UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
NO. 1
(Mark One)
[X] AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number _____________
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
(Exact name of registrant as specified in its charter)
Delaware 52-2154847
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-3200
(Registrant's telephone number, including area code)
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC MEETS THE CONDITIONS SET FORTH
IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS
FORM 10-Q/A WITH THE REDUCED DISCLOSURE FORMAT.
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 twelve months (or for such shorter 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
As of August 10, 2001, all 1,000 shares of Reliant Energy Mid-Atlantic Power
Holdings, LLC common stock were held by Reliant Energy Northeast Generation,
Inc.
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
(FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES
Reliant Energy Mid-Atlantic Power Holdings, LLC (REMA) hereby amends Items 1
and 2 of Part 1 of its Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2001 as originally filed on August 10, 2001.
RESTATEMENT
On February 5, 2002, REMA announced that is was restating its earnings for
the second and third quarters of 2001. As more fully described in Note 1, the
restatement relates to a correction in accounting treatment for a series of four
structured transactions entered into on behalf of REMA that were inappropriately
accounted for as cash flow hedges for the period of May through September 2001.
Although these transactions were undertaken and accounted for as cash flow
hedges, having further reviewed the transactions, REMA now believes that they
did not meet the requirements of a cash flow hedge under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended (SFAS No. 133). Instead, they should have been accounted
for as a capital contribution of non-trading derivatives that had positive fair
value at inception.
As a result, REMA's unaudited consolidated condensed financial statements
(Original Interim Financial Statements) and related disclosures as of June 30,
2001 and for the three and six months ended June 30, 2001 have been restated
from amounts previously reported. The principal effects of the restatement on
the accompanying financial statements are set forth in Note 1 of the Notes to
Interim Financial Statements.
For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under
the Securities Exchange Act of 1934, as amended, each item of the June 30, 2001
Form 10-Q as originally filed on August 10, 2001 that was affected by the
restatement has been amended and restated in its entirety. No attempt has been
made in this Form 10-Q/A to modify or update other disclosures as presented in
the original Form 10-Q except as required to reflect the effects of the
restatement.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements .................................... 1
Statements of Combined and Consolidated Operations
For the periods from April 1, 2000 to May 11,
2000 and May 12, 2000 to June 30, 2000 and the
Three Months Ended June 30, 2001 (unaudited) ............ 1
For the periods from January 1, 2000 to May 11,
2000 and May 12, 2000 to June 30, 2000 and the
Six Months Ended June 30, 2001 (unaudited) .............. 2
Consolidated Balance Sheets
December 31, 2000 and June 30, 2001 (unaudited) ............ 3
Statements of Combined and Consolidated Cash Flows
For the periods from January 1, 2000 to May 11,
2000 and May 12, 2000 to June 30, 2000 and the
Six Months Ended June 30, 2001 (unaudited) .............. 4
Notes to Unaudited Combined and Consolidated Financial
Statements .............................................. 5
Item 2. Management's Narrative Analysis of the Results of
Operations of Reliant Energy Mid-Atlantic Power Holdings, LLC 10
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
(FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES
STATEMENTS OF COMBINED AND CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
FOR THE PERIOD FROM
----------------------------------
APRIL 1, 2000 TO MAY 12, 2000 TO THREE MONTHS
MAY 11, 2000 JUNE 30, 2000 ENDED
(FORMER REMA) (CURRENT REMA) JUNE 30, 2001
------------- -------------- -------------
(AS RESTATED)
Revenues, including $59.1 million, $30.4 million and
$11.7 million from affiliate ..................... $ 59,058 $ 111,503 $ 134,085
Expenses:
Fuel, including $10.9 million, $5.1 million and
$30.7 million from affiliate .................... 15,128 24,341 40,221
Operation and maintenance ........................ 15,068 13,495 43,832
Facilities lease ................................. -- -- 14,708
General and administrative ....................... 5,555 4,131 11,870
Depreciation and amortization .................... 6,653 10,118 11,153
--------- --------- ---------
Total Expenses .................................. 42,404 52,085 121,784
--------- --------- ---------
Operating Income ................................... 16,654 59,418 12,301
Interest Expense to Affiliate, net ................. (14,726) (20,896) (21,023)
Interest Income (Expense), net ..................... -- 4 (175)
--------- --------- ---------
Net Income (Loss) Before Taxes ..................... 1,928 38,526 (8,897)
--------- --------- ---------
Income Tax Expense (Benefit) ....................... -- 15,937 (3,678)
--------- --------- ---------
Net Income (Loss) .................................. $ 1,928 $ 22,589 $ (5,219)
========= ========= =========
See Notes to the Interim Financial Statements.
1
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
(FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES
STATEMENTS OF COMBINED AND CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
FOR THE PERIOD FROM
------------------------------------
JANUARY 1, 2000 TO MAY 12, 2000 TO SIX
MAY 11, 2000 JUNE 30, 2000 MONTHS ENDED
(FORMER REMA) (CURRENT REMA) JUNE 30, 2001
------------- -------------- -------------
(AS RESTATED)
Revenues, including $166.5 million, $30.4 million
and $16.2 million from affiliate .............. $ 166,490 $ 111,503 $ 279,936
Expenses:
Fuel, including $37.3 million, $5.1 million and
$31.0 million from affiliate ................. 53,628 24,341 86,129
Operation and maintenance ..................... 40,372 13,495 78,287
Facilities lease .............................. -- -- 29,416
General and administrative .................... 13,101 4,131 25,604
Depreciation and amortization ................. 19,538 10,118 22,098
--------- --------- ---------
Total Expenses ............................... 126,639 52,085 241,534
--------- --------- ---------
Operating Income ................................ 39,851 59,418 38,402
Interest Expense to Affiliate, net .............. (46,538) (20,896) (41,856)
Interest Income, net ............................ -- 4 291
--------- --------- ---------
Net (Loss) Income Before Taxes .................. (6,687) 38,526 (3,163)
--------- --------- ---------
Income Tax Expense (Benefit) .................... -- 15,937 (1,178)
--------- --------- ---------
Net (Loss) Income ............................... $ (6,687) $ 22,589 $ (1,985)
========= ========= =========
See Notes to the Interim Financial Statements.
2
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
(FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
DECEMBER 31, 2000 JUNE 30, 2001
----------------- -------------
ASSETS (AS RESTATED)
Current Assets:
Cash and cash equivalents .......................... $ 38,107 $ 21,952
Fuel inventories ................................... 29,180 49,576
Material and supplies inventories .................. 34,885 35,173
Non-trading derivative assets ...................... -- 362,156
Restricted deposits ................................ 50,000 --
Other current assets ............................... 7,029 60,392
----------- -----------
Total current assets ............................ 159,201 529,249
----------- -----------
Property, Plant and Equipment:
Property, plant and equipment ...................... 936,845 896,378
Less accumulated depreciation ...................... (23,922) (40,761)
----------- -----------
Property, plant and equipment, net .............. 912,923 855,617
----------- -----------
Other Noncurrent Assets:
Goodwill, net ...................................... 7,100 4,626
Air emissions regulatory allowances
and other intangibles, net ...................... 154,988 203,528
Non-trading derivative assets ...................... -- 394,901
Other .............................................. 24,726 66,925
Deferred income taxes, net ......................... 2,346 --
----------- -----------
Total other noncurrent assets ................... 189,160 669,980
----------- -----------
Total Assets .................................... $ 1,261,284 $ 2,054,846
=========== ===========
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities:
Accounts payable ................................... $ 56,432 $ 11,266
Accounts and notes payable to affiliates, net ...... 105,047 203,688
Accrued payroll .................................... 10,394 7,878
Non-trading derivative liabilities ................. -- 256,440
Deferred income taxes, net ......................... -- 37,668
Other current liabilities .......................... 17,727 7,140
----------- -----------
Total current liabilities ....................... 189,600 524,080
Noncurrent Liabilities:
Accrued environmental liabilities .................. 35,826 35,606
Deferred income taxes, net ......................... -- 50,481
Non-trading derivative liabilities ................. -- 284,371
Other noncurrent liabilities ....................... 5,041 7,912
----------- -----------
Total noncurrent liabilities .................... 40,867 378,370
Subordinated Note Payable to Affiliate ................ 838,356 838,000
Commitments and Contingencies (Note 6)
Member's Equity:
Common stock (no par value, 1,000 shares authorized,
1,000 shares issued and outstanding) ............ -- --
Capital contributions .............................. 111,245 194,463
Retained earnings .................................. 81,216 79,231
Accumulated other comprehensive income ............. -- 40,702
----------- -----------
Total Member's Equity ........................... 192,461 314,396
----------- -----------
Total Liabilities and Member's Equity ........... $ 1,261,284 $ 2,054,846
=========== ===========
See Notes to the Interim Financial Statements.
3
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
(FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES
STATEMENTS OF COMBINED AND CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
FOR THE PERIODS FROM
---------------------------------
JANUARY 1, 2000 MAY 12, 2000 TO
TO MAY 11, 2000 JUNE 30, 2000 SIX MONTHS ENDED
(FORMER REMA) (CURRENT REMA) JUNE 30, 2001
------------- -------------- -------------
(AS RESTATED)
Cash Flows from Operating Activities:
Net (loss) income .................................... $ (6,687) $ 22,589 $ (1,985)
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operations:
Depreciation and amortization ....................... 19,538 10,118 22,098
Deferred income taxes ............................... -- 2,713 24,116
Changes in assets and liabilities:
Inventories ........................................ (1,107) (4,861) (20,253)
Net non-trading derivative assets and liabilities .. -- -- (27,863)
Other assets ....................................... (30,668) 252 (43,237)
Accounts payable ................................... 4,114 7,751 (45,166)
Accounts and notes payable to affiliates, net ...... -- (20,435) 102,244
Other liabilities .................................. 848 (876) (12,800)
----------- ----------- -----------
Net cash (used in) provided by operating activities (13,962) 17,251 (2,846)
----------- ----------- -----------
Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired .......... -- (2,092,565) --
Capital expenditures ................................. -- (163) (13,309)
----------- ----------- -----------
Net cash used in investing activities ............. -- (2,092,728) (13,309)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from note payable to affiliate .............. -- 1,611,550 --
Net change in payable to affiliates .................. 14,415 -- --
Capital contributions ................................ -- 481,015 --
----------- ----------- -----------
Net cash provided by financing activities .......... 14,415 2,092,565 --
----------- ----------- -----------
Net Change in Cash and Cash Equivalents ................ 453 17,088 (16,155)
Cash and Cash Equivalents, Beginning of Period ......... 570 -- 38,107
----------- ----------- -----------
Cash and Cash Equivalents, End of Period ............... $ 1,023 $ 17,088 $ 21,952
=========== =========== ===========
Supplemental Cash Flow Information:
Cash Payments:
Interest to affiliate ............................ $ 46,519 $ -- $ --
Income taxes ..................................... -- -- 42,361
See Notes to the Interim Financial Statements.
4
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
(FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES
NOTES TO UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
These Interim Financial Statements include the accounts of Reliant Energy
Mid-Atlantic Power Holdings, LLC (formerly Sithe Pennsylvania Holdings, LLC) and
the affiliates and subsidiaries (collectively, REMA) described in Note 1(a) to
REMA's Annual Report on Form 10-K for the year ended December 31, 2000 (REMA
Form 10-K). These Interim Financial Statements are unaudited, omit certain
information included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America and
should be read in combination with the REMA Form 10-K and the Quarterly Report
on Form 10-Q for the quarter ended March 31, 2001 (REMA First Quarter 10-Q).
RESTATEMENT
On February 5, 2002, Reliant Resources, Inc. (Reliant Resources) announced
that it was restating its earnings for the second and third quarters of 2001.
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 May 2001 through September 2001. The derivative
transactions discussed below were part of the four structured transactions that
gave rise to the Reliant Resources restatement. As a result, REMA reevaluated
its accounting for the derivative transactions entered into on its behalf by the
subsidiary of Reliant Resources.
A subsidiary of Reliant Resources entered into derivative transactions on
behalf of REMA which, on an aggregated basis at inception, had positive fair
value. For the 2001 period, the contracts resulted in net cash outflows which
will be more than offset through contractually increased net cash inflows in
2002. REMA accounted for these contracts as cash flow hedges of forecasted
transactions pursuant to Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS
No. 133). REMA initially accounted for these contracts by recognizing the fair
value of the derivative as an asset or liability and recognizing the
corresponding amount in accumulated other comprehensive income. As cash flow
hedges, the amount recognized in accumulated other comprehensive income would
have been recognized in earnings when the forecasted transactions occur.
REMA now believes these derivative transactions should have been recorded as
a capital contribution of a non-trading derivative asset that had positive fair
value at inception. Therefore, REMA has now recorded these transactions as a
capital contribution resulting in the elimination of previously recorded
accumulated other comprehensive income and the reversal of previously recognized
losses related to these derivative transactions. In addition, in contemplation
of one of the structured transactions referred to above, in August 2001, a
subsidiary of Reliant Resources, on behalf of REMA, entered into forward
contracts to buy and sell natural gas, a portion of which was inappropriately
recorded in the fourth quarter of 2001. REMA has also eliminated previously
recorded accumulated other comprehensive income recognized in connection with
these transactions as of September 30, 2001.
As a result, REMA's unaudited consolidated condensed financial statements and
related disclosures as of June 30, 2001 and for the three and six months ended
June 30, 2001 have been restated from amounts previously reported to
appropriately account for the transactions as described above. A summary of the
principal effects of the restatement is as follows: (Note - Those line items for
which no change in amounts are shown were not affected by the restatement.)
5
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
--------------------------- ---------------------------
AS PREVIOUSLY AS PREVIOUSLY
AS RESTATED REPORTED AS RESTATED REPORTED
----------- ------------- ----------- -------------
(IN THOUSANDS)
Revenues .............. $ 134,085 $ 134,085 $ 279,936 $ 279,936
Expenses:
Fuel ............... 40,221 68,084 86,129 113,992
Other expenses ..... 81,563 81,563 155,405 155,405
--------- --------- --------- ---------
Total ............ 121,784 149,647 241,534 269,397
--------- --------- --------- ---------
Operating Income (Loss) 12,301 (15,562) 38,402 10,539
Other Expense, net .... (21,198) (21,198) (41,565) (41,565)
Income Tax Benefit .... 3,678 15,255 1,178 12,755
--------- --------- --------- ---------
Net Loss .............. $ (5,219) $ (21,505) $ (1,985) $ (18,271)
========= ========= ========= =========
JUNE 30, 2001
----------------------------
AS PREVIOUSLY
AS RESTATED REPORTED
---------- ----------
ASSETS (IN THOUSANDS)
CURRENT ASSETS:
Non-trading derivative assets ............. $ 362,156 $ 365,496
Other ..................................... 167,093 167,093
---------- ----------
Total current assets .................. 529,249 532,589
PROPERTY, PLANT AND EQUIPMENT, NET .......... 855,617 855,617
OTHER NONCURRENT ASSETS:
Non-trading derivative assets ............. 394,901 411,638
Other ..................................... 275,079 275,079
---------- ----------
Total other noncurrent assets ........... 669,980 686,717
---------- ----------
TOTAL ASSETS .......................... $2,054,846 $2,074,923
========== ==========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Non-trading derivative liabilities ........ $ 256,440 $ 253,115
Deferred income taxes, net ................ 37,668 40,437
Other ..................................... 229,972 229,972
---------- ----------
Total current liabilities ............... 524,080 523,524
NONCURRENT LIABILITIES:
Deferred income taxes, net ................ 50,481 57,683
Non-trading derivative liabilities ........ 284,371 283,776
Other noncurrent liabilities .............. 43,518 43,518
---------- ----------
Total other noncurrent liabilities ...... 378,370 384,977
---------- ----------
SUBORDINATED NOTE PAYABLE TO AFFILIATE ...... 838,000 838,000
---------- ----------
MEMBER'S EQUITY:
Common stock (no par value 1,000 shares
authorized, 1,000 issued and outstanding) -- --
Capital contributions ..................... 194,463 111,678
Retained earnings ......................... 79,231 62,945
Accumulated other comprehensive income .... 40,702 153,799
---------- ----------
Total Member's Equity ................... 314,396 328,422
---------- ----------
TOTAL LIABILITIES AND MEMBER'S EQUITY . $2,054,846 $2,074,923
========== ==========
6
BASIS OF PRESENTATION
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REMA's Interim Financial Statements reflect all normal recurring adjustments
that are, in the opinion of management, necessary to present fairly the
financial position and results of operations for the respective periods. Amounts
reported in REMA's statements of combined and consolidated operations are not
necessarily indicative of amounts expected for a full year period due to the
effects of, among other things, (a) seasonal variations in energy consumption,
(b) changes in energy commodity prices, (c) timing of maintenance and other
expenditures and (d) acquisitions and dispositions of assets and other
interests. In addition, certain amounts from the prior year have been
reclassified to conform to REMA's presentation of financial statements in the
current year. These reclassifications do not affect earnings of REMA.
Note 5 of the Notes to Combined and Consolidated Financial Statements of REMA
included in REMA's Form 10-K (REMA 10-K Notes) relates to material
contingencies. This note, updated by the notes contained in these Interim
Financial Statements, is incorporated herein by reference.
In May 2000, Sithe Energies, Inc. (Sithe), through an indirect wholly
owned subsidiary, sold all of its equity interests in REMA to an indirect
wholly owned subsidiary of Reliant Energy Power Generation, Inc. (REPG). REPG
is a wholly owned subsidiary of Reliant Resources, Inc., which is in turn, a
majority-owned subsidiary of Reliant Energy, Incorporated (Reliant Energy).
See Note 2 to REMA 10-K Notes.
2. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 "Business Combinations"
(SFAS No. 141) and SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS No.
142). SFAS No. 141 requires business combinations initiated after June 30, 2001
to be accounted for using the purchase method of accounting, and broadens the
criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against these new criteria and may
result in certain intangibles being transferred to goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. Under SFAS No. 142, a nonamortization approach,
goodwill and certain intangibles with indefinite lives will not be amortized
into results of operations, but instead would be reviewed periodically for
impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles with
indefinite lives is more than its fair value. The provisions of each statement
which apply to goodwill and intangible assets acquired prior to June 30, 2001
will be adopted by REMA on January 1, 2002. REMA is in the process of
determining the effect of adoption of SFAS No. 141 and SFAS No. 142 on its
consolidated financial statements.
3. DERIVATIVE FINANCIAL INSTRUMENTS
Adoption of SFAS No. 133 on January 1, 2001 resulted in no cumulative
after-tax change in net income and a cumulative after-tax increase in
accumulated other comprehensive loss of $73.7 million. The adoption also
increased current assets, noncurrent assets, current liabilities and noncurrent
liabilities by $85.1 million, $9.0 million, $155.2 million and $12.6 million,
respectively, in REMA's Consolidated Balance Sheet. During the three and six
months ended June 30, 2001, $10.2 million and $27.5 million, respectively, of
the initial after-tax transition loss adjustment recognized in other
comprehensive income was reclassified to net loss. For additional information
regarding the adoption of SFAS No. 133 and REMA's accounting policies for
derivative financial instruments, see Note 2 of REMA First Quarter 10-Q.
The application of SFAS No. 133 is still evolving as the FASB clears issues
submitted to the Derivatives Implementation Group for consideration. The FASB
approved a number of issues regarding the normal purchases and normal sales
exception in the second quarter. One issue concluded forward contracts with
volumetric optionality do not qualify for the normal purchases and normal sales
exception, while another issue applies
7
exclusively to the electric industry and allows the normal purchases and normal
sales exception for option-type contracts if certain criteria are met. The
effective date for implementation of these decisions is July 1, 2001. REMA is
currently assessing the impact of the recently cleared issues and does not
believe they will have a material impact on the REMA's Consolidated Financial
Statements.
Cash Flow Hedges. During the six months ended June 30, 2001, the amount of
hedge ineffectiveness recognized in earnings from derivatives that are
designated and qualify as cash flow hedges was immaterial. No component of the
derivative instruments' gain or loss was excluded from the assessment of
effectiveness. During the six months ended June 30, 2001, there were no deferred
gains or losses recognized in earnings as a result of the discontinuance of cash
flow hedges because it was no longer probable that the forecasted transaction
would occur. As of June 30, 2001, current non-trading derivative assets and
liabilities and corresponding amounts in accumulated other comprehensive income
are expected to be reclassified into net income (loss) during the next twelve
months.
The maximum length of time REMA is hedging its exposure to the variability in
future cash flows for forecasted transactions is five years.
Other Derivatives. During the second quarter of 2001, Reliant Resources
contributed $234 million of non-trading derivative assets and $92 million of
non-trading derivative liabilities to REMA as a result of two structured
transactions. For further discussion of these transactions, see Note 1. The
change in fair value of these derivative assets and liabilities must be recorded
in the statement of income each reporting period. During the second quarter of
2001, $28 million of non-trading derivative liabilities were settled related to
these transactions. Accordingly, as of June 30, 2001, REMA has recognized $234
million of non-trading derivative assets and $64 million of non-trading
derivative liabilities related to these transactions.
4. COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive income
for the three and six months ended June 30, 2001. There was no comprehensive
income for the periods from January 1, 2000 to May 11, 2000 or May 12, 2000 to
June 30, 2000.
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
------------- -------------
(IN MILLIONS)
Net loss ...................................... $ (5) $ (2)
Other comprehensive income (loss):
Cumulative effect of adoption of SFAS No. 133 -- (74)
Net deferred gains from cash flow hedges .... 81 91
Reclassification of deferred loss from
cash flow hedges .......................... 7 24
------ ------
Comprehensive income .......................... $ 83 $ 39
====== ======
5. ACQUISITION BY REPG
In May 2000, REPG purchased the equity in REMA from Sithe for an aggregate
purchase price of $2.1 billion, subject to post-closing adjustments which
management does not believe will be material. Included within this purchase
transaction were transition power purchase agreements, including the capacity
transition contract with GPU, Inc. (GPU) described in Note 1(e) to REMA 10-K
Notes. The transaction was completed in May 2000. REPG accounted for the
acquisition as a purchase with assets and liabilities of REMA reflected at their
estimated fair values. The fair value adjustments related to the acquisition,
which have been pushed down to REMA, primarily included adjustments in property,
plant and equipment, air emissions regulatory allowances, materials and supplies
inventories, specific intangibles related to generating plant, environmental
reserves and related deferred taxes. REMA finalized these fair value adjustments
in May 2001. During May 2001, in connection with finalizing the purchase
allocation, REMA recognized $43 million of specific intangibles related to
generating plant and reduced generating plant by the same amount, which was
included in the purchase adjustments. There were no additional material
modifications to the preliminary adjustments from December 31, 2000. For
additional information regarding the acquisition of REMA, see Note 2(a) to REMA
10-K Notes.
8
Current REMA's results of operations include the results of REMA only for the
period beginning May 12, 2000. The following table presents Former REMA's
selected actual financial information and unaudited pro forma information for
the three and six months ended June 30, 2000, as if the acquisition had occurred
on January 1, 2000. Pro forma amounts also give effect to the sale and leaseback
of interests in three of the REMA generating plants, consummated in August 2000.
For additional information regarding sale and leaseback transactions, see Note
5(a) to REMA 10-K Notes.
PERIOD FROM JANUARY 1, 2000 PERIOD FROM MAY 12, 2000
TO MAY 11, 2000 TO JUNE 30, 2000
--------------------------- ------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- ---------
(IN MILLIONS)
Revenues ........ $ 166.5 $ 166.5 $ 111.5 $ 111.5
Net (loss) income (6.7) (19.7) 22.6 17.8
These pro forma results, based on assumptions deemed appropriate by REMA's
management, have been prepared for informational purposes only and are not
necessarily indicative of the amounts that would have resulted if the
acquisition of the REMA entities had occurred on January 1, 2000.
Purchase-related adjustments to the results of operations include the effects of
depreciation and amortization, interest expense and income taxes.
6. COMMITMENTS AND CONTINGENCIES
(a) REMA Ash Disposal Site Closures and Site Contaminations.
Under the agreement to acquire REMA's generating assets from GPU (see Note
2(a) to REMA 10-K Notes), liabilities associated with ash disposal site closures
and site contamination at the acquired facilities in Pennsylvania and New Jersey
prior to a plant closing were assumed, except for the first $6 million of
remediation costs at the Seward Generating Station. GPU retained liabilities
associated with the disposal of hazardous substances to off-site locations prior
to November 24, 1999. As of June 30, 2001, REMA has liabilities associated with
six ash disposal site closures and six site investigations and environmental
remediations. REMA has recorded its estimate of these environmental liabilities
in the amount of $36 million as of June 30, 2001. REMA expects approximately $13
million will be paid over the next five years.
(b) Other Legal Matters.
REMA is party to various legal proceedings that arise from time to time in
the ordinary course of business. While REMA cannot predict the outcome of these
proceedings, REMA does not expect these matters to have a material adverse
effect on REMA's financial position, results of operations or cash flows.
7. DEPRECIATION AND AMORTIZATION
REMA's depreciation expense for the periods from January 1, 2000 to May 11,
2000, May 12, 2000 to June 30, 2000, and April 1, 2000 to May 11, 2000 was $15.4
million, $8.8 million and $4.9 million, respectively. Depreciation expense was
$7.4 million and $16.8 million for the three months and six months ended June
30, 2001, respectively. Amortization expense, primarily related to goodwill and
air emissions regulatory allowances, was $4.1 million, $1.3 million and $1.7
million for the periods from January 1, 2000 to May 11, 2000, May 12, 2000 to
June 30, 2000, and April 1, 2000 to May 11, 2000, respectively. Amortization
expense was $3.7 million and $5.3 million for the three months and six months
ended June 30, 2001, respectively.
8. PREPAID LEASE EXPENSE
During the first quarter of 2001, REMA paid $150.9 million to lessors related
to the sale and leaseback transactions (see Note 5(a) to REMA 10-K Notes). As of
June 30, 2001, REMA had recorded prepaid lease expense of $101.5 million in
other current and other noncurrent assets of $58.8 million and $42.7 million,
respectively.
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MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS OF
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
The following narrative analysis should be read in combination with REMA's
Interim Financial Statements and REMA Form 10-K.
REMA meets the conditions specified in General Instruction H(1)(a) and (b) to
Form 10-Q and is therefore permitted to use the reduced disclosure format for
wholly owned subsidiaries of reporting companies. Accordingly, REMA has omitted
from this report the information called for by Item 3 (Quantitative and
Qualitative Disclosure About Market Risk) of Part I and the following Part II
items of Form 10-Q: Item 2 (Changes in Securities and Use of Proceeds), Item 3
(Defaults Upon Senior Securities) and Item 4 (Submission of Matters to a Vote of
Security Holders). The following discussion explains material changes in the
amount of revenue and expense items of REMA between the second quarter and first
six months of 2000 and 2001.
RESTATEMENT OF THE INTERIM FINANCIAL STATEMENTS
On February 5, 2002, REMA announced that is was restating its earnings for
the second and third quarters of 2001. As more fully described in Note 1, the
restatement relates to a correction in accounting treatment for a series of four
structured transactions entered into on behalf of REMA that were inappropriately
accounted for as cash flow hedges for the period of May through September 2001.
Although these transactions were undertaken and accounted for as cash flow
hedges, having further reviewed the transactions, REMA now believes that they
did not meet the requirements of a cash flow hedge under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended (SFAS No. 133). Instead, they should have been accounted
for as a capital contribution of non-trading derivatives that had positive fair
value at inception.
As a result, the Original Interim Financial Statements and related
disclosures as of June 30, 2001 and for the three and six months ended June 30,
2001 have been restated from amounts previously reported. The principal effects
of the restatement on the accompanying financial statements are set forth in
Note 1 of the Notes to Interim Financial Statements.
OVERVIEW
REMA is a Delaware limited liability company that owns or leases 21 electric
generation facilities in Pennsylvania, New Jersey and Maryland. REMA is an
indirect wholly owned subsidiary of REPG.
Until the end of May 2002, we expect to sell a portion of our capacity under
transition power sales contracts entered into with affiliates of GPU at the time
of Sithe's acquisition of REMA in November 1999 from GPU. During the term of the
transition power sales contracts, we will derive revenues from sales of capacity
under the contracts, as well as sales into the Pennsylvania-New Jersey-Maryland
market (PJM market) of capacity and energy not required to meet the terms of the
contracts, sales of ancillary services and sales through bilateral contracts
with power marketers and load serving entities within the PJM market and the
surrounding markets.
In May 2000, REPG purchased the equity in REMA from Sithe for an aggregate
purchase price of $2.1 billion. REPG accounted for the acquisition as a purchase
with assets and liabilities of REMA reflected at their estimated fair values.
The fair value adjustments related to the acquisition, which have been pushed
down to REMA, primarily included adjustments in property, plant and equipment,
air emissions regulatory allowances, materials and supplies inventories,
specific intangibles related to generating plants, environmental reserves and
related deferred taxes. For additional information regarding the acquisition of
REMA, see Note 2(a) to REMA 10-K Notes.
In August 2000, REMA sold to and leased back from each of three owner-lessors
in separate lease transactions REMA's respective 16.45%, 16.67% and 100%
interests in the Conemaugh, Keystone and Shawville generating stations,
respectively. As lessee, REMA leases an interest in each facility from each
owner-lessor under a facility lease agreement. As consideration for the sale of
REMA's interest in the facilities, REMA received $1.0 billion in cash. REMA used
the $1.0 billion of sale proceeds to return capital of $183 million, with the
remainder used to
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reduce affiliate debt. For additional information regarding sale and leaseback
transactions, see Note 5(a) to REMA 10-K Notes.
COMBINED AND CONSOLIDATED RESULTS OF OPERATIONS
FOR THE PERIODS FROM
----------------------------------
APRIL 1, 2000 TO MAY 12, 2000 TO THREE MONTHS
MAY 11, 2000 JUNE 30, 2000 ENDED
(FORMER REMA) (CURRENT REMA) JUNE 30, 2001
------------- -------------- -------------
(IN THOUSANDS)
Revenues ................... $ 59,058 $ 111,503 $ 134,085
Operating Expenses ......... 42,404 52,085 121,784
--------- --------- ---------
Operating Income (Loss) .... 16,654 59,418 12,301
Interest Expense, net ...... 14,726 20,892 21,198
Income Tax Expense (Benefit) -- 15,937 (3,678)
--------- --------- ---------
Net Income (Loss) ........ $ 1,928 $ 22,589 $ (5,219)
========= ========= =========
FOR THE PERIODS FROM
---------------------------------
JANUARY 1, 2000 MAY 12, 2000 TO SIX MONTHS
TO MAY 11, 2000 JUNE 30, 2000 ENDED
(FORMER REMA) (CURRENT REMA) JUNE 30, 2001
------------- -------------- -------------
(IN THOUSANDS)
Revenues ................... $ 166,490 $ 111,503 $ 279,936
Operating Expenses ......... 126,639 52,085 241,534
--------- --------- ---------
Operating Income ........... 39,851 59,418 38,402
Interest Expense, net ...... 46,538 20,892 41,565
Income Tax Expense (Benefit) -- 15,937 (1,178)
--------- --------- ---------
Net (Loss) Income ........ $ (6,687) $ 22,589 $ (1,985)
========= ========= =========
Periods from April 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000
compared to three months ended June 30, 2001
For the three months ended June 30, 2001, REMA's net loss was $5.2 million
compared to net income of $1.9 million and $22.6 million for the periods from
April 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000, respectively.
Net income decreased in the second quarter of 2001 compared to the same period
in 2000 primarily due to decreased operating margins (revenues less fuel) and
increased operating expenses, partially offset by decreased interest expense to
affiliates and decreased depreciation expense.
REMA's revenues and operating margins declined in the second quarter of 2001
from the same period in 2000 primarily due to lower prices for power sales
combined with higher fuel costs in 2001. Total operating expenses increased in
the second quarter of 2001 compared to same period in 2000 primarily due to
increased maintenance at the plants, facilities lease expense and increased
administrative and support costs. Depreciation expense declined in the second
quarter of 2001 compared to the same period in 2000 primarily as a result of the
sale of interests in three of its generating plants. During August 2000, REMA
sold and leased back interests in three of its generating plants. For additional
information regarding the sale and leaseback transactions, see Note 5(a) to REMA
10-K Notes.
For the three months ended June 30, 2001, REMA's interest expense, net
primarily related to notes payable to an affiliate, aggregated $21.2 million
compared to $14.7 million and $20.9 million for the periods from April 1, 2000
to May 11, 2000 and May 12, 2000 to June 30, 2000, respectively. The weighted
average principal amount of the notes was approximately $838 million during the
three months ended June 30, 2001 and $1.6 billion during the period from April
1, 2000 to June 30, 2000. For additional information regarding notes payable to
affiliates, see Note 4 to REMA 10-K Notes.
In connection with the acquisition, REMA entered into a tax sharing agreement
with Reliant Energy, whereby REMA calculates its income tax provision on a
separate return basis. REMA uses the liability method of accounting for deferred
income taxes and measures deferred income taxes of all significant income tax
temporary differences. REMA's current federal and state income taxes are payable
to and receivable from Reliant Energy.
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Prior to May 11, 2000, REMA and some of its affiliates that were limited
liability companies were not taxable for federal income tax purposes. Any
taxable earnings or losses and certain other tax attributes were reported by the
member on its income tax return. Other affiliates that were taxable corporate
entities have incurred tax and book losses but were not subject to any
tax-sharing agreements with Sithe. As such, no tax benefits have been recorded
for these entities since the tax benefits were not considered realized. These
tax benefits and the offsetting valuation allowance were less than $1 million.
Periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000
compared to six months ended June 30, 2001
For the six months ended June 30, 2001, REMA's net loss was $2.0 million
compared to a net loss of $6.7 million and net income $22.6 million for the
periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000,
respectively. Net income decreased in the first six months of 2001 compared to
the same period in 2000 primarily due to decreased operating margins (revenues
less fuel) and increased operating expenses, partially offset by decreased
interest expense to affiliates and decreased depreciation expense.
REMA's revenues and operating margins declined in the first six months of
2001 compared to the same period in 2000 primarily due to lower prices for power
sales combined with higher fuel costs in 2001. Total operating expenses
increased in the first six months of 2001 compared to same period in 2000
primarily due to increased maintenance at the plants, facilities lease expense
and increased administrative and support costs. Depreciation expense declined
from the first six months of 2001 compared to the same period in 2000 primarily
as a result of the sale of interests in three of its generating plants.
For the six months ended June 30, 2001, REMA's interest expense, net
primarily related to notes payable to an affiliate, aggregated $41.6 million
compared to $46.5 million and $20.9 million for the periods from January 1, 2000
to May 11, 2000 and May 12, 2000 to June 30, 2000, respectively. The weighted
average principal amount of the notes was approximately $838 million during the
six months ended June 30, 2001 and $1.6 billion during the six months ended June
30, 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141 and SFAS No. 142. SFAS No. 141
requires business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles will
be evaluated against these new criteria and may result in certain intangibles
being transferred to goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill. Under
SFAS No. 142, a nonamortization approach, goodwill and certain intangibles with
indefinite lives will not be amortized into results of operations, but instead
would be reviewed periodically for impairment and written down and charged to
results of operations only in the periods in which the recorded value of
goodwill and certain intangibles with indefinite lives is more than its fair
value. The provisions of each statement which apply to goodwill and intangible
assets acquired prior to June 30, 2001 will be adopted by us on January 1, 2002.
We are in the process of determining the effect of adoption of SFAS No. 141 and
SFAS No. 142 on our consolidated financial statements.
SEASONALITY OF OUR BUSINESS
Our revenues are seasonal and are affected by unusual weather conditions.
Short-term prices for capacity, energy and ancillary services in the PJM market
are particularly impacted by weather conditions. Peak demand for electricity
typically occurs during the summer months, caused by increased use of
air-conditioning. Cooler than normal summer temperatures may lead to reduced use
of air-conditioners. This reduces short-term demand for capacity, energy and
ancillary services and may lead to a reduction in wholesale electric prices.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q/A to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANT ENERGY MID-ATLANTIC
POWER HOLDINGS, LLC
(Registrant)
By: /s/ Curtis A. Morgan
------------------------------
Curtis A. Morgan
President
Date: March 25, 2002
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