Exhibit 99.1
Index to Consolidated Financial Statements of NRG Energy, Inc.
PAGE NO.
--------
Report of Independent Accountants 1
Consolidated Statement of Income 2
Consolidated Statement of Cash Flows 3
Consolidated Balance Sheet 4-5
Consolidated Statement of Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of NRG Energy, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of NRG Energy,
Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 21 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" on January 1, 2001.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 21, 2002
1
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations................... $2,798,608 $2,018,622 $432,518
Equity in earnings of unconsolidated affiliates........... 210,032 139,364 67,500
---------- ---------- --------
Total operating revenues and equity earnings......... 3,008,640 2,157,986 500,018
---------- ---------- --------
OPERATING COSTS AND EXPENSES
Cost of majority-owned operations......................... 1,855,631 1,289,471 269,900
Depreciation and amortization............................. 212,493 122,953 37,026
General, administrative and development................... 225,694 172,489 83,572
---------- ---------- --------
Total operating costs and expenses................... 2,293,818 1,584,913 390,498
---------- ---------- --------
OPERATING INCOME............................................ 714,822 573,073 109,520
---------- ---------- --------
OTHER INCOME (EXPENSE)
Minority interest in earnings of consolidated
subsidiaries........................................... (6,564) (11,335) (2,456)
Gain on sale of interest in projects...................... -- -- 10,994
Other income, net......................................... 34,084 7,857 6,432
Interest expense.......................................... (443,734) (293,922) (93,376)
---------- ---------- --------
Total other expense.................................. (416,214) (297,400) (78,406)
---------- ---------- --------
INCOME BEFORE INCOME TAXES.................................. 298,608 275,673 31,114
INCOME TAX EXPENSE (BENEFIT)................................ 33,404 92,738 (26,081)
---------- ---------- --------
NET INCOME.................................................. $ 265,204 $ 182,935 $ 57,195
========== ========== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC....................................... 194,929 165,861 147,605
EARNINGS PER WEIGHTED AVERAGE COMMON SHARE - BASIC.......... $ 1.36 $ 1.10 $ 0.39
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - DILUTED..................................... 196,439 166,989 147,605
EARNINGS PER WEIGHTED AVERAGE COMMON SHARES - DILUTED....... $ 1.35 $ 1.10 $ 0.39
</Table>
See notes to consolidated financial statements.
2
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 265,204 $ 182,935 $ 57,195
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Undistributed equity in earnings of unconsolidated
affiliates............................................ (119,002) (43,258) (27,181)
Depreciation and amortization........................... 212,493 122,953 37,026
Deferred income taxes and investment tax credits........ 45,556 38,458 (3,401)
Unrealized (gains)/losses on energy contracts........... (13,257) -- --
Minority interest....................................... 6,564 4,993 857
Gain on sale of investments............................. -- -- (10,994)
Cash provided by (used in) changes in certain working
capital items, net of effects from acquisitions and
dispositions..........................................
Accounts receivable................................... 89,523 (198,091) (99,608)
Accounts receivable-affiliates........................ -- 10,703 9,964
Inventory............................................. (111,131) (12,316) (17,287)
Prepayments and other current assets.................. (36,530) (608) (13,433)
Accounts payable...................................... (4,512) 143,045 40,616
Accounts payable-affiliates........................... 4,989 -- --
Accrued income taxes.................................. (75,132) 39,137 25,834
Accrued property and sales taxes...................... 4,054 3,743 1,740
Accrued salaries, benefits, and related costs......... 15,785 (8,153) 1,955
Accrued interest...................................... 35,637 38,479 5,192
Other current liabilities............................. 37,675 (5,136) (3,533)
Cash provided by (used by) changes in other assets and
liabilities........................................... (81,902) 44,794 (16,322)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 276,014 361,678 (11,380)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of liabilities assumed.................. (2,813,117) (1,912,957) (1,519,365)
Consolidation of equity subsidiaries...................... -- -- 20,181
Proceeds from sale of investments......................... 4,063 8,917 43,500
Decrease/(increase) in restricted cash.................... (99,707) 5,306 (13,067)
Decrease/(increase) in notes receivable................... 45,091 (5,444) 58,331
Capital expenditures...................................... (1,322,130) (223,560) (94,853)
Proceeds from sale of property............................ -- 9,785 --
Investments in projects................................... (149,841) (86,195) (163,340)
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES....................... (4,335,641) (2,204,148) (1,668,613)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments)/borrowings under line of credit
agreement............................................... 202,000 (367,766) 216,000
Proceeds from issuance of stock........................... 475,464 453,719 --
Proceeds from issuance of corporate units (warrants)...... 4,080 -- --
Proceeds from issuance of short term debt................. 622,156 -- 682,096
Capital contributions from parent......................... -- -- 250,000
Proceeds from issuance of long-term debt.................. 3,268,017 3,034,909 575,633
Principal payments on long-term debt...................... (418,171) (1,214,992) (18,634)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 4,153,546 1,905,870 1,705,095
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (3,055) 360 --
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 90,864 63,760 25,102
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 95,243 31,483 6,381
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 186,107 $ 95,243 $ 31,483
=========== =========== ===========
</Table>
See notes to consolidated financial statements.
3
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
DECEMBER 31,
-------------------------
2001 2000
----------- ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 186,107 $ 95,243
Restricted cash........................................... 161,842 12,135
Accounts receivable-trade, less allowance for doubtful
accounts of $33,962 and $21,199........................ 346,154 360,075
Income tax receivable..................................... 28,118 --
Inventory................................................. 331,323 174,864
Current portion of notes receivable....................... 737 267
Derivative instruments valuation -- at market............. 54,934 --
Prepayments and other current assets...................... 78,142 30,074
----------- ----------
Total current assets........................................ 1,187,357 672,658
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
In service................................................ 7,005,680 4,106,653
Under construction........................................ 2,942,993 206,992
----------- ----------
Total property, plant and equipment......................... 9,948,673 4,313,645
Less accumulated depreciation............................. (516,454) (271,977)
----------- ----------
Net property, plant and equipment........................... 9,432,219 4,041,668
----------- ----------
OTHER ASSETS
Equity investments in affiliates.......................... 1,050,510 973,261
Capitalized project costs................................. 2,581 10,262
Notes receivable, less current portion.................... 775,865 76,745
Decommissioning fund investments.......................... 4,336 3,863
Intangible assets, net of accumulated amortization of
$15,311 and $8,951..................................... 97,133 101,570
Debt issuance costs, net of accumulated amortization of
$17,250 and $6,443..................................... 110,708 48,773
Derivative instruments valuation -- at market............. 179,605 --
Other assets, net of accumulated amortization of $13,323
and $10,628............................................ 54,231 50,192
----------- ----------
Total other assets.......................................... 2,274,969 1,264,666
----------- ----------
TOTAL ASSETS................................................ $12,894,545 $5,978,992
=========== ==========
</Table>
See notes to consolidated financial statements.
4
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
DECEMBER 31,
-------------------------
2001 2000
----------- ----------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of project level long-term debt........... $ 500,154 $ 146,469
Revolving line of credit.................................. 170,000 8,000
Revolving line of credit, non-recourse debt............... 40,000 --
Project-level, non-recourse debt.......................... 22,156 --
Corporate level, recourse debt............................ 600,000 --
Accounts payable-trade.................................... 330,471 255,917
Accounts payable-affiliate................................ 16,867 7,191
Accrued income taxes...................................... -- 43,870
Accrued property, sales and other taxes................... 14,585 10,531
Accrued salaries, benefits and related costs.............. 40,043 24,830
Accrued interest.......................................... 96,479 51,962
Derivative instruments valuation -- at market............. 21,910 --
Other current liabilities................................. 97,939 14,220
----------- ----------
Total current liabilities................................... 1,950,604 562,990
OTHER LIABILITIES
Project-level, long-term, non-recourse debt............... 4,871,432 2,146,953
Corporate level long-term, recourse debt.................. 2,972,400 1,503,896
Deferred Income Taxes..................................... 445,736 55,642
Postretirement and other benefit obligations.............. 75,455 83,098
Derivative instruments valuation -- at market............. 51,520 --
Other long-term obligations and deferred income........... 222,468 149,640
Minority interest......................................... 67,801 14,685
----------- ----------
Total liabilities........................................... 10,657,416 4,516,904
----------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A - Common stock; $.01 par value; 250,000,000 shares
authorized; 147,604,500 shares issued and
outstanding............................................ 1,476 1,476
Common stock; $.01 par value; 550,000,000 shares
authorized; 50,939,875 shares and 32,395,500 shares
issued and outstanding at December 31, 2001 and 2000... 509 324
Additional paid-in capital................................ 1,713,984 1,233,833
Retained earnings......................................... 635,349 370,145
Accumulated other comprehensive income.................... (114,189) (143,690)
----------- ----------
Total Stockholders' Equity.................................. 2,237,129 1,462,088
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $12,894,545 $5,978,992
=========== ==========
</Table>
See notes to consolidated financial statements.
5
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
CLASS A ACCUMULATED
COMMON COMMON ADDITIONAL OTHER TOTAL
---------------- -------------- PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SHARES STOCK SHARES CAPITAL EARNINGS INCOME EQUITY
----- ------ ----- ------ ---------- -------- ------------- -------------
(IN THOUSANDS)
BALANCES AT DECEMBER 31, 1998........ $1,476 147,605 $ -- -- $ 530,438 $130,015 $ (82,597) $ 579,332
------ ------- ---- ------ ---------- -------- --------- ----------
Net Income......................... 57,195 57,195
Foreign currency translation
adjustments.................... 7,127 7,127
----------
Comprehensive income for 1999.... 64,322
Capital contribution from
parent......................... 250,000 250,000
------ ------- ---- ------ ---------- -------- --------- ----------
BALANCES AT DECEMBER 31, 1999........ $1,476 147,605 $ -- -- $ 780,438 $187,210 $ (75,470) $ 893,654
====== ======= ==== ====== ========== ======== ========= ==========
Net Income......................... 182,935 182,935
Foreign currency translation
adjustments.................... (68,220) (68,220)
----------
Comprehensive income for 2000.... 114,715
Issuance of common stock, net of
issuance costs of $32.2
million........................ 324 32,396 453,395 453,719
------ ------- ---- ------ ---------- -------- --------- ----------
BALANCES AT DECEMBER 31, 2000........ $1,476 147,605 $324 32,396 $1,233,833 $370,145 $(143,690) $1,462,088
====== ======= ==== ====== ========== ======== ========= ==========
Net Income......................... 265,204 265,204
Foreign currency translation
adjustments and other.......... (41,600) (41,600)
Deferred unrealized gains, net on
derivatives.................... 71,101 71,101
----------
Comprehensive income for 2001.... 294,705
Capital stock activity:
-Issuance of corporate units/
warrant........................ 4,080 4,080
-Tax benefits of stock option
issuance....................... 792 792
-Issuance of common stock, net of
issuance costs of $23.5
million........................ 185 18,543 475,279 475,464
------ ------- ---- ------ ---------- -------- --------- ----------
BALANCES AT DECEMBER 31, 2001........ $1,476 147,605 $509 50,939 $1,713,984 $635,349 $(114,189) $2,237,129
====== ======= ==== ====== ========== ======== ========= ==========
</Table>
See notes to consolidated financial statements.
6
NOTE 1 -- ORGANIZATION
NRG Energy, Inc., (NRG Energy), was incorporated as a Delaware corporation
on May 29, 1992. Beginning in 1989, NRG Energy conducted business through its
predecessor companies, NRG Energy, Inc. and NRG Group, Inc., Minnesota
corporations, which were merged into NRG Energy subsequent to its incorporation.
NRG Energy, together with its majority owned subsidiaries and affiliates, 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.
On June 5, 2000, NRG Energy completed its initial public offering. Prior to
completing its initial public offering, NRG Energy was a wholly owned subsidiary
of Northern States Power Company (NSP). During August 2000, NSP and New Century
Energies, Inc. completed their merger. The surviving company operates under the
new name Xcel Energy, Inc. (Xcel Energy). The shares of NRG Energy's class A
common stock previously held by NSP are now owned by Xcel Energy. As of December
31, 2001, Xcel Energy owned a 74% interest in NRG Energy's outstanding common
and class A common stock, representing 97% of the total voting power of NRG
Energy's common stock and class A common stock.
In February 2002, Xcel Energy announced its intention to commence an
exchange offer to acquire all of NRG Energy's outstanding common stock, and
stated its intention to close this transaction in April 2002 (See Note 23).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include NRG Energy's accounts and
those of its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Accounting policies for all of
NRG Energy's operations are in accordance with accounting principles generally
accepted in the United States of America. As discussed in Note 6, NRG Energy has
investments in partnerships, joint ventures and projects. Investments in such
businesses in which NRG Energy does not have control, but has the ability to
exercise significant influence over the operating and financial policies, are
accounted for under the equity method. Earnings from equity in international
investments are recorded net of foreign income taxes.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments (primarily commercial
paper) with an original maturity of three months or less at the time of
purchase.
RESTRICTED CASH
Restricted cash consists primarily of cash collateral for letters of credit
issued in relation to project development activities and funds held in trust
accounts to satisfy the requirements of certain debt agreements.
INVENTORY
Inventory is valued at the lower of weighted average cost or market and
consists principally of fuel oil, spare parts, coal, kerosene, emission
allowance credits and raw materials used to generate steam.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at original cost or the present
value of minimum lease payments for assets under capital leases. Significant
additions or improvements extending asset lives are capitalized,
7
while repairs and maintenance are charged to expense as incurred. Depreciation
is computed using the straight-line method over the following estimated useful
lives:
<Table>
Facilities and improvements................................. 10-45 years
Machinery and equipment..................................... 7-30 years
Office furnishings and equipment............................ 3-5 years
</Table>
The assets and related accumulated depreciation amounts are adjusted for
asset retirements and disposals with the resulting gain or loss included in
operations. NRG Energy analyzes property, plant and equipment quarterly for
potential impairment, assessing the appropriateness of lives and recoverability
of net balances in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
IMPAIRMENT OF LONG LIVED ASSETS
Long-lived assets and intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to the future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the cost to sell.
CAPITALIZED INTEREST
Interest incurred on funds borrowed to finance projects expected to require
more than three months to complete is capitalized. Capitalization of interest is
discontinued when the asset under construction is ready for its intended use.
Capitalized interest was approximately $27,175,000, $2,667,000, and $287,000 in
2001, 2000 and 1999, respectively.
CAPITALIZED PROJECT COSTS
Development costs and capitalized project costs include third party
professional services, permits, and other costs which are incurred incidental to
a particular project. Such costs are expensed as incurred until an acquisition
agreement or letter of intent is signed, and the project has been approved by
NRG Energy's Board of Directors. Additional costs incurred after this point are
capitalized. When a project begins operation, previously capitalized project
costs are reclassified to equity investments in affiliates or property plant and
equipment and amortized on a straight-line basis over the lesser of the life of
the project's related assets or revenue contract period.
DEBT ISSUANCE COSTS
Debt issuance costs are capitalized and amortized over the terms of the
related debt.
INTANGIBLE ASSETS
Goodwill results when NRG Energy purchases a business at a price higher
than the underlying fair value of the net assets. Effective January 1, 2002, NRG
Energy implemented SFAS No. 142, "Goodwill and Other Intangible Assets." (SFAS
No. 142). At December 31, 2001, NRG Energy had intangible assets of $97.1
million including $56.6 million of goodwill. These amounts and all intangible
assets and goodwill acquired in the future will be accounted for under the new
accounting standard. The new accounting can be expected to initially increase
earnings due to the elimination of regular amortization expense, but
periodically cause reductions in earnings when impairment write-downs of
goodwill and/or intangible assets are required.
8
INCOME TAXES
In March 2001, NRG Energy was deconsolidated from Xcel Energy for Federal
income tax purposes. Prior to March 13, 2001, NRG Energy was included in the
consolidated tax returns of Xcel Energy. NRG Energy calculated its income tax
provision on a separate return basis under a tax sharing agreement with Xcel
Energy as discussed in Note 10. Current Federal and certain state income taxes
were payable to or receivable from Xcel Energy.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
REVENUE RECOGNITION
NRG Energy is primarily an electric generation company, operating a
portfolio of majority-owned electric generating plants and certain plants in
which its ownership interest is 50% or less and which are accounted for under
the equity method. In connection with its electric generation business, NRG
Energy also produces thermal energy for sale to customers, principally through
steam and chilled water facilities. NRG Energy also collects methane gas from
landfill sites, which is then used for the generation of electricity. In
addition, NRG Energy sells small amounts of natural gas and oil to third
parties. NRG Energy's wholly owned subsidiary, NRG Power Marketing, Inc. enters
into both physical and financial transactions on behalf of the entities which
own the electric generating plants in order to optimize the financial
performance of the plants.
Electrical energy revenue is recognized upon transmission to the customer.
Capacity and ancillary revenue is recognized when contractually earned. Disputed
revenues are not recorded on the financial statements and will not be recognized
as income until disputes are resolved and collection is assured.
NRG Energy also performs operations and maintenance services for some of
the projects in which it has an interest. Revenue is recognized as service
contract revenue on these contracts when the services are performed.
NRG Energy uses the equity method of accounting to recognize as revenue its
pro rata share of the net income or loss of the unconsolidated investment until
such time as the company's investment is reduced to zero, at which time equity
income is generally recognized only upon receipt of cash distributions from the
investee.
NRG Energy recognizes other income for interest income on loans to
affiliates as the interest is earned and realizable.
FOREIGN CURRENCY TRANSLATION
The local currencies are generally the functional currency of NRG Energy's
foreign operations. Foreign currency denominated assets and liabilities are
translated at end-of-period rates of exchange. Revenues, expenses and cash flows
are translated at weighted-average rates of exchange for the period. The
resulting currency adjustments are accumulated and reported as a separate
component of stockholders' equity and are not included in the determination of
the results of operations.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject NRG Energy to
concentrations of credit risk consist primarily of cash, accounts receivable,
and notes receivable. Cash accounts are generally held in Federally insured
banks. Accounts receivable, notes receivable and derivative instruments are
concentrated within entities engaged in the energy industry. These industry
concentrations may impact NRG Energy's overall exposure to credit risk, either
positively or negatively, in that the customers may be similarly affected by
9
changes in economic, industry or other conditions. Receivables are generally not
collateralized; however, NRG Energy believes the credit risk posed by industry
concentration is offset by the diversification and creditworthiness of its
customer base. See Note 17.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, receivables, accounts
payables, and accrued liabilities approximate fair value because of the short
maturity of these instruments. The carrying amounts of long-term receivables
approximate fair value as the effective rates for these instruments are
comparable to market rates at year end, including current portions. The carrying
amount of long term debt was approximately $8.3 billion and $3.8 billion at
December 31, 2001 and 2000, respectively. The estimated fair value of long-term
debt is based on borrowing rates currently available with similar terms and
average maturities.
STOCK BASED COMPENSATION
In 1995, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock Based
Compensation." NRG Energy has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting Principle
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
NRG Energy records expense in an amount equal to the excess of the quoted market
price on the grant date over the option price. Such expense is recognized at the
grant date for options fully vested. For options with a vesting period, the
expense is recognized over the vesting period. NRG Energy has recognized
approximately $1.9 million and $7.3 million of stock based compensation expense
for the periods ended December 31, 2001 and 2000, respectively.
NET INCOME (LOSS) PER SHARE
Basic net income per share is calculated based on the weighted average of
common shares outstanding during the period. Net income per share, assuming
dilution is computed by dividing net income by the weighted average number of
common and common equivalent shares outstanding. NRG Energy's only common
equivalent shares are those that result from dilutive common stock options and
NRG Energy's Corporate Units (see Note 15).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
In recording transactions and balances resulting from business operations,
NRG Energy uses estimates based on the best information available. Estimates are
used for such items as plant depreciable lives, tax provisions, un-collectible
accounts and actuarially determined benefit costs and the valuation of long-term
energy commodities contracts, among others. As better information becomes
available (or actual amounts are determinable), the recorded estimates are
revised. Consequently, operating results can be affected by revisions to prior
accounting estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized but instead be tested for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-lived assets and for Long-lived Assets to Be Disposed Of." Goodwill will no
longer be amortized to comply with the
10
provisions of SFAS No. 142. Instead, goodwill and intangible assets that will
not be amortized should be tested for impairment annually and on an interim
basis if an event occurs or a circumstance changes between annual tests that may
reduce the fair value of a reporting unit below its carrying value. An
impairment test is required to be performed within six months of the date of
adoption, and the first annual impairment test must be performed in the year the
statement is initially adopted.
NRG Energy and its subsidiaries, as required, adopted SFAS No. 142 on
January 1, 2002. At December 31, 2001, NRG Energy had intangible assets of $97.1
million, including $56.6 million of goodwill. These amounts and all intangible
assets and goodwill acquired in the future will be accounted for under the new
accounting standard. The new accounting standard is expected to initially
increase earnings by an immaterial amount due to the elimination of regular
amortization expense, but occasionally cause reductions in earnings when
impairment write-downs of goodwill and/or intangible assets are required.
Expense recognized for amortization of goodwill in 2001 was $3.8 million
(pre-tax). NRG Energy does not expect to recognize any asset impairments as a
result of adopting SFAS No. 142 in the first quarter of 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement 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.
NRG Energy has not completed its analysis of SFAS No. 143.
In October 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.
RECLASSIFICATIONS
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.
NOTE 3 -- ASSET ACQUISITIONS
During the year ended December 31, 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 may be adjusted based upon
completion of certain procedures including third party valuations. Operations of
the acquired companies have been included in the operations of NRG Energy since
the date of the respective acquisitions.
In January 2001, NRG Energy purchased from LS Power, LLC a 5,633 MW
portfolio of operating projects and projects in construction and advanced
development that are located primarily in the north central and south central
United States. Each facility employs natural gas-fired, combined-cycle
technology. Through December 31, 2005, NRG Energy also has the opportunity to
acquire ownership interests in an additional 3,000 MW of generation projects
developed and offered for sale by LS Power and its partners.
In March 2001, NRG Energy purchased from Cogentrix the remaining 430 MW, or
51.37% interest, in an 837 MW natural gas-fired combined-cycle plant in
Batesville, Mississippi. NRG Energy acquired a 48.63% interest in the plant in
January 2001 from LS Power.
11
In May 2001, NRG Energy purchased a 640 MW natural gas-fired power plant in
Audrain County, Missouri from Duke Energy North America LLC.
In June 2001, NRG Energy closed on the construction financing for the
Brazos Valley generating facility, a 633 MW gas-fired power plant in Fort Bend
County, Texas that NRG Energy will build, operate and manage. At the time of the
closing, NRG Energy also became the 100% owner of the project by purchasing
STEAG Power LLC's 50% interest in the project. NRG Energy expects the project to
begin commercial operation in February 2003.
In June 2001, NRG Energy purchased 1,081 MW of interests in power
generation plants from a subsidiary of Conectiv. NRG Energy acquired a 100%
interest in the 784 MW coal-fired Indian River Generating Station located near
Millsboro, Delaware and in the 170 MW oil-fired Vienna Generating Station
located in Vienna, Maryland. In addition, NRG Energy acquired 64 MW of the 1,711
MW coal-fired Conemaugh Generating Station located approximately 60 miles east
of Pittsburgh, Pennsylvania and 63 MW of the 1,711 MW coal-fired Keystone
Generating Station located approximately 50 miles east of Pittsburgh,
Pennsylvania.
In June 2001, NRG Energy purchased a 389 MW gas-fired power plant and a 116
MW thermal power plant, both of which are located on Csepel Island in Budapest,
Hungary, from PowerGen. In April 2001, NRG Energy also purchased from PowerGen
its interest in Saale Energie GmbH and its 33.3% interest in MIBRAG BV. By
acquiring PowerGen's interest in Saale Energie, NRG Energy increased its
ownership interest in the 960 MW coal-fired Schkopau power station located near
Halle, Germany from 200 MW to 400 MW.
By acquiring PowerGen's interest in MIBRAG, an integrated energy business
in eastern Germany consisting primarily of two lignite mines and three power
stations, and following MIBRAG's buy back of the shares NRG Energy acquired from
PowerGen, NRG Energy increased its ownership of MIBRAG from 33.3% to 50%. The
Washington Group International, Inc., owns the remaining 50% of MIBRAG.
In August 2001, NRG Energy acquired an approximately 2,255 MW portfolio of
operating projects and projects in advanced development, including projects that
NRG Energy intends to develop, that are located in Illinois and upstate New York
from Indeck Energy Services, Inc.
In August 2001, NRG Energy acquired Duke Energy's 77% interest in the
approximately 520 MW natural-gas fired McClain Energy Generating Facility
located near Oklahoma City, Oklahoma. The Oklahoma Municipal Power Authority
owns the remaining 23% interest. The McClain facility commenced operations in
June 2001.
In September 2001, NRG Energy acquired a 50% interest in Termo Rio SA, a
1,040 MW gas-fired cogeneration facility currently under construction in Rio de
Janeiro State, Brazil, from Petroleos Brasileiros SA (Petrobras). Commercial
operation of the facility is expected to begin in March 2004. NRG Energy has the
option to put its interest in the project back to Petrobras after March 2002 if
by that time certain milestones have not been met, including final agreement on
the terms of all project documents.
During fiscal year 2001, NRG Energy also acquired other minor interests in
projects in Taiwan, India, Peru and the State of Nevada.
12
The respective purchase prices have been allocated to the net assets of the
acquired entities as follows:
<Table>
<Caption>
DECEMBER 31, 2001
-----------------
(IN THOUSANDS)
Current assets.............................................. $ 307,654
Property plant and equipment................................ 4,173,509
Non-current portion of notes receivable..................... 736,041
Current portion of long term debt assumed................... (61,268)
Other current liabilities................................... (99,666)
Long term debt assumed...................................... (1,586,501)
Deferred income taxes....................................... (149,988)
Other long term liabilities................................. (202,411)
Other non-current assets and liabilities.................... (181,473)
-----------
Total purchase price................................... 2,935,897
Less -- Cash balances acquired (excluding restricted
cash)..................................................... (122,780)
-----------
Net purchase price..................................... $ 2,813,117
===========
</Table>
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment at December 31, were as
follows:
<Table>
<Caption>
2001 2000
---------- ----------
(IN THOUSANDS)
Facilities and equipment.................................... $6,863,930 $4,009,244
Land and improvements....................................... 111,368 79,190
Office furnishings and equipment............................ 30,382 18,219
Construction in Progress.................................... 2,942,993 206,992
---------- ----------
Total property, plant and equipment.................. 9,948,673 4,313,645
Accumulated depreciation............................. (516,454) (271,977)
---------- ----------
Net property, plant and equipment.................... $9,432,219 $4,041,668
========== ==========
</Table>
NOTE 5 -- INVENTORY
Inventory, which is stated at the lower of weighted average cost or market,
at December 31, consists of:
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
Fuel oil.................................................... $ 89,318 $ 48,541
Coal........................................................ 96,193 17,439
Kerosene.................................................... 1,267 1,524
Spare parts................................................. 121,622 85,136
Emission credits............................................ 16,995 871
Natural gas................................................. 1,395 --
Other....................................................... 4,533 21,353
-------- --------
Total Inventory...................................... $331,323 $174,864
======== ========
</Table>
NOTE 6 -- INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD
NRG Energy has investments in various international and domestic energy
projects. The equity method of accounting is applied to such investments in
affiliates, which include joint ventures and partnerships, because the ownership
structure prevents NRG Energy from exercising a controlling influence over
operating and financial policies of the projects. Under this method, equity in
pretax income or losses of domestic
13
partnerships and, generally, in the net income or losses of international
projects, are reflected as equity in earnings of unconsolidated affiliates.
A summary of NRG Energy's equity-method investments of 200 MW or more which
were in operation at December 31, 2001 is as follows:
<Table>
<Caption>
NAME GEOGRAPHIC AREA ECONOMIC INTEREST
- ---- --------------- -----------------
Gladstone Power Station..................................... Australia 37.50%
Loy Yang Power A............................................ Australia 25.37%
Lanco Kondapalli Power...................................... India 30.00%
MIBRAG GmbH................................................. Europe 50.00%
ECK Generating (ECKG)....................................... Czech Republic 44.50%
Scudder Latin American Power................................ Latin America 25.00%
El Segundo Power............................................ USA 50.00%
Long Beach Generating....................................... USA 50.00%
Encina...................................................... USA 50.00%
San Diego Combustion Turbines............................... USA 50.00%
Rocky Road Power............................................ USA 50.00%
Mustang..................................................... USA 25.00%
Sabine River Works Cogeneration............................. USA 50.00%
Cogeneration Corp. of America............................... USA 20.00%
</Table>
Summarized financial information for investments in unconsolidated
affiliates accounted for under the equity method as of and for the year ended
December 31, is as follows:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
Operating revenues....................................... $3,070,078 $2,349,108 $1,732,521
Costs and expenses....................................... 2,658,168 1,991,086 1,531,958
---------- ---------- ----------
Net income.......................................... $ 411,910 $ 358,022 $ 200,563
---------- ---------- ----------
Current assets........................................... $1,425,175 $1,000,670 $ 742,674
Noncurrent assets........................................ 7,009,862 7,470,766 7,322,219
---------- ---------- ----------
Total assets........................................ $8,435,037 $8,471,436 $8,064,893
---------- ---------- ----------
Current liabilities...................................... $1,192,630 $1,094,304 $ 708,114
Noncurrent liabilities................................... 4,533,168 4,306,142 5,168,893
Equity................................................... 2,709,239 3,070,990 2,187,886
---------- ---------- ----------
Total liabilities and equity........................ $8,435,037 $8,471,436 $8,064,893
NRG's share of equity.................................... $1,050,510 $ 973,261 $ 932,591
NRG's share of net income................................ $ 210,032 $ 139,364 $ 67,500
</Table>
NOTE 7 -- RELATED PARTY TRANSACTIONS
NRG Energy and Xcel Energy have entered into material transactions and
agreements with one another and are expected to enter into material transactions
and agreements from time to time in the future. Certain material agreements and
transactions currently existing between NRG Energy and Xcel Energy are described
below.
OPERATING AGREEMENTS
NRG Energy has two agreements with Xcel Energy for the purchase of thermal
energy. Under the terms of the agreements, Xcel Energy charges NRG Energy for
certain costs (fuel, labor, plant maintenance, and auxiliary power) incurred by
Xcel Energy to produce the thermal energy. NRG Energy paid Xcel Energy $7.1
million, $5.5 million and $4.4 million in 2001, 2000 and 1999, respectively,
under these agreements. One of these agreements expires on December 31, 2002 and
the other expires on December 31, 2006.
14
NRG Energy has a renewable 10-year agreement with Xcel Energy, expiring on
December 31, 2006, whereby Xcel Energy agreed to purchase refuse-derived fuel
for use in certain of its boilers and NRG Energy agrees to pay Xcel Energy a
burn incentive. Under this agreement, NRG Energy received $1.6 million, $1.5
million and $1.4 million from Xcel Energy, and paid $2.8 million, $2.8 million
and $2.7 million to Xcel Energy in 2001, 2000 and 1999, respectively.
ADMINISTRATIVE SERVICES AND OTHER COSTS
NRG Energy has an administrative services agreement in place with Xcel
Energy. Under this agreement NRG Energy reimburses Xcel Energy for certain
overhead and administrative costs, including benefits administration,
engineering support, accounting, and other shared services as requested by NRG
Energy. In addition, NRG Energy employees participate in certain employee
benefit plans of Xcel Energy as discussed in Note 11. NRG Energy reimbursed Xcel
Energy in the amounts of $12.2 million, $5.9 million and $6.4 million, during
2001, 2000 and 1999, respectively, under this agreement.
NOTE 8 -- NOTES RECEIVABLE
Notes receivable consists primarily of fixed and variable rate notes
secured by equity interests in partnerships and joint ventures. The notes
receivable as of December 31, are as follows:
<Table>
<Caption>
2001 2000
-------- -------
(THOUSANDS OF DOLLARS)
Central Texas Commercial Air Conditioning & Heating, Inc.,
due July 10, 2001, 10%.................................... $ -- $ 60
O'Brien Cogen II note, due 2008, non-interest bearing....... 553 513
Southern Minnesota-Praireland Solid Waste, note due 2003,
7%........................................................ 24 34
Omega Energy, LLC, due 2004, 12.5%.......................... 4,095 3,745
Omega Energy, LLC, due 2009, 11%............................ 1,533 1,533
Audrain County, due December 2023, 10%...................... 239,930 --
Elk River -- GRE, due December 31, 2008, non-interest
bearing................................................... 2,098 --
Bangor Hydro Electric, due October 1, 2002, 5.45%........... 737 --
SET PERC Investment, LLC, due December 31, 2005, 7%......... 2,497
SET Telogia Investment, LLC, due December 31, 2008, 7%...... 3,775 --
-------- -------
Notes receivable - non-affiliates......................... 255,242 5,885
NEO notes to various affiliates due primarily 2012, prime
+2%....................................................... 21,087 23,277
TOSLI, various notes due 2000, LIBOR plus 4.0%, 6.56%
December 31, 2000......................................... -- 207
Pacific Generation, various notes, prime +2% to 12%......... -- 3,368
Kladno Power (No. 2) B.V. notes to various affiliates,
non-interest bearing...................................... 46,635 44,275
Termo Rio (via NRGenerating Luxembourg (No. 2) S.a.r.L, due
20 years after plant becomes operational, 19.5%........... 46,890 --
Saale Energie Gmbh, indefinite maturity date, 4.75%-7.79%... 79,476 --
Northbrook Texas LLC, due February 2024, 9.25%.............. 8,323 --
-------- -------
Notes receivable - affiliates............................. 202,411 71,127
Saale Energia GmbH, due August 31, 2021, 13.88% (direct
financing lease).......................................... 318,949 --
-------- -------
Total................................................. $776,602 $77,012
======== =======
</Table>
Saale Energie GmbH (SEG) has a long-term electricity supply contract with
its sole customer, VEAG. SEG supplies its total available electricity capacity
to VEAG. The contract has a term of 25 years. VEAG is obligated to pay on a
monthly basis a price that covers 1) the availability of power supply capacity
and 2) the operating costs incurred to produce electricity. During the nine
months subsequent to NRG Energy's consolidation of SEG in March 2001,
approximately $56.3 million was recognized as revenue under this agreement.
15
NOTE 9 -- DEBT AND CAPITAL LEASES
Long-term debt and capital leases consist of the following:
<Table>
<Caption>
2001 2000
---------- ----------
(THOUSANDS OF DOLLARS)
NRG DEBT:
NRG Energy ROARS, due March 15, 2020, 7.97%................. $ 232,960 $ 239,386
NRG Finance Company I LLC -- Construction revolver, due May
2006, various interest rates.............................. 697,500 --
NRG Energy senior debentures (corporate units), due May 16,
2006, 6.5%................................................ 284,440 --
NRG Energy senior notes:
February 1, 2006, 7.625%.................................. 125,000 125,000
July 15, 2006, 6.75%...................................... 340,000 --
June 15, 2007, 7.50%...................................... 250,000 250,000
June 1, 2009, 7.50%....................................... 300,000 300,000
September 15, 2010, 8.25%................................. 350,000 350,000
April 1, 2011, 7.75%...................................... 350,000 --
Nov. 1, 2013, 8.00%....................................... 240,000 240,000
April 1, 2031, 8.625%..................................... 500,000 --
NRG DEBT SECURED SOLELY BY PROJECT ASSETS:
COBEE, due upon demand, non-interest bearing................ -- 69
San Francisco Capital lease, due September, 2002, 20.8%..... 11 --
Timber Energy Resources, Inc., due December 2002, 7%........ 4,620 --
Entrade revolving line of credit, various interest rates.... 8,485 --
Hsin Yu Energy -- Capital lease, due April, 2003, 10.25%.... 518 --
NRG San Diego, Inc. promissory note, due June 25, 2003,
8.0%...................................................... 801 1,283
Pittsburgh Thermal LP, due 2002-2004, 10.61%-10.73%......... 4,400 5,525
San Francisco Thermal LP, October 5, 2004, 10.61%........... 3,761 4,984
Cahua SA, due various dates through November 2004, various
interest rates............................................ 29,106 --
Various NEO debt due 2005-2008, 9.35%....................... 23,956 27,186
LSP Kendall Energy LLC, due September 2005, 3.15%........... 499,500 --
MidAtlantic Generating LLC, due October 2005, 3.56%......... 420,892 --
NRG McClain due December 31, 2005, 3.43%.................... 159,885 --
Camas Power Boiler LP, unsecured term loan, due June 30,
2007, 7.65%............................................... 11,779 14,526
COBEE, due July 2007, various interest rates................ 51,600 --
Camas Power Boiler LP, revenue bonds, due August 1, 2007,
4.65%..................................................... 9,130 9,130
NRG Brazos Valley LLC, due June 30, 2008, 3.44%............. 159,750 --
Cementos Energia SA, due various dates through January 2011,
various interest rates.................................... 26,014 --
Hsin Yu Energy Development, due various dates through 2012,
various interest rates.................................... 89,964 --
Flinders Power Finance Pty, due September 2012, 8.56%....... 74,886 83,820
NRG Energy Center, Inc. senior secured notes due June 15,
2013, 7.31%............................................... 62,408 65,762
LSP Energy LLC (Batesville), due 2014 and 2025,
7.16%-8.16%............................................... 321,875 --
Crockett Cogeneration LLP, due December 31, 2014, 8.13%..... 234,497 245,229
PERC, due 2017 and 2018, 5.2%............................... 33,220 --
Csepeli Aramtermelo, due October 2017, 3.79%-4.85%.......... 169,712 --
Sterling Luxembourg (No. 3) S.a.r.L., due June 30, 2019,
7.86%, LIBOR+1.31%........................................ 329,842 346,668
Saale Energie GmbH, Schkopau Capital lease, due 2021,
various interest rates.................................... 311,867 --
Audrain County, MO -- Capital lease, due December 2023,
10%....................................................... 239,930 --
</Table>
16
<Table>
<Caption>
2001 2000
---------- ----------
(THOUSANDS OF DOLLARS)
NRG South Central Generating LLC senior bonds, due various
dates through September 15, 2024, various interest
rates..................................................... 763,500 788,750
NRG Northeast Generating LLC senior bonds, due various dates
through December 15, 2024, various interest rates......... 610,000 700,000
Bulo Bulo, indefinite lived, non-interest bearing........... 18,177 --
---------- ----------
8,343,986 3,797,318
Less current maturities..................................... 500,154 146,469
---------- ----------
Total................................................... $7,843,832 $3,650,849
========== ==========
</Table>
SHORT TERM DEBT
As of December 31, 2001, NRG Energy had a $500 million recourse revolving
credit facility under a commitment fee arrangement that matures in March of
2002. This facility provides short-term financing in the form of bank loans and
replaced an earlier facility with substantially similar terms and conditions,
that matured in March 2001. At December 31, 2001, NRG Energy had $170 million
outstanding under this facility. NRG Energy expects to replace the facility with
a $1.0 billion facility with substantially similar terms and conditions
terminating in March 2003. During the period ended December 31, 2001 the
facility bore interest at a floating rate based on LIBOR and Prime rates
throughout the period and had a weighted average interest rate of 5.89%.
As of December 31, 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. During the period ended December 31, 2001, the weighted average
interest rate of such outstanding advances was 4.46%. The maximum available
under this facility is $40 million. NRG Energy intends to renew this facility
with a facility having substantially similar terms and conditions.
In January 2001, NRG Energy entered into a bridge credit agreement, with a
final maturity date of December 31, 2001. Approximately $600 million was
borrowed under this facility to partially finance NRG Energy's acquisition of
the LS Power generation assets. In March 2001, the bridge credit facility was
repaid with proceeds from NRG Energy's offering of common stock and equity
units.
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 December 31,
2001, the aggregate amount outstanding under this facility was $600 million.
During the period ended December 31, 2001 the weighted average interest rate of
such outstanding advances was 3.94%. NRG Energy intends to repay this facility
from future issuances of equity or debt securities or through borrowings under
new credit facilities.
NRG Energy had $170 million and $63 million in outstanding letters of
credit as of December 31, 2001 and 2000, respectively.
LONG-TERM DEBT AND CAPITAL LEASES
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 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
17
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, 2006. 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 December 31,
2001, the aggregate amount outstanding under this facility was $697.5 million.
During the period ended December 31, 2001, the weighted average interest rate of
such outstanding advances was 4.83%.
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 December 31, 2001, there were borrowings totaling
approximately $499.5 million outstanding under the facility at a weighted
average annual interest rate of 5.12%.
Upon the acquisition of the LS Power assets, NRG Energy assumed
approximately $326 million of bonds outstanding originally issued to finance the
construction of the Batesville generation plant. In May 1999, LSP Energy Limited
Partnership (Partnership) and LSP Batesville Funding Corporation (Funding)
issued two series of Senior Secured Bonds (Bonds) in the following total
principle amounts: $150 million 7.16% Series A Senior Secured Bonds due 2014 and
$176 million 8.160% Series B Senior Secured Bonds due 2025. Interest is payable
semiannually on each January 15 and July 15. In March 2000, a registration
statement was filed by Partnership and Funding and became effective. The
registration statement was filed to allow the exchange of the Bonds for two
series of debt securities (Exchange Bonds), which are in all material respects
substantially identical to the Bonds. The Exchange Bonds are secured by
substantially all of the personal property and contract rights of the
Partnership and Funding. The Exchange Bonds are redeemable, at the option of
Partnership and Funding, at any time in whole or from time to time in part, on
not less than 30 nor more than 60 days prior notice to the holders of that
series of Exchange Bonds, on any date prior to their maturity at a redemption
price equal to 100% of the outstanding principal amount of the Exchange Bonds
being redeemed and a make whole premium. In no event will the redemption price
ever be less than 100% of the principal amount of the Exchange Bonds being
redeemed plus accrued and unpaid interest thereon. Principal payments are
payable on each January 15 and July 15 beginning July 15, 2001.
On March 13, 2001, NRG Energy completed the sale of 11.5 million equity
units for an initial price of $25 per unit. The 11.5 million equity units sold
included 1.5 million units sold pursuant to the underwriters' over-allotment
option. NRG Energy received gross proceeds from the issuance of $287.5 million.
Net proceeds from this issuance were $278.4 million after deducting underwriting
discounts, commissions and estimated offering expenses. Each equity unit
initially consists of a corporate unit comprising a $25 principal amount of NRG
Energy's senior debentures and an obligation to acquire shares of NRG Energy
common stock no later than May 18, 2004 at a price ranging from between $27.00
and $32.94. Approximately $4.1 million of the gross proceeds have been recorded
as additional paid in capital to reflect the value of the obligation to purchase
NRG Energy's common stock. Interest payments will be payable on the debentures
quarterly in arrears on each February 16, May 16, August 16 and November 16,
commencing May 16, 2001. Interest will be payable initially at an annual rate of
6.50% of the principal amount of $25 per debenture to, but excluding, February
17, 2004, or May 18, 2004 if the interest rate is not reset three business days
prior to February 17, 2004 or three business days prior to May 18, 2004, the
debentures will bear interest from February 17, 2004, or May 18, 2004, as
applicable, at the reset rate to, but excluding, May 16, 2006. In addition,
original issued discount will accrue on the debentures. The net proceeds were
used in part to reduce amounts outstanding under NRG Energy's $600 million
short-term bridge credit agreement, which was used to finance in part NRG
Energy's acquisition of LS Power generation assets.
In March 2001, NRG Energy increased its ownership interest in PERC, which
resulted in the consolidation of its equity investment in PERC. As a result, the
assets and liabilities of PERC became part of the assets and liabilities of NRG
Energy. Upon completion of the transaction, NRG Energy recorded approximately
$37.9 million of outstanding Finance Authority of Maine (FAME) Electric Rate
Stabilization Revenue Refunding Bonds Series 1998 (FAME bonds) which were issued
on PERC's behalf by FAME in June 1998. The face amount of the bonds that were
initially issued was approximately $44.9 million and was used to repay the
Floating Rate Demand Resource Revenue Bonds issued by the Town of Orrington,
Maine
18
on behalf of PERC. The FAME bonds are fixed rate bonds with yields ranging from
3.75% to 5.2%. The weighted average yield on the FAME bonds is approximately
5.1%. The FAME bonds are subject to mandatory redemption in annual installments
of varying amounts through July 1, 2018. Beginning July 1, 2008 the FAME bonds
are subject to redemption at the option of PERC at a redemption price equal to
102% through June 30, 2009, 101% for the period July 1, 2009 to June 30, 2010
and 100% thereafter, of the principal amount outstanding, plus accrued interest.
The loan agreement with FAME contains certain restrictive covenants relating to
the FAME bonds, which restrict PERC's ability to incur additional indebtedness,
and restricts the ability of the general partners to sell, assign or transfer
their general partner interests. The bonds are collateralized by liens on
substantially all of PERC's assets.
In April 2001, NRG Energy issued $690 million of senior notes in two
tranches. The first tranche of $350 million matures in April 2011 and bears an
interest rate of 7.75%. The second tranche of $340 million matures in April 2031
and bears an interest rate of 8.625%. Interest on the notes is due semi-annually
each April and October. The net proceeds of the issuance were used for repayment
of short-term indebtedness incurred to fund acquisitions, for investments,
general corporate purposes and to provide capital for future planned
acquisitions.
On June 22, 2001, NRG MidAtlantic Generating LLC (MidAtlantic), a wholly
owned subsidiary of NRG Energy, borrowed approximately $420.9 million under a
five year term loan agreement (Agreement) to finance, in part, the acquisition
of certain generating facilities from Conectiv. The Agreement terminates in
November 2005 and provides for a total credit facility of $580 million. Interest
is payable quarterly. The debt is guaranteed by Midatlantic and its wholly owned
subsidiaries. The Agreement provides for a variable interest rate at either the
higher of the Prime rate or the Federal Funds rate plus 0.50%, or the London
Interbank Offered Rate (LIBOR) of interest. During the period ended December 31,
2001, the weighted average interest rate for amounts outstanding under the
Agreement was 4.56%. MidAtlantic is obligated to pay a commitment fee of 0.375%
of the unused portion of the credit facility. The Agreement requires MidAtlantic
to comply with certain covenants concerning limitations on additional
borrowings, sales of assets, capital expenditures, and payment of dividends or
other distributions to shareholders.
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 December 31, 2001, there exists an outstanding balance of approximately
$169.7 million under this credit facility. The facility terminates in 2017 with
principle payments due quarterly in varying amounts throughout the term of the
agreement. Interest is payable quarterly at a variable rate.
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 December 31, 2001, there exists an outstanding
balance of $159.8 million under this credit agreement. The weighted average
interest rate as of December 31, 2001 was 4.61%, interest is payable quarterly.
In connection with NRG Energy's acquisition of the COBEE facilities, NRG
Energy recorded on its balance sheet approximately $56.3 million of non-recourse
long-term debt that is due in 18 semi-annual installments of varying amounts
beginning January 31, 1999 and ending July 31, 2007. The loan agreement provides
an A Loan of up to $30 million and a B Loan of up to $45 million. Interest is
payable semi-annual in arrears at a rate equal to 6-month LIBOR plus a margin of
4.5% on the A Loan and 6-month LIBOR plus a margin of 4.0% on the B Loan. The A
Loan and the B Loan are collateralized by a mortgage on substantially all of
COBEE's assets.
In August 2001, NRG Energy entered into a 364-day term loan of up to $296
million. The credit facility was structured as a senior unsecured loan and was
partially non-recourse to NRG Energy. The proceeds were used to finance the
McClain generating facility acquisition. In November 2001, the credit facility
was repaid from the proceeds of a $181.0 million term loan and $8.0 million
working capital facility entered into by NRG McClain LLC, with Westdeutsche
Landesbank Girozentrale, New York branch, as agent (non-recourse to NRG Energy).
The final maturity date of the facility is November 30, 2006. As of December 31,
2001, the
19
aggregate amount outstanding under this facility was $159.9 million. During the
period ended December 31, 2001, the weighted average interest rate of such
outstanding borrowings was 5.07%.
In connection with NRG Energy's acquisition of the Audrain facilities, NRG
Energy has recognized a capital lease on its balance sheet within long-term debt
in the amount of $239.9 million, as of December 31, 2001. The capital lease
obligation is recorded at the net present value of the minimum lease obligation
payable. The lease terminates in May 2023. NRG Energy will make interest
payments only over the term of the lease and no principal payments until the end
of the lease term. In addition, NRG Energy has recorded in notes receivable, an
amount of approximately $239.9 million, which represents its investment in the
bonds that the county of Audrain issued to finance the project.
In connection with NRG Energy's purchase of PowerGen's interest in Saale
Energie GmbH, NRG Energy has recognized a non-recourse capital lease on its
balance sheet within long-term debt in the amount of $311.9 million, as of
December 31, 2001. The capital lease obligation is recorded at the net present
value of the minimum lease obligation payable over the lease's remaining period
of 20 years. In addition, a direct financing lease was recorded in notes
receivable in the amount of approximately $318.9 million.
The NRG Energy Center, Inc. notes are secured principally by long-term
assets of the Minneapolis Energy Center (MEC). In accordance with the terms of
the note agreement, MEC is required to maintain compliance with certain
financial covenants primarily related to incurring debt, disposing of MEC
assets, and affiliate transactions. MEC was in compliance with these covenants
at December 31, 2001.
The NRG Energy senior notes are unsecured and are used to support equity
requirements for projects acquired and in development. Interest is paid
semi-annually.
The $240 million NRG Energy Senior notes due November 1, 2013 are
remarketable or redeemable Security (ROARS). November 1, 2003 is the first
remarketing date for these notes. Interest is payable semi-annually on May 1,
and November 1, of each year through 2003, and then at intervals and interest
rates as discussed in the indenture. On the remarketing date, the notes will
either be mandatorily tendered to and purchased by Credit Suisse Financial
Products or mandatorily redeemed by NRG Energy at prices discussed in the
indenture. The notes are unsecured debt that rank senior to all of NRG Energy's
existing and future subordinated indebtedness.
The various NEO notes are term loans. The loans are secured principally by
long-term assets of NEO Landfill Gas collection system. NEO Landfill Gas is
required to maintain compliance with certain covenants primarily related to
incurring debt, disposing of the NEO Landfill Gas assets, and affiliate
transactions. NEO was in compliance with these covenants at December 31, 2001.
The Camas Power Boiler LP notes are secured principally by its long-term
assets. In accordance with the terms of the note agreements, Camas Power Boiler
LP is required to maintain compliance with certain financial covenants primarily
related to incurring debt, disposing of assets, and affiliate transactions.
Camas Power Boiler was in compliance with these covenants at December 31, 2001.
The Crockett Corporation term loan is secured primarily by the long-term
assets of the Crockett Cogeneration project. Crockett is required to maintain
compliance with certain financial covenants primarily related to incurring debt,
disposing of assets and complying with the terms of the contract to sell energy,
capacity and steam to Pacific Gas & Electric and its other customer. Crockett
was in compliance with these covenants at December 31, 2001, but the bankruptcy
of Pacific Gas & Electric, the counterparty on a material contract that provides
security to the lenders, gives rise to a situation that could result in the
acceleration of the loan. The Crockett partnership has been working with the
lenders to resolve this issue, and it is the view of NRG Energy management that
the lenders will not exercise their right to accelerate this loan.
On February 22, 2000, NRG Northeast Generating LLC, an indirect,
wholly-owned subsidiary of NRG Energy, issued $750 million of project level
senior secured bonds, to refinance short-term project borrowings and for certain
other purposes. The bond offering included three tranches: $320 million with an
interest rate of 8.065% due in 2004, $130 million with an interest rate of
8.842% due in 2015 and $300 million with an interest rate of 9.292% due in 2024.
Interest and principal payments are due quarterly. The bonds are jointly and
20
severally guaranteed by each of NRG Northeast's existing and future
subsidiaries. The bonds are secured by a security interest in NRG Northeast's
membership or other ownership interests in the guarantors and its rights under
all inter-company notes between NRG Northeast and the guarantors. In December
2000, NRG Northeast Generating LLC exchanged all of its outstanding bonds for
bonds registered under the Securities Act of 1933. As of December 31, 2001,
there remains $610 million of outstanding bonds.
In March 2000, NRG Energy issued $250 million of 8.70% ROARS due March 15,
2005. Each security represents a fractional interest in the assets of an
unconsolidated grantor trust that pays interest semi-annually on March 15, and
September 15, of each year through 2005. The sole assets of the Trust consists
of (pounds)160 million of Reset senior notes due March 15, 2020 issued by NRG
Energy pursuant to the Indenture and certain other defined rights. The Reset
senior notes were used principally to finance NRG Energy's acquisition of the
Killingholme facility. On March 15, 2005, these senior notes may be remarketed
by Bank of America, N.A. at a fixed rate of interest through the maturity date
or, at a floating rate of interest for up to one year and then at a fixed rate
of interest through 2020, or redeemed by NRG Energy. Interest is payable
semi-annually on these securities beginning September 15, 2000 through March 15,
2005, and then at intervals and interest rates established in the remarketing
process.
Additionally, three of NRG Energy's foreign subsidiaries entered into a
(pounds)325 million (US $517 million at March 31, 2000) secured borrowing
facility agreement with Bank of America International Limited. Under this
facility, the financial institutions have made available to our subsidiaries
various term loans totaling (pounds)235 million (US $374 million at March 31,
2000) for purposes of financing the acquisition of the Killingholme facility and
(pounds)90 million (US $143 million at March 31, 2000) of revolving credit and
letter of credit facilities to provide working capital for operating the
Killingholme facility. The final maturity date of the facility is the earlier of
June 30, 2019, or the date on which all borrowings and commitments under the
largest tranche of the term facility have been repaid or cancelled.
In March 2000, NRG South Central Generating LLC, an indirect wholly owned
subsidiary of NRG Energy, issued $800 million of senior secured bonds in a
two-part offering, to finance its acquisition of the Cajun generating
facilities. The first tranche was for $500 million with a coupon of 8.962% and a
maturity of 2016. The second tranche was for $300 million with a coupon of
9.479% and a maturity of 2024. Interest and principal payments are due
quarterly. The bonds are secured by a security interest in NRG Central U.S.
LLC's and South Central Generating Holding LLC's membership interests in NRG
South Central and NRG South Central's membership interests in Louisiana
Generating and all of the assets related to the Cajun facilities including its
rights under a guarantor loan agreement and all inter-company notes between it
and Louisiana Generating, and a revenue account and a debt service reserve
account. In January 2001, NRG South Central Generating LLC exchanged all of its
outstanding bonds for bonds registered under the Securities Act of 1933. As of
December 31, 2001, there remains $763.5 million of outstanding bonds.
In September 2000, Flinders Power Finance Pty, an Australian wholly owned
subsidiary, entered into a twelve year AUD $150 million promissory note (US
$81.4 million at September 2000). The interest has a fixed and variable
component. At December 31, 2001, the effective interest rate was 5.89% and is
paid semi annually.
In December 2000, NRG Energy filed a shelf registration with the SEC to
issue up to $1,650.0 million of an indeterminate amount of debt securities,
preferred stock, common stock, depository shares, debt warrants, stock purchase
contracts, stock purchase units and hybrid securities. This shelf registration
includes $150 million of securities that were carried forward from NRG Energy's
previous shelf registration filed in December 1999.
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 of offering under the shelf 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
21
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.
Annual maturities of long-term debt and capital leases for the years ending
after December 31, 2001 are as follows:
<Table>
<Caption>
(THOUSANDS OF DOLLARS) TOTAL
- ---------------------- ----------
2002........................................................ $ 500,154
2003........................................................ 159,095
2004........................................................ 160,829
2005........................................................ 908,435
2006........................................................ 1,189,538
Thereafter.................................................. 5,425,935
----------
Total.................................................. $8,343,986
</Table>
Future minimum lease payments for capital leases included above at December
31, 2001 are as follows:
<Table>
<Caption>
(THOUSANDS OF DOLLARS)
- ----------------------
2002........................................................ $ 69,565
2003........................................................ 67,775
2004........................................................ 65,985
2005........................................................ 64,195
2006........................................................ 62,405
Thereafter.................................................. 988,420
----------
Total minimum obligations.............................. $1,318,345
==========
Interest.................................................... $ (766,030)
----------
Present value of minimum obligations........................ 552,315
----------
Current Portion............................................. (22,505)
----------
Long-term obligations....................................... $ 529,810
==========
</Table>
Total accumulated amortization related to the assets recorded with respect
to NRG Energy's capital leases at December 31, 2001 was $0.
NRG ENERGY CREDIT RATING
NRG Energy's unsecured credit rating is BBB- from Standard & Poor's and
Baa3 from Moody's Investors Service. In December 2001, Moody's placed NRG
Energy's credit rating on review for potential downgrade.
As of December 31, 2001, and 2000, NRG Energy's off-balance sheet
obligations pursuant to its guarantees of performance, equity and indebtedness
obligations of its subsidiaries totaled approximately $721.7 million and $493
million, respectively. 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.
If Moody's or Standard & Poor's were to downgrade NRG Energy, many of the
corporate guarantees and commitments currently in place would need to be
supported with letters of credit or cash collateral within 5 to 30 days.
22
As of December 31, 2001, the amount of collateral required, if NRG Energy
was downgraded, was approximately $960 million to satisfy certain of the above
mentioned guarantees and certain obligations associated with the $2 billion
construction/acquisition revolver. Of the $960 million in collateral that could
be required, approximately $200 million relates to NRG Energy's guarantees of
debt service reserve accounts required by some of its project-level financings,
approximately $400 million relates to NRG Energy's power marketing activities;
and $360 million would be required to support its Contingent Equity Guarantee
associated with the $2 billion Construction/Acquisition Revolver.
Because NRG Energy, places a maximum amount on its guarantees in place to
support power marketing activities, and because of the relatively small number
of margin accounts in place, even very large changes in market conditions would
not have a material impact on the approximately $400 million of collateral that
would be required for NRG Power Marketing in the event of a downgrade.
In the event of a downgrade, NRG Energy would expect to meet its collateral
obligations with cash on hand, available credit lines provided under its
revolving line of credit, liquidity support from Xcel Energy and potentially
from the issuance of debt into capital markets. NRG Energy's revolving line of
credit is expected to be increased from $500 million to $1 billion in March
2002. In addition, NRG Energy will maintain its $125 million letter of credit
facility and plans to secure an additional $125 million credit facility for
total credit facilities of $1.25 billion to be available in 2002.
The Contingent Equity Guarantee associated with NRG Energy's construction
revolver could increase to a maximum of $850 million by the end of 2002 as NRG
Energy utilizes the capacity of the Construction/ Acquisition Revolver.
Therefore, the amount of collateral required by the end of 2002 could increase
to $1.45 billion.
NOTE 10 -- INCOME TAXES
Through March 12, 2001, NRG Energy had a tax sharing agreement with its
parent, Xcel Energy, that included the following significant provisions: (1) if
NRG Energy, along with its subsidiaries, is in a taxable income position, NRG
Energy will be currently charged with an amount equivalent to its federal income
tax computed as if the group had actually filed a separate return, and (2) if
NRG Energy, along with its subsidiaries, is in a tax loss position, NRG Energy
will be currently reimbursed to the extent its combined losses are utilized in a
consolidated return, and (3) NRG Energy will be currently reimbursed for the tax
credits it generates to the extent its tax credits are utilized in a
consolidated return.
Due to the 2001 public equity offering, NRG Energy and its subsidiaries
will file a federal income tax return separate from Xcel Energy for the period
March 13, 2001 through December 31, 2001. This deconsolidation for tax purposes
has had no material impact on current or deferred taxes recorded for NRG Energy.
The provision (benefit) for income taxes for the years ended December 31,
consists of the following:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
(THOUSANDS OF DOLLARS)
Current
U.S.................................................... $ 29,301 $ 89,020 $ 4,661
Foreign................................................ 7,149 (614) 4,040
-------- -------- --------
36,450 88,406 8,701
-------- -------- --------
Deferred
U.S.................................................... 31,773 31,311 (6,693)
Foreign................................................ 13,969 7,104 (7,668)
-------- -------- --------
45,742 38,415 (14,361)
Tax credits recognized................................... (48,788) (34,083) (20,421)
-------- -------- --------
Total income tax (benefit).......................... 33,404 92,738 (26,081)
-------- -------- --------
Effective tax rate....................................... 11.2% 33.6% (84.0)%
</Table>
23
The components of the net deferred income tax liability at December 31
were:
<Table>
<Caption>
2001 2000
--------- ---------
(THOUSANDS OF DOLLARS)
Deferred tax liabilities
Differences between book and tax basis of property........ $491,633 $ 82,392
Investments in projects................................... 30,036 29,475
Goodwill.................................................. 2,116 2,015
Net unrealized gains on mark to market transactions....... 53,944 --
Other..................................................... 8,845 10,546
-------- --------
Total deferred tax liabilities............................ $586,574 $124,428
-------- --------
Deferred tax assets
Deferred compensation, accrued vacation and other
reserves............................................... 23,555 23,703
Development costs......................................... 5,741 13,891
Foreign tax loss carryforwards............................ 23,630 25,063
Differences between book and tax basis of contracts....... 82,972 --
Other..................................................... 4,940 6,129
-------- --------
Total deferred tax assets................................. 140,838 68,786
======== ========
Net deferred tax liability................................ $445,736 $ 55,642
======== ========
</Table>
The effective income tax rates for the years ended December 31, 2001 and
2000 differ from the statutory federal income tax rate of 35% as follows:
<Table>
<Caption>
2001 2000
-------------------- ---------------------
Income before income taxes........................ $298,608 $ 275,673
======== =========
Tax at 35%........................................ 104,512 35.0% 96,486 35%
State taxes (net of federal benefit).............. 7,576 2.5% 29,541 10.72%
Foreign operations................................ (29,386) (9.8)% (10,692) (3.88)%
Tax credits....................................... (48,788) (16.3)% (34,083) (12.36)%
Permanent differences, reserves, other............ (510) (0.2)% 11,486 4.16%
-------- -------- --------- --------
Income Tax Expense................................ $ 33,404 11.2% $ 92,738 33.64%
======== ======== ========= ========
</Table>
For the year ended December 31, 2001, income tax expense was $33.4 million,
compared to an income tax expense of $92.7 million for the year ended December
31, 2000, a decrease of $59.3 million. The decrease in tax expense compared to
2000 was primarily due to increased IRC Section 29 energy credits, a reduction
in the state effective tax rate, and a higher percentage of NRG's overall
earnings derived from foreign projects in lower tax jurisdictions. For the year
ended December 31, 2001, NRG Energy's overall effective tax rate was 11.2%,
compared to 33.6% for the same period in 2000. For the year ended December 31,
2001, NRG Energy's overall effective income tax rate before recognition of tax
credits was 27.5% compared to 46.0%, for the same period in 2000.
The effective income tax rate for the year ended December 31, 2000 differs
from the statutory federal income tax rate of 35% primarily due to state tax,
foreign tax and tax credits as shown above.
NRG Energy intends to reinvest the earnings of foreign operations except to
the extent the earnings are subject to current U.S. income taxes. Accordingly,
U.S. income taxes and foreign withholding taxes have not been provided on a
cumulative amount of un-remitted earnings of foreign subsidiaries of
approximately $346 million and $238 million at December 31, 2001 and 2000,
respectively. The additional U.S. income tax and foreign withholding tax on the
un-remitted foreign earnings, if repatriated, would be offset in whole or in
part by foreign tax credits. Thus, it is not practicable to estimate the amount
of tax that might be payable.
24
NOTE 11 -- BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS PENSION BENEFITS
Substantially all of NRG Energy's employees participate in defined benefit
pension plans. The majority of the employees participate in Xcel Energy's
noncontributory, defined benefit pension plan which was formerly sponsored by
NSP. Other employees participate in noncontributory, defined benefit pension
plans that are sponsored by NRG Energy or NRG Energy affiliates. Benefits are
generally based on a combination of an employee's years of service and earnings.
Some formulas also take into account Social Security benefits. Plan assets
principally consist of the common stock of public companies, corporate bonds and
U.S. government securities. In addition, NRG Energy provides postretirement
health and welfare benefits (health care and death benefits) for certain groups
of its employees. Generally, these are groups that were acquired in recent years
and for whom prior benefits are being continued (at least for a certain period
of time or as required by union contracts). Cost sharing provisions vary by
acquisition group and terms of any applicable collective bargaining agreements.
Certain former NRG retirees are covered under the legacy Xcel plan, which was
terminated for non-bargaining employees retiring after 1998 and for bargaining
employees retiring after 1999.
Xcel's pension and other postretirement health and welfare benefit
obligations and assets/(liability) at December 31, 2001 and 2000 were as
follows:
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
------------------------ --------------------------
2001 2000 2001 2000
---------- ---------- -------- --------------
(THOUSANDS OF DOLLARS)
Benefit obligation at Dec. 31............. $1,366,912 $1,275,815 $191,114 $170,932
Fair value of plan assets at Dec. 31...... 2,090,846 2,411,238 30,767 32,127
Accrued asset (liability) at Dec. 31...... 224,907 113,551 (90,566) (91,165)
</Table>
NRG Energy's net annual periodic pension cost includes the following
components:
COMPONENTS OF NET PERIODIC BENEFIT COST
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
-------------------- ------------------------
2001 2000 2001 2000
-------- -------- ------ --------------
(THOUSANDS OF DOLLARS)
Service cost benefits earned................... $ 6,931 $ 5,769 $ 910 $ 833
Interest cost on benefit obligation............ 9,802 6,728 1,439 1,270
Amortization of prior service cost............. 427 394 (129) (104)
Expected return on plan assets................. (15,748) (11,227) -- --
Recognized actuarial (gain)/loss............... (6,549) (5,355) (51) (28)
-------- -------- ------ ------
Net periodic benefit cost (credit)........ $ (5,137) $ (3,691) $2,169 $1,971
======== ======== ====== ======
</Table>
25
A comparison of the pension benefit obligation and pension assets at
December 31, 2001 and 2000 for all of NRG's plans on a combined basis is as
follows:
RECONCILIATION OF FUNDED STATUS
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
--------------------- --------------------
2001 2000 2001 2000
--------- -------- -------- --------
(THOUSANDS OF DOLLARS)
Benefit obligation at Jan. 1....................... $ 90,572 $ 24,289 $ 18,194 $ 421
Service cost....................................... 6,931 5,769 910 833
Interest cost...................................... 9,802 6,728 1,439 1,270
Employee contributions............................. 570 -- 7 6
Plan amendments.................................... 1,446 -- (278) --
Actuarial (gain)/loss.............................. 8,407 5,357 1,806 (755)
Acquisitions....................................... 31,404 52,800 3,212 16,445
Benefit payments................................... (6,402) (4,371) (107) (26)
--------- -------- -------- --------
Benefit obligation at Dec. 31...................... $ 142,730 $ 90,572 $ 25,183 $ 18,194
========= ======== ======== ========
Fair value of plan assets at Jan. 1................ $ 171,177 $ 47,078 $ -- $ --
Actual return on plan assets....................... (4,424) 90,058 -- --
Employee contributions............................. -- -- 7 6
Employer contributions............................. 14 -- 100 20
Benefit payments................................... (6,402) (4,371) (107) (26)
Acquisitions....................................... 17,334 38,412 -- --
--------- -------- -------- --------
Fair value of plan assets at Dec. 31............. $ 177,699 $171,177 $ -- $ --
========= ======== ======== ========
Funded status at Dec. 31 - excess of assets over
obligation....................................... $ 35,376 $ 80,605 ($25,183) ($18,194)
Unrecognized prior service cost.................... 5,400 4,381 (1,497) (1,348)
Unrecognized net gain.............................. (65,031) (98,874) 1,419 (2,106)
--------- -------- -------- --------
Accrued asset (liability) at Dec. 31............... $ (24,255) $(13,888) ($25,261) ($21,648)
========= ======== ======== ========
</Table>
AMOUNT RECOGNIZED IN THE BALANCE SHEET
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
(THOUSANDS OF DOLLARS)
Accrued benefit liability..................... $(24,255) $(13,888) $(25,261) $(18,199)
Intangible asset.............................. (1,121) -- -- --
-------- -------- -------- --------
Net amount recognized -- asset (liability).... $(25,376) $(13,888) $(25,261) $(18,199)
======== ======== ======== ========
</Table>
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
2001 2000 2001 2000
------ ------ ----- -----
Weighted-average assumption as of December 31,
Discount Rate............................................. 7.25 7.75 7.25 7.75
Expected return on plan assets............................ 9.50 8.50 9.00 8.00
Rate of compensation increase............................. 4.50 4.50 -- --
</Table>
26
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effect:
<Table>
<Caption>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components..... $ 304 $ (217)
Effect on postretirement benefit obligation................. 2,620 (2,086)
</Table>
NRG Energy participates in Xcel Energy's defined contribution 401(K) plan
that covers substantially all employees. Total contributions to the plan were
approximately $1.7 million, $1.1 million and $0.5 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
NRG EQUITY PLAN
During 1998 and 1999, NRG Energy's employees were eligible to participate
in its Equity Plan (the Plan). The Plan granted, to employees, phantom equity
units that were intended to simulate Stock options. Grant size was based on the
participant's position in NRG Energy and base salary. Equity unit valuations
were performed annually by an outside valuation firm. The value of an equity
unit was the approximate value per share of NRG Energy's stockholder equity as
of the valuation date, less the value of Xcel Energy's (formerly NSP) equity
investments. The units were awarded to employees annually at the respective
year's calculated share price (grant price). The Plan provided employees with a
cash pay out for the unit's appreciation in value over the vesting period. The
Plan had a seven year vesting schedule with actual payments beginning after the
end of the third year and continuing at 20% each year for the subsequent five
years. During 2001, 2000 and 1999, NRG Energy recorded compensation expense of
approximately $0, $6.0 million and $13.0 million, respectively, for the Plan.
The Plan included a change of control provision, which allowed all shares
to vest if NRG Energy's ownership were to change. Subsequent to the completion
of NRG Energy's initial public offering in June 2000, the Plan was converted to
a new stock option plan (see Note 14).
401(K) PLANS
NRG Energy also assumed several contributory, defined contribution employee
savings plans as a result of its 2000 and 1999 acquisition activity. These plans
comply with Section 401(k) of the Internal Revenue Code and cover substantially
all of our employees who are not covered by Xcel Energy's 401(k) Plan. NRG
Energy matches specified amounts of employee contributions to the plan. Employer
contributions made to these plans were approximately $1.5 million, $1.1 million
and $0.3 million in 2001, 2000 and 1999, respectively.
PENSION AND OTHER BENEFITS -- 2001 ACQUISITIONS
During 2001, NRG Energy acquired several generating assets and assumed
benefit obligations for a number of employees associated with those
acquisitions. The plans assumption included noncontributory defined benefit
pension plans, matched 401(k) savings plans, and contributory post-retirement
welfare plans. Of the 2001 acquisitions where these obligations were assumed,
approximately 79% percent of such employees are represented by one local union
under collective bargaining agreements, which expire on July 1, 2004. Plan
liability and expense amounts for these acquisitions are included in the pension
and postretirement health care amounts shown above.
PENSION AND OTHER BENEFITS
NRG Energy assumed the Hsin Yu Energy Development Co., LTD. defined pension
obligation upon NRG Energy's approximate 60% acquisition of Hsin Yu Development
Co. LTD during fiscal year 2001. The approximate net periodic benefit cost for
the year related to this plan was $0.07 million.
27
NRG Energy also assumed the pension obligation related to Killingholme due
to NRG Energy's acquisition of the gas-fired combined cycle, baseload facility
in March of 2000. Pension costs relating to this plan for FY 2001 were
approximately $0.5 million.
NOTE 12 -- SALES TO SIGNIFICANT CUSTOMERS
During 2001, sales to two customers accounted for 26.7% and 13.8% of total
revenues from majority owned operations in 2001. During 2000, sales to two
customers accounted for 22.2% and 12.2% of total revenues from majority owned
operations in 2000. Sales to three customers accounted for 21.0%, 19.7% and
10.5% of total revenues from majority owned operations in 1999.
NOTE 13 -- FINANCIAL INSTRUMENTS
The estimated December 31 fair values of NRG Energy's recorded financial
instruments are as follows:
<Table>
<Caption>
2001 2000
------------------------ -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ---------
(IN THOUSANDS)
Cash and Cash equivalents...................... $ 186,107 $ 186,107 $ 95,243 $ 95,243
Restricted cash................................ 161,842 161,842 12,135 12,135
Notes receivable, including current portion.... 777,602 777,602 77,012 77,012
Long-term debt, including current portion...... 8,343,986 8,217,452 3,797,318 3,838,627
</Table>
For cash and cash equivalents and restricted cash, the carrying amount
approximates fair value because of the short-term maturity of those instruments.
The fair value of notes receivable is based on expected future cash flows
discounted at market interest rates. The fair value of long-term debt is
estimated based on the quoted market prices for the same or similar issues.
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign currency exchange rates
At December 31, 2001 and 2000, NRG energy had various foreign currency
exchange instruments with combined notional amounts of $46.3 million and $8.8
million, respectively. These foreign currency exchange instruments were hedges
of expected future cash flows. If the hedges had been terminated at December 31,
2001 and 2000, NRG Energy would have owed the counterparties $2.4 million and
$0.7 million, respectively.
Interest rates
At December 31, 2001 and 2000, NRG Energy had various interest-rate swap
agreements with combined notional amounts of $2.4 billion and $530 million,
respectively. These contracts are used to manage NRG Energy's exposure to
changes in interest rates. If these swaps had been terminated at December 31,
2001 and 2000, NRG Energy would have owed the counterparties $81.5 million and
$28.9 million, respectively.
Energy related commodities
At December 31, 2001 and 2000 NRG Energy had various energy related
commodities financial instruments with combined notional amounts of $1.0 billion
and $309.0 million, respectively. These financial instruments take the form of
fixed price, floating price or indexed sales or purchases, and options, such as
puts, calls, basis transactions and swaps. These contracts are used to manage
NRG Energy's exposure to commodity price variability in electricity, emission
allowances and natural gas, oil and coal used to meet fuel requirements. If
these contracts were terminated at December 31, 2001 and 2000, NRG Energy would
have received $224.1 million and $52.8 million from counterparties,
respectively.
28
Credit Risk
Management believes that NRG Energy's exposure to credit risk due to
nonperformance by the counter-parties to its hedging contracts is insignificant,
based on the investment grade rating of the counterparties. Counter-parties
consist principally of financial institutions and major energy companies. NRG
Energy actively manages its exposure to counter-party risk. NRG Energy has an
established credit policy in place to minimize overall credit risk. Important
elements of this policy include ongoing financial reviews of all counterparties,
established credit limits, as well as monitoring, managing and mitigating credit
exposure.
Enron Bankruptcy
During the fourth quarter of 2001, NRG Energy recorded a net after-tax
expense of approximately $6.7 million related to Enron Corp.'s bankruptcy. This
amount includes a $14.2 million after-tax charge to establish bad debt reserves,
which was partially offset by a $7.5 million after-tax gain on a credit swap
agreement entered into as part of NRG Energy's credit risk management program.
NRG Energy has fully provided for its exposure to Enron; however, as with any
receivable, NRG Energy will pursue collection of all amounts outstanding through
the ordinary course of business.
In addition, an Enron subsidiary, NEPCO, is serving as the construction
contractor for two greenfield development projects, the Kendall and Nelson
projects (2,336 MW combined) currently under construction in Illinois. Enron
guaranteed NEPCO's obligations under the construction contracts. To date, the
actual construction and engineering work on both projects has continued without
disruption and NRG Energy expects the projects to achieve commercial operations
on schedule. NRG Energy believes its overall construction costs for these two
projects will increase by approximately $22 per kilowatt, as a result of the
need to restructure the underlying construction contracts following the Enron
bankruptcy.
NOTE 14 -- CAPITAL STOCK
SALE OF STOCK
In March 2001, NRG Energy completed the sale of 18.4 million shares of
common stock for an initial price of $27 per share. The offering was completed
with all 18.4 million shares of common stock being sold including the
over-allotment shares of 2.4 million. NRG Energy received gross proceeds from
the issuance of $496.6 million. Net proceeds from the issuance were $473.4
million after deducting underwriting discounts, commissions and estimated
offering expenses. The net proceeds were used in part to reduce amounts
outstanding under NRG Energy's short-term bridge credit agreement, which was
used to finance in part NRG Energy's acquisition of the LS Power assets. At
December 31, 2001, there were approximately 50,939,875 shares of common stock,
and 147,605,000 shares of Class A common stock issued and outstanding.
In June 2000, NRG Energy sold 32.4 million shares of common stock at $15
per share. Net proceeds from the offering were $453.7 million. NRG Energy has
authorized capital stock consisting of 550,000,000 shares of common stock, and
250,000,000 shares of Class A common stock. At December 31, 2000, there were
approximately 32,396,000 shares of common stock, and 147,605,000 shares of Class
A common stock issued and outstanding.
INCENTIVE COMPENSATION PLAN
In June 2000, NRG Energy adopted a new incentive compensation plan (the New
Stock Plan), which was approved by shareholders in June 2001 and which will be
administered by a committee appointed by the Board of Directors. The New Stock
Plan provides for awards in the form of stock options, stock appreciation
rights, restricted stock, performance units, performance shares, or cash based
awards as determined by the Board of Directors. All officers, certain other
employees, and non-employee directors are eligible to participate in the plan.
Nine million shares of common stock are authorized for issuance under the Stock
Plan. Initially, only stock option grants will be made to certain officers,
independent directors and employees under the plan.
Each new option granted is valued at the fair market value per share at
date of grant. The difference between the option price and the market value of
the stock at the date of grant, if any, of each option on the
29
date of grant is recorded as compensation expense over a vesting period. Options
granted prior to June 2001 vest over a period of five years, with 25% vesting in
each of the years two through five and generally expire ten years from the date
of grant. Options granted in June 2001 and subsequently, vest over a four year
period, with 25% vesting each year and generally expire ten years from the date
of grant. The board's independent directors' options vested immediately upon
being granted. The average exercise price of vested options at December 31, 2001
and 2000 was $14.39 and $9.51, respectively, all of which were granted in
replacement of units previously outstanding under the equity plan. Compensation
expense related to options granted totaled $1.9 million and $7.3 million, for
the year ended December 31, 2001 and 2000, respectively.
At December 31, 2000, no employee stock options were exercisable. Other
options currently granted under the equity plan will fully vest periodically and
become exercisable through the year 2005 at prices ranging from $5.75 to $17.25.
Stock option transactions were (shares in thousands):
<Table>
<Caption>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------ ---------
Outstanding at January 1, 2000.............................. -- $ --
Granted..................................................... 4,304 9.51
Exercised................................................... -- --
Canceled or expired......................................... -- --
Other, contingent share issuance............................ -- --
----- ------
Outstanding at December 31, 2000............................ 4,304 9.51
----- ------
Exercisable December 31, 2000............................... -- $ --
----- ------
Outstanding at January 1, 2001.............................. 4,304 $ 9.51
Granted..................................................... 3,437 20.19
Exercised................................................... (145) 6.97
Canceled or expired......................................... (169) 14.66
Other, contingent share issuance............................ -- --
----- ------
Outstanding at December 31, 2001............................ 7,427 14.39
----- ------
Exercisable at December 31, 2001............................ 1,368 7.45
----- ------
</Table>
The following table summarizes information about stock options outstanding
at December 31, 2001 (in thousands of shares):
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
TOTAL LIFE EXERCISE TOTAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
------------------------ ----------- ---------- --------- ----------- ---------
$ 3.18 - $ 6.36........................... 635 1.7 $ 5.75 329 $ 5.75
$ 6.36 - $ 9.54........................... 2,371 5.0 8.14 1,024 7.77
$ 9.54 - $15.90........................... 2,211 9.1 14.43 -- --
$15.90 - $19.08........................... 62 9.4 17.77 -- --
$19.08 - $22.26........................... 36 9.5 21.45 -- --
$22.26 - $25.44........................... 2,050 9.3 23.49 15 22.95
$25.44 - $28.62........................... 2 8.6 25.62 -- --
$28.62 - $31.80........................... 60 9.2 31.80 -- --
----- --- ------ ----- ------
Total................................... 7,427 7.2 $14.39 1,368 $ 7.45
===== === ====== ===== ======
</Table>
30
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model, with the following
weighted-average assumptions used for grants in 2001 and 2000.
<Table>
<Caption>
2001 2000
----- -----
Dividends per year.......................................... -- --
Expected volatility......................................... 60.54 50.26
Risk-free interest rate..................................... 5.47 5.01
Expected life (years)....................................... 7 7
</Table>
Using the Black-Scholes option-pricing model, the weighted-average fair
value of NRG Energy's stock options granted for 2001 and 2000 is $13.26 and
$14.38 per share, respectively.
NRG Energy accounts for its stock option plan in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
under which, no compensation cost has been recognized. Had compensation cost
been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), NRG Energy's net income and per share amounts
would have approximated the following pro forma amounts for the years ended
December 31:
<Table>
<Caption>
2001 2000
-------- --------
Net income.................................................. As reported $265,204 $182,935
Pro Forma $260,404 182,279
Earnings per share data:
Basic earnings per share.................................... As reported $ 1.36 $ 1.10
Pro Forma 1.34 1.10
Diluted earnings per share.................................. As reported 1.35 1.10
Pro Forma 1.33 1.09
</Table>
The effects of applying SFAS No. 123 on pro forma disclosures of net income
and earnings per share for the years ended December 31, 2001 and 2000 are not
likely to be representative of the pro forma effects on net income and earnings
per share in future years for the following reasons: 1) the number of future
shares to be issued under this plan is not known, 2) the effect of an additional
year of vesting no options granted in prior years is not considered in the
assumptions as of December 31, 2001 and 3) the assumptions used to determine the
fair value can vary significantly.
NOTE 15 -- EARNINGS PER SHARE
Basic earnings per common share were computed by dividing net income by the
weighted average number of Class A common stock and common stock shares
outstanding during each year. Shares issued during the year are weighted for the
portion of the year that they were outstanding. Diluted earnings per share is
computed in a manner consistent with that of basic earnings per share while
giving effect to all potentially dilutive common shares that were outstanding
during the period. The dilutive effect of the potential exercise of outstanding
options to purchase shares of common stock is calculated using the treasury
stock method. The dilutive effect of the issuance of common stock in the future
due to the outstanding warrants (11.5 million shares) to buy NRG Energy common
stock issued in connection with NRG Energy's Corporate Units issuance in March
2001 is calculated using the treasury stock method. The reconciliation of basic
earnings per
31
common share to diluted earnings per share is shown in the following table (in
thousands, except per share data):
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------ -----------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ --------- ------ ------ ---------
Basic earnings per share
Income before
extraordinary items... $265,204 194,929 $ 1.36 $182,935 165,861 $1.10 $57,195 147,605 $.39
Effect of dilutive
securities:
Warrants (corporate
units).................. -- -- -- -- -- -- -- -- --
Stock options......... -- 1,510 $(0.01) -- 1,128 -- -- -- --
-------- ------- ------ -------- ------- ----- ------- ------- ----
Diluted earnings per
share................... $265,204 196,439 $ 1.35 $182,935 166,989 $1.10 $57,195 147,605 $.39
======== ======= ====== ======== ======= ===== ======= ======= ====
</Table>
As of December 31, 2001, 2000 and 1999, 2,077,180, 2,700 and 0 options,
respectively, have been excluded from the dilutive calculation above as their
exercise price exceeded the average fair market value of NRG Energy's common
stock.
NOTE 16 -- CASH FLOW INFORMATION
Detail of supplemental disclosures of cash flow and non-cash investing and
financing information was:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
(THOUSANDS OF DOLLARS)
Interest paid (net of amount capitalized)............... $ 385,885 $ 248,325 $ 82,891
Taxes paid/(refunds).................................... $ 57,055 $ 20,923 $ (54,384)
----------- ---------- ----------
Detail of businesses and assets acquired:
Current assets (including restricted cash)............ $ 184,874 $ 97,970 $ 110,821
Fair value of non-current assets...................... 4,779,530 1,896,113 1,433,370
Liabilities assumed, including deferred taxes......... (2,151,287) (81,126) (24,826)
----------- ---------- ----------
Cash paid net of cash acquired........................ $ 2,813,117 $1,912,957 $1,519,365
=========== ========== ==========
</Table>
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
NRG Energy leases certain of its facilities and equipment under operating
leases, some of which include escalation clauses, expiring on various dates
through 2010. Rental expense under these operating leases was $9.7 million, $2.3
million and $2.2 million in 2001, 2000 and 1999, respectively. Future minimum
lease commitments under these leases for the years ending after December 31,
2001 are as follows:
<Table>
<Caption>
(THOUSANDS OF
DOLLARS)
-------------
2002........................................................ $10,742
2003........................................................ 9,844
2004........................................................ 9,267
2005........................................................ 8,355
2006........................................................ 7,956
Thereafter.................................................. 41,615
-------
Total..................................................... $87,779
=======
</Table>
32
CAPITAL COMMITMENTS
NRG Energy's management expects future capital expenditures related to
projects listed below, as well as construction and the purchase of turbines, to
total approximately $7.5 billion in the years 2002 through 2006. NRG Energy
anticipates funding its ongoing capital requirements through the issuance of
debt, equity and equity like instruments, preferred stock and operating cash
flows.
NRG Energy has contractually agreed to the monetization of certain tax
credits generated from landfill gas sales through the year 2007.
FirstEnergy. In November 2001, NRG Energy signed purchase agreements to
acquire or lease four coal-fired generating facilities totaling approximately
2,535 MW and two ash disposal sites from subsidiaries of FirstEnergy
Corporation. The four generating facilities are located in Ohio, along the shore
of Lake Erie, and are the approximately 376 MW Ashtabula facility in Ashtabula,
Ohio, the approximately 249 MW Lake Shore facility in downtown Cleveland, the
approximately 1,262 MW Eastlake facility near Cleveland and the approximately
648 MW Bay Shore facility near Toledo. NRG Energy is also acquiring all of the
equity interests in Bay Shore Power Company, which is a subsidiary of
FirstEnergy and the owner of a 136 MW petroleum coke-fired steam generating
project currently undergoing testing and commissioning on the Bay Shore facility
site. NRG Energy is working to close these acquisitions in the second quarter of
2002. In connection with the acquisition of these facilities, NRG Energy is
entering into a Transition Power Purchase Agreement with FirstEnergy, pursuant
to which NRG Energy will supply to FirstEnergy approximately 95% of the output
from the facilities through 2005.
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 expects
the acquisition to close in the first quarter of 2002.
CALIFORNIA LIQUIDITY CRISIS
NRG Energy's California generation assets include a 57.67% interest in
Crockett Cogeneration, a 39.5% interest in the Mt. Poso facility and a 50%
interest in the West Coast Power partnership with Dynegy.
In March 2001, the California PX filed for bankruptcy under Chapter Eleven
of the Bankruptcy Code, and in April 2001, Pacific Gas & Electric Company (PG&E)
also filed for bankruptcy under Chapter Eleven. PG&E's filing delayed collection
of receivables owed to the Crockett facility. In September 2001, PG&E filed a
proposed plan of reorganization. Under the terms of the proposed plan, which is
subject to challenge by interested parties, unsecured creditors such as NRG
Energy's California affiliates would receive 60% of the amounts owed upon
approval of the plan. The remaining 40% would be paid in negotiable debt with
terms from 10 to 30 years. The California Power Exchange's (PX) ability to repay
its debt is dependent on the extent to which it receives payments from PG&E and
SCE. On December 21, 2001, the California bankruptcy court affirmed the Crockett
Power Purchase Agreement (it had previously affirmed Mt. Poso's agreement) with
PG&E and, in respect of the Crockett Power Purchase Agreement, approved a
twelve-month repayment schedule of all past due amounts totaling $49.6 million,
plus interest. The first payment of $6.2 million, including accrued interest,
was received on December 31, 2001.
NRG Energy's share of the net amounts owed to West Coast Power by the
California ISO and PX totaled approximately $85.1 million as of December 31,
2001 compared to $101.8 million at December 31, 2000. These amounts reflect NRG
Energy's share of (a) total amounts owed to West Coast Power less (b) amounts
that are currently treated as disputed revenues and are not recorded as accounts
receivable in the financial statements of West Coast Power LLC, and reserves
taken against accounts receivable that have been recorded in the financial
statements. The decrease is primarily attributed to cash collections from the
California ISO during the fourth quarter of 2001.
33
CONTRACTUAL COMMITMENTS
In connection with the acquisition of certain generating facilities NRG
Energy entered into various long-term transition agreements and standard offer
agreements that obligated NRG Energy to provide its customers, primarily the
previous owners of the acquired facilities, with a certain portion of the energy
and capacity output of the acquired facilities.
During 1999, NRG Energy acquired the Huntley and Dunkirk generating
facilities from Niagara Mohawk Power Corporation (NiMo). In connection with this
acquisition, NRG Energy entered into a 4-year agreement with NiMo that requires
NRG Energy to provide to NiMo pursuant to a predetermined schedule fixed
quantities of energy and capacity at a fixed price.
During 1999, NRG Energy acquired certain generating facilities from
Connecticut Light and Power Company (CL&P). NRG also entered into a 4-year
standard offer agreement that requires NRG Energy to provide to CL&P a portion
of its load requirements through the year 2003 at a substantially fixed rate.
During 2000, NRG Energy acquired the non-nuclear generating assets of Cajun
Electric. Upon acquisition of the facilities, NRG Energy entered into various
long-term power purchase agreements with the former customers of Cajun Electric,
primarily distribution cooperatives and municipalities. These agreements specify
that NRG Energy provide these customers with all requirements necessary to
satisfy the energy and capacity needs of their retail load.
Also during 2000, NRG Energy acquired the Killingholme generating
facilities from National Power plc. In connection with this acquisition, NRG
Energy entered into certain agreements to provide the natural gas to operate the
facility which generally sells its power into the spot market. NRG Energy has
entered into two gas purchase agreements, the first being a 5-year agreement
that provides approximately 30% of the generating facilities natural gas
requirements and the second agreement being a 10-year agreement that provides
approximately 70% of the generating facilities natural gas requirements. NRG
Energy has also entered into a 5-year fixed price agreement to resell up to 15%
of the gas it has contracted for at a slightly higher price.
Also during 2000, NRG Energy acquired the Flinders Power operations in
South Australia. Upon the closing of the acquisition, NRG Energy assumed a gas
purchase and sales agreement relating to the Osborne generating plant with a
remaining life of 18-years. These agreements require NRG Energy to purchase a
specified quantity of natural gas from a third party supplier at a fixed price
for 18-years and resell the natural gas to Osborne at a fixed price for
13-years. The sales price is substantially lower than the purchase price. NRG
Energy has recorded the liability associated with this out of the market
contract in the amount of approximately $66 million in other long-term
obligations and deferred income on its balance sheet. In addition, NRG Energy
has entered into a contract for differences agreement which provides for the
sale of energy into the South Australian power pool through the year 2002. The
agreement provides for a swap of the variable market price to a fixed price.
During 2001, NRG Energy acquired a portfolio of projects located in
Delaware, Maryland and Pennsylvania from Conectiv. Upon closing of the
acquisition, NRG Energy assumed a power purchase agreement. This agreement,
which is not project specific, requires NRG Energy to deliver and Conectiv to
purchase 500 MW of electric energy around the clock at a specified price through
2005. The sales price of the contracted electricity was substantially lower than
the fair value that the electricity on the merchant market at the date of
acquisition. NRG Energy has recorded the liability associated with the out of
market contract on the balance sheet in the amount of approximately $89.4
million as of December 31, 2001. Approximately $45.1 million is recorded in
other current liabilities and approximately $44.3 million in other long-term
obligations and deferred income. The difference will be amortized into income
over the life of the agreement.
ENVIRONMENTAL REGULATIONS
As part of acquiring existing generating assets, NRG Energy has inherited
environmental liabilities. Generally, potential liabilities are identified and
researched during due diligence processes and funds are reserved in the
financial pro forma to address them as circumstances dictate. Often, potential
implementation plans are changed, delayed or abandoned due to one or more of the
following conditions: (a) extended
34
negotiations with regulatory agencies, (b) a delay in promulgating rules
critical to dictating the design of expensive control systems, (c) changes in
governmental/regulatory personnel, (d) changes in governmental priorities (i.e.,
events of September 11th, 2001), or (e) selection of a less expensive compliance
option than originally envisioned. The following paragraphs present an update on
capital investments associated with existing environmental liabilities.
WEST COAST REGION
Environmental expenditures at the Encina Generating Station include the
installation of Selective Catalytic Reduction (SCR) emission control technology
on all five units. These SCRs are mandated by the San Diego County Air Pollution
Control District Rule 69 and by the December 13, 2001 Rule 69 Regular Variance
Order 3732. Units 4 & 5 were retrofit with SCRs beginning in late 2001 and
scheduled to end in spring 2002. SCR emission control installations on Units 1,
2 & 3 are scheduled to be phased in beginning in fall 2002 and ending in spring
2003. The cost for all five SCR retrofits is estimated at approximately $39
million.
NORTHEAST REGION
The total budgeted capital expenditures during the first 5 years of the
Con-Ed, NIMO, Somerset and CLP assets acquired by NRG Energy were in the range
of $60 million dollars. During the years 1999-2001, NRG Energy recorded
approximately $4 million of expenditures on environmental matters related to
inherited liabilities associated with these assets. These expenditures were
incurred as a result of moving forward with efforts to address NRG Energy's
inherited remedial obligations, studies related to establishing strategies for
complying with the NO(X) budget program, and other matters required as part of
consent orders transferred to NRG Energy as part of acquisition packages. As the
company progresses in its negotiations to close out consent order issues, an
increased rate of expenditure is anticipated. NRG Energy estimates approximately
$7.5 million to close out the remaining issues associated with remedial
investigations/clean-ups at Somerset, Arthur Kill, Astoria, Middletown, Norwalk
Harbor, Devon, and Montville. In response to liabilities associated with these
activities, accruals have been established when reasonable estimates are
possible. As of December 31, 2001 and 2000, NRG Energy has established such
accruals in the amount of approximately $5.0 million and $6.0 million,
respectively. NRG Energy has not used discounting in determining its accrued
liabilities for environmental remediation and no claims for possible recovery
from third party issuers or other parties related to environmental costs have
been recognized in NRG Energy's consolidated financial statements. NRG Energy
adjusts the accruals when new remediation responsibilities are discovered and
probable costs become estimable, or when current remediation estimates are
adjusted to reflect new information. During the years 2001, 2000 and 1999, NRG
Energy recorded expenses of approximately $15.3 million, $3.4 million and $0.3
million of expenditures related to environmental matters, respectively.
The balance of the estimated $60 million in capital expenditures over the
next five years is most notably for landfill construction, installation of NO(X)
controls, installation of best available technology for minimizing environmental
impacts associated with impingement and entrainment of fish and larvae,
particulate matter control improvements, and spill prevention controls.
MIDATLANTIC REGION
Capital expenditures over the next five years related to resolving
environmental concerns at the Indian River Generating Station are centered
around possible closure of the existing landfill and construction of a new
cell(s) to replace it, possible addition of a cooling tower, and the addition of
controls to reduce NO(X) emissions. Currently, cost estimates for addressing the
first two items vary widely with NRG Energy's success in selling ash and in NRG
Energy's negotiations with the Delaware Natural Resources and Environment
Commission (DNREC). If ash sales are poor, it is estimated that NRG Energy could
spend up to $11 million over the five-year timeframe to close/construct sections
of the landfill; if sales are robust, expenditures related to
closure/construction are expected to be minimal. In the unlikely event NRG
Energy is unable reach
35
agreement with DNREC on extension of a variance, NRG Energy estimates a $40
million cooling tower could be required; if negotiations are successful, a
cooling tower can be avoided.
NRG Energy has also budgeted funds for installation of NO(X) controls at
both the Indian River and Vienna Generating Stations.
SOUTH CENTRAL REGION
Approximately $35 million over the next five years has been budgeted for
the addition of NO(X) controls to Units 1-3 at Big Cajun II; $5-10 million over
the same time period is for NO(X) controls on the steam boilers at Big Cajun I.
Approximately $4-5 million will be spent over the next two years to reduce
particulate matter emissions during start-up of the Big Cajun II boilers and
$3-5 million for expanding the existing bottom ash pond at the Big Cajun II
plant site.
NORTH CENTRAL REGION
No capital expenditures related to environmental liabilities have been
budgeted at this time.
LEGAL ISSUES
New York Environmental Litigation
In January 2002 the New York Attorney General and the New York Department
of Environmental Control filed suit in the western district of New York against
NRG Energy and Niagara Mohawk Power Corporation, the prior owner of the Huntley
and Dunkirk facilities in New York. The lawsuit relates to physical changes made
at those facilities prior to NRG Energy's assumption of ownership. The complaint
alleges that these changes represent major modifications undertaken without the
required permits having been obtained. 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, NRG Energy could be enjoined from operating
the facilities if the facilities are found not to comply with applicable permit
requirements.
In July 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. Niagara Mohawk Power Corporation requests a declaration by
the Court that, pursuant to the terms of the Assets 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 Niagara Mohawk Power Corporation, and the
parties have exchanged discovery requests.
California Litigation
NRG Energy and other power generators and power traders have been named as
defendants in certain private plaintiff class actions filed in the Superior
Court of the State of California for the County of San Diego in San Diego,
California in November 2000 (Pamela R. Gordon v. Reliant Energy, Inc., et al.
and Ruth Hendricks v. Dynegy Power Marketing Inc., et al). NRG Energy has also
been named in another suit filed in January 2001 in San Diego County and brought
by three California water districts, as consumers of electricity (Sweetwater
Authority v. Dynegy, Inc., et al.), and in two suits filed in San Francisco
County, one brought by the San Francisco City Attorney on behalf of the people
of the State of California (The People of the State of California v. Dynegy
Power Marketing, Inc., et al.) and one brought by Pier 23 Restaurant as a class
action
36
(Pier 23 Restaurant v. PG&E Energy Trading, et al.). Certain NRG Energy
affiliates in NRG Energy's West Coast power partnership with Dynegy (Cabrillo I
and II, Long Beach Generation and El Segundo Power) have been named as
defendants in a state court action in Los Angeles County (Bustamonte v. Dynegy,
Inc., et al.).
Although the complaints contain a number of allegations, the basic claim is
that, by underbidding forward contracts and exporting electricity to surrounding
markets, the defendants, acting in collusion, were able to drive up wholesale
prices on the Real Time and Replacement Reserve markets, through the Western
Coordinating Council and otherwise. The complaints allege that the conduct
violated California antitrust and unfair competition laws. NRG Energy does not
believe that it has engaged in any illegal activities, and intends to vigorously
defend these lawsuits. These 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 County Superior Court, and
a pretrial conference has been scheduled for March 2002. While these cases are
in too preliminary a stage to speculate on their outcome, if they were
ultimately resolved adversely to the defendants it could have a material adverse
effect on NRG Energy's results of operations and financial condition.
Shareholder Litigation
On February 15, 2002, Xcel Energy announced its intention to commence an
exchange offer to acquire all of the outstanding publicly held shares of NRG
Energy. On the same day, eight separate civil actions were filed in the Court of
Chancery of the State of Delaware in and for New Castle County by owners of NRG
common stock, against Xcel Energy, NRG Energy, and NRG Energy's directors. The
complaints contain a number of allegations, but the basic claim is that Xcel
proposes to acquire the remaining ownership of NRG for inadequate consideration
and without full and complete disclosure of all material information, in breach
of defendants' fiduciary duties. The complaints request the court to enjoin the
proposed transaction and, in the event the exchange offer is consummated, to
award damages to defendants.
NOTE 18 -- SEGMENT REPORTING
NRG Energy conducts its business within six segments: Independent Power
Generation in North America, Independent Power Generation outside North America
(Europe, Asia Pacific and Other Americas regions), Alternative Energy and
Thermal projects. NRG Energy's Revenues from majority owned operations
attributable to Europe and Asia Pacific primarily relate to operations in the
United Kingdom and Australia, respectively. These segments are distinct
components 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.
<Table>
<Caption>
POWER GENERATION
----------------------------------------------------
OTHER
NORTH AMERICA EUROPE ASIA PACIFIC AMERICAS
------------- ------ ------------ --------
(THOUSANDS OF DOLLARS)
2001
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............. $1,835,221 $490,885 $239,085 $ 34,690
Inter-segment revenues.............................. -- -- -- --
Equity in earnings of unconsolidated affiliates..... 187,579 31,977 13,228 3,886
---------- -------- -------- ----------
Total operating revenues and equity earnings........ 2,022,800 522,862 252,313 38,576
---------- -------- -------- ----------
Operating Income.................................... 563,584 113,038 22,252 12,608
---------- -------- -------- ----------
Net Income.......................................... $ 261,317 $64,345 $ 12,427 $ 1,381
========== ======== ======== ==========
</Table>
37
<Table>
<Caption>
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
----------- ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............. $ 77,629 $ 108,319 $ 10,920 $2,796,749
Inter-segment revenues.............................. 1,859 -- -- 1,859
Equity in earnings of unconsolidated affiliates..... (26,638) -- -- 210,032
---------- ---------- ---------- ----------
Total operating revenues and equity earnings........ 52,850 108,319 10,920 3,008,640
---------- ---------- ---------- ----------
Operating Income.................................... (25,688) 18,666 10,362 714,822
---------- ---------- ---------- ----------
Net Income (Loss)................................... $ 35,013 $ 10,219 $ (119,498) $ 265,204
========== ========== ========== ==========
</Table>
Total assets as of December 31, 2001, for North America, Europe, Asia
Pacific and Other Americas total $9.6 billion, $1.9 billion, $882 million and
$508 million, respectively.
<Table>
<Caption>
POWER GENERATION
------------------------------------------------------
OTHER
NORTH AMERICA EUROPE ASIA PACIFIC AMERICAS
------------- ------ ------------ --------
(THOUSANDS OF DOLLARS)
2000
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............ $1,578,706 $ 197,718 $ 94,681 $ 291
Inter-segment revenues............................. -- -- -- --
Equity in earnings of unconsolidated affiliates.... 138,655 9,098 3,456 5,704
---------- ---------- ---------- ----------
Total operating revenues and equity earnings....... 1,717,361 206,816 98,137 5,995
Operating Income................................... 596,919 32,573 6,297 2,268
---------- ---------- ---------- ----------
Net Income......................................... $ 241,846 $ 9,706 $ 9,343 $ 3,607
---------- ---------- ---------- ----------
</Table>
<Table>
<Caption>
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
----------- ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............ $ 39,379 $ 87,802 $ 17,789 $2,016,366
Inter-segment revenues............................. 2,256 -- -- 2,256
Equity in earnings of unconsolidated affiliates.... (17,300) (249) -- 139,364
---------- ---------- ---------- ----------
Total operating revenues and equity earnings....... 24,335 87,553 17,789 2,157,986
---------- ---------- ---------- ----------
Operating Income (Loss)............................ (28,898) 20,303 (56,389) 573,073
---------- ---------- ---------- ----------
Net Income (Loss).................................. $ 14,637 $ 7,590 $ (103,794) $ 182,935
========== ========== ========== ==========
</Table>
Total assets as of December 31, 2000, for North America, Europe, Asia
Pacific and Other Americas total $4.4 billion, $828 million, $599 million and
$141 million, respectively.
<Table>
<Caption>
POWER GENERATION
-------------------------------------------------
OTHER
NORTH AMERICA EUROPE ASIA PACIFIC AMERICAS
------------- ------ ------------ --------
(THOUSANDS OF DOLLARS)
1999
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............. $319,598 $ -- $ 3,155 $ 189
Inter-segment revenues.............................. -- -- -- --
Equity in earnings of unconsolidated affiliates..... 31,052 22,840 9,915 5,879
-------- ------- -------- --------
Total operating revenues and equity earnings........ 350,650 22,840 13,070 6,068
-------- ------- -------- --------
Operating Income.................................... 114,628 9,168 7,901 2,916
-------- ------- -------- --------
Net Income (Loss)................................... $ 71,850 $9,509 $ 15,028 $ 3,502
======== ======= ======== ========
</Table>
38
<Table>
<Caption>
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
----------- ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............. $ 26,934 $76,277 $ 5,402 $431,555
Inter-segment revenues.............................. 963 -- -- 963
Equity in earnings of unconsolidated affiliates..... (2,205) 19 -- 67,500
-------- ------- -------- --------
Total operating revenues and equity earnings........ 25,692 76,296 5,402 500,018
-------- ------- -------- --------
Operating Income (Loss)............................. (13,288) 18,746 (30,551) 109,520
-------- ------- -------- --------
Net Income (Loss)................................... $ 10,243 $6,506 $(59,443) $ 57,195
======== ======= ======== ========
</Table>
All operating revenues are from external customers located in the United
States except $764.7 million and $292 million of revenues in 2001 and 2000,
respectively, which came from external customers outside of the United States.
NRG Energy's equity in earnings of unconsolidated affiliates, primarily
independent power projects, includes $54.1 million in 2001, $19.2 million in
2000 and $38.6 million in 1999 from non-regulated projects located outside of
the United States. NRG Energy's investments in affiliates outside of the United
States were $519 million in 2001, $566 million in 2000 and $606 million in 1999.
In addition, NRG Energy's majority owned foreign assets of $2.8 billion in 2001
and $796 million in 2000, contributed earnings of $49.2 million in 2001, $30.1
million in 2000 and $0 in 1999.
Total assets as of December 31, 1999, for North America, Europe, Asia
Pacific and Other Americas total $2.8 billion, $179 million, $346 million and
$117 million, respectively.
NOTE 19 -- JOINTLY OWNED PLANTS
On March 31, 2000, NRG Energy acquired a 58% interest in the Big Cajun II,
Unit 3 generation plant. Entergy Gulf States owns the remaining 42%. Big Cajun
II, Unit 3 is operated and maintained by Louisiana Generating pursuant to a
joint ownership participation and operating agreement. Under this agreement,
Louisiana Generating and Entergy Gulf States are each entitled to their
ownership percentage of the hourly net electrical output of Big Cajun II, Unit
3. All fixed costs are shared in proportion to the ownership interests. Fixed
costs include the cost of operating common facilities. All variable costs are
incurred in proportion to the energy delivered to the owners. NRG Energy's
income statement includes its share of all fixed and variable costs of operating
the unit. NRG Energy's 58% share of the original cost included in Property,
Plant and Equipment and construction in progress at December 31, 2001 and 2000,
was $179.6 million and $179.1 million, respectively. The corresponding
accumulated depreciation and amortization at December 31, 2001 and 2000, was
$7.8 million and $3.4 million, respectively.
In August 2001, NRG Energy completed the acquisition of a 77% interest in
the 520 MW gas fired electric generating facility located in McClain County,
Oklahoma from Duke energy North America LLC (McClain generating facility). The
remaining 23% of the McClain generating facility is owned and operated by the
Oklahoma Municipal Power Authority (OMPA) pursuant to a joint ownership and
operating agreement. Under this agreement, NRG McClain LLC operates the facility
and NRG Energy and OMPA are entitled to their ownership ratio of the net
available output of the McClain facility. All fixed costs are shared in
proportion to the ownership interests. All variable costs are incurred in
proportion to the energy delivered to the owners. NRG Energy's income statement
includes its share of all fixed and variable costs of operating the facilities.
NRG Energy's 77% share of the original cost included in Property, Plant and
Equipment and construction in progress at December 31, 2001 was $276.6 million.
The corresponding accumulated depreciation and amortization at December 31,
2001, was $3.8 million.
In June 2001, NRG Energy completed the acquisition of an approximately 3.7%
interest in both the Keystone and Conemaugh coal-fired generating facilities.
The Keystone and Conemaugh facilities are located near Pittsburgh, Pennsylvania
and are jointly owned by a consortium of energy companies. NRG Energy purchase
its interests from Conectiv, Inc. Keystone and Conemaugh are operated by GPU
Generation, Inc. which sold its assets and operating responsibilities to Sithe
Energies. Keystone and Conemaugh both consist of two operational coal-fired
steam power units with a combined net output of 1,700 MW, four diesel units with
a
39
combined net output of 11 MW and an on-site landfill. The units are operated
pursuant to a joint ownership participation and operating agreement. Under this
agreement each joint owner is entitled to its ownership ratio of the net
available output of the facility. All fixed costs are shared in proportion to
the ownership interests. All variable costs are incurred in proportion to the
energy delivered to the owners. NRG Energy's income statement includes its share
of all fixed and variable costs of operating the facilities. NRG Energy's 3.70%
and 3.72% share of the Keystone and Conemaugh facilities original cost included
in Property, Plant and Equipment and construction in progress at December 31,
2001 was $52.9 million and $60.9 million, respectively. The corresponding
accumulated depreciation and amortization at December 31, 2001, for Keystone and
Conemaugh was $1.3 million and $1.5 million, respectively.
NOTE 20 -- DECOMMISSIONING FUNDS
NRG Energy is required by the State of Louisiana Department of
Environmental Quality ("DEQ") to rehabilitate NRG Energy's Big Cajun II ash and
wastewater impoundment areas, subsequent to the Big Cajun II facilities' removal
from service. On July 1, 1989, a guarantor trust fund (the "Solid Waste Disposal
Trust Fund") was established to accumulate the estimated funds necessary for
such purpose. Approximately $1.1 million was initially deposited in the Solid
Waste Disposal Trust Fund in 1989, and $116,000 has been funded annually
thereafter, based upon an estimated future rehabilitation cost (in 1989 dollars)
of approximately $3.5 million and the remaining estimated useful life of the Big
Cajun II facilities. Cumulative contributions to the Solid Waste Disposal Trust
Fund and earnings on the investments therein are accrued as a decommissioning
liability. At December 31, 2001 and 2000, the carrying value of the trust fund
investments and the related accrued decommissioning liability was approximately
$4.3 million and $3.9 million, respectively. The trust fund investments are
comprised of various debt securities of the United States and are carried at
amortized cost, which approximates their fair value.
NOTE 21 -- ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
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. SFAS
No. 133 requires NRG Energy to record all derivatives on the balance sheet at
fair value. Changes in the fair value of non-hedge derivatives will be
immediately recognized in earnings. Changes in fair values of derivatives
accounted for as hedges will either be recognized in earnings as offsets to the
changes in fair value of related hedged assets, liabilities and firm commitments
or, for forecasted transactions, deferred and recorded as a component of other
accumulated comprehensive income (OCI) until the hedged transactions occur and
are recognized in earnings. The ineffective portion of a hedging derivative
instrument's change in fair value will be immediately recognized in earnings.
NRG Energy also formally assesses both at inception and at least quarterly
thereafter, whether the derivatives that are used in hedging transactions are
highly effective in offsetting the changes in either the fair value or cash
flows of the hedged item. This assessment includes all components of each
derivative's gain or loss unless otherwise noted. When it is determined that a
derivative ceases to be a highly effective hedge, hedge accounting is
discontinued.
SFAS No. 133 applies to NRG Energy's long-term power sales contracts,
long-term gas purchase contracts and other energy related commodities financial
instruments used to mitigate variability in earnings due to fluctuations in spot
market prices, hedge fuel requirements at generation facilities and protect
investments 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. At
December 31, 2001, NRG Energy had various commodity contracts extending through
December 2003, and several fixed-price gas and electricity purchase contracts
extending through 2018.
40
ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the effects of SFAS No. 133 on NRG Energy's
Other Comprehensive Income balance as of December 31, 2001:
<Table>
<Caption>
ENERGY INTEREST FOREIGN
COMMODITIES RATE CURRENCY TOTAL
----------- -------- -------- --------
(GAINS/(LOSSES) IN $ THOUSANDS)
OCI balance at December 31, 2000............. $ -- $ -- $ -- $ --
Initial adoption of SFAS No. 133........... (6,567) (16,064) -- (22,631)
Unwound from OCI during period:
- due to unwinding of previously deferred
amounts.................................. (25,789) 662 (167) (25,294)
Mark to market of hedge contracts.......... 167,224 (46,002) (2,196) 119,026
-------- -------- ------- --------
OCI balance at December 31, 2001............. 134,868 (61,404) (2,363) 71,101
======== ======== ======= ========
Gains/(Losses) expected to unwind from OCI
during next 12 months...................... 24,157 (7,636) (2,196) 14,325
</Table>
The adoption of SFAS No. 133 on January 1, 2001, resulted in an after-tax
unrealized loss of $22.6 million recorded to OCI related to previously deferred
net losses on derivatives designated as cash flow hedges. During the year ended
December 31, 2001, NRG Energy reclassified gains of $25.3 million from OCI to
current-period earnings. This amount is recorded on the same line in the
statement of operations in which the hedged item is recorded. Also during the
year ended December 31, 2001, NRG Energy recorded an after-tax gain in OCI of
approximately $119.0 million related to changes in the fair values of
derivatives accounted for as hedges. The net balance in OCI relating to SFAS No.
133 as of December 31, 2001 was an unrecognized gain of approximately $71.1
million. NRG Energy expects $14.3 million of the deferred net gains on
derivative instruments accumulated in OCI to be recognized as earnings during
the next twelve months.
STATEMENT OF OPERATIONS
The following tables summarize the effects of SFAS No. 133 on NRG Energy's
statement of operations for the period ended December 31, 2001:
<Table>
<Caption>
ENERGY FOREIGN
COMMODITIES CURRENCY TOTAL
----------- -------- -------
(GAINS/(LOSSES) IN $ THOUSANDS)
Revenue from majority owned subsidiaries................ $(8,138) $ -- $(8,138)
Equity in earnings of unconsolidated subsidiaries....... 4,662 -- 4,662
Cost of operations...................................... 17,556 -- 17,556
Other income............................................ -- 252 252
------- ---- -------
Total Statement of Operations impact before tax.... $14,080 $252 $14,332
======= ==== =======
</Table>
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
41
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. Certain of these transactions have been
designated as cash flow hedges. NRG Energy has accounted for these derivatives
by recording the effective portion of the cumulative gain or loss on the
derivative instrument as a component of OCI in shareholders' equity. NRG Energy
recognizes deferred gains and losses into earnings in the same period or periods
during which the hedged transaction affects earnings. Such reclassifications are
included on the same line of the statement of operations in which the hedged
item is recorded.
No ineffectiveness was recognized on commodity cash flow hedges during the
period ended December 31, 2001.
NRG Energy's pre-tax earnings for the year ended December 31, 2001 were
increased by an unrealized gain of $14.1 million associated with changes in the
fair value of energy related derivative instruments not accounted for as hedges
in accordance with SFAS No. 133.
During the year ended December 31, 2001, NRG Energy reclassified gains of
$25.8 million from OCI to current-period earnings and expects to reclassify an
additional $24.2 million of deferred gains to earnings during the next twelve
months on energy related derivative instruments accounted for as hedges.
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. Such
reclassifications are included on the same line of the statement of operations
in which the hedged item is recorded.
No ineffectiveness was recognized on interest rate cash flow hedges during
the period ended December 31, 2001.
During the year ended December 31, 2001, NRG Energy reclassified losses of
$0.7 million from OCI to current-period earnings and expects to reclassify $7.6
million of deferred losses to earnings during the next twelve months on interest
rate swaps accounted for as hedges.
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.
No ineffectiveness was recognized on foreign currency cash flow hedges
during the period ended December 31, 2001.
NRG Energy's pre-tax earnings for the year ended December 31, 2001 were
increased by an unrealized gain of $0.3 million associated with foreign currency
hedging instruments not accounted for as hedges in accordance with SFAS No. 133.
During the year ended December 31, 2001, NRG Energy reclassified gains of
$0.2 million from OCI to current period earnings and expects to reclassify $2.2
million of deferred losses to earnings during the next twelve months on foreign
currency swaps accounted for as hedges.
42
NOTE 22 -- UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly unaudited financial data is as follows:
<Table>
<Caption>
QUARTER ENDED 2001
-------------------------------------------------------------
MAR 31 JUNE 30 SEPT 30 DEC 31 TOTAL YEAR(1)
------ ------- ------- ------ -------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenues and equity earnings............ $643,166 $722,900 $963,302 $679,272 $3,008,640
Operating Income........................ 127,024 153,363 309,370 125,065 714,822
Net income.............................. 35,178 49,114 141,580 39,332 265,204
Earnings per share:
Basic................................. $ .19 $ .25 $ .71 $ .20 $ 1.36
Diluted............................... .19 .25 .71 .20 1.35
</Table>
<Table>
<Caption>
QUARTER ENDED 2000
-------------------------------------------------------------
MAR 31 JUNE 30 SEPT 30 DEC 31 TOTAL YEAR(1)
------ ------- ------- ------ -------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenues and equity earnings............ $323,027 $522,009 $624,798 $688,152 $2,157,986
Operating income........................ 62,937 154,128 227,209 128,799 573,073
Net income.............................. 8,746 43,581 88,604 42,004 182,935
Earnings per share:
Basic................................. $ .06 $ .28 $ .49 $ .23 $ 1.10
Diluted............................... .06 .28 .49 .23 1.10
</Table>
- ---------------
(1) The sum of earnings per share for the four quarters may not equal earnings
per share for the total year due to changes in the average number of common
shares outstanding.
During the fourth quarter of the year ended December 31, 2001, NRG Energy
recorded a $24.5 million income tax benefit as a result of state income tax
planning strategies and a higher percentage of NRG Energy's overall earnings
derived from foreign projects in lower tax jurisdictions, than expected
throughout the year. Also during the fourth quarter of 2001, NRG Energy recorded
a net after-tax expense of $6.7 million related to Enron's bankruptcy. This
amount includes a $14.2 million after-tax charge to establish bad debt reserves,
which was partially offset by a $7.5 million after-tax gain on a credit swap
agreement entered into as part of NRG's credit risk management program.
NOTE 23 -- SUBSEQUENT EVENT
In February 2002, Xcel Energy announced its intention to commence an
exchange offer by which Xcel Energy would acquire all of the outstanding
publicly held shares of NRG Energy. In the announcement Xcel Energy stated its
intention to close this transaction in April 2002 and stated that in the offer,
NRG Energy shareholders would receive 0.4846 shares of Xcel Energy common stock
in a tax-free exchange for each outstanding share of NRG Energy common stock.
43