1
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 JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
------------------------------
Commission file number 1-3187
RELIANT ENERGY, INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-0694415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-3000
(Registrant's telephone number, including area code)
Commission file number 1-13265
RELIANT ENERGY RESOURCES CORP.
(Exact name of registrant as specified in its charter)
Delaware 76-0511406
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-3000
(Registrant's telephone number, including area code)
-----------------------------
RELIANT ENERGY RESOURCES CORP. MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q
WITH THE REDUCED DISCLOSURE FORMAT.
Indicate by check mark whether the registrants: (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 6, 1999, Reliant Energy, Incorporated had 295,814,956 shares of
common stock outstanding, including 10,719,489 ESOP shares not deemed
outstanding for financial statement purposes and excluding 1,133,235 shares held
as treasury stock. As of August 6, 1999, all 1,000 shares of Reliant Energy
Resources Corp. common stock were held by Reliant Energy, Incorporated.
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THIS COMBINED QUARTERLY REPORT ON FORM 10-Q IS SEPARATELY FILED BY RELIANT
ENERGY, INCORPORATED (COMPANY) AND RELIANT ENERGY RESOURCES CORP. (RESOURCES).
INFORMATION CONTAINED HEREIN RELATING TO RESOURCES IS FILED BY THE COMPANY AND
SEPARATELY BY RESOURCES ON ITS OWN BEHALF. RESOURCES MAKES NO REPRESENTATION AS
TO INFORMATION RELATING TO THE COMPANY (EXCEPT AS IT MAY RELATE TO RESOURCES AND
ITS SUBSIDIARIES) OR TO ANY OTHER AFFILIATE OR SUBSIDIARY OF THE COMPANY.
RELIANT ENERGY, INCORPORATED
AND RELIANT ENERGY RESOURCES CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
COMPANY:
Financial Statements........................................................................1
Statements of Consolidated Operations
Three and Six Months Ended June 30, 1999 and 1998 (Unaudited).........................1
Consolidated Balance Sheets
June 30, 1999 (Unaudited) and December 31, 1998.......................................2
Statements of Consolidated Cash Flows
Six Months Ended June 30, 1999 and 1998 (Unaudited)...................................4
Statements of Consolidated Retained Earnings and Comprehensive Income (Loss)
Three and Six Months Ended June 30, 1999 and 1998 (Unaudited).........................6
Notes to Unaudited Consolidated Financial Statements..................................7
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company............................................................20
Quantitative and Qualitative Disclosures about Market Risk of the Company..................32
RESOURCES:
Financial Statements.......................................................................34
Statements of Consolidated Operations
Three and Six Months Ended June 30, 1999 and 1998 (Unaudited)........................34
Consolidated Balance Sheets
June 30, 1999 (Unaudited) and December 31, 1998......................................35
Statements of Consolidated Cash Flows
Six Months Ended June 30, 1999 and 1998 (Unaudited)..................................37
Consolidated Statements of Retained Earnings and Comprehensive Income (Loss)
Three and Six Months Ended June 30, 1999 and 1998 (Unaudited)........................38
Notes to Unaudited Consolidated Financial Statements.................................39
Management's Narrative Analysis of the Results of
Operations of Resources..............................................................41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................43
Item 4. Submission of Matters to a Vote of Security Holders............................43
Item 5. Other Information..............................................................44
Item 6. Exhibits and Reports on Form 8-K...............................................44
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PART I. FINANCIAL INFORMATION
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ --------------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
REVENUES:
Electric Operations .......................................... $ 1,166,642 $ 1,181,300 $ 2,016,548 $ 2,027,862
Natural Gas Distribution ..................................... 329,340 330,667 1,007,455 1,061,385
Interstate Pipelines ......................................... 66,117 76,516 132,222 147,497
Wholesale Energy ............................................. 1,937,830 914,022 2,945,933 1,805,395
International ................................................ 43,631 169,435 (7,853) 196,681
Corporate .................................................... 202,739 156,231 423,173 345,242
Eliminations ................................................. (88,471) (91,545) (216,746) (216,114)
----------- ----------- ----------- -----------
Total ................................................... 3,657,828 2,736,626 6,300,732 5,367,948
----------- ----------- ----------- -----------
EXPENSES:
Fuel and cost of gas sold .................................... 1,621,239 1,050,669 3,038,603 2,329,063
Purchased power .............................................. 924,481 489,479 1,252,988 902,516
Operation and maintenance .................................... 436,656 386,190 835,668 757,830
Taxes other than income taxes ................................ 126,150 119,444 243,471 229,204
Depreciation and amortization ................................ 225,919 235,035 416,504 410,634
----------- ----------- ----------- -----------
Total ................................................... 3,334,445 2,280,817 5,787,234 4,629,247
----------- ----------- ----------- -----------
OPERATING INCOME ................................................ 323,383 455,809 513,498 738,701
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Unrealized loss on Automatic Common Exchange Securities (ACES) (68,628) (254,458) (399,939) (443,778)
Time Warner dividend income .................................. 10,312 10,312 20,625 20,625
Other - net .................................................. 1,480 6,295 2,182 13,509
----------- ----------- ----------- -----------
Total ................................................... (56,836) (237,851) (377,132) (409,644)
----------- ----------- ----------- -----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt ................................... 105,866 103,326 209,720 209,355
Other interest ............................................... 21,859 23,034 45,198 47,393
Distributions on trust securities ............................ 13,990 7,302 23,781 14,712
Allowance for borrowed funds used during construction ........ (1,405) (612) (2,335) (1,569)
----------- ----------- ----------- -----------
Total ................................................... 140,310 133,050 276,364 269,891
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND PREFERRED DIVIDENDS ....... 126,237 84,908 (139,998) 59,166
INCOME TAX EXPENSE (BENEFIT) .................................... 51,475 43,326 (5,068) 47,602
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................................... 74,762 41,582 (134,930) 11,564
PREFERRED DIVIDENDS ............................................. 98 98 195 195
----------- ----------- ----------- -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ........... $ 74,664 $ 41,484 $ (135,125) $ 11,369
=========== =========== =========== ===========
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE ................ $ .26 $ .15 $ (.47) $ .04
=========== =========== =========== ===========
See Notes to the Company's Consolidated Financial Statements.
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RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 66,639 $ 29,673
Accounts receivable - net .................................. 755,888 726,377
Accrued unbilled revenues .................................. 70,609 175,515
Fuel stock and petroleum products .......................... 212,000 211,750
Materials and supplies, at average cost .................... 181,903 171,998
Price risk management assets ............................... 294,950 265,203
Restricted deposit for bond redemption ..................... 200,000
Prepayments and other current assets ....................... 109,091 88,655
----------- -----------
Total current assets ..................................... 1,891,080 1,669,171
----------- -----------
PROPERTY, PLANT AND EQUIPMENT -- AT COST:
Electric ................................................... 14,238,519 13,969,302
Natural gas distribution and gathering systems ............. 1,801,632 1,686,159
Interstate pipelines ....................................... 1,310,143 1,302,829
Other property ............................................. 107,708 72,299
----------- -----------
Total .................................................... 17,458,002 17,030,589
Less accumulated depreciation and amortization ............. 6,641,995 5,499,448
----------- -----------
Property, plant and equipment - net ...................... 10,816,007 11,531,141
----------- -----------
OTHER ASSETS:
Goodwill - net ............................................. 2,089,601 2,098,890
Equity investments and advances to unconsolidated affiliates 923,243 1,051,600
Investment in Time Warner securities ....................... 990,000 990,000
Recoverable impaired plant costs ........................... 796,666
Price risk management assets ............................... 92,310 21,414
Other ...................................................... 1,861,493 1,800,681
----------- -----------
Total other assets ....................................... 6,753,313 5,962,585
----------- -----------
TOTAL ASSETS .......................................... $19,460,400 $19,162,897
=========== ===========
See Notes to the Company's Consolidated Financial Statements.
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RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
CURRENT LIABILITIES:
Notes payable .............................................................. $ 1,812,849 $ 1,812,739
Accounts payable ........................................................... 774,846 807,977
Price risk management liabilities .......................................... 255,916 227,652
Current portion of long-term debt .......................................... 647,144 397,454
Other ...................................................................... 791,604 825,120
------------ ------------
Total current liabilities ............................................. 4,282,359 4,070,942
------------ ------------
DEFERRED CREDITS:
Accumulated deferred income taxes .......................................... 2,064,132 2,364,036
Unamortized investment tax credit .......................................... 277,998 328,949
Price risk management liabilities .......................................... 84,753 29,108
Other ...................................................................... 1,134,595 905,014
------------ ------------
Total deferred credits ................................................ 3,561,478 3,627,107
------------ ------------
LONG-TERM DEBT ................................................................ 6,946,144 6,800,748
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 1)
Total liabilities ................................................... 14,789,981 14,498,797
------------ ------------
COMPANY/RESOURCES OBLIGATED MANDATORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
OF COMPANY/RESOURCES - NET ............................................... 705,294 342,232
------------ ------------
PREFERENCE STOCK, NONE OUTSTANDING
CUMULATIVE PREFERRED STOCK, NOT SUBJECT
TO MANDATORY REDEMPTION .................................................. 9,740 9,740
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, no par value ............................................... 3,160,013 3,136,826
Treasury stock, at cost .................................................. (2,390) (2,384)
Unearned ESOP shares ..................................................... (207,071) (217,780)
Retained earnings ........................................................ 1,096,058 1,445,081
Accumulated other comprehensive loss ..................................... (91,225) (49,615)
------------ ------------
Total stockholders' equity ............................................ 3,955,385 4,312,128
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 19,460,400 $ 19,162,897
============ ============
See Notes to the Company's Consolidated Financial Statements
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RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) attributable to common stockholders ........... $(135,125) $ 11,369
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................. 416,504 410,634
Deferred income taxes ......................................... (151,386) (122,370)
Investment tax credit ......................................... (50,951) (10,062)
Unrealized loss on ACES ....................................... 399,939 443,778
Undistributed loss (earnings) of equity investments
in unconsolidated affiliates ............................... 64,654 (10,566)
Changes in other assets and liabilities:
Accounts receivable - net .................................. 70,899 179,348
Accounts receivable - IRS .................................. 140,532
Inventory .................................................. (8,693) (18,315)
Other current assets ....................................... (20,437) (6,741)
Accounts payable ........................................... (33,131) (102,394)
Interest and taxes accrued ................................. (9,663) (31,824)
Other current liabilities .................................. (54,267) (16,746)
Net price risk management assets ........................... (16,734) 25
Other - net ................................................ 84,392 (52,590)
--------- ---------
Net cash provided by operating activities ................ 556,001 814,078
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including allowance for
borrowed funds used during construction) ...................... (441,296) (268,567)
Acquisitions of non-rate regulated electric power plants ........ (230,462)
Sale of equity investments in foreign electric system projects .. 242,744
Equity investment and advances to unconsolidated affiliates - net (20,458) (175,706)
Other - net .................................................... 7,980 (19,892)
--------- ---------
Net cash used in investing activities .................... $(453,774) $(451,883)
--------- ---------
(Continued on next page)
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RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS - (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------
1999 1998
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of matured bonds ........................................ $ (29,000)
Proceeds from issuance of trust preferred securities ............ $ 362,994
Proceeds from issuance of pollution control revenue bonds ....... 215,023 386,634
Restricted deposit for bond redemption .......................... (200,000)
Proceeds from issuance of debentures ............................ 298,514
Payment of debentures ........................................... (12,718)
Payment of common stock dividends ............................... (213,641) (210,376)
Decrease in notes payable - net ................................. (6,725) (339,854)
Extinguishment of long-term debt ................................ (195,636) (402,587)
Conversion of convertible securities ............................ (6) (10,097)
Other - net ..................................................... (14,552) (17,587)
--------- ---------
Net cash used in financing activities ...................... (65,261) (324,353)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... 36,966 37,842
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 29,673 51,712
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 66,639 $ 89,554
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments:
Interest (net of amounts capitalized) ........................... $ 243,463 $ 276,679
Income taxes .................................................... 181,210 164,655
See Notes to the Company's Consolidated Financial Statements.
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RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
AND COMPREHENSIVE INCOME (LOSS)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------
1999 1998
---------------------------- -----------------------------
RETAINED EARNINGS:
Balance at beginning of period................ $ 1,128,387 $ 1,876,435
Net income.................................... 74,664 $ 74,664 41,484 $ 41,484
------------ -----------
Total.................................... 1,203,051 1,917,919
Common stock dividends........................ (106,993) (103,985)
------------ -----------
Balance at end of period...................... $ 1,096,058 $ 1,813,934
------------ -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX:
Balance at beginning of period................ $ (98,495) $ (4,957)
Foreign currency translation adjustments...... 8,049 8,049 (5,164) (5,164)
Unrealized loss on available
for sale securities......................... (779) (779) (6,414) (6,414)
------------ -----------
Balance at end of period...................... $ (91,225) $ (16,535)
============ ===========
========== ===========
COMPREHENSIVE INCOME............................. $ 81,934 $ 29,906
========== ===========
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------
1999 1998
------------------------------ -----------------------------
RETAINED EARNINGS:
Balance at beginning of period................ $ 1,445,081 $ 2,013,055
Net income (loss)............................. (135,125) $ (135,125) 11,369 $ 11,369
------------ -----------
Total.................................... 1,309,956 2,024,424
Common stock dividends........................ (213,898) (210,490)
------------ -----------
Balance at end of period...................... $ 1,096,058 $ 1,813,934
============ ===========
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX:
Balance at beginning of period................ $ (49,615) $ (6,455)
Foreign currency translation adjustments...... (42,929) (42,929) (5,045) (5,045)
Unrealized gain (loss) on available
for sale securities......................... 1,319 1,319 (5,035) (5,035)
------------ -----------
Balance at end of period...................... $ (91,225) $ (16,535)
------------ -----------
------------ -----------
COMPREHENSIVE INCOME (LOSS)...................... $ (176,735) $ 1,289
============ ===========
See Notes to the Company's Consolidated Financial Statements.
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RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Included in this combined Form 10-Q (Form 10-Q) for Reliant Energy,
Incorporated (Company) and for Reliant Energy Resources Corp. (Resources) are
the Company's and Resources' consolidated interim financial statements and notes
(Interim Financial Statements) including such companies' wholly owned and
majority owned subsidiaries. The Interim Financial Statements are unaudited,
omit certain financial statement disclosures and should be read with the
combined Annual Report on Form 10-K of the Company (Company Form 10-K) and
Resources (Resources Form 10-K) for the year ended December 31, 1998 and the
combined Quarterly Report on Form 10-Q of the Company (Company First Quarter
10-Q) and Resources (Resources First Quarter 10-Q) for the quarter ended March
31, 1999. For additional information regarding the presentation of interim
period results, see Note 14.
The financial statements for the three and six months ended June 30,
1998 have been restated to reflect the Company's and Resources' adoption of
mark-to-market accounting in the fourth quarter of 1998, retroactive to January
1, 1998. See Note 1(r) of the Company 10-K Notes (as defined below).
The following notes to the financial statements in the Company Form
10-K and the Resources Form 10-K relate to material contingencies. These notes,
as updated herein, are incorporated herein by reference:
Notes to Consolidated Financial Statements of the Company (Company
10-K Notes): Note 1(c) (Regulatory Assets and Other Long-Lived
Assets), Note 1(n) (Investments in Time Warner Securities), Note
1(p) (Foreign Currency Adjustments), Note 2 (Derivative Financial
Instruments), Note 3 (Rate Matters), Note 4 (Jointly Owned Electric
Utility Plant), Note 5 (Equity Investments and Advances to
Unconsolidated Subsidiaries), Note 12 (Commitments and
Contingencies) and Note 16(a) (Foreign Currency Devaluation).
Notes to Consolidated Financial Statements of Resources (Resources
10-K Notes): Note 1(c) (Regulatory Assets and Regulation), Note 2
(Derivative Financial Instruments) and Note 8 (Commitments and
Contingencies).
Historically, the Company has applied the accounting policies
established in SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71). For a discussion of the Company's accounting policies
under SFAS No. 71, see Note 1(c) of the Company 10-K Notes. The Texas Electric
Choice Plan, enacted in June 1999, will ultimately deregulate the Company's
electric generation operations. As a result, the Company is required to
discontinue the use of SFAS No. 71 for such operations. For additional
information on the discontinuation of SFAS No. 71, see Note 2.
(2) TEXAS ELECTRIC CHOICE PLAN AND DISCONTINUANCE OF SFAS NO. 71 FOR
ELECTRIC GENERATION OPERATIONS
In June 1999, Texas adopted the Texas Electric Choice Plan
(Legislation) that substantially amends the regulatory structure governing
electric utilities in order to allow retail competition beginning on January 1,
2002. In preparation for that competition, the Company will make significant
changes in the electric utility operations it conducts through Reliant Energy
HL&P. In addition, the Legislation requires the Public Utility Commission of
Texas (Texas PUC) to issue a number of new rules and determinations in
implementing the Legislation.
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The Legislation defines the process for competition and creates a
transition period during which most utility rates are frozen at their present
levels. The Legislation provides for utilities to recover 100 percent of their
generation related stranded costs and regulatory assets (as defined in the
Legislation).
Retail Choice. Under the Legislation, on January 1, 2002, most
retail customers of investor-owned electric utilities in Texas will be entitled
to purchase their electricity from any of a number of "retail electric
providers" which will have been certified by the Texas PUC. Retail electric
providers will not own or operate generation assets and their sales rates will
not be subject to traditional cost-of-service regulation. Retail electric
providers affiliated with the Company may compete statewide for these sales, but
rates they charge within the electric utility's traditional service territory
are subject to certain limitations at the outset of retail choice, as described
below. The Texas PUC will prescribe regulations governing quality, reliability
and other aspects of service from retail electric providers.
Unbundling. By January 1, 2002, electric utilities in Texas such as
Reliant Energy HL&P will restructure their businesses in order to separate power
generation, transmission and distribution and retail activities into different
units. Under the Legislation, Reliant Energy HL&P is required to submit a plan
to accomplish that separation to the Texas PUC by January 10, 2000. The
transmission and distribution business will continue to be subject to
cost-of-service rate regulation and will be responsible for the delivery of
electricity to retail consumers.
Generation. Power generators will sell electric energy to wholesale
purchasers, including retail electric providers, at unregulated rates beginning
January 1, 2002. To facilitate a competitive market, Reliant Energy HL&P and
most other electric utilities will be required to sell at auction entitlements
to 15 percent of their installed generating capacity no later than 60 days
before January 1, 2002. That obligation to auction entitlements continues until
the earlier of January 1, 2007 or the date the Texas PUC determines that at
least 40 percent of the residential and small commercial load served in the
electric utility's service area is being served by non-affiliated retail
electric providers. In addition, a power generator that owns and controls more
than 20 percent of the power generation in, or capable of delivering power to, a
power region after the reductions from the capacity auction (calculated as
prescribed in the Legislation) must submit a mitigation plan to reduce
generation that it owns and controls to no more than 20 percent in the power
region. The Legislation also creates a program mandating air emissions
reductions for non-permitted generating facilities. The Company anticipates that
costs associated with this obligation will be recoverable through the stranded
cost recovery mechanisms contained in the Legislation.
Rates. Base rates charged by Reliant Energy HL&P on September 1,
1999 will be frozen until January 1, 2002. Effective January 1, 2002, retail
rates charged to residential and small commercial customers by the utility's
affiliated retail electric provider will be reduced by 6 percent from the
average rates (on a bundled basis) in effect on January 1, 1999. That reduced
rate will be known as the "price to beat" and will be charged by the affiliated
retail electric provider to residential and small commercial customers in
Reliant Energy HL&P's service area who have not elected service from another
retail electric provider. The affiliated retail electric provider may not offer
different rates to residential or small commercial customer classes in the
utility's service area until the earlier of the date the Texas PUC determines
that 40 percent of power consumed by that class is being served by
non-affiliated retail electric providers or January 1, 2005. In addition, the
affiliated retail electric provider must make the price to beat available to
consumers until January 1, 2007.
Stranded Costs. Reliant Energy HL&P will be entitled to recover its
stranded costs (i.e., the excess of net book value of generation assets (as
defined by the Legislation) over the market value of those assets) and
regulatory assets related to generation. The Legislation prescribes specific
methods for determining the amount of stranded costs and the details for their
recovery. However, during the base rate freeze from 1999 until January 2002,
earnings above the utility's authorized return formula will be applied in a
manner to accelerate depreciation of generation related plant assets for
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regulatory purposes. In addition, depreciation expense for transmission and
distribution related assets may be redirected to generation assets for
regulatory purposes during that period.
The Legislation provides for Reliant Energy HL&P, or a special
purpose entity, to issue securitization bonds for regulatory assets and for
stranded costs. These bonds will be sold to third parties and will be amortized
through non-bypassable charges to transmission and distribution customers. Any
stranded costs not recovered through the securitization bonds will be recovered
through a non-bypassable charge to transmission and distribution customers.
Costs associated with nuclear decommissioning that have not been recovered as of
January 1, 2002, will continue to be subject to cost-of-service rate regulation
and will be included in a non-bypassable charge to transmission and distribution
customers.
Accounting. Historically, the Company has applied the accounting
policies established in SFAS No. 71. For a discussion of the Company's
accounting policies under SFAS No. 71, see Note 1(c) of the Company 10-K Notes.
In general, SFAS No. 71 permits a company with cost-based rates to defer certain
costs that would otherwise be expensed to the extent that it meets the following
requirements: (1) its rates are regulated by a third party; (2) its rates are
cost-based; and (3) there exists a reasonable assumption that all costs will be
recoverable from customers through rates. When a company determines that it no
longer meets the requirements of SFAS No. 71, pursuant to SFAS No. 101,
"Accounting for the Discontinuation of Application of SFAS No. 71" (SFAS No.
101) and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), it is required to write
off regulatory assets and liabilities unless some form of recovery continues
through rates established and collected from remaining regulated operations. In
addition, such company is required to determine any impairment to the carrying
costs of deregulated plant and inventory assets in accordance with SFAS No. 121.
In July 1997, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on Issue No. 97-4, "Deregulation
of the Pricing of Electricity - Issues Related to the Application of FASB
Statements No. 71, Accounting for the Effects of Certain Types of Regulation,
and No. 101, Regulated Enterprises - Accounting for the Discontinuation of
Application of FASB Statement No. 71" (EITF No. 97-4). EITF No. 97-4 concluded
that a company should stop applying SFAS No. 71 to a segment which is subject to
a deregulation plan at the time the deregulation legislation or enabling rate
order contains sufficient detail for the utility to reasonably determine how the
plan will affect the segment to be deregulated. In addition, EITF No. 97-4
requires that regulatory assets and liabilities be allocated to the applicable
portion of the electric utility from which the source of the regulated cash
flows will be derived.
The Company believes that the Legislation provides sufficient detail
regarding the deregulation of the Company's electric generation operations to
require it to discontinue the use of SFAS No. 71 for those operations. Effective
June 30, 1999, the Company applied SFAS No. 101 to its electric generation
operations. Reliant Energy HL&P's transmission and distribution operations
continue to meet the criteria of SFAS No. 71.
The Company has evaluated the recovery of its generation related
regulatory assets and liabilities. Because the Legislation provides for the
issuance of securitization bonds up to the amount of generation related
regulatory assets at December 31, 1998 and because these bonds will be amortized
through non-bypassable charges to transmission and distribution customers, the
Company believes these amounts are probable of full recovery. If events were to
occur that made the recovery of certain of these regulatory assets no longer
probable, the Company would write off the remaining balance of such assets as a
non-cash charge against earnings. Pursuant to EITF No. 97-4, the recoverable
regulatory assets will not be written off and will become associated with the
transmission and distribution portion of the Company's electric utility
business.
At June 30, 1999, the Company performed an impairment test of its
previously regulated electric generation assets pursuant to SFAS No. 121 on a
plant specific basis. Under SFAS No. 121, an asset is considered
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impaired, and should be written down to fair value, if the future undiscounted
cash flows generated by the use of the asset are insufficient to recover the
carrying amount of the asset. For assets that are impaired pursuant to SFAS No.
121, the Company determined the fair value for each generating plant by
estimating the net present value of future cash inflows and outflows over the
estimated life of each plant. The difference between fair value and net book
value was recorded as a reduction in the current book value. The Company
determined that $797 million of its $4.5 billion electric generation assets
(prior to the impairment loss) was impaired as of June 30, 1999. Of such
amounts, $745 million relate to the South Texas Project Electric Generating
Station and $52 million relate to two gas-fired generation plants. The
Legislation provides recovery of this impairment through regulated cash flows
during the transition period and through non-bypassable charges to transmission
and distribution customers. As such, a regulatory asset has been recorded for an
amount equal to the impairment loss and is included on the Company's
Consolidated Balance Sheets as recoverable impaired plant costs. This new
regulatory asset will be amortized as it is recovered.
The impairment analysis requires estimates of possible future market
prices, load growth, competition and many other factors over the lives of the
plants. The resulting $797 million pre-tax impairment loss is highly dependent
on these underlying assumptions. In addition, after January 10, 2004, Reliant
Energy HL&P must finalize and reconcile stranded costs (as defined by the
Legislation) in a filing with the Texas PUC. Any difference between the fair
market value and the regulatory net book value of the generation assets (as
defined by the Legislation) will either be refunded or collected through future
transmission and distribution rates. This final reconciliation allows
alternative methods of third party valuation of the fair market value of these
assets, including outright sale, stock valuations and asset exchanges. Because
generally accepted accounting principles require the Company to estimate fair
market values on a plant by plant basis in advance of the final reconciliation,
the financial impacts of the Legislation with respect to stranded costs are
subject to material changes. Factors affecting such change may include
estimation risk, uncertainty of future energy prices, the passage of time during
the transition period and the economic lives of the plants. If events occur that
make the recovery of the regulatory asset associated with the generation plant
impairment loss and deferred debits created from discontinuance of SFAS No. 71
pursuant to the Legislation no longer probable, the Company will write off the
remaining balance of such assets as a non-cash charge against earnings. One of
the results of discontinuing the application of SFAS No. 71 for the generation
operations is the elimination of the regulatory accounting effects of excess
deferred income taxes and investment tax credits related to such operations. The
Company believes it is probable that some parties will seek to return such
amounts to ratepayers and accordingly, the Company has recorded an offsetting
liability.
Following are the classes of electric property, plant and equipment
at cost, with associated accumulated depreciation, at June 30, 1999 (including
the impairment loss discussed above) and December 31, 1998.
CONSOLIDATED
TRANSMISSION GENERAL ELECTRIC
AND AND PLANT IN
GENERATION DISTRIBUTION INTANGIBLE SERVICE
---------- ------------ ---------- ------------
(IN MILLIONS)
June 30, 1999:
Original cost ........................ $ 8,920 $ 4,349 $ 970 $14,239
Accumulated depreciation ............. 4,904 1,270 210 6,384
Property, plant and equipment - net(1) 4,016 3,079 760 7,855
December 31, 1998:
Original cost ........................ $ 8,843 $ 4,196 $ 930 $13,969
Accumulated depreciation ............. 3,822 1,276 207 5,305
Property, plant and equipment - net(1) 5,021 2,920 723 8,664
- -------------
(1) Includes non-utility generation facilities of $354 million at
June 30, 1999 and $338 million at December 31, 1998 and international
distribution facilities of $25 million at June 30, 1999 and $19 million
at December 31, 1998.
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In order to reduce potential exposure to stranded costs related to
generation assets, Reliant Energy HL&P redirected $102 million and $195 million
of depreciation in the six months ended June 30, 1999 and year ended December
31, 1998, respectively, from transmission, distribution and general plant assets
to generation assets. Such redirection is in accordance with the Company's
transition to competition plan, approved by the Texas PUC (Transition Plan). See
Note 3(b) of the Company 10-K Notes. The cumulative amount of redirected
depreciation of $297 million is an embedded regulatory asset included in
transmission and distribution and general plant and equipment balances.
The Company reviewed its long-term purchase power contracts and
fuel contracts for potential loss in accordance with SFAS No. 5, "Accounting for
Contingencies" and Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing." Based on projections of future market prices for wholesale
electricity, the analysis indicated no loss recognition is appropriate at this
time.
Other Accounting Policy Changes. As a result of discontinuing SFAS
No. 71, other accounting policies related to the Company's electric generation
plant have been changed effective July 1, 1999. Allowance for funds used during
construction will no longer be accrued on generation related construction
projects. Instead, interest will be capitalized on these projects in accordance
with SFAS No. 34, "Capitalization of Interest Cost."
In accordance with SFAS No. 71, Reliant Energy HL&P deferred the
premiums and expenses that arose when long term debt was redeemed and amortized
these costs over the life of the new debt. When no new debt was issued to
refinance the retired debt, these costs were amortized over the remaining life
of the retired debt. Effective July 1, 1999, costs resulting from the retirement
of debt attributable to the generation operations of Reliant Energy HL&P will be
recorded in accordance with SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt."
The economic lives of Reliant Energy HL&P's generation plant and
equipment will be reassessed and prospective depreciation rates may be revised
due to changing economic circumstances as a result of the Legislation.
(3) FOREIGN CURRENCY ADJUSTMENTS
For information about the Company's foreign currency adjustments,
see Note 1(p) of the Company 10-K Notes. The Company has an indirect 11.8%
common stock interest in Light Servicos de Eletricidade S.A. (Light) and through
its investment in Light, has a 9.1% common stock interest in Metropolitana
Eletricidade de Sao Paulo S.A. (Metropolitana), both in Brazil. The Company
accounts for its investment in Light under the equity method of accounting and
records its proportionate share, based on stock ownership, in the net income of
Light and its affiliates (including Metropolitana) as part of the Company's
consolidated net income.
As of June 30, 1999, Light and Metropolitana had total borrowings of
$2.8 billion in non-local currencies. During the first quarter of 1999, the
Brazilian real was devalued and allowed to float against other major currencies.
The effects of devaluation on the non-local currency denominated borrowings
caused the Company to record a non-cash, after-tax charge of $4 million and $91
million in the second quarter and first quarter of 1999, respectively, as a
result of foreign currency translation losses recorded by both Light and
Metropolitana in such periods. At June 30, 1999, one U.S. dollar could be
exchanged for 1.7695 Brazilian reais. Because the Company uses the Brazilian
real as the functional currency in which it reports Light's equity earnings, any
decrease in the value of the Brazilian real below its June 30, 1999 level will
increase Light's liability represented by the non-local currency denominated
borrowings
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which will also be reflected in the Company's consolidated earnings, to the
extent of the Company's 11.8% ownership interest in Light. Similarly, any
increase in the value of the Brazilian real above its June 30, 1999 level will
decrease Light's liability represented by such borrowings.
(4) DEPRECIATION
(a) Company.
The Company calculates depreciation using the straight-line method.
The Company's depreciation expense for the second quarter and first half of 1999
was $196 million and $335 million, respectively, compared to $193 million and
$332 million for the corresponding 1998 periods. Pursuant to the Transition
Plan, the Company recorded $45 million and $58 million of additional
depreciation for the second quarter and first half of 1999, respectively,
compared to $68 million and $80 million for the corresponding 1998 periods. For
information regarding the additional depreciation of electric utility generating
assets under the Transition Plan, see Note 3(b) of the Company 10-K Notes.
(b) Resources.
Resources calculates depreciation using the straight-line method.
Resources' depreciation expense for the second quarter and first half of 1999
was $34 million and $71 million, respectively, compared to $30 million and $63
million for the corresponding 1998 periods.
(5) COMBINED FINANCIAL STATEMENT DATA OF EQUITY INVESTMENTS AND ADVANCES
TO UNCONSOLIDATED AFFILIATES
The following table shows certain summary financial information for
the Company's unconsolidated affiliates:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------ ------ ------ ------
(IN MILLIONS)
Revenues...................... $1,240 $2,045 $2,383 $2,680
Operating expenses............ 913 1,544 1,744 1,986
Net income (loss)............. 107 145 (566) 276
Dividends received from these affiliates equaled $8.4 million and
$10.5 million for the second quarter and first half of 1999, respectively,
compared to $23.1 million and $26.7 million for the corresponding 1998 periods.
(6) CHANGE IN ACCOUNTING PRINCIPLE
The Company and Resources adopted Emerging Issues Task Force 98-10,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" (EITF 98-10) on January 1, 1999 for the energy trading activities of
Reliant Energy Services, Inc. The adoption of EITF 98-10 had no material impact
on the Company's or Resources' consolidated financial statements.
(7) TIME WARNER SECURITIES INVESTMENT
As of June 30, 1999, the Company owned 11 million shares of Time
Warner Inc. (Time Warner) convertible preferred stock (TW Preferred). On July 6,
1999, the Company converted its TW Preferred into 45.8 million shares of Time
Warner common stock (TW Common). Accordingly, the Company will no longer receive
the quarterly pre-tax dividend of $10.3 million that was paid on the TW
Preferred, but
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is expected to receive a quarterly pre-tax dividend on the TW Common of
approximately $2.1 million (based on current dividend levels).
In 1997, in order to monetize a portion of the cash value of its
investment in Time Warner, the Company sold 22.9 million of its unsecured 7%
Automatic Common Exchange Securities (ACES). The market value of ACES is indexed
to the market value of TW Common. In July 2000, the ACES will be mandatorily
exchangeable for, at the Company's option, either shares of TW Common at the
exchange rate set forth below or cash with an equal value. The current exchange
rate is as follows:
MARKET PRICE OF TW COMMON EXCHANGE RATE
------------------------- -------------
Below $22.96875 2.0 shares of TW Common
$22.96875 - $27.7922 Share equivalent of $45.9375
Above $27.7922 1.6528 shares of TW Common
By issuing the ACES, the Company effectively eliminated the economic
exposure of its investment in Time Warner to decreases in the price of TW Common
below $22.96875. In addition, the Company retained 100% of any increase in TW
Common price up to $27.7922 per share and 17% of any increase in market price
above $27.7922. The closing price per share of TW Common on June 30, 1999 was
$72.625.
Prior to the July 1999 conversion of the TW Preferred, any increase
in the market value of TW Common above $27.7922 was treated for accounting
purposes as an increase in the payment amount of the ACES equal to 83% of the
increase in the market price per share and was recorded by the Company as a
non-cash expense. As a result, the Company recorded in the second quarter and
first half of 1999 a non-cash, unrealized accounting loss of $69 million and
$400 million, respectively (which resulted in an after-tax earnings reduction of
$44 million, or $0.16 per share, and $260 million, or $0.91 per share,
respectively); this correlates to the $83 million and $484 million unrecorded
unrealized gain related to the increase in the market value of TW Common during
the second quarter and first half of 1999. The Company believes the cumulative
unrealized loss for the ACES of $1.7 billion is more than economically hedged by
the approximately $2.3 billion unrecorded unrealized gain at June 30, 1999,
relating to the increase in market value of the TW Common from the Company's
cost.
Upon conversion, the Company recorded an increase in its investment
in TW Common of $2.3 billion, which represents the increase in market value of
TW Common over the Company's cost for the TW Preferred. In addition, the Company
recognized an increase of $1.5 billion in other comprehensive income, which
represents the change in market price of TW Common, net of related deferred
taxes. Upon the sale or other disposition of the TW Common, the Company is
expected to record a gain equal to the amount realized on the sale or
disposition less the original cost of the TW Preferred. As a result of the
conversion, the Company will now record changes in the market price of the TW
Common and the related changes in the market value of the ACES as a component of
stockholders' equity and other comprehensive income.
(8) CAPITAL STOCK
(a) Common Stock.
The Company has 700,000,000 authorized shares of common stock. At
June 30, 1999, the Company had 296,904,308 shares of common stock issued
(286,093,084 outstanding). At December 31, 1998, the Company had 296,271,063
shares of common stock issued (284,494,195 outstanding). Outstanding common
shares exclude (i) shares pledged to secure a loan to the Company's Employee
Stock Ownership Plan (10,719,489 and 11,674,063 at June 30, 1999 and December
31, 1998, respectively) and (ii) treasury shares (91,735 and 102,805 at June 30,
1999 and December 31, 1998, respectively), which are shares received by the
Company in partial payment of exercised stock options.
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In June 1999, the Company registered the sale of up to 15,000,000
shares of its common stock. The shares may be sold in one or more public
offerings.
As of June 30, 1999, the Company had the authority to repurchase up
to $89 million of its common stock under a repurchase program approved in 1996.
Any repurchase depends on market conditions, might not be announced in advance
and may be made in open market or privately negotiated transactions. For
information on the Company's repurchases of its stock since June 30, 1999, see
Note 13.
(b) Earnings Per Share.
The following table presents the Company's basic and diluted
earnings per share (EPS) calculation:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
1999(1) 1998 1999(2) 1998
-------- -------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic EPS Calculation:
Income (loss) before preferred dividends ........................ $ 74,762 $ 41,582 $ (134,930) $ 11,564
Preferred dividends ............................................. 98 98 195 195
======== ======== ========== =========
Net income (loss) attributable to common stock .................. $ 74,664 $ 41,484 $ (135,125) $ 11,369
======== ======== ========== =========
Weighted average shares outstanding ............................. 285,474 284,015 285,222 283,773
Basic EPS:
Income (loss) before preferred dividends ........................ $ 0.26 $ 0.15 $ (0.47) $ 0.04
Preferred dividends ............................................. 0.00 0.00 0.00 0.00
======== ======== ========== =========
Net income (loss) attributable to common stock .................. $ 0.26 $ 0.15 $ (0.47) $ 0.04
======== ======== ========== =========
Diluted EPS Calculation:
Income before preferred dividends ............................... $ 74,762 $ 41,582 (134,930) $ 11,564
Interest on 6-1/4% convertible debentures ................... 9 14 18 29
-------- -------- ---------- ---------
Income before preferred dividends assuming dilution.............. 74,771 41,596 (134,912) 11,593
Preferred dividends ............................................. 98 98 195 195
======== ======== ========== =========
Net income attributable to common stock ......................... $ 74,673 $ 41,498 (135,107) $ 11,398
======== ======== ========== =========
Weighted average shares outstanding ............................. 285,474 284,015 285,222 283,773
Stock options .............................................. 576 469 358
Restricted stock ........................................... 740 496 496
6-1/4% convertible debentures .............................. 27 44 44
-------- -------- ---------- ---------
Weighted average shares assuming dilution ....................... 286,817 285,024 285,222 284,671
======== ======== ========== =========
Diluted EPS:
Income (loss) before preferred dividends ........................ $ 0.26 $ 0.15 $ (0.47) $ 0.04
Preferred dividends ................................................ 0.00 0.00 0.00 0.00
======== ======== ========== =========
Net income (loss) attributable to common stock .................. $ 0.26 $ 0.15 $ (0.47) $ 0.04
======== ======== ========== =========
- ----------------
(1) For the three months ended June 30, 1999, the computation of diluted
EPS excludes purchase options for 23,334 shares of common stock that
have exercise prices (ranging from $28.71 to
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$35.18 per share) greater than the $28.52 per share average market
price for the period and would thus be anti-dilutive if exercised.
(2) Assumed conversions were not included in the computation of diluted
earnings per share for the six months ended June 30, 1999 because
additional shares outstanding would result in an anti-dilutive per
share amount. The computation for the six months ended June 30, 1999
excludes 740,000 shares of restricted stock, 27,000 shares for
assumed conversion of debentures and purchase options for 628,000
shares of common stock, which would be anti-dilutive if exercised.
(c) Preferred Stock.
At June 30, 1999 and December 31, 1998, the Company had 10,000,000
authorized shares of preferred stock, of which 97,397 shares of $4.00 Preferred
Stock were outstanding. The Preferred Stock pays an annual dividend of $4.00 per
share, is redeemable at $105 per share and has a liquidation price of $100 per
share.
(d) Preference Stock.
At June 30, 1999 and December 31, 1998, the Company had 10,000,000
authorized shares of preference stock, of which 700,000 shares are classified as
Series A Preference Stock, 27,000 shares are classified as Series B Preference
Stock and 1,575 are classified as Series C Preference Stock. At June 30, 1999
and December 31, 1998, there were no shares of Series A Preference Stock issued
and outstanding (such shares being issuable in accordance with the Company's
Shareholder Rights Agreement upon the occurrence of certain events) and 17,000
shares of Series B Preference Stock issued and outstanding. At June 30, 1999,
there were no shares of Series C Preference Stock issued and outstanding (due to
a redemption of 1,575 shares in March 1999). The Series B Preference Stock is
not deemed outstanding for financial reporting purposes, because the sole holder
of such series is a wholly owned financing subsidiary of the Company.
(9) COMPANY/RESOURCES OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES OF THE COMPANY/RESOURCES
(a) Company.
For information regarding $375 million of preferred securities
issued by a statutory business trust formed by the Company, see Note 8(a) of the
Company First Quarter 10-Q. For information regarding $250 million of preferred
securities and $100 million of capital securities previously issued by statutory
business trusts formed by the Company, see Note 9(a) of the Company 10-K Notes.
The sole asset of each trust consists of junior subordinated debentures of the
Company having interest rates and maturity dates corresponding to each issue of
preferred or capital securities, and the principal amounts corresponding to the
common and preferred or capital securities issued by such trust.
The Company has a registration statement under which $125 million of
trust preferred securities and related junior subordinated debt securities are
available for issuance. The issuance of all securities registered by the Company
and its affiliates is subject to market and other conditions.
(b) Resources.
For information regarding $177.8 million of convertible preferred
securities previously issued by a statutory business trust formed by Resources,
of which approximately $1 million was outstanding at June 30, 1999, see Note 5
of Resources 10-K Notes. The sole asset of the trust consists of junior
subordinated debentures of Resources having an interest rate and maturity date
corresponding to the preferred
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securities, and a principal amount corresponding to the common and preferred
securities issued by the trust.
(10) LONG-TERM DEBT AND SHORT-TERM FINANCING
(a) Company.
(i) Consolidated Debt.
The Company's consolidated long-term and short-term debt outstanding
is summarized in the following table:
JUNE 30, 1999 DECEMBER 31, 1998
---------------------- ---------------------
LONG-TERM CURRENT LONG-TERM CURRENT
--------- ------- --------- -------
(IN MILLIONS)
Short-Term Borrowings (1):
Commercial Paper........................................... $ 1,511 $ 1,360
Lines of Credit............................................ 150
Resources Receivables Facility............................. 300 300
Notes Payable.............................................. 2 3
------- ------- ------ -------
Total Short-Term Borrowings................................... 1,813 1,813
------- ------- ------ -------
Long-Term Debt - net:
ACES ...................................................... $ 2,750 $ 2,350
Debentures (2)(3).......................................... 1,469 1,482
First Mortgage Bonds (2)................................... 1,427 420 1,866 170
Pollution Control Bonds.................................... 801 581
Resources Medium-Term Notes (3)............................ 175 178
Notes Payable (3).......................................... 311 226 330 226
Capital Leases............................................. 13 1 14 1
------- ------- ------ -------
Total Long-Term Debt.......................................... 6,946 647 6,801 397
------- ------- ------ -------
Total Long-Term and Short-Term Debt........................ $ 6,946 $ 2,460 $ 6,801 $ 2,210
======= ======= ======= =======
- -------------
(1) Includes amounts due within one year of the date noted.
(2) Includes unamortized discount related to debentures of approximately
$0.4 million at June 30, 1999 and $1 million at December 31, 1998
and unamortized premium related to debentures of approximately $16.7
million at June 30, 1999 and $17.0 million at December 31, 1998. The
unamortized discount related to first mortgage bonds was
approximately $9.5 million at June 30, 1999 and $9.9 million at
December 31, 1998.
(3) Includes unamortized premium related to fair value adjustments of
approximately $17.2 million and $18.1 million for debentures at June
30, 1999 and December 31, 1998, respectively. The unamortized
premium for Resources long-term notes was approximately $9.5 million
and $12 million at June 30, 1999 and December 31, 1998,
respectively. The unamortized premium for long-term and current
notes payable was approximately $2.1 million and $0.5 million at
June 30, 1999 and $3 million each at December 31, 1998,
respectively.
Consolidated maturities of long-term debt and sinking fund
requirements for the Company (including Resources) are approximately $212
million for the remainder of 1999.
(ii) Financing Developments.
At June 30, 1999, a financing subsidiary of the Company had $1.464
billion in commercial paper borrowings supported by a $1.644 billion revolving
credit facility. At June 30, 1999, the weighted average interest rate of these
commercial paper borrowings was 5.26%. At June 30, 1999, the Company had $46.6
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million in commercial paper borrowings supported by a $200 million revolving
credit facility. The weighted average interest rate of these commercial paper
borrowings was 6.10% at June 30, 1999. For additional information regarding the
Company's and its subsidiaries' financings and repayments, see Note 8(c) and (d)
of the Company 10-K Notes and Note 9(a) of the Company First Quarter 10-Q.
In April 1999, the Gulf Coast Waste Disposal Authority (GCWDA)
issued on behalf of the Company $19.2 million of revenue refunding bonds having
an annual interest rate of 4.70%. The GCWDA bonds will mature in 2011, and
proceeds from the issuance were used on June 1, 1999 to redeem all outstanding
7.0% GCWDA Series 1989A collateralized revenue refunding bonds ($19.2 million)
at a redemption price of 102% of their aggregate principal amount.
In April 1999, the Matagorda County Navigation District Number One
(MCND) issued on behalf of the Company $100 million of revenue refunding bonds
having an annual interest rate of 5.25%. The MCND bonds will mature in 2026, and
proceeds from the issuance were used on July 1, 1999 to redeem all outstanding
7.125% MCND Series 1989C collateralized revenue refunding bonds ($100 million)
at a redemption price of 102% of their aggregate principal amount.
In April 1999, the Brazos River Authority (BRA) issued on behalf of
the Company $100 million of revenue refunding bonds having an annual interest
rate of 5.375%. The BRA bonds will mature in 2019, and proceeds from the
issuance were used on July 1, 1999 to redeem all outstanding 7.625% BRA Series
1989A collateralized revenue refunding bonds ($100 million) at a redemption
price of 102% of their aggregate principal amount.
For financial reporting purposes, both the MCND and BRA bonds issued
in April 1999 and the MCND and BRA revenue refunding bonds redeemed in July 1999
were deemed to be outstanding at June 30, 1999.
(b) Resources.
As of June 30, 1999, Resources had outstanding $2.0 billion of
long-term and short-term debt. Consolidated maturities of long-term debt and
sinking fund requirements for Resources are approximately $200 million for the
remainder of 1999.
In the second quarter of 1999, Resources purchased $6 million of its
6% convertible subordinated debentures due 2012 at an average purchase price of
96.125% of the aggregate principal amount, plus accrued interest. Resources
plans to use the purchased debentures to satisfy the March 2001 sinking fund
requirement of the 6% convertible subordinated debentures. For more information
regarding Resources' financing arrangements, lease commitments and letters of
credit, see Notes 4 and 8(a) and (b) of the Resources 10-K Notes and Note 9(b)
of the Company First Quarter 10-Q.
For information regarding Resources' $300 million receivables
facility, see Note 4(a) of the Resources 10-K Notes. At June 30, 1999, Resources
had sold $300 million of receivables under the facility. The weighted average
interest rate was 5.11%.
For information regarding Resources' $350 million revolving credit
facility, see Note 4(a) of the Resources 10-K Notes. At June 30, 1999, there
were no commercial paper borrowings or loans outstanding under the facility and
letters of credit issued under the facility aggregated $15.2 million.
(11) ACQUISITIONS
As previously disclosed in the Company First Quarter 10-Q, the
Company and one of its subsidiaries have entered into an agreement to acquire an
interest in N.V. Energieproduktiebedrijf UNA (UNA), a
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power generation company providing service in the Netherlands. Consummation of
that transaction is awaiting certain government approvals in the Netherlands. It
is anticipated that the transaction will close in the third or fourth quarter of
1999. The acquisition schedule contemplates an initial purchase of 40% of UNA's
capital stock, with up to 52% to be acquired no later than December 31, 2002 and
the remainder to be acquired no later than December 31, 2006. It is possible
that some of the acquisition dates may be accelerated. The transaction is
subject to usual and customary conditions, including the receipt of government
approvals on terms and conditions acceptable to the Company. For further
information see Note 11 of the Company First Quarter 10-Q.
(12) REPORTABLE SEGMENTS
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has identified the following
reportable segments: Electric Operations, Natural Gas Distribution, Interstate
Pipelines, Wholesale Energy, International and Corporate. Electric Operations
provides electric utility generation, transmission, distribution and sales to
customers. Natural Gas Distribution operations consist of natural gas utility
sales to, and natural gas utility transportation for, residential, commercial
and industrial customers. Interstate Pipelines operates two interstate natural
gas pipelines. Wholesale Energy is engaged in the acquisition, development and
operation of, and sale of capacity and energy from, domestic and certain
international non-utility power generation facilities and in the wholesale
energy trading and marketing and natural gas gathering businesses. International
invests in foreign electric and gas utility operations, primarily in Latin
America. Corporate includes a non-rate regulated retail service business,
certain real estate holdings and corporate expenses.
Financial data for the business segments are as follows (in
thousands):
ELECTRIC NATURAL GAS INTERSTATE WHOLESALE INTER- RECONCILING
OPERATIONS DISTRIBUTION PIPELINES ENERGY NATIONAL CORPORATE ELIMINATIONS CONSOLIDATED
---------- ------------ ---------- --------- -------- --------- ------------ ------------
For the Three Months Ended
June 30, 1999:
Revenues ................. $1,166,642 $ 329,027 $ 26,824 $1,905,758 $ 43,631 $ 185,946 $3,657,828
Intersegment revenues .... 313 39,293 32,072 16,793 $(88,471)
Operating income (loss) .. 284,920 (5,700) 27,206 8,616 15,197 (6,856) 323,383
For the Three Months Ended
June 30, 1998:
Revenues ................. 1,181,300 330,363 36,577 885,374 169,435 133,577 2,736,626
Intersegment revenues .... 303 39,940 28,648 22,654 (91,545)
Operating income (loss) .. 293,753 (5,127) 32,849 (26,473) 151,031 9,776 455,809
18
21
ELECTRIC NATURAL GAS INTERSTATE WHOLESALE INTER- RECONCILING
OPERATIONS DISTRIBUTION PIPELINES ENERGY NATIONAL CORPORATE ELIMINATIONS CONSOLIDATED
---------- ------------ --------- ----------- -------- --------- ------------ ------------
For the Six Months Ended
June 30, 1999:
Revenues....................... $2,016,548 $ 1,006,854 $ 53,305 $ 2,844,640 $ (7,853) $ 387,238 $ 6,300,732
Intersegment revenues.......... 601 78,917 101,293 35,935 $ (216,746)
Operating income (loss)........ 429,400 92,490 55,099 9,794 (62,703) (10,582) 513,498
For the Six Months Ended
June 30, 1998
Revenues....................... 2,027,862 1,060,761 69,810 1,713,537 196,681 299,297 5,367,948
Intersegment revenues.......... 624 77,688 91,859 45,943 (216,114)
Operating income (loss)........ 436,364 97,615 64,922 (25,960) 162,011 3,749 738,701
Reconciliation of Operating Income to Net Income (Loss) (in thousands) is
as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Operating income................................ $ 323,383 $ 455,809 $ 513,498 $ 738,701
Dividend income................................. 10,312 10,312 20,625 20,625
Interest expense................................ 127,725 126,360 254,918 256,748
Unrealized loss on ACES......................... 68,628 254,458 399,939 443,778
Distribution on trust securities................ 13,990 7,302 23,781 14,712
Income tax expense (benefit).................... 51,475 43,326 (5,068) 47,602
Other income.................................... 2,787 6,809 4,322 14,883
--------- --------- --------- ---------
Net income (loss) attributable to common
shareholders.................................. $ 74,664 $ 41,484 $(135,125) $ 11,369
========= ========= ========= =========
(13) SUBSEQUENT EVENTS
In July 1999, the MCND issued on behalf of the Company $70.3 million
of revenue refunding bonds having an annual interest rate of 5.95%. The MCND
bonds will mature in 2030 and proceeds from the issuance will be used on October
1, 1999 to redeem all outstanding 7.60% MCND Series 1989D collateralized
pollution revenue bonds at a redemption price of 102% of their aggregate
principal amount.
During the period from July 7, 1999 through August 6, 1999, the
Company purchased 1,041,500 shares of its common stock for $28.6 million at an
average price of $27.47 per share. See Note 7 for more information.
On July 6, 1999, the 11,000,000 shares of TW Preferred owned by the
Company were converted into approximately 45.8 million shares of TW Common. See
Note 7 for more information.
In July 1999, Resources repaid at maturity $200 million of its
8.875% Notes.
(14) COMPANY/RESOURCES INTERIM PERIOD RESULTS; RECLASSIFICATIONS
The Company's and Resources' Interim Financial Statements reflect all
normal recurring adjustments that are, in the opinion of management, necessary
to present fairly the financial position and results of operations for the
respective periods. Amounts reported in the Company's Statements of Consolidated
Operations and Resources' Statements of Consolidated Operations are not
necessarily indicative of amounts expected for a full-year period due to the
effects of, among other things,
19
22
(i) seasonal variations in energy consumption, (ii) timing of maintenance and
other expenditures and (iii) acquisitions and dispositions of assets and other
interests. In addition, certain amounts from the prior year have been
reclassified to conform to the Company's and Resources' presentation of
financial statements in the current year. These reclassifications do not affect
their respective earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
The following should be read in combination with the unaudited
consolidated financial statements and notes thereto.
Reliant Energy, Incorporated (Company), together with various
divisions and subsidiaries, including Reliant Energy Resources Corp.
(Resources), is a diversified international energy services company. The Company
reports its financial information in six segments. The Company's Electric
Operations segment operates the nation's tenth largest utility in terms of
kilowatt-hour (KWH) sales. The Natural Gas Distribution segment includes the gas
utility operations of Resources and is the third largest such operation in the
U.S. in terms of number of customers served. The Interstate Pipelines segment
operates two interstate natural gas pipelines. The Wholesale Energy segment is
engaged in the acquisition, development and operation of, and sale of capacity,
energy and ancillary services from, domestic and certain international
non-utility power generation facilities, and in the wholesale energy trading and
marketing and natural gas gathering businesses. The International segment
invests in foreign electric and gas utility operations, primarily in Latin
America. The Corporate segment includes a non-rate regulated retail service
business, certain real estate holdings and corporate expenses.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, PERCENT JUNE 30, PERCENT
1999 1998 CHANGE 1999 1998 CHANGE
------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT (IN MILLIONS, EXCEPT
PER SHARE DATA) PER SHARE DATA)
Revenues.............................. $ 3,658 $ 2,737 34% $ 6,301 $ 5,368 17%
Operating Expenses.................... 3,335 2,281 46% 5,788 4,629 25%
Operating Income...................... 323 456 (29%) 513 739 (31%)
Other Expenses(1)..................... 57 238 (76%) 377 410 (8%)
Interest and Other Charges............ 140 133 5% 276 270 2%
Income Tax Expense (Benefit).......... 51 44 16% (5) 48 --
------- ------- ------- -------
Net Income (Loss)(1).................. $ 75 $ 41 83% $ (135) $ 11 --
======= ======= ======= =======
Basic and Diluted Income (Loss) Per
Share(1)............................ $ .26 $ .15 73% $ (.47) $ .04 --
- ---------------
(1) Other Expenses and Net Income (Loss) reflect the effect of a $69 million
and $400 million non-cash, unrealized pre-tax accounting loss recorded in
the three and six months ended June 30, 1999 compared to a $254 million and
$444 million pre-tax loss in the same periods in 1998 relating to the
Company's 7% Automatic Common Exchange Securities (ACES). See Note 7 to the
Company's Interim Financial Statements.
Second Quarter of 1999 Compared to Second Quarter of 1998. The Company
reported consolidated net income of $75 million ($0.26 per share) for the second
quarter of 1999 compared to consolidated net income of $41 million ($0.15 per
share) for the second quarter of 1998. The 1999 results reflect a $44 million
after-tax, non-cash, unrealized accounting loss on the ACES and a $4 million
20
23
after-tax, non-cash loss due to the devaluation of the Brazilian real. The 1998
results reflect a $165 million, after-tax, non-cash unrealized accounting loss
on the ACES.
After adjusting for the charges described above, the Company would
have had consolidated net income of $123 million ($0.43 per share) in the second
quarter of 1999 and $206 million ($0.73 per share) in the second quarter of
1998. The decrease was primarily due to an $80 million, or $0.28 per share, gain
on the sale of the Company's indirect interest in an electric distribution
system in Argentina in the second quarter of 1998. Also contributing to the
decrease was a settlement relating to gas purchase contracts that resulted in
the recognition of approximately $6 million of revenues at Interstate Pipelines
in the second quarter of 1998.
First Six Months of 1999 Compared to First Six Months of 1998. The
Company reported a consolidated net loss of $135 million ($0.47 per share) for
the first six months of 1999 compared to consolidated net income of $11 million
($0.04 per share) for the same period of 1998. The 1999 results reflect a $260
million after-tax, non-cash, unrealized accounting loss on the ACES and a $95
million after-tax, non-cash loss due to the devaluation of the Brazilian real.
The 1998 results reflect a $288 million after-tax, non-cash unrealized
accounting loss on the ACES.
After adjusting for the charges described above, the Company would
have had consolidated net income of $220 million ($0.77 per share) for the first
six months of 1999 and $299 million ($1.05 per share) for the first six months
of 1998. The $79 million decrease was primarily due to the same factors
mentioned above for the quarterly period.
The Company's income tax benefit for the first six months of 1999 was
$5 million. In addition, an income tax benefit is reflected in International's
revenues relating to the Company's after-tax interest in the operations of its
foreign affiliates accounted for under the equity method.
The table below shows operating income (loss) by segment:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
(IN MILLIONS)
Electric Operations.................................. $ 285 $ 294 $ 429 $ 436
Natural Gas Distribution............................. (6) (5) 92 98
Interstate Pipelines................................. 27 33 55 65
Wholesale Energy..................................... 9 (26) 10 (26)
International........................................ 15 151 (63) 162
Corporate............................................ (7) 9 (10) 4
------ ------ ------ ------
Total Consolidated................................ $ 323 $ 456 $ 513 $ 739
====== ====== ====== ======
ELECTRIC OPERATIONS
Electric Operations are conducted under the name "Reliant Energy
HL&P," an unincorporated division of the Company. Electric Operations provides
electric generation, transmission, distribution and sales to approximately 1.6
million customers in a 5,000 square mile area on the Texas Gulf Coast, including
Houston (the nation's fourth largest city).
21
24
THREE MONTHS ENDED JUNE 30,
------------------------------ PERCENT
1999 1998 CHANGE
----------- ----------- -----------
(IN MILLIONS)
Operating Revenues:
Base Revenues (1) ......................... $ 787 $ 802 (2%)
Reconcilable Fuel Revenues (2) ............ 379 379 --
----------- -----------
Total Operating Revenues ............ 1,166 1,181 (1%)
=========== ===========
Operating Expenses:
Fuel and Purchased Power .................. 394 395 --
Operation and Maintenance ................. 217 214 1%
Depreciation and Amortization ............. 172 185 (7%)
Other Operating Expenses .................. 98 93 5%
----------- -----------
Total Operating Expenses ............. 881 887 (1%)
----------- -----------
Operating Income ............................ $ 285 $ 294 (3%)
=========== ===========
Electric Sales (MWH):
Residential ............................... 4,727,387 4,475,019 6%
Commercial ............................... 4,036,304 3,897,340 4%
Industrial - Firm ........................ 6,678,597 6,773,768 (1%)
Municipal & Public Utilities ............. 91,100 76,521 19%
=========== ===========
Total Firm Billed Sales ............. 15,533,388 15,222,648 2%
=========== ===========
Average Cost of Reconcilable Fuel
(Cents/MMBtu) ............................ 181.8 176.8 3%
SIX MONTHS ENDED JUNE 30,
------------------------------ PERCENT
1999 1998 CHANGE
----------- ----------- -----------
(IN MILLIONS)
Operating Revenues:
Base Revenues (1) ......................... $ 1,356 $ 1,357 --
Reconcilable Fuel Revenues (2) ............ 661 671 (1%)
----------- -----------
Total Operating Revenues .............. 2,017 2,028 (1%)
=========== ===========
Operating Expenses:
Fuel and Purchased Power .................. 688 700 (2%)
Operation and Maintenance ................. 407 408
Depreciation and Amortization ............. 308 315 (2%)
Other Operating Expenses .................. 185 169 9%
----------- -----------
Total Operating Expenses .............. 1,588 1,592 --
----------- -----------
Operating Income ............................ $ 429 $ 436 (2%)
=========== ===========
Electric Sales (MWH):
Residential ............................... 8,553,151 8,072,040 6%
Commercial ................................ 7,652,980 7,321,690 5%
Industrial - Firm ......................... 12,846,497 13,141,747 (2%)
Municipal & Public Utilities .............. 166,395 157,909 5%
=========== ===========
Total Firm Billed Sales ............... 29,219,023 28,693,386 2%
=========== ===========
Average Cost of Reconcilable Fuel
(Cents/MMBtu) ............................. 169.1 179.2 (6%)
- -------------------
(1) Includes miscellaneous revenues (including transmission revenues) and
certain purchased power-related revenues.
(2) Includes revenues collected through a fixed fuel factor and surcharge, net
of over/under recovery.
22
25
Electric Operations earnings are capped at an overall rate of return
formula on a calendar year basis as part of the Transition Plan. As a result,
any earnings over the maximum allowed return on invested capital will be used as
additional depreciation of generation assets, mitigating potential stranded
costs. For information on the Transition Plan, see Note 3(b) of the Company 10-K
Notes.
Electric Operations operating income for the second quarter and first
half of 1999 decreased $9 million and $7 million, respectively, compared to the
corresponding 1998 periods. For both periods of 1999, higher base rate credits,
as required under the Transition Plan, and milder weather combined to reduce
operating revenues. Strong customer growth partially offset these effects.
The Company recorded additional depreciation of $58 million and $80
million on generation assets for the first half of 1999 and 1998, respectively.
The Company recorded additional depreciation on generation assets of $45 million
and $68 million for the second quarter of 1999 and 1998, respectively.
Fuel and purchased power expenses for the second quarter of 1999
decreased slightly compared to the 1998 period. For the first half of 1999, such
expenses decreased $12 million compared to the 1998 period as a result of lower
cost per unit for purchased power ($0.0228 per KWH in the 1999 period compared
to $0.0241 per KWH in the 1998 period) and lower reconcilable cost of natural
gas ($2.16 per MMBtu in the 1999 period and $2.31 per MMBtu in the 1998 period),
offset somewhat by higher reconcilable cost per unit of lignite ($1.23 per MMBtu
in the 1999 period compared to $1.10 per MMBtu in the 1998 period).
Other operating expenses increased for the second quarter and first
half of 1999 largely due to higher state franchise and gross receipts taxes.
NATURAL GAS DISTRIBUTION
Natural Gas Distribution operations are conducted through three
divisions of Resources: Reliant Energy Arkla, Reliant Energy Entex and Reliant
Energy Minnegasco. These operations consist of intrastate natural gas sales to,
and natural gas transportation for, residential, commercial and industrial
customers in six states: Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma
and Texas.
THREE MONTHS ENDED JUNE 30,
--------------------------- PERCENT
1999 1998 CHANGE
-------- -------- --------
(IN MILLIONS)
Operating Revenues:
Base Revenues ............................. $ 155 $ 154 1%
Recovered Gas Revenues .................... 174 177 (2%)
-------- --------
Total Operating Revenues ................ 329 331 (1%)
-------- --------
Operating Expenses:
Natural Gas ............................... 172 174 (1%)
Operation and Maintenance ................. 109 107 2%
Depreciation and Amortization ............. 32 32 --
Other Operating Expenses .................. 22 23 (4%)
-------- --------
Total Operating Expenses ................ 335 336 --
-------- --------
Operating Loss .............................. $ (6) $ (5) (20%)
-------- --------
Throughput Data (in Bcf):
Residential and Commercial Sales .......... 43 43 --
Industrial Sales .......................... 13 13 --
Transportation ............................ 10 10 --
-------- --------
Total Throughput ........................ 66 66 --
======== ========
23
26
SIX MONTHS ENDED JUNE 30,
------------------------- PERCENT
1999 1998 CHANGE
------ ------ -------
(IN MILLIONS)
Operating Revenues:
Base Revenues..................................... $ 422 $ 429 (2%)
Recovered Gas Cost Revenues....................... 585 632 (7%)
------ ------
Total Operating Revenues........................ 1,007 1,061 (5%)
------ ------
Operating Expenses:
Natural Gas....................................... 586 632 (7%)
Operation and Maintenance......................... 217 218 --
Depreciation and Amortization..................... 65 63 3%
Other Operating Expenses.......................... 47 50 (6%)
------ ------
Total Operating Expenses........................ 915 963 (5%)
------ ------
Operating Income.................................... $ 92 $ 98 (6%)
====== ======
Throughput Data (in Bcf):
Residential and Commercial Sales.................. 167 169 (1%)
Industrial Sales.................................. 27 29 (7%)
Transportation.................................... 23 22 5%
------ ------
Total Throughput................................ 217 220 (1%)
====== ======
Natural Gas Distribution operating income for the first half of 1999
decreased $6 million compared to the 1998 period primarily due to a change in
the regulatory methodology of calculating the price of gas charged to customers
in Louisiana at Reliant Energy Arkla. The decreases in recovered gas cost
revenues and purchased gas costs reflect a lower average cost of gas.
INTERSTATE PIPELINES
The Interstate Pipelines segment provides interstate gas
transportation and related services to customers. These operations are conducted
by Reliant Energy Gas Transmission Company and Mississippi River Transmission
Corporation, two wholly owned subsidiaries of Resources.
THREE MONTHS ENDED JUNE 30,
--------------------------- PERCENT
1999 1998 CHANGE
------ ------ -------
(IN MILLIONS)
Operating Revenues.................................. $ 66 $ 77 (14%)
Operating Expenses:
Natural Gas....................................... 4 8 (50%)
Operation and Maintenance......................... 19 22 (14%)
Depreciation and Amortization..................... 12 10 20%
Other Operating Expenses.......................... 4 4 --
------ ------
Total Operating Expenses........................ 39 44 (11%)
------ ------
Operating Income.................................... $ 27 $ 33 (18%)
====== ======
Throughput Data (in MMBtu):
Natural Gas Sales................................. 4 4 --
Transportation.................................... 204 187 9%
Elimination(1).................................. (4) (4) --
------ ------
Total Throughput.................................... 204 187 9%
====== ======
24
27
SIX MONTHS ENDED JUNE 30,
------------------------- PERCENT
1999 1998 CHANGE
------ ------ -------
(IN MILLIONS)
Operating Revenues.................................. $ 132 $ 148 (11%)
Operating Expenses:
Natural Gas....................................... 9 16 (44%)
Operation and Maintenance......................... 36 40 (10%)
Depreciation and Amortization..................... 24 19 26%
Other Operating Expenses.......................... 8 8 --
------ ------
Total Operating Expenses........................ 77 83 (7%)
------ ------
Operating Income.................................... $ 55 $ 65 (15%)
====== ======
Throughput Data (in MMBtu):
Natural Gas Sales................................. 7 8 (13%)
Transportation.................................... 435 424 3%
Elimination(1).................................. (7) (7) --
------ ------
Total Throughput.................................... 435 425 2%
====== ======
- ---------------
(1) Elimination of volumes both transported and sold.
Interstate Pipelines operating income decreased by $6 million and $10
million in the second quarter and first half of 1999 compared to the same
periods in 1998. The decreases are primarily due to the settlement of a dispute
related to certain gas purchase contracts that resulted in $6 million of
revenues in the second quarter of 1998 and a rate settlement, reflected in the
first quarter of 1998 as a $5 million reduction of depreciation rates
retroactive to July 1996.
Second quarter operating revenues, net of natural gas purchased cost,
decreased $7 million from 1998 primarily due to the gas purchase contract
settlement discussed above. Expenses, other than natural gas purchased,
decreased $1 million due to continued cost control initiatives.
Operating revenues, net of natural gas purchased cost, for the first
half of 1999 decreased $9 million primarily due to the recognition of $6 million
in revenues from the settlement in the second quarter of 1998 as discussed above
and lower transportation revenues. Lower transportation revenues are primarily
attributable to less weather-related demand and lower spot market transportation
differentials.
WHOLESALE ENERGY
Wholesale Energy includes the acquisition, development and operation
of, and international sales of capacity, energy and ancillary services from,
domestic and certain international non-utility power generation facilities;
wholesale energy trading and marketing; and natural gas gathering activities.
This segment includes operations of subsidiaries owned by the Company and
Resources.
25
28
THREE MONTHS ENDED JUNE 30,
--------------------------- PERCENT
1999 1998 CHANGE
---------- ------------ --------
(IN MILLIONS)
Operating Revenues ................... $ 1,938 $ 914 112%
-------- --------
Operating Expenses:
Natural Gas ........................ 1,023 501 104%
Purchased Power .................... 834 396 111%
Operation and Maintenance .......... 64 38 68%
Depreciation and Amortization ........ 6 4 50%
Other Operating Expenses ........... 2 1 100%
-------- --------
Total Operating Expenses ......... 1,929 940 105%
-------- --------
Operating Income (Loss) .............. $ 9 $ (26) 135%
======== ========
Operations Data:
Natural Gas (in Bcf):
Sales .............................. 528 242 118%
Gathering .......................... 67 57 18%
-------- --------
Total ............................ 595 299 99%
======== ========
Electricity (in thousand MWH):
Wholesale Power Sales .............. 23,500 16,348 44%
======== ========
SIX MONTHS ENDED JUNE 30,
--------------------------- PERCENT
1999 1998 CHANGE
---------- ------------ --------
(IN MILLIONS)
Operating Revenues ................... $ 2,946 $ 1,805 63%
Operating Expenses:
Natural Gas ........................ 1,729 1,066 62%
Purchased Power .................... 1,075 697 54%
Operation and Maintenance .......... 116 60 93%
Depreciation and Amortization ...... 12 6 100%
Other Operating Expenses ........... 4 2 100%
-------- --------
Total Operating Expenses ......... 2,936 1,831 60%
-------- --------
Operating Income (Loss) .............. $ 10 $ (26) 138%
======== ========
Operations Data:
Natural Gas (in Bcf):
Sales .............................. 885 506 75%
Gathering .......................... 128 115 11%
-------- --------
Total ............................ 1,013 621 63%
======== ========
Electricity (in thousand MWH):
Wholesale Power Sales .............. 33,768 30,118 12%
======== ========
Wholesale Energy operating income for the second quarter and first half
of 1999 increased by $35 million and $36 million, respectively, over the 1998
periods primarily due to higher operating income from trading and marketing
activities, partially offset by increased operating and maintenance expenses of
the California power plants, most of which were purchased and began operations
during the second quarter of 1998. The operations of the California plants are
seasonal with the plants running primarily in the third quarter of the year.
Improved results from trading were due to improved margins and volumes on the
sale of natural gas and electricity, net of higher operating expenses due to
staffing increases.
26
29
Wholesale Energy operating revenues increased $1.02 billion and $1.14
billion in the second quarter and first half of 1999, respectively, primarily
due to an increase in gas and power marketing sales volumes partially offset by
a decrease in the average sales price of gas.
Wholesale Energy purchased natural gas costs increased $522 million and
$663 million in the second quarter and first half of 1999, respectively, due to
an increase in gas sales volume partially offset by a decrease in the average
sales price of gas. Wholesale Energy purchased power expense increased $438
million and $378 million in the second quarter and first half of 1999,
respectively, primarily due to increased power sales volume.
Operation and maintenance expense for Wholesale Energy increased $26
million and $56 million in the second quarter and first half of 1999,
respectively, primarily due to operating expenses of the California plants and
staffing increases.
Depreciation and amortization expense for Wholesale Energy increased $6
million for the first half of 1999 largely due to the depreciation of the
California plants.
To minimize the Company's risks associated with fluctuations in the
price of natural gas and transportation, the Company, primarily through Reliant
Energy Services, Inc. (a subsidiary of Resources), enters into futures
transactions, swaps and options relating to (i) certain commitments to buy, sell
and transport natural gas, (ii) existing natural gas and heating oil inventory,
(iii) future power sales and natural gas purchases by generation facilities,
(iv) crude oil and refined products and (v) certain anticipated transactions,
some of which carry off-balance sheet risk. Reliant Energy Services also enters
into commodity derivatives in its trading and price risk management activities.
For a discussion of the Company's accounting treatment of derivative
instruments, see Note 2 of the Company 10-K Notes and Item 7A (Quantitative and
Qualitative Disclosure About Market Risk) in the Company's Form 10-K.
INTERNATIONAL
The International segment includes Reliant Energy International, Inc.
(a wholly owned subsidiary of the Company) and the international operations of
Resources. Substantially all of International's operations are in Latin America.
THREE MONTHS ENDED JUNE 30,
--------------------------- PERCENT
1999 1998 CHANGE
---- ---- -------
(IN MILLIONS)
Operating Revenues ................... $ 44 $169 (74%)
Operating Expenses:
Fuel ............................... 13 5 160%
Operation and Maintenance .......... 14 12 17%
Depreciation and Amortization ...... 2 1 100%
---- ----
Total Operating Expenses ......... 29 18 61%
---- ----
Operating Income ..................... $ 15 $151 (90%)
==== ====
27
30
SIX MONTHS ENDED JUNE 30,
------------------------- PERCENT
1999 1998 CHANGE
---- ---- -------
(IN MILLIONS)
Operating Revenues ................... $ (8) $197 (104%)
Operating Expenses:
Fuel ............................... 25 10 150%
Operation and Maintenance .......... 28 23 22%
Depreciation and Amortization ...... 2 2 --
---- ----
Total Operating Expenses ......... 55 35 57%
---- ----
Operating Income (Loss) .............. $(63) $162 (139%)
==== ====
International had operating income of $15 million in the second quarter
of 1999 and operating loss of $63 million in the first half of 1999 compared to
operating income of $151 and $162 million in the same periods of 1998,
respectively. Results for the second quarter and first half of 1999 reflect a $4
million and $95 million, respectively, after-tax, non-cash charge relating to
the Company's share of foreign exchange losses incurred by its Brazilian
affiliates, Light and Metropolitana, with respect to their non-local currency
denominated borrowings. Such devaluation losses stem from the Brazilian
government's January 1999 decision to allow the Brazilian real to float against
other foreign currencies. Excluding the devaluation loss, operating income for
the second quarter and first half of 1999 would have been $19 million and $32
million, respectively. The decrease in 1999 compared to 1998 operating income
was primarily due to a $138 million pre-tax gain on the sale of International's
63 percent interest in an Argentine electric distribution company in 1998,
partially offset by increased earnings in 1999 from equity investments made in
1998. For more information regarding risks of the Company's international
operations, see "Certain Factors Affecting Future Earnings- Risks of
International Operations" below.
Fuel expenses and operation and maintenance expenses were higher in the
1999 periods compared to the 1998 periods primarily due to completion of a
160-megawatt cogeneration facility in Argentina, which commenced operation in
November 1998.
CORPORATE
In the second quarter of 1999, Corporate had an operating loss of $7
million compared to income of $9 million in 1998. Operating loss for the first
half of 1999 was $10 million compared to operating income for $4 million for the
1998 period. The decline in the 1999 periods compared to the 1998 periods is
primarily due to increased information system and business development expenses
and increased expenses associated with certain compensation plans.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
For information on developments, factors and trends that may have an
impact on the Company's future earnings, please read "Management's Discussion
and Analysis of Financial Condition and Results of Operations of the Company -
Certain Factors Affecting Future Earnings of the Company and its Subsidiaries"
in the Company's Form 10-K, which is incorporated herein by reference. Among the
factors discussed are: "Competition and Restructuring of the Electric Utility
Industry," "Competition - Other Operations," "Fluctuation In Commodity Prices
and Derivative Instruments," "Accounting Treatment of ACES," "Impact of the Year
2000 Issue and Other System Implementation Issues," "Risks of International
Operations," "Environmental Expenditures" and "Other Contingencies." Certain
updated information contained in the Notes to the Company's Interim Financial
Statements is referenced below.
ACCOUNTING TREATMENT OF ACES
The Company accounts for its investment in Time Warner under the cost
method. As a result of the Company's issuance of the ACES, prior to the
conversion of the TW Preferred into TW Common in
28
31
July 1999, a portion of the increase in the market value above $27.7922 per
share of TW Common resulted in unrealized accounting losses to the Company.
Excluding the unrealized, non-cash accounting loss for ACES, the Company's
retained earnings and total common stock equity would have been $2.2 billion and
$5.1 billion, respectively, at June 30, 1999. For additional information
regarding the accounting treatment of the ACES and the Time Warner investment,
see Note 7 to the Company's Interim Financial Statements.
TEXAS ELECTRIC CHOICE PLAN
In June 1999, Texas adopted the Texas Electric Choice Plan that
substantially amends the regulatory structure governing electric utilities in
order to allow retail competition beginning on January 1, 2002. In preparation
for that competition, the Company will make significant changes in the electric
utility operations it conducts through Reliant Energy HL&P. For additional
information regarding the Legislation, see Note 2 to the Company's Interim
Financial Statements.
IMPACT OF THE YEAR 2000 AND OTHER SYSTEM IMPLEMENTATION ISSUES
For a description of the Company's Year 2000 and other system
implementation issues, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company - Certain Factors Affecting
Future Earnings of the Company and its Subsidiaries - Impact of the Year 2000
and Other System Implementation Issues" in the Company Form 10-K.
All of the Company's and its subsidiaries' business units have
completed a Year 2000 Project analysis of critical systems and equipment that
control the production and delivery of energy, as well as corporate,
departmental and personnel systems and equipment. Remediation and testing of all
systems and equipment that could affect the production and delivery of energy
(Priority 1 items) were completed during the second quarter of 1999. The Company
also completed Year 2000 contingency planning during the second quarter of 1999.
It is anticipated that work will be completed by September 30, 1999 with respect
to Priority 2 items, and by December 1, 1999 with respect to Priority 3 items.
The following table illustrates the Company's completion percentages for the
Year 2000 activities as of July 31, 1999:
PRIORITY 1 PRIORITY 2 PRIORITY 3
---------- ---------- ----------
Assessment.............................................. 100% 99% 98%
Conversion.............................................. 100% 95% 97%
Testing................................................. 100% 92% 95%
Implementation.......................................... 100% 85% 93%
Total direct costs of resolving the Year 2000 issue with respect to the
Company and its subsidiaries are expected to be between $35 and $40 million and
include approximately $23 million spent through June 30, 1999.
The Company is in the process of implementing SAP America, Inc.'s (SAP)
proprietary R/3 enterprise software. Although it is anticipated that the
implementation of the SAP system will have the incidental effect of negating the
need to modify many of the Company's computer systems to accommodate the Year
2000 problem, the Company does not deem the costs of the SAP system as directly
related to its Year 2000 compliance program. Portions of the SAP system were
implemented in December 1998 and March 1999, and it is expected that the final
portion of the SAP system will be fully implemented by August 2000. The cost of
implementing the SAP system is currently estimated to be approximately $226
million, inclusive of internal costs. As of June 30, 1999, $153 million has been
spent on the implementation.
29
32
RISKS OF INTERNATIONAL OPERATIONS
The Company's international operations are subject to various risks
incidental to investing or operating in emerging market countries. These risks
include political risks, such as government instability, and economic risks,
such as fluctuations in currency exchange rates, restrictions on the
repatriation of foreign earnings and/or restrictions on the conversion of local
currency earnings into U.S. dollars. The Company's international operations are
also highly capital intensive and significantly dependent on the availability of
bank financing and other sources of capital on commercially acceptable terms.
As a result of the devaluation of the Brazilian real, and the resulting
increased operating costs and inflation, Light and Metropolitana received tariff
rate increases of 16% and 21%, respectively, which were phased in over June and
July 1999. Light also anticipates another rate increase in November 1999, for
its annual rate adjustment. The Company is pursuing additional tariff increases
to mitigate the impact of the devaluation; however, there can be no assurance
that such adjustments will be timely or that they will permit substantial
recovery of impact of the devaluation.
For more information on the risks of international operations, see
"Qualitative and Quantitative Disclosures About Market Risk of the Company"
herein, Note 3 to the Company's Interim Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company - Certain Factors Affecting Future Earnings of the Company and its
Subsidiaries - Risks of International Operations" in the Company Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
For the first half of 1999, the Company's net cash provided by
operating activities decreased $258 million over the same period in 1998 due in
part to a $141 million tax refund received in the 1998 period and changes in
working capital.
Net cash used in financing activities for the first half of 1999
reflected a $65 million outflow compared to a $324 million outflow for the same
period of 1998. The cash outflow in 1999 included the payment of common stock
dividends, the restricted deposit for bond redemptions and the extinguishment of
long-term debt, partially offset by proceeds from the issuance of trust
preferred securities and the issuance of pollution control revenue refunding
bonds.
The following tables provide information about the Company's and
Resources' unused sources of capital at June 30, 1999 and financing transactions
that occurred in the second quarter of 1999:
UNUSED SOURCES OF CAPITAL AT JUNE 30, 1999
SOURCE AVAILABILITY
------ ------------
(IN MILLIONS)
COMPANY:
$200 million revolving credit facility (1)......................... $ 153
Shelf registration statements (2).................................. 230 preferred stock
580 debt securities
125 trust preferred securities and
related junior subordinated debt
securities
414 common stock(3)
FINANCECO LP:
$1.6 billion revolving credit facility (4)......................... 180
RESOURCES:(5)
$350 million revolving credit facility (6)......................... 335
- ----------------
(1) Supports up to $200 million of commercial paper borrowings.
(2) Issuance of securities under the shelf registration statements is
subject to market and other conditions.
(3) Amount is based on the closing price of the common stock as of June 30,
1999. The registration statement covers the sale of 15 million shares.
(4) Supports up to $1.6 billion of commercial paper borrowings.
30
33
(5) Resources also has a $300 million receivables facility that was fully
utilized at June 30, 1999. The Company expects to amend this facility in
the third quarter of 1999 to add an additional $50 million capacity.
(6) Supports commercial paper borrowings and has a $65 million subfacility,
which may be used for letters of credit. At June 30, 1999, there were
outstanding letters of credit totaling $15.2 million.
SECOND QUARTER 1999 REPAYMENTS AND REPURCHASES
TYPE OF DEBT AMOUNT
- ------------ ------
(IN MILLIONS)
COMPANY:
7% First Mortgage Bonds, pollution control series, due 2008............ $ 19.2
RESOURCES:
6.0% Convertible subordinated debentures due 2012 (1).................. 6.0
- -----------------
(1) The average purchase price was 96.125%. These debentures will be used to
fully fund the sinking fund for the 6% convertible subordinated
debentures in March 2001.
During the period from July 7, 1999 through August 6, 1999, the Company
purchased 1,041,500 shares of its common stock for $28.6 million. As of August
6, 1999, the Company was authorized to purchase an additional $60 million of its
common stock.
In July 1999, Resources repaid $200 million of its 8.875% notes at
maturity with proceeds from cash generated by operations and newly issued
commercial paper.
SECOND QUARTER 1999 REFUNDING ISSUANCES
AMOUNT INTEREST RATE MATURITY DATE
------ ------------- -------------
(IN MILLIONS)
Brazos River Authority (BRA)............... $100 revenue refunding bonds 5.375%(1) 2019
Matagorda County Navigation
District Number One (MCND)............... $100 revenue refunding bonds 5.25%(2) 2026
Gulf Coast Waste Disposal
Authority (GCWDA)....................... $19.2 revenue refunding bonds 4.70%(3) 2011
- --------------
(1) On behalf of the Company. Proceeds from the sale were used July 1, 1999
to redeem $100 million 7.625% BRA Series 1989A collateralized revenue
refunding bonds at a price of 102%.
(2) On behalf of the Company. Proceeds from the sale were used July 1, 1999
to redeem $100 million 7.125% MCND Series 1989C collateralized revenue
refunding bonds at a price of 102%.
(3) On behalf of the Company. Proceeds from the sale were used June 1, 1999
to redeem $19.2 million 7% GCWDA Series 1989A collateralized revenue
refunding bonds at a price of 102%.
In July 1999, the Company completed the following refunding issuance:
AMOUNT INTEREST RATE MATURITY DATE
------ ------------- -------------
(IN MILLIONS)
MCND (1) $70.315 revenue refunding bonds 5.95%(1) 2030
- --------------
(1) On behalf of the Company. Proceeds will be used on October 1, 1999 to
redeem $70.315 million 7.60% MCND Series 1989D collateralized pollution
control revenue bonds at a price of 102%.
As of June 30, 1999, Light and Metropolitana had $2.8 billion in
non-local currency denominated borrowings. In April 1999, approximately $1.2
billion was refinanced with U.S. Dollar denominated
31
34
loans, which expire within one year to 14 months, and $300 million was funded
through a 60-day local currency loan. The short-term loan was guaranteed by a
subsidiary of the Company, Light and certain other shareholders of Light and was
repaid through capital contributions in the second quarter of 1999. The
Company's portion of the capital contributions was $28.8 million. Certain
shareholders elected not to contribute their share of the required capital
contributions which increased the Company's capital contribution to $28.8
million from $28.1 million and increased the Company's ownership in Light to
11.8% from 11.69%. For the same reason, Light, through its capital
contributions, increased its ownership interest in Metropolitana to 77.5% from
74.88%, which in turn increased the Company's indirect ownership interest in
Metropolitana to 9.1% from 8.75%.
Due to a number of circumstances, the Company now expects that 1999
operating cash flow for certain of its Colombian operations will not meet
working capital and capital expenditure needs. Consequently, a short-term loan
arrangement was entered into by the Colombian operating companies. It is
currently anticipated that an equity contribution will be made by a subsidiary
of the Company and its partner in this venture. The Company's 50% share is
approximately $30 million in September 1999, with an additional infusion of $15
million in November 1999. This equity injection will be used in large part to
repay the loan.
The Company has a "money fund" through which it and its subsidiaries
can borrow or invest on a short-term basis. Funding needs are aggregated and
borrowing or investing is based on the net cash position. The money fund's net
funding requirements are generally met with commercial paper issued by a
financing subsidiary. At June 30, 1999, Resources had $159.4 million in
investments in this fund.
The Company believes that its current level of cash and borrowing
capability along with future cash flows from operations is sufficient to meet
the needs of its existing businesses. However, to achieve its objectives, the
Company may, when necessary, supplement its available cash resources by seeking
funds in the equity or debt markets.
NEW ACCOUNTING ISSUES
In 2001, the Company and Resources expect to adopt SFAS No. 133,
"Accounting For Derivative Instruments and Hedging Activities" as amended (SFAS
No. 133), which establishes accounting and reporting standards for derivative
instruments, including certain hedging instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. The
Company and Resources are in the process of determining the effect of adoption
of SFAS No. 133 on their consolidated financial statements.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK OF THE COMPANY
The Company and its subsidiaries have financial instruments that
involve various market risks and uncertainties. For information regarding the
Company's exposure to risks associated with interest rates, equity market
prices, foreign currency exchange rate risk and energy commodity prices, see
Item 7A of the Company's Form 10-K. These risks have not materially changed from
the market risks disclosed in the Company's Form 10-K. As described in
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations of the Company," in the first half of 1999, the Company reported a
$95 million charge to net income and a $43 million charge to other comprehensive
income, due to the devaluation of the Brazilian real. The charge to net income
reflects increases in the liabilities at Light and Metropolitana for their
non-local currency denominated borrowings using the exchange rate in effect at
June 30, 1999 and a monthly weighted average exchange rate for the first six
months of 1999. The charge to other comprehensive income reflects the
translation effect on the local currency denominated net assets underlying the
Company's investment in Light. As of June 30, 1999, the Brazilian real exchange
rate was 1.7695 per U.S. dollar. An increase of 10% from the June 30, 1999
32
35
exchange rate would result in the Company recording an additional charge of $17
million and $15 million to net income and other comprehensive income,
respectively.
In the second quarter and first six months of 1999, the Company
recorded an additional $44 million and $260 million unrealized loss (net of tax)
related to the ACES. For further discussion of this loss, see Note 7 to the
Company's Interim Financial Statements. The Company believes that this
additional unrealized loss for the ACES is more than economically hedged by the
unrecorded unrealized gain relating to the increase in the fair value of the TW
Common underlying the investment in TW Preferred since the date of its
acquisition. The Company converted its TW Preferred into TW Common in July 1999.
33
36
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
STATEMENTS OF CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUES ........................................ $ 2,430,890 $ 1,380,470 $ 4,258,954 $ 3,135,011
----------- ----------- ----------- -----------
EXPENSES:
Natural gas and purchased power - net ......... 2,149,755 1,140,518 3,593,438 2,521,554
Operation and maintenance ..................... 160,453 149,686 314,367 301,295
Depreciation and amortization ................. 48,096 46,335 98,114 91,065
Taxes other than income taxes ................. 27,637 28,197 57,909 61,869
----------- ----------- ----------- -----------
2,385,941 1,364,736 4,063,828 2,975,783
----------- ----------- ----------- -----------
OPERATING INCOME ................................ 44,949 15,734 195,126 159,228
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense .............................. (30,191) (25,479) (59,853) (52,379)
Dividend requirement on preferred securities
subsidiary trust............................. (98) (159) (197) (427)
Other - net.................................... 3,727 1,980 6,758 4,536
----------- ----------- ----------- -----------
(26,562) (23,658) (53,292) (48,270)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............... 18,387 (7,924) 141,834 110,958
INCOME TAX EXPENSE (BENEFIT) .................... 12,431 (3,051) 64,905 54,003
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................... $ 5,956 $ (4,873) $ 76,929 $ 56,955
=========== =========== =========== ===========
See Notes to Resources' Consolidated Financial Statements.
34
37
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 14,448 $ 26,576
Accounts and notes receivable, principally customer................... 732,984 682,552
Unbilled revenue...................................................... 23,278 145,131
Accounts and notes receivable - affiliated companies.................. 200,859 193,177
Income tax receivable................................................. 36,472
Gas in underground storage............................................ 109,758 79,855
Materials and supplies................................................ 33,096 33,947
Fuel stock and petroleum products..................................... 34,878 81,230
Price risk management assets.......................................... 294,950 265,203
Other current assets.................................................. 65,641 39,234
------------- -------------
Total current assets................................................ 1,546,364 1,546,905
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Natural gas distribution and gathering systems........................ 1,801,632 1,686,159
Interstate pipelines.................................................. 1,310,144 1,302,829
Other................................................................. 18,088 13,976
------------- -------------
Total............................................................... 3,129,864 3,002,964
Less accumulated depreciation and amortization........................ 250,289 187,936
------------- -------------
Property, plant and equipment - net................................... 2,879,575 2,815,028
------------- -------------
OTHER ASSETS:
Goodwill, net......................................................... 2,021,940 2,050,386
Price risk management assets.......................................... 92,310 21,414
Deferred debits - net................................................. 218,964 221,788
------------- -------------
Total other assets.................................................. 2,333,214 2,293,588
------------- -------------
TOTAL ASSETS............................................................ $ 6,759,153 $ 6,655,521
============= =============
See Notes to Resources' Consolidated Financial Statements.
35
38
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDER'S EQUITY
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
CURRENT LIABILITIES:
Current maturities of long-term debt.................................. $ 200,491 $ 203,438
Receivables facility.................................................. 300,000 300,000
Accounts payable, principally trade................................... 575,646 622,262
Accounts payable - affiliated companies............................... 64,262
Interest payable...................................................... 35,529 36,197
Other taxes........................................................... 32,973 42,107
Customer deposits..................................................... 34,780 36,985
Price risk management liabilities..................................... 255,916 227,652
Other current liabilities............................................. 108,528 172,616
------------- -------------
Total current liabilities....................................... 1,608,125 1,641,257
------------- -------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes..................................... 534,988 511,070
Price risk management liabilities..................................... 84,753 29,108
Other................................................................. 392,866 397,141
------------- -------------
Total deferred credits and other liabilities...................... 1,012,607 937,319
------------- -------------
LONG-TERM DEBT, LESS CURRENT MATURITIES................................. 1,496,530 1,513,289
------------- -------------
Total Liabilities................................................ 4,117,262 4,091,865
COMMITMENTS AND CONTINGENCIES (NOTE 1)
RESOURCES OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES OF RESOURCES - NET ........................................ 1,144 1,157
------------- -------------
STOCKHOLDER'S EQUITY:
Common stock.......................................................... 1 1
Paid-in capital....................................................... 2,463,831 2,463,831
Retained earnings..................................................... 191,600 114,671
Accumulated other comprehensive income................................ (14,685) (16,004)
------------- -------------
Total stockholder's equity...................................... 2,640,747 2,562,499
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........................... $ 6,759,153 $ 6,655,521
============= =============
See Notes to Resources' Consolidated Financial Statements.
36
39
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------------------------------
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 76,929 $ 56,955
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 98,114 91,065
Deferred income taxes............................................... 28,027 29,734
Changes in other assets and liabilities:
Accounts and notes receivable - net................................. 59,239 189,924
Inventories......................................................... 17,300 (12,591)
Other current assets................................................ (54,479) 23,110
Accounts payable.................................................... 17,646 (83,462)
Interest and taxes accrued.......................................... (9,802) (41,932)
Other current liabilities........................................... (66,293) (11,909)
Net price risk management activities................................ (16,734) 25
Other - net......................................................... (12,641) 30,964
------------- -------------
Net cash provided by operating activities....................... 137,306 271,883
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................. (135,467) (106,267)
Other - net........................................................... 5,752 1,147
------------- -------------
Net cash used in investing activities........................... (129,715) (105,120)
============= =============
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements and reacquisitions of long-term debt...................... (12,042) (29,000)
Decrease in notes payable............................................. (419,779)
Proceeds from issuance of debentures.................................. 298,514
Redemption of convertible securities.................................. (6) (10,097)
Other - net........................................................... (7,671) (12,126)
------------- -------------
Net cash used in financing activities............................. (19,719) (172,488)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................... (12,128) (5,725)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD.................... 26,576 35,682
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.......................... $ 14,448 $ 29,957
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments:
Interest (net of amounts capitalized)................................. $ 46,359 $ 63,798
Income taxes - net.................................................... 62,606 75,129
See Notes to Resources' Consolidated Financial Statements.
37
40
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
AND COMPREHENSIVE INCOME (LOSS)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------
1999 1998
------------------------------ -------------------------------
RETAINED EARNINGS:
Balance at beginning of period................. $ 185,644 $ 82,675
Net Income (Loss).............................. 5,956 $ 5,956 (4,873) $ (4,873)
------------- -------------
Balance at end of period....................... $ 191,600 $ 77,802
============= =============
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX:
Balance at beginning of period................. $ (13,906) $ (4,255)
Unrealized loss on available for sale
securities, net tax of $442 and $3,635....... (779) (779) (6,414) (6,414)
------------- -------------
Balance at end of period....................... $ (14,685) $ (10,669)
============= =============
------------- -------------
COMPREHENSIVE INCOME (LOSS)...................... $ 5,177 $ (11,287)
============= =============
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------
1999 1998
------------------------------ -------------------------------
RETAINED EARNINGS:
Balance at beginning of period................. $ 114,671 $ 20,847
Net income..................................... 76,929 $ 76,929 56,955 $ 56,955
------------- -------------
Balance at end of period....................... $ 191,600 $ 77,802
============= =============
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX:
Balance at beginning of period................. $ (16,004) $ (5,634)
Unrealized gain (loss) on available for sale
securities, net tax of $(747) and $2,854..... 1,319 1,319 (5,035) (5,035)
------------- -------------
Balance at end of period....................... $ (14,685) $ (10,669)
============= =============
------------- -------------
COMPREHENSIVE INCOME............................. $ 78,248 $ 51,920
============= =============
See Notes to the Resources' Consolidated Financial Statements.
38
41
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Notes to the unaudited consolidated financial statements of Reliant
Energy Resources Corp. (Resources) are included in the Notes to the unaudited
consolidated financial statements of Reliant Energy, Incorporated (Company) as
follows and are incorporated herein by reference:
(1) BASIS OF PRESENTATION -- see Note 1 to the Company's Interim Financial
Statements.
(2) DEPRECIATION -- see Note 4(b) to the Company's Interim Financial
Statements.
(3) CHANGE IN ACCOUNTING PRINCIPLE -- see Note 6 to the Company's Interim
Financial Statements.
(4) COMPANY/RESOURCES OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES OF THE COMPANY/RESOURCES -- see Note 9(b) to the Company's
Interim Financial Statements.
(5) LONG-TERM DEBT AND SHORT-TERM FINANCING -- see Note 10(b) to the
Company's Interim Financial Statements.
(6) REPORTABLE SEGMENTS
Effective January 1, 1998, Resources adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS No. 131). Because
Resources is a wholly owned subsidiary of the Company, Resources has determined
its reportable segments based in part on the operating units under which its
parent manages sales to wholesale or retail customers in differing regulatory
environments. The segment financial data include information for the Company and
Resources on a combined basis, except for Electric Operations, which has no
Resources operations, and International, which has minimal Resources operations.
Reconciling items included under the caption "Elimination of Non-Resources
Operations" reduce the amounts by those operations not conducted within the
Resources legal entity. Operations not owned or operated by Resources, but
included in segment information before elimination, include primarily the
operations of the Company's non-rate regulated power generation business, and
non-Resources corporate expenses.
In accordance with SFAS No. 131, the Company has identified the
following reportable segments: Electric Operations, Natural Gas Distribution,
Interstate Pipelines, Wholesale Energy, International and Corporate. See Note 12
to the Company's Interim Financial Statements for a description of these
segments.
39
42
Financial data for business segments are as follows (in thousands):
ELIMINATION OF
NON-
NATURAL GAS INTERSTATE WHOLESALE CORPORATE RECONCILING RESOURCES
DISTRIBUTION PIPELINES ENERGY AND OTHER ELIMINATIONS(1) OPERATIONS CONSOLIDATED
------------ ---------- ----------- --------- --------------- -------------- ------------
For the Three Months Ended
June 30, 1999:
Revenues....................... $ 329,027 $ 26,824 $ 1,905,758 $ 185,946 $ (16,665) $ 2,430,890
Intersegment revenues.......... 313 39,293 32,072 16,793 $ (88,471)
Operating income (loss)........ (5,700) 27,206 8,616 (6,856) 21,683 44,949
For the Three Months Ended
June 30, 1998:
Revenues....................... 330,363 36,577 885,374 133,577 (5,421) 1,380,470
Intersegment revenues.......... 303 39,940 28,648 22,654 (91,545)
Operating income (loss)........ (5,127) 32,849 (26,473) 9,776 4,709 15,734
For the Six Months Ended
June 30, 1999:
Revenues....................... $ 1,006,854 $ 53,305 $ 2,844,640 $ 387,238 $ (33,083) $ 4,258,954
Intersegment revenues.......... 601 78,917 101,293 35,935 $ (216,746)
Operating income (loss)........ 92,490 55,099 9,794 (10,582) 48,325 195,126
For the Six Months Ended
June 30, 1998:
Revenues....................... 1,060,761 69,810 1,713,537 299,297 (8,394) 3,135,011
Intersegment revenues.......... 624 77,688 91,859 45,943 (216,114)
Operating income (loss)........ 97,615 64,922 (25,960) 3,749 18,902 159,228
- ----------
(1) Includes data for operations conducted at the parent level and for
subsidiaries of the Company that are not Resources entities. This data is
eliminated for purposes of the consolidated data at the Resources level.
Reconciliation of Operating Income to Net Income (Loss) (in thousands) is
as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Operating income ............................ $ 44,949 $ 15,734 $ 195,126 $ 159,228
Interest expense ............................ 30,191 25,479 59,853 52,379
Distribution on preferred trust securities... 98 159 197 427
Income tax expense (benefit) ................ 12,431 (3,051) 64,905 54,003
Other income - net .......................... 3,727 1,980 6,758 4,536
---------- ---------- ---------- ----------
Net income (loss) ........................... $ 5,956 $ (4,873) $ 76,929 $ 56,955
========== ========== ========== ==========
(7) COMPANY/RESOURCES INTERIM PERIOD RESULTS; RECLASSIFICATIONS -- see
Note 14 to the Company's Interim Financial Statements.
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43
MANAGEMENT'S NARRATIVE ANALYSIS OF
THE RESULTS OF OPERATIONS OF RESOURCES
Resources reports its financial information in the following segments:
Natural Gas Distribution, Interstate Pipelines, Wholesale Energy (through which
Resources conducts energy trading and marketing operations and natural gas
gathering operations, but does not conduct the operations of Reliant Energy
Power Generation, Inc.) and Corporate. Although Resources has international
operations, they are not significant.
Resources meets the conditions specified in General Instruction H to
Form 10-Q and is permitted to use the reduced disclosure format for wholly owned
subsidiaries of reporting companies. Accordingly, Resources has omitted from
this report the information called for by Item 3 (quantitative and qualitative
disclosure about market risk) of Part I and the following Part II items of Form
10-Q: Item 2 (changes in securities and use of proceeds), Item 3 (defaults upon
senior securities) and Item 4 (submission of matters to a vote of security
holders). The following discussion explains material changes in the amount of
revenue and expense items of Resources between the three and six month periods
ended June 30, 1999 and 1998. Reference is made to Management's Narrative
Analysis of the Results of Operations in Item 7 of Resources' Form 10-K, the
Resources 10-K Notes referred to herein and Resources' Interim Financial
Statements contained in this Form 10-Q.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30,
----------------------------- PERCENT
1999 1998 CHANGE
----------- ----------- -------
(IN THOUSANDS)
Operating Revenues ......................... $ 2,430,890 $ 1,380,470 76%
Operating Expenses ......................... 2,385,941 1,364,736 75%
Operating Income - Net ..................... 44,949 15,734 186%
Interest Expense - Net ..................... 30,191 25,479 18%
Distributions on Subsidiary Trust Securities 98 159 (38%)
Other Income - Net ........................ 3,727 1,980 88%
Income Tax Expense (Benefit) ............... 12,431 (3,051) --
----------- -----------
Net Income (Loss) ........................ $ 5,956 $ (4,873) --
=========== ===========
SIX MONTHS ENDED JUNE 30,
----------------------------- PERCENT
1999 1998 CHANGE
----------- ----------- -------
(IN THOUSANDS)
Operating Revenues ......................... $ 4,258,954 $ 3,135,011 36%
Operating Expenses ......................... 4,063,828 2,975,783 37%
Operating Income - Net ..................... 195,126 159,228 23%
Interest Expense - Net ..................... 59,853 52,379 14%
Distributions on Subsidiary Trust Securities 197 427 (54%)
Other Income - Net ......................... 6,758 4,536 49%
Income Tax Expense ......................... 64,905 54,003 20%
----------- -----------
Net Income ............................... $ 76,929 $ 56,955 35%
=========== ===========
Second Quarter of 1999 Compared to Second Quarter of 1998. Resources'
net income improved $10.8 million in the second quarter of 1999 compared to the
1998 period. This increase was primarily due to increased operating income
related to improved trading and marketing results at Wholesale Energy partially
offset by lower 1999 earnings at Interstate Pipelines due to the settlement of a
dispute related to certain gas purchase contracts that resulted in $6 million of
revenues in the second quarter of 1998.
Resources' net income increased $20 million in the first six months of
1999 compared to the 1998 period primarily due to increased operating income
related to improved trading and marketing results at
41
44
Wholesale Energy. This increase was partially offset by lower earnings at
Interstate Pipelines due to the gas purchase contracts settlement discussed
above and a rate settlement in the first quarter of 1998 which resulted in $5
million of reduced depreciation expense in that period. Improved results from
trading and marketing in the second quarter and first half of 1999 were due to
improved margins and volumes on the sale of natural gas and electricity, net of
higher operating expenses due to staffing increases.
Resources' revenues increased $1.05 billion and $1.1 billion in the
second quarter and first half of 1999, respectively, compared to the same
periods of 1998 primarily due to increased trading and marketing activities at
Wholesale Energy. This increase was partially offset by a decrease at Natural
Gas Distribution due to a lower average cost of gas and at Interstate Pipelines
due to the $6 million settlement in 1998 discussed above and lower
transportation revenues. Lower transportation revenues are primarily
attributable to less weather-related demand and lower spot market transportation
differentials.
Resources' operating expenses increased $1.02 billion and $1.09 billion
in the second quarter and first half of 1999, respectively, compared to the
corresponding periods in 1998 primarily due to increases in purchased natural
gas costs and purchased power expenses at Wholesale Energy. Purchased natural
gas cost increased primarily due to greater gas sales volumes partially offset
by a decrease in the average sales price of gas. Purchased power expenses
increased primarily due to increased power sales volumes.
To minimize risks associated with fluctuations in the price of natural
gas and transportation, Resources, through its subsidiary, Reliant Energy
Services, Inc., enters into futures transactions, swaps and options relating to
(i) certain commitments to buy, sell and transport natural gas, (ii) existing
natural gas and heating oil inventory, (iii) crude oil and refined products and
(iv) certain anticipated transactions, some of which carry off-balance sheet
risk. Reliant Energy Services also enters into commodity derivatives in its
trading and price risk management activities. For a discussion of the accounting
treatment of derivative instruments, see Note 2 of Resources 10-K Notes and Item
7A (Quantitative and Qualitative Disclosure About Market Risk) in the Company's
Form 10-K.
Seasonality and Other Factors. Resources results of operations are
affected by seasonal fluctuations in the demand for and, to a lesser extent, the
price of natural gas. Resources results of operations are also affected by,
among other things, the actions of various federal and state governmental
authorities having jurisdiction over rates charged by Resources and its
subsidiaries, competition in Resources various business operations, debt service
costs and income tax expense. For a discussion of certain other factors that may
affect Resources future earnings see "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company - Certain Factors
Affecting Future Earnings of the Company and its Subsidiaries - Competition -
Other Operations," "- Fluctuations in Commodity Prices and Derivative
Instruments," "Environmental Expenditures" and "- Other Contingencies " in the
Company's Form 10-K.
NEW ACCOUNTING ISSUES
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- New Accounting Issues" in
the Company's Form 10-Q for a discussion of certain new accounting issues
affecting Resources.
42
45
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Company:
For a description of legal proceedings affecting the Company
and its subsidiaries, please review Item 3 of the Company Form
10-K and Notes 3(b), 12(h) and 12(i) of the Company 10-K
Notes, which are incorporated herein by reference.
Resources:
For a description of legal proceedings affecting Resources,
please review Note 8(g) of the Resources 10-K Notes, which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Company
At the annual meeting of the Company's shareholders held on
May 5, 1999, the matters voted upon and the number of votes
cast for, against or withheld, as well as the number of
abstentions and broker non-votes as to such matters (including
a separate tabulation with respect to each nominee for office)
were as stated below:
The following four nominees for Class III directors were
elected to serve three-year terms expiring in 2002:
FOR WITHHELD
----------- ---------
James A. Baker, III 246,485,461 4,339,053
Richard E. Balzhiser 246,589,050 4,235,464
O. Holcombe Crosswell 246,787,595 4,036,919
Don D. Jordan 246,423,076 4,401,438
The proposal to amend the Company's Restated Articles of
Incorporation to change its name from "Houston Industries
Incorporated" to "Reliant Energy, Incorporated" was approved
with 246,013,385 votes for, 3,012,801 votes against and
1,798,328 abstentions.
The ratification of the appointment of Deloitte & Touche LLP
as independent accountants and auditors for the Company for
1999 was approved with 247,073,625 votes for, 2,301,536 votes
against and 1,449,353 abstentions.
There were no broker non-votes.
Resources
Omitted pursuant to Instruction H(2)(b).
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46
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements. From time to time, the Company and
Resources may make statements regarding their assumptions, projections,
expectations, intentions or beliefs about future events. These
statements and other statements that are not historical facts are
intended as "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. The Company and Resources caution that
assumptions, projections, expectations, intentions or beliefs about
future events may and often do vary materially from actual results, and
the differences between assumptions, projections, expectations,
intentions or beliefs and actual results can be material. Accordingly,
there can be no assurance that actual results will not differ
materially from those expressed or implied by the forward-looking
statements.
The following are some of the factors that could cause actual results
to differ from those expressed or implied in forward-looking
statements: (i) state and federal legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on
rate structures and affect the speed and degree to which competition
enters the electric and natural gas industries; (ii) industrial,
commercial and residential growth in service territories of the Company
and Resources; (iii) the weather and other natural phenomena; (iv) the
timing and extent of changes in commodity prices and interest rates;
(v) changes in environmental and other laws and regulations to which
the Company, Resources and their respective subsidiaries are subject or
other external factors over which the Company and Resources have no
control; (vi) the results of financing efforts; (vii) growth in
opportunities for the Company's and Resources' subsidiaries and
diversified operations; (viii) risks incidental to the Company's
overseas operations (including the effects of fluctuations in foreign
currency exchange rates); (ix) the effect of the Company's and
Resources' accounting policies; (x) the timing of the closing of the
Company's acquisition of an interest in UNA; and (xi) other factors
discussed in this and other filings by the Company and Resources with
the Securities and Exchange Commission.
When used in the Company's or Resources' documents or oral
presentations, the words "anticipate," "estimate," "expect,"
"objective," "projection," "forecast," "goal" or similar words are
intended to identify forward-looking statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Company:
Exhibit 12 Ratio of Earnings to Fixed Charges and Preferred
Dividends.
Exhibit 27 Financial Data Schedule.
Exhibit 99 Items incorporated by reference from the Company
Form 10-K: Item 3 "Legal Proceedings," Item 7
"Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -
Certain Factors Affecting Future Earnings of the
Company and its Subsidiaries" and "- New Accounting
Issues," and Item 7A "Quantitative and Qualitative
Disclosures About Market Risk" and Note 1(c)
(Regulatory Assets and Other Long-Lived Assets),
Note 1(f) (Depreciation and Amortization Expense),
Note 1(n) (Investments in Time Warner Securities),
Note 1(p) (Foreign Currency Adjustments), Note 1(r)
(Change in Accounting Principle), Note 2 (Derivative
Financial Instruments), Note 3 (Rate Matters), Note
4 (Jointly Owned Electric Utility Plant), Note 5
(Equity Investments and Advances to Unconsolidated
Subsidiaries), Note 8(c) (FinanceCo and
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47
FinanceCo II Credit Facilities), Note 8(d) (Company
Credit Facility), Note 9(a) (Trust Securities -
Company), Note 12 (Commitments and Contingencies)
and Note 16(a) (Foreign Currency Devaluation) of the
Company 10-K Notes. Items incorporated by reference
from the Company First Quarter 10-Q: Note 8(a)
(Company/Resources Obligated Mandatorily Redeemable
Trust Preferred Securities of Subsidiary Trusts
Holding Solely Junior Subordinated Debentures of the
Company/Resources), Note 9(a) (Long-Term Debt and
Short-Term Financing) and Note 11 (Acquisitions).
Resources:
Exhibit 12 Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
Exhibit 99 Items incorporated by reference from Resources Form
10-K: Item 3 "Legal Proceedings," Item 7
"Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -
Certain Factors Affecting Future Earnings of the
Company and its Subsidiaries" and "- New Accounting
Issues," Item 7A "Quantitative and Qualitative
Disclosures About Market Risk," Item 7 "Management's
Narrative Analysis of the Results of Operations of
Reliant Energy Resources Corp. and Consolidated
Subsidiaries" and Note 1(c) (Regulatory Assets and
Regulation), Note 2 (Derivative Financial
Instruments), Note 4 (Long-Term and Short-Term
Financing), Note 5 (Trust Securities), and Note 8
(Commitments and Contingencies) of Resources 10-K
Notes. Item incorporated by reference from the
Resources First Quarter 10-Q: Note 9(b) (Long-Term
Debt and Short-Term Financing).
(b) Reports on Form 8-K.
Company:
Form 8-K filed July 7, 1999 regarding the passage of Texas Electric
Choice Plan.
Resources:
None.
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48
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANT ENERGY, INCORPORATED
(Registrant)
By: /s/ Mary P. Ricciardello
-------------------------------------
Mary Ricciardello
Senior Vice President and Comptroller
(Principal Accounting Officer)
Date: August 13, 1999
49
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANT ENERGY RESOURCES CORP.
(Registrant)
By: /s/ Mary P. Ricciardello
-------------------------------------
Mary Ricciardello
Senior Vice President and Comptroller
(Principal Accounting Officer)
Date: August 13, 1999
50
EXHIBIT INDEX
Company:
--------
Exhibit 12 Ratio of Earnings to Fixed Charges and Preferred
Dividends.
Exhibit 27 Financial Data Schedule.
Exhibit 99 Items incorporated by reference from the Company
Form 10-K: Item 3 "Legal Proceedings," Item 7
"Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -
Certain Factors Affecting Future Earnings of the
Company and its Subsidiaries" and "- New Accounting
Issues," and Item 7A "Quantitative and Qualitative
Disclosures About Market Risk" and Note 1(c)
(Regulatory Assets and Other Long-Lived Assets),
Note 1(f) (Depreciation and Amortization Expense),
Note 1(n) (Investments in Time Warner Securities),
Note 1(p) (Foreign Currency Adjustments), Note 1(r)
(Change in Accounting Principle), Note 2 (Derivative
Financial Instruments), Note 3 (Rate Matters), Note
4 (Jointly Owned Electric Utility Plant), Note 5
(Equity Investments and Advances to Unconsolidated
Subsidiaries), Note 8(c) (FinanceCo and FinanceCo II
Credit Facilities), Note 8(d) (Company Credit
Facility), Note 9(a) (Trust Securities - Company),
Note 12 (Commitments and Contingencies) and Note
16(a) (Foreign Currency Devaluation) of the Company
10-K Notes. Items incorporated by reference from the
Company First Quarter 10-Q: Note 8(a)
(Company/Resources Obligated Mandatorily Redeemable
Trust Preferred Securities of Subsidiary Trusts
Holding Solely Junior Subordinated Debentures of the
Company/Resources), Note 9(a) (Long-Term Debt and
Short-Term Financing) and Note 11 (Acquisitions).
Resources:
----------
Exhibit 12 Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
Exhibit 99 Items incorporated by reference from Resources Form
10-K: Item 3 "Legal Proceedings," Item 7
"Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -
Certain Factors Affecting Future Earnings of the
Company and its Subsidiaries" and "- New Accounting
Issues," Item 7A "Quantitative and Qualitative
Disclosures About Market Risk," Item 7 "Management's
Narrative Analysis of the Results of Operations of
Reliant Energy Resources Corp. and Consolidated
Subsidiaries" and Note 1(c) (Regulatory Assets and
Regulation), Note 2 (Derivative Financial
Instruments), Note 4 (Long-Term and Short-Term
Financing), Note 5 (Trust Securities), and Note 8
(Commitments and Contingencies) of Resources 10-K
Notes. Item incorporated by reference from the
Resources First Quarter 10-Q: Note 9(b) (Long-Term
Debt and Short-Term Financing).