<PAGE> 1
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
Transition report pursuant to Section 13 or 15(d) of the Securities
- - ----- Exchange Act of 1934
For Quarter Ended September 30, 1998 Commission File Number 333-33397
------------------ ---------
NRG Energy, Inc.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1724239
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1221 Nicollet Mall, Minneapolis, Minnesota 55403
- - --------------------------------------------------------------------------------
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code (612) 373-5300
---------------------------
None
- - --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicated by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 1, 1998
----------------------------- -------------------------------
Common Stock, $1.00 par value 1,000 Shares
All outstanding common stock of NRG Energy, Inc., is owned beneficially
and of record by Northern States Power Company, a Minnesota corporation.
The Registrant meets the conditions set forth in general instruction H
(1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
<PAGE> 2
INDEX
- - --------------------------------------------------------------------------------
PAGE NO.
--------
PART I
- - ------
Item 1 Consolidated Financial Statements and Notes
Consolidated Statements of Income 1
Consolidated Balance Sheets 2-3
Consolidated Statements of Stockholder's Equity 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II
- - -------
Item 1 Legal Proceedings 12
Item 6 Exhibits, Financial Statement Schedules, and Reports 13
on Form 8-K
SIGNATURES 14
<PAGE> 3
PART I
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
- - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)*
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Thousands of Dollars) 1998 1997 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
<S> <C> <C> <C> <C>
Revenues from wholly-owned operations $ 25,047 $ 22,396 $ 74,829 $ 65,081
Equity in earnings of unconsolidated affiliates 29,249 3,913 58,432 17,759
- - ----------------------------------------------------------------------------------------------------------------------
Total operating revenues 54,296 26,309 133,261 82,840
- - ----------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of wholly-owned operations 13,079 10,167 39,384 32,863
Depreciation and amortization 4,511 2,552 12,560 7,096
General, administrative, and development 15,201 10,363 39,581 28,402
- - ----------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 32,791 23,082 91,525 68,361
- - ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 21,505 3,227 41,736 14,479
- - ----------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Minority interest in earnings of consolidated subsidiary (492) - (1,652) -
Write-down of investment in projects (23,410) - (23,410) -
Other income, net 1,206 2,343 3,105 8,610
Interest expense (13,598) (8,633) (37,849) (19,815)
- - ----------------------------------------------------------------------------------------------------------------------
Total other expense (36,294) (6,290) (59,806) (11,205)
- - ----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (14,789) (3,063) (18,070) 3,274
INCOME TAXES - BENEFIT (10,014) (5,488) (26,353) (11,140)
- - ----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (4,775) $ 2,425 $ 8,283 $ 14,414
======================================================================================================================
</TABLE>
* See notes to consolidated financial statements.
1
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CONSOLIDATED BALANCE SHEETS
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)*
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(Thousands of Dollars) 1998 1997
- - ---------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 13,972 $ 11,986
Restricted cash 3,929 1,588
Accounts receivable-trade, less allowance
for doubtful accounts of $100 15,717 15,520
Accounts receivable-affiliates 15,047 29,162
Current portion of notes receivable - affiliates 19,359 48,816
Current portion of notes receivable 3,537 3,729
Inventory 2,757 2,619
Prepayments and other current assets 7,907 5,002
- - ---------------------------------------------------------------------------------------------------------------
Total current assets 82,225 118,422
- - ---------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
In service 279,335 255,433
Under construction 9,121 9,758
- - ---------------------------------------------------------------------------------------------------------------
288,456 265,191
Less accumulated depreciation (89,185) (79,300)
- - ---------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 199,271 185,891
- - ---------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Investments in projects 793,500 694,655
Capitalized project costs 17,341 17,791
Notes receivable, less current portion - affiliates 74,264 71,759
Notes receivable, less current portion 3,744 4,624
Intangible assets, net of accumulated amortization of $2,806 and $2,012 20,144 21,414
Debt issuance costs, net of accumulated amortization of $1,414 and $779 6,044 6,569
Other assets, net of accumulated amortization of $6,338 and $4,782 45,421 46,977
- - ---------------------------------------------------------------------------------------------------------------
Total other assets 960,458 863,789
- - ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,241,954 $ 1,168,102
===============================================================================================================
</TABLE>
* See notes to consolidated financial statements.
2
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)*
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
- - ---------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 5,957 $ 7,676
Revolving line of credit 225,000 122,000
Accounts payable-trade 7,465 16,101
Accrued income taxes - 3,692
Accrued property and sales taxes 3,292 3,804
Accrued salaries, benefits and related costs 12,272 10,998
Accrued interest 11,028 6,310
Other current liabilities 12,250 10,508
- - ---------------------------------------------------------------------------------------------
Total current liabilities 277,264 181,089
- - ---------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT PORTION 497,480 491,179
DEFERRED REVENUES 9,637 9,577
DEFERRED INCOME TAXES 4,558 11,968
DEFERRED INVESTMENT TAX CREDITS 1,407 1,598
DEFERRED COMPENSATION 2,472 2,175
MINORITY INTEREST IN SUBSIDIARY 13,305 19,818
- - ---------------------------------------------------------------------------------------------
Total liabilities 806,123 717,404
- - ---------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Common stock; $1 par value; 1,000 shares authorized;
1,000 shares issued and outstanding 1 1
Additional paid-in capital 431,913 431,913
Retained earnings 96,566 88,283
Accumulated other comprehensive income (92,649) (69,499)
- - ---------------------------------------------------------------------------------------------
Total Stockholder's Equity 435,831 450,698
- - ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,241,954 $ 1,168,102
- - ---------------------------------------------------------------------------------------------
</TABLE>
* See notes to consolidated financial statements.
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)*
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholder's
(Thousands of Dollars) Stock Capital Earnings Income Equity
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1997 $ 1 $ 351,013 $ 66,301 $ 4,599 $ 421,914
Net Income 14,414 14,414
Foreign currency translation adjustments (35,410) (35,410)
-------------
Comprehensive income (20,996)
Capital contributions from parent 80,361 80,361
- - -----------------------------------------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 1997 $ 1 $ 431,374 $ 80,715 $ (30,811) $ 481,279
=============================================================================
BALANCES AT JANUARY 1, 1998 $ 1 $ 431,913 $ 88,283 $ (69,499) $ 450,698
Net Income 8,283 8,283
Foreign currency translation adjustments (23,150) (23,150)
-------------
Comprehensive income (14,867)
- - -----------------------------------------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 1998 $ 1 $ 431,913 $ 96,566 $ (92,649) $ 435,831
=============================================================================
</TABLE>
* See notes to consolidated financial statements.
4
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CONSOLIDATED STATEMENTS OF CASH FLOWS
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)*
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(Thousands of Dollars) 1998 1997
- - ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 8,283 $ 14,414
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Undistributed equity earnings of unconsolidated affiliates (29,873) (2,662)
Depreciation and amortization 12,560 7,096
Deferred income taxes and investment tax credits (7,601) 7,245
Write-down of investment in projects 23,410 -
Cash provided (used) by changes in certain working capital items,
net of divestiture and write-down effects
Accounts receivable (197) (14,138)
Accounts receivable-affiliates 13,934 7,105
Accrued income taxes (3,692) 1,777
Prepayments and other current assets (3,043) (640)
Accounts payable-trade (8,636) (1,602)
Accrued property and sales taxes (512) 802
Accrued salaried, benefits and related costs 1,274 2,432
Accrued interest 4,430 745
Other current liabilities 1,742 1,163
Cash provided by changes in other assets and liabilities 2,808 3,711
- - ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,887 27,448
- - ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in projects (124,903) (326,288)
Divestiture of projects 9,219 6,655
Changes in notes receivable (net) 20,918 (59,195)
Capital expenditures (23,265) (41,062)
(Increase) decrease in restricted cash (2,341) 17,341
- - ---------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (120,372) (402,549)
- - ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from parent - 80,361
Revolving line of credit borrowings (net) 103,000 -
Proceeds from issuance of long-term debt 22,658 303,511
Principal payments on long-term debt (18,187) (1,915)
- - ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 107,471 381,957
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,986 6,856
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,986 12,438
- - ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,972 $ 19,294
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
* See notes to consolidated financial statements.
5
<PAGE> 8
NRG ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NRG Energy, Inc., (the Company) is a wholly owned subsidiary of Northern States
Power Company (NSP), a Minnesota corporation. Additional information regarding
the Company can be found in NSP's Form 10-Q for the nine months ended September
30, 1998.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with SEC regulations for interim financial information and with
the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accounting policies followed by the
Company are set forth in Note 1 to the Company's financial statements in its
Annual Report on Form 10-K for the year ended December 31, 1997 (Form 10-K). The
following notes should be read in conjunction with such policies and other
disclosures in the Form 10-K. Interim results are not necessarily indicative of
results for a full year.
In the opinion of management, the accompanying unaudited interim financial
statements contain all material adjustments necessary to present fairly the
consolidated financial position of the Company as of September 30, 1998 and
December 31, 1997, the results of its operations for the three months and nine
months ended September 30, 1998 and 1997, and its cash flows and shareholders'
equity for the nine months ended September 30, 1998 and 1997.
1. BUSINESS DEVELOPMENTS
In April, the Company along with its 50% partner, Dynegy, acquired the El
Segundo Generating Station from Southern California Edison Company for
$87.8 million. The El Segundo Generating Station is a gas-fired plant with
a capacity rating of 1,020 MW.
Also during April, the Company exercised its option to acquire 16.8 million
convertible, non-voting preference shares of Energy Development Limited
(EDL) for $24.8 million, bringing the Company's total investment in EDL to
$48.8 million or approximately a 35 percent ownership interest. EDL is a
listed Australian company that owns 189 MW and operates 238 MW of
generation throughout Australia and the United Kingdom.
In June, the Company sold two affiliates, Wind Power Partners 1987 LP and
Wind Power Partners 1988 LP, for $9.2 million. These companies were
acquired as part of the Pacific Generation acquisition. There was no gain
or loss recorded from the sale.
In 1996, the Company formed a joint venture with Ansaldo Energia SpA, a
major Italian industrial company ("Ansaldo"), and P.T. Kiani Metra, an
Indonesian industrial company ("PTKM") to develop a 400-megawatt coal-fired
power generation facility in West Java, Indonesia, through P.T. Dayslistrik
Pratama (PTDP"), a limited liability company created by the joint
venturers. The Company and Ansaldo each have an ownership interest of 45
percent in PTDP, with the remaining 10% held by PTKM. During the third
quarter of 1998, the Company recorded a $20 million write-down of its
investment in the West Java project due to the continuing political and
economic instability in Indonesia.
During October 1998, the Company executed a binding agreement to purchase
the Somerset power station for approximately $55 million from Eastern
Utilities Association (EUA). The Somerset station, located in Somerset,
Massachusetts, includes two coal-fired generating facilities supplying a
total of 181 megawatts and two aeroderivative combustion turbine peaking
units supplying a total of 48 megawatts. In addition, a total of 69
megawatts is on deactivated reserve. The Company will hold a 100 percent
interest in the project and will own, operate and maintain the units. The
project's financial close is expected to occur in the first quarter of
1999.
During October 1998, the Company sold its interest in the Mid-Continent
Power Company facility (MCPC) to Cogeneration Corporation of American
(CogenAmerica). Pursuant to the Co-investment Agreement the Company loaned
CogenAmerica approximately $24 million to finance the transaction. The MCPC
facility is a 110-megwatt,
6
<PAGE> 9
gas-fired power generation station located near Pryor, Oklahoma. NRG is the
beneficial owner of approximately 47 percent of the outstanding stock of
CogenAmerica.
In September 1998, Enron Capital & Trade Corp. (Enron) withdrew from the
Cajun Electric Power Cooperative, Inc. (Cajun) bankruptcy proceedings.
Enron's withdrawal leaves the bankruptcy court with two competing plans
offered by Louisiana Generating LLC, which includes NRG and two other
partners, and Southwestern Electric Power Co. In March 1998, Louisiana
Generating LLC filed its final proposal for acquiring the fossil generating
assets of Cajun. The final offer increased the acquisition price to $1.2
billion while keeping proposed electricity prices 10 percent below Cajun's
current prices. Under the plan, the Company would hold a 30 percent equity
interest in the partnership, which would own Cajun's 1,706 megawatts,
excluding nuclear generating assets.
In September 1998, the Company filed preliminary proxy materials and a
revised schedule 13D with the Securities and Exchange Commission to seek a
special meeting of the shareholders of CogenAmerica for the purpose of
removing Robert T. Sherman, president and chief executive officer of
CogenAmerica, from his position as a director of CogenAmerica. In October
1998, the Company delivered to CogenAmerica written consents from a
majority of CogenAmerica's shareholders in favor of the removal of Robert
Sherman as a director of CogenAmerica. At a regularly scheduled board
meeting, following the delivery of the consents, the board of directors of
CogenAmerica terminated Robert Sherman's employment agreement and appointed
Julie A. Jorgenson, senior counsel and corporate secretary of NRG and a
director of CogenAmerica, interim president and chief executive officer of
CogenAmerica. The Company is continuing to actively solicit proxies for the
Nov. 12, 1998 special meeting of CogenAmerica's shareholders. The Company
expects that it will be necessary to proceed with the special meeting,
since Robert Sherman continues to challenge the ability of a majority of
shareholders to act via written consent.
In September 1998, the Company announced plans to start direct negotiations
with the government of Estonia to form a joint venture with Eesti Energia
for ownership of two of Estonia's largest power plants (Narva Power). Eesti
Energia is Estonia's national electricity generator and distributor.
In August 1998, the Collinsville Power Station entered into commercial
operation. The Collinsville Power Station, located in Queensland,
Australia, has been idle since 1988. In 1996, the Company acquired 50% of
the plant from the Queensland State government. The remaining 50% is owned
by Transfield Collinsville Pty. Ltd.
2. COMMITMENTS AND CONTINGENT LIABILITIES
In late October, 1998, Robert Sherman sued the Company and several
individual employees of the Company who are on the board of CogenAmerica
in Federal District Court in Minnesota. Sherman's suit requests an order
enjoining his removal from the board of CogenAmerica, enjoining his
termination as President and CEO of CogenAmerica, enjoining the November
12, 1998 CogenAmerica shareholder's meeting and enjoining NRG from voting
the proxies it received with respect to such meeting. In addition, Sherman
sought a preliminary injunction on these claims and on November 10, 1998,
the Federal District Court denied Sherman's motion for a preliminary
injunction in its entirety.
7
<PAGE> 10
3. SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATES
The Company has 20-50% investments in three companies that are considered
significant subsidiaries, as defined by applicable SEC regulations, and
accounts for those investments using the equity method. The following
summarizes the income statements of these unconsolidated entities:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Thousands of Dollars) 1998 1997 1998 1997
-------------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 137,334 $ 154,802 $ 421,005 $ 510,160
Other income (expense) 632 (116) 123 2,816
Costs and expenses:
Cost of sales 120,563 128,664 350,516 415,875
General and administrative 5,194 2,412 17,514 22,448
-------------------- ---------------- ------------- --------------
125,757 131,076 368,030 438,323
-------------------- ---------------- ------------- --------------
Income before income taxes 12,209 23,610 53,098 74,653
Income taxes 1,988 3,876 7,600 17,139
-------------------- ---------------- ------------- --------------
Net income $ 10,221 $ 19,734 $ 45,498 $ 57,514
==================== ================ ============= ==============
Company's share of net income $ 4,219 $ 8,089 $ 17,614 $ 22,423
==================== ================ ============= ==============
</TABLE>
4. PENSION COSTS
During 1998 NSP changed its method of allocating pension trust assets to
its individual subsidiaries as part of the calculation of pension costs
under SFAS No. 87. The new method was adopted to better match pension plan
assets with the individual participants' benefit obligations for which
funding has been established. The effect of this change is a decrease in
the Company's pension costs of approximately $2.9 million for the full year
1998, including $1.3 million related to periods prior to the change.
5. SUBSEQUENT EVENTS
On October 30, 1998, the Company received a $100 million equity
contribution from NSP. These funds were used to partially pay down the
outstanding balance on the Company's revolving line of credit.
6. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Financial Accounting Standard Statement (SFAS)
No. 130, "Reporting Comprehensive Income." This statement establishes rules
for reporting comprehensive income and its components. Comprehensive income
consists of net income and foreign currency translation adjustments and is
presented in the Consolidated Statement of Stockholder's Equity.
Accumulated Other Comprehensive Income, as presented therein and on the
Balance Sheet, consists solely of foreign currency translation adjustments.
The adoption of SFAS No. 130 had no impact on total stockholder's equity.
Certain reclassifications to prior year financial statements have been made
in order to conform to the SFAS No. 130 requirements.
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
This Statement establishes standards for reporting information about
operating segments in annual financial statements and requires that
companies report selected information by operating segments in interim
financial reports. The Company will be required to adopt this statement in
its December 31, 1998 financial reports. The Company has not yet determined
its reportable segments under the statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivatives be recognized at fair value in the Balance Sheet, and that
changes in fair value be recognized either currently in earnings or
deferred as a component of Other Comprehensive Income, depending on the
intended use of derivative and the resulting designation (e.g., as a
qualifying hedge). The Company will be required to adopt this statement in
2000, but can elect to adopt it in 1998 or 1999. The Company has not yet
determined the potential impacts of implementing this statement or the
expected adoption date.
8
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
- - --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition is omitted
per conditions as set forth in General Instructions H (1) (a) and (b) of Form
10-Q for wholly owned subsidiaries. It is replaced with management's narrative
analysis of the results of operations set forth in General Instructions H (2)
(a) of Form 10-Q for wholly owned subsidiaries (reduced disclosure format). This
analysis will primarily compare the Company's revenue and expense items for the
nine months ended September 30, 1998 with the nine months ended September 30,
1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net income for the nine months ended September 30, 1998, was $8.3
million compared to $14.4 million for the same period in 1997. The decrease in
net income of $6.1 million was due mainly to a $15.3 million after tax
write-down of investment in projects. Without this nonrecurring charge, net
income would have been $23.6 million, an increase of 64% (or $9.2 million) for
the nine month period. The increase in net income from on-going operations
(excluding the non-recurring charge) was due to new projects and increased tax
benefits, partially offset by increased interest expense on corporate debt.
OPERATING REVENUES
For the nine months ended September 30, 1998, the Company had total
revenues of $133.3 million, compared to $82.8 million for the nine months ended
September 30, 1997, an increase of 61%.
The Company's operating revenues from wholly owned operations for the
nine months ended September 30, 1998 were $74.8 million, an increase of $9.7
million, or 15%, over the same period in 1997. The increase in revenues was due
primarily to new projects, including San Diego Power and Cooling and certain
Pacific Generation operations. This increase was partially offset by lower
revenues from heating and cooling subsidiaries due to the unusually mild
weather. For the nine months ended September 30, 1998, revenues from wholly
owned operations consisted of revenue from heating, cooling and thermal
activities (46%), electrical generation (47%) and technical services (7%).
Equity in earnings of unconsolidated affiliates was $58.4 million for
the nine months ended September 30, 1998, compared to $17.8 million for the nine
months ended September 30, 1997, an increase of 229%. The increase was due to
new projects including El Segundo, Long Beach and certain Pacific Generation
operations, an increase in the Company's holdings in EDL as well as higher
earnings from MIBRAG.
OPERATING COSTS AND EXPENSES
Operating costs and expenses for the nine months ended September 30,
1998, were $91.5 million, an increase of $23.1 million or 33.9%, compared to
$68.4 million for the same period in 1997. As a percent of revenue, operating
costs and expenses for the nine months were 68.7% as compared to 82.5% during
the same period one year earlier.
Cost of wholly owned operations was $39.4 million for the nine months
ended September 30. This is an increase of $6.5 million or 20% over the same
period in 1997. The increase was due primarily to new projects. Cost of
operations, as a percentage of revenues from wholly owned operations for the
nine month period, was 53% which is 2% higher than the same period in 1997. The
increase in cost of operations was due to new NEO projects.
Depreciation and amortization costs were $12.6 million for the nine
months ended September 30, 1998, compared to $7.1 million for the nine months
ended September 30, 1997. The depreciation and amortization increase
9
<PAGE> 12
was due primarily to increased amortization of intangible assets related to the
Pacific Generation acquisition and additional NEO project depreciation.
General, administrative and development costs were $39.6 million for
the nine months ended September 30, 1998, compared to $28.4 million for the nine
months ended September 30, 1997. The increase was due primarily to increased
business development activities and increased legal, technical, and accounting
expenses resulting from expanded operations. As a percent of revenues,
administrative and general expenses declined to 30% from 34% during the same
period one year earlier.
OTHER INCOME (EXPENSE)
Other expense for the nine months ended September 30, 1998, was $59.8
million, an increase of $48.6 million, compared to $11.2 million for the same
period in 1997. Other expense before the write-down of investments was $36.4
million in 1998. As a percent of revenue, other expenses (net) before the
write-down of investments were 27.3% for the nine months ended September 30,
1998, as compared to 13.5% during the same period one year earlier.
Minority interest in projects was $1.7 million for the nine months
period compared to zero for the same period in 1997. Minority interest relates
to one of the Pacific Generation projects acquired during the fourth quarter of
1997.
Write down of investments was $23.4 million ($15.3 million after tax).
The Company wrote down its accumulated project development expenditures of $20.1
million for the West Java, Indonesia, project due to the uncertainties
surrounding all infrastructure projects in Indonesia. The Company also reviewed
all international projects in development and has created a reserve of $3.3
million for other project write-downs that may be required. As of the end of
September 1998, the Company's investment portfolio was weighted as follows:
United States 39%, Australia 36%, Germany 12%, South America 10%, Canada 1%, the
Czech Republic 1% and Other Countries 1%.
Other income was $3.1 million for the nine months ended September 30,
1998 compared with $8.6 million for the nine months ended September 30, 1997.
The decline was due primarily to a lower amount of short-term investments in
1998.
Interest expense was $37.8 million for the nine months ended September
30, 1998 compared with $19.8 million for the nine months ended September 30,
1997. The increase in interest expense was due primarily to the issuance of the
$250 million Senior Notes at the end of June 1997, interest on the Company's
revolving line of credit, new debt obtained for certain NEO projects and debt
from the purchase of Pacific Generation.
INCOME TAX
The Company has recorded an income tax benefit due to domestic tax
losses and the recognition of certain tax credits. The net income tax benefit
for the nine months ended September 30, 1998, increased by $15.2 million to
$26.4 million as compared to the same period one year earlier. The increase in
tax benefits for the nine month period reflects tax effects of increased
interest expense on corporate debt and investment write downs as well as an
increase in Section 29 credits.
YEAR 2000 ISSUE
NRG is in the process of examining year 2000 issues and is partnering
with its parent, NSP, in employing a systematic approach to deal with the Year
2000 issue. NRG's year 2000 program covers not only NRG's corporate computer
applications but also the hardware and embedded system components in use
throughout NRG operations. Embedded systems perform mission-critical functions
in all parts of operations including power generation, distribution,
communications and business operations. The Company expects to be well along in
the process of completing its analysis by the end of 1998 and 1999. A committee
made up of senior management is leading NRG's initiatives to identify year 2000
related issues and remediate business processes as necessary in 1998. As part of
the process, the Company is verifying that all critical hardware and software
systems within the corporate, subsidiary and affiliate operations will not be
subject to year 2000 issues. Additionally, the Company, in conjunction with NSP,
is working with its significant suppliers to identify and minimize any business
interruptions due to year 2000 issues in the
10
<PAGE> 13
suppliers' business processes. The cost to address the Year 2000 issue has not
yet been fully determined, but, based on the analysis to date, is not expected
to materially effect the Company's earnings or financial condition. Despite
these efforts, there can be no assurances that every material year 2000 related
issue will be identified and addressed beforehand. An unexpected failure
regarding a year 2000 issue could result in an interruption in certain normal
business activities or operations. However, NRG believes that with the
completion of its year 2000 project, significant interruptions are unlikely.
FORWARD-LOOKING STATEMENTS
In addition to any assumptions and other factors referred to
specifically in connection with such forward-looking statements, factors that
could cause the Company's actual results to differ materially from those
contemplated in any forward-looking statements include, among others, the
following:
- Economic conditions including inflation rates and monetary
fluctuations;
- Trade, monetary, fiscal, taxation, and environmental policies of
governments, agencies and similar organizations in geographic areas
where the Company has a financial interest;
- Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their
products and services;
- Financial or regulatory accounting principles or policies imposed by
the Financial Accounting Standards Board, the Securities and
Exchange Commission, the Federal Energy Regulatory Commission and
similar entities with regulatory oversight;
- Availability or cost of capital such as changes in: interest rates;
market perceptions of the power generation industry, the Company or
any of its subsidiaries; or security ratings;
- Factors affecting power generation operations such as unusual
weather conditions; catastrophic weather-related damage; unscheduled
generation outages, maintenance or repairs; unanticipated changes to
fossil fuel, or gas supply costs or availability due to higher
demand, shortages, transportation problems or other developments;
environmental incidents; or electric transmission or gas pipeline
system constraints;
- Employee workforce factors including loss or retirement of key
executives, collective bargaining agreements with union employees,
or work stoppages;
- Increased competition in the power generation industry;
- Cost and other effects of legal and administrative proceedings,
settlements, investigations and claims;
- Technological developments that result in competitive disadvantages
and create the potential for impairment of existing assets;
- Factors associated with various investments including conditions of
final legal closing, foreign government actions, foreign economic
and currency risks, political instability in foreign countries,
partnership actions, competition, operating risks, dependence on
certain suppliers and customers, domestic and foreign environmental
and energy regulations;
- Limitations on the Company's ability to control the development or
operation of projects in which the Company has less than 100%
interest;
- Other business or investment considerations that may be disclosed
from time to time in the Company's Securities and Exchange
Commission filings or in other publicly disseminated written
documents, including the Company's Registration Statement No.
333-33397, as amended.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors pursuant to the Act should
not be construed as exhaustive.
11
<PAGE> 14
PART II
ITEM 1 - LEGAL PROCEEDINGS
- - --------------------------------------------------------------------------------
On July 31, 1998, an arbitration panel ordered the Company to offer its interest
in the Mid-Continent Power Company ("MCPC") facility to the Company's 45% owned
affiliate Cogeneration Corporation of America ("CogenAmerica") (formerly known
as NRG Generating (U.S.) Inc.) and enjoined the Company's pending sale of the
MCPC facility to a wholly-owned subsidiary of OGE Energy Corp. The arbitration
panel's order ultimately led to a negotiated sale of the MCPC facility to
CogenAmerica which closed on October 9, 1998. As a result, the arbitration has
concluded.
Other legal proceedings are set forth in Part I, Item 3 of the Company's Form
10-K for the year ended December 31, 1997 and in Part II, Item 1 of the
Company's Form 10-Q for the quarter ended March 31, 1998.
12
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
(a) EXHIBITS
27 FINANCIAL DATA SCHEDULE FOR THE PERIOD ENDED SEPTEMBER 30, 1998.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed either during the three months
ended Sept. 30, 1998, or between Sept. 30, 1998 and the date of this report.
Oct. 6, 1998 (Filed Oct. 6, 1998) - Item 5 Other Events. Re: Disclosure of
NRG's $23 million pretax write-down of investments in Indonesia and other
projects against third quarter 1998 earnings.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NRG ENERGY, INC.
------------------------
(REGISTRANT)
---------------------------------------------
LEONARD A. BLUHM
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER)
---------------------------------------------
DAVID RIPKA
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
DATE: NOVEMBER 11, 1998
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1998 Financial Statements included in the Company's Form 10-Q and
is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,972
<SECURITIES> 0
<RECEIVABLES> 19,354
<ALLOWANCES> 100
<INVENTORY> 2,757
<CURRENT-ASSETS> 82,225
<PP&E> 288,456
<DEPRECIATION> 89,185
<TOTAL-ASSETS> 1,241,954
<CURRENT-LIABILITIES> 277,264
<BONDS> 497,480
1
0
<COMMON> 0
<OTHER-SE> 435,830
<TOTAL-LIABILITY-AND-EQUITY> 1,241,954
<SALES> 74,829
<TOTAL-REVENUES> 133,261
<CGS> 39,384
<TOTAL-COSTS> 91,525
<OTHER-EXPENSES> 59,806
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,849
<INCOME-PRETAX> (18,070)
<INCOME-TAX> (26,353)
<INCOME-CONTINUING> 8,283
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,283
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
