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 SEPTEMBER 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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 November 13, 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 September 30, 2001 as originally filed on November 14, 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 nine months ended September 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
September 30, 2001 Form 10-Q as originally filed on November 14, 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 Three Months Ended September 30, 2000 and 2001 (unaudited) .................. 1
For the Periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to September
30, 2000 and the Nine Months Ended September 30, 2001 (unaudited) .............. 2
Consolidated Balance Sheets
December 31, 2000 and September 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
September 30, 2000 and the Nine Months Ended September 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.......................................... 11
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
(FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2000 2001
-------------- --------------
(AS RESTATED)
Revenues, including $103.1 million and $34.7 million from affiliate......... $ 253,819 $ 249,925
Expenses:
Fuel, including $9.6 million and $42.7 million from affiliate............. 45,658 61,568
Operation and maintenance................................................. 19,651 28,666
Facilities lease.......................................................... 6,245 14,708
General and administrative................................................ 8,006 12,708
Depreciation and amortization............................................. 15,509 14,409
-------------- --------------
Total Expenses.......................................................... 95,069 132,059
-------------- --------------
Operating Income............................................................ 158,750 117,866
Other Income................................................................ -- 571
Interest Expense to Affiliate, net.......................................... (30,586) (23,762)
Interest (Expense) Income, net.............................................. (4) 25
-------------- --------------
Income Before Income Taxes.................................................. 128,160 94,700
-------------- --------------
Income Tax Expense.......................................................... 52,891 40,876
-------------- --------------
Net Income.................................................................. $ 75,269 $ 53,824
============== ==============
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 PERIODS FROM
--------------------------------------
JANUARY 1, 2000 MAY 12, 2000 TO NINE
TO MAY, 11, 2000 SEPTEMBER 30, 2000 MONTHS ENDED
(FORMER REMA) (CURRENT REMA) SEPTEMBER 30, 2001
-------------------- ------------------ ------------------
(AS RESTATED)
Revenues, including $166.5 million, $133.5 million and
$50.9 million from affiliate $ 166,490 $ 365,322 $ 529,861
Expenses:
Fuel, including $37.3 million, $14.7 million and $73.7
million from affiliate 53,628 69,999 147,697
Operation and maintenance 40,372 33,146 106,953
Facilities lease -- 6,245 44,124
General and administrative 13,101 12,137 38,312
Depreciation and amortization 19,538 25,627 36,507
--------- --------- ---------
Total Expenses 126,639 147,154 373,593
--------- --------- ---------
Operating Income 39,851 218,168 156,268
Other Income -- -- 571
Interest Expense to Affiliate, net (46,538) (51,482) (65,618)
Interest Income, net -- -- 316
--------- --------- ---------
(Loss) Income Before Income Taxes (6,687) 166,686 91,537
--------- --------- ---------
Income Tax Expense -- 68,828 39,698
--------- --------- ---------
Net (Loss) Income $ (6,687) $ 97,858 $ 51,839
========= ========= =========
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 SEPTEMBER 30, 2001
----------------- ------------------
(AS RESTATED)
ASSETS
Current Assets:
Cash and cash equivalents $ 38,107 $ 142,522
Restricted deposits 50,000 --
Fuel inventories 29,180 46,083
Materials and supplies inventories 34,885 35,803
Non-trading derivative assets -- 663,460
Other current assets 7,029 60,987
----------- -----------
Total current assets 159,201 948,855
----------- -----------
Property, Plant and Equipment:
Property, plant and equipment 936,845 899,709
Less accumulated depreciation (23,922) (49,743)
----------- -----------
Property, plant and equipment, net 912,923 849,966
----------- -----------
Other Noncurrent Assets:
Goodwill, net 7,100 4,593
Air emissions regulatory allowances and other intangibles, net 154,988 203,888
Non-trading derivative assets -- 384,990
Other 24,726 160,374
Deferred income taxes, net 2,346 --
----------- -----------
Total other noncurrent assets 189,160 753,845
----------- -----------
Total Assets $ 1,261,284 $ 2,552,666
=========== ===========
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities:
Accounts payable $ 56,432 $ 6,950
Accounts and notes payable to affiliates, net 105,047 373,015
Accrued payroll 10,394 7,252
Non-trading derivative liabilities -- 479,536
Deferred income taxes, net -- 72,314
Other current liabilities 17,727 3,274
----------- -----------
Total current liabilities 189,600 942,341
Noncurrent Liabilities:
Accrued environmental liabilities 35,826 35,501
Deferred income taxes, net -- 75,696
Non-trading derivative liabilities -- 232,543
Other noncurrent liabilities 5,041 8,285
----------- -----------
Total noncurrent liabilities 40,867 352,025
Subordinated Note Payable to Affiliate 838,356 838,003
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 111,245 215,037
Retained earnings 81,216 133,055
Accumulated other comprehensive income -- 72,205
----------- -----------
Total Member's Equity 192,461 420,297
----------- -----------
Total Liabilities and Member's Equity $ 1,261,284 $ 2,552,666
=========== ===========
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 NINE
TO MAY 11, 2000 SEPTEMBER 30, 2000 MONTHS ENDED
(FORMER REMA) (CURRENT REMA) SEPTEMBER 30, 2001
--------------- ------------------ ------------------
(AS RESTATED)
Cash Flows from Operating Activities:
Net (loss) income $ (6,687) $ 97,858 $ 51,839
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operations:
Depreciation and amortization 19,538 25,627 36,507
Deferred income taxes -- (4,611) 47,330
Changes in assets and liabilities:
Inventories (1,107) (11,903) (17,390)
Pre-paid lease obligation -- -- (195,239)
Net non-trading derivative assets and liabilities . -- -- (59,264)
Other assets (30,668) (53,603) 57,958
Accounts payable 4,114 26,269 (49,482)
Accounts and notes payable to affiliates, net -- -- 84,959
Other liabilities 848 (2,361) (17,023)
----------- ----------- -----------
Net cash (used in) provided by operating
activities (13,962) 77,276 (59,805)
----------- ----------- -----------
Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired -- (2,084,960) --
Proceeds from sale-leaseback transactions -- 1,000,000 --
Proceeds from sale of development companies -- 8,041 --
Capital expenditures -- (9,949) (22,395)
----------- ----------- -----------
Net cash used in investing activities -- (1,086,868) (22,395)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from note payable to affiliate -- 1,611,550 --
Payments on subordinated note payable to affiliate -- (650,000) --
Net change in payable to affiliates 14,415 119,325 186,615
Capital contributions -- 294,244 --
Return of capital -- (183,000) --
Lease financing costs -- (24,687) --
----------- ----------- -----------
Net cash provided by financing activities 14,415 1,167,432 186,615
----------- ----------- -----------
Net Change in Cash and Cash Equivalents 453 157,840 104,415
Cash and Cash Equivalents, Beginning of Period 570 -- 38,107
----------- ----------- -----------
Cash and Cash Equivalents, End of Period $ 1,023 $ 157,840 $ 142,522
=========== =========== ===========
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 its 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) incorporated herein by reference. 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) and the Quarterly Report on Form 10-Q/A for the
quarter ended June 30, 2001 (REMA Second Quarter 10-Q/A).
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 September 30, 2001 and for the three
and nine months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------------------ ------------------------------
AS PREVIOUSLY AS PREVIOUSLY
AS RESTATED REPORTED AS RESTATED REPORTED
----------- ------------- ----------- -------------
(IN THOUSANDS)
Revenues $ 249,925 $ 247,720 $ 529,861 $ 527,656
Expenses:
Fuel 61,568 90,764 147,697 204,756
Other expenses 70,491 70,491 225,896 225,896
--------- --------- --------- ---------
Total 132,059 161,255 373,593 430,652
--------- --------- --------- ---------
Operating Income 117,866 86,465 156,268 97,004
Other Expense, net (23,166) (23,166) (64,731) (64,731)
Income Tax Expense (40,876) (27,242) (39,698) (14,487)
--------- --------- --------- ---------
Net Income $ 53,824 $ 36,057 $ 51,839 $ 17,786
========= ========= ========= =========
SEPTEMBER 30, 2001
--------------------------------
AS PREVIOUSLY
AS RESTATED REPORTED
----------- -------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Non-trading derivative assets $ 663,460 $ 672,947
Other 285,395 285,395
---------- ----------
Total current assets 948,855 958,342
PROPERTY, PLANT AND EQUIPMENT, NET 849,966 849,966
OTHER NONCURRENT ASSETS:
Non-trading derivative assets 384,990 394,455
Other 368,855 368,855
---------- ----------
Total other noncurrent assets 753,845 763,310
---------- ----------
TOTAL ASSETS $2,552,666 $2,571,618
========== ==========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Non-trading derivative liabilities $ 479,536 $ 570,950
Deferred income taxes, net 72,314 36,701
Other 390,491 390,491
---------- ----------
Total current liabilities 942,341 998,142
NONCURRENT LIABILITIES:
Deferred income taxes, net 75,696 79,355
Non-trading derivative liabilities 232,543 232,987
Other 43,786 43,786
---------- ----------
Total noncurrent liabilities 352,025 356,128
---------- ----------
SUBORDINATED NOTE PAYABLE TO AFFILIATE 838,003 838,003
---------- ----------
MEMBER'S EQUITY:
Common stock (no par value 1,000 shares authorized, 1,000 issued and
outstanding) -- --
Capital contributions 215,037 111,678
Retained earnings 133,055 99,002
Accumulated other comprehensive income 72,205 168,665
---------- ----------
Total Member's Equity 420,297 379,345
---------- ----------
TOTAL LIABILITIES AND MEMBER'S EQUITY $2,552,666 $2,571,618
========== ==========
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 the 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 (SFAS) 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. SFAS No. 142 provides for a
nonamortization approach, whereby goodwill and certain intangibles with
indefinite lives will not be amortized into results of operations, but instead
will 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.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of
a liability for an asset retirement legal obligation to be recognized in the
period in which it is incurred. When the liability is initially recorded,
associated costs are capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002, with earlier application encouraged. SFAS No. 143 requires
entities to record a cumulative effect of change in accounting principle in the
income statement in the period of adoption. REMA plans to adopt SFAS No. 143 on
January 1, 2003 and is in the process of determining the effect of adoption on
its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144
provides new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of and also broadens the definition
of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS No. 144 supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to
7
Be Disposed Of" and Accounting Principles Board Opinion No. 30, while retaining
many of the requirements of these two statements. Under SFAS No. 144, assets
held for sale that are a component of an entity will be included in discontinued
operations if the operations and cash flows will be or have been eliminated from
the ongoing operations of the entity and the entity will not have any
significant continuing involvement in the operations prospectively. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001, with early
adoption encouraged. SFAS No. 144 is not expected to materially change the
methods used by REMA to measure impairment losses on long-lived assets, but may
result in additional future dispositions being reported as discontinued
operations than is currently permitted. REMA plans to adopt SFAS No. 144 on
January 1, 2002.
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 nine months ended
September 30, 2001, $74.5 million of the initial after-tax transition loss
adjustment recognized in other comprehensive income was reclassified to net
income. 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 incorporated herein by reference.
The application of SFAS No. 133 is still evolving as the FASB clears issues
submitted to the Derivatives Implementation Group for consideration. During the
second quarter of 2001, an issue that applies exclusively to the electric
industry and allows the normal purchases and normal sales exception for
option-type contracts if certain criteria are met was approved by the FASB with
an effective date of July 1, 2001. The adoption of this cleared guidance had no
impact on the REMA's results of operations. One criteria of this previously
approved guidance was revised in October 2001 and will become effective on
January 1, 2002. REMA is currently in the process of determining the effect of
adoption of the revised guidance.
During the third quarter of 2001, the FASB cleared an issue related to
application of the normal purchases and normal sales exception to contracts that
combine forward and purchased option contracts. The effective date of this
guidance is April 1, 2002, and REMA is currently assessing the impact of this
recently cleared issue and does not believe it will have a material impact on
REMA's consolidated financial statements.
Cash Flow Hedges. During the nine months ended September 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 nine months ended September 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 September 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 during the next twelve months.
Other Derivatives. During the nine months ended September 30, 2001, Reliant
Resources contributed $337 million of non-trading derivative assets and $159
million of non-trading derivative liabilities to REMA as a result of four
structured transactions. For further discussion of these transactions, see Note
1. During the nine months ended September 30, 2001, $54 million of non-trading
derivative liabilities were settled related to these transactions. The change in
fair value of these derivative assets and liabilities must be recorded in the
statement of income each reporting period. REMA recognized a change in fair
value of $6 million for the non-trading derivative assets and $1 million for the
non-trading liabilities related to these transactions resulting in a net pre-tax
tax unrealized gain of $5 million in the nine months ended September 30, 2001.
Therefore, as of September 30, 2001, REMA has recognized $343 million of
non-trading derivative assets and $106 million of non-trading derivative
liabilities related to these transactions.
8
4. COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive income
for the three and nine months ended September 30, 2001. There was no
comprehensive income for the three months ended September 30, 2000 or for the
periods from January 1, 2000 to May 11, 2000 or May 12, 2000 to September 30,
2000.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
(IN MILLIONS)
Net income.................................................................. $ 54 $ 52
Other comprehensive income (loss):
Cumulative effect of adoption of SFAS No. 133........................... -- (74)
Net deferred gains from cash flow hedges................................ 51 142
Reclassification of net deferred (gain) loss from cash flow hedges...... (20) 4
------------------ ------------------
Comprehensive income........................................................ $ 85 $ 124
================== ==================
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). 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.
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 nine months ended September 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 TO PERIOD FROM MAY 12, 2000 TO
MAY 11, 2000 SEPTEMBER 30, 2000
------------------------------------ ------------------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
----------------- ----------------- ----------------- -----------------
(IN MILLIONS)
Revenues............................. $ 166.5 $ 166.5 $ 365.3 $ 365.3
Net (loss) income.................... (6.7) (19.7) 97.9 108.7
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
9
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 September 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 September 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 September 30, 2000, and the three months ended September
30, 2000 was $15.4 million, $21.6 million and $12.8 million, respectively.
Depreciation expense was $9.0 million and $25.8 million for the three months and
nine months ended September 30, 2001, respectively. Amortization expense,
primarily related to goodwill and air emissions regulatory allowances, was $4.1
million, $4.0 million and $2.7 million for the periods from January 1, 2000 to
May 11, 2000, May 12, 2000 to September 30, 2000, and the three months ended
September 30, 2000, respectively. Amortization expense was $5.4 million and
$10.7 million for the three months and nine months ended September 30, 2001,
respectively.
8. PREPAID LEASE EXPENSE
During the first quarter and third quarter of 2001, REMA paid $150.9
million and $108.4 million, respectively, to lessors related to the sale and
leaseback transactions (see Note 5(a) to REMA 10-K Notes). As of September 30,
2001, REMA had recorded prepaid lease expense of $195.2 million in other current
and other noncurrent assets of $58.8 million and $136.4 million, respectively.
10
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 third quarter and first
nine months of 2000 and the comparable periods in 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 September 30, 2001 and for the three and nine months ended
September 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, REMA expects to sell a portion of its 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, REMA 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
11
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
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2000 2001
--------------- ---------------
(IN THOUSANDS)
Revenues.................................................................... $ 253,819 $ 249,925
Operating Expenses.......................................................... 95,069 132,059
--------------- ---------------
Operating Income............................................................ 158,750 117,866
Other Income................................................................ -- 571
Interest Expense, net....................................................... (30,590) (23,737)
Income Tax Expense.......................................................... (52,891) (40,876)
--------------- ---------------
Net Income................................................................ $ 75,269 $ 53,824
=============== ===============
FOR THE PERIODS FROM
------------------------------------
JANUARY 1, 2000 MAY 12, 2000 TO NINE MONTHS
TO MAY 11, 2000 SEPTEMBER 30, 2000 ENDED
(FORMER REMA) (CURRENT REMA) SEPTEMBER 30, 2001
--------------- ------------------ ------------------
( IN THOUSANDS)
Revenues................................................. $ 166,490 $ 365,322 $ 529,861
Operating Expenses....................................... 126,639 147,154 373,593
--------------- ------------------ ------------------
Operating Income......................................... 39,851 218,168 156,268
Other Income............................................. -- -- 571
Interest Expense, net.................................... (46,538) (51,482) (65,302)
Income Tax Expense....................................... -- (68,828) (39,698)
--------------- ------------------ ------------------
Net (Loss) Income...................................... $ (6,687) $ 97,858 $ 51,839
=============== ================== ==================
Three months ended September 30, 2001 compared to three months ended September
30, 2000
For the three months ended September 30, 2001, REMA's net income was $53.8
million compared to net income of $75.3 million for the same period in 2000. Net
income decreased in the third 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 third quarter of 2001
from the same period in 2000 primarily due to lower prices for power sales
combined with higher fuel costs in 2001 and favorable hedging activities in
2000. Total operating expenses increased in the third quarter of 2001 compared
to same period in 2000 primarily due to increased maintenance at the plants,
facilities lease expense and administrative and support costs. Depreciation
expense declined in the third 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 in August 2000 as discussed above.
For the three months ended September 30, 2001, REMA's interest expense, net,
primarily related to notes payable to an affiliate, aggregated $23.7 million
compared to $30.6 million for the same periods in 2000. The weighted average
principal amount of the notes was approximately $838 million during the three
months ended September 30, 2001 and $961 million during the same period in 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.
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
12
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.
Nine months ended September 30, 2001 compared to periods from January 1, 2000 to
May 11, 2000 and May 12, 2000 to September 30, 2000
For the nine months ended September 30, 2001, REMA's net income was $51.8
million compared to a net loss of $6.7 million and net income $97.9 million for
the periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to September
30, 2000, respectively. Net income decreased in the first nine 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 operating margins declined in the first nine 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 nine months of 2001 compared to same period in 2000 primarily due to
increased maintenance at the plants, facilities lease expense and administrative
and support costs. Depreciation expense declined for the first nine 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 nine months ended September 30, 2001, REMA's interest expense, net,
primarily related to notes payable to an affiliate, aggregated $65.3 million
compared to $46.5 million and $51.5 million for the periods from January 1, 2000
to May 11, 2000 and May 12, 2000 to September 30, 2000, respectively. The
weighted average principal amount of the notes was approximately $838 million
during the nine months ended September 30, 2001 and $1.4 billion during the nine
months ended September 30, 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 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. SFAS No. 142 provides for a
nonamortization approach, whereby goodwill and certain intangibles with
indefinite lives will not be amortized into results of operations, but instead
will 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.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of
a liability for an asset retirement legal obligation to be recognized in the
period in which it is incurred. When the liability is initially recorded,
associated costs are capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002, with earlier application encouraged. SFAS No. 143 requires
entities to record a cumulative effect of change in accounting principle in the
income statement in the period of adoption. We plan to adopt SFAS No. 143 on
January 1, 2003 and are in the process of determining the effect of adoption on
our consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144
provides new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of and also broadens the definition
of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS No. 144 supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No.
30, while retaining many of the requirements of
13
these two statements. Under SFAS No. 144, assets held for sale that are a
component of an entity will be included in discontinued operations if the
operations and cash flows will be or have been eliminated from the ongoing
operations of the entity and the entity will not have any significant continuing
involvement in the operations prospectively. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, with early adoption encouraged.
SFAS No. 144 is not expected to materially change the methods used by REMA to
measure impairment losses on long-lived assets, but may result in additional
future dispositions being reported as discontinued operations than is currently
permitted. We plan to adopt SFAS No. 144 on January 1, 2002.
SEASONALITY OF OUR BUSINESS
Our revenues are seasonal and are affected by unusual weather conditions.
Short-term prices for capacity, energy and ancilliary 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
ancilliary services and may lead to a reduction in wholesale electric prices.
14
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
15
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
Exhibit 99 (a) Items incorporated by reference from the REMA 10-K:
Notes 1 (a) (Reliant Energy Mid-Atlantic Power
Holdings, LLC) and 5 (Commitments and Contingencies).
Exhibit 99 (b) Items incorporated by reference from the REMA First
Quarter 10-Q: Note 2 Derivative Financial Instruments.
16