EXHIBIT 99.4
ARTHUR KILL POWER LLC
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ARTHUR KILL POWER LLC
INDEX TO FINANCIAL STATEMENTS
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PAGE(S)
Report of Independent Accountants 1
Financial Statements:
Balance Sheets at December 31, 2002 and 2001 2
Statements of Operations for the years ended December 31, 2002, 2001 and 2000 3
Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 4
Statements of Member's Equity for the years ended December 31, 2002, 2001 and 2000 5
Notes to Financial Statements 6-14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management Committee of
Arthur Kill Power LLC:
In our opinion, the accompanying balance sheets and the related statements of
operations, of member's equity and of cash flows present fairly, in all material
respects, the financial position of Arthur Kill Power LLC at December 31, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2002 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 and Note 5 to
the financial statements, the Company and its parent NRG Northeast Generating
LLC, as well as NRG Energy, Inc., are experiencing credit and liquidity
constraints and have various credit arrangements that are in default. As a
direct consequence, during 2002 NRG Energy, Inc. entered into discussions with
its creditors to develop a comprehensive restructuring plan. In connection with
these restructuring efforts, it is likely that NRG Energy, Inc. and certain of
its subsidiaries will file for Chapter 11 bankruptcy protection. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," on January 1, 2002.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 28, 2003
ARTHUR KILL POWER LLC
BALANCE SHEETS
AT DECEMBER 31, 2002 AND 2001
(Thousands of dollars)
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ASSETS 2002 2001
Current assets:
Cash and cash equivalents $ 2 $ -
Accounts receivable, net of allowance for doubtful accounts
of $10,198 and $0 7,281 16,437
Accounts receivable, affiliate 22,865 -
Inventory 9,073 8,364
Prepaid expenses 1,985 607
-------- --------
Total current assets 41,206 25,408
Property, plant and equipment, net of accumulated depreciation of
$46,249 and $32,513 386,549 385,110
Deferred financing costs, net of accumulated amortization of
$351 and $228 2,721 2,844
-------- --------
Total assets $430,476 $413,362
======== ========
LIABILITIES AND MEMBER'S EQUITY
Liabilities:
Current liabilities:
Accounts payable $ 8,717 $ 1,934
Current portion of long-term debt (intercompany note payable) 177,441 32,393
Checks in excess of cash - 1,868
Accrued interest 2,086 633
Accrued fuel and purchased power expense 1,117 11,042
Other current liabilities 6,707 15,824
-------- --------
Total current liabilities 196,068 63,694
Long-term debt (intercompany note payable) - 152,157
Other long term liabilities 4,122 1,465
-------- --------
Total liabilities 200,190 217,316
Commitments and contingencies
Member's equity 230,286 196,046
-------- --------
Total liabilities and member's equity $430,476 $413,362
======== ========
The accompanying notes are an integral part of the financial statements.
2
ARTHUR KILL POWER LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Thousands of dollars)
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2002 2001 2000
Revenues $ 200,955 $ 320,792 $ 219,509
Operating costs 120,769 181,866 129,858
--------- --------- ---------
Operating margin 80,186 138,926 89,651
Depreciation 14,440 13,035 12,858
General and administrative expenses 15,732 1,526 1,328
--------- --------- ---------
Income from operations 50,014 124,365 75,465
Other (expense)/income, net (108) 133 35
Interest expense (15,666) (17,713) (20,930)
--------- --------- ---------
Net income $ 34,240 $ 106,785 $ 54,570
========= ========= =========
The accompanying notes are an integral part of the financial statements.
3
ARTHUR KILL POWER LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Thousands of dollars)
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2002 2001 2000
Cash flows from operating activities:
Net income $ 34,240 $ 106,785 $ 54,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 14,440 13,035 12,858
Amortization of deferred financing costs 123 125 1,314
Allowance for doubtful accounts 10,198 (722) 722
Changes in assets and liabilities:
Accounts receivable (1,042) 2,972 4,328
Inventories (709) (611) 831
Accounts receivable, affiliate (22,865) 44,830 (44,830)
Prepaid expenses (1,378) 7,204 (1,586)
Accounts payable 6,783 1,410 330
Accounts payable - affiliates - - (9,296)
Accrued fuel and purchased power expense (9,925) 5,731 (4,757)
Accrued interest 1,453 (132) 765
Other current liabilities (9,117) 3,881 9,658
Other assets and liabilities 2,657 1,465 (91)
--------- --------- ---------
Net cash provided by operating activities 24,858 185,973 24,816
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (15,879) (5,892) (4,014)
Proceeds from disposition of fixed assets - - 728
--------- --------- ---------
Net cash used in investing activities (15,879) (5,892) (3,286)
--------- --------- ---------
Cash flows from financing activities:
Principal payments of long-term debt (16,184) (27,226) (264,629)
Proceeds from borrowings 9,075 - 226,900
Deferred financing costs - (60) (3,012)
(Distributions to)/contribution from member's - (153,814) 24,197
(Decrease)/increase in checks in excess of cash (1,868) 1,017 (4,986)
--------- --------- ---------
Net cash used in financing activities (8,977) (180,083) (21,530)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2 (2) -
Cash and cash equivalents at beginning of period - 2 2
--------- --------- ---------
Cash and cash equivalents at end of period $ 2 $ - $ 2
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid (net of amount capitalized) $ 14,213 $ 17,720 $ 17,537
The accompanying notes are an integral part of the financial statements.
4
ARTHUR KILL POWER LLC
STATEMENTS OF MEMBER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Thousands of dollars)
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TOTAL
MEMBER'S
EQUITY
Balance, December 31, 1999 $ 164,308
=========
Net income 54,570
Contributions from member's 24,197
---------
Balance, December 31, 2000 $ 243,075
=========
Net income 106,785
Member's distributions, net (153,814)
---------
Balance, December 31, 2001 $ 196,046
=========
Net income 34,240
---------
Balance, December 31, 2002 $ 230,286
=========
The accompanying notes are an integral part of the financial statements.
5
ARTHUR KILL POWER LLC
NOTES TO FINANCIAL STATEMENTS
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NOTE 1 - ORGANIZATION
Arthur Kill Power LLC (the Company), a wholly-owned subsidiary of NRG
Northeast Generating LLC (Northeast Gen), owns and operates the approximately
842 Megawatt (MW), three unit, natural gas/oil fired intermediate/peaking
electric generating facility located in Staten Island, New York.
Northeast Gen, a wholly-owned indirect subsidiary of NRG Energy, Inc. (NRG
Energy), owns electric power generation plants in the northeastern region of the
United States. Northeast Gen was formed for the purpose of financing, acquiring,
owning, operating and maintaining, through its subsidiaries and affiliates the
electric generating facilities owned by Arthur Kill Power LLC, Astoria Gas
Turbine Power LLC, Connecticut Jet Power LLC, Devon Power LLC, Dunkirk Power
LLC, Huntley Power LLC, Middletown Power LLC, Montville Power LLC, Norwalk Power
LLC, Oswego Harbor Power LLC and Somerset Power LLC.
Recent Developments
As of December 31, 2002, NRG Energy has failed to make scheduled payments on
interest and/or principal on approximately $4.0 billion of its recourse debt and
is in default under the related debt instruments. These missed payments also
have resulted in cross-defaults of numerous other non-recourse and limited
recourse debt instruments of NRG Energy. In addition to the missed debt
payments, a significant amount of NRG Energy's debt and other obligations
contain terms, which require that they be supported with letters of credit or
cash collateral following a ratings downgrade. As a result of the downgrades
that NRG Energy has experienced in 2002, NRG Energy is in default of its
obligations to post collateral of approximately $1.1 billion, principally to
fund equity guarantees associated with its construction revolver financing
facility, to fund debt service reserves and other guarantees related to NRG
Energy projects and to fund trading operations. In early November 2002, NRG
Energy presented a restructuring plan to its creditors.
In mid-December 2002, the NRG Energy bank steering committee submitted a
counter-proposal to the restructuring plan. In January 2003, a new restructuring
proposal was presented to the creditors and negotiations are ongoing. On March
26, 2003, Xcel Energy announced that its board of directors had approved a
tentative settlement agreement with holders of most of NRG Energy's long-term
notes and the steering committee representing NRG Energy's bank lenders. The
settlement is subject to certain conditions, including the approval of at least
a majority in dollar amount of the NRG Energy bank lenders and long-term
noteholders and definitive documentation. There can be no assurance that such
approvals will be obtained. The terms of the settlement call for Xcel Energy to
make payments to NRG Energy over the next 13 months totaling up to $752 million
for the benefit of NRG Energy's creditors in consideration for their waiver of
an existing and potential claims against Xcel Energy. Under the settlement, Xcel
Energy will make the following payments: (i)$350 million at or shortly following
the consummation of a restructuring of NRG Energy's debt. It is expected this
payment would be made prior to year-end 2003; (ii)$50 million on January 1,
2004. At Xcel Energy's option, it may fill this requirement with either cash or
Xcel Energy common stock or any combination thereof and (iii)$352 million in
April 2004.
Absent an agreement on a comprehensive restructuring plan, NRG Energy will
remain in default under its debt and other obligations, because it does not have
sufficient funds to meet such requirements and obligations. As a result, the
lenders will be able, if they so choose, to seek to enforce their remedies at
any time, which would likely lead to a bankruptcy filing by NRG Energy. There
can be no assurance that NRG Energy's creditors ultimately will accept any
consensual restructuring plan, or that, in the interim, NRG Energy's lenders and
bondholders will continue to forbear from exercising any or all of the remedies
available to them, including acceleration of NRG Energy's indebtedness,
commencement of an
6
ARTHUR KILL POWER LLC
NOTES TO FINANCIAL STATEMENTS
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involuntary proceeding in bankruptcy and, in the case of certain lenders,
realization on the collateral for their indebtedness.
On March 26, 2003, Xcel Energy announced that its board of directors had
approved a tentative settlement agreement with holders of most of NRG Energy's
long-term notes and the steering committee representing NRG's bank lenders. The
settlement is subject to certain conditions, including the approval of at least
a majority in dollar amount of the NRG Energy bank lenders and long-term
noteholders and definitive documentation. There can be no assurance that such
approvals will be obtained.
The Company expects to have cash available for operations through 2003. This
forecast does not assume further investment by Xcel Energy, NRG Energy,
Northeast Gen or modification of the Company's current debt obligations. In the
event that Northeast Gen and the Company are unable to obtain adequate financing
on terms acceptable to Northeast Gen and the Company to continue their
operations, Northeast Gen and the Company may have to file bankruptcy. Northeast
Gen and the Company 's inability to obtain timely waivers and avoid defaults on
their credit obligations could lead to additional involuntary bankruptcy
proceedings. In any case, there is substantial doubt as to the Company's ability
to continue as a going concern.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Additional information regarding the Northeast Gen and the Company can be
found in NRG Energy's Form 10-K for the year ended December 31, 2002.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN FINANCIAL STATEMENTS
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 reported amounts of
assets and liabilities at the date of the financial statements and reported
amounts of revenue and expenses during the reporting period. Actual results may
differ from those estimates.
In recording transactions and balances resulting from business operations,
the Company uses estimates based on the best information available. Estimates
are used for such items as plant depreciable lives, uncollectible accounts and
actuarially determined benefit costs, among others. In addition, estimates are
used to test long-lived assets for impairment and to determine fair value of
impaired assets. 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.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash and
short-term investments with original maturities of three months or less.
INVENTORY
Inventory consists primarily of spare parts and is valued at the lower of
weighted average cost or market.
7
ARTHUR KILL POWER LLC
NOTES TO FINANCIAL STATEMENTS
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PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost or the present value of
minimum lease payments for assets under capital leases. Significant additions or
improvements extending asset lives are capitalized, while repairs and
maintenance that do not improve or extend the life of the respective asset are
charged to expense as incurred. Depreciation is computed using the straight-line
method over the following estimated useful lives:
Facilities, machinery and equipment 25 to 30 years
Office furnishings and equipment 3 to 10 years
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 expenses all repair and maintenance as incurred,
including planned major maintenance.
ASSET IMPAIRMENTS
Long-lived assets that are held and used are reviewed for impairment
whenever events or changes in circumstances indicate carrying values may not be
recoverable. Such reviews were performed in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," (SFAS No. 144)
in 2002 and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" (SFAS No. 121) in prior years. An
impairment loss is recognized if the total future estimated undiscounted cash
flows expected from an asset is less than its carrying value. An impairment
charge is measured by the difference between an asset's carrying amount and fair
value. Fair values are determined by a variety of valuation methods, including
appraisals, sales prices of similar assets and present value techniques. The
adoption of SFAS 144 had no impact on the Company's financial statements.
DEFERRED FINANCING COSTS
Deferred financing costs consist of legal and other costs incurred to obtain
debt financing. These costs are being amortized over the terms of the related
debt.
REVENUE RECOGNITION
Revenues from the sale of electricity are recorded based upon the output
delivered and capacity provided at rates specified under contract terms or
prevailing market prices. The Company has recorded an allowance for doubtful
accounts of $10.2 million in 2002. This is included in general and
administrative expenses.
POWER MARKETING ACTIVITIES
The Company has entered into a contract with its marketing affiliate, NRG
Power Marketing, Inc., for the sale of energy, capacity and ancillary services
produced, which enables the affiliate to engage in forward sales and hedging
transactions to manage the Company's electricity price exposure. Net gains or
losses on hedges by the marketing affiliate, which are physically settled, are
recognized in the same manner as the hedged item. The Company receives the net
transaction price on all contracts that are physically settled by its marketing
affiliate.
8
ARTHUR KILL POWER LLC
NOTES TO FINANCIAL STATEMENTS
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INCOME TAXES
The Company has been organized as a LLC. Therefore, federal and state income
taxes are assessed at the member level. Accordingly, no provision has been made
for federal or state income taxes in the accompanying financial statements.
COMPREHENSIVE INCOME
For all periods, net income is equal to comprehensive income as there were
no additional items impacting comprehensive income for these years.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, accounts receivable and
derivative instruments. Cash accounts are generally held in federally insured
banks. Accounts receivable and derivative instruments are concentrated within
entities engaged in the energy industry. These industry concentrations may
impact the Company's overall exposure to credit risk, either positively or
negatively, in that the customers may be similarly affected by changes in
economic, industry or other conditions. Receivables are generally not
collateralized; however, the Company believes the credit risk posed by industry
concentration is offset by the diversification and creditworthiness of its
customer base.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001,the FASB issued SFAS No.143, "Accounting for Asset Retirement
Obligations" (SFAS No.143). 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. The liability is initially capitalized as
part of the cost of the related tangible long-lived asset and thus depreciated
over the asset's useful life. Accretion of the liabilities due to the passage of
time will be an operating expense. Retirement obligations associated with
long-lived assets included within the scope of SFAS No.143 are those for which a
legal obligation exists under enacted laws, statutes written or oral contracts,
including obligations arising under the doctrine of promissory estoppel. The
Company is required to adopt SFAS No.143 on January 1, 2003. The Company is in
the process of evaluating the impact of adopting SFAS No.143.
In November 2002,the FASB issued FASB Interpretation No. 45,Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The initial recognition and initial
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The interpretation addresses the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees. The interpretation also clarifies the requirements related to the
recognition of a liability by a guarantor at the inception of the guarantee for
the obligations the guarantor has undertaken in issuing the guarantee.
9
ARTHUR KILL POWER LLC
NOTES TO FINANCIAL STATEMENTS
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RECLASSIFICATIONS
Certain prior-year amounts have been reclassified for comparative purposes.
These reclassifications had no effect on net income or total member's equity as
previously reported.
NOTE 3 - INVENTORY
Inventory, which is stated at the lower of weighted average cost or market,
at December 31, consists of:
2002 2001
------- -------
(In thousands)
Spare parts $ 8,927 $ 8,364
Natural gas 146 -
------- -------
$ 9,073 $ 8,364
======= =======
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment at December 31, were as
follows:
2002 2001
--------- ---------
(In thousands)
Land $ 24,826 $ 24,826
Facilities, machinery and equipment 397,853 386,030
Construction in progress 9,914 6,562
Office furnishings and equipment 205 205
Accumulated depreciation (46,249) (32,513)
--------- ---------
Property, plant and equipment, net $ 386,549 $ 385,110
========= =========
NOTE 5 - LONG-TERM DEBT
On February 22, 2000, Northeast Gen 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 semi-annually. The Northeast Gen senior
secured bonds are jointly and severally guaranteed by each of Northeast Gen's
subsidiaries including the Company. In addition, the bonds are secured by a
security interest in Northeast Gen's membership or other ownership interests in
the guarantors and its rights under all inter-company notes between Northeast
Gen and the guarantors.
In December 2000, Northeast Gen exchanged all of its outstanding bonds for
bonds registered under the Securities Act of 1933. As of December 31, 2002 and
2001, there remains $556.5 million and $610 million of outstanding bonds,
respectively.
On December 15, 2002, Northeast Gen failed to make $24.7 million interest
and $53.5 million principal payments. Northeast Gen had a 15-day grace period to
make payment. On December 27, 2002, Northeast Gen made the $24.7 million
interest payment due on the Northeast Gen bonds but failed to make the $53.5
million principal payment. As a result, the payment default associated with its
failure to make principal payments when they come due is currently in effect.
Northeast Gen also failed to make a debt service reserve account cash deposit
within 30 days of NRG Energy's credit rating downgrade in July 2002. In
addition,
10
ARTHUR KILL POWER LLC
NOTES TO FINANCIAL STATEMENTS
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Northeast Gen is also in default of its debt covenants because of the lapse of
the 60 day grace period regarding the necessary dismissal of an involuntary
bankruptcy proceeding.
Northeast Gen loaned the proceeds from its $750 million senior secured bonds
to its subsidiaries. The subsidiary loans in the aggregate original principal
amount of $750 million are evidenced by intercompany note agreements with terms
and provisions similar to Northeast Gen's senior secured bonds. The amount
loaned by Northeast Gen to Arthur Kill Power LLC under this arrangement was
$226.9 million, of which $168.4 million and $184.6 million was outstanding at
December 31, 2002 and 2001, respectively. As a result of the defaults on the
Northeast Gen senior secured bonds, the related intercompany note payable to
Northeast Gen has been classified as a current liability at December 31, 2002.
On June 15, 2002, NRG Energy loaned Northeast Gen and its subsidiaries $30
million to fund capital expenditures at its subsidiaries. The Company's share of
the loan proceeds was $9.1 million. At December 31, 2002, the Company's
outstanding loan balance was $9.1 million. The debt bears interest at the
3-month London Interbank Offered Rate plus 0.5%. The debt is subordinate to and
subject to the terms and conditions of the senior secured bonds. Accordingly,
the Company has classified this loan as a short-term affiliated note payable.
NOTE 6 - GUARANTEES
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The initial recognition and initial
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The interpretation addresses the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees. The interpretation also clarifies the requirements related to the
recognition of a liability by a guarantor at the inception of the guarantee for
the obligations the guarantor has undertaken in issuing the guarantee.
On February 22, 2000, Northeast Gen issued $750 million of project level
senior secured bonds, to refinance short-term project borrowings and for certain
other purposes. The bonds are jointly and severally guaranteed by each of
Northeast Gen's subsidiaries, therefore the amount in the following table
represents the total outstanding bonds for Northeast Gen. The bonds are secured
by a security interest in Northeast Gen's membership or other ownership
interests in the guarantors and its rights under all inter-company notes between
Northeast Gen and the guarantors.
As of December 31, 2002 and 2001, the Company's obligations pursuant to its
guarantees of the performance, equity and indebtedness obligations were as
follows:
DESCRIPTION 2002 2001
------------------------------------------------------- --------- ---------
(IN THOUSANDS)
Guarantees of Northeast Gen debt....................... $ 556,500 $ 610,000
--------- ---------
Total guarantees..................................... $ 556,500 $ 610,000
========= =========
As of December 31, 2002, the nature and details of the Company's guarantees
were as follows:
GUARANTEE/
MAXIMUM
EXPOSURE
NAME (IN THOUSANDS) NATURE OF GUARANTEE EXPIRATION DATE TRIGGERING EVENT
------------------------------- ---------------- ---------------------------------- --------------- ----------------
NRG Northeast Generating...... $ 556,500 Obligations under credit agreement None stated Nonperformance
11
ARTHUR KILL POWER LLC
NOTES TO FINANCIAL STATEMENTS
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NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
On January 1, 2001, the Company 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 applies to Northeast Gen's energy and energy related
commodities financial instruments, long-term power sales contracts and long-term
gas purchase contracts used to mitigate variability in earnings due to
fluctuations in spot market prices, hedge fuel requirements at generation
facilities and protect investment in fuel inventories. The Company does not
enter into long-term power sales contracts, long-term gas purchase contracts, or
other derivative instruments. These activities are conducted by an affiliate of
Northeast Gen and are not recorded by the Company.
NOTE 8 - RELATED PARTY TRANSACTIONS
POWER MARKETING AGREEMENT
On June 25, 1999, the Company entered into a power sales and agency
agreement with NRG Power Marketing Inc. (NRG Power Marketing), a wholly-owned
subsidiary of NRG. The agreement is effective until December 31, 2030. Under the
agreement, NRG Power Marketing will (i) have the exclusive right to manage,
market and sell all power not otherwise sold or committed to or by such
subsidiaries, (ii) procure and provide to such subsidiaries all fuel required to
operate their respective facilities and (iii) market, sell and purchase all
emission credits owned, earned or acquired by such subsidiaries. In addition,
NRG Power Marketing will have the exclusive right and obligation to effect the
direction of the power output from the facilities.
Under the agreement, NRG Power Marketing pays to the Company gross receipts
generated through sales, less costs incurred by NRG Power Marketing relative to
its providing services (e.g. transmission and delivery costs, fuel cost, taxes,
employee labor, contract services, etc.). The Company incurs no fees related to
these power sales and agency agreements with NRG Power Marketing.
OPERATING AND MAINTENANCE AGREEMENT
On June 25, 1999, the Company entered into an operation and maintenance
agreement with a subsidiary of NRG Operating Services, Inc. (NRG Operating
Services), a wholly-owned subsidiary of NRG Energy. The agreement is effective
for five years, with options to extend beyond five years. Under the agreement,
the NRG Operating Services company operator operates and maintains its
respective facility, including (i) coordinating fuel delivery, unloading and
inventory, (ii) managing facility spare parts, (iii) meeting external
performance standards for transmission of electricity, (iv) providing operating
and maintenance consulting and (v) cooperating with and assisting the Company in
performing the Company's obligations under agreements related to its facilities.
Under the agreement, the operator charges an annual fee, and in addition
will be reimbursed for usual and customary costs related to providing the
services including plant labor and other operating costs. A demobilization
payment will be made if the subsidiary elects not to renew the agreement. There
are also incentive fees and penalties based on performance under the approved
operating budget, the heat rate and safety.
During 2002, 2001 and 2000, the Company incurred annual operating and
maintenance costs billed from NRG Operating Services Inc. totaling $0.4 million.
In addition, the Company incurred $22.2 million, $16.6 million and $20.0
million, respectively, for usual and customary costs related to providing
12
ARTHUR KILL POWER LLC
NOTES TO FINANCIAL STATEMENTS
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the services including plant labor and other operating costs.
On June 25, 1999, the Company entered into an agreement with NRG for
corporate support and services. The agreement is perpetual in term, unless
terminated in writing. Under the agreement, NRG will provide services, as
requested, in areas such as human resources, accounting, finance, treasury, tax,
office administration, information technology, engineering, construction
management, environmental, legal and safety. Under the agreement, NRG is paid
for personnel time as well as out-of-pocket costs.
During 2002, 2001 and 2000, the Company paid NRG approximately $0.4 million,
$0.5 million and $0.4 million, respectively, for corporate support and services.
NOTE 9 - SALES TO SIGNIFICANT CUSTOMERS
One customer, NYISO, accounted for 72.8%, 73.1% and 54.1% of the Company's
revenues during 2002, 2001 and 2000, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
The Company leases certain of its facilities and equipment under operating
leases. Rental expense under these operating leases was $0.4 million in 2002,
2001 and 2000. Future minimum lease commitments under these leases are as
follows:
(In thousands)
2003 $ 396
2004 396
2005 396
2006 396
-------------
Total $ 1,584
=============
ENVIRONMENTAL
Northeast Gen estimates that it will incur total environmental capital
expenditures of $53 million during 2003 through 2007 for the facilities in New
York. Connecticut and Massachusetts. These expenditures will be primarily
related to landfill construction, installation of NO(x) controls, installation
of the best technology available for minimizing environmental impacts associated
with impingment and entrainment of fish and larvae, particulate matter control
improvements, spill prevention controls, and undertaking remedial actions.
As part of acquiring existing generating assets, Northeast Gen has inherited
certain environmental liabilities associated with regulatory compliance and site
contamination.
In response to liabilities associated with these activities, accruals have
been established when reasonable estimates are possible. At December 31, 2002
and 2001, the Company has established such accruals in the amount of
approximately $0.6 million and $1.5 million, respectively. Such accruals
primarily include estimated costs associated with remediation. The Company 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 the
Company's financial statements. The Company 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.
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ARTHUR KILL POWER LLC
NOTES TO FINANCIAL STATEMENTS
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NYISO CLAIMS
In November 2002, the NYISO notified NRG Energy of claims related to New
York City mitigation adjustments, general NYISO billing adjustments and other
miscellaneous charges related to sales between November 2000 and October 2002.
NRG Energy contests both the validity and calculation of the claims and is
currently negotiating with the NYISO over the ultimate disposition. Accordingly,
Arthur Kill reduced its revenues by $10.2 million and recorded a corresponding
reserve for the receivable.
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