Filed Pursuant to Rule 424(b)(3)
Registration No. 333-107297-01
PROSPECTUS
(RELIANT RESOURCES LOGO)
OFFER TO EXCHANGE:
$550,000,000 9.25% SENIOR SECURED NOTES DUE 2010
CUSIP # 75952B AE 5, ISIN # US75952BAE56,
CUSIP # U75885 AB 6, ISIN # USU75885AB69,
CUSIP # 75952B AG 0, ISIN # US75952BAG05,
IN EXCHANGE FOR $550,000,000 9.25% SENIOR SECURED NOTES DUE 2010
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AND
$550,000,000 9.50% SENIOR SECURED NOTES DUE 2013
CUSIP # 75952B AH 8, ISIN # US75952BAH87,
CUSIP # U75885 AC 4, ISIN # USU75885AC43,
CUSIP # 75952B AK 1, ISIN # US75952BAK17,
IN EXCHANGE FOR $550,000,000 9.50% SENIOR SECURED NOTES DUE 2013
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
OF
RELIANT RESOURCES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON JANUARY 9, 2004, UNLESS EXTENDED.
---------------------
Terms of the exchange offer:
- The exchange notes are being registered with the Securities and Exchange
Commission and are being offered in exchange for the original notes that
were previously issued in an offering exempt from the Securities and
Exchange Commission's registration requirements.
- The terms of the exchange offer are summarized below and more fully
described in this prospectus.
- We will exchange all original notes that are validly tendered and not
withdrawn prior to the expiration of the exchange offer.
- You may withdraw tenders of original notes at any time prior to the
expiration of the exchange offer.
- We will not receive any proceeds from the exchange offer.
- The terms of the exchange 2010 notes and 2013 notes are substantially
identical to the original 2010 notes and 2013 notes, respectively, except
that the exchange notes are registered under the Securities Act of 1933,
as amended, and the transfer restrictions and registration rights
applicable to the original notes do not apply to the exchange notes.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF THE RISKS THAT
SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR ORIGINAL NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this prospectus is December 11, 2003.
TABLE OF CONTENTS
PROSPECTUS
<Table>
AVAILABLE INFORMATION....................................... i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION............................................... iii
PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 18
USE OF PROCEEDS............................................. 42
THE EXCHANGE OFFER.......................................... 43
CAPITALIZATION.............................................. 49
SELECTED FINANCIAL INFORMATION AND OTHER DATA............... 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 54
OUR BUSINESS................................................ 55
MANAGEMENT.................................................. 78
DESCRIPTION OF NOTES........................................ 80
PLAN OF DISTRIBUTION........................................ 150
LEGAL MATTERS............................................... 150
EXPERTS..................................................... 150
GLOSSARY OF TERMS........................................... A-1
</Table>
AVAILABLE INFORMATION
Reliant Resources files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission, or
the SEC. You may read and copy any document Reliant Resources files at the SEC's
public reference room in Washington, D.C., 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-888-SEC-0330 for further information on the
public reference room. Our SEC filings are also available to the public from the
SEC's Web site at www.sec.gov or from Reliant Resources' web site at
www.reliantresources.com. However, the information on Reliant Resources' web
site does not constitute a part of this prospectus.
In this document, Reliant Resources "incorporates by reference" the
information it files with the SEC, which means that Reliant Resources can
disclose important information to you by referring to that information. The
information incorporated by reference is considered to be a part of this
prospectus, and later information filed with the SEC will update and supersede
this information. Reliant Resources incorporates by reference the documents
listed below and any future filings made with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act,
until the completion of the exchange of original notes:
- Reliant Resources' Annual Report on Form 10-K/A filed on May 1, 2003 for
the fiscal year ended December 31, 2002;
- Reliant Resources' Proxy Statement on Schedule 14A, filed on April 30,
2003;
- Reliant Resources' Quarterly Report on Form 10-Q filed on May 14, 2003
for the quarter ended March 31, 2003;
- Reliant Resources' Quarterly Report on Form 10-Q filed on August 13, 2003
for the quarter ended June 30, 2003;
- Reliant Resources' Quarterly Report on Form 10-Q filed on November 12,
2003 for the quarter ended September 30, 2003;
- Reliant Resources' Current Report on Form 8-K filed on January 10, 2003;
- Reliant Resources' Current Report on Form 8-K filed on February 3, 2003;
- Reliant Resources' Current Report on Form 8-K filed on February 24, 2003;
- Reliant Resources' Current Report on Form 8-K filed on March 17, 2003;
- Reliant Resources' Current Report on Form 8-K filed on March 24, 2003;
- Reliant Resources' Current Report on Form 8-K filed on March 28, 2003;
- Reliant Resources' Current Report on Form 8-K filed on April 1, 2003 (to
the extent filed by Reliant Resources under the Securities Exchange Act
of 1934);
- Reliant Resources' Current Report on Form 8-K filed on April 16, 2003;
- Reliant Resources' Current Report on Form 8-K filed on May 12, 2003;
- Reliant Resources' Current Report on Form 8-K filed on June 5, 2003;
- Reliant Resources' Current Report on Form 8-K filed on June 18, 2003;
- Reliant Resources' Current Report on Form 8-K filed on June 24, 2003;
- Reliant Resources' Current Report on Form 8-K filed on June 27, 2003;
- Reliant Resources' Current Report on Form 8-K filed on June 30, 2003;
- Reliant Resources' Current Report on Form 8-K filed on July 11, 2003;
- Reliant Resources' Current Report on Form 8-K filed on July 22, 2003;
- Reliant Resources' Current Report on Form 8-K filed on July 23, 2003;
- Reliant Resources' Current Report on Form 8-K filed on August 12, 2003
(to the extent filed by Reliant Resources under the Securities Exchange
Act of 1934);
- Reliant Resources' Current Report on Form 8-K filed on August 26, 2003;
- Reliant Resources' Current Report on Form 8-K filed on September 26,
2003;
- Reliant Resources' Current Report (items 5 and 7) on Form 8-K filed on
November 14, 2003;
- Reliant Resources' Current Report (item 9) on Form 8-K filed on November
14, 2003;
- Reliant Resources' Current Report on Form 8-K filed on November 26, 2003;
and
- Reliant Resources' Current Report on Form 8-K filed on December 9, 2003.
You may request a copy of these filings at no cost, by writing or
telephoning Reliant Resources at: P.O. Box 148, Houston, Texas 77001-0148,
Attention: Investor Relations, telephone (713) 497-7000.
For our most recent annual consolidated financial statements and notes, see
our Current Report on Form 8-K filed on November 14, 2003 and incorporated by
reference herein. For our most recent annual "Management's Discussion and
Analysis of Financial Condition and Results of Operations," see our Current
Report on Form 8-K filed on November 14, 2003 and incorporated by reference
herein. For our most recent interim consolidated financial statements and notes
and interim "Management's Discussion and Analysis of Financial Condition and
Results of Operations," see our Quarterly Report on Form 10-Q filed on November
12, 2003 and incorporated by reference herein.
For Orion Power Holdings, Inc.'s most recent annual consolidated financial
statements and notes and annual "Management's Discussion and Analysis of
Financial Condition and Results of Operations," see our Current Report on Form
8-K filed on April 16, 2003 and incorporated by reference herein. For Orion
Power Holdings, Inc.'s most recent interim consolidated financial statements and
notes and interim
ii
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," see our Current Report on Form 8-K filed on November 14, 2003 and
incorporated by reference herein.
For Reliant Energy Mid-Atlantic Power Holdings, LLC's most recent annual
consolidated financial statements and notes, see our Current Report on Form 8-K
filed on July 22, 2003 and incorporated by reference herein. For Reliant Energy
Retail Holdings, LLC's most recent annual consolidated financial statements and
notes, see our Current Report on Form 8-K filed on June 27, 2003 and
incorporated by reference herein.
You should rely only upon the information provided in this prospectus or
incorporated by reference into this prospectus. Reliant Resources has not
authorized anyone to provide you with different information. You should not
assume that the information in this prospectus, including any information
incorporated by reference, is accurate as of any date other than the date of
this prospectus.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
When we make statements containing projections about our revenues, income,
earnings and other financial items, our plans and objectives for the future,
future economic performance, transactions for the sale of parts of our
operations and financings related thereto, or when we make statements containing
any other projections or estimates about our assumptions relating to these types
of statements, we are making "forward-looking statements." These statements
usually relate to future events and anticipated revenues, earnings, business
strategies, competitive position or other aspects of our operations or operating
results. In many cases you can identify forward-looking statements by
terminology such as "anticipate," "estimate," "believe," "continue," "could,"
"intend," "may," "plan," "potential," "predict," "should," "will," "expect,"
"objective," "projection," "forecast," "goal," "guidance," "outlook" and other
similar words. However, the absence of these words does not mean that the
statements are not forward-looking. Although we believe that the expectations
and the underlying assumptions reflected in our forward-looking statements are
reasonable, there can be no assurance that these expectations will prove to be
correct. Forward-looking statements are not guarantees of future performance or
events. Such statements involve a number of risks and uncertainties, and actual
results may differ materially from the results discussed in the forward-looking
statements.
In addition to the matters described in this prospectus, the following are
some of the factors that could cause actual results to differ materially from
those expressed or implied in our forward-looking statements:
- Changes in laws and regulations, including deregulation, re-regulation
and restructuring of the electric utility industry, changes in or
application of environmental and other laws and regulations to which we
are subject, and changes in or application of laws or regulations
applicable to other aspects of our business, such as hedging activities;
- The outcome of pending lawsuits, governmental proceedings and
investigations;
- The effects of competition, including the extent and timing of the entry
of additional competitors in our markets;
- Liquidity concerns in our markets;
- Our pursuit of potential business strategies;
- The timing and extent of changes in commodity prices and interest rates;
- The availability of adequate supplies of fuel, water, and associated
transportation necessary to operate our portfolio of generation assets;
- Weather variations and other natural phenomena, which can affect the
demand for power from or our ability to produce power at our generating
facilities;
iii
- Financial market conditions and our access to capital, including
availability of funds in the capital markets for merchant generation
companies;
- The creditworthiness or bankruptcy or other financial distress of our
counterparties;
- Actions by rating agencies with respect to us or our competitors;
- Acts of terrorism or war;
- The availability and price of insurance;
- Political, legal, regulatory and economic conditions and developments;
- The successful operation of deregulating power markets; the reliability
of the systems, procedures and other infrastructure necessary to operate
our retail electric business, including the systems owned and operated by
the independent system operator in ERCOT; and
- The resolution of the refusal by certain California market participants
to pay our receivables balances and the resolution of the refund
methodologies.
Each forward-looking statement speaks only as of the date of the particular
statement and we undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
iv
PROSPECTUS SUMMARY
In this prospectus, the words "Reliant Resources" refer to Reliant
Resources, Inc. and the words "we", "our", "ours", and "us" refer to Reliant
Resources, Inc. and our subsidiaries. The following summary contains basic
information about the notes and the exchange offer. It does not contain all of
the information that may be important to you. For a complete understanding of
the notes and the exchange offer, we encourage you to read this entire document
and the documents we have referred you to herein. We provide a glossary of terms
used in this prospectus beginning on page A-1.
COMPANY OVERVIEW
We provide electricity and energy services with a focus on the competitive
retail and wholesale segments of the electric power industry in the United
States. With respect to the retail segment of the industry, we provide
customized electricity and related energy services to large commercial,
industrial and institutional customers in Texas and, to a lesser extent, in the
Pennsylvania -- New Jersey -- Maryland (PJM) Interconnection. We also provide
standardized electricity and related services to residential and small
commercial customers in Texas. Within the wholesale segment of the industry, we
own and/or operate a substantial number of electric power generating units
dispersed broadly across the United States. These units are not subject to
traditional cost-based regulation; therefore, we can generally sell electricity
at prices determined by the market, subject to regulatory limitations. We market
electric energy, capacity and ancillary services and procure and, in some
instances, resell natural gas, coal, fuel oil, natural gas transportation
capacity and other energy-related commodities to optimize our physical assets
and manage the risk of our asset portfolio. We sell energy commodities to and
buy energy commodities from a variety of over-the-counter and exchange-based
markets, as well as directly to or from energy producers, distributors and
retailers, as appropriate.
RETAIL ENERGY
Our retail energy segment provides electricity products and services to
end-use customers, ranging from residential and small commercial customers to
large commercial, industrial and institutional customers. Our retail energy
segment acquires and manages the electric energy, capacity and ancillary
services associated with supplying these retail customers. We began serving
approximately 1.7 million electric customers in the Houston metropolitan area
when the Texas market opened to full competition in January 2002. We also began
serving customers in other areas of Texas, which were obtained through our
marketing efforts. As of September 30, 2003, our total retail customer count in
Texas, as measured by number of metered locations, had increased approximately
five percent as compared to September 30, 2002 due to customers added in markets
outside of the Houston area. We are taking steps to provide electricity and
related products and services to large commercial, industrial and institutional
customers in certain other states. In New Jersey, we are registered as an
"electric power supplier," in Pennsylvania, we are registered as an "electric
generation supplier" and in Maryland, we are licensed as an "electric supplier."
We began to deliver electricity in New Jersey effective August 1, 2003.
WHOLESALE ENERGY
Our wholesale energy segment includes our non-Texas portfolio of electric
power generation facilities and related purchased power, fuel delivery and
storage asset positions. We own and/or operate a substantial number of electric
power generating units dispersed broadly across the United States. These units
are not subject to traditional cost-based regulation; therefore, we can
generally sell electricity at prices determined by the market, subject to
regulatory limitations. We market electric energy, capacity and ancillary
services and procure and, in some instances, resell natural gas, coal, fuel oil,
natural gas transportation capacity and other energy-related commodities to
optimize our physical assets and manage the risk of our asset portfolio. We sell
energy commodities to and buy energy commodities from a variety of
over-the-counter and exchange-based markets, as well as directly to or from
energy producers, distributors and retailers, as appropriate.
1
We own an interest in, or lease 119 operating electric power generation
facilities with an aggregate net generating capacity of 19,279 MW located in
five regions of the United States -- the Mid-Atlantic, New York, the
Mid-Continent, the Southeast and the West regions. This excludes 588 MW related
to our Desert Basin plant, which was sold in October 2003, and 811 MW related to
the retirement of certain units in the West and Mid-Atlantic regions. We have
1,063 MW of additional net generating capacity under construction. One gas-fired
generating facility (541 MW) is due to reach commercial operation in the forth
quarter of 2003 and one waste-coal fired generating facility (522 MW) is due to
reach commercial operation in the second half of 2004. The generating capacity
of these facilities consists of approximately 25% of base-load, 44% of
intermediate and 31% of peaking capacity. Our generating capacity is fueled 42%
by natural gas, 21% by coal, 3% by oil and 30% has dual-fuel capability. The
remaining 4% of our generating capacity is hydroelectric.
The following table describes our electric power generation facilities and
net generating capacity by region as of December 5, 2003:
<Table>
<Caption>
TOTAL NET
NUMBER OF GENERATING
GENERATION CAPACITY
REGION FACILITIES(1) (MW)(2) DISPATCH TYPE(3) FUEL TYPE
- ------ ------------- ---------- ---------------- ---------
MID-ATLANTIC
Operating(4)(5)............ 21 5,161 Base, Intermediate, Peak Gas/Coal/Oil/Hydro
Under Construction(6)(7)... 1 522 Base Coal
--- ------
Combined................... 22 5,683
NEW YORK
Operating(8)............... 77 2,952 Base, Intermediate, Peak Gas/Oil/Hydro
MID-CONTINENT
Operating.................. 9 4,484 Base, Intermediate, Peak Gas/Oil/Coal
SOUTHEAST
Operating(9)(10)........... 6 3,010 Base, Intermediate, Peak Gas/Oil
WEST
Operating(11)(12)(13)(14).. 6 3,672 Base, Intermediate, Peak Gas/Oil
Under Construction(6)...... 1 541 Base, Intermediate Gas
--- ------
Combined................... 7 4,213
TOTAL
Operating.................. 119 19,279
Under Construction......... 2 1,063
--- ------
Combined................... 121 20,342
=== ======
</Table>
- ---------------
(1) Unless otherwise indicated, we own a 100% interest in each facility listed.
(2) Average summer and winter net generating capacity.
(3) We use the designations "Base," "Intermediate," and "Peak" to indicate
whether the facilities described are base-load, intermediate, or peaking
facilities, respectively.
(4) We lease a 100%, 16.67% and 16.45% interest in three Pennsylvania
facilities having 614 MW, 284 MW and 282 MW of net generating capacity,
respectively, through facility lease agreements having terms of 26.25
years, 33.75 years and 33.75 years, respectively.
(5) In October 2003, we announced the retirement of two Mid-Atlantic generation
units having 232 MW of net generating capacity, which are excluded from the
table above.
(6) We consider a project to be "under construction" once we have acquired the
necessary permits to begin construction, broken ground on the project site
and contracted to purchase machinery for the project, including the
combustion turbines.
(7) In November 2003, we retired two generation units having 197 MW of net
generating capacity at the Seward facility, which are excluded from the
table above. This retirement was necessary to continue construction of the
replacement capacity of 522 MW.
2
(8) Excludes two hydro plants with a net generating capacity of 5 MW, which are
not currently operational.
(9) We own a 50% interest in one of these facilities having a net generating
capacity of 108 MW. An independent third party owns the other 50%.
(10) We are party to tolling agreements entitling us to 100% of the capacity of
two Florida facilities having 630 MW and 474 MW of net generating capacity,
respectively. These tolling agreements have terms of 10 years and 5 years,
respectively, and are treated as operating leases for accounting purposes.
(11) In October 2003, we announced the retirement of two California generation
units having 264 MW of total net generating capacity due to a lack of
required environmental permits, which are excluded from the table above.
(12) At the end of December 2003, we will retire one California generation unit
having 118 MW of net generating capacity, which are excluded from the table
above, due to a lack of required environmental permits.
(13) We own a 50% interest in one Nevada facility having a total generating
capacity of 470 MW. An independent third party owns the other 50%.
(14) In November 2003, we announced that the following units in California will
be mothballed: two units at Etiwanda (640 MW); one unit at Mandalay (130
MW) and one unit at Ellwood (54 MW), which are included in the table above.
We seek to optimize our physical asset positions consisting of our power
generation asset portfolio, pipeline transportation capacity positions, pipeline
storage positions and fuel positions and provide risk management services for
our asset positions. We perform these functions through procurement, marketing
and hedging activities for power, fuels and other energy related commodities.
With the downturn in the industry, the decline in market liquidity and our
liquidity capital constraints, the principal function of our commercial
activities is to optimize our assets. In March 2003, we decided to exit our
proprietary trading activities and liquidate, to the extent practicable, our
proprietary positions. Although we have exited our proprietary trading
activities, we have legacy positions, which will be closed as economically
feasible or in accordance with their terms. We will continue to engage in
marketing and hedging activities related to our electric generating facilities,
pipeline transportation capacity positions, pipeline storage positions and fuel
positions of our wholesale energy segment and energy supply costs related to our
retail energy segment.
DISCONTINUED OPERATIONS
In February 2003, we announced the sale of our European energy business to
Nuon for approximately Euro 1.1 billion (on December 10, 2003, $1.3 billion).
The sale closed on December 10, 2003. In accordance with current accounting
standards, the results of these operations are reported as discontinued
operations.
On July 9, 2003, we entered into a definitive agreement to sell our 588 MW
Desert Basin plant, located in Casa Grande, Arizona, to SRP of Phoenix for $289
million. The sale closed on October 15, 2003. In accordance with current
accounting standards, the results of these operations have been reflected as
discontinued operations.
For additional information regarding discontinued operations, see notes 17
and 18 to our interim financial statements for the three and nine months ended
September 30, 2003 incorporated by reference herein.
RECENT DEVELOPMENTS
On November 25, 2003, we entered into a settlement with the CFTC in
connection with an investigation relating to trading and price reporting issues.
The settlement addressed the reporting of natural gas trading information to
energy industry publications that compile and report index prices and seven
offsetting and pre-arranged electricity trades (involving standard, 25-megawatt
electricity contracts) that were executed on an electronic trading platform in
2000. Pursuant to the terms of the settlement, one of our subsidiaries agreed to
pay a civil monetary penalty of $18 million.
On December 5, 2003, we announced that it is unlikely that we will exercise
our option to purchase CenterPoint's holdings of common stock of Texas Genco.
Pursuant to the terms of our credit and debt agreements, we have established an
escrow account to repay indebtedness under our credit facility and for
3
general corporate purposes or for possible use in the acquisition of
CenterPoint's holdings of common stock of Texas Genco.
After giving effect to the receipt of net cash proceeds expected to be
received from the sale of our European energy segment, we expect that the total
amount of cash on deposit in the escrow account will be approximately $917
million.
If as expected, we do not exercise the Texas Genco option, our credit and
debt agreements entitle us to maintain the funds in the restricted escrow
account for the possible subsequent purchase of CenterPoint's holdings of common
stock of Texas Genco (at a price not to exceed the option price) until the
earlier of September 15, 2004 or the date that CenterPoint sells more than 20%
of the outstanding common stock of Texas Genco to someone other than us.
Upon the occurrence of the earlier of those events, we would be required
under the terms of our March 2003 credit facilities to apply the funds in the
escrow account to collateralize the $300 million senior priority loan commitment
and to prepay term indebtedness under our March 2003 credit facilities. Once the
senior priority commitment has terminated, we would be permitted to use 50% of
the funds from our offering of convertible debt securities for general corporate
purposes.
For additional information regarding the Texas Genco option, see our
Current Report on Form 8-K filed December 9, 2003 incorporated by reference
herein.
OBJECTIVES AND STRATEGY
We are committed to building a balanced wholesale and retail energy
business. Achievement of this goal will be facilitated by focusing on the
following strategic priorities:
OPTIMIZE OUR BUSINESS
Our retail energy business has a strong competitive position in Texas and
has provided us with a stable source of earnings. Following deregulation, as
anticipated, we have seen a loss of residential and small business market share
in the Houston area service territory. We are pursuing customers in other
markets outside of the Houston area service territory to mitigate the loss of
this market share. As a result of such marketing efforts, we have made
out-of-territory market share gains which have helped to offset losses within
the Houston area service territory. Further, our business which provides
electricity and energy services to customers with an aggregate peak demand of
greater than approximately one MW has grown its market share substantially since
deregulation and is poised to continue to grow in Texas. In addition, we have
recently opened an office in New Jersey and are focused on building a strong
position in the surrounding region.
Our wholesale energy business consists of a portfolio of diverse generation
assets which enable us to market electric energy, capacity and ancillary
services. In addition, we procure and, in some instances, resell natural gas,
coal, fuel oil, natural gas transportation capacity and other energy-related
commodities and maintain a commercial infrastructure to optimize our physical
assets and contractual positions through marketing and hedging activities. We
focus on contracting our capacity and procuring the necessary fuel to generate
that power, to lock in energy margins. While current market conditions are
generally weak, we expect the profitability of our wholesale energy business to
improve markedly when markets return to more balanced supply and demand
fundamentals and market rules and regulations improve.
IMPROVE OUR CAPITAL STRUCTURE
Our March 2003 refinancing provided us liquidity and removed near-term debt
maturities which enhances our ability to access the capital markets. Our
business is an inherently cyclical one; consequently, we believe that we need a
more balanced capital structure, and we intend to replace the majority of our
bank debt with long-term fixed income debt and equity. Our first step in this
process was our issuances of $275 million of convertible senior subordinated
notes in June and July 2003 and $1.1 billion of notes in
4
July 2003. The net proceeds of the convertible senior subordinated notes may be
used to repay indebtedness under our credit facilities and for general corporate
purposes or for the possible acquisition of CenterPoint's holdings of the common
stock of Texas Genco and the net proceeds of the notes were used to pay down our
bank debt. On December 5, 2003, we announced that it is unlikely that we will
exercise our option to purchase CenterPoint's holdings of common stock of Texas
Genco.
OPPORTUNISTICALLY DIVEST NON-CORE ASSETS
We continuously evaluate our non-core assets. As we demonstrated by the
sale of our European energy operations and by the sale of our 588 MW Desert
Basin plant operations, we will consider selling specific generation assets in
order to narrow our focus, bolster our liquidity and strengthen our financial
position.
CAPITALIZE ON UNIQUE OPPORTUNITIES
We will continue to pursue opportunities to enhance our businesses within
the parameters of our capital structure. The continued expansion and growth of
our residential and small commercial retail energy business in Texas and our
large commercial, industrial and institutional retail energy business both in
Texas and other strategic markets in the United States also remain top
priorities.
EVALUATION OF WHOLESALE ENERGY SEGMENT
We are engaged in an ongoing evaluation of our wholesale energy businesses,
which could lead to decisions to mothball, retire or dispose of assets. In
October 2003, we elect to retire five generation units representing a total of
614 MW and, in November 2003, we elected to mothball an additional four
generation units representing a total of 824 MW. Additionally, in November 2003,
we retired two generation units having 197 MW of net generating capacity to
allow continued construction of replacement capacity (522 MW) at the facility.
It is possible that we may retire or mothball additional assets, although to
date, we have not reached a decision to do so for any other generating assets of
our wholesale energy segment.
* * *
Our principal executive offices are located at 1000 Main Street, Houston,
Texas 77002, and our telephone number is (713) 497-3000.
5
CORPORATE STRUCTURE AND COMPONENTS OF DEBT
The following simplified diagram presents our general corporate structure
and the components of our banking and credit facilities and other long-term debt
to third parties of Reliant Resources and its subsidiaries (excluding our
European energy discontinued operations) as of September 30, 2003 (in millions):
(DEBT STRUCTURE CHART)
- ---------------
(1) In addition, as of September 30, 2003, Reliant Resources had letters of
credit outstanding of $407 million supporting the Reliant Energy Seward, LLC
tax-exempt debt.
(2) As of September 30, 2003, we had posted cash of $83 million and letters of
credit of $424 million relating to commercial activities.
(3) Includes $272 million in a restricted escrow account. Such funds may be used
for possible acquisition of CenterPoint's holdings of the common stock of
Texas Genco. On December 5, 2003, we announced that it is unlikely that we
will exercise our option to purchase CenterPoint's holdings of common stock
of Texas Genco.
(4) Debt acquired in the Orion Power acquisition was adjusted to fair market
value as of the acquisition date. Included in this amount is $68 million of
fair value adjustments related to the Orion power senior notes.
(5) Interest rate swaps acquired in the Orion Power acquisition were adjusted to
fair market value as of the acquisition date. Included in the Orion MidWest
and Orion NY debt amounts are $29 million and $20 million, respectively,
related to the fair value adjustments of the interest rate swaps.
(6) Included in Orion MidWest is restricted cash of $72 million and $2 million
held by Orion Power Capital, LLC and Orion Power Operating Services Midwest,
Inc., respectively. Included in Orion NY is restricted cash of $3 million,
$2 million and $2 million held by Orion Power Capital, LLC, Orion Power
Operating Services Astoria, Inc. and Orion Power Operating Services
Coldwater, Inc., respectively. Included in Liberty is restricted cash of $1
million held by Orion Power Operating Services MidAtlantic, Inc. Such cash
is restricted pursuant to the applicable subsidiaries' credit agreements.
(7) Includes an aggregate of 13 generation facilities located in the states of
California, Nevada, Florida, Illinois, Pennsylvania and Mississippi.
(8) In August 2000, we entered into separate sale/leaseback transactions with
each of the three owner-lessors for our interests in three generating
stations acquired in the REMA acquisition. For additional discussion of
these lease transactions, see note 14(a) to our consolidated financial
statements incorporated by reference herein.
6
(9) We have a receivables facility arrangement with financial institutions to
sell an undivided interest in accounts receivable from our retail energy
segment electric customers on an ongoing basis. Pursuant to this receivables
facility, we formed a QSPE as a bankruptcy remote indirect subsidiary of
RERH. For additional information regarding this transaction, see note 14 to
our interim financial statements incorporated by reference herein.
SUMMARY OF COLLATERAL AND GUARANTEES
The table below outlines the principal differences between the collateral
for the notes and our new credit facilities. In the tables below, "X" indicates
that such entity is providing this indicated collateral or guaranty. The
property securing the notes consists of substantially all of our and our
guarantors' operating assets, except: (1) certain assets that secure our new
credit facilities but not the notes and (2) certain assets that were otherwise
permitted to be excluded from the property securing our new credit facilities.
The notes are guaranteed by each of our domestic restricted subsidiaries that
guarantee borrowings under our new credit facilities other than certain
subsidiaries of Orion Power. This summary does not contain all the information
that may be important to you. For a complete understanding of the collateral
securing the notes, we encourage you to read the section entitled "Description
of Notes" and the security documents.
LIEN ON ASSETS
(EXCLUDING STOCK)(1)
<Table>
<Caption>
ORION RELIANT OTHER MERCHANT
MIDWEST/ ENERGY GENERATION
RERH ORION NY SERVICES REPG REMA FACILITIES(2)
---- -------- -------- ---- ---- --------------
Notes........................ X X X X
Credit Facilities............ X X X X
</Table>
STOCK PLEDGES
(BY ISSUER OF THE PLEDGED STOCK)
<Table>
<Caption>
ORION RELIANT OTHER MERCHANT
POWER ENERGY GENERATION
RERH HOLDINGS SERVICES REPG REMA FACILITIES(2)
---- -------- -------- ---- ---- --------------
Notes........................ X X X
Credit Facilities............ X X X X X X
</Table>
GUARANTORS(3)
<Table>
<Caption>
ORION RELIANT OTHER MERCHANT
POWER ENERGY GENERATION
RERH HOLDINGS SERVICES REPG REMA FACILITIES(2)
---- -------- -------- ---- ---- --------------
Notes........................ X Partial X X X
Credit Facilities............ X Partial X X X
</Table>
- ---------------
(1) Certain intercompany notes that are subordinated to the guarantees have not
been pledged to secure the notes.
(2) Our other merchant generation facilities include 13 generation facilities
located in the states of California, Nevada, Florida, Illinois, Pennsylvania
and Mississippi.
(3) Subsidiary Guarantees: provided by substantially all subsidiaries unless
limited by financing restrictions and structural issues (non-guarantors
include Liberty, LEP, Orion Capital, Orion MidWest, Orion NY, RECE,
Channelview, REMA and REPGB).
7
SUMMARY OF THE EXCHANGE OFFER
On July 1, 2003, we completed the private offering of $550,000,000
aggregate principal amount of 9.25% Senior Secured Notes due 2010 and
$550,000,000 aggregate principal amount of 9.50% Senior Secured Notes due 2013.
As part of that offering, we entered into a registration rights agreement with
the initial purchasers of the original notes in which we agreed, among other
things, to deliver this prospectus to you and to complete an exchange offer for
the original notes. Below is a summary of the exchange offer.
SECURITIES OFFERED............ Up to:
- $550,000,000 aggregate principal amount of
new 9.25% Senior Secured Notes due 2010,
which have been registered under the
Securities Act, and
- $550,000,000 aggregate principal amount of
new 9.50% Senior Secured Notes due 2013,
which have been registered under the
Securities Act.
The form and terms of these exchange notes are
identical in all material respects to those of
the original notes of the same series. The
exchange notes, however, will not contain
transfer restrictions and registration rights
applicable to the original notes.
THE EXCHANGE OFFER............ We are offering to exchange:
- $1,000 principal amount of our new 9.25%
Senior Secured Notes due 2010, which have
been registered under the Securities Act, for
each $1,000 principal amount of our
outstanding 9.25% Senior Secured Notes due
2010, and
- $1,000 principal amount of our new 9.50%
Senior Secured Notes due 2013, which have
been registered under the Securities Act, for
each $1,000 principal amount of our
outstanding 9.50% Senior Secured Notes due
2013.
In order to be exchanged, an original note must
be properly tendered and accepted. All original
notes that are validly tendered and not
withdrawn will be exchanged. As of the date of
this prospectus, there are $550,000,000
principal amount of original 9.25% Senior
Secured Notes due 2010 outstanding and
$550,000,000 principal amount of original 9.50%
Senior Secured Notes due 2013 outstanding. We
will issue exchange notes promptly after the
expiration of the exchange offer.
RESALES....................... Based on interpretations by the staff of the
SEC, as detailed in a series of no-action
letters issued to third parties, we believe
that the exchange notes issued in the exchange
offer may be offered for resale, resold or
otherwise transferred by you without compliance
with the registration and prospectus delivery
requirements of the Securities Act as long as:
- you are acquiring the exchange notes in the
ordinary course of your business;
- you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate,
in a distribution of the exchange notes; and
- you are not an affiliate of ours.
8
If you are an affiliate of ours, are engaged in
or intend to engage in or have any arrangement
or understanding with any person to participate
in the distribution of the exchange notes:
- you cannot rely on the applicable
interpretations of the staff of the SEC; and
- you must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any resale
transaction.
Each broker or dealer that receives exchange
notes for its own account in exchange for
original notes that were acquired as a result
of market-making or other trading activities
must acknowledge that it will comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any offer to resell or other
transfer of the exchange notes issued in the
exchange offer, including the delivery of a
prospectus that contains information with
respect to any selling holder required by the
Securities Act in connection with any resale of
the exchange notes.
Furthermore, any broker-dealer that acquired
any of its original notes directly from us:
- may not rely on the applicable interpretation
of the staff of the SEC's position contained
in Exxon Capital Holdings Corp., SEC
no-action letter (April 13, 1988), Morgan,
Stanley & Co. Inc., SEC no-action letter
(June 5, 1991) and Shearman & Sterling, SEC
no-action letter (July 2, 1983); and
- must also be named as a selling noteholder in
connection with the registration and
prospectus delivery requirements of the
Securities Act relating to any resale
transaction.
EXPIRATION DATE............... 12:00 Midnight, New York City time, on January
9, 2004 unless we extend the expiration date.
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND ORIGINAL
NOTES......................... The exchange notes will bear interest from the
most recent date to which interest has been
paid on the original notes. Interest is paid on
the notes on January 15 and July 15 of each
year, commencing on January 15, 2004. If your
original notes are accepted for exchange, then
you will receive interest on the exchange notes
and not on the original notes.
CONDITIONS TO THE EXCHANGE
OFFER......................... The exchange offer is subject to customary
conditions. We may assert or waive these
conditions in our sole discretion. If we
materially change the terms of the exchange
offer, we will resolicit tenders of the
original notes. See "The Exchange
Offer -- Conditions to the Exchange Offer" for
more information regarding conditions to the
exchange offer.
PROCEDURES FOR TENDERING
ORIGINAL NOTES................ Except as described in the section titled "The
Exchange Offer -- Procedures for Tendering", a
tendering holder must, on or prior
9
to the expiration date transmit an agent's
message to the exchange agent at the address
listed in this prospectus.
WITHDRAWAL RIGHTS............. Tenders may be withdrawn at any time before
12:00 Midnight, New York City time, on the
expiration date.
ACCEPTANCE OF ORIGINAL NOTES
AND DELIVERY OF EXCHANGE
NOTES......................... Subject to the conditions stated in the section
"The Exchange Offer -- Conditions to the
Exchange Offer" of this prospectus, we will
accept for exchange any and all original notes
which are properly tendered in the exchange
offer before 12:00 Midnight, New York City
time, on the expiration date. The exchange
notes will be delivered promptly after the
expiration date. See "The Exchange
Offer -- Terms of the Exchange Offer."
EXCHANGE AGENT................ Wilmington Trust Company is serving as exchange
agent in connection with the exchange offer.
The address and telephone number of the
exchange agent are listed under the heading
"The Exchange Offer -- Exchange Agent."
USE OF PROCEEDS............... We will not receive any proceeds from the
issuance of exchange notes in the exchange
offer. We will pay all expenses incident to the
exchange offer. See "Use of Proceeds."
SUMMARY OF THE TERMS OF THE NOTES
The form and terms of the exchange notes and the original notes are
identical in all material respects, except that the transfer restrictions and
registration rights applicable to the original notes do not apply to the
exchange notes. The exchange notes will evidence the same debt as the original
notes and will be governed by the same indenture.
ISSUER........................ Reliant Resources, Inc.
EXCHANGE NOTES OFFERED........ $550 million in aggregate principal amount of
9.25% Senior Secured Notes due 2010 and $550
million in aggregate principal amount of 9.50%
Senior Secured Notes due 2013.
MATURITY...................... 2010 notes: July 15, 2010
2013 notes: July 15, 2013.
INTEREST RATE................. 2010 notes: 9.25% per year
2013 notes: 9.50% per year.
INTEREST PAYMENT DATES........ January 15 and July 15 of each year, commencing
on January 15, 2004.
RANKING....................... The notes are our senior obligations and are
pari passu in right of payment with all our
existing and future senior indebtedness,
including the Credit Agreement Debt (as defined
under "Description of Notes -- Certain
Definitions"). The notes are senior in right of
payment to all our existing and future
subordinated indebtedness, including the 5.00%
Convertible Senior Subordinated Notes due 2010
that were offered in the concurrent offering
with the notes.
GUARANTEES.................... The notes are jointly and severally guaranteed
by each of our current and future domestic
restricted subsidiaries that guarantee
10
borrowings under our Credit Agreement or any of
our other debt (other than certain subsidiaries
of Orion Power Holdings, Inc., also referred to
as the Orion Bank Guarantors). Except for the
limited guarantee by Orion Power Holdings,
Inc., each guarantee is pari passu in right of
payment with all existing and future senior
indebtedness of that guarantor, including all
Credit Agreement Debt, and is senior in right
of payment to all existing and future
subordinated indebtedness of such guarantor.
The Orion Power Holdings, Inc. limited
guarantee, together with the guaranty of the
Orion Bank Guarantors of the Credit Agreement
Debt, limited to an amount of approximately
$1.1 billion, ratably guarantees the Credit
Agreement Debt and the notes, and is
subordinated to the Existing Indebtedness of
Orion Power Holdings, Inc. and the existing
indebtedness of Orion NY and Orion MidWest.
SECURITY...................... The notes and the subsidiary guarantees are
secured together with the Credit Agreement
General Facilities Debt and all future Parity
Secured Debt equally and ratably by security
interests in the Shared Collateral (subject to
Credit Agreement Priority Facility Liens,
Tranche A Priority Liens and other Permitted
Liens). The Shared Collateral includes all of
the assets of Reliant Resources and the
guarantors that secure the Credit Agreement
Debt, except for (1) capital stock or other
securities issued by our subsidiaries (other
than Orion Power Holdings, Inc., Reliant Energy
Retail Holdings, LLC and Reliant Energy
Mid-Atlantic Power Holdings, LLC), (2) the
assets of the Orion Bank Guarantors and (3)
proceeds of the issuance of these notes and
other prepayments deposited to a prepayment
collateral account and certain cash collateral
deposits required under our Credit Agreement.
The collateral trustee's liens upon the
Collateral may be released under certain
conditions as described under "Description of
Notes -- Security -- Release of Security
Interests." The terms "Parity Secured Debt,"
"Credit Agreement Priority Facility Liens,"
"Tranche A Priority Liens," "Permitted Liens,"
"equally and ratably," "Collateral" and "Orion
Bank Guarantors" are defined in the
"Description of Notes" section of this
prospectus.
OPTIONAL REDEMPTION........... We cannot redeem the 2010 notes until July 15,
2007 or the 2013 notes until July 15, 2008,
except as described below. At anytime on or
after July 15, 2007 for the 2010 notes and at
anytime on or after July 15, 2008 for the 2013
notes, we can, in each case, redeem some or all
of the notes at the respective redemption
prices listed in the "Description of
Notes -- Optional Redemption" section of this
prospectus, plus accrued interest.
OPTIONAL REDEMPTION AFTER
EQUITY OFFERINGS.............. At any time before July 15, 2006, on one or
more occasions, we can choose to redeem up to
35% of the outstanding aggregate principal
amount of the 2010 notes and up to 35% of the
outstanding aggregate principal amount of the
2013 notes with
11
the net cash proceeds of any one or more equity
offerings, so long as:
- at least 65% of the aggregate principal
amount of notes issued under the applicable
indenture remains outstanding immediately
after each such redemption; and
- we redeem the notes within 75 days of such
equity offering (or, in the case of net
proceeds deposited into the Texas Genco
Escrow Account, within 75 days of the date of
such deposit).
See "Description of Notes -- Optional
Redemption."
CHANGE OF CONTROL OFFER....... If a change of control of our company occurs,
we must give holders of the notes the
opportunity to sell to us at a purchase price
of 101% of their face amount, plus accrued and
unpaid interest. The term "Change of Control"
is defined in the "Description of
Notes -- Certain Definitions" section of this
prospectus.
COVENANTS..................... We issued each series of notes under a separate
indenture. The indentures governing the notes
contain covenants that limit our ability and
that of our subsidiaries to:
- incur additional debt;
- pay dividends or distributions on, or redeem
or repurchase, our capital stock;
- make investments;
- engage in transactions with affiliates;
- create liens on our assets;
- transfer or sell assets;
- guarantee debt;
- enter into sale and leaseback transactions;
- restrict dividend or other payments to us;
- consolidate, merge or transfer all or
substantially all of our assets and the
assets of our subsidiaries;
- amend the subordination provisions of the
convertible senior subordinated notes; and
- engage in unrelated businesses.
These covenants are subject to important
exceptions and qualifications, which are
described in the "Description of Notes" section
of this prospectus. If the notes are assigned a
rating equal to or higher than Baa3 by Moody's
and BBB- by S&P and no default or event of
default has occurred and is continuing, certain
covenants will be suspended. If both ratings
should subsequently decline to below Baa3 and
BBB-, the suspended covenants will be
reinstituted. For more details, see the
"Description of Notes -- Certain
Covenants -- Changes in Covenants when Notes
Rated Investment Grade" section of this
prospectus. The
12
security documents creating the security
interests in the Collateral include certain
covenants relating to the Collateral.
AMENDMENTS AND WAIVERS........ Except for specific amendments, each of the
indentures may be amended with the consent of
the holders of a majority of the principal
amount of the applicable notes then
outstanding. In general, the security documents
may be amended with the consent of Reliant
Resources and the Credit Agreement Agent acting
at the direction of the requisite number of
lenders under the Credit Agreement, provided
that no amendment may release all or
substantially all of the Collateral without the
consent of 100% of the lenders under the Credit
Agreement Debt.
13
SUMMARY SELECTED FINANCIAL DATA
The following tables present our summary selected consolidated financial
data for 1998 through 2002 and the nine months ended September 30, 2002 and
September 30, 2003. The financial data for 1998, 1999 and 2000 are derived from
the consolidated historical financial statements of CenterPoint. The financial
data for 2001 and 2002 are derived from our audited financial statements. The
financial data for the nine months ended September 30, 2002 and September 30,
2003 are derived from our unaudited interim consolidated financial statements.
The data set forth below should be read together with our historical
consolidated financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the three years ended December 31, 2000, 2001 and 2002 included
in our Current Report on Form 8-K filed on November 14, 2003, incorporated by
reference herein, and our interim consolidated financial statements and the
notes to those statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for the nine months ended September 30,
2002 and 2003 included in our Quarterly Report on Form 10-Q filed on November
12, 2003, incorporated by reference herein. The historical financial information
may not be indicative of our future performance and the historical financial
information for 1998, 1999 and 2000 does not reflect what our financial position
and results of operations would have been had we operated as a separate,
stand-alone entity during the periods presented.
14
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ----------------------
1998 1999 2000 2001 2002 2002 2003
(1)(4) (1)(4) (1)(4)(5) (1)(2)(4)(5) (1)(3)(4) (1)(3)(4)(5) (1)(6)
------ ------ --------- ------------ --------- ------------ -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNT)
INCOME STATEMENT DATA:
Revenues....................................... $277 $601 $2,732 $5,499 $10,577 $8,712 $ 9,209
Trading margins................................ 33 88 198 378 288 281 (45)
---- ---- ------ ------ ------- ------ -------
Total........................................ 310 689 2,930 5,877 10,865 8,993 9,164
---- ---- ------ ------ ------- ------ -------
Expenses:
Fuel and cost of gas sold.................... 102 293 911 1,576 1,082 826 1,078
Purchased power.............................. 13 149 926 2,498 7,421 6,118 6,122
Accrual for payment to CenterPoint........... -- -- -- -- 128 89 47
Operation and maintenance.................... 65 128 336 461 786 589 645
General, administrative and development...... 78 94 270 471 635 476 404
Wholesale energy goodwill impairment......... -- -- -- -- -- -- 985
Depreciation and amortization................ 15 23 118 170 368 268 313
---- ---- ------ ------ ------- ------ -------
Total...................................... 273 687 2,561 5,176 10,420 8,366 9,594
---- ---- ------ ------ ------- ------ -------
Operating income (loss)........................ 37 2 369 701 445 627 (430)
---- ---- ------ ------ ------- ------ -------
Other income (expense):
Gains (losses) from investments.............. -- 14 (22) 23 (23) 3 2
(Loss) income of equity investments of
unconsolidated subsidiaries................ (1) (1) 43 7 18 11 (1)
Gain on sale of development project.......... -- -- 18 -- -- -- --
Other, net................................... 1 1 -- 2 23 6 (6)
Interest expense............................. (2) -- (7) (16) (267) (178) (365)
Interest income.............................. 1 1 16 22 28 14 24
Interest income (expense) -- affiliated
companies, net............................. 2 (6) (172) 12 5 5 --
---- ---- ------ ------ ------- ------ -------
Total other income (expense)................. 1 9 (124) 50 (216) (139) (346)
---- ---- ------ ------ ------- ------ -------
Income (loss) from continuing operations before
income taxes................................. 38 11 245 751 229 488 (776)
Income tax expense........................... 17 6 102 290 106 189 97
---- ---- ------ ------ ------- ------ -------
Income (loss) from continuing operations..... 21 5 143 461 123 299 (873)
---- ---- ------ ------ ------- ------ -------
Income (loss) from discontinued operations
before income taxes........................ -- 15 73 83 (341) 119 (417)
Income tax (benefit) expense................. -- (4) (7) (16) 108 95 61
---- ---- ------ ------ ------- ------ -------
Income (loss) from discontinued operations... -- 19 80 99 (449) 24 (478)
---- ---- ------ ------ ------- ------ -------
Income (loss) before cumulative effect of
accounting changes........................... 21 24 223 560 (326) 323 (1,351)
Cumulative effect of accounting changes, net of
tax.......................................... -- -- -- 3 (234) (234) (24)
---- ---- ------ ------ ------- ------ -------
Net income (loss).............................. $ 21 $ 24 $ 223 $ 563 $ (560) $ 89 $(1,375)
==== ==== ====== ====== ======= ====== =======
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations..... $ 1.66 $ 0.43 $ 1.03 $ (2.98)
Income (loss) from discontinued operations,
net of tax................................. 0.36 (1.55) 0.08 (1.64)
------ ------- ------ -------
Income (loss) before cumulative effect of
accounting changes......................... 2.02 (1.12) 1.11 (4.62)
Cumulative effect of accounting changes, net
of tax..................................... .01 (0.81) (0.80) (0.08)
------ ------- ------ -------
Net income (loss)............................ $ 2.03 $ (1.93) $ 0.31 $ (4.70)
====== ======= ====== =======
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations..... $ 1.66 $ 0.42 $ 1.02 $ (2.98)
Income (loss) from discontinued operations,
net of tax................................. 0.36 (1.54) 0.08 (1.64)
------ ------- ------ -------
Income (loss) before cumulative effect of
accounting changes......................... 2.02 (1.12) 1.10 (4.62)
Cumulative effect of accounting changes, net
of tax..................................... .01 (0.80) (0.80) (0.08)
------ ------- ------ -------
Net income (loss)............................ $ 2.03 $ (1.92) $ 0.30 $ (4.70)
====== ======= ====== =======
</Table>
15
<Table>
<Caption>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -----------------
1998 1999 2000 2001 2002 2002 2003
(1) (1) (1)(5) (1)(2)(5) (1)(3) (1)(5) (1)
------- -------- -------- --------- -------- ------- -------
(IN MILLIONS, EXCEPT OPERATING DATA AND RATIO)
STATEMENT OF CASH FLOW DATA:
Cash flows from operating activities............... $ (2) $ 38 $ 335 $ (152) $ 519 $ 272 $ 528
Cash flows from investing activities............... (365) (1,406) (3,013) (838) (3,486) (3,302) (757)
Cash flows from financing activities............... 379 1,408 2,721 1,000 3,981 4,291 (771)
OTHER OPERATING DATA:
Capital expenditures............................... (31) (293) (747) (728) (640) (455) (472)
Trading and marketing activity(7):
Natural gas (Bcf)(8)............................. 1,115 1,481 2,273 3,265 3,449 2,925 765
Power sales (thousand MWh)(8).................... 61,195 128,266 125,971 222,907 306,425 244,332 67,450
Power generation activity:
Wholesale power sales (thousand MWh)(8).......... 2,973 10,204 39,300 62,825 128,588 105,161 87,468
Retail power sales (GWh)........................... -- -- -- 473 62,455 48,379 49,721
Net power generation capacity at the end of period
(MW)............................................. 3,800 4,469 9,231 10,521 19,300 19,888 20,399
Ratio of earnings to fixed charges(9)(10)(11)...... 19.31 1.28 1.83 7.50 1.55 2.92 --
</Table>
<Table>
<Caption>
DECEMBER 31,
----------------------------------------------
1998 1999 2000 2001 2002 SEPTEMBER 30,
(1) (1) (1)(5) (1)(5) (1) 2003(6)
------ ------- ------- ------- ------- -------------
(IN MILLIONS)
BALANCE SHEET DATA:
Property, plant and equipment, net.......................... $ 270 $ 592 $ 2,217 $ 2,796 $ 6,991 $ 8,508
Total assets................................................ 1,409 5,624 13,475 11,726 17,669 16,624
Short-term borrowings....................................... -- -- -- 92 669 307
Long-term debt to third parties, including current
maturities................................................ -- 69 260 297 6,159 7,218
Accounts and notes (payable) receivable -- affiliated
companies, net............................................ (17) (1,333) (1,967) 445 -- --
Stockholders' equity........................................ 652 741 2,345 5,984 5,653 4,285
</Table>
- ---------------
(1) Our results of operations include the results of the following
acquisitions, all of which were accounted for using the purchase method of
accounting, from their respective acquisition dates: the five generating
facilities in California substantially acquired in April 1998, a generating
facility in Florida acquired in October 1999, the REMA acquisition that
occurred in May 2000 and the Orion Power acquisition that occurred in
February 2002. See note 5 to our consolidated financial statements
incorporated by reference herein for further information about the
acquisitions occurring in 2000 and 2002. In October 1999, we acquired
REPGB, which is part of our European energy operations. In February 2003,
we signed an agreement to sell our European energy operations to Nuon. In
the first quarter of 2003, we began to report the results of our European
energy operations as discontinued operations in accordance with SFAS No.
144 and accordingly, reclassified prior period amounts. Also, in July 2003,
we entered into a definitive agreement to sell our Desert Basin plant and
have reflected those operations as discontinued and accordingly have
reclassified prior periods. For further discussion of the sales, see notes
17 and 18 to our interim financial statements incorporated by reference
herein.
(2) Effective January 1, 2001, we adopted SFAS No. 133 which established
accounting and reporting standards for derivative instruments. See note 7
to our consolidated financial statements incorporated by reference herein
for further information regarding the impact of the adoption of SFAS No.
133.
(3) During the third quarter of 2002, we completed the transitional impairment
test for the adoption of SFAS No. 142 on our consolidated financial
statements, including the review of goodwill for impairment as of January
1, 2002. Based on this impairment test, we recorded an impairment of our
European energy segment's goodwill of $234 million, net of tax, as a
cumulative effect of accounting change. See note 6 to our consolidated
financial statements incorporated by reference herein for further
discussion.
(4) Beginning with the quarter ended September 30, 2002, we now report all
energy trading and marketing activities on a net basis in the statements of
consolidated operations. Comparative financial statements for prior periods
have been reclassified to conform to this presentation. See note 2(t) to
our consolidated financial statements incorporated by reference herein for
further discussion.
16
(5) As described in note 1 to our consolidated financial statements
incorporated by reference herein, our consolidated financial statements for
2000 and 2001 have been restated from amounts previously reported. The
restatement had no impact on previously reported consolidated cash flows.
(6) During the nine months ended September 30, 2003, we recorded a charge of
$985 million (pre-tax and after tax) related to an impairment of goodwill
in our wholesale energy reporting unit. See note 7 to our interim financial
statements incorporated by reference herein for discussion.
(7) Excludes financial transactions.
(8) Includes physical contracts not delivered.
(9) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income (loss) from continuing operations before income
taxes less (a)(1) income of equity investments of unconsolidated
subsidiaries and (2) capitalized interest plus (b)(1) loss of equity
investments of unconsolidated subsidiaries, (2) fixed charges, (3)
amortization of capitalized interest and (4) distributed income of equity
investees. Fixed charges consist of (a) interest expense, (b) interest
expense -- affiliated companies, net, (c) capitalized interest and (d)
interest within rent expense.
(10) For the nine months ended September 30, 2003, our earnings were
insufficient to cover our fixed charges by $837 million as fixed charges
were $481 million and our loss was $356 million.
(11) The pro forma ratios of earnings to fixed charges for the year ended
December 31, 2002 and for the nine months ended September 30, 2003 for the
issuance of the notes and the convertible senior subordinated notes did not
change from the historical ratios by more than 10% since the specific debt
that was repaid with the issuance of the notes has only been outstanding
since March 31, 2003. However, had we assumed the notes and the convertible
senior subordinated notes had been issued and outstanding as of January 1,
2002, and had repaid debt, with the amount of the net proceeds from the
notes, that was in place prior to our March 31, 2003 refinancing, our fixed
charges would have increased by $96 million and $32 million for the year
ended December 31, 2002 and the nine months ended September 30, 2003,
respectively. In addition, our ratio of earnings to fixed charges would
have been 1.22 for the year ended December 31, 2002 and our earnings would
have been insufficient to cover our fixed charges by $869 million for the
nine months ended September 30, 2003.
17
RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information in this prospectus and the documents
incorporated by reference.
RISKS RELATED TO OUR RETAIL ENERGY OPERATIONS
WE MAY LOSE A SIGNIFICANT NUMBER OF OUR RETAIL RESIDENTIAL AND SMALL
COMMERCIAL CUSTOMERS IN THE HOUSTON METROPOLITAN AREA.
In June 1999, the Texas legislature adopted the Texas electric
restructuring law, which substantially amended the regulatory structure
governing electric utilities in Texas in order to allow full retail competition.
Beginning in 2002, all classes of Texas customers of most investor-owned
electric utilities, and those of any municipal utility and electric cooperative
that opted to participate in the competitive marketplace, were able to choose
their retail electric provider. In January 2002, we began to provide retail
electric services to all customers of CenterPoint who did not take action to
select another retail electric provider. As an affiliated retail electric
provider, we are initially required to sell electricity to these Houston area
residential and small commercial customers at a specified price, or price to
beat, whereas other retail electric providers will be allowed to sell
electricity to these customers at any price. We are not permitted to offer
electricity to these customers at a price other than the price to beat until
January 2005, unless before that date the PUCT determines that 40% or more of
the amount of electric power that was consumed in 2000 by the relevant class of
customers in the Houston metropolitan area is being provided by retail electric
providers other than us. Because we are not able to compete for residential and
small commercial customers on the basis of price in the Houston area, we may
lose a significant number of these customers to other providers.
WE MAY LOSE A SIGNIFICANT PORTION OF OUR MARKET SHARE OF LARGE COMMERCIAL,
INDUSTRIAL AND INSTITUTIONAL CUSTOMERS IN TEXAS.
We are providing commodity services to the large commercial, industrial and
institutional customers previously served by CenterPoint who did not take action
to contract with another retail electric provider. In addition, we have signed
contracts to provide electricity and energy efficiency services to large
commercial, industrial and institutional customers, both in the Houston area, as
well as in other parts of the ERCOT Region. We or any other retail electric
provider can provide services to these customers at any negotiated price. The
market for these customers is very competitive, and any of these customers that
selects us to be their provider may subsequently decide to switch to another
provider at the conclusion of the term of their contract with us.
THE RESULTS OF OUR RETAIL ELECTRIC OPERATIONS IN TEXAS ARE LARGELY DEPENDENT
UPON THE AMOUNT OF HEADROOM AVAILABLE IN OUR PRICE TO BEAT. FUTURE ADJUSTMENTS
TO THE PRICE TO BEAT MAY BE INADEQUATE TO COVER OUR COSTS TO PURCHASE POWER TO
SERVE OUR RESIDENTIAL AND SMALL COMMERCIAL CUSTOMERS.
The results of our residential and small commercial retail electric
operations in Texas are largely dependent upon the amount of headroom available
in our price to beat. Headroom may be a positive or negative number. The PUCT's
current regulations allow us to request an adjustment of our fuel factor based
on the percentage change in the forward price of natural gas or as a result of
changes in the price of purchased energy up to twice a year. As part of a
request to change the fuel factor for changes in purchased energy prices, we
would have to show that the fuel factor must be adjusted to restore the amount
of headroom that existed at the time the initial price to beat fuel factor was
set by the PUCT. We cannot estimate with any certainty the magnitude and
frequency of the adjustments required, if any, and the eventual impact of such
adjustments on the amount of headroom available in our price to beat. If this
adjustment and any future adjustments to our price to beat are inadequate to
cover future increases in our costs to purchase power to serve our price to beat
customers or are delayed by the PUCT, our business, results of operations,
financial condition and cash flows could be materially adversely affected.
18
In March 2003, the PUCT approved a revised price to beat rule. The changes
from the previous rule include an increase in the number of days used to
calculate the natural gas price average from 10 trading days to 20 trading days
, and an increase in the threshold of what constitutes a significant change in
the market price of natural gas and purchased energy from 4% to 5%, except for
filings made after November 15th of a given year that must meet a 10% threshold.
The revised rule also provides that the PUCT will, after reaching a
determination of stranded costs in 2004, make downward adjustments to the price
to beat fuel factor if natural gas prices drop below the prices embedded in the
then-current price to beat fuel factor. In addition, the revised rule also
specifies that the base rate portion of the price to beat will be adjusted to
account for changes in the non-bypassable rates that result from the utilities'
final stranded cost determination in 2004. Adjustments to the price to beat will
be made following the utilities' final stranded cost determination in 2004. At
this time, we cannot predict the impact of the changes on our financial
condition or results of operations. In March 2003, the PUCT approved our request
to increase the price to beat fuel factor for residential and small commercial
customers based on a 23.4% increase in the price of natural gas from our
previous increase in December 2002. In July 2003, our second and final request
for 2003 was approved by the PUCT to increase the price to beat fuel factor
based on a 23.1% increase in the price of natural gas. Our requested increase
was based on an average forward 12-month natural gas price of $6.1000/MMbtu
during the twenty-day trading period beginning May 14, 2003 and ending June 11,
2003. The requested increase represents an increase of 9.2% in the total bill of
a residential customer using, on average, 12,000 kilowatt hours per year.
On June 26, 2003, CenterPoint petitioned the PUCT to request immediate
elimination of the transmission and distribution utility's excess mitigation
credits (EMC). EMC are credits against the transmission and distribution
utility's nonbypassable charges to retail electric providers providing service
in CenterPoint's territory. On August 6, 2003, the staff of the PUCT filed a
recommendation that the PUCT dismiss CenterPoint's petition because it does not
comply with the procedure set out in the statute for addressing the issues
raised. Subsequently, the procedural schedule was suspended. We, along with a
number of other parties, are currently engaged in settlement discussions on this
issue and other outstanding issues that CenterPoint currently has before the
PUCT. It is not known at this time what the ultimate outcome from this
proceeding will be and whether the PUCT will grant, deny or take other action
with respect to CenterPoint's petition. If CenterPoint's request is granted and
there is no corresponding increase in the price to beat rate, there could be a
material adverse impact on our financial condition, results of operations and
cash flows.
WE FACE STRONG COMPETITION FROM AFFILIATED RETAIL ELECTRIC PROVIDERS OF
INCUMBENT ELECTRIC UTILITIES AND OTHER COMPETITORS OUTSIDE OF HOUSTON.
In most retail electric markets outside the Houston area, our principal
competitor is the local incumbent electric utility company's retail affiliate.
These retail affiliates have the advantage of long-standing relationships with
their customers. In addition to competition from the incumbent electric
utilities' affiliates, we face competition from a number of other retail
electric providers, including affiliates of other non-incumbent electric
utilities, independent retail electric providers and, with respect to sales to
large commercial, industrial and institutional customers, independent power
producers and wholesale power providers acting as retail electric providers.
Some of these competitors are larger and better capitalized than we are.
OUR RETAIL ENERGY OPERATIONS ARE SUBJECT TO EXTENSIVE MARKET OVERSIGHT.
CHANGES TO MARKET PROTOCOLS OR NEW REGULATION COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH
FLOWS.
The ERCOT ISO, which oversees the ERCOT Region, has and may continue to
modify the market structure and other market mechanisms in an attempt to improve
market efficiency. Moreover, existing regulations may be revised or
reinterpreted and new laws and regulations may be adopted or become applicable
to our commercial activities. These actions could have a material adverse effect
on our results of operations, financial condition and cash flows.
19
PAYMENT DEFAULTS BY AND LITIGATION WITH OTHER RETAIL ELECTRIC PROVIDERS TO
ERCOT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS.
In the event of a default by a retail electric provider of its payment
obligations to ERCOT, the portion of the obligation that is unrecoverable by
ERCOT from the defaulting retail electric provider is assumed by the remaining
market participants in proportion to each participant's load ratio share. As a
retail electric provider and market participant in ERCOT, we would pay a portion
of the amount owed to ERCOT should such a default occur, and ERCOT is not
successful in recovering such amounts. The default of a retail electric provider
in its obligations to ERCOT could have a material adverse effect on our
business, results of operations, financial condition and cash flows.
In March 2003, TCE, a retail electricity provider in the ERCOT market,
filed for bankruptcy protection. The bankruptcy court has approved TCE's
treatment of ERCOT's claim, which provides for payments to ERCOT of $1 million a
month beginning in July 2004. From September 15, 2003 until July 15, 2004, TCE
will pay ERCOT fifty percent of any prepetition accounts receivable collected,
as well as $25,000 per month. This treatment is also included in TCE's first
amended disclosure statement, which is awaiting the approval of the bankruptcy
court. No assurance can be given that TCE will be able to satisfy its
obligations to ERCOT. For information regarding a lawsuit filed by TCE against
ERCOT and several other electricity suppliers for antitrust and other claims,
see note 13(a) to our interim financial statements, incorporated by reference
herein.
WE ARE HEAVILY DEPENDENT UPON THIRD PARTY PROVIDERS OF CAPACITY AND ENERGY TO
SUPPLY OUR RETAIL OBLIGATIONS.
We do not own sufficient generating resources in Texas to supply our retail
business. The capacity and energy to supply our retail business is purchased at
market prices from a variety of suppliers under contracts with varying terms.
Our retail customers are concentrated in the Houston metropolitan area, and
there is limited ability to serve these customers with generation located
outside the Houston metropolitan area. Texas Genco, located in the Houston
congestion zone, is the largest supplier of capacity and energy for our retail
business and is likely to remain our largest supplier for the foreseeable
future. There is a significant risk that our business, results of operations,
financial condition and cash flows could be materially adversely affected if we
are not able to purchase the capacity and energy from Texas Genco or otherwise
obtain sufficient capacity and energy required to serve our customers. The
failure of any of our third party suppliers to perform under the terms of
existing or future contracts could have a material adverse effect on our results
of operations, financial condition and cash flows.
WE MAY BE REQUIRED TO MAKE A SUBSTANTIAL PAYMENT TO CENTERPOINT IN 2004.
We will be required to make a payment to CenterPoint in 2004 as required by
the Texas electric restructuring law, unless on or prior to January 1, 2004, 40%
or more of the amount of electric power that was consumed in 2000 by residential
or small commercial customers, as applicable, within CenterPoint's Houston
service territory is being provided by retail electric providers other than us.
This amount will be computed by multiplying $150 by the number of residential or
small commercial customers, as the case may be, that we serve on January 1, 2004
in CenterPoint's Houston service territory, less the number of residential or
small commercial electric customers, as the case may be, we serve in other areas
of Texas. Currently, we believe it is probable that we will be required to make
a payment in the range of $170 million to $180 million (pre-tax), with a most
probable estimate of $175 million to CenterPoint related to our residential
customers only.
Currently, we believe that the 40% test for small commercial customers will
be met and we will not make a payment related to those customers. If the 40%
test is not met related to our small commercial customers and a payment is
required, we estimate this payment would be approximately $30 million.
20
WE RELY ON THE INFRASTRUCTURE OF TRANSMISSION AND DISTRIBUTION UTILITIES AND
THE ERCOT ISO TO TRANSMIT AND DELIVER ELECTRICITY TO OUR RETAIL CUSTOMERS AND
TO OBTAIN INFORMATION ABOUT OUR RETAIL CUSTOMERS. IN ADDITION, WE RELY ON THE
RELIABILITY OF OUR OWN INFRASTRUCTURE AND SYSTEMS TO PERFORM ENROLLMENT AND
BILLING FUNCTIONS. ANY INFRASTRUCTURE FAILURE COULD NEGATIVELY IMPACT OUR
CUSTOMERS' SATISFACTION AND COULD HAVE A MATERIAL NEGATIVE IMPACT ON OUR
EARNINGS.
We are dependent on transmission and distribution utilities for maintenance
of the infrastructure through which we deliver electricity to our retail
customers. Any infrastructure failure that interrupts or impairs delivery of
electricity to our customers could negatively impact the satisfaction of our
customers with our service and could have a material adverse effect on our
results of operations, financial condition and cash flow. Additionally, we are
dependent on the transmission and distribution utilities for performing service
initiations and changes, and for reading our customers' energy meters. We are
required to rely on the transmission and distribution utility or, in some cases,
the ERCOT ISO, to provide us with our customers' information regarding energy
usage, and we may be limited in our ability to confirm the accuracy of the
information. The provision of inaccurate information or delayed provision of
such information by the transmission and distribution utilities or the ERCOT ISO
could have a material adverse effect on our business, results of operations,
financial condition and cash flow. In addition, any operational problems with
our new systems and processes could similarly have a material adverse effect on
our business, results of operations, financial condition and cash flow. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Retail Energy" for the three years ended
December 31, 2000, 2001 and 2002 and for the nine months ended September 30,
2002 and 2003, incorporated by reference herein.
THE ERCOT ISO HAS EXPERIENCED A NUMBER OF PROBLEMS WITH ITS INFORMATION
SYSTEMS SINCE THE ADVENT OF COMPETITION IN THE TEXAS MARKET THAT HAVE RESULTED
IN DELAYS IN SWITCHING CUSTOMERS AND RECEIVING FINAL SETTLEMENT INFORMATION
FOR CUSTOMER ACCOUNTS. OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED IF
THESE PROBLEMS ARE NOT ALLEVIATED.
The ERCOT ISO is the independent system operator responsible for
maintaining reliable operations of the bulk electric power supply system in the
ERCOT Region and for acting as a central agent for the registration of customers
with their chosen retail electric supplier. Its responsibilities include
ensuring that information relating to a customer's choice of retail electric
provider, including data needed for ongoing servicing of customer accounts, is
conveyed in a timely manner to the appropriate parties. Problems in the flow of
information between the ERCOT ISO, the transmission and distribution utilities
and the retail electric providers have resulted in delays and other problems in
enrolling and billing customers. While the flow of information has improved
materially over the course of the first year of full market choice operations,
remaining system and process problems are still being addressed. When customer
enrollment transactions are not successfully processed by all involved parties,
ownership records in the various systems supporting the market are not
synchronized properly and subsequent transactions for billing and settlement are
adversely affected. The impact can include us not being the electric
provider-of-record for intended or agreed upon time periods, delays in receiving
customer consumption data from the ERCOT ISO that is necessary for billing, as
well as the incorrect application of rates or prices and imbalances in our
electricity supply and actual sales.
The ERCOT ISO is also responsible for handling, scheduling and settlement
for all electricity supply volumes in the ERCOT Region. The ERCOT ISO plays a
vital role in the collection and dissemination of metering data from the
transmission and distribution utilities to the retail electric providers. We and
other retail electric providers schedule volumes based on forecasts, which are
based, in part, on information supplied by the ERCOT ISO. To the extent that
these amounts are not accurate or timely, we could have incorrectly estimated
our scheduled volumes and supply costs.
The ERCOT ISO volume settlement process has been delayed on several
occasions since the opening of the market in order to address operational
problems with data management between the ERCOT ISO, the transmission and
distribution utilities and the retail electric providers. During the third
quarter of 2002, the ERCOT ISO issued true-up settlements for the pilot time
period of July 31, 2001 to December 31,
21
2001. True-up settlement calculations were then temporarily suspended to allow a
threshold level of consumption data for subsequent periods from the transmission
and distribution utilities to be loaded into the ERCOT ISO's systems. True-up
settlement calculations for the period January 1, 2002 through December 31, 2002
were performed by the ERCOT ISO during the second, third and early fourth
quarters of 2003. These settlement calculations indicate that our customers
utilized greater volumes of electricity than our records indicate. We are
currently pursuing the ERCOT ISO's process for disputing settlement calculations
for that time period. True-up settlement calculations for periods after December
31, 2002 are currently suspended while the ERCOT ISO provides the transmission
and distribution utilities and retail electric providers with more detailed
information on data in the ERCOT ISO's systems that are being used in the
settlement calculations. We are working closely with the ERCOT ISO and other
market participants to identify and resolve discrepancies that may have impacted
settlements already performed as well as future settlements.
The ERCOT ISO fees related to resolving local congestion have increased
substantially during 2003. Efforts are ongoing to establish the causes of the
fee increases and to correct the market design or systems, if necessary. In
addition, we may be billed a larger than expected share of these total fees if
the ERCOT ISO's records indicate that our volumes delivered were greater than
the volumes our records indicate.
For additional information regarding settlement issues, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Retail Energy" for the three years ended December 31, 2000, 2001
and 2002 and for the nine months ended September 30, 2002 and 2003, incorporated
by reference herein.
RISKS RELATED TO OUR WHOLESALE ENERGY OPERATIONS
WE MAY BE REQUIRED TO RECORD ADDITIONAL IMPAIRMENTS IN THE RECORDED VALUE OF
OUR ASSETS.
We tested our wholesale energy segment's goodwill for impairment effective
July 2003 as required under SFAS No. 142 due to the disposition of our Desert
Basin plant operations. In connection with this July 2003 impairment analysis,
we recognized an impairment of $985 million (pre-tax and after-tax) relating to
our wholesale energy reporting unit. We plan to perform our annual goodwill
impairment tests for our wholesale energy and retail energy reporting units
effective November 1, 2003. If actual results of operations are worse than
projected or our wholesale energy market outlook changes, we could have
additional impairments of goodwill and impairments of our property, plant and
equipment in future periods, which, in turn, could have a material adverse
effect on our results of operations.
OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS ARE SUBJECT TO
MARKET RISKS, THE IMPACT OF WHICH WE CANNOT FULLY MITIGATE.
As part of our merchant electric generation business, we sell electric
energy, capacity and ancillary services and purchase fuel under short and
long-term contractual obligations and through various spot markets. We are not
guaranteed any rate of return on our capital investments through cost of service
rates, and our results of operations, financial condition and cash flows from
these businesses are subject to market risks which can be partially mitigated by
hedging long-term sales agreements and other management actions. However, a
substantial portion of market risk remains beyond our control. These market
risks include commodity price risk, counterparty risk, credit risk, transmission
risk and competitor actions.
WE RELY ON MARKET LIQUIDITY AND THE ESTABLISHMENT OF VALID PRICING TO PROPERLY
MANAGE OUR RISKS.
Our commercial businesses depend on sufficient market participation to
establish market liquidity and valid pricing to properly manage the risks
inherent in our businesses. The recent reduction in the number of market
participants has significantly decreased market liquidity and may impair our
ability to manage business risks. In addition, such a reduction may increase our
management's reliance on internal models for decision-making. Our internal
models may not accurately represent the markets in which we
22
participate, potentially causing us to make incorrect decisions. These factors
could have a material adverse effect on our results of operations, financial
condition and cash flows.
WE MAY NOT BE ABLE TO SATISFY THE GUARANTEES AND INDEMNIFICATION OBLIGATIONS
RELATING TO OUR COMMERCIAL ACTIVITIES IF THEY BECOME DUE AT THE SAME TIME.
In connection with our commercial businesses, we guarantee or indemnify the
performance of a significant portion of the obligations of certain of our
subsidiaries. For example, we routinely guarantee the obligations of Reliant
Energy Services and other subsidiaries of ours under substantially all of their
gas and electricity trading, marketing and origination contracts. The
obligations underlying these guarantees and indemnities are recorded on our
consolidated balance sheet as trading and marketing liabilities and non-trading
derivative liabilities. These obligations make up a significant portion of these
line items. In addition, we have, from time to time, executed guarantees of the
obligations of our subsidiaries under leases of real property, financing
documents and certain other miscellaneous contracts such as long-term turbine
maintenance contracts. Some of these guarantees and indemnities are for fixed
amounts, others have a fixed maximum amount and others do not specify a maximum
amount. If we were unable to successfully negotiate lower amounts or alternative
arrangements, we would not be able to satisfy all of these guarantees and
indemnification obligations if they were to all come due at the same time. For
additional information regarding our guarantees and indemnification obligations,
see note 14(f) to our consolidated financial statements incorporated by
reference herein.
WE RELY ON POWER TRANSMISSION AND NATURAL GAS TRANSPORTATION FACILITIES THAT
WE DO NOT OWN OR CONTROL. IF THESE FACILITIES FAIL TO PROVIDE US WITH ADEQUATE
TRANSMISSION CAPACITY, WE MAY NOT BE ABLE TO DELIVER OUR WHOLESALE POWER TO
OUR CUSTOMERS OR RECEIVE NATURAL GAS PRODUCTS AT OUR FACILITIES.
We depend on power transmission and distribution and natural gas
transportation facilities owned and operated by utilities and others to deliver
energy products to our customers. Our customers in turn either consume these
products or deliver them to the ultimate consumer. If transmission or
transportation is disrupted, or the capacity is inadequate, our ability to sell
and deliver our products may be hindered.
AS A RESULT OF EVENTS IN CALIFORNIA OVER THE PAST FEW YEARS, OUR WHOLESALE
POWER OPERATIONS IN OUR WEST REGION HAVE EXPERIENCED DELAYS IN THE COLLECTION
OF RECEIVABLES AND ARE SUBJECT TO UNCERTAINTY, INCLUDING POTENTIALLY MATERIAL
REFUND OBLIGATIONS, RELATING TO ONGOING LITIGATION AND GOVERNMENTAL
PROCEEDINGS RELATING TO OUR ACTIVITIES IN THE ELECTRICITY AND GAS MARKETS.
We are defendants in several class action lawsuits and other lawsuits filed
against us and a number of other companies that either owned generation plants
in California or sold electricity in California markets. These lawsuits
challenge the prices for wholesale electricity in California during parts of
2000 and 2001. For information regarding these and other lawsuits, see notes
13(a) and 13(b) to our interim financial statements incorporated by reference
herein.
The FERC has established a refund proceeding to reset the market clearing
prices for sales into the Cal ISO and Cal PX spot markets for the period from
October 2000 to mid-June 2001. Although this proceeding has not yet concluded,
we are likely to have a substantial net refund obligation as a result of this
proceeding, which we estimate to be between approximately $103 million and $231
million for energy sales in California. For information regarding reserves
against receivables, the FERC refund methodology and uncertainty in the
California wholesale energy market, see note 13(b) to our interim financial
statements incorporated by reference herein.
Several state and other federal regulatory investigations are ongoing in
connection with the wholesale electricity and natural gas prices in California
and neighboring Western states to determine the causes of the high prices and
potentially to recommend remedial action. In July 2003, the City of Los Angeles
announced that it had filed suit against us and one of our employees in the
United States District Court for the Central District of California. The lawsuit
alleges that we conspired to manipulate the price for natural gas in breach of
our contract to supply the Los Angeles Department of Water and Power with
23
natural gas and acted in violation of federal and state antitrust laws, the
federal Racketeer Influenced and Corrupt Organization Act and the California
False Claims Act. The lawsuit seeks treble damages for the alleged overcharges
for gas purchased by the Los Angeles Department of Water and Power of an
estimated $218 million, interest, costs of suit and attorneys' fees.
We may also face more stringent state regulations in the future. There have
been efforts in California to repeal deregulation. Also, a new California state
statute may give the CPUC authority to regulate the operations of our California
generating subsidiaries, beyond the existing state regulation regarding
environmental and other health and safety matters. The CPUC has recently
initiated the process of establishing the methods through which these new
requirements will be administered.
As these investigations proceed, additional matters could be discovered
that could result in the imposition of restrictions on our businesses, fines,
penalties or other adverse events. Furthermore, as events occur to other
companies in the retail and wholesale energy industry that lead to
investigations of such companies by regulatory authorities, we may also be
investigated by such regulatory authorities if they decide to broaden their
investigation to comparable companies in the industry.
OUR WHOLESALE ENERGY SEGMENT IS SUBJECT TO EXTENSIVE MARKET REGULATION.
CHANGES IN THESE REGULATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS.
The FERC, which has jurisdiction over wholesale power rates, as well as
independent system operators that oversee some of these markets, has imposed and
may continue to impose price limitations, bidding rules and other mechanisms in
an attempt to address some of the price volatility in these markets and mitigate
market price fluctuations. These actions, along with potential changes to
existing mechanisms, could have a material adverse effect on our results of
operations, financial condition and cash flows.
We operate in a regulatory environment that is undergoing significant
changes as a result of varying restructuring initiatives at both the state and
federal levels. New regulatory policies, which may have a significant impact on
our industry, are now being developed and we cannot predict the future direction
of these changes or the ultimate effect that this changing regulatory
environment will have on our business.
Moreover, existing regulations may be revised or reinterpreted and new laws
and regulations may be adopted or become applicable to our facilities or our
commercial activities. Such future changes in laws and regulations may have a
detrimental effect on our business. In this connection, state officials, the Cal
ISO and the investor-owned utilities in California have argued to the FERC that
our California generating subsidiaries should not continue to have market-based
rate authority. (As discussed further above, in addition to these requests, the
FERC has also recently issued a number of "Show Cause" orders against various
market participants in the California markets, including a number of Reliant
Resources entities. These "Show Cause" orders relate to alleged market
manipulation and/or anomalous bidding practices, and could result in either
disgorgement of alleged profits or the loss of market-based rate authority for
various Reliant Resources entities. The FERC has also initiated an investigation
into economic withholding allegations that could result in similar remedies.) In
the event the market-based rate authority of any Reliant Resources entity is
revoked, the FERC has not provided guidance on how cost-based rates might be
implemented in a market regime. We cannot predict what actions the FERC may take
in the future. The impact of receiving cost-based rates on our California
portfolio is also not predictable given that the numerous details of any such
implementation are unknown at this time.
In addition to the FERC investigations, several state and other federal
regulatory investigations are ongoing in connection with wholesale electricity
prices to determine the causes of the high prices and potentially to recommend
remedial action. As these investigations proceed, additional matters could be
discovered that could result in the imposition of restrictions on our business,
fines, penalties or other adverse actions.
The Cal ISO has undertaken, at the FERC's direction, a market redesign
process that includes an ongoing obligation to offer available capacity in Cal
ISO markets, a $250 per MWh price cap, as well as
24
"automated" mitigation of all bids when any zonal clearing price for balancing
energy exceeds $91.87 per MWh. The automated mitigation is only applied to bids
that exceed certain reference prices and that would significantly increase the
market price. However, in February 2003, the Cal ISO stated that it intends to
appeal in federal court the FERC's decision regarding the application of
automated mitigation to local market power situations. While the FERC has
adopted similar thresholds for both local and system market power, Cal ISO is
seeking to have a more restrictive procedure applied to local market power.
Additional features of the California market redesign to be implemented in the
future include a revised market monitoring and mitigation structure, a revised
congestion management mechanism and an obligation for load-serving entities in
California to maintain capacity reserves. A new California state statute
purports to give the CPUC new power to regulate the operations and maintenance
practices of our California generating subsidiaries, beyond the existing state
regulation, regarding environmental and other health and safety matters. The
CPUC has recently initiated the process of establishing the methods through
which these new requirements will be administered.
The NY Market is subject to significant regulatory oversight and control.
The results of our operations in the NY Market are dependent on the continuance
of the current regulatory structure. The rules governing the current regulatory
structure are subject to change. We cannot assure you that we will be able to
adapt our business in a timely manner in response to any changes in the
regulatory structure, which could have a material adverse effect on our
financial condition, results of operations and cash flows. The primary
regulatory risk in this market is associated with the oversight activity of the
New York Public Service Commission, the NYISO and the FERC. Our assets located
in New York are subject to "lightened regulation" by the New York Public Service
Commission, including provisions of the New York Public Service Law that relate
to enforcement, investigation, safety, reliability, system improvements,
construction, excavation, and the issuance of securities. Because "lightened
regulation" was accomplished administratively, it could be revoked. The NYISO
has the ability to revise wholesale prices, which could lead to delayed or
disputed collection of amounts due to us for sales of electric energy and
ancillary services. The NYISO may in some cases, subject to the FERC approval,
also impose cost-based pricing and/or price caps. The NYISO has implemented
automated mitigation procedures under which day-ahead energy bids will be
automatically reviewed. If bids exceed certain pre-established thresholds and
have a significant impact on the market-clearing price, the bids are then
reduced to a pre-established market-based or negotiated reference bid. The NYISO
has also adopted, at the FERC's direction, more stringent mitigation measures
for all generating facilities in transmission-constrained New York City.
On June 25, 2003, the FERC announced that it was proposing new rules to
prevent market abuse. The rules would prohibit certain transactions and
practices under sellers' market-based rate electric tariffs and blanket gas
certificates. The new rules relate to market manipulation, communications,
reporting and record retention. Under the proposed rules, a seller found to have
engaged in prohibited behavior would be subject to disgorgement of unjust
profits and non-monetary remedies such as revocation of the seller's
market-based rate authority or blanket certificate authority. If the FERC adopts
its proposed market behavior rules, our future earnings may be adversely
affected by an open-ended refund obligation on sales at market-based rates or
under blanket certificate authority to the extent we were determined to have
violated the new tariff provisions required by the proposed rule.
The FERC also instituted a SMD rulemaking proceeding that proposes to
eliminate discrimination in transmission service and to standardize electricity
market design. The FERC's SMD proceeding would establish standardized
transmission service throughout the United States, a standard wholesale electric
market design, including forward and spot markets for energy and an ancillary
services market. Further, this proceeding is also expected to provide all RTOs
specifications regarding the entities that administer these markets and how
these entities perform market monitoring and mitigation. While we believe SMD is
a positive development for our business, significant opposition to SMD has been
voiced, and we cannot predict at this time whether SMD will be adopted as
proposed or what effect standard market design, in whatever form it may take if
and when it is adopted, would have on our business growth prospects and
financial results.
25
The FERC's RTO initiative, which began in May 1999, is making progress in
all areas of the country. If RTOs are established as envisioned by the FERC,
"rate pancaking," or multiple transmission charges that apply to a single
point-to-point delivery of energy will be eliminated within a region, and
wholesale transactions within the region and between regions will be
facilitated. The end result could be a more competitive, transparent market for
the sale of energy and a more economic and efficient use and allocation of
resources. However, considerable opposition exists in some regions of the United
States to the development of RTOs as envisioned by the FERC, and the timing for
completion of the developing RTOs is uncertain.
Additionally, federal legislative initiatives have been introduced and
discussed to address the problems being experienced in some power markets and to
enhance or limit the FERC authority. We cannot predict whether such proposals
will be adopted or their impact on industry restructuring. If the trend towards
competitive restructuring of the wholesale power markets is reversed,
discontinued or delayed, the business growth prospects and financial results of
our wholesale energy and retail energy segments could be adversely affected.
OUR COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS ARE SIGNIFICANT AND THE COST
OF COMPLIANCE WITH NEW ENVIRONMENTAL LAWS COULD ADVERSELY IMPACT OUR
PROFITABILITY.
Our wholesale energy segment is subject to extensive environmental
regulation by federal, state and local authorities. We are required to comply
with numerous environmental laws and regulations, and to obtain numerous
governmental permits in operating our facilities, a number of which are
coal-fired and affected by more numerous and diverse regulations. We may incur
significant costs to comply with these requirements. If we fail to comply with
these requirements, we could be subject to civil or criminal penalties including
fines. Existing environmental regulations can be revised, reinterpreted or
become applicable to our facilities, new laws and regulations could be adopted,
and future changes in environmental laws and regulations could occur, including
potential regulatory and enforcement developments related to air emissions. If
any of these events occur, our business, results of operations, financial
condition and cash flows could be materially adversely affected. For more
information regarding compliance with environmental laws, see "Our
Business -- Environmental Matters".
THE MAJORITY OF OUR HYDROELECTRIC FACILITIES ARE REQUIRED TO BE LICENSED UNDER
THE FEDERAL POWER ACT. ANY FAILURE TO OBTAIN OR MAINTAIN A REQUIRED LICENSE
FOR ONE OR MORE OF OUR HYDROELECTRIC FACILITIES COULD HAVE AN ADVERSE IMPACT
ON US.
The Federal Power Act gives the FERC exclusive authority to license
non-federal hydroelectric projects on navigable waterways and federal lands. The
FERC hydroelectric licenses are issued for terms of 30 to 50 years. Some of our
hydroelectric facilities, representing approximately 90 MW of capacity, have
licenses that expire within the next ten years. Facilities that we own
representing approximately 160 MW of capacity have new or initial license
applications pending before the FERC. Upon expiration of a FERC license, the
federal government can take over the project and compensate the licensee, or the
FERC can issue a new license to either the existing licensee or a new licensee.
In addition, upon license expiration, the FERC can decommission an operating
project and even order that it be removed from the river at the owner's expense.
In deciding whether to issue a license, the FERC gives equal consideration to a
full range of licensing purposes related to the potential value of a stream or
river. It is not uncommon for the relicensing process to take between four and
ten years to complete. Generally, the relicensing process begins at least five
years before the license expiration date and the FERC issues annual licenses to
permit a hydroelectric facility to continue operations pending conclusion of the
relicensing process. We expect that the FERC will issue to us new or initial
hydroelectric licenses for all the facilities with pending applications.
Presently, there are no applications for competing licenses and there is no
indication that the FERC will decommission or order any of the projects to be
removed.
26
INCREASING COMPETITION IN WHOLESALE POWER MARKETS MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS, FINANCIAL CONDITION, CASH FLOWS AND MAY REQUIRE
ADDITIONAL LIQUIDITY TO REMAIN COMPETITIVE.
Our wholesale energy segment competes with other energy merchants. In order
to successfully compete, we must have the ability to aggregate supplies at
competitive prices from different sources and locations and must be able to
efficiently utilize transportation services from third-party pipelines and
transmission services from electric utilities. We also compete against other
energy merchants on the basis of our relative skills, financial position and
access to credit sources. Energy customers, wholesale energy suppliers and
transporters often seek financial guarantees and other assurances that their
energy contracts will be satisfied. If price information becomes increasingly
available in the energy marketing and trading business, we anticipate that our
operations will experience greater competition and downward pressure on per-unit
profit margins. In addition, our merchant asset business is constrained by our
liquidity, our access to credit and the reduction in market liquidity. Other
companies with which we compete may not have similar constraints.
OUR BUSINESS OPERATIONS AND HEDGING ACTIVITIES EXPOSE US TO THE RISK OF
NON-PERFORMANCE BY COUNTERPARTIES.
Our trading, marketing and risk management services operations are exposed
to the risk that counterparties who owe us money or physical commodities and
services, such as power, natural gas or coal, will not perform their
obligations. Should the counterparties to these arrangements fail to perform, we
might be forced to acquire alternative hedging arrangements or replace the
underlying commitment at then-current market prices. In this event, we might
incur additional losses to the extent of amounts, if any, already paid to the
counterparties.
As a result of recent events, including the credit crisis in the merchant
energy sector, the bankruptcy filings of NRG Energy Inc., National Energy & Gas
Transmission, Inc. and Mirant Corp., the decreasing liquidity in our trading
markets and the related downgrading of our credit ratings and the credit ratings
of many of our trading counterparties to below investment grade, we have been
required to enter into trading and other commercial arrangements with higher
risk counterparties than those with whom we have typically contracted in the
past. These arrangements, coupled with the credit crisis in our sector, have
increased our exposure to the risk of non-performance by counterparties who owe
us money or physical commodities.
OPERATION OF POWER GENERATION FACILITIES INVOLVES SIGNIFICANT RISKS THAT COULD
NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS AND CASH FLOWS.
Our wholesale energy segment is exposed to risks relating to the breakdown
or failure of equipment or processes, fuel supply interruptions, shortages of
equipment, material and labor, and operating performance below expected levels
of output or efficiency. Significant portions of our facilities were constructed
many years ago. Older generating equipment, even if maintained in accordance
with good engineering practices, may require significant capital expenditures to
add to or upgrade equipment to keep it operating at peak efficiency, to comply
with changing environmental requirements, or to provide reliable operations.
Such changes could affect our operating costs. Any unexpected failure to produce
power, including failure caused by breakdown or forced outage, could have a
material adverse effect on our results of operations, financial condition and
cash flows.
27
CONSTRUCTION OF POWER GENERATION FACILITIES INVOLVES SIGNIFICANT SCHEDULE AND
COST RISKS THAT COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS, FINANCIAL
CONDITION AND CASH FLOWS.
Currently, we have one power generation facility, and a replacement or
incremental electric power generation unit at an existing facility, under
construction. Our successful completion of these facilities is subject to the
following:
- power prices;
- shortages and inconsistent qualities of equipment, material and labor;
- availability of financing;
- failure of key contractors and vendors to fulfill their obligations;
- work stoppages due to plant bankruptcies and contract labor disputes;
- permitting and other regulatory matters;
- unforeseen weather conditions;
- unforeseen equipment problems;
- environmental and geological conditions; and
- unanticipated capital cost increases.
Any of these factors could give rise to delays, cost overruns or the
termination of the plant expansion or construction. Many of these risks cannot
be adequately covered by insurance. While we maintain insurance, obtain
warranties from vendors and obligate contractors to meet specified performance
standards, the proceeds of such insurance, warranties or performance guarantees
may not be adequate to cover lost revenues, increased expenses or liquidated
damages payments we may owe.
In addition, construction delays and contractor performance shortfalls can
result in the loss of revenues and may, in turn, adversely affect our results of
operations. At our Seward power plant, one of our facilities under construction,
a sub-contractor of one of our two main contractors at the plant, after a
dispute with such main contractor, has filed a mechanics lien against the
property to secure payment of the amount of their fees and damages, which the
subcontractor alleges to be $36 million. These fees are disputed. The failure to
complete construction according to specifications at this plant and our other
facilities under construction can result in liabilities, reduced plant
efficiency, higher operating costs and reduced earnings.
THE RECENT TERMINATION OF THE TOLLING AGREEMENT FOR OUR LIBERTY ELECTRIC
GENERATING STATION AND/OR A POTENTIAL FORECLOSURE BY THE LIBERTY LENDERS COULD
HAVE A MATERIAL ADVERSE IMPACT ON OUR RESULTS OF OPERATIONS, FINANCIAL
CONDITION AND CASH FLOWS.
One of our subsidiaries owns a 530 MW combined cycle gas fired power
generation facility (the Liberty generating station). Liberty financed
substantially all of the construction costs of the Liberty generating station
through borrowings under a credit agreement of which $262 million was
outstanding as of September 30, 2003. Borrowings under the Liberty credit
agreement, which are non-recourse to Reliant Resources and its affiliates (other
than LEP and Liberty), are secured by pledges of, among other things, the assets
of the Liberty generating station, including a tolling agreement for the
purchase and sale of all of the electric energy, capacity and ancillary services
of the station which was terminated effective as of July 8, 2003.
In July 2003, the counterparty under the tolling agreement, and one of its
corporate guarantors, filed for reorganization under Chapter 11 of the United
States Bankruptcy Code. In August 2003, the federal bankruptcy court issued an
order rejecting the tolling agreement, which had the effect of terminating it,
effective retroactively to July 8, 2003. The bankruptcy filing and the related
termination of the tolling agreement constitute an event of default under the
Liberty credit agreement. As a result, Liberty's lenders
28
are currently entitled to control disbursement of funds by Liberty, accelerate
the maturity date of the debt of the Liberty credit agreement and/or foreclose
upon the lenders' security interests in Liberty's assets. In addition, as a
result of the termination of the tolling agreement, and in light of current
market conditions, Liberty does not expect to have sufficient cash flow to pay
all of its expenses and to post the collateral required to buy fuel or in
respect of the gas transportation agreements, and, at the same time, meet debt
service obligations.
An event of default under the Liberty credit agreement does not constitute
an event of default under any other debt agreements of Reliant Resources or its
affiliates. Likewise, a bankruptcy or reorganization of Liberty would not
constitute an event of default under the debt agreements of Reliant Resources or
its affiliates. If, however, the lenders foreclose on the Liberty generating
station, we could incur a pre-tax loss of an amount up to our recorded net book
value, with the potential of an additional loss due to an impairment of goodwill
to be allocated to LEP, as a result of the foreclosure. As of September 30,
2003, the combined net book value of LEP and Liberty was $358 million, excluding
the non-recourse debt obligations of $262 million.
On December 4, 2003, the federal bankruptcy court held a hearing to
consider, among other things, Liberty's motion to refer the issue of the
calculation of the termination payment to arbitration (which is the dispute
mechanism provided in the agreement), and the counterparty's motion to stay
Liberty's action in the Federal District Court in Texas against one of the
corporate guarantors. The ruling by the federal bankruptcy court on these
motions is expected on or about December 18, 2003. This ruling will not resolve
the merits of Liberty's or the counterparty's damage claims but rather whether
the claims will be resolved in arbitration or in the federal bankruptcy court.
For additional information regarding the bankruptcy, see note 13(e) to our
interim financial statements incorporated herein by reference. Note 13(e) also
contains information regarding litigation among us, the counterparty to the
tolling agreement and the corporate guarantors of the counterparty to the
tolling agreement, regarding a disputed termination payment of $177 million,
including a counterclaim against us in the amount of $108 million. In its
lawsuit, the counterparty and its corporate guarantors have reserved the right
to draw upon a $35 million letter of credit issued under the senior secured
revolver of Reliant Resources.
WE COULD BE SUBJECT TO MARKET PRICES WHEN PURCHASING POWER AND/OR TO FINES
UNDER CERTAIN OF OUR PROVIDER OF LAST RESORT AGREEMENTS.
As part of our acquisition of Orion Power in February 2002, we became the
provider of last resort for Duquesne Light. Under two agreements to be such
provider of last resort, we are obligated for a specific period to provide
energy to Duquesne Light to meet its obligations to satisfy the demands of any
customer in the Duquesne Light service area that does not elect to buy energy
from a competitive supplier as allowed by the Pennsylvania state deregulation
initiatives or that elects to return to Duquesne Light as the designated
provider of last resort. Under these contracts, we must provide all of the
energy necessary to meet the contractual requirements with no minimum and no
maximum quantity and Duquesne Light must buy all of the energy needed to satisfy
its provider of last resort obligation from us. Given the historical demand for
energy from provider of last resort customers and the historical energy
generation from our assets located in Ohio, Pennsylvania and West Virginia, we
generally expect to produce more energy than needed to meet our provider of last
resort obligations under the POLR agreements. We will attempt to sell this
excess energy into the market. The provider of last resort demand, however, will
fluctuate on a continuous, real-time basis, and will likely peak during summer
and winter, on weekdays, and during some hours of the day. This could cause the
provider of last resort demand to be greater than the amount of energy we are
able to generate at any given moment. As a result, we may need to purchase
energy from the market to cover our contractual obligations. This is likely to
occur at times of higher market prices, while the price we receive will be fixed
under our provider of last resort agreements and will not fluctuate with the
market. We may also have to purchase energy from the market to cover our
contractual obligations if we have operational problems at one or more of our
generating facilities that reduce our ability to produce energy. Failure to
provide sufficient energy could give rise to penalties under both of our
29
provider of last resort agreements. A severe under-delivery of energy that
forces Duquesne Light to deny some customers energy could give rise to penalties
of $1,000 per MWh under the first agreement or between $100 and $1,000 per MWh
under the second agreement, depending upon the circumstances of such
under-delivery.
RISKS RELATED TO OUR BUSINESSES GENERALLY
WE DO NOT ATTEMPT TO FULLY HEDGE OUR ASSETS OR POSITIONS AGAINST CHANGES IN
COMMODITY PRICES, AND OUR RISK MANAGEMENT POLICIES AND PROCEDURES MAY NOT BE
EFFECTIVE.
Commodity price risk is an inherent component of our retail and wholesale
energy operations. Our results of operations, financial condition and cash flows
depend, in large part, upon prevailing market prices for electricity and fuel in
our markets. Market prices may fluctuate substantially over relatively short
periods of time, potentially adversely impacting our results of operations,
financial condition and cash flows. Changes in market prices for electricity and
fuel may result from the following:
- weather conditions;
- seasonality;
- demand for energy commodities and general economic conditions;
- forced or unscheduled plant outages;
- disruption of electricity or gas transmission or transportation,
infrastructure or other constraints or inefficiencies;
- addition of generating capacity;
- availability of competitively priced alternative energy sources;
- availability and levels of storage and inventory for fuel stocks;
- natural gas, crude oil and refined products, and coal production levels;
- the creditworthiness or bankruptcy or other financial distress of market
participants;
- changes in market liquidity;
- natural disasters, wars, embargoes, acts of terrorism and other
catastrophic events; and
- federal, state and foreign governmental regulation and legislation.
To mitigate our financial exposure related to commodity price fluctuations,
we routinely enter into contracts to hedge a portion of our purchase and sale
commitments, exposure to weather fluctuations, fuel requirements and
transportation and inventories of natural gas, coal, refined products, and other
commodities and services. As part of this strategy, we routinely utilize
derivative instruments (e.g., fixed-price forward physical purchase and sales
contracts, futures, financial swaps and option contracts). However, we do not
expect to cover the entire exposure of our assets or positions to market price
and volatility changes, and the coverage will vary over time. This hedging
activity fluctuates according to strategic objectives, taking into account the
desire for cash flow or earnings certainty, the availability of liquidity
resources and our view of market prices.
Our risk management procedures and our hedging strategies are constrained
by our liquidity, our access to credit and the reduction in market liquidity,
and may not be followed or work as planned. These and other factors may
adversely impact our results of operations, financial condition and cash flows.
WE MAY EXPERIENCE INADEQUATE LIQUIDITY DUE TO FACTORS WHICH LEAD TO POSTING OF
ADDITIONAL COLLATERAL RELATED TO OUR DOMESTIC OPERATIONS.
Based on current commodity prices, we estimate that as of November 1, 2003,
we could be required to post additional collateral of up to $368 million related
to our domestic operations. Factors which could
30
lead to an increase in our actual posting of collateral include adverse changes
in our industry, negative reactions to additional credit rating downgrades and
changes in commodity prices. Under certain unfavorable commodity price
scenarios, it is possible that we could experience inadequate liquidity as a
result of the posting of additional collateral.
At times we have open positions in the market (required to be within
established corporate risk management guidelines), resulting from optimizing our
power generation portfolio and eliminating our remaining trading positions. If
we have open positions, changes in commodity prices could negatively impact our
results of operations, financial condition and cash flows. We have measures and
controls in place that are designed to mitigate the impact of commodity price
changes on our positions. These measures and controls are based on statistical
analyses and estimates. Consequently, no assurance can be given that these
controls and measures will be effective in the event that anomalous commodity
price changes occur.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Trading and Marketing and
Non-trading Operations" and "Quantitative and Qualitative Disclosures About
Market Risk" for the three years ended December 31, 2000, 2001 and 2002 and for
the nine months ended September 30, 2002 and 2003, incorporated by reference
herein.
THE ULTIMATE OUTCOME OF THE NUMEROUS LAWSUITS AND REGULATORY PROCEEDINGS
RELATING TO OUR ACTIVITIES IN THE ELECTRICITY AND GAS MARKETS TO WHICH WE ARE
A PARTY CANNOT BE PREDICTED AT THIS TIME. ANY ADVERSE DETERMINATION COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS
AND CASH FLOWS.
We are party to numerous lawsuits and regulatory proceedings relating to
our trading and marketing activities. In addition, various state and federal
governmental agencies have commenced investigations relating to these
activities, including the California Attorney General, the FERC, the CFTC and
criminal investigations by the United States Attorneys for the Southern District
of New York, the Northern District of California and the Southern District of
Texas and, in certain circumstances, the matters described elsewhere in this
prospectus that have been the subject of the FERC and CFTC investigations. These
lawsuits, proceedings and investigations are currently the subject of intense,
highly charged media and political attention. While their ultimate outcome
cannot be predicted at this time, the possibility of civil or criminal action
against us or our current or former employees is possible. In addition, these
lawsuits, proceedings and investigations could lead to the discovery of
additional conduct or transactions not known at this time that could result in
additional litigation or regulatory action.
We have received subpoenas and informal requests for information from the
United States Attorneys for the Southern District of New York, the Southern
District of Texas and the Northern District of California for documents,
interviews and other information pertaining to the round trip trades, price
reporting and alleged price manipulation. We have produced information to each
of the United States Attorneys' offices. The United States Attorney for the
Southern District of New York has informed us that its investigation has been
closed. In response to July 24, 2003 Grand Jury subpoenas, a number of current
and former employees have given interviews to the United States Attorney for the
Northern District of California or testified before the Grand Jury investigating
allegations of electricity price manipulation. Based on a meeting with the
United States Attorney for the Northern District of California on December 1,
2003, we understand that the United States Attorney's office anticipates making
a decision on how to proceed in this matter within the next thirty to sixty
days. This pending investigation, as well as the pending investigation by the
United States Attorney for the Southern District of Texas, could result in civil
or criminal actions being brought against us, certain of our subsidiaries or our
current or former employees. The ultimate disposition of these matters could
have a material adverse effect on us, our financial condition, results of
operations and cash flows. See note 13(a) to our interim financial statements
incorporated by reference herein.
31
OUR STRATEGIC PLANS MAY NOT BE SUCCESSFUL.
Our future results of operations are dependent on the success of our
strategic plans. Our strategic plans with respect to our wholesale energy
segment indicate a shift in emphasis from identifying and pursuing acquisition
and development candidates to completing facilities currently under construction
and integrating recently acquired generation facilities. The integration and
consolidation of our acquisitions with our existing business requires
substantial management, financial and other resources and may not be
successfully integrated.
IF WE FAIL TO OBTAIN OR MAINTAIN ANY NECESSARY GOVERNMENTAL PERMIT OR
APPROVAL, OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED.
Our operations are subject to complex and stringent energy, environmental
and other governmental laws and regulations. The acquisition, ownership and
operation of power generation facilities require numerous permits, approvals and
certificates from federal, state and local governmental agencies. The operation
of our generation facilities must also comply with environmental protection and
other legislation and regulations. At present, we have wholesale operations in
California, Florida, Illinois, Maryland, Mississippi, Nevada, New Jersey, New
York, Ohio, Pennsylvania, Texas and West Virginia. Most of our existing domestic
generation facilities are exempt wholesale generators that sell electricity
exclusively into the wholesale market. These facilities are subject to
regulation by the FERC regarding rate matters and by state regulatory
commissions regarding environmental and other health and safety matters. The
FERC has authorized us to sell electricity produced from these facilities at
market prices. The FERC retains the authority to modify or withdraw our
market-based rate authority and to impose "cost of service" rates. Any reduction
by the FERC of the rates we may receive for our generation activities may
materially adversely affect our business, results of operations, financial
condition and cash flows.
CHANGES IN TECHNOLOGY MAY IMPAIR THE VALUE OF OUR POWER PLANTS AND MAY
SIGNIFICANTLY IMPACT OUR BUSINESS IN OTHER WAYS AS WELL.
Research and development activities are ongoing to improve alternative
technologies to produce electricity, including fuel cells, microturbines and
photovoltaic (solar) cells. It is possible that advances in these or other
alternative technologies will reduce the costs of electricity production from
these technologies to a level below that which we have forecasted. In addition,
increased conservation efforts and advances in technology could reduce
electricity demand and significantly reduce the value of our power generation
assets. Changes in technology could also alter the channels through which retail
electric customers buy electricity.
OUR RESULTS OF OPERATIONS, OUR ABILITY TO ACCESS CAPITAL AND INSURANCE AND OUR
FUTURE GROWTH PROSPECTS COULD BE ADVERSELY AFFECTED BY THE OCCURRENCE OR RISK
OF OCCURRENCE OF FUTURE TERRORIST ATTACKS OR RELATED ACTS OF WAR.
We are currently unable to measure the ultimate impact of the terrorist
attacks on our industry and the United States economy as a whole. The
uncertainty associated with the military activity of the United States and other
nations and the risk of future terrorist activity may impact our results of
operations and financial condition in unpredictable ways. These actions could
result in adverse changes in the insurance markets and disruptions of power and
fuel markets. In addition, our generation facilities or the power transmission
and distribution facilities on which we rely could be directly or indirectly
harmed by future terrorist activity. The occurrence or risk of occurrence of
future terrorist attacks or related acts of war could also adversely affect the
United States economy. A lower level of economic activity could result in a
decline in energy consumption, which could adversely affect our revenues,
margins and cash flows and limit our future growth prospects. The occurrence or
risk of occurrence could also increase pressure to regulate or otherwise limit
the prices charged for electricity or gas. Also, these risks could cause
instability in the financial markets and adversely affect our ability to access
capital on terms and conditions acceptable to us.
32
OUR INSURANCE COVERAGE MAY NOT BE SUFFICIENT AND OUR INSURANCE COSTS MAY
INCREASE.
We have insurance coverage, subject to various limits and deductibles,
covering our generation facilities, including property damage insurance and
general liability insurance in amounts that we consider appropriate. However, we
cannot assure you that insurance coverage will be available in the future on
commercially reasonable terms or that the insurance proceeds received for any
loss of or any damage to any of our generation facilities will be sufficient to
restore the loss or damage without negative impact on our financial condition
and results of operations. The costs of our insurance coverage have increased
significantly during recent periods and may continue to increase in the future.
RISKS RELATED TO OUR CORPORATE AND FINANCIAL STRUCTURE
WE HAVE SIGNIFICANT DEBT THAT COULD NEGATIVELY IMPACT OUR BUSINESS.
We have a significant amount of debt outstanding. As of September 30, 2003,
we had total consolidated debt of $7.5 billion (excluding $740 million of debt
related to our European energy operations), of which $1.4 billion consisted of
the notes and the convertible senior subordinated notes and the balance
consisted of other debt including all borrowings under the credit facilities.
Also, after giving pro forma effect to the offering of the notes and the
concurrent offering of the convertible senior subordinated notes assuming these
offerings had occurred on January 1, 2002, and the repayment of debt, with the
amount of the net proceeds from the notes, that was in place prior to our March
2003 refinancing, our earnings would have been insufficient to cover our fixed
charges by approximately $869 million for the nine months ended September 30,
2003, and our ratio of earnings to fixed charges would have been 1.22 for the
year ended December 31, 2002. Our high level of debt could:
- make it difficult for us to satisfy our obligations, including debt
service requirements under our outstanding debt and the notes;
- limit our ability to obtain additional financing to operate our business;
- limit our financial flexibility in planning for and reacting to business
and industry changes;
- place us at a competitive disadvantage as compared to less leveraged
companies;
- increase our vulnerability to general adverse economic and industry
conditions, including changes in interest rates and volatility in
commodity prices; and
- require us to dedicate a substantial portion of our cash flows to
payments on our debt, thereby reducing the availability of our cash flow
for other purposes including our operations, capital expenditures and
future business opportunities.
The incurrence of additional debt could make it more likely that we will
experience some or all of the above-described risks.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES, INCLUDING THE
GUARANTORS, MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD
FURTHER EXACERBATE THE RISKS ASSOCIATED WITH OUR SUBSTANTIAL LEVERAGE.
We and our subsidiaries, including the guarantors, may be able to incur
substantial additional indebtedness in the future. In certain instances, the
terms of the indentures do not prohibit us or our subsidiaries from doing so. As
of September 30, 2003, the credit agreement governing our new credit facilities
permit additional borrowings of up to $1.1 billion and all of those borrowings
would rank pari passu with the notes and the subsidiary guarantees. If new debt
is added to our and our subsidiaries' current debt levels, the related risks
that we and they now face could significantly increase. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Consolidated Future Uses and Sources of Cash and Certain Factors
Impacting Future Uses and Sources of Cash" for the three years ended December
31, 2000, 2001 and 2002 and for the nine months ended September 30, 2002 and
2003, incorporated by reference herein.
33
IF WE DO NOT GENERATE SUFFICIENT POSITIVE CASH FLOWS, WE MAY BE UNABLE TO
SERVICE OUR DEBT.
Our ability to pay principal and interest on our debt, including the
principal and interest on the notes, depends on our future operating
performance. Future operating performance is subject to market conditions and
business factors that often are beyond our control. If our cash flows and
capital resources are insufficient to allow us to make scheduled payments on our
debt, we may have to reduce or delay capital expenditures, sell assets, seek
additional capital or restructure or refinance our debt. We cannot assure you
that the terms of our debt will allow these alternative measures or that such
measures would satisfy our scheduled debt service obligations.
Based on our current level of anticipated cost savings and operating
improvements, we believe our cash flow from operations, available cash and
available borrowings under our credit facilities will be adequate to meet our
future needs for at least the next twelve months. However, under certain
commodity pricing scenarios, we may experience strains on our liquidity. For
further discussion of our current liquidity situation and related impacts, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for the three years ended
December 31, 2000, 2001 and 2002 and for the nine months ended September 30,
2002 and 2003, incorporated by reference herein.
We cannot assure you that our businesses will generate sufficient cash
flows from operations to enable us to pay the principal, premium, if any, and
interest on our debt, including these notes, or to fund our other liquidity
needs. We may not be successful in realizing the cost savings and operating
improvements that we currently anticipate. If commodity prices increase
substantially in the near term, our liquidity could be severely strained. We may
need to refinance all or a portion of our indebtedness, including these notes on
or before maturity; however, we cannot assure you that we will be able to
refinance the indebtedness on commercially reasonable terms or at all. If we
cannot make scheduled payments on our debt, we will be in default and, as a
result:
- our debt holders could declare all outstanding principal and interest to
be due and payable;
- our senior secured debt lenders could terminate their commitments and
commence foreclosure proceedings against our assets; and
- we could be forced into bankruptcy or liquidation.
THE TERMS OF OUR DEBT MAY SEVERELY LIMIT OUR ABILITY TO PLAN FOR OR RESPOND TO
CHANGES IN OUR BUSINESSES.
Our new credit facilities and these notes restrict our ability to take
specific actions in planning for and responding to changes in our business
without the consent of our lenders and noteholders, even if such actions may be
in our best interest. Our new credit facilities also require us to maintain
specified financial ratios and meet specific financial tests. Our ability to
comply with these covenants, as they currently exist or as they may be amended,
may be affected by many events beyond our control and our future operating
results may not allow us to comply with the covenants, or in the event of a
default, to remedy that default. Our failure to comply with those financial
covenants or to comply with the other restrictions in the credit agreement
governing our new credit facilities could result in a default, which could cause
that indebtedness (and by reason of cross-acceleration provisions, the notes and
other indebtedness) to become immediately due and payable. If we are unable to
repay those amounts, the holders of the Credit Agreement Debt could proceed
against the collateral granted to them to secure that indebtedness. If those
lenders accelerate the payment of our Credit Agreement Debt, we cannot assure
you that we could pay that indebtedness immediately and continue to operate our
business.
In addition, the credit agreement governing our new credit facilities and
the indentures governing the notes contain other covenants that restrict, among
other things, our ability to:
- pay dividends and other distributions with respect to our capital stock
and purchase, redeem or retire our capital stock;
- incur additional indebtedness and issue preferred stock;
34
- enter into asset sales unless the proceeds from those asset sales are
used to repay debt or, in certain circumstances and for a limited period
of time, are placed in an escrow account to be available to be used to
possibly acquire CenterPoint's holdings of the common stock of Texas
Genco in the event that we determine that such acquisition is
advantageous, although it is unlikely that we will do so;
- enter into transactions with affiliates;
- incur liens on assets to secure certain debt;
- engage in certain business activities; and
- engage in certain mergers or consolidations and transfers of assets.
See "Description of Notes."
AN INCREASE IN OUR INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOWS.
As of September 30, 2003, we had $5.4 billion of outstanding floating-rate
debt (excluding $699 million of floating-rate debt of our European energy
operations). Because of capital constraints impacting our business at the time
some of this floating-rate debt was entered into, the interest rate margins are
substantially above our historical borrowing margins. In addition, any
floating-rate debt issued by us in the future could be at interest rate margins
substantially above our historical borrowing margins. While we may seek to use
interest rate swaps or other derivative instruments to hedge portions of our
floating-rate exposure, we may not be successful in obtaining hedges on
acceptable terms. Any increase in short-term interest rates would result in
higher interest costs and could adversely affect our results of operations,
financial condition and cash flows.
In addition, the capital constraints currently impacting our industry may
require additional future indebtedness to include terms and/or pricing that are
more restrictive or burdensome than those of our current indebtedness. This may
negatively impact our ability to operate our business and could adversely affect
our results of operations, financial condition and cash flows. As a result of
the June and July 2003 issuances of convertible senior subordinated notes and
notes, our interest expense will increase substantially. For additional
information regarding the $275 million of convertible senior subordinated notes
and $1.1 billion of notes, see note 10 to our interim financial statements and
"Description of Notes", respectively.
OUR NON-INVESTMENT GRADE CREDIT RATINGS COULD ADVERSELY IMPACT OUR ABILITY TO
ACCESS CAPITAL ON ACCEPTABLE TERMS, OPTIMIZE OUR ASSETS AND OPERATE OUR RISK
MANAGEMENT ACTIVITIES.
Our credit ratings have been downgraded to below investment grade and could
be downgraded further. The downgrading of our credit ratings has limited, and
will likely continue to limit, our ability to refinance our debt obligations and
access the capital markets. A number of our commercial contracts and guarantees
associated with our asset optimization and risk management operations require us
to satisfy collateral margin requirements that vary depending on energy market
prices and contract prices. In most cases, the consequences of rating downgrades
under these contracts and guarantees could require that we provide credit
support to our counterparties in the form of a pledge of cash collateral, a
letter of credit or other similar credit support. To meet future requirements,
substantial credit support could be necessary thereby reducing the availability
of our cash flows for other purposes. In certain circumstances, our liquidity
could be significantly strained, which could have a material adverse effect on
our business. In addition, certain of our contracts with commercial, industrial
and institutional retail electricity customers give the customer the right to
terminate the contract based on our receiving a below-investment-grade credit
rating from certain ratings agencies. As a result of the downgrading of our
credit ratings, we may not be able to satisfy future collateral margin
requirements under these contracts and guarantees.
35
OUR HISTORICAL FINANCIAL RESULTS AS A SUBSIDIARY OF CENTERPOINT MAY NOT BE
REPRESENTATIVE OF OUR RESULTS AS A SEPARATE COMPANY.
The historical financial information relating to periods prior to the
Distribution that we have included in this prospectus does not necessarily
reflect what our results of operations, financial condition and cash flows would
have been had we been a separate, stand-alone entity during such periods. Our
costs and expenses during such periods reflect charges from CenterPoint for
centralized corporate services and infrastructure costs. These allocations have
been determined based on assumptions that we and CenterPoint considered to be
reasonable under the circumstances. This historical financial information is not
necessarily indicative of what our results of operations, financial condition
and cash flows will be in the future. We may experience significant changes in
our cost structure, funding and operations as a result of our separation from
CenterPoint, including increased costs associated with reduced economies of
scale and increased costs associated with being a publicly traded, stand-alone
company.
RISKS RELATING TO THE NOTES
YOU MAY HAVE DIFFICULTY SELLING THE ORIGINAL NOTES THAT YOU DO NOT EXCHANGE.
If you do not exchange your original notes for exchange notes in the
exchange offer, you will continue to be subject to the restrictions on transfer
of your original notes described in the legend on your original notes. The
restrictions on transfer of your original notes arise because we issued the
original notes under exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, you may only offer or sell the original notes if they are
registered under the Securities Act and applicable state securities laws, or
offered and sold under an exemption from these requirements. We do not intend to
register the original notes under the Securities Act. To the extent original
notes are tendered and accepted in the exchange offer, the trading market for
the original notes could be adversely affected. See "The Exchange
Offer -- Consequences of Exchanging or Failing to Exchange Original Notes."
YOU MAY FIND IT DIFFICULT TO SELL YOUR EXCHANGE NOTES BECAUSE THERE IS NO
EXISTING TRADING MARKET FOR THE EXCHANGE NOTES.
You may find it difficult to sell your exchange notes because an active
trading market for the exchange notes may not develop. The exchange notes are
being offered to the holders of the original notes. The original notes were
issued on July 1, 2003 primarily to a small number of institutional investors.
There is no existing trading market for the exchange notes, and there can be no
assurance regarding the future development of a market for the exchange notes,
or the ability of the holders of the exchange notes to sell their exchange notes
or the price at which such holders may be able to sell their exchange notes. If
such a market were to develop, the exchange notes could trade at prices that may
be higher or lower than the initial offering price of the original notes
depending on many factors, including prevailing interest rates, our financial
position, operating results and the market for similar securities. We do not
intend to apply for listing or quotation of the exchange notes on any exchange,
and so we do not know the extent to which investor interest will lead to the
development of a trading market or how liquid that market might be. Although the
initial purchasers of the original notes have informed us that they intend to
make a market in the exchange notes, they are not obligated to do so, and any
market-making may be discontinued at any time without notice. Therefore, there
can be no assurance as to the liquidity of any trading market for the exchange
notes or that an active market for the exchange notes will develop. As a result,
the market price of the exchange notes, as well as your ability to sell the
exchange notes, could be adversely affected.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the exchange notes
will not be subject to similar disruptions. Any such disruptions may have an
adverse effect on holders of the exchange notes.
36
BROKER-DEALERS OR NOTEHOLDERS MAY BECOME SUBJECT TO THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT.
Any broker-dealer that:
- exchanges its original notes in the exchange offer for the purpose of
participating in a distribution of the exchange notes, or
- resells exchange notes that were received by it for its own account in
the exchange offer,
may be deemed to have received restricted securities and may be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction by that broker-dealer.
Any profit on the resale of the exchange notes and any commission or concessions
received by a broker-dealer may be deemed to be underwriting compensation under
the Securities Act. In addition to broker-dealers, any noteholder that exchanges
its original notes in exchange offer for the purpose of participating in a
distribution of the exchange notes may be deemed to have received restricted
securities and may be required to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction by that noteholder.
NOT ALL OF OUR SUBSIDIARIES ARE GUARANTORS -- YOUR RIGHT TO RECEIVE PAYMENTS
ON THESE NOTES COULD BE ADVERSELY AFFECTED IF ANY OF OUR NON-GUARANTOR
SUBSIDIARIES DECLARE BANKRUPTCY, LIQUIDATE, OR REORGANIZE.
Not all of our subsidiaries guarantee the notes. The notes are guaranteed
by all of our current and future domestic subsidiaries that guarantee borrowings
under our new credit facilities or any of our other debt (other than certain
subsidiaries of Orion Power Holdings, Inc., also referred to as the Orion Bank
Guarantors). Orion Power Holdings, Inc. is prohibited by the terms of its
indenture from guaranteeing the notes, except to the extent it meets certain
financial tests. Orion Power Capital, LLC and its subsidiaries, Reliant Energy
Mid-Atlantic Power Holdings, LLC and its subsidiaries, Reliant Energy
Channelview, LP, Liberty Electric PA, LLC and Liberty Electric Power, LLC, and
Reliant Energy Capital (Europe), Inc. and its subsidiaries are prohibited by the
terms of their debt agreements from guaranteeing the notes, and RE Retail
Receivables is prohibited by the terms of its receivables purchase agreement
from guaranteeing the notes. In addition, certain non-wholly-owned and other of
our subsidiaries, which are not guarantors of the Credit Agreement Debt, cannot
guarantee the notes due to restrictions in the constituent documents or other
agreements. In the event of a bankruptcy, liquidation or reorganization of any
of our non-guarantor subsidiaries, holders of their indebtedness and their trade
creditors will generally be entitled to payment of their claims from the assets
of those subsidiaries before any assets are made available for distribution to
us.
THE NOTES ARE EFFECTIVELY JUNIOR TO THE INDEBTEDNESS AND OTHER LIABILITIES OF
OUR NON-GUARANTOR SUBSIDIARIES.
The notes are effectively subordinated to the outstanding indebtedness and
other liabilities, including trade payables, of our non-guarantor subsidiaries.
As of September 30, 2003, these notes were effectively junior to $2.9
billion (excluding $1.9 billion related to our European energy operations) of
indebtedness and other liabilities, including trade payables (excluding
intercompany liabilities), of our non-guarantor subsidiaries and approximately
$52 million was available to these subsidiaries for future borrowing under their
credit facilities (excluding $181 million available for future borrowings under
our European credit facilities). The guarantor subsidiaries generated 89% of our
consolidated revenues and 44% of our operating income for the year ended
December 31, 2002. For the nine months ended September 30, 2003, the guarantor
subsidiaries generated 88% of our consolidated revenues. For the nine months
ended September 30, 2003, the guarantor subsidiaries had operating income of
$222 million while we had an operating loss of $430 million on a consolidated
basis. As of September 30, 2003, the guarantor subsidiaries held 42% of our net
consolidated property, plant and equipment.
37
THE INDEBTEDNESS UNDER OUR NEW CREDIT FACILITIES IS GUARANTEED BY CERTAIN
SUBSIDIARIES THAT DO NOT GUARANTEE THE NOTES AND IS SECURED BY CERTAIN ASSETS
THAT DO NOT SECURE THE NOTES.
The notes are guaranteed by all of our subsidiaries that guarantee
borrowings under our new credit facilities other than the Orion Bank Guarantors.
In addition, the notes and the guarantees are secured by security interests
in all of our and our subsidiaries' assets that secure indebtedness under our
new credit facilities, except for (1) the assets of the Orion Bank Guarantors,
(2) debt and equity securities issued by our subsidiaries (other than Orion
Power Holdings, Inc., Reliant Energy Retail Holdings, LLC and Reliant Energy
Mid-Atlantic Power Holdings, LLC) (also referred to as the "excluded
securities"), and (3) proceeds of the issuance of these notes and certain
prepayments. See "Description of Notes -- Security -- Excluded Property." The
notes are, however, guaranteed by the issuers of the excluded securities in all
instances and are secured, equally and ratably with the Credit Agreement Debt
and all other Secured Obligations, by all Collateral owned by each such issuer
of excluded securities except: (1) in the case of capital stock, Reliant Energy
Services Canada, Ltd. and RE Retail Receivables, LLC and (2) in the case of
intercompany notes, RE Retail Receivables, LLC, Reliant Energy Capital (Europe),
Inc., Reliant Energy Channelview LP, Reliant Energy Mid-Atlantic Power Holdings,
LLC and Reliant Energy Northeast Management Company. The value of this excluded
collateral could be significant, and the notes effectively rank junior to
indebtedness secured by liens on, and to the extent of, this excluded
collateral.
THERE MAY NOT BE SUFFICIENT SHARED COLLATERAL TO PAY ALL OR ANY OF THE NOTES,
ESPECIALLY IF WE INCUR ADDITIONAL SENIOR SECURED INDEBTEDNESS AS PERMITTED
UNDER OUR NEW CREDIT FACILITIES AND THESE NOTES, WHICH WILL DILUTE THE VALUE
OF THE SHARED COLLATERAL SECURING THE NOTES.
Under the terms of the indentures governing the notes and the credit
agreement governing our new credit facilities, we also are permitted in the
future to incur additional indebtedness and other obligations that may share in
the liens on the Collateral securing the notes. Any additional obligations
secured by a lien on the Shared Collateral (whether senior to or equal with the
lien of the notes) will dilute the value of the Shared Collateral.
The proceeds from the sale of all such Shared Collateral may not be
sufficient to satisfy the amounts outstanding under the notes and all other
obligations secured by such liens after payment in full of the obligations
secured by the Credit Agreement Priority Liens, Tranche A Priority Liens and
other Permitted Prior Liens. Further, the proceeds from the sale of the Seward
facility, the Hunterstown facility, and the Choctaw facility in a bankruptcy
proceeding are subject to an intercreditor liquidation priority claim of up to
$200 million in favor of the holders of the Tranche A Priority Liens in
accordance with the provisions of the Citibank Intercreditor Agreement and
proceeds from the sale of all Collateral will be applied, in priority over these
notes, to pay obligations under the Credit Agreement Priority Facility in an
aggregate amount up to $300 million.
If such proceeds were not sufficient to repay amounts outstanding under the
notes, then holders of the notes (to the extent not repaid from the proceeds of
the sale of the Collateral) would only have an unsecured claim against our
remaining assets. As of September 30, 2003, we had approximately $3.3 billion of
indebtedness outstanding under our new credit facilities, $1.1 billion of
outstanding indebtedness in these notes and $3.1 billion in all other debt
(excluding $740 million related to our European energy operations). Under the
indentures, we could also incur additional indebtedness secured by liens
securing the notes so long as such liens secure indebtedness permitted to be
incurred by the covenant described under "Description of Notes -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" and
certain other conditions are met, including the satisfaction of the requirements
of the definition "Sharing Eligible Debt" set forth under "Description of
Notes -- Certain Definitions."
38
IT MAY BE DIFFICULT TO REALIZE THE VALUE OF THE SHARED COLLATERAL PLEDGED TO
SECURE THE NOTES, AND THE PROCEEDS FROM THE SALE OF THE SHARED COLLATERAL MAY
BE INSUFFICIENT TO REPAY THE NOTES.
No appraisals of any Shared Collateral were prepared in connection with the
offering of the notes. The value of the Shared Collateral at any time will
depend on market and other economic conditions, including the availability of
suitable buyers for the Shared Collateral. By their nature some or all of the
pledged assets may be illiquid and may have no readily ascertainable market
value. We cannot assure you that the fair market value of the Shared Collateral
as of the date of this prospectus exceeds the principal amount of the debt
secured thereby. The value of the assets pledged as Shared Collateral for the
notes could be impaired in the future as a result of changing economic
conditions, our failure to implement our business strategy, competition and
other future trends. In the event that a bankruptcy case is commenced by or
against us, if the value of the Shared Collateral is less than the amount of
principal and accrued and unpaid interest on the notes and all other Secured
Obligations, interest may cease to accrue on the notes from and after the date
the bankruptcy petition is filed.
The security interest of the collateral trustee is subject to practical
problems generally associated with the realization of security interests in
collateral. For example, the collateral trustee may need to obtain the consent
of a third party to obtain or enforce a security interest in a contract. We
cannot assure you that the collateral trustee will be able to obtain any such
consent. If the collateral trustee exercises its rights to foreclose on certain
assets, transferring required government approvals to, or obtaining new
approvals by, a purchaser of assets may require governmental proceedings with
consequent delays.
RELEASE OF COLLATERAL BY REQUIRED LENDERS UNDER THE CREDIT AGREEMENT.
Under the terms of the collateral trust agreement, so long as no Actionable
Default Period is continuing, the Required Lenders under the Credit Agreement
have the ability to release Shared Collateral without the consent of the holders
of the notes. Therefore, the Shared Collateral available to secure the notes
could be reduced in connection with the sales of assets or otherwise, subject to
the use of proceeds requirements in the Credit Agreement and the indentures. At
the election of the Required Lenders under the Credit Agreement, both the Credit
Agreement and the notes could become unsecured obligations, with increased risks
in bankruptcy or in other situations.
YOUR RIGHT TO ENFORCE REMEDIES UNDER THE CREDIT AGREEMENT AND THE SECURITY
DOCUMENTS IS LIMITED BY THE VOTING PROVISIONS OF THE COLLATERAL TRUST
AGREEMENT.
Under the terms of the collateral trust agreement, the collateral trustee
generally acts pursuant to the direction of, when no Actionable Default Period
is continuing, the required holders of the Credit Agreement Debt or the Credit
Agreement Agent upon the authorization of such required holders, and when an
Actionable Default Period is continuing, by the Required Secured Debtholders,
voting together as a single class. In addition, when an Actionable Default
Period is continuing, the required holders of the Credit Agreement Debt or the
Credit Agreement Agent upon the authorization of such required holders may
authorize the collateral trustee to commence enforcement proceedings against the
Shared Collateral. Although the Required Secured Debtholders may also direct the
collateral trustee during the continuance of an Actionable Default Period, they
may not countermand any direction of the holders of the Credit Agreement Debt
(or the Credit Agreement Agent on their authorization) regarding foreclosure or
enforcement of liens or default remedies upon any Collateral.
As of September 30, 2003, $3.3 billion in aggregate principal amount of all
borrowings under our new credit facilities was outstanding and $1.1 billion in
aggregate principal amount of the notes was outstanding. As of September 30,
2003, the holders of the notes would have 21% of the outstanding principal
amount of Secured Debt and would therefore be unable to direct the collateral
trustee without the consent of the holders of the Credit Agreement Debt. In
addition, as of September 30, 2003, $1.1 billion in additional borrowings under
our new credit facilities is available to us. Future issuances of Secured Debt
would further dilute your percentage ownership of the outstanding principal
amount of Secured Debt.
39
TREATMENT OF COLLATERAL IN BANKRUPTCY -- THE COLLATERAL SECURING THE NOTES
COULD BE IMPAIRED IN THE EVENT WE WERE TO FILE FOR BANKRUPTCY.
Upon the occurrence of an event of default, the collateral trustee will
have certain rights to foreclose upon and sell the Collateral. See "Description
of Notes -- Security -- Collateral Trustee." This right to foreclose, however,
would be subject to limitations under applicable bankruptcy law if we become
subject to a bankruptcy proceeding. Under the U.S. Bankruptcy Code, a secured
creditor, such as the collateral trustee, is prohibited from repossessing its
security from a debtor in a bankruptcy case, or from disposing of security
repossessed from a debtor, without bankruptcy court approval. Moreover,
bankruptcy law permits the debtor to continue to retain and to use collateral,
and the proceeds, products, rents or profits of the collateral, even though the
debtor is in default under the applicable debt instruments, provided that the
secured creditor is given "adequate protection." The meaning of the term
"adequate protection" may vary according to circumstances, but it is intended in
general to protect the value of the secured creditor's interest in the
collateral and may include cash payments or the granting of additional security,
if and at such time as the court in its discretion determines, for any
diminution in the value of the collateral as a result of the stay or
repossession or disposition or any use of the collateral by the debtor during
the pendency of the bankruptcy case. In view of the broad discretionary powers
of a bankruptcy court, it is impossible to predict how long payments under the
notes could be delayed following commencement of a bankruptcy case, whether or
when the collateral trustee would repossess or dispose of the collateral, or
whether or to what extent holders of the notes would be compensated for any
delay in payment or loss of value of the collateral through the requirements of
"adequate protection." In certain circumstances, the security documents require
the holders to waive this right to adequate protection. Furthermore, in the
event the bankruptcy court determines that the value of the collateral is not
sufficient to repay all amounts due on the notes, the holders of the notes would
have "undersecured claims" as to the difference. Federal bankruptcy laws do not
permit the payment or accrual of interest, costs, and attorneys' fees for
"undersecured claims" during the debtor's bankruptcy case.
FRAUDULENT CONVEYANCE MATTERS -- FEDERAL AND STATE STATUTES ALLOW COURTS,
UNDER SPECIFIC CIRCUMSTANCES, TO VOID GUARANTEES AND LIENS SECURING GUARANTEES
AND TO REQUIRE NOTE HOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee and any liens granted to secure such
guarantee could be voided, or claims in respect of a guarantee could be
subordinated to all other debts of that guarantor if, among other things, the
guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such guarantee; and
- was insolvent or rendered insolvent by reason of such incurrence; or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets; or
40
- if the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
FRAUDULENT CONVEYANCE MATTERS -- ANY FUTURE PLEDGE OF COLLATERAL MIGHT BE
AVOIDABLE BY A TRUSTEE IN BANKRUPTCY.
Any future pledge of collateral in favor of the collateral trustee,
including pursuant to security documents delivered after the date of the
indentures, might be avoidable by the pledgor (as debtor in possession) or by
its trustee in bankruptcy if certain events or circumstances exist or occur,
including, among others, if the pledgor is insolvent at the time of the pledge,
the pledge permits the holders of the notes to receive a greater recovery than
if the pledge had not been given and a bankruptcy proceeding in respect of the
pledgor is commenced within 90 days following the pledge, or, in certain
circumstances, a longer period.
FAILURE TO PERFECT SECURITY INTERESTS -- RIGHTS OF HOLDERS OF NOTES IN THE
COLLATERAL MAY BE ADVERSELY AFFECTED BY THE FAILURE TO PERFECT SECURITY
INTERESTS IN CERTAIN COLLATERAL.
The security interest in the Collateral securing the notes includes certain
domestic assets, both tangible and intangible, whether now owned or acquired or
arising in the future. Applicable law requires that certain property and rights
acquired after the grant of a general security interest can only be perfected at
the time such property and rights are acquired and identified. There can be no
assurance that the collateral trustee will monitor, or that we will inform the
collateral trustee of, the future acquisition of property and rights that
constitute Collateral, and that the necessary action will be taken to properly
perfect the security interest in such after acquired Collateral. Such failure
may result in the loss of the security interest therein or the priority of the
security interest in favor of the notes against third parties.
FINANCING CHANGE OF CONTROL OFFER -- WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURES.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding notes at 101% of the
principal amount thereof plus accrued and unpaid interest and special interest,
if any, to the date of repurchase. However, it is possible that we will not have
sufficient funds at the time of the change of control to make the required
repurchase of notes or that restrictions in the credit agreement governing our
new credit facilities will not allow such repurchases. In addition, certain
important corporate events, such as leveraged recapitalizations that would
increase the level of our indebtedness, would not constitute a "Change of
Control" under the indentures. See "Description of Notes -- Repurchase at the
Option of Holders."
41
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. In consideration
for issuing the exchange notes, we will receive in exchange the original notes
of like principal amount, the terms of which are identical in all material
respects to the exchange notes. The original notes surrendered in exchange for
exchange notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the exchange notes will not result in any increase in our
indebtedness. We have agreed to bear the expenses of the exchange offer. No
underwriter is being used in connection with the exchange offer.
42
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
When we sold the original notes in July 2003, we and the guarantors entered
into a registration rights agreement with the initial purchasers of those
original notes. Under the registration rights agreement, we agreed to file a
registration statement regarding the exchange of the original notes for notes of
the same series that are registered under the Securities Act. We also agreed to
use commercially reasonable efforts to cause the registration statement to
become effective with the SEC and to conduct this exchange offer after the
registration statement is declared effective. The registration rights agreement
provides that we will be required to pay additional cash interest to the holders
of the original notes if:
- the registration statement is not filed by December 28, 2003;
- the registration statement is not declared effective by March 24, 2004;
or
- the exchange offer has not been consummated within 30 days of such
registration statement being declared effective.
The exchange offer is not being made to holders of original notes in any
jurisdiction in which the exchange would not comply with the securities or blue
sky laws of such jurisdiction. A copy of the registration rights agreement is
filed as an exhibit to the registration statement of which this prospectus is a
part.
TERMS OF THE EXCHANGE OFFER
Upon the terms and conditions described in this prospectus, we will accept
for exchange original notes that are properly tendered on or before the
expiration date and not withdrawn as permitted below. As used in this
prospectus, the term "expiration date" means 12:00 Midnight, New York City time,
on January 9, 2004. However, if we, in our sole discretion, have extended the
period of time for which the exchange offer is open, the term "expiration date"
means the latest time and date to which we extend the exchange offer.
As of the date of this prospectus, $550,000,000 aggregate principal amount
of the 9.25% Senior Secured Notes due 2010 and $550,000,000 aggregate principal
amount of the 9.50% Senior Secured Notes due 2013 are outstanding. This
prospectus is first being sent on or about December 11, 2003 to all holders of
original notes known to us. Our obligation to accept original notes for exchange
in the exchange offer is subject to the conditions described below under
"Conditions to the Exchange Offer." We reserve the right to extend the period of
time during which the exchange offer is open. We would then delay acceptance for
exchange of any original notes by giving oral or written notice of an extension
to the holders of original notes as described below. During any extension
period, all original notes previously tendered will remain subject to the
exchange offer and may be accepted for exchange by us. Any original notes not
accepted for exchange will be returned to the tendering holder after the
expiration or termination of the exchange offer.
Original notes tendered in the exchange offer must be in denominations of
principal amount of $1,000 and any integral multiple of $1,000. The CUSIP and
other clearing reference numbers for the original notes are:
ORIGINAL 2010 NOTES
<Table>
<Caption>
CUSIP NUMBER ISIN NUMBER
------------ ------------
Rule 144A Notes...................................... 75952B AE 5 US75952BAE56
Regulation S Notes................................... U75885 AB 6 USU75885AB69
Notes resold to Accredited Investors................. 75952B AG 0 US75952BAG05
</Table>
43
ORIGINAL 2013 NOTES
<Table>
<Caption>
CUSIP NUMBER ISIN NUMBER
------------ -------------------
Rule 144A Notes..................................... 75952B AH 8 US75952BAH87
Regulation S Notes.................................. U75885 AC 4 USU75885AC43
Notes resold to Accredited Investors................ 75952B AK 1 US75952BAK17
</Table>
We reserve the right to amend or terminate the exchange offer, and not to
accept for exchange any original notes not previously accepted for exchange,
upon the occurrence of any of the conditions of the exchange offer specified
below under "Conditions to the Exchange Offer." We will give oral or written
notice of any extension, amendment, non-acceptance or termination to the holders
of the original notes as promptly as practicable. If we materially change the
terms of the exchange offer, we will resolicit tenders of the original notes,
file a post-effective amendment to the prospectus and provide notice to the
noteholders. If the change is made less than five business days before the
expiration of the exchange offer, we will extend the offer so that the
noteholders have at least five business days to tender or withdraw. We will
notify you of any extension by means of a press release or other public
announcement no later than 9:00 a.m., New York City time on the next business
day after the expiration date.
Our acceptance of the tender of original notes by a tendering holder will
form a binding agreement upon the terms and subject to the conditions provided
in this prospectus.
PROCEDURES FOR TENDERING
Except as described below, a tendering holder must, on or prior to the
expiration date transmit an agent's message to the exchange agent at the address
listed below under the heading "Exchange Agent." In addition, the exchange agent
must receive, on or before the expiration date, a timely confirmation of
book-entry transfer of the original notes into the exchange agent's account at
The Depository Trust Company, or DTC, along with an agent's message.
The term "agent's message" means a message, transmitted to DTC and received
by the exchange agent and forming a part of a book-entry transfer.
If you are a beneficial owner whose original notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee, and
wish to tender, you should promptly instruct the registered holder to tender on
your behalf. Any registered holder that is a participant in DTC's book-entry
transfer facility system may make book-entry delivery of the original notes by
causing DTC to transfer the original notes into the exchange agent's account.
We will determine in our sole discretion all questions as to the validity,
form and eligibility of original notes tendered for exchange. This discretion
extends to the determination of all questions concerning the timing of receipts
and acceptance of tenders. These determinations will be final and binding.
We reserve the right to reject any particular original note not properly
tendered or any which acceptance might, in our judgment or our counsel's
judgment, be unlawful. We also reserve the right to waive any defects or
irregularities or conditions of the exchange offer as to any particular original
note either before or after the expiration date, including the right to waive
the ineligibility of any tendering holder. Our interpretation of the terms and
conditions of the exchange offer as to any particular original note either
before or after the expiration date shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
original notes must be cured within a reasonable period of time. Neither we, the
exchange agent nor any other person will be under any duty to give notification
of any defect or irregularity in any tender of original notes. Nor will we, the
exchange agent or any other person incur any liability for failing to give
notification of any defect or irregularity.
By tendering, each holder will be deemed to have represented to us that,
among other things,
- the exchange notes are being acquired in the ordinary course of business
of the person receiving the exchange notes, whether or not that person is
the holder; and
44
- neither the holder nor the other person has any arrangement or
understanding with any person to participate in the distribution of the
exchange notes.
In the case of a holder that is not a broker-dealer, that holder, by
tendering, will also represent to us that the holder is not engaged in and does
not intend to engage in a distribution of the exchange notes. If any holder or
other person is an "affiliate" of ours, as defined under Rule 405 of the
Securities Act, or is engaged in, or intends to engage in, or has an arrangement
or understanding with any person to participate in, a distribution of the
exchange notes, that holder or other person cannot rely on the applicable
interpretations of the staff of the SEC and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction.
Each broker-dealer that receives exchange notes for its own account in
exchange for original notes, where the original notes were acquired by it as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus that meets the requirements of the Securities
Act in connection with any resale of the exchange notes. By so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. See "Plan of
Distribution."
By delivering an agent's message, a beneficial owner or holder will be
deemed to have irrevocably appointed the exchange agent as its agent and
attorney-in-fact (with full knowledge that the exchange agent is also acting as
an agent for us in connection with the exchange offer) with respect to the
original notes, with full power of substitution (such power of attorney being
deemed to be an irrevocable power coupled with in interest subject only to the
right of withdrawal described in this prospectus), to receive for our account
all benefits and otherwise exercise all rights of beneficial ownership of such
original notes, in accordance with the terms and conditions of the exchange
offer.
Each beneficial owner or holder will also be deemed to have represented and
warranted to us that it has authority to tender, exchange, sell, assign and
transfer the original notes it tenders and that, when the same are accepted for
exchange, we will acquire good, marketable and unencumbered title to such
original notes, free and clear of all liens, restrictions, charges and
encumbrances, and that the original notes tendered are not subject to any
adverse claims or proxies. Each beneficial owner and holder, by tendering its
original notes, also agrees that it will comply with its obligations under the
registration rights agreement.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all original notes properly
tendered. We will issue the exchange notes promptly after acceptance of the
original notes. See "Conditions to the Exchange Offer" below. For purposes of
the exchange offer, we will be deemed to have accepted properly tendered
original notes for exchange when, as and if we have given oral or written notice
to the exchange agent, with prompt written confirmation of any oral notice.
For each original note accepted for exchange, the holder of the original
note will receive an exchange note of the same series as and having a principal
amount equal to that of the surrendered original note. The exchange notes will
bear interest from the most recent date to which interest has been paid on the
original notes. Accordingly, registered holders of exchange notes on the
relevant record date for the first interest payment date following the
completion of the exchange offer will receive interest accruing from the most
recent date to which interest has been paid on the original notes. Original
notes accepted for exchange will cease to accrue interest from and after the
date of completion of the exchange offer. Holders of original notes whose
original notes are accepted for exchange will not receive any payment for
accrued interest on the original notes otherwise payable on any interest payment
date the record date for which occurs on or after completion of the exchange
offer and will be deemed to have waived their rights to receive the accrued
interest on the original notes.
45
In all cases, issuance of exchange notes for original notes will be made
only after timely receipt by the exchange agent of a timely book-entry
confirmation of the original notes into the exchange agent's account at DTC.
The non-exchanged original notes will be credited to an account maintained
with DTC, as promptly as practicable after the expiration or termination of the
exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account for the
original notes at DTC for purposes of the exchange offer within two business
days after the date of this prospectus. Any financial institution that is a
participant in DTC's systems must make book-entry delivery of original notes by
causing DTC to transfer those original notes into the exchange agent's account
at DTC in accordance with DTC's procedure for transfer. This participant should
transmit its acceptance to DTC on or prior to the expiration date. DTC will
verify this acceptance, execute a book-entry transfer of the tendered original
notes into the exchange agent's account at DTC and then send to the exchange
agent confirmation of this book-entry transfer. The transmission of the notes
and agent's message to DTC and delivery by DTC to and receipt by the exchange
agent of the related agent's message will be deemed to be a valid tender.
WITHDRAWAL RIGHTS
Tenders of original notes may be withdrawn at any time before 12:00
Midnight, New York City time, on the expiration date.
For a withdrawal of a tender of notes to be effective, the exchange agent
must receive a valid withdrawal request through the Automated Tender Offer
Program system from the tendering DTC participant before the expiration date.
Any such request for withdrawal must include the VOI number of the tender to be
withdrawn and the name of the ultimate beneficial owner of the related notes in
order that such notes may be withdrawn. Properly withdrawn original notes may be
re-tendered by following the procedures described under "Procedures for
Tendering" above at any time on or before 12:00 Midnight, New York City time, on
the expiration date.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal. Any original notes so
withdrawn will be deemed not to have been validly tendered for exchange. No
exchange notes will be issued unless the original notes so withdrawn are validly
re-tendered.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we will not be
required to accept for exchange, or to issue exchange notes in exchange for, any
original notes of the same series, and may terminate or amend the exchange
offer, if at any time before the acceptance of the original notes for exchange
or the exchange of the exchange notes for the original notes, any of the
following events occurs:
- there is threatened, instituted or pending any action or proceeding
before, or any injunction, order or decree issued by, any court or
governmental agency or other governmental regulatory or administrative
agency or commission: (1) seeking to restrain or prohibit the making or
completion of the exchange offer or any other transaction contemplated by
the exchange offer, or assessing or seeking any damages as a result of
this transaction; (2) resulting in a material delay in our ability to
accept for exchange or exchange some or all of the original notes in the
exchange offer; or (3) any statute, rule, regulation, order or injunction
has been sought, proposed, introduced, enacted, promulgated or deemed
applicable to the exchange offer or any of the transactions contemplated
by the exchange offer by any governmental authority, domestic or foreign;
or
- any action has been taken, proposed or threatened, by any governmental
authority, domestic or foreign, that in our sole judgment might directly
or indirectly result in any of the consequences referred to in clauses
(1), (2) or (3) above or, in our sole judgment, might result in the
holders of
46
exchange notes having obligations with respect to resales and transfers
of exchange notes which are greater than those described in the
interpretation of the SEC referred to above, or would otherwise make it
inadvisable to proceed with the exchange offer; or
- any of the following has occurred: (1) any general suspension of or
general limitation on prices for, or trading in, securities on any
national securities exchange or in the over-the-counter market; or (2)
any limitation by a governmental authority, which may adversely affect
our ability to complete the transactions contemplated by the exchange
offer; or (3) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any limitation by
any governmental agency or authority which adversely affects the
extension of credit; or (4) a commencement of a war, armed hostilities or
other similar international calamity directly or indirectly involving the
United States, or, in the case of any of the preceding events existing at
the time of the commencement of the exchange offer, a material
acceleration or worsening of these calamities; or
- any change, or any development involving a prospective change, has
occurred or been threatened in our business, financial condition,
operations or prospects and those of our subsidiaries taken as a whole
that is or may be adverse to us, or we have become aware of facts that
have or may have an adverse impact on the value of the original notes or
the exchange notes; which in our sole judgment in any case makes it
inadvisable to proceed with the exchange offer and/or with such
acceptance for exchange or with such exchange.
These conditions to the exchange offer are for our sole benefit and we may
assert them regardless of the circumstances giving rise to any of these
conditions, or we may waive them in whole or in part in our sole discretion. If
we do so, the exchange offer will remain open for at least five business days
following any waiver of the preceding conditions. Our failure at any time to
exercise any of the foregoing rights will not be deemed a waiver of any right.
In addition, we will not accept for exchange any original notes tendered,
and no exchange notes will be issued in exchange for any original notes, if any
stop order is threatened or in effect relating to the registration statement of
which this prospectus constitutes a part or the qualification of the indenture
under the Trust Indenture Act of 1939.
EXCHANGE AGENT
We have appointed Wilmington Trust Company as the exchange agent for the
exchange offer. You should direct questions and requests for assistance or
requests for additional copies of this prospectus to the exchange agent
addressed as follows:
Delivery To: WILMINGTON TRUST COMPANY, EXCHANGE AGENT
<Table>
By Hand Before 12:00 Midnight: By Registered or Certified Mail:
Wilmington Trust Company Wilmington Trust Company
One Rodney Square North DC-1615 Reorg Services
1100 N. Market Street P.O. Box 8861
Wilmington, DE 19890-1615 1100 N. Market Street
Attention: Corporate Trust Wilmington, DE 19899-8861
Reorg Services, Attention: Corporate Trust
1st Floor Reorg Services
</Table>
By Facsimile Transmission
(for Eligible Institutions only): (302) 636-4145
Confirm by Telephone: (302) 636-6472
All other questions should be addressed to Reliant Resources, Inc., P.O.
Box 148, Houston, Texas 77001-0148, Attention: Investor Relations.
47
FEES AND EXPENSES
We will not make any payment to brokers, dealers, or others soliciting
acceptances of the exchange offer. We will, however, pay the applicable exchange
agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses incurred in connection with these
services. We will pay the cash expenses to be incurred in connection with the
exchange offer. Such expenses include fees and expenses of the applicable
exchange agent and trustee, accounting and legal fees and printing costs, among
others.
Solicitation of tenders may be made by telephone, facsimile or in person by
our, and our affiliates', officers and regular employees.
REIMBURSEMENT OF NOMINEE OF FORWARDING EXPENSES
Banks, brokerage firms, or other nominees holding the notes on your behalf
will be reimbursed for reasonable expenses incurred in transmitting this
document and all related materials with respect to this offer to their customers
and account executives via First Class Mail and via Internet Email. Any such
reimbursement will be made at levels consistent with those established by the
New York Stock Exchange.
TRANSFER TAXES
Holders who tender their original notes for exchange will not be obligated
to pay any related transfer taxes, except that holders who instruct us to
register exchange notes in the name of, or request that original notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer taxes.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE ORIGINAL NOTES
Holders of original notes who do not exchange their original notes for
exchange notes of the same series in the exchange offer will continue to be
subject to the provisions in the indenture regarding transfer and exchange of
the original notes and the restrictions on transfer of the original notes as
described in the legend on the original notes as a consequence of the issuance
of the original notes under exemptions from, or in transactions not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. In general, the original notes may not be offered or sold,
unless registered under the Securities Act, except under an exemption from, or
in a transaction not subject to, the Securities Act and applicable state
securities laws. Under existing interpretations of the Securities Act by the
SEC's staff contained in several no-action letters to third parties, and subject
to the immediately following sentence, we believe that the exchange notes would
generally be freely transferable by holders after the exchange offer without
further registration under the Securities Act, subject to certain
representations required to be made by each holder of exchange notes, as set
forth below. However, any purchaser of exchange notes who is one of our
"affiliates" (as defined in Rule 405 under the Securities Act) or who intends to
participate in the exchange offer for the purpose of distributing the exchange
notes:
- will not be able to rely on the interpretation of the SEC's staff;
- will not be able to tender its original notes in the exchange offer; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the notes
unless such sale or transfer is made pursuant to an exemption from such
requirements. See "Plan of Distribution."
We do not intend to seek our own interpretation regarding the exchange
offer and there can be no assurance that the SEC's staff would make a similar
determination with respect to the exchange notes as it has in other
interpretations to other parties, although we have no reason to believe
otherwise.
48
CAPITALIZATION
The following table sets forth our cash and cash equivalents, restricted
cash and certain other assets and our consolidated historical capitalization as
of September 30, 2003. The information appearing in this table should be read in
conjunction with our historical and unaudited financial information, together
with the notes thereto, where applicable, incorporated by reference herein.
<Table>
<Caption>
AS OF
SEPTEMBER 30,
2003
-------------
ACTUAL
-------------
(IN MILLIONS)
Cash and cash equivalents................................... $ 131
=======
Restricted cash (current and long-term)..................... $ 549
=======
Margin deposits on energy trading and hedging activities.... $ 83
=======
Current maturities of long-term debt and short-term
borrowings................................................ $ 412
Reliant Resources credit facilities......................... 3,264
9.25% senior secured notes due 2010......................... 550
9.50% senior secured notes due 2013......................... 550
Convertible senior subordinated notes....................... 275
Other long-term debt........................................ 2,474
-------
Total debt.................................................. 7,525
-------
Stockholders' equity:
Preferred stock, par value $0.001 per share; 125,000,000
shares authorized; none outstanding.................... --
Common stock, par value $0.001 per share; 2,000,000,000
shares authorized; 299,804,000 issued.................. --
Additional paid-in capital................................ 5,841
Treasury stock at cost, 5,214,806 shares.................. (90)
Retained deficit.......................................... (1,371)
Accumulated other comprehensive loss...................... (95)
-------
Total stockholders' equity.................................. 4,285
-------
Total capitalization........................................ $11,810
=======
</Table>
49
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following tables present our selected consolidated financial data for
1998 through 2002 and the nine months ended September 30, 2002 and September 30,
2003. The financial data for 1998, 1999 and 2000 are derived from the
consolidated historical financial statements of CenterPoint. The financial data
for 2001 and 2002 are derived from our audited financial statements. The
financial data for the nine months ended September 30, 2002 and September 30,
2003 are derived from our unaudited interim consolidated financial statements.
The data set forth below should be read together with our historical
consolidated financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the three years ended December 31, 2000, 2001 and 2002 included
in our Current Report on Form 8-K filed on November 14, 2003, incorporated by
reference herein, and our interim consolidated financial statements and the
notes to those statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for the nine months ended September 30,
2002 and 2003 included in our Quarterly Report on Form 10-Q filed on November
12, 2003, incorporated by reference herein. The historical financial information
may not be indicative of our future performance and the historical financial
information for 1998, 1999 and 2000 does not reflect what our financial position
and results of operations would have been had we operated as a separate,
stand-alone entity during the periods presented.
50
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ----------------------
1998 1999 2000 2001 2002 2002 2003
(1)(4) (1)(4) (1)(4)(5) (1)(2)(4)(5) (1)(3)(4) (1)(3)(4)(5) (1)(6)
------ ------ --------- ------------ --------- ------------ -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNT)
INCOME STATEMENT DATA:
Revenues......................... $277 $601 $2,732 $5,499 $10,577 $8,712 $ 9,209
Trading margins.................. 33 88 198 378 288 281 (45)
---- ---- ------ ------ ------- ------ -------
Total........................ 310 689 2,930 5,877 10,865 8,993 9,164
---- ---- ------ ------ ------- ------ -------
Expenses:
Fuel and cost of gas sold...... 102 293 911 1,576 1,082 826 1,078
Purchased power................ 13 149 926 2,498 7,421 6,118 6,122
Accrual for payment to
CenterPoint.................. -- -- -- -- 128 89 47
Operation and maintenance...... 65 128 336 461 786 589 645
General, administrative and
development.................. 78 94 270 471 635 476 404
Wholesale energy goodwill
impairment................... -- -- -- -- -- -- 985
Depreciation and
amortization................. 15 23 118 170 368 268 313
---- ---- ------ ------ ------- ------ -------
Total........................ 273 687 2,561 5,176 10,420 8,366 9,594
---- ---- ------ ------ ------- ------ -------
Operating income (loss).......... 37 2 369 701 445 627 (430)
---- ---- ------ ------ ------- ------ -------
Other income (expense):
Gains (losses) from
investments.................. -- 14 (22) 23 (23) 3 2
(Loss) income of equity
investments of unconsolidated
subsidiaries................. (1) (1) 43 7 18 11 (1)
Gain on sale of development
project...................... -- -- 18 -- -- -- --
Other, net..................... 1 1 -- 2 23 6 (6)
Interest expense............... (2) -- (7) (16) (267) (178) (365)
Interest income................ 1 1 16 22 28 14 24
Interest income(expense) --
affiliated companies, net.... 2 (6) (172) 12 5 5 --
---- ---- ------ ------ ------- ------ -------
Total other
income(expense)............ 1 9 (124) 50 (216) (139) (346)
---- ---- ------ ------ ------- ------ -------
Income (loss) from continuing
operations before income
taxes.......................... 38 11 245 751 229 488 (776)
Income tax expense............. 17 6 102 290 106 189 97
---- ---- ------ ------ ------- ------ -------
Income (loss) from continuing
operations..................... 21 5 143 461 123 299 (873)
---- ---- ------ ------ ------- ------ -------
Income (loss) from discontinued
operations before income
taxes........................ -- 15 73 83 (341) 119 (417)
Income tax (benefit) expense... -- (4) (7) (16) 108 95 61
---- ---- ------ ------ ------- ------ -------
Income (loss) from discontinued
operations................... -- 19 80 99 (449) 24 (478)
---- ---- ------ ------ ------- ------ -------
Income (loss) before cumulative
effect of accounting changes... 21 24 223 560 (326) 323 (1,351)
Cumulative effect of accounting
changes, net of tax............ -- -- -- 3 (234) (234) (24)
---- ---- ------ ------ ------- ------ -------
Net income (loss)................ $ 21 $ 24 $ 223 $ 563 $ (560) $ 89 $(1,375)
==== ==== ====== ====== ======= ====== =======
</Table>
51
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ----------------------
1998 1999 2000 2001 2002 2002 2003
(1)(4) (1)(4) (1)(4)(5) (1)(2)(4)(5) (1)(3)(4) (1)(3)(4)(5) (1)(6)
------ ------ --------- ------------ --------- ------------ -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNT)
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing
operations................... $ 1.66 $ 0.43 $ 1.03 $ (2.98)
Income (loss)from discontinued
operations, net of tax....... 0.36 (1.55) 0.08 (1.64)
------ ------- ------ -------
Income (loss) before cumulative
effect of accounting
changes...................... 2.02 (1.12) 1.11 (4.62)
Cumulative effect of accounting
changes, net of tax.......... .01 (0.81) (0.80) (0.08)
------ ------- ------ -------
Net income (loss).............. $ 2.03 $ (1.93) $ 0.31 $ (4.70)
====== ======= ====== =======
DILUTED EARNINGS (LOSS) PER
SHARE:
Income (loss) from continuing
operations................... $ 1.66 $ 0.42 $ 1.02 $ (2.98)
Income (loss) from discontinued
operations, net of tax....... 0.36 (1.54) 0.08 (1.64)
------ ------- ------ -------
Income (loss) before cumulative
effect of accounting
changes...................... 2.02 (1.12) 1.10 (4.62)
Cumulative effect of accounting
changes, net of tax.......... .01 (0.80) (0.80) (0.08)
------ ------- ------ -------
Net income (loss).............. $ 2.03 $ (1.92) $ 0.30 $ (4.70)
====== ======= ====== =======
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
---------------------------------------------------- SEPTEMBER 30,
1998 1999 2000 2001 2002 -----------------
(1) (1) (1)(5) (1)(2)(5) (1)(3) 2002(5) 2003
------- -------- -------- --------- -------- ------- -------
(IN MILLIONS, EXCEPT OPERATING DATA)
STATEMENT OF CASH FLOW DATA:
Cash flows from operating
activities.................... $ (2) $ 38 $ 335 $ (152) $ 519 $ 272 $ 528
Cash flows from investing
activities.................... (365) (1,406) (3,013) (838) (3,486) (3,302) (757)
Cash flows from financing
activities.................... 379 1,408 2,721 1,000 3,981 4,291 (771)
OTHER OPERATING DATA:
Trading and marketing
activity(7):
Natural gas (Bcf)(8).......... 1,115 1,481 2,273 3,265 3,449 2,925 765
Power sales (thousand
MWh)(8)..................... 61,195 128,266 125,971 222,907 306,425 244,332 67,450
Power generation activity:
Wholesale power sales (thousand
MWh)(8)....................... 2,973 10,204 39,300 62,825 128,588 105,161 87,468
Retail power sales (GWh)........ -- -- -- 473 62,455 48,379 49,721
Net power generation capacity at
end of period (MW)............ 3,800 4,469 9,231 10,521 19,300 19,888 20,399
</Table>
52
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------
1998 2000 2001 SEPTEMBER 30,
(1) 1999 (1) (1)(5) (1)(5) 2002 (1) 2003 (6)
------ -------- ------- ------- -------- -------------
(IN MILLIONS)
BALANCE SHEET DATA:
Property, plant and equipment, net.......... $ 270 $ 592 $ 2,217 $ 2,796 $ 6,991 $ 8,508
Total assets................................ 1,409 5,624 13,475 11,726 17,669 16,624
Short-term borrowings....................... -- -- -- 92 669 307
Long-term debt to third parties, including
current maturities........................ -- 69 260 297 6,159 7,218
Accounts and notes (payable) receivable --
affiliated companies, net................. (17) (1,333) (1,967) 445 -- --
Stockholders' equity........................ 652 741 2,345 5,984 5,653 4,285
</Table>
- ---------------
(1) Our results of operations include the results of the following acquisitions,
all of which were accounted for using the purchase method of accounting,
from their respective acquisition dates: the five generating facilities in
California substantially acquired in April 1998, a generating facility in
Florida acquired in October 1999, the REMA acquisition that occurred in May
2000 and the Orion Power acquisition that occurred in February 2002. See
note 5 to our consolidated financial statements incorporated by reference
herein for further information about the acquisitions occurring in 2000 and
2002. In October 1999, we acquired REPGB, which is part of our European
energy operations. In February 2003, we signed an agreement to sell our
European energy operations to Nuon, a Netherlands-based electricity
distributor. In the first quarter of 2003, we began to report the results of
our European energy operations as discontinued operations in accordance with
SFAS No. 144 and accordingly, reclassified prior period amounts. Also, in
July 2003, we entered into a definitive agreement to sell our Desert Basin
plant and have reflected those operations as discontinued and accordingly
have reclassified prior periods. For further discussion of the sales, see
notes 17 and 18 to our interim financial statements incorporated by
reference herein.
(2) Effective January 1, 2001, we adopted SFAS No. 133 which established
accounting and reporting standards for derivative instruments. See note 7 to
our consolidated financial statements incorporated by reference herein for
further information regarding the impact of the adoption of SFAS No. 133.
(3) During the third quarter of 2002, we completed the transitional impairment
test for the adoption of SFAS No. 142 on our consolidated financial
statements, including the review of goodwill for impairment as of January 1,
2002. Based on this impairment test, we recorded an impairment of our
European energy segment's goodwill of $234 million, net of tax, as a
cumulative effect of accounting change. See note 6 to our consolidated
financial statements incorporated by reference herein for further
discussion.
(4) Beginning with the quarter ended September 30, 2002, we now report all
energy trading and marketing activities on a net basis in the statements of
consolidated operations. Comparative financial statements for prior periods
have been reclassified to conform to this presentation. See note 2(t) to our
consolidated financial statements incorporated by reference herein for
further discussion.
(5) As described in note 1 to our consolidated financial statements incorporated
by reference herein, our consolidated financial statements for 2000 and 2001
have been restated from amounts previously reported. The restatement had no
impact on previously reported consolidated cash flows.
(6) During the nine months ended September 30, 2003, we recorded a charge of
$985 million (pre-tax and after tax) related to an impairment of goodwill in
our wholesale energy reporting unit. See note 7 to our interim financial
statements incorporated by reference herein for discussion.
(7) Excludes financial transactions.
(8) Includes physical contracts not delivered.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For our most recent annual consolidated financial statements and notes, see
our Current Report on Form 8-K filed on November 14, 2003 and incorporated by
reference herein. For our most recent annual "Management's Discussion and
Analysis of Financial Condition and Results of Operations", see our Current
Report on Form 8-K filed on November 14, 2003 and incorporated by reference
herein. For our most recent interim consolidated financial statements and notes
and interim "Management's Discussion and Analysis of Financial Condition and
Results of Operations", see our Quarterly Report on Form 10-Q filed on November
12, 2003 and incorporated by reference herein.
54
OUR BUSINESS
GENERAL
Our business operations consist of the following business segments:
- Retail energy -- provides electricity and related services to retail
customers primarily in Texas and acquires and manages the electric
energy, capacity and ancillary services associated with supplying these
retail customers;
- Wholesale energy -- provides electric energy and energy services in the
competitive segments of the United States wholesale energy markets;
- Other operations -- includes our venture capital investment portfolio and
unallocated corporate costs.
FORMATION, IPO AND DISTRIBUTION
In June 1999, the Texas legislature adopted an electric restructuring law
that amended the regulatory structure governing electric utilities in Texas in
order to allow retail electric competition with respect to all customer classes
beginning in January 2002. In response to this legislation, CenterPoint,
formerly Reliant Energy, adopted a business separation plan in order to separate
its regulated and unregulated electric operations. Under the business separation
plan, we were incorporated in Delaware in August 2000, and CenterPoint
transferred substantially all of its unregulated businesses to us. We completed
an initial public offering of approximately 20% of our common stock in May 2001
and received net proceeds from our initial public offering of $1.7 billion. We
used $147 million of the net proceeds of our initial public offering to repay
certain indebtedness that we owed to CenterPoint. We used the remainder of the
net proceeds of our IPO for repayment of third party borrowings, capital
expenditures, repurchases of our common stock and general corporate purposes. In
September 2002, the Distribution was completed and, as a result, we are no
longer a subsidiary of CenterPoint.
RETAIL ENERGY
We are a certified retail electric provider in Texas, which allows us to
provide electricity to residential, small commercial and large commercial,
industrial and institutional customers. In January 2002, we began to provide
retail electric service to all customers of CenterPoint that did not take action
to select another retail electric provider and to customers that selected us to
provide them electric service. All classes of customers of most investor-owned
Texas utilities can choose their retail electric provider. The law also allows
municipal utilities and electric cooperatives to participate in the competitive
marketplace, but to date, none have chosen to do so.
Our retail energy segment provides standardized electricity and related
products and services to residential and small commercial customers with an
aggregate peak demand for power up to approximately one MW (i.e., small and
mid-sized business customers) and offers customized electric commodity and
energy management services to large commercial, industrial and institutional
customers with an aggregate peak demand for power in excess of approximately one
MW (e.g., refineries, chemical plants, manufacturing facilities, real estate
management firms, hospitals, universities, school systems, governmental
agencies, multi-site retailers, restaurants, and other facilities under common
ownership or franchise arrangements with a single franchiser, which aggregate to
approximately one MW or greater of peak demand). We own certain ERCOT generation
facilities, which consist of ten power generation units completed or under
various stages of construction at seven facilities with an aggregate net
generation capacity of 805 MW located in Texas. The generating capacity of these
facilities consists of 100% base-load capacity.
We currently provide retail electric service only in Texas. However, we
entered into contracts to provide retail electric services to large commercial,
industrial and institutional customers in New Jersey that began on August 1,
2003, and we are taking steps to provide electricity and related products and
55
services to large commercial, industrial and institutional customers in certain
other states. In New Jersey, we are registered as an "electric power supplier",
in Pennsylvania, we are registered as an "electric generation supplier", and in
Maryland, we are licensed as an "electric supplier".
RESIDENTIAL AND SMALL COMMERCIAL SERVICES
We have approximately 1.6 million residential customers and over 200,000
small commercial accounts in Texas, making us the second largest retail electric
provider in Texas. The majority of our customers are in the Houston metropolitan
area, but we also have customers in other metropolitan areas, including Dallas
and Corpus Christi, Texas.
In general, the Texas regulatory structure permits retail electric
providers to procure electricity from wholesale generators at unregulated rates,
sell the electricity at generally unregulated prices to retail customers and pay
the local transmission and distribution utilities a regulated tariff rate for
delivering the electricity to the customers. By allowing retail electric
providers to provide retail electricity at any price, the Texas electric
restructuring law is designed to encourage competition among retail electric
providers. However, retail electric providers which are affiliates of, or
successors in interest to, electric utilities are restricted in the prices they
may charge to residential and small commercial customers within the affiliated
transmission and distribution utility's traditional service territory. We are
deemed to be the affiliated retail electric provider in CenterPoint's Houston
area service territory, and we are an unaffiliated retail electric provider in
all other areas. The prices that affiliated retail electric providers charge are
subject to a specified price, or "price to beat" and the affiliated retail
electric providers are not permitted to sell electricity to residential and
small commercial customers in the service territory of the affiliated
transmission and distribution utility at a price other than the price to beat
until January 2005, unless before that date 40% or more electricity consumed in
2000 by the relevant class of customers in the affiliated transmission and
distribution utility service territory is committed to be served by other retail
electric providers. Unaffiliated retail electric providers may sell electricity
to residential and small commercial customers at any price.
In addition, the Texas electric restructuring law requires the affiliated
retail electric provider to make the price to beat available to residential and
small commercial customers who request it in the affiliated transmission and
distribution utility's traditional service territory until January 1, 2007. The
price to beat only applies to electric services provided to residential and
small commercial customers (i.e., customers with an aggregate peak demand at or
below one MW).
The PUCT's regulations allow an affiliated retail electric provider to
adjust the price to beat based on the wholesale energy supply cost component or
"fuel factor" included in its price to beat up to twice a year. The PUCT's
current regulations allow us to request an adjustment of our fuel factor based
on the percentage change in the forward price of natural gas or as a result of
changes in the price of purchased energy. As part of a request to change the
fuel factor for changes in purchased energy prices, we would have to show that
the fuel factor must be adjusted to restore the amount of headroom that existed
at the time the initial price to beat fuel factor was set by the PUCT. During
2002, we requested, and the PUCT approved, two such adjustments to our price to
beat fuel factor. In January 2003, we requested, and the PUCT approved in March
2003, an increase of our price to beat fuel factor. In July 2003, our second and
final request for 2003 was approved by the PUCT to increase the price to beat
fuel factor based on a 23.1% increase in the price of natural gas. Our requested
increase was based on an average forward 12-month natural gas price of
$6.1000/MMbtu during the twenty-day trading period beginning May 14, 2003 and
ending June 11, 2003. The requested increase represents an increase of 9.2% in
the total bill of a residential customer using, on average, 12,000 kilowatt
hours per year. We cannot estimate with any certainty the magnitude and timing
of future adjustments required, if any, or the impact of such adjustments on our
headroom. To the extent that a requested adjustment is not received on a timely
basis, our results of operations, financial condition and cash flows may be
adversely affected.
In March 2003, the PUCT approved a revised price to beat rule. The changes
from the previous rule include an increase in the number of days used to
calculate the natural gas price average from 10 trading
56
days to 20 trading days, and an increase in the threshold of what constitutes a
significant change in the market price of natural gas from 4% to 5%, except for
filings made after November 15th of a given year that must meet a 10% threshold.
The revised rule also provides that the PUCT will, after reaching a
determination of stranded costs in 2004, make downward adjustments to the price
to beat fuel factor if natural gas prices drop below the prices embedded in the
then-current price to beat fuel factor. In addition, the revised rule also
specifies that the base rate portion of the price to beat will be adjusted to
account for changes in the non-bypassable rates that result from the utilities'
final stranded cost determination in 2004. Adjustments to the price to beat will
be made following the utilities' final stranded cost determination in 2004.
We will be required to make a payment to CenterPoint in 2004 as required by
the Texas electric restructuring law, unless on or prior to January 1, 2004, 40%
or more of the amount of electric power that was consumed in 2000 by residential
or small commercial customers, as applicable, within CenterPoint's Houston
service territory is being provided by retail electric providers other than us.
This amount will be computed by multiplying $150 by the number of residential or
small commercial customers, as the case may be, that we serve on January 1, 2004
in CenterPoint's Houston service territory, less the number of residential or
small commercial electric customers, as the case may be, we serve in other ares
of Texas. Currently, we believe it is probable that we will be required to make
a payment in the range of $170 million to $180 million (pre-tax), with a most
probable estimate of $175 million to CenterPoint related to our residential
customers only.
Currently, we believe that the 40% test for small commercial customers will
be met and we will not make a payment related to those customers. If the 40%
test is not met related to our small commercial customers and a payment is
required, we estimate this payment would be approximately $30 million.
LARGE COMMERCIAL, INDUSTRIAL AND INSTITUTIONAL SERVICES -- SOLUTIONS BUSINESS
We provide electricity and energy services to large commercial, industrial
and institutional customers (i.e., customers with an aggregate peak demand of
greater than approximately one MW) in Texas with whom we have signed contracts.
In addition, we provide electricity to those large commercial, industrial and
institutional customers in CenterPoint's service territory who have not entered
into a contract with any retail electric provider. We also provide customized
energy solutions, including risk management and energy services products, and
demand side and energy information services to our large commercial, industrial
and institutional customers.
Our large commercial, industrial and institutional customers include
refineries, chemical plants, manufacturing facilities, real estate management
firms, hospitals, universities, school systems, governmental agencies,
multi-site retailers, restaurants and other facilities under common ownership or
franchise arrangements with a single franchiser, which aggregate to
approximately one MW or greater of peak demand. Excluding those parts of Texas
not currently open to competition, the large commercial, industrial and
institutional segment in Texas consists of approximately 2,700 buying
organizations consuming an estimated aggregate of approximately 17,000 MW of
electricity at peak demand. Our contracts with customers represent a peak demand
of approximately 5,500 MW at approximately 24,000 metered locations.
PROVIDER OF LAST RESORT
In Texas, a provider of last resort is required to offer standard retail
electric service with no interruption of service, except in the event of
non-payment, to any customer requesting electric service, to any customer whose
certified retail electric provider has failed to provide electric service or to
any customer that voluntarily requests this type of service. Through a
competitive bid process administered by the PUCT, we were appointed to serve as
the provider of last resort in many regions of the state. We do not expect to
serve a large number of customers in this capacity, as many customers are
expected to subsequently select a retail electric provider. We will serve a
two-year term as the provider of last resort ending December 31, 2004. Pricing
for service provided by a provider of last resort may include a
57
customer charge and an energy charge, which for residential and small commercial
customers is adjustable based upon changes in the forward price of natural gas.
For large non-residential customers, the energy charge is adjusted based upon
the ERCOT market-clearing price of energy. For all customer classes, the
adjustment to the energy charge is subject to a floor amount. Non-residential
customers will be assessed a demand charge.
RETAIL ENERGY SUPPLY
We continuously monitor and update our retail energy supply positions based
on our retail energy demand forecasts and market conditions. We enter into
bilateral contracts with third parties for electric energy, capacity and
ancillary services.
Texas Genco (currently 81% owned by CenterPoint), which owns approximately
13,900 MW of aggregate net generation capacity in Texas, is our primary source
of retail energy capacity. In total, we have contracted for approximately
two-thirds of our capacity requirements for 2004 and a significant portion of
our estimated 2005 requirements, in part, by purchasing entitlements to
generation capacity from Texas Genco.
In the future, we expect to continue to contract for a significant portion
of the supply requirements of our Texas retail energy business, but over time we
are likely to supplement our market-based purchases with the acquisition of
individual generation assets.
Unless otherwise extended, Texas Genco's obligation to sell 85% of its
generation capacity in auctions and the master purchase agreement governing
purchases of capacity and/or energy from Texas Genco will terminate on January
24, 2004, the expiration date of the Texas Genco option. The termination of
these contractual arrangements will have no impact on existing purchase
commitments with Texas Genco entered into prior to that date.
The master power purchase agreement is secured by a lien against our rights
in accounts receivable and related assets of certain of our subsidiaries. The
master power purchase agreement does not require us to post cash collateral or
letters of credit to secure our obligations so long as Texas Genco's credit
exposure to us under the contract does not exceed $250 million from May 1 to
August 31 and $200 million from September 1 through April 30.
We have an option to acquire CenterPoint's holdings of the common stock of
Texas Genco that is exercisable from January 10, 2004 until January 24, 2004. On
December 5, 2003, we announced that it is unlikely that we will exercise our
option to purchase CenterPoint's holdings of common stock of Texas Genco.
ERCOT
We are a member of ERCOT. The ERCOT ISO is responsible for maintaining
reliable operations of the bulk electric power supply system in the ERCOT
Region. Its responsibilities include ensuring that information relating to a
customer's choice of retail electric provider is conveyed in a timely manner to
anyone needing the information. It is also responsible for ensuring that
electricity production and delivery are accurately accounted for among the
generation resources and wholesale buyers and sellers in the ERCOT Region.
Unlike some independent system operators in other regions of the country, the
ERCOT ISO does not operate a centrally dispatched pool and does not procure
energy on behalf of its members other than to maintain the reliable operation of
the transmission system. Members are responsible for contracting their energy
requirements bilaterally. The ERCOT ISO also serves as agent for procuring
ancillary services for those who elect not to secure their own ancillary
services requirement.
Members of ERCOT include retail customers, investor and municipal owned
electric utilities, rural electric cooperatives, river authorities, independent
generators, power marketers and retail electric providers. The ERCOT Region
operates under the reliability standards set by the North American Electric
Reliability Council. The PUCT has primary jurisdictional authority over the
ERCOT Region to ensure the adequacy and reliability of electricity across the
state's main interconnected power grid.
58
The ERCOT Region is divided into four congestion zones: north, south, west
and Houston. While most of our retail demand and associated supply is located in
the Houston congestion zone, we serve customers and acquire supply in all four
congestion zones. In addition, ERCOT conducts annual and monthly auctions of
transmission congestion rights which provide the entity owning transmission
congestion rights the ability to financially hedge price differences between
zones (basis risk). The PUCT prohibits any single ERCOT market participant from
owning more than 25% of the available transmission congestion rights on any
congestion path.
COMPETITION
For information regarding competitive factors affecting our retail energy
segment, see "Risk Factors -- Risks Related to Our Retail Energy Operations".
WHOLESALE ENERGY
Our wholesale energy segment provides energy and energy services with a
focus on the competitive segment of the United States wholesale energy markets.
We have built a portfolio of electric power generation facilities, through a
combination of acquisitions and development, that are not subject to traditional
cost-based regulation; therefore, we can generally sell electricity at prices
determined by the market, subject to regulatory limitations. We market electric
energy, capacity and ancillary services and procure and, in some instances,
resell, natural gas, coal, fuel oil, natural gas transportation capacity and
other energy-related commodities to optimize our physical assets and manage the
risk of our asset portfolio. In March 2003, we decided to exit our proprietary
trading activities and liquidate, to the extent practicable, our proprietary
positions. Although we have exited our proprietary trading activities, we have
legacy positions, which will be closed as economically feasible or in accordance
with their terms. We will continue to engage in marketing and hedging activities
related to our electric generating facilities, pipeline transportation capacity
positions, pipeline storage positions and fuel positions.
OVERVIEW OF WHOLESALE ENERGY MARKET
Over the past two years, the wholesale energy markets in the United States
have undergone dramatic changes. In late 2000 into early 2001, power markets
across most of the United States were trading at historical highs due in large
part to tight wholesale power market conditions, gas prices being at record
levels because of falling supplies and strong demand from a growing economy, gas
trading volumes continuing their rapid growth, and power trading and generation
companies having substantial access to the debt and equity markets. However,
during the summer of 2001, market conditions began to take a downward turn when
the first significant wave of nearly 200,000 MW of new generating capacity
commenced operations and began to ease the tight wholesale power market
conditions. Also, state regulators, in concert with the FERC, began to impose
price caps and other marketplace rules that resulted in power and ancillary
service prices in certain markets being at or near the variable cost to provide
them. Energy trading activity also saw a sharp reversal during 2001. The failure
of certain energy companies damaged the reputation of the entire industry and
energy trading specifically. The heightened attention on energy trading
businesses and the subsequent findings and allegations of questionable business
practices and transactions engaged in by a number of industry participants,
including us, caused a further erosion of confidence in the industry. As a
result, liquidity in the market began to decline.
The overall market conditions in the wholesale power industry continued to
worsen during 2002. With the addition of still more generation capacity and
heightened regulatory oversight, power prices continued their downward trend,
trading at or barely above the variable cost of production in many markets.
Confronted with a weaker profit outlook in both electric generation and energy
trading and significant amounts of short-term debt to be refinanced, credit
agencies began a series of downgrades of substantially all the industry's major
market participants, leaving many with below investment grade credit ratings.
These downgrades severely curtailed the access of these companies to the debt or
equity markets and triggered credit collateral requirements relating to their
trading and hedging activities. Consequently, many companies were forced to
significantly reduce their trading activities, which further reduced market
59
liquidity. Moreover, during the second quarter of 2003, market liquidity was
negatively impacted by the filings for reorganization under Chapter 11 of the
United States Bankruptcy Code of three companies in the wholesale power
industry, NRG Energy Inc., National Energy & Gas Transmission, Inc. and Mirant
Corp.
During the second half of 2002 and continuing into 2003, investors and
government regulators, as well as many industry participants and independent
observers, urged industry reforms to provide more balanced and sustainable
long-term market conditions in both the power markets and the energy trading
markets. The most significant of these are the FERC's efforts to implement SMD
and industry efforts to develop clearing and settlement provisions at energy
exchanges that would greatly reduce collateral requirements of participating
companies.
POWER GENERATION OPERATIONS
We own, own an interest in, or lease 119 operating electric power
generation facilities with an aggregate net generating capacity of 19,279 MW
located in five regions of the United States (excluding our ERCOT generation
facilities). This excludes 588 MW related to our Desert Basin plant, which was
sold in October 2003, and 811 MW related to the retirement of certain units in
the West and Mid-Atlantic regions. We have 1,063 MW of additional net generating
capacity under construction. One gas-fired generating facility (541 MW) is due
to reach commercial operation in the fourth quarter of 2003 and one waste-coal
fired generating facility (522 MW) is due to reach commercial operation in the
second half of 2004. The generating capacity of these facilities consists of
approximately 25% of base-load, 44% of intermediate and 31% of peaking capacity.
The following table describes our electric power generation facilities and
net generating capacity by region as of December 5, 2003:
<Table>
<Caption>
TOTAL NET
NUMBER OF GENERATING
GENERATION CAPACITY
REGION FACILITIES(1) (MW)(2) DISPATCH TYPE(3) FUEL TYPE
- ------ ------------- ---------- ---------------- ---------
MID-ATLANTIC
Operating(4)(5)........... 21 5,161 Base, Intermediate, Peak Gas/Coal/Oil/Hydro
Under 1 522 Base Coal
Construction(6)(7).....
--- ------
Combined.................. 22 5,683
NEW YORK
Operating(8).............. 77 2,952 Base, Intermediate, Peak Gas/Oil/Hydro
MID-CONTINENT
Operating................. 9 4,484 Base, Intermediate, Peak Gas/Oil/Coal
SOUTHEAST
Operating(9)(10).......... 6 3,010 Base, Intermediate, Peak Gas/Oil
WEST
6 3,672 Base, Intermediate, Peak Gas/Oil
Operating(11)(12)(13)(14)..
Under Construction(6)..... 1 541 Base, Intermediate Gas
--- ------
Combined.................. 7 4,213
TOTAL
Operating................. 119 19,279
--- ------
Under Construction........ 2 1,063
--- ------
Combined.................. 121 20,342
=== ======
</Table>
60
- ---------------
(1) Unless otherwise indicated, we own a 100% interest in each facility listed.
(2) Average summer and winter net generating capacity.
(3) We use the designations "Base," "Intermediate," and "Peak" to indicate
whether the facilities described are base-load, intermediate, or peaking
facilities, respectively.
(4) We lease a 100%, 16.67% and 16.45% interest in three Pennsylvania
facilities having 614 MW, 284 MW and 282 MW of net generating capacity,
respectively, through facility lease agreements having terms of 26.25
years, 33.75 years and 33.75 years, respectively.
(5) In October 2003, we announced the retirement of two Mid-Atlantic generation
units having 232 MW of net generating capacity, which are excluded from the
above table.
(6) We consider a project to be "under construction" once we have acquired the
necessary permits to begin construction, broken ground on the project site
and contracted to purchase machinery for the project, including the
combustion turbines.
(7) In November 2003, we retired two generation units having 197 MW of net
generating capacity at the Seward facility, which are excluded from the
table above. This retirement was necessary to continue construction of the
replacement capacity of 522 MW.
(8) Excludes two hydro plants with a net generating capacity of 5 MW, which are
not currently operational.
(9) We own a 50% interest in one of these facilities having a net generating
capacity of 108 MW. An independent third party owns the other 50%.
(10) We are party to tolling agreements entitling us to 100% of the capacity of
two Florida facilities having 630 MW and 474 MW of net generating capacity,
respectively. These tolling agreements have terms of 10 years and 5 years,
respectively, and are treated as operating leases for accounting purposes.
(11) In October 2003, we announced the retirement of two California generation
units having 264 MW of total net generating capacity due to a lack of
required environmental permits, which are excluded from the above table.
(12) At the end of December 2003, we will retire one California generation unit
having 118 MW of net generating capacity, which are excluded from the table
above, due to a lack of required environmental permits.
(13) We own a 50% interest in one Nevada facility having a total generating
capacity of 470 MW. An independent third party owns the other 50%.
(14) In November 2003, we announced that the following units in California will
be mothballed: two units at Etiwanda (640 MW); one unit at Mandalay (130
MW) and one unit at Ellwood (54 MW), which are included in the above table.
MID-ATLANTIC REGION
Facilities. We own, own an interest in, or lease 21 operating electric
power generation facilities with an aggregate net generating capacity of 5,161
MW located in Pennsylvania, New Jersey and Maryland. The generating capacity of
these facilities consists of approximately 28% of base-load, 47% of intermediate
and 25% of peaking capacity.
We are constructing a 522 MW coal-fired base-load unit that will replace
two of our generating units at an existing facility located in Pennsylvania. We
expect this unit will begin commercial operation by the end of 2004. Because of
lower price conditions in the PJM Market and the rising cost of operations,
particularly with respect to emission costs, we retired an 82 MW coal-fired
facility located in our Mid-Atlantic region in September 2002. In November 2003,
we retired two generation units having 197 MW of net generating capacity to
allow continued construction of replacement capacity (522 MW) at the facility.
In addition, we plan to retire two Mid-Atlantic generation units having 232 MW
of total net generating capacity, in early 2004.
61
The following table describes the electric power generation facilities we
owned, leased or had under construction in the Mid-Atlantic region of the United
States as of December 5, 2003:
<Table>
<Caption>
SUMMER/WINTER
NET GENERATING
GENERATION FACILITIES(1) LOCATION CAPACITY(MW) FUEL TYPE DISPATCH TYPE(2)
- ------------------------ -------- -------------- --------- ----------------
Operating
Blossburg................. Pennsylvania 23 Gas Peak
Conemaugh(3).............. Pennsylvania 282 Coal/Oil Base/Peak
Deep Creek................ Maryland 19 Hydro Base
Gilbert................... New Jersey 615 Dual Inter/Peak
Glen Gardner.............. New Jersey 184 Dual Peak
Hamilton.................. Pennsylvania 23 Oil Peak
Hunterstown............... Pennsylvania 866 Dual/Gas Inter/Peak
Keystone(3)............... Pennsylvania 284 Coal/Oil Base/Peak
Liberty................... Pennsylvania 568 Gas Base
Mountain.................. Pennsylvania 47 Dual Peak
Orrtanna.................. Pennsylvania 23 Oil Peak
Piney..................... Pennsylvania 28 Hydro Base
Portland.................. Pennsylvania 584 Coal/Gas/Oil Base/Inter/Peak
Sayreville(5)............. New Jersey 264 Dual Peak
Shawnee................... Pennsylvania 23 Oil Peak
Shawville(3).............. Pennsylvania 614 Coal/Oil Base/Peak
Titus..................... Pennsylvania 281 Coal/Dual Inter/Peak
Tolna Station............. Pennsylvania 47 Oil Peak
Warren.................... Pennsylvania 68 Dual Peak
Wayne..................... Pennsylvania 66 Oil Peak
Werner.................... New Jersey 252 Oil Peak
-----
Total Operating............. 5,161
-----
Under Construction
Seward(4).............. Pennsylvania 522 Coal Base
-----
Total Under Construction.... 522
-----
TOTAL COMBINED.............. 5,683
=====
</Table>
- ---------------
(1) Unless otherwise indicated, we own a 100% interest in each facility listed.
All of these facilities are operational.
(2) We use the designations "Base," "Inter" and "Peak" to indicate whether the
facilities described are base-load, intermediate or peaking facilities,
respectively.
(3) We lease a 100% interest in the Shawville Station, a 16.67% interest in the
Keystone Station and a 16.45% interest in the Conemaugh Station under
facility interest lease agreements with original terms of 26.25 years, 33.75
years and 33.75 years, respectively.
(4) In November 2003, we retired two generation units having 197 MW of net
generating capacity at the Seward facility, which are excluded from the
table above. This retirement was necessary to continue construction of the
replacement capacity of 522 MW.
(5) In October 2003, we announced the retirement of two Sayreville generation
units having 232 MW of net generating capacity, which are excluded from the
table above.
Market Framework. We currently sell the power generated by our
Mid-Atlantic facilities in the PJM Market and occasionally to buyers in adjacent
power markets, such as the ECAR Market and NY Market. We also expect to sell
power in a newly created PJM West Market. Each of the PJM, the NY and the
62
PJM West Markets operates as centralized power pools with open-access,
non-discriminatory transmission systems. The PJM and PJM West Markets are
administered by PJM, a FERC-approved RTO.
Although the transmission infrastructure within these markets is generally
well developed and independently operated, transmission constraints exist
between, and to a certain extent within, these markets. In particular,
transmission of power from western Pennsylvania and upstate New York to eastern
Pennsylvania, New Jersey and New York City may be constrained. Depending on the
timing and nature of transmission constraints, market prices may vary from
market to market, or between sub-regions of a particular market. Market prices
are generally higher in New York City than in other parts of New York due to the
transmission constraints.
In addition to managing the transmission system, PJM is responsible for
maintaining competitive wholesale markets, operating the spot wholesale electric
energy, capacity and ancillary services markets and determining the market
clearing price based on bids submitted by participating generators in each
market. PJM generally matches sellers with buyers within a particular market
that meet specified minimum credit standards. We sell electric energy, capacity
and ancillary services into the markets maintained by PJM on both a real-time
basis and a forward basis for periods of up to one year. Our customers consist
of the members of each market, including municipalities, electric cooperatives,
integrated utilities, transmission and distribution utilities, retail electric
providers and power marketers. We also sell electric energy, capacity and
ancillary services to customers in our Mid-Atlantic region under negotiated
bilateral contracts.
PJM has an internal market monitor. The internal market monitor reports on
issues relating to the operation of the PJM Market, including the determination
of transmission congestion costs or the potential of any market participation to
exercise market power within the PJM Market or PJM West Market. The internal
market monitor evaluates the operation of both spot and bilateral markets to
detect either design or structural flaws in the PJM Market and evaluates any
proposed enforcement mechanisms that are necessary to assure compliance with the
PJM Protocols.
The PJM Protocols allow energy demand to respond to price changes. The lack
of sufficient energy demand that may respond has been cited as the primary
reason for retaining the electric energy, capacity and ancillary service market
caps, which are currently set at $1,000 per MWh in the PJM Market and the energy
price mitigation measures in the PJM Market.
Energy market price mitigation measures are implemented for some generating
facilities when, in the opinion of PJM, transmission constraints are present.
This is commonly referred to as price capping. In such instances, PJM requires,
for purposes of system reliability, the dispatch of specific units. In the
opinion of PJM, these units are not needed to meet energy demand and are only
necessary to maintain the stability of the PJM transmission system. When price
capping is imposed, the asking price submitted by these generating facilities is
disregarded in setting the PJM market price and the subject units receive a
mitigated price that is generally equal to incremental operating costs of the
generating unit plus 10%. Historically, 11 generating facilities, representing
over 250 MW, in our Mid-Atlantic region have been consistently impacted by this
procedure. In addition, a few other generating facilities in our Mid-Atlantic
region have experienced occasional price capping during selective hours.
PJM attempts to ensure that there is sufficient generation capacity to meet
energy demand and ancillary services requirements through a capacity market. All
power retailers are required to demonstrate commitments for capacity sufficient
to meet their peak forecasted load plus a reserve above this level, currently
set at 18%. Prices for capacity are capped by PJM at approximately $175 per MW
per day.
NEW YORK REGION
Facilities. We own 77 operating electric power generation facilities with
an aggregate net generating capacity of 2,952 MW located in New York. Our
generating facilities in the New York region consist of two distinct groups,
intermediate and peaking facilities located in New York City and, with the
exception of one gas-fired facility, 73 small run-of-river hydro facilities
located in central and northern New York
63
State. The overall generating capacity of these facilities consists of
approximately 23% of base-load, 41% of intermediate and 36% of peaking capacity.
With the exception of one facility, all of our New York facilities were acquired
as a result of utility divestitures.
The following table describes the electric power generation facilities we
owned, leased or had under construction in the New York region of the United
States as of December 5, 2003:
<Table>
<Caption>
SUMMER/WINTER
NET GENERATING
GENERATION FACILITIES(1) LOCATION CAPACITY (MW) FUEL TYPE DISPATCH TYPE(2)
- ------------------------ -------- -------------- --------- ----------------
Operating
Astoria....................... New York 1,277 Gas/Dual Inter/Peak
Carr Street................... New York 101 Gas Inter
Gowanus....................... New York 597 Dual/Oil Peak
Narrows....................... New York 305 Dual Peak
Hydroelectric assets(3)....... New York 672 Hydro Base
-----
Total Operating................. 2,952
=====
</Table>
- ---------------
(1) Unless otherwise indicated, we own a 100% interest in each facility listed.
All of these facilities are operational.
(2) We use the designations "Base," "Inter" and "Peak" to indicate whether the
facilities described are base-load, intermediate or peaking facilities,
respectively.
(3) Excludes two hydro plants with a net generating capacity of 5 MW, which are
not currently operational.
Market Framework. We currently sell the power generated by our New York
regional facilities in the NY Market. In New York City, we sell electric energy
and ancillary services into both day-ahead and real-time markets and capacity in
the monthly and six month forward markets. Our customers include municipalities,
electric cooperatives, integrated utilities, transmission and distribution
utilities, retail electric providers and power marketers. Our hydro facilities
are currently under contract to sell all electric energy, capacity and ancillary
services to Niagara Mohawk under contract through September 2004.
Our sales into markets administered by NYISO are governed by the NYISO
Protocols. The NYISO Protocols allow energy demand to respond to high prices in
emergency and non-emergency situations. The lack of sufficient energy demand
that may respond to prices has been cited as one of the primary reasons for
retaining wholesale energy bid caps, which are currently set at $1,000 per MWh
in the NY Market.
The NYISO Protocols established a capacity market in order to ensure that
there is enough generation capacity to meet retail energy demand and ancillary
services requirements. All power retailers are required to demonstrate
commitments for capacity sufficient to meet their peak forecasted load plus a
reserve requirement, currently set at 18%. As an additional local reliability
measure, power retailers located in New York City are required to procure the
majority of this capacity, currently 80% of their peak forecasted load, from
generating units located in New York City. Because only a few suppliers own the
existing in-city capacity, previously divested utility generation is subject to
a capacity price cap of $105 per KW per year, and sales capacity from
substantially all our existing in-city generating units are subject to this cap.
Any generation capacity added following divestiture is not subject to a capacity
price cap.
NYISO has implemented a measure known as the "automated mitigation
procedure" under which day-ahead energy bids will be automatically reviewed. If
bids exceed certain pre-established thresholds and have a significant impact on
the market-clearing price, the bids are then reduced to a pre-established market
based or negotiated reference bid. NYISO has also adopted, at the FERC's
direction, more stringent mitigation measures for all generating facilities in
transmission-constrained New York City.
NYISO has an internal market monitoring organization. The market monitor
assesses the efficiency and effectiveness of the electric energy, capacity and
ancillary services. In performing these functions, the internal market monitor
develops reference price levels for each generator, oversees the operation of
NYISO's automatic mitigation procedure, investigates potential anti-competitive
behavior by market
64
participants, recommends changes in market Protocols and prepares periodic
reports for submission to the FERC and other agencies. In addition, NYISO also
has an external market advisor that works closely with the market monitor and
has the independent authority to suggest changes in Protocols or recommend
sanctions or penalties directly to the NYISO governing board. The NYISO market
advisor issues written reports containing analyses and recommendations, which
are made available to the public.
MID-CONTINENT REGION
Facilities. We own 9 operating electric power generation facilities with
an aggregate net generating capacity of 4,484 MW located in Illinois, Ohio,
Pennsylvania and West Virginia. The generating capacity of these facilities
consists of approximately 51% of base-load, 7% of intermediate and 42% of
peaking capacity.
The following table describes the electric power generation facilities we
owned or had under construction in the Mid-Continent region of the United States
as of December 5, 2003:
<Table>
<Caption>
SUMMER/WINTER
NET GENERATING
GENERATION FACILITIES(1) LOCATION CAPACITY(MW) FUEL TYPE DISPATCH TYPE(2)
- ------------------------ -------- -------------- --------- ----------------
Operating
Aurora...................... Illinois 912 Gas Peak
Avon Lake................... Ohio 721 Coal/Oil Base/Peak
Brunot Island............... Pennsylvania 367 Gas/Oil Inter/Peak
Ceredo...................... West Virginia 475 Gas Peak
Cheswick.................... Pennsylvania 566 Coal Base
Elrama...................... Pennsylvania 487 Coal Base
New Castle.................. Pennsylvania 339 Coal/Gas Base/Peak
Niles....................... Ohio 246 Coal/Gas Base/Peak
Shelby County............... Illinois 371 Gas Peak
-----
Total Operating............... 4,484
=====
</Table>
- ---------------
(1) Unless otherwise indicated, we own a 100% interest in each facility listed.
(2) We use the designations "Base," "Inter" and "Peak" to indicate whether the
facilities described are base-load, intermediate or peaking facilities,
respectively.
Market Framework. We generally sell the electric energy, capacity and
ancillary services generated and/or provided by our Mid-Continent region
portfolio into the PJM West Market, the ECAR Market and the MAIN Market. These
markets include all or portions of Illinois, Wisconsin, Missouri, Indiana, Ohio,
Michigan, Virginia, West Virginia, Tennessee, Maryland and Pennsylvania. The PJM
West Market operates as part of the PJM centralized power pool with an
open-access, non-discriminatory transmission system administered by an
independent system operator approved by the FERC that is responsible for, among
other things, maintaining competitive wholesale markets, operating the spot
wholesale energy market and determining the market clearing price.
The ECAR and MAIN Markets continue to be in a state of transition and are
in the process of establishing RTOs that would define the rules and requirements
around which competitive wholesale markets in the region would develop. The FERC
has granted RTO status to the MISO, which administers a substantial portion of
the transmission facilities in the Mid-Continent region. The FERC has also
approved the various RTO selections made by the members of the former Alliance
RTO. Some of the members of this group will join the MISO and others will join
PJM. The final market structure for the Mid-Continent region remains unsettled.
Some states within the ECAR and MAIN Markets have restructured their retail
electric power markets to competitive markets from traditional utility monopoly
markets, while others have not.
65
The FERC has also required MISO to engage the services of an independent
market monitor. The independent market monitor's duties include monitoring the
functioning of the markets run by the MISO to ensure that they are functioning
efficiently. This includes identifying factors that might contribute to economic
inefficiency such as design flaws, inefficient market rules and barriers to
entry. The independent market monitor must also monitor the conduct of
individual market participants. MISO is currently waiting on approval by the
FERC for a market mitigation plan that resembles the automated mitigation
procedure utilized by NYISO.
Our generating facilities located in Pennsylvania, Ohio, and West Virginia
straddle the PJM West and other ECAR Markets. Currently, these generating
facilities are primarily dedicated to serving the power demands of Duquesne
Light in the greater Pittsburgh area under one contract through December 2004
and another which does not have a fixed termination date. During periods when
the capacity of the generating facilities in our Mid-Continent region exceeds
the power demands of the Duquesne Light, we may sell the excess power into the
market.
We currently sell electric energy, capacity and ancillary services from our
Illinois generating facilities under bilateral contracts that have terms and
conditions tailored to meet the customers' requirements. Our customers include
municipalities, electric cooperatives, vertically integrated utilities,
transmission and distribution utilities and power marketers.
SOUTHEAST REGION
Facilities. We own, own an interest in, or lease six power generation
facilities with an aggregate net generating capacity of 3,010 MW located in
Florida, Mississippi and Texas. The generating capacity of these facilities
consists of approximately 2% of base-load, 46% of intermediate and 52% of
peaking capacity.
The following table describes the electric power generation facilities we
owned in the Southeast region of the United States as of December 5, 2003:
<Table>
<Caption>
NET GENERATING
GENERATION FACILITIES(1) LOCATION CAPACITY(MW) FUEL TYPE DISPATCH TYPE(2)
- ------------------------ -------- -------------- --------- ----------------
Operating
Sabine(3)....................... Texas 54 Gas Base
Choctaw......................... Mississippi 800 Gas Inter
Indian River.................... Florida 587 Dual Inter
Osceola......................... Florida 465 Dual Peak
Leased facilities(4)............ Florida 1,104 Dual Peak
-----
Total Operating................... 3,010
=====
</Table>
- ---------------
(1) Unless otherwise indicated, we own a 100% interest in each facility listed.
(2) We use the designations "Base," "Inter" and "Peak" to indicate whether the
facilities described are base-load, intermediate or peaking facilities,
respectively.
(3) We own a 50% interest in this facility. An independent third party owns the
other 50%.
(4) We are party to tolling agreements entitling us to 100% of the capacity of
two Florida facilities having 630 MW and 474 MW of net generating capacity,
respectively. These tolling agreements have terms of 10 years and 5 years,
respectively, and are treated as operating leases for accounting purposes.
One of these facilities is currently owned by Mirant Corp., which filed for
reorganization under Chapter 11 of the United States Bankruptcy Code on July
14, 2003.
Market Framework. We currently conduct the majority of our Southeast
regional operations in Florida. Florida, other than a portion of the western
panhandle, constitutes a single reliability council and contains approximately
5% of the United States population. Although dominated by incumbent utilities,
Florida is in the process of transitioning to a competitive wholesale generation
market by developing rules for new capacity procurement and establishing the
GridFlorida RTO. The FPSC has implemented new capacity procurement rules that
require utilities to seek bids to purchase electricity from independent
66
power producers and other utilities before embarking on self-build options for
new capacity requirements. Additionally, the FPSC has approved a proposal to
increase the level of planning reserve capacity from 15% to 20%. This new
criterion applies to the three investor-owned utilities operating in peninsular
Florida and becomes effective in the summer of 2004.
The Florida markets are expected to be administered by the GridFlorida RTO.
For the past year, the Grid Florida RTO's activities have focused on concerns
expressed by the FPSC. However, recent progress has been slow due to a legal
challenge by the state's consumer advocate division, which is disputing the
FPSC's authority to authorize the transfer of assets to an RTO. A decision on
this matter may not be reached until early 2004. At this time, the GridFlorida
RTO has not finalized its proposal for market monitoring, but it will be
obligated to establish a market monitor.
We currently sell electric energy and capacity into the Florida market
primarily under bilateral contracts that are non-standard and negotiated for
terms and conditions. An OTC trading and ancillary services market has yet to
fully develop. Customers who participate in power transactions in this region
include municipalities, electric cooperatives and integrated utilities.
In the rest of the Southeast Region, RTO formation is occurring under the
auspices of the SeTrans RTO. The SeTrans RTO will cover the area from Georgia to
eastern Texas. While the FERC has currently approved the basic formation of this
entity, significant details of this market will not be known until mid or late
2003. Because the SeTrans RTO is still in the formative stages of development,
it has only recently begun the process of selecting the independent entity that
will become its market monitor.
WEST REGION
Facilities. We own, or own an interest in, six electric power generation
facilities with an aggregate net generating capacity of 3,790 MW located in
California and Nevada. The generating capacity of these facilities consists of
approximately 89% of base-load, 5% of intermediate and 8% of peaking capacity.
We are constructing a 541 MW gas-fired, base-load and intermediate generation
facility in southern Nevada. We expect this facility will begin commercial
operation in the fourth quarter of 2003.
The following table describes the electric power generation facilities we
owned or had under construction in the West region of the United States as of
December 5, 2003:
<Table>
<Caption>
SUMMER/WINTER
NET GENERATING
GENERATION FACILITIES(1) LOCATION CAPACITY(MW) PRIMARY FUEL DISPATCH TYPE(2)
- ------------------------ -------- -------------- ------------ ----------------
Operating
Coolwater..................... California 658 Gas/Dual Inter
El Dorado(3).................. Nevada 235 Gas Base
Ormond Beach.................. California 1,525 Gas Inter
Etiwanda(4)(5)(6)............. California 640 Gas Inter/Peak
Mandalay(7)................... California 560 Gas Inter/Peak
Ellwood(8).................... California 54 Gas Peak
-----
Total Operating................. 3,672
Under Construction
Big Horn(9)................... Nevada 541 Gas Base/Inter
-----
TOTAL COMBINED.................. 4,213
=====
</Table>
- ---------------
(1) Unless otherwise indicated, we own a 100% interest in each facility listed.
(2) We use the designations "Base," "Inter" and "Peak" to indicate whether the
facilities described are base-load, intermediate or peaking facilities,
respectively.
(3) We own a 50% interest in the El Dorado facility. Sempra Energy owns the
other 50%.
(4) In October 2003, we announced the retirement of two Etiwanda generation
units having 264 MW of total net generating capacity, due to a lack of
required environmental permits, which are excluded from the table above.
67
(5) At the end of December 2003, we will retire one California generation unit
having 118 MW of net generating capacity, which are excluded from the table
above, due to a lack of required environmental permits.
(6) Includes 640 MW of capacity mothballed in November 2003.
(7) Includes 130 MW of capacity mothballed in November 2003.
(8) Includes 54 MW of capacity mothballed in November 2003.
(9) We expect this facility will begin commercial operation in the fourth
quarter of 2003.
Market Framework. Our West regional market includes the states of Arizona,
California, Oregon, Nevada, New Mexico, Utah and Washington. Generally we sell
the electric energy, capacity and ancillary services generated and/or provided
by our California and Nevada facilities to customers located in the greater Los
Angeles metropolitan area and in southern Nevada. We believe that our portfolio
of intermediate and peaking facilities in southern California is important to
the reliability of the California market given its production flexibility and
close proximity to Los Angeles. Our customers in these states include power
marketers, investor-owned utilities, electric cooperatives, municipal utilities
and the Cal ISO acting on behalf of load-serving entities. We sell electric
energy, capacity and ancillary services to these customers through a combination
of bilateral contracts and sales made in the Cal ISO's day-ahead and hour-ahead
ancillary services markets and its real-time energy market. The Cal ISO does not
currently maintain a capacity market to ensure resource adequacy; however,
California regulatory authorities are in the process of developing such a
mechanism.
On July 9, 2003, we entered into a definitive agreement to sell our 588 MW
plant to SRP. The sale on October 15, 2003. In addition, although we do not own
generation facilities in the states of Oregon, New Mexico, Utah and Washington,
our trading and marketing operations have historically purchased and delivered
energy commodities in these states.
Two units at our Etiwanda facility in California totaling 264 MW of
intermediate capacity, under their current configuration, do not satisfy the
more stringent emissions standards that went into effect in 2003. As such, in
October 2003, we announced our intention to retire those units.
In November 2003, given that no bids were received in the auction process
on our offer of 824 MW of generation to the market in 2004 in connection with
our FERC settlement agreement, we announced our decision to mothball four units
in California through March 2005, at a minimum, pending results of the auction
process for the 12-month period beginning April 1, 2005. The following units
will be mothballed: Etiwanda Units 3 and 4 (640 MW); Mandalay Unit 3 (130 MW);
and Ellwood (54 MW).
In response to California's energy crisis of 2000 and 2001, the FERC and
the Cal ISO have instituted energy price caps, formerly set below $100 per MWh
and currently set at $250 per MWh, and must-offer requirements affecting all
merchant generators in California. Furthermore, the Western region has seen
significant new generation capacity become operational as well as a return to
more normal hydro and temperature conditions. The impact of these regulatory and
market changes has been to significantly lower power prices and spark spreads in
the West region.
The Cal ISO has a department of market analysis that acts as its internal
market monitor. The department of market analysis monitors the efficiency and
effectiveness of the ancillary services, congestion management and real-time
energy markets. In performing these functions, the department of market analysis
develops and publishes market performance indices, investigates potential
anti-competitive behavior by market participants, recommends changes in market
rules and protocols, and prepares periodic reports for submission to the FERC
and other agencies. In addition to the department of market analysis, the Cal
ISO also has a market surveillance committee that acts as its external advisor.
The market surveillance committee works closely with the department of market
analysis and has the independent authority to suggest changes in Cal ISO
Protocols or recommend sanctions or penalties directly to the Cal ISO governing
board. The market surveillance committee periodically produces written reports
containing its analyses and recommendations, which are made available to the
public subject to restrictions on confidential information. The Cal ISO has
initiated, at the FERC's direction, automated mitigation procedures when any
zonal clearing price for balancing energy exceeds $91.87 per MWh with any
resulting zonal clearing price subject to the price cap of $250 per MWh. The
automated mitigation procedures are
68
only applied to bids that exceed certain reference prices and that would
significantly increase the market price. However, in February 2003, the Cal ISO
stated that it intends to appeal the FERC's decision regarding the application
of automated mitigation procedures to local market power situations. While the
FERC had adopted similar thresholds for both local and system market power, the
Cal ISO is seeking to have a more restrictive procedure applied to local market
power.
A number of initiatives currently under consideration could materially
impact our California operations. These initiatives include:
- a California law directing the CPUC to seek approval from the FERC to
allow the CPUC to enforce state-established maintenance and operation
standards of our California plants;
- implementation of a CPUC procurement process directing California
utilities to procure, on a forward basis, electricity and capacity to
serve the demand on their systems;
- efforts by the Cal ISO to redesign the spot markets in California; and
- the effect of the FERC's SMD effort, including its impact on the FERC
approved western RTOs.
In Nevada and Arizona, there is presently no RTO in place to manage the
transmission systems or to operate energy markets, although the utilities in
both states are participating in the development of RTOs. The West Connect RTO,
which includes Arizona, and the RTO West, which includes Nevada, have both been
approved by the FERC and are in process of developing operating rules and
tariffs. Both RTOs are expected to be operational and assume control over
transmission of facilities of participating utilities within the next several
years. The FERC has also approved the establishment of market monitoring
organizations as part of RTO West and West Connect RTO. The FERC is encouraging
the RTOs to coordinate in the development of a region-wide market monitoring
function. Additionally, in Nevada and Arizona, state-level regulatory
initiatives may impact competition in the electric sector. In Nevada, the state
legislature has passed legislation prohibiting the state's investor-owned
utilities from divesting generation. Nevada also passed legislation and adopted
regulations allowing large commercial and industrial customers to seek
competitive alternatives to utility generation. In Arizona, proceedings are
pending before the Arizona Corporate Commission that would require the state's
investor owned utilities to seek competitive supply offers to serve 2,500 to
3,200 MW of local system demand.
LONG-TERM PURCHASE AND SALE AGREEMENTS
In the ordinary course of business, and as part of our hedging strategy, we
enter into long-term sales arrangements for electric energy, capacity and
ancillary services, as well as long-term purchase arrangements. For information
regarding our long-term fuel supply contracts, purchase power and electric
capacity contracts and commitments, electric energy and electric sale contracts
and tolling arrangements, see note 14(e) to our consolidated financial
statements incorporated by reference herein. For information regarding our
hedging strategy relating to such long-term commitments, see "Risk
Factors -- Risks Related to Our Wholesale Energy Operations".
COMMERCIAL OPERATIONS -- MARKETING, TRADING, POWER ORIGINATION AND RISK
MANAGEMENT
Strategy. Our domestic commercial business seeks to optimize our physical
asset positions consisting of our power generation asset portfolio, pipeline
transportation capacity positions, pipeline storage positions and fuel positions
and provides risk management services for our asset positions. We perform these
functions through procurement, marketing and hedging activities for power, fuels
and other energy related commodities. With the downturn in the industry, the
decline in market liquidity, and our liquidity capital constraints, the
principal function of our commercial activities has shifted to optimizing our
assets. Previous large volume activities primarily involving risk management to
customers, gas marketing to third parties and trading of power and gas have been
significantly reduced, and in some cases eliminated. As a result, we reduced our
workforce and support staff. In March 2003, we decided to exit our proprietary
trading activities and liquidate, to the extent practicable, our proprietary
positions. Although we have exited our proprietary trading activities, we have
legacy positions, which will be closed as economically
69
feasible or in accordance with their terms. We will continue to engage in
marketing and hedging activities related to our electric generating facilities,
pipeline transportation capacity positions, pipeline storage positions and fuel
positions of our wholesale energy segment and energy supply costs related to our
retail energy segment.
Asset Optimization and Risk Management. Our domestic commercial businesses
complement our merchant power generation business by providing a full range of
energy management services. These services focus on two core functions,
optimizing our physical asset position and providing risk management services
for our portfolio. To perform these functions, we trade, market and hedge
electric energy, capacity and ancillary services, as well as manage the purchase
and sale of fuels and emission allowances.
Asset optimization is maximizing the financial performance of an asset
position. Our commercial groups optimize our assets by employing different
products (e.g., on-peak power), geographic markets (e.g., buying from and
selling into adjacent markets), fuel types (e.g., burning oil rather than
natural gas at our fuel switching capable plants) and transaction terms (spot to
multi-year term).
Risk management services focus on managing the performance risk and price
risk (of both purchases and sales) inherent in the asset position. The ultimate
purpose of this activity is to identify the risks and reduce the volatility they
could cause in our financial performance. Our commercial groups assist our risk
control personnel and management in the identification of these risks and
execute the transactions necessary to achieve this goal. As an example of this,
we generally seek to sell a portion of the capacity of our domestic facilities
under fixed-price sale contracts (energy or capacity) or contracts to sell
energy at a predetermined multiple of fuel prices. Generally, we also seek to
hedge our fuel needs associated with our forward power sale obligations. These
power sales and fuel purchases provide us with certainty as to a portion of our
margins. With respect to performance risk, we also take into account plant
operational constraints and operating risk in making these determinations.
Physical power and services from our assets portfolios are sold in
real-time, hour-ahead, day-ahead, or multi-month or multi-year term markets. For
purposes of supplying our generation, we purchase fuel from a variety of
suppliers under daily, monthly and term, variable-load and base-load contracts
that include either market-based or fixed pricing provisions. We use derivative
instruments to execute these transactions.
In addition, as part of our efforts to commercialize our asset portfolio
and provide risk management services, we arrange for, schedule and balance the
transportation rights of the natural gas from the supply receipt point to our
plants. We generally obtain pipeline transportation to perform this function.
Accordingly, we use a variety of transportation arrangements including
short-term and long-term firm and interruptible agreements with intrastate and
interstate pipelines. We also utilize brokered firm transportation agreements
when dealing on the interstate pipeline system. In the normal course of
business, it is common for us to hedge the risk of pipeline transportation
expenses through "basis swap" transactions.
We also enter into various short-term and long-term firm and interruptible
agreements for natural gas storage in order to offer peak delivery services to
satisfy electric generating demands. Natural gas storage capacity allows us to
better manage the unpredictable daily or seasonal imbalances between supply
volumes and demand levels.
In support of our optimization and risk management effects, our power
origination group, working closely with our other commercial groups, focuses on
developing customized near-term products and long-term contracts. These are
designed and negotiated on a case-by-case basis to meet the specific energy
requirements of our customers. The target customer group generally includes
investor-owned utilities, municipalities, cooperatives and other companies that
serve end users.
Risk Management Services to Customers. In addition to optimizing our power
asset portfolio, our trading and marketing businesses provide risk management
services to a variety of customers, which include natural gas distribution
companies, electric utilities, municipalities, cooperatives, power generators,
marketers or other retail energy providers, aggregators and large volume
industrial customers. Risk
70
management services primarily focus on mitigating customers' commodity price
exposure and providing firm delivery services. To provide these services to
these customers, we utilize the same skills and physical and financial
instruments used to optimize and manage the risks of our asset portfolio. See
below for the discussion of our decision to exit proprietary trading in March
2003.
Proprietary Trading. Our commercial business obtains proprietary market
knowledge and develops proprietary analysis through its efforts to manage our
asset portfolio and provide risk management services to our customers. This
enabled our commercial groups to take selective market positions, typically on a
short-term basis, in power, fuel and other energy related commodities. Our
commercial groups used derivative instruments to execute these transactions. In
March 2003, we decided to exit our proprietary trading activities and liquidate,
to the extent practicable, our proprietary positions. Although we have exited
our proprietary trading activities, we have legacy positions, which will be
closed as economically feasible or in accordance with their terms. We will
continue to engage in marketing and hedging activities related to our electric
generating facilities, pipeline transportation capacity positions, pipeline
storage positions and fuel positions of our wholesale energy segment and energy
supply costs related to our retail energy segment.
Risk Management Controls. For information regarding our risk management
structure and policies relating to our trading and marketing operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Trading and Marketing and Non-Trading Operations and Quantitative
and Qualitative Disclosures About Market Risk" for the three years ended
December 31, 2000, 2001 and 2002 and for the nine months ended September 30,
2002 and 2003, incorporated by reference herein.
REGULATION
Electricity. The FERC has exclusive rate-making jurisdiction over
wholesale sales of electricity and the transmission of electricity in interstate
commerce by "public utilities." Public utilities that are subject to the FERC's
jurisdiction must file rates with the FERC applicable to their wholesale sales
or transmission of electricity in interstate commerce. All of our public utility
subsidiaries sell electric energy, capacity and ancillary services at wholesale
and are public utilities with the exception of those facilities that are
classified as qualifying facilities and not regulated as public utilities. The
FERC has authorized all of our generation subsidiaries to sell electricity and
related services at wholesale market-based rates. In its orders authorizing
market-based rates, the FERC also has granted certain of these subsidiaries
waivers of many of the accounting, record keeping and reporting requirements
that are imposed on public utilities with cost-based rate schedules.
The FERC's orders accepting the market-based rate schedules filed by our
subsidiaries or their predecessors, as is customary with such orders, reserve
the right to revoke or limit our market-based rate authority if the FERC
subsequently determines that any of our affiliates possess and exercise market
power. If the FERC were to revoke or limit our market-based rate authority, we
would have to file, and obtain the FERC's acceptance of, cost-based rate
schedules for all or some of our sales. In addition, the loss of market-based
rate authority could subject us to the accounting, record keeping and reporting
requirements that the FERC imposes on public utilities with cost-based rate
schedules. In October 2003, the FERC issued an order approving an agreement with
certain subsidiaries in our wholesale energy segment to settle inquiries,
investigations, and proceedings instituted by the FERC in connection with the
FERC's ongoing review of western energy markets. Under the terms of the
settlement, we retain the ability to make sales of power at market-based rates.
The FERC has issued a notice of proposed rulemaking describing its
intention to standardize electricity markets and eliminate continuing
discrimination in transmission service, with a proposed implementation date of
September 2004. The goal of SMD is to promote a more economically efficient
market design that will lower delivered energy costs, maintain reliability,
mitigate market power and increase customer choice options. SMD proposes to
eliminate discrimination in transmission service by requiring that all users of
the grid take service pursuant to the same rates and terms and conditions of
71
service, thus eliminating certain existing preferences enjoyed by some classes
of customers. In addition, transmission-owning public utilities will be required
to turn over the operation of their transmission systems to an independent
transmission provider. SMD also seeks to establish day-ahead and real-time
electric energy and ancillary service markets modeled after the energy markets
that currently exist in the Northeast. Finally, SMD proposes to establish a
capacity obligation on load serving entities and establishes nationwide price
mitigation measures. However, there is substantial controversy surrounding the
development of SMD, and it is unclear whether SMD would be implemented and what
form it would take.
The FERC also continues to promote the formation of large RTOs and has
issued numerous orders on the various RTO proposals. The FERC's goal is to
promote the formation of a robust wholesale market for electricity. While RTO
participation by public utilities is voluntary, the overwhelming majority of the
FERC jurisdictional utilities have indicated that they will join the proposed
RTO for their region. At this time there are approximately nine proposed RTOs
covering the vast majority of the continental United States. In addition, large
portions of the nation's transmission system are currently operated by an
independent entity. The Midwest grid is operated by the MISO and the Northeast
grid is operated by three separate independent entities: New England ISO, NYISO
and PJM. The ERCOT ISO independently operates the Texas grid. MISO and PJM have
received RTO status from the FERC.
Commercial Activities. As a gas marketer, we make sales of natural gas in
interstate commerce and the FERC has issued us a blanket certificate, but the
FERC does not otherwise regulate the rates, terms or conditions of these gas
sales.
Hydroelectric Facilities. Our hydroelectric generation facilities are
subject to the FERC's exclusive authority to license non-federal hydroelectric
projects located on navigable waterways and federal lands. These FERC licenses
must be renewed periodically and can include conditions on operation of the
project at issue.
SEC. A company engaged exclusively in the business of owning and/or
operating facilities used for the generation of electric energy exclusively for
sale at wholesale and selling electric energy at wholesale may be exempted from
regulation under the PUHCA as an exempt wholesale generator. Our electric
generation subsidiaries have received determinations of exempt wholesale
generator status from the FERC or are companies that own or operate qualifying
facilities. If we lose our exempt wholesale generator status or qualifying
facility status, we would have to restructure our organization or risk being
subjected to further regulation by the SEC.
COMPETITION
For a discussion of competitive factors affecting our wholesale energy
segment, see "Risk Factors -- Risks Related to Our Wholesale Energy Operations".
OTHER OPERATIONS
Our other operations business segment includes the following:
- our venture capital investment portfolio; and
- unallocated corporate costs.
We are currently managing our venture capital investment portfolio and do
not have plans to expand this business. As of September 30, 2003, the net book
value of these investments was $35 million.
ENVIRONMENTAL MATTERS
GENERAL
We are subject to numerous federal, state and local requirements relating
to the protection of the environment and the safety and health of personnel and
the public. These requirements relate to a broad
72
range of our activities, including the discharge of compounds into air, water,
and soil, the proper handling of solid, hazardous, and toxic materials and
waste, noise, and safety and health standards applicable to the workplace. In
order to comply with these requirements, we will, as necessary, spend
substantial funds to construct, modify and retrofit equipment, and clean up or
decommission disposal or fuel storage areas and other locations as necessary. We
anticipate spending approximately $246 million for the remainder of 2003 through
2007 for such environmental compliance and remediation. As of September 30,
2003, we have accrued $44 million related to these remediation costs.
If we do not comply with environmental requirements that apply to our
operations, regulatory agencies could seek to impose on us civil, administrative
and/or criminal liabilities as well as seek to curtail our operations. Under
some statutes, private parties could also seek to impose civil fines or
liabilities for property damage, personal injury and possibly other costs.
AIR QUALITY MATTERS
As part of the 1990 amendments to the Federal Clean Air Act, additional
requirements for the emission of nitrogen oxide, a product of the combustion
process associated with power generation, have been developed. This compound is
a precursor to ozone, fine particulate matter and regional haze. While new
requirements have been developed, it is possible that additional requirements
could be required in the future to provide for the attainment and maintenance of
the National Ambient Air Quality Standards (NAAQS) and visibility standards.
These requirements affect our power generating facilities in the United States.
The EPA has announced its determination to regulate hazardous air
pollutants, including mercury, from coal-fired and oil-fired steam electric
generating facilities under Section 112 of the Clean Air Act. The EPA plans to
develop maximum achievable control technology (MACT) standards for these types
of generating facilities as well as for turbines, engines and industrial
boilers. The rulemaking for coal and oil-fired steam electric generating
facilities must be completed by December 2004. Compliance with the rules will be
required within three years thereafter. The MACT standards that will be
applicable to coal- and oil-fired facilities cannot be predicted at this time
and may adversely impact our operations. The MACT rule for combustion turbines
was issued in August 2003 and there is no impact on existing facilities. The
MACT rulemaking for engines and industrial boilers is expected to be completed
in early 2004. Based on the rules currently proposed for engines and industrial
boilers, we do not anticipate a material adverse impact on our financial
condition, results of operations and cash flows.
In 1998, the United States became a signatory to the United Nations
Framework Convention on Climate Change or "Kyoto Protocol". The Kyoto Protocol
calls for developed nations to reduce their emissions of greenhouse gases.
Carbon dioxide, which is a major byproduct of the combustion of fossil fuel, is
considered to be a greenhouse gas. If the United States Senate ultimately
ratifies the Kyoto Protocol, any resulting limitations on power plant carbon
dioxide emissions could have a material adverse impact on all fossil fuel fired
facilities, including those belonging to us.
The EPA is conducting a nationwide investigation regarding the historical
compliance of coal-fueled electric generating stations with various permitting
requirements of the Clean Air Act. Specifically, the EPA and the United States
Department of Justice have initiated formal enforcement actions and litigation
against several other utility companies that operate these stations, alleging
that these companies modified their facilities without proper pre-construction
permit authority. Since June 1998, six of our coal-fired facilities have
received requests for information related to work activities conducted at those
sites, as have two of our recently acquired Orion Power facilities. The EPA has
not filed an enforcement action or initiated litigation in connection with these
facilities at this time. Nevertheless, any litigation, if pursued successfully
by the EPA, could accelerate the timing of emission reductions currently
contemplated for the facilities and result in the imposition of penalties. In
addition to the EPA's requests for information, the New Jersey Department of
Environmental Protection (NJDEP) recently requested a copy of all correspondence
relating to the EPA requests for information for one of the six stations. We
have recently
73
signed a confidentiality agreement with the NJDEP relative to the information
they have received from the EPA. To date, NJDEP has taken no further legal
action in connection with this request.
In February 2001, the United States Supreme Court upheld previously adopted
EPA ambient air quality standards for fine particulate matter and ozone. While
attaining these new standards may ultimately require expenditures for air
quality control system upgrades for our facilities, regulations addressing
affected sources and required controls are not expected until after 2005.
Consequently, it is not possible to determine the impact on our operations at
this time.
In February 2002, the White House announced its "Clear Skies Initiative".
The proposal is aimed at long-term reductions of multiple pollutants produced
from fossil fuel-fired power plants. Reductions averaging 70% are targeted for
sulfur dioxide, nitrogen oxide and mercury. If approved by the United States
Congress, this program would entail a market-based approach using emission
allowances; compliance with emission limits would be phased in over a period
from 2008 to 2018. The Clear Skies Initiative has the potential to revise or
eliminate several of the programs discussed above, including the maximum
achievable control technology standards, the coal-fired utility enforcement
initiative and fine particulate controls. In addition, a voluntary program for
reducing greenhouse gas emissions was proposed as an alternative to the Kyoto
Protocol. Fossil fuel-fired power plants in the United States would be affected
by the adoption of this program, or other legislation that may be enacted by the
United States Congress addressing similar issues. Such programs would require
compliance to be achieved by the installation of pollution controls, the
purchase of emission allowances or curtailment of operations.
In April 2003, the Group Against Smog and Pollution (GASP), a private
citizens organization, notified the Allegheny County Health Department (ACHD)
and Pennsylvania Department of Environmental Protection (PDEP) of GASP's intent
to initiate an action under the citizens' suit provisions of the state and
federal clean air laws to compel Orion Power to comply with ACHD air quality
regulations at one of its plants. Under applicable PDEP environmental
regulations, potential penalties in an action for past violations could exceed
$100,000. We are currently in discussions with GASP in an effort to resolve the
issue, but the outcome cannot be predicted at this time.
FERC
Last year the FERC granted ten new licenses for 23 of our hydroelectric
facilities in New York. (For additional information related to the FERC, see
"Risk Factors -- Risks Related To Our Wholesale Energy Operations"). The FERC
imposed conditions in such licenses which will require us to spend approximately
$21 million in capital expenditures in order to comply with such conditions.
Applications for three new FERC licenses remain pending for five of our
hydroelectric facilities in New York. Conditions which may be imposed in such
additional new licenses may also result in capital expenditures.
In the course of the FERC licensing proceedings various agencies have
requested increased flow rates downstream of the dams in order to enhance fish
habitats and for other purposes. The FERC has imposed conditions in the new
licenses to increase such flow rates and we expect that the FERC will also
impose similar conditions in the licenses for which applications remain pending.
Increased flow rates may affect revenues for these facilities due to the loss of
use of water for power generation. However, all of the minimum flow requirements
and other environmental conditions in the respective licenses are the result of
settlement agreements negotiated by us and our predecessors and settlement
agreements are being pursued for the remaining pending license applications.
Therefore, we do not expect such lost revenues to be material to the economic
viability of such facilities.
WATER QUALITY MATTERS
As a result of litigation and technological improvements, state and federal
efforts toward implementing the total maximum daily load provisions of the Clean
Water Act have substantially increased in recent years. The establishment of
total maximum daily loads to restore water bodies currently designated as
impaired may result in more stringent discharge limitations for our facilities.
Compliance with such limitations may require our facilities to install
additional water treatment systems, modify operational
74
practices or implement other wastewater control measures, the costs of which
cannot be estimated at this time.
In April 2002, the EPA proposed rules under Section 316(b) of the Clean
Water Act relating to the design and operation of cooling water intake
structures. This proposal is the second of three current phases of rulemaking
dealing with Section 316(b) and generally would affect existing facilities that
use significant quantities of cooling water. Under the amended court deadline,
the EPA is to issue final rules for these Phase II facilities by February 2004.
While the requirements of the final rule cannot be predicted at this time, there
are significant potential implications under the EPA proposal for our generating
facilities.
Under a separate consent order issued by the New York State Department of
Environmental Conservation (NYSDEC) in 2000, Orion Power is required to evaluate
certain technical changes to modify the intake cooling system of one of its
plants. Orion Power and the NYSDEC will discuss the technical changes to be
implemented. Depending on the outcome of these discussions, including the form
of technology ultimately selected, we estimate that capital expenditures
necessary to comply with the order could meet or exceed $65 million. We expect
to begin construction on a portion of the cooling water intake in 2004.
EPA and states periodically review and revise water quality criteria for
parameters such as copper, selenium and temperature that can be associated with
our facility discharges. For certain parameters, the water quality criteria have
been established at levels at or below the current analytical detection limits.
Advancing technology is anticipated to allow the detection of such parameters at
increasingly lower levels. As a result, more stringent water quality criteria
and lower analytical detection limits could affect facility compliance
requirements. This may require our facilities to install additional water
treatment systems, modify operational practices or implement other wastewater
control measures, the costs of which cannot be estimated at this time.
LIABILITY FOR PREEXISTING CONDITIONS AND REMEDIATIONS
In connection with our acquisition of facilities, we, with a few
exceptions, assumed liability for preexisting conditions, including some ongoing
remediations. Funds for carrying out identified remediations have been included
in our planning for future funding requirements, and we are not currently aware
of any environmental condition at any of our facilities that we expect to have a
material adverse effect on our financial position, results of operations or cash
flows.
We are responsible for the costs of closing a number of active ash and
related waste disposal sites associated with certain of our facilities, located
in Pennsylvania. A number of such sites have already been closed (for which we
are responsible for long-term maintenance costs), some will be closed within the
next five years, and the remainder are anticipated to be closed thereafter. We
have estimated that the total cost of our share to close these active sites
(including future maintenance costs at closed sites) is approximately $29
million with $6 million estimated in years 2003 through 2007.
Under the New Jersey Industrial Site Recovery Act, owners and operators of
industrial properties are responsible for performing all necessary remediation
at a facility prior to the closing of the facility and the termination of
operations, or ensuring that in connection with the transfer of such a facility
the property will be remediated after the closing of the facility and the
termination of operations. We have responsibility for costs relating to the
transfer of four New Jersey properties we purchased from Sithe Energies, Inc. We
estimate that the remaining costs to fulfill our obligations under the act will
be approximately $8 million, which we expect to pay out through 2007. However,
these remedial activities are still in the early stage. Following further
investigation the scope of the necessary remedial work could increase and we
could, as a result, incur greater costs.
One of our Florida generation facilities discharges wastewater to
percolation ponds, which in turn, percolate into the groundwater. Elevated
levels of vanadium and sodium have been detected in groundwater monitoring
wells. A noncompliance letter was received in 1999 from the Florida Department
of Environmental Protection. In response to that letter, a study to evaluate the
cause of the elevated
75
constituents was undertaken and operational procedures were modified. At this
time, if remediation is required, the cost, if any, is not anticipated to be
material.
Our subsidiary, Orion Power, is liable under the terms of a consent order
issued in 2000 with NYSDEC for past releases of petroleum and other substances
at two of its generation facilities. Based on investigations by third-party
consultants and current engineering assessments, we have developed remediation
plans for both facilities. As of September 30, 2003, we have recorded the
estimated liability for the remediation costs of $7 million, which we expect to
pay out through 2006.
As a result of their age, many of our facilities contain significant
amounts of asbestos insulation, other asbestos containing materials, as well as
lead-based paint. Existing state and federal rules require the proper management
and disposal of these potentially toxic materials. We have developed a
management plan that includes proper maintenance of existing non-friable
asbestos installations, and removal and abatement of asbestos containing
materials where necessary because of maintenance, repairs, replacement or damage
to the asbestos itself. We have planned for the proper management, abatement and
disposal of asbestos and lead-based paint at our facilities in our financial
planning.
Under CERCLA and similar state laws, owners and operators of facilities
from or at which there has been a release or threatened release of hazardous
substances, together with those who have transported or arranged for the
disposal of those substances, are liable for the costs of responding to that
release or threatened release, and the restoration of natural resources damaged
by any such release. We are not aware of any liabilities under the act that
would have a material adverse effect on our results of operations, financial
position or cash flows.
LEGAL PROCEEDINGS
On December 1, 2003 Enron North America Corp. (ENA), a subsidiary of Enron
Corp., filed a complaint in the United States Bankruptcy Court for the Southern
District of New York seeking recovery of $85 million from Reliant Energy
Services. ENA alleges that a series of related natural gas financial swap
transactions executed by and among ENA, Reliant Energy Services and the Bank of
Montreal on November 5, 2001, resulted in setoffs against debts with ENA which
should be invalidated under the preference, setoff and fraudulent conveyance
provisions of the Bankruptcy Code. ENA has also sued the Bank of Montreal and is
seeking recovery of $80 million. When we are formally served with the notice of
the complaint, we intend to vigorously contest the recovery sought. The outcome
of this litigation cannot be predicted at this time.
For a discussion regarding additional legal proceedings affecting us, see
note 13(a) to our interim financial statements and our Current Report on Form
8-K dated November 26, 2003, each of which are incorporated by reference herein.
EMPLOYEES
As of December 10, 2003, we had 5,286 full-time employees. Of these
employees, 1,442 are covered by collective bargaining agreements. The collective
bargaining agreements expire on various dates until May 14, 2007. The following
table sets forth the number of our employees by business segment as of December
10, 2003:
<Table>
<Caption>
SEGMENT NUMBER
- ------- ------
Retail energy............................................... 1,784
Wholesale energy............................................ 2,924
Other operations............................................ 578
-----
Total..................................................... 5,286
=====
</Table>
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PROPERTIES
During 2003, we have relocated our corporate offices to approximately
520,000 square feet of leased space in downtown Houston. The lease term expires
in 2018, subject to two five-year renewal options. In addition to the corporate
headquarters, we lease another 400,000 square feet of office space in the
greater Houston area with various lease terms.
In addition to office space in Houston, we lease or own real property and
facilities around the country. These properties support a combination of retail
and wholesale activities. Our principal generation facilities are described
under "-- Wholesale Energy". We believe we have satisfactory title to our
facilities in accordance with standards generally accepted in the electric power
industry, subject to exceptions, which, in our opinion, would not have a
material adverse effect on the use or value of the facilities.
77
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, including their ages as of December
5, 2003, are as follows:
<Table>
<Caption>
NAME AGE PRESENT POSITION
- ---- --- ----------------
Joel V. Staff......................... 59 Chairman and Chief Executive Officer
Robert W. Harvey...................... 48 Executive Vice President and Group
President -- Wholesale Business
Mark M. Jacobs........................ 41 Executive Vice President and Chief
Financial Officer
Jerry J. Langdon...................... 51 Executive Vice President and Chief
Administrative Officer
Michael L. Jines...................... 45 Senior Vice President, General Counsel
and Corporate Secretary
Thomas C. Livengood................... 48 Vice President and Controller
Laree E. Perez........................ 50 Director
William L. Transier................... 49 Director
E. William Barnett.................... 70 Director
Donald J. Breeding.................... 68 Director
Kirbyjon H. Caldwell.................. 50 Director
Steven L. Miller...................... 58 Director
</Table>
JOEL V. STAFF is our Chairman and Chief Executive Officer. Mr. Staff was
appointed Chairman and Chief Executive Officer in April 2003. Until May 2002, he
was with National-Oilwell, Inc., where he served as chairman, president and
chief executive officer from July 1993 until May 2001 and as executive chairman
from May 2001 until May 2002. Previously, Mr. Staff spent 17 years with Baker
Hughes, Inc. where he held various financial and general management positions,
including senior vice president of the parent company and president of both the
drilling and production groups. Mr. Staff serves on the board of directors of
National-Oilwell, Inc. where he is a member of its executive committee and Ensco
International, Incorporated, where he is a member of its audit committee.
ROBERT W. HARVEY is our Executive Vice President and Group
President -- Wholesale Business. Prior to being appointed to such position in
May 2003, he served as our Executive Vice President and Group
President -- Retail Business. Mr. Harvey served as Vice Chairman of CenterPoint
from June 1999 until the Distribution. From 1982 to 1999, Mr. Harvey was
employed with the Houston office of McKinsey & Co., Inc. He was a director
(senior partner) and was the leader of the firm's North American electric power
and natural gas practice.
MARK M. JACOBS is our Executive Vice President and Chief Financial Officer.
Mr. Jacobs served as Executive Vice President and Chief Financial Officer of
CenterPoint from July 2002 until the Distribution. From 1989 to 2002, Mr. Jacobs
was employed by Goldman, Sachs & Co. He was a Managing Director in the firm's
Natural Resources Group.
JERRY J. LANGDON has served as our Executive Vice President and Chief
Administrative Officer since May 2003. Mr. Langdon served as president of EPGT
Texas Pipeline, L.P. from June 2001 until May 2003. He served as the Managing
Partner and Chief Operating Officer of CARLANG Partners, L.P. from September
1999 until November 2001 and the President of Republic Gas Corporation from June
1993 until June 2001. In October 1988, Mr. Langdon was appointed by President
Reagan to be a Commissioner to the Federal Energy Regulatory Commission, where
he served until 1993. He has served as a director on the Gas Industry Standards
Board (now the North American Energy Standards Board) since 1999 and is Chairman
of the National Petroleum Council Coordinating Subcommittee. Mr. Langdon has
served as an advisory director of Highland Energy Company since 1998, an
advisory director of DLJ Global Energy
78
Partners from 1999 until 2000 and a director of Costilla Energy Inc., Quanta
Services, Inc. and Midcoast Energy, Inc. at various times from June 1996 to
February 2002.
MICHAEL L. JINES is our senior vice president, corporate secretary and
general counsel. Until mid-2003, he was our deputy general counsel and senior
vice president and general counsel of our Wholesale Group. Until the
Distribution, Mr. Jines served as deputy general counsel of CenterPoint and
senior vice president and general counsel of Reliant Resources' Wholesale Group.
He joined CenterPoint in 1982.
THOMAS C. LIVENGOOD is our Vice President and Controller. Prior to joining
us in August 2002, he served as Executive Vice President and Chief Financial
Officer of Carriage Services, Inc., a publicly traded consumer services company,
since 1996. From 1991 to 1996, he served as Vice President and Chief Financial
Officer of Tenneco Energy Company, a division of Tenneco, Inc.
LAREE E. PEREZ has been a Director of Reliant Resources since April 2002.
Ms. Perez is an independent financial consultant in Albuquerque, New Mexico with
The Medallion Company. From February 1996 until September 2002, she was Vice
President of Loomis, Sayles & Company, L.P. Ms. Perez was co-founder, president
and chief executive officer of Medallion Investment Company, Inc. from November
1991 until it was acquired by Loomis Sayles in 1996.
WILLIAM L. TRANSIER has been a Director of Reliant Resources since December
2002. Mr. Transier served as executive vice president and chief financial
officer of Ocean Energy, Inc. from March 1999 until April 2003. Mr. Transier has
served as co-chief executive officer of North Sea New Ventures, LLC since
October 2003. From September 1998 to March 1999, he served as executive vice
president and chief financial officer of Seagull Energy Corporation. From May
1996 to September 1998, he served as senior vice president and chief financial
officer of Seagull Energy Corporation. Mr. Transier is also a director of Cal
Dive International, Inc. and chairman of its audit committee.
E. WILLIAM BARNETT has been a Director of Reliant Resources since October
2002. Mr. Barnett is a retired partner and currently senior counsel with Baker
Botts LLP. He began practicing law with Baker Botts in 1958 and served as
managing partner from 1984 through the end of 1997. He serves on the board of
directors of numerous educational, health care and community organizations
including chairman of the board of trustees of Rice University and life trustee
of The University of Texas Law School Foundation.
DONALD J. BREEDING has been a Director of Reliant Resources since October
2002. Mr. Breeding has been president and chief executive officer of Airline
Management, LLC, engaged in aviation and airline consulting, since 1997. From
1992 to 1997, he was president and chief executive officer of Continental
Micronesia, a majority-owned subsidiary of Continental Airlines. From 1988 to
1992, he was senior vice president of operations for Continental Airlines with
responsibility for all flying operations activities of the company and
responsibility for Continental Express. Mr. Breeding serves as a member of the
board of directors of Pinnacle Airlines, Inc. and Miami Air International.
KIRBYJON H. CALDWELL has been a Director of Reliant Resources since August
2003. Reverend Caldwell has been the senior pastor of Windsor Village United
Methodist Church since June 1982. Reverend Caldwell has served as a director of
Continental Airlines, Inc. since 1999. He also serves on the board of directors
of numerous corporate, educational, health care and community organizations,
including J.P. Morgan Chase Bank Houston, The Greater Houston Partnership,
Memorial Hermann Health Care System and Baylor College of Medicine.
STEVEN L. MILLER has been a Director of Reliant Resources since August
2003. Mr. Miller is chairman and president of SLM Discovery Ventures, Inc.,
engaged in commercial ventures in support of volunteerism, social outreach, and
higher eduction and academic achievement. He is also chairman of Momentum Bio
Ventures, Inc., a venture capital and management services company focused on
biotechnology and life sciences opportunities in southeast Texas. Prior to his
retirement in September 2002, Mr. Miller served as chairman of the board of
directors, president and chief executive officer of Shell Oil Company. Mr.
Miller serves as a director of Applied Materials, Inc.
79
DESCRIPTION OF NOTES
The terms of the exchange notes to be issued in the exchange offer are
identical in all respects to the terms of the original notes of the same series,
except for the transfer restrictions and registration rights relating to the
original notes. In the case of each series, any original notes that remain
outstanding after the exchange offer, together with the exchange notes issued in
the exchange offer, will be treated as a single class of securities for voting
purposes under the applicable indenture under which they were issued. You can
find the definitions of certain terms used in this description under the
subheading "Certain Definitions." In this description, the word "RRI" refers
only to Reliant Resources, Inc. and not to any of its Subsidiaries. References
to the "notes" refer to the original and exchange 2010 notes and the original
and exchange 2013 notes collectively.
RRI issued the original 2010 notes, and will issue the exchange 2010 notes,
under an indenture, dated as July 1, 2003, among itself, the Guarantors and
Wilmington Trust Company, as trustee. RRI issued the original 2013 notes, and
will issue the exchange 2013 notes, under an indenture, dated as July 1, 2003,
among itself, the Guarantors and Wilmington Trust Company, as trustee. RRI
issued the original notes in a private transaction that was not subject to the
registration requirements of the Securities Act. The terms of the notes include
those stated in the indentures and those made part of the indentures by
reference to the Trust Indenture Act of 1939, as amended. The security documents
referred to below under the caption "-- Security" by and among RRI, the
Guarantors and Wachovia Bank, National Association or one of its affiliates, as
collateral trustee, contain the terms of the security arrangements that secure
the notes.
The following description is a summary of the material provisions of the
indentures, the registration rights agreement and the security documents. It
does not restate those agreements in their entirety. We urge you to read the
indentures, the registration rights agreement and the security documents because
they, and not this description, define your rights as holders of the notes.
Copies of the indentures, the registration rights agreement and the security
documents are available as set forth below under "-- Additional Information."
Certain defined terms used in this description but not defined below under
"-- Certain Definitions" have the meanings assigned to them in the indentures.
The registered holder of a note will be treated as the owner of it for all
purposes. Only registered holders will have rights under the indentures.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
THE NOTES
The notes:
- are general obligations of RRI;
- are secured on an equal and ratable basis with the Credit Agreement
General Facilities Debt and all future Parity Secured Debt by security
interests in all Shared Collateral owned or at any time acquired by RRI
(subject to Credit Agreement Priority Facility Liens, Tranche A Priority
Liens and other Permitted Liens);
- are pari passu in right of payment with all existing and future senior
Indebtedness of RRI, including the Credit Agreement Debt;
- are senior in right of payment to all current and future subordinated
Indebtedness of RRI, including the Convertible Notes; and
- are unconditionally guaranteed by the Guarantors.
THE GUARANTEES
The notes are guaranteed by all of RRI's Domestic Subsidiaries that
guarantee borrowings under the Credit Agreement (other than the Orion Bank
Guarantors). The notes are not guaranteed by the Excluded Subsidiaries.
80
Each guarantee of the notes (other than the guarantee by Orion Power
Holdings, Inc.):
- is a general obligation of the Guarantor;
- is secured on an equal and ratable basis with that Guarantor's guarantee
of the Credit Agreement General Facilities Debt and that Guarantor's
guarantee of future Parity Secured Debt by security interests in all
Shared Collateral owned or at any time acquired by that Guarantor
(subject to Credit Agreement Priority Facility Liens, Tranche A Priority
Liens and other Permitted Liens);
- is pari passu in right of payment with all existing and future senior
Indebtedness of that Guarantor, including the Credit Agreement Debt; and
- is senior in right of payment to all current and future subordinated
Indebtedness of such Guarantor.
The notes are also guaranteed by Orion Power Holdings, Inc. under the Orion
Limited Guaranty on a limited basis. The Orion Limited Guaranty:
- is limited in amount to an amount that, together with the amount
guaranteed for the benefit of the Credit Agreement Debt by the Orion Bank
Guarantors, will not cause Orion Power Holdings, Inc. to violate certain
financial tests set forth in its indenture. RRI has calculated the
aggregate amount permitted to be guaranteed by Orion Power Holdings, Inc.
and the Orion Bank Guarantors to be approximately $1.1 billion.
- is enforceable by the collateral trustee for the benefit of the holders
of obligations secured by the security documents and is shared, as to
such limited amount, on an equal and ratable basis with the holders of
the Credit Agreement General Facilities Debt and of future Parity Secured
Debt after satisfaction of Credit Agreement Priority Facility Liens and
Tranche A Priority Liens.
- is secured by security interests in all Shared Collateral owned or at any
time acquired by Orion Power Holdings, Inc. (subject to Credit Agreement
Priority Facility Liens, Tranche A Priority Liens and other Permitted
Liens).
- is subordinated in right of payment to Existing Indebtedness of Orion
Power Holdings, Inc. and obligations under the existing Credit Facilities
of Orion Power New York, L.P. and Orion Power Midwest, L.P. Such
subordination terms also provide that, in the event Orion Power Holdings,
Inc. is substantively consolidated with any Orion Facility Party upon a
bankruptcy or similar proceeding relating to Orion Power Holdings, Inc.,
the collateral trustee may not proceed against the assets of Orion Power
Holdings, Inc. or any Orion Facility Party until either (a) the Orion
Power New York, L.P. and Orion Power Midwest, L.P. Credit Facilities
shall have been paid in full or (b) the lenders under such Credit
Facilities shall have received an amount equal to the amount guaranteed
pursuant to the Orion Limited Guaranty.
The operations of RRI are conducted through its subsidiaries and,
therefore, RRI depends on the cash flow of its subsidiaries to meet its
obligations, including its obligations under the notes. However, not all of our
subsidiaries guarantee the notes. The notes are effectively subordinated in
right of payment to all Indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of RRI's non-guarantor
subsidiaries. Orion Power Holdings, Inc. is prohibited by the terms of its
indenture from guaranteeing these notes, except for the limited guaranty
provided under the Orion Limited Guaranty. Orion Power Capital, LLC and its
subsidiaries, Reliant Energy Mid-Atlantic Power Holdings, LLC and its
subsidiaries, Reliant Energy Channelview, LP, Liberty Electric PA, LLC and
Liberty Electric Power, LLC, and Reliant Energy Capital (Europe), Inc. and its
subsidiaries are prohibited by the terms of their debt agreements from
guaranteeing these notes, and RE Retail Receivables, LLC is prohibited by the
terms of its receivables purchase agreement from guaranteeing these notes. In
addition, certain non wholly-owned and other subsidiaries of RRI, which are not
guarantors of the Credit Agreement Debt, cannot guarantee the notes due to
restrictions in their constituent documents or other agreements. In the event of
a bankruptcy, liquidation or reorganization of any of the non-guarantor
subsidiaries, the non-guarantor subsidiaries will pay the holders of their debt
and their trade creditors before they will be able to distribute any of their
assets to us, except to the extent that RRI is itself recognized as a creditor
of the non-
81
guarantor subsidiary, in which case the claims of RRI would still be effectively
subordinated to the extent RRI's claims against the non-guarantor subsidiary are
unsecured and the claims held by the other creditors are secured or RRI's claims
are subordinated in right of payment to the claims held by the other creditors.
The guarantor subsidiaries generated 89% of our consolidated revenues and 44% of
our operating income in the year ended December 31, 2002 and held 42% of our
consolidated property, plant and equipment, net, as of September 30, 2003.
As of the date of the indentures and the date hereof, all of our
subsidiaries other than RE Retail Receivables, LLC are "Restricted
Subsidiaries." RE Retail Receivables, LLC was created in connection with an
accounts receivable securitization program. As of the date of the indentures,
its assets consisted of receivables and related assets purchased from Reliant
Energy Retail Services, LLC and StarEnPower, LLC. Under the circumstances
described below under the caption "-- Certain Covenants -- Designation of
Restricted and Unrestricted Subsidiaries," we may designate certain of our other
subsidiaries as "Unrestricted Subsidiaries." Our Unrestricted Subsidiaries are
not subject to many of the restrictive covenants in the indentures. Our
Unrestricted Subsidiaries will not guarantee the notes.
PRINCIPAL, MATURITY AND INTEREST
RRI issued $550 million in aggregate principal amount of 2010 notes and
$550 million in aggregate principal amount of 2013 notes on July 1, 2003. RRI
may issue additional notes under either indenture from time to time. Any
issuance of additional notes is subject to all of the covenants in the
indentures, including the covenants described below under the captions
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock" and "-- Certain Covenants -- Liens." In the case of each series, the
notes and any additional notes subsequently issued under the same indenture will
be treated as a single class for all purposes under that indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase. RRI
issued the original notes in denominations of $1,000 and integral multiples of
$1,000. The 2010 notes will mature on July 15, 2010, and the 2013 notes will
mature on July 15, 2013.
Interest on the 2010 notes accrues at the rate of 9.25% per annum and is
payable semi-annually in arrears on January 15 and July 15, commencing on
January 15, 2004. RRI will make each interest payment to the holders of record
on the immediately preceding January 1 and July 1.
Interest on the 2013 notes accrues at the rate of 9.50% per annum and is
payable semi-annually in arrears on January 15 and July 15, commencing on
January 15, 2004. RRI will make each interest payment to the holders of record
on the immediately preceding January 1 and July 1.
Interest on the notes accrues from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest is computed on the basis of a 360-day year comprised of twelve 30-day
months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a holder has given wire transfer instructions to RRI, RRI will pay all
principal, interest and premium and special interest, if any, on that holder's
notes in accordance with those instructions. All other payments on notes will be
made at the office or agency of the paying agent and registrar within the City
and State of New York unless RRI elects to make interest payments by check
mailed to the holders at their address set forth in the register of holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustees are initially acting as paying agent and registrar. RRI may
change the paying agent or registrar without prior notice to the holders of the
notes, and RRI or any of its subsidiaries may act as paying agent or registrar.
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TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the applicable
indenture. The registrar and the applicable trustee may require a holder, among
other things, to furnish appropriate endorsements and transfer documents in
connection with a transfer of notes. Holders will be required to pay all taxes
due on transfer. RRI is not required to transfer or exchange any note selected
for redemption. Also, RRI is not required to transfer or exchange any note for a
period of 15 days before a selection of notes to be redeemed.
SUBSIDIARY GUARANTEES
RRI's payment obligations under the 2010 notes and under the 2013 notes are
jointly and severally guaranteed on a senior basis by each of RRI's current
(other than the Excluded Subsidiaries) and future Domestic Subsidiaries that
guarantee borrowings under the Credit Agreement or any other Indebtedness of
RRI. These subsidiary guarantees (except the Orion Limited Guaranty) are joint
and several obligations of the Guarantors. The obligations of each Guarantor
under its subsidiary guarantees are limited as necessary to prevent the
subsidiary guarantees from constituting a fraudulent conveyance under applicable
law. The Orion Limited Guaranty is limited to an amount that, together with the
amount guaranteed for the benefit of the Credit Agreement Debt by the Orion Bank
Guarantors, will not cause Orion Power Holdings, Inc. to violate certain
financial tests set forth in its indenture. RRI has calculated the aggregate
amount permitted to be guaranteed by Orion Power Holdings, Inc. and the Orion
Bank Guarantors to be to approximately $1.1 billion. See "Risk
Factors -- Fraudulent Conveyance Matters -- Federal and State statutes allow
courts, under specific circumstances, to void guarantees and liens securing
guarantees and to require note holders to return payments received from
guarantors."
The subsidiary guarantees of each Guarantor are secured by all Shared
Collateral owned or at any time acquired by that Guarantor (subject to Credit
Agreement Priority Facility Liens, Tranche A Priority Liens and other Permitted
Liens) and such subsidiary guarantees are pari passu in right of payment with
all existing and future senior Indebtedness of that Guarantor, including the
Credit Agreement Debt.
A Guarantor may not sell or otherwise dispose of all or substantially all
of its assets to, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than RRI or another
Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) either:
(A) the Person acquiring the property in any such sale or
disposition or the Person formed by or surviving any such consolidation
or merger assumes all the obligations of that Guarantor under the
indentures, its subsidiary guarantees, the registration rights agreement
(unless all material obligations in that agreement have been performed)
and all security documents delivered by that Guarantor pursuant to
supplemental indentures; or
(B) the Net Proceeds of such sale or other disposition are applied
in accordance with the applicable provisions of the indentures and the
collateral trust agreement.
The subsidiary guarantees of a Guarantor will be released automatically and
all security interests granted by that Guarantor to the collateral trustee will
be released:
(1) in connection with any sale or other disposition of all of the
assets or Capital Stock of that Guarantor (including by way of merger or
consolidation) to a Person that is not (either before or after giving
effect to such transaction) RRI or a Restricted Subsidiary of RRI, if the
Net Proceeds of the sale or disposition are applied in accordance with the
applicable provisions of the indentures and the collateral trust agreement;
(2) if RRI designates any Restricted Subsidiary that is a Guarantor to
be an Unrestricted Subsidiary in accordance with the applicable provisions
of the indentures;
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(3) upon legal defeasance or satisfaction and discharge of the notes
as provided below under the captions "-- Legal Defeasance and Covenant
Defeasance" and "-- Satisfaction and Discharge;"
(4) upon a dissolution of a Guarantor that is permitted under the
indenture; or
(5) if that Guarantor is released from its guarantee of all other
Indebtedness of RRI; provided that all Liens on the Excluded Securities
issued by such Guarantor securing any such Indebtedness have previously
been or are concurrently released.
SECURITY
The payment of the notes and all other Parity Secured Obligations of RRI,
when due, and the performance of all other obligations of RRI under the Secured
Debt Documents are secured equally and ratably by liens upon RRI's rights in the
Shared Collateral. The payment of the guarantees of each Guarantor and all other
obligations of such Guarantor, when due, and the performance of all other
obligations of such Guarantor under the Secured Debt Documents are secured
equally and ratably by liens upon such Guarantor's rights in the Shared
Collateral. These liens are junior in priority to Credit Agreement Priority
Facility Liens, Tranche A Priority Liens and other Permitted Prior Liens.
The notes and the guarantees are not secured by Excluded Property. The
Excluded Property consists of two classes of property:
- Separate Collateral, which consists of Excluded Securities and assets of
the Orion Bank Guarantors. The collateral trustee will hold liens on the
Separate Collateral pursuant to the security documents to secure
Obligations under the Credit Agreement and, at the option of RRI, other
Credit Facilities, but these liens do not secure the notes or the
guarantees; and
- Separate Cash Deposits held under the control of the Credit Agreement
Agent to secure certain Obligations under the Credit Agreement.
COLLATERAL TRUSTEE
RRI has appointed Wachovia Bank, National Association to serve as the
collateral trustee for the benefit of the holders of:
- the 2010 notes;
- the 2013 notes;
- the Credit Agreement Debt;
- any and all future Parity Secured Debt; and
- all other Secured Obligations outstanding from time to time.
The collateral trust agreement provides that the collateral trustee may not
be the same institution serving as a Secured Debt Representative, but the Credit
Agreement Agent or any other Secured Debt Representative may serve as agent for
the collateral trustee.
The collateral trustee (directly or through co-trustees, agents or
sub-agents) holds, and is entitled to enforce, all Liens on the Collateral.
Except as provided in the collateral trust agreement or the security
documents or as directed by an Act of Secured Debtholders, the collateral
trustee is not obligated:
(1) to act upon directions purported to be delivered to it by any
other Person;
(2) to foreclose upon or otherwise enforce any Lien; or
(3) to take any other action whatsoever with regard to any or all of
the security documents, the Liens created thereby or the Collateral.
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SHARED COLLATERAL
The indentures and the security documents provide that:
(1) the notes are secured, together with the Credit Agreement General
Facilities Debt, all other Parity Secured Debt of RRI and all other Parity
Secured Obligations of RRI, equally and ratably by security interests
granted to the collateral trustee in all of the assets of RRI that secure
Credit Agreement General Facilities Obligations except Excluded Property,
and
(2) each Guarantor's subsidiary guarantees are secured, together with
such Guarantor's guarantee of the Credit Agreement General Facilities Debt,
all other guarantees of Parity Secured Debt of such Guarantor and all other
Parity Secured Obligations of such Guarantor, equally and ratably by
security interests granted to the collateral trustee in all assets of such
Guarantor that secure its guarantee of Credit Agreement General Facilities
Obligations except Excluded Property
(the assets securing Credit Agreement General Facilities Obligations and
guarantees of Credit Agreement General Facilities Obligations, excluding
Excluded Property, are collectively the "Shared Collateral"). These security
interests are junior in priority to the Credit Agreement Priority Facility Liens
and Tranche A Priority Liens, which also are held by the collateral trustee
under the security documents on a priority basis, and to other Permitted Prior
Liens.
As of the date of the Indentures, the Shared Collateral consists of
substantially all the operating assets of RRI and the Guarantors, subject to
Permitted Liens, including:
- mortgages on 14 electric generating plants (of which four are not yet in
commercial operation) with a net generating capacity of 9,203 megawatts
and related rights of way;
- the outstanding Capital Stock of Reliant Energy Retail Holdings, LLC,
which through its Subsidiaries is engaged in the retail energy business;
- the outstanding Capital Stock of Orion Power Holdings, Inc., which
through its Subsidiaries owns and operates 83 electric generating plants
with a net generating capacity of 6,598 megawatts located in New York,
Pennsylvania, Ohio and West Virginia;
- the outstanding Capital Stock of REMA, which owns or leases, together
with its subsidiaries, 21 electric generating plants with a net
generating capacity of 4,227 megawatts located in Pennsylvania, New
Jersey and Maryland; and
- substantially all of the inventory, equipment, accounts, general
intangibles and other personal property of the Guarantors, except
Excluded Securities.
The Shared Collateral does not include any of the assets of the Excluded
Subsidiaries.
The Shared Collateral also does not include certain assets that are subject
to various contractual or legal restrictions on liens or were otherwise
permitted by the holders of the Credit Agreement Obligations to be excluded from
the Liens securing the Credit Agreement Obligations, including (1) certain
receivables and related accounts of certain Guarantors that are in the retail
energy business, which are subject to a receivables securitization program, and
(2) proceeds from the issuance of Seward Tax-Exempt Bonds or Permitted PEDFA
Bond Indebtedness that secure the Seward Tax-Exempt Bonds or Permitted PEDFA
Bond Indebtedness.
EXCLUDED PROPERTY
The notes are not secured by all of the assets that secure Credit Agreement
Obligations. The indentures permit RRI and its Restricted Subsidiaries to
maintain Permitted Separate Liens upon certain assets ("Excluded Property") as
security for Obligations under the Credit Agreement or other Credit Facilities,
without requiring RRI to grant Liens upon those assets as security for the notes
or any future Parity Secured Debt. See "Risk Factors -- The indebtedness under
our new credit facilities is guaranteed
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by certain subsidiaries that do not guarantee the notes and is secured by
certain assets that do not secure the notes."
The Excluded Property consists of:
- All assets of the Subsidiaries of Orion Power Holdings, Inc. that are
Orion Bank Guarantors. These Subsidiaries either are inactive, provide
certain services to Orion Power Holdings, Inc. or its other Subsidiaries,
or own certain of our wholesale power generation assets.
- Capital Stock of subsidiaries and intercompany notes that satisfy the
requirements of the defined term "Excluded Securities" (together with the
assets of the Orion Bank Guarantors, "Separate Collateral"). The notes,
however, are guaranteed by all issuers of Excluded Securities that are
not Excluded Subsidiaries and such guarantees are secured under the
security documents, equally and ratably with the Credit Agreement General
Facilities Debt and all other Parity Secured Obligations by all Shared
Collateral owned by all issuers of Excluded Securities that are not
Excluded Subsidiaries. The Excluded Subsidiaries (excluding RE Retail
Receivables, LLC and the entities reported as discontinued operations)
generated 16% of our consolidated revenues and a $25 million operating
loss for the year ended December 31, 2002 and held 58% of our
consolidated property, plant and equipment, net, as of September 30,
2003.
- Proceeds of the issuance of the original notes and other prepayments
deposited to a prepayment collateral account pending application to the
prepayment of the Credit Agreement Debt and cash collateral deposits
required by the Credit Agreement to secure letter of credit exposure
after default or to provide for mandatory prepayments after outstanding
loans are repaid ("Separate Cash Deposits").
All liens on Separate Collateral securing Credit Agreement Obligations and
other Credit Facilities are held by the collateral trustee. Separate Cash
Deposits will not be held by the collateral trustee.
RRI and its Restricted Subsidiaries are permitted under the indentures to
maintain or grant liens upon Excluded Property as security for Obligations under
Credit Facilities without securing the notes or other Note Obligations by the
additional lien ("Permitted Separate Liens"). The indentures limit Permitted
Separate Liens on Excluded Securities as follows:
(1) Liens that are attached to any Excluded Securities on the date of
the indentures and were granted by the security documents to secure
Indebtedness outstanding or committed under the Credit Agreement on the
date of the indentures and Obligations in respect thereof may be maintained
and, at the option of RRI, may also secure Obligations under other Credit
Facilities constituting Parity Secured Debt;
(2) Liens attaching to other Excluded Securities issued by a
Restricted Subsidiary that is a Guarantor may be granted and maintained to
secure only Credit Agreement Obligations and, at the option of RRI,
Obligations under other Credit Facilities constituting Parity Secured Debt;
(3) Liens attaching to Excluded Securities issued by Texas Genco or
Texas Genco, L.P. and securing only Credit Agreement Obligations and, at
the option of RRI, Obligations under other Credit Facilities constituting
Parity Secured Debt may be granted and maintained if the issuer of such
Excluded Securities either (A) guarantees the Parity Secured Obligations or
(B) is prohibited, by the terms of an agreement governing its outstanding
Indebtedness, from guaranteeing the Parity Secured Obligations; and
(4) Liens attaching to Excluded Securities issued by an Unrestricted
Subsidiary may be granted and maintained to secure any Indebtedness of such
Unrestricted Subsidiary.
Property that is received by RRI or any of its Subsidiaries as proceeds
from the sale, exchange or other disposition of any Excluded Securities and
other proceeds of Excluded Securities (except proceeds from the foreclosure,
collection or other enforcement of Liens upon Excluded Securities) will not
constitute Excluded Property and will be part of the Shared Collateral, to the
extent such property
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otherwise constitutes Shared Collateral under the security documents, unless the
proceeds are themselves Excluded Securities.
During the pendency of any Actionable Default, and subject to the Order of
Application, if any payment or distribution is made in cash to holders of Credit
Agreement General Facilities Obligations or any other holders of Parity Secured
Obligations from or on account of Separate Collateral by reason of enforcement
of Liens or realization in a bankruptcy case, receivership or other insolvency
or liquidation proceeding, then any concurrent or subsequent payment or
distribution that is to be made in cash to such holders from or on account of
Shared Collateral by reason of any such enforcement or realization shall be
reduced, and any concurrent or subsequent payment or distribution that is to be
made in cash to the remaining holders of Parity Secured Obligations from or on
account of Shared Collateral by reason of any such enforcement or realization
shall be increased, to the extent necessary to cause the aggregate amount of all
payments and distributions made in cash to all holders of Parity Secured
Obligations (whether made from or on account of Separate Collateral or from or
on account of Shared Collateral) by reason of any such enforcement or
realization to be distributed equally and ratably as fully as if the Separate
Collateral had been Shared Collateral.
ADDITIONAL PARITY SECURED DEBT
The indentures and the security documents provide that RRI may incur
additional Parity Secured Debt by issuing additional notes under either
indenture, obtaining additional extensions of credit under the Credit Agreement
or issuing or increasing a new Series of Secured Debt. The additional Parity
Secured Debt will be pari passu with the notes and Obligations under the Credit
Agreement, will be guaranteed on a pari passu basis by each Guarantor and will
be secured by the Shared Collateral equally and ratably with the Credit
Agreement General Facilities Debt and the notes for as long as the notes and
guarantees of notes, subject to the covenants contained in the indentures, are
secured by the Shared Collateral. The additional Parity Secured Debt will only
be permitted to share in the Shared Collateral if such Indebtedness and the
related Liens are permitted to be incurred under the covenants described below
under the captions "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock" and "-- Certain Covenants -- Liens."
EQUAL AND RATABLE SHARING OF SHARED COLLATERAL BY HOLDERS OF PARITY SECURED
DEBT
Notwithstanding (1) anything to the contrary contained in the Secured Debt
Documents, (2) the time of incurrence of any Series of Secured Debt, (3) the
order or method of attachment or perfection of any Liens securing any Series of
Secured Debt, (4) the time or order of filing or recording of financing
statements, mortgages or other documents filed or recorded to perfect any Lien
upon any Shared Collateral, (5) the time of taking possession or control over
any Shared Collateral or (6) the rules for determining priority under any law
governing relative priorities of Liens:
(A) all Liens at any time granted by RRI or any of its Subsidiaries in
the Shared Collateral to secure any of the Parity Secured Debt shall
secure, equally and ratably, all liabilities of RRI or such Subsidiary
under or in respect of the Parity Secured Debt and other Parity Secured
Obligations; and
(B) all proceeds of all Liens at any time granted by RRI or any its
Subsidiaries in the Shared Collateral to secure any of the Parity Secured
Debt shall be allocated and distributed equally and ratably on account of
all liabilities of RRI or such Subsidiary under or in respect of the Parity
Secured Debt and other Parity Secured Obligations.
The foregoing provision is intended for the benefit of, and will be
enforceable as a third party beneficiary by, each present and future holder of
Secured Obligations and each present and future Secured Debt Representative.
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PRIORITY LIENS
Notwithstanding (1) anything to the contrary contained in the Secured Debt
Documents, (2) the time of incurrence of any Series of Secured Debt, (3) the
order or method of attachment or perfection of any Liens securing any Series of
Secured Debt, (4) the time or order of filing or recording of financing
statements, mortgages or other documents filed or recorded to perfect any Lien
upon any Collateral, (5) the time of taking possession or control over any
Collateral or (6) the rules for determining priority under any law governing
relative priorities of Liens, all Liens at any time granted by RRI or any of its
Subsidiaries to secure any of the Parity Secured Debt shall be subject and
subordinate to Credit Agreement Priority Facility Liens and Tranche A Priority
Liens.
The foregoing provision is intended for the benefit of, and will be
enforceable as a third party beneficiary by, the collateral trustee as holder of
Credit Agreement Priority Facility Liens and Tranche A Priority Liens.
ESTABLISHMENT OF THE COLLATERAL TRUST; INTERCREDITOR CONFIRMATION
On the date of the indentures:
(1) RRI and the Guarantors entered into a collateral trust agreement
with the collateral trustee, which set forth the terms on which the
collateral trustee will receive, hold, administer, maintain, enforce and
distribute the proceeds of all Liens upon any property of RRI or any of its
Subsidiaries at any time delivered to it, in trust for the benefit of the
present and future holders of the Secured Obligations.
(2) The Credit Agreement was amended (A) to authorize the Credit
Agreement Agent to transfer to the collateral trustee all Liens and
security documents securing any and all Obligations under the Credit
Agreement, except Separate Cash Deposits, and (B) to confirm the agreement
of the holders of the Credit Agreement Debt to the provisions described
above under the captions "-- Equal and Ratable Sharing of Shared Collateral
by Holders of Parity Secured Debt".
(3) The Credit Agreement Agent transferred all its Liens and security
documents, except Separate Cash Deposits, to the collateral trustee and
undertook to act as agent for the collateral trustee in respect of certain
matters, including the exercise of all powers granted to the Credit
Agreement Agent in control agreements governing deposit accounts, commodity
accounts and securities accounts constituting Collateral.
(4) The collateral trustee and each other party to the security
documents transferred to the collateral trustee entered into an amendment
of or supplement to the security documents by which, among other things,
the notes and other Note Obligations and each future Series of Secured Debt
and all other Parity Secured Obligations were added to the obligations
secured by the Shared Collateral.
(5) The collateral trustee entered into an agreement by which it and
the holders of Secured Obligations succeeded to the rights and obligations
of the Credit Agreement Agent and the holders of the Obligations under the
Credit Agreement, respectively, under the Texas Genco Intercreditor
Agreement. Under the Texas Genco Intercreditor Agreement, the Liens of the
collateral trustee in certain receivables and other assets of Reliant
Energy Retail Holdings, LLC, and its Subsidiaries are subordinated to the
Permitted Prior Liens of Texas Genco in such Collateral, and the collateral
trustee is subject to related intercreditor provisions in favor of Texas
Genco that limit the rights of the collateral trustee to enforce its Liens
in such Collateral and otherwise limit the rights of the collateral trustee
and the holders of Secured Obligations with respect to such Collateral.
(6) The collateral trustee entered into an agreement by which it and
the holders of Secured Obligations succeeded to the rights and obligations
of the Credit Agreement Agent and the holders of the Credit Agreement
Obligations, respectively, under an existing intercreditor agreement among
the lenders party to the Credit Agreement, which provides the holders of
Tranche A Loans under the Credit Agreement with a priority claim to
proceeds of liquidation to the electric generating plants that
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constitute the Seward Facility, Hunterstown Facility, and Choctaw Facility
and related contracts, rights and assets:
- in the case of a liquidation of such assets after the commencement of a
bankruptcy proceeding by or against RRI or certain of its subsidiaries
that occurs on or before the expiration of any relevant preference
periods set forth in the intercreditor agreement which RRI estimates to
be approximately July 7, 2003, and
- in an amount not to exceed $200,000,000 in the case of a liquidation of
such assets of after the commencement of a bankruptcy by or against RRI
or certain of its subsidiaries that occurs after the expiration of any
relevant preference periods set forth in the intercreditor agreement
which the RRI estimates to be approximately July 7, 2003.
Each future Series of Secured Debt will be required to include an
intercreditor confirmation.
ENFORCEMENT OF SECURITY INTERESTS
The collateral trust agreement permits the Required Lenders under the
Credit Agreement, or the Credit Agreement Agent acting upon the authorization or
with the consent of the Required Lenders, to direct the collateral trustee in
the enforcement of the liens held by the collateral trustee and its rights under
the security documents, to the extent permitted by the security documents.
During an Actionable Default Period such directions will be subject to any
contrary direction at any time given by the Required Secured Debtholders, based
on a majority vote of outstanding and committed principal amount of Secured Debt
(with all holders, including holders of notes and Credit Agreement Debt, voting
as a single class), except that the Required Secured Debtholders may not
countermand, in whole or in part, a direction by the Required Lenders
instructing the collateral trustee to foreclose or otherwise enforce the
collateral trustee's liens or default remedies upon any Collateral. See "Risk
Factors -- Your right to enforce remedies under the Credit Agreement and the
security documents will be limited by the voting provisions of the collateral
trust agreement."
ORDER OF APPLICATION
The collateral trust agreement provides that if, pursuant to the exercise
of any default remedies set forth in any security document, any Shared
Collateral is sold or otherwise realized upon by the collateral trustee, the
proceeds received by the collateral trustee in respect of such Shared Collateral
will be distributed by the collateral trustee in the following order of
application (the "Order of Application"):
FIRST, to the payment of all reasonable legal fees and expenses and
other reasonable costs or expenses or other liabilities of any kind
incurred by the collateral trustee or any co-trustee or agent in connection
with any security document, including the reimbursement to any Secured Debt
Representative of any amounts theretofore advanced by such Secured Debt
Representative for the payment of such fees, costs and expenses;
SECOND, to the collateral trustee (without duplication) in an amount
equal to the collateral trustee's fees which are unpaid and to any Secured
Debt Representative which has theretofore advanced or paid any such
collateral trustee's fees in an amount equal to the amount thereof so
advanced or paid by such Secured Debt Representative;
THIRD, to the Credit Agreement Agent for application to the payment of
Obligations under the Credit Agreement Priority Facility, or to be held by
the Credit Agreement Agent pending such application, until all such
Obligations have been paid in full in cash or the cash amount held by the
Credit Agreement Agent in respect of the Credit Agreement Priority Facility
is sufficient to pay all such Obligations in full in cash;
FOURTH, to the Secured Debt Representative for the holders of the
Obligations secured by the Tranche A Priority Liens for application to the
Obligations secured by the Tranche A Priority Liens or to be held by such
Secured Debt Representative pending such application in an amount not to
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exceed $200 million to the extent that the terms of the intercreditor
agreement relating to the Tranche A Priority Liens require such payment;
FIFTH, to the respective Secured Debt Representatives for application
to the Parity Secured Obligations equally and ratably until all Parity
Secured Obligations have been paid in full in cash for distribution, to (1)
in the case of Credit Agreement General Facilities Obligations, to the
Credit Agreement Agent for application pursuant to the terms of the Credit
Agreement, (2) in the case of Note Obligations, to the trustees for
application pursuant to the indentures and (3) in the case of all other
Parity Secured Obligations, to the respective Secured Debt Representatives
for application pursuant to the applicable Secured Debt Documents; and
SIXTH, any surplus remaining after the payment in full in cash of all
of the Secured Obligations shall be paid to the applicable Grantor, its
successors or assigns, or to whomsoever may be lawfully entitled to receive
the same, or as a court of competent jurisdiction may direct.
RELEASE OF SECURITY INTERESTS
The indentures provide that the collateral trustee's Liens upon the Shared
Collateral will be released:
(1) in whole, at any time when no Actionable Default Period is
continuing, if neither RRI nor any Guarantor has any Indebtedness secured
by Liens, except for the Liens described in clauses (10), (11), (17), and
(28) of the definition of "Permitted Liens;"
(2) as to any or all Shared Collateral at any time when no Actionable
Default Period is continuing, if (A) consent to the release of Shared
Collateral has been given by an Act of Secured Debtholders and (B) such
release has become effective in accordance with the terms of the consent;
(3) as to any or all Shared Collateral at any time when an Actionable
Default Period is continuing, if (A) consent to the release of such Shared
Collateral has been given by an Act of Secured Debtholders and by the
Required Lenders and (B) such release has become effective in accordance
with the terms of the consent;
(4) as to (A) deposits in the Texas Genco Escrow Account that are to
be applied to pay the purchase price to acquire assets or Equity Interests
in Texas Genco or any of its Subsidiaries, concurrently with such
application; (B) any or all deposits in the Texas Genco Escrow Account that
are proceeds of Specified Junior Securities issued pursuant to clause (8)
of the definition of "Permitted Debt," so long as 50% of such deposits are
concurrently applied to the repayment of term Indebtedness constituting
Credit Agreement Debt; (C) deposits in any Cash Collateral Account or the
Texas Genco Escrow Account that are to be applied to fund any mandatory
prepayment or purpose offer (including an Asset Sale Offer) that becomes
required as to any Secured Debt as a result of a sale of assets,
concurrently with such application, so long as effective provision is made
for apportionment of such funding to all holders of Secured Debt entitled
to participate in such mandatory prepayment or purchase offer in accordance
with their respective entitlements under the Secured Debt Documents; and
(D) deposits in any Cash Collateral Account or the Texas Genco Escrow
Account that constitute proceeds from an asset sale that are permitted
under the Secured Debt Documents to be reinvested or otherwise are not
required under the Secured Debt Documents to be reinvested or otherwise are
not required to be applied to a mandatory prepayment or purchase offer in
respect of any Secured Debt, concurrently with such reinvestment in assets
constituting Collateral or other permitted use under the Secured Debt
Documents;
(5) as to assets of the Seward Subsidiaries, concurrently with the
incurrence by the Seward Subsidiaries of Permitted PEDFA Bond Indebtedness
that (A) is Non-Recourse to RRI and all of its other Restricted
Subsidiaries (other than an unsecured Guarantee, if any provided by RRI);
and (B) is secured solely by Liens on such assets; or
(6) in accordance with the provisions of the security documents as in
effect from time to time.
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With respect to each series of notes, the indenture also provides that the
collateral trustee's Liens upon Shared Collateral will no longer secure the Note
Obligations with respect to that series of notes and the right of the holders of
such Note Obligations to the benefits and proceeds of the collateral trustee's
Liens on Shared Collateral will terminate and be discharged:
(1) upon satisfaction and discharge of the applicable indenture as set
forth under the caption "-- Satisfaction and Discharge;"
(2) upon a Legal Defeasance or Covenant Defeasance with respect to
that series of notes as set forth under the caption "-- Legal Defeasance
and Covenant Defeasance;" or
(3) upon payment in full in cash of the applicable notes and all other
related Note Obligations that are outstanding, due and payable at the time
the notes are paid in full in cash.
The collateral trust agreement authorizes the collateral trustee to
effectuate or confirm any such release of Shared Collateral as required by the
security documents if and as the collateral trustee is directed to do so by the
Credit Agreement Agent or an Act of Secured Debtholders. Any release of all or
substantially all Shared Collateral owned by any Guarantor will become effective
only if all Liens on Excluded Securities issued by such Guarantor have
previously been or are concurrently released.
RRI will otherwise comply with the provisions of TIA sec.314(b).
To the extent applicable, RRI will cause TIA sec.313(b), relating to
reports, and TIA sec.314(d), relating to the release of property or securities
or relating to the substitution therefor of any property or securities to be
subjected to the Lien of the security documents, to be complied with. Any
certificate or opinion required by TIA sec.314(d) may be made by an officer of
RRI except in cases where TIA sec.314(d) requires that such certificate or
opinion be made by an independent Person, which Person will be an independent
engineer, appraiser or other expert selected or reasonably satisfactory to the
applicable trustee. Notwithstanding anything to the contrary in this paragraph,
RRI will not be required to comply with all or any portion of TIA sec.314(d) if
it determines, in good faith based on advice of counsel, that under the terms of
TIA sec.314(d) and/or any interpretation or guidance as to the meaning thereof
of the Commission and its staff, including "no action" letters or exemptive
orders, all or any portion of TIA sec.314(d) is inapplicable to one or a series
of released Collateral.
To the extent applicable, RRI will furnish to the applicable trustee, prior
to each proposed release of Collateral pursuant to the security documents:
(1) all documents required by TIA sec.314(d); and
(2) an opinion of counsel to the effect that such accompanying
documents constitute all documents required by TIA sec.314(d).
If any Collateral is released in accordance with the indentures or any
security document and if RRI has delivered the certificates and documents
required by the security documents and this covenant, the trustees, upon receipt
of such certificates and opinion of counsel, will notify the collateral trustee
of the receipt of such documents.
AMENDMENT OF SECURITY DOCUMENTS
The collateral trust agreement provides that no amendment or supplement to
the provisions of any security document will be effective without the approval
of the Obligors party thereto and the collateral trustee acting as directed by
an Act of Secured Debtholders, except that:
(1) any amendment or supplement that has the effect solely of adding
or maintaining Collateral, securing additional Secured Debt that was
otherwise permitted by the terms of the Secured Debt Documents to be
secured by the Collateral or preserving or perfecting the Liens thereon or
the rights of the collateral trustee therein will become effective when
executed and delivered by the Obligors party thereto and the collateral
trustee as directed by such Obligors;
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(2) no amendment or supplement that reduces, impairs or adversely
affects the right of any holder of Secured Debt (A) to vote its outstanding
Secured Debt at any time when an Actionable Default Period is continuing as
to any matter described as subject to an Act of Secured Debtholders (or
that amends the provisions of this clause (2) or the definitions of "Act of
Secured Debtholders", "Actionable Default", "Actionable Default Period",
"equally and ratably" or "Required Secured Debtholders"), (B) to share in
the Order of Application in the proceeds of enforcement of or realization
on any Shared Collateral that has not been released in accordance with the
provisions described above under the caption "-- Release of Security
Interests" or (C) to require that Liens securing Secured Obligations be
released only as set forth in the provisions described above under the
caption "-- Release of Security Interests", will become effective without
the additional consent of such holder; and
(3) no amendment or supplement that imposes any obligation upon the
collateral trustee or any Secured Debt Representative in its individual
capacity or adversely affects the rights of the collateral trustee or any
Secured Debt Representative in its individual capacity will become
effective without the additional consent of the collateral trustee or such
Secured Debt Representative, in its individual capacity.
Any amendment or supplement to the provisions of the security documents
that releases Shared Collateral will be effective only in accordance with the
requirements set forth above under the caption "-- Release of Security
Interests."
OPTIONAL REDEMPTION
2010 NOTES
At any time prior to July 15, 2006, RRI may on any one or more occasions
redeem up to 35% of the aggregate principal amount of the 2010 notes issued
under the related indenture at a redemption price of 109.250% of the principal
amount, plus accrued and unpaid interest and special interest, if any, to the
redemption date, with the net cash proceeds of one or more Equity Offerings of
RRI (other than any such net proceeds that are deposited into the Texas Genco
Escrow Account, unless such net proceeds are released from that escrow account
without being used to acquire assets of or Equity Interests in Texas Genco or
any of its subsidiaries); provided that:
(1) at least 65% of the aggregate principal amount of the 2010 notes
issued under the related indenture remains outstanding immediately after
the occurrence of such redemption (excluding notes held by RRI and its
Subsidiaries); and
(2) the redemption occurs within 75 days of the date of the closing of
such Equity Offering (or, in the case of net proceeds deposited into the
Texas Genco Escrow Account, within 75 days of the date of such deposit).
On or after July 15, 2007, RRI may redeem all or a part of the 2010 notes
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and special interest, if any, on the 2010 notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on July 15 of the years indicated below, subject to the rights of holders on the
relevant record date to receive interest on the relevant interest payment date:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2007........................................................ 104.625%
2008........................................................ 102.313%
2009 and thereafter......................................... 100.000%
</Table>
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2013 NOTES
At any time prior to July 15, 2006, RRI may on any one or more occasions
redeem up to 35% of the aggregate principal amount of the 2013 notes issued
under the related indenture at a redemption price of 109.500% of the principal
amount, plus accrued and unpaid interest and special interest, if any, to the
redemption date, with the net cash proceeds of one or more Equity Offerings of
RRI (other than any such net proceeds that are deposited into the Texas Genco
Escrow Account, unless such net proceeds are released from that escrow account
without being used to acquire assets or Equity Interests in Texas Genco or any
of its subsidiaries); provided that:
(1) at least 65% of the aggregate principal amount of the 2013 notes
issued under the related indenture remains outstanding immediately after
the occurrence of such redemption (excluding notes held by RRI and its
Subsidiaries); and
(2) the redemption occurs within 75 days of the date of the closing of
such Equity Offering (or, in the case of net proceeds deposited into the
Texas Genco Escrow Account, within 75 days of the date of such deposit).
On or after July 15, 2008, RRI may redeem all or a part of the 2013 notes
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and special interest, if any, on the 2013 notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on July 15 of the years indicated below, subject to the rights of holders on the
relevant record date to receive interest on the relevant interest payment date:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2008........................................................ 104.750%
2009........................................................ 103.167%
2010........................................................ 101.583%
2011 and thereafter......................................... 100.000%
</Table>
MANDATORY REDEMPTION
RRI is not required to make mandatory redemption or sinking fund payments
with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each holder of notes will have the right to
require RRI to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that holder's notes pursuant to a Change of Control Offer
on the terms set forth in the indentures. In the Change of Control Offer, RRI
will offer a Change of Control Payment in cash equal to 101% of the aggregate
principal amount of notes repurchased plus accrued and unpaid interest and
special interest, if any, on the notes repurchased, to the date of purchase.
Within 30 days following any Change of Control, RRI will mail a notice to each
holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase notes on the Change of Control Payment Date
specified in the notice, which date will be no earlier than 30 days and no later
than 60 days from the date such notice is mailed, pursuant to the procedures
required by the indentures and described in such notice. RRI will comply with
the requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent those laws and regulations are
applicable in connection with the repurchase of the notes as a result of a
Change of Control. To the extent that the provisions of any securities laws or
regulations conflict with the Change of Control provisions of the indentures,
RRI will comply with the applicable securities laws and regulations and will not
be deemed to have breached its obligations under the Change of Control
provisions of the indentures by virtue of such compliance.
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On the Change of Control Payment Date, RRI will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes properly
tendered; and
(3) deliver or cause to be delivered to the trustees the notes
properly accepted together with an officer's certificate stating the
aggregate principal amount of notes or portions of notes being purchased by
RRI.
The paying agent will promptly mail to each holder of notes properly
tendered the Change of Control Payment for such notes, and the trustees will
promptly authenticate and mail (or cause to be transferred by book entry) to
each holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
The provisions described above that require RRI to make a Change of Control
Offer following a Change of Control will be applicable whether or not any other
provisions of the indentures are applicable. Except as described above with
respect to a Change of Control, the indentures do not contain provisions that
permit the holders of the notes to require that RRI repurchase or redeem the
notes in the event of a takeover, recapitalization or similar transaction.
The restrictions on the ability of RRI and its subsidiaries described in
this prospectus to incur additional indebtedness, to grant liens on its
property, to make restricted payments and to make asset sales may discourage a
takeover of RRI. Such restrictions and the restriction on transactions with
affiliates may, in certain circumstances, discourage any leveraged buyout of RRI
or any of its subsidiaries by the management of RRI. While such restrictions
cover a wide variety of arrangements which have traditionally been used to
effect highly leveraged transactions, the indentures may not afford holders
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
RRI will not be required to make a Change of Control Offer upon a Change of
Control if (1) a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indentures applicable to a Change of Control Offer made by RRI and purchases all
notes properly tendered and not withdrawn under the Change of Control Offer, or
(2) notice of redemption has been given pursuant to the indentures as described
above under the caption "-- Optional Redemption," unless and until there is a
default in payment of the applicable redemption price.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of RRI and its Restricted
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of notes to require RRI to repurchase its notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of RRI and its Restricted Subsidiaries taken as a whole to another Person or
group may be uncertain.
ASSET SALES
RRI will not, and will not permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) RRI (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of the Asset Sale at least equal to the Fair
Market Value of the assets or Equity Interests issued or sold or otherwise
disposed of (as reasonably determined by RRI or such Restricted
Subsidiary);
94
(2) except for a Sale of the European Operations, at least 75% of the
consideration received in the Asset Sale by RRI or such Restricted
Subsidiary is in the form of cash or Cash Equivalents. For purposes of this
provision, each of the following will be deemed to be cash:
(A) any liabilities, as shown on RRI's most recent consolidated
balance sheet, of RRI or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms
subordinated to the notes or any subsidiary guarantee) that are assumed
by the transferee of any such assets pursuant to a customary novation
agreement that releases RRI or such Restricted Subsidiary from further
liability;
(B) any securities, notes or other obligations received by RRI or
any such Restricted Subsidiary from such transferee that are converted
(by sale or other disposition) by RRI or such Restricted Subsidiary into
cash, to the extent of the cash received in that conversion within 60
days; and
(C) reasonable reserves for indemnity obligations and purchase
price adjustments funded in cash or held back by the purchaser.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
other than Excluded Proceeds, RRI (or the applicable Restricted Subsidiary, as
the case may be) may apply those Net Proceeds:
(1) in the case of a sale of assets of a Restricted Subsidiary of RRI
that is not a Guarantor, to repay Indebtedness of that Restricted
Subsidiary and correspondingly reduce commitments with respect thereto;
(2) in the case of a sale of assets pledged to secure Indebtedness
(including Capital Lease Obligations), other than Secured Debt, to repay
the Indebtedness secured by those assets; or
(3) in the case of any Asset Sale:
(A) to repay loans or letter of credit obligations outstanding
under any Credit Agreement Priority Facility or to provide cash
collateral for letters of credit issued under a Credit Agreement
Priority Facility;
(B) to acquire all or substantially all of the assets of, or all or
a majority of the Voting Stock of, a Person engaged in a Permitted
Business provided that such Person becomes a Guarantor;
(C) to make a capital expenditure; or
(D) to acquire other assets that are not classified as current
assets under GAAP and that are used or useful in a Permitted Business.
If any Net Proceeds from any sale of Shared Collateral or Excluded
Securities or from any issuance of Equity Securities that constitute an Asset
Sale are required pursuant to the terms of any of the Secured Debt Documents to
be deposited into a cash collateral or similar account, then such Net Proceeds
shall be deposited into a Cash Collateral Account as part of the Shared
Collateral. As to any other Net Proceeds, pending final application of such Net
Proceeds in accordance with this covenant, RRI may temporarily reduce revolving
credit borrowings or otherwise invest the Net Proceeds in any manner that is not
prohibited by the indentures.
Any Net Proceeds from Asset Sales (other than Excluded Proceeds) that are
not applied or invested as provided in the second paragraph under "-- Asset
Sales" will constitute "Excess Proceeds," except that if any portion of any Net
Proceeds from an Asset Sale (other than Excluded Proceeds) is required at any
time pursuant to any Secured Debt Document to be applied to the mandatory
prepayment, redemption, repurchase or purchase of Parity Secured Debt or to
provide cash collateral for letters of credit issued under Parity Secured Debt,
then all of the Net Proceeds from that Asset Sale (other than Excluded Proceeds)
will be deemed to be "Excess Proceeds" at that time. When the aggregate amount
of Excess
95
Proceeds exceeds $25.0 million, RRI will make an offer to all holders of notes
and all other holders of other Indebtedness that is pari passu with the notes
(other than Credit Agreement General Facilities Debt) (and, so long as the notes
are secured, equally and ratably secured with the notes) containing provisions
similar to those set forth in the indentures with respect to offers to purchase
or redeem with the proceeds of sales of assets, to purchase (or repay, prepay or
redeem, as applicable) an aggregate principal amount of notes and such other
pari passu Indebtedness that may be purchased (or repaid, prepaid or redeemed)
equal to the aggregate Excess Proceeds multiplied by a fraction, the numerator
of which consists of (A) the aggregate principal amount then outstanding on the
notes and all such pari passu Indebtedness containing such provisions (not
including Credit Agreement General Facilities Debt) and the denominator of which
is (B) the sum of (i) such aggregate amount in the preceding clause (A) and (ii)
the Credit Agreement General Facilities Debt then outstanding (an "Asset Sale
Offer"). The offer price in any Asset Sale Offer will be equal to 100% of
principal amount plus accrued and unpaid interest and special interest, if any,
to the date of purchase, and will be payable in cash. If any Excess Proceeds
remain after consummation of an Asset Sale Offer, RRI may use those Excess
Proceeds for any purpose not otherwise prohibited by the indentures. If the
aggregate principal amount of notes and other pari passu Indebtedness tendered
into any Asset Sale Offer exceeds the amount of Excess Proceeds, RRI will select
the notes and such other pari passu Indebtedness to be purchased on a pro rata
basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds
will be reset at zero.
Notwithstanding the foregoing provisions of this "Asset Sale" covenant, any
Net Proceeds received by RRI or a Restricted Subsidiary of RRI in connection
with an Asset Sale may be deposited to the Texas Genco Escrow Account as part of
the Shared Collateral and such deposit may be reserved for as long as deemed
appropriate by RRI for application to the payment of the purchase price for
assets of or Equity Interests in Texas Genco or any of its Subsidiaries, if (1)
all other deposits in the Texas Genco Escrow Account derived from any source
other than an Asset Sale are first applied to the payment of such purchase price
and (2) in the case of a purchase of Equity Interests, Texas Genco or such
Subsidiary, as applicable, becomes a Restricted Subsidiary of RRI concurrently
with the first application of any funds on deposit in the Texas Genco Escrow
Account to the payment of the purchase price for any Equity Interests in Texas
Genco or any of its Subsidiaries. RRI may terminate such reserve at any time as
to any or all proceeds from Asset Sales then held in the Texas Genco Escrow
Account, and such proceeds will thereupon immediately become Excess Proceeds as
to which an Asset Sale Offer is required as set forth in the preceding
paragraph; provided, that any Net Proceeds of any Asset Sale of Reliant Energy
Desert Basin, LLC and any of its Subsidiaries (or any of its or their assets) or
RECE and any of its Subsidiaries (or any of its or their assets) that are
released from the Texas Genco Escrow Account will not be treated as Excess
Proceeds if they are applied promptly after such release to repay Indebtedness
incurred pursuant to clause (1) of the definition of Permitted Debt.
RRI will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with each repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
indentures, RRI will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations under the Asset Sale
provisions of the indentures by virtue of such conflict.
SELECTION AND NOTICE
If less than all of the 2010 notes or the 2013 notes are to be redeemed at
any time, the applicable trustee will select notes for redemption as follows:
(1) if the applicable notes are listed on any national securities
exchange, in compliance with the requirements of the principal national
securities exchange on which such notes are listed; or
(2) if the applicable notes are not listed on any national securities
exchange, on a pro rata basis, by lot or by such method as the applicable
trustee deems fair and appropriate.
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No notes of $1,000 or less can be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than 60 days prior to
a redemption date if the notice is issued in connection with a defeasance of the
notes or a satisfaction and discharge of either of the indentures. Notices of
redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the holder of notes
upon cancellation of the original note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
CERTAIN COVENANTS
CHANGES IN COVENANTS WHEN NOTES RATED INVESTMENT GRADE
If on any date following the date of the indentures:
(1) the rating assigned to either series of notes by each of S&P and
Moody's is an Investment Grade Rating, and
(2) no Default or Event of Default shall have occurred and be
continuing,
then, beginning on that day and subject to the provisions of the following
paragraph, the covenants specifically listed under the following captions in
this prospectus will be suspended with respect to that series of notes:
(1) "-- Repurchase at the Option of Holders-Asset Sales;"
(2) "-- Restricted Payments;"
(3) "-- Incurrence of Indebtedness and Issuance of Preferred Stock;"
(4) "-- Dividend and Other Payment Restrictions Affecting
Subsidiaries;"
(5) "-- Designation of Restricted and Unrestricted Subsidiaries;"
(6) "-- Transactions with Affiliates;" and
(7) clause (4) of the covenant described below under "-- Merger,
Consolidation or Sale of Assets."
Notwithstanding the foregoing, if the ratings assigned by both such rating
agencies with respect to that series of notes should subsequently decline to
below an Investment Grade Rating, the foregoing covenants will be reinstituted
as of and from the date of such rating decline. The "Restricted Payments"
covenant will be interpreted as if it had been in effect since the date of the
indentures except that no default will be deemed to have occurred solely by
reason of a Restricted Payment made while that covenant was suspended. There can
be no assurance that either series of notes will ever achieve an investment
grade rating or that any such rating will be maintained.
Restricted Payments
RRI will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of RRI's or any of its Restricted Subsidiaries'
Equity Interests (including, without limitation, any payment in connection
with any merger or consolidation involving RRI or any of its Restricted
Subsidiaries) or to the direct or indirect holders of RRI's or any of its
Restricted Subsidiaries' Equity Interests in their capacity as such (other
than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of RRI or to RRI or a Restricted Subsidiary of RRI);
97
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving RRI) any Equity Interests of RRI;
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness of RRI or
of any Guarantor that is contractually subordinated to the notes or any
subsidiary guarantee (excluding any intercompany Indebtedness, intercompany
receivables or intercompany advances between or among any of RRI and any of
its Restricted Subsidiaries and Permitted PEDFA Bond Indebtedness), except
a payment of interest or principal at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other
actions set forth in these clauses (1) through (4) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence of such Restricted Payment; and
(2) RRI would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by RRI and its Restricted Subsidiaries after
the date of the indentures (excluding Restricted Payments permitted by
clauses (2) through (12) of the next succeeding paragraph), is less than
the sum, without duplication, of:
(A) 50% of the Consolidated Net Income of RRI for the period (taken
as one accounting period) from the beginning of the first full fiscal
quarter since the date of the indentures to the end of RRI's most
recently ended fiscal quarter for which internal financial statements
are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus
(B) 100% of the aggregate net cash proceeds (other than any such
net cash proceeds that are deposited into the Texas Genco Escrow Account
unless such net cash proceeds are released from the Texas Genco Escrow
Account without being used to acquire assets or Equity Interests in
Texas Genco or any of its Subsidiaries) received by RRI since the date
of the indentures as a contribution to its common equity capital or
surplus or from the issue or sale of Equity Interests of RRI (other than
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of RRI that have been converted into or exchanged for such
Equity Interests (other than Equity Interests (or Disqualified Stock or
debt securities) sold to a Subsidiary of RRI), plus
(C) to the extent that any Restricted Investment that was made
after the date of the indentures is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (i) the cash return with
respect to such Restricted Investment (less the cost of disposition, if
any) and (ii) the initial amount of such Restricted Investment, plus
(D) 50% of any cash received by RRI or a Restricted Subsidiary of
RRI after the date of the indentures from an Unrestricted Subsidiary of
RRI, to the extent that such cash was not otherwise included in
Consolidated Net Income of RRI for such period and did not result in an
increase in the amount available for future Permitted Investments, plus
(E) to the extent that any Unrestricted Subsidiary of RRI is
redesignated as a Restricted Subsidiary after the date of the
indentures, the Fair Market Value of RRI's Investment in such Subsidiary
as of the date of such redesignation.
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The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the dividend
payment would have complied with the provisions of the indentures;
(2) so long as no Default has occurred and is continuing or would be
caused thereby, the making of any Restricted Payment in exchange for, or
out of the net cash proceeds (other than any such net cash proceeds that
are deposited into the Texas Genco Escrow Account) of, the substantially
concurrent sale (other than to a Restricted Subsidiary of RRI) of, Equity
Interests of RRI (other than Disqualified Stock) or of the substantially
concurrent contribution of common equity capital or surplus to RRI,
provided that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement, defeasance or other
acquisition will be excluded from clause (3)(B) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
Indebtedness of RRI or any Guarantor that is subordinated to the notes or
to any subsidiary guarantee with the net cash proceeds from a substantially
concurrent incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend (or, in the case of any partnership or
limited liability company, any similar distribution) by a Restricted
Subsidiary of RRI to the holders of its Equity Interests on a pro rata
basis;
(5) so long as no Default has occurred and is continuing or would be
caused thereby, (A) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of RRI or any Restricted
Subsidiary of RRI in connection with any management equity subscription
agreement, stock option agreement, shareholders' agreement, severance
agreement, employee benefit plan or agreement or similar agreement or (B)
the repurchase for value of any Equity Interests of RRI in the open market
to satisfy stock options issued by RRI that are outstanding; provided that
the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests after the date of the indentures may not exceed
$15.0 million in any calendar year (or the pro rata portion thereof for the
calendar year 2003);
(6) the repurchase of Equity Interests deemed to occur upon the
exercise of stock options to the extent such Equity Interests represent a
portion of the exercise price of those stock options;
(7) the purchase by RRI of fractional shares upon conversion of any
securities of RRI into Equity Interests of RRI;
(8) the declaration and payment of dividends (A) to holders of any
class or series of Disqualified Stock of RRI or any Restricted Subsidiary
of RRI issued on or after the date of the indentures in accordance with the
Fixed Charge Coverage test described below under the caption "-- Incurrence
of Indebtedness and Issuance of Preferred Stock" or (B) to holders of Texas
Genco Preferred Stock issued pursuant to clause (7) of the second paragraph
of the covenant entitled "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(9) upon the occurrence of a Change of Control and after the
completion of the offer to repurchase the notes as described above under
the caption "-- Repurchase at the Option of Holders -- Change of Control"
(including the purchase of all notes tendered), any purchase, defeasance,
retirement, redemption or other acquisition of Capital Stock or
Indebtedness that is contractually subordinated to the notes or any
subsidiary guarantee required under the terms of such Capital Stock or
Indebtedness as a result of such Change of Control;
(10) the transactions with any Person (including any Affiliate of RRI)
set forth in clauses (1) and (4) of the second paragraph of the covenant
described under the caption "-- Transaction with Affiliates" and the
funding of any obligations in connection therewith;
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(11) the issuance of Equity Interests of RRI (other than Disqualified
Stock) for other Equity Interests of RRI in connection with any rights
offering and payments for the redemption of fractional shares in connection
with any rights offering; and
(12) so long as no Default has occurred and is continuing or would be
caused thereby, additional Restricted Payments in an aggregate amount not
to exceed $75.0 million since the date of the indentures.
The amount of all Restricted Payments (other than cash) will be the Fair
Market Value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by RRI or such Restricted Subsidiary, as
the case may be, pursuant to the Restricted Payment.
For purposes of determining compliance with this "Restricted Payments"
covenant, in the event that a Restricted Payment meets the criteria of more than
one of the types of Restricted Payments described in the above clauses, RRI, in
its sole discretion, may order and classify, and from time to time may reorder
and reclassify, such Restricted Payment if it would have been permitted at the
time such Restricted Payment was made and at the time of any such
reclassification.
Incurrence of Indebtedness and Issuance of Preferred Stock
RRI will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and RRI will
not issue any Disqualified Stock and will not permit any of its Restricted
Subsidiaries to issue any shares of preferred stock; provided, however, that RRI
may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock,
and the Guarantors may incur Indebtedness or issue preferred stock, if the Fixed
Charge Coverage Ratio for RRI's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock or preferred stock is issued would have been at least 2.0 to 1, determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred or the
Disqualified Stock or preferred stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence (A) by RRI and the guarantee by the Guarantors and
the Orion Bank Guarantors of additional Indebtedness and letters of credit
under Credit Facilities and (B) by Securitization Entities of Indebtedness
in Qualified Securitization Transactions in an aggregate principal amount
at any one time outstanding under this clause (1) (with letters of credit
being deemed to have a principal amount equal to the maximum potential
liability of RRI and its Restricted Subsidiaries thereunder), including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (1), not to exceed the
greater of:
(i) $3.0 billion; or
(ii) $5.527 billion less the sum, without duplication, of:
(a) the aggregate amount of all repayments, optional or
mandatory, of the principal of any term Indebtedness under a Credit
Facility (other than repayments under Credit Facilities of Excluded
Subsidiaries, RECE and its Subsidiaries, REMA and its Subsidiaries or
the Seward Subsidiaries) that have been made by RRI or any of its
Restricted Subsidiaries since the date of the indentures (excluding
the first $500.0 million of such repayments other than repayments
made with the proceeds from the issuance of Parity Secured Debt as
permitted under the indentures);
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(b) the aggregate amount, without duplication, of (x) all
commitment reductions with respect to any revolving credit borrowings
under a Credit Facility that have been made by RRI or any of its
Restricted Subsidiaries (other than Credit Facilities of Excluded
Subsidiaries, RECE and its Subsidiaries, REMA and its Subsidiaries or
the Seward Subsidiaries) and (y) all repayments of revolving credit
borrowings under the Credit Agreement Priority Facility with the Net
Proceeds from an Asset Sale other than temporary repayments pending
the final application of such Net Proceeds contemplated by the "Asset
Sale" covenant (whether or not the commitments thereunder are
correspondingly reduced), in each case, since the date of the
indentures; and
(c) the aggregate principal amount of Indebtedness incurred
pursuant to clause (5) of this paragraph (including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to such clause (5)) that is at the
time outstanding;
(2) the incurrence by the Excluded Orion Power Subsidiaries of
additional Indebtedness and letters of credit under Credit Facilities of an
Excluded Orion Power Subsidiary in an aggregate principal amount at any one
time outstanding under this clause (2) (with letters of credit being deemed
to have a principal amount equal to the maximum potential liability of all
Excluded Orion Power Subsidiaries thereunder), including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (2), not to exceed $1.425
billion less the aggregate amount of all repayments, optional or mandatory,
of the principal of any term Indebtedness under a Credit Facility of an
Excluded Orion Power Subsidiary that have been made by the Excluded Orion
Power Subsidiaries since the date of the indentures and less the aggregate
amount of all commitment reductions with respect to any revolving credit
borrowings under a Credit Facility of an Excluded Orion Power Subsidiary
that have been made by the Excluded Orion Power Subsidiaries since the date
of the indentures; provided that the aggregate principal amount of all
Indebtedness permitted to be incurred pursuant to this clause (2)
(including all Permitted Refinancing Indebtedness to refund, refinance or
replace Indebtedness incurred pursuant to this clause (2)) shall in no
event be reduced to less than $150.0 million;
(3) the incurrence by RECE and its Subsidiaries of additional
Indebtedness and letters of credit under Credit Facilities of RECE or any
of its Subsidiaries in an aggregate principal amount at any one time
outstanding under this clause (3) (with letters of credit being deemed to
have a principal amount equal to the maximum potential liability of RECE
and all Foreign Subsidiaries thereunder) not to exceed 110% of the amounts
committed or outstanding under such Credit Facilities on the date of the
indentures in any currency permitted by the terms of such Credit Facilities
less the aggregate amount of all repayments, optional or mandatory, of the
principal of any term Indebtedness under a Credit Facility of RECE or a
Foreign Subsidiary that have been made by RECE or Foreign Subsidiaries
since the date of the indentures and less the aggregate amount of all
commitment reductions with respect to any revolving credit borrowings under
a Credit Facility of RECE or a Foreign Subsidiary that have been made by
RECE or the Foreign Subsidiaries since the date of the indentures; provided
that the aggregate principal amount of all such Indebtedness permitted to
be incurred pursuant to this clause (3) (including all Permitted
Refinancing Indebtedness to refund, refinance or replace Indebtedness
incurred pursuant to this clause (3)) shall in no event be reduced to less
than the currency equivalent of $100.0 million;
(4) the incurrence by REMA and its Subsidiaries of additional
Indebtedness and letters of credit under Credit Facilities of REMA or any
of its Subsidiaries in an aggregate principal amount at any one time
outstanding under this clause (4) (with letters of credit being deemed to
have a principal amount equal to the maximum potential liability of REMA
and its Subsidiaries thereunder), including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (4), not to exceed $60.0 million;
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(5) the incurrence by RRI and/or the Seward Subsidiaries of (A)
Permitted PEDFA Bond Indebtedness and/or the guarantee thereof by RRI or
(B) Indebtedness evidenced by or in support of the Seward Tax-Exempt Bonds,
in an aggregate principal amount at any one time outstanding under this
clause (5), including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any Indebtedness incurred pursuant to this
clause (5), without duplication, not to exceed $600.0 million less the
aggregate amount of all repayments, optional or mandatory, of the principal
of any Indebtedness incurred pursuant to this clause (5) that have been
made by RRI and/or the Guarantors and/or the Seward Subsidiaries since the
date of the indentures;
(6) the incurrence by Texas Genco or TG Holdco or any of its
Subsidiaries, (A) after the first acquisition by RRI or TG Holdco of either
(i) Equity Interests in Texas Genco or (ii) assets of Texas Genco or any of
its Subsidiaries having a Fair Market Value equal to at least 50% of the
Fair Market Value of Texas Genco and its Subsidiaries, of Indebtedness
under a Credit Facility of Texas Genco or TG Holdco and/or one or more of
its Subsidiaries in an aggregate principal amount, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (6)(A), not to exceed $150.0
million at any one time outstanding or (B) after the first acquisition of
assets of Texas Genco or any of its Subsidiaries having a Fair Market Value
of less than 50% of the Fair Market Value of Texas Genco and its
Subsidiaries, of Indebtedness under a Credit Facility of Texas Genco or TG
Holdco and/or one or more of its Subsidiaries in an aggregate principal
amount, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any Indebtedness incurred pursuant to this
clause (6)(B), not to exceed $75.0 million at any one time outstanding;
provided that any such Indebtedness incurred pursuant to this clause (6) is
Non-Recourse to RRI and its Restricted Subsidiaries other than TG Holdco
and its Subsidiaries;
(7) (A) the issuance of Texas Genco Preferred Stock or (B) the
incurrence of Indebtedness by Texas Genco, TG Holdco or any of their
Subsidiaries or by RRI and the Guarantors, in each case, to finance the
purchase of assets of or Equity Interests in Texas Genco or any of its
Subsidiaries, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any Indebtedness incurred pursuant to this
clause (7); provided that the aggregate original principal amount of all
such Indebtedness plus the aggregate original liquidation preference of
such preferred stock does not exceed 50% of the purchase price paid for any
such assets or 50% of the Enterprise Value of Texas Genco in the case of
any acquisition of Equity Interests; provided further, that any such
Indebtedness incurred by Texas Genco, TG Holdco or any of their
Subsidiaries is Non-Recourse to RRI and its Restricted Subsidiaries other
than TG Holdco and its subsidiaries; provided, further, in the case of a
purchase of Equity Interests, Texas Genco or such Subsidiary, as
applicable, becomes a Restricted Subsidiary of RRI concurrently with the
first application of any funds on deposit in the Texas Genco Escrow Account
to the payment of the purchase price for such Equity Interests;
(8) the issuance of Specified Junior Securities by RRI, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (8); provided that at
least 50% of the net proceeds of such issuance (other than proceeds that
are deposited into the Texas Genco Escrow Account) are applied to the
repayment of term Indebtedness under RRI's Credit Facilities; provided,
further, that if there is any change in the terms of such Specified Junior
Securities that results in such securities no longer meeting all of the
requirements of the definition of "Specified Junior Securities," then such
change will be deemed to constitute an incurrence of Indebtedness by RRI
that was not permitted by this clause (8);
(9) the incurrence by RRI and its Restricted Subsidiaries of the
Existing Indebtedness, including the Convertible Notes, and including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (9);
(10) the incurrence by RRI and the Guarantors of Indebtedness
represented by the notes and the related subsidiary guarantees issued on
the date of the indentures and the exchange notes and the related
subsidiary guarantees to be issued pursuant to the registration rights
agreement and the
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incurrence by any Restricted Subsidiary of RRI of any other subsidiary
guarantee of the notes and the exchange notes, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (10);
(11) the incurrence by RRI or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case, incurred for the purpose of
financing all or any part of the purchase price or cost of design,
construction, installation or improvement of property, plant or equipment
used in the business of RRI or any of its Restricted Subsidiaries, in an
aggregate principal amount, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (11), not to exceed $100.0 million at any
one time outstanding;
(12) the incurrence by RRI or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the indentures to be
incurred under the first paragraph of this covenant or clauses (1), (2),
(3), (4), (5), (6), (7), (8), (9), (10), (11), (12) or (21) of this
paragraph;
(13) the incurrence by RRI or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among RRI and any of its Restricted
Subsidiaries; provided, however, that:
(A) if RRI or any Guarantor is the obligor on such Indebtedness and
(i) the payee is not RRI or a Guarantor or (ii) such Indebtedness
constitutes Excluded Securities, such Indebtedness (except Permitted
PEDFA Bond Indebtedness) must be expressly subordinated to the prior
payment in full in cash of all Obligations then due with respect to the
notes, in the case of RRI, or the subsidiary guarantee, in the case of a
Guarantor; and
(B) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
RRI or a Restricted Subsidiary of RRI and (ii) any sale or other
transfer of any such Indebtedness to a Person that is not either RRI or
a Restricted Subsidiary of RRI (except transfers to the collateral
trustee to secure Secured Obligations) will be deemed, in each case, to
constitute an incurrence of such Indebtedness by RRI or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause
(13);
(14) the incurrence by Orion Power Holdings, Inc. of the Orion Limited
Guaranty or the incurrence of any other obligation of any Restricted
Subsidiary that guarantees, secures or supports, equally and ratably, all
of the Parity Secured Debt and other Parity Secured Obligations;
(15) the issuance by any of RRI's Restricted Subsidiaries to RRI or to
any of its Restricted Subsidiaries of shares of preferred stock; provided,
however, that:
(A) any subsequent issuance or transfer of Equity Interests that
results in any such preferred stock being held by a Person other than
RRI or a Restricted Subsidiary of RRI; and
(B) any sale or other transfer of any such preferred stock to a
Person that is not either RRI or a Restricted Subsidiary of RRI, will be
deemed, in each case, to constitute an issuance of such preferred stock
by RRI or such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (15);
(16) the incurrence by RRI or any of its Restricted Subsidiaries of
Hedging Obligations in the ordinary course of business and not for
speculative purposes;
(17) the incurrence by RRI or any of its Restricted Subsidiaries of
Indebtedness in respect of workers' compensation claims, self-insurance
obligations, bankers' acceptances, performance and surety bonds provided by
RRI or a Restricted Subsidiary in the ordinary course of business;
(18) the incurrence by RRI or any of its Restricted Subsidiaries of
Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument
103
inadvertently drawn against insufficient funds, so long as such
Indebtedness is covered within five business days;
(19) the incurrence of Indebtedness arising from agreements of RRI or
a Restricted Subsidiary providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or Equity Interests
of a Subsidiary; provided that the maximum aggregate liability in respect
of all such Indebtedness shall at no time exceed the gross proceeds
(including non-cash proceeds) actually received by RRI and/or such
Restricted Subsidiary in connection with such disposition;
(20) the Guarantee by RRI or any Guarantor of Indebtedness that was
permitted by the indentures to be incurred under the first paragraph of
this covenant or clauses (8), (11) or (21) of this paragraph; and
(21) the incurrence by RRI or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding pursuant to this clause (21),
including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause
(21), not to exceed $500.0 million (which may, but need not, be incurred
under a Credit Facility).
RRI will not, and will not permit any Guarantor to, incur any Indebtedness
(including Permitted Debt), other than the Orion Limited Guaranty, that is
contractually subordinated in right of payment to any other Indebtedness of RRI
or that Guarantor (except Permitted PEDFA Bond Indebtedness) unless such
Indebtedness is also contractually subordinated in right of payment to the notes
or the applicable subsidiary guarantee on substantially identical terms;
provided, however, that no Indebtedness of RRI will be deemed to be
contractually subordinated in right of payment to any other Indebtedness of RRI
solely by virtue of being unsecured or by virtue of being secured on a junior
basis.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (21) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, RRI
will be permitted to classify such item of Indebtedness on the date of its
incurrence, or later reclassify from time to time all or a portion of such item
of Indebtedness, in any manner that complies with this covenant. Indebtedness
under Credit Facilities outstanding on the date on which notes were first issued
and authenticated under the indentures will initially be deemed to have been
incurred on such date in reliance on the exception provided by clauses (1)
through (4) and (9) of the definition of Permitted Debt, as applicable, and all
Permitted PEDFA Bond Indebtedness and other Indebtedness evidenced by or in
support of the Seward Tax-Exempt Bonds outstanding on the date on which notes
were first issued and authenticated under the indentures will initially be
deemed to have been incurred on such date in reliance on the exception provided
by clause (5) of the definition of Permitted Debt. The accrual of interest, the
accretion or amortization of original issue discount, the payment of interest on
any Indebtedness in the form of additional Indebtedness with the same terms, and
the payment of dividends on Disqualified Stock in the form of additional shares
of the same class of Disqualified Stock will not be deemed to be an incurrence
of Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant; provided, in each such case, that the amount thereof is included in
Fixed Charges of RRI as accrued. Notwithstanding any other provision of this
covenant, the maximum amount of Indebtedness that RRI or any Restricted
Subsidiary may incur pursuant to this covenant shall not be deemed to be
exceeded solely as a result of fluctuations in exchange rates or currency
values.
Liens
RRI will not and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or otherwise cause or suffer to
exist or become effective any Lien of any kind on any asset now owned or
hereafter acquired, except Permitted Liens.
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Sale and Leaseback Transactions
RRI will not, and will not permit any of its Restricted Subsidiaries to,
enter into any sale and leaseback transaction; provided that RRI or any
Restricted Subsidiary may enter into a sale and leaseback transaction if:
(1) RRI or that Restricted Subsidiary, as applicable, could have
incurred Indebtedness in an amount equal to the Attributable Debt relating
to such sale and leaseback transaction under the covenant described above
under the caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock;"
(2) the gross cash proceeds of that sale and leaseback transaction are
at least equal to the Fair Market Value of the property that is the subject
of that sale and leaseback transaction; and
(3) if such sale and leaseback transaction constitutes an Asset Sale,
the transfer of assets in that sale and leaseback transaction is permitted
by, and RRI applies the proceeds of such transaction in compliance with,
the covenant described above under the caption "-- Repurchase at the Option
of Holders -- Asset Sales."
However, the preceding restrictions will not apply to a sale and leaseback
transaction entered into between RRI and a Restricted Subsidiary or between
Restricted Subsidiaries of RRI.
Dividend and Other Payment Restrictions Affecting Subsidiaries
RRI will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
to RRI or any of its Restricted Subsidiaries, or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to RRI or any of its Restricted Subsidiaries;
(2) make loans or advances to RRI or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to RRI or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements as in effect on the date of the indentures and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of those agreements, provided that
the amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are not materially
more restrictive, taken as a whole, with respect to such dividend and other
payment restrictions than those contained in those agreements on the date
of the indentures as reasonably determined by RRI or such Restricted
Subsidiary;
(2) the indentures, the notes and the subsidiary guarantees;
(3) applicable law, rule, regulation or order;
(4) Indebtedness incurred by RECE and Foreign Subsidiaries of RRI that
are Restricted Subsidiaries pursuant to clause (3) of the second paragraph
of the covenant entitled "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(5) Indebtedness incurred by REMA pursuant to clause (4) of the second
paragraph of the covenant entitled "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(6) Indebtedness incurred by the Seward Subsidiaries of Permitted
PEDFA Bond Indebtedness or Indebtedness evidenced by or in support of the
Seward Tax-Exempt Bonds pursuant to clause (5)
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of the second paragraph of the covenant entitled "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock;"
(7) Indebtedness incurred by Texas Genco or TG Holdco pursuant to
clause (6) of the second paragraph of the covenant entitled "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock;"
(8) Indebtedness incurred by TG Holdco or Texas Genco or any of their
Subsidiaries or by RRI and the Guarantors pursuant to clause (7) of the
second paragraph of the covenant entitled "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock;"
(9) customary non-assignment provisions in contracts, agreements,
leases, permits and licenses entered into or issued in the ordinary course
of business;
(10) purchase money obligations for property acquired in the ordinary
course of business and Capital Lease Obligations that impose restrictions
on the property purchased or leased of the nature described in clause (3)
of the preceding paragraph;
(11) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary
pending the sale or other disposition;
(12) Permitted Refinancing Indebtedness; provided that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are not materially more restrictive, taken as a
whole, than those contained in the agreements governing the Indebtedness
being refinanced, as reasonably determined by RRI or such Restricted
Subsidiary;
(13) Permitted Liens that limit the right of the debtor to dispose of
the assets subject to such Liens;
(14) provisions limiting or prohibiting the disposition or
distribution of assets or property in joint venture agreements, asset sale
agreements, sale-leaseback agreements, stock sale agreements and other
similar agreements entered into (i) in the ordinary course of business or
(ii) with the approval of RRI's or the Restricted Subsidiary's Board of
Directors or chief financial officer, which limitation or prohibition is
applicable only to the assets that are the subject of such agreements;
(15) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(16) any Purchase Money Note or other Indebtedness or any contractual
requirements of a Securitization Entity in connection with a Qualified
Securitization Transaction; provided that such restrictions apply only to
such Securitization Entity;
(17) restrictions or conditions contained in any trading, netting,
operating, construction, service, supply, purchase, sale or similar
agreement to which RRI or any Restricted Subsidiary of RRI is a party
entered into in the ordinary course of business; provided that such
agreement prohibits the encumbrance of solely the property or assets of RRI
or such Restricted Subsidiary that are the subject of such agreement, the
payment rights arising thereunder and/or the proceeds thereof and not to
any other asset or property of RRI or such Restricted Subsidiary or the
assets or property of any other Restricted Subsidiary;
(18) Indebtedness of a Restricted Subsidiary of RRI existing at the
time it became a Restricted Subsidiary if such restriction was not created
in connection with or in anticipation of the transaction or series of
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by RRI; and
(19) with respect to clause (3) of the first paragraph of this
covenant only, restrictions encumbering property at the time such property
was acquired by RRI or any of its Restricted Subsidiaries, so long as such
restriction relates solely to the property so acquired and was not created
in connection with or in anticipation of such acquisition.
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Merger, Consolidation or Sale of Assets
RRI may not, directly or indirectly: (1) consolidate or merge with or into
another Person (whether or not RRI is the surviving corporation); or (2) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of the
properties or assets of RRI and its Restricted Subsidiaries taken as a whole, in
one or more related transactions, to another Person; unless:
(1) either:
(A) RRI is the surviving corporation; or
(B) the Person formed by or surviving any such consolidation or
merger (if other than RRI) or to which such sale, assignment, transfer,
conveyance or other disposition has been made is either (i) a
corporation organized or existing under the laws of the United States,
any state of the United States or the District of Columbia or (ii) is a
partnership or limited liability company organized or existing under the
laws of the United States, any state thereof or the District of Columbia
that has at least one Restricted Subsidiary that is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia which corporation becomes a
co-issuer of the notes pursuant to supplemental indentures duly and
validly executed by the trustees;
(2) the Person formed by or surviving any such consolidation or merger
(if other than RRI) or the Person to which such sale, assignment, transfer,
conveyance or other disposition has been made assumes all the obligations
of RRI under the notes, the indentures, the registration rights agreement
(unless all material obligations in that agreement have been performed) and
the security documents pursuant to supplemental indentures reasonably
satisfactory to the trustees;
(3) immediately after such transaction, no Default or Event of Default
exists; and
(4) RRI or the Person formed by or surviving any such consolidation or
merger (if other than RRI), or to which such sale, assignment, transfer,
conveyance or other disposition has been made:
(A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of RRI
immediately preceding the transaction; and
(B) will, on the date of such transaction after giving pro forma
effect thereto and to any related financing transactions as if the same
had occurred at the beginning of the applicable four-quarter period,
have a pro forma Fixed Charge Coverage Ratio that is at least equal to
the actual Fixed Charge Coverage Ratio of RRI as of such date.
In addition, RRI may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person.
Notwithstanding the foregoing:
(1) any Restricted Subsidiary of RRI may consolidate with, merge into
or transfer all or part of its properties and assets to RRI or any other
Restricted Subsidiary of RRI; and
(2) RRI may merge with an Affiliate solely for the purpose of
reincorporating RRI or re-forming in another jurisdiction.
Transactions with Affiliates
RRI will not, and will not permit any of its Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets
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from, or enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate of RRI (each, an "Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable
(as reasonably determined by RRI) to RRI or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction by RRI or such Restricted Subsidiary with an unrelated Person;
and
(2) RRI delivers to the trustees:
(A) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, a resolution of the Board of Directors set forth in an
officer's certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of
Directors; and
(B) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$35.0 million, an opinion as to the fairness to RRI or such Restricted
Subsidiary of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of
national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement or director's engagement agreement,
employee benefit plan, officer and director indemnification agreement or
any similar arrangement entered into by RRI or any of its Restricted
Subsidiaries in the ordinary course of business or approved by the Board of
Directors;
(2) transactions between or among RRI and/or its Restricted
Subsidiaries;
(3) transactions with a Person that is an Affiliate of RRI solely
because RRI owns, directly or through a Restricted Subsidiary, an Equity
Interest in, or controls, such Person;
(4) payment of reasonable directors' fees to Persons who are not
otherwise Affiliates of RRI;
(5) any issuance of Equity Interests (other than Disqualified Stock)
of RRI to Affiliates of RRI;
(6) Restricted Payments that do not violate the provisions of the
indentures described above under the caption "-- Restricted Payments;"
(7) transactions effected as part of a Qualified Securitization
Transaction;
(8) loans or advances to employees in the ordinary course of business
not to exceed $10.0 million in the aggregate outstanding at any one time;
(9) any agreement, instrument or arrangement as in effect as of the
date of the indentures or any amendment thereto or any transaction
contemplated thereby (including pursuant to any amendment thereto) in any
replacement agreement thereto so long as any such amendment or replacement
agreement is not more disadvantageous to the holders in any material
respect than the original agreement as in effect on the date of the
indentures as determined by RRI;
(10) any pro rata distribution (including a rights offering) to all
holders of a class of Equity Interests or Indebtedness of RRI or any of its
Restricted Subsidiaries, including Persons who are Affiliates of RRI or any
of its Restricted Subsidiaries; and
(11) any transaction involving sales of electric capacity, energy,
ancillary services, transmission services and products, steam, emissions
credits, fuel, fuel transportation and fuel storage in the ordinary course
of business on terms that are no less favorable (as reasonably determined
by RRI) to RRI or the relevant Restricted Subsidiary of RRI than those that
would have been obtained in a comparable transaction by RRI or such
Restricted Subsidiary with an unrelated Person.
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Business Activities
RRI will not, and will not permit any of its Restricted Subsidiaries to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to RRI and its Subsidiaries taken as a whole.
Additional Subsidiary Guarantees; Further Assurances; Insurance
If after the date of the indentures RRI or any of its Restricted
Subsidiaries acquires or creates another Domestic Subsidiary that is required to
become a guarantor of any borrowings under the Credit Agreement or any other
Indebtedness of RRI, or any Excluded Subsidiary ceases to be an Excluded
Subsidiary, then that Domestic Subsidiary or former Excluded Subsidiary will
become a Guarantor and (A) execute supplemental indentures and a joinder
agreement to the security documents in form and substance reasonably
satisfactory to the trustees providing that such Subsidiary shall become a
Guarantor under the indentures and a party as grantor to the security documents
and (B) deliver an opinion of counsel satisfactory to the trustee, in each case,
within 30 business days of the date on which it was acquired or created.
RRI and each Guarantor will do or cause to be done all acts and things
which may be required, or which the collateral trustee from time to time may
reasonably request, to assure and confirm that the collateral trustee holds, for
the benefit of the holders of the notes duly created, enforceable and perfected
Liens (subject to Credit Agreement Priority Facility Liens, Tranche A Priority
Liens and other Permitted Liens) upon all property, whether real, personal
(including after-acquired personal property) or mixed, of RRI and the Guarantors
that is subject to any Lien securing any other Series of Secured Debt, except
Permitted Separate Liens upon Excluded Property.
If RRI or any of the Guarantors at any time owns or acquires any property
that is subject to a Lien securing any Parity Secured Debt (except Permitted
Separate Liens upon Excluded Property), but is not subject to a valid,
enforceable perfected Lien (subject to Credit Agreement Priority Facility Liens,
Tranche A Priority Liens and other Permitted Liens) in favor of the collateral
trustee as security equally and ratably for all of the Parity Secured
Obligations, then RRI will, or will cause such Guarantor to the extent required
under the Credit Agreement or any other Credit Facility of RRI to, concurrently:
(1) execute and deliver to the collateral trustee a security document
upon substantially the same terms as the security documents delivered in
connection with the issuance of the notes or other terms reasonably
satisfactory to RRI or such Guarantor and the collateral trustee acting at
the direction of the Credit Agreement Agent, granting a Lien upon such
property to the collateral trustee for the benefit of the holders of Parity
Secured Obligations, equally and ratably;
(2) cause the Lien granted in such security document to be duly
perfected in any manner permitted by law and cause each other Lien that
secures Indebtedness upon such property to be (A) released, unless it is a
Permitted Lien, or (B) subordinated to the collateral trustee's Liens if it
is not a Permitted Prior Lien; and
(3) deliver to the trustees and collateral trustee any opinion of
counsel delivered to or for the benefit of any Series of Secured Debt.
Upon request of the collateral trustee at any time and from time to time,
RRI and each Guarantor will promptly execute, acknowledge and deliver such
security documents, instruments, certificates, notices and other documents and
take such other actions as shall be required or which the collateral trustee may
reasonably request to grant, perfect or maintain the priority of (subject to
Credit Agreement Priority Facility Liens, Tranche A Priority Liens and other
Permitted Prior Liens) the Liens and benefits intended to be conferred as
contemplated by the Secured Debt Documents and the security documents for the
benefit of the holders of the Parity Secured Obligations.
RRI and the Guarantors will maintain with financially sound and reputable
insurance companies, insurance on their property and assets (including the
Shared Collateral) in at least such amounts, with
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such deductibles and against at least such risks as is customary for companies
of the same or similar size engaged in the same or similar businesses as those
of RRI and the Guarantors and furnish to the collateral trustee, upon written
request, full information as to its property and liability insurance carriers.
Holders of Note Obligations, as a class, will be named as an additional insured
on all liability insurance policies of RRI and its Restricted Subsidiaries and
the collateral trustee will be named as loss payee on all property and casualty
insurance policies of each such person.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
Fair Market Value of all outstanding Investments owned by RRI and its Restricted
Subsidiaries in the Subsidiary properly designated will be deemed to be an
Investment made as of the time of the designation and will reduce the amount
available for Restricted Payments under the first paragraph of the covenant
described above under the caption "-- Restricted Payments" or Permitted
Investments, as determined by RRI. That designation will only be permitted if
the Investment would be permitted at that time and if the Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. The Board of
Directors may redesignate any Unrestricted Subsidiary to be a Restricted
Subsidiary.
No Amendment to Provisions of Convertible Notes
Without the consent of the holders of at least a majority in aggregate
principal amount of the 2010 notes and the holders of at least a majority in
aggregate principal amount of the 2013 notes then outstanding, RRI will not
amend, modify or alter the Convertible Note Indenture in any way to:
(1) increase the rate of or change the time for payment of interest on
any Convertible Notes;
(2) increase the principal of, advance the final maturity date of or
shorten the Weighted Average Life to Maturity of any Convertible Notes;
(3) alter the redemption provisions or the price or terms at which RRI
is required to offer to purchase any Convertible Notes; or
(4) amend the subordination provisions of the Convertible Note
Indenture.
Payments for Consent
RRI will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, pay or cause to be paid any monetary consideration to or
for the benefit of any holder of any series of notes for or as an inducement to
any consent under or waiver or amendment of any of the terms or provisions of
the applicable indenture, such notes, the subsidiary guarantees or the
registration rights agreement unless such consideration is offered to be paid
and is paid to all holders of the notes that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS
Whether or not required by the Commission's rules and regulations, so long
as any notes are outstanding, RRI will furnish to holders of notes, within the
time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual reports that would be required to be
filed with the Commission on Forms 10-Q and 10-K if RRI were required to
file such reports; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if RRI were required to file such reports.
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All such reports will be prepared in all material respects in accordance
with all of the rules and regulations applicable to such reports. Each annual
report on Form 10-K will include a report on RRI's consolidated financial
statements by RRI's certified independent accountants. In addition, RRI will
file a copy of each of the reports referred to in clauses (1) and (2) above with
the Commission for public availability within the time periods specified in the
rules and regulations applicable to such reports (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon reasonable request.
If, at any time, RRI is no longer subject to the periodic reporting
requirements of the Exchange Act for any reason, RRI will nevertheless continue
filing the reports specified in the preceding paragraph with the Commission
within the time periods specified above unless the Commission will not accept
such a filing. RRI agrees that it will not take any action for the purpose of
causing the Commission not to accept any such filings. If, notwithstanding the
foregoing, the Commission will not accept RRI's filings for any reason, RRI will
post the reports referred to in the preceding paragraph on its website within
the time periods that would apply if RRI were required to file those reports
with the Commission.
In addition, RRI and the Guarantors agree that, for so long as any notes
remain outstanding, at any time they are not required to file the reports
required by the preceding paragraphs with the Commission, they will furnish to
the holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
With respect to each series of notes, each of the following is an Event of
Default:
(1) default for 30 days in the payment when due of interest on, or
special interest with respect to, the applicable notes;
(2) default in payment when due of the principal of, or premium, if
any, on the applicable notes;
(3) failure by RRI or any of its Restricted Subsidiaries to comply
with the provisions described under the captions "-- Repurchase at the
Option of Holders -- Change of Control," "-- Repurchase at the Option of
Holders -- Asset Sales" or "-- Certain Covenants -- Merger, Consolidation
or Sale of Assets" for 30 days after notice from the applicable trustee or
the holders of at least 25% in aggregate principal amount of the applicable
series of notes then outstanding to comply with such provisions;
(4) failure by RRI or any of its Restricted Subsidiaries for 60 days
after notice from the applicable trustee or the holders of at least 25% in
aggregate principal amount of the applicable series of notes then
outstanding to comply with any of the other agreements in the applicable
indenture or the security documents;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by RRI or any of its Restricted
Subsidiaries other than (A) RECE and its Subsidiaries, (B) Reliant Energy
Channelview, L.P. and its Subsidiaries so long as, taken together, they
would not constitute a Significant Subsidiary, (C) Liberty Electric PA,
LLC, Liberty Electric Power, LLC and their respective Subsidiaries so long
as, taken together, they would not constitute a Significant Subsidiary and
(D) Reliant Energy Retail Holdings, LLC or any Subsidiary thereof in
connection with a Qualified Securitization Transaction (or the payment of
which is guaranteed by RRI or any of its Restricted Subsidiaries) whether
such Indebtedness or guarantee now exists, or is created after the date of
the indentures, if that default:
(A) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness after the expiration of the grace
period provided in such Indebtedness on the date of such default (a
"Payment Default"); or
(B) results in the acceleration of such Indebtedness prior to its
express maturity,
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and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $50.0 million or more;
(6) failure by RRI or any of its Restricted Subsidiaries to pay final
and non-appealable judgments aggregating in excess of $50.0 million, which
are not covered by indemnities or third-party insurance, which judgments
are not paid, discharged, vacated or stayed for a period of 60 days;
(7) the repudiation by RRI or any of its Restricted Subsidiaries of
any of its obligations under any of the security documents or the
unenforceability of any of the security documents against RRI or any of its
Restricted Subsidiaries for any reason if such unenforceability shall be
applicable to Collateral having an aggregate Fair Market Value of $50.0
million or more;
(8) any security document or any Lien purported to be granted thereby
on assets having a Fair Market Value in excess of $50.0 million is held in
any judicial proceeding to be unenforceable or invalid, in whole or in
part, or ceases for any reason within the control of RRI or any of its
Restricted Subsidiaries (other than pursuant to a release that is delivered
or becomes effective as set forth in the applicable indenture) to be fully
enforceable and perfected;
(9) except as permitted by the applicable indenture, any subsidiary
guarantee of a Significant Subsidiary shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to
be in full force and effect or any Guarantor that is a Significant
Subsidiary, or any Person acting on behalf of any Guarantor that is a
Significant Subsidiary, shall deny or disaffirm its obligations under its
subsidiary guarantee; and
(10) certain events of bankruptcy or insolvency described in the
applicable indenture with respect to RRI or any of its Restricted
Subsidiaries (other than RECE and its Subsidiaries) that would constitute a
Significant Subsidiary or relating to any group of Restricted Subsidiaries
that, taken together, would constitute a Significant Subsidiary.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to RRI, any Restricted Subsidiary that is
a Significant Subsidiary or any group of Subsidiaries that, taken together,
would constitute a Significant Subsidiary, all outstanding notes will become due
and payable immediately without further action or notice. If any other Event of
Default occurs and is continuing, the applicable trustee or the holders of at
least 25% in principal amount of the then outstanding notes of the applicable
series may declare all the notes of that series to be due and payable
immediately. Under certain circumstances, the holders of a majority in principal
amount of the outstanding notes of the applicable series may rescind any such
acceleration with respect to that series of notes and its consequences.
Subject to the provisions of the indentures relating to the duties of the
trustees, in case an Event of Default occurs and is continuing, the trustees
will be under no obligation to exercise any of the rights or powers under the
indentures at the request or direction of any of the holders of the notes unless
such holders have offered to the trustees indemnity or security satisfactory to
it against any loss, liability or expense. Except to enforce the right to
receive payment of principal, premium (if any) or interest when due, no holder
of a note may pursue any remedy with respect to the indentures or the notes
unless:
(1) such holder has previously given the applicable trustee notice
that an Event of Default is continuing;
(2) holders of at least 25% in aggregate principal amount of the
outstanding notes of the applicable series have requested the applicable
trustee to pursue the remedy;
(3) such holders have offered the applicable trustee security or
indemnity satisfactory to it against any loss, liability or expense;
(4) the applicable trustee has not complied with such request within
60 days after the receipt thereof and the offer of security or indemnity;
and
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(5) holders of a majority in aggregate principal amount of the
outstanding notes of the applicable series have not given the applicable
trustee a direction inconsistent with such request within such 60-day
period.
Subject to certain limitations, with respect to either series of notes,
holders of a majority in principal amount of the then outstanding notes of that
series may direct the applicable trustee in its exercise of any trust or power.
Either trustee may withhold from holders of the notes notice of any continuing
Default or Event of Default if it determines that withholding notice is in their
interest, except a Default or Event of Default relating to the payment of
principal or interest or special interest.
With respect to either series of notes, the holders of a majority in
aggregate principal amount of notes of that series then outstanding by notice to
the applicable trustee may on behalf of the holders of that series of notes
waive any existing Default or Event of Default and its consequences under the
applicable indenture except a continuing Default or Event of Default in the
payment of interest or special interest on, or the principal of, that series of
notes.
RRI is required to deliver to the trustees annually a statement regarding
compliance with the indentures. Upon becoming aware of any Default or Event of
Default, RRI is required to deliver to the trustees a statement specifying such
Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of RRI or any
Guarantor, as such, will have any liability for any obligations of RRI or the
Guarantors under the notes, the indentures, the subsidiary guarantees, the
security documents or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each holder of notes by accepting a note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
RRI may, at its option and at any time, elect to have all of its
obligations discharged with respect to either or both series of the outstanding
notes and all obligations of the Guarantors discharged with respect to the
related subsidiary guarantees ("Legal Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and special interest,
if any, on such notes when such payments are due from the trust referred to
below;
(2) RRI's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustees,
and RRI's and the Guarantor's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indentures.
In addition, RRI may, at its option and at any time, elect to have the
obligations of RRI and the Guarantors released with respect to certain covenants
(including its obligation to make Change of Control Offers and Asset Sale
Offers) that are described in the indentures ("Covenant Defeasance") and
thereafter any omission to comply with those covenants will not constitute a
Default or Event of Default with respect to the applicable series of notes. In
the event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"-- Events of Default and Remedies" will no longer constitute an Event of
Default with respect to the applicable series of notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) RRI must irrevocably deposit with the applicable trustee, in
trust, for the benefit of the holders of the applicable series of notes,
cash in U.S. dollars, non-callable Government Securities, or a combination
of cash in U.S. dollars and non-callable Government Securities, in amounts
as will be sufficient, in the opinion of a nationally recognized investment
bank, appraisal firm or firm of independent public accountants to pay the
principal of, or interest and premium and special interest, if any, on the
outstanding notes of the applicable series on the Stated Maturity or on the
applicable redemption date, as the case may be, and RRI must specify
whether the notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, RRI has delivered to the
applicable trustee an opinion of counsel reasonably acceptable to such
trustee confirming that (A) RRI has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date
of the indentures, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such opinion
of counsel will confirm that, the holders of the outstanding notes of the
applicable series will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal Defeasance had
not occurred;
(3) in the case of Covenant Defeasance, RRI has delivered to the
applicable trustee an opinion of counsel reasonably acceptable to such
trustee confirming that the holders of the outstanding notes of the
applicable series will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Covenant Defeasance
had not occurred;
(4) no Default or Event of Default has occurred and is continuing on
the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the indentures) to which RRI or any of
its Subsidiaries is a party or by which RRI or any of its Subsidiaries is
bound;
(6) RRI must deliver to the applicable trustee an officer's
certificate stating that the deposit was not made by RRI with the intent of
preferring the holders of notes of the applicable series over the other
creditors of RRI with the intent of defeating, hindering, delaying or
defrauding creditors of RRI; and
(7) RRI must deliver to the applicable trustee an officer's
certificate and an opinion of counsel, each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
The Shared Collateral will be released with respect to the Note Obligations
with respect to the applicable series of notes, as provided above under the
caption "-- Security -- Release of Security Interests," upon a Legal Defeasance
or Covenant Defeasance in accordance with the provisions described in this
section.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the 2010 notes
and the related indenture or the 2013 notes and the related indenture may be
amended or supplemented with the consent of the holders of at least a majority
in principal amount of the 2010 notes or the 2013 notes, as the case may be,
then outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, notes), and any
existing default or compliance with any provision of the
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2010 notes and the related indenture or the 2013 notes and the related indenture
may be waived with the consent of the holders of a majority in principal amount
of the then outstanding 2010 notes or the 2013 notes, as the case may be,
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes).
With respect to each series of notes, without the consent of each
noteholder affected, an amendment or waiver may not (with respect to any such
notes held by a non-consenting holder):
(1) reduce the principal amount of such notes whose holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any such
note or alter the provisions with respect to the redemption of such notes
(other than provisions relating to the covenants described above under the
caption "-- Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on
any such note;
(4) waive a Default or Event of Default in the payment of principal
of, or interest or premium, or special interest, if any, on such notes
(except a rescission of acceleration of such notes by the holders of at
least a majority in aggregate principal amount of the applicable series of
notes and a waiver of the payment default that resulted from such
acceleration);
(5) make any such note payable in money other than that stated in such
notes;
(6) make any change in the provisions of the applicable indenture
relating to waivers of past Defaults or the rights of holders of such notes
to receive payments of principal of, or interest or premium or special
interest, if any, on such notes;
(7) waive a redemption payment with respect to any such note (other
than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders"); or
(8) make any change in the preceding amendment and waiver provisions.
With respect to each series of notes, notwithstanding the preceding,
without the consent of any holder of such notes, RRI, the Guarantors and the
applicable trustee may amend or supplement the applicable indenture or the
applicable notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of RRI's obligations to holders of
such notes in the case of a merger or consolidation or sale of all or
substantially all of RRI's assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of such notes, or that does not adversely affect
the legal rights under the applicable indenture of any such holder;
(5) to comply with requirements of the Commission in order to effect
or maintain the qualification of the applicable indenture under the Trust
Indenture Act;
(6) to make, complete or confirm any grant of Collateral permitted or
required by the security documents, the collateral trust agreement or the
applicable indenture or, with the consent of the Credit Agreement Agent,
any release of Collateral that becomes effective as set forth in the
security documents, the collateral trust agreement or the applicable
indenture;
(7) to conform the text of the applicable indenture, the applicable
notes or the applicable subsidiary guarantees to any provision of this
Description of Notes to the extent that such provision in this Description
of Notes was intended to be a verbatim recitation of a provision of the
applicable indenture, the applicable notes or the applicable subsidiary
guarantees; or
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(8) to reflect any waiver or termination of any right arising under
the provisions of the applicable indenture described above under the
caption "-- Equal and Ratable Sharing of Shared Collateral by Holders of
Parity Secured Debt" that otherwise would be enforceable by any holder of
any Series of Secured Debt other than the applicable notes or any
additional notes at any time issued under the applicable indenture, if such
waiver or termination is set forth or provided in the applicable indenture
or agreement governing or giving rise to such Series of Secured Debt, but
no waiver or amendment pursuant to this clause (8) shall adversely affect
the rights of any holder of notes.
No amendment or supplement to the provisions of either indenture described
under the caption "-- Equal and Ratable Sharing of Shared Collateral by Holders
of Parity Secured Debt" will:
(1) be effective unless set forth in a writing signed by the
applicable trustee with the consent of the holders of at least a majority
in principal amount of each affected Series of Secured Debt then
outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, any Series of
Secured Debt), voting as a separate class; or
(2) be effective without the written consent of RRI.
Any such amendment or supplement that imposes any obligation upon the
collateral trustee or adversely affects the rights of the collateral trustee in
its individual capacity will become effective only with the consent of the
collateral trustee.
SATISFACTION AND DISCHARGE
Each indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(A) all applicable notes that have been authenticated, except lost,
stolen or destroyed notes that have been replaced or paid and applicable
notes for whose payment money has been deposited in trust and thereafter
repaid to RRI, have been delivered to the applicable trustee for
cancellation; or
(B) all applicable notes that have not been delivered to the
applicable trustee for cancellation have become due and payable by
reason of the mailing of a notice of redemption or otherwise or will
become due and payable within one year and RRI or any Guarantor has
irrevocably deposited or caused to be deposited with such trustee as
trust funds in trust solely for the benefit of the holders, cash in U.S.
dollars, non-callable Government Securities, or a combination of cash in
U.S. dollars and non-callable Government Securities, in amounts as will
be sufficient, without consideration of any reinvestment of interest, to
pay and discharge the entire indebtedness on the applicable notes not
delivered to the applicable trustee for cancellation for principal,
premium and special interest, if any, and accrued interest to the date
of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on
the date of the deposit or will occur as a result of the deposit and the
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which RRI or any Guarantor is a
party or by which RRI or any Guarantor is bound;
(3) RRI or any Guarantor has paid or caused to be paid all sums
payable by it under the applicable indenture; and
(4) RRI has delivered irrevocable instructions to the applicable
trustee under the applicable indenture to apply the deposited money toward
the payment of the applicable notes at maturity or the redemption date, as
the case may be.
In addition, RRI must deliver an officer's certificate and an opinion of
counsel to the applicable trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
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The Shared Collateral will be released with respect to the Note Obligations
with respect to the applicable series of notes only, as provided above under the
caption "-- Security -- Release of Security Interests," upon a discharge of the
applicable indenture in accordance with the provisions described in this
section.
CONCERNING THE TRUSTEES
If a trustee becomes a creditor of RRI or any Guarantor, the applicable
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. Each trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the Commission for permission to continue (if the
applicable indenture has been qualified under the Trust Indenture Act) or
resign.
The holders of a majority in principal amount of the then outstanding 2010
notes or 2013 notes, as the case may be, will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the trustee, subject to certain exceptions. The applicable
indenture provides that in case an Event of Default occurs and is continuing,
the applicable trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the applicable trustee will be under no obligation to
exercise any of its rights or powers under the applicable indenture at the
request of any holder of 2010 notes or 2013 notes, as the case may be, unless
such holder has offered to the trustee security and indemnity satisfactory to it
against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indentures,
the security documents and the registration rights agreement without charge by
writing to Reliant Resources, Inc., 1000 Main Street, Houston, Texas 77002,
Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
The original notes were offered and sold to qualified institutional buyers
in reliance on Rule 144A("Rule 144A Notes"). The original notes also were
offered and sold in offshore transactions in reliance on Regulation S
("Regulation S Notes"). Except as set forth below, the original notes were and
the exchange notes will be issued in registered, global form in minimum
denominations of $1,000 and integral multiples of $1,000 in excess of $1,000.
The Rule 144A Notes and Regulation S Notes were initially represented by
one or more notes in registered, global form without interest coupons
(respectively, the "Rule 144A Global Notes" and the "Regulation S Global Notes")
The exchange notes initially will be represented by one or more notes in
registered, global form without interest coupons (the "Global Notes"). The Rule
144A Global Notes and the Regulation S Global Notes were and the Global Notes
will be deposited upon issuance with the applicable trustee as custodian for
DTC, in New York, New York, and registered in the name of DTC or its nominee, in
each case for credit to an account of a direct or indirect participant in DTC as
described below. "
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for notes
in certificated form except in the limited circumstances described below. See
"-- Exchange of Global Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of notes in certificated
form.
Transfers of beneficial interests in the Global Notes will be subject to
the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear
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System ("Euroclear") and Clearstream Banking, S.A. ("Clearstream"), which may
change from time to time.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. RRI takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised RRI that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, the "Indirect Participants"). Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised RRI that, pursuant to procedures established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the holders to the exchange agent with portions
of the principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on,
and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other
owners of beneficial interest in the Global Notes).
Investors in the Global Notes who are Participants in DTC's system may hold
their interests therein directly through DTC. Investors in the Global Notes who
are not Participants may hold their interests therein indirectly through
organizations (including Euroclear and Clearstream) which are Participants in
such system. Certain investors in the Global Notes that represent the original
notes must initially hold their interests therein through Euroclear or
Clearstream, if they are participants in such systems, or indirectly through
organizations that are participants in such systems. After forty days from the
closing of the offering of the original notes, such investors may also hold
interests in such Global Notes through Participants in the DTC system other than
Euroclear and Clearstream. Euroclear and Clearstream hold interests in such
Global Notes on behalf of their participants through customers' securities
accounts in their respective names on the books of their respective
depositories, which are Euroclear Bank S.A./N.V., as operator of Euroclear, and
Citibank, N.A., as operator of Clearstream.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURES FOR ANY PURPOSE.
Payments in respect of the principal of, and interest and premium and
special interest, if any, on a Global Note registered in the name of DTC or its
nominee will be payable to DTC in its capacity as the registered holder under
the indentures. Under the terms of the indentures, RRI and the trustees will
treat the Persons in whose names the notes, including the Global Notes, are
registered as the owners of the
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notes for the purpose of receiving payments and for all other purposes.
Consequently, neither RRI, the trustees nor any agent of RRI or the trustees has
or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised RRI that its current practice, upon receipt of any payment
in respect of securities such as the notes (including principal and interest),
is to credit the accounts of the relevant Participants with the payment on the
payment date unless DTC has reason to believe it will not receive payment on
such payment date. Each relevant Participant is credited with an amount
proportionate to its beneficial ownership of an interest in the principal amount
of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the trustees or RRI. Neither RRI nor the trustees
will be liable for any delay by DTC or any of its Participants in identifying
the beneficial owners of the notes, and RRI and the trustees may conclusively
rely on and will be protected in relying on instructions from DTC or its nominee
for all purposes.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Clearstream will be effected in accordance with
their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand,
and Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant Global Note in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.
DTC has advised RRI that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the Global Notes and only in respect
of such portion of the aggregate principal amount of the notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the notes, DTC reserves the right to exchange the
Global Notes for legended notes in certificated form, and to distribute such
notes to its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Rule 144A Global Notes,
the Regulation S Global Notes and the Global Notes among participants in DTC,
Euroclear and Clearstream, they are under no obligation to perform or to
continue to perform such procedures, and may discontinue such procedures at any
time. Neither RRI nor the trustees nor any of their respective agents will have
any responsibility for the performance by DTC, Euroclear or Clearstream or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
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EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
All Global Notes of each series are exchangeable for definitive notes in
registered certificated form ("Certificated Notes") if:
(1) DTC (A) notifies RRI that it is unwilling or unable to continue as
depositary for the Global Notes or (B) has ceased to be a clearing agency
registered under the Exchange Act and, in either case, RRI fails to appoint
a successor depositary;
(2) RRI, at its option, notifies the applicable trustee in writing
that it elects to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a Default or Event of Default
with respect to the notes.
In all cases, Certificated Notes delivered in exchange for any Global Note
or beneficial interests in Global Notes will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures) and will bear a
restrictive legend unless that legend is not required by applicable law.
SAME DAY SETTLEMENT AND PAYMENT
RRI will make payments in respect of the notes represented by the Global
Notes (including principal, premium, if any, interest and special interest, if
any) by wire transfer of immediately available funds to the accounts specified
by the Global Note holder. RRI will make all payments of principal, interest and
premium and special interest, if any, with respect to Certificated Notes by wire
transfer of immediately available funds to the accounts specified by the holders
of the Certificated Notes or, if no such account is specified, by mailing a
check to each such holder's registered address. The notes represented by the
Global Notes are expected to be eligible to trade in the PORTAL market and to
trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such notes will, therefore, be required by DTC to be
settled in immediately available funds. RRI expects that secondary trading in
any Certificated Notes will also be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
RRI that cash received in Euroclear or Clearstream as a result of sales of
interests in a Global Note by or through a Euroclear or Clearstream participant
to a Participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Clearstream cash account
only as of the business day for Euroclear or Clearstream following DTC's
settlement date.
REGISTRATION RIGHTS; SPECIAL INTEREST
The following description is a summary of the material provisions of the
registration rights agreement. It does not restate that agreement in its
entirety. We urge you to read the registration rights agreement in its entirety
because it, and not this description, defines your registration rights as
holders of these notes. See "-- Additional Information."
RRI, the Guarantors and the Initial Purchasers entered into the
registration rights agreement upon the closing of the offering of the original
notes. Pursuant to the registration rights agreement, RRI and the Guarantors
agreed to file with the Commission the Exchange Offer Registration Statement on
the appropriate form under the Securities Act with respect to the exchange
notes. Upon the effectiveness of the Exchange Offer Registration Statement of
which this prospectus is a part, RRI and the Guarantors will offer to the
holders of Transfer Restricted Securities pursuant to the Exchange Offer who are
able to make certain representations the opportunity to exchange their Transfer
Restricted Securities for exchange notes.
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If:
(1) RRI and the Guarantors are not
(A) required to file the Exchange Offer Registration Statement; or
(B) permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy; or
(2) any holder of Transfer Restricted Securities notifies RRI prior to
the 20th day following consummation of the Exchange Offer that:
(A) it is prohibited by law or Commission policy from participating
in the Exchange Offer; or
(B) that it may not resell the exchange notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales; or
(C) that it is a broker-dealer and owns notes acquired directly
from RRI or an affiliate of RRI,
RRI and the Guarantors will file with the Commission a Shelf Registration
Statement to cover resales of the notes by the holders of the notes who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement.
RRI and the Guarantors will use all commercially reasonable efforts to
cause the applicable registration statement to be declared effective as promptly
as possible by the Commission.
For purposes of the preceding, "Transfer Restricted Securities" means each
note until:
(1) the date on which such note has been exchanged by a Person other
than a broker-dealer for an Exchange Note in the Exchange Offer;
(2) following the exchange by a broker-dealer in the Exchange Offer of
a note for an Exchange Note, the date on which such Exchange Note is sold
to a purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement;
(3) the date on which such note has been effectively registered under
the Securities Act and disposed of in accordance with the Shelf
Registration Statement; or
(4) the date on which such note is distributed to the public pursuant
to Rule 144 under the Securities Act.
The registration rights agreement provides that:
(1) RRI and the Guarantors will file an Exchange Offer Registration
Statement with the Commission on or prior to 180 days after the closing of
the offering of the notes;
(2) RRI and the Guarantors will use all commercially reasonable
efforts to have the Exchange Offer Registration Statement declared
effective by the Commission on or prior to 270 days after the closing of
the offering of the notes;
(3) unless the Exchange Offer would not be permitted by applicable law
or Commission policy, RRI and the Guarantors will
(A) commence the Exchange Offer; and
(B) use all commercially reasonable efforts to issue on or prior to
300 days after the closing of the offering of the notes exchange notes
in exchange for all notes tendered prior thereto in the Exchange Offer;
and
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(4) if obligated to file the Shelf Registration Statement, RRI and the
Guarantors will use all commercially reasonable efforts to file the Shelf
Registration Statement with the Commission on or prior to 30 days after
such filing obligation arises but no earlier than 180 days after the date
of the indentures and to cause the Shelf Registration to be declared
effective by the Commission on or prior to 90 days after filing with the
Commission.
If:
(1) RRI and the Guarantors fail to file any of the registration
statements required by the registration rights agreement on or before the
date specified for such filing; or
(2) any of such registration statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness; or
(3) RRI and the Guarantors fail to consummate the Exchange Offer
within 300 days of the closing of the offering of the notes with respect to
the Exchange Offer Registration Statement; or
(4) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the registration rights
agreement (each such event referred to in clauses (1) through (4) above, a
"Registration Default"),
then RRI and the Guarantors will pay special interest to each holder of notes,
with respect to the first 90-day period immediately following the occurrence of
the first Registration Default at a rate equal to 0.25% of the principal amount
of notes held by such holder per annum, and such special interest will increase
by an additional 0.25% per annum every 90 days thereafter, up to a maximum of
1.0% per annum, until the Exchange Offer is completed or the Shelf Registration
Statement is declared effective.
All accrued special interest will be paid by RRI and the Guarantors on each
Damages Payment Date to the Global Note holder by wire transfer of immediately
available funds or by federal funds check and to holders of Certificated Notes
by wire transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified.
Following the cure of all Registration Defaults, the accrual of special
interest will cease.
Holders of notes are required to make certain representations to RRI and
Guarantors (as described in the registration rights agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the registration rights agreement in order to have their notes
included in the Shelf Registration Statement and benefit from the provisions
regarding special interest set forth above. By acquiring Transfer Restricted
Securities, a holder will be deemed to have agreed to indemnify RRI and the
Guarantors against certain losses arising out of information furnished by such
holder in writing for inclusion in any Shelf Registration Statement. Holders of
notes will also be required to suspend their use of the prospectus included in
the Shelf Registration Statement under certain circumstances upon receipt of
written notice to that effect from RRI.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indentures. Reference
is made to the indentures for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Restricted Subsidiary of, such specified Person; and
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(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Act of Secured Debtholders" means, as to any matter, a direction in
writing delivered to the collateral trustee:
(1) at any time when no Actionable Default Period is continuing, by
the Required Lenders; and
(2) at any time when an Actionable Default Period is continuing, by or
with the written consent of the Required Secured Debtholders; provided,
that (A) so long as no direction has been given by or on behalf of the
Required Secured Debtholders and subject in all respects to any contrary
direction at any time given by the Required Secured Debtholders, the
collateral trustee will act in accordance with instructions given to it
from time to time by the Required Lenders (B) the Required Secured
Debtholders may not countermand, in whole or in part, a direction by the
Required Lenders instructing the collateral trustee to foreclose or
otherwise enforce the collateral trustee's liens or default remedies upon
any Collateral.
"Actionable Default" means (1) the failure to pay any payment of principal
of or interest on any Series of Secured Debt outstanding in the amount of $50.0
million or more resulting in an event of default under the applicable Series of
Secured Debt after payment is due, including payments that are due (or if any
required offer had been timely made would be due) in respect of any mandatory
offer to purchase Parity Secured Debt resulting in an event of default under the
applicable Series of Secured Debt, (2) the failure to pay in full, when due and
payable in full (whether at maturity, upon acceleration or otherwise), either
the notes or the Credit Agreement Debt or any other Series of Secured Debt
outstanding in the amount of $50.0 million or more, (3) the exercise by the
collateral trustee or any of its co-trustees or agents (including the Credit
Agreement Agent) of any right or power that is exercisable by it only upon
default to take sole and exclusive dominion or control over any deposits in a
deposit account, commodity contract in a commodity account or financial asset in
a securities account constituting any Shared Collateral or the delivery of any
instructions to the collateral trustee directing it to foreclose or otherwise
enforce, or to disburse the proceeds of enforcement of, any Lien upon any
Collateral, or (4) the occurrence of any event of default under the indenture
governing the notes or the Credit Agreement arising from the commencement of any
bankruptcy case, receivership or other insolvency or liquidation proceeding by
or against RRI or any of its Subsidiaries or any similar default provision at
any time in effect under any indenture or agreement governing any Series of
Secured Debt.
"Actionable Default Period" means a period that commences on the date a
Notice of Actionable Default is delivered to the collateral trustee and
continues until the date (if ever) on which all notices of Actionable Default
are withdrawn.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that a Person will be deemed to be an Affiliate
if RRI has knowledge that such Person beneficially owns 10% or more of the
Voting Stock of RRI; provided, further, that RRI will only be deemed to have
knowledge of any Person beneficially owning 10% or more of RRI's Voting Stock if
such Person has filed a statement of beneficial ownership pursuant to Sections
13(d) or 13(g) of the Exchange Act or has provided written notice thereof to
RRI. For purposes of this definition, the terms "controlling," "controlled by"
and "under common control with" have correlative meanings. Notwithstanding the
foregoing, no Person (other than RRI or any Restricted Subsidiary of RRI) in
whom a Securitization Entity makes an Investment in connection with a Qualified
Securitization Transaction shall be deemed to be an Affiliate of RRI solely by
reason of such Investment.
"Applicable Value" means the greater of (1) the aggregate principal amount,
par value or book value as carried by RRI, as appropriate, or (2) the market
value, of any capital stock or other securities of any Subsidiary of RRI.
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"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets;
provided that the sale, conveyance or other disposition of all or
substantially all of the assets of RRI and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the indentures
described above under the caption "-- Repurchase at the Option of
Holders -- Change of Control" and/or the provisions described above under
the caption "-- Certain Covenants -- Merger, Consolidation or Sale of
Assets" and not by the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests in any of RRI's Restricted
Subsidiaries (other than Equity Interests of Texas Genco or TG Holdco
issued within one year of the first acquisition of assets or Equity
Interests of Texas Genco or any of its Subsidiaries).
Notwithstanding the preceding, none of the following items will be deemed
to be an Asset Sale:
(1) any single transaction or series of related transactions that
involves assets having a Fair Market Value of less than $20.0 million;
(2) a transfer of assets between or among RRI and its Restricted
Subsidiaries;
(3) an issuance of Equity Interests by a Restricted Subsidiary to RRI
or to a Restricted Subsidiary of RRI;
(4) the sale or lease of products, services or accounts receivable in
the ordinary course of business and any sale or other disposition of
damaged, worn out or obsolete assets or assets no longer used or useful in
RRI's or any of its Restricted Subsidiaries' business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) sales of accounts receivable, equipment and related assets
(including contract rights) of the type specified in the definition of
Qualified Securitization Transaction to a Securitization Entity;
(7) a Restricted Payment that does not violate the covenant described
above under the caption "-- Certain Covenants -- Restricted Payments" or a
Permitted Investment;
(8) the transfer by Erie Boulevard Hydropower, L.P. of the NiMo Assets
to a New York (or a political subdivision thereof) industrial revenue
authority in connection with any Approved IDA Transaction (as all of the
foregoing capitalized terms are defined in the Amended and Restated Credit
Agreement dated October 28, 2002 (the "OPNY Credit Agreement") as in effect
on the date of the indentures, among Orion Power New York, L.P., Bank of
America, N.A. as administrative agent, and the lenders parties thereto);
provided that such transfer shall only be permitted hereunder if such
transfer is permitted under the OPNY Credit Agreement;
(9) a disposition resulting from any condemnation or other taking, or
temporary or permanent requisition of, any property, any interest therein
or right appurtenant thereto, or any change of grade affecting any
property, in each case, as the result of the exercise of any right of
condemnation or eminent domain, including any sale or other transfer to a
Governmental Authority in lieu of, or in anticipation of, any of the
foregoing events; provided that if such disposition involves assets having
a Fair Market Value in excess of $20.0 million, that any cash proceeds
received in connection therewith are treated as Net Proceeds of an Asset
Sale;
(10) the disposition by Choctaw County Trust or Reliant Energy Choctaw
County, LLC of the substations and the related real property assets at the
Choctaw Facility to be conveyed to Entergy pursuant to the terms and
provisions of that certain Agreement for Engineering, Procurement and
Construction between Entergy Mississippi Inc. and Reliant Energy Choctaw
County, LLC dated as of July 31, 2001 and to the Tennessee Valley
Authority;
(12) the disposition by Reliant Energy Bighorn, LLC of the substation
at the Bighorn generating facility (and the related real property assets)
to be conveyed to Nevada Power Company pursuant to
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the terms and provisions of that certain EPC Agreement dated December 18,
2002 between Reliant Energy Bighorn, LLC and Nevada Power Company; and
(13) a disposition of assets (other than any assets securing Secured
Debt) in connection with a foreclosure, transfer or deed in lieu of
foreclosure or other exercise of remedial action.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP; provided,
however, that if such sale and leaseback transaction results in a Capital Lease
Obligation, the amount of Indebtedness represented thereby will be determined in
accordance with the definition of "Capital Lease Obligation."
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act. The terms "Beneficially Owns" and
"Beneficially Owned" have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation or any committee thereof duly authorized to act on behalf of
such board;
(2) with respect to a partnership, the Board of Directors of the
general partner of the partnership;
(3) with respect to a limited liability company, the managing member
or members or any controlling committee of managing members or board of
directors thereof; and
(4) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP, and the Stated Maturity thereof shall be the date of the last payment of
rent or any other amount due under such lease prior to the first date upon which
such lease may be prepaid by the lessee without payment of a penalty.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership interests (whether general or limited) or membership interests;
and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person, but excluding from all of the foregoing any
debt securities convertible into Capital Stock, whether or not such debt
securities include any right of participation with Capital Stock.
"Cash Collateral Account" means a deposit account at all times under the
sole dominion and control of the collateral trustee (acting on its own or
through its agent Bank of America, N.A., as collateral agent under the Credit
Agreement or a successor collateral agent under the Credit Agreement) that is
being held by the collateral trustee or such agent for the benefit of the
holders of Secured Debt and includes the Texas Genco Escrow Account.
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"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United
States is pledged in support of those securities) having maturities of not
more than one year from the date of acquisition;
(3) deposit accounts with any lender party to the Credit Agreement,
Mellon Bank N.A., Wells Fargo Bank, N.A., Wachovia Bank, National
Association, or any other bank that has a long-term debt rating of A+ or
better by S&P and A1 or better by Moody's (an "Approved Bank");
(4) time deposits, certificates of deposit, acceptances or prime
commercial paper issued by an Approved Bank at the time acquired or issued
(as applicable and whichever is latest), in each case, having a maturity of
not more than one year from the date of acquisition;
(5) repurchase obligations for underlying securities of the types
described in clause (1) entered into with an Approved Bank at the time
acquired, issued or entered into (as applicable and whichever is latest),
in each case, having a maturity of not more than one year from the date of
acquisition and secured by securities of the type described in clause (1),
the market value of which (including accrued interest) is not less than the
amount of the applicable repurchase agreement;
(6) commercial paper with a rating of A-1 by S&P and P-1 by Moody's
and, in each case, maturing within one year after the date of acquisition;
and
(7) money market funds which invest primarily in Cash Equivalents of
the kinds described in clauses (1) through (6) of this definition.
"CenterPoint" means CenterPoint Energy, Inc., a Texas corporation and its
successors.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
properties or assets of RRI and its Subsidiaries taken as a whole to any
"person" (as that term is used in Section 13(d) of the Exchange Act, but
excluding any employee benefit plan of RRI or any of its Restricted
Subsidiaries, and any person or entity acting in its capacity as trustee,
agent or other fiduciary or administrator of any such plan);
(2) the adoption of a plan relating to the liquidation or dissolution
of RRI other than (A) the consolidation with, merger into or transfer of
all or part of the properties and assets of any Restricted Subsidiary of
RRI to RRI or any other Restricted Subsidiary of RRI and (B) the merger of
RRI with an Affiliate solely for the purpose of reincorporating RRI or
reforming RRI in another jurisdiction;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above) becomes the Beneficial Owner, directly or
indirectly, of more than 50% of the Voting Stock of RRI, measured by voting
power rather than number of shares;
(4) the first day on which a majority of the members of the Board of
Directors of RRI are not Continuing Directors; or
(5) RRI consolidates with, or merges with or into, any Person, or any
Person consolidates with, or merges with or into, RRI, in any such event
pursuant to a transaction in which any of the outstanding Voting Stock of
RRI or such other Person is converted into or exchanged for cash,
securities or other property, other than any such transaction where the
Voting Stock of RRI outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified
Stock) of the surviving or transferee Person constituting a majority of the
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outstanding shares of such Voting Stock of such surviving or transferee
Person (immediately after giving effect to such issuance).
"Choctaw Facility" means the nominally rated 872 MW combined cycle facility
and related assets owned by Choctaw County Trust and located, or to be located,
in French Camp, Choctaw County, Mississippi.
"Citibank Intercreditor Agreement" means the Intercreditor Agreement, dated
as of March 28, 2003, between Bank of America, N.A., as Administrative Agent and
Collateral Agent, Citicorp USA, Inc., as Tranche A Agent, and Citibank, N.A., as
Tranche A Collateral Agent, as in effect when originally entered into by the
parties thereto and assumed by the collateral trustee.
"Collateral" means the Shared Collateral and the Separate Collateral.
"collateral trust agreement" means the Collateral Trust Agreement dated the
date of the indentures, executed and delivered by RRI, the Guarantors and the
collateral trustee, as amended, modified, renewed, restated or replaced, in
whole or in part, from time to time.
"collateral trustee" means Wachovia Bank, National Association or one of
its affiliates, in its capacity as collateral trustee under the collateral
trustee agreement, together with its successors in such capacity.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus,
without duplication:
(1) an amount equal to any extraordinary loss plus any net loss
realized by such Person or any of its Restricted Subsidiaries in connection
with an Asset Sale or the disposition of any securities by such Person or
any of its Restricted Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Restricted Subsidiaries, to the
extent such losses were deducted in computing such Consolidated Net Income;
plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net Income;
plus
(3) the Fixed Charges of such Person and its Restricted Subsidiaries
for such period, to the extent that such Fixed Charges were deducted in
computing such Consolidated Net Income; plus
(4) depreciation, depletion, amortization (including amortization of
intangibles) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period) of such Person and its Restricted
Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such
Consolidated Net Income; plus
(5) accruals for payments to CenterPoint as required under Section
39.262 of the Texas Public Utility Regulatory Act to the extent by which
RRI's affiliated retail electric provider's price to beat for providing
retail electric service to residential and small commercial customers in
CenterPoint's Houston service territory during 2002 and 2003 exceeds the
market price of electricity, to the extent such accruals were deducted in
computing such Consolidated Net Income; plus
(6) charges associated with fees and expenses, including professional
fees, incurred prior to the date of the indentures in connection with the
modification of or preparation in connection therewith of Indebtedness of
RRI that occurred prior to the date of the indentures, to the extent such
charges were deducted in computing such Consolidated Net Income; plus
(7) any fees payable pursuant to the Credit Agreement for failure to
reduce Indebtedness below certain levels, to the extent such fees were
deducted in computing such Consolidated Net Income; plus
(8) the upfront costs of any Hedging Obligations paid prior to the
date of the indentures, to the extent such costs were deducted in computing
Consolidated Net Income; plus
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(9) cash received during such period related to mark-to-market
activities; less
(10) cash paid during such period related to mark-to-market
activities;
provided, however, that for purposes of this definition, any mark-to-market
earnings or losses shall be excluded from the calculation of Consolidated Cash
Flow to the extent taken into account in calculating Consolidated Net Income for
such period.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income of any Person that is not a Restricted Subsidiary
or that is accounted for by the equity method of accounting will be
included only to the extent of the amount of dividends or similar
distributions (including pursuant to other intercompany payments) paid in
cash to the specified Person or a Restricted Subsidiary of the Person;
(2) for purposes of the covenant described above under the caption
"-- Restricted Payments" only, the Net Income of any Restricted Subsidiary
will be excluded to the extent that the declaration or payment of dividends
or similar distributions by that Restricted Subsidiary of that Net Income
is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders;
(3) the cumulative effect of a change in accounting principles will be
excluded; and
(4) any non-cash impairment charges incurred subsequent to the date of
the indentures will be excluded.
"Consolidated Net Worth" means, with respect to any specified Person as of
any date, the assets of such Person less the liabilities of such Person all as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Senior Debt" means, as of any date, the sum, without
duplication, of:
(1) the amount that would be shown on a consolidated balance sheet of
RRI and its Restricted Subsidiaries prepared as of such date in accordance
with GAAP as the liability in respect of (A) all Secured Debt, (B) all
other Indebtedness of RRI or any Guarantor that is secured by a Lien on any
of their properties and (C) all Indebtedness of any Excluded Subsidiary
(other than intercompany Indebtedness between or among RRI and any of its
Restricted Subsidiaries); provided, however, that Hedging Obligations will
be excluded for purposes of this definition; and
(2) to the extent not required to be reflected as a balance sheet
liability, the aggregate maximum possible contingent reimbursement
obligations of RRI and its Restricted Subsidiaries on such day in respect
of all letters of credit and other extensions of credit that are then
outstanding under any Credit Facility, secured by a Lien upon any of their
properties, or incurred or Guaranteed by any Excluded Subsidiary.
"Consolidated Senior Leverage Ratio" means, as of any date, the ratio of
(1) the Consolidated Senior Debt outstanding on such date after giving effect to
all incurrences and repayments of Indebtedness made or to be made on such date
to (2) the Consolidated Cash Flow of RRI for the most recently ended four full
fiscal quarters for which internal financial statements are available.
In addition, for purposes of calculating the Consolidated Senior Leverage
Ratio:
(1) acquisitions that have been made by RRI or any of its Restricted
Subsidiaries, including through mergers or consolidations, or any Person or
any of its Restricted Subsidiaries acquired by RRI or any of its Restricted
Subsidiaries, and including any related financing transactions and
including increases in ownership of Restricted Subsidiaries, during the
four-quarter reference period or
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subsequent to such reference period and on or prior to the date on which
the event for which the calculation of the Consolidated Senior Leverage
Ratio is made ("Leverage Ratio Calculation Date") will be given pro forma
effect in accordance with Regulation S-X under the Securities Act as if
they had occurred on the first day of the four-quarter reference period;
and
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses (and ownership interests therein) disposed of prior to the
Leverage Ratio Calculation Date, will be excluded.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of RRI who:
(1) was a member of such Board of Directors on the date of the
indentures; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Convertible Note Indenture" means that certain indenture, dated as of June
24, 2003, by and between RRI and Wilmington Trust Company, as trustee, governing
the Convertible Notes.
"Convertible Notes" means $275.0 million in aggregate principal amount of
RRI's 5.00% Convertible Subordinated Notes due 2010 that were issued and sold
concurrently with the notes.
"Credit Agreement" means the Amended and Restated Credit and Guaranty
Agreement, dated as of March 28, 2003, among RRI, the other Credit Parties named
therein, the Lenders named therein, Bank of America, N.A., as Administrative
Agent, Collateral Agent and an Issuing Bank, Barclays Bank PLC and Deutsche Bank
AG, New York Branch, as Syndication Agents, Citicorp USA, Inc., as Tranche A
Agent and Citibank, N.A., as Tranche A Collateral Agent, providing for up to
$3.833 billion of term borrowings, $2.10 billion of revolving credit borrowings
and letters of credit and $300.0 million of additional revolving credit
borrowings, and letters of credit, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, modified, restated, renewed, extended,
refinanced, or replaced, in each case, in whole or in part; provided, that a
refinancing or replacement of any such agreement will only be deemed a "Credit
Agreement" if so designated by RRI.
"Credit Agreement Agent" means Bank of America, N.A., as administrative
agent and collateral agent under the Credit Agreement, together with any
successor or replacement agent in such capacity.
"Credit Agreement Debt" means the Credit Agreement General Facilities Debt
and the Credit Agreement Priority Facility.
"Credit Agreement Documents" means the Credit Agreement and the security
documents.
"Credit Agreement General Facilities Debt" means Indebtedness of RRI (and
guarantees thereof by any Guarantor or by any Orion Bank Guarantor under an
Existing Orion Bank Guaranty) under the Credit Agreement, except the Credit
Agreement Priority Facility. For purposes only of the covenant described above
under the caption "-- Repurchase at the Option of Holders -- Asset Sales," the
aggregate amount of Credit Agreement General Facilities Debt shall be the sum of
the outstanding principal amount of any loans, the aggregate face amount of any
outstanding letters of credit, the aggregate amount of any unreimbursed drawings
under any letters of credit and all unused commitments under the Credit
Agreement that have not terminated, except (in each case) those outstanding
under the Credit Agreement Priority Facility.
"Credit Agreement General Facilities Obligations" means Credit Agreement
General Facilities Debt and all Obligations in respect thereof under the Credit
Agreement Documents but does not include Obligations in respect of the Credit
Agreement Priority Facility.
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"Credit Agreement Obligations" means Credit Agreement General Facilities
Obligations and Obligations under the Credit Agreement Priority Facility.
"Credit Agreement Priority Facility" means a revolving credit facility
under the Credit Agreement under which revolving loans or letters of credit may
be provided to RRI or any of the guarantors under the Credit Agreement up to an
aggregate outstanding amount not at any time exceeding $300.0 million (as such
revolving credit facility may be extended, amended, refinanced or replaced from
time to time so long as the aggregate principal amount available under such
revolving credit facility does not exceed $300.0 million at any time), but only
if and to the extent the Credit Agreement requires that (A) if a default or
event of default under the Credit Agreements exists and is continuing, payments
made by RRI or any of its Subsidiaries on account of Indebtedness outstanding
under the Credit Agreement will be applied first to the payment of principal of
and interest on the loans and the letter of credit obligations outstanding under
such revolving credit facility before application is made to the payment of
principal of and interest on the loans and the letter of credit obligations
outstanding as Credit Agreement General Facilities Debt, and (B) proceeds from
the enforcement of all Liens upon any property of RRI or any of its Subsidiaries
securing any Indebtedness outstanding under the Credit Agreement will be applied
to the payment of principal of and interest on the loans and the letter of
credit obligations outstanding under such revolving credit facility before
application is made to payment of principal of and interest on the loans and the
letter of credit obligations outstanding as Credit Agreement General Facilities
Debt; provided that a refinancing or replacement of any such revolving credit
facility will only be deemed a "Credit Agreement Priority Facility" if so
designated by RRI.
"Credit Agreement Priority Facility Liens" means Liens securing Obligations
under the Credit Agreement Priority Facility, but only to the extent securing
such Obligations.
"Credit Facility" or "Credit Facilities" means, one or more debt facilities
(including, without limitation, the Credit Agreement) or commercial paper
facilities, in each case, with banks or other institutional lenders (including
PEDFA) providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special purpose
entities formed to borrow from such lenders against such receivables) or letters
of credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced (including by means of sales of debt securities to
institutional investors), in each case, in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case, at the option of the holder of the Capital Stock),
or upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable at the option
of the holder of the Capital Stock, in whole or in part, on or prior to the date
that is 91 days after the date on which the notes issued under that indenture
mature. Notwithstanding the preceding sentence, any Capital Stock that would
constitute Disqualified Stock solely because the holders of the Capital Stock
have the right to require RRI to repurchase such Capital Stock upon the
occurrence of a change of control or an asset sale will not constitute
Disqualified Stock if the terms of such Capital Stock provide that RRI may not
repurchase or redeem any such Capital Stock pursuant to such provisions unless
such repurchase or redemption complies with the covenant described above under
the caption "-- Certain Covenants -- Restricted Payments." The amount of
Disqualified Stock deemed to be outstanding at any time for purposes of the
indentures shall be equal to the maximum amount that RRI and its Restricted
Subsidiaries may become obligated to pay upon the maturity of, or pursuant to
any mandatory redemption provisions of, such Disqualified Stock, exclusive of
accrued dividends.
"Domestic Subsidiary" means any Restricted Subsidiary of RRI that was
formed under the laws of the United States or any state of the United States or
the District of Columbia or that guarantees or otherwise provides direct credit
support for any Indebtedness of RRI.
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"Enterprise Value" means an amount equal to (i) the product of (A) the
purchase price per share to be paid by RRI or TG Holdco for each share of common
stock of Texas Genco either upon the exercise of the Option Agreement determined
on such exercise date in accordance with the Option Agreement or in connection
with a Permitted TG Purchase Transaction (as applicable), in each case exclusive
of any control premium multiplied by (B) the aggregate number of shares of the
common stock of Texas Genco issued and outstanding on the date the Option
Agreement is exercised in accordance with the Option Agreement or a definitive
agreement with respect to a Permitted TG Purchase Transaction is fully executed
(as applicable), plus (ii) to the extent not included in the purchase price per
share set forth in clause (i)(A) above and without any duplication, any control
premium actually paid by RRI or TG Holdco in connection with the purchase of the
outstanding common stock of Texas Genco pursuant to the Option Agreement or a
Permitted TG Purchase Transaction (as applicable), plus (iii) the aggregate
principal amount of any consolidated Indebtedness of Texas Genco and its
Subsidiaries (A) on the date RRI or TG Holdco exercises the Texas Genco Option
or a definitive agreement with respect to a Permitted TG Purchase Transaction is
fully executed (as applicable) or (B) if such amount is not capable of being
determined within two business days (x) after the earliest to occur of the
exercise of the Option Agreement, the expiration of the Option Agreement and the
termination of the Option Agreement, (y) after the execution of a definitive
agreement with respect to a Permitted TG Purchase Transaction or (z) after the
exercise of the Option Agreement or the execution of a definitive agreement with
respect to a Permitted TG Purchase Transaction (as applicable), on the last day
of the fiscal quarter ending immediately before the date the Option Agreement is
exercised or a defined agreement with respect to a Permitted TG Purchase
Transaction is executed (as applicable). In no event shall "Enterprise Value"
include the principal amount of any Indebtedness incurred to purchase Texas
Genco or incurred to provide working capital to Texas Genco or TG Holdco.
"equally and ratably" means, in reference to sharing of any Liens on Shared
Collateral or proceeds thereof as among the holders of Note Obligations, the
holders of Credit Agreement General Facilities Obligations and the holders of
Parity Secured Obligations in respect of any other Series of Secured Debt, after
allowing for the payment priorities in the Order of Application, that such Liens
or proceeds:
(1) shall be allocated and distributed first to the trustees for
account of the holders of notes, to the Credit Agreement Agent for account
of the holders of Credit Agreement General Facilities Debt and to the
Secured Debt Representative for each other Series of Secured Debt for
account of the holders of such Series of Secured Debt, ratably in
proportion to the principal, interest, fees and premium (if any)
outstanding, when the allocation or distribution is made, on the notes,
Credit Agreement General Facilities Debt (including Hedging Obligations and
amounts payable to a lender in connection with a bank account or any other
banking services, in each case, that are required by the Credit Agreement
to be secured on an equal and ratable basis with the Credit Agreement
General Facilities Debt) and all other Series of Secured Debt (allocated
proportionately to the Secured Debt Representative for each other Series of
Secured Debt if there is more than one), respectively; and thereafter
(2) shall be allocated and distributed thereafter (if any remain after
payment in full of all of the principal, interest, fees and premium (if
any) outstanding on the notes, Credit Agreement General Facilities Debt,
including the Hedging Obligations and other amounts payable to a lender
referred to in clause (1), and each other Series of Secured Debt) to the
trustees for account of the holders of any remaining Note Obligations, to
the Credit Agreement Agent for account of the holders of any remaining
Credit Agreement General Facilities Obligations and to the Secured Debt
Representative for each other Series of Secured Debt for account of the
holders of any remaining Parity Secured Obligations in respect of such
Series of Secured Debt, ratably in proportion to the aggregate unpaid
amount of such remaining Note Obligations, Credit Agreement General
Facilities Obligations and other remaining Parity Secured Obligations,
respectively, that are due and demanded prior to the date such distribution
is made.
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For this purpose:
(A) Unfunded commitments to extend credit shall not be counted as
outstanding debt;
(B) Obligations of RRI or any Guarantor or OPH or any Orion Bank
Guarantor in respect of outstanding letters of credit, bank guarantees,
bankers' acceptances or other similar instruments shall be counted as
outstanding debt (whether or not contingent), except that if any such
instrument thereafter expires without being funded, an equitable adjustment
shall be made in any future distribution so that the aggregate amount
distributed is distributed equally and ratably as if such instrument had
never been outstanding (but all distributions shall be final and non-
refundable when made);
(C) During the pendency of any Actionable Default, and subject to the
Order of Application, if any payment or distribution is made in cash to
holders of Credit Agreement General Facilities Obligations or any other
holders of Parity Secured Obligations from or on account of Separate
Collateral by reason of enforcement of Liens or realization in a bankruptcy
case, receivership or other insolvency or liquidation proceeding, then any
concurrent or subsequent payment or distribution that is to be made in cash
to such holders from or on account of Shared Collateral by reason of any
such enforcement or realization shall be reduced, and any concurrent or
subsequent payment or distribution that is to be made in cash to the
remaining holders of Parity Secured Obligations from or on account of
Shared Collateral by reason of any such enforcement or realization shall be
increased, to the extent necessary to cause the aggregate amount of all
payments and distributions made in cash to all holders of Parity Secured
Obligations (whether made from or on account of Separate Collateral or from
or on account of Shared Collateral) by reason of any such enforcement or
realization to be distributed equally and ratably as fully as if the
Separate Collateral had been Shared Collateral; and
(D) All amounts apportioned and distributed to the Credit Agreement
Agent or the Secured Debt Representative for any other Series of Secured
Debt may be allocated, apportioned and distributed by it in accordance with
the applicable provisions of the Credit Agreement or the indentures or
agreement governing such other Series of Secured Debt, including to give
effect to any payment priorities provided for therein as among the holders
of Obligations outstanding thereunder.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means a public or private sale for cash of Capital Stock
(other than Disqualified Stock).
"Excluded Orion Power Subsidiaries" means Orion Power Capital LLC and each
of its Subsidiaries for so long as each such Person has not guaranteed or
otherwise provided direct credit support for any other Indebtedness of RRI or
any of its other Restricted Subsidiaries.
"Excluded Proceeds" means any Net Proceeds of Asset Sales that are
designated by the Board of Directors of RRI as "Excluded Proceeds;" provided,
that not more than $300.0 million of such Net Proceeds from Asset Sales may be
designated as "Excluded Proceeds" during any single calendar year.
"Excluded Securities" means debt or equity securities issued by any
Subsidiary of RRI other than Reliant Energy Retail Holdings, LLC, Orion Power
Holdings, Inc. and REMA (or their successors).
"Excluded Subsidiaries" means each of the Excluded Orion Power
Subsidiaries, the Orion Bank Guarantors, the Excluded Texas Genco Subsidiaries,
Reliant Energy Mid-Atlantic Power Holdings, LLC and its Subsidiaries, Reliant
Energy Capital (Europe), Inc. and its Subsidiaries, Liberty Electric PA, LLC,
Liberty Electric Power, LLC, Reliant Energy Channelview, L.P., Reliant Energy
Channelview (Delaware) LLC, Reliant Energy Channelview (Texas) LLC, Reliant
Energy Services Channelview LLC, Reliant Energy Services Canada, Ltd., RE Retail
Receivables, LLC, Midwest Ash Disposal, Inc., CapTrades GP, LLC and CapTrades,
LP, in each case, only if and for as long as it has not guaranteed or otherwise
provided direct credit support for any Indebtedness of RRI or any of its other
Restricted Subsidiaries (except, in the case of the Orion Bank Guarantors,
pursuant to the Existing Orion Bank
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Guarantees for as long as the limitations on such guarantee under the Credit
Agreement (as in effect on the date of the indentures) and under the Existing
Indebtedness of Orion Power Holdings, Inc. continue to be applicable to such
Orion Bank Guarantor, or with respect to Indebtedness of other Excluded
Subsidiaries).
"Excluded Texas Genco Subsidiaries" means TG Holdco, Texas Genco and each
of their respective subsidiaries, but only if and for as long as none of them
has guaranteed or otherwise provided direct credit support for any Indebtedness
of RRI or any of its other Restricted Subsidiaries that are not TG Holdco or
Subsidiaries of TG Holdco.
"Existing Indebtedness" means Indebtedness of RRI and its Restricted
Subsidiaries in existence on the date of the indentures, until such amounts are
repaid; provided, however, that in no event will any Indebtedness that qualifies
for categorization as Permitted Debt under clauses (1) through (5) of the
definition of Permitted Debt be considered to be Existing Indebtedness.
"Existing Orion Bank Guarantees" means limited guarantees of Credit
Agreement Obligations delivered by Orion Bank Guarantors prior to the date of
the indentures.
"Fair Market Value" means the value that would be paid by a willing buyer
to a willing seller in a transaction not involving distress or necessity of
either party, determined in good faith by the chief financial officer or Board
of Directors of RRI (unless otherwise provided in the indentures).
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person for
such period. In the event that the specified Person or any of its Restricted
Subsidiaries incurs, assumes, guarantees, repays, repurchases, redeems, defeases
or otherwise discharges any Indebtedness (other than ordinary working capital
borrowings) or issues, repurchases or redeems preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated and on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio will be calculated giving pro forma effect
to such incurrence, assumption, guarantee, repayment, repurchase, redemption,
defeasance or other discharge of Indebtedness, or such issuance, repurchase or
redemption of preferred stock, and the use of the proceeds therefrom as if the
same had occurred at the beginning of the applicable four-quarter reference
period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of
its Restricted Subsidiaries, including through mergers or consolidations,
or any Person or any of its Restricted Subsidiaries acquired by the
specified Person or any of its Restricted Subsidiaries, and including any
related financing transactions and including increases in ownership of
Restricted Subsidiaries, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
will be given pro forma effect in accordance with Regulation S-X under the
Securities Act as if they had occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period will
be calculated on a pro forma basis;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses (and ownership interests therein) disposed of prior to the
Calculation Date, will be excluded;
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses (and
ownership interests therein) disposed of prior to the Calculation Date,
will be excluded, but only to the extent that the obligations giving rise
to such Fixed Charges will not be obligations of the specified Person or
any of its Restricted Subsidiaries following the Calculation Date; and
(4) if any Indebtedness that is being incurred on the Calculation Date
bears a floating rate of interest, the interest expense on such
Indebtedness will be calculated as if the rate in effect on the
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Calculation Date had been the applicable rate for the entire period (taking
into account any Hedging Obligations applicable to such Indebtedness, but
only for such period of time as equals the then remaining term of such
Hedging Obligations as of the Calculation Date).
"Fixed Charges" means, with respect to any specified Person for any period,
the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued determined
in accordance with GAAP, including, without limitation, amortization of
debt issuance costs incurred on or after the date of the indentures (but
excluding (A) amortization of debt issuance costs incurred prior to the
date of the indentures and (B) charges associated with fees and expenses,
including professional fees, incurred prior to the date of the indentures
in connection with the modification of or preparation in connection
therewith of Indebtedness of RRI that occurred prior to the date of the
indentures) and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt created after the date
of the indentures, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net of the effect of all payments made or received pursuant to Hedging
Obligations with respect to interest rates and net of interest income; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest accruing on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon; plus
(4) the product of (A) all dividends, whether paid or accrued and
whether or not in cash, on any series of preferred stock of such Person or
any of its Restricted Subsidiaries, other than dividends on Equity
Interests payable solely in Equity Interests of RRI (other than
Disqualified Stock) or to RRI or a Restricted Subsidiary of RRI, times (B)
a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP; minus
(5) any charges associated with upfront payments with respect to
interest rate hedges made prior to the date of the indentures.
"Foreign Subsidiary" means any Restricted Subsidiary that is not a Domestic
Subsidiary.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Governmental Authority" means the government of the United States of
America, any other nation or any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of, or pertaining to,
government.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take or pay or to maintain financial statement
conditions or otherwise).
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"Guarantors" means each of:
(1) Choctaw County Trust, GuideStreet, Inc., Hunterstown Trust, Insync
Internet Services, Incorporated, Reeves County Land Associates, LLC,
Reliant Energy Arrow Canyon, LLC, Reliant Energy Atlantic, LLC, Reliant
Energy Aurora Development, LLC, Reliant Energy Aurora Holding, LLC, Reliant
Energy Aurora I, LP, Reliant Energy Aurora II, LP, Reliant Energy Aurora,
LP, Reliant Energy Bighorn, LLC, Reliant Energy Broadband, Inc., Reliant
Energy California Holdings, LLC, Reliant Energy CapTrades Holding Corp.,
Reliant Energy Choctaw County, LLC, Reliant Energy Communications, Inc.,
Reliant Energy Construction, LLC, Reliant Energy Coolwater, Inc., Reliant
Energy Corporate Services, LLC, Reliant Energy Customer Care Services, LLC,
Reliant Energy Deer Park, Inc., Reliant Energy Desert Basin, LLC, Reliant
Energy Development Services, Inc., Reliant Energy Electric Solutions, LLC,
Reliant Energy Ellwood, Inc., Reliant Energy Equipment Company, LLC,
Reliant Energy Erie West, LLC, Reliant Energy Etiwanda, Inc., Reliant
Energy Europe Trading & Marketing, Inc., Reliant Energy Florida Holdings,
LLC, Reliant Energy Funding, LLC, Reliant Energy Gas Storage, LLC, Reliant
Energy Gilbert, LLC, Reliant Energy Hunterstown, LLC, Reliant Energy Indian
River, LLC, Reliant Energy Key/Con Fuels, LLC, Reliant Energy Mandalay,
Inc., Reliant Energy Mid-Atlantic Development, Inc., Reliant Energy Net
Ventures, Inc., Reliant Energy New Smyrna Beach, LLC, Reliant Energy
Northeast Generation, Inc., Reliant Energy Northeast Holdings, Inc.,
Reliant Energy Ormond Beach, Inc., Reliant Energy Osceola, LLC, Reliant
Energy Partsco, LLC, Reliant Energy Portland, LLC, Reliant Energy Power
Generation, Inc., Reliant Energy Power Operations I, Inc., Reliant Energy
Power Operations II, Inc., Reliant Energy Renewables Atascocita GP, LLC,
Reliant Energy Renewables Atascocita, LP, Reliant Energy Renewables Baytown
GP, LLC, Reliant Energy Renewables Baytown, LP, Reliant Energy Renewables
Blue Bonnet GP, LLC, Reliant Energy Renewables Blue Bonnet, LP, Reliant
Energy Renewables Coastal Plains GP, LLC, Reliant Energy Renewables Coastal
Plains, LP, Reliant Energy Renewables Conroe GP, LLC, Reliant Energy
Renewables Conroe, LP, Reliant Energy Renewables Fort Worth GP, LLC,
Reliant Energy Renewables Fort Worth, LP, Reliant Energy Renewables
Holdings II, LLC, Reliant Energy Renewables Security GP, LLC, Reliant
Energy Renewables Security, LP, Reliant Energy Renewables, Inc., Reliant
Energy Retail Holdings, LLC, Reliant Energy Retail Services, LLC, Reliant
Energy Sabine (Delaware), Inc., Reliant Energy Sabine (Texas), Inc.,
Reliant Energy Services Desert Basin, LLC, Reliant Energy Services
International, Inc., Reliant Energy Services Mid-Stream, LLC, Reliant
Energy Services New Mexico, LLC, Reliant Energy Services, Inc., Reliant
Energy Seward, LLC, Reliant Energy Shelby County II, LP, Reliant Energy
Shelby County, LP, Reliant Energy Shelby Development Corp., Reliant Energy
Shelby Holding Corp., Reliant Energy Shelby I, LP, Reliant Energy Shelby
II, LP, Reliant Energy Signal Peak, LLC, Reliant Energy Solutions, LLC,
Reliant Energy Solutions California, Inc., Reliant Energy Solutions East,
LLC, Reliant Energy Solutions Holdings, LLC, Reliant Energy Solutions West,
LLC, Reliant Energy Titus, LLC, Reliant Energy Trading Exchange, Inc.,
Reliant Energy Ventures, Inc., Reliant Energy Wholesale Service Company,
Reliant Energy Winter Haven, LLC, Reliant Resources International Services,
Inc., ReliantEnergy.com, Inc., Seward Trust, StarEn Power, LLC, Texas Star
Energy Company; and
(2) any other Restricted Subsidiary of RRI that executes a subsidiary
guarantee in accordance with the provisions of the indentures;
and their respective successors and assigns.
"Hedging Obligations" means, with respect to any specified Person, the net
obligations of such Person under:
(1) interest rate swap agreements (whether from fixed to floating or
from floating to fixed), interest rate cap agreements and interest rate
collar agreements;
(2) other agreements or arrangements designed to manage interest rate
risk; and
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(3) other agreements or arrangements designed to protect such Person
against fluctuations in currency exchange rates.
"Hunterstown Facility" means the nominally rated 873 MW combined cycle
facility and related assets owned by Hunterstown Trust and located, or to be
located, in Straban Township, Adams County, Pennsylvania.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person (excluding accrued expenses or trade payables),
whether or not contingent (without duplication):
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit or reimbursement agreements in respect thereof;
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations or Attributable Debt in
respect of sale and leaseback transactions;
(5) representing the balance deferred and unpaid of the purchase price
of any property or services due more than six months after such property is
acquired or such services are completed; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit,
Attributable Debt and Hedging Obligations) would appear as a liability upon a
balance sheet of the specified Person prepared in accordance with GAAP. In
addition, the term "Indebtedness" includes all Indebtedness of others secured by
a Lien on any asset of the specified Person (whether or not such Indebtedness is
assumed by the specified Person) and, to the extent not otherwise included, the
Guarantee by the specified Person of any Indebtedness of any other Person. If
obligations of a Securitization Entity are Indebtedness, for the purposes of
calculating the amount of Indebtedness of a Securitization Entity outstanding as
of any date, the face or notional amount of any interest in receivables or
equipment that is outstanding as of such date shall be deemed to be Indebtedness
but any such interests held by Affiliates of such Securitization Entity shall be
excluded for purposes of such calculation.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount;
(2) the principal amount of and premium (if any) on the Indebtedness,
in the case of any other Indebtedness; and
(3) in respect of Indebtedness of other Persons secured by a Lien on
the assets of the specified Person, the lesser of:
(A) the Fair Market Value of such asset at such date of
determination, and
(B) the amount of such Indebtedness of such other Persons.
"intercreditor confirmation" means the agreement of any holder of Parity
Secured Debt or other Parity Secured Obligations to the provisions described
under the captions "-- Equal and Ratable Sharing of Shared Collateral by Holders
of Parity Secured Debt" and "-- Priority Liens", as set forth in any Secured
Debt Document for the benefit of, and enforceable as a third party beneficiary
by, each present and future holder of Parity Secured Obligations and each
present and future Secured Debt Representative and, in the case of the
provisions described under the caption "-- Priority Liens", the collateral
trustee as holder of Credit Agreement Priority Facility Liens and Tranche A
Priority Liens.
"Investment Grade Rating" means a rating equal to or higher than Baa3 (or
the equivalent) by Moody's or BBB- (or the equivalent) by S&P.
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"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or similar obligations), advances or capital
contributions (excluding payroll, commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. "Investment"
shall exclude extensions of trade credit by RRI and its Restricted Subsidiaries
in the ordinary course of business and Permitted PEDFA Bond Indebtedness. If RRI
or any Subsidiary of RRI sells or otherwise disposes of any Equity Interests of
any direct or indirect Subsidiary of RRI such that, after giving effect to any
such sale or disposition, such Person is no longer a Subsidiary of RRI, RRI will
be deemed to have made an Investment on the date of any such sale or disposition
equal to the Fair Market Value of RRI's Investments in such Subsidiary that were
not sold or disposed of. The acquisition by RRI or any Subsidiary of RRI of a
Person that holds an Investment in a third Person will be deemed to be an
Investment by RRI or such Subsidiary in such third Person in an amount equal to
the Fair Market Value of the Investments held by the acquired Person in such
third Person. Except as otherwise provided in the indentures, the amount of an
Investment shall be its Fair Market Value at the time the Investment is made and
without giving effect to subsequent changes in value.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement and any lease
that constitutes a security interest.
"Moody's" means Moody's Investors Service, Inc.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (or loss), together with any related provision for taxes
on such gain (or loss), realized in connection with: (A) any Asset Sale; or
(B) the disposition of any securities by such Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (or loss), together with any related
provision for taxes on such extraordinary gain (or loss).
"Net Proceeds" means the aggregate cash proceeds received by RRI or any of
its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale, including, without limitation, legal, accounting and investment
banking fees, and sales commissions, and any relocation expenses incurred as a
result of the Asset Sale, taxes paid or payable as a result of the Asset Sale,
in each case, after taking into account any available tax credits or deductions
and any tax sharing arrangements, and amounts reserved for adjustment in respect
of the sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse" means, with respect to any specified Person and the
Indebtedness of such Person:
(1) neither RRI nor any of its Restricted Subsidiaries (A) provides
credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness) for the Indebtedness of such
Person other than a pledge of the Equity Interests of such Person, (B) is
directly or indirectly liable as a guarantor or otherwise of the
Indebtedness of such Person, or (C) constitutes the lender with respect to
the Indebtedness of such Person; and
(2) in the case of an Unrestricted Subsidiary, no default on the
Indebtedness of such Person (including any rights that the holders of the
Indebtedness may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
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Indebtedness of RRI or any of its Restricted Subsidiaries to declare a
default on such Indebtedness of RRI or any of its Restricted Subsidiaries
or cause the payment of such Indebtedness of RRI or any of its Restricted
Subsidiaries to be accelerated or payable prior to its stated maturity.
"Note Documents" means the 2010 notes and the related indenture, the 2013
notes and the related indenture, the registration rights agreement, the
respective exchange notes, the subsidiary guarantees, each intercreditor
confirmation and the security documents.
"Note Obligations" means:
(1) notes issued on the date of the indentures;
(2) notes issued by RRI after the date of the indentures that
constitute Sharing Eligible Debt; or
(3) all related exchange notes;
together with the subsidiary guarantees and all other Obligations (including all
Obligations owing to the trustees) of any Obligor under the Note Documents.
"Notice of Actionable Default" means a written notice given to the
collateral trustee by the Required Secured Debtholders or any Secured Debt
Representative, stating that an Actionable Default has occurred and is
continuing.
"Obligations" means any principal, interest, premium, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Obligor" means RRI, the Guarantors and each other Subsidiary of RRI that
has granted the collateral trustee a Lien upon any property as security for any
Note Obligation.
"Option Agreement" means that certain Option Agreement, dated as of
December 31, 2000, by and between CenterPoint and RRI, as the same may be
amended, supplemented or otherwise modified from time to time.
"Orion Bank Guarantors" means, collectively, Beaver River, LLC, Eddystone
Power, LLC, Free State Electric, LLC, Grane Creek, LLC, Liberty Member, LLC,
Liberty MidAtlantic, LLC, MidAtlantic Liberty, LLC, OPD Group, Inc., OPOS
MidAtlantic, Inc., Orion Power Atlantic, Inc., Orion Power Atlantic LLC, Orion
Power Atlantic, Ltd., Orion Power Development Company, Inc., Orion Power
Marketing and Supply, Inc., Orion Power New York GP II, Inc., Orion Power
Operating Services, Inc., Orion Power Operating Services Astoria, Inc., Orion
Power Operating Services Carr Street, Inc., Orion Power Operating Services
Coldwater, Inc. and Orion Power Operating Services Midwest, Inc.
"Orion Facility Party" means each of Orion Power New York, L.P., Orion
Power Midwest, L.P., Orion Power Capital, LLC, Midwest Ash Disposal, Inc., Orion
Power MidWest GP, Inc., Orion Power MidWest LP, LLC, Twelvepole Creek, LLC, Carr
Street Generating Station, LP, Eric Boulevard Hydropower, LP, Astoria Generating
Company, LP, Orion Power New York GP, Inc., and Orion Power New York LP, LLC.
"Orion Limited Guaranty" means the Amended and Restated Limited Guaranty,
dated as of the date of the indentures, executed by Orion Power Holdings, Inc.
and delivered to the collateral trustee.
"Parity Secured Debt" means:
(1) the notes issued on the date of the indentures and any related
exchange notes;
(2) Credit Agreement General Facilities Debt outstanding or committed
on the date of the indentures; and
(3) Sharing Eligible Debt that is designated by RRI, in an officers'
certificate delivered to the collateral trustee on or before the date of
incurrence of such Indebtedness, as entitled to share equally
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and ratably in the benefits and proceeds of all Liens held by the
collateral trustee in Shared Collateral.
"Parity Secured Obligations" means, collectively, the Note Obligations, the
Credit Agreement General Facilities Obligations and all Obligations in respect
of each other Series of Secured Debt but does not include Obligations in respect
of the Credit Agreement Priority Facility.
"PEDFA" means Pennsylvania Economic Development Financing Authority and its
successors.
"Permitted Business" means the business of providing services and products
in the energy market and any businesses incidental or reasonably related
thereto.
"Permitted Investments" means:
(1) any Investment in RRI or in a Restricted Subsidiary of RRI (other
than an Orion Bank Guarantor);
(2) any Investment in Cash Equivalents and, in the case of the
Excluded Subsidiaries only, cash equivalents or other liquid investments
permitted under any Credit Facility to which it is a party;
(3) any Investment by RRI or any Restricted Subsidiary of RRI in a
Person (other than an Orion Bank Guarantor), if as a result of such
Investment:
(A) such Person becomes a Restricted Subsidiary of RRI; or
(B) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, RRI or a Restricted Subsidiary of RRI;
(4) the exercise of the Texas Genco Option or the purchase of any
assets or Equity Interests in Texas Genco or any of its Subsidiaries in
accordance with the terms of the Credit Agreement;
(5) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales;"
(6) any acquisition of assets or Capital Stock solely in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of RRI;
(7) any Investments received in compromise or resolution of (A)
obligations of trade creditors or customers that were incurred in the
ordinary course of business of RRI or any of its Restricted Subsidiaries,
including pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of any trade creditor or customer; or (B)
litigation, arbitration or other disputes with Persons who are not
Affiliates;
(8) Investments represented by Hedging Obligations;
(9) loans or advances to employees made in the ordinary course of
business up to an aggregate principal amount not to exceed $10.0 million at
any one time;
(10) any Investment acquired by RRI or any of its Restricted
Subsidiaries on account of any claim against, or interest in, any other
Person (A) acquired in good faith in connection with or as a result of a
bankruptcy, workout, reorganization or recapitalization of such other
Person or (B) as a result of a bona fide foreclosure by RRI or any of its
Restricted Subsidiaries with respect to any claim against any other Person;
(11) repurchases of the notes or pari passu Indebtedness;
(12) any Investment by RRI or a Restricted Subsidiary of RRI in a
Securitization Entity or any Investment by a Securitization Entity in any
other Person in connection with a Qualified Securitization Transaction;
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(13) payment of consolidated taxes pursuant to the Tax Sharing
Agreement, dated as of October 1, 2002, among RRI and its Subsidiaries
named therein, as amended, supplemented or modified from time to time and
any other tax allocation agreements among RRI and its Subsidiaries;
(14) receivables owing to RRI or a Restricted Subsidiary, if created
or acquired in the ordinary course of business and payable or dischargeable
in accordance with customary trade terms; provided, however, that such
trade terms may include such concessionary trade terms as RRI or such
Restricted Subsidiary deems reasonable under the circumstances; and
(15) other Investments in any Person having an aggregate Fair Market
Value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (15) that are at the time
outstanding not to exceed $125.0 million.
"Permitted Liens" means:
(1) Liens held by the collateral trustee equally and ratably securing
all Indebtedness that is Parity Secured Debt and equally and ratably
securing all other Parity Secured Obligations;
(2) Credit Agreement Priority Facility Liens, Tranche A Priority Liens
and Permitted Separate Liens;
(3) Liens on assets of Excluded Orion Power Subsidiaries securing
Indebtedness of Excluded Orion Power Subsidiaries permitted to be incurred
pursuant to clause (2) of the definition of Permitted Debt;
(4) Liens on assets of RECE and its Subsidiaries securing Indebtedness
of RECE and its Subsidiaries permitted to be incurred pursuant to clause
(3) of the definition of Permitted Debt;
(5) Liens on assets of REMA and its Subsidiaries securing Indebtedness
of REMA and its Subsidiaries permitted to be incurred pursuant to clause
(4) of the definition of Permitted Debt, including cash collateral for
letters of credit issued thereunder and Liens encumbering assets of REMA
and/or any of its Subsidiaries securing obligations under, or in connection
with, or which constitute, Qualifying Credit Support (as defined in the
participation agreements to which REMA is a party);
(6) Liens on assets of the Seward Subsidiaries securing Permitted
PEDFA Bond Indebtedness incurred by the Seward Subsidiaries and that is
Non-Recourse to RRI and all of its other Restricted Subsidiaries (other
than an unsecured Guarantee, if any, provided by RRI);
(7) Liens on assets of Reliant Energy Desert Basin, LLC securing
Indebtedness of Reliant Energy Desert Basin, LLC permitted to be incurred
under clause (21) of the definition of Permitted Debt;
(8) Liens on assets of Texas Genco or TG Holdco or any of their
Subsidiaries securing Indebtedness of Texas Genco or TG Holdco or any of
their Subsidiaries permitted to be incurred pursuant to clauses (6) and (7)
of the definition of Permitted Debt;
(9) Liens on assets of a Restricted Subsidiary in existence on the
date on which such Person becomes a Restricted Subsidiary; provided that on
the date on which such Person becomes a Restricted Subsidiary, after giving
effect to the incurrence of such Liens, the Consolidated Senior Leverage
Ratio would not exceed 3.0 to 1.0;
(10) Liens securing Indebtedness (including Capital Lease Obligations)
permitted to be incurred pursuant to clause (11) of the definition of
Permitted Debt, covering only the assets acquired with or financed by such
Indebtedness;
(11) Liens securing obligations under sale leaseback transactions
permitted by the covenant described above under the caption "Certain
Covenants -- Sale Leaseback," covering only the assets subject to such
transaction;
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(12) Liens in favor of RRI or the Guarantors;
(13) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as is required in
conformity with GAAP has been made therefor;
(14) Liens imposed by law, such as carriers', warehousemen's,
landlord's and mechanics' Liens, in each case, incurred in the ordinary
course of business;
(15) survey exceptions, encumbrances, easements or reservations,
including those for licenses, rights-of-way, sewers, electric lines,
telegraph and telephone lines, mineral reservations and rights and leases,
zoning restrictions and other restrictions as to the use of real property
that were not incurred in connection with Indebtedness and that (A) exist
on the date of the indentures and are recorded on such date, (B) are
permitted under the terms of the security documents or (C) do not in the
aggregate materially adversely affect the value of said properties or
materially impair their use in the operation of the business of such
Person;
(16) Liens to secure any Permitted Refinancing Indebtedness permitted
to be incurred under the indentures if such Permitted Refinancing
Indebtedness is incurred by the same obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded (except as
provided in the proviso in clause (4) of the definition of Permitted
Refinancing Indebtedness); provided, however, that:
(A) the new Lien shall be limited to all or part of the same
categories of property and assets that secured or, under the written
agreements pursuant to which the original Lien arose, could secure the
original Lien (plus improvements and accessions to, such property or
proceeds or distributions thereof), except, if Permitted PEDFA Bond
Indebtedness is Sharing Eligible Debt, it may be secured by Liens held
by the collateral trustee on the Shared Collateral;
(B) the Indebtedness secured by the new Lien is not increased to
any amount greater than the sum of (i) the outstanding principal amount
or, if greater, committed amount of the Permitted Refinancing
Indebtedness and (ii) an amount necessary to pay any fees and expenses,
including premiums, related to such refinancings, refunding, extension,
renewal or replacement and (iii) any protective advances with respect to
the property and assets that secure such Permitted Refinancing
Indebtedness;
(17) Liens on assets transferred to a Securitization Entity or on
assets of a Securitization Entity, in either case incurred in connection
with a Qualified Securitization Transaction;
(18) financing statements (including precautionary statements) filed
in connection with a Capital Lease Obligation or an operating lease, in
each case, not prohibited hereunder; provided that no such financing
statement extends to, covers or refers to as collateral, any property or
assets of a RRI or a Restricted Subsidiary, other than the property or
assets which are subject to such Capital Lease Obligation or such operating
lease;
(19) Liens arising out of or in connection with any judgment that does
not constitute an Event of Default or in connection with any litigation or
other legal proceeding as to which an appeal to contest or review is timely
commenced in good faith by appropriate proceedings and as to which adequate
reserves have been established in accordance with GAAP; provided that any
right to levy, seizure, attachment, sequestration, foreclosure or
garnishment of any property and assets of RRI or a Restricted Subsidiary
thereof arising out of or in connection with any such Lien has been and
continues to be enjoined or effectively stayed;
(20) inchoate statutory Liens arising under ERISA;
(21) Liens (A) on cash and short-term investments (i) deposited by RRI
or any of its Subsidiaries in margin accounts with or on behalf of futures
contract brokers or paid over to other
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counterparties or (ii) pledged or deposited as collateral to a contract
counterparty or issuer of surety bonds by RRI or any of its Subsidiaries,
in the case of clause (i) or (ii), to secure obligations with respect to
(a) contracts for commercial and trading activities in the ordinary course
of business and contracts (including without limitation, physical delivery,
option (whether cash or financial), exchange, swap and futures contracts)
for the purchase, transmission, distribution, sale, lease or hedge of any
energy-related commodity or service or (b) interest rate, commodity price,
or currency rate management contracts or derivatives and (B) encumbering
assets other than accounts or receivables arising out of contracts or
agreements relating to the generation, distribution or transmission of
energy; provided that all such agreements or contracts are entered into in
the ordinary course of business;
(22) Liens arising by virtue of any statutory or common law provision
relating to banker's liens, rights of set off or similar rights,
contractual rights of setoff or netting arrangements entered into in the
ordinary course of business and similar rights with respect to deposit
accounts, commodity accounts and/or securities accounts;
(23) Liens arising under Section 9.343 of the Texas Uniform Commercial
Code or similar statutes of states other than Texas;
(24) Liens in favor of Texas Genco, L.P. created under the Security
Agreement dated as of March 28, 2003 among Reliant Energy Retail Services,
LLC ("RERS"), StarEn Power, LLC ("StarEn") and Reliant Energy Solutions,
LLC ("Solutions"), as debtors, and Texas Genco, L.P. as secured party
securing up to $250.0 million of obligations owing to Texas Genco, L.P.
under the Master Power Purchase and Sale Agreement dated as of October 1,
2002 between Texas Genco, L.P. and Solutions, as the same may be amended,
amended and restated, supplemented or otherwise modified, renewed or
replaced from time to time, and the related Guaranty dated as of October 1,
2002 by Reliant Energy Retail Holdings, LLC, RERS, StarEn and Solutions in
favor of Texas Genco, L.P., as the same may be amended, amended and
restated, supplemented or otherwise modified, renewed or replaced from time
to time, provided that such Liens are subject always to the terms of the
Texas Genco Intercreditor Agreement, as such agreement may be amended,
amended and restated, supplemented or otherwise modified, renewed or
replaced from time to time;
(25) pledges and deposits to secure the payment of worker's
compensation, unemployment insurance, social security benefits or
obligations under similar laws, or to secure the payment or performance of
statutory or public obligations (including environmental, municipal and
public utility commission obligations and requirements), reimbursement or
indemnity obligations arising out of surety, performance, or other similar
bonds, and other obligations of a like nature, in each case incurred in the
ordinary course of business;
(26) Liens in connection with any Approved IDA Transaction as
described in clause (8) of the definition of Asset Sale;
(27) Liens granted by a Person in favor of a commercial trading
counterparty pursuant to a netting agreement, which Liens encumber rights
under agreements that are subject to such netting agreement and which Liens
secure such Person's obligations to such counterparty under such netting
agreement; provided, that any such agreements and netting agreements are
entered into in the ordinary course of business; and provided, further,
that the Liens are incurred in the ordinary course of business and when
granted, do not secure obligations which are past due;
(28) Liens on proceeds from the issuance of Seward Tax-Exempt Bonds or
Permitted PEDFA Bond Indebtedness and Liens on Indebtedness of RRI held by
a Seward Subsidiary securing the Seward Tax-Exempt Bonds or Permitted PEDFA
Bond Indebtedness;
(29) Liens on assets of the Excluded Subsidiaries existing on the date
of the indentures;
(30) Liens on assets of REMA and its Subsidiaries created in
connection with the sale-leaseback of REMA's interests in the Keystone,
Conemaugh and Shawville generating facilities consummated in August 2000;
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(31) Liens on certain of Reliant Energy Choctaw County, LLC's
switchyard equipment at the Choctaw generating facility granted to Entergy
in connection with an Operating and Maintenance Agreement;
(32) Liens created in connection with the indemnity and contribution
obligations in favor of underwriters or note purchasers in connection with
the Seward Tax-Exempt Bonds;
(33) Liens on assets of Reliant Energy Solutions, LLC created in
connection with Delivery Order No. DABT39-97-C-4046 dated September 1997
and issued by the Directorate of Contracting, Contract Support Division,
Ft. Sill, Oklahoma; and
(34) Liens incurred in the ordinary course of business of RRI or any
Restricted Subsidiary of RRI securing obligations that do not exceed $25.0
million in the aggregate at any one time outstanding.
"Permitted PEDFA Bond Indebtedness" means Indebtedness incurred or
guaranteed by RRI and/or the Seward Subsidiaries in tax-exempt industrial
development act financings that are not supported by letters of credit
outstanding under the Credit Agreement, the proceeds of which are used either:
(1) to build the Seward Facility;
(2) to reimburse RRI, its Restricted Subsidiaries or the Seward
Subsidiaries for amounts advanced or incurred, or for Indebtedness incurred
to fund such construction costs, prior to the date of incurrence of such
Indebtedness; or
(3) to refund or defease the Seward-Tax Exempt Bonds or refinance
Indebtedness evidenced by or in support of the Seward Tax-Exempt Bonds.
"Permitted Prior Liens" means (1) Liens described in clauses (9), (10),
(11), (13), (14), (15), (18), (21), (22), (23), (24), (25), (27), (31), (32) and
(33) of the definition of "Permitted Liens," (2) Liens refinancing or replacing
any of the Liens contemplated in clause (1) of this definition, (3) Liens that
arise by operation of law and are not voluntarily granted, to the extent
entitled by law to priority over the security interests created by the security
documents, (4) Credit Agreement Priority Facility Liens, and (5) Tranche A
Priority Liens.
"Permitted Refinancing Indebtedness" means any Indebtedness of RRI or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of RRI or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness extended, refinanced,
renewed, replaced, defeased or refunded (plus all accrued interest on the
Indebtedness and the amount of all expenses, costs and fees and premiums
incurred in connection therewith);
(2) except for Permitted PEDFA Bond Indebtedness, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness is subordinated in right of payment to,
the notes on terms at least as favorable to the holders of notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded, as reasonably
determined by RRI or such Restricted Subsidiary;
143
(4) such Indebtedness is incurred either by RRI or by the Restricted
Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded, except that Permitted
PEDFA Bond Indebtedness may be (A) incurred by RRI and/or guaranteed by RRI
if the assets of the Seward Subsidiaries (other than Investments in RRI
pledged to secure such Permitted PEDFA Bond Indebtedness and proceeds from
the issuance of Permitted PEDFA Bond Indebtedness that secures Permitted
PEDFA Bond Indebtedness) remain free of all Liens securing Indebtedness,
except Liens held by the collateral trustee as security for Secured
Obligations or (B) guaranteed by RRI on an unsecured basis if such
Indebtedness is otherwise Non-Recourse to RRI and its other Restricted
Subsidiaries(other than the Seward Subsidiaries) and is secured solely by
Liens on the assets of the Seward Subsidiaries and/or the Equity Interests
of the Seward Subsidiaries; provided, further, that in the case of (1)
Indebtedness of an Excluded Orion Power Subsidiary that is being
refinanced, replaced or refunded, such Indebtedness may be incurred at
another Excluded Orion Power Subsidiary or at Orion Power Holdings, Inc.
and (2) Indebtedness of RECE and any of its Subsidiaries that is being
refinanced, replaced or refunded, such Indebtedness may be incurred by RECE
or any of its Subsidiaries;
(5) if incurred by RRI, such Indebtedness may be guaranteed by the
Guarantors; and
(6) in the case of any Indebtedness under the Credit Agreement, such
Indebtedness may be guaranteed by the Orion Bank Guarantors.
"Permitted TG Purchase Transaction" means a single transaction pursuant to
which RRI or TG Holdco shall purchase Equity Interests of Texas Genco.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Purchase Money Note" means a promissory note of a Securitization Entity
evidencing amounts owed to RRI or any Restricted Subsidiary of RRI in connection
with a Qualified Securitization Transaction to a Securitization Entity, which
note shall be repaid from cash available to the Securitization Entity other than
amounts required to be established as reserves pursuant to agreements, amounts
paid to investors in respect of interest and principal and amounts paid in
connection with the purchase of newly generated receivables or newly acquired
equipment.
"Qualified Securitization Transaction" means any transaction or series of
transactions that may be entered into by RRI or any of its Restricted
Subsidiaries pursuant to which RRI or any of its Restricted Subsidiaries may
sell, convey or otherwise transfer to:
(1) a Securitization Entity (in the case of a transfer by RRI or any
of its Restricted Subsidiaries); and
(2) any other Person (in the case of a transfer by a Securitization
Entity), or may grant a security interest in any accounts receivable or
equipment (whether now existing or arising or acquired in the future) of
RRI or any of its Restricted Subsidiaries, and any assets related thereto,
including, without limitation, all collateral securing such accounts
receivable and equipment, all contracts and contract rights and all
guarantees or other obligations in respect of such accounts receivable and
equipment, proceeds of such accounts receivable and equipment and other
assets (including contract rights) which are customarily transferred or in
respect of which security interests are customarily granted in connection
with asset securitization transactions involving accounts receivable and
equipment.
"RECE" means Reliant Energy Capital (Europe), Inc.
"REMA" means Reliant Energy Mid-Atlantic Power Holdings, LLC.
"Required Lenders" means, at any time in respect of any action or matter,
(1) the number or percentage of holders of Credit Agreement Obligations whose
consent is required under the Credit Agreement to take such action or bind the
holders of Credit Agreement Obligations to such matter or
144
(2) the Credit Agreement Agent acting upon authorization under the Credit
Agreement or under the authorization or consent of the number or percentage of
holders referred to in clause (1).
"Required Secured Debtholders" means, at any time, the holders of a
majority in aggregate outstanding principal amount of all Secured Debt then
outstanding and unfunded letters of credit or credit commitments which, if
funded, would constitute outstanding Secured Debt, voting together as a single
class. For this purpose only, Secured Debt registered in the name of, or
beneficially owned by, RRI or any of its Subsidiaries shall be deemed not to be
outstanding.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Sale of the European Operations" means the sale of RRI's European energy
operations to n.v. Nuon (Nuon), a Netherlands-based electricity distributor,
pursuant to an agreement entered into in February 2003, as amended from time to
time.
"S&P" means Standard & Poor's Ratings Group.
"Secured Debt" means the Parity Secured Debt and Indebtedness under the
Credit Agreement Priority Facility.
"Secured Debt Documents" means, collectively, the Credit Agreement
Documents, the Note Documents, and the indentures or agreement governing each
other Series of Secured Debt and all agreements binding on any Obligor related
thereto.
"Secured Debt Representative" means:
(1) in the case of the 2010 notes, the applicable trustee;
(2) in the case of the 2013 notes, the applicable trustee;
(3) in the case of Credit Agreement Debt, the Credit Agreement Agent;
or
(4) in the case of any other Series of Secured Debt, the trustee,
agent or representative of the holders of such Series of Secured Debt who
maintains, or on whose behalf is maintained, the transfer register for or
who acts as administrative agent for such Series of Secured Debt and is
appointed as Secured Debt Representative (for purposes related to the
administration of the security documents) pursuant to the indentures or
agreement governing such Series of Secured Debt.
"Secured Obligations" means the Parity Secured Obligations and all
Obligations under the Credit Agreement Priority Facility.
"Securitization Entity" means RE Retail Receivables, LLC, and any Person in
which RRI or any Restricted Subsidiary of RRI makes an Investment and to which
RRI or any Restricted Subsidiary of RRI transfers accounts receivable or
equipment (and related assets, including contract rights) which engages in no
activities other than in connection with the financing, sale, or purchase of
accounts receivable or equipment or related assets (including contract rights)
and which is designated by the Board of Directors of RRI (as provided below) as
a Securitization Entity:
(1) no portion of the Indebtedness or any other Obligations
(contingent or otherwise) of which:
(A) is guaranteed by RRI or any Restricted Subsidiary of RRI
(excluding guarantees of Obligations (other than the principal of, and
interest on, Indebtedness)) pursuant to Standard Securitization
Undertakings;
(B) is recourse to or obligates RRI or any Restricted Subsidiary of
RRI in any way other than pursuant to Standard Securitization
Undertakings; or
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(C) subjects any property or asset of RRI or any Restricted
Subsidiary of RRI, directly or indirectly, contingently or otherwise, to
the satisfaction thereof, other than pursuant to Standard Securitization
Undertakings;
(2) with which neither RRI nor any Restricted Subsidiary of RRI has
any material contract, agreement, arrangement or understanding (except in
connection with a Purchase Money Note or Qualified Securitization
Transaction) other than on terms no less favorable to RRI or such
Restricted Subsidiary than those that might be obtained at the time from
Persons that are not Affiliates of RRI, as determined by RRI, other than
amounts payable in the ordinary course of business in connection with
servicing receivables and other assets of such entity; and
(3) to which neither RRI nor any Restricted Subsidiary of RRI has any
obligation to maintain or preserve such entity's financial condition or
cause such entity to achieve certain levels of operating results.
Any such designation by the Board of Directors of RRI shall be evidenced to the
applicable trustee by filing with such trustee a certified copy of the Board
Resolution of RRI giving effect to such designation and an officer's certificate
certifying that such designation complied with the foregoing conditions.
"security documents" means the collateral trust agreement, and all security
agreements, pledge agreements, control agreements, collateral assignments,
mortgages, deed of trust or other grants or transfers for security or agreements
related thereto executed and delivered by RRI or any Guarantor creating (or
purporting to create) a Lien upon Collateral in favor of the collateral trustee
to secure Secured Obligations, in each case, as amended, modified, renewed,
restated or replaced, in whole or in part, from time to time.
"Series of Secured Debt" means, severally, the notes, the Credit Agreement
General Facilities Debt and each other issue or series of Parity Secured Debt.
"Seward Facility" means the 521 MW coal facility and related assets owned
by Seward Trust and located, or to be located, in New Florence, Indiana County,
Pennsylvania.
"Seward Subsidiaries" means Reliant Energy Seward, LLC, a Delaware limited
liability company, and Seward Trust, a Delaware statutory trust.
"Seward Tax-Exempt Bonds" mean (1) the Pennsylvania Economic Financing
Authority Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project),
Series 2001A, in the original aggregate principal amount of $150,000,000 (the
"Seward Series 2001A Bonds"), (2) the Pennsylvania Economic Financing Authority
Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project), Series
2002A, in the original aggregate principal amount of $75,000,000 (the "Seward
Series 2002A Bonds"), (3) the Pennsylvania Economic Financing Authority Exempt
Facilities Revenue Bonds (Reliant Energy Seward, LLC Project), Series 2002B, in
the original aggregate principal amount of $75,000,000 (the "Seward Series 2002B
Bonds"), and (4) any bonds issued by PEDFA after the date of the indentures as
permitted under the Credit Agreement as in effect on the date of the indentures
and supported by letters of credit outstanding under the Credit Agreement.
"Sharing Eligible Debt" means:
(1) Indebtedness incurred pursuant to clause (1) of the definition of
Permitted Debt;
(2) Indebtedness incurred under clause (21) of the definition of
Permitted Debt;
(3) the notes issued on the date of the indentures and the related
exchange notes;
(4) Permitted Refinancing Indebtedness incurred by RRI or, if it
constitutes Permitted PEDFA Bond Indebtedness, Indebtedness incurred by RRI
and/or the Seward Subsidiaries and/or guaranteed by RRI, the net proceeds
of which are used to refinance Indebtedness evidenced by or in support of
the Seward Tax-Exempt Bonds; provided, that, in the case of Permitted PEDFA
Bond Indebtedness, the assets of the Seward Subsidiaries (other than
Investments in RRI pledged to secure such
146
Permitted PEDFA Bond Indebtedness and proceeds from the issuance of
Permitted PEDFA Bond Indebtedness that secures Permitted PEDFA Bond
Indebtedness) shall remain free of all Liens securing Indebtedness, except
Permitted Prior Liens and Liens held by the collateral trustee as security
for the Parity Secured Debt;
(5) Permitted Refinancing Indebtedness incurred by RRI, the net
proceeds of which are used to refinance Indebtedness of Excluded Orion
Power Subsidiaries incurred pursuant to clause (2) of the definition of
Permitted Debt;
(6) Indebtedness incurred by RRI and the Guarantors pursuant to clause
(7) of the definition of Permitted Debt;
(7) Permitted Refinancing Indebtedness, the net proceeds of which are
used to refinance Parity Secured Debt; and
(8) any other Indebtedness incurred by RRI if (A) when it was
incurred, the incurrence of such Indebtedness by RRI was permitted by the
indentures and (B) on the day such Indebtedness was incurred, after giving
effect to such incurrence and the application of the proceeds from, and the
creation of Liens to secure, such Indebtedness, the Consolidated Senior
Leverage Ratio was not greater than 3.0 to 1.0;
provided that each category of Indebtedness described above:
(A) must be guaranteed by any of the Restricted Subsidiaries that,
on the date of incurrence of such Indebtedness, is obligated as a
Guarantor under a subsidiary guarantee of the notes;
(B) must not be subordinated in right of payment or in respect of
the application of the proceeds of the collateral trustee's Liens on the
Collateral to any other Indebtedness of RRI or any Guarantor (whether or
not such other Indebtedness is part of the same series of Indebtedness),
except in accordance with the Order of Application; and
(C) is governed by an indenture or agreement that appoints a
Secured Debt Representative and includes an intercreditor confirmation.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Specified Junior Securities" means subordinated debt securities issued by
RRI that:
(1) are subordinated in right of payment in full to the notes;
(2) have a final maturity date occurring at least 91 days after the
final maturity date of the notes issued under that indenture and have a
Weighted Average Life to Maturity at least 91 days longer than the Weighted
Average Life to Maturity of the notes;
(3) are not guaranteed by any Subsidiary of RRI except for any
guarantee by a Guarantor that is contractually subordinated in right of
payment to the prior payment in full in cash to the subsidiary guarantees
of the notes; and
(4) are not convertible into any other securities except Equity
Interests of RRI (other than Disqualified Stock).
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by RRI or any Subsidiary of RRI which are
substantially similar to those in existence on the date of the indentures or are
otherwise reasonably customary in an accounts receivable or equipment
securitization transaction, in each case, as determined by RRI.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the
147
documentation governing such Indebtedness as of the date of the indentures, and
will not include any contingent obligations to repay, redeem or repurchase any
such interest or principal prior to the date originally scheduled for the
payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency and after giving
effect to any voting agreement or stockholders' agreement that effectively
transfers voting power) to vote in the election of directors, managers or
trustees of the corporation, association or other business entity is at the
time owned or controlled, directly or indirectly, by that Person or one or
more of the other Subsidiaries of that Person (or a combination thereof);
and
(2) any partnership (A) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(B) the only general partners of which are that Person or one or more
Subsidiaries of that Person (or any combination thereof).
"Texas Genco" means Texas Genco Holdings, Inc., a Texas corporation and a
100% owner of Texas Genco, LP, a Texas limited partnership.
"Texas Genco Escrow Account" means a securities account at all times under
the sole dominion and control of the collateral trustee (acting on its own or
through its agent Bank of America, N.A. as collateral agent under the Credit
Agreement or a successor collateral agent under the Credit Agreement), in which
funds will be deposited and withdrawn in accordance with the terms of the Credit
Agreement set forth therein as to the "Purchase Escrow Account," as defined
therein.
"Texas Genco Intercreditor Agreement" means the Intercreditor Agreement
dated as of March 28, 2003 between Texas Genco, L.P. and Bank of America, N.A.,
and the collateral trustee.
"Texas Genco Option" means the option, as amended from time to time,
granted by CenterPoint to RRI or an assignee of RRI, to purchase all of the
shares of common stock of Texas Genco owned by CenterPoint pursuant to the
Option Agreement.
"Texas Genco Preferred Stock" means preferred or preference stock of Texas
Genco or TG Holdco the net proceeds of which are applied to purchase assets or
Equity Interests of Texas Genco or any of its Subsidiaries.
"TG Holdco" means a special purpose direct or indirect subsidiary of RRI
organized under the laws of a State of the United States of America, which
subsidiary may be formed by RRI solely for the purpose of owning and holding
directly the Equity Interests of Texas Genco or any of its Subsidiaries or any
of their respective assets; provided, however, that if TG Holdco is not,
directly or indirectly, wholly-owned by RRI, then all of the Equity Interests of
TG Holdco that are owned at any time by RRI or its Subsidiaries will be at all
times owned and held in a single entity that is a Guarantor.
"Tranche A Priority Liens" means:
(1) the priority Liens on the electric generating plants that
constitute the Seward Facility, Hunterstown Facility and Choctaw Facility
and related contracts, rights and assets securing the "Adjusted Tranche A
Obligations" (as defined in the Citibank Intercreditor Agreement), but such
Liens shall cease to be Tranche A Priority Liens when, in accordance with
the provisions of Section 2 of the Citibank Intercreditor Agreement, such
Liens cease to secure Adjusted Tranche A Obligations in priority over other
Credit Agreement General Facilities Debt; and
(2) the liquidation priority claim of the holders of the Tranche A
Priority Liens pursuant to Section 3 of the Citibank Intercreditor
Agreement in an amount not to exceed $200.0 million.
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"Unrestricted Subsidiary" means any Subsidiary of RRI or any successor to
any of them that is designated by the Board of Directors as an Unrestricted
Subsidiary pursuant to a Board Resolution, but only to the extent that such
Subsidiary:
(1) has no Indebtedness other than Indebtedness that is Non-Recourse
to RRI and its Restricted Subsidiaries;
(2) is not party to any agreement, contract, arrangement or
understanding with RRI or any Restricted Subsidiary of RRI unless the terms
of any such agreement, contract, arrangement or understanding are no less
favorable to RRI or such Restricted Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of RRI; and
(3) is a Person with respect to which neither RRI nor any of its
Restricted Subsidiaries has any direct or indirect obligation (A) to
subscribe for additional Equity Interests or (B) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results.
Any designation of a Subsidiary of RRI as an Unrestricted Subsidiary will
be evidenced to the applicable trustee by filing with such trustee a certified
copy of the Board Resolution giving effect to such designation and an officer's
certificate certifying that such designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for
purposes of the indentures and any Indebtedness of such Subsidiary will be
deemed to be incurred by a Restricted Subsidiary of RRI as of such date and, if
such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," RRI will be in default of such
covenant. The Board of Directors of RRI may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation will be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of RRI of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation will only be permitted if (1) such Indebtedness
is permitted under the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period; and (2) no Default or Event of
Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (A) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (B) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of
such payment; by
(2) the then outstanding principal amount of such Indebtedness.
149
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for original notes where the
original notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
expiration date of the exchange offer, we will make this prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
in the exchange offer may be sold from time to time in one or more transactions
in the over-the-counter market, in negotiated transactions, through the writing
of options on the exchange notes or a combination of these methods of resale.
These resales may be made at market prices prevailing at the time of resale, at
prices related to these prevailing market prices or negotiated prices. Any
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
broker-dealer and/or the purchasers of any of the exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account in the exchange offer and any broker or dealer that participates in a
distribution of the exchange notes may be deemed to be an underwriter within the
meaning of the Securities Act, and any profit on the resale of exchange notes
and any commission or concessions received by those persons may be deemed to be
underwriting compensation under the Securities Act. And such broker-dealer must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, including the delivery
of a prospectus that contains information with respect to any selling holder
required by the Securities Act in connection with any resale of the exchange
notes.
Furthermore, any broker-dealer that acquired any of its original notes
directly from us:
- may not rely on the applicable interpretation of the staff of the SEC's
position contained in Exxon Capital Holdings Corp., SEC no-action letter
(April 13, 1988), Morgan, Stanley & Co. Inc., SEC no-action letter (June
5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1983);
and
- must also be named as a selling noteholder in connection with the
registration and prospectus delivery requirements of the Securities Act
relating to any resale transaction.
For a period of 180 days after the expiration date of the exchange offer,
we will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests these
documents. We have agreed to pay all expenses incident to the performance of our
obligations in relation to the exchange offer. We will indemnify the holders of
the notes, including any broker-dealers, against various liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the exchange notes will be passed
upon for Reliant Resources, Inc. by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York.
EXPERTS
The consolidated financial statements and the related financial statement
schedules of Reliant Resources, Inc. as of December 31, 2001 and 2002 and for
each of the three years in the period ended December 31, 2002, incorporated in
this prospectus by reference from the Company's Current Report on Form 8-K dated
November 14, 2003, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report (which report expresses an unqualified
opinion and includes explanatory paragraphs relating to (i) the change in method
of accounting for derivatives and hedging activities in 2001, (ii) the change in
method of accounting for goodwill and other intangibles in 2002, (iii) the
change in method of presenting trading and marketing activities from a gross
basis to net basis in 2002, (iv) the
150
change in method of accounting for early debt extinguishment, (v) accounting for
European energy operations as discontinued operations, (vi) accounting for
Desert Basin plant operations as discontinued operations, and (vii) the
restatement of the 2000 and 2001 consolidated financial statements) which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of El Dorado Energy, LLC as of December 31, 2002
and 2001 and for each of the three years in the period ended December 31, 2002,
incorporated in this prospectus by reference from the Current Report on Form 8-K
of Reliant Resources, Inc. dated November 14, 2003, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report (which
report expresses an unqualified opinion and includes an explanatory paragraph
relating to the change in method of accounting for derivatives and hedging
activities in 2001) which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The combined and consolidated financial statements of Reliant Energy
Mid-Atlantic Power Holdings, LLC as of December 31, 2001 and 2002 and for the
periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to December 31,
2000 and the years ended December 31, 2001 and 2002, incorporated in this
prospectus by reference from the Current Report on Form 8-K of Reliant
Resources, Inc. dated July 22, 2003, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to (i) the
change in method of accounting for derivatives and hedging activities in 2001
and (ii) the change in method of accounting for goodwill and other intangibles
in 2002) which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of Reliant Energy Retail Holdings ,
LLC as of December 31, 2001 and 2002 and for each of the three years in the
period ended December 31, 2002, incorporated in this prospectus by reference
from the Current Report on Form 8-K of Reliant Resources, Inc. dated June 27,
2003, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report (which report expresses an unqualified opinion and
includes explanatory paragraphs relating to (i) the change in method of
accounting for goodwill and other intangibles in 2002 and (ii) the acquisition
of Reliant Energy Renewables, Inc.) which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The consolidated financial statements and related financial statement
schedules of Orion Power Holdings, Inc. as of December 31, 2002 and for the
periods from January 1, 2002 to February 19, 2002 and February 20, 2002 to
December 31, 2002, incorporated in this prospectus by reference from the Current
Report on Form 8-K of Reliant Resources, Inc. dated April 16, 2003 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report (which report expresses an unqualified opinion and includes explanatory
paragraphs relating to (i) the change in method of accounting for goodwill and
other intangibles in 2002 and (ii) the application of procedures relating to
certain disclosures and reclassifications related to the 2000 and 2001 financial
statements that were audited by other auditors who have ceased operations and
for which Deloitte & Touche LLP have expressed no opinion or other form of
assurance other than with respect to such disclosures and reclassifications)
which is incorporated herein by reference, and have been so incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements for Orion Power Holdings, Inc. as of
December 31, 2001 and for the years ended December 31, 2000 and 2001,
incorporated in this prospectus by reference have been audited by Arthur
Andersen LLP, independent public accountants, as stated in their report (which
report expresses an unqualified opinion and includes an explanatory paragraph
relating to the change in method of accounting for derivative financial
instruments in 2001) which is incorporated by reference.
151
We have been unable to obtain Arthur Andersen LLP's permission for the
incorporation by reference in this prospectus of their report on the financial
statements of Orion Power Holdings, Inc. Because Arthur Andersen LLP has not
granted us permission to incorporate their report in this registration
statement, you will not be able to recover against Arthur Andersen LLP for any
untrue statements of material fact contained in our financial statements audited
by Arthur Andersen LLP or for any omission to state a material fact required to
be stated in those financial statements.
152
APPENDIX A
GLOSSARY OF TERMS
The following terms are used in this prospectus:
Alliance RTO.................. the proposed RTO for all or parts of Missouri,
Illinois, Indiana, Michigan, Ohio, Kentucky,
West Virginia, Pennsylvania, Tennessee,
Virginia and North Carolina.
Bcf........................... one billion cubic feet of natural gas.
Cal ISO....................... California Independent System Operator.
Cal PX........................ California Power Exchange.
CenterPoint................... CenterPoint Energy, Inc., on and after August
31, 2002 and Reliant Energy, Incorporated prior
to August 31, 2002.
CERCLA........................ Comprehensive Environmental Response
Corporation and Liability Act of 1980.
CFTC.......................... Commodity Futures Trading Commission.
Channelview................... Reliant Energy Channelview L.P., one of our
subsidiaries.
CPUC.......................... California Public Utility Commission.
Distribution.................. the distribution of approximately 83% of our
common stock owned by CenterPoint to its
stockholders on September 30, 2002.
Duquesne Light................ Duquesne Light Company
EBITDA........................ earnings (loss) before interest expense,
interest income, income taxes, depreciation and
amortization expense.
ECAR.......................... East Central Area Reliability Coordination
Council.
ECAR Market................... the wholesale electric market operated by ECAR.
EPA........................... Environmental Protection Agency.
ERCOT......................... Electric Reliability Council of Texas.
ERCOT ISO..................... ERCOT Independent System Operator.
ERCOT Region.................. the electric market operated by ERCOT.
FERC.......................... Federal Energy Regulatory Commission.
FPA........................... the Federal Power Act.
FPSC.......................... Florida Public Service Commission.
GAAP.......................... United States generally accepted accounting
principles.
GridFlorida RTO............... the FERC approved RTO for Florida.
GWh........................... gigawatt hour.
headroom...................... the difference between the price to beat and
the sum of (a) the charges, fees and
transportation and distribution utility rates
approved by the PUCT and (b) the price paid for
electricity to serve price to beat customers.
A-1
IPO........................... our initial public offering in May 2001.
LEP........................... Liberty Electric Power, LLC, one of our
subsidiaries.
Liberty....................... Liberty Electric PA, LLC, one of our
subsidiaries.
MAIN.......................... Mid-America Interconnected Network.
MAIN Market................... the wholesale electric market operated by MAIN.
MISO.......................... Midwest Independent Transmission System
Operator.
MMbtu......................... one million British thermal units.
MW............................ megawatt.
MWh........................... megawatt hour.
Nuon.......................... N.V. Nuon, a Netherlands-based electricity
distributor.
NYISO......................... New York Independent System Operator.
NY Market..................... the wholesale electric market operated by
NYISO.
Orion MidWest................. Orion Power MidWest, L.P., one of our
subsidiaries.
Orion NY...................... Orion Power New York, L.P., one of our
subsidiaries.
Orion Power................... Orion Power Holdings, Inc., one of our
subsidiaries.
OTC........................... over-the-counter market.
PJM........................... PJM Interconnection, LLC.
PJM Market.................... the wholesale electric market operated by PJM
regional transmission organization in all or
part of Delaware, the District of Columbia,
Maryland, New Jersey and Virginia.
PJM West Market............... the wholesale electric market operated by PJM
in the Midwest.
Protocols..................... structure, agreements, tariffs, rules,
regulations, mechanisms and requirements that
govern rates, terms and conditions for
electricity services.
PUCT.......................... Public Utility Commission of Texas.
PUHCA......................... Public Utility Holding Company Act of 1935.
QSPE.......................... qualified special purpose entity.
RECE.......................... Reliant Energy Capital (Europe), Inc., one of
our subsidiaries.
REDB.......................... Reliant Energy Desert Basin, LLC, one of our
subsidiaries.
Reliant Energy................ Reliant Energy, Incorporated and its
subsidiaries.
Reliant Energy Services....... Reliant Energy Services, Inc., one of our
subsidiaries.
REMA.......................... Reliant Energy Mid-Atlantic Power Holdings,
LLC, one of our subsidiaries.
REPG.......................... Reliant Energy Power Generation, Inc., one of
our subsidiaries.
REPGB......................... Reliant Energy Power Generation Benelux, N.V.,
one of our subsidiaries.
RERH.......................... Reliant Energy Retail Holdings, LLC, one of our
subsidiaries.
A-2
RTO........................... regional transmission organizations.
RTO West...................... the FERC approved RTO for Idaho, Montana,
Nevada, Oregon, Utah and Washington.
SEC........................... Securities and Exchange Commission.
SeTrans RTO................... the FERC approved RTO for all or parts of
Georgia, Alabama, Louisiana, Mississippi,
Arkansas and eastern Texas.
SFAS.......................... Statement of Financial Accounting Standards.
SFAS No. 133.................. SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as
amended.
SFAS No. 142.................. SFAS No. 142, "Goodwill and Other Intangible
Assets".
SFAS No. 144.................. SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets".
Share Purchase Agreement...... Share Purchase Agreement, dated as of February
28, 2003, among Reliant Energy Europe Inc.,
Reliant Energy Wholesale (Europe) Holdings
B.V., N.V. Nuon and Reliant Resources, Inc.
SMD........................... the standard market design for the wholesale
electric market proposed by the FERC.
SRP........................... Saltwater River Project Agricultural
Improvement and Power District of the State of
Arizona.
TCE........................... Texas Commercial Energy, a retail electric
provider to ERCOT.
Texas electric restructuring
law........................... Texas Electric Choice Plan adopted by the Texas
legislature in June 1999.
Texas Genco................... Texas Genco Holdings, Inc., a subsidiary of
CenterPoint, and Texas Genco, LP, its
wholly-owned subsidiary.
West Connect RTO.............. the FERC approved RTO for all or part of
Colorado, Arizona, New Mexico and a portion of
Texas.
A-3
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$1,100,000,000
(RELIANT RESOURCES, INC. LOGO) RELIANT RESOURCES, INC.
OFFER FOR
ALL OUTSTANDING 9.25% SENIOR SECURED NOTES DUE 2010
IN EXCHANGE FOR 9.25% SENIOR SECURED NOTES DUE 2010
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND
ALL OUTSTANDING 9.50% SENIOR SECURED NOTES DUE 2013
IN EXCHANGE FOR 9.50% SENIOR SECURED NOTES DUE 2013
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
-------------------------
PROSPECTUS
-------------------------
December 11, 2003
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