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 SEPTEMBER 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 November 5, 1999, Reliant Energy, Incorporated had 295,671,579 shares of
common stock outstanding, including 10,719,489 ESOP shares not deemed
outstanding for financial statement purposes and excluding 1,610,918 shares held
as treasury stock. As of November 5, 1999, all 1,000 shares of Reliant Energy
Resources Corp. common stock were held by Reliant Energy, Incorporated.
2
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 SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
COMPANY:
Financial Statements...............................................................................1
Statements of Consolidated Operations
Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited)............................1
Consolidated Balance Sheets
September 30, 1999 (Unaudited) and December 31, 1998...........................................2
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 1999 and 1998 (Unaudited)......................................4
Statements of Consolidated Retained Earnings and Comprehensive Income (Loss)
Three and Nine Months Ended September 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.....................................................................19
Quantitative and Qualitative Disclosures About Market Risk of the Company.........................34
RESOURCES:
Financial Statements..............................................................................36
Statements of Consolidated Operations
Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited)...........................36
Consolidated Balance Sheets
September 30, 1999 (Unaudited) and December 31, 1998..........................................37
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 1999 and 1998 (Unaudited).....................................39
Consolidated Statements of Retained Earnings and Comprehensive Income (Loss)
Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited)...........................40
Notes to Unaudited Consolidated Financial Statements..........................................41
Management's Narrative Analysis of the Results of
Operations of Resources.......................................................................43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................45
Item 5. Other Information......................................................................45
Item 6. Exhibits and Reports on Form 8-K.......................................................46
3
PART I. FINANCIAL INFORMATION
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUES:
Electric Operations ...................................... $ 1,496,596 $ 1,415,832 $ 3,513,144 $ 3,443,694
Natural Gas Distribution ................................. 302,698 266,177 1,310,153 1,327,562
Interstate Pipelines ..................................... 70,024 70,394 202,246 217,891
Wholesale Energy ......................................... 2,908,119 1,610,653 5,854,052 3,416,048
International ............................................ 34,126 31,813 26,273 228,494
Corporate ................................................ 250,036 157,351 673,209 502,593
Eliminations ............................................. (114,407) (86,733) (331,153) (302,847)
------------ ------------ ------------ ------------
Total ................................................ 4,947,192 3,465,487 11,247,924 8,833,435
------------ ------------ ------------ ------------
EXPENSES:
Fuel and cost of gas sold ................................ 1,563,552 1,143,149 4,631,147 3,487,332
Purchased power .......................................... 2,062,679 970,041 3,315,667 1,872,557
Operation and maintenance ................................ 455,687 430,060 1,281,898 1,184,545
Taxes other than income taxes ............................ 113,643 148,039 340,800 368,226
Depreciation and amortization ............................ 288,833 267,204 705,337 677,838
------------ ------------ ------------ ------------
Total ................................................ 4,484,394 2,958,493 10,274,849 7,590,498
------------ ------------ ------------ ------------
OPERATING INCOME ........................................... 462,798 506,994 973,075 1,242,937
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Unrealized gain on Time Warner investment ................ 1,816,105 1,816,105
Unrealized gain (loss) on indexed debt securities ........ 406,717 (40,231) 6,778 (484,009)
Time Warner dividend income .............................. 2,622 10,313 23,247 30,938
Other - net .............................................. 10,045 8,652 15,448 24,919
------------ ------------ ------------ ------------
Total ................................................ 2,235,489 (21,266) 1,861,578 (428,152)
------------ ------------ ------------ ------------
INTEREST AND OTHER CHARGES:
Interest on long-term debt ............................... 98,245 101,229 307,965 310,584
Other interest ........................................... 17,931 18,829 60,794 64,653
Distributions on trust securities ........................ 14,652 7,248 38,433 21,960
------------ ------------ ------------ ------------
Total ................................................ 130,828 127,306 407,192 397,197
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND PREFERRED
DIVIDENDS ................................................ 2,567,459 358,422 2,427,461 417,588
INCOME TAX EXPENSE ......................................... 877,372 106,616 872,304 154,218
------------ ------------ ------------ ------------
NET INCOME ................................................. 1,690,087 251,806 1,555,157 263,370
PREFERRED DIVIDENDS ........................................ 97 97 292 292
------------ ------------ ------------ ------------
NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS .............................................. $ 1,689,990 $ 251,709 $ 1,554,865 $ 263,078
============ ============ ============ ============
BASIC INCOME PER COMMON SHARE .............................. $ 5.92 $ .89 $ 5.45 $ .93
DILUTED INCOME PER COMMON SHARE ............................ $ 5.90 $ .88 $ 5.43 $ .92
See Notes to the Company's Consolidated Financial Statements.
1
4
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 489,878 $ 29,673
Investment in Time Warner securities ............................... 3,343,160
Accounts receivable - net .......................................... 880,236 726,377
Accrued unbilled revenues .......................................... 113,004 175,515
Fuel, gas and petroleum products ................................... 209,300 211,750
Materials and supplies, at average cost ............................ 186,474 171,998
Price risk management assets ....................................... 481,147 265,203
Restricted deposit for bond redemption ............................. 70,315
Prepayments and other current assets ............................... 89,244 88,655
----------- -----------
Total current assets ............................................. 5,862,758 1,669,171
----------- -----------
PROPERTY, PLANT AND EQUIPMENT -- AT COST:
Electric ........................................................... 14,423,741 13,969,302
Natural gas distribution and gathering systems ..................... 1,870,869 1,686,159
Interstate pipelines ............................................... 1,316,329 1,302,829
Other property ..................................................... 119,878 72,299
----------- -----------
Total ............................................................ 17,730,817 17,030,589
Less accumulated depreciation and amortization ..................... 6,772,020 5,499,448
----------- -----------
Property, plant and equipment - net .............................. 10,958,797 11,531,141
----------- -----------
OTHER ASSETS:
Goodwill - net ..................................................... 2,061,682 2,098,890
Equity investments and advances to unconsolidated affiliates ....... 936,338 1,051,600
Investment in Time Warner securities ............................... 990,000
Recoverable impaired plant costs ................................... 664,106
Price risk management assets ....................................... 100,593 21,414
Other .............................................................. 2,019,843 1,800,681
----------- -----------
Total other assets ............................................... 5,782,562 5,962,585
----------- -----------
TOTAL ASSETS ................................................... $22,604,117 $19,162,897
=========== ===========
See Notes to the Company's Consolidated Financial Statements.
2
5
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- ------------
CURRENT LIABILITIES:
Notes payable ........................................................... $ 1,883,163 $ 1,812,739
Accounts payable ........................................................ 899,419 807,977
Price risk management liabilities ....................................... 457,420 227,652
Current portion of long-term debt ....................................... 3,791,562 397,454
Other ................................................................... 1,032,239 825,120
-------------- --------------
Total current liabilities ........................................... 8,063,803 4,070,942
-------------- --------------
DEFERRED CREDITS:
Accumulated deferred income taxes ....................................... 2,868,652 2,364,036
Unamortized investment tax credit ....................................... 274,397 328,949
Price risk management liabilities ....................................... 95,494 29,108
Other ................................................................... 1,034,289 905,014
-------------- --------------
Total deferred credits .............................................. 4,272,832 3,627,107
-------------- --------------
LONG-TERM DEBT ............................................................ 4,063,041 6,800,748
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 1)
TOTAL LIABILITIES ................................................. 16,399,676 14,498,797
-------------- --------------
COMPANY/RESOURCES OBLIGATED MANDATORILY REDEEMABLE TRUST
PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR
SUBORDINATED DEBENTURES OF COMPANY/RESOURCES - NET .................... 705,261 342,232
-------------- --------------
PREFERENCE STOCK, NONE OUTSTANDING
CUMULATIVE PREFERRED STOCK, NOT SUBJECT TO MANDATORY REDEMPTION ........... 9,740 9,740
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, no par value ............................................ 3,170,989 3,136,826
Treasury stock, at cost ............................................... (41,198) (2,384)
Unearned ESOP shares .................................................. (203,053) (217,780)
Retained earnings ..................................................... 2,679,024 1,445,081
Accumulated other comprehensive loss .................................. (116,322) (49,615)
-------------- --------------
Total stockholders' equity .......................................... 5,489,440 4,312,128
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $ 22,604,117 $ 19,162,897
============== ==============
See Notes to the Company's Consolidated Financial Statements.
3
6
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to common stockholders ............................... $ 1,554,865 $ 263,078
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .............................................. 705,337 677,838
Deferred income taxes ...................................................... 606,786 (154,092)
Investment tax credit ...................................................... (54,552) (15,092)
Unrealized gain on investment in Time Warner securities .................... (1,816,105)
Unrealized (gain) loss on indexed debt securities .......................... (6,778) 484,009
Undistributed loss (earnings) of equity investments in unconsolidated
affiliates ............................................................... 65,401 (26,496)
Changes in other assets and liabilities:
Accounts receivable - net ................................................ (91,348) (591,241)
Accounts receivable - IRS ................................................ 140,532
Inventory ................................................................ (12,026) (129,444)
Other current assets ..................................................... (589) (37,801)
Accounts payable ......................................................... 91,442 528,582
Interest and taxes accrued ............................................... (44,821) 58,810
Other current liabilities ................................................ 122,936 (17,200)
Net price risk management assets ......................................... 1,031 (4,638)
Other - net .............................................................. 4,810 (2,766)
----------- -----------
Net cash provided by operating activities .............................. 1,126,389 1,174,079
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................................... (708,542) (447,152)
Investment in Time Warner securities ......................................... (537,055)
Acquisitions of non-rate regulated electric power plants ..................... (275,056)
Sale of equity investments in foreign electric system projects ............... 242,744
Equity investment in foreign electric system projects ........................ (240,377)
Equity investment and advances to unconsolidated affiliates .................. (97,080) (42,439)
Other - net ................................................................. 35,422 (40,339)
----------- -----------
Net cash used in investing activities .................................. $(1,307,255) $ (802,619)
----------- -----------
(Continued on next page)
4
7
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS - (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of matured bonds ...................................... $ (76,000)
Proceeds from issuance of indexed debt securities ............. $ 980,000
Proceeds from issuance of trust preferred securities .......... 362,994
Proceeds from issuance of pollution control revenue bonds ..... 284,102 454,258
Restricted deposit for bond redemption ........................ (70,315) (68,700)
Proceeds from issuance of debentures .......................... 298,514
Payment of debentures ......................................... (12,042)
Payment of common stock dividends ............................. (320,461) (316,968)
Repurchase of common stock .................................... (38,757)
Decrease in notes payable - net ............................... (153,835) (226,836)
Extinguishment of long-term debt .............................. (395,636) (402,587)
Redemption of convertible securities .......................... (57) (10,399)
Other - net ................................................... 5,078 (18,151)
----------- -----------
Net cash provided by (used in) financing activities ....... 641,071 (366,869)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 460,205 4,591
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................ 29,673 51,712
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 489,878 $ 56,303
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments:
Interest (net of amounts capitalized) ......................... $ 365,052 $ 376,194
Income taxes .................................................. 277,725 302,474
See Notes to the Company's Consolidated Financial Statements.
5
8
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
AND COMPREHENSIVE INCOME (LOSS)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
RETAINED EARNINGS:
Balance at beginning of period ...................... $ 1,096,058 $ 1,813,934
Net income .......................................... 1,689,990 $ 1,689,990 251,709 $ 251,709
------------- -------------
Total ........................................... 2,786,048 2,065,643
Common stock dividends .............................. (107,024) (106,647)
------------- -------------
Balance at end of period ............................ $ 2,679,024 $ 1,958,996
============= =============
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX:
Balance at beginning of period ...................... $ (91,225) $ (16,535)
Foreign currency translation adjustments, net of
tax of $12,127 and $84 ........................... (22,521) (22,521) (156) (156)
Unrealized loss on available for sale
securities, net of tax of $1,449 and $3,304 ....... (2,576) (2,576) (5,874) (5,874)
------------- -------------
Balance at end of period ............................ $ (116,322) $ (22,565)
============= =============
------------- -------------
COMPREHENSIVE INCOME .................................. $ 1,664,893 $ 245,679
============= =============
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
RETAINED EARNINGS:
Balance at beginning of period ................. $ 1,445,081 $ 2,013,055
Net income ..................................... 1,554,865 $ 1,554,865 263,078 $ 263,078
-------------- --------------
Total ...................................... 2,999,946 2,276,133
Common stock dividends ......................... (320,922) (317,137)
-------------- --------------
Balance at end of period ....................... $ 2,679,024 $ 1,958,996
============== ==============
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX:
Balance at beginning of period ................. $ (49,615) $ (6,455)
Foreign currency translation adjustments, net of
tax of $35,242 and $2,801 .................... (65,450) (65,450) (5,201) (5,201)
Unrealized loss on available for sale
securities, net of tax of $707 and $6,136 .... (1,257) (1,257) (10,909) (10,909)
-------------- --------------
Balance at end of period ....................... $ (116,322) $ (22,565)
============== ==============
-------------- --------------
COMPREHENSIVE INCOME ............................. $ 1,488,158 $ 246,968
============== ==============
See Notes to the Company's Consolidated Financial Statements.
6
9
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Included in this combined Quarterly Report on 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 Reports on Form 10-Q of the Company (Company First Quarter
10-Q and Second Quarter 10-Q) and Resources (Resources First Quarter 10-Q and
Second Quarter 10-Q) for the quarters ended March 31, 1999 and June 30, 1999,
respectively. For additional information regarding the presentation of interim
period results, see Note 13.
The financial statements for the three and nine months ended September
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 Statement of Financial Accounting Standards (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, effective June 30, 1999, the Company was 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 of the Company Second Quarter 10-Q
and Note 2 below.
7
10
(2) TEXAS ELECTRIC CHOICE PLAN AND DISCONTINUANCE OF SFAS NO. 71 FOR
ELECTRIC GENERATION OPERATIONS
In June 1999, the State of 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. For additional information regarding the Legislation, see Note 2 of the
Company Second Quarter 10-Q.
At June 30, 1999, the Company performed an impairment test of its
previously regulated electric generation assets pursuant to SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," on a plant specific basis. The Company determined that $797
million of its electric generation assets was impaired as of June 30, 1999. The
Legislation provides for recovery of this impairment through regulated cash
flows during the transition period and through non-bypassable charges to
transmission and distribution customers. As a result, a regulatory asset was
recorded for an amount equal to the impairment loss and is included on the
Company's Consolidated Balance Sheets as recoverable impaired plant costs. In
addition, the Company has recorded an additional $12 million of recoverable
impaired plant costs in the third quarter of 1999 related to previously incurred
costs that are now deemed to be recoverable pursuant to the Legislation. During
the third quarter of 1999, the Company recorded amortization expense related to
the recoverable impaired plant costs of $144 million in its Statements of
Consolidated Operations. The Company will continue to amortize this regulatory
asset as it is recovered.
The impairment test required estimates of possible future market
prices, load growth, competition and many other factors over the lives of the
plants. The resulting impairment loss is highly dependent on the assumptions
underlying these estimates. 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 Public Utility Commission of Texas (Texas PUC). Any
difference between the fair market value and the regulatory net book value of
the generation related 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
changes may include estimation risk, uncertainty of future energy prices and the
economic lives of the plants. If events occur that make the recovery of all or a
portion 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 corresponding
balance of such assets as a non-cash charge against earnings.
Following are the classes of electric property, plant and equipment at
cost, with associated accumulated depreciation at September 30, 1999 (including
the impairment loss discussed above) and December 31, 1998.
TRANSMISSION CONSOLIDATED
AND GENERAL ELECTRIC PLANT
GENERATION DISTRIBUTION AND INTANGIBLE IN SERVICE
---------- -------------- -------------- ----------------
(IN MILLIONS)
September 30, 1999:
Original cost ............................. $ 9,002 $ 4,471 $ 951 $14,424
Accumulated depreciation .................. 4,878 1,265 251 6,394
Property, plant and equipment - net (1) ... 4,124 3,206 700 8,030
8
11
TRANSMISSION CONSOLIDATED
AND GENERAL ELECTRIC PLANT
GENERATION DISTRIBUTION AND INTANGIBLE IN SERVICE
---------- -------------- -------------- ----------------
(IN MILLIONS)
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 $387 million at September
30, 1999 and $338 million at December 31, 1998 and international
distribution facilities of $28 million at September 30, 1999 and $19
million at December 31, 1998.
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 the year ended
December 31, 1998, respectively, from transmission and distribution related
plant assets to generation assets for regulatory and financial reporting
purposes. Such redirection was 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 Legislation provides that depreciation expense for
transmission and distribution related assets may be redirected to generation
assets during the base rate freeze period from 1999 through 2001. For regulatory
purposes, the Company has continued to redirect transmission and distribution
depreciation to generation assets. Beginning June 30, 1999, redirected
depreciation expense cannot be recorded by the electric generation operations
portion of Reliant Energy HL&P for financial reporting purposes as this portion
of electric operations is no longer accounted for under SFAS No. 71. For the
third quarter of 1999, $51 million in depreciation expense has been redirected
from transmission and distribution for regulatory purposes and established as an
embedded asset included in transmission and distribution related plant and
equipment balances. As of September 30, 1999, the cumulative amount of
redirected depreciation is $348 million.
Reliant Energy HL&P plans to file an application with the Texas PUC
requesting a financing order authorizing the issuance by a special purpose
entity organized by the Company, pursuant to the Legislation, of approximately
$1 billion of transition bonds related to Reliant Energy HL&P's
generation-related regulatory assets. Payments on the transition bonds will be
made from non-bypassable transition charges to Reliant Energy HL&P's
transmission and distribution customers. The offering and sale of the transition
bonds will be registered under the Securities Act of 1933 and is expected to be
consummated in the first quarter of 2000.
(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 9.2% common stock interest in Metropolitana
Eletricidade de Sao Paulo S.A. (Metropolitana), both Brazilian operating
companies. The Company accounts for its investment in Light under the equity
method 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 September 30, 1999, Light and Metropolitana had total borrowings
of $2.7 billion denominated 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 an after-tax charge for the three months
and nine months ended September 30, 1999 of $19 million and $114 million,
respectively, as a result of foreign currency transaction losses recorded by
both Light and Metropolitana in such periods. At September 30, 1999, one U.S.
dollar could be exchanged for 1.9223 Brazilian reais. Because the Company uses
the Brazilian real as the functional currency to report Light's equity earnings,
any decrease
9
12
in the value of the Brazilian real below its September 30, 1999 level
will increase Light's liability represented by the non-local currency
denominated borrowings. This amount will also be reflected in the Company's
consolidated earnings, to the extent of the Company's ownership interest in
Light. Similarly, any increase in the value of the Brazilian real above its
September 30, 1999 level will decrease Light's liability represented by such
borrowings. In November 1999, Light issued 650 million Brazilian reais of
subordinated debentures. The proceeds of the debentures will be used to retire
approximately $325 million of non-local currency denominated borrowings. At
September 30, 1999, one U.S. dollar could be exchanged for 1.9223 Brazilian
reais.
(4) DEPRECIATION
(a) Company.
The Company calculates depreciation using the straight-line method. The
Company's depreciation expense for the third quarter and first nine months of
1999 was $123 million and $458 million, respectively, compared to $227 million
and $559 million for the corresponding 1998 periods.
Pursuant to the Transition Plan, the Company recorded $58 million of
additional depreciation for the six months ended June 30, 1999. Because the
electric generation operations portion of Reliant Energy HL&P discontinued
application of SFAS No. 71 effective June 30, 1999, such operations can no
longer record additional depreciation for financial reporting purposes. The
Company recorded $91 million and $171 million of additional depreciation
pursuant to the Transition Plan for the third quarter and the first nine months
of 1998, respectively. 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. Pursuant to the Legislation, the Company is allowed to
recover generation related regulatory assets and liabilities reported in the
Company 10-K as of December 31, 1998. Therefore, the Company discontinued
amortizing certain generation related regulatory assets effective as of January
1, 1999, reversed the related amortization expense of $46 million incurred prior
to June 30, 1999 and recorded additional depreciation expense of a like amount.
(b) Resources.
Resources calculates depreciation using the straight-line method.
Resources' depreciation expense was $35 million and $106 million for the third
quarter and first nine months of 1999, respectively, compared to $40 million and
$103 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------------
1999 1998 1999 1998
------- -------- -------- ---------
(IN MILLIONS)
Revenues ................ $ 986 $ 606 $ 3,369 $ 3,286
Operating expenses ...... 808 382 2,552 2,368
Net income (loss) ....... 47 81 (519) 357
Dividends received from these affiliates were $11 million and $6
million for the three months ended September 30, 1999 and 1998, respectively.
For the nine months ended September 30, 1999 and 1998, dividends received from
these affiliates were $22 million and $33 million, respectively.
10
13
(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) ZENS AND TIME WARNER SECURITIES INVESTMENT
On September 21, 1999, the Company issued 17.2 million of its 2.0%
Zero-Premium Exchangeable Subordinated Notes due 2029 (ZENS) having an original
principal amount of $1.0 billion. At maturity the holders of the ZENS will
receive in cash the higher of the principal amount of the ZENS or an amount
based on the then-current market value of Time Warner Inc. (TW) common stock (TW
Common), or other securities distributed in connection with such stock (one
share of TW Common and such other securities are referred to as reference
shares). Each ZENS having a principal amount of $58.25 (the closing market price
of the TW Common on September 15, 1999) is exchangeable at any time at the
option of the holder for cash equal to 95% (and in certain cases 100%) of the
market value of a reference share. In addition to paying interest at an accrued
rate of 2.0%, the amount of any cash dividend on the reference shares will be
paid to the ZENS holders.
Of the $980 million net proceeds from the offering, the Company used
$443 million for general corporate purposes, including repayment of Company
indebtedness. The Company used $537 million of the net proceeds to purchase 9.2
million shares of TW Common, which are classified as trading securities under
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Therefore, unrealized gains and losses resulting from changes in
the market value of the TW Common are recorded in the Statements of Consolidated
Operations.
An increase above $58.25 (subject to certain adjustments) in the market
value per share of TW Common results in an increase in the liability for the
ZENS and is recorded by the Company as a non-cash expense. If the market value
per share of TW Common declines below $58.25(subject to certain adjustments),
the liability for the ZENS would not decline below the original principal
amount. However, the decline in market value of the Company's investment in the
TW Common would be recorded as an unrealized loss as discussed above.
On July 6, 1999, the Company converted its 11 million shares of Time
Warner convertible preferred stock into 45.8 million shares of TW Common. Prior
to the conversion, the Company's investment in the Time Warner preferred stock
was accounted for under the cost method. Effective on the conversion date, the
shares of TW Common were classified as trading securities under SFAS No. 115 and
an unrealized gain was recorded in the amount of $2.38 billion ($1.53 billion
after tax) to reflect the cumulative appreciation in the fair value of the
Company's investment in Time Warner securities. In the future, changes in the
market value of the Company's TW Common investment and the related offsetting
changes in the liability related to the Company's unsecured 7% Automatic Common
Exchange Securities (ACES) will be recorded in the Company's Statement of
Consolidated Operations. For the period from July 1, 1999 to the conversion date
of July 6, 1999, non-cash, unrealized accounting losses on the ACES were $35
million ($23 million after tax).
Prior to the purchase of additional shares of TW Common on September
21, 1999, the Company owned 8.0 million shares of TW Common that were in excess
of the 38 million shares needed to economically hedge its ACES obligation. For
more information about the ACES obligations, see Note 7 to the Company Second
Quarter 10-Q. For the period from July 6, 1999 to the ZENS issuance date, losses
(due to the decline in the market value of the TW Common during such period) on
these 8.0 million shares were $122 million ($79 million after tax). The 8.0
million shares of TW Common combined with the additional 9.2
11
14
million shares purchased are expected to be held to provide an economic hedge
against increases in the ZENS obligation.
(8) CAPITAL STOCK
(a) Common Stock.
The Company has 700,000,000 authorized shares of common stock. At
September 30, 1999, the Company had 297,224,668 shares of common stock issued
(284,994,244 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 September 30, 1999 and
December 31, 1998, respectively) and (ii) treasury shares (1,510,935 and 102,805
at September 30, 1999 and December 31, 1998, respectively).
The Company has a registration statement under which 15,000,000 shares
of its common stock are available for issuance. The issuance of all securities
registered by the Company is subject to market and other conditions.
During the third quarter of 1999, the Company purchased 1,419,200
shares of its common stock for $38.8 million at an average price of $27.34 per
share. As of September 30, 1999, the Company was authorized to purchase an
additional $49.9 million of its common stock. Purchases depend 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 purchases
since September 30, 1999, see Note 12.
(b) Earnings Per Share.
The following table presents the Company's basic and diluted earnings
per share (EPS) calculation:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999(1) 1998 1999(2) 1998
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic EPS Calculation:
Income before preferred dividends ......... $1,690,087 $ 251,806 $1,555,157 $ 263,370
Preferred dividends ....................... 97 97 292 292
---------- ---------- ---------- ----------
Net income attributable to common stock ... $1,689,990 $ 251,709 $1,554,865 $ 263,078
========== ========== ========== ==========
Weighted average shares outstanding ....... 285,287 284,344 285,247 283,965
Basic EPS ................................. $ 5.92 $ 0.89 $ 5.45 $ 0.93
========== ========== ========== ==========
12
15
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999(1) 1998 1999(2) 1998
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Diluted EPS Calculation:
Income before preferred dividends ........... $1,690,087 $ 251,806 $1,555,157 $ 263,370
Interest on 6 1/4% convertible debentures ... 8 14 25 43
---------- ---------- ---------- ----------
Income before preferred dividends assuming
dilution .................................. 1,690,095 251,820 1,555,182 263,413
Preferred dividends ......................... 97 97 292 292
---------- ---------- ---------- ----------
Net income attributable to common stock ..... $1,689,998 $ 251,723 $1,554,890 $ 263,121
========== ========== ========== ==========
Weighted average shares outstanding ......... 285,287 284,344 285,247 283,965
Stock options ........................... 362 432 525 368
Restricted stock ........................ 740 492 740 492
6 1/4% convertible debentures ........... 25 44 25 44
---------- ---------- ---------- ----------
Weighted average shares assuming dilution ... 286,414 285,312 286,537 284,869
Diluted EPS ................................. $ 5.90 $ 0.88 $ 5.43 $ 0.92
========== ========== ========== ==========
- ------------------
(1) For the three months ended September 30, 1999, the computation of
diluted EPS excludes purchase options for 51,631 shares of common stock
that have exercise prices (ranging from $28.71 to $35.18 per share)
greater than the $27.41 per share average market price for the period
and would thus be anti-dilutive if exercised.
(2) For the nine months ended September 30, 1999, the computation of
diluted EPS excludes purchase options for 29,316 shares of common stock
that have exercise prices (ranging from $28.71 to $35.18 per share)
greater than the $28.26 per share average market price for the period
and would thus be anti-dilutive if exercised.
(c) Preferred Stock.
At September 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 September 30, 1999 and December 31, 1998, the Company had 10,000,000
authorized shares of preference stock, which were designated and outstanding,
as shown below.
----------------------------- ------------------------------
SEPTEMBER 30, 1999 DECEMBER 31, 1998
----------------------------- ------------------------------
LIQUIDATION SHARES SHARES SHARES SHARES
VALUE PER SHARE DESIGNATED OUTSTANDING DESIGNATED OUTSTANDING
--------------- ---------- ----------- ---------- -----------
Series A $ 1,000 700,000 -- 700,000 --
Series B $ 100,000 27,000 17,000 27,000 17,000
Series C $ 100,000 1,575 -- 1,575 1,575
Series D Euro 100,000(1) 5,880 3,660 -- --
- ----------
(1) As of September 30, 1999, one U.S. dollar could be exchanged for 1.0651
Euros.
The Series A Preference Stock is issuable in accordance with the
Company's Shareholder Rights Agreement upon the occurrence of certain events.
The Series C Preference Stock was redeemed in March 1999. The Series B
Preference Stock and the Series D Preference Stock are not deemed outstanding
for financial reporting purposes because the sole holders of each series are
separate wholly owned financing
13
16
subsidiaries of the Company. For information regarding the Company's Series E
Preference Stock issued in the fourth quarter of 1999, see Note 12.
(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 is
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 September 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 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:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
LONG-TERM CURRENT LONG-TERM CURRENT
--------- ---------- --------- -------
(IN MILLIONS)
Short-Term Borrowings (1):
Commercial Paper ...................... $ 1,170 $ 1,360
Lines of Credit ....................... 360 150
Resources Receivables Facility ........ 350 300
Notes Payable ......................... 3 3
--------- -------- --------- -------
Total Short-Term Borrowings ............. 1,883 1,813
--------- -------- --------- -------
14
17
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
LONG-TERM CURRENT LONG-TERM CURRENT
--------- ---------- --------- -------
(IN MILLIONS)
Long-Term Debt - net:
ACES ...................................... 2,300 $2,350
ZENS (4) .................................. 1,043
Debentures (2)(3) ......................... $1,468 1,482
First Mortgage Bonds (2) .................. 1,427 221 1,866 170
Pollution Control Bonds ................... 871 581
Resources Medium-Term Notes (3) ........... 174 178
Notes Payable (3) ......................... 110 227 330 226
Capital Leases ............................ 13 1 14 1
------ ------ ------ ------
Total Long-Term Debt ........................ 4,063 3,792 6,801 397
------ ------ ------ ------
Total Long-Term and Short-Term Debt ....... $4,063 $5,675 $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 September 30, 1999 and $1 million at December 31, 1998
and unamortized premium related to debentures of approximately $16
million at September 30, 1999 and $17 million at December 31, 1998. The
unamortized discount related to first mortgage bonds was approximately
$9 million at September 30, 1999 and $10 million at December 31, 1998.
(3) Includes unamortized premium related to fair value adjustments of
approximately $17 million and $18 million for debentures at September
30, 1999 and December 31, 1998, respectively. The unamortized premium
for Resources long-term notes was approximately $8 million and $12
million at September 30, 1999 and December 31, 1998, respectively. The
unamortized premium for notes payable was approximately $2 million and
$6 million at September 30, 1999 and December 31, 1998, respectively.
(4) As ZENS are exchangeable at any time at the option of the holder, these
notes are classified as a current portion of long-term debt.
Consolidated maturities of long-term debt and sinking fund requirements
for the Company (including Resources) are approximately $11 million for the
remainder of 1999.
(ii) Financing Developments.
At September 30, 1999, a financing subsidiary of the Company had $1.136
billion in commercial paper borrowings supported by a $1.644 billion revolving
credit facility. At September 30, 1999, the weighted average interest rate of
these commercial paper borrowings was 5.98%. On September 24, 1999, another
financing subsidiary of the Company established a 364-day Euro 560 million
(approximately $596 million) revolving credit facility (FinanceCo III Facility).
At September 30, 1999, borrowings under the FinanceCo III Facility were Euro 338
million (approximately $360 million) at an interest rate of 3.127%. Borrowings
under the facility are determined based on competitive bids or by adding a
margin to the rate at which Euro deposits are offered in the interbank Euro
market. For additional information regarding the Company's and its subsidiaries'
bank facilities and commercial paper programs, see Note 8(c) and (d) of the
Company 10-K Notes.
For information regarding the redemption of $200 million revenue
refunding bonds in July 1999, see Note 10(a) to the Company Second Quarter 10-Q.
In July 1999, the Matagorda County Navigation District Number One
(MCND) issued on behalf of the Company $70.315 million of revenue refunding
bonds having an interest rate of 5.95%. The MCND bonds will mature in 2030, and
proceeds from the issuance were used on October 1, 1999 to redeem all
outstanding 7.60% MCND Series 1989D collateralized pollution control revenue
bonds
15
18
($70.315 million) at a redemption price of 102% of their aggregate principal
amount. For financial reporting purposes, both the MCND bonds issued in July
1999 and the MCND bonds redeemed in October 1999 were deemed to be outstanding
at September 30, 1999.
On September 21, 1999, the Company issued 17.2 million of its ZENS
having an original principal amount of $1.0 billion. For information on the
ZENS, see Note 7.
(b) Resources.
As of September 30, 1999, Resources had outstanding $1.9 billion of
long-term and short-term debt. For information regarding Resources' financing
arrangements and lease commitments, see Notes 4 and 8(a) of the Resources 10-K
Notes.
In July 1999, Resources repaid at maturity $200 million of its 8.875%
Notes.
In August 1999, Resources increased its receivables facility by $50
million and received $50 million of additional proceeds from its sale of
receivables. For information regarding Resources' $350 million receivables
facility, see Note 4(a) of the Resources 10-K Notes. At September 30, 1999,
Resources had sold $350 million of receivables under the facility at a weighted
average interest rate of 5.53%.
For information regarding Resources' $350 million revolving credit
facility, see Note 4(a) of the Resources 10-K Notes. This facility includes a
$65 million sub-facility under which letters of credit may be obtained. At
September 30, 1999, commercial paper borrowings supported by the facility
aggregated $34.2 million and had a weighted average interest rate of 6.05%. As
of September 30, 1999, letters of credit issued under the facility aggregated
$22.8 million.
(11) 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, energy and ancilliary services 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 retail
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):
16
19
ELECTRIC NATURAL GAS INTERSTATE WHOLESALE INTER-
OPERATIONS DISTRIBUTION PIPELINES ENERGY NATIONAL
----------- ------------ ---------- ---------- ----------
For the Three Months Ended
September 30, 1999:
Revenues ..................... $1,496,596 $ 302,387 $ 37,303 $2,847,388 $ 34,126
Intersegment revenues ........ 311 32,721 60,731
Operating income (loss) ...... 410,234 (12,349) 28,767 43,584 9,809
For the Three Months Ended
September 30, 1998:
Revenues ..................... 1,415,832 265,911 34,110 1,584,472 31,813
Intersegment revenues ........ 266 36,284 26,181
Operating income (loss) ...... 412,669 (17,212) 27,421 94,511 14,419
RECONCILING
CORPORATE ELIMINATIONS CONSOLIDATED
---------- ------------ ------------
For the Three Months Ended
September 30, 1999:
Revenues ..................... $ 229,392 $4,947,192
Intersegment revenues ........ 20,644 $ (114,407)
Operating income (loss) ...... (17,247) 462,798
For the Three Months Ended
September 30, 1998:
Revenues ..................... 133,349 3,465,487
Intersegment revenues ........ 24,002 (86,733)
Operating income (loss) ...... (24,814) 506,994
ELECTRIC NATURAL GAS INTERSTATE WHOLESALE INTER-
OPERATIONS DISTRIBUTION PIPELINES ENERGY NATIONAL
----------- ------------ ----------- ----------- -----------
As of and for the Nine
Months Ended
September 30, 1999:
Revenues ..................... $ 3,513,144 $ 1,309,241 $ 90,608 $ 5,692,028 $ 26,273
Intersegment revenues ........ 912 111,638 162,024
Operating income (loss) ...... 836,413 80,141 83,866 53,378 (52,894)
Total Assets ................. 10,427,643 2,960,971 2,025,244 2,725,752 1,100,138
As of and for the Nine
Months Ended
September 30, 1998:
Revenues ..................... 3,443,694 1,326,672 103,919 3,298,008 228,494
Intersegment revenues ........ 890 113,972 118,040
Operating income (loss) ...... 846,275 80,403 92,343 68,551 176,430
Total Assets ................. 10,604,590 2,830,260 2,116,927 2,108,629 1,086,407
RECONCILING
CORPORATE ELIMINATIONS CONSOLIDATED
----------- ------------ ------------
As of and for the Nine
Months Ended
September 30, 1999:
Revenues ..................... $ 616,630 $11,247,924
Intersegment revenues ........ 56,579 $ (331,153)
Operating income (loss) ...... (27,829) 973,075
Total Assets ................. 4,010,246 (645,877) 22,604,117
As of and for the Nine
Months Ended
September 30, 1998:
Revenues ..................... 432,648 8,833,435
Intersegment revenues ........ 69,945 (302,847)
Operating income (loss) ...... (21,065) 1,242,937
Total Assets ................. 1,762,848 (851,829) 19,657,832
Reconciliation of operating income to net income (in thousands) is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Operating income ........................... $ 462,798 $ 506,994 $ 973,075 $ 1,242,937
Dividend income ............................ 2,622 10,313 23,247 30,938
Interest expense ........................... 116,176 120,058 368,759 375,237
Unrealized gain on Time Warner
investment ............................. 1,816,105 1,816,105
Unrealized gain (loss) on indexed debt
securities ............................. 406,717 (40,231) 6,778 (484,009)
Distribution on trust securities ........... 14,652 7,248 38,433 21,960
Income tax expense ......................... 877,372 106,616 872,304 154,218
Other income - net ......................... 9,948 8,555 15,156 24,627
----------- ----------- ----------- -----------
Net income attributable to common
shareholders ........................... $ 1,689,990 $ 251,709 $ 1,554,865 $ 263,078
=========== =========== =========== ===========
17
20
(12) SUBSEQUENT EVENTS
On October 7, 1999, the Company completed the first phase of its
acquisition of the Dutch power generation company N.V. UNA (UNA). On that date,
a subsidiary of the Company purchased 40 percent of the capital stock of UNA for
$780 million, which included $354 million in cash and a $426 million five-year
promissory note. The promissory note must be prepaid in certain circumstances.
In accordance with the stock purchase agreement, the Company's subsidiary has
irrevocable fixed commitments to increase its ownership interest in UNA to 52
percent by December 1, 1999 and purchase the remaining shares of UNA on March 1,
2000. The total purchase price of the acquisition is approximately $2.4 billion.
All purchase price obligations are denominated in Dutch guilders (NLG). The
amounts shown above assume an exchange rate of 2.0565 NLG per U.S. dollar (the
exchange rate on October 7, 1999).
In connection with obtaining the necessary Dutch regulatory approvals,
the Company, UNA and the other shareholders of UNA agreed to revise the terms of
their original agreement that provided that if UNA's stranded costs exceeded NLG
500 million, the purchase price would be reduced. Any downward adjustment would
have been limited to approximately NLG 1.4 billion. Under the amended agreement,
the other UNA shareholders are responsible for up to NLG 1.9 billion of UNA's
stranded costs. Accordingly, the purchase price was increased by NLG 500
million. This payment will be made in December 1999.
During the period from October 1, 1999 through November 12, 1999, the
Company purchased 90,800 shares of its common stock for $2.4 million at an
average price of $26.45 per share. See Note 8 for more information.
In October 1999, Resources called for redemption the remaining $42.76
million principal amount of its 10% Debentures due 2019. The debentures will be
redeemed on November 15, 1999 at 105% of their principal amount plus accrued
interest.
On November 10, 1999, the Brazos River Authority (BRA) issued on behalf
of the Company $100 million of revenue refunding bonds having an annual interest
rate of 5.20% and a maturity date of December 1, 2018. The BRA bonds will be
subject to mandatory tender or optional redemption on December 1, 2002 at a
price equal to 100% of the principal amount. The proceeds from the issuance will
be used on December 13, 1999 to redeem all outstanding BRA Series 1989B
collateralized revenue refunding bonds ($100 million) at a redemption price of
102% of the aggregate principal amount.
On November 10, 1999, the MCND issued on behalf of the Company $75
million of revenue refunding bonds having an annual interest rate of 5.20% and a
maturity date of May 1, 2029. The MCND bonds will be subject to mandatory tender
or optional redemption on November 1, 2002 at a price equal to 100% of the
principal amount. The proceeds from the issuance will be used on December 13,
1999 to redeem all outstanding MCND Series 1989E collateralized revenue
refunding bonds ($75 million) at a redemption price of 102% of the aggregate
principal amount.
On November 12, 1999, a financing subsidiary issued $300 million of
Senior Notes due 2002 having an annual interest rate of 7.4%. The proceeds from
the issuance were used by the financing subsidiary to purchase Series E
Preference Stock of the Company. As a result of the transaction, the financing
subsidiary owns 3,160 shares of the Series E Preference Stock. These shares are
not deemed outstanding for financial reporting purposes because they are held by
a wholly owned financing subsidiary of the Company. The Company anticipates that
the proceeds from the sale of such preference stock will be used for general
corporate purposes, including the repayment of indebtedness.
The devaluation of the Brazilian real has resulted in the inability of
Light and Metropolitana to distribute adequate dividends to meet debt
requirements of a subsidiary of the Company. In July 1999, the subsidiary
executed a guarantee of up to $45 million. In November 1999, it is anticipated
that the Company will make a capital contribution of approximately $20 million
to fund a portion of this obligation.
18
21
(13) 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, (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.
19
22
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 one of the nation's 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 retail 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ PERCENT ----------------------- PERCENT
1999 1998 CHANGE 1999 1998 CHANGE
--------- ---------- ------- ---------- --------- -------
(IN MILLIONS, EXCEPT PER (IN MILLIONS, EXCEPT PER
SHARE DATA) SHARE DATA)
Revenues .......................... $ 4,947 $ 3,465 43% $ 11,248 $ 8,833 27%
Operating Expenses ................ 4,484 2,958 52% 10,275 7,590 35%
Operating Income .................. 463 507 (9%) 973 1,243 (22%)
Other (Expenses) Income (1) ....... 2,235 (21) -- 1,861 (428) --
Interest and Other Charges ........ 131 127 3% 407 398 2%
Income Tax Expense ................ 877 107 -- 872 154 --
--------- --------- --------- ---------
Net Income (1) .................... $ 1,690 $ 252 -- $ 1,555 $ 263 --
========= ========= ========= =========
Basic Income Per Share (1) ........ $ 5.92 $ 0.89 -- $ 5.45 $ 0.93 --
Diluted Income Per Share (1) ...... $ 5.90 $ 0.88 -- $ 5.43 $ 0.92 --
- --------------
(1) Other (Expenses) Income and Net Income reflect the effect of a $1.816
billion non-cash, unrealized pre-tax ($1.161 billion after-tax)
accounting gain recorded in the three and nine months ended September
30, 1999 related to the unrealized gain on the Company's investment in
Time Warner. No such gain was recorded in 1998. The line items also
reflect unrealized gains and losses on the indexed debt securities
(ACES and ZENS). Such amounts were a pre-tax gain of $407 million and
$7 million for the three and nine month periods of 1999, respectively,
compared to a pre-tax loss of $40 million and $484 million for the same
periods in 1998, respectively. See Note 7 to the Company's Interim
Financial Statements regarding both of these items.
Third Quarter of 1999 Compared to Third Quarter of 1998. The Company
reported consolidated net income of $1.690 billion ($5.92 per basic share) for
the third quarter of 1999 compared to consolidated net income of $252 million
($0.89 per basic share) for the third quarter of 1998. The 1999 results reflect
a $1.161 billion after-tax, non-cash unrealized accounting gain on the Company's
investment in TW Common, a $264 million after-tax, non-cash unrealized gain on
indexed debt securities
20
23
and an after-tax loss of $19 million due to the devaluation of the Brazilian
real. The third quarter of 1998 results include a $26 million after-tax,
non-cash unrealized accounting loss on indexed debt securities.
After adjusting for the gains and losses described above, the Company
would have had consolidated net income of $283 million ($0.99 per basic share)
in the third quarter of 1999 compared to $278 million ($0.98 per basic share)
in the third quarter of 1998.
First Nine Months of 1999 Compared to First Nine Months of 1998. The
Company reported consolidated net income of $1.555 billion ($5.45 per basic
share) for the first nine months of 1999 compared to consolidated net income of
$263 million ($0.93 per basic share) for the same period of 1998. The 1999
results reflect a $1.161 billion after-tax, non-cash unrealized accounting gain
on the Company's investment in TW Common, a $4 million after-tax, non-cash
unrealized accounting gain on indexed debt securities and a $114 million
after-tax loss due to the devaluation of the Brazilian real. Net income for the
1998 period reflects a $315 million after-tax, non-cash unrealized accounting
loss on indexed debt securities.
After adjusting for the gains and losses described above, the Company
would have had consolidated net income of $504 million ($1.77 per basic share)
for the first nine months of 1999 and $577 million ($2.03 per basic share) for
the first nine months of 1998. The $73 million decrease was primarily due to an
$80 million after-tax gain on the sale of an Argentine electric distribution
company in 1998 and lower earnings in 1999 from the Wholesale Energy, Electric
Operations and Interstate Pipelines segments, partially offset by improved
results from the International segment.
The table below shows operating income (loss) by segment:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(IN MILLIONS)
Electric Operations .......... $ 410 $ 413 $ 837 $ 846
Natural Gas Distribution ..... (12) (17) 80 80
Interstate Pipelines ......... 29 27 84 92
Wholesale Energy ............. 44 95 53 69
International ................ 10 14 (53) 176
Corporate .................... (18) (25) (28) (20)
------- ------- ------- -------
Total Consolidated ..... $ 463 $ 507 $ 973 $ 1,243
======= ======= ======= =======
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 1.7 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
SEPTEMBER 30,
--------------------------- PERCENT
1999 1998 CHANGE
----------- ----------- ----------
(IN MILLIONS)
Operating Revenues:
Base Revenues (1) .................... $ 975 $ 986 (1%)
Reconcilable Fuel Revenues (2) ....... 521 430 21%
----------- -----------
Total Operating Revenues ....... 1,496 1,416 6%
----------- -----------
Operating Expenses:
Fuel and Purchased Power ............. 536 447 20%
Operation and Maintenance ............ 214 242 (12%)
Depreciation and Amortization ........ 233 209 11%
Other Operating Expenses ............. 103 105 (2%)
----------- -----------
Total Operating Expenses ........ 1,086 1,003 8%
----------- -----------
Operating Income ....................... $ 410 $ 413 (1%)
=========== ===========
Electric Sales (MWH):
Residential .......................... 7,732,696 7,971,198 (3%)
Commercial ........................... 4,854,343 4,860,627 --
Industrial - Firm .................... 6,836,545 7,018,296 (3%)
Municipal and Public Utilities ....... 101,231 95,204 6%
----------- -----------
Total Firm Billed Sales ............ 19,524,815 19,945,325 (2%)
=========== ===========
Average Cost of Fuel (Cents/MMBtu) ..... 198.8 173.4 15%
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
1999 1998 CHANGE
----------- ----------- -------
(IN MILLIONS)
Operating Revenues:
Base Revenues (1) .................... $ 2,330 $ 2,344 (1%)
Reconcilable Fuel Revenues (2) ....... 1,183 1,100 8%
----------- -----------
Total Operating Revenues ......... 3,513 3,444 2%
----------- -----------
Operating Expenses:
Fuel and Purchased Power ............. 1,224 1,147 7%
Operation and Maintenance ............ 640 662 (3%)
Depreciation and Amortization ........ 541 524 3%
Other Operating Expenses ............. 271 265 2%
----------- -----------
Total Operating Expenses ......... 2,676 2,598 3%
----------- -----------
Operating Income ....................... $ 837 $ 846 (1%)
=========== ===========
Electric Sales (MWH):
Residential .......................... 16,285,847 16,043,238 2%
Commercial ........................... 12,507,322 12,182,317 3%
Industrial - Firm .................... 19,683,042 20,160,044 (2%)
Municipal and Public Utilities ....... 267,626 253,113 6%
=========== ===========
Total Firm Billed Sales .......... 48,743,837 48,638,712 --
=========== ===========
Average Cost of Fuel (Cents/MMBtu) .... 188.0 176.7 6%
- ----------------
(1) Includes miscellaneous revenues (including transmission revenues) and
certain purchased power-related revenues.
22
25
(2) Includes revenues collected through a fixed fuel factor and surcharge,
net of over/under recovery of fuel. Pursuant to the Legislation,
Reliant Energy HL&P can recover fuel costs during the base rate freeze
period from 1999 through 2001.
Electric Operations' operating income for the third quarter and first
nine months of 1999 decreased $3 million and $9 million, respectively, compared
to the corresponding 1998 periods. For both periods, the decrease is primarily
attributable to milder weather, additional base rate reductions and higher
depreciation and amortization expenses, which were partially offset by strong
customer growth and reduced operation and maintenance expenses.
Fuel and purchased power expenses for the third quarter of 1999
increased by $89 million compared to the 1998 period as a result of higher cost
per unit for purchased power ($0.0373 per KWH in the 1999 period compared to
$0.0270 per KWH in the 1998 period) and higher reconcilable cost of natural gas
($2.65 per MMBtu in the 1999 period compared to $2.08 per MMBtu in the 1998
period).
Fuel and purchased power expenses for the first nine months of 1999
increased by $77 million compared to the 1998 period as a result of higher
reconcilable cost of natural gas ($2.41 per MMBtu for 1999 compared to $2.21 for
1998), lignite ($1.48 per MMBtu for 1999 compared to $1.24 for 1998) and
purchased power ($0.0271 per KWH for 1999 compared to $0.0249 for 1998).
Operations and maintenance expense for the third quarter of 1999
decreased $28 million compared to the same period in 1998, primarily due to
lower insurance, advertising and nuclear operation and maintenance expenses.
Operations and maintenance expense decreased $22 million for the first nine
months of 1999 compared to the same period in 1998. This decrease is
attributable to lower costs mentioned above partially offset by higher materials
and supplies expense.
Depreciation and amortization expense increased $24 million and $17
million for the third quarter and first nine months of 1999, respectively,
compared to the same periods in 1998 due to the net increase in amortization
pursuant to the Legislation.
Other operating expenses increased for the first nine months of 1999
compared to 1998 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
SEPTEMBER 30,
--------------------- PERCENT
1999 1998 CHANGE
-------- -------- -------
(IN MILLIONS)
Operating Revenues:
Base Revenues ................... $ 156 $ 136 15%
Recovered Gas Revenues .......... 146 130 12%
-------- --------
Total Operating Revenues ...... 302 266 14%
-------- --------
23
26
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------- PERCENT
1999 1998 CHANGE
-------- -------- -------
(IN MILLIONS)
Operating Expenses:
Natural Gas .......................... 156 126 24%
Operation and Maintenance ............ 108 105 3%
Depreciation and Amortization ........ 33 33 --
Other Operating Expenses ............. 17 19 (11%)
-------- --------
Total Operating Expenses ........... 314 283 11%
-------- --------
Operating Loss ......................... $ (12) $ (17) 29%
======== ========
Throughput Data (in Bcf):
Residential and Commercial Sales ..... 33 31 6%
Industrial Sales ..................... 13 14 (7%)
Transportation ....................... 11 9 22%
-------- --------
Total Throughput ................... 57 54 6%
======== ========
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------- PERCENT
1999 1998 CHANGE
-------- -------- ----------
(IN MILLIONS)
Operating Revenues:
Base Revenues ........................ $ 578 $ 565 2%
Recovered Gas Cost Revenues .......... 732 762 (4%)
-------- --------
Total Operating Revenues ........... 1,310 1,327 (1%)
-------- --------
Operating Expenses:
Natural Gas .......................... 742 758 (2%)
Operation and Maintenance ............ 326 322 1%
Depreciation and Amortization ........ 98 97 1%
Other Operating Expenses ............. 64 70 (9%)
-------- --------
Total Operating Expenses ........... 1,230 1,247 (1%)
-------- --------
Operating Income ....................... $ 80 $ 80 --
======== ========
Throughput Data (in Bcf):
Residential and Commercial Sales ..... 199 200 (1%)
Industrial Sales ..................... 39 42 (7%)
Transportation ....................... 34 32 6%
-------- --------
Total Throughput ................... 272 274 (1%)
======== ========
Natural Gas Distribution operating loss for the third quarter of 1999
decreased $5 million compared to the 1998 period, primarily due to increased
revenue from customer growth, weather related usage and increased appliance
services and sales. Operating expenses, other than natural gas expense, were
consistent between the two periods.
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.
24
27
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------- PERCENT
1999 1998 CHANGE
-------- -------- -------
(IN MILLIONS)
Operating Revenues ..................... $ 70 $ 70 --
Operating Expenses:
Natural Gas .......................... 10 6 67%
Operation and Maintenance ............ 15 20 (25%)
Depreciation and Amortization ........ 12 13 (8%)
Other Operating Expenses ............. 4 4 --
-------- --------
Total Operating Expenses ........... 41 43 (5%)
-------- --------
Operating Income ....................... $ 29 $ 27 7%
======== ========
Throughput Data (in MMBtu):
Natural Gas Sales .................... 3 4 (25%)
Transportation ....................... 202 186 9%
Elimination (1) .................... (3) (4) 25%
-------- --------
Total Throughput ....................... 202 186 9%
======== ========
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------- PERCENT
1999 1998 CHANGE
------- ------- --------
(IN MILLIONS)
Operating Revenues .................... $ 202 $ 218 (7%)
Operating Expenses:
Natural Gas ......................... 18 22 (18%)
Operation and Maintenance ........... 51 60 (15%)
Depreciation and Amortization ....... 37 32 16%
Other Operating Expenses ............ 12 12 --
------- -------
Total Operating Expenses .......... 118 126 (6%)
------- -------
Operating Income ...................... $ 84 $ 92 (9%)
======= =======
Throughput Data (in MMBtu):
Natural Gas Sales ................... 11 12 (8%)
Transportation ...................... 637 610 4%
Elimination (1) ................... (11) (11) --
------- -------
Total Throughput ...................... 637 611 4%
======= =======
- ------------------
(1) Elimination of volumes both transported and sold.
Interstate Pipelines operating income increased by $2 million and
decreased by $8 million in the third quarter and first nine months of 1999,
respectively, compared to the same periods in 1998. The increase for the
three-month period was primarily due to the reduction of operation and
maintenance expenses related to continued cost control initiatives. The decrease
for the nine-month period is 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. This decrease was partially offset by lower operation
and maintenance expenses related to continued cost control initiatives.
25
28
WHOLESALE ENERGY
Wholesale Energy includes the acquisition, development and operation
of, and 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.
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------- PERCENT
1999 1998 CHANGE
---------- ---------- ---------
(IN MILLIONS)
Operating Revenues ..................... $ 2,908 $ 1,611 81%
Operating Expenses:
Natural Gas ......................... 945 566 67%
Purchased Power ...................... 1,861 907 105%
Operation and Maintenance ............ 51 35 (46%)
Depreciation and Amortization ........ 6 6 --
Other Operating Expenses ............. 1 2 (50%)
---------- ----------
Total Operating Expenses ........... 2,864 1,516 89%
---------- ----------
Operating Income ....................... $ 44 $ 95 (54%)
========== ==========
Operations Data:
Natural Gas (in Bcf):
Sales ................................ 432 294 47%
Gathering ............................ 70 60 17%
---------- ----------
Total .............................. 502 354 42%
========== ==========
Electricity (in thousand MWH):
Wholesale Power Sales ................ 43,856 22,353 96%
========== ==========
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------- PERCENT
1999 1998 CHANGE
--------- --------- ---------
(IN MILLIONS)
Operating Revenues ..................... $ 5,854 $ 3,416 71%
Operating Expenses:
Natural Gas .......................... 2,703 1,647 64%
Purchased Power ...................... 2,936 1,604 83%
Operation and Maintenance ............ 139 80 74%
Depreciation and Amortization ........ 18 12 50%
Other Operating Expenses ............. 5 4 25%
--------- ---------
Total Operating Expenses ........... 5,801 3,347 73%
--------- ---------
Operating Income ....................... $ 53 $ 69 (23%)
========= =========
Operations Data:
Natural Gas (in Bcf):
Sales ................................ 1,317 800 65%
Gathering ............................ 198 175 13%
--------- ---------
Total .............................. 1,515 975 55%
========= =========
Electricity (in thousand MWH):
Wholesale Power Sales ................ 77,624 52,471 48%
========= =========
26
29
Wholesale Energy operating income for the third quarter and first nine
months of 1999 decreased by $51 million and $16 million, respectively, over the
1998 periods. The decreases are primarily due to milder weather, competition
from higher levels of hydro-electric generation imports in the California market
and higher operating expense due to staffing increases for trading and marketing
activities. The decreases were partially offset by improved margins and volumes
from the trading and marketing activities largely due to higher power marketing
and petroleum margins offset by lower natural gas margins.
Wholesale Energy operating revenues increased $1.3 billion and $2.4
billion in the third quarter and first nine months 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 natural gas costs increased $379 million and $1.1
billion in the third quarter and first nine months of 1999, respectively, due to
an increase in gas sales volume, partially offset by a decrease in the average
price of gas. Wholesale Energy purchased power expense increased $954 million
and $1.3 billion in the third quarter and first nine months of 1999,
respectively, primarily due to increased power sales volume.
Wholesale Energy operating and maintenance expense increased $16
million in the third quarter of 1999 compared to the same period of 1998
primarily due to staffing increases for trading and marketing activities.
Operation and maintenance expense for Wholesale Energy increased $59 million
in the first nine months of 1999 primarily due to operating expenses of the
California plants for the full nine months and staffing increases.
Depreciation and amortization expense for Wholesale Energy remained
steady in the third quarter and increased $6 million in the first nine months of
1999 largely due to the depreciation of the California plants for the full
period.
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 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
SEPTEMBER 30,
------------------- PERCENT
1999 1998 CHANGE
------- ------- ---------
(IN MILLIONS)
Operating Revenues ..................... $ 34 $ 32 6%
Operating Expenses:
Fuel ................................. 11 5 120%
Operation and Maintenance ............ 12 12 --
Depreciation and Amortization ........ 1 1 --
------- -------
Total Operating Expenses ........... 24 18 33%
------- -------
Operating Income ....................... $ 10 $ 14 (29%)
======= =======
27
30
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------- PERCENT
1999 1998 CHANGE
-------- -------- -------
(IN MILLIONS)
Operating Revenues ..................... $ 26 $ 228 (89%)
Operating Expenses:
Fuel ................................. 36 15 140%
Operation and Maintenance ............ 40 34 18%
Depreciation and Amortization ........ 3 3 --
-------- ---------
Total Operating Expenses ........... 79 52 52%
-------- ---------
Operating Income (Loss) ................ $ (53) $ 176 --
======== =========
International had operating income of $10 million in the third quarter
of 1999 and operating loss of $53 million in the first nine months of 1999
compared to operating income of $14 and $176 million in the same periods of
1998, respectively.
The third quarter of 1999 operating income includes a $19 million after
tax loss resulting from the devaluation of the Brazilian real on Light and
Metropolitana's non-local currency denominated debt. 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 loss
from the currency devaluation, operating income for the third quarter of 1999
was $29 million. The increase from the prior year, after consideration of the
currency devaluation, is primarily attributed to increases in equity earnings.
For more information regarding risks of the Company's international operations,
see "Certain Factors Affecting Future Earnings - Risks of International
Operations" below.
The operating loss for the nine-month period of 1999 includes a $114
million after tax loss resulting from the devaluation of the Brazilian real as
discussed above. Excluding the loss from the currency devaluation, operating
income for the first nine months of 1999 was $61 million. The decrease from the
prior year is primarily attributed to a $138 million pre-tax gain on the sale of
International's 63% interest in an Argentine electric distribution company in
1998. This was partially offset by increased equity earnings and earnings from a
cogeneration facility that became operational in November 1998.
Fuel expenses increased in the third quarter and first nine months of
1999 compared to the same periods in 1998 primarily due to the cogeneration
facility that became operational in November 1998.
CORPORATE
In the third quarter of 1999, Corporate had an operating loss of $18
million compared to an operating loss of $25 million in 1998. The operating loss
for the first nine months of 1999 was $28 million compared to an operating loss
of $20 million for the 1998 period. The improved results in the third quarter of
1999 compared to 1998 were due to reduced benefit liabilities. The increased
operating loss in the nine month period compared to the 1998 period is due to
increased information system, general insurance liability and business
development expenses.
28
31
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 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 AND ZENS
For information on the accounting treatment of the ACES, the Company's
investment in Time Warner common stock (TW Common) and the ZENS issued in
September 1999, see Note 7 to the Company's Interim Financial Statements.
TEXAS ELECTRIC CHOICE PLAN
In June 1999, the State of Texas adopted 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. For additional information
regarding the Legislation, see Note 2 to the Company's Interim Financial
Statements. The Legislation is further described in Note 2 to the Company Second
Quarter 10-Q, which description is incorporated herein by reference.
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.
Remediation and testing of substantially all systems and equipment that impact
financial operation processes such as billing, repairs and payroll (Priority 2
items) were completed during the third quarter of 1999. It is anticipated that
work will be completed by December 31, 1999 with respect to Priority 3 items
(activities that would cause inconvenience or productivity loss, such as air
conditioning systems and elevators). The following table illustrates the
Company's completion percentages for the Year 2000 activities as of October 31,
1999:
PRIORITY 1 PRIORITY 2 PRIORITY 3
-------------- -------------- ---------------
Assessment ......... 100% 100% 100%
Conversion ......... 100% 100% 99%
Testing ............ 100% 100% 98%
Implementation ..... 100% 100% 96%
29
32
Total direct costs of resolving the Year 2000 issue with respect to the
Company and its subsidiaries are expected to be between $30 and $35 million and
include approximately $26.3 million spent through September 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, March 1999 and September 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 September 30,
1999, $173 million has been spent on the implementation.
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.
To offset 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 during June
and July 1999. Light also received its annual rate adjustment in November 1999
resulting in a tariff rate increase of 11%. 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 the 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 nine months ended September 30, 1999, the Company's net cash
provided by operating activities decreased $48 million compared to 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 investing activities increased $505 million for the
nine months ended September 30, 1999 compared to the 1998 period primarily due
to the purchase of additional TW Common.
Cash flows from financing activities for the nine months ended
September 30, 1999 reflected a cash inflow of $641 million as compared to a cash
outflow of $367 million for the same period in 1998. The funds in 1999 included
proceeds from the issuance of indexed debt securities, trust preferred
securities, commercial paper, pollution control revenue bonds and borrowings
under a Euro revolving credit facility, partially offset by the extinguishment
of long-term debt, the payment of common stock dividends and the payment of
notes payable.
30
33
On October 7, 1999, a subsidiary of the Company purchased the
619-megawatt Indian River Steam Generation Plant in Florida for $205 million.
External funding for the acquisition was obtained through the issuance of
commercial paper at a financing subsidiary of the Company.
On October 7, 1999, a subsidiary of the Company purchased 40% of the
capital stock of UNA for $780 million, which included $354 million in cash and a
$426 million five-year promissory note. The promissory note must be prepaid
under certain circumstances. In accordance with the stock purchase agreement,
the Company's subsidiary has irrevocable fixed commitments to increase its
ownership interest of UNA to 52% by December 1, 1999 and will purchase the
remaining shares of UNA on March 1, 2000. The total purchase price of the
acquisition is approximately $2.4 billion. All purchase price obligations are
denominated in NLG. The dollar amounts shown above assume an exchange rate of
2.0565 NLG per U.S. dollar (the exchange rate on October 7, 1999). The Company
is evaluating financing alternatives in connection with the funding of increases
in its UNA ownership interest and promissory note payments.
During the three months ended September 30, 1999 and the period from
October 1, 1999 through November 8, 1999, the Company purchased 1,419,200 and
90,800 shares, respectively, of its common stock for $38.8 million and $2.4
million. As of September 30, 1999, the Company was authorized to purchase an
additional $47.5 million of its common stock.
The following tables provide information about the Company's and
Resources' unused sources of capital at September 30, 1999 and financing
transactions that occurred in the third quarter of 1999.
UNUSED SOURCES OF CAPITAL AT SEPTEMBER 30, 1999
SOURCE AVAILABILITY
------ ------------
(IN MILLIONS)
COMPANY:
$200 million revolving credit facility (1)......................... $ 200
Shelf registration statements (2).................................. $ 230 preferred stock
580 debt securities
125 trust preferred securities and
related junior subordinated debt
securities
406 common stock (3)
RESOURCES:(4)
$350 million revolving credit facility (5)......................... $ 293
FINANCING SUBSIDIARIES:
$1.6 billion revolving credit facility (6)......................... $ 508
Euro 560 million revolving credit facility (7)..................... Euro 222 (approximately $236)
- ----------------
(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
September 30, 1999. The registration statement covers the sale of 15
million shares.
(4) Resources also has a $350 million receivables facility that was fully
utilized at September 30, 1999.
(5) Supports commercial paper borrowings and has a $65 million subfacility
which may be used for letters of credit. At September 30, 1999, there
were outstanding letters of credit totaling $22.8 million and
outstanding commercial paper of $34.2 million.
(6) Supports up to $1.6 billion of commercial paper borrowings.
(7) Borrowings under this facility are denominated in Euros.
31
34
On September 30, 1999, Reliant Energy Power Generation, Inc. (REPG), a
wholly owned subsidiary of the Company, had Euro 338 million (approximately $360
million) invested at an overnight rate of 2.25% in anticipation of funding the
cash portion (approximately $354 million) of the acquisition of a 40% interest
in UNA which occurred on October 7, 1999.
Reliant Energy HL&P plans to file an application with the Public
Utility Commission of Texas requesting a financing order authorizing the
issuance by a special purpose entity organized by the Company, pursuant to the
Legislation, of approximately $1 billion of transition bonds related to Reliant
Energy HL&P's generation related regulatory assets. Payments on the transition
bonds will be made from non-bypassable transition charges to Reliant Energy
HL&P's transmission and distribution customers. The offering and sale of the
transition bonds will be registered under the Securities Act of 1933 and is
expected to be consummated in the first quarter of 2000.
THIRD QUARTER 1999 REPAYMENTS AND REDEMPTIONS
TYPE OF DEBT AMOUNT
- ------------ -------------
(IN MILLIONS)
COMPANY OR ON BEHALF OF COMPANY:
Brazos River Authority (BRA) 7.625% Collateralized Revenue Refunding Bonds,
Series 1989A ................................................................... $ 100
Matagorda County Navigation District Number One (MCND) 7.125% Collateralized
Revenue Refunding Bonds, Series 1989C ....................................... 100
Reduction in outstanding commercial paper ...................................... 47
RESOURCES:
8.875% Notes due 1999 .......................................................... 200
FINANCING SUBSIDIARIES:
Reduction in outstanding commercial paper ...................................... 328
On October 1, 1999, MCND Series 1989D 7.60% Collateralized Pollution
Control Revenue Bonds aggregating $70.315 million were redeemed at 102% of their
principal amount plus accrued interest.
In October 1999, Resources called for redemption the remaining $42.76
million principal amount of its 10% Debentures due 2019. The debentures will be
redeemed on November 15, 1999 at 105% of their principal amount plus accrued
interest.
32
35
THIRD QUARTER 1999 FINANCINGS
TYPE OF DEBT AMOUNT INTEREST RATE MATURITY DATE
- ------------ ------------- ------------- --------------
(IN MILLIONS)
COMPANY:
MCND 5.95% Revenue Refunding Bonds (1) $ 70.315 5.95% 2030
ZENS (2) $ 1,000 2.0% 2029
RESOURCES:
Receivables Facility (3) $ 50 5.53% 2000
FINANCING SUBSIDIARIES:
Bank Borrowings (4) Euro 338 (approximately $360) 3.127% 2000
- ------------------
(1) On behalf of the Company. Proceeds from the sale were used October 1,
1999 to redeem $70.315 million 7.6% MCND Series 1989D collateralized
revenue refunding bonds at a price of 102%.
(2) See Notes 7 and 10(a) to the Interim Financial Statements for a
description of the ZENS.
(3) In August 1999, Resources increased the size of its receivables
facility from $300 million to $350 million and received an additional
$50 million from its sale of receivables. The receivables facility
expires in August 2000.
(4) In September 1999, a finance subsidiary of the Company established a
Euro 560 million (approximately $596 million) revolving credit facility
expiring in September 2000 and borrowed Euro 338 million under such
facility.
On April 8, 1999, in anticipation of the UNA transaction, REPG entered
into call option agreements with several banks to hedge the impact of foreign
exchange movements in NLG. These call options provided the right, but not the
obligation, to purchase 695 million NLG at strike prices ranging from 1.99 to
2.01 NLG per US dollar. The total premium paid for the options, which expired on
October 26, 1999, was $7.7 million. The premium was being amortized on a
straight line basis. On October 12, 1999, REPG sold the remaining value in the
call options for $0.6 million which will be reflected in the fourth quarter
results of operations.
Due to the worsening economic and political conditions in Colombia,
S.A., the Company expects that 1999 operating cash flow for certain of its
Colombian operations will not meet their working capital and capital expenditure
needs. Consequently, a short-term loan was entered into by the Colombian
operating companies. In September 1999, the Company made a contribution of
approximately $33 million and expects to make an additional contribution of
approximately $12 million during the fourth quarter of 1999. These funds will be
used in large part to repay the short-term loan.
In November 1999, Light issued 650 million Brazilian reais of
subordinated debentures. The proceeds of the debentures will be used to retire
approximately $325 million of non-local currency denominated borrowings. At
September 30, 1999, one U.S. dollar could be exchanged for 1.9223 Brazilian
reais.
33
36
On November 10, 1999, the BRA issued on behalf of the Company $100
million of revenue refunding bonds having an annual interest rate of 5.20% and a
maturity date of December 1, 2018. The BRA bonds will be subject to mandatory
tender or optional redemption on December 1, 2002 at a price equal to 100% of
the principal amount. The proceeds from the issuance will be used on December
13, 1999 to redeem all outstanding BRA Series 1989B collateralized revenue
refunding bonds ($100 million) at a redemption price of 102% of their aggregate
principal amount.
On November 10, 1999, the MCND issued on behalf of the Company $75
million of revenue refunding bonds having an annual interest rate of 5.20% and a
maturity date of May 1, 2029. The MCND bonds will be subject to mandatory tender
or optional redemption on November 1, 2002 at a price equal to 100% of the
principal amount. The proceeds from the issuance will be used on December 13,
1999 to redeem all outstanding MCND Series 1989E collateralized revenue
refunding bonds ($75 million) at a redemption price of 102% of their aggregate
principal amount.
On November 12, 1999, a financing subsidiary issued $300 million of
Senior Notes due 2002 having an annual interest rate of 7.4%. The proceeds from
the issuance were used by the financing subsidiary to purchase Series E
Preference stock of the Company. As a result of the transaction, the financing
subsidiary owns 3,160 shares of the Series E Preference Stock. The Company
anticipates that the proceeds from the sale of such preference stock will be
used for general corporate purposes, including the repayment of indebtedness.
The devaluation of the Brazilian real has resulted in the inability of
Light and Metropolitana to distribute adequate dividends to meet debt
requirements of a subsidiary of the Company. In July 1999, the subsidiary
executed a guarantee of up to $45 million. In November 1999, it is anticipated
that the Company will make a capital contribution of approximately $20 million
to fund a portion of this obligation. If Light and Metropolitana are not able
to distribute adequate dividends to meet debt requirements of the subsidiary,
it is anticipated that the Company will make a capital contribution in May 2000
to fund the remainder of this obligation.
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 Statement of
Financial Accounting Standards (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 the 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 Form 10-K. These risks have not materially changed from
the market risks disclosed in the Company Form 10-K, except as discussed below.
As described in "Management's Discussion and Analysis of Financial Conditions
and Results of Operations of the Company," for the nine months period ended on
September 30, 1999, the Company reported a $114 million charge to net income and
a $65 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 September 30, 1999 and a monthly
weighted average exchange rate for the nine-month period then ended. The charge
to other comprehensive income
34
37
reflects the translation effect on the local currency denominated net assets
underlying the Company's investment in Light. As of September 30, 1999, the
Brazilian real exchange rate was 1.9223 per U.S. dollar. An increase of 10% from
the September 30, 1999 exchange rate would result in the Company recording an
additional charge of $18 million and $14 million to net income and other
comprehensive income, respectively.
As discussed in Notes 7 and 10 to the Company's Interim Financial
Statements, the Company owns approximately 55 million shares of TW Common, of
which approximately 38 million and 17 million shares are expected to
economically hedge the ACES and ZENS, respectively. Unrealized gains and losses
resulting from changes in the market value of the Company's TW Common are
recorded in the Consolidated Statement of Operations. Increases in the market
value of TW Common result in an increase in the liability for the ZENS and ACES
and are recorded as a non-cash expense. Such non-cash expense will be offset by
an unrealized gain on the Company's TW Common investment. However, if the market
value of TW Common declines below $58.25, the ZENS payment obligation will not
decline below its original principal amount. Therefore, a decrease of 10% from
the September 30, 1999 market value of TW Common of $60.75 per share would
result in a $40 million after-tax unrealized loss on the TW Common investment
that would not be offset by the decrease in the liability for the ZENS.
35
38
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
REVENUES............................................. $ 3,446,925 $ 1,927,156 $7,705,879 $ 5,062,167
--------------- --------------- --------------- ---------------
EXPENSES:
Natural gas and purchased power.................... 3,171,485 1,685,067 6,793,915 4,221,741
Operation and maintenance.......................... 176,522 140,331 461,897 426,506
Depreciation and amortization...................... 50,045 53,240 148,159 144,305
Taxes other than income taxes...................... 21,145 24,865 79,054 86,734
--------------- --------------- --------------- ---------------
3,419,197 1,903,503 7,483,025 4,879,286
--------------- --------------- --------------- ---------------
OPERATING INCOME..................................... 27,728 23,653 222,854 182,881
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense................................... (30,378) (25,736) (90,231) (78,115)
Distributions on trust securities.................. (64) (106) (261) (533)
Other - net........................................ 1,846 1,049 8,604 5,585
--------------- --------------- --------------- ---------------
(28,596) (24,793) (81,888) (73,063)
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES.................... (868) (1,140) 140,966 109,818
INCOME TAX EXPENSE................................... 5,664 1,446 70,569 55,449
--------------- --------------- --------------- ---------------
NET INCOME (LOSS).................................... $ (6,532) $ (2,586) $ 70,397 $ 54,369
=============== =============== =============== ===============
See Notes to Resources' Consolidated Financial Statements.
36
39
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------- -------------------
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 69,507 $ 26,576
Accounts and notes receivable, principally customer................... 874,324 682,552
Unbilled revenue...................................................... 44,851 145,131
Accounts and notes receivable - affiliated companies, net............. 193,177
Income tax receivable................................................. 44,270
Materials and supplies................................................ 35,100 33,947
Fuel, gas and petroleum products...................................... 148,015 161,085
Price risk management assets.......................................... 481,147 265,203
Other current assets.................................................. 49,611 39,234
------------------- -------------------
Total current assets................................................ 1,746,825 1,546,905
------------------- -------------------
PROPERTY, PLANT AND EQUIPMENT:
Natural gas distribution and gathering systems........................ 1,870,869 1,686,159
Interstate pipelines.................................................. 1,316,329 1,302,829
Other................................................................. 20,870 13,976
------------------- -------------------
Total............................................................... 3,208,068 3,002,964
Less accumulated depreciation and amortization........................ 290,317 187,936
------------------- -------------------
Property, plant and equipment - net................................... 2,917,751 2,815,028
------------------- -------------------
OTHER ASSETS:
Goodwill - net........................................................ 1,994,608 2,050,386
Price risk management assets.......................................... 100,593 21,414
Deferred debits ...................................................... 259,522 221,788
------------------- -------------------
Total other assets.................................................. 2,354,723 2,293,588
------------------- -------------------
TOTAL ASSETS............................................................ $ 7,019,299 $ 6,655,521
=================== ===================
See Notes to Resources' Consolidated Financial Statements.
37
40
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
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------- -------------------
CURRENT LIABILITIES:
Current maturities of long-term debt.................................. $ 201,671 $ 203,438
Receivables facility.................................................. 350,000 300,000
Notes payable......................................................... 34,200
Accounts payable, principally trade................................... 694,467 622,262
Accounts and notes payable - affiliated companies, net................ 55,938
Interest payable...................................................... 29,030 36,197
Other taxes........................................................... 42,971 42,107
Customer deposits..................................................... 33,349 36,985
Price risk management liabilities..................................... 457,420 227,652
Other current liabilities............................................. 233,063 172,616
------------------- -------------------
Total current liabilities....................................... 2,132,109 1,641,257
------------------- -------------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes..................................... 548,334 511,070
Price risk management liabilities..................................... 95,494 29,108
Other................................................................. 318,178 397,141
------------------- -------------------
Total deferred credits and other liabilities...................... 962,006 937,319
------------------- -------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES................................. 1,292,479 1,513,289
------------------- -------------------
Total Liabilities................................................ 4,386,594 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........................................ 1,066 1,157
------------------- -------------------
STOCKHOLDER'S EQUITY:
Common stock.......................................................... 1 1
Paid-in capital....................................................... 2,463,831 2,463,831
Retained earnings..................................................... 185,068 114,671
Accumulated other comprehensive income................................ (17,261) (16,004)
------------------- -------------------
Total stockholder's equity...................................... 2,631,639 2,562,499
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........................... $ 7,019,299 $ 6,655,521
=================== ===================
See Notes to Resources' Consolidated Financial Statements.
38
41
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 70,397 $ 54,369
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 148,159 144,305
Deferred income taxes............................................... 46,356 21,029
Changes in other assets and liabilities:
Accounts and notes receivable - net................................. (91,492) (473,373)
Inventories......................................................... 11,917 (116,942)
Other current assets................................................ (10,377) (18,056)
Accounts payable.................................................... 86,240 511,261
Accounts and notes receivable/payable - affiliated companies........ 249,115 92,959
Interest and taxes accrued.......................................... (59,665) (55,780)
Other current liabilities........................................... 56,811 (34,844)
Net price risk management activities................................ 1,031 (20,974)
Other - net......................................................... (118,286) 88,364
------------------- -------------------
Net cash provided by operating activities....................... 390,206 192,318
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................. (200,858) (184,301)
Other - net.......................................................... (7,950) 4,032
------------------- -------------------
Net cash used in investing activities........................... (208,808) (180,269)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements and reacquisitions of long-term debt...................... (212,042) (76,000)
Proceeds from receivables facility.................................... 50,000
Increase (decrease) in notes payable.................................. 34,200 (216,931)
Proceeds from issuance of debentures.................................. 298,514
Redemption of convertible securities.................................. (57) (10,399)
Other - net........................................................... (10,568) (20,504)
------------------- -------------------
Net cash used in financing activities............................. (138,467) (25,320)
------------------- -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 42,931 (13,271)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD.................... 26,576 35,682
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.......................... $ 69,507 $ 22,411
=================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments:
Interest (net of amounts capitalized)................................. $ 93,493 $ 97,822
Income taxes - net.................................................... 66,095 (57,863)
See Notes to Resources' Consolidated Financial Statements.
39
42
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 SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
RETAINED EARNINGS:
Balance at beginning of period............. $ 191,600 $ 77,802
Net loss................................... (6,532) $ (6,532) (2,586) $ (2,586)
---------------- ----------------
Balance at end of period................... $ 185,068 $ 75,216
================ ================
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX:
Balance at beginning of period............. $ (14,685) $ (10,669)
Unrealized loss on available for sale
securities, net of tax of $1,449 and
$3,304 (2,576) (2,576) (5,874) (5,874)
---------------- ----------------
Balance at end of period................... $ (17,261) $ (16,543)
================ ================
---------------- ----------------
COMPREHENSIVE LOSS........................... $ (9,108) $ (8,460)
================ ================
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
RETAINED EARNINGS:
Balance at beginning of period............. $ 114,671 $ 20,847
Net income................................. 70,397 $ 70,397 54,369 $ 54,369
---------------- ----------------
Balance at end of period................... $ 185,068 $ 75,216
================ ================
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX:
Balance at beginning of period............. $ (16,004) $ (5,634)
Unrealized loss on available for sale
securities, net of tax of $707 and $6,136 (1,257) (1,257) (10,909) (10,909)
---------------- ----------------
Balance at end of period................... $ (17,261) $ (16,543)
================ ================
---------------- ---------------
COMPREHENSIVE INCOME......................... $ 69,140 $ 43,460
================ ===============
See Notes to the Resources' Consolidated Financial Statements.
40
43
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 11 to the
Company's Interim Financial Statements for a description of these segments.
41
44
Financial data for business segments are as follows (in thousands):
ELIMINATION
OF NON-
NATURAL GAS INTERSTATE WHOLESALE CORPORATE RECONCILING RESOURCE
DISTRIBUTION PIPELINES ENERGY AND OTHER ELIMINATIONS(1) OPERATIONS CONSOLIDATED
------------ ----------- ----------- ----------- --------------- ----------- ------------
For the Three Months Ended
September 30, 1999:
Revenues .................... $ 302,387 $ 37,303 $ 2,847,388 $ 229,392 $ 30,455 $ 3,446,925
Intersegment revenues ....... 311 32,721 60,731 20,644 $ (114,407)
Operating income (loss) ..... (12,349) 28,767 43,584 (17,247) (15,027) 27,728
For the Three Months Ended
September 30, 1998:
Revenues .................... 265,911 34,110 1,584,472 133,349 (90,686) 1,927,156
Intersegment revenues ....... 266 36,284 26,181 24,002 (86,733)
Operating income (loss) ..... (17,212) 27,421 94,511 (24,814) (56,253) 23,653
As of and for the Nine Months
Ended September 30, 1999:
Revenues .................... $ 1,309,241 $ 90,608 $ 5,692,028 $ 616,630 $ (2,628) $ 7,705,879
Intersegment revenues ....... 912 111,638 162,024 56,579 $ (331,153)
Operating income (loss) ..... 80,141 83,866 53,378 (27,829) 33,298 222,854
Total assets ................ 2,960,971 2,025,244 2,725,752 4,010,246 (645,877) (4,057,037) 7,019,299
As of and for the Nine Months
Ended September 30, 1998:
Revenues .................... 1,326,672 103,919 3,298,008 432,648 (99,080) 5,062,167
Intersegment revenues ....... 890 113,972 118,040 69,945 (302,847)
Operating income (loss) ..... 80,403 92,343 68,551 (21,065) (37,351) 182,881
Total assets ................ 2,830,260 2,116,927 2,108,629 1,762,848 (851,829) (1,019,779) 6,947,056
- ----------
(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 Company
level.
Reconciliation of operating income to net income (loss) (in thousands) is
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ---------------
Operating income.............................. $ 27,728 $ 23,653 $ 222,854 $ 182,881
Interest expense.............................. 30,378 25,736 90,231 78,115
Distribution on trust securities.............. 64 106 261 533
Income tax expense............................ 5,664 1,446 70,569 55,449
Other income - net............................ 1,846 1,049 8,604 5,585
---------------- ---------------- ---------------- ---------------
Net income (loss)............................. $ (6,532) $ (2,586) $ 70,397 $ 54,369
================ ================ ================ ===============
(7) COMPANY/RESOURCES INTERIM PERIOD RESULTS; RECLASSIFICATIONS -- see Note 13
to the Company's Interim Financial Statements.
42
45
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 nine month periods
ended September 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
SEPTEMBER 30,
------------------------------------- PERCENT
1999 1998 CHANGE
----------------- ------------------ ------------------
(IN THOUSANDS)
Operating Revenues................................... $ 3,446,925 $ 1,927,156 79%
Operating Expenses................................... 3,419,197 1,903,503 80%
Operating Income - Net............................... 27,728 23,653 17%
Interest Expense .................................... 30,378 25,736 18%
Distributions on Trust Securities.................... 64 106 (40%)
Other Income - Net................................... 1,846 1,049 76%
Income Tax Expense................................... 5,664 1,446 --
----------------- ------------------
Net Income (Loss).................................. $ (6,532) $ (2,586) --
================= ==================
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------- PERCENT
1999 1998 CHANGE
----------------- ------------------ ------------------
(IN THOUSANDS)
Operating Revenues................................... $ 7,705,879 $ 5,062,167 52%
Operating Expenses................................... 7,483,025 4,879,286 53%
Operating Income - Net............................... 222,854 182,881 22%
Interest Expense..................................... 90,231 78,115 16%
Distributions on Trust Securities.................... 261 533 (51%)
Other Income - Net................................... 8,604 5,585 54%
Income Tax Expense................................... 70,569 55,449 27%
----------------- ------------------
Net Income......................................... $ 70,397 $ 54,369 29%
================= ==================
Resources' net loss increased $3.9 million in the third quarter of 1999
compared to the 1998 period, primarily due to an increase in the quarterly
effective tax rate, interest expense and general insurance liability expense,
partially offset by an increase in operating income from Wholesale Energy
trading and marketing activities and a decrease in operating loss from the
Natural Gas Distribution segment. Wholesale Energy trading and marketing
activities increased due to improved margins and volumes partially offset by
higher operating expenses due to staffing increases. Improved margins from
43
46
trading and marketing activities were largely due to higher power marketing and
petroleum margins offset by lower natural gas margins. Natural Gas
Distribution's operating loss for the third quarter of 1999 compared to the same
period in 1998 decreased primarily due to increased revenue from customer
growth, weather related usage and increased appliance services and sales.
Resources' net income increased $16 million in the nine months of 1999
compared to the 1998 period primarily due to increased operating income related
to improved trading and marketing results at Wholesale Energy, as discussed
above. This increase was partially offset by lower operating income at
Interstate Pipelines for the nine-month period and increased interest and
general insurance liability expenses. Interstate Pipelines' operating income
decreased 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. This decrease
from Interstate Pipelines was partially offset by lower operation and
maintenance expenses related to continued cost control initiatives in this
segment.
Resources' revenues increased $1.5 billion and $2.6 billion in the third
quarter and first nine months of 1999, respectively, compared to the same
periods of 1998. Resources' operating expenses increased $1.5 billion and $2.6
billion in the third quarter and first nine months of 1999, respectively,
compared to the corresponding periods in 1998. The increases in revenues and
expenses in both periods primarily resulted from an increase in gas and power
marketing sales volumes, partially offset by a decrease in the average price of
gas.
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
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 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 Form 10-Q for a discussion of certain new accounting issues
affecting Resources.
44
47
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 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 reflect 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; (xi) the success of
integrating acquired operations; and (xii) 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" and similar words are
intended to identify forward-looking statements.
45
48
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 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).
Items incorporated by reference from the Company
Second Quarter 10-Q: Note 2 (Texas Electric Choice
Plan and Discontinuance of SFAS No. 71 for Electric
Generation Operations) and Note 7 (Time Warner
Securities Investment).
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).
46
49
(b) Reports on Form 8-K.
Company:
--------
Form 8-K filed with the SEC on July 7, 1999 regarding the passage of
Texas Electric Choice Plan.
Form 8-K filed with the SEC on September 21, 1999 regarding the
execution of an Underwriting Agreement relating to the issuance and
sale of the ZENS.
Form 8-K filed with the SEC on October 18, 1999 regarding (i) the
closing of the first phase of the UNA acquisition, (ii) the closing of
the ZENS offering, (iii) the conversion of the TW Preferred into TW
Common and (iv) the filing of an application with the Texas PUC
requesting a financing order authorizing the issuance of transition
bonds.
Resources:
----------
None.
47
50
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: November 12, 1999
48
51
EXHIBIT INDEX
Exhibits. Description
Company:
--------
Exhibit 12.A Ratio of Earnings to Fixed Charges and Preferred
Dividends.
Exhibit 27.A Financial Data Schedule.
Exhibit 99.A 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).
Items incorporated by reference from the Company
Second Quarter 10-Q: Note 2 (Texas Electric Choice
Plan and Discontinuance of SFAS No. 71 for Electric
Generation Operations) and Note 7 (Time Warner
Securities Investment).
Resources:
----------
Exhibit 12.B Ratio of Earnings to Fixed Charges.
Exhibit 27.B Financial Data Schedule.
Exhibit 99.B 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).