million
and $65 million, respectively.
Audit Committee Review. At the time of the Company's public announcement of its
intention to restate its reporting of the structured transactions, the Audit
Committee of the Company instructed the Company to conduct an internal audit
review to determine whether there were any other transactions included in the
asset books as cash flow hedges that failed to meet the cash flow hedge
requirements under SFAS No. 133. This targeted internal audit review found no
other similar transactions. The Audit Committee also directed an internal
investigation by outside legal counsel of the facts and circumstances leading to
the restatement, which investigation has been completed. To address the issues
identified in that process, the Company expects to take remedial actions,
including, among other things, changes in organizational structure and
enhancement of internal controls and procedures.
3
The effects of the restatement are outlined in the tables below:
RELIANT ENERGY, INCORPORATED
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
----------------------- ----------------------
AS AS
AS PREVIOUSLY AS PREVIOUSLY
RESTATED REPORTED RESTATED REPORTED
-------- ---------- -------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues ...................................................... $ 11,986 $ 11,974 $ 25,271 $ 25,259
Expenses:
Fuel and cost of gas sold ................................ 5,314 5,389 12,981 13,056
Purchased power .......................................... 5,077 5,077 9,184 9,184
Other expenses ........................................... 986 986 2,037 2,037
-------- -------- -------- --------
Total .................................................. 11,377 11,452 24,202 24,277
-------- -------- -------- --------
Operating Income .............................................. 609 522 1,069 982
Other Expense, net ............................................ (77) (77) (218) (218)
Minority Interest ............................................. (34) (23) (34) (23)
Income Tax Expense ............................................ (182) (148) (294) (260)
-------- -------- -------- --------
Income from Continuing Operations Before Cumulative Effect of
Accounting Change and Preferred Dividends ................... 316 274 523 481
Loss on Disposal of Discontinued Operations, net of tax ....... -- -- (7) (7)
Cumulative effect of accounting change, net of tax ............ -- -- 62 62
Preferred Dividends ........................................... -- -- -- --
-------- -------- -------- --------
Net Income Attributable to Common Shareholders ................ $ 316 $ 274 $ 578 $ 536
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Income from Continuing Operations ............................. $ 1.09 $ 0.94 $ 1.82 $ 1.67
Loss on Disposal of Discontinued Operations, net of tax ....... -- -- (0.03) (0.03)
Cumulative effect of accounting change, net of tax ............ -- -- 0.22 0.22
-------- -------- -------- --------
Net Income Attributable to Common Shareholders ................ $ 1.09 $ 0.94 $ 2.01 $ 1.86
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Income from Continuing Operations ............................. $ 1.08 $ 0.93 $ 1.81 $ 1.66
Loss on Disposal of Discontinued Operations, net of tax
-- -- (0.03) (0.03)
Cumulative effect of accounting change, net of tax ............ -- -- 0.21 0.21
-------- -------- -------- --------
Net Income Attributable to Common Shareholders ................ $ 1.08 $ 0.93 $ 1.99 $ 1.84
======== ======== ======== ========
4
RELIANT ENERGY, INCORPORATED
<Table>
<Caption>
JUNE 30, 2001
-------------------------
AS
AS PREVIOUSLY
RESTATED REPORTED
---------- ------------
(IN MILLIONS)
ASSETS
CURRENT ASSETS:
Price risk management assets .............................................. $ 2,514 $ 2,514
Non-trading derivative assets ............................................. 2,033 2,047
Other ..................................................................... 5,426 5,426
-------- --------
Total current assets ............................................... 9,973 9,987
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET .......................................... 15,826 15,826
-------- --------
OTHER ASSETS:
Price risk management assets .............................................. 543 543
Non-trading derivative assets ............................................. 619 711
Other ..................................................................... 6,171 6,171
-------- --------
Total other assets ................................................. 7,333 7,425
-------- --------
TOTAL ASSETS ....................................................... $ 33,132 $ 33,238
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Price risk management liabilities ......................................... $ 2,420 $ 2,420
Non-trading derivative liabilities ........................................ 1,800 1,809
Accumulated deferred income taxes ......................................... 409 412
Other ..................................................................... 8,608 8,608
-------- --------
Total current liabilities .......................................... 13,237 13,249
OTHER LIABILITIES:
Accumulated deferred income taxes ......................................... 2,691 2,694
Price risk management liabilities ......................................... 489 564
Non-trading derivative liabilities ........................................ 678 677
Other ..................................................................... 1,944 1,944
-------- --------
Total other liabilities ............................................ 5,802 5,879
-------- --------
LONG-TERM DEBT .............................................................. 5,449 5,449
-------- --------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES .............................. 1,232 1,221
-------- --------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS .................................................................... 705 705
-------- --------
STOCKHOLDERS' EQUITY:
Cumulative preferred stock ................................................ 10 10
Common stock .............................................................. 3,869 3,869
Treasury stock ............................................................ (113) (113)
Unearned ESOP ............................................................. (144) (144)
Retained earnings ......................................................... 2,881 2,839
Accumulated other comprehensive income .................................... 204 274
-------- --------
Stockholders' equity ............................................... 6,707 6,735
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $ 33,132 $ 33,238
======== ========
</Table>
5
RELIANT ENERGY, INCORPORATED
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
----------------------- ----------------------
AS AS
AS PREVIOUSLY AS PREVIOUSLY
RESTATED REPORTED RESTATED REPORTED
-------- ---------- -------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues ...................................................... $ 12,510 $ 12,467 $ 37,781 $ 37,726
Expenses:
Fuel and cost of gas sold ................................ 3,928 4,018 16,909 17,074
Purchased power .......................................... 6,695 6,695 15,879 15,879
Other expenses ........................................... 1,108 1,108 3,145 3,145
-------- -------- -------- -------
Total .................................................. 11,731 11,821 35,933 36,098
-------- -------- -------- -------
Operating Income .............................................. 779 646 1,848 1,628
Other Expense, net ............................................ (133) (133) (351) (351)
Minority Interest ............................................. (42) (26) (76) (49)
Income Tax Expense ............................................ (249) (197) (542) (456)
-------- -------- -------- -------
Income from Continuing Operations Before Cumulative Effect of
Accounting Change and Preferred Dividends ................... 355 290 879 772
Loss on Disposal of Discontinued Operations, net of tax ....... -- -- (7) (7)
Cumulative effect of accounting change, net of tax ............ -- -- 62 62
Preferred Dividends ........................................... -- -- -- --
-------- -------- -------- -------
Net Income Attributable to Common Shareholders ................ $ 355 $ 290 $ 934 $ 827
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Income from Continuing Operations ............................. $ 1.22 $ 1.00 $ 3.04 $ 2.67
Loss on Disposal of Discontinued Operations, net of tax ....... -- -- (0.03) (0.03)
Cumulative effect of accounting change, net of tax ............ -- -- 0.22 0.22
-------- -------- -------- -------
Net Income Attributable to Common Shareholders ................ $ 1.22 $ 1.00 $ 3.23 $ 2.86
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Income from Continuing Operations ............................. $ 1.21 $ 0.99 $ 3.02 $ 2.65
Loss on Disposal of Discontinued Operations, net of tax ....... -- -- (0.03) (0.03)
Cumulative effect of accounting change, net of tax ............ -- -- 0.21 0.21
-------- -------- -------- -------
Net Income Attributable to Common Shareholders ................ $ 1.21 $ 0.99 $ 3.20 $ 2.83
======== ======== ======== ========
</Table>
6
RELIANT ENERGY, INCORPORATED
<Table>
<Caption>
SEPTEMBER 30, 2001
------------------------
AS
AS PREVIOUSLY
RESTATED REPORTED
---------- ------------
ASSETS (IN MILLIONS)
CURRENT ASSETS:
Price risk management assets .............................................. $ 2,128 $ 2,128
Non-trading derivative assets ............................................. 1,339 1,425
Other ..................................................................... 4,369 4,369
-------- --------
Total current assets ............................................... 7,836 7,922
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET .......................................... 16,343 16,343
-------- --------
OTHER ASSETS:
Price risk management assets .............................................. 690 690
Non-trading derivative assets ............................................. 543 630
Other ..................................................................... 5,924 5,924
-------- --------
Total other assets ................................................. 7,157 7,244
-------- --------
TOTAL ASSETS ....................................................... $ 31,336 $ 31,509
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Price risk management liabilities ......................................... $ 2,089 $ 2,157
Non-trading derivative liabilities ........................................ 1,236 1,415
Accumulated deferred income taxes ......................................... 438 376
Other ..................................................................... 7,730 7,730
-------- --------
Total current liabilities .......................................... 11,493 11,678
OTHER LIABILITIES:
Accumulated deferred income taxes ......................................... 2,497 2,497
Price risk management liabilities ......................................... 653 731
Non-trading derivative liabilities ........................................ 579 579
Other ..................................................................... 1,983 1,983
-------- --------
Total other liabilities ............................................ 5,712 5,790
-------- --------
LONG-TERM DEBT .............................................................. 5,401 5,401
-------- --------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES .............................. 1,254 1,227
-------- --------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS .................................................................... 706 706
-------- --------
STOCKHOLDERS' EQUITY:
Cumulative preferred stock ................................................ 10 10
Common stock .............................................................. 3,887 3,887
Treasury stock ............................................................ (113) (113)
Unearned ESOP ............................................................. (138) (138)
Retained earnings ......................................................... 3,127 3,020
Accumulated other comprehensive (loss) income ............................. (3) 41
-------- --------
Stockholders' equity ............................................... 6,770 6,707
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $ 31,336 $ 31,509
======== ========
</Table>
7
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
The following exhibits are filed herewith:
99.1 Press Release issued March 15, 2002 regarding Reliant
Energy's 2001 earnings.
ITEM 9. REGULATION FD DISCLOSURE.
Reliant Energy incorporates by reference into this Item 9 the information in the
Press Release under the caption "Outlook for 2002." The information in Item 9 of
this report is being furnished, not filed, pursuant to Regulation FD.
Accordingly, the information in Item 9 of this report will not be incorporated
by reference into any registration statement filed by Reliant Energy under the
Securities Act of 1933, as amended, unless specifically identified therein as
being incorporated therein by reference. The furnishing of the information in
this report is not intended to, and does not, constitute a determination or
admission by Reliant Energy, that the information in this report is material or
complete, or that investors should consider this information before making an
investment decision with respect to any security of Reliant Energy or any of its
affiliates.
Some of the statements in this report and the exhibits hereto are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Although Reliant Energy believes that the
expectations and the underlying assumptions reflected in its forward-looking
statements are reasonable, there can be no assurance that these expectations
will prove to be correct. Forward-looking statements involve a number of risks
and uncertainties, and actual results may differ materially from the results
discussed in the forward-looking statements. References in this Current Report
to the terms "we," "us" or other similar terms mean the Company.
In addition to the matters described in this report and the exhibits hereto, the
following are some of the factors that could cause actual results to differ
materially from those expressed or implied in Reliant Energy's forward-looking
statements:
o state, federal and international legislative and regulatory
developments, including deregulation, re-regulation and restructuring of
the electric utility industry, and changes in or application of
environmental and other laws and regulations to which we are subject,
o the timing of the implementation of the business separation plan of
Reliant Energy,
o the effects of competition, including the extent and timing of the entry
of additional competitors in our markets,
o the degree to which we are able to successfully integrate the operations
and assets of Orion Power Holdings into our Wholesale Energy segment,
o industrial, commercial and residential growth in our service
territories,
o our pursuit of potential business strategies, including acquisitions or
dispositions of assets,
o state, federal and other rate regulations in the United States and in
foreign countries in which we operate or into which we might expand our
operations,
o the timing and extent of changes in commodity prices and interest rates,
o weather variations and other natural phenomena,
o political, legal and economic conditions and developments in
the United States and in foreign countries in which we operate or into
which we might expand our operations, including the effects of
fluctuations in foreign currency exchange rates,
o financial market conditions and the results of our financing efforts,
8
o the bankruptcy or other financial distress of our trading
counterparties,
o actions by rating agencies with respect to us or our competitors,
o acts of terrorism or war,
o the availability and price of insurance,
o the reliability of the systems, procedures and other infrastructure
necessary to operate our retail electric business, including the systems
owned and operated by the Electric Reliability Council of Texas, Inc.,
o the performance of our projects undertaken and the success of our
efforts to invest in and develop new opportunities,
o market conditions in deregulating power markets, including the extent to
which the energy crisis in the state of California is resolved, and
o other factors we discuss in our other filings with the SEC.
The words "anticipate," "estimate," "believe," "continue," "could," "intend,"
"may," "plan," "potential," "predict," "should," "will," "expect," "objective,"
"projection," "forecast," "goal" and other similar words are intended to
identify Reliant Energy' forward-looking statements.
9
SIGNATURE
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 hereunto duly authorized.
RELIANT ENERGY, INCORPORATED
Date: March 15, 2002 By: /S/ MARY P. RICCIARDELLO
-----------------------------------
Mary P. Ricciardello
Senior Vice President and
Chief Accounting Officer
10
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
99.1 Press Release issued March 15, 2002 regarding Reliant
Energy's 2001 earnings.
11