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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _______________
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Commission file number 1-16077
ORION POWER HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-2087649
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
c/o Reliant Energy, Inc.
1000 Main Street
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
(713) 497-3000
(Registrant's Telephone Number, Including Area Code)
------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 3, 2004, Orion Power Holdings, Inc. had 1,000 shares of voting common
stock outstanding. All shares of voting common stock are held by Reliant Energy,
Inc.
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 2003 and 2004............................................................. 1
Consolidated Balance Sheets (unaudited)
December 31, 2003 and March 31, 2004................................................................... 2
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2003 and 2004............................................................. 3
Notes to Unaudited Consolidated Interim Financial Statements........................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 12
Recent Developments and Other Information........................................................... 12
Consolidated Results of Operations.................................................................. 12
Financial Condition................................................................................. 14
Item 3. Quantitative and Qualitative Disclosures About Non-trading Activities and Related Market Risks.......... 18
Item 4. Controls and Procedures................................................................................ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................................ 20
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
As used in this Form 10-Q, "Orion Power" refers to Orion Power Holdings,
Inc. and its consolidated subsidiaries.
When Orion Power makes statements containing projections, estimates or
assumptions about revenues, income and other financial items, plans for the
future, future economic performance, transactions for the sale of parts of the
operations and financings related thereto, Orion Power is making
"forward-looking statements." Forward-looking statements relate to future events
and anticipated revenues, earnings, business strategies, competitive position or
other aspects of the 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," "effort," "target" and other similar
words. However, the absence of these words does not mean that the statements are
not forward-looking. Although Orion Power believes that the expectations and the
underlying assumptions reflected in the 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.
Among other things, the matters described in (a) note 14 to Orion Power's
consolidated financial statements, included in Orion Power's Annual Report on
Form 10-K for the year ended December 31, 2003, filed on March 17, 2004 and (b)
(i) "Management's Discussion and Analysis of Financial Condition and Results of
Operations", (ii) notes 11 and 12 to the interim financial statements and (iii)
"Legal Proceedings" in Part II, Item 1, all included in this report, could cause
actual results to differ materially from those expressed or implied in the
forward-looking statements.
Each forward-looking statement speaks only as of the date of the
particular statement and Orion Power undertakes no obligation to publicly update
or revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2003 2004
--------------- ---------------
REVENUES:
Revenues................................................................. $ 263,055 $ 307,765
Revenues-affiliate....................................................... 16,614 11,993
--------------- ---------------
Total.................................................................. 279,669 319,758
--------------- ---------------
EXPENSES:
Fuel..................................................................... 89,703 97,136
Fuel-affiliate........................................................... 21,554 37,203
Purchased power.......................................................... 4,448 6,326
Purchased power-affiliate................................................ 5,691 7,471
Operation and maintenance................................................ 59,770 70,761
General and administrative-affiliates.................................... 12,715 13,468
Taxes other than income taxes............................................ 19,526 18,255
Depreciation............................................................. 30,911 34,091
Amortization............................................................. 6,312 10,516
--------------- ---------------
Total.................................................................. 250,630 295,227
--------------- ---------------
OPERATING INCOME............................................................ 29,039 24,531
--------------- ---------------
OTHER INCOME (EXPENSE):
Other, net............................................................... (434) 739
Interest expense......................................................... (36,440) (36,117)
Interest income.......................................................... 508 396
--------------- ---------------
Total other expense.................................................... (36,366) (34,982)
--------------- ---------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE......... (7,327) (10,451)
Income tax benefit....................................................... (5,391) (6,777)
--------------- ---------------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE.......................... (1,936) (3,674)
Cumulative effect of accounting change, net of tax....................... 2,121 -
--------------- ---------------
NET INCOME (LOSS)........................................................... $ 185 $ (3,674)
=============== ===============
See Notes to the Unaudited Consolidated Interim Financial Statements
1
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31, MARCH 31,
2003 2004
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................... $ 33,441 $ 34,762
Restricted cash............................................................................. 189,440 180,286
Accounts receivable, principally customer, net of allowance of $7,115 and $6,870............ 111,795 115,796
Receivable from affiliates, net............................................................. 221 -
State income taxes receivable............................................................... 34,850 35,258
Inventory................................................................................... 69,479 65,342
Derivative assets........................................................................... 23,045 65,784
Accumulated deferred income taxes........................................................... 11,530 1,635
Prepaid insurance and property taxes........................................................ 11,756 21,902
Other current assets........................................................................ 9,345 9,272
------------- -------------
Total current assets.................................................................... 494,902 530,037
------------- -------------
Property, plant and equipment, gross........................................................... 3,969,326 3,981,030
Accumulated depreciation....................................................................... (239,893) (273,259)
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET............................................................. 3,729,433 3,707,771
------------- -------------
OTHER ASSETS:
Goodwill, net............................................................................... 395,079 395,079
Other intangibles, net...................................................................... 434,413 430,390
Derivative assets........................................................................... 12,150 32,977
Deferred financing costs, net............................................................... 17,484 15,100
Restricted cash............................................................................. 8,656 8,656
Other....................................................................................... 5,523 5,333
------------- -------------
Total other assets...................................................................... 873,305 887,535
------------- -------------
TOTAL ASSETS................................................................................... $ 5,097,640 $ 5,125,343
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and short-term borrowings................................. $ 407,690 $ 375,671
Accounts payable, principally trade......................................................... 49,373 39,415
Derivative liabilities...................................................................... 19,480 18,986
Payable to affiliates, net.................................................................. - 3,624
Accumulated deferred income taxes........................................................... - 17,964
Accrued interest............................................................................ 19,487 35,543
Other....................................................................................... 29,025 24,417
------------- -------------
Total current liabilities............................................................... 525,055 515,620
------------- -------------
OTHER LIABILITIES:
Accumulated deferred income taxes........................................................... 429,168 420,782
Derivative liabilities...................................................................... 17,293 22,472
Contractual obligations..................................................................... 52,439 55,983
Other....................................................................................... 72,519 76,730
------------- -------------
Total other liabilities................................................................. 571,419 575,967
------------- -------------
LONG-TERM DEBT................................................................................. 1,585,689 1,572,259
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock; par value $1.00 per share (1,000 shares authorized, issued and outstanding)... 1 1
Additional paid-in capital.................................................................. 3,233,308 3,251,430
Retained deficit............................................................................ (813,101) (816,775)
Accumulated other comprehensive (loss) income............................................... (4,731) 26,841
------------- -------------
Stockholder's equity.................................................................... 2,415,477 2,461,497
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..................................................... $ 5,097,640 $ 5,125,343
============= =============
See Notes to the Unaudited Consolidated Interim Financial Statements
2
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ 185 $ (3,674)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Cumulative effect of accounting changes....................................... (2,121) -
Depreciation and amortization................................................. 37,223 44,607
Non-cash equity contribution of operation and maintenance and general and
administrative costs from stockholder....................................... 16,000 17,904
Deferred income taxes......................................................... (1,437) (2,924)
Net unrealized gains on derivatives........................................... (4,539) (4,913)
Net amortization of contractual rights and obligations........................ 14,406 8,887
Amortization of deferred financing costs...................................... 2,449 2,384
Amortization of revaluation of acquired swaps and debt........................ (8,089) (5,109)
Changes in other assets and liabilities:
Restricted cash............................................................. 29,116 9,154
Accounts receivable, net.................................................... (5,586) (4,001)
Inventory................................................................... (1,058) 4,137
Prepaid insurance and property taxes and other current assets............... (9,918) (10,783)
Other assets................................................................ (22,744) (10,936)
Accounts payable............................................................ (13,004) (10,004)
Payable to/receivable from affiliates, net.................................. 9,266 4,064
Other current liabilities................................................... (14,286) (4,608)
Taxes payable/receivable.................................................... 8,723 (363)
Accrued interest............................................................ 11,545 16,056
Other liabilities........................................................... (1,706) 3,313
------------ ------------
Net cash provided by operating activities................................. 44,425 53,191
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (13,119) (12,429)
------------ ------------
Net cash used in investing activities..................................... (13,119) (12,429)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt...................................................... (9,720) (39,441)
Decrease in short-term borrowings and revolving credit facilities, net.......... (11,000) -
------------ ------------
Net cash used in financing activities..................................... (20,720) (39,441)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................................ 10,586 1,321
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 7,400 33,441
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 17,986 $ 34,762
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest paid (net of amounts capitalized).................................... $ 30,655 $ 21,619
Income taxes paid (net of income tax refunds received)........................ $ (12,677) $ (3,490)
See Notes to the Unaudited Consolidated Interim Financial Statements
3
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
As used in this Form 10-Q, "Orion Power Holdings" refers to Orion Power
Holdings, Inc. "Orion Power" refers to Orion Power Holdings, Inc. and its
consolidated subsidiaries. Orion Power Holdings, a Delaware corporation, and its
subsidiaries own and operate electric generation facilities in New York, Ohio,
Pennsylvania and West Virginia with an aggregate generating capacity of 6,690
megawatts, as of March 31, 2004. Orion Power typically sells its wholesale
products to electric power retailers, which are the entities that supply power
to consumers.
Orion Power is an indirect, wholly-owned subsidiary of Reliant Energy,
Inc. (Reliant Energy) (formerly known as Reliant Resources, Inc.). Reliant
Resources, Inc. changed its name to Reliant Energy effective April 26, 2004.
This Form 10-Q includes Orion Power's consolidated interim financial
statements and notes (interim financial statements). The interim financial
statements are unaudited, omit certain financial statement disclosures and
should be read in conjunction with Orion Power's audited consolidated financial
statements and notes included in its Annual Report on Form 10-K for the year
ended December 31, 2003.
BASIS OF PRESENTATION
Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America (GAAP)
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Adjustments and Reclassifications. The interim financial statements
reflect all normal recurring adjustments necessary, in management's opinion to
present fairly the financial position and results of operations for the reported
periods. Amounts reported for interim periods, however, may not be indicative of
a full year period due to seasonal fluctuations in demand for energy and energy
services, changes in energy commodity prices, timing of maintenance and other
expenditures, dispositions, changes in interest expense and other factors.
Orion Power has reclassified certain amounts reported in this Form 10-Q
from prior periods to conform to the 2004 presentation of financial statements.
These reclassifications had no impact on reported earnings.
Orion Power has reclassified general and administrative expenses and
operation and maintenance expenses from prior period's presentation. General and
administrative expenses in the consolidated statements of operations include (a)
administrative services (including management services, financial and
accounting, cash management and treasury support, legal, information technology
system support, communications, office management and human resources), (b)
regulatory costs and (c) certain benefit costs.
FIN No. 46R. In January 2004, Orion Power adopted Financial Accounting
Standards Board (FASB) Interpretation No. 46 (revised December 2003)
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51"
(FIN No. 46R), which replaces the original FIN No. 46 and modified certain
criteria in determining which entities should be considered as variable interest
entities. The adoption had no impact on Orion Power's financial statements. The
application of FIN No. 46R continues to evolve as the FASB continues to address
issues submitted for consideration. Orion Power will continue to assess its
application of clarified or revised guidance related to FIN No. 46R.
Each of Orion Power New York, LP (Orion NY), Orion Power New York LP, LLC,
Orion Power New York GP, Inc., Astoria Generating Company, L.P. (Astoria), Carr
Street Generating Station, LP (Carr Street), Erie Boulevard Hydropower, LP (Erie
Boulevard), Orion Power MidWest, LP (Orion MidWest), Orion Power MidWest LP,
LLC, Orion Power MidWest GP, Inc., Twelvepole Creek, LLC and Orion Power
Capital, LLC (Orion Capital) is a separate legal entity and has its own assets.
4
(2) RELATED PARTY TRANSACTIONS
The interim financial statements include significant transactions between
Orion Power and Reliant Energy and its other subsidiaries. The majority of these
transactions involve the purchase or sale of energy, capacity, fuel, emissions
allowances or related services (including transportation, transmission and
storage services) by Reliant Energy Services, Inc. (Reliant Energy Services), a
wholly-owned subsidiary of Reliant Energy, from or to Orion Power. In addition,
significant technical and administrative support services are provided by
affiliates. The following describes the impacts on the interim financial
statements for the particular transactions:
Support Services Agreement. In October 2002, Orion Power entered into a
services arrangement with Reliant Energy Wholesale Service Company (REWSC), a
wholly-owned subsidiary of Reliant Energy. REWSC allocates certain support
services costs to Orion Power based on Orion Power's direct labor costs relative
to the direct labor costs of other entities to which REWSC provides similar
services. Management believes this method of allocation is reasonable. These
allocations are not necessarily indicative of what would have been incurred had
Orion Power been an unaffiliated entity. Orion MidWest and Orion NY may only pay
a fixed amount for certain of these services due to contractual restrictions.
The excess of the allocated amount over the fixed amount has been recorded as a
non-cash equity contribution to Orion Power from Reliant Energy. During the
three months ended March 31, 2003 and 2004, $20 million and $22 million,
respectively, of support services costs were allocated to Orion Power by REWSC
(and are recorded in operation and maintenance expenses and general and
administrative expenses), of which $4 million in each period were billed and $16
million and $18 million, respectively, were recorded as non-cash equity
contributions from Reliant Energy.
Services and Commodity Agreements. In October 2002, Orion Power entered
into an agreement with Reliant Energy Services to provide support services to
Orion Power Holdings' subsidiaries, Orion MidWest and Orion NY, and their
respective subsidiaries. Purchases from Reliant Energy Services under various
commodity agreements, recorded in fuel expense and purchased power expense, were
$22 million and $6 million, respectively, and $17 million and $7 million,
respectively, during the three months ended March 31, 2003 and 2004,
respectively. Sales to Reliant Energy Services under various commodity
agreements, recorded in revenue, were $17 million and $12 million during the
three months ended March 31, 2003 and 2004, respectively.
Technical Services Arrangement. Beginning July 2002, REWSC agreed to
provide personnel and technical services as required to the operating services
subsidiaries of Orion Power Holdings under an informal agreement. These services
assure that facilities are properly operated and maintained. Amounts incurred
under this agreement during the three months ended March 31, 2003 and 2004, were
$0.5 million and $2 million, respectively, and are included in operation and
maintenance expense or capital, as appropriate.
Liberty Energy Services Agreement and Gas Purchase Agreement. In August
2003, Liberty Electric Power, LLC (Liberty Power) entered into an agreement with
Reliant Energy Services to provide certain services to Liberty Power. Reliant
Energy Services receives a flat monthly fee from Liberty Power for providing
these services in the amount of $0.1 million. The agreement had an initial term
of 60 days and has been extended on a month-to-month basis. During the three
months ended March 31, 2004, $0.2 million was incurred and expensed under this
agreement. In addition, in August 2003, Liberty Power and Reliant Energy
Services entered into a base contract for sale and purchase of natural gas
pursuant to which Liberty Power buys natural gas from Reliant Energy Services.
Liberty is required to pre-pay Reliant Energy Services at least monthly for all
gas purchases. The contract had an initial term of 60 days and has been extended
on a month-to-month basis. During the three months ended March 31, 2004, $20
million was incurred and expensed under this contract.
Other. In May 2003 and November 2003, Reliant Energy contributed $15
million and $20 million, respectively, to Orion Power Holdings, as a partial
funding of the semi-annual interest payment of $24 million on the senior notes
due in each of May 2003 and November 2003. Orion Power Holdings used the cash
from an income tax refund to fund the $24 million interest payment in May 2004.
While Reliant Energy has no obligation, it intends to contribute any funding
shortfall, as a partial funding of the semi-annual interest payment due in
November 2004 should Orion Power Holdings' funds be insufficient. See note 7.
(3) RETIREMENT PLANS
5
Net benefit cost for Orion Power's qualified retirement plans includes the
following components:
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------- -----------------------
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
2003 2004 2003 2004
------- ------- ------- -------
(IN MILLIONS)
Service cost................................................ $ 1.0 $ 1.2 $ 0.4 $ 0.3
Interest cost............................................... 1.0 1.1 0.5 0.5
Expected return on plan assets.............................. (0.6) (0.7) - -
Accounting settlement charge................................ 0.3 - - -
Net amortization............................................ 0.3 0.3 (0.1) (0.1)
------- ------- ------- -------
Net benefit cost......................................... $ 2.0 $ 1.9 $ 0.8 $ 0.7
======= ======= ======= =======
Orion Power expects cash contributions to its pension plans will be
approximately $7 million during 2004. As of March 31, 2004, Orion Power had
contributed $2 million.
(4) COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive
income:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004
------------ -------------
(IN MILLIONS)
Net income (loss).................................................................... $ - $ (4)
Other comprehensive income, net of tax:
Deferred gain from cash flow hedges............................................... 3 32
Reclassification of net deferred loss from cash flow hedges realized
in net income.................................................................. 4 -
------------ -------------
Comprehensive income................................................................. $ 7 $ 28
============ =============
(5) GOODWILL AND PROPERTY, PLANT AND EQUIPMENT
Orion Power evaluates goodwill and property, plant and equipment annually
and when events or changes in circumstances indicate that the carrying value of
these assets may not be recoverable. Orion Power performed its annual impairment
analysis of goodwill as of November 1, 2003 and recorded no impairments at that
time. During July 2003, Orion Power recognized an impairment charge of $585
million (pre-tax and after-tax). Orion Power performed impairment analyses of
all of its property, plant and equipment as of July 2003 and performed
subsequent impairment analyses of certain of its property, plant and equipment
as of December 31, 2003. In conjunction with those tests, Orion Power recorded
no impairments.
As Orion Power recognized a goodwill impairment in 2003, in the near
future, if actual results of operations are worse than projected or Orion
Power's wholesale energy market outlook changes negatively, Orion Power could
have impairments of property, plant and equipment and goodwill in future
periods. In addition, ongoing evaluations of the wholesale energy business could
result in decisions to mothball, retire or dispose of additional generation
assets, any of which could result in impairment charges of goodwill or property,
plant and equipment or impact the fixed assets' depreciable lives.
See note 12 for discussion of possible impairment of a subsidiary's
generation assets.
(6) DERIVATIVE INSTRUMENTS
Derivative assets and liabilities at December 31, 2003 and March 31, 2004
are as follows:
6
ASSETS LIABILITIES
----------------------- ----------------------- NET ASSETS
CURRENT LONG-TERM CURRENT LONG-TERM (LIABILITIES)
---------- ---------- ---------- ---------- -------------
(IN MILLIONS)
DECEMBER 31, 2003:
Derivative activities:
Cash flow hedges - offset to accumulated
other comprehensive income (loss):
Commodity.......................................... $ 17 $ 10 $ - $ - $ 27
Interest........................................... - - (18) (17) (35)
---------- ---------- ---------- ---------- -------------
Total............................................ 17 10 (18) (17) (8)
Derivatives marked to market through earnings........ 6 2 (1) - 7
---------- ---------- ---------- ---------- -------------
Total............................................ $ 23 $ 12 $ (19) $ (17) $ (1)
========== ========== ========== ========== =============
MARCH 31, 2004:
Derivative activities:
Cash flow hedges - offset to accumulated
other comprehensive income (loss):
Commodity.......................................... $ 56 $ 31 $ - $ - $ 87
Interest........................................... - - (19) (22) (41)
---------- ---------- ---------- ---------- -------------
Total............................................ 56 31 (19) (22) 46
Derivatives marked to market through earnings........ 10 2 - - 12
---------- ---------- ---------- ---------- -------------
Total............................................ $ 66 $ 33 $ (19) $ (22) $ 58
========== ========== ========== ========== =============
Pre-tax income of derivative instruments, including energy derivatives and
interest rate derivatives, both from cash flow hedge ineffectiveness and from
derivative mark-to-market income and losses, for the three months ended March
31, 2003 and 2004 are as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004
------------ ------------
(IN MILLIONS)
Energy derivative instruments:
Hedge ineffectiveness (1)...................................... $ - $ -
Other net unrealized gains on derivatives (2).................. 5 5
Interest rate derivative instruments:
Hedge ineffectiveness (1)...................................... - -
Other net unrealized gains on derivatives (2).................. - -
------------ ------------
Total........................................................ $ 5 $ 5
============ ============
- ------------
(1) For the three months ended March 31, 2003 and 2004, no component of the
derivative instruments' gain or loss was excluded from the assessment of
effectiveness.
(2) Includes $0 for the three months ended March 31, 2003 and 2004, of
income/losses recognized in the results of operations as a result of the
discontinuance of cash flow hedges because it was probable that the
forecasted transaction would not occur.
As of December 31, 2003 and March 31, 2004, the maximum length of time
Orion Power is hedging its exposure to the variability in future cash flows for
forecasted transactions, excluding the payment of variable interest on existing
financial instruments, is two years. As of December 31, 2003 and March 31, 2004,
the maximum length of time Orion Power is hedging its exposure to the payment of
variable interest rates is six years. As of March 31, 2004, Orion Power expects
$22 million of gains netted in accumulated other comprehensive income/loss to be
reclassified into net income (loss) during the period from April 1, 2004 to
March 31, 2005.
7
(7) CREDIT FACILITIES AND DEBT
The following table sets forth the debt outstanding to third parties as of
December 31, 2003 and March 31, 2004:
DECEMBER 31, 2003 MARCH 31, 2004
------------------------------------- ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
CONTRACTUAL CONTRACTUAL
INTEREST INTEREST
RATE (1) LONG-TERM CURRENT (2) RATE (1) LONG-TERM CURRENT (2)
----------- --------- ----------- ----------- --------- -----------
(IN MILLIONS, EXCEPT INTEREST RATES)
CREDIT FACILITIES
Orion Power Holdings senior notes................ 12.00% $ 400 $ - 12.00% $ 400 $ -
Orion MidWest and Orion NY term loans............ 3.93 1,093 125 3.94 1,085 93
Orion MidWest revolving working capital
facility........................................ - - - - - -
Orion NY revolving working capital facility...... - - - - - -
Liberty credit agreement:
Floating rate debt (3)......................... 2.40 - 97 2.37 - 97
Fixed rate debt (3)............................ 9.02 - 165 9.02 - 165
--------- ----------- --------- -----------
Total facilities............................. 1,493 387 1,485 355
--------- ----------- --------- -----------
OTHER
Adjustment to fair value of debt (4)............. - 58 8 - 56 8
Adjustment to fair value of interest rate swaps
(4)............................................ - 34 13 - 31 12
Other............................................ 6.20 1 - 6.20 - 1
--------- ----------- --------- -----------
Total other debt............................. 93 21 87 21
--------- ----------- --------- -----------
Total debt................................. $ 1,586 $ 408 $ 1,572 376
========= =========== ========= ===========
- ---------------------
(1) The weighted average contractual interest rates are for borrowings
outstanding as of December 31, 2003 or March 31, 2004, as applicable.
(2) Includes amounts due within one year of the date noted and loans
outstanding under revolving and working capital facilities classified as
current liabilities. See sub-footnote 3 below.
(3) The entire balance outstanding under this credit agreement has been
classified as current as of December 31, 2003 and March 31, 2004. Included
in the outstanding amount as of December 31, 2003 and March 31, 2004, is
$2 million and $4 million, respectively, of scheduled principal payments
for which no payment has been made. The scheduled principal payments
totaled $2 million in each of October 2003 and January 2004. In addition,
no payment has been made for the $2 million principal payment scheduled
for April 2004. As interest payments due were deferred, additional
interest will be charged on the past due interest amounts. Of the amount
shown as current under the Liberty credit agreement, $9 million matures
within 12 months of March 31, 2004. See note 12 for further discussion.
(4) As a result of the acquisition by Reliant Energy, debt and interest rate
swaps were adjusted to fair market value as of the acquisition date.
Included in the adjustment to fair value of debt is $66 million and $64
million related to the Orion Power Holdings senior notes as of December
31, 2003 and March 31, 2004, respectively. Included in the adjustment to
fair value of interest rate swaps is $28 million and $19 million related
to the Orion MidWest and Orion NY credit facilities, respectively, as of
December 31, 2003. Included in the adjustment to fair value of interest
rate swaps is $26 million and $17 million related to the Orion MidWest and
Orion NY credit facilities, respectively, as of March 31, 2004. Included
in interest expense is amortization of $2 million and $2 million for
valuation adjustments for debt and $7 million and $4 million for valuation
adjustments for interest rate swaps, respectively, for the three months
ended March 31, 2003 and 2004, respectively. These valuation adjustments
are being amortized over the respective remaining terms of the related
financial instruments.
The following table provides a summary of the amounts owed and amounts
available as of March 31, 2004, under the various committed credit facilities:
COMMITMENTS
TOTAL EXPIRING BY
COMMITTED DRAWN LETTERS OF UNUSED MARCH 31, PRINCIPAL AMORTIZATION AND
CREDIT AMOUNT CREDIT AMOUNT 2005 COMMITMENT EXPIRATION DATE
---------- ---------- ---------- --------- ----------- --------------------------
(IN MILLIONS)
Orion Power Holdings senior notes... $ 400 $ 400 $ - $ - $ - May 2010
Orion MidWest and Orion NY term
loans............................. 1,178 1,178 - - 28 June 2004 - October 2005
Orion MidWest revolving working
capital facility.................. 75 - 13 62 - October 2005
Orion NY revolving working capital
facility.......................... 30 - 7 23 - October 2005
Liberty credit agreement............ 284 262 17 5(1) 9 April 2004 - April 2026
---------- ---------- ---------- --------- -----------
Total............................... $ 1,967 $ 1,840 $ 37 $ 90 $ 37
========== ========== ========== ========= ===========
- ------------
(1) This amount is currently not available to Liberty Electric PA, LLC and
Liberty Power. See note 12.
As of March 31, 2004, only the Orion Power Holdings senior notes
aggregating $400 million were unsecured.
8
(8) STOCKHOLDER'S EQUITY
For a discussion of Orion Power equity transactions related to Reliant
Energy, see note 2.
(9) INCOME TAXES
A reconciliation of the federal statutory income tax rate to the
effective income tax rate is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004
---------- ----------
(IN MILLIONS)
Loss before income taxes and cumulative effect of accounting
change......................................................... $ (7.3) $ (10.5)
Federal statutory rate............................................ 35% 35%
---------- ----------
Income tax benefit at statutory rate.............................. (2.6) (3.7)
---------- ----------
Net (reduction) addition in taxes resulting from:
State tax credits (Empire Zone tax credits).................... (2.9) (2.9)
State income taxes, net of federal income tax benefit.......... - (0.7)
Other.......................................................... 0.1 0.5
---------- ----------
Total........................................................ (2.8) (3.1)
---------- ----------
Income tax benefit................................................ $ (5.4) $ (6.8)
========== ==========
Effective tax rate................................................ 73.6% 64.8%
(10) COMMITMENTS
Guarantees. Together with certain of Reliant Energy's other subsidiaries,
Orion Power Holdings is a guarantor of the obligations under Reliant Energy's
Amended and Restated Credit and Guaranty Agreement dated as of March 28, 2003,
subject to certain limitations under Orion Power Holdings' senior notes. These
limitations limit the amount of the guarantee based on a fixed charge coverage
ratio, consolidated tangible assets and a restricted payment ceiling test, under
the Orion Power Holdings senior notes. Additionally, Orion Power Holdings is the
only limited guarantor of the obligations under Reliant Energy's senior secured
notes issued in July 2003, subject to the same limitations. None of Orion Power
Holdings' subsidiaries guarantee Reliant Energy's senior secured notes.
Reliant Energy has calculated the aggregate amount permitted to be
guaranteed under both the guarantee for its March 2003 credit facility and the
guarantee for its senior secured notes to be approximately $1.1 billion, which
is the maximum potential amount of future payments. These guarantees mature at
varying dates from 2007 to 2013.
Both Reliant Energy's March 2003 credit facility and its senior secured
notes restrict Orion Power Holdings' and its subsidiaries' ability to take
specific actions, subject to numerous exceptions that are designed to allow for
the execution of Reliant Energy's and its subsidiaries' business plans in the
ordinary course, including the preservation and optimization of existing
investments in the retail energy and wholesale energy businesses and the ability
to provide credit support for commercial obligations. Orion Power's failure to
comply with these restrictions could result in an event of default under the
Reliant Energy's March 2003 credit facility or its senior secured notes that, if
not cured or waived, could result in Reliant Energy being required to repay its
borrowings before their due date.
Orion Power routinely enters into contracts that include indemnification
and guarantee provisions. Examples of these contracts include purchase and sale
agreements, commodity purchase and sale agreements, operating agreements,
service agreements, lease agreements, procurement agreements and certain debt
agreements. In general, these provisions indemnify the counterparty for matters
such as breaches of representations and warranties and covenants contained in
the contract and/or against certain specified liabilities. In the case of
commodity purchase and sale agreements, generally damages are limited through
liquidated damages clauses whereby the parties agree to establish damages as the
costs of covering any breached performance obligations. In the case of debt
agreements, Orion Power generally indemnifies against liabilities that arise
from the preparation, entry into, administration or enforcement of the
agreement. Orion Power is unable to estimate its maximum potential amount under
these provisions unless and until an event triggering payment under these
provisions occurs. However, based on current information, Orion Power considers
the likelihood of making any material payments under these provisions to be
remote.
9
(11) CONTINGENCIES
Legal and Environmental Matters. For information regarding legal
proceedings and environmental matters, see note 14 to Orion Power's consolidated
financial statements included in its Annual Report on Form 10-K for the year
ended December 31, 2003, which, as updated herein, is incorporated by reference.
Indictment of Reliant Energy Services, Inc. On April 8, 2004, Reliant
Energy was notified that a federal grand jury in San Francisco, California had
returned an indictment against one of Reliant Energy's subsidiaries, Reliant
Energy Services, as well as two former and two current employees of Reliant
Energy Services, on charges related to an alleged violation of the Commodity
Exchange Act and related wire fraud and conspiracy charges. Reliant Energy
Services is not a subsidiary of Orion Power Holdings; however, Orion Power does
engage in transactions with Reliant Energy Services (see note 2). The indictment
is based on allegations that Reliant Energy Services engaged in price
manipulation by curtailing electricity generation in California on two days in
June 2000. Reliant Energy Services is the subsidiary of Reliant Energy
responsible for purchasing fuel for and marketing the power produced by the
generation facilities. Reliant Energy and Orion Power believe the actions that
are the subject of the indictment were not in violation of laws, tariffs or
regulations in effect at the time. Reliant Energy intends to contest these
charges vigorously. Orion Power does not believe that this action will have any
material adverse impact on its results of operations, financial position and
cash flows. In addition, Reliant Energy and Orion Power do not believe that this
proceeding will have any material adverse impact on their ongoing business
operations, including any impact on credit or debt agreements; the wholesale
license held by Reliant Energy Services; the licenses held by other
subsidiaries; or contracts and agreements to which Reliant Energy Services is a
party.
(12) LIBERTY GENERATING STATION
Default Under Non-Recourse Financing Agreement. Liberty Power is a
wholly-owned subsidiary of Liberty Electric PA, LLC (Liberty Electric), which is
an indirect wholly-owned subsidiary of Orion Power Holdings. Liberty Power and
Liberty Electric are collectively referred to as "Liberty." Liberty owns a 530
megawatt combined cycle gas fired power generation facility (the Liberty
generating station). Liberty financed the construction costs of the Liberty
generating station with borrowings under a credit agreement of which $262
million (in principal) is outstanding as of March 31, 2004. Borrowings under the
credit agreement, which are non-recourse to Reliant Energy and Orion Power
Holdings and their affiliates (other than Liberty), are secured solely by the
assets of the Liberty generating station and by the ownership interest in
Liberty. For additional information, see notes 7 and 14 to Orion Power's
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended December 31, 2003.
As of May 3, 2004, Liberty is in default under its credit agreement,
including its obligation to make $6 million in principal payments and $14
million in interest payments. Orion Power has classified the debt as a current
liability.
Neither Reliant Energy nor Orion Power intends to make additional capital
contributions to Liberty. Reliant Energy and Orion Power have initiated
discussions with Liberty's lenders regarding a possible arrangement that would
result in a transfer of ownership of Liberty to the lenders or foreclosure.
Orion Power is not able to predict the outcome of these discussions. Although,
to date, Liberty's lenders have not foreclosed on their security interests in
Liberty's assets or in the ownership of Liberty, Orion Power would not expect
the lenders to continue to refrain from exercising such rights indefinitely.
Liberty's defaults under its credit agreement do not constitute an event
of default under any other debt agreement of Reliant Energy or Orion Power or
their affiliates. In addition, the exercise of the lenders foreclosure remedies
with respect to Liberty, or the transfer of ownership of Liberty to the lenders,
would not constitute an event of default under any of these debt agreements.
At December 31, 2003 and March 31, 2004, Orion Power evaluated the Liberty
generating station and its related intangible asset for impairment. Based on the
analyses, there were no impairments at that time. However, if the lenders
exercise their default remedies and/or Orion Power enters into a transfer
arrangement, Orion Power will incur a pre-tax loss of an amount up to its
recorded net book value, including the non-recourse debt obligations, with the
potential of an additional loss due to an impairment of goodwill allocable to
Liberty. As of March 31, 2004, the consolidated net book value of Liberty
Electric was $342 million, excluding the non-recourse debt obligations of $262
million, resulting in a net amount of $80 million.
Tolling Agreement Litigation. In July 2003, NEGT Energy Trading-Power,
L.P. (ET Power), the counterparty to the tolling agreement under which Liberty
sold the generation output of the Liberty generating station, filed for
10
bankruptcy. In connection with the bankruptcy proceeding, ET Power terminated
the tolling agreement. National Energy & Gas Transmission, Inc. (NEGT), which is
a debtor in the bankruptcy proceeding, and Gas Transmission Northwest
Corporation (GTN), which is not a debtor in the bankruptcy proceeding, have each
guaranteed ET Power's obligations under the tolling agreement. The liability of
each guarantor is capped at $140 million and the combined liability of the
guarantors is also capped at $140 million. Following the termination of the
tolling agreement, Liberty submitted a termination invoice to ET Power of $177
million.
In September 2003, Liberty sued GTN in federal court in Texas seeking
payment of $140 million (the maximum amount of its guarantee) out of the $177
million termination claim. Subsequently, ET Power countersued Liberty in
bankruptcy court seeking to collect a $108 million termination payment under the
tolling agreement. Liberty's obligations under the tolling agreement are secured
by a $35 million letter of credit issued under the senior secured revolver of
Reliant Energy. If the letter of credit were to be drawn, Reliant Energy would
be required to reimburse the issuing bank and may have an unsecured claim for
reimbursement against Liberty.
In April 2004, the parties commenced arbitration proceedings over the
disputed termination payment. Liberty submitted its arbitration claim for $159
million plus costs, fees and interest. Pending the conclusion of the
arbitration, Liberty has agreed to stay its litigation against GTN. Orion Power
is not able to predict the ultimate outcome of the arbitration and related
litigation. If, however, Liberty recovers the termination amount, the credit
agreement requires that such amounts be used to pay down principal and interest
under the Liberty credit agreement. Under United States and Pennsylvania tax
laws, the receipt of a termination payment by Liberty will likely be deemed
taxable income to Reliant Energy and Orion Power Holdings and their other
affiliates even though the proceeds are required to pay down debt to the
lenders.
* * *
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As used in this Form 10-Q, "Orion Power Holdings" refers to Orion Power
Holdings, Inc. and "we," "us" and "our" refer to Orion Power Holdings, Inc. and
its consolidated subsidiaries.
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is provided as a supplement to our interim financial
statements to help provide an understanding of our results of operations,
financial condition and changes in financial condition. It should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31,
2003.
RECENT DEVELOPMENTS AND OTHER INFORMATION
Restructuring Impacts. We are a wholly-owned subsidiary of Reliant Energy.
Throughout 2004, Reliant Energy intends to continue to identify, evaluate and
pursue opportunities to restructure its business operations in order to increase
its efficiency, reduce costs and reduce its liquidity and capital requirements.
Reliant Energy will incur short-term costs in the form of severance payments,
information technology systems investments, costs and write-offs related to
corporate leases and other restructuring costs as part of its efforts to reduce
its cost structure. Reliant Energy estimates that its future severance and other
restructuring costs will be $55 million for April through December 2004. In
addition, severance costs and other restructuring costs are expected to be
incurred in 2005 and 2006. Future decisions to mothball, retire or dispose of
assets could result in impairment charges. In addition, Reliant Energy could
have write-offs or shorten depreciable lives of other types of property, plant
and equipment, such as information technology systems. Reliant Energy is
currently evaluating the future use of certain information technology systems.
We will be impacted by some of these actions of Reliant Energy.
CONSOLIDATED RESULTS OF OPERATIONS
See our consolidated statements of operations in our interim financial
statements.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Net Income (Loss). We reported $3.7 million consolidated net loss for the
three months ended March 31, 2004 compared to $0.2 million consolidated net
income for the three months ended March 31, 2003. The reasons for the change
from net income to net loss are explained below.
Revenues. Revenues increased $40 million during the three months ended
March 31, 2004 compared to the three months ended March 31, 2003. The increase
is detailed as follows:
THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2004 CHANGE
---------- ----------- -----------
(IN MILLIONS)
Third-party revenues....................................... $ 258 $ 303 $ 45 (1)
Revenues - affiliates...................................... 17 12 (5)
Unrealized gains........................................... 5 5 -
---------- ----------- -----------
Total revenues......................................... $ 280 $ 320 $ 40
========== =========== ===========
- --------------
(1) Increase primarily due to (a) 13% increase in generation, (b) increased
energy revenues at the Liberty generating facility as a result of selling
power as a merchant energy plant beginning in July 2003, as compared to
earning capacity revenues under a tolling agreement during the three
months ended March 31, 2003 and (c) decreased amortization of contractual
rights and obligations.
Fuel and Purchased Power. Fuel and purchased power increased $27 million
during the three months ended March 31, 2004 compared to the three months ended
March 31, 2003. The increase is detailed as follows:
12
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2003 2004 CHANGE
---------- ----------- ----------
(IN MILLIONS)
Third-party fuel and purchased power costs................. $ 94 $ 103 $ 9
Fuel and purchased power - affiliates...................... 27 45 18
---------- ----------- ----------
Total fuel and purchased power......................... $ 121 $ 148 $ 27(1)
========== =========== ==========
- ----------------
(1) Increase primarily due to (a) the termination of the tolling agreement at
the Liberty generating facility in July 2003, which resulted in Liberty
purchasing fuel to operate the station as a merchant plant and (b)
increased purchased power at our MidWest facilities due to increased
outages.
Gross margins. Gross margins increased $13 million during the three months
ended March 31, 2004 compared to the three months ended March 31, 2003. The
detail is as follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2003 2004 CHANGE
---------- ----------- ----------
(IN MILLIONS)
Orion MidWest.............................................. $ 74 $ 67 $ (7)(1)
Orion NY................................................... 80 100 20 (2)
Liberty.................................................... 5 5 -
---------- ----------- ----------
Total gross margin....................................... $ 159 $ 172 $ 13
========== =========== ==========
- ----------------
(1) Decrease primarily due to lower volumes as a result of lower generation
volumes under a "provider of last resort" contract.
(2) Increase primarily due to (a) increased generation at our New York City
facilities, (b) higher capacity revenues at our New York City facilities
and (c) increased generation at our hydro facilities in 2004.
Operation and Maintenance. Operation and maintenance expenses, including
amounts allocated from affiliates, increased $11 million during the three months
ended March 31, 2004 compared to the three months ended March 31, 2003. The
increase is detailed as follows (in millions):
Maintenance projects and outages........................................... $ 13
Legal costs................................................................ 2
Bad debt expense........................................................... (5)(1)
Other, net................................................................. 1
----------
Net increase in expense................................................. $ 11
==========
- ---------------
(1) Decrease primarily due to the recognition of $5 million of bad debt
expense during the three months ended March 31, 2003, related to the
Liberty generating station tolling agreement. See note 12 to our interim
financial statements.
General and Administrative-Affiliates. General and administrative
expenses, which are allocated from Reliant Energy, did not change significantly
during the three months ended March 31, 2004 compared to the three months ended
March 31, 2003.
Taxes Other Than Income Taxes. Taxes other than income taxes decreased $1
million during the three months ended March 31, 2004 compared to the three
months ended March 31, 2003 due to a tax refund of $1 million received in 2004.
Depreciation and Amortization. Depreciation and amortization expense
increased $7 million during the three months ended March 31, 2004 compared to
the three months ended March 31, 2003 primarily due to increased amortization of
air emissions regulatory allowances.
Interest Expense. Interest expense to third parties did not change
significantly during the three months ended March 31, 2004 compared to the three
months ended March 31, 2003. The detail is as follows (in millions):
13
Interest expense on third-party debt...................................... $ (7)(1)
Bank and facility fees expensed........................................... 2
Offset to interest expense for amortization of
adjustments to fair value of acquired interest rate swaps.............. 3 (2)
Other, net................................................................ 2
--------
Net decrease in expense................................................ $ -
========
- -------------------
(1) This net impact is due to $(6) million due to lower debt balances and $(1)
million due to lower interest rates.
(2) See note 7 to our interim financial statements.
Income Tax Benefit. For the three months ended March 31, 2003 and 2004,
our effective tax rates were 73.6% and 64.8%, respectively. Our reconciling
items from the federal statutory rate of 35% to the effective tax rate totaled
$3 million for both the three months ended March 31, 2003 and 2004. These items
primarily related to Empire Zone tax credits (see below). See note 9 to our
interim financial statements.
Certain of our New York operations qualify for the Empire Zone program
beginning with calendar tax year ending December 31, 2001. The benefits under
the program include a New York state income tax reduction credit, a wage tax
credit, a sales tax credit and a real property tax credit. All credits are used
to offset New York state income tax with any excess credits being refundable. We
recognized in our results of operations Empire Zone benefits of $3 million
(after federal taxes) for both the three months ended March 31, 2003 and 2004.
Under current law, we are entitled to program benefits for a 14-year period,
which began in 2001 and ends in 2014. Legislation has been introduced that, if
passed, could materially change or eliminate the benefits received from the
Empire Zone program.
FINANCIAL CONDITION
In this section, we provide updates related to sources of liquidity and
capital resources, liquidity and capital requirements and historical cash flows.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2003.
SOURCES OF LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity and capital resources are cash flows
from operations, borrowings under our various revolving credit facilities, as
described below and capital contributions from Reliant Energy.
Cash Flows from Operations. All of our operations are conducted by our
subsidiaries. As a result, our cash flow is dependent upon the receipt from our
subsidiaries of cash dividends, distributions or other transfers of cash
generated by their operations.
For the three months ended March 31, 2003 and 2004, our earnings were
insufficient to cover our fixed charges by $7 million and $10 million,
respectively.
Credit Capacity, Cash and Cash Equivalents. The following table summarizes
our credit capacity, cash and cash equivalents and current restricted cash at
March 31, 2004 (in millions):
Total committed credit (1).............................. $ 1,967
Outstanding borrowings.................................. 1,840
Outstanding letters of credit........................... 37
------------
Unused borrowing capacity .............................. 90 (2)
Cash and cash equivalents............................... 35
Current restricted cash (3)............................. 180
------------
Total................................................ $ 305
============
- ------------
(1) As of March 31, 2004, we had consolidated current and long-term debt
outstanding of $1.9 billion. As of March 31, 2004, $37 million of our
committed credit facilities are to expire by March 31, 2005. For a
discussion of our credit facilities and other debt, see note 7 to our
interim financial statements.
(2) See notes 7 and 12 to our interim financial statements; $5 million of the
unused capacity relates to Liberty's working capital facility, which is
currently not available to Liberty.
(3) Current restricted cash includes cash at certain subsidiaries, the
transfer or distribution of which is effectively restricted by the terms
of financing agreements but is otherwise available to the applicable
subsidiary for use in satisfying certain of its obligations.
14
LIQUIDITY AND CAPITAL REQUIREMENTS
Our liquidity and capital requirements are primarily a function of our
operations, borrowings under our various revolving credit facilities, as
described below, and capital contributions from Reliant Energy.
All of our credit and other debt agreements contain restrictive covenants.
Failure to comply with these covenants could have a number of effects, including
limitations on our ability to make additional borrowings under the credit
facilities, increases in borrowing costs and the acceleration of indebtedness.
Contributions from Reliant Energy. Orion Power has outstanding $400
million aggregate principal amount of 12% senior notes due 2010. The senior
notes are unsecured. Credit agreements entered into by Orion MidWest and Orion
NY contain requirements that are expected to restrict these entities from making
dividends, loans or advances to Orion Power for future interest payments on the
senior notes. If at the time such payments are due, dividends, loans or advances
are restricted under the Orion NY and Orion MidWest credit agreements, and funds
generated from Orion Power's other subsidiaries or from other sources are
insufficient, payment default under Orion Power's senior notes may occur unless
Reliant Energy elects to invest additional funds in Orion Power. In May 2003 and
November 2003, Reliant Energy contributed $15 million and $20 million,
respectively, to us, as a partial funding of the semi-annual interest payment of
$24 million on the senior notes due in each of May 2003 and November 2003. Orion
Power Holdings used the cash from an income tax refund to fund the $24 million
interest payment in May 2004. While Reliant Energy has no obligation, it intends
to contribute any funding shortfall, as a partial funding of the semi-annual
interest payment due in November 2004 should Orion Power Holdings' funds be
insufficient. During the three months ended March 31, 2003 and 2004, Reliant
Energy did not contribute any funds to us related to these semi-annual interest
payments. See note 2 to our interim financial statements.
The following table details our cash collateral posted and letters of
credit outstanding as of April 28, 2004 (in millions):
Cash collateral posted:
For commercial operations............................ $ 7
In support of financings............................. -
------------
$ 7
============
Letters of credit outstanding:
For commercial operations............................ $ 24
In support of financings............................. 17
------------
$ 41
============
HISTORICAL CASH FLOWS
The following table provides an overview of cash flows relating to our
operating, investing and financing activities for the three months ended March
31, 2003 and 2004:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2003 2004
---------------- ----------------
(IN MILLIONS)
Cash provided by (used in):
Operating activities................................................................... $ 44 $ 53
Investing activities................................................................... (13) (12)
Financing activities................................................................... (21) (39)
Cash Flows - Operating Activities
Net cash provided by operating activities increased by $9 million during
the three months ended March 31, 2004 compared to the same period in 2003. The
change is detailed as follows (in millions):
Changes in working capital and other assets and liabilities..................... $ 6(1)
Changes in cash flows from operations, excluding working capital and other
assets and liabilities....................................................... 3(2)
--------------
Net change................................................................... $ 9
==============
- -------------------
(1) Decrease in net cash outflows from $10 million for the three months ended
March 31, 2003 to $4 million for the same period in 2004 due to a decrease
in cash used to meet working capital and other assets and liabilities
requirements. See further analysis below.
15
(2) Change from net cash inflows of $54 million for the three months ended
March 31, 2003 to $57 million for the same period in 2004 due primarily to
changes in our results of operations.
Three Months Ended March 31, 2004. Net cash provided by our operations for
the three months ended March 31, 2004 is detailed as follows (in millions):
Net cash flows from continuing operations, excluding changes in
working capital and other assets and liabilities............... $ 57 (1)
Increase in accrued interest...................................... 16 (2)
Decrease in restricted cash....................................... 9 (3)
Decrease in inventory............................................. 4 (4)
Increase in accounts receivable................................... (4)(5)
Decrease in accounts payable...................................... (10)(6)
Increase in prepaid insurance and property taxes and other
current assets................................................. (11)(7)
Net purchases of emissions credits................................ (11)
Other, net........................................................ 3
----------
Cash provided by operating activities.......................... $ 53
==========
- --------------
(1) Due to the results of operations.
(2) Increase is due primarily to the accrual of interest on the Orion Power
Holdings senior notes at 12% and the Liberty credit agreement. See note 12
to our interim financial statements.
(3) Decrease primarily attributable to a reduction in restricted cash at Orion
NY for property tax payments and payments for maintenance and outages
related to the New York facilities.
(4) Decrease primarily due to fuel inventory.
(5) Increase primarily due to increased revenues at our Orion NY facilities.
(6) Decrease primarily due to the timing of cash payments at our Orion NY
facilities.
(7) Increase primarily due to property tax prepayments related to our New York
facilities for normal operations.
Three Months Ended March 31, 2003. Net cash provided by our operations for
the three months ended March 31, 2003 is detailed as follows (in millions):
Net cash flows from continuing operations, excluding changes in
working capital and other assets and liabilities............... $ 54 (1)
Decrease in restricted cash....................................... 29 (2)
Increase in accrued interest...................................... 12 (3)
Taxes payable/receivable, net..................................... 9 (4)
Increase in prepaid insurance and property taxes and other
current assets................................................. (10)(5)
Decrease in accounts payable...................................... (13)(6)
Net purchases of emission credits................................. (26)
Other, net........................................................ (11)
----------
Cash provided by operating activities.......................... $ 44
==========
- --------------
(1) Due to the result of operations.
(2) Decrease primarily attributable to a reduction in restricted cash at Orion
NY for property tax payments and at Orion Power Development for the
purchase of emissions credits.
(3) Increase primarily due to the accrual of interest on the Orion Power
Holdings senior notes at 12%. See note 7 to our interim financial
statements.
(4) Change primarily relates to $13 million in net state income tax refunds,
partially offset by $4 million of accrued tax liability.
(5) Increase primarily due to property tax prepayments related to our New York
facilities for normal operations.
(6) Decrease primarily due to reduced coal purchases in 2003 and the timing of
cash payments.
Cash Flows - Investing Activities
Net cash used in investing activities decreased by $1 million during three
months ended March 31, 2004 compared to the same period in 2003, due to a
decrease in capital expenditures.
Three Months Ended March 31, 2004. Net cash used in investing activities
during the three months ended March 31, 2004 was $12 million, due to capital
expenditures related to our power generation operations.
16
Three Months Ended March 31, 2003. Net cash used in investing activities
during the three months ended March 31, 2003 was $13 million, due to capital
expenditures related to our power generation operations.
Cash Flows - Financing Activities
Net cash used in financing activities during the three months ended March
31, 2004 increased $18 million compared to the same period in 2003. See below
for discussion.
Three Months Ended March 31, 2004. Net cash used in financing activities
during the three months ended March 31, 2004 was $39 million, which is primarily
due to payments made on the Orion MidWest and Orion NY term loans. See note 7 to
our interim financial statements.
Three Months Ended March 31, 2003. Net cash used in financing activities
during the three months ended March 31, 2003 was $21 million, which is primarily
due to payments of $11 million on the Orion MidWest revolving credit facility as
well as payments of $10 million made on the Orion MidWest and Orion NY term
loans and the Liberty credit agreement.
NEW ACCOUNTING PRONOUNCEMENTS, SIGNIFICANT ACCOUNTING POLICIES AND
CRITICAL ACCOUNTING ESTIMATES
NEW ACCOUNTING PRONOUNCEMENTS
As of April 2004, there are no new accounting pronouncements that would
have a material impact to our results of operations, financial position or cash
flows, for which we have not already adopted and/or disclosed elsewhere in the
notes to our interim financial statements.
SIGNIFICANT ACCOUNTING POLICIES
For discussion regarding significant accounting policies, see note 2 to
Orion Power's consolidated financial statements included in the Annual Report on
Form 10-K for the year ended December 31, 2003 and note 1 to the interim
financial statements.
CRITICAL ACCOUNTING ESTIMATES
For a discussion of the critical accounting estimates, see Orion Power's
Annual Report on Form 10-K for the year ended December 31, 2003.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT NON-TRADING ACTIVITIES
AND RELATED MARKET RISKS
MARKET RISK AND RISK MANAGEMENT
We are exposed to various market risks. These risks arise from the
ownership of our assets and operation of our business. Most of the revenues,
expenses, results of operations and cash flows from our business activities are
impacted by market risks. Categories of significant market risks include
exposures primarily related to commodity prices and interest rates.
NON-TRADING MARKET RISK
Commodity Price Risk. Commodity price risk is an inherent component of our
business. Prior to the energy delivery period, we attempt to hedge, in part, the
economics of our business. Derivative instruments are used to mitigate exposure
to variability in future cash flows from probable, anticipated future
transactions attributable to a commodity risk.
The following table sets forth the fair values of the contracts related to
our net derivative assets and liabilities as of March 31, 2004:
FAIR VALUE OF CONTRACTS AT MARCH 31, 2004
------------------------------------------------------------------------------------
TWELVE
MONTHS
ENDED
MARCH 31, REMAINDER 2009 AND TOTAL
SOURCE OF FAIR VALUE 2005 OF 2005 2006 2007 2008 THEREAFTER FAIR VALUE
--------- --------- -------- -------- -------- ---------- ----------
(IN MILLIONS)
Prices provided by other
external sources (1)...... $ 45 $ 13 $ 2 $ (3) $ (1) $ - $ 56
Prices based on models and
other valuation methods
(2)....................... 2 1 (1) - - - 2
-------- -------- -------- -------- -------- -------- --------
Total..................... $ 47 $ 14 $ 1 $ (3) $ (1) $ - $ 58
======== ======== ======== ======== ======== ======== ========
- ---------------
(1) Represents our forward positions in power, oil and coal commodities at
points for which over-the-counter market (OTC) broker quotes are
available, which on average, extend 24, 36 and 36 months into the future,
respectively. OTC broker quotes are available for power, oil and coal.
Commodity positions are valued against internally developed forward market
price curves that are frequently validated and recalibrated against OTC
broker quotes. This category includes some transactions whose prices are
obtained from external sources and then modeled to hourly, daily or
monthly prices, as appropriate. This category also includes our interest
rate derivative instruments, which are valued based on information from
market participants.
(2) Represents the value of (a) our valuation adjustments for liquidity,
credit and administrative costs, (b) options or structured transactions
not quoted by an exchange or OTC broker, but for which the prices of the
underlying position are available and (c) transactions for which an
internally developed price curve was constructed as a result of the
long-dated nature of the transaction or the illiquidity of the market
point.
We assess the risk of our derivatives using a sensitivity analysis method.
Derivative instruments, which we use as economic hedges, create exposure to
commodity prices, which, in turn, offset the commodity exposure inherent in our
business. The stand-alone commodity risk created by these instruments, without
regard to the offsetting effect of the underlying exposure these instruments are
intended to hedge, is described below. The sensitivity analysis performed on our
energy derivatives measures the potential loss in fair value based on a
hypothetical 10% movement in the underlying energy prices. A decrease of 10% in
the market prices of energy commodities from their March 31, 2004 levels would
have decreased the fair value of our energy derivatives by $29 million. Of this
amount, $27 million relates to a loss in fair value of our derivatives that are
designated as cash flow hedges and $2 million relates to a loss in earnings of
our economic hedges. A decrease of 10% in the market prices of energy
commodities from their December 31, 2003 levels would have decreased the fair
value of our energy derivatives by $14 million.
Interest Rate Risk. There was no significant change in our interest rate
risk based on a sensitivity analysis during the three months ended March 31,
2004 from December 31, 2003.
* * *
18
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our president and chief financial officer have evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based on such evaluation, such officers
have concluded that, as of the end of such period, our disclosure controls and
procedures are effective in alerting them on a timely basis to material
information required to be included in our reports filed or submitted under the
Securities Exchange Act of 1934.
CHANGES IN INTERNAL CONTROLS
In connection with the evaluation described above, we identified no change
in our internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during
our fiscal quarter ended March 31, 2004, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information in response to this item, see (a) note 14 to the
consolidated financial statements included in Orion Power's Annual Report on
Form 10-K for the year ended December 31, 2003 and (b) notes 11 and 12 to the
interim financial statements included in this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Index of Exhibits.
(b) Reports on Form 8-K.
None.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORION POWER HOLDINGS, INC.
(Registrant)
MAY 7, 2004 By: /s/ Thomas C. Livengood
-----------------------
Thomas C. Livengood
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
INDEX OF EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
SEC FILE OR
EXHIBIT REPORT OR REGISTRATION REGISTRATION EXHIBIT
NUMBER DOCUMENT DESCRIPTION STATEMENT NUMBER REFERENCE
------ -------------------- --------- ------ ---------
+12.1 Orion Power Holdings, Inc. and Subsidiaries Ratio
of Earnings to Fixed Charges
+31.1 Certification of the President Pursuant to Section
302 of the Sarbanes Oxley Act of 2002
+31.2 Certification of the Executive Vice President and
Chief Financial Officer Pursuant to Section 302 of
the Sarbanes Oxley Act of 2002
+32.1 Certification of the President of Orion Power
Holdings, Inc. Certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (Subsections
(a) and (b) of Section 1350, Chapter 63 of Title
18, United States Code)
+32.2 Certification of Executive Vice President and
Chief Financial Officer of Orion Power Holdings,
Inc. Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18,
United States Code)
+99.1 Orion Power Holdings, Inc.'s note 14 to its
consolidated financial statements included in its
Annual Report on Form 10-K for the year ended
December 31, 2003