UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q/A
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the Quarter Ended: September 30, 2003 | Commission File Number: 001-15891 |
NRG Energy, Inc.
Delaware | 41-1724239 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
901 Marquette Avenue, Suite 2300 Minneapolis, Minnesota |
55402 |
|
(Address of principal executive offices) | (Zip Code) |
(612) 373-5300
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act).
Yes o No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes x No o
As of November 13, 2003, there were 3 shares of Class A common stock and 1 share of Common stock outstanding, all of which were owned by Xcel Energy Wholesale Group Inc.
TABLE OF CONTENTS
Index
Page No. | |||||
Part I FINANCIAL INFORMATION |
|||||
Item 1 Consolidated Financial Statements and Notes |
|||||
Consolidated Statements of Operations |
3 | ||||
Consolidated Balance Sheets |
4 | ||||
Consolidated Statements of Stockholders (Deficit)/Equity |
6 | ||||
Consolidated Statements of Cash Flows |
8 | ||||
Notes
to Consolidated Financial Statements |
9 | ||||
Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations |
62 | ||||
Item 3 Quantitative and Qualitative Disclosures About Market Risk |
76 | ||||
Item 4 Controls and Procedures |
77 | ||||
Part II OTHER INFORMATION |
|||||
Item 1 Legal Proceedings |
78 | ||||
Item 3 Defaults Upon Senior Securities |
78 | ||||
Item 6 Exhibits and Reports on Form 8-K |
81 | ||||
Cautionary Statement Regarding Forward Looking Information |
81 | ||||
SIGNATURES |
84 |
This Quarterly Report on Form 10-Q/A is being filed as Amendment No. 1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed on November 13, 2003 to reclassify out of reorganization items to legal settlement a $396 million charge recorded during the third quarter of 2003 in the Consolidated Statements of Operations related to the resolution of the FirstEnergy Arbitration Claim.
Additional disclosure changes have also been made to reflect the corresponding changes that result from the above noted reclassification adjustment. The adjustment is a reclassification only and has no effect on the results of operations or total stockholders deficit as previously reported. Additionally, Note 20 has been included to provide disclosures regarding NRG Energys bankruptcy proceedings through the date of the filing of this Form 10-Q/A.
2
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
(Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||
(In thousands) | |||||||||||||||||
Operating Revenues and Equity
Earnings
|
|||||||||||||||||
Revenues from majority-owned operations
|
$ | 608,009 | $ | 627,352 | $ | 1,616,869 | $ | 1,602,859 | |||||||||
Equity in earnings of unconsolidated affiliates
|
63,272 | 25,920 | 155,758 | 68,916 | |||||||||||||
Total operating revenues and equity earnings
|
671,281 | 653,272 | 1,772,627 | 1,671,775 | |||||||||||||
Operating Costs and Expenses
|
|||||||||||||||||
Cost of majority-owned operations
|
401,290 | 424,251 | 1,186,241 | 1,064,021 | |||||||||||||
Depreciation and amortization
|
64,476 | 64,141 | 203,050 | 176,686 | |||||||||||||
General, administrative and development
|
36,609 | 65,463 | 128,010 | 171,855 | |||||||||||||
Write downs and (gains) losses on sales of
equity method investments
|
(12,310 | ) | 117,869 | 136,717 | 127,715 | ||||||||||||
Legal settlement
|
396,000 | | 396,000 | | |||||||||||||
Reorganization items
|
20,698 | | 27,032 | | |||||||||||||
Restructuring and impairment charges
|
6,252 | 2,487,746 | 298,019 | 2,533,670 | |||||||||||||
Total operating costs and expenses
|
913,015 | 3,159,470 | 2,375,069 | 4,073,947 | |||||||||||||
Operating (Loss)
|
(241,734 | ) | (2,506,198 | ) | (602,442 | ) | (2,402,172 | ) | |||||||||
Other Income (Expense)
|
|||||||||||||||||
Minority interest in earnings of consolidated
subsidiaries
|
(1,166 | ) | (637 | ) | (2,415 | ) | (1,317 | ) | |||||||||
Other income (expense), net
|
6,090 | 7,464 | 7,316 | 14,441 | |||||||||||||
Restructuring interest income
|
478 | | 608 | | |||||||||||||
Interest expense
|
(42,367 | ) | (66,470 | ) | (317,984 | ) | (289,346 | ) | |||||||||
Total other expense
|
(36,965 | ) | (59,643 | ) | (312,475 | ) | (276,222 | ) | |||||||||
Loss From Continuing Operations Before Income
Taxes
|
(278,699 | ) | (2,565,841 | ) | (914,917 | ) | (2,678,394 | ) | |||||||||
Income Tax Expense (Benefit)
|
4,991 | (96,905 | ) | 44,864 | (150,755 | ) | |||||||||||
Loss From Continuing Operations
|
(283,690 | ) | (2,468,936 | ) | (959,781 | ) | (2,527,639 | ) | |||||||||
(Loss)/ Income on Discontinued Operations, Net
of Income Taxes
|
(1,104 | ) | (586,458 | ) | 53,954 | (595,570 | ) | ||||||||||
Net Loss
|
$ | (284,794 | ) | $ | (3,055,394 | ) | $ | (905,827 | ) | $ | (3,123,209 | ) | |||||
See notes to consolidated financial statements.
3
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||||
2003 | 2002 | |||||||||
(In thousands) | ||||||||||
ASSETS | ||||||||||
Current Assets
|
||||||||||
Cash and cash equivalents
|
$ | 292,644 | $ | 381,514 | ||||||
Restricted cash
|
487,644 | 277,489 | ||||||||
Accounts receivable trade, less
allowance for doubtful accounts of $11,069 and $18,163
|
383,631 | 273,944 | ||||||||
Current portion of notes receivable
affiliates
|
| 2,442 | ||||||||
Current portion of notes receivable
|
1,639 | 3,000 | ||||||||
Income tax receivable
|
19,092 | 4,320 | ||||||||
Inventory
|
255,803 | 265,585 | ||||||||
Derivative instruments valuation
|
543 | 28,791 | ||||||||
Prepayments and other current assets
|
166,952 | 138,567 | ||||||||
Current assets discontinued operations
|
35,842 | 119,509 | ||||||||
Total current assets
|
1,643,790 | 1,495,161 | ||||||||
Property, Plant and Equipment
|
||||||||||
In service
|
6,364,407 | 6,499,685 | ||||||||
Under construction
|
460,989 | 623,750 | ||||||||
Total property, plant and equipment
|
6,825,396 | 7,123,435 | ||||||||
Less accumulated depreciation
|
(771,613 | ) | (602,712 | ) | ||||||
Net property, plant and equipment
|
6,053,783 | 6,520,723 | ||||||||
Other Assets
|
||||||||||
Equity investments in affiliates
|
954,602 | 884,263 | ||||||||
Notes receivable, less current
portion affiliates
|
168,185 | 206,308 | ||||||||
Notes receivable, less current portion
|
813,006 | 778,945 | ||||||||
Intangible assets, net of accumulated
amortization of $25,126 and $22,110
|
72,424 | 76,639 | ||||||||
Debt issuance costs, net of accumulated
amortization of $62,143 and $49,670
|
140,119 | 136,346 | ||||||||
Derivative instruments valuation
|
80,543 | 90,766 | ||||||||
Other assets, net of accumulated amortization of
$4,095 and $4,250
|
34,866 | 24,810 | ||||||||
Non-current assets discontinued
operations
|
213,454 | 678,822 | ||||||||
Total other assets
|
2,477,199 | 2,876,899 | ||||||||
Total Assets
|
$ | 10,174,772 | $ | 10,892,783 | ||||||
See notes to consolidated financial statements.
4
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, | December 31, | |||||||||
2003 | 2002 | |||||||||
(In thousands) | ||||||||||
LIABILITIES AND STOCKHOLDERS DEFICIT | ||||||||||
Liabilities Not Subject to
Compromise
|
||||||||||
Current Liabilities
|
||||||||||
Current portion of long-term debt
|
$ | 1,444,450 | $ | 7,026,771 | ||||||
Revolving line of credit
|
| 1,000,000 | ||||||||
Project-level, non-recourse debt
|
18,991 | 30,064 | ||||||||
Accounts payable trade
|
307,641 | 556,712 | ||||||||
Accounts payable affiliate
|
28,948 | 50,659 | ||||||||
Accrued property, sales and other taxes
|
27,227 | 24,420 | ||||||||
Accrued salaries, benefits and related costs
|
20,768 | 21,018 | ||||||||
Accrued interest
|
46,103 | 289,553 | ||||||||
Derivative instruments valuation
|
649 | 13,439 | ||||||||
Other current liabilities
|
81,190 | 110,645 | ||||||||
Current liabilities discontinued
operations
|
113,339 | 694,464 | ||||||||
Total current liabilities
|
2,089,306 | 9,817,745 | ||||||||
Other Liabilities
|
||||||||||
Long-term debt
|
1,188,599 | 1,184,287 | ||||||||
Deferred income taxes
|
178,197 | 91,634 | ||||||||
Postretirement and other benefit obligations
|
45,852 | 67,495 | ||||||||
Derivative instruments valuation
|
69,731 | 91,039 | ||||||||
Other long-term obligations
|
143,053 | 154,710 | ||||||||
Minority interest
|
32,151 | 29,625 | ||||||||
Non-current liabilities discontinued
operations
|
22,773 | 152,447 | ||||||||
Total liabilities not subject to compromise
|
3,769,662 | 11,588,982 | ||||||||
Liabilities Subject to Compromise
|
||||||||||
Financing debt
|
6,409,964 | | ||||||||
Accounts payable trade
|
157,855 | | ||||||||
Accounts payable affiliate
|
68,989 | | ||||||||
Accrued liabilities
|
1,071,527 | | ||||||||
Other liabilities
|
68,882 | | ||||||||
Liabilities discontinued operations
|
159,110 | | ||||||||
Total liabilities subject to compromise
|
7,936,327 | | ||||||||
Commitments and Contingencies
|
||||||||||
Stockholders Deficit
Class A common stock;
$.01 par value; 100 shares authorized; 3 shares
at September 30, 2003 and at December 31, 2002 issued
and outstanding
|
| | ||||||||
Common stock; $.01 par value;
100 shares authorized, 1 share at September 30,
2003 and at December 31, 2002 issued and outstanding
|
| | ||||||||
Additional paid-in capital
|
2,227,692 | 2,227,692 | ||||||||
Retained deficit
|
(3,734,760 | ) | (2,828,933 | ) | ||||||
Accumulated other comprehensive loss
|
(24,149 | ) | (94,958 | ) | ||||||
Total stockholders deficit
|
(1,531,217 | ) | (696,199 | ) | ||||||
Total Liabilities and Stockholders
Deficit
|
$ | 10,174,772 | $ | 10,892,783 | ||||||
See notes to consolidated financial statements.
5
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS (DEFICIT)/ EQUITY
Accumulated | ||||||||||||||||||||||||||||||||
Class A | Other | |||||||||||||||||||||||||||||||
Common | Common | Additional | Comprehensive | Total | ||||||||||||||||||||||||||||
Paid-in | Retained | Income | Stockholders | |||||||||||||||||||||||||||||
Stock | Shares | Stock | Shares | Capital | (Deficit)/Earnings | (Loss) | Deficit | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Balances at June 30, 2002
|
$ | | | $ | | | $ | 2,227,692 | $ | 567,534 | $ | (9,306 | ) | $ | 2,785,920 | |||||||||||||||||
Net Loss
|
(3,055,394 | ) | (3,055,394 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustments and other
|
(34,598 | ) | (34,598 | ) | ||||||||||||||||||||||||||||
Deferred unrealized loss on derivatives, net
|
(22,588 | ) | (22,588 | ) | ||||||||||||||||||||||||||||
Comprehensive loss for the three months ended
September 30, 2002
|
(3,112,580 | ) | ||||||||||||||||||||||||||||||
Balances at September 30, 2002, as
restated
|
$ | | | $ | | | $ | 2,227,692 | $ | (2,487,860 | ) | $ | (66,492 | ) | $ | (326,660 | ) | |||||||||||||||
Balances at June 30, 2003
|
$ | | | $ | | | $ | 2,227,692 | $ | (3,449,966 | ) | $ | (56,072 | ) | $ | (1,278,346 | ) | |||||||||||||||
Net Loss
|
(284,794 | ) | (284,794 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustments and other
|
(3,133 | ) | (3,133 | ) | ||||||||||||||||||||||||||||
Deferred unrealized gain on derivatives, net
|
35,056 | 35,056 | ||||||||||||||||||||||||||||||
Comprehensive loss for the three months ended
September 30, 2003
|
(252,871 | ) | ||||||||||||||||||||||||||||||
Balances at September 30, 2003
|
$ | | | $ | | | $ | 2,227,692 | $ | (3,734,760 | ) | $ | (24,149 | ) | $ | (1,531,217 | ) | |||||||||||||||
See notes to consolidated financial statements.
6
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS (DEFICIT)/ EQUITY
Class A | Accumulated | |||||||||||||||||||||||||||||||
Common | Common | Additional | Retained | Other | Total | |||||||||||||||||||||||||||
Paid-in | (Deficit)/ | Comprehensive | Stockholders | |||||||||||||||||||||||||||||
Stock | Shares | Stock | Shares | Capital | Earnings | Income (Loss) | Deficit | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Balances at December 31, 2001
|
$ | 1,476 | 147,605 | $ | 509 | 50,939 | $ | 1,713,984 | $ | 635,349 | $ | (114,189 | ) | $ | 2,237,129 | |||||||||||||||||
Net Loss
|
(3,123,209 | ) | (3,123,209 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustments and other
|
53,304 | 53,304 | ||||||||||||||||||||||||||||||
Deferred unrealized loss on derivatives, net
|
(5,607 | ) | (5,607 | ) | ||||||||||||||||||||||||||||
Comprehensive loss for the nine months ended
September 30, 2002
|
(3,075,512 | ) | ||||||||||||||||||||||||||||||
Contribution from parent
|
502,874 | 502,874 | ||||||||||||||||||||||||||||||
Issuance of common stock, net
|
6 | 591 | 8,843 | 8,849 | ||||||||||||||||||||||||||||
Impact of exchange offer
|
(1,476 | ) | (147,605 | ) | (515 | ) | (51,530 | ) | 1,991 | |||||||||||||||||||||||
Balances at September 30, 2002, as
restated
|
$ | | | $ | | | $ | 2,227,692 | $ | (2,487,860 | ) | $ | (66,492 | ) | $ | (326,660 | ) | |||||||||||||||
Balances at December 31, 2002
|
$ | | | $ | | | $ | 2,227,692 | $ | (2,828,933 | ) | $ | (94,958 | ) | $ | (696,199 | ) | |||||||||||||||
Net Loss
|
(905,827 | ) | (905,827 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustments and other
|
87,734 | 87,734 | ||||||||||||||||||||||||||||||
Deferred unrealized loss on derivatives, net
|
(16,925 | ) | (16,925 | ) | ||||||||||||||||||||||||||||
Comprehensive loss for the nine months ended
September 30, 2003
|
(835,018 | ) | ||||||||||||||||||||||||||||||
Balances at September 30, 2003
|
$ | | | $ | | | $ | 2,227,692 | $ | (3,734,760 | ) | $ | (24,149 | ) | $ | (1,531,217 | ) | |||||||||||||||
See notes to consolidated financial statements.
7
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended | ||||||||||
September 30, | ||||||||||
2002 | ||||||||||
2003 | (Restated) | |||||||||
(In thousands) | ||||||||||
Cash Flows from Operating Activities
|
||||||||||
Net loss
|
$ | (905,827 | ) | $ | (3,123,209 | ) | ||||
Adjustments to reconcile net loss to net cash
provided (used) by operating activities
|
||||||||||
Undistributed equity in earnings of
unconsolidated affiliates
|
(47,500 | ) | (15,344 | ) | ||||||
Depreciation and amortization
|
211,201 | 207,751 | ||||||||
Amortization of deferred financing costs
|
14,306 | 20,463 | ||||||||
Deferred income taxes and investment tax credits
|
18,502 | (186,300 | ) | |||||||
Minority interest
|
2,010 | (26,791 | ) | |||||||
Unrealized gains on energy contracts
|
(12,500 | ) | (47,747 | ) | ||||||
Asset impairment
|
353,871 | 3,156,610 | ||||||||
Write down and (gains)/loss on sale of equity
method investments
|
136,531 | 122,037 | ||||||||
(Gain)/loss on sale of discontinued operations
|
(217,920 | ) | 17,099 | |||||||
Amortization of assumed out of market power
contracts
|
| (34,949 | ) | |||||||
Cash provided (used) by changes in certain
working capital items, net of acquisition effects
|
||||||||||
Accounts receivable
|
(103,377 | ) | (96,779 | ) | ||||||
Accounts receivable affiliates
|
| (8,478 | ) | |||||||
Accrued income taxes
|
(16,495 | ) | 24,510 | |||||||
Inventory
|
12,314 | 64,965 | ||||||||
Prepayments and other current assets
|
(28,748 | ) | (50,280 | ) | ||||||
Accounts payable
|
618,099 | 281,102 | ||||||||
Accounts payable affiliates
|
36,571 | | ||||||||
Accrued property, sales and other taxes
|
1,733 | 4,708 | ||||||||
Accrued salaries, benefits and related costs
|
(10,605 | ) | (32,257 | ) | ||||||
Accrued interest
|
129,585 | 75,266 | ||||||||
Other current liabilities
|
(118,365 | ) | 24,041 | |||||||
Cash used by changes in other assets and
liabilities
|
47,929 | 12,089 | ||||||||
Net Cash Provided by Operating
Activities
|
121,315 | 388,507 | ||||||||
Cash Flows from Investing Activities
|
||||||||||
Proceeds on sale of discontinued operations
|
1,011 | | ||||||||
Proceeds from sale of equity method investments
|
102,546 | 29,313 | ||||||||
Proceeds on sale of subsidiaries
|
1,000 | | ||||||||
Investments in equity method investments and
projects
|
(369 | ) | (35,402 | ) | ||||||
Decrease/(increase) in notes receivable (net)
|
9,450 | (189,698 | ) | |||||||
Capital expenditures
|
(85,635 | ) | (1,391,019 | ) | ||||||
Increase in restricted cash
|
(188,127 | ) | (65,316 | ) | ||||||
Net Cash Used by Investing
Activities
|
(160,124 | ) | (1,652,122 | ) | ||||||
Cash Flows from Financing Activities
|
||||||||||
Proceeds from issuance of stock, net
|
| 4,065 | ||||||||
Net borrowings under line of credit agreements
|
| 790,000 | ||||||||
Proceeds from issuance of long-term debt, net
|
43,797 | 1,251,530 | ||||||||
Deferred debt issuance costs
|
(17,843 | ) | | |||||||
Capital contributions from parent
|
| 500,000 | ||||||||
Principal payments on short and long-term debt
|
(50,073 | ) | (1,111,621 | ) | ||||||
Net Cash (Used) Provided by Financing
Activities
|
(24,119 | ) | 1,433,974 | |||||||
Change in Cash from Discontinued
Operations
|
26,595 | 18,325 | ||||||||
Effect of Exchange Rate Changes on Cash and
Cash Equivalents
|
(52,537 | ) | 31,813 | |||||||
Net (Decrease) Increase in Cash and Cash
Equivalents
|
(88,870 | ) | 220,497 | |||||||
Cash and Cash Equivalents at Beginning of
Period
|
381,514 | 105,405 | ||||||||
Cash and Cash Equivalents at End of
Period
|
$ | 292,644 | $ | 325,902 | ||||||
See notes to consolidated financial statements.
8
NRG ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NRG Energy Inc. (NRG Energy or the Company) is an energy company, primarily engaged in the ownership and operation of power generation facilities and the sale of energy, capacity and related products in the United States and internationally. NRG Energy is a wholly owned subsidiary of Xcel Energy Inc. (Xcel Energy). Xcel Energy directly owns six utility subsidiaries that serve electric and natural gas customers in 12 states. Xcel Energy also owns or has an interest in a number of non-regulated businesses, the largest of which is NRG Energy.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the Securities and Exchange Commissions (SEC) regulations for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accounting policies followed by NRG Energy are set forth in Note 2 to the Companys financial statements in its Annual Report on Form 10-K for the year ended December 31, 2002 (Form 10-K). The following notes should be read in conjunction with such policies and other disclosures in the Form 10-K. Interim results are not necessarily indicative of results for a full year.
On May 14, 2003 (the Petition Date) NRG Energy and 26 of its affiliates (the Debtors) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) in re: NRG ENERGY, INC., et al., Case No. 03-13024 (PCB) (such proceedings, the Chapter 11 Cases). See Note 2 for a complete list of debtors. It is possible that additional subsidiaries will file petitions for reorganization under Chapter 11. Since the Petition Date, three additional subsidiaries have filed for reorganization under Chapter 11 of the Bankruptcy Code. International operations and certain other subsidiaries were not included in the filing. NRG Energy expects operations to continue as normal during the restructuring process, while it operates its business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. For more information about NRG Energys restructuring process, refer to the Form 10-K filed by NRG Energy on March 31, 2003, Form 10-Qs filed by NRG Energy on May 20, 2003 and August 14, 2003.
The consolidated financial statements have been prepared on a going concern basis in accordance with GAAP. The going concern basis of presentation assumes that NRG Energy will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. Because of the Chapter 11 Cases and the circumstances leading to the filing thereof, NRG Energys ability to continue as a going concern is subject to substantial doubt and is dependent upon, among other things, confirmation of a plan of reorganization, NRG Energys ability to comply with the terms of, and if necessary renew at its expiry in May 2004, the Debtor in Possession Credit Facility, and NRG Energys ability to generate sufficient cash flows from operations, asset sales and financing arrangements to meet its obligations. There can be no assurance that this can be accomplished and if it were not, NRG Energys ability to realize the carrying value of its assets and discharge its liabilities would be subject to substantial uncertainty. Therefore, if the going concern basis were not used for the financial statements, then significant adjustments could be necessary to the carrying value of assets and liabilities, the revenues and expenses reported, and the balance sheet classifications used.
The consolidated financial statements also have been prepared in accordance with The American Institute of Certified Public Accountants Statement of Position 90-7 (SOP 90-7), Financial Reporting by Entities in Reorganization under the Bankruptcy Code. Accordingly, all prepetition liabilities believed to be subject to compromise have been segregated in the consolidated balance sheet and classified as liabilities subject to compromise, at the estimated amount of allowable claims. Liabilities not believed to be subject to compromise are separately classified as current and non-current. Interest expense is reported only to the extent that it will be paid or that it is probable that it will be an allowed claim.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all material adjustments necessary to present fairly the consolidated financial position of NRG Energy as of September 30, 2003 and December 31, 2002, the results of its operations and stockholders deficit for the three and nine months ended September 30, 2003 and 2002, and its cash flows for the nine months ended September 30, 2003 and 2002.
Certain prior-year amounts have been reclassified for comparative purposes. As previously disclosed in NRG Energys 10-K filed on March 31, 2003, NRG Energys results of operations for the three and nine months ended September 30, 2002 have been restated to reflect the impairment of Somerset Power and Bayou Cove Peaking Power. The effect of these restatements are disclosed in Note 20. In addition, NRG Energys results of operations for the three and nine months ended September 30, 2003 have been restated to reclassify $396 million from reorganization items to legal settlement in the consolidated statements of operations.
1. | Restructuring Activities |
During 2002, Xcel Energy contributed $500 million to NRG Energy, and NRG Energy and its subsidiaries sold assets and businesses that provided NRG Energy in excess of $286 million in cash and eliminated approximately $432 million in debt. NRG Energy also cancelled or deferred construction of approximately 3,900 MW of new generation projects. On July 26, 2002, Standard & Poors (S&P) downgraded NRG Energys senior unsecured bonds to below investment grade, and three days later Moodys also downgraded NRG Energys senior unsecured debt rating to below investment grade. Currently, NRG Energys unsecured bonds carry a rating of D at S&P and Ca at Moodys.
In August 2002, NRG Energy retained financial and legal restructuring advisors to assist its management in the preparation of a comprehensive financial and operational restructuring. In November 2002, NRG Energy and Xcel Energy presented a comprehensive plan of restructuring to an ad hoc committee of its bondholders and a steering committee of its bank lenders (the Ad Hoc Creditors Committees). The restructuring plan served as a basis for continuing negotiations between the Ad Hoc Creditors Committees, NRG Energy and Xcel Energy related to a consensual plan of reorganization for NRG Energy.
On March 26, 2003, Xcel Energy announced that its board of directors had approved a tentative settlement agreement with holders of most of NRG Energys long-term notes and the steering committee representing NRG Energys bank lenders. The terms of the settlement call for Xcel Energy to make payments to NRG Energy totaling up to $752 million for the benefit of NRG Energys creditors in consideration for their waiver of any existing and potential claims against Xcel Energy. Under the settlement, Xcel Energy would make the following payments: (i) $350 million, up to $150 million of which may be in Xcel Energy common stock if Xcel Energys public debt fails to maintain a certain rating, on the later of: (a) 90 days after NRG Energys plan of reorganization is confirmed by the Bankruptcy Court, and (b) one day after the effective date of NRG Energys plan of reorganization; (ii) $50 million in the first quarter of 2004. At Xcel Energys option, it may fill this requirement with either cash or Xcel Energy common stock or any combination thereof; and (iii) up to $352 million in April 2004. Since the announcement on March 26, 2003, representatives of NRG Energy, Xcel Energy, the bank lenders and noteholders continued to meet to draft the definitive documentation necessary to fully implement the terms and conditions of the tentative settlement agreement. The final settlement agreement between Xcel Energy and NRG Energy is subject to the Bankruptcy Court approval including certain provisions and conditions in its order approving the confirmation of NRG Energys plan of reorganization and the satisfaction, or waiver by Xcel Energy, of certain other conditions (including obtaining requisite releases of Xcel Energy by NRG Energy creditors). There can be no assurance that such conditions will be met.
As noted above, on May 14, 2003, the Debtors filed the Chapter 11 Cases. NRG Energy expects operations to continue as normal during the restructuring process, while it operates its business as a
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In connection with its Chapter 11 filing, NRG Energy also announced that it had secured a $250 million debtor-in-possession (DIP) financing facility from GE Capital Corporation, subject to Bankruptcy Court approval, to be utilized by its NRG Northeast Generating LLC subsidiary ( NRG Northeast) and certain NRG Northeast subsidiaries. The Bankruptcy Court entered an order approving the DIP facility on July 24, 2003. NRG Energy anticipates that the DIP, together with its cash reserves and its ongoing revenue stream, will be sufficient to fund its operations, including payment of employee wages and benefits, during the negotiation process.
Subsequent to the Petition Date, additional NRG Energy subsidiaries filed petitions for reorganization with the Bankruptcy Court. On June 5, 2003, NRG Nelson Turbines LLC and LSP-Nelson Energy LLC (both wholly owned subsidiaries of NRG Energy) filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. On August 19, 2003, NRG McClain LLC (a wholly owned subsidiary of NRG Energy) filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
On May 15, 2003, NRG Energy announced that it had been notified that the New York Stock Exchange (NYSE) has suspended trading in NRG Energys corporate units that trade under the ticker symbol NRZ (Units) and that an application to the Securities and Exchange Commission to delist the Units is pending the completion of applicable procedures, including appeal by NRG Energy of the NYSE staffs decision. NRG Energy does not plan to make such an appeal. The NYSE took this action following NRG Energys announcement that it and certain of its affiliates had filed voluntary positions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
In addition, on May 15, 2003, NRG Energy, NRG Power Marketing, Inc. (NRG PMI), NRG Finance Company I LLC, NRGenerating Holdings (No. 23) B.V. and NRG Capital LLC (collectively, the Plan Debtors) filed their Disclosure Statement for Reorganizing Debtors Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (as subsequently amended, the Disclosure Statement). The Bankruptcy Court held a hearing on the Disclosure Statement on June 30, 2003, and instructed the Plan Debtors to include certain additional disclosure. The Plan Debtors amended the Disclosure Statement and obtained Bankruptcy Court approval for the Third Amended Disclosure Statement for Debtors Second Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (respectively, the Amended Disclosure Statement, the Plan) on October 14, 2003.
The Plan must be approved by the SEC prior to its becoming effective. As subsidiaries of a registered holding company (Xcel Energy) under the Public Utility Holding Company Act of 1935 (PUHCA), any reorganization plan for NRG Energy or NRG Energys subsidiaries must be approved by the SEC prior to such plan becoming effective. Furthermore, each solicitation of any consent in respect of any reorganization plan must be accompanied or preceded by a copy of a report on the plan made by the SEC, or an abstract thereof made or approved by the SEC. The Plan and Amended Disclosure Statement were submitted to the SEC for review on July 28, 2003. The SEC issued an order approving the Plan on October 10, 2003, permitting the Plan Debtors, subject to the approval of the Bankruptcy Court, to commence solicitation of votes on the Plan.
The Plan Debtors commenced solicitation of votes on the Plan on October 14, 2003. The voting deadline by which holders of claims and equity interests of the Plan Debtors must submit their ballots accepting or rejecting the Plan was November 12, 2003. Objections to confirmation of the Plan must be filed with Bankruptcy Court by November 12, 2003. The Bankruptcy Court has scheduled the confirmation hearing to determine whether the Plan should be confirmed on November 21, 2003.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
If the Plan is confirmed, holders of NRG Energy unsecured claims (including bank and bond debt) will receive a combination of New NRG Energy common stock, New NRG Energy senior notes and cash for an estimated percentage recovery of 50.7%. Holders of NRG PMI unsecured claims will receive a combination of New NRG Energy common stock and New NRG Energy senior notes for an estimated percentage recovery of 44.6%. If the Plan is confirmed, certain other holders of claims or equity interests in the Plan Debtors will (i) have their claims paid in full in accordance with the Bankruptcy Code, (ii) have their claims or equity interests reinstated, or (iii) have their claims or equity interests cancelled, and receive no distribution on account of such claims or equity interests. Upon emergence from bankruptcy, Xcel Energys ownership interest in NRG Energy will be cancelled and ownership in NRG Energy will vest in the unsecured creditors of NRG Energy and NRG PMI.
On September 17, 2003, NRG Northeast Generating LLC (NRG Northeast) and NRG South Central Generating LLC (NRG South Central) and certain of their subsidiaries and affiliates filed a plan of reorganization with the Bankruptcy Court (the NRG Northeast and NRG South Central Plan). The debtors under the NRG Northeast and NRG South Central Plan are not soliciting votes for approval of the NRG Northeast and NRG South Central Plan because none of the holders of claims or equity interests are impaired under the NRG Northeast and NRG South Central Plan. The Bankruptcy Court has scheduled a hearing on the confirmation of the NRG Northeast and NRG South Central Plan on November 21, 24 and 25, 2003.
During the Chapter 11 Cases, the Debtors may, subject to any necessary Bankruptcy Court and lender approvals, sell assets and settle liabilities for amounts other than those reflected in the financial statements. The administrative and reorganization expenses resulting from Chapter 11 Cases will unfavorably affect the Debtors results of operations. Future results of operations may also be adversely affected by other factors related to Chapter 11 Cases.
The Company is in the process of reconciling recorded prepetition liabilities with claims filed by creditors with the Bankruptcy Court. Differences resulting from that reconciliation process will be recorded as adjustments to prepetition liabilities. The Company recently began this process and has not yet determined the reorganization adjustments.
2. | Debtors Statements |
As stated above, NRG Energy and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code on May 14, 2003, June 5, 2003, and August 19, 2003. As of the respective bankruptcy filing dates, the Debtors financial records were closed for the Prepetition Period. As required by SOP 90-7 Financial Report by Entities in Reorganization under the Bankruptcy Code, below are the condensed combined financial statements of the Debtors since the date of the bankruptcy filings (the Debtors Statements). The Debtors Statements consist of the following entities: Arthur Kill Power LLC, Astoria Gas Turbine Power LLC, Berrians I Gas Turbine Power, LLC, Big Cajun II Unit 4 LLC, Connecticut Jet Power LLC, Devon Power LLC, Dunkirk Power LLC, Huntley Power LLC, Louisiana Generating LLC, NRG Nelson Turbines LLC, LSP-Nelson Energy LLC, Middletown Power LLC, Montville Power LLC, Northeast Generation Holding LLC, Norwalk Power LLC, NRG Capital LLC, NRG Central US LLC, NRG Eastern LLC, NRG Energy, Inc., NRG Finance Company I LLC, NRG McClain LLC, NRG New Roads Holdings LLC, NRG Northeast Generating LLC, NRG Power Marketing Inc., NRG South Central Generating LLC, NRGenerating Holdings No. 23 B.V., Oswego Harbor Power LLC, Somerset Power LLC, and South Central Generation Holding LLC. The Debtors Statements have been prepared on the same basis as NRG Energys Consolidated Financial Statements.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Debtors Condensed Combined Statement of Operations
For the Three | For the Period from | ||||||||
Months Ended | May 15, 2003 to | ||||||||
September 30, 2003 | September 30, 2003 | ||||||||
(Restated) | (Restated) | ||||||||
(In thousands) | |||||||||
Operating revenue
|
$ | 335,344 | $ | 523,412 | |||||
Operating costs and expenses
|
753,979 | 964,796 | |||||||
Reorganization items
|
20,299 | 26,633 | |||||||
Operating loss
|
(438,934 | ) | (468,017 | ) | |||||
Equity in income (losses) of non-Debtor
subsidiaries
|
170,959 | (40,100 | ) | ||||||
Restructuring interest income
|
478 | 608 | |||||||
Other Expense
|
(16,608 | ) | (12,340 | ) | |||||
Pretax loss
|
(284,105 | ) | (519,849 | ) | |||||
Income tax (benefit) expense
|
(545 | ) | 621 | ||||||
Loss from continuing operations
|
(283,560 | ) | (520,470 | ) | |||||
Loss from discontinued operations, net of tax
|
(301 | ) | (301 | ) | |||||
Net loss
|
$ | (283,861 | ) | $ | (520,771 | ) | |||
Debtors Condensed Combined Balance Sheet
September 30, 2003 | |||||
(In thousands) | |||||
ASSETS | |||||
Cash
|
$ | 66,288 | |||
Receivables, net
|
289,551 | ||||
Receivables, non-Debtor affiliates
|
147,234 | ||||
Current portion of notes receivable
|
493,681 | ||||
Other current assets
|
699,297 | ||||
Total current assets
|
1,696,051 | ||||
Property, plant and equipment, net
|
2,260,644 | ||||
Investment in non-Debtors
|
2,087,593 | ||||
Notes receivable, less current portion
|
157,317 | ||||
Other assets
|
346,595 | ||||
Total assets
|
$ | 6,548,200 | |||
LIABILITIES AND STOCKHOLDERS DEFICIT | |||||
Other current liabilities
|
$ | 140,584 | |||
Other long-term obligations
|
2,506 | ||||
Liabilities subject to compromise
|
7,936,327 | ||||
Total stockholders deficit
|
(1,531,217 | ) | |||
Total liabilities and stockholders deficit
|
$ | 6,548,200 | |||
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Debtors Condensed Combined Statement of Cash Flows
For the Period from | ||||
May 15, 2003 to | ||||
September 30, 2003 | ||||
(In thousands) | ||||
Net cash provided by operating activities
|
$ | 144,342 | ||
Net cash used by investing activities
|
(196,379 | ) | ||
Net cash used by financing activities
|
| |||
Net increase in cash and cash equivalents
|
(52,037 | ) | ||
Cash and cash equivalents at beginning of period
|
118,325 | |||
Cash and cash equivalents at end of period
|
$ | 66,288 | ||
3. | Discontinued Operations |
Pursuant to the requirements of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, NRG Energy has classified and is accounting for certain of its assets as held-for-sale at September 30, 2003. SFAS No. 144 requires that assets held for sale be valued on an asset-by-asset basis at the lower of carrying amount or fair value less costs to sell. In applying those provisions NRG Energys management considered projected cash flows, bids and offers related to those assets and businesses.
Discontinued operations consist of the historical operations and net gains/losses related to our Crockett Cogeneration, Entrade, Killingholme, Csepel, Hsin Yu, Bulo Bulo, McClain, NEO Landfill Gas, Inc. (NLGI) and Timber Energy Resources, Inc. (TERI) projects that were sold or have met the required criteria for such classification pending final disposition. Sales of four of the projects closed during 2002 (Bulo Bulo, Csepel, Entrade and Crockett Cogeneration). One project, Killingholme, was sold in January 2003. During 2003, NRG Energy committed to a plan to sell McClain and closed on the sale of TERI. In addition, in May 2003 the project lender foreclosed on NRG Energys ownership interests in the wholly owned operating subsidiaries of NLGI.
The financial results for all of these businesses have been accounted for as discontinued operations. Accordingly, operating results of 2003 and of prior periods have been restated to report the operations as discontinued.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized results of operations of the discontinued operations are presented in the following table. The three months ended September 2003 results of operations include the Hsin Yu, McClain, and TERI projects. The nine months ended September 2003 results of operations include the Killingholme, Hsin Yu, McClain, NLGI, and TERI projects. The three and nine months ended September 2002 results of operations include the Crockett Cogeneration, Entrade, Killingholme, Csepel, Hsin Yu, Bulo Bulo, McClain, NLGI, and TERI projects.
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | |||||||||||||
(In thousands) | ||||||||||||||||
Operating revenue
|
$ | 38,817 | $ | 224,075 | $ | 102,944 | $ | 629,344 | ||||||||
Operating & other expenses
|
38,969 | 812,721 | 237,508 | 1,218,192 | ||||||||||||
Pretax loss from operations of discontinued
components
|
(152 | ) | (588,646 | ) | (134,564 | ) | (588,848 | ) | ||||||||
Income tax expense/(benefit)
|
328 | (3,024 | ) | (414 | ) | (3,788 | ) | |||||||||
Loss from operations of discontinued components
|
(480 | ) | (585,622 | ) | (134,150 | ) | (585,060 | ) | ||||||||
Disposal of discontinued components gain
(loss) net of income taxes
|
(624 | ) | (836 | ) | 188,104 | (10,510 | ) | |||||||||
Net income (loss) on discontinued operations
|
$ | (1,104 | ) | $ | (586,458 | ) | $ | 53,954 | $ | (595,570 | ) | |||||
The assets and liabilities of the discontinued operations are reported in the balance sheets as of September 30, 2003 as held for sale. The major classes of assets and liabilities held for sale by geographic area are presented in the following table. The North America segment includes the McClain project. The Asia Pacific segment includes the Hsin Yu project.
Power Generation | ||||||||||||
North | Asia | |||||||||||
September 30, 2003 | America | Pacific | Total | |||||||||
(In thousands) | ||||||||||||
Cash
|
$ | 201 | $ | 653 | $ | 854 | ||||||
Restricted cash
|
1,821 | 444 | 2,265 | |||||||||
Receivables, net
|
412 | 16,572 | 16,984 | |||||||||
Inventory
|
2,109 | 2,581 | 4,690 | |||||||||
Prepaids and deposits
|
462 | 7,894 | 8,356 | |||||||||
Other current assets
|
731 | 1,962 | 2,693 | |||||||||
Current assets discontinued
operations
|
$ | 5,736 | $ | 30,106 | $ | 35,842 | ||||||
PP&E, net
|
$ | 159,176 | $ | 41,301 | $ | 200,477 | ||||||
Other non-current assets
|
2,687 | 10,290 | 12,977 | |||||||||
Non-current assets discontinued
operations
|
$ | 161,863 | $ | 51,591 | $ | 213,454 | ||||||
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Power Generation | ||||||||||||
North | Asia | |||||||||||
September 30, 2003 | America | Pacific | Total | |||||||||
(In thousands) | ||||||||||||
Current portion of long-term debt
|
$ | | $ | 86,546 | $ | 86,546 | ||||||
Accounts payable trade
|
155 | 25,413 | 25,568 | |||||||||
Other current liabilities
|
857 | 368 | 1,225 | |||||||||
Current liabilities discontinued
operations
|
$ | 1,012 | $ | 112,327 | $ | 113,339 | ||||||
Long-term debt
|
$ | | $ | 3,883 | $ | 3,883 | ||||||
Deferred income tax
|
| 4,909 | 4,909 | |||||||||
Payable to contractors
|
| 4,389 | 4,389 | |||||||||
Other accrued liabilities
|
| 4,400 | 4,400 | |||||||||
Other non-current liabilities
|
| 5,192 | 5,192 | |||||||||
Non-current liabilities
discontinued operations
|
$ | | $ | 22,773 | $ | 22,773 | ||||||
Financing debt subject to compromise
|
$ | 156,509 | $ | | $ | 156,509 | ||||||
Other liabilities subject to
compromise
|
2,601 | | 2,601 | |||||||||
Liabilities discontinued
operations subject to compromise
|
$ | 159,110 | $ | | $ | 159,110 | ||||||
The disclosure below has been updated to reflect discontinued components as of September 30, 2003. The North America segment includes the McClain project. The Europe segment includes the Killingholme
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
projects. The Asia Pacific segment includes the Hsin Yu Project. The Alternative Energy segment includes the NLGI and TERI projects.
Power Generation | ||||||||||||||||||||
North | Asia | |||||||||||||||||||
December 31, 2002 | America | Europe | Pacific | Alt-Energy | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Cash
|
$ | 3,111 | $ | 23,173 | $ | 736 | $ | 430 | $ | 27,450 | ||||||||||
Restricted cash
|
5,094 | | 3 | | 5,097 | |||||||||||||||
Receivables, net
|
7,857 | 19,869 | 3,315 | 269 | 31,310 | |||||||||||||||
Derivative instruments valuation
|
| 29,795 | | | 29,795 | |||||||||||||||
Other current assets
|
2,329 | 14,768 | 8,203 | 557 | 25,857 | |||||||||||||||
Current assets discontinued
operations
|
$ | 18,391 | $ | 87,605 | $ | 12,257 | $ | 1,256 | $ | 119,509 | ||||||||||
PP&E, net
|
$ | 265,236 | $ | 231,048 | $ | 43,496 | $ | 11,962 | $ | 551,742 | ||||||||||
Derivative instruments valuation
|
| 87,804 | | | 87,804 | |||||||||||||||
Other non-current assets
|
3,320 | 6,983 | 10,441 | 18,532 | 39,276 | |||||||||||||||
Non-current assets discontinued
operations
|
$ | 268,556 | $ | 325,835 | $ | 53,937 | $ | 30,494 | $ | 678,822 | ||||||||||
Current portion of long-term debt
|
$ | 157,288 | $ | 360,122 | $ | 85,534 | $ | 7,658 | $ | 610,602 | ||||||||||
Accounts payable trade
|
5,362 | 35,310 | 15,457 | 859 | 56,988 | |||||||||||||||
Other current liabilities
|
6,426 | 16,054 | 596 | 3,798 | 26,874 | |||||||||||||||
Current liabilities discontinued
operations
|
$ | 169,076 | $ | 411,486 | $ | 101,587 | $ | 12,315 | $ | 694,464 | ||||||||||
Long-term debt
|
$ | | $ | | $ | 72 | $ | | $ | 72 | ||||||||||
Deferred income tax
|
(1 | ) | 123,632 | 4,364 | (2,102 | ) | 125,893 | |||||||||||||
Derivative instruments valuation
|
| 12,302 | | | 12,302 | |||||||||||||||
Other non-current liabilities
|
16 | | 13,947 | 217 | 14,180 | |||||||||||||||
Non-current liabilities
discontinued operations
|
$ | 15 | $ | 135,934 | $ | 18,383 | $ | (1,885 | ) | $ | 152,447 | |||||||||
Bulo Bulo In June 2002, NRG Energy began negotiations to sell its 60% interest in Compania Electrica Central Bulo Bulo S.A. (Bulo Bulo), a Bolivian corporation. The transaction reached financial close in the fourth quarter of 2002 resulting in cash proceeds of $10.9 million (net of cash transferred of $8.6 million) and a loss of $10.6 million. NRG Energy accounted for the results of operations of Bulo Bulo as part of its power generation segment within the Other Americas region.
Crockett Cogeneration Project In September 2002, NRG Energy announced that it had reached an agreement to sell its 57.7% interest in the Crockett Cogeneration Project, a 240 MW natural gas fueled cogeneration plant near San Francisco, California, to Energy Investment Fund Group, an existing LP, and a unit of GE Capital. In November 2002, the sale closed and NRG Energy realized net cash proceeds of approximately $52.1 million (net of cash transferred of $0.2 million) and a loss on disposal of approximately $11.5 million. NRG Energy accounted for the results of operations of Crockett Cogeneration as part of its power generation segment within North America.
Csepel and Entrade In September 2002, NRG Energy announced that it had reached agreements to sell its Csepel power generating facilities (located in Budapest, Hungary) and its interest in Entrade (an electricity trading business headquartered in Prague) to Atel, an independent energy group headquartered in Switzerland. The sales of Csepel and Entrade closed before year-end and resulted in cash proceeds of
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$92.6 million (net of cash transferred of $44.1 million) and a gain of approximately $24.0 million. NRG Energy accounted for the results of operations of Csepel and Entrade as part of its power generation segment within Europe.
Killingholme During third quarter 2002 NRG Energy recorded an impairment charge of $477.9 million. In January 2003, NRG Energy completed the sale of its interest in the Killingholme project to its lenders for a nominal value and forgiveness of outstanding debt with a carrying value of approximately $360.1 million at December 31, 2002. The sale of NRG Energys interest in the Killingholme project and the release of debt obligations resulted in a gain on sale in the first quarter of 2003 of approximately $191.2 million. The gain results from the write-down of the projects assets in the third quarter of 2002 below the carrying value of the related debt. NRG Energy accounted for the results of operations of Killingholme as part of its power generation segment within Europe.
Hsin Yu During the third quarter of 2002, NRG Energy committed to sell its ownership interest in Hsin Yu located in Taiwan and recorded an impairment charge of approximately $121.8 million for the project. NRG Energy owns 60% with one other party owning the remaining minority interest. NRG Energy was negotiating to sell its interest in the project to the minority owner for a nominal value plus assumption of its future funding obligations. As of July 4, 2003, the minority owners withdrew from the negotiation process. NRG Energy continues to pursue other sales alternatives. NRG Energy accounts for the results of operations of Hsin Yu as part of its power generation segment within Asia Pacific.
NLGI During 2002, NRG Energy recorded an impairment charge of $12.4 million related to subsidiaries of NLGI, an indirect wholly owned subsidiary of NRG Energy. The charge was based on a revised project outlook. During the quarter ended March 31, 2003, NRG Energy recorded impairment charges of $23.6 million related to subsidiaries of NLGI and a charge of $14.5 million to write off its 50% investment in Minnesota Methane, LLC. Through April 30, 2003, NRG Energy and NLGI failed to make certain payments causing a default under NLGIs term loan agreements. In May 2003, the project lenders to the wholly-owned subsidiaries of NLGI and Minnesota Methane LLC foreclosed on NRG Energys membership interest in the NLGI subsidiaries and NRG Energys equity interest in Minnesota Methane LLC. There was no material gain or loss recognized as a result of the foreclosure.
NRG Energy may be contingently liable for up to approximately $50 million of future tax-related payments through 2007 to the owners of NLGI. NRG Energy recorded a Section 29 tax credit obligation of approximately $6.5 million in connection with the foreclosure that represents the amount owed by NRG Energy for the tax credits generated by NLGI prior to the change in ownership. Additional obligations do not exist until the Section 29 tax credits are generated from ongoing operations and the new project owner is unable to utilize such credits.
McClain During second quarter of 2003, NRG reviewed the recoverability of its McClain assets pursuant to SFAS No. 144 and recorded an impairment charge of $101.8. In August 2003, NRG Energy announced that it had reached an agreement to sell its 77% interest in McClain Generating Station, a 520 MW combined-cycle, natural gas-fired facility located in Newcastle, Oklahoma to Oklahoma Gas & Electric Company. As part of the sales process, the project company NRG McClain LLC, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Upon completion, the sale will result in proceeds of approximately $160 million. No material gain or loss is expected on the sale.
TERI During 2002, NRG Energy recorded an impairment charge of $11.7 million based on a revised project outlook. In September 2003, NRG Energy completed the sale of its controlling interest in TERI, a biomass waste-fuel power plant located in Florida and a wood processing facility located in Georgia, to DG Telogia Power, LLC. The sale resulted in net proceeds of approximately $1.0 million and an additional net loss of approximately $0.6 million at closing.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. | Restructuring and Impairment Charges and Legal Settlement |
NRG Energy reviews the recoverability of its long-lived assets in accordance with the guidelines of SFAS No. 144. As a result of this review, NRG Energy recorded impairment charges of $6.0 million and $229.6 million for the three and nine months ended September 30, 2003, respectively and $2.5 billion for the three and nine months ended September 30, 2002, as shown in the table below.
To determine whether an asset was impaired, NRG Energy compared asset carrying values to total future estimated undiscounted cash flows. Separate analyses were completed for assets or groups of assets at the lowest level for which identifiable cash flows were largely independent of the cash flows of other assets and liabilities. The estimates of future cash flows included only future cash flows, net of associated cash outflows, directly associated with and expected to arise as a result of NRG Energys assumed use and eventual disposition of the asset. Cash flow estimates associated with assets in service were based on the assets existing service potential. The cash flow estimates may include probability weightings to consider possible alternative courses of action and outcomes, given the uncertainty of available information and prospective market conditions.
If an asset was determined to be impaired based on the cash flow testing performed, an impairment loss was recorded to write down the asset to its fair value. Estimates of fair value were based on prices for similar assets and present value techniques. Fair values determined by similar asset prices reflect NRG Energys current estimate of recoverability from expected marketing of project assets. For fair values determined by projected cash flows, the fair value represents a discounted cash flow amount over the remaining life of each project that reflects project-specific assumptions for long-term power pool prices, escalated future project operating costs, and expected plant operation given assumed market conditions.
Restructuring and impairment charges and legal settlement costs included in operating expenses in the Consolidated Statement of Operations include the following:
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, 2003 | Three Months Ended | September 30, 2003 | Nine Months Ended | ||||||||||||||
Restated | September 30, 2002 | Restated | September 30, 2002 | ||||||||||||||
(In thousands) | |||||||||||||||||
Impairment charges
|
$ | 5,958 | $ | 2,470,656 | $ | 229,564 | $ | 2,496,001 | |||||||||
Legal settlement
|
396,000 | | 396,000 | | |||||||||||||
*Reorganization items
|
20,698 | | 27,032 | | |||||||||||||
*Restructuring charges
|
294 | 17,090 | 68,455 | 37,669 | |||||||||||||
Total
|
$ | 422,950 | $ | 2,487,746 | $ | 721,051 | $ | 2,533,670 | |||||||||
*Total reorganization items and restructuring
charges for periods indicated
|
$ | 20,992 | $ | 17,090 | $ | 95,487 | $ | 37,669 | |||||||||
Impairment Charges |
Impairment charges included the following for the three months ended September 30, 2003:
Pre-tax | ||||||||||
Project Name | Project Status | Charge | Fair Value Basis | |||||||
(In thousands) | ||||||||||
Arthur Kill Power, LLC
|
Terminated | $ | 9,049 | Projected cash flows | ||||||
Langage (UK)
|
Sold | (3,091 | ) | Realized gain upon sale | ||||||
Total Impairment Charges
|
$ | 5,958 | ||||||||
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment charges included the following for the nine months ended September 30, 2003:
Pre-tax | ||||||||||
Project Name | Project Status | Charge | Fair Value Basis | |||||||
(In thousands) | ||||||||||
Devon Power LLC
|
Operating at a loss | $ | 64,198 | Projected cash flows | ||||||
Middletown Power LLC
|
Operating at a loss | 157,323 | Projected cash flows | |||||||
Arthur Kill Power, LLC
|
Terminated | 9,049 | Projected cash flows | |||||||
Langage (UK)
|
Terminated | (3,091 | ) | Realized gain | ||||||
Other
|
Terminated | 2,085 | ||||||||
Total Impairment Charges
|
$ | 229,564 | ||||||||
Impairment charges included the following for the three months ended September 30, 2002:
Pre-tax | ||||||||||
Project Name | Project Status | Charge | Fair Value Basis | |||||||
(In thousands) | ||||||||||
Nelson
|
Terminated | $ | 619,768 | Similar asset prices | ||||||
Pike
|
Terminated in bankruptcy | 528,654 | Similar asset prices | |||||||
Bourbonnais
|
Terminated | 269,649 | Similar asset prices | |||||||
Meriden
|
On hold | 180,318 | Similar asset prices | |||||||
Brazos Valley
|
Foreclosure | 102,900 | Projected cash flows | |||||||
Kendall, Batesville & other expansion
projects
|
Terminated | 147,053 | Similar asset prices | |||||||
Langage (UK)
|
Terminated | 43,828 | Estimated market price | |||||||
Turbines & other costs
|
Construction on hold | 308,651 | Similar asset prices | |||||||
Audrain
|
Operating at a loss | 66,142 | Projected cash flows | |||||||
Bayou Cove
|
Operating at a loss | 126,528 | Projected cash flows | |||||||
Somerset
|
Operating at a loss | 49,289 | Projected cash flows | |||||||
Other
|
Operating at a loss | 27,876 | Projected cash flows | |||||||
Total Impairment Charges
|
$ | 2,470,656 | ||||||||
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment charges included the following for the nine months ended September 30, 2002:
Pre-tax | ||||||||||
Project Name | Project Status | Charge | Fair Value Basis | |||||||
(In thousands) | ||||||||||
Nelson
|
Terminated | $ | 619,768 | Similar asset prices | ||||||
Pike
|
Terminated | 528,654 | Similar asset prices | |||||||
Bourbonnais
|
Terminated | 269,649 | Similar asset prices | |||||||
Meriden
|
On hold | 180,318 | Similar asset prices | |||||||
Brazos Valley
|
Foreclosure in process | 102,900 | Projected cash flows | |||||||
Kendall, Batesville & other expansion
projects
|
Terminated | 147,053 | Similar asset prices | |||||||
Langage (UK)
|
Terminated | 43,828 | Estimated market price | |||||||
Turbines & other costs
|
Construction on hold | 308,651 | Similar asset prices | |||||||
Audrain
|
Operating at a loss | 66,142 | Projected cash flows | |||||||
Bayou Cove
|
Operating at a loss | 126,528 | Projected cash flow | |||||||
Somerset
|
Operating at a loss | 49,289 | Projected cash flow | |||||||
Other
|
Operating at a loss | 53,221 | Projected cash flows | |||||||
Total Impairment Charges
|
$ | 2,496,001 | ||||||||
Connecticut Facilities NRG Energy reviewed cash flow models for its Connecticut generating facilities at December 31, 2002. No impairment was required based on the pricing and cost recovery assumptions at December 31, 2002. On February 26, 2003 NRG Energy filed a proposed cost of service agreement for the following Connecticut facilities with the Federal Energy Regulatory Commission (FERC) Devon 11-14, Middletown station, Montville station, Norwalk Harbor station. On April 25, 2003, the FERC issued an order that rejected NRG Energys proposed fixed monthly charges, citing certain policy determinations regarding cost-of-service agreements. FERC instead directed NRG Energy to recover its fixed and variable costs under interim bidding rules for generators located in constrained areas, the so-called Peaking Unit Safe Harbor (PUSH) mechanism. The PUSH bidding rules would apply to all of NRG Energys Connecticut facilities that filed the proposed cost of service agreements, with the exception of Middletown Units 2 and 3, until June 1, 2004. The following quick start facilities, located in Connecticut also have submitted PUSH bids that have been approved by FERC: Cos Cob, Franklin Drive, Branford and Torrington. FERC also ordered that the regional power agencies overseeing the energy markets in Connecticut, the Independent System Operator for New England (ISO-NE) and the New England Power Pool (NEPOOL), modify the New England market rules to establish and implement locational capacity or deliverability requirements no later than June 1, 2004. In late May and June 2003, ISO-NE revised its market pricing rules to facilitate FERCs mandated PUSH mechanism, but has not yet proposed the market modifications required to implement locational capacity or deliverability requirements. In June 2003 NRG Energy filed for rehearing of several elements of FERCs April 25, 2003 order. In response, on July 25, 2003, FERC re-affirmed the PUSH interim pricing mechanism.
The existing RMR between ISO-NE and NRG Energy covering Devon 7 and 8 terminated on September 30, 2003. On October 2, 2003, NRG filed to extend the existing RMR agreements. A number of protests have been filed and FERC has yet to act on the request to extend the agreements.
As a result of these regulatory developments and changing circumstances in the second quarter of 2003, NRG Energy updated the facilities cash flow models to incorporate changes to reflect the impact of the April 25, 2003 FERCs orders on PUSH pricing, the pending termination of the RMR, and to update the
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
estimated impact of future locational capacity or deliverability requirements. Based on these revised cash flow models, management determined that the new estimates of pricing and cost recovery levels were not projected to return sufficient revenue to cover the fixed costs at Devon Power LLC and Middletown Power LLC. As a consequence, during the second quarter of 2003 NRG Energy recorded a $64.2 million and $157.3 million impairment at Devon Power LLC and Middletown Power LLC, respectively. NRG Energy accounts for the results of operations of the Connecticut Facilities as part of its power generation segment within North America.
Langage (UK) During the third quarter of 2002, NRG Energy reviewed the recoverability of its Langage assets pursuant to SFAS No. 144 and recorded a charge of $43.8 million. In August 2003 NRG Energy closed on the sale of Langage to Carlton Power Limited resulting in net cash proceeds of approximately $1.0 million and a net gain of approximately $3.1 million.
Arthur Kill Power, LLC During the third quarter of 2003 NRG Energy cancelled its plans to re-establish fuel oil capacity at its Arthur Kill plant. This resulted in a charge of approximately $9.0 million to write-off assets under development.
Credit rating downgrades, defaults under certain credit agreements, increased collateral requirements and reduced liquidity experienced by NRG Energy during the third quarter of 2002 were triggering events which required NRG Energy to review the recoverability of its long-lived assets. Adverse economic conditions resulted in declining energy prices. Consequently, NRG Energy determined that many of its construction projects and its operational projects were impaired during the third quarter of 2002 and should be written down to fair market value.
Turbines In October 2003, NRG Energy closed on the sale of three turbines and related equipment. During second quarter of 2002, NRG Energy recorded an impairment charge of $52.8 million related to these turbines. The sale resulted in net cash proceeds of $70.7 million and a gain of approximately $21.9 million.
Restructuring Charges |
NRG Energy incurred total restructuring charges of approximately $0.3 million and $68.5 million for the three and nine months ended September 30, 2003. NRG Energy incurred total restructuring costs of approximately $17.1 million and $37.7 million for the three and nine months ended September 30, 2002. These costs consist of employee separation costs and advisor fees..
NRG Energy incurred approximately $20.7 million and $27.0 million of reorganization items related to professional and advisors fees for the three and nine months ended September 30, 2003, respectively.
Severance accruals have been recorded based on certain contractual agreements and benefits offered by NRG Energy to its employees. Severance costs have been recognized for only those employees who have been terminated as of September 30, 2003. The severance accrual was $1.9 million and $18.4 million as of September 30, 2003 and December 31, 2002, respectively. During the second quarter of 2003, a settlement agreement was reached with former NRG Energy executives resulting in a lower severance cost than previously recorded. As a result, approximately $8.4 million was reversed out of the severance accrual into income during the second quarter of 2003.
Brazos Valley In January 2003, the project lenders foreclosed on NRG Energys ownership interests in NRG Brazos Valley GP, LLC, NRG Brazos Valley LP, LLC, NRG Brazos Valley Technology LP, LLC and NRG Brazos Valley Energy, LP, and the lenders thereby acquired all of the assets of the Brazos Valley project, a 633 MW project under construction near Houston, TX. NRG Energy agreed to the consensual foreclosure of the companies including a possible obligation of approximately $75.0 million under a contingent equity agreement if the project assets were not sufficient to cover the outstanding obligations to the lender. As
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of December 31, 2002, NRG Energy recorded approximately $24.0 million for the potential obligation to infuse additional amounts of capital to fund a debt service reserve account (approximately $10.0 million) and the potential obligation to satisfy a contingent equity agreement. The consensual foreclosure in the first quarter of 2003 resulted in a pre-tax gain on sale of approximately $20.0 million. This gain resulted from the debt extinguishment. The gain was offset in full by the recognition of an additional $20.0 million obligation to satisfy the contingent equity agreement, resulting in a contingent equity total obligation recorded of approximately $34.0 million as of March 31, 2003. In June 2003, the lenders entered into a sales agreement whereby they agreed to sell the Brazos Valley project to a third party for a lower sale price then originally estimated. As a result of the lower sales price, in the second quarter of 2003, NRG Energy recorded an additional $42.0 million of contingent equity obligation, which is included in restructuring charges. As of September 30, 2003, approximately $76.0 million of contingent equity obligation was recorded.
Legal Settlement |
During the third quarter of 2003, NRG Energy recorded $396.0 million in connection with the resolution of the FirstEnergy Arbitration Claim. As a result of this resolution, FirstEnergy will retain ownership of the Lake Plant Assets and will receive an allowed general unsecured claim of $396 million under NRG Energys Plan of Reorganization submitted to the Bankruptcy Court. In accordance with SOP 90-7, this amount is recorded on the balance sheet as a prepetition liability.
5. | Write Downs and (Gains) Losses on Sales of Equity Method Investments |
Write downs and (gains) losses on sales of equity method investments recorded in operating expenses in the consolidated statement of operations includes the following:
(Income)/Loss | (Income)/Loss | (Income)/Loss | (Income)/Loss | |||||||||||||
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(In thousands) | ||||||||||||||||
NEO Corporation Minnesota Methane
|
$ | | $ | | $ | 12,257 | $ | 5,678 | ||||||||
Kondapalli
|
| | (519 | ) | | |||||||||||
ECKG
|
| | (2,869 | ) | | |||||||||||
Loy Yang
|
| 53,590 | 139,972 | 53,590 | ||||||||||||
Mustang
|
(12,310 | ) | (12,124 | ) | ||||||||||||
Energy Development Limited (EDL)
|
14,287 | 14,287 | ||||||||||||||
Sabine River Works
|
49,392 | 49,392 | ||||||||||||||
Mt. Poso
|
600 | 600 | ||||||||||||||
Collinsville Power Station
|
| | | 4,168 | ||||||||||||
Total write downs and (gains) losses of
equity method investments
|
$ | (12,310 | ) | $ | 117,869 | $ | 136,717 | $ | 127,715 | |||||||
NEO Corporation Minnesota Methane NRG Energy recorded an impairment charge of $5.6 million during the second quarter of 2002 to write-down its 50% investment in Minnesota Methane. NRG Energy recorded an additional impairment charge of $14.5 million during the first quarter of 2003. These charges were related to revised project outlook and managements belief that the decline in fair value was other than temporary. Through April 30, 2003, NRG Energy and NEO Landfill Gas, Inc. failed to make certain payments causing a default under NEO Landfill Gas, Inc.s term loan agreements. In May 2003, the project
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
lenders to the wholly-owned subsidiaries of NEO Landfill Gas, Inc. and Minnesota Methane LLC foreclosed on NRG Energys membership interest in the NEO Landfill Gas Inc. subsidiaries and NRG Energys equity interest in Minnesota Methane LLC. Upon completion of the foreclosure, NRG Energy recorded a gain of $2.2 million. This gain resulted from the release of certain obligations. NRG Energy accounts for the results of operations of NEO Corporation Minnesota Methane as part of its power generation segment within Alternative Energy.
Kondapalli On January 30, 2003, NRG Energy signed a sale agreement with the Genting Group of Malaysia (Genting) to sell NRG Energys 30% interest in Lanco Kondapalli Power Pvt Ltd (Kondapalli) and a 74% interest in Eastern Generation Services (India) Pvt Ltd (the O&M company). Kondapalli is based in Hyderabad, Andhra Pradesh, India, and is the owner of a 368 MW natural gas fired combined cycle gas turbine. In the first quarter of 2003, NRG Energy wrote down its investment in Kondapalli by $1.3 million due to developments related to the sale that indicated an impairment of its book value that was considered to be other than temporary. The sale closed on May 30, 2003 resulting in net cash proceeds of approximately $24 million and a gain of approximately $1.8 million. The gain resulted from incurring lower selling costs then estimated as part of the first quarter impairment. NRG Energy accounted for the results of operations of Kondapalli as part of its power generation segment within the Asia Pacific Region.
ECKG In September 2002, NRG Energy announced that it had reached agreement to sell its 44.5% interest in the ECKG power station in connection with its Csepel power generating facilities, and its interest in Entrade, an electricity trading business, to Atel, an independent energy group headquartered in Switzerland. The transaction closed in January 2003 and resulted in cash proceeds of $65.3 million and a net loss of less than $1.0 million. In accordance with the purchase agreement, NRG Energy was to receive additional consideration if Atel purchased shares held by NRG Energys partner. During the second quarter of 2003, NRG Energy received approximately $3.7 million of additional consideration. NRG Energy accounted for the results of operations of its investment in ECKG as part of its power generation segment within the Europe Region.
Loy Yang Based on a third party market valuation and bids received in response to marketing Loy Yang for possible sale, NRG Energy recorded a write down of its investment of approximately $111.4 million during 2002 ($53.6 during the third quarter and an additional $57.8 million during the fourth quarter). This write-down reflected managements belief that the decline in fair value of the investment was other than temporary. Accumulated other comprehensive loss at December 31, 2002 included foreign currency translation losses of approximately $76.7 million related to Loy Yang. The foreign currency translation losses were to remain as a component of accumulated other comprehensive loss until completion of the sale as required by FASB Statement No. 52 Foreign Currency Translation (FASB No. 52).
In May 2003, NRG Energy and it partners entered into negotiations that culminated in the completion of a Share Purchase Agreement to sell 100% of the Loy Yang project. Completion of the sale is subject to various conditions. Upon completion, the sale will result in proceeds of approximately $25.0 million to $31.0 million to NRG Energy. Consequently, NRG Energy recorded an additional impairment charge of approximately $140.0 million during the quarter ended June 30, 2003, which includes a charge of approximately $61.0 million of foreign currency translation losses related to the investment in Loy Yang in accordance with EITF Issue No 01-05 Application of FASB Statement No. 52 to an Investment Being Evaluated for Impairment that will be Disposed of. In accordance with FASB No. 52, accumulated other comprehensive loss at June 30, 2003 included foreign currency translation losses of approximately $61.0 million related to Loy Yang. NRG Energy accounts for the results of operations of its investment in Loy Yang as part of its power generation segment within the Asia Pacific region.
Mustang Station On July 7, 2003, NRG Energy completed the sale of its 50% interest in Mustang Station, a 483 MW gas-fired combined cycle power generating plant located in Denver City, Texas, to EIF
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Mustang Holdings I, LLC. The sale resulted in net cash proceeds of approximately $13.3 million and a net gain of approximately $12.1 million.
Energy Development Limited On July 25, 2002, NRG Energy announced it had completed the sale of its ownership interests in an Australian energy company, Energy Development Limited (EDL). EDL is a listed Australian energy company engaged in the development and management of an international portfolio of projects with a particular focus on renewable and waste fuels. In October 2002, NRG Energy received proceeds of $78.5 million (AUS), or approximately $43.9 million (U.S.), in exchange for its ownership interest in EDL with the closing of the transaction. During the third quarter of 2002, NRG Energy recorded a write-down of the investment of approximately $14.3 million to write down the carrying value of its equity investment due to the pending sale. NRG Energy accounted for the results of operations of its investment in EDL as part of its power generation segment within the Asia Pacific region.
Sabine River In September 2002, NRG Energy agreed to transfer its indirect 50% interest in SRW Cogeneration LP (SRW) to its partner in SRW, Conoco, Inc. in consideration for Conocos agreement to terminate or assume all of the obligations of NRG Energy in relation to SRW. SRW owns a cogeneration facility in Orange County, Texas. NRG Energy recorded a charge of approximately $49.4 million during the quarter ended September 30, 2002 to write down the carrying value of its investment due to the pending sale. The transaction closed on November 5, 2002. NRG Energy accounted for the results of operations of its investment in SRW as part of its power generation segment within North America.
Mt. Poso In September 2002, NRG Energy agreed to sell its 39.5% indirect partnership interest in the Mt. Poso Cogeneration Company, a California limited partnership (Mt. Poso) for approximately $10 million to Red Hawk Energy, LLC. Mt. Poso owns a 49.5 MW coal-fired cogeneration power plant and thermally enhanced oil recovery facility located 20 miles north of Bakersfield, California. The sale closed in November 2002 resulting in a loss of approximately $1.0 million. NRG Energy accounted for the results of operations of its investment in Mt. Poso as part of its power generation segment within North America.
Collinsville Power Station Based on third party market valuation and bids received in response to marketing the investment for possible sale, NRG Energy recorded a write down of its investment of approximately $4.1 million during the second quarter of 2002. In August 2002, NRG Energy announced that it had completed the sale of its 50% interest in the 192 MW Collinsville Power Station in Australia, to its partner, a subsidiary of Transfield Services Limited for $8.6 million (AUS), or approximately $4.8 million (USD). NRG Energys ultimate loss on the sale of Collinsville Power Station was approximately $3.6 million. NRG Energy accounted for the results of operations of its investment in Collinsville Power Station as part of its power generation segment within the Asia Pacific region.
6. | Income Taxes |
The income tax provision for the nine months ended September 30, 2003 has been recorded on the basis that NRG Energy and each of its subsidiaries will file separate federal income tax returns. The income tax provision for the nine months ended September 30, 2002 has been recorded on the basis that NRG Energy and its subsidiaries filed a consolidated federal income tax return for the period January 1 through June 3, 2002, and NRG Energy and each of its subsidiaries filed separate federal income tax returns for the remainder of 2002.
Following Xcel Energys acquisition of NRG Energys public shares on June 3, 2002, Xcel Energy decided not to include NRG Energy in its consolidated federal income tax return. Consequently, NRG Energy and each of its subsidiaries are required to file separate federal income tax returns.
For the nine months ended September 30, 2003 income tax expense on continuing operations was $44.9 million compared to a tax benefit of $150.8 million for the same period in 2002. The tax expense for the
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
nine months ended September 30, 2003 includes $36.1 million and $8.8 million of U.S. and foreign taxes, respectively. During 2003, an additional valuation allowance of $33 million was recorded against the deferred tax assets of NRG West Coast as a result of its conversion from a corporation to a disregarded entity for federal income tax purposes. Subsequent to the conversion, NRG West Coast will no longer be taxed as an entity separate from NRG Energy. This conversion was completed to reduce current tax payments for 2003.
The tax benefit for the nine months ended September 30, 2002 resulted from the recognition of deferred tax assets related to asset impairments recorded for financial reporting purposes. It is uncertain if NRG Energy will be able to fully realize tax benefits on net operating losses and deferred tax assets. Consequently, a valuation allowance was recorded against the deferred tax assets for net operating loss carryforwards and for other deferred tax assets in excess of previously-recognized deferred tax liabilities.
The effective income tax rate for the periods ended September 30, 2003 and September 30, 2002 differs from the statutory federal income tax rate of 35% primarily due to limitation on tax benefits and lower foreign statutory rates.
As of September 30, 2003, NRG Energy provided a valuation allowance of approximately $701.6 million to account for potential limitations on utilization of U.S. and Foreign net operating loss carryforwards compared to a valuation allowance of $281.8 for the same period in 2002. The net operating loss carryforwards expire between 2003 and 2021. NRG Energy also provided a valuation allowance for other U.S. and Foreign deferred income tax assets of approximately $846.7 million for the period ending September 30, 2003 compared to $402.7 million for the same period in 2002.
7. | Summarized Financial Information of Affiliates |
NRG Energy has a 50% interest in one company (West Coast Power LLC) that was considered significant, as defined by applicable SEC regulations, and accounts for its investment using the equity method.
West Coast Power LLC Summarized Financial Information
The following table summarizes financial information for West Coast Power LLC, including interests owned by NRG Energy and other parties for the periods shown below:
Results of Operations |
Three | Three | For the | For the | |||||||||||||
Months | Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(In millions) | ||||||||||||||||
Operating revenues
|
$ | 308 | $ | 288 | $ | 834 | $ | 688 | ||||||||
Operating income
|
$ | 67 | $ | 38 | $ | 204 | $ | 119 | ||||||||
Net income (pre-tax)
|
$ | 74 | $ | 24 | $ | 205 | $ | 98 |
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial Position |
September 30, | December 31, | ||||||||
2003 | 2002 | ||||||||
(In millions) | |||||||||
Current assets
|
$ | 236 | $ | 255 | |||||
Other assets
|
497 | 532 | |||||||
Total assets
|
$ | 733 | $ | 787 | |||||
Current liabilities
|
$ | 54 | $ | 112 | |||||
Other liabilities
|
| 34 | |||||||
Equity
|
679 | 641 | |||||||
Total liabilities and equity
|
$ | 733 | $ | 787 | |||||
8. | Short Term Debt and Long Term Debt |
As of September 30, 2003, NRG Energy has failed to make scheduled payments of 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 and its subsidiaries. In addition to the missed debt payments, a significant amount of NRG Energys 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 experienced in 2002, NRG Energy estimates that it is in default on approximately $1.2 billion of cash collateral obligations principally to fund a $842.5 million guarantee 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.
Absent an agreement on a comprehensive restructuring plan, NRG Energy will remain in default under its debt and other obligations until its restructuring plan is approved and emerges from bankruptcy, because it does not have sufficient funds to meet such debt and other obligations. There can be no assurance that NRG Energys creditors ultimately will accept the reorganization plan that NRG Energy will submitted for approval as part of its Chapter 11 reorganization. See Note 1 for discussion of NRG Energys restructuring efforts.
As a result of NRG Energys bankruptcy filing, NRG Energy has classified its corporate level debt as a prepetition obligation subject to compromise and has ceased recording accrued interest as it is not probable of being paid. The contractual interest requirement for such corporate level debt is $78.4 million and $118.6 million for the three months ended September 30, 2003, and for the period May 14, 2003 (the date of the bankruptcy petition) to September 30, 2003, respectively.
NRG Energy Bank Debt
NRG Energy has a $1.0 billion unsecured 364-day revolving line of credit. As of September 30, 2003 the outstanding balance was $1.0 billion, unchanged from the December 31, 2002 balance. As of September 30, 2003, the interest rate on such outstanding advances was 7.0% plus a 0.5% facility fee per year. The credit facility matured fully drawn on March 7, 2003. NRG Energy failed to make a first-quarter payment of $19.3 million, failed to make a second quarter payment of $18.0 million and failed to make a third quarter payment of $18.9 million relating to interest and fees on the facility.
As a result of NRG Energys bankruptcy filing, NRG Energy has classified the revolving line of credit as a prepetition obligation subject to compromise and has ceased recording accrued interest, as it is not probable
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of being paid. Contractual interest requirement for the revolving line of credit is $18.9 million and $28.6 million for the three months ended September 30, 2003, and for the period May 14, 2003 (the date of the bankruptcy petition) to September 30, 2003, respectively.
NRG Energy has in place a syndicated letter of credit facility that contains terms, conditions and covenants that are substantially the same as those in NRG Energys $1.0 billion 364-day revolving line of credit. The original amount of the letter of credit facility was $125 million, but the amount has been reduced to the amount outstanding. NRG Energy had $103.0 million and $110.7 million in outstanding letters of credit under the facility as of September 30, 2003 and December 31, 2002, respectively. Of the $103.0 million outstanding at September 30, 2003, $88.8 million was in the form of standby letters of credit, and $14.2 million was drawn.
Debtor-in-Possession Facility
NRG Energy and certain of its subsidiaries have negotiated a Senior Secured, Super-Priority Debtor-in-Possession Credit Agreement (the DIP Agreement) with General Electric Capital Corporation (GECC), which was executed following the filing of the petition in NRG Energys Chapter 11 bankruptcy case. Under the DIP Agreement, GECC has agreed to make up to $250 million (the DIP Facility) available for working capital and general corporate needs of the debtors that comprise NRGs Northeast generating facilities (the DIP Borrowers). The DIP Facility is secured by a first priority lien on substantially all of the assets of and equity interest in the DIP Borrowers, plus the assets of Power Marketing, Inc. that relate to the revenues of the DIP Borrowers.
The DIP Facility bears an interest rate of 2.00% over the prime rate or 3.50% over the LIBOR rate and is currently set to expire on May 13, 2004. NRG Energy does not currently anticipate that it will seek to extend the DIP Facility beyond May 13, 2004. However, should the DIP Facility be extended for more than one year, approval of such financing by New York Public Service Commission will be required as certain NRG Energy assets securing the loan are located in New York. Should such approval be necessary, NRG Energy intends to make a timely application for the approval.
The amount available under the DIP Facility may vary from time to time, depending on valuations of the collateral securing the DIP Facility and GECCs right to set aside certain reserves. The DIP Facility currently permits the DIP Borrowers to borrow up to $210 million. The total availability may increase to $250 million upon the occurrence of certain subsequent events. A final order approving the DIP Facility was entered by the Bankruptcy Court on July 24, 2003. Such order provides, among other things, that the borrowers may not use DIP funds or cash collateral to make disbursements to, or for the benefit of the Connecticut Light and Power Company, unless further agreed to by GECC, the DIP lender, the Official Committee of Unsecured Creditors of NRG Energy, Inc. et al. and the informal committee of holders of the three series of Senior Secured Bonds issued by NRG Northeast Generating LLC, or further order of the Bankruptcy Court.
As of September 30, 2003, there was no amount outstanding under the DIP Facility. As of September 30, 2003, under the DIP Facility, the Company paid a facility fee of approximately $0.9 million. In addition, the Company pays a commitment fee based on utilization of the facility of between 0.5% and 1.0% of the unused commitments of $210.0 million.
The DIP Facility contains covenants which restrict mergers and acquisitions, the incurrence of additional debt, the creation of liens, sale of stock and assets, sale-leasebacks, cancellation of indebtedness constituting collateral or subordinated debt, restricted payments, speculative transactions, maximum annual capital expenditures and minimum quarterly earnings as outlined in the DIP Agreement.
In addition, the DIP Facility includes the following reporting covenants: provide monthly financial statements and operating reports within 30 days, provide quarterly financial statements and operating reports
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
within 45 days, provide annual audited financial statements within 90 days of the end of the Companys fiscal year; provide an operating plan within 30 days of the fiscal year end, provide management letter and notices described in the DIP Agreement when available or as reasonably requested by the DIP Lenders.
Senior Notes
Between 1996 and 2001, NRG Energy issued the following series of senior notes: $125 million of 7.625% senior notes due February 1, 2006; $250 million of 7.5% senior notes due June 15, 2007; $300 million of 7.5% senior notes due June 1, 2009; $350 million of 8.25% senior notes due September 15, 2010; $350 million of 7.75% senior notes due April 1, 2011; $500 million of 8.625% senior notes due April 1, 2031; $340 million of 6.75% senior notes due July 15, 2006; and £160 million of 7.97% senior reset notes due March 15, 2020. The entire principal amount issued for each note was outstanding as of September 30, 2003 and December 31, 2002, respectively.
During the third quarter of 2003, NRG failed to make a $11.5 million interest payment due on July 15, 2003 on $340 million of 6.75% senior notes maturing July 15, 2006; a $4.8 million interest payment due on August 1, 2003, on $125 million of 7.625% senior notes maturing on February 1, 2006; a $4.7 million interest payment due August 16, 2003 on $287.5 million of 6.5% senior debentures maturing on May 16, 2004; a $10.9 million interest payment due on September 15, 2003, on £160 million of 7.97% Remarketable or Redeemable securities maturing March 15, 2005; and a $14.4 million interest payment due on September 15, 2003 on $350 million 8.250% senior notes maturing on September 15, 2010.
As a result of NRG Energys bankruptcy filing, NRG Energy has classified the senior notes as a prepetition obligation subject to compromise and has ceased recording accrued interest, as it is not probable of being paid. The contractual interest requirements for the Senior notes is $49.3 million and $74.4 million for the three months ended September 30, 2003, and for the period May 14, 2003 (the date of the bankruptcy petition) to September 30, 2003, respectively.
Remarketable or Redeemable Securities
On November 8, 1999, NRG Energy issued $240 million of 8.0% Remarketable or Redeemable Securities due November 1, 2013. The outstanding principal amount was $240 million as of both September 30, 2003 and December 31, 2002.
As a result of NRG Energys bankruptcy filing, NRG Energy has classified the remarketable or redeemable securities as a prepetition obligation subject to compromise and has ceased recording accrued interest, as it is not probable of being paid. The contractual interest requirements for the remarketable or redeemable securities is $4.8 million and $7.4 million for the three months ended September 30, 2003, and for the period May 14, 2003 (the date of the bankruptcy petition) to September 30, 2003.
Equity Units
On March 13, 2001, NRG Energy completed the sale of 11.5 million equity units (symbol: NRZ) for an initial price of $25 per unit. Each equity unit consisted of a corporate unit comprising a $25 principal amount of NRG Energys senior debentures and an obligation to acquire shares of Xcel Energy common stock. When NRG Energy filed for bankruptcy, the obligation to purchase shares of Xcel Energy stock terminated.
On May 15, 2003, NRG Energy announced that it had been notified that the New York Stock Exchange (NYSE) has suspended trading in NRG Energys corporate units that trade under the ticker symbol NRZ and that an application to the Securities and Exchange Commission to delist the Units is pending the completion of applicable procedures, including appeal by NRG Energy of the NYSE staffs decision. NRG Energy does not plan to make such an appeal. The NYSE took this action following NRG Energys
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
announcement that it and certain of its affiliates had filed voluntary positions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
As of both September 30, 2003 and December 31, 2002, the outstanding principal amount of the senior debentures was $287.5 million. Pursuant to an order of the Bankruptcy Court dated July 16, 2003, NRG Energy was directed to instruct the collateral agent to release the debentures pledged in connection with the NRZs.
As a result of NRG Energys bankruptcy filing, NRG Energy has classified the Equity Units outstanding amount as a prepetition obligation subject to compromise and has ceased recording accrued interest, as it is not probable of being paid. The contractual interest requirement for the Equity Units is $4.7 million and $7.2 million for the three months ended September 30, 2003, and for the period May 14, 2003 (the date of the bankruptcy petition) to September 30, 2003, respectively.
Project Debt Defaults
In May 2001, NRG Energys indirect wholly-owned subsidiary, NRG Finance Company I LLC, entered into a $2 billion revolving credit facility. As of September 30, 2003, the outstanding amount under this facility was $1.1 billion, unchanged from December 31, 2002. As of September 30, 2003, the interest rate on such outstanding advances was 6.85% per year.
As a result of NRG Energys bankruptcy filing, NRG Energy has classified the revolving credit facility as a prepetition obligation subject to compromise and has ceased recording accrued interest, as it is not probable of being paid. Contractual interest requirement for the revolving credit facility is $18.9 million and $28.6 million for the three months ended September 30, 2003, and for the period May 14, 2003 (the date of the bankruptcy petition) to September 30, 2003, respectively.
As part of NRG Energys acquisition of the LS Power assets in January 2001, NRG Energy, through its indirect wholly owned subsidiary, LSP Kendall Energy LLC, 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 facility. As of September 30, 2003 and December 31, 2002, there were borrowings totaling approximately $489.2 million and $495.8 million, respectively, outstanding. The facilitys interest rate was 2.49% as of September 30, 2003.
On November 28, 2001, NRG McClain LLC entered into a credit agreement with Westdeutsche Landesbank Girozentrale, New York Branch and various other lending institutions for a $181.0 million secured term loan (the McClain Secured Term Loan) and an $8.0 million working capital facility. As of September 30, 2003 and December 31, 2002, the outstanding amount under this facility was $156.5 million and $157.3 million, respectively. As of September 30, 2003, the interest rate on such outstanding borrowings was 4.5%. On August 19, 2003, NRG announced an agreement to sell its interest in McClain to Oklahoma Gas and Electric Company.
In June 2002, NRG Peaker Finance Company LLC (NRG Peaker), an indirect wholly owned subsidiary of NRG Energy, completed the issuance of $325 million of Series A Floating Rate Senior Secured Bonds due 2019. The bonds bear interest at a floating rate equal to three-months USD-LIBOR BBA plus 1.07%. NRG Peaker entered into an interest rate swap by which NRG Peaker pays a fixed rate of 6.667% through the final maturity of the bonds. As of September 30, 2003 the outstanding amount on this facility was $319.4 million, unchanged from December 31, 2002. On May 13, 2003, XL Capital Assurance, as controlling party, accelerated the debt issued by NRG Peaker, rendering the debt immediately due and payable.
On September 18, 2003, NRG Energy, NRG Peaker and certain other affiliated entities entered into a Restructuring Agreement with XL Capital Assurance providing, among other things, NRG Energy will post a
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Letter of Credit for the benefit of the secured parties in the peaker financing in an amount equal to the termination payment (plus interest) under NRG Energys contingent guarantee multiplied by the percentage recovery for such secured parties creditor class in the NRG Energy bankruptcy. The Letter of Credit will be drawn down to pay the principal and interest payments on the bonds to the extent net revenues from the peaker projects are insufficient to make such payments. Pursuant to the terms of the Restructuring Agreement, all defaults arising under the original financing shall either be cured or waived by XL Capital Assurance and each of the parties to the Restructuring Agreement will provide mutual releases. The Restructuring Agreement will allow the peaker projects to continue their operations without interruption.
9. | Guarantees |
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors 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 guarantors 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.
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. As of September 30, 2003, NRG Energy had extended approximately 39 guarantees, which are listed below. For 25 of these 39 guarantees, the maximum exposure can be quantified, and totals approximately $800 million. The maximum exposure under the remaining 14 guarantees is indeterminate.
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 Energys generation facilities in the United States, NRG Energy may be required to guarantee a portion of the obligations of certain of its subsidiaries. For these purposes, NRG Energy, Inc. guarantees the obligations of its wholly owned subsidiary, NRG Power Marketing, Inc (NRG PMI). As of September 30, 2003, NRG Energy guarantees of NRG PMI obligations to approximately 23 counter-parties totaled approximately $154 million.
As a result of the downgrades of NRG Energys unsecured debt ratings, NRG Energy has been required to post cash collateral with respect to 11 separate transactions. The cash collateral requirement for the 11 transactions totals approximately $1.2 billion. NRG Energys cash collateral obligations are listed below. As of September 30, 2003, NRG Energy has been unable to provide any of the required cash collateral.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NRG Energys obligations pursuant to its guarantees of the performance, equity and indebtedness obligations of its subsidiaries are summarized as follows:
NRG Energy, Inc.s Guarantee and Cash Collateral Obligations as of September 30, 2003
(includes only quantifiable amounts)
Description | September 30, 2003 | ||||
(In thousands) | |||||
Guarantees of subsidiaries
|
$ | 799,636 | |||
Guarantees of NRG PMI obligations
|
154,295 | ||||
Cash collateral calls
|
1,177,545 | ||||
Total guarantees
|
$ | 2,131,476 | |||
As of September 30, 2003, the nature and details of NRG Energys subsidiary guarantees, excluding guarantees of NRG PMI obligations and cash collateral calls were as follows:
NRG Energy Inc. Guarantee Obligations as of September 30, 2003
Guarantee/Maximum | |||||||||||||||||
Project/Subsidiary | Exposure | Nature of Guarantee | Expiration Date | Triggering Event | |||||||||||||
(In thousands) | |||||||||||||||||
Able Acquisition Co.
|
Indeterminate | Performance Under | None stated | Non-performance | |||||||||||||
(First Energy Acquisition)
|
Asset Sales Agreement | ||||||||||||||||
Astoria/ Arthur Kill
|
Indeterminate | Performance Under Swaption Agreement | None stated | Non-performance | |||||||||||||
Audrain
|
Indeterminate | Payment Obligations of Municipal Bonds | December 1, 2023 | Non-payment | |||||||||||||
Bourbonnais/ Hardee
|
$44,125 | Turbine Purchase Obligation | October 1, 2007 | Non-performance | |||||||||||||
Brazos Valley
|
$7,600 | Interconnection Agreement Obligation | Upon Completion of the Interconnect | Non-performance of Subsidiary Obligations | |||||||||||||
Bulo Bulo
|
$8,000 | Obligations Under Share Purchase Agreement | December 1, 2007 | Non-performance of Subsidiary Obligations | |||||||||||||
Cahua S.A.
|
$5,258 | Obligations Under Three Separate Credit Agreement | Undetermined | Default Under Terms of Credit Agreement | |||||||||||||
CL&P SOS
|
$37,000 | Obligation Under Standard Offer Service Agreement | December 2003 | Non-performance | |||||||||||||
Csepel
|
$50,000 | Obligations Under Share Purchase Agreement | December 13, 2007 | Non-performance of Subsidiary Obligations | |||||||||||||
ECKG
|
$22,250 | Obligations Under Share Purchase Agreement | December 13, 2007 | Non-performance of Subsidiary Obligations | |||||||||||||
Elk River/ Newport
|
$25,790 | Obligation Under Bond Arrangement with NSP | Undetermined | Non-payment of Affiliate Obligation | |||||||||||||
Enfield
|
$3,751 | Guarantee of Debt Service Reserve Amount | December 13, 2007 | Non-performance of Subsidiary Obligations | |||||||||||||
Entrade
|
$8,000 | Obligations Under Share Purchase Agreement | December 13, 2007 | Non-performance of Subsidiary Obligations |
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Guarantee/Maximum | ||||||||||||||||
Project/Subsidiary | Exposure | Nature of Guarantee | Expiration Date | Triggering Event | ||||||||||||
(In thousands) | ||||||||||||||||
Flinders
|
$8,257 | Fund Superannuation (pension) reserve | September 8, 2012 | Credit Agreement default | ||||||||||||
Flinders
|
$47,691 | Debt service reserve guarantee | September 8, 2012 | Credit Agreement default | ||||||||||||
Flinders
|
$51,098 | Plant Removal and Site Remediation Obligation | Undetermined, at end of site lease | Non-performance | ||||||||||||
Flinders
|
$50,144 | Guarantee of Employee Separation Benefits | None stated | Non-payment | ||||||||||||
Flinders (Flinders Osborne Trading)
|
$173,422 | Guarantee of Obligation to Purchase Gas | None stated | Non-payment | ||||||||||||
Flinders (Flinders Osborne Trading)
|
Indeterminate | Indemnification of Government Entity for Payment for Power and Fuel | Fourth Quarter 2018 | Non-payment | ||||||||||||
Gladstone
|
$21,923 | Payment of Penalties in the Event of an Extraordinary Operational Breach | None stated | Non-performance | ||||||||||||
Gladstone
|
Indeterminate | Obligations Under Credit Agreement | March 31, 2009 | Non-performance | ||||||||||||
Hsin Yu
|
$34,460 | Obligations Under Share Purchase Agreement | None stated | Non-performance | ||||||||||||
Ilion
|
$13,200 | Lease Payments | March 25, 2011 | Non-payment | ||||||||||||
Killingholme
|
$134,087 | Guarantees and Indemnifications Associated with Purchase of the Project | November 1, 2006 | Credit Agreement default | ||||||||||||
NRG McClain LLC
|
Indeterminate | Payments Due Under Turbine Service Agreement | 2015 | Cancellation of Turbine Service Agreement | ||||||||||||
MIBRAG
|
Indeterminate | Guarantee of Share Purchase Agreement | None stated | Non-performance | ||||||||||||
Mid-Atlantic (Conectiv)
|
$2,400 | Site Remediation Obligation | None stated | Non-performance | ||||||||||||
LSP Nelson LLC
|
$30,670 | Obligation to Fund Liquidated Damages no Paid by EPC Contractor | May 8, 2006 (Expiration of Construction Revolver) | Non-payment | ||||||||||||
LSP Nelson LLC
|
Indeterminate | Payment of Cost Overruns Caused by Force Majeure During Construction | May 8, 2006 (Expiration of Construction Revolver) | Non-payment | ||||||||||||
NEO California Power LLC
|
$10,206 | Guarantee of Power Delivery Obligations |
None stated | Non-performance | ||||||||||||
NRG Finance Co.
|
Indeterminate | Interest Payments to Lenders if Borrower has Insufficient Funds to Pay Current Interest | May 8, 2006 (Expiration of Construction Revolver) | Non-payment | ||||||||||||
LSP Pike Energy LLC
|
$8,800 | Liquidated Damages | May 8, 2006 (Expiration of Construction Revolver) | Non-payment |
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Guarantee/Maximum | ||||||||||||||||
Project/Subsidiary | Exposure | Nature of Guarantee | Expiration Date | Triggering Event | ||||||||||||
(In thousands) | ||||||||||||||||
LSP Pike Energy LLC
|
Indeterminate | Guarantee of Performance of EPC Contractor | May 8, 2006 (Expiration of Construction Revolver) | Non-payment | ||||||||||||
LSP Pike Energy LLC
|
Indeterminate | Guarantee of Payment of Cost Overruns | May 8, 2006 (Expiration of Construction Revolver) | Non-payment | ||||||||||||
LSP Pike Energy LLC
|
Indeterminate | Guarantee of Payments for Cost Overruns Under the Water Plan | May 8, 2006 (Expiration of Construction Revolver) | Non-payment | ||||||||||||
Saguaro
|
$754 | Guarantee of Tax Indemnity Payments | Undetermined | Non-payment | ||||||||||||
SLAP I
|
Indeterminate | Guarantee of Subscription Agreement in Favor of Scudder Latin American Power I-P LDC & I-C LDC | None stated | Non-performance | ||||||||||||
West Coast LLC
|
$750 | Guarantee of Environmental Clean Up Costs Continuing Obligations Under Asset | None stated | Non-performance | ||||||||||||
West Coast LLC (CP I)
|
Indeterminate | Sales Agreement and Related Contracts (shared with Dynegy) | None stated | Non-performance |
NRG Energy, Inc.s Cash Collateral Obligations as of September 30, 2003
Cash Collateral | Nature of | |||||||||||||||
Project/Subsidiary | Amount | Collateral Call | Expiration Date | Triggering Event | ||||||||||||
(In thousands) | ||||||||||||||||
Brazos Valley
|
$75,527 | Equity Infusion | December 1, 2006 | Non-payment | ||||||||||||
Killingholme
|
$24,160 | Debt Service Reserve Guarantee | None Stated | Non-payment | ||||||||||||
McClain LLC
|
$4,589 | Debt service reserve guarantee | November 1, 2006 | Credit Agreement default | ||||||||||||
Mid-Atlantic (Conectiv)
|
$23,163 | Debt service reserve guarantee | November 13, 2005 | Credit Agreement default | ||||||||||||
Northeast Generating LLC(*)
|
$39,423 | Debt service reserve guarantee | 2004, 2015, 2024 Upon Bond Repayments | Credit Agreement default | ||||||||||||
NRG Finance Company I LLC
|
$842,500 | Obligation to Make Equity Infusion | None stated | Non-payment | ||||||||||||
Peaker Finance Co
|
$34,500 | Penalty for Early Termination | June 18, 2019 | Non-performance | ||||||||||||
Peaker Finance Co
|
$30,380 | Shortfall in Revenue | June 18, 2019 | Non-performance |
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Collateral | Nature of | |||||||||||||||||
Project/Subsidiary | Amount | Collateral Call | Expiration Date | Triggering Event | ||||||||||||||
(In thousands) | ||||||||||||||||||
Peaker Finance Co | $6,500 | Late Completion of a Project | December 31, 2003 | Non-performance | ||||||||||||||
South Central Generating LLC(**) | $40,203 | Fund Debt Service Reserve in the Event of Payment Default | 2016 and 2024 Upon Bond Repayment | Credit Agreement default | ||||||||||||||
RG Turbines LLC | $56,600 | If Insufficient Funds in Construction Revolver, NRG Energy Must Fund all Remaining Turbine Payments | May 8, 2006 (Expiration of Construction Revolver) | Credit Agreement default |
Recourse provisions for each of the guarantees above are to the extent of their respective liability. Absent an explicit cap per the respective guarantee, maximum exposure amounts project potential maximum exposure. Indeterminate amounts reflect those guarantees with no explicit cap amount. Additionally, no assets are held as collateral for any of the above guarantees.
* | The cash collateral amount for NRG Northeast Generating LLC reflects the six-month forward principal and interest payment due on June 16, 2003 per the bond indenture. This amount excludes the outstanding principal payment of $53.5 million that was due on December 16, 2002. Further, this amount excludes any adjustments to interest related to the missed principal payment. |
** | The cash collateral amount for NRG South Central Generating LLC reflects the six-month forward principal and interest payment due on September 15, 2003 per the bond indenture. This amount excludes the outstanding principal payment of $12.8 million that was due on September 16, 2002 as well as the outstanding principal payment of $12.8 million that was due on March 17, 2003. Further, this amount excludes any adjustments to interest related to the missed principal payments. |
10. | Segment Reporting |
NRG Energy conducts its business within six segments: Independent Power Generation in North America, Europe, Asia Pacific and Other Americas regions, Alternative Energy and Thermal projects. These segments are distinct components of NRG Energy with separate operating results and management structures in place. The Other category includes operations that do not meet the threshold for separate disclosure and
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
corporate charges (primarily interest expense) that have not been allocated to the operating segments. Segment information for the three and nine months ended September 30, 2003 and 2002 is as follows:
For the Three Months Ended September 30, 2003 | ||||||||||||||||
Power Generation | ||||||||||||||||
North | Asia | Other | ||||||||||||||
America | Europe | Pacific | Americas | |||||||||||||
(In thousands) | ||||||||||||||||
Operating Revenues and Equity Earnings
|
||||||||||||||||
Revenues from majority-owned operations
|
$ | 450,219 | $ | 32,462 | $ | 48,170 | $ | 19,397 | ||||||||
Equity in earnings/(losses) of unconsolidated
affiliates
|
46,225 | 8,181 | 8,407 | 593 | ||||||||||||
Total operating revenues and equity earnings
|
496,444 | 40,643 | 56,577 | 19,990 | ||||||||||||
Write downs and (gains)/losses on equity method
investments
|
(12,310 | ) | | | | |||||||||||
Reorganization items
|
1,266 | | | | ||||||||||||
Legal settlement
|
| | | | ||||||||||||
Restructuring and impairment charges
|
8,622 | (3,311 | ) | (685 | ) | 906 | ||||||||||
Net Income (Loss) from continuing operations
|
67,070 | 19,623 | 9,732 | 2,616 | ||||||||||||
Net Income (Loss) from discontinued operations
|
(1,084 | ) | 1 | 604 | | |||||||||||
Net Income (Loss)
|
65,986 | 19,624 | 10,336 | 2,616 | ||||||||||||
Balance Sheet Total assets
|
$ | 6,990,454 | $ | 757,483 | $ | 846,416 | $ | 504,289 |
For the Three Months Ended September 30, 2003 | ||||||||||||||||
Alternative | ||||||||||||||||
Energy | Thermal | Other | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Operating Revenues and Equity Earnings
|
||||||||||||||||
Revenues from majority-owned operations
|
$ | 30,076 | $ | 26,981 | $ | 704 | $ | 608,009 | ||||||||
Equity in earnings/(losses) of unconsolidated
affiliates
|
330 | | (464 | ) | 63,272 | |||||||||||
Total operating revenues and equity earnings
|
30,406 | 26,981 | 240 | 671,281 | ||||||||||||
Write downs and (gains)/losses on equity method
investments
|
| | | (12,310 | ) | |||||||||||
Reorganization items
|
| | 19,432 | 20,698 | ||||||||||||
Legal settlement
|
| | 396,000 | 396,000 | ||||||||||||
Restructuring and impairment charges
|
(1 | ) | | 721 | 6,252 | |||||||||||
Net Income (Loss) from continuing operations
|
4,504 | 1,889 | (389,124 | ) | (283,690 | ) | ||||||||||
Net Income (Loss) from discontinued operations
|
(625 | ) | | | (1,104 | ) | ||||||||||
Net Income (Loss)
|
3,879 | 1,889 | (389,124 | ) | (284,794 | ) | ||||||||||
Balance Sheet Total assets
|
$ | 126,483 | $ | 275,029 | $ | 674,618 | $ | 10,174,772 |
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended September 30, 2002 | ||||||||||||||||
Power Generation | ||||||||||||||||
North | Asia | Other | ||||||||||||||
America | Europe | Pacific | Americas | |||||||||||||
(In thousands) | ||||||||||||||||
Operating Revenues and Equity Earnings
|
||||||||||||||||
Revenues from majority-owned operations
|
$ | 486,444 | $ | 27,943 | $ | 39,067 | $ | 13,790 | ||||||||
Equity in earnings/ (losses) of unconsolidated
affiliates
|
29,813 | 628 | 8,217 | 248 | ||||||||||||
Total operating revenues and equity earnings
|
516,257 | 28,571 | 47,284 | 14,038 | ||||||||||||
Write downs and (gains)/losses on equity method
investments
|
49,992 | | 67,877 | | ||||||||||||
Restructuring and impairment charges
|
2,068,740 | 43,628 | (1,476 | ) | 147 | |||||||||||
Net Income (Loss) from continuing operations
|
(1,874,229 | ) | (42,440 | ) | (58,192 | ) | 2,955 | |||||||||
Net Income (Loss) from discontinued operations
|
(458 | ) | (478,916 | ) | (100,248 | ) | (36 | ) | ||||||||
Net Income (Loss)
|
(1,874,687 | ) | (521,356 | ) | (158,440 | ) | 2,919 | |||||||||
Balance Sheet Total assets
|
$ | 7,068,073 | $ | 1,277,484 | $ | 850,868 | $ | 498,574 |
For the Three Months Ended September 30, 2002 | ||||||||||||||||
Alternative | ||||||||||||||||
Energy | Thermal | Other | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Operating Revenues and Equity Earnings
|
||||||||||||||||
Revenues from majority-owned operations
|
$ | 34,423 | $ | 26,185 | $ | (500 | ) | $ | 627,352 | |||||||
Equity in earnings/ (losses) of unconsolidated
affiliates
|
(13,574 | ) | | 588 | 25,920 | |||||||||||
Total operating revenues and equity earnings
|
20,849 | 26,185 | 88 | 653,272 | ||||||||||||
Write downs and (gains)/losses on equity method
investments
|
| | | 117,869 | ||||||||||||
Restructuring and impairment charges
|
260 | 47 | 376,400 | 2,487,746 | ||||||||||||
Net Income (Loss) from continuing operations
|
(21,193 | ) | 1,942 | (477,779 | ) | (2,468,936 | ) | |||||||||
Net Income (Loss) from discontinued operations
|
(6,800 | ) | | | (586,458 | ) | ||||||||||
Net Income (Loss)
|
(27,993 | ) | 1,942 | (477,779 | ) | (3,055,394 | ) | |||||||||
Balance Sheet Total assets
|
$ | 149,813 | $ | 259,196 | $ | 1,584,405 | $ | 11,688,413 |
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Nine Months Ended September 30, 2003 | ||||||||||||||||
Power Generation | ||||||||||||||||
North | Asia | Other | ||||||||||||||
America | Europe | Pacific | Americas | |||||||||||||
(In thousands) | ||||||||||||||||
Operating Revenues and Equity Earnings
|
||||||||||||||||
Revenues from majority-owned operations
|
$ | 1,171,718 | $ | 96,318 | $ | 131,186 | $ | 57,006 | ||||||||
Equity in earnings/ (losses) of Unconsolidated
affiliates
|
114,811 | 23,641 | 17,232 | 2,162 | ||||||||||||
Total operating revenues and equity earnings
|
1,286,529 | 119,959 | 148,418 | 59,168 | ||||||||||||
Write downs and (gains)/losses on equity method
investments
|
(12,124 | ) | (2,870 | ) | 139,454 | | ||||||||||
Reorganization items
|
2,718 | | | | ||||||||||||
Legal settlement
|
| | | | ||||||||||||
Restructuring and impairment charges
|
236,497 | (7,510 | ) | 1,027 | 97 | |||||||||||
Net Income (Loss) from continuing operations
|
(277,401 | ) | 51,148 | (127,122 | ) | 7,502 | ||||||||||
Net Income (Loss) from discontinued operations
|
(109,810 | ) | 200,069 | 2,678 | | |||||||||||
Net Income (Loss)
|
(387,211 | ) | 251,217 | (124,444 | ) | 7,502 |
For the Nine Months Ended September 30, 2003 | ||||||||||||||||
Alternative | ||||||||||||||||
Energy | Thermal | Other | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Operating Revenues and Equity Earnings
|
||||||||||||||||
Revenues from majority-owned operations
|
$ | 68,352 | $ | 87,669 | $ | 4,620 | $ | 1,616,869 | ||||||||
Equity in earnings/ (losses) of Unconsolidated
affiliates
|
(1,047 | ) | | (1,041 | ) | 155,758 | ||||||||||
Total operating revenues and equity earnings
|
67,305 | 87,669 | 3,579 | 1,772,627 | ||||||||||||
Write downs and (gains)/losses on equity method
investments
|
12,257 | | | 136,717 | ||||||||||||
Reorganization items
|
| | 24,314 | 27,032 | ||||||||||||
Legal settlement
|
| | 396,000 | 396,000 | ||||||||||||
Restructuring and impairment charges
|
(1 | ) | 16 | 67,893 | 298,019 | |||||||||||
Net Income (Loss) from continuing operations
|
(5,955 | ) | 8,615 | (616,568 | ) | (959,781 | ) | |||||||||
Net Income (Loss) from discontinued operations
|
(23,322 | ) | | (15,661 | ) | 53,954 | ||||||||||
Net Income (Loss)
|
(29,277 | ) | 8,615 | (632,229 | ) | (905,827 | ) |
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Nine Months Ended September 30, 2002 | ||||||||||||||||
Power Generation | ||||||||||||||||
North | Asia | Other | ||||||||||||||
America | Europe | Pacific | Americas | |||||||||||||
(In thousands) | ||||||||||||||||
Operating Revenues and Equity Earnings
|
||||||||||||||||
Revenues from majority-owned operations
|
$ | 1,174,645 | $ | 77,071 | $ | 137,611 | $ | 44,864 | ||||||||
Equity in earnings/ (losses) of unconsolidated
affiliates
|
72,763 | 10,845 | 18,303 | 607 | ||||||||||||
Total operating revenues and equity earnings
|
1,247,408 | 87,916 | 155,914 | 45,471 | ||||||||||||
Write downs and (gains)/losses on equity method
investments
|
49,992 | | 72,045 | | ||||||||||||
Restructuring and impairment charges
|
2,068,740 | 44,678 | (1,476 | ) | 147 | |||||||||||
Net Income (Loss) from continuing operations
|
(1,788,088 | ) | (27,468 | ) | (61,708 | ) | 6,281 | |||||||||
Net Income (Loss) from discontinued operations
|
(5,156 | ) | (462,197 | ) | (102,015 | ) | (9,633 | ) | ||||||||
Net Income (Loss)
|
(1,793,244 | ) | (489,665 | ) | (163,723 | ) | (3,352 | ) |
For the Nine Months Ended September 30, 2002 | ||||||||||||||||
Alternative | ||||||||||||||||
Energy | Thermal | Other | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Operating Revenues and Equity Earnings
|
||||||||||||||||
Revenues from majority-owned operations
|
$ | 81,257 | $ | 84,165 | $ | 3,246 | $ | 1,602,859 | ||||||||
Equity in earnings/ (losses) of unconsolidated
affiliates
|
(33,734 | ) | | 132 | 68,916 | |||||||||||
Total operating revenues and equity earnings
|
47,523 | 84,165 | 3,378 | 1,671,775 | ||||||||||||
Write down and (gains)/losses on equity method
investments
|
5,678 | | | 127,715 | ||||||||||||
Restructuring and impairment charges
|
25,704 | 47 | 395,830 | 2,533,670 | ||||||||||||
Net Income (Loss) from continuing operations
|
(26,521 | ) | 8,146 | (638,281 | ) | (2,527,639 | ) | |||||||||
Net Income (Loss) from discontinued operations
|
(16,569 | ) | | | (595,570 | ) | ||||||||||
Net Income (Loss)
|
(43,090 | ) | 8,146 | (638,281 | ) | (3,123,209 | ) |
11. Commitments and Contingencies
California Wholesale Electricity Litigation and Related Investigations |
People of the State of California ex. rel. Bill Lockyer, Attorney General, v. Dynegy, Inc. et al., United States District Court, Northern District of California, Case No. C-02-O1854 VRW; United States Court of Appeals for the Ninth Circuit, Case No. 02-16619.
This action was filed in state court on March 11, 2002. It alleges that the defendants violated California Business & Professions Code § 17200 by selling ancillary services to the California ISO, and subsequently selling the same capacity into the spot market. The Attorney General seeks injunctive relief as well as restitution, disgorgement and civil penalties.
On April 17, 2002, the defendants removed the case to the United States District Court in San Francisco. Thereafter, the case was transferred to Judge Vaughn Walker, who is also presiding over various other ancillary services cases brought by the California Attorney General against other participants in the California market, as well as other lawsuits brought by the Attorney General against these other market
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
participants. NRG Energy has tolling agreements in place with the Attorney General with respect to such other proposed claims against it.
The Attorney General filed motions to remand, which the defendants opposed in July of 2002. In an Order filed in early September 2002, Judge Walker denied the remand motions. The Attorney General has appealed that decision to the United States Court of Appeal for the Ninth Circuit, and the appeal is pending. The Attorney General also sought a stay of proceedings in the district court pending the appeal, and this request was also denied. A Notice of Bankruptcy Filing respecting NRG Energy was filed in the Ninth Circuit and in the District Court in mid-December 2002. The Attorney General filed a paper asserting that the police power exception to the automatic stay is applicable here. Judge Walker agreed with the Attorney General on this issue. In a lengthy opinion filed March 25, 2003, Judge Walker dismissed the Attorney Generals action against NRG and Dynegy with prejudice, finding it was barred by the filed rate doctrine and preempted by federal law. The Attorney General filed a Notice of Appeal, and the appeal was argued in August 2003 and also is pending. NRG Energy also filed a Notice of Bankruptcy Filing in the Ninth Circuit shortly after its Chapter 11 filing, and the Ninth Circuit issued a stay as to NRG Energy. NRG Energy is unable at this time to accurately estimate the damages sought by the Attorney General against NRG Energy and its affiliates, or predict the outcome of the case.
Public Utility District of Snohomish County v. Dynegy Power Marketing, Inc et al., Case No. 02-CV-1993 RHW, United States District Court, Southern District of California (part of MDL 1405).
This action was filed against Dynegy, NRG Energy, Xcel Energy and several other market participants in the United States District Court in Los Angeles on July 15, 2002. The Complaint alleges violations of the California Business & Professions Code § 16720 (the Cartwright Act) and Business & Professions Code § 17200. The basic claims are price fixing and restriction of supply, and other market gaming activities.
The action was transferred from Los Angeles to the United States District Court in San Diego and was made a part of the Multi-District Litigation proceeding described below. All defendants filed motions to dismiss and to strike in the fall of 2002. In an Order dated January 6, 2003, the Honorable Robert Whaley, a federal judge from Spokane sitting in the United States District Court in San Diego, pursuant to the Order of the MDL Panel, granted the motions to dismiss on the grounds of federal preemption and filed-rate doctrine. The plaintiffs have filed a notice of appeal, and the appeal is pending.
In re: Wholesale Electricity Antitrust Litigation, MDL 1405, United States District Court, Southern District of California, pending before Honorable Robert H. Whaley. The cases included in this proceeding are as follows:
Pamela R. Gordon, on Behalf of Herself and All Others Similarly Situated v. Reliant Energy, Inc. et al., Case No. 758487, Superior Court of the State of California, County of San Diego (filed on November 27, 2000).
Ruth Hendricks, On Behalf of Herself and All Others Similarly Situated and On Behalf of the General Public v. Dynegy Power Marketing, Inc. et al., Case No. 758565, Superior Court of the State of California, County of San Diego (filed November 29, 2000).
The People of the State of California, by and through San Francisco City Attorney Louise H. Renne v. Dynegy Power Marketing, Inc. et al., Case No. 318189, Superior Court of California, San Francisco County (filed January 18, 2001).
Pier 23 Restaurant, A California Partnership, On Behalf of Itself and All Others Similarly Situated v. PG&E Energy Trading et al., Case No. 318343, Superior Court of California, San Francisco County (filed January 24, 2001).
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Sweetwater Authority, et al. v. Dynegy Inc. et al., Case No. 760743, Superior Court of California, San Diego County (filed January 16, 2001).
Cruz M. Bustamante, individually, and Barbara Matthews, individually, and on behalf of the general public and as a representative taxpayer suit, v. Dynegy Inc. et al., inclusive. Case No. BC249705, Superior Court of California, Los Angeles County (filed May 2, 2001).
These cases were all filed in late 2000 and 2001 in various state courts throughout California. They allege unfair competition, market manipulation, and price fixing. All the cases were removed to the appropriate United States District Courts, and were thereafter made the subject of a petition to the Multi-District Litigation Panel (Case No. MDL 1405). The cases were ultimately assigned to Judge Whaley. Judge Whaley entered an order in 2001 remanding the cases to state court, and thereafter the cases were coordinated pursuant to state court coordination proceedings before a single judge in San Diego Superior Court. Thereafter, Reliant Energy and Duke Energy filed cross-complaints naming various Canadian, Mexican and United States government entities. Some of these defendants once again removed the cases to federal court, where they were again assigned to Judge Whaley. The defendants filed motions to dismiss and to strike under the filed-rate and federal preemption theories, and the plaintiffs challenged the district courts jurisdiction and sought to have the cases remanded to state court. In December 2002, Judge Whaley issued an opinion finding that federal jurisdiction was absent in the district court, and remanding the cases to state court. Duke Energy and Reliant Energy then filed a notice of appeal with the Ninth Circuit, and also sought a stay of the remand pending appeal. The stay request was denied by Judge Whaley. On February 20, 2003, however, the Ninth Circuit stayed the remand order and accepted jurisdiction to hear the appeal of Reliant Energy and Duke Energy on the remand order. The Company anticipates that filed-rate/federal preemption pleading challenges will be renewed once the remand appeal is decided. A Notice of Bankruptcy Filing respecting NRG Energy has also been filed in this action. We are not active in the appeal, which remains pending.
Northern California cases against various market participants, not including NRG Energy (part of MDL 1405). These include the Millar, Pastorino, RDJ Farms, Century Theatres, EI Super Burrito, Leos, J&M Karsant, and the Bronco Don cases. NRG Energy was not named in any of these cases, but in virtually all of them, either West Coast Power or one or more of the operating LLCs with which NRG Energy is indirectly affiliated is named as a defendant. These cases all allege violation of Business & Professions Code § 17200, and are similar to the various allegations made by the Attorney General. Dynegy is named as a defendant in all these actions, and Dynegys outside counsel is representing both Dynegy and the West Coast Power entities in each of these cases. These cases all were removed to federal court, made part of the Multi-District Litigation, and denied remand to state court. In late August 2003, Judge Whaley granted the defendants motions to dismiss in these various cases.
Bustamante v. McGraw-Hill Companies Inc., et al., No. BC 235598, California Superior Court, Los Angeles County. This putative class action lawsuit was filed on November 20, 2002. In addition to naming WCP-related entities as defendants, numerous industry participants are named in this lawsuit that are unrelated to WCP or NRG Energy. The Complaint generally alleges that the defendants attempted to manipulate gas indexes by reporting false and fraudulent trades. Named defendants in the suit are the LLCs established by WCP for each of its four plants: El Segundo Power, LLC; Long Beach Generation, LLC; Cabrillo Power I LLC; and Cabrillo Power II LLC. NRG Energy is not named as a defendant. The complaint seeks restitution and disgorgement of ill-gotten gains, civil fines, compensatory and punitive damages, attorneys fees, and declaratory and injunctive relief. The plaintiff recently filed an amended complaint.
Jerry Egger, et al. v. Dynegy Inc., et al., Case No. 809822, Superior Court of California, San Diego County (filed May 1, 2003). This class action Complaint alleges violations of Californias Antitrust Law, Business and Professional Code, and unlawful and unfair business practices. The named defendants include West Coast Power, Cabrillo II, El Segundo Power, Long Beach Generation. NRG Energy is not named.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
This case now has been removed to the U.S. District Court, and the defendants have moved to have this case included as Multi-District Litigation along with the above referenced cases before Judge Walker. Plaintiffs have stated an intention to file a motion to remand to state court. Plaintiffs filed an amended complaint in federal court in October, 2003. Egger essentially replaces the Pacific Northwest cases referenced below. This case is the subject of an MDL petition.
Pacific Northwest cases: Symonds v. Dynegy Power Marketing, NRG Energy, Inc., Xcel Energy, Inc., West Coast Power LLC, et al., United States District Court, Western District of Washington, Case No. CV02-2552; Lodewick v. Dynegy Power Marketing, NRG Energy, Inc., Xcel Energy, Inc., West Coast Power LLC, et al., Oregon Circuit Court Case No. 0212-12771. NRG Energy is represented in these matters by Thomas Nelson of Portland. Lodewick was removed to federal court, and both cases were briefly the subject of MDL 1533. In early May, plaintiffs in both cases requested voluntary dismissal of the actions.
Investigations
FERC California Market Manipulation
The Federal Energy Regulatory Commission has an ongoing Investigation of Potential Manipulation of Electric and Natural Gas Prices, which involves hundreds of parties (including NRG Energy affiliate, West Coast Power) and substantial discovery. In June 2001, FERC initiated proceedings related to Californias demand for $8.9 billion in refunds from power sellers who allegedly inflated wholesale prices during the energy crisis. Hearings have been conducted before an administrative law judge who issued an opinion in late 2002. The administrative law judge stated that after assessing a refund of $1.8 billion for unjust and unreasonable power prices between October 2, 2000 and June 20, 2001, power suppliers were owed $1.2 billion because the State was holding funds owed to suppliers.
In August 2002, the 9th U.S. Circuit Court of Appeals granted a request by the Electricity Oversight Board, the California Public Utilities Commission, and others, to seek out and introduce to FERC additional evidence of market manipulation by wholesale sellers. This decision resulted in FERC ordering an additional 100 days of discovery in the refund proceeding, and also allowing the relevant time period for potential refund liability to extend back an additional nine months, to January 1, 2000.
On December 12, 2002, FERC Administrative Law Judge Birchman issued a Certification of Proposed Findings on California Refund Liability in Docket No. EL00-95-045 et al., which determined the method for calculating the mitigated energy market clearing price during each hour of the refund period. On March 26, 2003, FERC issued an Order on Proposed Findings on Refund Liability in Docket No. EL00-95-045 (Refund Order), adopting, in part, and modifying, in part, the Proposed Findings issued by Judge Birchman on December 12, 2002. In the Refund Order, FERC adopted the refund methodology in the Staff Final Report on Price Manipulation in Western Markets issued contemporaneously with the Refund Order in Docket No. PA02-2-000. This refund calculation methodology makes certain changes to Judge Birchmans methodology, because of FERC Staffs findings of manipulation in gas index prices. This could materially increase the estimated refund liability. The Refund Order directed generators wanting to recover any fuel costs above the mitigated market clearing price during the refund period to submit cost information justifying such recovery within forty (40) days of the issuance of the Refund Order, which West Coast Power did. FERC announced in the Refund Order that it expects that refunds will be paid by suppliers by the end of fall 2003.
CFTC Dynegy/ West Coast Power Natural Gas Futures Index Manipulation |
Through its subsidiary NRG West Coast Inc., NRG Energy is essentially a joint venturer with Dynegy, Inc. in West Coast Power LLC (WCP), which owns, operates, and markets the power of California plants. Dynegy and its affiliates and subsidiaries are responsible for gas procurement and marketing and trading
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
activities on behalf of the joint venture. On December 18, 2002, a Dynegy subsidiary, Dynegy Marketing & Trade (DMT), and West Coast Power LLC (Respondents), entered into a consent Offer of Settlement and Order (Consent Order) with the Commodity Futures and Trading Commission (CFTC). The action is captioned In re Dynegy Marketing & Trade and West Coast Power LLC, CFTC Docket No. 03-03. The CFTC asserted various violations of the Commodity Exchange Act, as well as CFTC regulations.
The CFTC alleged in the Consent Order that DMT natural gas traders reported false natural gas trading information, including price and volume information, to certain industry publications that establish and publish indexes for natural gas prices. The CFTC alleged that DMT submitted the false information in an attempt to manipulate the indexes for DMTs benefit. The CFTC further alleged that DMT traders directed other Dynegy personnel to report each of the same false trades in the name of West Coast Power, as counterparty, in an effort to lend credence to the trades validity. The Respondents to the Consent Order did not admit or deny the allegations or findings made by the CFTC, but agreed to an Offer of Settlement, and agreed to pay a civil monetary fine of $5 million. The Respondents also agreed to undertakings regarding further cooperation with the CFTC and public statements concerning the Consent Order. Dynegy agreed to pay and be entirely responsible for the $5 million fine imposed by the CFTC.
U.S. Attorney Houston |
The U.S. Attorney indicted two fired Dynegy traders in connection with the index reporting scheme, and is reportedly investigating other Dynegy activity and employees.
U.S. Attorney San Francisco |
According to press reports, the U.S. Attorney in San Francisco has assembled an energy crisis task force. While Dynegy received a grand jury subpoena in November 2002, the scope and targets of this investigation are unknown to us. NRG did not receive a subpoena.
California State Senate Select Committee |
This Committee, chaired by Senator Dunn, subpoenaed records from NRG Energy during the Summer of 2001. NRG Energy produced about 5,000 pages of documents; Dynegy produced a much larger volume of documents. The Committee is scheduled to sunset later this year.
California PUC
The PUC continues to request data and documents in several settings. First, it is one of the parties in the FERC proceeding mentioned above. Second, inspectors have visited WCP plants, usually unannounced and usually immediately following an unplanned outage. They have demanded documentation concerning the reason for the outage. Third, the PUC has demanded documents to allow it to prepare reports, one of which was issued last fall and another of which was issued January 30, 2003. The FERCs above-referenced March 26 Refund Order undercut the accuracy and reliability of these CPUC reports. Dynegy has made extensive productions to the CPUC of plant-related materials as well as trading data.
California Attorney General
In addition to the litigation it has undertaken described above, the California Attorney General has undertaken an investigation entitled In the Matter of the Investigation of Possibly Unlawful, Unfair, or Anti-Competitive Behavior Affecting Electricity Prices in California. In this connection, the Attorney General has issued subpoenas to Dynegy, served interrogatories on Dynegy and NRG Energy, and informally requested documents and interviews from Dynegy and Dynegy employees as well as NRG Energy and NRG Energy
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
employees. NRG Energy responded to the interrogatories last summer, with the final set of responses being served on September 3, 2002. NRG Energy has also produced a large volume of documentation relating to the West Coast Power plants. In addition, NRG Energy employees in California have sat for informal interviews with representatives of the Attorney Generals office. Dynegy employees have also been interviewed.
Although any evaluation of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss in the above-referenced private actions and various investigations cannot be made at this time, NRG Energy notes that the Gordon complaint alleges that the defendants, collectively, overcharged California ratepayers during 2000 by $4.0 billion. NRG Energy knows of no evidence implicating NRG Energy in plaintiffs allegations of collusion. NRG Energy cannot predict the outcome of these cases and investigations at this time.
The New York Voluntary Bankruptcy Case
On May 14, 2003 NRG Energy and certain of its U.S. affiliates filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court), In re: NRG ENERGY, INC., et. al., Case No. 03-13024 (PCB). NRG Energy expects operations to continue as normal during the restructuring process, while it operates its business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
Fortistar Capital Inc. v. NRG Energy, Inc., Hennepin County District Court
On July 12, 1999, Fortistar Capital Inc. (Fortistar) sued NRG Energy in Minnesota state court. The complaint sought injunctive relief and damages of over $50 million resulting from NRG Energys alleged breach of a letter agreement with Fortistar relating to the Oswego power plant. NRG Energy asserted counterclaims. After considerable litigation, the parties entered into a conditional, confidential settlement agreement, which was subject to necessary board and lender approvals. NRG Energy was unable to obtain necessary approvals. Fortistar initially moved the court to enforce the settlement, seeking damages in excess of $35 million plus interest and attorneys fees. NRG Energy opposed Fortistars motion on the grounds that conditions to contract performance had not been satisfied. In July 2003, Fortistar purported to withdraw its motion without prejudice and sought relief from stay at the Bankruptcy Court to liquidate its bankruptcy claim by trying the action in the Minnesota State Court. The Bankruptcy Court denied Fortistars relief from stay motion and Fortistar is now seeking relief and review at the United States District Court for the Southern District of New York. NRG Energy cannot predict the outcome of this dispute.
Fortistar RICO Claims/ Indemnity Requests |
On February 26, 2003, Fortistar Capital, Inc. and Fortistar Methane, LLC filed a lawsuit in the Federal District Court for the Northern District of New York against Xcel Energy and five present or former NRG Energy or NEO Corporation (NEO) officers and employees. NRG Energy is a wholly owned subsidiary of Xcel Energy, and NEO is a wholly owned subsidiary of NRG Energy. In the lawsuit, Fortistar claims that the defendants violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and committed fraud by engaging in a pattern of negotiating and executing agreements they intended not to comply with and made false statements later to conceal their fraudulent promises. The plaintiffs allege damages of some $350 million and also assert entitlement to a trebling of these damages under the provisions of the RICO Act. The present and former NRG Energy and NEO officers and employees have requested indemnity from NRG Energy and NEO, and NEO is indemnifying its respective agents. NRG Energy cannot at this time estimate the likelihood of an unfavorable outcome to the defendants in this lawsuit.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NEO Corporation, a Minnesota Corporation on Behalf of Itself and on Behalf of Minnesota Methane, LLC, a Delaware Limited Liability Company v. Fortistar Methane, LLC, a Delaware Limited Liability Company, Hennepin County District Court |
NEO Corporation, a wholly owned subsidiary of NRG Energy, brought this lawsuit in January of 2001. NEO asserted claims for breach of contract, breach of the covenant of good faith and fair dealing, fraudulent misrepresentations and omissions, defamation, business disparagement and derivative claims. Fortistar Methane, LLC denied NEOs claims and counterclaimed alleging breach of contract, fraud, negligent misrepresentation and breach of warranty. NEO denied Fortistar Methanes claims. Discovery has not been conducted. The parties entered into a conditional, confidential settlement of this matter and the Fortistar Capital action, described above. The agreement, however, was subject to necessary board and lender approvals. NEO was unable to obtain necessary approvals. Fortistar Methane initially moved to enforce the settlement, seeking damages against NRG Energy in excess of $35 million plus interest and attorneys fees. NRG Energy and NEO opposed Fortistars motion on the grounds that conditions to contract performance were not met. NRG Energy cannot predict the likelihood of an unfavorable outcome.
Connecticut Light & Power Company v. NRG Power Marketing Inc., Docket No. 3:01-CV-2373 (A WT), pending in the United States District Court, District of Connecticut |
This matter involves a claim by Connecticut Light & Power Company for recovery of amounts it claims are owing for congestion charges under the terms of a Standard Offer Services contract between the parties, dated October 29, 1999. CL&P has served and filed its motion for summary judgment to which NRG Power Marketing Inc. (NRG PMI) filed a response on March 21, 2003. CL&P has withheld approximately $30 million from amounts owed to NRG PMI, claiming that it has the right to offset those amounts under the contract. NRG PMI has counterclaimed seeking to recover those amounts, arguing among other things that CL&P has no rights under the contract to offset them. By reason of the bankruptcy stay, the court has not ruled on the pending motion. On November 6, 2003, the parties filed a joint stipulation for relief from the automatic stay in order to allow the proceeding to go forward. NRG PMI cannot estimate at this time the likelihood of an unfavorable outcome in this matter, or the overall exposure for congestion charges for the full term of the contract.
Connecticut Light & Power Company, Docket No. EL03-135, pending at the Federal Energy Regulatory Commission |
This matter involves a dispute between CL&P and NRG PMI concerning which of those parties is responsible, under the terms of the October 29, 1999 Standard Offer Services contract, for costs related to congestion and losses associated with the implementation of standard market design (SMD-Related Costs). CL&P has withheld, beyond the $30 million discussed above, an additional approximately $70 million from amounts owed to NRG PMI, claiming that it is entitled under the contract to offset those additional amounts for SMD-Related Costs. NRG PMI cannot estimate at this time the likelihood of an unfavorable outcome in this matter, or the overall exposure for SMD-Related Costs for the full term of the contract.
Connecticut Light & Power Related Proceedings at the Federal Energy Regulatory Commission, the United States District Court for the Southern District of New York, and the United States Court of Appeals for the D.C. Circuit and the Second Circuit. |
In May 2003, NRG PMI took steps to terminate or reject in bankruptcy the subject Standard Offer Services contract. CL&P, the Connecticut Attorney General and the Connecticut Department of Public Utility Control (DPUC) sought and obtained from FERC an Order dated May 16, 2003, temporarily requiring NRG PMI to continue to comply with the terms of the contract, pending further notice from FERC.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Thereafter, On June 2, 2003, the United States Bankruptcy Court for the Southern District of New York issued its Order specifically authorizing NRG PMIs rejection of the contract, and by Order dated June 12, 2003, the United States District Court for the Southern District of New York granted NRG PMIs motion for a temporary restraining order staying all actions by CL&P, the Connecticut Attorney General and the DPUC to enforce or apply the above-referenced FERC Order and affording NRG PMI leave to cease its performance under the contract, effective retroactive to June 2, 2003. FERC then issued an order on June 25, 2003 (June 25 Order), that again commanded NRG PMIs continued performance regardless of any contrary ruling by the Bankruptcy Court and the District Courts temporary restraining order. By order dated June 30, 2003, the District Court reversed itself and dismissed NRG PMIs motion for preliminary injunction for lack of subject matter jurisdiction. On July 18, 2003, NRG PMI appealed to the Second Circuit respecting the District Courts refusal to enjoin FERC. On August 15, 2003, FERC issued orders denying rehearing of the June 25 Order and requiring NRG PMI to continue to perform under the Standard Offer Services contract (the June 25 Order, together with the August 15 Orders, the Commission Orders). NRG PMI filed a request for rehearing with FERC and a petition for review in the United States Court of Appeals for the District of Columbia Circuit in Case No. 03-1346 relating to the Commission Orders. On November 4, 2003, the parties reached a settlement under which the Second Circuit and D.C. Circuit litigation respecting the above matters will be dismissed, while preserving the parties rights to litigate those matters which are before the United States District Court for the District of Connecticut and FERC, as previously discussed. The settlement does not affect issues between CL&P and NRG Energy, Inc., related to station service, described hereafter, which will be separately arbitrated. The settlement is subject to regulatory and legal approvals, including approval from FERC and the United States Bankruptcy Court for the Southern District of New York.
The State of New York and Erin M. Crotty, as Commissioner of the New York State Department of Environmental Conservation v. Niagara Mohawk Power Corporation et al., United States District Court for the Western District of New York, Civil Action No. 02-CV-002S |
In January 2002, NRG Energy and Niagara Mohawk Power Corporation (NiMo) were sued by the New York Department of Environmental Conservation in federal court in New York. The complaint asserted that projects undertaken at NRG Energys Huntley and Dunkirk plants by NiMo, the former owner of the facilities, required preconstruction permits pursuant to the Clean Air Act and that the failure to obtain these permits violated federal and state laws. In July 2002, NRG Energy filed a motion to dismiss. On March 27, 2003 the court dismissed the complaint against NRG Energy with prejudice as to the federal claims and without prejudice as to the state claims. It is possible the state will appeal this dismissal to the Second Circuit Court of Appeals. In the meantime, on April 25, 2003, the state provided to NRG Energy notice of intent to again sue the Company and various affiliates by filing a second amended complaint in this same action in the federal court in New York, asserting against the NRG Defendants violations of operating permits and deficient operating permits at the Huntley and Dunkirk plants. The NRG Defendants have moved to dismiss the second amended complaint, and that motion is now under advisement. If the case ultimately is litigated to a judgment and there is an unfavorable outcome that could not be addressed otherwise, NRG Energy has estimated that the total investment that would be required to install pollution control devices could be as high as $300 million over a ten to twelve-year period.
Niagara Mohawk Power Corporation v. NRG Energy, Inc., Huntley Power, LLC, and Dunkirk Power, LLC, Supreme Court, State of New York, County of Onondaga, Case No. 2001-4372 |
NRG Energy has asserted that NiMo is obligated to indemnify it for any related compliance costs associated with resolution of the above enforcement action. NiMo has filed suit in state court in New York seeking a declaratory judgment with respect to its obligations to indemnify NRG Energy under the asset sales
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
agreement. NRG Energy has pending a summary judgment motion on its entitlement to be reimbursed by NiMo for the attorneys fees NRG Energy has incurred in the enforcement action.
Huntley Power LLC, Dunkirk Power LLC and Oswego Power LLC |
All three of these facilities have been issued Notices of Violation with respect to opacity exceedances. The above entities have been engaged in consent order negotiations with the New York State Department of Environmental Conservation (DEC) relative to opacity issues affecting all three facilities since the plants were acquired. It appears that by year-end, the parties will finalize the terms of a consent order, which will quantify the number of opacity exceedances at the three facilities through the second quarter of 2003 and set a cumulative penalty, presently anticipated to be some $1 million. In the event that the consent order negotiations prove unsuccessful, it is not known what relief the DEC will seek through an enforcement action and what the result of such action will be.
Huntley Power LLC |
On April 30, 2003, the Huntley Station submitted a self-disclosure letter to the New York Department of Environmental Conservation (DEC) reporting violations of applicable sulfur in fuel limits, which had occurred during 6 days in March 2003 at the chimney stack serving Huntley Units 63-66. The Huntley Station self-disclosed that the average sulfur emissions rates for those days had been 1.8 lbs/mm BTU, rather than the maximum allowance of 1.7 lbs/mm BTU. NRG Huntley Operations discontinued use of Unit 65 (the only unit utilizing the subject stack at the time) and has kept the remaining 3 units off line until adherence with the applicable standard is assured. On May 19, 2003, the DEC issued Huntley Power LLC a Notice of Violation. The Company has met with the DEC to discuss the circumstances surrounding the event and the appropriate means of resolving the matter. The Company does not know what relief the DEC will seek through an enforcement action. Under applicable provisions of the Environmental Conservation Law, the DEC asserts that it may impose a civil penalty up to $10,000, plus an additional penalty not to exceed $10,000 for each day that a violation continues and may enjoin continuing violations.
Niagara Mohawk Power Corporation v. Dunkirk Power LLC, NRG Dunkirk Operations, Inc., Huntley Power LLC, NRG Huntley Operations, Inc., Oswego Power LLC and NRG Oswego Operations, Inc., Supreme Court, Erie County, Index No. 1-2000-8681 Station Service Dispute. |
On October 2, 2000, plaintiff Niagara Mohawk Power Corporation commenced this action against NRG Energy to recover damages plus late fees, less payments received through the date of judgment, as well as any additional amounts due and owing, for electric service provided to the Dunkirk Plant after September 18, 2000. Plaintiff Niagara Mohawk claims that NRG Energy has failed to pay retail tariff amounts for utility services commencing on or about June 11, 1999 and continuing to September 18, 2000 and thereafter. Plaintiff has alleged breach of contract, suit on account, violation of statutory duty, and unjust enrichment claims. On or about October 23, 2000, NRG Energy served an answer denying liability and asserting affirmative defenses.
After proceeding through discovery, and prior to trial, the parties and the court entered into a stipulation and order filed August 9, 2002 consolidating this action with two other actions against NRG Northeasts Huntley and Oswego subsidiaries, both of which cases assert the same claims and legal theories for failure to pay retail tariffs for utility services.
On October 8, 2002, a Stipulation and Order was filed in the Erie County Clerks Office staying this action pending submission of some or all of the disputes in the action to the FERC. NRG Energy cannot make an evaluation of the likelihood of an unfavorable outcome. The cumulative potential loss could exceed $35 million.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Niagara Mohawk Power Corporation v. Huntley Power LLC, NRG Huntley Operations, Inc., NRG Dunkirk Operations, Inc., Dunkirk Power LLC, Oswego Harbor Power LLC, and NRG Oswego Operations, Inc., Case Filed November 26, 2002 in Federal Energy Regulatory Commission Docket No. EL 03-27-000. |
This is the companion action filed by Niagara Mohawk at FERC, similarly asserting that Niagara Mohawk is entitled to receive retail tariff amounts for electric service provided to the Huntley, Dunkirk and Oswego plants. On October 31, 2003, the FERC Trial Staff, a party to the proceedings, filed a reply brief in which they supported and agreed with each position taken by the NRG Generators in their initial brief. In short, the staff argued that the NRG Generators: (1) self-supply station power under the NYISO tariff (which took effect on April 1, 2003), in any month during which they produce more energy than they consume and, as such should not be assessed a retail rate; (2) are connected only to transmission facilities and as such, at most should only pay NiMo a FERC-approved transmission rate; and (3) should be allowed to net consumption and output even if power is injected into the grid at a different point from which it is drawn off. The parties are currently engaged in settlement negotiations which, should they prove successful, will resolve both this FERC action and the above-referenced state court proceedings respecting amounts owing for electrical service provided to these three plants. At this stage of the proceedings, we cannot estimate the likelihood of an adverse determination. As noted above, the cumulative potential loss could exceed $35 million.
Pointe Coupee Parish Police Jury and Louisiana Generating, LLC v. United States Environmental Protection Agency and Christine Todd Whitman, Administrator, Adversary Proceeding No. 02-61021 on the docket of the United States Court of Appeals for the Fifth Circuit |
On December 2, 2002, a Petition for Review was filed to appeal the United States Environmental Protection Agencys approval of the Louisiana Department of Environmental Qualitys (DEQ) revisions to the Baton Rouge State Implementation Plan (SIP). Pointe Coupee and NRG Energys subsidiary, Louisiana Generating, object to the approval of SIP Section 4.2.1. Permitting NOx Sources that purports to require DEQ to obtain offsets of major increases in emissions of nitrogen oxides (NOx) associated with major modifications of existing facilities or construction of new facilities both in the Baton Rouge Ozone Nonattainment Area and in four adjoining attainment parishes referred to as the Region of Influence, including Pointe Coupee Parish. The plaintiffs challenge is based on DEQs failure to comply with Administrative Procedures Act requirements related to rulemaking and EPAs regulations, which prohibit EPA from approving a SIP not prepared in accordance with state law. The action is currently stayed by the United States Fifth Circuit Court of Appeals in response to the filing of the Suggestion of Bankruptcy, and the parties have been engaged in settlement discussions in the meantime. EPA has just served notice that it intends to withdraw its approval of DEQs Attainment Demonstration and will thereupon move to voluntarily dismiss the action as moot.
In the Matter of Louisiana Generating, LLC, Adversary Proceeding No. 2002-1095 1-EQ on the docket of the Louisiana Division of Administrative Law. |
During 2000, DEQ issued a Part 70 Air Permit modification to Louisiana Generating to construct and operate two 240 MW natural gas-fired turbines. The Part 70 Air Permit set emissions limits for the criteria air pollutants, including NOx, based on the application of Best Available Control Technology (BACT). The BACT limitation for NOx was based on the guarantees of the manufacturer, Siemens-Westinghouse. Louisiana Generating sought an interim emissions limit to allow Siemens-Westinghouse time to install additional control equipment. To establish the interim limit, DEQ issued a Compliance Order and Notice of Potential Penalty, No. AE-CN-02-0022, on September 8, 2002, which is, in part, subject to the referenced administrative hearing. DEQ alleged that Louisiana Generating did not meet its NOx emissions limit on certain days, did not conduct all opacity monitoring and did not complete all record keeping and certification
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
requirements. Louisiana Generating intends to vigorously defend certain claims and any future penalty assessment, while also seeking an amendment of its limit for NOx. An initial status conference has been held with the Administrative Law Judge and quarterly reports will be submitted to describe progress, including settlement and amendment of the limit. The extension of an amended BACT analysis has been granted until December 31, 2003. In addition, NRG Energy may assert breach of warranty claims against the manufacturer. With respect to the administrative action described above, at this time NRG Energy is unable to predict the eventual outcome of this matter or the potential loss contingencies, if any, to which the Company may be subject.
NRG Sterlington Power, LLC |
During 2002, NRG Sterlington conducted a review of the Sterlington Power Facilitys Part 70 Air Permit obtained by the facilitys former owner and operator, Koch Power, Inc. Koch had outlined a plan to install eight 25 megawatt (MW) turbines to reach a 200 MW limit in the permit. Due to the inability of several units to reach their nameplate capacity, Koch determined that it would need additional units to reach the electric output target. In August 2000, NRG Sterlington acquired the remaining interests in the facility not originally held on a passive basis and sought the transfer of the Part 70 Air Permit along with a modification to incorporate two 17.5 MW turbines installed by Koch and to increase the total number of turbines to ten. The permit modification was issued February 13, 2002. During further review, NRG Sterlington determined that a ninth unit had been installed prior to issuance of the permit modification. In keeping with its environmental policy, it disclosed this matter to DEQ in April 2002. NRG Sterlington provided to DEQ additional information during July 2002. A Consolidated Compliance Order & Notice of Potential Penalty, No. AE-CN-01-0393, was issued by DEQ on September 10, 2003, wherein DEQ formally alleged that NRG Sterlington did not complete all certification requirements, and installed a ninth unit prior to issuance of its permit modification. A meeting with DEQ is scheduled for November 19, 2003 to discuss mitigating circumstances and to seek to resolve all matters. NRG Energy is unable at this time to predict the eventual outcome or potential loss contingencies, if any, to which the Company may be subject.
Commission for its approval a Consent Agreement establishing that Saguaro does in fact satisfy the requirements for a qualifying facility. NRG Energy awaits the Commissions ruling.
Stone & Webster, Inc. and Shaw Constructors, Inc. v. NRG Energy, Inc. et al. |
On October 17, 2002, Stone & Webster, Inc. and Shaw Constructors, Inc. filed a lawsuit in the United States District Court, Southern District of Mississippi, against NRG Energy, Xcel Energy, Inc., NRG Granite Acquisition LLC, Granite Power Partners II LP and two of Xcel Energys executives relating to the construction of a power plant in Pike County, Mississippi. Plaintiffs generally alleged that they were not paid for work performed to construct the power plant, and sued the parent entities of the company with which they contracted to build the plant in order to recover amounts allegedly owing. Plaintiffs asserted claims for breach of fiduciary duty, piercing the corporate veil, breach of contract, tortious interference with contract, enforcement of the NRG Energy guaranty, detrimental reliance, negligent or intentional misrepresentation, conspiracy, and aiding and abetting. The parties have entered into a global settlement respecting this lawsuit and the dismissal of the Mississippi Involuntary Case, described below, and have executed a settlement agreement, which must be approved by the United States Bankruptcy Courts for the Southern District of New York and Southern District of Mississippi.
The Mississippi Involuntary Case |
On October 17, 2002, a petition commencing an involuntary bankruptcy proceeding pursuant to Chapter 7 of the Bankruptcy Code was filed against LSP-Pike Energy, LLC, a subsidiary of NRG Energy, by
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stone & Webster, Inc. and Shaw Constructors, Inc. in the United States Bankruptcy Court for the Southern District of Mississippi. In their petition filed with the Mississippi Bankruptcy Court, the petitioners sought recovery of allegedly unpaid contractual construction-related obligations in an aggregate amount of $73.8 million, which amount LSP-Pike Energy, LLC disputed. As set forth above, the parties have reached a global settlement respecting this matter.
FirstEnergy Arbitration Claim |
On November 29, 2001, The Cleveland Electric Illuminating Company, The Toledo Edison Company and FirstEnergy Ventures (Sellers) entered into Purchase and Sale Agreements with NRG Able Acquisition LLC, which were guaranteed by NRG Energy (collectively, Purchasers), for the purchase of certain power plants for approximately $1.5 billion. On August 8, 2002, Sellers terminated the agreements and asserted that Purchasers were liable for anticipatory breach of the Purchase and Sale Agreements on the grounds that they could not finance the purchases. On August 8, 2002, Purchasers provided notice that they disagreed with Sellers assertion. After Sellers filed a motion seeking a waiver of the automatic stay of Section 362(a) of the Bankruptcy Code respecting NRG Energys then-existing involuntary bankruptcy, the parties stipulated to a waiver of that automatic stay, thereby allowing Sellers to proceed with arbitration, but only for the purpose of liquidating the dollar amount of Sellers claim. The collection of any award, however, was to remain fully subject to NRG Energys automatic stay. The parties thereafter obtained relief from stay respecting the present Chapter 11 Bankruptcy, so as to continue the arbitration. The parties have now reached an agreement in principle, which, if consummated and approved by regulators and the United States Bankruptcy Court for the Southern District of New York, will liquidate Sellers bankruptcy claim at $396 million.
General Electric Company and Siemens Westinghouse Turbine Purchase Disputes |
NRG Energy and/or its affiliates have entered into several turbine purchase agreements with affiliates of General Electric Company (GE) and Siemens Westinghouse Power Corporation (Siemens). GE and Siemens have notified NRG Energy that it is in default under certain of those contracts, terminated such contracts, and demanded that NRG Energy pay the termination fees set forth in such contracts. GEs claim amounts to $120 million and Siemens approximately $45 million in cumulative termination charges. NRG Energy cannot estimate the likelihood of unfavorable outcomes in these disputes.
Itiquira Energetica, S.A. |
NRG Energys indirectly controlled Brazilian project company, Itiquira Energetica S.A., the owner of a 156 MW hydro project in Brazil, is currently in arbitration with the former EPC contractor for the project, Inepar Industria e Construcoes (Inepar). The dispute was commenced by Itiquira in September, 2002 and pertains to certain matters arising under the former EPC contract. Itiquira principally asserts that Inepar breached the contract and caused damages to Itiquira by (i) failing to meet milestones for substantial completion; (ii) failing to provide adequate resources to meet such milestones; (iii) failing to pay subcontractors amounts due; and (iv) being insolvent. Itiquiras arbitration claim is for approximately US $40 million. Inepar has asserted in the arbitration that Itiquira breached the contact and caused damages to Inepar by failing to recognize events of force majeure as grounds for excused delay and extensions of scope of services and material under the contract. Inepars damage claim is for approximately US $10 million. The parties submitted their respective statements of claims, counterclaims and responses, and a preliminary arbitration hearing was held on March 21, 2003. In lieu of taking expert testimony at hearing, the court of arbitration has ordered an expert investigation process to cover technical and accounting issues. If the court of arbitration determines that the final report from the expert investigation process is inconclusive, it may then require expert testimony. NRG Energy anticipates that the expert investigation process will not be completed
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
sooner than February 2004. NRG Energy cannot estimate the likelihood of an unfavorable outcome in this dispute.
NRG Energy Credit Defaults |
NRG Energy and various of its subsidiaries are in default under various of their credit facilities, financial instruments, construction agreements and other contracts, which have given rise to liens, claims and contingencies against them and may in the future give rise to additional liens, claims and contingencies against them. In addition, NRG Energy and various of its subsidiaries have entered into various guarantees, equity contribution agreements, and other financial support agreements with respect to the obligations of their affiliates, which have given rise to liens, claims and contingencies against them and may in the future give rise to additional liens, claims and contingencies against the party or parties providing the financial support. NRG Energy cannot predict the outcome or financial impact of these matters.
12. | Inventory |
Inventory, which is stated at the lower of weighted average cost or market, consisted of:
September 30, | December 31, | ||||||||
2003 | 2002 | ||||||||
(In thousands) | |||||||||
Fuel oil
|
$ | 68,740 | $ | 51,442 | |||||
Coal
|
64,273 | 82,554 | |||||||
Kerosene
|
2,624 | 2,852 | |||||||
Spare parts
|
102,661 | 107,542 | |||||||
Emission credits
|
9,180 | 14,742 | |||||||
Natural gas
|
364 | 153 | |||||||
Other
|
7,961 | 6,300 | |||||||
Total Inventory
|
$ | 255,803 | $ | 265,585 | |||||
13. | Property, Plant and Equipment |
The major classes of property, plant and equipment were as follows:
September 30, | December 31, | ||||||||
2003 | 2002 | ||||||||
(In thousands) | |||||||||
Facilities and equipment
|
$ | 6,194,512 | $ | 6,324,358 | |||||
Land and improvements
|
100,884 | 108,241 | |||||||
Office furnishings and equipment
|
69,011 | 67,086 | |||||||
Construction in progress(1)
|
460,989 | 623,750 | |||||||
Total property, plant and equipment
|
6,825,396 | 7,123,435 | |||||||
Accumulated depreciation
|
(771,613 | ) | (602,712 | ) | |||||
Net property, plant and equipment
|
$ | 6,053,783 | $ | 6,520,723 | |||||
In light of economic developments related to the Connecticut assets and the FERC issued order regarding cost of service reimbursements, NRG Energy reassessed the asset lives for the Connecticut
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
facilities. The shorter depreciable lives resulted in an increase in depreciation of approximately $0.7 million and $13.9 million for the three and nine months ended September 30, 2003.
(1) | Included in construction in progress is approximately $248.9 million related to turbines associated with cancelled projects as of September 30, 2003 and December 31, 2002, respectively. |
14. | Derivative Instruments and Hedging Activities |
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 instruments 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 derivatives 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 Energys 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, foreign exchange contracts used to reduce the effect of fluctuating foreign currencies on foreign denominated investments and other transactions. At September 30, 2003, NRG Energy had various commodity contracts extending through December 2003, and several fixed-price gas and electricity purchase contracts extending through 2018.
Accumulated Other Comprehensive Income
The following table summarizes the effects of SFAS No. 133 on NRG Energys OCI balance for the three months ended September 30, 2003:
Energy | Interest | Foreign | |||||||||||||||
(Gains/(Losses) In thousands) | Commodities | Rate | Currency | Total | |||||||||||||
Accumulated OCI balance at June 30, 2003
|
$ | 52,595 | $ | (78,298 | ) | $ | | $ | (25,703 | ) | |||||||
Unwound from OCI during period:
|
|||||||||||||||||
Due to unwinding of previously
deferred amounts
|
(11,303 | ) | 100 | | (11,203 | ) | |||||||||||
Mark to market of hedge contracts
|
39,123 | 7,136 | | 46,259 | |||||||||||||
Accumulated OCI balance at September 30, 2003
|
$ | 80,415 | $ | (71,062 | ) | $ | | $ | 9,353 | ||||||||
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the effects of SFAS No. 133 on NRG Energys OCI balance for the nine months ended September 30, 2003:
Energy | Interest | Foreign | |||||||||||||||
(Gains/(Losses) In thousands) | Commodities | Rate | Currency | Total | |||||||||||||
Accumulated OCI balance at December 31, 2002
|
$ | 129,496 | $ | (102,957 | ) | $ | (261 | ) | $ | 26,278 | |||||||
Unwound from OCI during period:
|
|||||||||||||||||
Rolloff of forecasted transactions
no longer being probable
|
| 32,025 | | 32,025 | |||||||||||||
Due to unwinding of previously
deferred amounts
|
(100,333 | ) | 5,750 | 261 | (94,322 | ) | |||||||||||
Mark to market of hedge contracts
|
51,252 | (5,880 | ) | | 45,372 | ||||||||||||
Accumulated OCI balance at September 30, 2003
|
$ | 80,415 | $ | (71,062 | ) | $ | | $ | 9,353 | ||||||||
Gains/(Losses) expected to unwind from OCI during
next 12 months
|
$ | 46,630 | $ | (359 | ) | $ | | $ | 46,271 |
Losses of $0 and $32 million were reclassified from OCI to current period earnings during the three and nine months ended September 30, 2003 due to forecasted transactions no longer being probable. Gains of $11.2 million and $94.3 million were reclassified from OCI to current period earnings during the three and nine months ended September 30, 2003, respectively, due to the unwinding of previously deferred amounts. These amounts are recorded on the same line in the statement of operations in which the hedged items are recorded. Also during the three and nine months ended September 30, 2003, NRG Energy recorded gains in OCI of approximately $46.3 million $45.4 million, respectively, 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 September 30, 2003 was an unrecognized gain of approximately $9.4 million. NRG Energy expects $46.3 million of deferred net gains on derivative instruments accumulated in OCI to be recognized in earnings during the next twelve months.
Statement of Operations
The following tables summarize the pre-tax effects of SFAS No. 133 on NRG Energys statement of operations for the three months ended September 30, 2003:
Energy | Foreign | ||||||||||||||||
(Gains/(Losses) In thousands) | Commodities | Interest Rate | Currency | Total | |||||||||||||
Revenue from majority owned subsidiaries
|
$ | (3,448 | ) | $ | | $ | | $ | (3,448 | ) | |||||||
Equity in earnings of unconsolidated subsidiaries
|
7,901 | | | 7,901 | |||||||||||||
Cost of operations
|
1,769 | | | 1,769 | |||||||||||||
Interest expense
|
| 24,638 | | 24,638 | |||||||||||||
Total Statement of Operations impact before tax
|
$ | 6,222 | $ | 24,638 | $ | | $ | 30,860 | |||||||||
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables summarize the pre-tax effects of SFAS No. 133 on NRG Energys statement of operations for the nine months ended September 30, 2003:
Energy | Foreign | ||||||||||||||||
(Gains/(Losses) In thousands) | Commodities | Interest Rate | Currency | Total | |||||||||||||
Revenue from majority owned subsidiaries
|
$ | 29,845 | $ | | $ | | $ | 29,845 | |||||||||
Equity in earnings of unconsolidated subsidiaries
|
11,567 | (222 | ) | | 11,345 | ||||||||||||
Cost of operations
|
(7,386 | ) | | | (7,386 | ) | |||||||||||
Other income
|
| | 92 | 92 | |||||||||||||
Interest expense
|
| (20,970 | ) | | (20,970 | ) | |||||||||||
Total Statement of Operations impact before tax
|
$ | 34,026 | $ | (21,192 | ) | $ | 92 | $ | 12,926 | ||||||||
Energy Related Commodities
NRG Energy is exposed to commodity price variability in electricity, emission allowances and natural gas, oil and coal used to meet fuel requirements. In order to manage these commodity price risks, NRG Energy enters into financial instruments, which may take the form of fixed price, floating price or indexed sales or purchases, and options, such as puts, calls, basis transactions and swaps. 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 stockholders deficit. 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 three and nine months ended September 30, 2003.
NRG Energys pre-tax earnings for the three and nine months ended September 30, 2003 were increased by an unrealized gain of $6.2 million and $34.0 million, respectively, 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 three and nine months ended September 30, 2003, NRG Energy reclassified gains of $11.3 million and $100.3 million, respectively, from OCI to current-period earnings and expects to reclassify an additional $46.6 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. Qualifying 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 three and nine months ended September 30, 2003.
NRG Energys pre-tax earnings for the three and nine months ended September 30, 2003 were increased by an unrealized gain of $24.6 million and decreased by an unrealized loss $21.2 million, respectively,
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
associated with changes in the fair value of interest rate derivative instruments not accounted for as hedges in accordance with SFAS No. 133.
During the three and nine months ended September 30, 2003, NRG Energy reclassified losses of $100,000 and $5.8 million from OCI to current-period earnings and expects to reclassify $359,000 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 three and nine months ended September 30, 2003.
NRG Energys pre-tax earnings for the three and nine months ended September 30, 2003 were increased by an unrealized gain of $0 and $92,000 associated with foreign currency hedging instruments not accounted for as hedges in accordance with SFAS No. 133.
During the three and nine months ended September 30, 2003, NRG Energy reclassified losses of $0 and $261,000 from OCI to current period earnings and does not expect to reclassify any deferred gains/losses to earnings during the next twelve months on foreign currency swaps accounted for as hedges.
15. Goodwill and Other Intangible Assets
During the first quarter of 2002, NRG Energy adopted SFAS No. 142 Goodwill and Other Intangible Assets (SFAS No. 142), which requires new accounting for intangible assets, including goodwill. Intangible assets with finite lives will be amortized over their economic useful lives and periodically reviewed for impairment. Goodwill will no longer be amortized, but will 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. NRG Energy had intangible assets with a net carrying value of $26.8 million at September 30, 2003, which will not be amortized and consists of goodwill. The majority of NRG Energys goodwill and other intangible assets are attributable to NRG Energys Thermal operations which are not subject to NRG Energys bankruptcy filing. The Thermal operations have historically demonstrated adequate cash flows to justify the existence of such balances.
Aggregate amortization expense recognized for the three months ended September 30, 2003 and 2002 was approximately $1.0 million and $0.7 million, respectively. Aggregate amortization expense recognized for the nine months ended September 30, 2003 and 2002 was approximately $3.1 million and $2.1 million, respectively. The annual aggregate amortization expense for each of the five succeeding years is expected to approximate $4.0 million in each of years one, two and three and $3.9 million in each of years four and five. The estimated useful lives of these amortizable intangibles were reduced effective January 1, 2003 from a range of 3 to 40 years to a range of 3 to 30 years.
Intangible assets consisted of the following:
At September 30, 2003 | At December 31, 2002 | ||||||||||||||||
Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||
Class of Intangible Asset | Amount | Amortization | Amount | Amortization | |||||||||||||
(In thousands) | |||||||||||||||||
Goodwill
|
$ | 32,958 | $ | 6,124 | $ | 32,958 | $ | 6,124 | |||||||||
Amortized:
|
|||||||||||||||||
Service contracts
|
$ | 64,592 | $ | 19,002 | $ | 65,791 | $ | 15,986 |
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. | Regulatory Issues |
NRG Energy is impacted by market rule and tariff changes in the existing markets operated by Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs).
On March 1, 2003, ISO-New England implemented its version of Standard Market Design. This change dramatically modifies the New England market structure by incorporating Locational Marginal Pricing (pricing by location rather than on a New England wide basis). While the ISO-New England Standard Market Design represents a significant improvement to the existing market design, NRG Energy still considered the market insufficient to allow NRG Energy to recover its reasonable costs and earn a reasonable return on investment. Therefore, and notwithstanding the impending implementation of Locational Marginal Pricing, on February 26, 2003, NRG Energy filed a proposed cost of service agreement with the Federal Energy Regulatory Commission (FERC) for the following Connecticut facilities: Middletown Power LLC, Montville Power LLC, Norwalk Power LLC and Devon Power LLC units 11-14 (collectively the NRG Subsidiaries). In the filing, NRG Energy requested that major and minor maintenance expenses of the NRG Subsidiaries be paid for through a tracking mechanism that would insure that NRG Energy receives compensation only for actual maintenance expenses. Under the proposed cost of service agreement, the other NRG Energy costs would be paid through a monthly cost-based payment. NRG Energy requested an effective date of February 27, 2003.
On March 25, 2003, FERC issued an order (the March Order) approving the recovery of the NRG Subsidiaries Spring 2003 maintenance expenses, subject to refund and authorized an effective date of February 27, 2003. FERC did not rule on the remainder of the issues to allow further time to consider protests.
On April 25, 2003, the FERC issued an order (the April Order) rejecting the remaining part of the proposed cost of service agreements including the monthly cost-based payment. Rather, FERC instructed ISO New England to establish temporary bidding rules that would permit selected peaking units (units with capacity factors of 10 percent or less during 2002), operating within designated congestion areas (such as Connecticut) to raise their bids to allow them the opportunity to recover their fixed and variable costs through the market. This temporary bidding rule would remain in place until ISO New England implements locational installed capacity requirements, which should be no later than June 1, 2004. In the July 24 Order on Rehearing (the July Order), FERC clarified that the capacity factor of 10 percent or less applies to units rather than complexes. On a unit basis, all the NRG Energy facilities qualify to bid under the temporary rules except Middletown 2 and 3, and Devon 7 and 8. The existing RMR agreement between ISO New England and NRG Energy covering Devon 7 and 8 terminated on September 30, 2003. On October 2, 2003, NRG Energy filed to extend the existing RMR agreement. FERC has yet to act on the request to extend the agreement. For additional information regarding the impact that the April 25, 2003 FERC order and other regulatory developments had on NRG Energys results of operations, See Note 4.
On October 17, 2003, the Midwest Independent Transmission Operator, Inc. (MISO) filed a motion to withdraw its Open Access Transmission and Energy Markets Tariff (TEMT), purportedly to allow more time to develop stakeholder consensus on critical outstanding issues relating to market features such as Fixed Transmission Rights, market monitoring and resource adequacy. Post-blackout reliability concerns were also a stated factor for the withdrawal. On October 29, 2003, FERC granted the MISOs motion. The MISO had planned to phase-in its energy markets during 2004. The withdrawal of the market tariff means that the market will be delayed for an undetermined period of time. The delay will have the potential to impact NRG Energys Illinois generating facilities.
On October 28, 2003, FERC issued an order conceptually approving the proposed re-design of the California ISO market, which has the potential to impact NRG Energys California interests.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. | Asset Retirement Obligation |
Effective January 1, 2003, NRG Energy adopted SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). 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. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. 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 and written or oral contracts, including obligations arising under the doctrine of promissory estoppel.
NRG Energy has identified certain retirement obligations within its power generation operations related to its North America projects in the South Central region, the Northeast region and the Mid Atlantic region, its Alternative Energy projects and its Thermal projects. These asset retirement obligations are related primarily to the future dismantlement of equipment on leased property and environment obligations related to ash disposal site closures. NRG Energy has also identified other asset retirement obligations that could not be calculated because the assets associated with the retirement obligations were determined to have an indeterminate life. The adoption of SFAS No. 143 resulted in recording a $2.6 million increase to property, plant and equipment and a $4.2 million increase to other long-term obligations. The cumulative effect of adopting SFAS No. 143 was a $0.6 million increase to depreciation expense and a $1.6 million increase to cost of majority-owned operations.
The following represents the balances of the asset retirement obligation as of January 1, 2003 and the additions and accretion of the asset retirement obligation for the nine months ended September 30, 2003, which is included in other long-term obligations in the consolidated balance sheet:
Accretion for Nine | ||||||||||||
Beginning Balance | Month Ended | Ending Balance | ||||||||||
Description | Jan. 1, 2003 | September 30, 2003 | September 30, 2003 | |||||||||
(In thousands) | ||||||||||||
South Central Region
|
$ | 396 | $ | 45 | $ | 441 | ||||||
Northeast Region
|
313 | 32 | 345 | |||||||||
Mid Atlantic Region
|
1,732 | 186 | 1,918 | |||||||||
Alternative Energy
|
629 | 59 | 688 | |||||||||
Thermal
|
1,171 | 75 | 1,246 | |||||||||
Total
|
$ | 4,241 | $ | 397 | $ | 4,638 | ||||||
The following represents the pro-forma effect on NRG Energys net income for the three and nine months ended September 30, 2002, as if NRG Energy had adopted SFAS No. 143 as of January 1, 2002:
Three Months Ended | ||||
September 30, 2002 | ||||
(In thousands) | ||||
Loss from continuing operations as reported
|
$ | (2,468,936 | ) | |
Pro-forma adjustment to reflect retroactive
adoption of SFAS No. 143
|
(171 | ) | ||
Pro-forma loss from continuing operations
|
$ | (2,469,107 | ) | |
Net loss as reported
|
$ | (3,055,394 | ) | |
Pro-forma adjustment to reflect retroactive
adoption of SFAS No. 143
|
(171 | ) | ||
Pro-forma net loss
|
$ | (3,055,565 | ) |
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Nine Months Ended | ||||
September 30, 2002 | ||||
(In thousands) | ||||
Loss from continuing operations as reported
|
$ | (2,527,639 | ) | |
Pro-forma adjustment to reflect retroactive
adoption of SFAS No. 143
|
(1,980 | ) | ||
Pro-forma loss from continuing operations
|
$ | (2,529,619 | ) | |
Net loss as reported
|
$ | (3,123,209 | ) | |
Pro-forma adjustment to reflect retroactive
adoption of SFAS No. 143
|
(1,980 | ) | ||
Pro-forma net loss
|
$ | (3,125,189 | ) |
18. | Recent Accounting Pronouncements |
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, that supersedes previous guidance for the reporting of gains and losses from extinguishment of debt and accounting for leases, among other things.
SFAS No. 145 requires that only gains and losses from the extinguishment of debt that meet the requirements for classification as Extraordinary Items, as prescribed in Accounting Practices Board Opinion No. 30, should be disclosed as such in the financial statements. Previous guidance required all gains and losses from the extinguishment of debt to be classified as Extraordinary Items. This portion of SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with restatement of prior periods required.
In addition, SFAS No. 145 amends SFAS No. 13, Accounting for Leases, as it relates to accounting by a lessee for certain lease modifications. Under SFAS No. 13, if a capital lease is modified in such a way that the change gives rise to a new agreement classified as an operating lease, the assets and obligation are removed, a gain or loss is recognized and the new lease is accounted for as an operating lease. Under SFAS No. 145, capital leases that are modified so the resulting lease agreement is classified as an operating lease are to be accounted for under the sale-leaseback provisions of SFAS No. 98, Accounting for Leases. These provisions of SFAS No. 145 are effective for transactions occurring after May 15, 2002.
SFAS No. 145 will be applied as required. Adoption of SFAS No. 145 is not expected to have a material impact on NRG Energy.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (SFAS No. 146). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. SFAS No. 146 will be applied as required.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN No. 46). FIN No. 46 requires an enterprises consolidated financial statements to include subsidiaries in which the enterprise has a controlling interest. Historically, that requirement has been applied to subsidiaries in which an enterprise has a majority voting interest, but in many circumstances the enterprises consolidated financial statements do not include the consolidation of variable interest entities with which it has similar relationships but no majority voting interest. Under FIN No. 46 the voting interest approach is not effective in identifying controlling financial interest. The new rule requires that for entities to be consolidated
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that those assets be initially recorded at their carrying amounts at the date the requirements of the new rule first apply. If determining carrying amounts as required is impractical, then the assets are to be measured at fair value the first date the new rule applies. Any difference between the net amounts of any previously recognized interest in the newly consolidated entity should be recognized as the cumulative effect of an accounting change. FIN No. 46 becomes effective in the first interim or annual period ending after December 15, 2003. FIN No. 46 will be applied as required and is not expected to have a material impact on NRG Energy.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, (SFAS No. 149). SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, provisions of SFAS 149 that relate to SFAS Statement No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. SFAS No. 149 has not had an impact on NRG Energy.
In May 2003, the FASB issues SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 has not had an impact on NRG Energy.
19. Adjustments to Previously Issued Financial Statements
Subsequent to the issuance of NRG Energys financial statements for the quarter ended September 30, 2002, NRG Energys management determined that the accounting for certain transactions required restatement.
NRG Energy determined that it had misapplied the provisions of SFAS No. 144 related to asset groupings in connection with the review for impairment of its long-lived assets during the quarter ended September 30, 2002. SFAS No. 144 requires that for purposes of testing recoverability, assets be grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. NRG Energy recalculated the asset impairment tests in accordance with SFAS No. 144 using the appropriate asset groupings for independent cash flows for each generation facility. As a result, NRG Energy concluded that asset impairments should have been recorded for two projects known as Bayou Cove Peaking Power LLC and Somerset Power LLC. Since NRG Energy concluded that the triggering events that led to the impairment charge were experienced in the third quarter of 2002, the asset impairments related to these projects should have been recorded as of September 30, 2002. NRG Energy calculated the asset impairment charges for Bayou Cove Peaking Power LLC and Somerset Power LLC to be $126.5 million and $49.3 million, respectively.
In connection with NRG Energys 2002 year-end audit, two additional items were found to be inappropriately recorded as of September 30, 2002. These items included the inappropriate treatment of interest rate swap transactions as cash flow hedges and the decrease in the value of a bond remarketing option from the original price paid by NRG Energy. The error correction for the interest rate swaps resulted in the
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recording of additional income of $61.6 million as of September 30, 2002. The recognition of the decrease in the value of the remarketing option resulted in a charge to income of $15.9 million as of September 30, 2002.
A summary of the significant effects of the restatement on our consolidated statements of operations for the three and nine months ended September 30, 2002 is as follows:
Previously Reported** | As Restated | |||||||||||||||
Three Months | Nine Months | Three Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
(In thousands) | ||||||||||||||||
Consolidated Statements of
Operations:
|
||||||||||||||||
Revenue and equity earnings
|
$ | 653,272 | $ | 1,671,775 | $ | 653,272 | $ | 1,671,775 | ||||||||
Operating income
|
(2,314,505 | ) | (2,210,479 | ) | (2,506,198 | ) | (2,402,172 | ) | ||||||||
Net loss from continuing operations
|
(2,338,856 | ) | (2,397,559 | ) | (2,468,936 | ) | (2,527,639 | ) | ||||||||
Net loss from discontinued operations
|
(586,458 | ) | (595,570 | ) | (586,458 | ) | (595,570 | ) | ||||||||
Net loss
|
(2,925,314 | ) | (2,993,129 | ) | (3,055,394 | ) | (3,123,209 | ) |
** | As reclassified for discontinued operations. |
In addition, the restatement for Bayou Cove Peaking LLC and Somerset Power LLC impairments reduced the previously reported net property, plant and equipment balance by $175.8 million. The restatement for the interest rate swaps had no impact on total shareholders equity and the restatement for the remarketing option reduced other assets by $15.9 million.
20. Subsequent Event NRG Energy Bankruptcy Filing
On May 14, 2003, NRG and 25 of its direct and indirect wholly owned subsidiaries commenced voluntary petitions under chapter 11 of the bankruptcy code in the United States Bankruptcy Court for the Southern District of New York. On that date, we filed a plan of reorganization providing for the reorganization of five of the debtors: NRG Energy, Inc., NRG Power Marketing Inc., NRG Capital LLC, NRG Finance Company I LLC (NRG FinCo) and NRGenerating Holdings (No. 23) B.V. (collectively the NRG Plan Debtors). No NRG Energy international operations were included in the filing. The plan of reorganization for the NRG Plan Debtors (the NRG plan of reorganization) generally provides for the elimination of approximately $5.2 billion of corporate level bank and bond debt and approximately $1.3 billion of additional claims and disputes by distributing a combination of equity, up to $540.0 million in cash and $500.0 million of new debt among our unsecured creditors.
On September 17, 2003, a plan of reorganization was filed for (i) NRG Northeast Generating LLC and its debtor subsidiaries (collectively NRG Northeast) (ii) NRG South Central Generating LLC and its debtor subsidiaries (collectively NRG South Central) and (iii) Berrians I Gas Turbine Power LLC (Berrians and, collectively with NRG Northeast and NRG South Central the Northeast/ South Central Debtors). The plan of reorganization for the Northeast/ South Central Debtors (the Northeast/ South Central plan of reorganization) generally provides for payment in full to holders of allowed secured claims in cash on or around the effective date of the Northeast/ South Central plan of reorganization. Holders of allowed general unsecured claims will receive either (i) cash equal to the unpaid portion of their allowed unsecured claim, (ii) treatment that leaves unaltered the legal, equitable and contractual rights to which such unsecured claim entitles the holder of such claim, (iii) treatment that otherwise renders such unsecured claim unimpaired pursuant to section 1124 of the bankruptcy code or (iv) such other, less favorable treatment that is confirmed in writing as being acceptable to such holder and to the applicable debtor.
An order confirming the NRG plan of reorganization was entered by the bankruptcy court on November 24, 2003 and NRG Energy anticipates the plan will become effective on or about December 5,
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2003. On November 25, 2003, an order confirming the Northeast/ South Central plan of reorganization was entered by the bankruptcy court and NRG Energy anticipates that the Northeast/ South Central plan of reorganization will become effective in late 2003 or early 2004.
61
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENTS DISCUSSION AND ANALYSIS OF
Overview
NRG Energy is a wholesale power generation company, primarily engaged in the ownership and operation of power generation facilities and the sale of energy, capacity and related products in the United States and internationally. NRG Energy has a diverse portfolio of electric generation facilities in terms of geography, fuel type and dispatch levels, which helps it mitigate risk. NRG Energy intends to maximize operating income through the efficient procurement and management of fuel supplies and maintenance services, and the sale of energy, capacity and ancillary services into attractive spot, intermediate and long-term markets.
NRG Energy does not anticipate any significant new acquisitions or construction in the near future, and instead will focus on operational performance, asset management and debt reduction. NRG Energy has already made significant reductions in capital expenditures, business development activities and personnel. Power sales, fuel procurement and risk management will remain a key strategic element of our operations. NRG Energys objective will be to optimize the operating income of our facilities within an appropriate risk and liquidity profile.
Industry Trends. In this Managements Discussion and Analysis of Financial Condition and Results of Operations, NRG Energy will discuss its historical results of operations. During 2003, the following factors, among others, have negatively affected NRG Energys results of operations:
| weak markets for electric energy, capacity and ancillary services; | |
| a narrowing of the spark spread (the difference between power prices and fuel costs) in most regions of the United States in which NRG Energy operates power generation facilities; | |
| mild weather during peak seasons in regions where NRG Energy has significant merchant capacity; | |
| reduced liquidity in the energy trading markets as a result of fewer participants trading lower volumes; | |
| the imposition of price caps and other market mitigation in markets where NRG Energy has significant merchant capacity; | |
| regulatory and market frameworks in certain regions where NRG Energy operates that prevent it from charging prices that will enable NRG Energy to recover its operating costs and to earn acceptable returns on capital; | |
| the obligation to perform under certain long-term contracts that are not profitable; | |
| physical, regulatory and market constraints on transmission facilities in certain regions that limit or prevent NRG Energy from selling power generated by certain of our facilities; | |
| limited access to capital due to our financial condition since July 2002 and the resulting contraction of NRG Energys ability to conduct business in the merchant energy markets; and | |
| changes and turnover in senior and middle management since June 2002 in connection with NRG Energys restructuring. |
NRG Energy expects that these generally weak market conditions will continue for the foreseeable future in some markets. Historically, NRG Energy has believed that, as supply surpluses begin to tighten and as market rules and regulatory conditions stabilize, prices will improve for energy, capacity and ancillary services. This view is consistent with NRG Energys belief that in the long run market prices will support an adequate rate of return on the
62
Asset Sales. As part of NRG Energys strategy, NRG Energy plans to continue the selective divestment of certain assets to further reduce indebtedness. Since July 2002 NRG Energy has sold or made arrangements to sell a number of assets and equity investments in an effort to raise cash and reduce our debt. In addition, NRG Energy is currently marketing its interest in several other assets.
Discontinued Operations. NRG Energy has classified certain business operations, and gains/losses recognized on sale, as discontinued operations for projects that were sold or have met the required criteria for such classification pending final disposition. Accounting regulations require that continuing operations be reported separately in the income statement from discontinued operations, and that any gain or loss on the disposition of any such business be reported along with the operating results of such business. Assets classified as discontinued operations on NRG Energys balance sheet as of September 30, 2003 include McClain and Hsin Yu. For the nine months ended September 30, 2003, discontinued results of operations include our Killingholme, Hsin Yu, McClain, NEO Landfill Gas, Inc., (NLGI) and Timber Energy Resources, Inc., (TERI) projects.
New Management. On October 21, 2003, NRG Energy announced the appointment of David W. Crane as its new President and Chief Executive Officer, effective December 1, 2003. Before joining NRG Energy, Mr. Crane served as the Chief Executive Officer of London-based International Power PLC and has over 12 years of energy industry experience. NRG Energy is currently conducting a search for a new Chief Financial Officer. NRG Energy anticipates the position will be filled in the months following its emergence from bankruptcy. In addition, NRG Energy has filled several other senior and middle management positions over the last 12 months. Upon emergence from bankruptcy, NRG Energys board of directors will consist of Mr. Crane and ten other individuals, three of whom have been designated by MattinPatterson, and seven of whom are independent.
Independent Public Accountants; Audit Committee. PricewaterhouseCoopers LLP has been NRG Energys independent auditors since 1995. In connection with the appointment of a new board of directors upon NRG Energys emergence from bankruptcy, NRG Energy will have an audit committee consisting entirely of independent directors. The operations of the audit committee will be governed by a charter. Pursuant to the charter, the committee will oversee NRG Energys independent auditor relationship and determine whether its best interest would be served by a change in independent auditors. The audit committees evaluation process is intended to ensure that NRG Energy will continue to have high-quality, cost-efficient independent auditing services.
Fresh-Start Reporting. Upon emergence from bankruptcy and completion of the restructuring, NRG Energy will implement fresh-start reporting. Under fresh-start reporting, a new reporting entity is considered to be created and its reorganizational value will be allocated to its assets based on their respective fair values in conformity with the purchase method of accounting for business combinations, and NRG Energys assets recorded values will be adjusted to reflect their estimated fair values at the date fresh-start reporting is applied. Any portion of NRG Energys reorganization value not attributable to specific assets will be an indefinite-lived intangible asset referred to as reorganization value in excess of value of identifiable assets and reported as goodwill. Any excess fair value of assets and liabilities over confirmed enterprise value will be allocated as a pro rata reduction of the amounts that otherwise would have been assigned to all of the assets except financial assets other than investments accounted for by the equity method, assets to be disposed of by sale, deferred tax assets, prepaid assets relating to pension or other postretirement benefit plans and any other current assets. As a result of adopting fresh-start reporting and emerging from bankruptcy, historical financial information will not be comparable to financial information for future periods after our emergence from bankruptcy.
RESULTS OF OPERATIONS
For the three months ended September 30, 2003 compared to the three months ended September 30, 2002
Net (Loss)/Income
For the three months ended September 30, 2003, NRG Energy recognized a net loss after discontinued operations of $284.8 million compared to a net loss after discontinued operations of $3.1 billion for the same period in 2002.
NRG Energy incurred impairment charges of $6.0 million for the three months ended September 30, 2003 and $2.5 billion for the same period in 2002. During the third quarter of 2003 NRG Energy cancelled its plans to re-establish fuel oil capacity at its Arthur Kill plant, which resulted in a charge of approximately $9.0 million to write-off assets under development. Offsetting this charge was a net gain of approximately $3.1 million relating to the sale of the Langage project. Credit rating downgrades, defaults under certain credit agreements, increased collateral requirements and reduced liquidity experienced by NRG Energy during the third quarter of 2002 were triggering events which required NRG Energy to review the recoverability of its long-lived assets. Adverse economic conditions resulted in declining energy prices. Consequently, NRG Energy determined that many of its construction projects and its operational projects were impaired during the third quarter of 2002 and should be written down to fair market value. NRG Energy incurred a gain on the sale of equity method investments of $12.3 million for the three months ended September 30, 2003 resulting from the sale of its 50% interest in Mustang Station. NRG Energy incurred a write-down of equity method investments of $117.9 million for the same period in 2002. This write down was primarily due to updated market values received in response to marketing Loy Yang for possible sale and the transfer of its indirect 50% interest in SRW Cogeneration LP (SRW) to its partner in SRW, Conoco, Inc. During the three months ended September 30, 2003, NRG Energy incurred reorganizational and restructuring charges of $21.0 million, which primarily consisted of employee separation costs, advisor and other professional fees. For the same period ended September 30, 2002, NRG Energy incurred restructuring charges of $17.1 million, which consisted of employee separation costs and advisor fees. During the third quarter of 2003, NRG Energy recorded a $396 million charge in connection with the resolution of the First Energy Arbitration Claim. This amount is recorded on the balance sheet as a prepetition Liability.
NRG Energy incurred net income before impairment and restructuring charges and write downs of equity method investments of $125.8 million for the three months ended September 30, 2003 compared to a net loss of $449.8 million for the same period in 2002, representing an increase of $575.6 million. Equity in operating earnings of unconsolidated affiliates increased for the three months ended September 30, 2003 compared to the same period in 2002 due to favorable results at West Coast Power resulting from increased ancillary, RMR contract revenues and other revenues. The sale of NRG Energys investment in MESI in 2002 also resulted in a favorable impact in 2003, as MESI generated substantial equity losses in the prior years. NRG Energy also incurred lower interest
63
expense. As a result of its bankruptcy filing, NRG Energy has ceased recording interest expense on debt where it is probable that such interest would not be paid, such as the NRG Corporate level debt (primarily bonds) and NRG Finance Company debt (construction revolver). In addition, NRG Energy reduced employee and office expenses related to work force reduction efforts, both domestically and internationally and the closure of certain offices. Outside services was lower compared to the same period in 2002 due to lower non-restructuring legal activities and reduced bad debt expense. These favorable items were offset by losses incurred on the Connecticut Standard Offer contracts due to increased market prices, contract terminations and liquidated damages triggered by NRG Energys financial condition and additional restructuring charges.
Operating Revenues and Equity Earnings
For the three months ended September 30, 2003, NRG Energy had total operating revenues and equity earnings from continuing operations of $671.3 million compared to $653.3 million for the same period in 2002.
Revenues from Majority Owned Operations
During the three months ended September 30, 2003, NRG Energy and its majority owned subsidiaries recorded revenues from majority owned operations of $608.0 million compared to $627.4 million for the same period in 2002. Revenues from majority-owned operations for the three months ended September 30, 2003, consisted primarily of power generating revenues from domestic operations of approximately $450.2 million, European operations of $32.4 million, Asia-Pacific operations of $48.2 million and Other Americas $19.4 million. In addition, NRG Energy recognized revenues from majority-owned operations from Alternative Energy, Thermal and Other Operations of $30.1 million, $27.0 million and $0.7 million, respectively.
Revenues from majority owned operations of $608.0 million for the three months ended September 30, 2003 includes $328.1 million of energy revenues, $188.5 million of capacity revenues, $48.0 million of revenues from the alternative and thermal portfolios, $3.5 million of operating and maintenance fees, and $43.3 million of other revenues, which include financial and physical gas sales, sales from NRG Energys Schkopau facility and New England Power Pool reimbursements. Revenues were offset by $3.4 million of unrealized losses on derivatives. Revenues from majority owned operations decreased $19.3 million or 3.1% compared to the same period in 2002. This decrease is primarily due to lower energy revenues. Energy revenues decreased due to losses incurred on the Connecticut Standard Offer contracts as a result of increased market prices, as well as the cancellation of certain contracts in 2002. Energy revenues also decreased due to lower overall generation. Such decreases were partially offset by increased market prices and reduced unrealized losses on derivatives. The impact on revenue related to the change in the fair value of derivatives was favorable due to termination of unfavorable financial transactions in 2003.
Equity in Operating Earnings of Unconsolidated Affiliates
Equity in operating earnings of unconsolidated affiliates for the three months ended September 30, 2003, were $63.3 million compared to $25.9 million for the same period in 2002.
Equity in operating earnings of unconsolidated affiliates of $63.3 million for the three months ended September 30, 2003 includes $46.1 million from the domestic portfolio and $17.2 million from the international portfolio, offset by equity losses in the Other Operations portfolio. Equity in operating earnings of unconsolidated affiliates for the three months ended September 30, 2003 increased $37.4 million or 144.4%. This increase is due to favorable results at West Coast Power as compared to the same period in 2002, resulting from increased ancillary and RMR contract revenues. The sale of NRG Energys investment in MESI in 2002 also resulted in a favorable impact in 2003, as MESI generated substantial losses.
Cost of Majority-Owned Operations
Cost of majority-owned operations was $401.3 million for the three months ended September 30, 2003, compared to $424.3 for the same period in 2002. Costs of majority-owned operations include fuel and related costs, operation and maintenance costs (O&M), property taxes and the mark-to-market of fuel and emission credits.
Cost of majority-owned operations for the three months ended September 30, 2003 decreased $23.0 million, or approximately 5.4%, over the same period in 2002. Cost of majority-owned operations, as a percentage of revenue from majority owned operations for the three months ended September 30, 2002, was 66.0% compared to 67.6% for the same period in 2002. This decrease in expense is primarily due to decreased costs of fuel and transmission and represents a reduction in generation levels for the three months ended September 30, 2003 as compared to the same period in 2002. The decrease in fuel and transmission expense was offset by expense related to contract terminations and liquidated damages of approximately $14.5 million triggered by NRG Energys financial
64
condition. The contract terminations and liquidated damages are related to electricity and fuel transactions. Offsetting this expense was a favorable change in the fair value of NRG Energys energy related derivatives directly resulting from the termination of contracts. O&M expenses also increased due to increased maintenance to improve plant availability and to ensure emission compliance.
Depreciation
Depreciation and amortization costs were $64.5 million for the three months ended September 30, 2003, compared to $64.1 million for the same period in 2002. Depreciation and amortization costs for the three months ended September 30, 2003 increased $0.4 million or 0.6%. Depreciation expense increased during 2003 primarily due to a reduction in the depreciable lives for certain Connecticut assets. The increase was offset by reduced depreciable asset values based on NRG Energys impairment analysis.
General, Administrative and Development
General, administrative and development costs were $36.6 million for the three months ended September 30, 2003, compared to $65.5 million for the same period in 2002. General, administrative and development costs include non-operational labor and other employee related costs, as well as outside services, insurance, office expenses, bad debt expense and administrative support.
General, administrative and development costs for the three months ended September 30, 2003 decreased $28.9 million or 44.1% over the same period in 2002. General, administrative and development costs, as a percentage of revenue from majority owned operations for the three months ended September 30, 2003, was 6.0% compared to 10.4% for the same period in 2002. This decrease is due to reduced employee and office expenses related to work force reduction efforts, both domestically and internationally and the closure of certain offices. In addition, outside support was lower for the three months ended September 30, 2003 as compared to the same period in 2002 due to reduced non-restructuring legal activities and lower bad debt expense. This decrease is offset by an increased property and casualty insurance costs due to increased rates.
Write Downs and (Gains)/Losses on Equity Method Investments
Write downs and (gains)/losses on equity method investments was a gain of $12.3 million for the three months ended September 30, 2003 compared to a loss of $117.9 million for the same period in 2002.
Write downs and (gains)/losses on equity method investments for the three month periods ended September 30, 2003 consisted primarily of the sale of Mustang Station. On July 7, 2003 NRG Energy completed the sale of its 50% interest in Mustang Station. The sale resulted in net cash proceeds of approximately $13.3 million and a net gain of approximately $12.3 million.
Write-downs and (gains)/losses on equity method investments for the three month periods ended September 30, 2002 consisted primarily of NRG Energys Loy Yang project and SRW Cogeneration LP project.
Based on a third party market valuation and bids received in response to marketing Loy Yang for possible sale, NRG Energy recorded a write down of its investment of approximately $53.6 during the third quarter of 2002. This write-down reflected managements belief that the decline in fair value of the investment was other than temporary.
In September 2002, NRG Energy agreed to transfer its indirect 50% interest in SRW Cogeneration LP (SRW) to its partner in SRW, Conoco, Inc. in consideration for Conocos agreement to terminate or assume all of the obligations of NRG Energy in relation to SRW. NRG Energy recorded a charge of approximately $49.4 million during the quarter ended September 30, 2002 to write down the carrying value of its investment due to the pending sale. The transaction closed on November 5, 2002.
Restructuring and Impairment Charges and Legal Settlement Costs
Restructuring and impairment charges and legal settlement costs were $423.0 million for the three months ended September 30, 2003 compared to $2.5 billion for the same period in 2002. Asset impairment charges were $6.0 million for the three months ended September 30, 2003 compared to $2.5 billion for the three months ended September 30, 2002. Reorganizational and restructuring costs were $21.0 million for the three months ended September 30, 2003 compared to $17.1 million for the three months ended September 30, 2002. NRG Energy recorded a charge of $396 million in the third quarter ended September 30, 2003 in connection with the resolution of the First Energy Arbitration Claims.
Impairment charges for the three month period ended September 30, 2003 consisted of terminated construction projects and the Langage project. During the third quarter of 2003, NRG Energy cancelled its plans to re-establish fuel oil capacity at its Arthur Kill
65
plant. This resulted in a charge of approximately $9.0 million to write-off assets under development. Offsetting this charge was the final results relating to the sale of Langage. In August 2003, NRG Energy closed on the sale of Langage to Carlton Power Limited resulting in cash proceeds of approximately $1.0 million and a net gain of approximately $3.1 million.
Credit rating downgrades, defaults under certain credit agreements, increased collateral requirements and reduced liquidity experienced by NRG Energy during the third quarter of 2002 were triggering events which required NRG Energy to review the recoverability of its long-lived assets. Adverse economic conditions resulted in declining energy prices. Consequently, NRG Energy determined that many of its construction projects and its operational projects were impaired during the third quarter of 2002 and should be written down to fair market value. NRG Energy management considered cash flow analyses, bids and offers related to those projects. These impairments of several of NRG Energy assets were recognized as impairment charges in the third quarter of 2002 Statements of Operations. See Item 1 Note 4 to the consolidated financial statements and notes of this Form 10-Q for additional information.
During the third quarter of 2003, NRG Energy recorded $396.0 million in connection with the resolution of the FirstEnergy Arbitration Claim. As a result of this resolution, FirstEnergy will retain ownership of the Lake Plant Assets and will receive an allowed general unsecured claim of $396.0 million under NRG Energys Plan of Reorganization submitted to the Bankruptcy Court. In accordance with SOP 90-7, this amount is recorded on the balance sheet as a prepetition liability. The remaining $21.0 million of charges incurred during the three months ended September 30, 2003 and the $17.1 million incurred during the same period in 2002 consisted primarily of employee separation costs, advisor fees and other professional fees.
Other (Expense) Income
Other expense for the three months ended September 30, 2003 was $37.0 million compared to $59.6 million for the same period in 2002. Other expense for the three months ended September 30, 2003 decreased $22.6 million or 37.9% over the same period in 2002. The primary reason for the decrease in other expense is due to reduced interest expense. As a result of NRG Energys bankruptcy filing, NRG Energy has ceased recording interest expense on debt where it is probable that such interest would not be paid, such as the NRG Corporate level debt (primarily bonds) and NRG Finance Company debt (construction revolver).
Income Tax
Income tax benefit/expense for the three months ended September 30, 2003 was a tax expense of $5.0 million compared to tax benefit of $96.9 million for the same period in 2002. The income tax expense for 2003 was primarily due to separate company tax liabilities. The income tax benefit for 2002 was primarily due to the increase in deferred tax assets relating to impairments recognized for financial reporting purposes. A valuation allowance was established limiting the recognition of deferred tax assets to the extent of previously-recorded deferred tax liabilities.
Income taxes have been recorded on the basis that Xcel Energy will not be including NRG Energy in its consolidated federal income tax return following Xcel Energys acquisition of NRG Energys public shares on June 3, 2002. Since Xcel Energy has decided not to include NRG Energy in its consolidated federal income tax return, NRG Energy and each of its subsidiaries must file a separate federal income tax return. It is uncertain if NRG Energy will be able to fully realize tax benefits on net operating losses and deferred tax assets on a stand-alone basis. Consequently, a total valuation allowance of $1,384.5 million has been recorded as of September 30, 2003.
For the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002
Net (Loss)/ Income
For the nine months ended September 30, 2003, NRG Energy recognized a net loss after discontinued operations of $905.8 million compared to a net loss after discontinued operations of $3.1 billion for the same period in 2002.
NRG Energy incurred impairment charges of $229.6 million for the nine months ended September 30, 2003 and $2.5 billion for the same period in 2002. During second quarter of 2003, NRG Energy received unfavorable FERC orders related to its Connecticut facilities, which resulted in an impairment charge of $221.5 million. Credit rating downgrades, defaults under certain credit agreements, increased collateral requirements and reduced liquidity experienced by NRG Energy during the third quarter of 2002 were triggering events which required NRG Energy to review the recoverability of NRG Energys long-lived assets. Adverse economic conditions resulted in declining energy prices. Consequently, NRG Energy determined that many of its construction projects and certain of its operational projects were impaired during the third quarter of 2002 and were written down to fair market value. NRG Energy incurred write downs of equity method investments of $136.7 million for the nine months ended September 30, 2003 and $127.7 million for the same period in 2002. The write downs for the nine months ended September 30, 2003 and 2002 consisted primarily of permanent reductions in the value of NRG Energys Loy Yang project and SRW Cogeneration LP project and were based on a third party market valuation and updated market values received in response to marketing Loy Yang for possible sale. During the nine months ended September 30, 2003, NRG Energy incurred reorganizational and restructuring charges of $95.5 million, which primarily consisted of employee separation costs, advisor and other professional fees. For the same period ended September 30, 2002, NRG Energy incurred restructuring charges of $37.7 million, which consisted of employee separation costs and advisor fees. During the third quarter of 2003, NRG Energy recorded a $396.0 million charge in connection with the resolution of the FirstEnergy Arbitration Claim. This amount is recorded on the balance sheet as a prepetition liability.
NRG Energy incurred a net loss before impairment and restructuring charges, write downs of equity method investments of equity method investments and a loss on legal settlement of $48.0 million for the nine months ended September 30, 2003 compared to $461.8 million for the same period in 2002, representing a decreased loss of $413.7 million. The lower net loss for 2003 is attributed to increased revenues from majority-owned operations for the nine months ended September 30, 2003 compared to the same period in 2002 due to higher market prices driven by higher natural gas prices and due to an increase in capacity revenues due to additional projects becoming operational in the middle of 2002 and higher sales in New York. In addition, equity in operating earnings of unconsolidated affiliates increased for the nine months ended September 30, 2003 compared to the same period in 2002 due to favorable results at West Coast Power project resulting from increased ancillary and RMR contract revenues. The sale of NRG Energy investment in MESI in 2002 also resulted in a favorable impact in 2003, as MESI generated substantial equity losses in the prior year. These favorable items were offset by losses incurred on the Connecticut Standard Offer contracts due to increased market prices, increased operating expenses, contract terminations and liquidated damages triggered by our financial condition and additional restructuring charges.
Operating Revenues and Equity Earnings
For the nine months ended September 30, 2003, NRG Energy had total operating revenues and equity earnings from continuing operations of $1.8 billion, compared to $1.7 billion for the same period in 2002.
Revenues from Majority-Owned Operations
During the nine months ended September 30, 2003, NRG Energy recorded revenues from majority-owned operations of $1.6 billion, compared to $1.6 billion for the same period in 2002. Revenues from majority-owned operations for the nine months ended September 30, 2003, consisted primarily of power generating revenues from domestic operations of approximately $1.2 billion, European operations of $96.3 million, Asia-
66
Pacific operations of $131.2 million and Latin American operations of $57.0 million. In addition, NRG Energy recognized revenues from majority-owned operations from Alternative Energy, Thermal and Other Operations of $68.4 million, $87.7 million and $4.6 million, respectively.
Revenues from majority-owned operations of $1.6 billion for the nine months ended September 30, 2003 includes $788.5 million of energy revenues, $504.7 million of capacity revenues, $143.6 million of alternative and thermal revenues, $29.8 million of changes in the fair market value of derivatives calculated in accordance with FAS No. 133, $10.9 million of operating and maintenance fees and $139.3 million of other revenues, which include financial and physical gas sales, sales from NRG Energys Schkopau facility and New England Power Pool (NEPOOL) expense reimbursements. Revenues from majority-owned operations increased $14.0 million, or 1% from the prior period. This increase is due to energy revenues, capacity revenues and changes in the fair market value of derivatives calculated in accordance with FAS No. 133. Energy revenues increased due to higher market prices driven by higher natural gas prices during the first quarter of 2003, as compared to the same period in 2002, attributable to NRG Energys North America operations. Capacity revenues increased due to additional projects becoming operational in the later part of 2002 and higher sales in New York. FAS No. 133 revenue was favorable due to termination of unfavorable financial transactions in 2003. These increases were offset by losses incurred on the Connecticut Standard Offer contracts due to increased market prices and a reduction in other revenues due to lower sales of natural gas.
Equity in Operating Earnings of Unconsolidated Affiliates
Equity in operating earnings of unconsolidated affiliates for the nine months ended September 30, 2003 was $155.8 million compared to $68.9 million for the same period in 2002.
Equity in operating earnings of unconsolidated affiliates of $155.8 million for the nine months ended September 30, 2003 includes $114.8 million from the domestic portfolio and $43.0 million from the international portfolio, offset by 2.0 million of equity losses in the Alternative Energy portfolio. Equity in operating earnings of unconsolidated affiliates for the nine months ended September 30, 2003 increased $86.8 million, or 126%, compared to the same period in 2002. This increase is due to favorable results at West Coast Power as compared to the same period in 2002, resulting from increased ancillary and RMR contract revenues and other revenues. The sale of NRG Energys investment in MESI in 2002 also resulted in a favorable impact in 2003, as MESI generated substantial losses in the prior years.
Cost of Majority-Owned Operations
Cost of majority-owned operations was $1.2 billion for the nine months ended September 30, 2003, compared to $1.1 billion for the same period in 2002. Costs of majority-owned operations include fuel and related costs, operation and maintenance costs, or O&M, property taxes and the mark-to-market of certain fuel contracts and emission credits.
Cost of majority-owned operations for the nine months ended September 30, 2003 increased $122.2 million, or approximately 11.5%, over the same period in 2002. Cost of majority-owned operations, as a percentage of revenue from majority-owned operations for the nine months ended September 30, 2003, was 73.4% compared to 66.4% for the same period in 2002. This increase in expense is primarily due to contract terminations and liquidated damages of approximately $72.0 million triggered by NRG Energys financial condition. The contract terminations and liquidated damages are related to long-term electricity and fuel transactions. Offsetting this expense was a favorable change in the fair value of NRG Energys energy related derivatives directly resulting from the termination of these contracts. In addition, the overall cost of fuel and transmission increased as compared to the same period in 2002 due to increased fuel prices. The increase in fuel and transmission expense was offset by a decrease in generation levels. O&M expenses also increased due to increased maintenance to improve plant availability and to ensure emission compliance. Property tax expense increased due to assessments related to assets placed in service during mid-2002 and higher assessments by taxing authorities.
67
Depreciation and Amortization
Depreciation and amortization costs were $203.1 million for the nine months ended September 30, 2003, compared to $176.7 million for the same period in 2002, an increase of $26.4 million, or 14.9%. This increase was primarily due to reducing the depreciable lives for certain Connecticut assets, which increased the depreciation expense by $13.9 million over the same period in 2002. In addition, depreciation expense increased due to completed construction projects being placed in service. Certain capitalized development costs were written-off in connection with the Loy Yang project resulting in increased expense. Amortization expense increased due to reducing the life of certain software costs. The increase in depreciation expense was partially offset due to reduced asset values based on NRG Energys impairment analysis.
General, Administrative and Development Expense
General, administrative and development costs were $128.0 million for the nine months ended September 30, 2003, compared to $171.9 million for the same period in 2002. General, administrative and development costs include non-operational labor and other employee related costs, as well as outside services, insurance, office expenses and administrative support.
General, administrative and development costs for the nine months ended September 30, 2003 decreased $43.9 million, or 25.5%, over the same period in 2002. General, administrative and development costs, as a percentage of revenue from majority-owned operations for the nine months ended September 30, 2003, was 7.9% compared to 10.7% for the same period in 2002. This decrease is due to decreased costs related to work force reduction efforts, cost reductions due to the closure of certain international offices and reduced legal costs. Outside services also decreased due to less non-restructuring related legal activities. Partially offsetting these favorable variances was an increase in bad debt expense at both our domestic and international operations.
Write Downs and (Gains)/ Losses on Equity Method Investments
Write downs and (gains)/losses on equity method investments was $136.7 million for the nine months ended September 30, 2003 compared to $127.7 million for the same period in 2002.
Write downs and (gains)/losses on equity method investments for the nine month period ended September 30, 2003 consisted primarily of permanent reductions in the value of NRG Energys Loy Yang project. In May 2003, NRG Energy and its partners completed negotiations, which culminated into the completion of a share purchase agreement to sell 100% of the project. Completion of the sale is subject to various conditions. Upon completion, the sale will result in proceeds of approximately $25.0 million to $31.0 million to NRG Energy. Consequently, NRG Energy recorded an impairment charge of approximately $140.0 million during the quarter ended June 30, 2003. This charge included approximately $61.0 million of foreign currency translation losses related to the investment in Loy Yang, in accordance with EITF Issue No. 01-05 Application of FASB Statement No. 52 to an Investment Being Evaluated for Impairment that will be Disposed of. Offsetting this charge is a net gain of approximately $12.1 million relating to the sale of NRG Energys interest in Mustang Station.
Write-downs and (gains)/losses on equity method investments for the nine month period ended September 30, 2002 consisted primarily of NRG Energys Loy Yang project and SRW Cogeneration LP project.
Based on a third party market valuation and bids received in response to marketing Loy Yang for possible sale, NRG Energy recorded a write down of its investment of approximately $53.6 million during the third quarter of 2002 and an additional $57.8 million during the fourth quarter of 2002. This write-down reflected managements belief that the decline in fair value of the investment was other than temporary.
In September 2002, NRG Energy agreed to transfer its indirect 50% interest in SRW Cogeneration LP, or SRW, to NRG Energys partner in SRW, Conoco, Inc. in consideration for Conocos agreement to terminate or assume all of NRG Energys obligations in relation to SRW. NRG Energy recorded a charge of approximately $49.4 million during the quarter ended September 30, 2002 to write down the carrying value of its investment due to the pending sale. The transaction closed on November 5, 2002.
68
Restructuring and impairment charges and legal settlement costs were $721.1 million for the nine months ended September 30, 2003 compared to $2.5 billion for the same period in 2002. Asset impairment charges were $229.6 million for the nine months ended September 30, 2003 compared to $2.5 billion for the nine months ended September 30, 2002. Reorganizational and restructuring costs were $95.5 million for the nine months ended September 30, 2003 compared to $37.7 million for the nine months ended September 30, 2002. NRG Energy recorded a charge of $396.0 million in the third quarter ended September 30, 2003 in connection with resolution of FirstEnergy Arbitration Claim.
Impairment charges for the nine month period ended September 30, 2003 consisted of charges taken primarily at Devon Power LLC and Middletown Power LLC. As a result of the implementation of PUSH bidding at NRG Energys Connecticut facilities and other regulatory developments and changing circumstances in the second quarter, as discussed further in Item 1 Note 4 to the consolidated financial statements NRG Energy deemed it necessary to review the Connecticut facilities cash flow models to incorporate changes to reflect the impact of FERCs April 25, 2003 orders on PUSH pricing and update the estimated impact of future locational pricing. These revised cash flow models determined that the new estimates of pricing and cost recovery levels were not projected to provide sufficient revenue to cover the fixed costs at Devon Power LLC and Middletown Power LLC. As a consequence, at June 30, 2003, NRG Energy recorded a $221.5 million impairment charge at Devon and Middletown Power LLC.
Credit rating downgrades, defaults under certain credit agreements, increased collateral requirements and reduced liquidity experienced by NRG Energys during the third quarter of 2002 were triggering events which required NRG Energy to review the recoverability of its long-lived assets. Adverse economic conditions resulted in declining energy prices. Consequently, NRG Energy determined that many of its construction projects and its operational projects were impaired during the third quarter of 2002 and should be written down to fair market value. NRG Energys management considered cash flow analyses, bids and offers related to those projects. These impairments of several of NRG Energys assets were recognized as impairment charges in the third quarter of 2002. See Item 1 Note 4 to the consolidated financial statements of the Form 10-Q for additional information.
During the third quarter of 2003, NRG Energy recorded $396.0 million in connection with the resolution of the FirstEnergy Arbitration Claim. As a result of this resolution, FirstEnergy will retain ownership of the Lake Plant Assets and will receive an allowed general unsecured claim of $396.0 million under its plan of reorganization submitted to the bankruptcy court. In accordance with SOP 90-7, this amount is recorded on the balance sheet as a pre-petition liability. NRG Energy also recorded approximately $42.0 million of a contingent equity obligation in connection with its Brazos Valley Project as a result of the project lenders entering into a sales agreement whereby they agreed to sell the Brazos Valley project for a lower sale price than originally estimated. This contingent equity obligation is recorded as a restructuring charge. The remaining charges consisted primarily of employee separation costs, advisor fees and other Professional fees. During the second quarter of 2003, a settlement agreement with former NRG executives was accepted that resulted in a lower severance cost relating to the executives. As a result, approximately $8.4 million was reversed out of the severance accrual during second quarter 2003.
NRG Energy incurred $37.7 million of restructuring costs for the nine months ended September 30, 2002. These costs consist primarily of employee separation costs and advisor fees. During second and third quarter of 2002, NRG Energy expensed a pre-tax charge of $20.5 million and $5.7 million for expected severance costs associated with its combining of various functions.
69
Other (Expense) Income
Other expense for the nine months ended September 30, 2003 was $312.5 million compared to $276.2 million, for the same period in 2002. Other expense for the nine months ended September 30, 2003 increased $36.3 million or 13.1% over the same period in 2002. This increase was primarily due to an increase in interest expense, including both corporate and project level interest expense. The increase in interest expense is due to increased debt balances and the completion of certain construction projects, which resulted in a reduction in the amount of capitalized interest in 2003 compared to 2002. This increase was partially offset by ceasing to record interest expense on debt, such as certain NRG Energy corporate level debt and NRG FinCo debt, where it was determined that such interest would not be paid due to NRG Energys bankruptcy filing. Other expense was also adversely affected due to an unfavorable mark-to-market on certain interest rate swaps not accounted for as cash flow hedges and an unfavorable mark-to-market of the British pound sterling 160 million corporate level debt.
Income Tax
Income tax benefit/expense for the nine months ended September 30, 2003 was a tax expense of $44.9 million compared to a tax benefit of $150.8 million for the same period in 2002. The income tax expense for 2003 was primarily due to separate company tax liabilities and an increase in the valuation allowance against the deferred tax assets. An additional valuation allowance of $33.0 million was recorded against the deferred tax assets of NRG West Coast as a result of its conversion from a corporation to a disregarded entity for federal income tax purposes. The income tax benefit for 2002 was primarily due to the increase in deferred tax assets relating to impairments recognized for financial reporting purposes. A valuation allowance was established limiting the recognition of deferred tax assets to the extent of previously-recorded deferred tax liabilities.
Income taxes have been recorded on the basis that Xcel Energy will not be including NRG Energy in its consolidated federal income tax return following Xcel Energys acquisition of NRG Energys public shares on June 3, 2002. Since Xcel Energy has decided not to include NRG Energy in its consolidated federal income tax return, NRG Energy and each of its subsidiaries must file separate federal income tax returns. A tax saving strategy has been implemented to reduce the current taxes due for those subsidiaries with taxable income for 2003. As part of this strategy, NRG West Coast was converted to a disregarded entity so its taxable income will flow up and be offset by NRG Energys tax losses. This conversion was completed to reduce current tax payments for 2003. It is uncertain if NRG Energy will be able to fully realize tax benefits on net operating losses and deferred tax assets. Consequently, a valuation allowance of approximately $1.4 billion has been recorded as of September 30, 2003.
Discontinued Operations
As of September 30, 2003, NRG Energy classified as discontinued operations the operations and gains/losses recognized on the sales of projects that were sold or were deemed to have met the required criteria for such classification pending final disposition. For the nine months ended September 30, 2003, discontinued operations consist of the historical operations and net gains/losses related to NRG Energys Killingholme, Hsin Yu, McClain, NLGI, and TERI projects. Discontinued operations for the same period in 2002 consist of NRG Energys Crockett Cogeneration, Entrade, Killingholme, Csepel, Hsin Yu, Bulo Bulo, McClain, NLGI and TERI projects.
For the nine months ended September 30, 2003, the results of operations related to such discontinued operations was a net gain of $54.0 million compared to a net loss of $595.6 million for the same period in 2002. The primary reason for the gain recognized during 2003 was the completion of the sale of NRG Energys interest in Killingholme resulting in a net gain of $191.2 million, offset by impairment charges recorded at McClain and NLGI. The primary reason for the loss recognized during 2002 was due to asset impairments recorded at Killingholme, Hsin Yu, NLGI and TERI projects.
70
Critical Accounting Policies and Estimates
NRG Energys discussion and analysis of its financial condition and results of operations are based upon NRG Energys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements and related disclosures in compliance with generally accepted accounting principles requires the application of appropriate technical accounting rules and guidance as well as the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. The application of these policies necessarily involves judgments regarding future events, including the likelihood of success of particular projects, legal and regulatory challenges. These judgments in and of themselves, could materially impact the financial statements and disclosures based on varying assumptions, which may be appropriate to use. In addition, the financial and operating environment also may have a significant effect, not only on the operation of the business, but on the results reported thought the application of accounting measures used in preparing the financial statements and related disclosures, even if the nature of the accounting policies have not changed.
On an ongoing basis, NRG Energy evaluates its estimates, utilizing historic experience, consultation with experts and other methods NRG Energy considers reasonable in particular circumstances. In any case, actual results may differ significantly from NRG Energys estimates. Any effects on NRG Energys business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
NRG Energy classifies its long-lived assets (disposal group) to be sold as held for sale in the period in which the following criteria are met: 1) Management approves the action and commits to a plan to sell the asset. This is generally evidenced by the signing of an asset sales agreement, Board of Directors approval, creditor committee approval and Bankruptcy court approval. 2) The long-lived asset (disposal group) is generally deemed to be available for immediate sale and NRG Energys condition is subject only to the terms and conditions customary for the sale of such assets. 3) Management has actively engaged in a program to locate a buyer and has initiated other such actions required to complete the plan to sell the asset. 4) The sale is probable and transfer of the asset is expected to be completed with one year. 5) The asset is being marketed at a price that is believed to be reasonable in relation to its current fair value. 6) Management believes that it is unlikely, that significant changes to the plan to sell that asset will be made or that the plan will be withdrawn
Refer to Item 15 Note 2 of the Consolidated financial statements of NRG Energys Form 10-K for the year ended December 31, 2002 for additional discussion regarding all of NRG Energys accounting policies and estimates.
Liquidity and Capital Resources
During 2002, Xcel Energy contributed $500 million to NRG Energy, and NRG Energy and its subsidiaries sold assets and businesses that provided NRG Energy in excess of $286 million in cash and eliminated approximately $432 million in debt. NRG Energy also cancelled or deferred construction of approximately 3,900 MW of new generation projects. On July 26, 2002, Standard & Poors (S&P) downgraded NRG Energys senior unsecured bonds to below investment grade, and three days later Moodys also downgraded NRG Energys senior unsecured debt rating to below investment grade. Currently, NRG Energys unsecured bonds carry a rating of D at S&P and Ca at Moodys.
In August 2002, NRG Energy retained financial and legal restructuring advisors to assist its management in the preparation of a comprehensive financial and operational restructuring. In November 2002, NRG Energy and Xcel Energy presented a comprehensive plan of restructuring to an ad hoc committee of its bondholders and a steering committee of its bank lenders (the Ad Hoc Creditors Committees). The restructuring plan served as a basis for continuing negotiations between the Ad Hoc Creditors Committees, NRG Energy and Xcel Energy related to a consensual plan of reorganization for NRG Energy.
On March 26, 2003, Xcel Energy announced that its board of directors had approved a tentative settlement agreement with holders of most of NRG Energys long-term notes and the steering committee representing NRG Energys bank lenders. The terms of the settlement call for Xcel Energy to make payments to NRG Energy totaling up to $752 million for the benefit of NRG Energys creditors in consideration for their waiver of any existing and potential claims against Xcel Energy. Under the settlement, Xcel Energy would make the following payments: (i) $350 million, up to $150 million of which may be in Xcel Energy common stock if Xcel Energys public debt fails to maintain a certain rating, on the later of: (a) 90 days after NRG Energys plan of reorganization is confirmed by the Bankruptcy Court, and (b) one day after the effective date of NRG Energys plan of reorganization; (ii) $50 million in the first quarter of 2004. At Xcel Energys option, it may fill this requirement with either cash or Xcel Energy common stock or any combination thereof; and (iii) up to $352 million in April 2004. Since the announcement on March 26, 2003, representatives of NRG
71
Energy, Xcel Energy, the bank lenders and noteholders continued to meet to draft the definitive documentation necessary to fully implement the terms and conditions of the tentative settlement agreement. The final settlement agreement between Xcel Energy and NRG Energy is subject to the Bankruptcy Court approval including certain provisions and conditions in its order approving the confirmation of NRG Energys plan of reorganization and the satisfaction, or waiver by Xcel Energy, of certain other conditions (including obtaining requisite releases of Xcel Energy by NRG Energy creditors). There can be no assurance that such conditions will be met.
As noted above, on May 14, 2003, the Debtors filed the Chapter 11 Cases. NRG Energy expects operations to continue as normal during the restructuring process, while it operates its business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In connection with its Chapter 11 filing, NRG Energy also announced that it had secured a $250 million debtor-in-possession (DIP) financing facility from GE Capital Corporation, subject to Bankruptcy Court approval, to be utilized by its NRG Northeast Generating LLC subsidiary ( NRG Northeast) and some NRG Northeast subsidiaries. The Bankruptcy Court entered an order approving the DIP facility on July 24, 2003. NRG Energy anticipates that the DIP, together with its cash reserves and its ongoing revenue stream, will be sufficient to fund its operations, including payment of employee wages and benefits, during the negotiation process.
Subsequent to the Petition Date, additional NRG Energy subsidiaries filed petitions for reorganization with the Bankruptcy Court. On June 5, 2003 NRG Nelson Turbines LLC and LSP-Nelson Energy LLC (both wholly owned subsidiaries of NRG Energy) filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. On August 19, 2003, NRG McClain LLC (a wholly owned subsidiary of NRG Energy) filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
On May 15, 2003, NRG Energy announced that it had been notified that the New York Stock Exchange (NYSE) has suspended trading in NRG Energys corporate units that trade under the ticker symbol NRZ (Units) and that an application to the Securities and Exchange Commission to delist the Units is pending the completion of applicable procedures, including appeal by NRG Energy of the NYSE staffs decision. NRG Energy does not plan to make such an appeal. The NYSE took this action following NRG Energys announcement that it and certain of its affiliates had filed voluntary positions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
In addition, on May 15, 2003, NRG Energy, NRG Power Marketing, Inc. (NRG PMI), NRG Finance Company I LLC, NRGenerating Holdings (No. 23) B.V. and NRG Capital LLC (collectively, the Plan Debtors) filed their Disclosure Statement for Reorganizing Debtors Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (as subsequently amended, the Disclosure Statement). The Bankruptcy Court held a hearing on the Disclosure Statement on June 30, 2003, and instructed the Plan Debtors to include certain additional disclosure. The Plan Debtors amended the Disclosure Statement and obtained Bankruptcy Court approval for the Third Amended Disclosure Statement for Debtors Second Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (respectively, the Amended Disclosure Statement, the Plan) on October 14, 2003.
The Plan must be approved by the SEC prior to its becoming effective. As subsidiaries of a registered holding company (Xcel Energy) under the Public Utility Holding Company Act of 1935 (PUHCA), any reorganization plan for NRG Energy or NRG Energys subsidiaries must be approved by the SEC prior to such plan becoming effective. Furthermore, each solicitation of any consent in respect of any reorganization plan must be accompanied or preceded by a copy of a report on the plan made by the SEC, or an abstract thereof made or approved by the SEC. The Plan and Amended Disclosure Statement were submitted to the SEC for review on July 28, 2003. The SEC issued an order approving the Plan on October 10, 2003, permitting the Plan Debtors, subject to the approval of the Bankruptcy Court, to commence solicitation of votes on the Plan.
The Plan Debtors commenced solicitation of votes on the Plan on October 14, 2003. The voting deadline by which holders of claims and equity interests of the Plan Debtors must submit their ballots accepting or rejecting the Plan is November 12, 2003. Objections to confirmation of the Plan must be filed with Bankruptcy Court by November 12, 2003. The Bankruptcy Court has scheduled the confirmation hearing to determine whether the Plan should be confirmed on November 21, 2003.
If the Plan is confirmed, holders of NRG Energy unsecured claims (including bank and bond debt) will receive a combination of New NRG Energy common stock, New NRG Energy senior notes and cash for an estimated percentage recovery of 50.7%. Holders of NRG PMI unsecured claims will receive a combination of combination of New NRG Energy common stock and New NRG Energy senior notes for an estimated percentage recovery of 44.6%. If the Plan is confirmed, certain other holders of claims or equity interests in the Plan Debtors will (i) have their claims paid in full in accordance with the Bankruptcy Code, (ii) have their claims or equity interests reinstated, or (iii) have their claims or equity interests cancelled, and receive no distribution on account of such claims
72
or equity interests. Upon emergence from bankruptcy, Xcel Energys ownership interest in NRG Energy will be cancelled and ownership in NRG Energy will vest in the unsecured creditors of NRG Energy and NRG PMI.
On September 17, 2003, NRG Northeast Generating LLC (NRG Northeast) and NRG South Central Generating LLC (NRG South Central) and certain of their subsidiaries and affiliates filed a plan of reorganization with the Bankruptcy Court (the NRG Northeast and NRG South Central Plan). The debtors under the NRG Northeast and NRG South Central Plan are not soliciting votes for approval of the NRG Northeast and NRG South Central Plan because none of the holders of claims or equity interests are impaired under the NRG Northeast and NRG South Central Plan. The Bankruptcy Court has scheduled a hearing on the confirmation of the NRG Northeast and NRG South Central Plan on November 21, 24 and 25, 2003.
During the Chapter 11 Cases, the Debtors may, subject to any necessary Bankruptcy Court and lender approvals, sell assets and settle liabilities for amounts other than those reflected in the financial statements. The administrative and reorganization expenses resulting from Chapter 11 Cases will unfavorably affect the Debtors results of operations. Future results of operations may also be adversely affected by other factors related to Chapter 11 Cases.
The Company is in the process of reconciling recorded pre-petition liabilities with claims filed by creditors with the Bankruptcy Court. Differences resulting from that reconciliation process will be recorded as adjustments to pre-petition liabilities. The Company recently began this process and has not yet determined the reorganization adjustments.
Cash Flows
For the Nine Months Ended | ||||||||
September 30, | June 30, | |||||||
(In thousands) | 2003 | 2002 | ||||||
Net cash provided by operating activities |
$ | 121,315 | $ | 388,507 |
Net cash provided by operating activities for the nine months ended September 30, 2003 resulted from unfavorable operating results offset by favorable changes in working capital items, as compared to the same period in 2002. The favorable changes in working capital was due to increased accounts payable.
Net cash used by investing activities |
$ | (160,124 | ) | $ | (1,652,122 | ) |
Net cash used by investing activities for the nine months ended September 30, 2003 was positively affected by cash proceeds received upon the sale of equity method investments and reduced capital expenditures as compared to the same period in 2002.
Net cash (used) provided by financing activities |
$ | (24,119 | ) | $ | 1,433,974 |
Net cash used by financing activities increased for the nine months ended September 30, 2003 compared to the same period in 2002. During the nine months ended September 30, 2003, NRG Energy borrowed less money than it did in the same period in 2002. Offsetting, NRG Energy made less principal payments in 2003 as compared to the same period in 2002 due to its deteriorating financial condition.
Off Balance-Sheet Arrangements
As of September 30, 2003, NRG Energy does not have any significant relationships with structured finance or special purpose entities that provide liquidity, financing or incremental market risk or credit risk.
In March 2000, a NRG Energy sponsored non-consolidated pass through trust issued $250 million of 8.70% certificates due March 15, 2005. Each certificate represents a fractional undivided beneficial interest in the assets of the trust. Interest is payable on the certificates semi-annually on March 15 and September 15 of each year through 2005. The sole assets of the trust consist of £160 million principal amount 7.97% Reset Senior Notes due March 15, 2020 issued by NRG Energy. Interest is payable semi-annually on the Reset Senior Notes on March 15 and September 15 through March 15, 2005, and then at intervals and interest rates established in a
73
remarketing process. If the Reset Senior Notes are not remarketed on March 15, 2005, they must be mandatorily redeemed by NRG Energy on such date.
NRG Energy has numerous investments of generally less then 50% interests in energy and energy related entities that are accounted for under the equity method of accounting as disclosed in Item 15 Note 10 to the Consolidated Financial Statements of NRG Energys Form 10-K for the year ended December 31, 2002. In the normal course of business NRG Energy may be asked to loan funds to these entities on both a long and short-term basis. Such transactions are generally accounted for as accounts payables and receivables to/from affiliates and notes receivables from affiliates and if appropriate, bear market-based interest rates. For additional information regarding amounts accounted for as notes receivables to affiliates see Item 15 Note 12 to the Consolidated Financial Statements of NRG Energys Form 10-K for the year ended December 31, 2002.
Contractual Obligations and Commercial Commitments
NRG Energy has a variety of contractual obligations and other commercial commitments that represent prospective cash requirements in addition to its capital expenditure programs. The following is a summarized table of contractual obligations. See additional discussion in Item 15 Notes 13, 14 and 22 to the Consolidated Financial Statements of NRG Energys Form 10-K for the year ended December 31, 2002.
Payments Due by Period as of September 30, 2003 | ||||||||||||||||||||
After | ||||||||||||||||||||
Contractual Cash Obligations | Total | Short Term | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Long-term debt |
$ | 8,506,395 | $ | 7,843,609 | $ | 103,821 | $ | 91,873 | $ | 467,092 | ||||||||||
Capital lease obligations |
555,609 | 29,796 | 50,061 | 50,000 | 425,752 | |||||||||||||||
Operating leases |
80,556 | 11,514 | 21,067 | 18,030 | 29,945 | |||||||||||||||
Total contractual cash obligations |
$ | 9,142,560 | $ | 7,884,919 | $ | 174,949 | $ | 159,903 | $ | 922,789 | ||||||||||
Amount of Commitment Expiration per Period as of September 30, 2003 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Other Commercial | Amounts | After | ||||||||||||||||||
Commitments | Committed | Short Term | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Lines of credit |
$ | 1,000,000 | $ | 1,000,000 | | | | |||||||||||||
Stand by letters of credit |
88,773 | 88,773 | | | | |||||||||||||||
Cash collateral calls |
1,177,545 | 1,177,545 | | | | |||||||||||||||
Guarantees of subsidiaries |
799,636 | 37,000 | 173,557 | 136,126 | 452,953 | |||||||||||||||
Guarantees
of NRG PMI |
154,295 | 63,963 | 5,000 | | 85,332 | |||||||||||||||
Total commercial
commitments |
$ | 3,220,249 | $ | 2,367,281 | $ | 178,557 | $ | 136,126 | $ | 538,285 | ||||||||||
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, that supersedes previous guidance for the reporting of gains and losses from extinguishment of debt and accounting for leases, among other things.
SFAS No. 145 requires that only gains and losses from the extinguishment of debt that meet the requirements for classification as Extraordinary Items, as prescribed in Accounting Practices Board Opinion No. 30, should be disclosed as such in the financial statements. Previous guidance required all gains and losses from the extinguishment of debt to be classified as Extraordinary Items. This portion of SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with restatement of prior periods required.
In addition, SFAS No. 145 amends SFAS No. 13, Accounting for Leases, as it relates to accounting by a lessee for certain lease modifications. Under SFAS No. 13, if a capital lease is modified in such a way that the change gives rise to a new agreement classified as an operating lease, the assets and obligation are removed, a gain or loss is recognized and the new lease is accounted for
74
as an operating lease. Under SFAS No. 145, capital leases that are modified so the resulting lease agreement is classified as an operating lease are to be accounted for under the sale-leaseback provisions of SFAS No. 98, Accounting for Leases. These provisions of SFAS No. 145 are effective for transactions occurring after May 15, 2002.
SFAS No. 145 will be applied as required. Adoption of SFAS No. 145 is not expected to have a material impact on NRG Energy.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (SFAS No. 146). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. SFAS No. 146 will be applied as required.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN No. 46). FIN No. 46 requires an enterprises consolidated financial statements to include subsidiaries in which the enterprise has a controlling interest. Historically, that requirement has been applied to subsidiaries in which an enterprise has a majority voting interest, but in many circumstances the enterprises consolidated financial statements do not include the consolidation of variable interest entities with which it has similar relationships, but no majority voting interest. Under FIN No. 46 the voting interest approach is not effective in identifying controlling financial interest. The new rule requires that for entities to be consolidated that those assets be initially recorded at their carrying amounts at the date the requirements of the new rule first apply. If determining carrying amounts as required is impractical, then the assets are to be measured at fair value as of the first date the new rule applies. Any difference between the net amounts of any previously recognized interest in the newly consolidated entity should be recognized as the cumulative effect of an accounting change. FIN No. 46 becomes effective in the first interim or annual period ending after December 15, 2003. FIN No. 46 will be applied as required and is not expected to have a material impact on NRG Energy.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, (SFAS No. 149). SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, provisions of SFAS 149 relating to SFAS Statement No. 133 Implementation Issues and effective for fiscal quarters beginning prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. SFAS No. 149 has not had an impact on NRG Energy.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 has not had an impact on NRG Energy.
Derivative Instruments
The tables below disclose the trading activities that include non-exchange traded contracts accounted for at fair value. Specifically, these tables disaggregate realized and unrealized changes in fair value; identify changes in fair value attributable to changes in valuation techniques; disaggregate estimated fair values at September 30, 2003 based on whether fair values are determined by quoted market prices or more subjective means; and indicate the maturities of contracts at September 30, 2003.
Trading Activity (Gains/(Losses), In thousands)
Fair value of contracts outstanding at December 31, 2002 |
$ | 30,640 | ||
Contracts realized or otherwise settled during the period |
(137,955 | ) | ||
Other changes in fair values |
12,862 | |||
Fair value of contracts outstanding at September 30, 2003 |
$ | (94,453 | ) | |
Fair value of contracts outstanding at June 30, 2003 |
$ | (100,637 | ) | |
Contracts realized or otherwise settled during the period |
(8,450 | ) | ||
Other changes in fair values |
14,634 | |||
Fair value of contracts outstanding at September 30, 2003 |
$ | (94,453 | ) | |
75
Sources of Fair Value (Gains/(Losses), In thousands)
Fair Value of Contracts at Period-End | ||||||||||||||||||||
Maturity | Maturity | Total | ||||||||||||||||||
Less than | Maturity | Maturity | in excess | Fair | ||||||||||||||||
1 Year | 1-3 Years | 4-5 Years | of 5 Years | Value | ||||||||||||||||
Prices actively quoted |
$ | (173 | ) | $ | 67 | $ | | $ | | $ | (106 | ) | ||||||||
Prices based on models & other valuation methods |
4,360 | (2,200 | ) | (7,115 | ) | (89,392 | ) | (94,347 | ) | |||||||||||
$ | 4,187 | $ | (2,133 | ) | $ | (7,115 | ) | $ | (89,392 | ) | $ | (94,453 | ) | |||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk
NRG Energy uses a variety of financial instruments to manage its exposure to fluctuations in foreign currency exchange rates on its international project cash flows, interest rates on its cost of borrowing and energy and energy related commodities prices.
Currency Exchange Risk
NRG Energy is also subject to currency risks associated with foreign denominated distributions from international investments. In the normal course of business, NRG Energy receives distributions denominated in Australian Dollar, British Pound, Euro and Brazilian Real. NRG Energy engages in a strategy of hedging foreign denominated cash flows through a program of matching currency inflows and outflows, and to the extent required, fixing the U.S. Dollar equivalent of net foreign denominated distributions with currency forward and swap agreements with highly credit worthy financial institutions.
NRG Energy has £160 million in long-term debt due 2020, which is subject to market fluctuations. If the value of the British Pound Sterling increases by 10% in relation to the U.S. dollar, NRG Energy would expect to record a loss of approximately $25.3 million. If the value of the British Pound Sterling decreases by 10% in relation to the U.S. dollar, NRG Energy would expect to record a gain of approximately $25.3 million.
As of September 30, 2003, NRG Energy had no foreign currency exchange contracts outstanding.
Interest Rate Risk
NRG Energy and its subsidiaries are exposed to fluctuations in interest rates when entering into variable rate debt obligations to fund certain power projects. Exposure to interest rate fluctuations may be mitigated by entering into derivative instruments known as interest rate swaps, caps, collars and put or call options. These contracts reduce exposure to interest rate volatility and result in primarily fixed rate debt obligations when taking into account the combination of the variable rate debt and the interest rate derivative instrument. NRG Energys risk management policy allows the company to reduce interest rate exposure from variable rate debt obligations.
During 2002, as a result of the various defaults under certain loan agreements, NRG Energys counter-parties have terminated interest rate swaps with NRG Energy, and NRG Finance Company I LLC. Until NRG Energy successfully restructures outstanding debt and returns to credit quality, NRG Energy will not seek to manage interest rate risk through the use of financial derivatives.
As of September 30, 2003, NRG Energy had no interest rate swaps outstanding.
NRG Energy and its subsidiaries have both long and short-term debt instruments that subject it to the risk of loss associated with movements in market interest rates. As of September 30, 2003, a 100 basis point change in the benchmark rate on NRG Energys variable rate debt would increase contractual interest expense by approximately $37.0 million.
76
Commodity Price Risk
NRG Energy is exposed to commodity price variability in electricity, emission allowances and natural gas, oil and coal used to meet fuel requirements. To manage earnings volatility associated with these commodity price risks, NRG Energy enters into financial instruments, which may take the form of fixed price, floating price or indexed sales or purchases, and options, such as puts, calls, basis transactions and swaps.
NRG Energy utilizes an undiversified Value-at-Risk (VAR) model to estimate a maximum potential loss in the fair value of its commodity portfolio including generation assets, load obligations and bilateral physical and financial transactions. The key assumptions for the NRG Energy VAR model include (1) a lognormal distribution of price returns (2) three day holding period and (3) a 95% confidence interval. The volatility estimate is based on the implied volatility for at the money call options. This model encompasses the following generating regions: Entergy, NEPOOL, NYPP, PJM, WSCC, SPP and Main.
The estimated maximum potential three-day loss in fair value of its commodity portfolio, calculated using the VAR model is as follows:
(In millions) | ||||
September 30, 2003 |
$ | 124.6 | ||
Average |
153.5 | |||
High |
181.5 | |||
Low |
124.6 | |||
September 30, 2002 |
93.3 | |||
Average |
78.1 | |||
High |
94.1 | |||
Low |
66.4 |
Credit Risk
NRG Energy is exposed to credit risk in its risk management activities. Credit risk relates to the risk of loss resulting from the nonperformance by a counter party of its contractual obligations. NRG Energy actively manages its counter-party credit 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 counter-parties, established credit limits, as well as monitoring, managing, and mitigating credit exposure.
Item 4. Controls and Procedures
The Chairman, Senior Vice President, General Counsel, Vice President and Treasurer and Vice President and Controller (the Certifying Officers) have evaluated NRG Energys disclosure controls and procedures as defined in the rules of the SEC as of the end of the period covered by this report and have determined that, except to the extent indicated otherwise in this paragraph, disclosure controls and procedures were effective in ensuring that material information required to be disclosed by NRG Energy in the reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. During the fourth quarter of 2002, the Certifying Officers determined that there were certain deficiencies in the internal controls relating to financial reporting at NRG Energy caused by NRG Energys pending financial restructuring and business realignment. During the second half of 2002, there were material changes and vacancies in senior NRG Energy management positions and a diversion of NRG Energy financial and management resources to restructuring efforts. These circumstances detracted from NRG Energys ability through its internal controls to timely monitor and accurately assess the impact of certain transactions, as would be expected in an effective financial reporting control environment. During 2003 NRG Energy has dedicated significant resources to make corrections to those control deficiencies, including hiring several key senior and middle management positions, hiring an outside consultant to review, document and suggest improvements to controls, and the implementation of new controls and procedures. NRG Energy will continue to dedicate resources to this effort over the next few months. In addition, on October 21, 2003, NRG Energy announced the appointment of David W. Crane as its new President and Chief Executive Officer, effective December 1, 2003. NRG Energy is currently conducting a search for a new Chief Financial Officer and anticipates the position will be filled in the months following its emergence from bankruptcy. Notwithstanding the foregoing and as indicated in the certification accompanying the signature page to this report, the Certifying Officers have certified that, to the best of their knowledge, the financial statements, and other financial information included in this report on Form 10-Q, fairly present in all material respects the financial conditions, results of operations and cash flows of NRG Energy as of, and for the periods presented in this report.
NRG Energys Certifying Officers are primarily responsible for the accuracy of the financial information that is represented in this report. To meet their responsibility for financial reporting, they have established internal controls and procedures, which, subject to the disclosure in the foregoing paragraph, they believe, are adequate to provide reasonable assurance that NRG Energy assets are protected from loss. There were no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of the Certifying Officers evaluation.
77
Part II OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of material legal proceedings in which NRG Energy was involved through September 30,2002, see Note 11 Commitments and Contingencies to NRG energys consolidated financial statements contained in part I, Item 1 of this Form 10-Q.
Item 3. Defaults Upon Senior Securities
The Company has identified the following material defaults with respect to the indebtedness of the Company and its significant subsidiaries:
$350 million 8.25% Senior Unsecured Notes due 2010 issued by NRG Energy
| Failure to make $14.4 million interest payment due on September 16, 2002 |
| Failure to make $14.4 million interest payment due on March 17, 2003 |
| Failure to make $14.4 million interest payment due on September 16, 2003 |
$250 million 8.70% Remarketable or Redeemable Securities due 2005 issued by NRG Energy Pass-Through Trust 2000-1
| Failure to make $10.9 million interest payment due on September 16, 2002 |
| Failure to make $10.9 million interest payment due on March 17, 2003 |
| Failure to make $10.9 million interest payment due on September 15, 2003 |
$240 million 8.0% Remarketable or Redeemable Securities due 2013 issued by NRG Energy
| Failure to make $9.6 million interest payment due on November 1, 2002 |
| Failure to make $9.6 million interest payment due on May 1, 2003 |
$350 million 7.75% Senior Unsecured Notes due 2011 issued by NRG Energy
| Failure to make $13.6 million interest payment due on October 1, 2002 |
| Failure to make $13.6 million interest payment due on April 1, 2003 |
$500 million of 8.625% Senior Unsecured Notes due 2031 issued by NRG Energy
| Failure to make $21.6 million interest payment due on October 1, 2002 |
| Failure to make $21.6 million interest payment due on April 1, 2003 |
78
$300 million of 7.50% Senior Unsecured Notes due 2009 issued by NRG Energy
| Failure to make $11.3 million interest payment due on December 1, 2002 |
Failure to make $11.3 million interest payment due on June 1, 2003 |
$250 million of 7.50% Senior Unsecured Notes due 2007 issued by NRG Energy
| Failure to make $9.4 million interest payment due on December 15, 2002 |
Failure to make $9.4 million interest payment due on June 15, 2003 |
$340 million of 6.75% Senior Unsecured Notes due 2006 issued by NRG Energy
| Failure to make $11.5 million interest payment due on January 15, 2003 |
| Failure to make $11.5 million interest payment due on July 15, 2003 |
$125 million of 7.625% Senior Unsecured Notes due 2006 issued by NRG Energy
| Failure to make $4.8 million interest payment due on February 1, 2003 |
| Failure to make $4.8 million interest payment due on August 1, 2003 |
NRG Equity Units (NRZ) and related 6.50% Senior Unsecured Debentures due 2006 issued by NRG Energy
| Failure to make $4.7 million interest payment due on November 16, 2002 |
| Failure to make $4.7 million interest payment due on February 17, 2003 |
| Failure to make $4.7 million interest payment due on May 16, 2003 |
| Failure to make $4.7 million interest payment due on August 16, 2003 |
$1.0 billion 364-Day Revolving Credit Agreement dated March 8, 2002, among NRG Energy ABN Amro Bank NV, as Administrative Agent and the other parties
| Failure to make $6.5 million interest payment due on September 30, 2002 |
| Failure to make $18.6 million interest payment due on December 31, 2002 |
| Failure to make $17.8 million interest payment due on March 31, 2003 |
| Failure to make $18.0 million interest payment due on June 30, 2003 |
| Failure to make $18.9 million interest payment due on September 30, 2003 |
| Missed minimum interest coverage ratio of 1.75x |
| Violated minimum net tangible worth of $1.5 billion |
| Notice of default issued on February 27, 2003, rendering the debt immediately due and payable |
$125 million Standby Letter of Credit Facility dated November 30, 1999, among NRG Energy, Australia and New Zealand Banking Group Limited, as Administrative Agent, and the other parties thereto
79
| Missed minimum interest coverage ratio of 1.75x |
| Violated minimum net tangible worth of $1.5 billion |
| Cross default to $1.0 billion revolving line of credit agreement |
| Availability reduced to the amount outstanding, which was $103 million as of June 30, 2003 |
| Failure to make $417,558 payment of LoC fees due July 31, 2003 |
| Failure to make $218,000 interest payment on drawn amount due July 1, 2003 |
$2.0 billion Credit Agreement, dated May 8, 2001 among NRG Finance Company I LLC, Credit Suisse First Boston as Administrative Agents, and the other parties thereto
| Failure to make $46.9 million in combined interest payments as of March 31, 2003 |
| Failure to fund equity obligations for construction |
| Failure to post collateral requirements due under equity support agreement |
| Acceleration of debt on November 6, 2002, rendering the debt immediately due and payable |
$325 million Series A floating rate Senior Secured Bonds due 2019 issued by NRG Peaker Finance Company LLC
| Failure to remove liens placed on one of the project company assets |
| A cross default resulting from failure by NRG Energy to make payments of principal, interest and other amounts due on NRG Energys debt for borrowed money in excess of $50 million in the aggregate |
| Notice of default issued on October 22, 2002 |
| Acceleration of debt on May 13, 2003, rendering the debt immediately due and payable |
$500 million of 8.962% Series A-1 Senior Secured Notes due 2016 issued by NRG South Central Generating LLC
| Failure to make $20.2 million interest and $12.8 million principal payment due on September 16, 2002 |
| Failure to make $12.8 million principal payment due on March 17, 2003 |
| Failure to fund debt service reserve account |
| Acceleration of debt on November 21, 2002, rendering the debt immediately due and payable |
$300 million 9.479% Series B-1 Senior Secured bonds due 2024 issued by NRG South Central Generating LLC
| Failure to make $14.2 million interest payment due on September 16, 2002 |
| Failure to fund debt service reserve account |
| Acceleration of debt on November 21, 2002, rendering the debt immediately due and payable |
$320 million of 8.065% Series A Senior Secured Bonds due 2004 issued by NRG Northeast Generating LLC
| Failure to make $53.5 million principal payment on December 15, 2002 |
80
| Failure to fund debt service reserve account |
| Failure to make $17.5 million principal payment due June 15, 2003 |
$130 million of 8.824% Series B Senior Secured Bonds due 2015 issued by NRG Northeast Generating LLC
| Failure to fund debt service reserve account |
$300 million of 9.29% Series C Senior Secured Bonds due 2024 issued by NRG Northeast Generating LLC
| Failure to fund debt service reserve account |
$580 million Loan Agreement dated June 25, 2001, as amended, among MidAtlantic Generating LLC, JP Morgan Chase Bank, as Administrative Agent, and the other parties thereto
| Failure to fund the debt service reserve account |
$554 million, Credit and Reimbursement Agreement dated November 12, 1999, as amended, between, LSP Kendall Energy LLC, Societe General, as Administrative Agent and the other parties thereto
| Liens placed against project assets |
$181 million Loan Agreement dated November 30, 2001, as amended, between McClain LLC and Westdeutsche Landesbank Girozentrale, as Administrative Agent
| Failure to fund the debt service reserve account |
| Failure to comply with revenue allocation procedures under Article 3 of the Energy Management Services Agreement |
In addition to the foregoing, there may be technical defaults with respect to these or other NRG Energy debt instruments. Further, defaults on or acceleration of the foregoing debt instruments may result in cross-defaults on or cross-acceleration of these or other NRG Energy debt instruments.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 | Amended and Restated Key Executive Retention, Restructuring Bonus and Severance Agreement between NRG Energy and Scott J. Davido. |
31 | Section 302 Certifications |
32 | Section 906 Certification |
(b) Reports on Form 8-K:
NRG Energy filed reports on Form 8-k on the following dates during the quarter ended September 30, 2003: August 27, 2003
Cautionary Statement Regarding Forward Looking Information
The information presented in this annual report includes forward-looking statements in addition to historical information. These statements involve known and unknown risks and relate to future events, or projected business results. In some cases forward-looking statements may be identified by their use of such words as may, expects, plans, anticipates, contemplates, believes, and similar terms. Forward-looking statements are only predictions or expectations and actual results may differ materially from the expectations expressed in any forward-looking statement. While NRG Energy believes that the expectations expressed in such forward-looking statements are reasonable, NRG Energy can give no assurances that these expectations will prove to have been correct. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following:
81
| NRG Energys ability to borrow additional funds and access capital markets; |
| NRG Energys substantial indebtedness and the possibility that NRG Energy may incur additional indebtedness going forward; |
| Restrictions on the ability to pay dividends, make distributions or otherwise transfer funds to NRG Energy contained in the debt agreements of certain of NRG Energys subsidiaries and project affiliates generally; |
| Volatility of energy and fuel prices and the possibility that NRG Energy will not have sufficient working capital and collateral to post performance guarantees or margin calls to mitigate such risks or manage such volatility; |
| Reduced competition in the power generation industry as regulators in certain markets advocate and allow utilities and utility holding companies to transfer unprofitable generation assets from non-utility entities to regulated utility entities (where costs can be recovered through regulated cost-of-serve rates); |
| Certain of NRG Energys prepetition creditors may receive NRG Energy common stock upon NRG Energys emergence from bankruptcy and will have the right to select NRG Energys board members and influence certain aspects of NRG Energys business operations; |
| The condition of the capital markets generally, which will be effected by interest rates, foreign currency fluctuations and general economic conditions; |
| Changes in the wholesale power market, including reduced liquidity which may limit opportunities to capitalize on short-term price volatility; |
| Trade, monetary, fiscal, taxation, and environmental policies of governments, agencies and similar organizations in geographic areas where NRG Energy has a financial interest; |
| Changes in government regulation, including but not limited to pending changes of market rules, market structures, rates, tariffs, environmental regulations, and regulatory compliance requirements imposed by the Federal Energy Regulatory Commission (FERC), state commissions, other state regulatory agencies, the Environmental Protection Agency (EPA), the National Electric Reliability Council (NERC) or other regulatory or industry bodies; |
| Cost and other effects of legal and administrative proceedings, settlements, investigations and claims, including claims which are not discharged in the bankruptcy proceedings and claims arising after the date of NRG Energys bankruptcy filing; |
| The impact of the bankruptcy proceedings on NRG Energys operations going forward, including the impact on NRG Energys ability to negotiate favorable terms with suppliers, customers, landlords and others. |
| Financial or regulatory accounting principles or policies imposed by the Financial Accounting Standards Board, or FASB, the SEC, the FERC and similar entities with regulatory oversight; |
| Factors affecting power generation operations such as unusual weather conditions; catastrophic weather-related or other damage to facilities; unscheduled generation outages, maintenance or repairs; unanticipated changes to fossil fuel, or gas supply costs or availability due to higher demand, shortages, transportation problems or other developments; environmental incidents; or electric transmission or gas pipeline system constraints; |
| Large energy blackouts, such as the blackout that impacted parts of the northeastern United States and Canada during the middle of August 2003, which have the potential to reduce NRG Energys revenue collection, increase NRG Energys costs and engender enhanced federal and state regulatory requirements; |
| NRG Energys inability to enter into intermediate and long-term contracts to sell power and procure fuel on terms and prices acceptable to NRG Energy; |
| Failure of customers and suppliers to perform under agreements, including failure to deliver procured commodities and services and failure to remit payment as required and directed, especially in instances where NRG Energy is relying on single suppliers or single customers at a particular facility; |
| Employee workforce factors including the hiring and retention of key executives, including NRG Energys new CEO, collective bargaining agreements with union employees, or work stoppages; |
82
| Factors associated with various investments including partnership actions, competition, operating risks, dependence on certain suppliers and customers and domestic and foreign environmental and energy regulations; |
| Limitations on NRG Energys ability to control projects in which NRG Energy has less than 100% interest; |
| Uncertainties affecting the financial projections prepared in connection with the bankruptcy; |
| Risks associated with timely completion of capital improvement and re-powering projects, including supply interruptions, work stoppages, labor disputes, social unrest, weather interferences, unforeseen engineering, environmental or geological problems and unanticipated cost overruns; |
| Failure to sell certain assets in the amounts and on the timetable assumed, including failure to timely satisfy the closing conditions contained in the definitive agreements for the sale of projects but not yet closed, many of which are beyond NRG Energys control; |
| Effects of political, regulatory and legal conditions on our international operations; |
| Acts of terrorism both in the United States and internationally; and |
| Other business or investment considerations that may be disclosed from time to time in our SEC filings or in other publicly disseminated written documents. |
NRG Energy undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause NRG Energys actual results to differ materially from those contemplated in any forward-looking statements included in this quarterly report should not be construed as exhaustive.
83
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NRG ENERGY, INC. | ||
|
||
(Registrant) | ||
/s/ David W. Crane | ||
|
||
David W. Crane, | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
/s/ George P. Schaefer | ||
|
||
George P. Schaefer, | ||
Vice President and Treasurer | ||
(Principal Financial Officer) | ||
/s/ William T. Pieper | ||
|
||
William T. Pieper, | ||
Vice President and Controller | ||
(Principal Accounting Officer) |
Date: December 8, 2003
84
EXHIBIT 31.1
CERTIFICATION
I, David W. Crane, certify that:
1. | I have reviewed this quarterly report on Form 10-Q/A of NRG Energy, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Omitted pursuant to SEC Release 33-8238; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: December 8, 2003 | ||
/s/ David W. Crane | ||
|
||
David W. Crane, Chief Executive Officer (Principal Executive Officer) |
85
EXHIBIT 31.2
CERTIFICATION
I, George P. Schaefer, certify that:
1. | I have reviewed this quarterly report on Form 10-Q/A of NRG Energy, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Omitted pursuant to SEC Release 33-8238; |
b) | Omitted pursuant to SEC Release 33-8238; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: December 8, 2003 | ||
/s/ George P. Schaefer | ||
|
||
George P. Schaefer, Vice President and Treasurer (Principal Financial Officer) |
86
EXHIBIT 31.3
CERTIFICATION
I, William T. Pieper, certify that:
1. | I have reviewed this quarterly report on Form 10-Q/A of NRG Energy, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Omitted pursuant to SEC Release 33-8238; |
b) | Omitted pursuant to SEC Release 33-8238; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: December 8, 2003 | ||
/s/ William T. Pieper | ||
|
||
William T. Pieper, Vice President and Controller (Principal Accounting Officer) |
87
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NRG Energy, Inc. (the Company) on Form 10-Q/A for the quarter ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (Form 10-Q), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officers knowledge:
(1) | The Form 10-Q/A fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Form 10-Q/A fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Form 10-Q/A. |
Date: December 8, 2003 | ||
/s/ David W. Crane | ||
|
||
David W. Crane, Chief Executive Officer (Principal Executive Officer) |
||
/s/ George P. Schaefer | ||
|
||
George P. Schaefer, Vice President and Treasurer (Principal Financial Officer) |
||
/s/ William T. Pieper | ||
|
||
William T. Pieper, Vice President and Controller (Principal Accounting Officer) |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to NRG Energy, Inc. and will be retained by NRG Energy, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
88