UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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 the Quarter Ended: SEPTEMBER 30, 2001 Commission File Number: 001-15891
NRG ENERGY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1724239
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
901 Marquette Avenue, Suite 2300
Minneapolis, Minnesota 55402
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 373-5300
---------------------------------------------------
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
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 2, 2001
- -------------------------------------- -------------------------------
Class A - Common Stock, $.01 par value 147,604,500 Shares
Common Stock, $.01 par value 50,930,984 Shares
INDEX
- --------------------------------------------------------------------------------
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes
Consolidated Statement of Income 1
Consolidated Balance Sheet 2-3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Financial Statements 6-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 3. Defaults upon Senior Securities 26
Item 6. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 26
Cautionary Statement Regarding Forward Looking Information 27
SIGNATURES 29
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
CONSOLIDATED STATEMENT OF INCOME
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands, except per share amounts) 2001 2000 2001 2000
- ---------------------------------------- -----------------------------------------------------
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $ 852,170 $533,156 $2,137,734 $1,339,663
Equity in earnings of unconsolidated affiliates 111,132 91,642 191,634 130,171
-----------------------------------------------------
Total operating revenues and equity earnings 963,302 624,798 2,329,368 1,469,834
------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of majority-owned operations 525,288 319,438 1,428,429 840,269
Depreciation and amortization 58,709 36,424 142,401 87,276
General, administrative and development 69,935 41,727 168,781 98,015
-----------------------------------------------------
Total operating costs and expenses 653,932 397,589 1,739,611 1,025,560
-----------------------------------------------------
OPERATING INCOME 309,370 227,209 589,757 444,274
-----------------------------------------------------
OTHER INCOME (EXPENSE)
Minority interest in earnings of consolidated
subsidiaries (3,380) (3,077) (8,038) (7,158)
Other income, net 23,172 346 37,117 1,911
Interest expense (130,249) (81,250) (323,008) (215,425)
-----------------------------------------------------
Total other expense (110,457) (83,981) (293,929) (220,672)
-----------------------------------------------------
INCOME BEFORE INCOME TAXES 198,913 143,228 295,828 223,602
INCOME TAX EXPENSE 57,333 54,624 69,956 82,671
-----------------------------------------------------
NET INCOME $ 141,580 $ 88,604 $ 225,872 $ 140,931
=====================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC 198,534 180,000 193,712 161,114
EARNINGS PER WEIGHTED AVERAGE COMMON SHARE - BASIC $ 0.71 $ 0.49 $ 1.17 $ 0.87
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - DILUTED 199,436 182,683 195,452 162,242
EARNINGS PER WEIGHTED AVERAGE COMMON SHARE - DILUTED $ 0.71 $ 0.49 $ 1.16 $ 0.87
See notes to consolidated financial statements.
1
CONSOLIDATED BALANCE SHEET
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2001 2000
- -------------- ----------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 188,984 $ 95,243
Restricted cash 136,663 12,135
Accounts receivable -- trade, less allowance
for doubtful accounts of $44,297 and $21,199 343,147 360,075
Accounts receivable -- affiliates 13,713 --
Inventory 281,216 174,864
Current portion of notes receivable 105,162 267
Prepayments and other current assets 120,620 30,074
-------------------------------
Total current assets 1,189,505 672,658
===============================
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
In service 6,701,618 4,106,653
Under construction 2,505,629 206,992
-------------------------------
Total property, plant and equipment 9,207,247 4,313,645
Less accumulated depreciation (400,024) (271,977)
-------------------------------
Net property, plant and equipment 8,807,223 4,041,668
===============================
OTHER ASSETS
Equity investments in affiliates 1,127,136 973,261
Capitalized project costs 22,077 10,262
Notes receivable, less current portion 760,240 76,745
Decommissioning fund investments 4,306 3,863
Intangible assets, net of accumulated amortization of $9,783 and $6,770 60,786 61,352
Debt issuance costs, net of accumulated amortization of $20,400 and $6,443 105,245 48,773
Other assets, net of accumulated amortization of $16,756 and $12,809 259,672 90,410
-------------------------------
Total other assets 2,353,624 1,264,666
-------------------------------
TOTAL ASSETS $12,350,352 $5,978,992
===============================
See notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEET
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2001 2000
------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 432,910 $ 146,469
Revolving line of credit -- 8,000
Revolving line of credit, non-recourse 195,000 --
Corporate level, recourse debt 735,700 --
Accounts payable-trade 481,460 255,917
Accounts payable-affiliate -- 7,191
Accrued income taxes 100,301 43,870
Accrued property and sales taxes 24,582 10,531
Accrued salaries, benefits and related costs 32,423 24,830
Accrued interest 109,652 51,962
Other current liabilities 84,809 14,220
------------------------------
Total current liabilities 2,196,837 562,990
==============================
OTHER LIABILITIES
Consolidated project-level, long term, non-recourse debt 4,170,428 2,146,953
Corporate level, long-term, recourse debt 2,974,163 1,503,896
Deferred income taxes 351,066 55,642
Postretirement and other benefit obligations 69,686 83,098
Other long-term obligations and deferred income 334,188 149,640
Minority Interest 80,780 14,685
------------------------------
Total liabilities 10,177,148 4,516,904
==============================
STOCKHOLDERS' EQUITY
Class A - common stock; $.01 par value; 250,000 shares authorized;
147,605 shares issued and outstanding 1,476 1,476
Common stock; $.01 par value; 550,000 shares authorized;
50,931 shares at September 30, 2001 and 32,396 shares at
December 31, 2000 issued and outstanding 509 324
Additional paid-in capital 1,714,152 1,233,833
Retained earnings 596,017 370,145
Accumulated other comprehensive loss (138,950) (143,690)
------------------------------
Total stockholders' equity 2,173,204 1,462,088
COMMITMENTS AND CONTINGENCIES
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,350,352 $5,978,992
==============================
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
Class A Accumulated
Common Common Additional Other Total
-------------------------------- Paid-in Retained Comprehensive Stockholders'
(In thousands) Stock Shares Stock Shares Capital Earnings Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 $1,476 147,605 $ -- -- $ 780,438 $187,210 $ (75,470) $ 893,654
Net Income 140,931 140,931
Foreign currency translation adjustments (84,105) (84,105)
-----------
Comprehensive income* 56,826
Issuance of common stock, net 324 32,396 453,395 453,719
-----------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 2000 $1,476 147,605 $324 32,396 $1,233,833 $328,141 $(159,575) $1,404,199
=========================================================================================
BALANCES AT DECEMBER 31, 2000 $1,476 147,605 $324 32,396 $1,233,833 $370,145 $(143,690) $1,462,088
Net Income 225,872 225,872
Deferred net unrealized gains on energy
contracts 35,863 35,863
Foreign currency translation adjustments (31,123) (31,123)
-----------
Comprehensive income * 230,612
Issuance of common stock, net 185 18,535 476,239 476,424
Issuance of corporate units 4,080 4,080
-----------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 2001 $1,476 147,605 $509 50,931 $1,714,152 $596,017 $(138,950) $2,173,204
=========================================================================================
( * ) Comprehensive income for the three months
ended September 30, 2001 and 2000 was
$123,557 and $43,285, respectively.
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands) 2001 2000
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 225,872 $ 140,931
Adjustments to reconcile net income to net cash (used in)
provided by operating activities
Undistributed equity in earnings of unconsolidated affiliates (160,464) (92,807)
Depreciation and amortization 142,401 87,276
Deferred income taxes and investment tax credits 33,142 36,680
Minority interest 8,038 582
Unrealized losses on energy contracts 17,786 --
Investment write downs 2,274 --
Cash provided (used) by changes in certain working capital items,
net of acquisition effects
Accounts receivable -- trade 65,867 (97,647)
Accounts receivable -- affiliates (42,609) (11,262)
Accrued income taxes 51,801 35,489
Inventory (63,973) (32,337)
Prepayments and other current assets (34,244) (7,606)
Accounts payable -- trade 23,547 105,318
Accounts payable -- affiliates (17,576) --
Accrued property and sales taxes 13,966 11,728
Accrued salaries, benefits and related costs (6,372) (7,304)
Accrued interest 57,605 42,460
Other current liabilities (16,191) 838
Cash provided by changes in other assets and liabilities 1,824 29,657
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 302,694 241,996
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Businesses and assets acquired, net of liabilities assumed (2,543,220) (1,940,642)
Proceeds from sale of investments 4,063 9,785
Investments in projects (74,665) (18,477)
Changes in notes receivable (net) (103,886) (4,664)
Capital expenditures (1,345,830) (102,169)
(Increase) in restricted cash (124,528) (15,343)
- ------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (4,188,066) (2,071,510)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock, net 475,528 453,719
Net borrowings/(payments) under line of credit agreements 187,000 (340,000)
Proceeds from issuance of corporate units 4,080 --
Proceeds from issuance of long-term debt and term loans 2,731,005 2,985,316
Proceeds from issuance of short term debt 1,335,700 --
Principal payments on long-term debt (762,373) (1,135,601)
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,970,940 1,963,434
- ------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 8,173 --
NET INCREASE IN CASH AND CASH EQUIVALENTS 93,741 133,920
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 95,243 31,483
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 188,984 $ 165,403
==================================================================================================================
See notes to consolidated financial statements.
5
NRG ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NRG Energy, Inc. (NRG Energy or the Company) is a leading global energy company
primarily engaged in the acquisition, development, ownership and operation of
power generation facilities and the sale of energy, capacity and related
products.
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 NRG
Energy 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 NRG Energy 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 2000, and its cash flows and stockholders' equity
for the nine months ended September 30, 2001 and 2000.
Certain prior-year amounts have been reclassified for comparative purposes.
These reclassifications had no effect on net income or total stockholders'
equity as previously reported.
1. BUSINESS DEVELOPMENTS
In July 2001, NRG Energy acquired approximately 60% of Hsin Yu Energy
Development Company Ltd, a Taiwan company. Hsin Yu currently owns a 170 MW
combined cycle gas turbine cogeneration facility, Hsinchu Phase 1, located
near Taipei. Hsin Yu is developing a 245 MW expansion of the Hsinchu
facility and a new 490 MW greenfield project at the Tainan Science - based
Industrial Park in southern Taiwan.
In July 2001, NRG Energy acquired a 30% ownership in the Kondapalli Power
station from TXU. The 360 MW gas and oil-fired generating facility is
located in India.
In August 2001, NRG Energy acquired a 67% interest in the 13.8 MW Timber
Energy Resources Inc. biomass fueled power plant and a wood processing
facility located southwest of Telogia, Florida.
In August 2001, NRG Energy acquired a 2,255 MW project portfolio from
Indeck Energy Services, Inc. The projects in the portfolio are primarily
located in the Chicago energy market. NRG Energy acquired full ownership of
five projects in operation, construction, and advanced development. The
portfolio includes combined-cycle and peaking power plants that employ,
natural gas-fueled combustion technology. The projects acquired are:
Rockford I Energy Center, a 342 MW gas-fired facility located in Rockford,
Illinois; Rockford II Energy Center, a 171 MW gas-fired facility under
construction in Rockford, Illinois; Bourbonnais I and II, a 1,682 MW
gas-fired facility under development in Bourbonnais, Illinois; and Ilion
Energy Center, a 60 MW co-generation facility in central up state New York.
In August 2001, NRG Energy acquired Duke Energy North America LLC's 77%
interest in the McClain Energy Generating Facility located near Oklahoma
City, Oklahoma. The Oklahoma Municipal Power Authority owns the remaining
23% interest of the 520 MW gas-fired facility which became operational in
August 2001.
In September 2001, NRG Energy acquired a 50% interest in the Saguaro
Generating Station from Edison Mission Energy. The Saguaro Generating
Station located near Las Vegas, Nevada is a 105 MW combined cycle facility
that provides electricity and steam to Nevada Power and two commercial
operations. Magna Energy Systems and Enron own the other 50% of the
project.
6
In September 2001, NRG Energy acquired a 50% interest in Termorio SA a
1,040 MW gas-fired co-generation facility currently under construction from
Petroleos Brasileiros SA located in Rio de Janeiro State, Brazil.
Commercial operation is expected in March 2004.
2. SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATES
NRG Energy has investments in four companies that were considered
significant subsidiaries as of December 31, 2000, as defined by applicable
SEC regulations, and accounts for those investments using the equity
method. The following summarizes the aggregate income statements of these
unconsolidated entities:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands) 2001 2000 2001 2000
-------------------------------------------------
Net sales $579,862 $443,945 $1,750,269 $932,216
Other income (8) (15,153) 4,703 (7,928)
Costs and expenses:
Cost of sales 371,317 240,005 1,308,478 597,649
Interest expense 12,032 -- 39,686 --
General and administrative 2,701 5,338 30,337 20,478
Other (42) (9,829) 6,558 2,198
-------------------------------------------------
Total costs and expenses 386,008 235,514 1,385,059 620,325
-------------------------------------------------
Income before income taxes 193,846 193,278 369,913 303,963
Income taxes 1,716 7,996 6,785 19,396
-------------------------------------------------
Net income $192,130 $185,282 $ 363,128 $284,567
=================================================
Company's share of net income $ 95,529 $ 90,598 $ 178,273 $136,915
=================================================
3. SHORT TERM DEBT
NRG Energy has a $500 million revolving credit facility under a commitment
fee arrangement that matures in March 2002. This facility provides
short-term financing in the form of bank loans. At September 30, 2001, the
Company had no outstanding balance under this credit facility.
As of September 30, 2001, NRG Energy, through its wholly owned subsidiary,
NRG South Central Generating LLC, had outstanding approximately $40 million
under a project level, non-recourse revolving credit agreement which
matures in March 2002. At September 30, 2001, the weighted average interest
rate of such outstanding advances was 4.547% per year. The maximum
available under this facility is $40 million.
In June 2001, NRG Energy entered into a $600 million term loan facility.
The facility is unsecured and provides for borrowings of base rate loans
and Eurocurrency loans. The facility terminates on June 21, 2002. As of
September 30, 2001, the aggregate amount outstanding under this facility
was $600 million. At September 30, 2001 the weighted average interest rate
of such outstanding advances was 4.517%. NRG Energy intends to repay this
facility from future issuances of equity or debt securities or through
borrowings under new debt facilities.
In August 2001, NRG Energy entered into a 364 day term loan of up to $296
million. The credit facility is structured as a senior unsecured loan and
is partially non-recourse to NRG Energy. The proceeds were used to finance
the McClain generating facility acquisition. As of September 30, 2001,
there is approximately $290.7 million outstanding under this credit
facility. The credit facility bears interest at a variable rate. As of
September 30, 2001, the weighted average interest rate of such outstanding
advances was 5.243%. NRG Energy intends to refinance this facility with
long term project level financing.
4. LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS
In May 2001, NRG Energy's wholly-owned subsidiary, NRG Finance Company I
LLC, entered into a $2 billion revolving credit facility. The facility will
be used to finance the acquisition, development and construction of power
generating plants located in the United States and to finance the
acquisition of turbines for such facilities. The facility provides for
borrowings of base rate loans and Eurocurrency loans and is secured by
mortgages and security agreements in respect of the assets of the projects
financed under the facility, pledges of the equity interests in the
7
subsidiaries or affiliates of the borrower that own such projects, and by
guaranties from each such subsidiary or affiliate. Provided that certain
conditions are met that assure the lenders that sufficient security remains
for the remaining outstanding loans, the borrower may repay loans relating
to one project and have the liens relating to that project released. Loans
that have been repaid may be re-borrowed, as permitted by the terms of the
facility. The facility terminates on May 8, 2009. The facility is
non-recourse to NRG Energy other than its obligation to contribute equity
at certain times in respect of projects and turbines financed under the
facility. As of September 30, 2001, the aggregate amount outstanding under
this facility was $292.6 million. At September 30, 2001, the weighted
average interest rate of such outstanding advances was 5.574%.
In June 2001, in connection with NRG Energy's acquisition of the Csepel
facilities, NRG Energy assumed a non-recourse credit facility agreement
that provides for borrowings of approximately $78.5 million and DEM 203.6
million. As of September 30, 2001, there exists an outstanding balance of
approximately $173.1 million under this credit facility. The facility
terminates in 2017 with principal payments due quarterly in varying amounts
throughout the term of the agreement. Interest is payable quarterly at a
variable rate.
As part of NRG Energy's acquisition of the LS Power assets in January 2001,
NRG Energy through its wholly owned subsidiary, LSP Kendall Energy LLC, has
acquired a $554.2 million credit facility. The facility is non-recourse to
NRG Energy and consists of a construction and term loan, working capital
and letter of credit facilities. As of September 30, 2001, there were
borrowings totaling approximately $468.6 million outstanding under the
facility at a weighted average annual interest rate of 4.961%.
In June 2001, NRG filed a shelf registration with the SEC to sell up to $2
billion in debt securities, common and preferred stock, warrants and other
securities. NRG expects to use the net proceeds for general corporate
purposes, which may include the financing and development of new
facilities, working capital and debt reduction. In July 2001, NRG Energy
completed the sale of $500 million of unsecured senior notes under this
shelf registration. The senior notes were issued in two tranches, the first
tranche of $340 million of 6.75% Senior Notes is due July 2006 and the
second tranche of $160 million of 8.625% Senior Notes is due April 2031.
Interest payments are due semi-annually on January 15 and July 15 until
maturity for the Senior Notes due 2006 and April 1 and October 1 until
maturity for the Senior Notes due 2031. NRG received net proceeds from the
sale of both series of notes of approximately $505.2 million, including
interest on the senior notes due 2031, accrued from April 5, 2001. The net
proceeds were used to repay all amounts outstanding under NRG's revolving
credit agreement and for investments and other general corporate purposes
and to provide capital for planned acquisitions.
In June 2001, NRG Energy through its wholly owned subsidiaries, Brazos
Valley Energy LP and Brazos Valley Technology LP, entered into a $180
million non-recourse construction credit facility to fund the construction
of the 600 MW Brazos Valley gas-fired combined cycle merchant generation
facility located in Fort Bend County, Texas. As of September 30, 2001,
there exists an outstanding balance of $115 million under this credit
agreement. The weighted average interest rate as of September 30, 2001 was
5.17%, interest is payable quarterly.
GUARANTEES
NRG Energy is directly liable for the obligations of certain of its project
affiliates and other subsidiaries pursuant to guarantees relating to
certain of their indebtedness, equity and operating obligations. In
addition, in connection with the purchase and sale of fuel, emission
credits and power generation products to and from third parties with
respect to the operation of some of NRG Energy's generation facilities in
the United States, NRG Energy may be required to guarantee a portion of the
obligations of certain of its subsidiaries. As of September 30, 2001, NRG
Energy's obligations pursuant to its guarantees of the performance, equity
and indebtedness obligations of its subsidiaries totaled approximately
$885.3 million.
5. FINANCIAL INSTRUMENTS
As of September 30, 2001, NRG Energy had seventeen interest rate swap
agreements with notional amounts totaling approximately $1.6 billion, as
described below. If the swaps had been discontinued on September 30, 2001,
NRG Energy would have owed the counter-parties approximately $76.6 million.
Based on the investment grade rating of the counter-parties, NRG Energy
believes that its exposure to credit risk due to nonperformance by the
counter-parties to its hedging contracts is insignificant.
8
o NRG Energy entered into a swap agreement effectively converting the
floating rate on AUD105 million debt into fixed rate debt. The swap
expires on September 8, 2012 and is secured by the Flinders assets.
o A second swap effectively converts a $19.6 million issue of
non-recourse variable rate debt into fixed rate debt. The swap
expires on September 30, 2002 and is secured by the Camas Power
Boiler assets.
o A third swap converts $137.6 million of non-recourse variable rate
debt into fixed rate debt. The swap expires on December 17, 2014
and is secured by the Crockett Cogeneration assets.
o A fourth swap converts (pound)188 million of non-recourse variable
rate debt into fixed rate debt. The swap expires on June 30, 2019
and is secured by the Killingholme assets.
o A fifth swap converts $250 million of construction revolver
variable rate debt into fixed rate debt. The swap expires on
December 31, 2002.
o As of September 30, 2001 NRG Energy had in place swaps totaling
approximately $522 million. These swaps convert the floating rate
on the Kendall debt to fixed rates. The swaps expire at various
times between June 2002 and September 2006 and are secured by the
Kendall assets.
o As of September 30, 2001, NRG Energy had in place swaps totaling
approximately $224.2 million. These swaps convert the floating rate
on the Brazos Valley debt to fixed rates. The swaps expire at
various times between July 2003 and July 2008 and are secured by
the Brazos Valley assets.
6. SEGMENT REPORTING
NRG Energy conducts its business within six segments: Independent Power
Generation in North America, Europe, Asia Pacific and Other Americas
regions, Alternative Energy and Thermal projects. These segments are
distinct components of NRG Energy with separate operating results and
management structures in place. The "Other" category includes operations
that do not meet the threshold for separate disclosure and corporate
charges (primarily interest expense) that have not been allocated to the
operating segments. Segment information for the three and nine months ended
September 30, 2001 and 2000 is as follows:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
POWER GENERATION
----------------------------------------------------------------------
(IN THOUSANDS) NORTH AMERICA EUROPE ASIA PACIFIC OTHER AMERICAS
- -------------- -------------- ------ ------------ ---------------
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $ 587,606 $ 98,095 $ 78,332 $ 11,824
Inter-segment Revenues -- -- -- --
Equity in earnings/(losses) of
unconsolidated affiliates 108,387 8,955 2,489 (775)
--------------- ------------ ----------- --------------
Total operating revenues and equity earnings 695,993 107,050 80,821 11,049
--------------- ------------ ------ -------------
Net Income (Loss) $ 154,959 $ 11,107 $ (3,278) $ 403
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
------ ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned Operations $ 37,903 $ 27,614 $ 10,631 $ 852,005
Inter-segment Revenues 165 -- -- 165
Equity in earnings/(losses) of
unconsolidated affiliates (7,926) 2 -- 111,132
---------------- ----------- ----------- --------------
Total operating revenues and equity earnings 30,142 27,616 10,631 963,302
--------------- ----------- ----------- --------------
Net Income (Loss) $ 6,865 $ 2,618 $ (31,094) $ 141,580
9
Total assets as of September 30, 2001 for North America, Europe, Asia Pacific
and Other Americas total $9,388 million, $1,756 million, $710 million and $496
million, respectively.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
POWER GENERATION
----------------------------------------------------------------------
(IN THOUSANDS) NORTH AMERICA EUROPE ASIA PACIFIC OTHER AMERICAS
- -------------- ------------- ------ ------------ ---------------
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $ 420,373 $ 42,611 $ 34,941 $ 120
Inter-segment Revenues -- -- -- --
Equity in earnings/(losses) of
unconsolidated affiliates 93,120 1,149 4,428 (218)
--------------- ------------ ----------- --------------
Total operating revenues and equity earnings 513,493 43,760 39,369 (98)
--------------- ------------ ----------- --------------
Net Income (Loss) $ 104,770 $ 3,123 $ 6,477 $ (695)
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
------ ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned Operations $ 7,684 $ 23,187 $ 3,939 $ 532,855
Inter-segment Revenues 301 -- -- 301
Equity in earnings/(losses) of
unconsolidated affiliates (6,842) 5 -- 91,642
------------ ---------- ---------- --------------
Total operating revenues and equity earnings 1,143 23,192 3,939 624,798
------------ ---------- ---------- --------------
Net Income (Loss) $ 3,744 $ 1,287 $ (30,102) $ 88,604
============ ========== =========== ==============
Total assets as of September 30, 2000 for North America, Europe, Asia Pacific
and Other Americas total $4,281 million, $935 million, $635 million and
$131 million, respectively.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
POWER GENERATION
----------------------------------------------------------------------
(IN THOUSANDS) NORTH AMERICA EUROPE ASIA PACIFIC OTHER AMERICAS
- -------------- -------------- ------ ------------ ---------------
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $ 1,438,973 $ 224,872 $ 268,375 $ 15,595
Inter-segment Revenues -- -- --
Equity in earnings of unconsolidated
Affiliates 172,033 23,727 12,641 3,116
--------------- ----------- ----------- --------------
Total operating revenues and equity earnings 1,611,006 248,599 281,016 18,711
--------------- ----------- ----------- --------------
Net Income $ 238,206 $ 45,822 $ 16,675 $ 2,050
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
------ ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $ 74,600 $ 85,241 $ 28,219 $ 2,135,875
Inter-segment Revenues 1,859 -- -- 1,859
Equity in earnings/(losses) of
unconsolidated Affiliates (19,896) 13 -- 191,634
---------------- ----------- ----------- --------------
Total operating revenues and equity earnings 56,563 85,254 28,219 2,329,368
---------------- ----------- ----------- --------------
Net Income (Loss) $ 22,496 $ 6,008 $ (105,385) $ 225,872
10
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
POWER GENERATION
----------------------------------------------------------------------
(IN THOUSANDS) NORTH AMERICA EUROPE ASIA PACIFIC OTHER AMERICAS
- -------------- -------------- ------ ------------ ---------------
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $ 1,084,439 $ 120,951 $ 35,013 $ 216
Inter-segment Revenues -- -- --
Equity in earnings of unconsolidated
Affiliates 129,195 3,835 6,014 4,447
--------------- ----------- ----------- --------------
Total operating revenues and equity earnings 1,213,634 124,786 41,027 4,663
--------------- ----------- ----------- --------------
Net Income $ 186,145 $ 10,907 $ 5,016 $ 2,661
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
------ ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations $ 22,923 $ 63,595 $ 11,624 $ 1,338,761
Inter-segment Revenues 902 -- -- 902
Equity in earnings/(losses) of
unconsolidated Affiliates (13,336) 16 -- 130,171
--------------- ----------- ----------- --------------
Total operating revenues and equity earnings 10,489 63,611 11,624 1,469,834
--------------- ----------- ----------- --------------
Net Income (Loss) $ 11,576 $ 4,518 $ (79,892) $ 140,931
=============== =========== =========== ==============
7. COMMITMENTS AND CONTINGENCIES
DISPUTED REVENUES
As of September 30, 2001, NRG Energy had approximately $26 million of
disputed revenues in respect of certain wholly-owned subsidiaries,
primarily NRG Northeast Generating LLC. NRG Energy is actively pursuing
resolution and/or collection of these amounts. These disputed 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. As previously disclosed in its annual report on
Form 10-K, NRG Energy had approximately $13.1 million of disputed revenues
as of December 31, 2000. During the nine months ended September 30, 2001,
$3.1 million of disputed revenues were resolved, and $16 million of new
disputed revenues were added.
CALIFORNIA LIQUIDITY CRISIS
NRG Energy's California generation assets consist primarily of interests in
the Crockett and Mt. Poso facilities and a 50% interest in West Coast Power
LLC, formed in 1999 with Dynegy, Inc. The West Coast Power facilities sold
uncommitted power through the California Power Exchange (PX) and the
California Independent System Operator (ISO) to Pacific Gas and Electric
Company (PG&E), Southern California Edison Company (SCE) and San Diego Gas
and Electric Company (SDG&E), the three major California investor owned
utilities. Crockett, Mt. Poso and certain of NRG Energy's other California
facilities also sell directly to PG&E, SCE and SDG&E. Currently, the West
Coast Power facilities sell uncommitted power through the California ISO to
the California Department of Water Resources (the CDWR).
The combination of rising wholesale electric prices, increases in the cost
of natural gas, the scarcity of hydroelectric power and regulatory
limitations on the rates that PG&E and SCE may charge their retail
customers caused both PG&E and SCE to default in their payments to the
California PX, the California ISO and other suppliers, including NRG
Energy. In March 2001, the California PX filed for bankruptcy under Chapter
11 of the Bankruptcy Code, and in April 2001, PG&E filed for bankruptcy
under Chapter 11 of the Bankruptcy Code.
11
In March 2001, certain affiliates of West Coast Power entered into a four
year contract with the CDWR pursuant to which the affiliates agreed to sell
up to 1,000 MW to the CDWR for the remainder of 2001 and up to 2,300 MW
from January 1, 2002 through December 31, 2004, any of which may be resold
by the CDWR to utilities such as SCE, PG&E and SDG&E. The ability of the
CDWR to make future payments is subject to the CDWR having a continued
source of funding, whether from legislative or other emergency
appropriations, from a bond issuance or from amounts collected from SCE,
PG&E and SDG&E for deliveries to their customers. As a result of the
present situation in California, all of NRG Energy's interests in
California are exposed to heightened risk of delayed payments and/or
non-payment regardless of whether the sales are made directly to PG&E, SCE
or SDG&E or to the California ISO or the CDWR.
NRG Energy's share of the net amounts owed to its California affiliates by
the California PX, the California ISO, and the three major California
utilities totaled $230 million as of September 30, 2001, based upon
unaudited financial information provided by such affiliates. This amount
reflects NRG Energy's share of (a) total amounts owed to its California
affiliates of $371 million, less (b) amounts that are currently treated as
"disputed revenues" and are not recorded as accounts receivable in the
financial statements of the California affiliates, and reserves taken
against accounts receivable that have been recorded in such financial
statements, both of which together totaled $141 million. NRG Energy
believes that it will ultimately collect in full the net amount of $230
million owed to its California affiliates; however, if some form of
financial relief or support is not provided to PG&E and SCE, the
collectibility of this amount will become more questionable in terms of
both timing and amount. With respect to disputed revenues, these amounts
relate to billing disputes arising in the ordinary course of business and
to disputes that have arisen as a result of the California ISO and the
Federal Energy Regulatory Commission (FERC) imposing various revenue caps
on the wholesale price of electricity. None of the disputed revenues will
be recorded until the particular issue that caused them to be excluded from
the financial statements is resolved. Since the date of the PG&E bankruptcy
filing, PG&E has been paying NRG Energy's Crockett and Mt. Poso affiliates
on a current basis.
The delayed collection of receivables owed to West Coast Power resulted in
a covenant default under its credit agreement. West Coast Power has entered
into a forbearance agreement with its lenders in connection with such
covenant default. In addition, NRG Energy's Crockett affiliate was notified
by its lenders that it has incurred a covenant default under its loan
agreement. As a result, NRG Energy has reclassified the long-term portion
of the Crockett debt to current. Defaults under the Crockett and West Coast
Power credit agreements do not trigger defaults under any of NRG Energy's
corporate-level financing debt securities or borrowing arrangements.
FERC has jurisdiction over sales for resale of electricity in the
California wholesale power markets. In March 2001, FERC issued orders that
presumptively approved prices up to $273/MWh during January 2001 and
$430/MWh during February 2001. The orders direct electricity suppliers
either to refund a portion of their January and February sales or justify
prices charged above these approved prices. The orders, if finalized, could
require West Coast Power to refund approximately $45 million in revenues
from January and February, of which NRG Energy's share would be
approximately $22.5 million. Dynegy Power Marketing, Inc., as the power
marketer for West Coast Power, has submitted information to justify each
component of the prices it charged that were in excess of the presumptively
approved prices, the FERC has rejected all of the generators' submissions
for excess prices for April 2001 through June 2001 (currently under
appeal).
On June 19, 2001, FERC issued an order establishing a maximum pricing
methodology for spot markets in California and throughout the Western
Systems Coordinating Council (WSCC) region at times when reserves fall
below 7% in California. The maximum prices for sales in the WSCC spot
markets during those hours, called the "market clearing price," is derived
from the costs of the least efficient provider based in California and
selling through the California ISO. At all other times, this order
establishes a maximum price equal to 85% of the last market-clearing price.
This maximum price program will terminate on September 30, 2002.
In its June order, FERC also mandated settlement negotiations among sellers
and buyers in the California ISO markets in respect of the settlement of
past accounts, refund issues related to periods after October 2, 2000 and
the structuring of future arrangements for meeting California's energy
requirements. The settlement talks were overseen by an Administrative Law
Judge (ALJ) and concluded without reaching a resolution on July 9, 2001.
Accordingly, the ALJ made a recommendation to FERC on such resolution. The
ALJ recommended that FERC hold a full evidentiary hearing to review his
proposals before reaching any decision. The Commission issued its order on
July 25, 2001, establishing evidentiary hearing procedures. At this early
point in the proceedings, NRG
12
Energy cannot predict what action FERC will take on any of the issues
presented, including any refunds sought from the generators.
PENDING ACQUISITIONS
Conectiv
In June 2001, NRG Energy extended purchase agreements that were entered
into with a subsidiary of Conectiv to acquire 794 MW of coal and oil-fired
electric generating capacity and other assets in New Jersey and
Pennsylvania, including an additional 66 MW of the Conemaugh Generating
Station and an additional 42 MW of the Keystone Generating Station. NRG
Energy will pay approximately $180 million for the assets. NRG Energy
expects the acquisition to close in the first quarter of 2002 following
approval of the New Jersey Board of Public Utilities.
Narva Power
In August 2000, NRG Energy signed a Heads of Terms Agreement with Eesti
Energia, the Estonian state-owned electric utility, providing for the
purchase for approximately $72 million of a 49% stake in Narva Power, the
owner and operator of the oil shale-fired Eesti and Balti power plants,
located near Narva, Estonia. The plants have a combined capacity of
approximately 2,700 MW. NRG Energy is working to close the acquisition in
the first quarter of 2002.
Edison Mission
In August 2001, NRG Energy signed an agreement to acquire a 50% interest in
the Commonwealth Atlantic 375 MW gas and oil-fired generating station from
Edison Mission Energy. The Commonwealth Atlantic facility is located near
Chesapeake, Virginia. In addition, NRG Energy will also acquire a 50%
interest in the James River 110 MW coal-fired generating facility located
in Hopewell, Virginia.
InnCOGEN
In October 2001, NRG Energy signed a purchase agreement to acquire from
York Research Corporation 100% of the shares of InnCOGEN, LTD., which own a
225 MW gas-fired generating facility located in the Republic of Trinidad
and Tobago.
LEGAL ISSUES
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. Management
believes that this lawsuit is premature, in the absence of action by the
New York Department of Environmental Conservation and the New York Attorney
General with respect to the Notice of Violation issued to NRG Energy.
13
8. EARNINGS PER SHARE
Diluted earnings per average common share is calculated by dividing net
income by the weighted average shares of common stock outstanding,
including stock options outstanding under NRG Energy's stock option plans
considered to be common stock equivalents. The following table shows the
effect of those stock options on the weighted average number of shares
outstanding used in calculating diluted earnings per average common share.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------
(In thousands) 2001 2000 2001 2000
-------------------------------------------------
Weighted Average Number of Common Shares Outstanding 198,534 180,000 193,712 161,114
Assumed Exercise of Dilutive Stock Options 902 2,683 1,740 1,128
-------------------------------------------------
Potential Weighted Average Diluted Common
Shares Outstanding 199,436 182,683 195,452 162,242
-------------------------------------------------
For the three and nine months ended September 30, 2001, 2,173,438 and
62,500 stock options, respectively, were excluded from the computation of
diluted earnings per share due to their anti-dilutive effect. In addition,
there was no effect on diluted earnings per share related to the forward
contract to buy NRG Energy's common stock issued in connection with NRG
Energy's recent issuance in March 2001 of Corporate Units.
9. 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 $ 88,479 $ 48,541
Spare parts 121,723 85,136
Coal 52,330 17,439
Kerosene 594 1,524
Other 18,090 22,224
-----------------------------------------
TOTAL $ 281,216 $ 174,864
-----------------------------------------
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, NRG Energy adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133), as amended by SFAS No. 137 and SFAS No. 138.
During the three and nine month periods ended September 30, 2001, NRG
Energy recorded an after-tax loss in Other comprehensive income (OCI) of
approximately $33.0 million and an after-tax gain of approximately $69.3
million, respectively. These gains and losses 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, NRG Energy reclassified from OCI into earnings $0.3 million of net
derivative losses and $10.9 million of accumulated net derivative gains,
respectively. The net balance in OCI relating to SFAS No. 133 as of
September 30, 2001 was a gain of approximately $35.9 million. Unrealized
gains and losses on derivatives are recorded in other current and long-term
assets and liabilities.
NRG Energy's pre-tax earnings for the three and nine month periods ended
September 30, 2001 were decreased by an unrealized loss of $21.7 million
and $35.2 million, respectively, relating to derivative instruments not
accounted for as hedges in accordance with SFAS No. 133 as follows:
14
THREE MONTHS ENDED NINE MONTHS ENDED
Gains/(Losses) in thousands SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
--------------------------- ------------------ ------------------
Revenue from majority-owned operations $ (10,212) $ (21,604)
Equity in earnings of unconsolidated affiliates (1,720) (877)
Cost of majority-owned operations (7,564) (12,693)
Other income, net (2,169) 3
--------- ---------
Total impact before income tax $ (21,665) $ (35,171)
========= =========
SFAS No. 133 applies to NRG Energy's energy and energy related commodities
financial instruments, long-term power sales contracts and long-term gas
purchase contracts used to mitigate variability in earnings due to
fluctuations in spot market prices, hedge fuel requirements at generation
facilities and protect investment in fuel inventories. SFAS No. 133 also
applies to various interest rate swaps used to mitigate the risks
associated with movements in interest rates and foreign exchange contracts
to reduce the effect of fluctuating foreign currencies on foreign
denominated investments and other transactions.
Energy and energy related commodities
NRG Energy 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, NRG Energy
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
NRG Energy are accounted for as cash flow hedges. The effective portion of
the cumulative gain or loss on the derivative instrument is reported as a
component of OCI in shareholders' 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. During the
three and nine month periods ended September 30, 2001, NRG recognized a
loss of $15.8 million and a loss of $0.9 million relating to the
ineffectiveness on commodity cash flow hedges, respectively. No gains or
losses were recognized related to derivative instruments excluded from the
assessment of effectiveness. At September 30, 2001, NRG Energy had various
commodity related contracts extending through December 2003 and several
fixed-price gas and electricity purchase contracts extending through 2005
to 2018. During the three and nine month periods ended September 30, 2001,
NRG Energy reclassified from OCI into earnings $0.1 million of accumulated
net derivative losses and $13.8 million, of accumulated net derivative
gains, respectively. Furthermore, during the three and nine month periods
ended September 30, 2001, NRG Energy reclassified from OCI into equity in
earnings of unconsolidated affiliates $1.7 million and $4.2 million,
respectively, of accumulated net derivative losses. NRG Energy expects to
reclassify into earnings during the next twelve months net gains from OCI
of approximately $21.3 million.
NRG Energy's pre-tax earnings for the three and nine month periods ended
September 30, 2001 were decreased by an unrealized loss of $3.7 million
and $34.3 million, respectively, relating to energy and energy related
derivative instruments not accounted for as hedges in accordance with SFAS
No. 133.
Interest rates
To manage interest rate risk, NRG Energy has entered into interest rate
swaps that effectively fix the interest payments of certain floating rate
debt instruments. Interest rate swap agreements are accounted for as cash
flow hedges. The effective portion of the cumulative gain or loss on the
derivative instrument is reported as a component of OCI in shareholders'
equity and recognized into earnings as the underlying interest expense is
incurred. No ineffectiveness was recognized on interest rate cash flow
hedges during the three and nine-month periods ended September 30, 2001.
During the three months ended September 30, 2001, NRG Energy reclassified
from OCI into earnings $0.2 million of accumulated net derivative losses.
During the nine months ended September 30, 2001, NRG Energy reclassified
from OCI into earnings $0.3 million of accumulated net derivative losses.
NRG Energy expects to reclassify into earnings in interest expense during
the next twelve months net losses from OCI of approximately $0.9 million.
15
Foreign currency exchange rates
To preserve the U.S. dollar value of projected foreign currency cash flows,
NRG Energy may hedge, or protect, those cash flows if appropriate foreign
hedging instruments are available. During the three and nine month periods
ended September 30, 2001, NRG Energy had various foreign currency exchange
contracts not designated as accounting hedges. Accordingly, the changes in
fair value of these derivatives, totaling a loss of $2.2 million and a gain
of approximately $3,000, respectively, for the three and nine-month periods
ended September 30, 2001, are reported in earnings in other income, net.
11. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
Statement No. 142, "Goodwill and Other Intangible Assets." Statement No.
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.
Statement No. 142 requires that goodwill and intangible assets with
indefinate useful lives no longer be amortized but instead be tested for
impairment at least annually. Intangible assets with definate useful lives
will continue to be amortized over their respective estimated useful lives.
NRG Energy, adopted the provisions of Statement No. 141 effective July 1,
2001 and plans to adopt the provisions of Statement No. 142 effective
January 1, 2002. NRG Energy does not expect the implementation of these
guidelines to have a material impact on its consolidated financial position
or results of operations.
In July 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. SFAS No. 143 requires an entity
to recognize the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. Upon initial recognition
of a liability for an asset retirement obligation, an entity shall
capitalize an asset retirement cost by increasing the carrying amount of
the related long-lived asset by the same amount as the liability. SFAS No.
143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. Although NRG Energy has not completed its analysis of
SFAS 143, it does not expect the impact to be significant.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 retains and expands upon the fundamental provisions of
existing guidance related to the recognition and measurement of the
impairment of long-lived assets to be held and used and the measurement of
long-lived assets to be disposed of by sale. Generally, the provisions of
SFAS No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Earlier application is encouraged.
Although NRG Energy has not completed its analysis of SFAS No. 144, it does
not expect the impact to be significant.
12. ACQUISITIONS
During the nine month period September 30, 2001, NRG Energy completed
numerous acquisitions. These acquisitions have been recorded using the
purchase method of accounting. Accordingly, these purchase prices have been
preliminarily allocated to assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. These estimates
will be adjusted based upon completion of certain procedures including
third party valuations. Operations of the acquired entities have been
included in the operations of NRG Energy since the date of the respective
acquisitions.
The respective purchase prices have been allocated to the net assets of
the acquired entities as follows:
<Table>
<Caption>
NINE MONTHS ENDED
Amounts in thousands SEPTEMBER 30, 2001
- -------------------- ------------------
Current assets $ 232,957
Property plant and equipment 3,473,480
Non-current portion of notes receivable 694,175
Current portion of long term debt assumed (48,932)
Other current liabilities (256,977)
Long-term debt assumed (1,099,999)
Deferred income taxes (112,639)
Other long term liabilities (154,347)
Other non-current assets and liabilities (58,916)
-----------
Total purchase price 2,668,802
Less -- Cash balances acquired 125,582
-----------
Net purchase price $ 2,543,220
===========
</Table>
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
________________________________________________________________________________
NRG Energy is a leading global energy company primarily engaged in the
acquisition, development, ownership and operation of power generation facilities
and the sale of energy, capacity and related products. NRG Energy believes that
it is one of the three largest independent power generation companies in the
world, measured by net ownership interest in power generation facilities in
operation or under construction. NRG Energy is actively pursuing the acquisition
and development of additional generation projects. NRG Energy intends to
continue its growth through a combination of targeted acquisitions in selected
core markets, the expansion or re-powering of existing facilities and the
development of new greenfield projects.
RESULTS OF OPERATIONS
Net income for the three and nine months ended September 30, 2001, was
$141.6 million and $225.9 million, an increase of $53.0 million and $84.9
million compared to the same periods in 2000, representing increases of
approximately 59.8% and 60.3%, respectively. These increases were due to the
factors described below.
OPERATING REVENUES
For the three months ended September 30, 2001, NRG Energy had total
revenues and equity earnings of $963.3 million, compared to $624.8 million for
the three months ended September 30, 2000, an increase of $338.5 million or
approximately 54.2%. NRG Energy's revenues from majority-owned operations were
$852.2 million, an increase of $319.0 million or approximately 59.8%, over the
same period in 2000. The increase of approximately $319.0 million over the same
period in 2000 is primarily due to increased sales resulting from NRG Energy's
recently completed acquisitions.
For the nine months ended September 30, 2001, NRG Energy had total
revenues and equity earnings of $2.3 billion, compared to $1.5 billion for the
nine months ended September 30, 2000, an increase of $0.8 billion or
approximately 58.5%. NRG Energy's revenues from majority-owned operations were
$2.1 billion, an increase of $0.8 billion or approximately 59.6%, over the same
period in 2000. The increase of approximately $0.8 billion, over the same period
in 2000 is primarily due to increased sales resulting from NRG Energy's recently
completed acquisitions.
During the period of time subsequent to September 2000, NRG Energy
successfully completed the acquisition of numerous operational projects that
have contributed to the growth in NRG Energy's revenues from majority owned
operations. Beginning in September 2000, NRG Energy completed the acquisition of
the Flinders Power facilities in South Australia, Entrade AG, an energy trading
company active in Europe, the LS Power assets, the Conectiv assets, the Csepel
acquisition, the Hsin Yu acquisition, the Indeck acquisition, the McClain
acquisition and the increased ownership and resulting consolidation of Schkopau
and Cobee. Each of these recently completed acquisitions and others of less
significance have contributed substantially to the growth of NRG Energy's
revenues from majority-owned operations for the three and nine months ended
September 30, 2001 as compared to the same periods in 2000. In addition, the
power generating facilities that NRG Energy acquired in 1999 and during the
first two quarters of 2000, also contributed to the increase in revenues from
majority-owned operations for the three and nine months ended September 30,
2001, as compared to the same periods in 2000.
Equity in operating earnings of unconsolidated affiliates was $111.1
million for the three months ended September 30, 2001, compared to $91.6 million
for the three months ended September 30, 2000, an increase of $19.5 million or
21.3%. For the nine months ended September 30, 2001, equity in operating
earnings of unconsolidated affiliates was $191.6 million compared to $130.2
million for the nine months ended September 30, 2000, an increase of $61.4
million, or 47.2%. These increases are primarily due to NRG Energy's investment
in West Coast Power LLC which has experienced favorable results of operations
for the three and nine months ended September 30, 2001 as compared to the same
periods in 2000 and NRG Energy's increased ownership in MIBRAG. This increase
was partially offset by increased losses from NEO Corporation which derives a
significant portion of its net income from IRC Section 29 energy credits.
17
OPERATING COSTS AND EXPENSES
Cost of majority-owned operations was $525.3 million for the three
months ended September 30, 2001, an increase of $205.9 million, or approximately
64.4%, over the same period in 2000. Cost of majority-owned operations, as a
percentage of operating revenues and equity earnings for the period, was 54.5%
compared to 51.1% for the same period in 2000. For the nine months ended
September 30, 2001,the cost of majority-owned operations was $1.4 billion, an
increase of $0.6 billion, or approximately 70.0%, over the same period in 2000.
Cost of majority-owned operations, as a percentage of operating revenues and
equity earnings for the period, was 61.3% compared to 57.2% for the same period
in 2000. The increases of $205.9 million and $0.6 billion, for the three and
nine months ended September 30, 2001 as compared to the same periods in 2000,
are primarily a result of increased costs incurred as a result of NRG Energy's
recently completed acquisitions referenced above, each of which has affected NRG
Energy's cost of majority-owned operations.
Depreciation and amortization costs were $58.7 million and $142.4
million for the three and nine months ended September 30, 2001, compared to
$36.4 million and $87.3 million for the same periods in 2000, representing
increases of $22.3 million and $55.1 million, or 61.2% and 63.2%, respectively.
The increases are primarily due to acquisitions of generating facilities and
capital additions to owned facilities.
General, administrative and development costs were $69.9 million and
$168.8 million for the three and nine months ended September 30, 2001, compared
to $41.7 million and $98.0 million for the same periods in 2000, representing
increases of $28.2 million and $70.8 million, or 67.6% and 72.2%, respectively.
The increases are due primarily to increased business development, associated
legal, technical, and accounting expenses, employees and equipment resulting
from expanded operations and acquisitions that took place in 2001. As a percent
of total operating revenues and equity earnings, administrative and general
expenses increased for both the three and nine months ended September 30, 2001
to 7.3% from 6.7% during the same periods in 2000, respectively. NRG Energy's
asset base has grown to approximately $12.4 billion at September 30, 2001
compared to approximately $5.9 billion at September 30, 2000, an increase of
approximately $6.5 billion or 107%. NRG Energy expects this trend to continue
as it expands its operations through acquisitions and business development
activities.
OTHER (EXPENSE) INCOME
Other expense was $110.5 million and $293.9 million for the three and
nine months ended September 30, 2001, compared to $84.0 million and $220.7
million for the same period in 2000, increases of approximately $26.5 million
and $73.2 million, or 31.5% and 33.2%, respectively. The increases in other
expense was primarily due to increases in interest expense of approximately
$49.0 million and $107.6 million, or 60.3% and 49.9%, respectively for the three
and nine months ended September 30, 2001 as compared to the same periods in
2000. Interest expense includes both corporate and project level interest
expense. The increases in interest expense are due to increased corporate and
project level debt issued and outstanding during 2001 as compared to 2000.
During the later portion of the year 2000 and during the second quarter of 2001,
NRG Energy issued substantial amounts of long and short-term debt at both the
corporate level (recourse debt) and the project level (non-recourse debt) to
either directly finance the acquisition of electric generating facilities or
refinance short-term bridge loans incurred to finance such acquisitions. The
increases in other expense due to increased interest expense were partially
offset by increases in other income, net of approximately $22.8 million and
$35.2 million for the three and nine months ended September 30, 2001,
respectively. The increases in other income, net are primarily related to
increases in interest income resulting from cash balances, interest bearing
accounts and notes receivables and miscellaneous gains and losses on project
dispositions.
INCOME TAX
Income tax expense for the three and nine months ended September 30,
2001 was $57.3 million and $69.9 million, compared to $54.6 million and $82.7
million for the same period in 2000, an increase of $2.7 million for the three
months ended September 30, 2001 and a decrease of $12.8 million for the nine
months ended September 30, 2001, or an increase of 5.0% and a decrease of 15.4%,
respectively. The increase in income tax expense of $2.7 million for the three
months ended September 30, 2001 as compared to the same period in 2000 is due
primarily to increased domestic earnings. For the three months ended September
30, 2001, NRG Energy's overall effective tax rate was
18
28.8%, compared to 38.1% for the same period in 2000, this decrease is primarily
due to increased foreign earnings which are taxed at a lower effective rate than
domestic earnings and increased IRC Section 29 energy credits. For the three
months ended September 30, 2001, NRG Energy's overall effective tax rate before
recognition of tax credits and the impact of SFAS No. 133 was 34.8% compared to
44.5%, for the same period in 2000.
The decrease in income tax expense of $12.8 million for the nine months
ended September 30, 2001 as compared to the same period in 2000 is due primarily
to increased foreign earnings, which are taxed at a lower effective rate than
domestic earnings and increased IRC Section 29 energy credits. These amounts
were partially offset by higher domestic earnings as compared to the same period
in 2000. For the nine months ended September 30, 2001, NRG Energy's overall
effective tax rate was 23.7%, compared to 37.0% for the same period in 2000. For
the nine months ended September 30, 2001, NRG Energy's overall effective income
tax rate before recognition of tax credits and the impact of SFAS No. 133 was
37.1% compared to 47.5%, for the same period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
NRG Energy and its majority-owned subsidiaries have historically
obtained cash from operations, issuance of debt and equity securities,
borrowings under credit facilities, and the reimbursement by Xcel Energy of tax
benefits pursuant to tax sharing agreements. NRG Energy has used these funds to
finance operations, service debt obligations, fund the acquisition, development
and construction of generation facilities, finance capital expenditures and meet
other cash and liquidity needs.
NRG Energy's strategy is to continue to grow through a combination of
new acquisitions, the expansion or re-powering of existing facilities and the
development of new greenfield projects. It is not expected that cash flow from
operations alone will be sufficient to fund management's minimum growth plan
through 2005. Therefore, NRG Energy expects to finance its growth through
issuances of debt and equity securities and borrowings under credit facilities.
NRG Energy has generally financed a significant portion of the
acquisition and development of its projects under financing arrangements to be
repaid solely from each of its projects' cash flows, which are typically secured
by the plant's physical assets and equity interests in the project company. See
Notes 3 and 4 of the Financial Statements in this Form 10-Q for further
discussion of the long and short-term debt issuances that NRG Energy has
recently completed. Reference is also made to Note 9 of the Financial Statements
in NRG Energy's Form 10-K for the year ended December 31, 2000.
As a majority-owned subsidiary of Xcel Energy, Inc., NRG Energy's
financing activities are subject to the restrictions under the Public Utility
Holding Company Act (PUHCA). NRG Energy's management is currently examining a
variety of alternatives which would give NRG Energy increased flexibility under
PUHCA in financing its future growth. Among other things, NRG Energy is
exploring the use of lease financing for existing assets as well as potential
issuances of equity securities.
As discussed above, NRG Energy entered into a $600 million term loan
facility which is due on June 21, 2002. If for any reason NRG Energy is not able
to repay this facility in full when due, the lenders under the facility can
require that NRG Energy issue debt securities in order to refinance the
facility. Because any such debt issuance could have a negative
19
impact on NRG Energy's credit rating, management intends to pursue other
alternatives in order to raise the capital required to repay this facility,
including the issuance of equity securities when market conditions permit.
For further discussion of some of the factors impacting NRG Energy's
ability to raise the significant amounts of capital required to meet its growth
targets, see the Risk Factors included in NRG Energy's registration statement on
Form S-3 filed with the Securities and Exchange Commission (Reg. No. 62958), in
particular the discussions under the heading "We require significant amounts of
capital to grow our business and our future access to such funds is uncertain"
and "Our business is subject to substantial governmental regulation and
permitting requirements and may be adversely affected by any future inability to
comply with existing or future regulations or requirements."
CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
NET CASH PROVIDED BY OPERATING ACTIVITIES (IN THOUSANDS) $302,694 $241,996
During the nine months ended September 30, 2001, net cash from
operating activities increased approximately $60.7 million in comparison to the
same period in 2000. The primary reason for the increase is increased earnings
after adjustments for non-cash charges such as undistributed earnings of
unconsolidated affiliates, depreciation and amortization, deferred income taxes
and unrealized gains/losses on energy contracts. Partially offsetting these
increases in operating cash flows was a reduction in cash provided by certain
working capital items as compared to the same period in 2000. Reductions in the
outstanding balances of accounts receivables including those from affiliates
resulted in increased cash flows however reductions in outstanding payables
served to partially reduce this increase in cash flows.
NET CASH USED BY INVESTING ACTIVITIES (IN THOUSANDS) $(4,188,066) $(2,071,625)
During the nine months ended September 2001, cash used by investing
activities increased by approximately $2.1 billion. During the nine months ended
September 30, 2001, NRG Energy invested approximately $2.5 billion in the
acquisition of newly acquired generating facilities such as the LS Power
acquisition, the Conectiv acquisition, the Audrain acquisition, the PowerGen
acquisitions, the Vattenfall acquisitions, Hsin Yu Energy Development Ltd, the
McCain acquisition and the Indeck acquisition as well as ongoing capital
expenditures for its existing facilities, those under construction and
additional investments in unconsolidated projects such as MIBRAG. In addition,
NRG Energy also experienced increased balances in its restricted cash accounts.
During the same period in 2000, NRG Energy invested approximately $1.9 billion
primarily in the Cajun, Killingholme facilities and Flinders Power assets.
NET CASH PROVIDED BY FINANCING ACTIVITIES (IN THOUSANDS) $ 3,970,940 $ 1,963,434
During the nine months ended September 30, 2001, NRG Energy generated a
net amount of approximately $4.0 billion of cash from financing activities.
These cash flows resulted from the issuance of long and short-term debt and
equity securities during the period. During the same period in 2000, NRG Energy
generated a net amount of approximately $2.0 billion of cash through its
financing activities, primarily through long and short-term debt and equity
issuances. During both periods, NRG Energy used these amounts to finance
recently acquired generating facilities and/or for general corporate purposes.
20
CAPITAL COMMITMENTS
NRG Energy's capital expenditure program is subject to continuing
review and modification. Actual expenditures may differ significantly depending
upon such factors as the success, timing of and level of involvement in projects
under construction. NRG Energy has entered into the following acquisition
agreements:
Conectiv
In June 2001, NRG Energy extended purchase agreements that were entered
into with a subsidiary of Conectiv to acquire 794 MW of coal and oil-fired
electric generating capacity and other assets in New Jersey and Pennsylvania,
including an additional 66 MW of the Conemaugh Generating Station and an
additional 42 MW of the Keystone Generating Station. NRG Energy will pay
approximately $180 million for the assets. NRG Energy expects the acquisitions
to close in the first quarter of 2002 following approval of the New Jersey Board
of Public Utilities.
Narva Power
In August 2000, NRG Energy signed a Heads of Terms Agreement with Eesti
Energia, the Estonian state-owned electric utility, providing for the purchase
for approximately $72 million of a 49% stake in Narva Power, the owner and
operator of the oil shale-fired Eesti and Balti power plants, located near
Narva, Estonia. The plants have a combined capacity of approximately 2,700 MW.
NRG Energy is working to close the acquisition in the first quarter of 2002.
Edison Mission Energy
In August 2001, NRG Energy signed an agreement to acquire a 50%
interest in the Commonwealth Atlantic 375 MW gas and oil-fired generating
station from Edison Mission Energy. The Commonwealth Atlantic facility is
located near Chesapeake, Virginia. In addition, NRG Energy will also acquire a
50% interest in the James River 110 MW coal-fired generating facility located in
Hopewell, Virginia.
InnCOGEN
In October 2001, NRG Energy, signed a purchase agreement to acquire
from York Research Corporation 100% of the shares of InnCOGEN, LTD., which owns
a 225 MW gas-fired generating facility located in the Republic of Trinidad and
Tobago.
OTHER CONTINGENCIES
DISPUTED REVENUES
As of September 30, 2001, NRG Energy had approximately $26 million of
disputed revenues in respect of certain wholly owned subsidiaries, primarily NRG
Northeast Generating LLC. NRG Energy is actively pursuing resolution and/or
collection of these amounts. These disputed 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. As
previously disclosed in its annual report on Form 10-K, NRG Energy had
approximately $13.1 million of disputed revenues as of December 31, 2000. During
the nine months ended September 30, 2001, $3.1 million of disputed revenues were
resolved, and $16 million of new disputed revenues were added.
CALIFORNIA LIQUIDITY CRISIS
NRG Energy's California generation assets consist primarily of
interests in the Crockett and Mt. Poso facilities and a 50% interest in West
Coast Power LLC, formed in 1999 with Dynegy, Inc. The West Coast Power
facilities sold uncommitted power through the California Power Exchange (PX) and
the California Independent System Operator (ISO) to Pacific Gas and Electric
Company (PG&E), Southern California Edison Company (SCE) and San Diego Gas and
Electric Company (SDG&E), the three major California investor owned utilities.
Crockett,
21
Mt. Poso and certain of NRG Energy's other California facilities also sell
directly to PG&E, SCE and SDG&E. Currently, the West Coast Power facilities sell
uncommitted power through the California ISO to the California Department of
Water Resources (the CDWR).
The combination of rising wholesale electric prices, increases in the
cost of natural gas, the scarcity of hydroelectric power and regulatory
limitations on the rates that PG&E and SCE may charge their retail customers
caused both PG&E and SCE to default in their payments to the California PX, the
California ISO and other suppliers, including NRG Energy. In March 2001, the
California PX filed for bankruptcy under Chapter 11 of the Bankruptcy Code, and
in April 2001, PG&E filed for bankruptcy under Chapter 11 of the Bankruptcy
Code.
In March 2001, certain affiliates of West Coast Power entered into a
four year contract with the CDWR pursuant to which the affiliates agreed to sell
up to 1,000 MW to the CDWR for the remainder of 2001 and up to 2,300 MW from
January 1, 2002 through December 31, 2004, any of which may be resold by the
CDWR to utilities such as SCE, PG&E and SDG&E. The ability of the CDWR to make
future payments is subject to the CDWR having a continued source of funding,
whether from legislative or other emergency appropriations, from a bond issuance
or from amounts collected from SCE, PG&E and SDG&E for deliveries to their
customers. As a result of the present situation in California, all of NRG
Energy's interests in California are exposed to heightened risk of delayed
payments and/or non-payment regardless of whether the sales are made directly to
PG&E, SCE or SDG&E or to the California ISO or the CDWR.
NRG Energy's share of the net amounts owed to its California affiliates
by the California PX, the California ISO, and the three major California
utilities totaled $230 million as of September 30, 2001, based upon unaudited
financial information provided by such affiliates. This amount reflects NRG
Energy's share of (a) total amounts owed to its California affiliates of $371
million, less (b) amounts that are currently treated as "disputed revenues" and
are not recorded as accounts receivable in the financial statements of the
California affiliates, and reserves taken against accounts receivable that have
been recorded in such financial statements, both of which together totaled $141
million. NRG Energy believes that it will ultimately collect in full the net
amount of $230 million owed to its California affiliates; however, if some form
of financial relief or support is not provided to PG&E and SCE, the
collectibility of this amount will become more questionable in terms of both
timing and amount. With respect to disputed revenues, these amounts relate to
billing disputes arising in the ordinary course of business and to disputes that
have arisen as a result of the California ISO and the Federal Energy Regulatory
Commission (FERC) imposing various revenue caps on the wholesale price of
electricity. None of the disputed revenues will be recorded until the particular
issue that caused them to be excluded from the financial statements is resolved.
Since the date of the PG&E bankruptcy filing, PG&E has been paying NRG Energy's
Crockett and Mt. Poso affiliates on a current basis.
On June 19, 2001, FERC issued an order establishing a maximum pricing
methodology for spot markets in California and throughout the Western Systems
Coordinating Council (WSCC) region at times when reserves fall below 7% in
California. The maximum prices for sales in the WSCC spot markets during those
hours, called the "market clearing prices," is derived from the costs of the
least efficient provider based in California and selling through the California
ISO. At all other times, this order establishes a maximum price equal to 85% of
the last market-clearing price. This maximum price program will terminate on
September 30, 2002.
In its June order, FERC also mandated settlement negotiations among
sellers and buyers in the California ISO markets in respect of the settlement of
past accounts, refund issues related to periods after October 2, 2000 and the
structuring of future arrangements for meeting California's energy requirements.
The settlement talks were overseen by Administrative Law Judge Curtis Wagner and
concluded without reaching a resolution on July 9, 2001. Accordingly, Judge
Wagner made a recommendation to FERC on such resolution. Judge Wagner
recommended that FERC hold a full evidentiary hearing to review his proposals
before reaching any decision. The Commission issued its order on July 25, 2001
establishing evidentiary hearing procedures. At this early point in the
proceedings, NRG Energy cannot predict what action FERC will take on any of the
issues presented, including any refunds sought from the generators.
22
For further information regarding the California Liquidity Crisis see
Note 7 to the financial statements included in this Form 10-Q.
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 NRG Energy's Somerset facility. The
new rules impose phased deadlines for achieving annual and monthly emission rate
reductions of sulfer dioxide (SO2) and nitrogen oxides (NOx). NRG Energy
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, NRG Energy 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 NRG
Energy reduce by October 1, 2006 its annual NOx emission rate by about 60% of
its current emission rate. In the case of NOx, NRG Energy anticipates the need
to install additional equipment to meet the annual NOx limitations; once
installed, there should be no problems meeting monthly emission rate limits. To
meet the monthly SO2 emission rate limits, NRG Energy 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 test 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. NRG Energy is
evaluating its compliance options under the new regulations. Such compliance
options could have a material adverse impact on the Somerset facility.
In May 2001, the South Coast Air Quality Management District of
California (AQMD) amended existing rules that govern the operation of the
Regional Clean Air Incentive Market (RECLAIM) program. Under the amendments,
once NRG Energy's RECLAIM trading credit allocations are depleted, NRG Energy
must pay the AQMD a mitigation fee of $7.50 per pound for any excess NOx
emissions. The amendments may restrict NRG Energy's ability to purchase
sufficient NOx emissions credits for its Long Beach and El Segundo plants. The
price of power sold to the California Department of Water Resources (the CDWR)
from NRG Energy's Long Beach and El Segundo plants will include excess emissions
costs. NRG Energy and the CDWR are evaluating the compliance options under the
amended rules, and such compliance could have a material adverse impact on those
facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
and Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 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. Statement No. 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. NRG Energy adopted the provisions of
Statement No. 141 effective July 1, 2001 and plans to adopt the provisions
of Statement No. 142 effective January 1, 2002. NRG Energy does not expect the
implementation of these guidelines to have a material impact on its consolidated
financial position or results of operations.
In July 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires an entity to recognize the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. Upon initial recognition of a liability for an asset retirement
obligation, an entity shall capitalize an asset retirement cost by increasing
the carrying amount of the related long-lived asset by the same amount as the
liability. SFAS No. 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002. Although NRG Energy has not completed its
analysis of SFAS 143, it does not expect the impact to be significant.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
retains and expands upon the fundamental provisions of existing guidance related
to the recognition and measurement of the impairment of long-lived assets to be
held and used and the measurement of long-lived assets to be disposed of by
sale. Generally, the provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. Earlier
application is encouraged. Although NRG Energy has not completed its analysis of
SFAS No. 144, it does not expect the impact to be significant.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NRG Energy and its subsidiaries are exposed to market risks, including
changes in commodity prices, interest rates and currency exchange rates as
disclosed in Management's Discussion and Analysis in its annual report on Form
10-K for the year ended December 31, 2000. There have been no material changes,
as of September 30, 2001, to the market risk exposures that affect the
quantitative and qualitative disclosures presented as of December 31, 2000.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 the prior owner of the Huntley
and Dunkirk facilities relating to physical changes made at those facilities
prior to our 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,
notifying NRG Energy pursuant to Section 304 of the Clean Air Act (the "Act") of
the States intent to file suit against NRG Energy and Niagara Mohawk Power
corporation 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 State
Attorney General's office and the state has not sued.
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.
CALIFORNIA LITIGATION
The six civil actions brought against NRG Energy and other power
generators and power traders in California have been consolidated and assigned
to the Presiding Judge of the San Diego Superior court to determine the
appropriate site and judge for the cases. In the meantime, NRG Energy and the
other defendants have served and filed alternative motions to dismiss all
claims, to strike Plaintiffs' damage claims, and to stay all proceedings pending
rulings from the Federal Energy Regulatory Commission on issues before it. These
motions will be heard after all the cases are assigned to one judge. For a
summary description of these six civil actions, see NRG Energy's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000 (the 2000 10-K), and
NRG Energy's quarterly report on Form 10-Q for the quarter ended March 31, 2001
filed with The Securities and Exchange Commission.
Except as described above and in NRG Energy's 2000 10-K and its
quarterly reports filed on Form 10-Q for the quarters ended March 31, 2001 and
June 30, 2001, there are no other material legal proceedings pending to which
NRG Energy is a party. There are no material legal proceedings to which an
officer or director is a party or has a material interest adverse to NRG Energy
or its subsidiaries. There are no other material administrative or judicial
proceedings arising under environmental quality or civil rights statutes pending
or known to be contemplated by governmental agencies to which NRG Energy is or
would be a party.
25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During May 2001, NRG Energy's affiliate Crockett Cogeneration became
technically in default of its loan agreement. The default arose as a result of
Crockett not making full payment of its fuel supply billings to BP Amoco because
Crockett was not receiving payment on its energy sales. No default in principal
or interest payment has occurred. Crockett is current on all payments due BP
Amoco. Due to ongoing credit concerns in respect of Crockett's customers, its
lenders have not retracted their default letter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None.
(B) REPORTS ON FORM 8-K:
On July 2, 2001, NRG Energy filed a Form 8-K under Item 2 - Acquisition
or Disposition of Assets.
On June 22, 2001, NRG Energy reported that it acquired 1,081
megawatts of baseload electric generating plants from Delmarva
Power and Light, a subsidiary of Wilmington, Delaware-based
Conectiv.
On July 18, 2001, NRG Energy filed a Form 8-K under Item 5 - Other
Events.
On July 16, 2001, NRG Energy completed the offering of
$340,000,000 of its 6.75% Senior Notes due 2006 and $160,000,000
of its 8.625% Senior Notes due 2031. In this connection, NRG
Energy filed certain exhibits.
On July 30, 2001, NRG Energy filed a Form 8-K reporting under Item 5 -
Other Events.
On July 25, 2001, NRG Energy, Inc. reported its financial results
for the second quarter of 2001.
On July 30, 2001, NRG Energy filed a Form 8-K reporting under Item 5 -
Other Events.
On July 26, 2001, NRG Energy, Inc. (NRG) reported that the
Federal Energy Regulatory Commission has instructed its staff to
convene a technical conference to "further explore issues related
to the competitive effects" resulting from NRG Energy's proposed
acquisition of the Bridgeport and New Haven Harbor Stations in
Connecticut. The action will result in the acquisition being
delayed beyond its previously expected close in the third quarter
of 2001.
On September 21, 2001, NRG Energy filed a Form 8-K reporting under Item
5 - Other Events.
On September 20, 2001, NRG Energy, Inc. reported that it is on
target to reach its forecasted EPS of $1.35 and announced that it
acquired a 50% interest in the Saguaro Station from Edison
Mission Energy and further announced that it has decided to stop
pursuing the acquisition of two Connecticut plants from Wisvest
Connecticut LLC.
On October 15, 2001, NRG Energy filed a Form 8-K reporting under Item 5
- - Other Events.
On October 11, 2001, NRG Energy, Inc. reported its financial
results for the third quarter of 2001.
26
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 NRG Energy 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; the risk of a significant slowdown in
growth in the U.S. economy or risk of delay in growth recovery in the U.S.
as a consequence of the September 11, 2001 terrorist attacks and other
factors;
o Trade, monetary, fiscal, taxation, and environmental policies of
governments, agencies and similar organizations in geographic areas where
NRG Energy has 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, the
Company or any of its subsidiaries; or 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 conditions of final
legal closing, partnership actions, competition, operating risks,
dependence on certain suppliers and customers, domestic and foreign
environmental and energy regulations;
o Limitations on NRG Energy's ability to control the development or operation
of projects in which NRG Energy has less than 100% interest;
o The lack of operating history at development projects, the lack of NRG
Energy's operating history at the projects not yet owned and the limited
operating history at the remaining projects provide only a limited basis
for management to project the results of future operations;
o Risks associated with timely completion of projects under construction,
including obtaining competitive contracts, obtaining regulatory and
permitting approvals, local opposition, construction delays and other
factors beyond NRG Energy's control;
o The failure to timely satisfy the closing conditions contained in the
definitive agreements for the acquisitions of projects subject to
definitive agreements but not yet closed, many of which are beyond NRG
Energy's control;
o Factors challenging the successful integration of projects not previously
owned or operated by NRG Energy, including the ability to obtain operating
synergies;
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o Factors associated with operating in foreign countries including: delays in
permitting and licensing, construction delays and interruption of business,
political instability, risk of war, expropriation, nationalization,
renegotiation, or nullification of existing contracts, changes in law, and
the ability to convert foreign currency into United States dollars;
o Changes in government regulation or the implementation of government
regulations, including pending changes within or outside of California as a
result of the California energy crisis, which could result in NRG Energy's
failure to obtain regulatory approvals required to close project
acquisitions, and which could adversely affect the continued deregulation
of the electric industry;
o Other business or investment considerations that may be disclosed from time
to time in NRG Energy's Securities and Exchange Commission filings or in
other publicly disseminated written documents, including NRG Energy's
Registration Statement No. 333-62958, as amended, and all supplements
thereto.
NRG Energy undertakes no obligation or publicly 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 our actual
results to differ materially from those contemplated in any forward-looking
statements included in this Form 10-Q should not be construed as exhaustive.
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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 ENERGY, INC.
----------------
(Registrant)
/s/ Leonard A. Bluhm
------------------------------
Leonard A. Bluhm
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ William T. Pieper
------------------------------
William T. Pieper
Vice President and Controller
(Principal Accounting Officer)
Date: November 14, 2001
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