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
- ----- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarter Ended SEPTEMBER 30, 2001 Commission File Number 333-42638
---------
NRG NORTHEAST GENERATING LLC
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(Exact name of registrant as specified in its charter)
Delaware 41-1937472
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
901 Marquette Avenue, Suite 2300 Minneapolis, MN 55402
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 373-5300
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The Registrant meets the conditions set forth in general instruction
H(1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
INDEX
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PAGE NO.
PART I
Item 1 Consolidated Financial Statements and Notes
Consolidated Statements of Income 1
Consolidated Balance Sheets 2
Consolidated Statements of Members' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk
(Omitted per general instruction H 1 (a) and (b) of
form 10-Q) --
PART II
Item 1 Legal Proceedings 14
Item 6 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 16
Cautionary Statement Regarding Forward Looking Information 17
SIGNATURES 18
CONSOLIDATED STATEMENTS OF INCOME
NRG NORTHEAST GENERATING LLC
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Revenues from wholly-owned operations $ 352,158 $ 265,687 $ 898,709 $ 793,241
OPERATING COSTS AND EXPENSES
Operating costs 204,908 141,373 621,828 492,087
Depreciation and amortization 12,238 12,299 36,553 36,345
General and administrative expenses 5,545 4,509 14,653 13,212
-------------------------------------------------------
OPERATING INCOME 129,467 107,506 225,675 251,597
-------------------------------------------------------
OTHER INCOME (EXPENSE)
Other income, net 563 897 1,854 2,063
Interest expense (15,226) (16,530) (45,562) (50,510)
-------------------------------------------------------
NET INCOME $ 114,804 $ 91,873 $ 181,967 $ 203,150
=======================================================
See accompanying notes to consolidated financial statements.
1
CONSOLIDATED BALANCE SHEETS
NRG NORTHEAST GENERATING LLC
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2001 2000
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(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 20,036 $ 2,444
Accounts receivable, net of allowance for doubtful
accounts of $8,165 and $8,165 84,401 157,660
Inventory 147,160 107,859
Prepaid expenses and other current assets 40,256 20,697
-----------------------------------
Total current assets 291,853 288,660
-----------------------------------
Property, plant and equipment, net 1,406,021 1,427,078
Deferred finance costs, net of accumulated amortization of $650 and $341 9,506 9,616
Other Assets, net of accumulated amortization of $1,520 and $870 93,773 25,130
-----------------------------------
TOTAL ASSETS $ 1,801,153 $ 1,750,484
===================================
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
NRG NORTHEAST GENERATING LLC
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Current portion of long-term debt $ 98,500 $ 90,000
Accounts payable - trade 2,329 3,914
Accounts payable - affiliates 348,200 146,894
Accrued interest 30,895 2,551
Accrued fuel and purchased power expenses 23,382 38,386
Other current accrued liabilities 5,260 49,607
----------------------------------
Total current liabilities 508,566 331,352
Long-term debt 556,500 610,000
Other long-term liabilities 20,324 20,817
----------------------------------
Total liabilities 1,085,390 962,169
Commitments and contingencies
Member's equity 715,763 788,315
----------------------------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 1,801,153 $ 1,750,484
==================================
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
NRG NORTHEAST GENERATING LLC
(UNAUDITED)
ACCUMULATED
MEMBER OTHER TOTAL
CONTRIBUTIONS/ ACCUMULATED COMPREHENSIVE MEMBER'S
(In thousands) DISTRIBUTIONS NET INCOME INCOME EQUITY
- ------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 $ 872,801 $ 54,347 -- $ 927,148
------------------------------------------------------------------
Net income -- 203,150 -- 203,150
Distributions to member, net (352,142) -- -- (352,142)
------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 2000 520,659 257,497 -- 778,156
------------------------------------------------------------------
------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2000 $ 450,659 $ 337,656 -- $ 788,315
==================================================================
Cumulative effect upon adoption of SFAS No. 133 -- -- 14,100 14,100
Impact of SFAS No. 133 for the period ending
September 30, 2001 -- -- 76,328 76,328
Net income -- $ 181,967 -- $ 181,967
==================================================================
Comprehensive income * -- 181,967 90,428 272,395
Distributions to member, net $ (344,947) -- -- (344,947)
==================================================================
BALANCES AT SEPTEMBER 30, 2001 $ 105,712 $ 519,623 90,428 $ 715,763
==================================================================
(*) Comprehensive income for the respective quarters of fiscal 2001 were as
follows:
March 31, 2001 $141,864
June 30, 2001 $ 47,036
September 30, 2001 $ 83,495
--------
Total $272,395
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
NRG NORTHEAST GENERATING LLC AND SUBSIDIARIES
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands) 2001 2000
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 181,967 $ 203,150
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 36,553 36,345
Amortization of deferred financing costs 309 3,409
Unrealized gains on energy contracts (12,891) --
Changes in assets and liabilities:
Accounts receivable, net 73,259 (1,235)
Inventory (39,301) (29,746)
Prepayments and other current assets (19,559) (1,095)
Accounts payable - trade (1,585) 4,781
Accounts payable - affiliates 201,306 75,273
Accrued interest 28,344 18,151
Accrued fuel and purchased power expense (15,004) 6,064
Other current liabilities (10,321) 19,391
Other assets and liabilities 157 20,836
------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 423,234 355,324
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant, property and equipment (15,496) (19,041)
Proceeds from disposition of property and equipment -- 768
------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (15,496) (18,273)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings -- 750,000
Distributions to members (344,947) (352,142)
Deferred financing costs (199) (9,897)
Principal payments on debt (45,000) (682,330)
------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (390,146) (294,369)
------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,592 42,682
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,444 10,551
------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,036 $ 52,233
==========================================
See accompanying notes to consolidated financial statements.
5
NRG NORTHEAST GENERATING LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NRG Northeast Generating LLC (the Company) owns electric power
generating plants in the northeastern region of the United States. The
Company was formed for the purpose of financing the facilities owned by its
subsidiaries: Arthur Kill Power LLC, Astoria Gas Turbine Power LLC,
Connecticut Jet Power LLC, Devon Power LLC, Dunkirk Power LLC, Huntley
Power LLC, Middletown Power LLC, Montville Power LLC, Norwalk Harbor Power
LLC, Oswego Harbor Power LLC and Somerset Power LLC. The Company is an
indirect wholly owned subsidiary of NRG Energy, Inc. (NRG Energy), a
Delaware corporation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with SEC regulations for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements in its annual report on Form 10-K for the
year ended December 31, 2000 (Form 10-K). The following notes should be
read in conjunction with such policies and other disclosures in the Form
10-K. Interim results are not necessarily indicative of results for a full
year.
In the opinion of management, the accompanying unaudited interim
financial statements contain all material adjustments necessary to present
fairly the consolidated financial position of the Company as of September
30, 2001 and December 31, 2000, the results of its operations for the three
and nine months ended September 30, 2001 and September 30, 2000, and its
cash flows and members' equity for the nine months ended September 30, 2001
and September 30, 2000.
1 - COMMITMENTS AND CONTINGENCIES
As of September 30, 2001, the Company had approximately $26 million of
disputed revenues. The Company is actively pursuing resolution and/or
collection of these amounts. The contingent revenues relate to the
interpretation of certain transition power sales agreements and certain
sales to the New York Power Pool and New England Power Pool, conflicting
meter readings, pricing of firm sales and other power pool reporting
issues. These amounts have not been recorded in the financial statements
and will not be recognized as income until disputes are resolved and
collection is assured. At December 31, 2000, $13.1 million of disputed
revenues were recorded. During the nine months ended September 30, 2001,
$3.1 million of disputed revenues were collected and recognized, and $16
million of new disputed revenues were added.
6
2 - INVENTORY
Inventory, which is stated at the lower of weighted average cost or
market, consisted of:
(IN THOUSANDS) SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------------------------------
Fuel oil $ 73,414 $ 47,616
Spare parts 57,472 55,277
Coal 15,091 3,435
Kerosene 594 1,523
Natural Gas 495 --
Other 94 8
--------------------------------------
TOTAL $ 147,160 $ 107,859
======================================
3 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, Plant and Equipment consisted of:
(IN THOUSANDS) SEPTEMBER 30, 2001 DECEMBER 31, 2000
----------------------------------------
Facilities, machinery and equipment $ 1,439,210 $ 1,425,274
Land 51,920 51,917
Construction in progress 15,590 13,234
Office furnishings and equipment 630 1,441
Accumulated depreciation (101,329) (64,788)
--------------------------------------
Property, Plant and Equipment, net $ 1,406,021 $ 1,427,078
======================================
4 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
The adoption of SFAS No. 133 on January 1, 2001 resulted in an
unrealized gain of $14.1 million recorded to other accumulated
comprehensive income (OCI). During the three and nine month periods ended
September 30, 2001, the Company recorded a loss and a gain in OCI of
approximately $47.2 million and $54.4 million, respectively. These
losses/gains related to changes in fair values of the derivatives accounted
for as hedges recorded on January 1, 2001. Also during the three and nine
month periods ended September 30, 2001, the Company reclassified from OCI
into earnings $15.8 million and $21.9 million, respectively, of accumulated
net derivative losses. As of September 30, 2001, the accumulated OCI
related to SFAS No. 133 was a net gain of approximately $90.4 million.
Unrealized gains and losses on derivatives are recorded in other current
and long-term assets and liabilities.
The Company's net income for the three and nine month periods ended
September 30, 2001 included unrealized losses of $17.4 million and $55.2
million, respectively, relating to derivative instruments not accounted for
as hedges in accordance with SFAS No. 133.
SFAS No. 133 applies to the Company's energy related commodities
financial instruments and one long-term power sales contract used to
mitigate variability in earnings due to fluctuations in spot market prices,
hedge fuel requirements at generation facilities and protect the Company's
investment in fuel inventories.
Energy related commodities
The Company is exposed to commodity price variability in electricity,
emission allowances and natural gas, oil and coal used to meet fuel
requirements. In order to manage these commodity price risks, the Company
enters into financial instruments, which may take the form of fixed price,
floating price or indexed sales or purchases, and options, such as puts,
calls, basis transactions and swaps. Derivatives designated to be hedges by
the Company are accounted for as cash flow hedges. The effective portion of
the cumulative gain or loss on the derivative instrument is reported as a
7
component of OCI in shareholder's equity and recognized into earnings in
the same period or periods during which the hedged transaction affects
earnings, (i.e., when electricity is generated, fuel is consumed etc). No
ineffectiveness was recognized on commodity cash flow hedges during the
three and nine-month periods ended September 30, 2001. No gains or losses
were recognized related to derivative instruments excluded from the
assessment of effectiveness. At September 30, 2001, the Company had various
commodity related contracts extending through December 2003 and one
long-term fixed-price electricity sales contract extending through 2003.
The Company expects to reclassify approximately $21.3 million of net gains
from OCI to earnings during the next twelve months.
The Company generally attempts to balance its fixed-price physical and
financial purchase and sales commitments in terms of contract volumes, and
the timing of performance and delivery obligations. However, within
guidelines established by the Board of Directors of NRG Power Marketing, an
affiliate, the Company does take certain market positions. These
derivatives do not qualify for hedge accounting and, accordingly, changes
in the fair value are reported as cost of operations. Furthermore, for
various commodity derivatives considered to be economic hedges, the Company
has elected not to designate them as accounting hedges due to the
burdensome documentation requirements under SFAS 133. The changes in fair
value of these derivatives are also reported in cost of operations.
5 - REGULATORY ISSUES
New England
On April 26, 2000 the Federal Energy Regulatory Commission ("FERC")
approved a change in the energy market bidding structure in New England
from a one part bidding structure with hourly uplift compensation to a
three part bidding system with Net Commitment Period Compensation. Under
this three part bidding system a supplier submits separate bids for energy,
start up costs and no load. Also under this revised bidding structure, a
supplier is guaranteed of receiving an amount at least equal to the
combination of its start up, no load and accepted energy bids over the
course of the day when it is dispatched to run in the energy market. The
impact of this change is that payments for operations dispatched
out-of-merit, or from operations required to relieve transmission
congestion are evaluated over a twenty four hour period and compensation is
paid if the monies received from the energy market are insufficient to
cover the as-bid offer. Previously, payments for out-of-merit energy was
awarded on an hourly basis and therefore payments received for out-of-merit
energy under three part bidding with NCPC are expected to be lower then
under the previously single part bid market.
On August 28, 2001, the FERC ruled that a capacity deficiency of $4.87
per KW per month was appropriate. The deficiency charge acts as a price cap
for the Installed Capacity ("ICAP") market because load-serving entities
("LSE") that do not satisfy their ICAP purchase obligation must pay the
deficiency charge. Previous to this ruling, a temporary deficiency charge
of $0.17 per KW per month existed. Thus, the increase of the deficiency
charge should enable NRG to sell ICAP that is not used to satisfy NRG's
standard offer load obligation at a higher price.
New York
On May 31, 2000, FERC approved a request of the New York System
Operator ("NYISO") to impose price limitations on one ancillary service,
Ten Minute Non Synchronized Reserves ("TMNSR") of $2.52 per MWh. This price
cap remains in effect today. At that time, the NYISO also requested that
FERC authorize the NYISO to retroactively adjust the market-clearing price
for this ancillary service. This request was rejected by FERC. On November
7, 2001 the FERC also rejected the NYISO's rehearing request concerning the
retroactive adjustment of TMNSR market clearing price. Subsequent to the
order the NYISO stated that it would request FERC to stay the effect of
this order and that if the stay request is rejected, it will pay the
outstanding TMNSR invoices. If the stay is rejected by FERC, NRG is
expected to receive approximately $ 8.1 million dollars.
On October 31, 2001, the extension of the New York City mitigation
measures to the real time market and out of merit dispatches expired
Consolidated Edison of New York ("Con Ed") has requested an extension of
the expanded mitigation measures, but the FERC has not acted on the
request. Currently, the New York
8
City mitigation measures only apply in the day-ahead market ("DAM"). The
effect of the expiration of part of these mitigation measures means that in
the real time market and out of merit dispatches, NRG's generating assets
in New York City are subject only to the NYISO's New York state mitigation
measures.
On October 31, 2001, the automatic mitigation measure for the entire
New York State DAM expired. The NYISO's request to renew these mitigation
measures has not been ruled on by FERC. The automatic mitigation measures
evaluates a suppliers bids to determine if (1) the bid is exceeds the
suppliers' historically accepted bids (over the past 90 days) by more that
$100 and (2) that there is an impact on the state-wide or a portion of the
state's energy price by more than $100. If both of these occur the
supplier's energy bid is reduced to the facilities historically accepted
bids. The impact of the expiration of the automatic mitigation measures
means that NRG and other market participants have greater flexibility in
submitting bids in the DAM.
The New York energy markets are subject to a price cap of $1000 per
MWh. This cap will continue indefinitely.
On September 4, 2001 FERC approve the request of the NYISO to revise
ICAP market to one based on unforced capacity similar to the capacity
market in the Pennsylvania New Jersey Maryland Interconnection. The change
from a capacity market that is based on ICAP to one based on unforced
capacity requires that certain New York City Capacity requirements be
revised to reflect the change. Under ICAP methodology, ICAP sold by NRG and
other New York City generators was capped at $105 per KW year. In the
September 4th order, FERC increased the price cap to approximately $112 per
KW year. Also in the order FERC reduced the amount of In-City Capacity an
LSE must purchase by 8.6%. The amount of New York City capacity that can be
sold as unforced capacity is dependent on the availability of the
generating assets to NYISO dispatch instructions. Initially FERC reduced
the amount of capacity available from New York City generation by
approximately 7.1%. The effect of these changes is that the capacity price
cap is higher while the amount of capacity an LSE must purchase from New
York City generation and the amount of available New York City generating
capacity is reduced .
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition is omitted
pursuant to General Instructions H (1) (a) and (b) of Form 10-Q for wholly owned
subsidiaries. It is replaced with management's narrative analysis of the results
of operations as permitted by General Instructions H (2) (a) of Form 10-Q for
wholly owned subsidiaries (reduced disclosure format). This analysis will
primarily compare the Company's revenue and expense items for the quarter and
nine months ended September 30, 2001 with the quarter and nine months ended
September 30, 2000.
RESULTS OF OPERATIONS
---------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE
-----------------------------------------------------------------
MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------
OPERATING REVENUES
For the nine months ended September 30, 2001, the Company had total
revenues of $898.7 million, compared to $793.2 million for the nine months ended
September 30, 2000. This represents an increase of $105.5 million or 13.3%. The
increase is due to higher per megawatt prices realized in the first nine months
of 2001 as compared with the same period in 2000, while generation levels were
largely unchanged in the nine months of 2001 as compared to the same period in
2000.
OPERATING COSTS AND EXPENSES
Operating costs were $621.8 million for the nine months ended September
30, 2001, which is an increase of $129.7 million, or 26.4% over the same period
in 2000. Operating costs consisted of expenses for fuel, and plant operations
and maintenance as well as the gain or loss on derivative instruments not
accounted for as hedges in accordance with SFAS No. 133. The increase in
operating costs is due primarily to $55.1 million of unrealized losses on energy
contracts during the nine months ended September 30, 2001, coupled with a
general market increase in fuel procurement costs and increased maintenance
expense for scheduled plant outages during the first nine months of 2001 as
compared to the same period in 2000.
Fuel expense for the nine months ended September 30, 2001 was $393.5
million, compared to $326.3 million for the nine months ended September 30,
2000. Fuel expense for the nine months ended September 30, 2001 represents 43.8%
of revenues. This includes $93.5 million of coal, $135.6 million of natural gas
and $164.4 million of fuel oil, diesel and other related costs for the nine
months ended September 30, 2001.
Plant operations and maintenance expense for the nine months ended
September 30, 2001 was $173.2 million, compared to $165.8 million for the nine
months ended September 30, 2000. Plant operations and maintenance expense for
the nine months ended September 30, 2001 represents 19.3% of revenues and
includes labor and benefits under operating service agreements of $47.3 million,
maintenance parts, supplies and services of $73.6 million and property taxes and
other expenses of $52.3 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs were $36.6 million for the nine
months ended September 30, 2001, which is an increase of 0.6% from the same
period in 2000. The depreciation expense was primarily related to the facilities
and related equipment, which are being depreciated over twenty-five to thirty
years.
10
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $14.7 million for the nine
months ended September 30, 2001, which is an increase of $1.4 million or 10.9%
over the nine months ending September 30, 2000. General and administrative
expenses include costs for outside legal and other contract services, payments
to NRG Energy for corporate services, expenses related to office administration,
as well as costs for certain employee benefits incurred under operating service
agreements. General and administrative expenses represent 1.6% of revenues for
the nine months ended September 30, 2001.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 2001 was $45.6
million, which is a decrease of $4.9 million, or 9.8% from the same period in
2000. The interest expense relates to amortization of deferred finance costs and
interest on the $750 million of senior secured bonds issued on February 22,
2000. The decrease in interest expense is due primarily to the write-off, in
February 2000, of the remaining unamortized deferred finance costs on short-term
project borrowings coupled with scheduled debt repayments resulting in a decline
in the average outstanding debt balances during the nine months ended September
30, 2001 versus the nine months ended September 30, 2000.
RESULTS OF OPERATIONS
---------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 2001 COMPARED TO THE QUARTER
----------------------------------------------------------------
ENDED SEPTEMBER 30, 2000
------------------------
OPERATING REVENUES
For the quarter ended September 30, 2001, the Company had total revenues
of $352.2 million, compared to $265.7 million for the quarter ended September
30, 2000. This represents an increase of $86.5 million or 32.5%. The increase is
due to higher per megawatt prices realized in the third quarter coupled with a
17.6% increase in generation as compared with the same period in 2000.
Higher prices and increased generation are due to warmer summer temperatures
experienced in the northeast region in 2001 compared to 2000.
OPERATING COSTS AND EXPENSES
Operating costs were $204.9 million for the quarter ended September 30,
2001, which is an increase of $63.5 million, or 44.9% over the same period in
2000. Operating costs consisted of expenses for fuel, and plant operations and
maintenance as well as the gain or loss on derivative instruments not accounted
for as hedges in accordance with SFAS No. 133. The increase in operating costs
is due primarily to $17.4 million of unrealized losses on energy contracts
during the nine months ended September 30, 2001 coupled with higher fuel costs
due to a combination of higher levels of generation in the quarter as higher
fuel prices, particularly natural gas.
Fuel expense for the quarter ended September 30, 2001 was $136.6
million, compared to $90.1 million for the quarter ended September 30, 2000.
Fuel expense for the quarter ended September 30, 2001 represents 38.8% of
revenues. This includes $28.7 million of coal, $61.7 million of natural gas and
$46.2 million of fuel oil, diesel and other related costs for the quarter ended
September 30, 2001. The increase in fuel costs is due to higher generating
levels during the three months ended September 30, 2001 coupled with higher fuel
prices as compared with the three months ended September 30, 2001.
Plant operations and maintenance expense for the quarter ended
September 30, 2001 was $50.9 million, compared to $51.2 million for the quarter
ended September 30, 2000. Plant operations and maintenance expense for the
quarter ended September 30, 2001 represents 14.4 % of revenues and includes
labor and benefits under operating service agreements of $11.5 million,
maintenance parts, supplies and services of $22.2 million and property taxes and
other expenses of $17.2 million, for the quarter ended September 30, 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs were $12.2 million for the quarter
ended September 30, 2001 compared to $12.3 million for the quarter ended
September 30, 2000, which is a decrease of $0.1 million, or 0.5%. The
depreciation expense was primarily related to the acquisition costs of the
facilities, which are being depreciated over twenty-five to thirty years.
11
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $5.5 million for the quarter
ended September 30, 2001, which is an increase of $1.0 million from the same
period in 2000. General and administrative expenses include costs for outside
legal and other contract services, payments to NRG Energy for corporate
services, expenses related to office administration, as well as costs for
certain employee benefits incurred under operating service agreements. General
and administrative expenses represent 1.6% of revenues for the quarter ended
September 30, 2001.
INTEREST EXPENSE
Interest expense for the quarter ended September 30, 2001 was $15.2
million, which is a decrease of $1.3 million, or 7.9% from the same period in
2000. The interest expense relates to amortization of deferred finance costs and
interest on the $750 million of senior secured bonds issued on February 22,
2000. The decrease in interest expense is due to scheduled debt repayments which
result in a decline in average outstanding debt in the quarter ended September
30, 2001 versus the quarter ended September 30, 2000.
ENVIRONMENTAL ISSUES
The Massachusetts Department of Environmental Protection registered on
May 11, 2001 regulations requiring emissions reductions from certain coal fired
power plants in the Commonwealth, including the Company's Somerset facility. The
new rules impose phased deadlines for achieving annual and monthly emission rate
reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx). The Company
believes that the new regulations require it by October 1, 2006 to reduce annual
SO2 emission rates by about 50% of its current emission rate; by October 1,
2008, The Somerset Facility would be required to reduced its annual emission
rates by about 75% of its current emission rate. The regulations allow
flexibility in determining how to best meet these SO2 reductions. They also
require that The Somerset Facility reduce by October 1, 2006 its annual NOx
emission rate by about 60% of its current emission rate. In the case of NOx, The
Company anticipates the need to install additional equipment to meet the annual
NOx limitations; once installed, there should be no problem meeting monthly
emission rate limits. To meet the monthly SO2 emission rate limits, the Company
will likely need to purchase more expensive fuel that has a lower sulfur content
and may need to make modifications to its facilities in order to burn such fuel.
The new Massachusetts regulations starting in 2006 also cap annual emissions of
carbon dioxide (CO2) at historical levels and the rate at which CO2 is emitted;
the new regulations allow flexibility in achieving compliance with the
reductions required. The annual CO2 emission rate reduction required represents
approximately a 20% decrease from current levels. Through August 1, 2002 the
Somerset facility will undergo tests to quantify the mercury and chlorine
content in each shipment of coal and the concentration of mercury in the
facility's stack emissions. The DEP will use these data to propose emission
standards for mercury; the proposed compliance date is October 1, 2006. The
Company is evaluating its compliance options under the new regulations. Such
compliance options could have a material adverse impact on the Somerset
facility.
NEW ACCOUNTING PRONOUNCEMENTS
Business Combinations, Goodwill and Other Intangible Assets
In July 2001, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 142, "Goodwill
and Other Intangible Assets". SFAS 141 requires that the purchase method of
accounting be used for all business combinations subsequent to June 30, 2001 and
specifies criteria for recognizing intangible assets acquired in a business
combination. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. Intangible assets with definite useful lives will
continue to be amortized over their respective estimated useful lives. The
Company plans to adopt the provisions of SFAS No. 141 and 142 effective July 1,
2001 and January 1, 2002, respectively. The Company does not expect that the
implementation of these guidelines will have a material impact on its
consolidated financial position or results of operations.
12
CONTINGENT REVENUES
As of September 30, 2001, the Company had approximately $26 million
of disputed revenues. The Company is actively pursuing resolution and/or
collection of these amounts. The contingent revenues relate to the
interpretation of certain transmission power sales agreements and certain sales
to the New York Power Pool and New England Power Pool, conflicting meter
readings, pricing of firm sales and other power pool reporting issues. These
amounts have not been recorded in the financial statements and will not be
recognized as income until disputes are resolved and collection is assured. At
December 31, 2000, $13.1 million of disputed revenues were recorded. During the
nine months ended September 30, 2001, $3.1 million of disputed revenues were
collected and recognized, and $16 million of new disputed revenues were added.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
FORTISTAR CAPITAL V. NRG ENERGY
In July 1999, Fortistar Capital Inc., a Delaware corporation, filed a
complaint in District Court (Fourth Judicial District, Hennepin County) in
Minnesota against NRG Energy, asserting claims for injunctive relief and for
damages as a result of NRG Energy's alleged breach of a confidentiality letter
agreement with Fortistar relating to the acquisition of the Oswego facility from
Niagara Mohawk Power Corporation (NiMo) and Rochester Gas and Electric Company.
NRG Energy disputed Fortistar's allegations and has asserted numerous
counterclaims. NRG Energy has counterclaimed against Fortistar for breach of
contract, fraud and negligent misrepresentations and omissions, tortious
interference with contract, prospective business opportunities and prospective
contractual relationships, unfair competition and breach of the covenant of good
faith and fair dealing. NRG Energy seeks, among other things, dismissal of
Fortistar's complaint with prejudice and rescission of the letter agreement.
A temporary injunction hearing was held on September 27, 1999. The
acquisition of the Oswego facility was closed on October 22, 1999, following
notification to the court of Oswego Power's and NiMo's intention to close on
that date. On January 14, 2000, the court denied Fortistar's request for a
temporary injunction. In April and December, 2000, NRG Energy filed a summary
judgment motion to dispose of the litigation. A hearing on these motions was
held in April 2001 and certain of Fortistar's claims were dismissed. A trial
date in February 2002 has been set in respect of the remaining claims. NRG
Energy intends to continue to vigorously defend the suit and believes
Fortistar's complaint to be without merit.
NEW YORK DEPARTMENT OF ENVIRONMENTAL CONSERVATION NOTICE OF VIOLATION
On May 25, 2000, the New York Department of Environmental Conservation
issued a Notice of Violation to NRG Energy and NiMo, the prior owner of the
Huntley and Dunkirk facilities relating to physical changes made at those
facilities prior to NRG Energy's assumption of ownership. The Notice of
Violation alleges that these changes represent major modifications undertaken
without obtaining the required permits. Although NRG Energy has a right to
indemnification by the previous owner for fines, penalties, assessments, and
related losses resulting from the previous owner's failure to comply with
environmental laws and regulations, if these facilities did not comply with the
applicable permit requirements, NRG Energy could be required, among other
things, to install specified pollution control technology to further reduce air
emissions from the Dunkirk and Huntley facilities and NRG Energy could become
subject to fines and penalties associated with the current and prior operation
of the facilities. On May 14, 2001, NRG Energy received a notice of intent to
sue from the New York Attorney General pursuant to section 304 of the Clean Air
Act ("the Act") of the State's intent to file suit against NRG Energy and NiMo
in federal district court for violations of the Act unless a settlement is
reached within 60 days. NRG Energy is currently in settlement discussions with
the Department of Environmental Conservation and the States Attorney General's
office and the State has not filed suit.
On July 13, 2001, Niagara Mohawk Power Corporation filed a declaratory
judgment action in the Supreme Court for the State of New York, County of
Onondaga, against NRG Energy and its wholly-owned subsidiaries, Huntley Power
LLC and Dunkirk Power LLC, to request a declaration by the Court that, pursuant
to the terms of the Asset Sales Agreement under which NRG Energy purchased the
Huntley and Dunkirk generating facilities from Niagara Mohawk (the ASA),
defendants have assumed liability for any costs for the installation of
emissions controls or other modifications to or related to the Huntley or
Dunkirk plants imposed as a result of violations or alleged violations of
environmental law. Niagara Mohawk Power Corporation also requests a declaration
by the Court that, pursuant to the ASA, defendants have assumed all liabilities,
including liabilities for natural resource damages, arising from emissions or
releases of pollutants from the Huntley and Dunkirk plants, without regard to
whether such emissions or releases occurred before, on or after the closing date
for the purchase of the Huntley and Dunkirk plants. NRG Energy has
counterclaimed against, and has served discovery requests on, Niagara Mohawk
Power Corporation.
14
STATION USE POWER
On September 21, 2000, Dunkirk Power LLC (Dunkirk), Huntley Power LLC
(Huntley) and Oswego Harbor Power LLC (Oswego) filed an action before FERC
seeking its declaration that they are entitled to pay NiMo wholesale prices for
the power consumed at their respective generating facilities, rather than paying
for such station power at retail rates, as NiMo alleges is required. On
September 28, 2000, NiMo filed separate actions against Dunkirk, Huntley and
Oswego in the State Supreme Court of New York, seeking in total, payment of
approximately $7.0 million, which NiMo asserts is due under such retail tariff.
The Company currently expects that discovery will be completed in the first few
months of 2002. The FERC rendered a decision on March 14, 2001, determining that
certain types of station use power are not subject to retail tariffs and
granting some relief sought by Dunkirk, Huntley and Oswego. Legal counsel is
evaluating the impact of the ruling on the merits of the NiMo litigation.
There are no other material legal proceedings pending to which the
Company or any of its subsidiaries is a party. There are no legal proceedings
pending to which an officer or director is a party or has a material interest
adverse to the Company. There are no other material administrative or judicial
proceedings arising under environmental quality statutes pending or known to be
contemplated by governmental agencies to which the Company is or would be a
party.
15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K:
None
16
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The information presented in this Form 10-Q includes forward-looking
statements in addition to historical information. These statements involve known
and unknown risks and relate to future events, or projected business results. In
some cases forward-looking statements may be identified by their use of such
words as "may," "expects," "plans," "anticipates," "believes," and similar
terms. Forward-looking statements are only predictions, and actual results may
differ materially from the expectations expressed in any forward-looking
statement. While the Company believes that the expectations expressed in such
forward-looking statements are reasonable, we can give no assurances that these
expectations will prove to have been correct. In addition to any assumptions and
other factors referred to specifically in connection with such forward-looking
statements, factors that could cause actual results to differ materially from
those contemplated in any forward-looking statements include, among others, the
following:
o General economic conditions including inflation rates and monetary or
currency exchange rate fluctuations;
o Trade, monetary, fiscal, taxation, and environmental policies of
governments, agencies and similar organizations in geographic areas where
we have a financial interest;
o Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their products
and services;
o Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board, the Securities and Exchange
Commission, the Federal Energy Regulatory Commission and similar entities
with regulatory oversight;
o Factors affecting the availability or cost of capital such as changes in
interest rates; market perceptions of the power generation industry, NRG
Northeast or any of its subsidiaries; or changes in credit ratings;
o Factors affecting power generation operations such as unusual weather
conditions; catastrophic weather-related damage; unscheduled generation
outages, maintenance or repairs; unanticipated changes to fossil fuel, or
gas supply costs or availability due to higher demand, shortages,
transportation problems or other developments; environmental incidents; or
electric transmission or gas pipeline system constraints;
o Employee workforce factors including loss or retirement of key executives,
collective bargaining agreements with union employees, or work stoppages;
o Volatility of energy prices in a deregulated market environment;
o Increased competition in the power generation industry;
o Cost and other effects of legal and administrative proceedings,
settlements, investigations and claims;
o Technological developments that result in competitive disadvantages and
create the potential for impairment of existing assets;
o Factors associated with various investments including competition,
operating risks, dependence on certain suppliers and customers, and
environmental and energy regulations;
o Other business or investment considerations that may be disclosed from time
to time in our Securities and Exchange Commission filings or in other
publicly disseminated written documents including NRG Northeast's
Registration Statement No. 333-42638, as amended.
NRG Northeast undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors that could cause NRG
Northeast's actual results to differ materially from those contemplated in any
forward-looking statements included in this Form 10Q should not be construed as
exhaustive.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NRG Northeast Generating LLC
-------------------------------
(Registrant)
/s/ Craig A. Mataczynski
---------------------------------
Craig A. Mataczynski, President
/s/ Brian B. Bird
---------------------------------
Brian B. Bird, Treasurer
(Principal Financial Officer)
Date: November 14, 2001
--------------------------------------
18