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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _______________
------------------------------
Commission file number 1-16455
RELIANT ENERGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 76-0655566
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1000 Main Street
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
(713) 497-3000
(Registrant's Telephone Number, Including Area Code)
RELIANT RESOURCES, INC.
(Former Name of Registrant Changed Effective
as of April 26, 2004)
------------------------------
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 shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
As of May 3, 2004, the last practicable date for determination, Reliant Energy,
Inc. had 296,358,268 shares of common stock outstanding, excluding 3,445,732
shares held by the Registrant as treasury stock.
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RELIANT ENERGY, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 2003 and 2004.............................................................. 1
Consolidated Balance Sheets (unaudited)
December 31, 2003 and March 31, 2004.................................................................... 2
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2003 and 2004.............................................................. 3
Notes to Unaudited Consolidated Interim Financial Statements............................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 26
Recent Developments and Other Information............................................................... 26
Consolidated Results of Operations...................................................................... 27
Financial Condition..................................................................................... 33
Item 3. Quantitative and Qualitative Disclosures About Non-trading and Trading Activities and Related Market
Risks................................................................................................. 38
Item 4. Controls and Procedures................................................................................. 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 44
Item 6. Exhibits and Reports on Form 8-K........................................................................ 44
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
When we make statements containing projections, estimates or assumptions
about our revenues, income and other financial items, our plans for the future,
future economic performance, transactions for the sale of parts of our
operations and financings related thereto, we are making "forward-looking
statements." Forward-looking statements relate to future events and anticipated
revenues, earnings, business strategies, competitive position or other aspects
of our operations or operating results. In many cases you can identify
forward-looking statements by terminology such as "anticipate," "estimate,"
"believe," "continue," "could," "intend," "may," "plan," "potential," "predict,"
"should," "will," "expect," "objective," "projection," "forecast," "goal,"
"guidance," "outlook," "effort," "target" and other similar words. However, the
absence of these words does not mean that the statements are not
forward-looking. Although we believe that the expectations and the underlying
assumptions reflected in our forward-looking statements are reasonable, there
can be no assurance that these expectations will prove to be correct.
Forward-looking statements are not guarantees of future performance or events.
Such statements involve a number of risks and uncertainties, and actual results
may differ materially from the results discussed in the forward-looking
statements.
Among other things, the matters described in (a) (i) "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors" in Item 7 and (ii) note 15 to our consolidated financial statements,
each included in our Annual Report on Form 10-K for the year ended December 31,
2003, filed on March 8, 2004 and (b) (i) "Management's Discussion and Analysis
of Financial Condition and Results of Operations", (ii) notes 11 and 12 to our
interim financial statements and (iii) "Legal Proceedings" in Part II, Item 1,
all included in this report, could cause actual results to differ materially
from those expressed or implied in our forward-looking statements.
Each forward-looking statement speaks only as of the date of the
particular statement and we undertake no obligation to publicly update or revise
any forward-looking statement, whether as a result of new information, future
events or otherwise.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RELIANT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2003 2004
------------ ------------
REVENUES:
Revenues (including $(6,472) and $783 unrealized (losses) gains) ..... $ 2,541,216 $ 1,732,983
Trading margins ...................................................... (83,683) 2,758
------------ ------------
Total .............................................................. 2,457,533 1,735,741
------------ ------------
EXPENSES:
Fuel and cost of gas sold (including $(7,603) and $12,380 unrealized
(losses) gains) .................................................. 345,468 249,782
Purchased power (including $(1,891) and $8,268 unrealized (losses)
gains) ........................................................... 1,646,565 998,730
Accrual for payment to CenterPoint Energy, Inc. ...................... 46,700 1,658
Operation and maintenance ............................................ 225,221 250,094
Selling and marketing ................................................ 20,048 17,620
Bad debt expense ..................................................... 17,046 8,698
Other general and administrative ..................................... 58,094 54,718
Depreciation ......................................................... 78,223 103,629
Amortization ......................................................... 9,461 13,980
------------ ------------
Total .............................................................. 2,446,826 1,698,909
------------ ------------
OPERATING INCOME ....................................................... 10,707 36,832
------------ ------------
OTHER INCOME (EXPENSE):
Gains (losses) from investments, net ................................. 1,644 (169)
Loss of equity investments ........................................... (1,210) (806)
Loss on sale of receivables .......................................... (3,836) (9,187)
Other, net ........................................................... 802 5,938
Interest expense ..................................................... (97,033) (110,174)
Interest income ...................................................... 14,142 5,139
------------ ------------
Total other expense ................................................ (85,491) (109,259)
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .................... (74,784) (72,427)
Income tax benefit ................................................... (23,001) (26,766)
------------ ------------
LOSS FROM CONTINUING OPERATIONS ........................................ (51,783) (45,661)
------------ ------------
Loss from discontinued operations before income taxes ................ (360,319) -
Income tax expense ................................................... 15,383 -
------------ ------------
Loss from discontinued operations .................................... (375,702) -
------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES .................... (427,485) (45,661)
Cumulative effect of accounting changes, net of tax .................. (24,917) 7,290
------------ ------------
NET LOSS ............................................................... $ (452,402) $ (38,371)
============ ============
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE:
Loss from continuing operations ...................................... $ (0.18) $ (0.15)
Loss from discontinued operations, net of tax ........................ (1.29) -
------------ ------------
Loss before cumulative effect of accounting changes .................. (1.47) (0.15)
Cumulative effect of accounting changes, net of tax .................. (0.08) 0.02
------------ ------------
Net loss ............................................................. $ (1.55) $ (0.13)
============ ============
See Notes to our Unaudited Consolidated Interim Financial Statements
1
RELIANT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31, 2003 MARCH 31, 2004
----------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 146,524 $ 116,627
Restricted cash .............................................................. 250,748 229,076
Accounts and notes receivable, principally customer, net of allowance of
$74,042 and $43,061 ........................................................ 602,859 458,632
Notes receivable related to receivables facility ............................. 393,822 289,439
Net California receivables subject to refund ................................. 198,609 -
Inventory .................................................................... 268,701 242,431
Trading and derivative assets ................................................ 493,046 602,179
Margin deposits on energy trading and hedging activities ..................... 77,271 153,054
Prepayments and other current assets ......................................... 257,690 253,801
---------------- ----------------
Total current assets ..................................................... 2,689,270 2,345,239
---------------- ----------------
Property, plant and equipment, gross ........................................... 9,251,118 9,304,831
Accumulated depreciation ....................................................... (724,334) (812,804)
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET ............................................. 8,526,784 8,492,027
---------------- ----------------
OTHER ASSETS:
Goodwill, net ................................................................ 482,534 482,534
Other intangibles, net ....................................................... 719,469 747,948
Net California receivables subject to refund ................................. - 217,000
Equity investments ........................................................... 95,223 92,747
Trading and derivative assets ................................................ 199,716 228,793
Prepaid lease ................................................................ 217,781 229,033
Restricted cash .............................................................. 36,916 36,916
Other ........................................................................ 340,566 332,134
---------------- ----------------
Total other assets ....................................................... 2,092,205 2,367,105
---------------- ----------------
TOTAL ASSETS ................................................................... $ 13,308,259 $ 13,204,371
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and short-term borrowings .................. $ 430,685 $ 401,240
Accounts payable, principally trade .......................................... 516,843 505,316
Trading and derivative liabilities ........................................... 357,219 362,115
Margin deposits from customers on energy trading and hedging activities ...... 36,136 35,856
Retail customer deposits ..................................................... 57,279 61,817
Accrual for payment to CenterPoint Energy, Inc. .............................. 175,000 176,658
Other ........................................................................ 425,247 364,903
---------------- ----------------
Total current liabilities ................................................ 1,998,409 1,907,905
---------------- ----------------
OTHER LIABILITIES:
Accumulated deferred income taxes ............................................ 524,701 487,480
Trading and derivative liabilities ........................................... 216,399 288,618
Benefit obligations .......................................................... 133,664 130,894
Other ........................................................................ 354,176 355,262
---------------- ----------------
Total other liabilities .................................................. 1,228,940 1,262,254
---------------- ----------------
LONG-TERM DEBT ................................................................. 5,709,111 5,659,798
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock; par value $0.001 per share (125,000,000 shares authorized;
none outstanding) .......................................................... - -
Common stock; par value $0.001 per share (2,000,000,000 shares authorized;
299,804,000 issued) ........................................................ 61 61
Additional paid-in capital ................................................... 5,841,438 5,830,628
Treasury stock at cost, 5,212,017 and 4,153,496 shares ....................... (89,769) (71,537)
Retained deficit ............................................................. (1,338,578) (1,376,949)
Accumulated other comprehensive loss ......................................... (41,353) (7,789)
---------------- ----------------
Stockholders' equity ..................................................... 4,371,799 4,374,414
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 13,308,259 $ 13,204,371
================ ================
See Notes to our Unaudited Consolidated Interim Financial Statements
2
RELIANT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2003 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................... $ (452,402) $ (38,371)
Loss from discontinued operations .......................................................... 375,702 -
------------ ------------
Net loss from continuing operations and cumulative effect of
accounting changes ....................................................................... (76,700) (38,371)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Cumulative effect of accounting changes .................................................. 24,917 (7,290)
Depreciation and amortization ............................................................ 87,684 117,609
Deferred income taxes .................................................................... (55,936) (22,681)
Net unrealized gains on trading energy derivatives ....................................... (91,739) (4,942)
Net unrealized losses (gains) on non-trading energy derivatives .......................... 15,966 (21,431)
Accrual for payment to CenterPoint Energy, Inc. .......................................... 46,700 1,658
Other, net ............................................................................... 1,189 27,405
Changes in other assets and liabilities:
Restricted cash ........................................................................ (115,782) 21,672
Accounts and notes receivable and unbilled revenue, net ................................ 6,179 82,776
Notes receivable facility payments/proceeds, net ....................................... (11,000) 46,000
Inventory .............................................................................. 48,475 26,882
Margin deposits on energy trading and hedging activities, net .......................... 4,881 (76,063)
Net non-trading derivative assets and liabilities ...................................... (12,221) 262
Prepaid lease obligation ............................................................... (12,221) (11,252)
Other current assets ................................................................... (61,941) (26,873)
Other assets ........................................................................... (39,282) (42,893)
Accounts payable ....................................................................... (15,951) (11,739)
Taxes payable/receivable ............................................................... 96,035 78,249
Other current liabilities .............................................................. (22,994) (47,190)
Other liabilities ...................................................................... (48,641) 3,818
------------ ------------
Net cash (used in) provided by continuing operations from operating activities ....... (232,382) 95,606
Net cash provided by discontinued operations from operating activities ............... 5,260 -
------------ ------------
Net cash (used in) provided by operating activities .................................. (227,122) 95,606
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................................................................... (188,910) (70,258)
Other, net ................................................................................. 481 2,100
------------ ------------
Net cash used in continuing operations from investing activities ..................... (188,429) (68,158)
Net cash used in discontinued operations from investing activities ................... (1,477) -
------------ ------------
Net cash used in investing activities ................................................ (189,906) (68,158)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ............................................................... 94,902 -
Payments of long-term debt ................................................................. (11,635) (49,149)
Decrease in short-term borrowings and revolving credit facilities, net ..................... (267,615) (25,050)
Payments of financing costs ................................................................ (130,774) (233)
Other, net ................................................................................. 1,912 17,087
------------ ------------
Net cash used in continuing operations from financing activities ..................... (313,210) (57,345)
Net cash used in discontinued operations from financing activities ................... (402) -
------------ ------------
Net cash used in financing activities ................................................ (313,612) (57,345)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ................................. 4,218 -
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...................................................... (726,422) (29,897)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................................. 1,114,850 146,524
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................... $ 388,428 $ 116,627
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest paid (net of amounts capitalized) for continuing operations ..................... $ 113,662 $ 142,049
Income taxes paid (net of income tax refunds received) for continuing operations ......... $ (55,186) $ (88,809)
See Notes to our Unaudited Consolidated Interim Financial Statements
3
RELIANT ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
In March 2004, the board of directors of Reliant Resources, Inc. approved
changing the name of the company from Reliant Resources, Inc. to Reliant Energy,
Inc. The name change became effective on April 26, 2004. The ticker symbol for
our common stock remains the same (NYSE: RRI). As used in this Form 10-Q,
"Reliant Energy" refers to Reliant Energy, Inc. and "we," "us" and "our" refer
to Reliant Energy, Inc. and its consolidated subsidiaries.
Our business operations provide electricity and related services to retail
customers primarily in Texas (including acquiring and managing the related
supply) and generate and sell electricity and other related services in
wholesale energy markets in various regions of the United States. For
information regarding our current reportable segments, see note 15. As part of
our efforts to simplify the corporate structure, we are evaluating a possible
change in our reportable segments.
This Form 10-Q includes our consolidated interim financial statements and
notes (interim financial statements). The interim financial statements are
unaudited, omit certain financial statement disclosures and should be read in
conjunction with our audited consolidated financial statements and notes
included in our Annual Report on Form 10-K for the year ended December 31, 2003.
BASIS OF PRESENTATION
Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America (GAAP)
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Adjustments and Reclassifications. The interim financial statements
reflect all normal recurring adjustments necessary, in management's opinion to
present fairly our financial position and results of operations for the reported
periods. Amounts reported for interim periods, however, may not be indicative of
a full year period due to seasonal fluctuations in demand for energy and energy
services, changes in energy commodity prices, timing of maintenance and other
expenditures, dispositions, changes in interest expense and other factors.
We have reclassified certain amounts reported in this Form 10-Q from prior
periods to conform to the 2004 presentation of financial statements. These
reclassifications had no impact on reported earnings.
We have reclassified general and administrative expenses and operation and
maintenance expenses from prior period's presentation. Other general and
administrative expenses in the consolidated statements of operations include (a)
corporate and administrative services (including management services, financial
and accounting, cash management and treasury support, legal, information
technology system support, communications, office management and human
resources), (b) regulatory costs and (c) certain benefit costs.
FIN No. 46R. In January 2004, we adopted Financial Accounting Standards
Board (FASB) Interpretation No. 46 (revised December 2003) "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN No. 46R),
which replaces the original FIN No. 46 and modified certain criteria in
determining which entities should be considered as variable interest entities.
The adoption had no impact on our financial statements. The application of FIN
No. 46R continues to evolve as the FASB continues to address issues submitted
for consideration. We will continue to assess our application of clarified or
revised guidance related to FIN No. 46R.
Changes in Estimates for Retail Energy Sales and Costs. As of December 31,
2003 and March 31, 2004, we recorded unbilled revenues of $290 million and $277
million, respectively, for retail energy sales. These revenues and the related
energy supply costs are based on (a) our estimates of customer usage and (b)
initial usage information provided by the Electric Reliability Council of Texas
(ERCOT) Independent System Operator (ISO) relating to customer meter reading
data provided by third parties. Upon receipt of actual or updated usage data
from
4
the ERCOT ISO, we revise the estimates and record any resulting changes in the
period when the information becomes available.
During the three months ended March 31, 2003 and 2004, we recognized in
gross margin $15 million of income and $9 million of expense, respectively,
resulting from revisions to prior period estimates related to ERCOT usage.
EITF No. 03-11. Prior to October 1, 2003, we generally recorded revenues,
fuel and cost of gas sold, and purchased power related to sale and purchase
contracts designated as hedges on a gross basis in the delivery period.
Thereafter, we began to record certain transactions on a net basis, including
the settlement of sales and purchases of fuel and purchased power related to our
non-trading energy derivative activities that were not physically delivered. The
change in accounting treatment resulted in a $434 million decrease in revenues
and a corresponding $434 million decrease in fuel and cost of gas sold and
purchased power for the three months ended March 31, 2004. We believe the
application of EITF No. 03-11 will continue to result in a significant amount of
our non-trading energy derivative activities being reported on a net basis
prospectively that were previously reported on a gross basis. Emerging Issues
Task Force (EITF) Issue No. 03-11, "Reporting Realized Gains and Losses on
Derivative Instruments That Are Subject to FASB Statement No. 133 and Not "Held
for Trading Purposes" As Defined in EITF Issue No. 02-03" (EITF No. 03-11) has
no impact on margins or net income. Reclassification of prior period amounts is
not required. It is not practicable for us to determine sales and purchases of
fuel and purchased power for the three months ended March 31, 2003 that would
have been shown net if EITF No. 03-11 had been applied to our results of
operations historically.
(2) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Prior to January 1, 2004, we recognized repair and maintenance costs for
power generation assets acquired prior to December 31, 1999, under the
"accrue-in-advance" method. Under the accrue-in-advance method, we estimated the
costs of planned major maintenance and accrued the related expense over the
maintenance cycle, which ranges from two to 12 years. Effective January 1, 2004,
we began expensing these costs as incurred. Such change conforms our accounting
for all major maintenance costs to a method that we believe is preferable in the
circumstances. As a result of this change in accounting method, we (a)
recognized a cumulative effect of an accounting change of $7 million, net of tax
of $3 million, (or $0.02 per diluted share), (b) decreased long-term liabilities
by $10 million and (c) decreased deferred tax assets by $3 million.
(3) STOCK-BASED COMPENSATION PLANS AND RETIREMENT PLANS
(a) STOCK-BASED COMPENSATION PLANS.
We currently apply the intrinsic value method of accounting for employee
stock-based compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25).
We disclose the pro forma effect on net income (loss) and per share
amounts as if the fair value (determined using the Black-Scholes model) method
of accounting had been applied to all stock awards. In March 2004, the FASB
issued a proposed statement that would eliminate the ability to account for
share-based compensation transactions using APB No. 25 and would generally
require that such transactions be accounted for using a fair value based method.
The final statement is expected to be issued in the fourth quarter of 2004 and
is expected to be effective for us beginning January 1, 2005.
If employee stock-based compensation costs had been expensed based on the
fair value method, our net loss and per share amounts would have approximated
the following pro forma results for the three months ended March 31, 2003 and
2004:
5
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2003 2004
----------------- -----------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net loss, as reported .................................................. $ (452) $ (38)
Add: Stock-based employee compensation expense included
in reported net loss, net of related tax effects ..................... 1 1
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects ................................... (9) (6)
----------------- -----------------
Pro forma net loss ..................................................... $ (460) $ (43)
================= =================
Loss per share:
Basic and diluted, as reported ....................................... $ (1.55) $ (0.13)
================= =================
Basic and diluted, pro forma ......................................... $ (1.58) $ (0.15)
================= =================
Prior to February 2004, our stock options granted to employees have all
been granted with exercise prices equal to or greater than market values at date
of grant and vesting was not contingent on achieving performance metrics. The
typical vesting schedule for these options is three years. We have recognized no
compensation expense under APB No. 25 for such grants.
In February 2004, the compensation committee of our board of directors
granted performance awards to 26 of our key employees under a Key Employee Award
Program (Key Employee Program) established under the Reliant Resources, Inc.
2002 Long-Term Incentive Plan (LTIP). The Key Employee Program is intended to
provide incentives to the group of key executives and other officers expected to
be significant contributors to the achievement of our three-year strategic plan.
Under the Key Employee Program, participants received an aggregate of 93 award
units ranging from a minimum of one to a maximum of 16 units per participant.
Each unit consisted of the following targeted awards: (a) 68,000 stock options
(exercise price of $8.135 per share), (b) 16,000 shares of performance vesting
restricted stock and (c) 16,000 cash performance units (convertible into a cash
amount equal to the market value of one share of our common stock on the date of
vesting). Participants in the Key Employee Program are not eligible to receive
additional LTIP grants until after December 31, 2006. Awards granted under the
Key Employee Program are forfeited if the participant ceases for any reason to
be an employee of Reliant Energy or its consolidated subsidiaries before the
award vests. Upon a change of control (as defined under the LTIP), performance
units will vest immediately at the maximum payout amount of 140% of the targeted
award.
No awards will be vested under the Key Employee Program unless we meet
specified qualitative and quantitative performance goals. The quantitative goals
entail achieving an adjusted debt to adjusted EBITDA (earnings before interest,
income taxes, depreciation and amortization and other items, as defined in the
Key Employee Program documents) ratio of no more than 3.5 as of December 31,
2006, subject to the compensation committee's discretion based on market
conditions and a review of other financial metrics. The qualitative goals
include (a) delivering superior customer value and (b) building a great company
for which to work. The amount of payout (60% to 140% of the targeted award) will
depend on our level of achievement of the performance goals as determined in the
discretion of the compensation committee of our board of directors and any other
factors it considers relevant.
The units awarded under the Key Employee Program are being accounted for
using variable plan accounting with related compensation cost recorded in the
statement of operations over the three-year vesting period.
In addition, during March 2004, the compensation committee of our board of
directors granted 588,000 time-based vesting restricted share units of our
common stock to other employees. These restricted share units will vest at the
end of a three-year period.
6
(b) RETIREMENT PLANS.
Net benefit cost for our qualified retirement plans includes the following
components:
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------- -------------------------
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------
2003 2004 2003 2004
---------- ---------- ---------- ----------
(IN MILLIONS)
Service cost ...................... $ 2.0 $ 2.2 $ 0.8 $ 0.8
Interest cost ..................... 1.2 1.4 1.0 1.1
Expected return on plan assets .... (0.7) (1.0) - -
Accounting settlement charge ...... 0.3 - - -
Net amortization .................. 0.3 0.4 0.3 0.4
---------- ---------- ---------- ----------
Net benefit cost .............. $ 3.1 $ 3.0 $ 2.1 $ 2.3
========== ========== ========== ==========
Pension expense associated with our non-qualified pension plan was $0 and
$2 million during the three months ended March 31, 2003 and 2004, respectively.
During the three months ended March 31, 2004, we recognized an accounting
settlement charge of $2 million (pre-tax) related to distributions paid.
We expect cash contributions to our pension plans will be approximately
$12 million during 2004. As of March 31, 2004, we had contributed $4 million.
(4) COMPREHENSIVE INCOME (LOSS)
The following table summarizes the components of total comprehensive
income (loss):
THREE MONTHS
ENDED MARCH 31,
------------ ------------
2003 2004
------------ ------------
(IN MILLIONS)
Net loss ................................................................. $ (452) $ (38)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ............................... (6) -
Deferred gain from cash flow hedges .................................... 36 28
Reclassification of net deferred loss from cash flow hedges realized
in net loss .......................................................... 6 5
Unrealized loss on available-for-sale securities ....................... (1) -
Comprehensive loss resulting from discontinued operations .............. (39) -
------------ ------------
Comprehensive loss ....................................................... $ (456) $ (5)
============ ============
(5) GOODWILL AND PROPERTY, PLANT AND EQUIPMENT
We evaluate goodwill and property, plant and equipment annually and when
events or changes in circumstances indicate that the carrying value of these
assets may not be recoverable. We performed our annual impairment analysis of
our goodwill as of November 1, 2003 and recorded no impairments at that time. We
performed impairment analyses of all of our wholesale energy reporting unit's
property, plant and equipment as of July 2003 and performed subsequent
impairment analyses of certain of our wholesale energy reporting unit's
property, plant and equipment as of December 31, 2003. In conjunction with those
tests, we recorded no impairments. During the three months ended March 31, 2004,
we recognized $12 million in accelerated depreciation expense related to early
retirements of certain property, plant and equipment.
If our wholesale energy market outlook changes negatively, we could have
impairments of property, plant and equipment and goodwill in future periods. In
addition, our ongoing evaluation of our wholesale energy business could result
in decisions to mothball, retire or dispose of additional generation assets, any
of which could result in impairment charges of goodwill or property, plant and
equipment or impact our fixed assets' depreciable lives.
In addition, as we continue to evaluate our business operations and to
simplify the corporate structure, we could have write-offs and impacts on
depreciable lives of other types of property, plant and equipment, such as
information technology systems. We are currently evaluating the future use of
certain information technology systems, which have a net book value of
approximately $127 million as March 31, 2004.
7
See note 12 for discussion of possible impairment of a subsidiary's
generation assets.
(6) DERIVATIVE INSTRUMENTS, INCLUDING ENERGY TRADING ACTIVITIES
Trading and derivative assets and liabilities at December 31, 2003 and
March 31, 2004 include amounts for non-trading and trading activities, as
follows:
ASSETS LIABILITIES
------------------------ ------------------------ NET ASSETS
CURRENT LONG-TERM CURRENT LONG-TERM (LIABILITIES)
---------- ---------- ---------- ---------- ------------
(IN MILLIONS)
DECEMBER 31, 2003:
Non-trading activities:
Cash flow hedges - offset to accumulated
other comprehensive income (loss):
Commodity ...................................... $ 828 $ 284 $ (668) $ (304) $ 140
Interest ....................................... - 3 (26) (22) (45)
---------- ---------- ---------- ---------- ----------
Total ........................................ 828 287 (694) (326) 95
Derivatives marked to market through earnings .... 404 58 (383) (53) 26
---------- ---------- ---------- ---------- ----------
Total ........................................ 1,232 345 (1,077) (379) 121
Trading activities ................................. 1,094 529 (1,113) (511) (1)
Set-off adjustments ................................ (1,833) (674) 1,833 674 -
---------- ---------- ---------- ---------- ----------
Total ........................................ $ 493 $ 200 $ (357) $ (216) $ 120
========== ========== ========== ========== ==========
MARCH 31, 2004:
Non-trading activities:
Cash flow hedges - offset to accumulated
other comprehensive income (loss):
Commodity ...................................... $ 1,143 $ 392 $ (865) $ (430) $ 240
Interest ....................................... - 1 (27) (27) (53)
---------- ---------- ---------- ---------- ----------
Total ........................................ 1,143 393 (892) (457) 187
Derivatives marked to market through earnings .... 569 64 (555) (83) (5)
---------- ---------- ---------- ---------- ----------
Total ........................................ 1,712 457 (1,447) (540) 182
Trading activities ................................. 1,123 574 (1,148) (551) (2)
Set-off adjustments ................................ (2,233) (802) 2,233 802 -
---------- ---------- ---------- ---------- ----------
Total ........................................ $ 602 $ 229 $ (362) $ (289) $ 180
========== ========== ========== ========== ==========
(a) NON-TRADING DERIVATIVE ACTIVITIES.
Pre-tax income (loss) of our non-trading derivative instruments, including
non-trading energy derivatives and interest rate derivatives, both from cash
flow hedge ineffectiveness and from non-trading derivative mark-to-market income
and losses, for the three months ended March 31, 2003 and 2004 are as follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
------------ ------------
(IN MILLIONS)
Non-trading energy derivative instruments:
Hedge ineffectiveness (1) .......................................... $ (12) $ -
Other net unrealized (losses) gains (2) ............................ (4) 21
Interest rate derivative instruments:
Hedge ineffectiveness (1) .......................................... (2) -
Other net unrealized losses (2) .................................... - (7)
------------ ------------
Total ............................................................ $ (18) $ 14
============ ============
- ----------------
(1) For the three months ended March 31, 2003 and 2004, no component of the
derivative instruments' gain or loss was excluded from the assessment of
effectiveness.
(2) Includes $0 for the three months ended March 31, 2003 and 2004, of
income/losses recognized in our results of operations as a result of the
discontinuance of cash flow hedges because it was probable that the
forecasted transaction would not occur.
8
As of December 31, 2003 and March 31, 2004, the maximum length of time we
are hedging our exposure to the variability in future cash flows for forecasted
transactions, excluding the payment of variable interest on existing financial
instruments, is nine years and eight years, respectively. As of December 31,
2003 and March 31, 2004, the maximum length of time we are hedging our exposure
to the payment of variable interest rates is six years. As of March 31, 2004, we
expect $75 million of gains netted in accumulated other comprehensive loss to be
reclassified into net income (loss) during the period from April 1, 2004 to
March 31, 2005.
(b) ENERGY TRADING ACTIVITIES.
In March 2003, we discontinued our proprietary trading business. Trading
positions taken prior to our decision to exit this business are managed solely
for purposes of closing them on acceptable terms.
During the three months ended March 31, 2003 and 2004, we recognized $92
million and $5 million in unrealized gains, which are included in trading
margins in our consolidated statements of operations. During the three months
ended March 31, 2003 and 2004, we did not recognize any income/loss for changes
in the fair values of trading assets/liabilities due to changes in valuation
techniques and assumptions.
9
(7) CREDIT FACILITIES AND DEBT
The following table sets forth our debt outstanding to third parties as of
December 31, 2003 and March 31, 2004:
DECEMBER 31, 2003 MARCH 31, 2004
--------------------------------- -----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
CONTRACTUAL CONTRACTUAL
INTEREST INTEREST
RATE(1) LONG-TERM CURRENT(2) RATE(1) LONG-TERM CURRENT(2)
---------- --------- ---------- ----------- --------- ----------
(IN MILLIONS, EXCEPT INTEREST RATES)
BANKING OR CREDIT FACILITIES, BONDS AND NOTES
Reliant Energy:
Senior secured term loans ......................... 5.27% $ 1,785 $ - 5.33% $ 1,785 $ -
Senior secured revolver ........................... 5.58 183 - 6.69 155 -
Senior secured notes - 2010 ....................... 9.25 550 - 9.25 550 -
Senior secured notes - 2013 ....................... 9.50 550 - 9.50 550 -
Convertible senior subordinated notes ............. 5.00 275 - 5.00 275 -
Orion Power Holdings and Subsidiaries:
Orion Power Holdings senior notes ................. 12.00 400 - 12.00 400 -
Orion MidWest and Orion NY term loans ............. 3.93 1,093 125 3.94 1,085 93
Orion MidWest revolving working capital
facility ........................................ - - - - - -
Orion NY revolving working capital
facility ........................................ - - - - - -
Liberty credit agreement:
Floating rate debt (3) .......................... 2.40 - 97 2.37 - 97
Fixed rate debt (3) ............................. 9.02 - 165 9.02 - 165
PEDFA bonds for Seward plant ........................ 1.27 400 - 1.09 400 -
REMA term loans ..................................... 4.19 28 14 4.22 21 14
Reliant Energy Channelview, L.P.:
Term loans and revolving working capital
facility:
Floating rate debt .............................. 2.54 283 7 2.50 281 11
Fixed rate debt ................................. 9.55 75 - 9.55 75 -
--------- ---------- ---------- ---------
Total facilities, bonds and notes .............. 5,622 408 5,577 380
--------- ---------- ---------- ---------
OTHER
Adjustment to fair value of debt (4) ................ - 58 8 - 56 8
Adjustment to fair value of interest rate swaps (4).. - 34 13 - 31 12
Adjustment to fair value of debt due to warrants .... - (6) (2) - (5) (2)
Other ............................................... 5.41-6.20 1 4 5.41-6.20 1 3
--------- ---------- ---------- ---------
Total other debt ............................... 87 23 83 21
--------- ---------- ----------- ---------
Total debt ................................... $ 5,709 $ 431 $ 5,660 $ 401
========= ========== ========== =========
- ---------------------
(1) The weighted average contractual interest rates are for borrowings
outstanding as of December 31, 2003 or March 31, 2004, as applicable.
(2) Includes amounts due within one year of the date noted and loans outstanding
under revolving and working capital facilities classified as current
liabilities. See sub-footnote 3 below.
(3) The entire balance outstanding under this credit agreement has been
classified as current as of December 31, 2003 and March 31, 2004. Included
in the outstanding amount as of December 31, 2003 and March 31, 2004, is $2
million and $4 million, respectively, of scheduled principal payments, for
which no payment has been made. The scheduled principal payments totaled $2
million in each of October 2003 and January 2004. In addition, no payment
has been made for the $2 million principal payment scheduled for April 2004.
As interest payments due were deferred, additional interest will be charged
on the past due interest amounts. Of the amount shown as current under the
Liberty credit agreement, $9 million matures within 12 months of March 31,
2004. See note 12 for further discussion.
(4) Debt and interest rate swaps acquired in the Orion Power acquisition were
adjusted to fair market value as of the acquisition date. "Orion Power"
refers to Orion Power Holdings, Inc. (Orion Power Holdings) and its
subsidiaries, unless we specify or the context indicates otherwise. Included
in the adjustment to fair value of debt is $66 million and $64 million
related to the Orion Power Holdings senior notes as of December 31, 2003 and
March 31, 2004, respectively. Included in the adjustment to fair value of
interest rate swaps is $28 million and $19 million related to the Orion
Power MidWest, L.P. (Orion MidWest) and Orion Power New York, L.P. (Orion
NY) credit facilities, respectively, as of December 31, 2003. Included in
the adjustment to fair value of interest rate swaps is $26 million and $17
million related to the Orion MidWest and Orion NY credit facilities,
respectively, as of March 31, 2004. Included in interest expense is
amortization of $2 million and $2 million for valuation adjustments for debt
and $7 million and $4 million for valuation adjustments for interest rate
swaps, respectively, for the three months ended March 31, 2003 and 2004,
respectively. These valuation adjustments are being amortized over the
respective remaining terms of the related financial instruments.
10
The following table provides a summary of the amounts owed and amounts
available as of March 31, 2004, under our various committed credit facilities,
bonds and notes:
TOTAL COMMITMENTS
COMMITTED DRAWN LETTERS OF UNUSED EXPIRING BY PRINCIPAL AMORTIZATION AND
CREDIT AMOUNT CREDIT AMOUNT MARCH 31, 2005 COMMITMENT EXPIRATION DATE
--------- ------- ------------- --------- -------------- --------------------------
(IN MILLIONS)
Reliant Energy:
Senior secured term loans...... $ 1,785 $ 1,785 $ - $ - $ - March 2007
Senior secured revolver........ 2,100 155 1,010(1) 935 - March 2007
Senior secured notes - 2010.... 550 550 - - - July 2010
Senior secured notes - 2013.... 550 550 - - - July 2013
Convertible senior
subordinated notes........... 275 275 - - - August 2010
Orion Power Holdings and
Subsidiaries:
Orion Power Holdings senior
notes........................ 400 400 - - - May 2010
Orion MidWest and Orion NY
term loans................... 1,178 1,178 - - 28 June 2004 - October 2005
Orion MidWest revolving
working capital facility..... 75 - 13 62 - October 2005
Orion NY revolving working
capital facility............. 30 - 7 23 - October 2005
Liberty credit agreement....... 284 262 17 5(2) 9 April 2004 - April 2026
PEDFA bonds for Seward plant..... 400 400 - - - December 2036
REMA term loans.................. 35 35 - - 14 July 2004 - July 2006
Reliant Energy Channelview, LP:
Term loans and revolving
working capital facility..... 377 367 - 10 7 April 2004 - July 2024
--------- ------- ----------- --------- --------------
Total..................... $ 8,039 $ 5,957 $ 1,047 $ 1,035 $ 58
========= ======= =========== ========= ==============
- ------------
(1) Included in this amount is $407 million of letters of credit outstanding
that support the $400 million of Pennsylvania Economic Development
Financing Authority (PEDFA) bonds related to the Seward plant.
(2) This amount is currently not available to Liberty Electric PA, LLC and
Liberty Electric Power, LLC. See note 12.
As of March 31, 2004, committed credit facilities and notes aggregating
$710 million were unsecured.
(8) STOCKHOLDERS' EQUITY
(a) COMMON STOCK ACTIVITY.
The following table describes our common stock activity for the indicated
periods:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
------------ ------------
(SHARES IN THOUSANDS)
Shares of common stock outstanding, net of treasury
stock, beginning of period ........................................... 290,605 294,592
Shares issued to employees under our employee stock
purchase plan ........................................................ 718 764
Shares issued to our savings plans ..................................... 726 5
Shares issued under our long-term incentive plans ...................... 83 290
------------ ------------
Shares of common stock outstanding, net of treasury
stock, end of period ................................................. 292,132 295,651
============ ============
11
(b) TREASURY STOCK ISSUANCES AND TRANSFERS.
The following table describes the changes in the number of shares of our
treasury stock for the indicated periods:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
------------ ------------
(SHARES IN THOUSANDS)
Shares of treasury stock, beginning of period .......................... 9,199 5,212
Shares of treasury stock issued to employees under our
employee stock purchase plan ......................................... (718) (764)
Shares of treasury stock issued to our savings plans ................... (726) (5)
Shares of treasury stock issued under our long-term
incentive plans ...................................................... (83) (290)
------------ ------------
Shares of treasury stock, end of period ................................ 7,672 4,153
============ ============
(c) EQUITY CONTRIBUTIONS.
During the three months ended March 31, 2003, CenterPoint Energy, Inc. and
its consolidated subsidiaries (CenterPoint) made equity contributions to us of
$45 million. The contributions in 2003 primarily related to the non-cash
conversion to equity of accounts payable to CenterPoint.
(9) EARNINGS PER SHARE
The following table presents our basic and diluted weighted average shares
outstanding:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
------------ ------------
(SHARES IN THOUSANDS)
Diluted Weighted Average Shares Calculation:
Weighted average shares outstanding .................................... 291,438 296,067
Plus: Incremental shares from assumed conversions:
Stock options ...................................................... - -
Restricted stock and performance-based shares ...................... - -
Employee stock purchase plan ....................................... - -
5.00% convertible senior subordinated notes ........................ - -
Warrants ........................................................... - -
------------ ------------
Weighted average shares assuming dilution ............................ 291,438 296,067
============ ============
For the three months ended March 31, 2003 and 2004, as we incurred a loss
from continuing operations, no potentially dilutive shares are included in the
computation of diluted EPS as such shares would be anti-dilutive. The
computation of diluted EPS excludes incremental shares in the following amounts
from assumed conversions:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
------------ ------------
(SHARES IN THOUSANDS)
Stock options .......................................................... 38(1) 1,619(2)
============ ============
Restricted stock and performance-based shares .......................... 894 1,431
============ ============
Employee stock purchase plan ........................................... 174 41
============ ============
5.00% convertible senior subordinated notes (3) ........................ - 28,823(4)
============ ============
Warrants ............................................................... - 2,681
============ ============
- -----------------
(1) For the three months ended March 31, 2003, the incremental shares from
assumed conversions exclude purchase options for 18,617,447 shares of
common stock that have an exercise price (ranging from $4.01 to $34.03 per
share) greater than or equal to the average market price ($3.97 per share)
and would thus be anti-dilutive if exercised.
(2) For the three months ended March 31, 2004, the incremental shares from
assumed conversions exclude purchase options for 13,362,313 shares of
common stock that have an exercise price (ranging from $7.74 to $34.03 per
share) greater than or equal to the average market price ($7.73 per share)
and would thus be anti-dilutive if exercised.
(3) These notes were issued in June and July 2003.
12
(4) If we had recorded income from continuing operations for the three months
ended March 31, 2004, for purposes of calculating diluted EPS, we would
have increased our income from continuing operations by $2 million as it
relates to the assumed conversions for our convertible senior subordinated
notes.
(10) COMMITMENTS
(a) PAYMENT TO CENTERPOINT IN 2004.
Under the Texas electric restructuring law, we will be required to make a
payment to CenterPoint estimated to be due in the third quarter of 2004 related
to residential customers. We recognized $128 million (pre-tax) in the third and
fourth quarters of 2002, $47 million (pre-tax) in the first quarter of 2003 and
$2 million (pre-tax) in the first quarter of 2004 for a total accrual and
estimated payment of $177 million as of March 31, 2004.
(b) GUARANTEES.
We have guaranteed, in the event CenterPoint becomes insolvent, certain
non-qualified benefits of CenterPoint's existing retirees at September 20, 2002.
The estimated maximum potential amount of future payments under this guarantee
was approximately $57 million and $60 million as of December 31, 2003 and March
31, 2004, respectively. There are no assets held as collateral. We have recorded
no liability in our consolidated balance sheet as of December 31, 2003 or March
31, 2004 for this guarantee. We believe the likelihood that we would be required
to perform or otherwise incur any significant losses associated with this
guarantee is remote.
We routinely enter into contracts that include indemnification and
guarantee provisions. Examples of these contracts include purchase and sale
agreements, commodity purchase and sale agreements, operating agreements,
service agreements, lease agreements, procurement agreements and certain debt
agreements. In general, these provisions indemnify the counterparty for matters
such as breaches of representations and warranties and covenants contained in
the contract and/or against certain specified liabilities. In the case of
commodity purchase and sale agreements, generally damages are limited through
liquidated damages clauses whereby the parties agree to establish damages as the
costs of covering any breached performance obligations. In the case of debt
agreements, we generally indemnify against liabilities that arise from the
preparation, entry into, administration or enforcement of the agreement. We are
unable to estimate our maximum potential amount under these provisions unless
and until an event triggering payment under these provisions occurs. However,
based on current information, we consider the likelihood of making any material
payments under these provisions to be remote.
(11) CONTINGENCIES
(a) LEGAL AND ENVIRONMENTAL MATTERS.
For information regarding legal proceedings and environmental matters, see
note 15 to our consolidated financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2003, which, as updated herein, is
incorporated by reference.
Indictment of Reliant Energy Services, Inc. On April 8, 2004, we were
notified that a federal grand jury in San Francisco, California had returned an
indictment against one of our subsidiaries, Reliant Energy Services, Inc.
(Reliant Energy Services), as well as two former and two current employees of
Reliant Energy Services, on charges related to an alleged violation of the
Commodity Exchange Act and related wire fraud and conspiracy charges. The
indictment is based on allegations that Reliant Energy Services engaged in price
manipulation by curtailing electricity generation in California on two days in
June 2000. Reliant Energy Services is the subsidiary of Reliant Energy
responsible for purchasing fuel for and marketing the power produced by our
generation facilities and acquiring some of our retail electric supply. We
believe the actions that are the subject of the indictment were not in violation
of laws, tariffs or regulations in effect at the time. We intend to contest
these charges vigorously. We do not believe that this action will have any
material adverse impact on our results of operations, financial position and
cash flows. In addition, we do not believe that this proceeding will have any
material adverse impact on our ongoing business operations, including any impact
on credit or debt agreements; the wholesale license held by our operating
subsidiary, Reliant Energy Services; the retail and wholesale licenses held by
other subsidiaries; or contracts and agreements to which Reliant Energy Services
is a party.
Shareholder Derivative Actions. In April 2004, a Texas Court granted
13
a motion for summary judgment dismissing the previously disclosed shareholder
derivative lawsuit filed against our directors and independent auditors in the
269th Judicial District, Harris County, Texas.
(b) CALIFORNIA ENERGY SALES CREDIT AND REFUND PROVISIONS.
We have recorded receivables from the California Independent System
Operator (Cal ISO) and the California Power Exchange (Cal PX) relating to power
sales into the markets run by the Cal ISO and the Cal PX. The receivables relate
to the period between the fourth quarter of 2000 and June 2001. For additional
information, see note 15(b) to our consolidated financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2003.
We are a party to a refund proceeding initiated by the Federal Energy
Regulatory Commission (FERC) in 2001 regarding wholesale electricity prices that
we charged in California from October 2, 2000 through June 20, 2001. Based on
the most recent refund methodology adopted by the FERC with respect to these
receivables, we currently estimate our refund obligation to be $81 million.
However, the estimated reasonably possible range of refunds, depending on
possible interpretations of the FERC's order, varies from $81 million to $210
million for the designated energy sales in California.
We have adjusted these receivables to take into account (a) the expected
refund obligation, (b) a credit reserve (as of December 31, 2003) and (c)
interest accrued on the receivables. The adjustments are as follows:
DECEMBER 31, 2003 MARCH 31, 2004
----------------- --------------
(IN MILLIONS)
Accounts receivable related to the period from October 2000 through
June 2001, excluding estimated refund obligation...................... $ 283 $ 279
Estimated refund obligation............................................. (81) (81)(1)
Credit reserve.......................................................... (21) -
Interest receivable..................................................... 18 19
----------------- --------------
Accounts receivable, net.............................................. $ 199 $ 217
================= ==============
- -----------------
(1) We will continue to assess the exposure to loss based on further
developments in the FERC refund proceeding and will adjust the refund
obligation to reflect the impact of such developments in the periods in
which they occur.
During the three months ended March 31, 2003 and 2004, we adjusted our
estimated refund obligation and credit reserve (netted in revenues) and interest
income (recorded in interest income) related to energy sales in California as
follows (income (loss)):
THREE MONTHS ENDED MARCH 31,
------------ ------------
2003 2004
------------ ------------
(IN MILLIONS)
Estimated refund obligation ............................................ $ 87 $ -
Credit reserve ......................................................... (12) 21(1)
Interest receivable .................................................... 9 1
------------ ------------
Pre-tax impact on loss ............................................... $ 84 $ 22
============ ============
- ----------------------
(1) During the three months ended March 31, 2004, we reversed the credit
reserve, which was related to Pacific Gas and Electric Company (PG&E), a
purchaser of power in the Cal ISO and Cal PX markets in 2000 and 2001, due
to PG&E funding its obligations into an escrow account pursuant to a
bankruptcy order and its emergence from bankruptcy. As of March 31, 2004,
we believe that the gross accounts receivable are fully collectible,
subject to the refund obligation discussed above.
14
(12) LIBERTY GENERATING STATION
Default Under Non-Recourse Financing Agreement. Liberty Electric Power,
LLC (Liberty Power) is a wholly-owned subsidiary of Liberty Electric PA, LLC
(Liberty Electric), which is an indirect wholly-owned subsidiary of Orion Power
Holdings. Liberty Power and Liberty Electric are collectively referred to as
"Liberty." Liberty owns a 530 megawatt combined cycle gas fired power generation
facility (the Liberty generating station). Liberty financed the construction
costs of the Liberty generating station with borrowings under a credit agreement
of which $262 million (in principal) is outstanding as of March 31, 2004.
Borrowings under the credit agreement, which are non-recourse to Reliant Energy
and its affiliates (other than Liberty), are secured solely by the assets of the
Liberty generating station and by the ownership interest in Liberty. For
additional information, see notes 9(a) and 15(c) to our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2003.
As of May 3, 2004, Liberty is in default under its credit agreement,
including its obligation to make $6 million in principal payments and $14
million in interest payments. We have classified the debt as a current
liability.
We do not intend to make additional capital contributions to Liberty and
have initiated discussions with Liberty's lenders regarding a possible
arrangement that would result in a transfer of ownership of Liberty to the
lenders or foreclosure. Although, to date, Liberty's lenders have not foreclosed
on their security interests in Liberty's assets or in the ownership of Liberty,
we would not expect the lenders to continue to refrain from exercising such
rights indefinitely.
Liberty's defaults under its credit agreement do not constitute an event
of default under any other debt agreement of Reliant Energy or its affiliates.
In addition, the exercise of the lenders foreclosure remedies with respect to
Liberty, or the transfer of ownership of Liberty to the lenders, would not
constitute an event of default under any of these debt agreements.
At December 31, 2003 and March 31, 2004, we evaluated the Liberty
generating station and its related intangible asset for impairment. Based on our
analyses, there were no impairments at that time. However, if the lenders
exercise their default remedies and/or we enter into a transfer arrangement, we
will incur a pre-tax loss of an amount up to our recorded net book value,
including the non-recourse debt obligations, with the potential of an additional
loss due to an impairment of goodwill allocable to Liberty. As of March 31,
2004, the consolidated net book value of Liberty Electric was $342 million,
excluding the non-recourse debt obligations of $262 million, resulting in a net
amount of $80 million.
Tolling Agreement Litigation. In July 2003, NEGT Energy Trading-Power,
L.P. (ET Power), the counterparty to the tolling agreement under which Liberty
sold the generation output of the Liberty generating station, filed for
bankruptcy. In connection with the bankruptcy proceeding, ET Power terminated
the tolling agreement. National Energy & Gas Transmission, Inc. (NEGT), which is
a debtor in the bankruptcy proceeding, and Gas Transmission Northwest
Corporation (GTN), which is not a debtor in the bankruptcy proceeding, have each
guaranteed ET Power's obligations under the tolling agreement. The liability of
each guarantor is capped at $140 million and the combined liability of the
guarantors is also capped at $140 million. Following the termination of the
tolling agreement, Liberty submitted a termination invoice to ET Power of $177
million.
In September 2003, Liberty sued GTN in federal court in Texas seeking
payment of $140 million (the maximum amount of its guarantee) out of the $177
million termination claim. Subsequently, ET Power countersued Liberty in
bankruptcy court seeking to collect a $108 million termination payment under the
tolling agreement. Liberty's obligations under the tolling agreement are secured
by a $35 million letter of credit issued under the senior secured revolver of
Reliant Energy. If the letter of credit were to be drawn, Reliant Energy would
be required to reimburse the issuing bank and may have an unsecured claim for
reimbursement against Liberty.
In April 2004, the parties commenced arbitration proceedings over the
disputed termination payment. Liberty submitted its arbitration claim for $159
million plus costs, fees and interest. Pending the conclusion of the
arbitration, Liberty has agreed to stay its litigation against GTN. We are not
able to predict the ultimate outcome of the arbitration and related litigation.
If, however, Liberty recovers the termination amount, the credit agreement
15
requires that such amounts be used to pay down principal and interest under the
Liberty credit agreement. Under United States and Pennsylvania tax laws, the
receipt of a termination payment by Liberty will likely be deemed taxable income
to Reliant Energy and its other affiliates even though the proceeds are required
to pay down debt to the lenders.
(13) RECEIVABLES FACILITY
We have a receivables facility arrangement with financial institutions to
sell an undivided interest in certain of our accounts receivable from our retail
business under which the financial institutions can invest a maximum of $350
million for their interests in eligible receivables. This transaction is
accounted for as a sale of receivables and, as a result, the related receivables
are excluded from our consolidated balance sheets.
The following table details the outstanding receivables that have been
sold and the corresponding notes receivable from the Qualified Special Purpose
Entity (QSPE), which have been reflected in our consolidated balance sheets:
DECEMBER 31, 2003 MARCH 31, 2004
----------------- -----------------
(IN MILLIONS)
Accounts receivable sold ............................................... $ 528 $ 467
Notes receivable from QSPE ............................................. (394) (289)
Equity contributed to QSPE ............................................. (16) (14)
----------------- -----------------
Funding outstanding .................................................. $ 118 $ 164
================= =================
We service the receivables and receive a fee of 0.5% and 0.4% of cash
collected for the three months ended March 31, 2003 and 2004, respectively. The
following table details the servicing fee income and costs associated with the
sale of receivables:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2003 2004
----------------- -----------------
(IN MILLIONS)
Servicing fee income ................................................... $ 3 $ 5
Interest income ........................................................ 2 3
Loss on sale of receivables ............................................ (4) (9)
----------------- -----------------
Net .................................................................. $ 1 $ (1)
================= =================
The amount of funding available to us under the receivables facility
fluctuates based on the amount of eligible receivables available and by the
performance of the receivables portfolio. The following table details the
maximum amount under the receivables facility and the amount of funding
outstanding as of each date indicated:
DECEMBER 31, 2003 MARCH 31, 2004
----------------- -----------------
(IN MILLIONS)
Maximum amount under the receivables facility .......................... $ 350 $ 350
Funding outstanding .................................................... (118) (164)
----------------- -----------------
Unused and unavailable amount ........................................ $ 232 $ 186
================= =================
Prior to their sale, the book value of the accounts receivable is offset
by the amount of the allowance for doubtful accounts and customer security
deposits. In calculating the loss on sale for the three months ended March 31,
2003 and 2004, an average discount rate of 5.03% and 7.65%, respectively, was
applied to projected cash collections over a 6-month period. Our collection
experience indicates that we can expect 98% of the accounts receivable to be
collected within a 6-month period.
The receivables facility expires on September 28, 2004. If the receivables
facility is not renewed on its termination date, the collections from the
receivables purchased will repay the financial institutions' investment and no
new receivables will be purchased under the receivables facility.
16
(14) SUPPLEMENTAL GUARANTOR INFORMATION
For the two issuances of senior secured notes in July 2003 totaling $1.1
billion, our wholly-owned subsidiaries are either (a) full and unconditional
guarantors, jointly and severally, (b) limited guarantors or (c) non-guarantors.
The primary full and unconditional guarantors of these senior secured
notes are: Reliant Energy Aurora, LP; Reliant Energy Capital (Europe), Inc.
(RECE) (effective February 2004); Reliant Energy Choctaw County, LLC; Reliant
Energy Coolwater, Inc.; Reliant Energy Electric Solutions, LLC; Reliant Energy
Europe, Inc. (REE) (effective February 2004); Reliant Energy Northeast Holdings,
Inc.; Reliant Energy Ormond Beach, Inc.; Reliant Energy Power Generation, Inc.;
Reliant Energy Retail Holdings, LLC; Reliant Energy Retail Services, LLC;
Reliant Energy Services and Reliant Energy Solutions, LLC.
Orion Power Holdings is the only limited guarantor of these senior secured
notes and its guarantee of both the March 2003 credit facilities and the senior
secured notes is limited to approximately $1.1 billion.
The primary non-guarantors of these senior secured notes are: Astoria
Generating Company, LP; Erie Boulevard Hydropower, LP; Liberty Electric; Liberty
Power; Orion Power Capital, LLC (Orion Capital); Orion MidWest; Orion Power
MidWest LP, LLC; Orion NY; Orion Power New York LP, LLC; Reliant Energy
Channelview, L.P. (Channelview); Reliant Energy Trading & Marketing, B.V. (sold
in December 2003); Reliant Energy Mid-Atlantic Power Holdings, LLC and its
subsidiaries (REMA); Reliant Energy New Jersey Holdings, LLC; Reliant Energy
Power Generation Benelux, N.V. (sold in December 2003) and Reliant Energy Europe
B.V. (sold in December 2003). All subsidiaries of Orion Power Holdings are
non-guarantors. Effective February 2004, after the sale of our European energy
operations, the following entities formerly classified as non-guarantors, became
full and unconditional guarantors: RECE and REE. No adjustments to the
disclosures for 2003 were made for this change. The change has been made
prospectively beginning in 2004.
Each of Astoria Generating Company, L.P., Carr Street Generating Station,
LP, Erie Boulevard Hydropower, LP, Orion Capital, Orion MidWest, Orion Power
MidWest LP, LLC, Orion Power MidWest GP, Inc., Orion NY, Orion Power New York
LP, LLC, Orion Power New York GP, Inc. and Twelvepole Creek, LLC is a separate
legal entity and has its own assets.
17
The following condensed consolidating financial information presents
supplemental information as of December 31, 2003 and March 31, 2004 and for the
three months ended March 31, 2003 and 2004:
Condensed Consolidating Statements of Operations.
THREE MONTHS ENDED MARCH 31, 2003
--------------------------------------------
ORION POWER
RELIANT ENERGY GUARANTORS HOLDINGS
-------------- ---------- -----------
(IN MILLIONS)
Revenues ......................................... $ - $ 2,153 $ -
Trading margins .................................. - (83) -
-------------- ---------- -----------
Total .......................................... - 2,070 -
-------------- ---------- -----------
Fuel and cost of gas sold ........................ - 197 -
Purchased power .................................. - 1,708 -
Accrual for payment to CenterPoint
Energy, Inc. ................................... - 47 -
Operation and maintenance ........................ - 88 -
General and administrative ....................... 2 67 -
Depreciation and amortization .................... 5 31 -
-------------- ---------- -----------
Total .......................................... 7 2,138 -
-------------- ---------- -----------
Operating (loss) income .......................... (7) (68) -
-------------- ---------- -----------
Gains from investments, net ...................... - 1 -
Loss of equity investments ....................... - (1) -
(Loss) income of equity investments of
consolidated subsidiaries ...................... (436) (379) 17
Loss on sale of receivables ...................... - (4) -
Other, net ....................................... - - -
Interest expense
(53) (1) (10)
Interest income .................................. 1 12 -
Interest income (expense) - affiliated
companies, net
41 (12) -
-------------- ---------- -----------
Total other (expense) income ................... (447) (384) 7
-------------- ---------- -----------
(Loss) income from continuing operations ......... (454) (452) 7
before income taxes
Income tax (benefit) expense ..................... (3) (24) (3)
-------------- ---------- -----------
(Loss) income from continuing operations ......... (451) (428) 10
-------------- ---------- -----------
(Loss) income from discontinued operations ....... (1) 38 -
before income taxes
Income tax expense ............................... - 13 -
-------------- ---------- -----------
(Loss) income from discontinued operations ....... (1) 25 -
-------------- ---------- -----------
(Loss) income before cumulative effect of ........ (452) (403) 10
accounting changes
Cumulative effect of accounting
changes, net of tax ............................ - (43) -
-------------- ---------- -----------
Net (loss) income ................................ $ (452) $ (446) $ 10
============== ========== ===========
THREE MONTHS ENDED MARCH 31, 2003
--------------------------------------------
NON-
GUARANTORS ADJUSTMENTS(1) CONSOLIDATED
---------- -------------- --------------
(IN MILLIONS)
Revenues ......................................... $ 566 $ (178) $ 2,541
Trading margins .................................. - - (83)
---------- -------------- --------------
Total .......................................... 566 (178) 2,458
---------- -------------- --------------
Fuel and cost of gas sold ........................ 253 (105) 345
Purchased power .................................. 12 (73) 1,647
Accrual for payment to CenterPoint
Energy, Inc. ................................... - - 47
Operation and maintenance ........................ 137 - 225
General and administrative ....................... 26 - 95
Depreciation and amortization .................... 52 - 88
---------- -------------- --------------
Total .......................................... 480 (178) 2,447
---------- -------------- --------------
Operating (loss) income .......................... 86 - 11
---------- -------------- --------------
Gains from investments, net ...................... - - 1
Loss of equity investments ....................... - - (1)
(Loss) income of equity investments of
consolidated subsidiaries ...................... - 798 -
Loss on sale of receivables ...................... - - (4)
Other, net ....................................... 1 - 1
Interest expense
(33) - (97)
Interest income .................................. 1 - 14
Interest income (expense) - affiliated
companies, net
(29) - -
---------- -------------- --------------
Total other (expense) income ................... (60) 798 (86)
---------- -------------- --------------
(Loss) income from continuing operations ......... 26 798 (75)
before income taxes
Income tax (benefit) expense ..................... 7 - (23)
---------- -------------- --------------
(Loss) income from continuing operations ......... 19 798 (52)
---------- -------------- --------------
(Loss) income from discontinued operations ....... (397) - (360)
before income taxes
Income tax expense ............................... 2 - 15
---------- -------------- --------------
(Loss) income from discontinued operations ....... (399) - (375)
---------- -------------- --------------
(Loss) income before cumulative effect of ........ (380) 798 (427)
accounting changes
Cumulative effect of accounting
changes, net of tax ............................ 18 - (25)
---------- -------------- --------------
Net (loss) income ................................ $ (362) $ 798 $ (452)
========== ============== ==============
18
THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------------------------------
RELIANT ORION POWER NON-
ENERGY GUARANTORS HOLDINGS GUARANTORS ADJUSTMENTS(1) CONSOLIDATED
------- ---------- ----------- ---------- -------------- ------------
(IN MILLIONS)
Revenues...................................... $ - $ 1,414 $ - $ 573 $ (254) $ 1,733
Trading margins............................... - 6 - (3) - 3
------- ---------- ----------- ---------- -------------- ------------
Total....................................... - 1,420 - 570 (254) 1,736
------- ---------- ----------- ---------- -------------- ------------
Fuel and cost of gas sold..................... - 106 - 247 (103) 250
Purchased power............................... - 1,093 - 57 (151) 999
Accrual for payment to CenterPoint Energy,
Inc. - 2 - - - 2
Operation and maintenance..................... - 101 - 149 - 250
General and administrative.................... - 52 - 28 - 80
Depreciation and amortization................. - 47 - 71 - 118
------- ---------- ----------- ---------- -------------- ------------
Total....................................... - 1,401 - 552 (254) 1,699
------- ---------- ----------- ---------- -------------- ------------
Operating income.............................. - 19 - 18 - 37
------- ---------- ----------- ---------- -------------- ------------
Loss of equity investments.................... - (1) - - - (1)
(Loss) income of equity investments of
consolidated subsidiaries................... (10) (16) 3 - 23 -
Loss on sale of receivables................... - (9) - - - (9)
Other, net.................................... - - - 6 - 6
Interest expense............................. (71) (8) (11) (33) 13 (110)
Interest income............................... - 4 - 1 - 5
Interest income (expense)- affiliated
companies, net.............................. 31 (2) - (16) (13) -
------- ---------- ----------- ---------- -------------- ------------
Total other expense......................... (50) (32) (8) (42) 23 (109)
------- ---------- ----------- ---------- -------------- ------------
Loss from continuing operations before income
income taxes................................ (50) (13) (8) (24) 23 (72)
Income tax benefit............................ (12) - (4) (11) - (27)
------- ---------- ----------- ---------- -------------- ------------
Loss from continuing operations............... (38) (13) (4) (13) 23 (45)
------- ---------- ----------- ---------- -------------- ------------
Income from discontinued operations........... - - - - - -
------- ---------- ----------- ---------- -------------- ------------
Loss before cumulative effect of accounting
change...................................... (38) (13) (4) (13) 23 (45)
Cumulative effect of accounting change, net
of tax...................................... - 7 - - - 7
------- ---------- ----------- ---------- -------------- ------------
Net loss...................................... $ (38) $ (6) (4) (13) $ 23 $ (38)
======= ========== =========== ========== ============== ============
- -------------
(1) These amounts relate to either (a) eliminations and adjustments recorded in
the normal consolidation process or (b) reclassifications recorded due to
differences in classifications at the subsidiary levels compared to the
consolidated level.
19
Condensed Consolidating Balance Sheets.
DECEMBER 31, 2003
-------------------------------------------------------------------------------
RELIANT ORION POWER NON-
ENERGY GUARANTORS HOLDINGS GUARANTORS ADJUSTMENTS(1) CONSOLIDATED
------- ---------- ----------- ---------- -------------- ------------
(IN MILLIONS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 23 $ 64 $ 10 $ 50 $ - $ 147
Restricted cash............................... 7 - 23 221 - 251
Accounts and notes receivable, principally
customer, net................................. 83 933 22 157 - 1,195
Accounts and notes receivable - affiliated
companies..................................... 421 546 - 257 (1,224) -
Inventory..................................... - 109 - 160 - 269
Trading and derivative assets................. - 372 - 121 - 493
Other current assets.......................... 8 218 3 105 - 334
------- ---------- ----------- ---------- -------------- ------------
Total current assets...................... 542 2,242 58 1,071 (1,224) 2,689
------- ---------- ----------- ---------- -------------- ------------
Property, plant and equipment, gross............ - 3,943 1 5,307 - 9,251
Accumulated depreciation........................ - (348) - (376) - (724)
------- ---------- ----------- ---------- -------------- ------------
PROPERTY, PLANT AND EQUIPMENT, NET.............. - 3,595 1 4,931 - 8,527
------- ---------- ----------- ---------- -------------- ------------
OTHER ASSETS:
Goodwill, net................................. - 84 - 399 - 483
Other intangibles, net........................ - 127 - 592 - 719
Notes receivable - affiliated companies....... 1,960 685 - 44 (2,689) -
Equity investments............................ - 95 - - - 95
Equity investments in consolidated
subsidiaries.................................... 5,178 275 2,821 - (8,274) -
Trading and derivative assets................. 3 170 - 27 - 200
Restricted cash............................... - - - 37 - 37
Other long-term assets........................ 139 139 26 279 (25) 558
------- ---------- ----------- ---------- -------------- ------------
Total other assets........................ 7,280 1,575 2,847 1,378 (10,988) 2,092
------- ---------- ----------- ---------- -------------- ------------
TOTAL ASSETS.............................. $ 7,822 $ 7,412 $ 2,906 $ 7,380 $ (12,212) $ 13,308
======= ========== =========== ========== ============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and
short-term borrowings....................... $ (2) $ 4 $ 8 $ 421 $ - $ 431
Accounts payable, principally trade........... 5 444 - 68 - 517
Accounts and notes payable - affiliated
companies................................... - 604 8 656 (1,268) -
Trading and derivative liabilities............ - 236 - 121 - 357
Accrual for payment to CenterPoint
Energy,Inc. ................................ - 175 - - - 175
Other current liabilities..................... 76 367 13 62 - 518
------- ---------- ----------- ---------- -------------- ------------
Total current liabilities................. 79 1,830 29 1,328 (1,268) 1,998
------- ---------- ----------- ---------- -------------- ------------
OTHER LIABILITIES:
Notes payable - affiliated companies.......... - 1,970 - 675 (2,645) -
Trading and derivative liabilities............ - 152 - 64 - 216
Other long-term liabilities................... 33 297 4 704 (25) 1,013
------- ---------- ----------- ---------- -------------- ------------
Total other liabilities................... 33 2,419 4 1,443 (2,670) 1,229
------- ---------- ----------- ---------- -------------- ------------
LONG-TERM DEBT.................................. 3,338 400 458 1,513 - 5,709
------- ---------- ----------- ---------- -------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY............................ 4,372 2,763 2,415 3,096 (8,274) 4,372
------- ---------- ----------- ---------- -------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................ $ 7,822 $ 7,412 $ 2,906 $ 7,380 $ (12,212) $ 13,308
======= ========== =========== ========== ============== ============
20
MARCH 31, 2004
-----------------------------------------------------------------
RELIANT ORION POWER NON-
ENERGY GUARANTORS HOLDINGS GUARANTORS
------------ ------------ ------------ ------------
(IN MILLIONS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 24 $ 49 $ 17 $ 27
Restricted cash............................................ 7 - 17 205
Accounts and notes receivable, principally customer, net... - 586 20 160
Accounts and notes receivable - affiliated companies....... 557 522 - 208
Inventory.................................................. - 100 - 142
Trading and derivative assets.............................. - 450 - 152
Other current assets....................................... 9 284 4 110
------------ ------------ ------------ ------------
Total current assets.................................. 597 1,991 58 1,004
------------ ------------ ------------ ------------
Property, plant and equipment, gross.......................... - 3,999 1 5,305
Accumulated depreciation...................................... - (393) - (420)
------------ ------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET............................ - 3,606 1 4,885
------------ ------------ ------------ ------------
OTHER ASSETS:
Goodwill, net ............................................. - 84 - 399
Other intangibles, net..................................... - 145 - 603
Notes receivable - affiliated companies.................... 1,819 688 - 44
Equity investments......................................... - 93 - -
Equity investments in consolidated subsidiaries............ 5,231 259 2,873 -
Trading and derivative assets.............................. 1 172 - 56
Restricted cash............................................ - - - 37
Other long-term assets..................................... 133 367 29 288
------------ ------------ ------------ ------------
Total other assets.................................... 7,184 1,808 2,902 1,427
------------ ------------ ------------ ------------
TOTAL ASSETS.......................................... $ 7,781 $ 7,405 $ 2,961 $ 7,316
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and short-term
borrowings............................................... $ (2) $ 3 $ 8 $ 392
Accounts payable, principally trade........................ 4 448 - 53
Accounts and notes payable - affiliated companies.......... - 717 7 608
Trading and derivative liabilities......................... - 210 - 152
Accrual for payment to CenterPoint Energy, Inc............. - 177 - -
Other current liabilities.................................. 49 350 25 57
------------ ------------ ------------ ------------
Total current liabilities............................. 51 1,905 40 1,262
------------ ------------ ------------ ------------
OTHER LIABILITIES:
Notes payable - affiliated companies....................... - 1,829 - 677
Trading and derivative liabilities......................... - 167 - 122
Other long-term liabilities................................ 45 335 4 629
------------ ------------ ------------ ------------
Total other liabilities............................... 45 2,331 4 1,428
------------ ------------ ------------ ------------
LONG-TERM DEBT................................................ 3,311 400 455 1,494
------------ ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY.......................................... 4,374 2,769 2,462 3,132
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $ 7,781 $ 7,405 $ 2,961 $ 7,316
============ ============ ============ ============
MARCH 31, 2004
---------------------------------
ADJUSTMENTS (1) CONSOLIDATED
--------------- ------------
(IN MILLIONS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ - $ 117
Restricted cash............................................ - 229
Accounts and notes receivable, principally customer, net... (18) 748
Accounts and notes receivable - affiliated companies....... (1,287) -
Inventory.................................................. - 242
Trading and derivative assets.............................. - 602
Other current assets....................................... - 407
-------------- ------------
Total current assets.................................. (1,305) 2,345
-------------- ------------
Property, plant and equipment, gross.......................... - 9,305
Accumulated depreciation...................................... - (813)
-------------- ------------
PROPERTY, PLANT AND EQUIPMENT, NET............................ - 8,492
-------------- ------------
OTHER ASSETS:
Goodwill, net ............................................. - 483
Other intangibles, net..................................... - 748
Notes receivable - affiliated companies.................... (2,551) -
Equity investments......................................... - 93
Equity investments in consolidated subsidiaries............ (8,363) -
Trading and derivative assets.............................. - 229
Restricted cash............................................ - 37
Other long-term assets..................................... (40) 777
-------------- ------------
Total other assets.................................... (10,954) 2,367
-------------- ------------
TOTAL ASSETS.......................................... $ (12,259) $ 13,204
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and short-term
borrowings............................................... $ - $ 401
Accounts payable, principally trade........................ - 505
Accounts and notes payable - affiliated companies.......... (1,332) -
Trading and derivative liabilities......................... - 362
Accrual for payment to CenterPoint Energy, Inc............. - 177
Other current liabilities.................................. (18) 463
-------------- ------------
Total current liabilities............................. (1,350) 1,908
-------------- ------------
OTHER LIABILITIES:
Notes payable - affiliated companies....................... (2,506) -
Trading and derivative liabilities......................... - 289
Other long-term liabilities................................ (40) 973
-------------- ------------
Total other liabilities............................... (2,546) 1,262
-------------- ------------
LONG-TERM DEBT................................................ - 5,660
-------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY.......................................... (8,363) 4,374
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $ (12,259) $ 13,204
============== =============
- ----------
(1) These amounts relate to either (a) eliminations and adjustments recorded
in the normal consolidation process or (b) reclassifications recorded due
to differences in classifications at the subsidiary levels compared to the
consolidated level.
21
Condensed Consolidating Statements of Cash Flows.
THREE MONTHS ENDED MARCH 31, 2003
----------------------------------------------------
ORION POWER NON-
RELIANT ENERGY GUARANTORS HOLDINGS GUARANTORS
-------------- ---------- -------- ----------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used in) provided by continuing
operations from operating activities............. $ (145) $ (97) $ 12 $ (2)
Net cash (used in) provided by discontinued
operations from operating activities............. (4) 4 - 5
------------- --------- --------- --------
Net cash (used in) provided by operating
activities....................................... (149) (93) 12 3
------------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (8) (161) - (20)
Investments in and distributions from
subsidiaries, net and Reliant Energy's advances
to and distributions from its wholly-owned
subsidiaries, net (2)............................ (62) - - -
------------- --------- --------- --------
Net cash used in continuing operations from
investing activities.......................... (70) (161) - (20)
Net cash used in discontinued operations from
investing activities.......................... - - - (1)
------------- --------- --------- --------
Net cash used in investing activities............ (70) (161) - (21)
------------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt....................... - 95 - -
Payments of long-term debt......................... - (1) - (11)
Decrease in short-term borrowings, net............. (261) (1) - (6)
Changes in notes with affiliated companies, net (3) - 7 - 55
Payments of financing costs........................ (131) - - -
Proceeds from issuances of treasury stock.......... 2 - - -
------------- --------- --------- --------
Net cash (used in) provided by continuing
operations from financing activities.......... (390) 100 - 38
Net cash used in discontinued operations from
financing activities.......................... - - - -
------------- --------- --------- --------
Net cash (used in) provided by financing
activities.................................... (390) 100 - 38
------------- --------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS........................................ - - - 4
------------- --------- --------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS............... (609) (154) 12 24
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...... 657 403 6 49
------------- --------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $ 48 $ 249 $ 18 $ 73
============= ========= ========= ========
THREE MONTHS ENDED MARCH 31, 2003
---------------------------------
ADJUSTMENTS (1) CONSOLIDATED
--------------- ------------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used in) provided by continuing
operations from operating activities............. $ - $ (232)
Net cash (used in) provided by discontinued
operations from operating activities............. - 5
------------- --------------
Net cash (used in) provided by operating
activities....................................... - (227)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... - (189)
Investments in and distributions from
subsidiaries, net and Reliant Energy's advances
to and distributions from its wholly-owned
subsidiaries, net (2)............................ 62 -
------------- --------------
Net cash used in continuing operations from
investing activities.......................... 62 (189)
Net cash used in discontinued operations from
investing activities.......................... - (1)
------------- --------------
Net cash used in investing activities............ 62 (190)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt....................... - 95
Payments of long-term debt......................... - (12)
Decrease in short-term borrowings, net............. - (268)
Changes in notes with affiliated companies, net (3) (62) -
Payments of financing costs........................ - (131)
Proceeds from issuances of treasury stock.......... - 2
------------- --------------
Net cash (used in) provided by continuing
operations from financing activities.......... (62) (314)
Net cash used in discontinued operations from
financing activities.......................... - -
------------- --------------
Net cash (used in) provided by financing
activities.................................... (62) (314)
------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS........................................ - 4
------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS............... - (727)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...... - 1,115
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $ - $ 388
============= ==============
22
THREE MONTHS ENDED MARCH 31, 2004
---------------------------------
RELIANT ORION POWER
ENERGY GUARANTORS HOLDINGS
------ ---------- --------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by continuing operations from operating
activities................................................ $ 10 $ 41 $ 9
------------ ------------ ---------------
Net cash provided by operating activities................... 10 41 9
------------ ------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ - (55) -
Investments in and distributions from subsidiaries, net and
Reliant Energy's advances to and distributions from its
wholly-owned subsidiaries, net (2)........................ 2 - -
Purchase and sale of permits and licenses to affiliates.... - (20) -
Other....................................................... - 2 -
------------ ------------ ---------------
Net cash provided by (used in) continuing operations from
investing activities................................... 2 (73) -
------------ ------------ ---------------
Net cash provided by (used in) investing activities....... 2 (73) -
------------ ------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt.................................. - (1) -
(Decrease) increase in short-term borrowings, net........... (28) - -
Changes in notes with affiliated companies, net (3)......... - 18 (2)
Other, net.................................................. 17 - -
------------ ------------ ---------------
Net cash (used in) provided by continuing operations from
financing activities................................... (11) 17 (2)
------------ ------------ ---------------
Net cash (used in) provided by financing activities....... (11) 17 (2)
------------ ------------ ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................ 1 (15) 7
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............... 23 64 10
------------ ------------ ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $ 24 $ 49 $ 17
============ ============ ===============
THREE MONTHS ENDED MARCH 31, 2004
---------------------------------
NON-
GUARANTORS ADJUSTMENTS (1) CONSOLIDATED
---------- --------------- ------------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by continuing operations from operating
activities................................................ $ 35 $ - $ 95
------------ ----------------- ---------------
Net cash provided by operating activities................... 35 - 95
------------ ----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (15) - (70)
Investments in and distributions from subsidiaries, net and
Reliant Energy's advances to and distributions from its
wholly-owned subsidiaries, net (2)........................
- (2) -
Purchase and sale of permits and licenses to affiliates.... 20 - -
Other....................................................... - - 2
------------ ----------------- ---------------
Net cash provided by (used in) continuing operations from
investing activities................................... 5 (2) (68)
------------ ----------------- ---------------
Net cash provided by (used in) investing activities....... 5 (2) (68)
------------ ----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt.................................. (48) - (49)
(Decrease) increase in short-term borrowings, net........... 3 - (25)
Changes in notes with affiliated companies, net (3)......... (18) 2 -
Other, net.................................................. - - 17
------------ ----------------- ---------------
Net cash (used in) provided by continuing operations from
financing activities................................... (63) 2 (57)
------------ ----------------- ---------------
Net cash (used in) provided by financing activities....... (63) 2 (57)
------------ ----------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................ (23) - (30)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............... 50 - 147
------------ ----------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $ 27 $ - $ 117
============ ================= ===============
- -------------
(1) These amounts relate to either (a) eliminations and adjustments recorded
in the normal consolidation process or (b) reclassifications recorded due
to differences in classifications at the subsidiary levels compared to the
consolidated level.
(2) Investments in and distributions from subsidiaries, net and Reliant
Energy's advances to and distributions from its wholly-owned subsidiaries,
net are classified as investing activities for Reliant Energy and its
wholly-owned subsidiaries.
(3) Changes in notes with affiliated companies, net are classified as
financing activities for Reliant Energy's wholly-owned subsidiaries.
(15) REPORTABLE SEGMENTS
Our business operations currently consist of two principal business
segments:
- Retail energy -- provides electricity and related services to retail
customers primarily in Texas (including acquiring and managing the
related supply), and
- Wholesale energy -- generates and sells electricity and other
related services in wholesale energy markets in various regions of
the United States.
Our remaining operations include unallocated corporate functions and minor
equity and other investments. As part of our efforts to simplify the corporate
structure, we are evaluating a possible change in our reportable segments.
Our determination of current reportable segments considers the strategic
operating units under which we manage sales, allocate resources and assess
performance of various products and services to wholesale or retail customers.
Earnings (loss) before interest expense, interest income and income taxes (EBIT)
is one of the primary measurements used by our management to evaluate
performance. EBIT is not defined under GAAP, should not be considered in
isolation or as a substitute for a measure of performance prepared in accordance
with GAAP and may not be indicative of income (loss) from operations as
determined under GAAP.
23
Financial data for business segments are as follows:
RETAIL WHOLESALE OTHER
ENERGY ENERGY OPERATIONS ELIMINATIONS CONSOLIDATED
------- ---------- ----------- ------------ ------------
(IN MILLIONS)
THREE MONTHS ENDED
MARCH 31, 2003 (EXCEPT AS DENOTED):
Revenues from external customers ............ $ 1,133 $ 1,408 $ - $ - $ 2,541
Intersegment revenues ....................... - 53 - (53) -
Trading margins ............................. - (83) - - (83)
Gross margin, excluding trading
margins (1) ............................... 185 364 - - 549
Operation and maintenance expenses .......... 57 168 - - 225
General and administrative expenses ......... 50 39 6 - 95
Depreciation and amortization ............... 9 74 5 - 88
Operating income (loss) ..................... 22 - (11) - 11
Loss of equity investments .................. - (1) - - (1)
EBIT ........................................ 18 - (10) - 8
Expenditures for long-lived assets .......... 5 175 9 - 189
Equity investments as of December 31,
2003 ...................................... - 95 - - 95
Total assets as of December 31, 2003 ........ 1,162 11,767 555 (176) 13,308
THREE MONTHS ENDED
MARCH 31, 2004 (EXCEPT AS DENOTED):
Revenues from external customers ............ 1,152 581 - - 1,733
Intersegment revenues ....................... - 60 - (60) -
Trading margins ............................. - 3 - - 3
Gross margin, excluding trading
margins (1) ............................... 162 322 - - 484
Operation and maintenance expenses .......... 55 195 - - 250
General and administrative expenses ......... 48 35 (3) - 80
Depreciation and amortization ............... 11 100 7 - 118
Operating income (loss) ..................... 46 (5) (4) - 37
Loss of equity investments .................. - (1) - - (1)
EBIT ........................................ 37 - (4) - 33
Expenditures for long-lived assets .......... 1 67 2 - 70
Equity investments as of March 31, 2004 ..... - 93 - - 93
Total assets as of March 31, 2004 ........... 1,139 11,906 410 (251) 13,204
- -------------
(1) Total revenues less (a) trading margins, (b) fuel and cost of gas sold and
(c) purchased power.
THREE MONTHS ENDED MARCH 31,
--------------------------------
2003 2004
-------------- --------------
(IN MILLIONS)
RECONCILIATION OF OPERATING INCOME TO EBIT AND EBIT TO NET LOSS:
Operating income ................................................... $ 11 $ 37
Gains from investments, net ........................................ 1 -
Loss of equity investments ......................................... (1) (1)
Loss on sale of receivables ........................................ (4) (9)
Other income, net .................................................. 1 6
-------------- --------------
EBIT ............................................................... 8 33
Interest expense ................................................... (97) (110)
Interest income .................................................... 14 5
-------------- --------------
Loss from continuing operations before income taxes ................ (75) (72)
Income tax benefit ................................................. (23) (27)
-------------- --------------
Loss from continuing operations .................................... (52) (45)
Loss from discontinued operations .................................. (375) -
-------------- --------------
Loss before cumulative effect of accounting changes ................ (427) (45)
Cumulative effect of accounting changes, net of tax ................ (25) 7
-------------- --------------
Net loss ....................................................... $ (452) $ (38)
============== ==============
24
(16) DISCONTINUED OPERATIONS - SALE OF OUR EUROPEAN ENERGY OPERATIONS AND DESERT
BASIN PLANT OPERATIONS
Our results of operations for the three months ended March 31, 2003,
include discontinued operations relating to our former European energy
operations and our former Desert Basin plant operations.
European Energy Operations. In February 2003, we signed an agreement to
sell the stock of the holding company for our European energy operations. The
sale closed in December 2003.
Revenues and pre-tax loss related to our European energy discontinued
operations were as follows for the three months ended March 31, 2003 (in
millions):
Revenues................................................... $ 195
Loss before income tax expense........................... (369)(1)
- --------------------
(1) Included in this amount is a $384 million loss related to our loss on
disposition, which was subsequently revised to a $310 million loss in
2003.
Desert Basin Plant Operations. On July 9, 2003, we signed an agreement to
sell our 588-megawatt Desert Basin plant, located in Casa Grande, Arizona. The
sale closed in October 2003.
Revenues and pre-tax income related to our Desert Basin plant discontinued
operations were as follows for the three months ended March 31, 2003 (in
millions):
Revenues................................................. $ 16
Income before income tax expense......................... 9
* * *
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is provided as a supplement to our interim financial
statements to help provide an understanding of our results of operations,
financial condition and changes in financial condition. It should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31,
2003. For a description of risk factors that could adversely affect our
operations, business or financial results, see "Risk Factors" included in Item 7
of our Annual Report on Form 10-K for the year ended December 31, 2003.
RECENT DEVELOPMENTS AND OTHER INFORMATION
Restructuring Impacts. Throughout 2004, we intend to continue to identify,
evaluate and pursue opportunities to restructure our business operations in
order to increase our efficiency, reduce our costs and reduce our liquidity and
capital requirements. We will incur short-term costs in the form of severance
payments, information technology systems investments, costs and write-offs
related to corporate leases and other restructuring costs as part of our efforts
to reduce our cost structure. We estimate that future severance and other
restructuring costs will be $55 million for April through December 2004. In
addition, severance costs and other restructuring costs are expected to be
incurred in 2005 and 2006. Future decisions to mothball, retire or dispose of
assets could result in impairment charges. In addition, we could have write-offs
or shorten depreciable lives of other types of property, plant and equipment,
such as information technology systems. We are currently evaluating the future
use of certain information technology systems.
Potential Impacts on "Price-to-Beat" Tariffs. In 2004, the Public Utility
Commission of Texas (PUCT) will determine the "stranded costs" of CenterPoint.
In March 2004, CenterPoint filed, together with us, a joint-application
requesting that the PUCT determine CenterPoint's stranded costs and review our
proposed $177 million payment to CenterPoint. Following this determination
(expected in the third quarter of 2004), the PUCT will revise the
"non-bypassable charges" to compensate CenterPoint for its stranded costs. On a
schedule consistent with the revision to the non-bypassable charges, we will
request an adjustment to "price-to-beat" to reflect the change in costs. Until
the price to beat is adjusted, any approved increase in CenterPoint's
non-bypassable charges will be borne by us. We cannot predict at this time what
level of stranded costs CenterPoint will be granted, nor can we predict the
timing or size of any adjustment to the price-to-beat.
As part of the proceeding to determine stranded costs, the PUCT will also
review CenterPoint's request for termination of certain credits in its
non-bypassable charges (excess mitigation credits). If the PUCT agrees to
terminate these excess mitigation credits, we estimate that we could incur
additional costs of approximately $0.3 million per day unless and until the PUCT
approves an adjustment in our "price-to-beat" tariff to compensate for the
termination of the credits.
In conjunction with the adjustment to the "price-to-beat" to reflect the
change in non-bypassable charges, we expect that the PUCT will also review the
fuel factor included in our price-to-beat tariff. If at the time of this review,
the average 12-month forward price of natural gas is lower than the average
price reflected in our then current "price-to-beat" fuel factor, the PUCT is
expected to lower our "price-to-beat" fuel factor.
For additional information see "Business-Retail
26
Energy-Regulation" in Part I, Item 1, of our Annual Report on Form 10-K for the
year ended December 31, 2003.
Potential Impacts of Applying Mark-to-Market Accounting Treatment to
Certain Contracts. For information regarding our intent to apply mark-to-market
accounting treatment to certain power capacity commitments we enter into in the
future, including the potential impact of this treatment on the volatility of
our earnings due to changes in natural gas and other commodity prices, see
"Quantitative and Qualitative Disclosures About Non-trading and Trading
Activities and Related Market Risks" in Item 3 of this report.
Choctaw Generation Facility Mothballed. In May 2004, we began to mothball
our 822-megawatt Choctaw generation facility, which began commercial operations
in July 2003, located in Mississippi. We currently plan to mothball this
facility until market conditions improve such that a re-opening of the plant is
justified. In connection with this, in the second quarter of 2004, we evaluated
the facility, which had a net book value of $459 million as of March 31, 2004,
for impairment and determined that no impairment had occurred.
CONSOLIDATED RESULTS OF OPERATIONS
See our consolidated statements of operations in our interim financial
statements.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Net Loss. We reported $38 million consolidated net loss, or $0.13 loss per
share, for the three months ended March 31, 2004 compared to $452 million
consolidated net loss, or $1.55 loss per share, for the three months ended March
31, 2003. The $414 million decrease in net loss is detailed as follows (in
millions):
Trading margins................................................. $ 86
Net unrealized gains/losses on non-trading energy derivatives... 37
Gross margin, excluding unrealized gains/losses and trading
margins....................................................... (102)
Accrual for payment to CenterPoint.............................. 45 (1)
Operation and maintenance....................................... (25)
Selling and marketing........................................... 2
Bad debt expense................................................ 9
Other general and administrative................................ 4
Depreciation and amortization................................... (30)
Interest expense................................................ (13)
Interest income................................................. (9)
Other, net...................................................... (1)
Income tax benefit.............................................. 4
Discontinued operations, net of tax............................. 375 (2)
---------
Net decrease before cumulative effect of accounting changes... 382
Cumulative effect of accounting change in 2004, net of tax..... 7 (3)
Cumulative effect of accounting changes in 2003, net of tax..... 25
---------
Net decrease in loss.......................................... $ 414
=========
- -----------------------
(1) See note 10(a) to our interim financial statements.
(2) See note 16 to our interim financial statements.
(3) See note 2 to our interim financial statements.
The following tables set forth our operational data relating to
electricity sales, retail customers and power generation for the periods
indicated:
27
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004
---------- ---------
(GIGAWATT HOURS)
ELECTRICITY SALES TO END-USE RETAIL CUSTOMERS:
Residential:
Houston service area.......................................... 3,663 3,678
Other 257 878
-------- ------
Total residential......................................... 3,920 4,556
Small commercial:
Houston service area.......................................... 2,474 1,867
Other 154 302
-------- ------
Total small commercial.................................... 2,628 2,169
Large commercial, industrial and institutional (1)............ 6,006 7,632
-------- ------
Total..................................................... 12,554 14,357
======== ======
MARCH 31,
---------------------------------
2003 2004
------------- -----------
(IN THOUSANDS, METERED LOCATIONS)
RETAIL CUSTOMERS:
Residential:
Houston service area.......................................... 1,407 1,379
Other 67 242
-------- ------
Total residential......................................... 1,474 1,621
Small commercial:
Houston service area.......................................... 205 191
Other 6 15
-------- ------
Total small commercial.................................... 211 206
Large commercial, industrial and institutional (1)............ 27 40
-------- ------
Total..................................................... 1,712 1,867
======== ======
THREE MONTHS ENDED MARCH 31,
---------------------------------
2003 2004
------------- -----------
(IN THOUSANDS, METERED LOCATIONS)
WEIGHTED AVERAGE RETAIL CUSTOMER COUNT:
Residential:
Houston service area.......................................... 1,409 1,385
Other 61 231
-------- ------
Total residential......................................... 1,470 1,616
Small commercial:
Houston service area.......................................... 204 191
Other 6 13
-------- ------
Total small commercial.................................... 210 204
Large commercial, industrial and institutional (1) ........... 29 40
-------- ------
Total..................................................... 1,709 1,860
======== ======
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004
---------- ---------
(GIGAWATT HOURS)
POWER GENERATION (2):
Wholesale net power generation volumes........................ 11,231 10,336
Wholesale power purchase volumes.............................. 16,290 7,642
-------- -------
Wholesale power sales volumes................................. 27,521 17,978
======== =======
- ------------------
(1) Includes volumes/customers of the Government Land Office for whom we
provide services.
(2) These amounts exclude volumes associated with our discontinued operations.
See note 16 to our interim financial statements. These amounts include
physically delivered volumes, physical transactions that are settled prior
to delivery and hedge activity related to our power generation portfolio.
28
Revenues. Our revenues, excluding trading margins, decreased $808 million
during the three months ended March 31, 2004 compared to the three months ended
March 31, 2003. The detail is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004 CHANGE
-------- -------- ------
(IN MILLIONS)
RETAIL ENERGY:
Retail energy revenues from end-use retail
customers:
Texas:
Residential and small commercial................. $ 564 $ 662 $ 98(1)
Large commercial, industrial and institutional... 331 427 96(2)
Outside of Texas:
Commercial, industrial and institutional......... - 30 30(3)
-------- ------- ------
Total.......................................... 895 1,119 224
Retail energy revenues from resales of purchased
power and other hedging activities................. 239 33 (206)(4)
Unrealized losses.................................... (1) - 1(5)
-------- ------- ------
Total retail energy revenues................... 1,133 1,152 19
-------- ------- ------
WHOLESALE ENERGY:
Wholesale energy third-party revenues................ 1,413 580 (833)(6)
Wholesale energy intersegment revenues............... 53 60 7
Unrealized (losses) gains............................ (5) 1 6(5)
-------- ------- ------
Total wholesale energy revenues................ 1,461 641 (820)
-------- ------- ------
Eliminations....................................... (53) (60) (7)
-------- ------- ------
Consolidated revenues, excluding trading
margins....................................... $ 2,541 $ 1,733 $ (808)
======== ======= ======
- --------------
(1) Increase primarily due to (a) a 14% increase in prices and (b) a 3%
increase in volumes sold primarily due to higher customer counts from
out-of-territory Texas customers.
(2) Increase primarily due to (a) increased volumes from additional customers
and (b) fixed-price contracts renewed at higher rates due to higher prices
of natural gas.
(3) Increase due to entering the PJM market in August 2003. The PJM market is
the wholesale electric market operated by PJM Interconnection, LLC
primarily in all or parts of Delaware, the District of Columbia, Maryland,
New Jersey, Ohio, Pennsylvania, Virginia and West Virginia. We are
currently operating in the states of New Jersey and Maryland.
(4) Decrease primarily due to (a) changes in our strategies for risk
management and hedging activities and (b) $61 million due to the
application of EITF No. 03-11 (see note 1 to our interim financial
statements).
(5) See analysis of margins below.
(6) Decrease primarily due to (a) $373 million due to the application of EITF
No. 03-11 (see note 1 to our interim financial statements), (b) a 35%
decrease in power sales volumes primarily due to lesser resales of
purchased power as a result of changes in our strategies for risk
management and hedging activities and (c) a $54 million change in our
refund obligation and credit reserves for energy sales in California (see
note 11(b) to our interim financial statements).
29
Fuel and Cost of Gas Sold and Purchased Power. Our fuel and cost of gas
sold and purchased power decreased $743 million during the three months ended
March 31, 2004 compared to the three months ended March 31, 2003. The detail is
as follows:
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2004 CHANGE
------ -------- ---------
(IN MILLIONS)
RETAIL ENERGY:
Costs of purchased power attributable to end-use
retail customers ............................... $ 655 $ 906 $ 251(1)
Costs of purchased power subsequently resold and
other hedging activities ....................... 239 33 (206)(2)
Retail energy intersegment costs .................. 53 60 7
Unrealized gains .................................. 1 (9) (10)(3)
------- ------- -------
Total retail energy ........................ 948 990 42
------- ------- -------
WHOLESALE ENERGY:
Wholesale energy third-party costs ................ 1,088 330 (758)(4)
Unrealized losses (gains) ......................... 9 (11) (20)
------- ------- -------
Total wholesale energy ..................... 1,097 319 (778)
------- ------- -------
Eliminations ...................................... (53) (60) (7)
------- ------- -------
Consolidated ................................... $ 1,992 $ 1,249 $ (743)
======= ======= =======
- ----------------
(1) Increase primarily due to (a) 28% increase in price of purchased power and
(b) 14% increase in volumes sold.
(2) See sub-footnote (4) above.
(3) See analysis of margins below.
(4) Decrease primarily due to (a) decreased purchased power volumes primarily
due to changes in our strategies for risk management and hedging
activities and (b) $373 million due to the application of EITF No. 03-11
(see note 1 to our interim financial statements).
Trading Margins. Trading margins increased $86 million (from a loss to
income) during the three months ended March 31, 2004 compared to the three
months ended March 31, 2003. The increase is primarily due to the fact that we
incurred a pre-tax loss of approximately $80 million in connection with a
financial gas spread position during the month of February 2003. We discontinued
our proprietary trading during March 2003. See "Quantitative and Qualitative
Disclosures About Non-trading and Trading Activities and Related Market Risks "
in Item 3 of this report.
30
Gross margins. Gross margins, excluding trading margins, decreased $65
million during the three months ended March 31, 2004 compared to the three
months ended March 31, 2003. The detail is as follows:
THREE MONTHS ENDED MARCH 31,
--------------------------------
2003 2004 CHANGE
------ ---- ------
(IN MILLIONS)
Retail energy...................................... $ 185 $ 162 $ (23)
Power generation................................... 364 322 (42)
----- ----- -----
Consolidated..................................... $ 549 $ 484 $ (65)
===== ===== =====
Our retail electricity gross margins decreased $23 million during the
three months ended March 31, 2004 compared to the three months ended March 31,
2003. The decrease is detailed as follows (in millions):
Change in ERCOT usage adjustments (revised estimates for
electric sales and supply costs related to prior periods)..... $ (24)(1)
Higher purchased power costs partially offset by higher
revenue rates and volumes..................................... (17)(2)
Gains recorded prior to 2003 realized/collected in current
periods....................................................... 7(3)
Net unrealized gains/losses on non-trading energy derivatives... 11(4)
----------
Net decrease in margin...................................... $ (23)
==========
- -----------
(1) See note 1 to our interim financial statements.
(2) Decrease primarily due to reduced hedging benefit realized in 2004
compared to 2003 and higher purchased power costs due to higher natural
gas prices partially offset by higher revenue rates and volumes due to
more customers.
(3) Increase due to impact of EITF Issue No. 02-03, "Issues Related to
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" (EITF No. 02-03).
(4) Increase primarily due to increase in mark-to-market activity and
volatility of forward prices.
Our power generation gross margins decreased $42 million during the three
months ended March 31, 2004 compared to the three months ended March 31, 2003.
The decrease is detailed as follows (in millions):
California energy sales refund provision reversals in 2003...... $ (87)(1)
Mid-Atlantic region............................................. (52)(2)
Mid-Continent region............................................ (7)(3)
California energy sales credit provisions in 2003............... 12 (1)
California energy sales credit provision reversals in 2004...... 21 (1)
Net unrealized gains/losses on non-trading energy derivatives... 26 (4)
New York region................................................. 47 (5)
Other, net...................................................... (2)
------
Net decrease in margin........................................ $ (42)
======
- --------------
(1) See note 11(b) to our interim financial statements.
(2) Decrease primarily due to (a) the retirement of a generating station in
the fourth quarter of 2003, (b) lower volumes due to milder weather and
(c) lower power prices realized by our coal-fired generation plants as a
result of reduced natural gas prices during 2004.
(3) Decrease primarily due to lower volumes as a result of lower generation
volumes under a "provider of last resort" contract.
(4) Increase primarily due to (a) $17 million of change in ineffectiveness on
hedges in the West region and (b) $9 million of mark-to-market changes due
to non-trading derivatives not designated as cash flow hedges.
(5) Increase primarily due to (a) 2003 losses on unhedged fuel and forward
power sales contracts, related to our New York City assets, not incurred
in 2004, (b) increased generation at our New York City assets, (c) higher
capacity revenues at our New York City assets and (d) increased generation
at our hydro facilities in 2004.
Accrual for Payment to CenterPoint. We will be required to make a payment
to CenterPoint estimated to be due in the third quarter of 2004 related to
residential customers. As of March 31, 2004, we estimate the payment to be $177
million. We accrued $47 million during the three months ended March 31, 2003,
for a total accrual of $175 million as of December 31, 2003. We accrued $2
million during the three months ended March 31, 2004, for a total accrual of
$177 million as of March 31, 2004. See note 10(a) to our interim financial
statements.
31
Operation and Maintenance. Operation and maintenance expenses increased
$25 million during the three months ended March 31, 2004 compared to the three
months ended March 31, 2003. The detail is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004 CHANGE
-------- -------- ------
(IN MILLIONS)
Retail energy...................................... $ 57 $ 55 $ (2)
Wholesale energy .................................. 168 195 27
-------- -------- ------
Consolidated..................................... $ 225 $ 250 $ 25
======== ======== ======
The increase is detailed as follows (in millions):
Power generation maintenance projects and outages............... 25 (1)
Severance costs................................................. 10
Three power generation facilities achieving commercial
operations in July 2003 and February 2004..................... 7
Taxes other than income taxes................................... 6 (2)
Insurance....................................................... 5
Professional fees primarily for information technology systems.. (5)
Other, net...................................................... (23)(3)
-----
Net increase in expense....................................... $ 25
=====
- --------------
(1) Increase primarily due to timing of maintenance projects and outages in
the West ($7 million), Mid-Continent ($7 million) and Mid-Atlantic ($6
million) regions.
(2) Increase primarily due to $5 million reduction in 2003 to gross receipts
tax related to an adjustment in the accrual rate.
(3) Decrease primarily relates to salaries and related benefit costs, due to
lower headcount, and other factors.
Selling and Marketing. Selling and marketing expenses, which relate to our
retail energy business, decreased $2 million during the three months ended March
31, 2004 compared to the three months ended March 31, 2003.
Bad Debt Expense. Bad debt expense decreased $9 million during the three
months ended March 31, 2004 compared to the three months ended March 31, 2003.
The detail is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004 CHANGE
-------- -------- ------
(IN MILLIONS)
Retail energy...................................... $ 11 $ 10 $ (1)
Wholesale energy .................................. 6 (2) (8)(1)
-------- -------- -----
Consolidated..................................... $ 17 $ 8 $ (9)
======== ======== =====
- ------------
(1) Decrease primarily due to recognition of $5 million of bad debt expense
during the three months ended March 31, 2003, related to the Liberty
generating station tolling agreement. See note 12 to our interim financial
statements.
Other General and Administrative. Other general and administrative
expenses decreased $4 million during the three months ended March 31, 2004
compared to the three months ended March 31, 2003. The decrease is detailed as
follows (in millions):
March 2003 refinancing costs.................................... $ (12)
Rent and utilities............................................. 5(1)
Severance costs................................................. 7
Other, net...................................................... (4)(2)
-------
Net decrease in expense....................................... $ (4)
=======
- --------------
(1) Increase in rent primarily due to our new corporate headquarters.
(2) Decrease primarily relates to salaries and related benefit costs, due to
lower headcount, and other factors.
Depreciation and Amortization. Depreciation and amortization expense
increased $30 million during the three months ended March 31, 2004 compared to
the three months ended March 31, 2003. The detail is as follows:
32
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004 CHANGE
-------- -------- ------
(IN MILLIONS)
Retail energy...................................... $ 9 $ 11 $ 2
Wholesale energy ..................................
74 100 26
Other operations................................... 5 7 2
-------- -------- ------
Consolidated..................................... $ 88 $ 118 $ 30
======== ======== ======
The increase is detailed as follows (in millions):
Accelerated depreciation on Wayne facility in the first quarter
of 2004 due to early retirement............................... $ 12
Depreciation for two power generation facilities (Hunterstown
and Choctaw) achieving commercial operation in July 2003...... 8
Increased amortization of air emissions regulatory allowances... 5
Depreciation for one power generation facility (Bighorn)
achieving commercial operation in February 2004............... 1
Other, net...................................................... 4
--------
Net increase in expense....................................... $ 30
========
Loss on Sale of Receivables. Loss on sale of receivables, which relates to
our retail energy business, increased $5 million during the three months ended
March 31, 2004 compared to the three months ended March 31, 2003. The increase
is due primarily to the increased amount of receivables sold in 2004 compared to
2003 as the maximum amount allowed to be sold under the facility was increased
in September 2003. See note 13 to our interim financials statements.
Interest Expense. Interest expense to third parties increased $13 million
during the three months ended March 31, 2004 compared to the three months ended
March 31, 2003. The increase is detailed as follows (in millions):
Higher interest rates primarily resulting from bank refinancing in March
2003 and capital market transactions in June and July 2003.................. $ 17
Reclass from other comprehensive loss for interest rate derivative
instruments................................................................. 5
Bank and facility fees expensed............................................... 4
Offset to interest expense for amortization of adjustments to fair value
of acquired interest rate swaps............................................. 3(1)
Amortization of warrants...................................................... 1
Reduction in outstanding debt................................................. (18)
Other, net.................................................................... 1
--------
Net increase in expense..................................................... $ 13
========
- -------------------
(1) See note 7 to our interim financial statements.
Interest Income. Interest income from third parties decreased $9 million
during the three months ended March 31, 2004 compared to the three months ended
March 31, 2003. The decrease is primarily due to interest recognized on
receivables related to energy sales in California (see note 11(b) to our interim
financial statements).
Income Tax Expense. During the three months ended March 31, 2003 and 2004,
our effective tax rate was 30.8% and 37.0%, respectively. Our reconciling items
from the federal statutory rate of 35% to the effective tax rate totaled $3
million and $1 million for the three months ended March 31, 2003 and 2004,
respectively. For the three months ended March 31, 2003, these items primarily
related to tax reserves and revisions of estimates for tax accrued in prior
periods, partially offset by state income tax benefits and utilization of
valuation allowances related to Canadian operating losses. For the three months
ended March 31, 2004, these items primarily related to state income tax
benefits, partially offset by valuation allowances related to Canadian operating
losses, tax reserves and stock-based compensation adjustments.
FINANCIAL CONDITION
In this section, we provide updates related to sources of liquidity and
capital resources, liquidity and capital
33
requirements and historical cash flows. For additional information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in Item 7 of our Annual Report on
Form 10-K for the year ended December 31, 2003.
SOURCES OF LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity and capital resources are cash flows
from operations, borrowings under our various revolving credit facilities,
proceeds from certain debt offerings and equity offerings and securitization of
assets.
Credit Capacity, Cash and Cash Equivalents. The following table summarizes
our credit capacity, cash and cash equivalents and current restricted cash at
March 31, 2004:
RELIANT ORION
TOTAL (1) ENERGY POWER OTHER
---------- -------- -------- ------
(IN MILLIONS)
Total committed credit.......................... $ 8,039 $ 5,260 $ 1,967 $ 812
Outstanding borrowings.......................... 5,957 3,315 1,840 802
Outstanding letters of credit................... 1,047 1,010 37 -
----------- -------- -------- ------
Unused borrowing capacity ...................... 1,035 935 90 (2) 10
Cash and cash equivalents....................... 117 24 18 75
Current restricted cash (3)..................... 229 7 197 25
----------- -------- -------- ------
Total......................................... $ 1,381 $ 966 $ 305 $ 110
=========== ======== ======== ======
- ------------
(1) As of March 31, 2004, we had consolidated current and long-term debt
outstanding of $6.1 billion. As of March 31, 2004, $58 million of our
committed credit facilities are to expire by March 31, 2005. For a
discussion of our credit facilities and other debt, see note 7 to our
interim financial statements.
(2) See notes 7 and 12 to our interim financial statements; $5 million of the
unused capacity relates to Liberty's working capital facility, which is
currently not available to Liberty.
(3) Current restricted cash includes cash at certain subsidiaries, the
transfer or distribution of which is effectively restricted by the terms
of financing agreements but is otherwise available to the applicable
subsidiary for use in satisfying certain of its obligations.
LIQUIDITY AND CAPITAL REQUIREMENTS
Our liquidity and capital requirements are primarily a function of our
working capital needs, capital expenditures, debt service requirements,
regulatory and legal settlements and collateral requirements. Examples of
working capital needs include purchases of fuel and electricity, plant
maintenance costs (including required environmental expenditures) and other
costs such as payroll. We expect that, in addition to the foregoing, our working
capital requirements will be affected by our cost-reduction efforts, which in
the near term will result in increased severance payments.
As set forth in Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2003, we currently have a sub-investment grade credit rating.
As a function of this status, we incur greater demands on liquidity and capital
resources than an investment grade company via our requirements to post
collateral with our counterparties. The following table details our cash
collateral posted and letters of credit outstanding as of April 28, 2004:
RELIANT ORION
TOTAL ENERGY POWER OTHER
------ --------- ------- ------
(IN MILLIONS)
Cash collateral posted:
For commercial operations.................... $ 168 $ 161 $ 7 $ -
In support of financings...................... 42 - - 42
------- --------- ------- ------
$ 210 $ 161 $ 7 $ 42
======= ========= ======= ======
Letters of credit outstanding:
For commercial operations..................... $ 673 $ 649 $ 24 $ -
In support of financings...................... 440 - 17 423
------- --------- ------- ------
$ 1,113 $ 649 $ 41 $ 423
======= ========= ======= ======
In certain cases, our counterparties have elected not to require us to
post collateral to which they are otherwise entitled under certain agreements.
However, these counterparties retain the right to require such collateral.
General factors that could trigger increased demands for collateral include
additional adverse changes in our industry,
34
negative regulatory or litigation developments and/or changes in commodity
prices. Based on current commodity prices, we estimate that as of April 28,
2004, we could be contractually required to post additional collateral of up to
$203 million related to our operations.
HISTORICAL CASH FLOWS
The following table provides an overview of cash flows relating to our
operating, investing and financing activities for the three months ended March
31, 2003 and 2004:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
-------- ----------
(IN MILLIONS)
Cash provided by (used in):
Operating activities..................................... $ (227) $ 95
Investing activities..................................... (190) (68)
Financing activities..................................... (314) (57)
Cash Flows - Operating Activities
Net cash provided by/used in operating activities changed by $322 million
during the three months ended March 31, 2004 compared to the same period in
2003. The change is detailed as follows (in millions):
Changes in working capital and other assets and liabilities............ $ 227(1)
Changes in cash flows from operations, excluding working capital and
other assets and liabilities......................................... 100(2)
Changes in cash flows related to our discontinued operations........... (5)
------
Net change........................................................... $ 322
======
- -------------------
(1) Change in net cash outflows from $184 million for the three months ended
March 31, 2003 to net cash inflows of $43 million for the same period in
2004 due to decrease in cash used to meet working capital and other assets
and liabilities requirements. See further analysis below.
(2) Change from net cash outflows of $48 million for the three months ended
March 31, 2003 to net cash inflows of $52 million for the same period in
2004 due primarily to cash flows of our wholesale business.
Three Months Ended March 31, 2004. Net cash provided by our operations for
the three months ended March 31, 2004 is detailed as follows (in millions):
Net cash flows from continuing operations, excluding
changes in working capital and other assets and
liabilities............................................ $ 52 (1)
Decrease in accounts and notes receivable and unbilled
revenue, net........................................... 83 (2)
Decrease in taxes receivable............................. 78 (3)
Net proceeds from receivables facility................... 46 (4)
Decrease in inventory.................................... 27 (5)
Decrease in restricted cash.............................. 22 (6)
Settlement of volumes delivered.......................... 11 (7)
Increase in lease payments related to REMA............... (11)(8)
Net purchase of option premiums.......................... (11)
Net purchases of emission credits........................ (47)
Increase in margin deposits on energy trading and
hedging activities..................................... (76)(9)
Other, net............................................... (79)
-----
Cash provided by operating activities.................. $ 95
=====
- --------------
(1) Due to the results of operations.
(2) Decrease primarily related to decrease in power sales volumes in our
wholesale business.
(3) Decrease primarily due to receipt of $76 million of federal tax refunds.
(4) See note 13 to our interim financial statements.
(5) Decrease primarily due to depletion in fuel inventory in our Mid-Atlantic
region, coupled with depletion of inventory related to the termination of
a New York offsite storage facility lease.
(6) Decrease primarily attributable to cash used in normal operations of
certain subsidiaries of Orion Power Holdings, which is restricted to
35
Reliant Energy.
(7) Relates to volumes delivered under contracted electricity sales to large
commercial, industrial and institutional customers and the related energy
supply contracts, which were previously recognized as unrealized earnings
in prior periods.
(8) Increase related to REMA's sale-leaseback agreements.
(9) Increase in cash deposits due to both a decrease in net unrealized value
of our broker accounts and increased counterparty exposure.
Three Months Ended March 31, 2003. Net cash used in our operations for the
three months ended March 31, 2003 is detailed as follows (in millions):
Net cash flows from continuing operations, excluding
changes in working capital and other assets and
liabilities............................................ $ (48)(1)
Restricted cash.......................................... (116)(2)
Increase in prepaid expenses............................. (62)(3)
Net purchases of emission credits........................ (34)
Purchase of interest rate caps........................... (29)
Increase in lease payments related to REMA............... (12)
Net payments under receivables facility.................. (11)(4)
Settlement of volumes delivered.......................... 18 (5)
Decrease in inventory.................................... 48 (6)
Taxes receivable......................................... 96 (7)
Discontinued operations.................................. 5
Other, net............................................... (82)
-------
Cash used in operating activities...................... $ (227)
=======
- --------------
(1) Due to the result of operations.
(2) Due to collateral deposits of $145 million made for letters of credit
relating to energy trading and hedging activities. Pursuant to a $200
million cash-secured revolving letter of credit facility, which has been
terminated, outstanding letters of credit were required to be 103% cash
collateralized. As of March 31, 2003, $128 million of letters of credit
were outstanding under this facility. In addition, there was a $29 million
decrease in restricted cash primarily attributable to cash used in normal
operations of certain subsidiaries of Orion Power Holdings, which is
restricted to Reliant Energy.
(3) Increase primarily due to prepayments related to gas, electric
transmission, property taxes and insurance for normal operations.
(4) See note 13 to our interim financial statements.
(5) Relates to volumes delivered under contracted electricity sales to large
commercial, industrial and institutional customers and the related energy
supply contracts, which were previously recognized as unrealized earnings
in prior periods.
(6) Decrease primarily due to decline in gas arbitrage transactions reducing
gas inventory, coupled with a decrease in fuel inventory because of
increases in both oil prices (we purchase less inventory while it is at
higher prices) and power generation.
(7) Change primarily relates to $55 million in federal and state income tax
refunds received, coupled with $34 million of increased accrued tax
liability related to our California operations.
Cash Flows - Investing Activities
Net cash used in investing activities decreased by $122 million during
three months ended March 31, 2004 compared to the same period in 2003, primarily
due to a decrease in capital expenditures related to our power generation
development projects as two facilities were completed in July 2003 and one
facility was completed in February 2004. See below for discussion.
Three Months Ended March 31, 2004. Net cash used in investing activities
during the three months ended March 31, 2004 was $68 million, due to $70 million
of capital expenditures ($51 million for growth capital expenditures and $19
million for maintenance capital expenditures) primarily related to our power
generation operations and development of power generation projects.
Three Months Ended March 31, 2003. Net cash used in investing activities
during the three months ended March 31, 2003 was $190 million, due to $189
million of capital expenditures ($151 million for growth capital expenditures
and $38 million for maintenance capital expenditures) primarily related to our
power generation operations and development of power generation projects.
Cash Flows - Financing Activities
Net cash used in financing activities during the three months ended March
31, 2004 changed by $257 million compared to the same period in 2003. See below
for discussion.
36
Three Months Ended March 31, 2004. Net cash used in financing activities
during the three months ended March 31, 2004 of $57 million is primarily due to
$49 million of payments of long-term debt (primarily Orion MidWest and Orion NY)
and a net decrease in short-term borrowings as a result of reduced working
capital requirements. See note 7 to our interim financial statements.
Three Months Ended March 31, 2003. Net cash used in financing activities
in the three months ended March 31, 2003 of $314 million is primarily due to a
decrease in short-term borrowings of $268 million due to March 2003 refinancing
activities, including a $350 million prepayment on the senior revolving credit
facility and an $11 million payment on the Orion MidWest revolving credit
facility, partially offset by net proceeds borrowed to meet working capital
requirements. In addition, we paid financing costs of $131 million related to
the March 2003 refinancing. Partially offsetting these items is $95 million of
net proceeds under a financing commitment for the construction of three power
generation facilities.
NEW ACCOUNTING PRONOUNCEMENTS, SIGNIFICANT ACCOUNTING POLICIES AND
CRITICAL ACCOUNTING ESTIMATES
NEW ACCOUNTING PRONOUNCEMENTS
As of April 2004, there are no new accounting pronouncements that would
have a material impact on our results of operations, financial position or cash
flows, which we have not already adopted and/or disclosed elsewhere in the notes
to our interim financial statements.
SIGNIFICANT ACCOUNTING POLICIES
For discussion regarding our significant accounting policies, see note 2
to our consolidated financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2003 and notes 1 and 2 to our interim
financial statements.
CRITICAL ACCOUNTING ESTIMATES
For a discussion of our critical accounting estimates, see our Annual
Report on Form 10-K for the year ended December 31, 2003.
37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT NON-TRADING AND TRADING
ACTIVITIES AND RELATED MARKET RISKS
MARKET RISK AND RISK MANAGEMENT MARKET RISK
We are exposed to various market risks. These risks arise from the
ownership of our assets and operation of our business. Most of the revenues,
expenses, results of operations and cash flows from our business activities are
impacted by market risks. Categories of significant market risks include
exposures primarily related to commodity prices and interest rates.
NON-TRADING MARKET RISK
Commodity Price Risk. Commodity price risk is an inherent component of
wholesale and retail electric businesses. Prior to the energy delivery period,
we attempt to hedge, in part, the economics of our wholesale and retail electric
businesses. Derivative instruments are used to mitigate exposure to variability
in future cash flows from probable, anticipated future transactions attributable
to a commodity risk.
We purchase from third parties substantially all of the generation
capacity necessary to supply our retail customer sales in Texas. To ensure an
adequate power capacity supply for our retail customers, we enter into
commitments to purchase power capacity as such capacity becomes available on
economic terms in the Texas market. The amount of capacity we purchase is based
on projections of our future retail customer delivery requirements. In most
cases, we enter into commitments to purchase power capacity (which are often
fixed price contracts) prior to determining the price and other terms of the
retail sales commitments for which the capacity has been purchased. Until these
retail sales commitments are determined, we may be exposed to changes in power
capacity prices and natural gas prices (which can have a significant impact on
the pricing of power capacity in the Texas market).
To minimize this exposure, we often enter into "short" contracts to sell
natural gas in order to offset our "long" position in power capacity. As the
retail sales commitments are determined, we close out our short natural gas
positions by purchasing natural gas contracts in the market or entering into
offsetting transactions.
We account for our short positions in natural gas on a mark-to-market
basis. For capacity commitments, we historically have elected the "normal
purchase" exception under Statement of Financial Accounting Standard (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
(SFAS No. 133), which permits us to account for these commitments on an accrual
basis. The application of different accounting treatments for these two related
transactions can have a significant impact in any reporting period in which
natural gas prices fluctuate. This result is because fluctuations in the market
price of natural gas (which are recorded on a mark-to-market basis) are not
offset for accounting purposes by the corresponding fluctuation in power prices
(which are accounted for on an accrual basis). The earnings impact is not offset
until the period that we take delivery under the capacity commitments. In 2004,
we record net unrealized gains (losses) attributable to fluctuations in such
natural gas commitments under "purchased power expense-net unrealized gains
(losses)" in our consolidated statements of operations.
In future reporting periods, we intend to discontinue our use of the
"normal purchase" exception and apply mark-to-market accounting treatment to
certain new power capacity commitments to partially offset potential
mark-to-market volatility in such short positions of natural gas. Pre-existing
capacity commitments that were designated as "normal purchases," however, will
continue to be accounted for under the accrual method until the settlement of
such commitments. We believe the earnings impact of marking to market such
future capacity purchases and related natural gas sales will partially offset
each other thus reducing the related potential earnings volatility of such
transactions.
38
The following table sets forth the fair values of the contracts related to
our net non-trading derivative assets and liabilities as of March 31, 2004:
FAIR VALUE OF CONTRACTS AT MARCH 31, 2004
---------------------------------------------------------------------------------------
TWELVE
MONTHS
ENDED
MARCH 31, REMAINDER 2009 AND TOTAL
SOURCE OF FAIR VALUE 2005 OF 2005 2006 2007 2008 THEREAFTER FAIR VALUE
--------- --------- -------- -------- -------- ---------- ----------
(IN MILLIONS)
Prices actively quoted (1).... $ (42) $ (17) $ 4 $ - $ - $ - $ (55)
Prices provided by other
external sources (2)........ 155 10 7 (2) (1) - 169
Prices based on models and
other valuation methods (3). 152 (2) (21) (14) (11) (36) 68
-------- -------- -------- -------- -------- -------- --------
Total....................... $ 265 $ (9) $ (10) $ (16) $ (12) $ (36) $ 182
======== ======== ======== ======== ======== ======== ========
- ---------------
(1) Represents our NYMEX futures positions in natural gas and crude oil. NYMEX
has quoted prices for natural gas and crude oil for the next 72 and 30
months, respectively.
(2) Represents our forward positions in natural gas and power at points for
which over-the-counter market (OTC) broker quotes are available, which on
average, extend 36 and 24 months into the future, respectively. Positions
are valued against internally developed forward market price curves that
are frequently validated and recalibrated against OTC broker quotes. This
category includes some transactions whose prices are obtained from
external sources and then modeled to hourly, daily or monthly prices, as
appropriate. This category also includes our interest rate derivative
instruments, which are valued based on information from market
participants.
(3) Represents the value of (a) our valuation adjustments for liquidity,
credit and administrative costs, (b) options or structured transactions
not quoted by an exchange or OTC broker, but for which the prices of the
underlying position are available and (c) transactions for which an
internally developed price curve was constructed as a result of the
long-dated nature of the transaction or the illiquidity of the market
point.
We assess the risk of our non-trading derivatives using a sensitivity
analysis method. Derivative instruments, which we use as economic hedges, create
exposure to commodity prices, which, in turn, offset the commodity exposure
inherent in our businesses. The stand-alone commodity risk created by these
instruments, without regard to the offsetting effect of the underlying exposure
these instruments are intended to hedge, is described below. The sensitivity
analysis performed on our non-trading energy derivatives measures the potential
loss in fair value based on a hypothetical 10% movement in the underlying energy
prices. A decrease of 10% in the market prices of energy commodities from their
March 31, 2004 levels would have decreased the fair value of our non-trading
energy derivatives by $35 million. Of this amount, $64 million relates to a loss
in fair value of our non-trading derivatives that are designated as cash flow
hedges and $29 million relates to a gain in earnings of our economic hedges. A
decrease of 10% in the market prices of energy commodities from their December
31, 2003 levels would have decreased the fair value of our non-trading energy
derivatives by $70 million.
Interest Rate Risk. We have issued long-term debt and have obligations
under bank facilities that subject us to the risk of loss associated with
movements in market interest rates. In addition, we have entered into interest
rate swap and interest rate cap agreements to mitigate our exposure to interest
rate fluctuations associated with certain of our variable rate debt instruments.
We assess interest rate risks using a sensitivity analysis method. The table
below provides information concerning our financial instruments as of December
31, 2003 and March 31, 2004, that are sensitive to changes in interest rates:
FAIR
MARKET HYPOTHETICAL
AGGREGATE VALUE/SWAP CHANGE IN
NOTIONAL TERMINATION UNDERLYING AT
AMOUNT VALUE END OF PERIOD FINANCIAL IMPACT
-------- ----------- ------------- ----------------------------------------------
(IN MILLIONS)
DECEMBER 31, 2003:
Floating rate debt (1) (2)....... $ 3,910 $ 3,850 10% increase $1 million increased monthly interest expense
Fixed rate debt (2).............. 1,921 1,992 10% decrease $91 million increase in fair market value
Interest rate swaps (3):
Orion Midwest.................. 300 (48) 10% decrease $3 million increase in termination cost
Orion NY....................... 250 (36) 10% decrease $3 million increase in termination cost
Channelview.................... 200 (13) 10% decrease $1 million increase in termination cost
Interest rate caps............... 4,500 4 10% decrease $1 million loss in earnings
39
FAIR
MARKET HYPOTHETICAL
AGGREGATE VALUE/SWAP CHANGE IN
NOTIONAL TERMINATION UNDERLYING AT
AMOUNT VALUE END OF PERIOD FINANCIAL IMPACT
-------- ----------- ------------- ----------------------------------------------
(IN MILLIONS)
MARCH 31, 2004:
Floating rate debt (1)(2)....... $ 3,838 $ 3,799 10% increase $1 million increased monthly interest expense
Fixed rate debt (2)............. 1,918 2,037 10% decrease $80 million increase in fair market value
Interest rate swaps (3):
Orion Midwest................. 300 (49) 10% decrease $2 million increase in termination cost
Orion NY...................... 250 (37) 10% decrease $3 million increase in termination cost
Channelview................... 200 (13) 10% decrease $1 million increase in termination cost
Interest rate caps.............. 4,500 1 10% increase $0 loss in earnings
- ------------
(1) Excludes adjustment to fair value of our interest rate swaps.
(2) Excludes Liberty's debt as Liberty is in default. See note 12 to our
interim financial statements.
(3) These derivative instruments qualify for hedge accounting under SFAS No.
133 and the periodic settlements are recognized as an adjustment to
interest expense in our results of operations over the term of the related
agreement. As of December 31, 2003 and March 31, 2004, these swaps have
negative termination values (i.e., we would have to pay).
40
TRADING MARKET RISK
The following table sets forth the fair values of the contracts related to
our net trading assets and liabilities as of March 31, 2004:
FAIR VALUE OF CONTRACTS AT MARCH 31, 2004
----------------------------------------------------------------------------
TWELVE
MONTHS
ENDED
MARCH 31, REMAINDER 2009 AND TOTAL
SOURCE OF FAIR VALUE 2005 OF 2005 2006 2007 2008 THEREAFTER FAIR VALUE
- -------------------- --------- --------- ------ -------- -------- ---------- ----------
(IN MILLIONS)
Prices actively quoted........ $ (47) $ 10 $ 4 $ 2 $ 1 $ 2 $ (28)
Prices provided by other
external sources............ 14 (13) 4 9 - - 14
Prices based on models and
other valuation methods..... 8 - (9) (4) 12 5 12
------- -------- ------ -------- -------- -------- --------
Total....................... $ (25) $ (3) $ (1) $ 7 $ 13 $ 7 $ (2)
======= ======== ====== ======== ======== ======== ========
For information regarding "prices actively quoted," "prices provided by
other external sources" and "prices based on models and other valuation
methods," see discussion above related to non-trading derivative assets and
liabilities.
The following table sets forth our consolidated realized and unrealized
trading margins:
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2004
---------- ----------
(IN MILLIONS)
Realized................................................................ $ (175) $ (2)
Unrealized.............................................................. 92 5
-------- --------
Total................................................................. $ (83) $ 3
======== ========
Below is an analysis of our net consolidated trading assets and
liabilities:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004
-------- ----------
(IN MILLIONS)
Fair value of contracts outstanding, beginning of period...................... $ 199 $ (1)
Net assets transferred to non-trading derivatives due to implementation
of EITF No. 02-03........................................................... (93) -
Other net assets transferred to non-trading derivatives....................... (10) -
Net assets recorded to cumulative effect under EITF No. 02-03................. (63) -
Contracts realized or settled................................................. 175 2
Changes in fair values attributable to market price and other market changes.. (74) (3)
Fair value of contracts outstanding, end of period..........................
-------- --------
Total......................................................................... $ 134 $ (2)
======== ========
We primarily assess the risk of our trading positions using a
value-at-risk method, in order to maintain our total exposure within authorized
limits. Value-at-risk is the potential loss in value of trading positions due to
adverse market movements over a defined time period within a specified
confidence level. We utilize the parametric variance/covariance method with
delta/gamma approximation to calculate value-at-risk. Our value-at-risk model
utilizes the following assumptions: (a) a confidence level for natural gas and
petroleum products of 95% and for power products of 99% and (b) a holding period
for natural gas and petroleum products generally of two days and for power
products of 5 to 20 days based on the risk profile of the portfolio.
The following table presents the daily value-at-risk for substantially all
of our trading positions for our continuing operations for the indicated periods
in 2003 and 2004:
41
2003 (1) 2004
-------- ---------
(IN MILLIONS)
As of March 31.............................................................. $ 10 $ 1
Three months ended March 31:
Average................................................................. 11 4
High.................................................................... 35 11
Low..................................................................... 6 1
- --------------
(1) There was a short-term increase in value-at-risk during February 2003 due
to volatility in the natural gas market. As a result, we realized a
trading loss related to certain of our natural gas trading positions of
approximately $80 million pre-tax during the three months ended March 31,
2003. In March 2003, we discontinued our proprietary trading business.
Trading positions taken prior to our decision to exit this business are
managed solely for purposes of closing them on acceptable terms.
CREDIT RISK
Credit risk relates to the risk of loss resulting from non-performance of
contractual obligations by a counterparty. Credit risk is inherent in our
commercial activities.
The following table includes: derivative assets and accounts receivable,
after taking into consideration netting within each contract and any master
netting contracts with counterparties, as of March 31, 2004:
EXPOSURES CREDIT EXPOSURE NUMBER OF NET EXPOSURE OF
BEFORE COLLATERAL NET OF COUNTERPARTIES COUNTERPARTIES
CREDIT RATING EQUIVALENT COLLATERAL HELD (1) COLLATERAL > 10% >10%
- ------------------------ ---------- ----------- ---------- -------------- ---------------
(IN MILLIONS)
Investment grade............................ $ 287 $ 13 $ 274 - $ -
Non-investment grade........................ 53 28 25 - -
No external ratings (2):
Internally rated - Investment grade...... 112 - 112 - -
Internally rated - Non-investment grade.. 306 - 306 1 126
---------- ----------- ---------- ------------ ------------
Total..................................... $ 758 $ 41 $ 717 1 $ 126
========== =========== ========== ============ ============
- ------------
(1) Collateral consists of cash and standby letters of credit.
(2) For unrated counterparties, we perform credit analyses, considering (a)
contractual rights and restrictions, (b) status of financial condition
determined through review of financial statements, (c) credit support,
such as parent company guarantees, and (d) other factors, to create an
internal credit rating.
As of December 31, 2003 and March 31, 2004, one non-investment grade
counterparty represented 18% of our total credit exposure, net of collateral.
The dollar amounts of our credit exposure to this one counterparty were $113
million and $126 million as of December 31, 2003 and March 31, 2004,
respectively. There were no other counterparties representing greater than 10%
of our total credit exposure, net of collateral.
* * *
42
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as
of the end of the period covered by this report. Based on such evaluation, such
officers have concluded that, as of the end of such period, our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information required to be included in our reports filed or submitted
under the Securities Exchange Act of 1934.
CHANGES IN INTERNAL CONTROLS
In connection with the evaluation described above, we identified no change
in our internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during
our fiscal quarter ended March 31, 2004, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
43
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information in response to this item, see (a) note 15 to our
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2003 and (b) notes 11 and 12 to our interim
financial statements included in this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Index of Exhibits.
(b) Reports on Form 8-K.
- - Current Report (items 5 and 7) on Form 8-K dated January 16, 2004;
- - Current Report (item 9) on Form 8-K dated January 28, 2004 (consolidated
interim financial statements of Orion Power Holdings, Inc., a wholly-owned
subsidiary);
- - Current Report (item 9) on Form 8-K dated January 28, 2004 (consolidated
interim financial statements of Orion Power Holdings, Inc., a wholly-owned
subsidiary);
- - Current Report (item 12) on Form 8-K dated February 17, 2004;
- - Current Report (items 5 and 7) on Form 8-K dated April 8, 2004;
- - Current Report (items 5 and 7) on Form 8-K dated April 26, 2004; and
- - Current Report (item 12) on Form 8-K dated May 5, 2004.
44
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.
RELIANT ENERGY, INC.
(Registrant)
By: /s/ Thomas C. Livengood
-----------------------------
MAY 6, 2004 Thomas C. Livengood
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
INDEX OF EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
SEC FILE OR
EXHIBIT REPORT OR REGISTRATION REGISTRATION EXHIBIT
NUMBER DOCUMENT DESCRIPTION STATEMENT NUMBER REFERENCE
------ -------------------- --------- ------ ---------
3.1 Restated Certificate of Incorporation Reliant Energy, Inc.'s 333-48038 3.1
Registration Statement on
Form S-1, dated October
16, 2000
3.2 Amended and Restated Bylaws Reliant Energy, Inc.'s 1-16455 3
Quarterly Report on Form
10-Q for the Quarterly
Period Ended March 31, 2001
3.3 Certificate of Ownership and Merger Reliant Energy, Inc.'s 1-16455 3.1
merging a wholly-owned subsidiary into Current Report on Form 8-K
registrant pursuant to Section 253 dated April 26, 2004
of the General Corporation
Law of the state of Delaware and as
became effecitve as of April 26, 2004
+12.1 Reliant Energy, Inc. and Subsidiaries Ratio
of Earnings from Continuing Operations to
Fixed Charges
+31.1 Certification of the Chairman and Chief
Executive Officer Pursuant to Section 302 of
the Sarbanes Oxley Act of 2002
+31.2 Certification of the Executive Vice President
and Chief Financial Officer Pursuant to
Section 302 of the Sarbanes Oxley Act of 2002
+32.1 Certification of Chairman and Chief Executive
Officer of Reliant Energy, Inc.
Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a)
and (b) of Section 1350, Chapter 63 of Title
18, United States Code)
+32.2 Certification of Executive Vice President and
Chief Financial Officer of Reliant Energy,
Inc. Certification Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Subsections
(a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code)
+99.1 Reliant Energy, Inc.'s (formerly Reliant
Resources, Inc.) note 15 to its consolidated
financial statements included in its Annual
Report on Form 10-K for the year ended
December 31, 2003
+99.2 Preferability Letter of Deloitte & Touche LLP
relating to change in method of accounting
for planned major maintenance