<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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 the Quarter Ended: JUNE 30, 2000 Commission File Number: 000-25569
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 August 11, 2000
-------------------------------------- ------------------------------
Class A - Common Stock, $.01 par value 147,604,500 Shares
Common Stock, $.01 par value 32,395,500 Shares
<PAGE> 2
INDEX
<TABLE>
PAGE NO.
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements and Notes
Consolidated Statements of Income 1
Consolidated Balance Sheets 2-3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 5. Other 23
Item 6. Exhibits, Financial Statement Schedules, and Reports 24
on Form 8-K
SIGNATURES 25
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
CONSOLIDATED STATEMENTS OF INCOME
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands, except per share data) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 473,836 $ 60,034 $ 806,507 $ 97,881
Equity in earnings of unconsolidated affiliates 48,173 6,625 38,529 15,292
---------------------------------------------------------------------------------------------------------------------------------
Total operating revenues 522,009 66,659 845,036 113,173
---------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of wholly-owned operations 305,908 41,124 520,831 69,064
Depreciation and amortization 30,865 6,291 50,852 11,025
General, administrative, and development 31,108 16,288 56,288 32,273
---------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 367,881 63,703 627,971 112,362
---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 154,128 2,956 217,065 811
---------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Minority interest in earnings of consolidated subsidiaries (2,283) (691) (4,081) (1,155)
Other income, net 34 2,574 1,565 3,308
Interest expense (81,858) (15,788) (134,175) (26,847)
---------------------------------------------------------------------------------------------------------------------------------
Total other expense (84,107) (13,905) (136,691) (24,694)
---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 70,021 (10,949) 80,374 (23,883)
INCOME TAXES - EXPENSE (BENEFIT) 26,440 (13,290) 28,047 (25,284)
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 43,581 $ 2,341 $ 52,327 $ 1,401
---------------------------------------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 155,529 147,605 151,567 147,605
EARNINGS PER AVERAGE COMMON SHARE - BASIC $0.28 $0.02 $0.35 $0.01
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 156,191 147,605 151,898 147,605
EARNINGS PER AVERAGE COMMON SHARE - DILUTED
$0.28 $0.02 $0.34 $0.01
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(In thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 70,840 $ 31,483
Restricted cash 21,061 17,441
Accounts receivable-trade, less allowance
for doubtful accounts of $946 and $186 254,237 126,376
Accounts receivable-affiliates 10,595 -
Inventory 198,464 119,181
Prepayments and other current assets 31,036 29,202
Current portion of notes receivable - affiliates 1,207 287
--------------------------------------------------------------------------------------------------------------------------
Total current assets 587,440 323,970
--------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
In service 3,825,030 2,078,804
Under construction 71,637 53,448
--------------------------------------------------------------------------------------------------------------------------
3,896,667 2,132,252
Less accumulated depreciation (205,810) (156,849)
--------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 3,690,857 1,975,403
--------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Investments in projects 949,129 932,591
Capitalized project costs 35,194 2,592
Notes receivable, less current portion - affiliates 66,464 65,494
Notes receivable 5,805 5,787
Intangible assets, net of accumulated amortization of $5,598 and $4,308 57,238 55,586
Debt issuance costs, net of accumulated amortization of $11,370 and $6,640 39,104 20,081
Other assets, net of accumulated amortization of $9,964 and $8,909 58,725 50,180
--------------------------------------------------------------------------------------------------------------------------
Total other assets 1,211,659 1,132,311
--------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 5,489,956 $ 3,431,684
==========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(In thousands) 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 140,341 $ 30,462
Revolving line of credit 166,000 340,000
Revolving line of credit, non-recourse - 35,766
Accounts payable-trade 159,530 61,211
Accounts payable-affiliates - 6,404
Accrued income taxes 22,631 4,730
Accrued property and sales taxes 7,299 4,998
Accrued salaries, benefits and related costs 8,210 9,648
Accrued interest 49,145 13,479
Other current liabilities 15,685 17,657
---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 568,841 524,355
---------------------------------------------------------------------------------------------------------------------------
Minority Interest 12,205 14,373
Consolidated Project-Level, Long Term, Non-recourse Debt 2,161,595 1,026,398
Corporate Level Long-Term, Recourse Debt 1,157,768 915,000
Deferred Income Taxes 109,283 16,940
Deferred Investment Tax Credits 960 1,088
Postretirement and Other Benefit Obligations 48,090 24,613
Deferred Income and Other Long-Term Obligations 70,300 15,263
---------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,129,042 2,538,030
---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Class A - common stock; $.01 par value; 250,000 shares authorized;
147,605 shares issued and outstanding 1,476 1,476
Common stock; $.01 par value; 550,000 shares authorized;
32,396 shares issued and outstanding 324 -
Additional paid-in capital 1,233,833 780,438
Retained earnings 239,537 187,210
Accumulated other comprehensive income (114,256) (75,470)
---------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,360,914 893,654
---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,489,956 $ 3,431,684
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Class A Additional Other Total
Common Common Paid-in Retained Comprehensive Stockholders'
(In thousands) Stock Stock Capital Earnings Income Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1999 $ 1,476 $ - $ 530,438 $ 130,015 $ (82,597) $ 579,332
Net Income 1,401 1,401
Foreign currency translation adjustments 17,793 17,793
------------
Comprehensive income 19,194
Capital Contribution from parent 100,000 100,000
---------------------------------------------------------------------------------------
BALANCES AT JUNE 30, 1999 $ 1,476 $ - $ 630,438 $ 131,416 $ (64,804) $ 698,526
=======================================================================================
BALANCES AT JANUARY 1, 2000 $ 1,476 $ - $ 780,438 $ 187,210 $ (75,470) $ 893,654
Net Income 52,327 52,327
Foreign currency translation adjustments (38,786) (38,786)
---------------
Comprehensive income 13,541
Capital stock activity:
Issuance of Common Stock 324 453,395 453,719
---------------------------------------------------------------------------------------
BALANCES AT JUNE 30, 2000 $ 1,476 $ 324 $ 1,233,833 $ 239,537 $ (114,256) $ 1,360,914
=======================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
NRG ENERGY, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(In thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 52,327 $ 1,401
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Undistributed equity earnings of unconsolidated affiliates (24,021) 26,141
Depreciation and amortization 50,852 11,025
Deferred income taxes and investment tax credits 92,215 (8,971)
Minority interest (2,168) (575)
Cash provided (used) by changes in certain working capital items, net of
acquisition effects:
Accounts receivable (103,807) (22,551)
Accounts receivable-affiliates (16,999) (9,427)
Accrued income taxes 16,657 14,546
Inventory (22,514) (5,438)
Prepayments and other current assets (1,834) (13,971)
Accounts payable-trade 72,471 29,565
Accrued property and sales tax 2,301 1,287
Accrued salaries, benefits and related costs (1,438) (1,047)
Accrued interest 35,666 3,469
Other current liabilities (3,244) 4,676
Cash provided (used) by changes in other assets and liabilities 72,040 (11,313)
--------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 218,504 18,817
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of liabilities assumed (1,723,158) (930,185)
Investments in projects (8,238) (37,167)
Divestiture of projects - 1,000
Changes in notes receivable (net) (1,908) 12,273
Capital expenditures (149,600) (47,760)
(Increase) decrease in restricted cash (3,620) 1,569
--------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (1,886,524) (1,000,270)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from parent - 100,000
Proceeds from issuance of stock 453,719 -
Revolving line of credit (174,000) 97,267
Proceeds from issuance of note - 539,965
Proceeds from issuance of long-term debt 2,508,688 310,294
Principal payments on long-term debt (1,081,030) (6,492)
--------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,707,377 1,041,034
--------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 39,357 59,581
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,483 6,381
--------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 70,840 $ 65,962
--------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 8
NRG ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NRG Energy, Inc. (the Company or NRG) is a majority-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 six months ended
June 30, 2000.
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, 1999 (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 consolidated
financial statements contain all material adjustments necessary to present
fairly the consolidated financial position of the Company as of June 30, 2000
and December 31, 1999, the results of its operations for the three months and
six months ended June 30, 2000 and 1999, and its cash flows and stockholders'
equity for the six months ended June 30, 2000 and 1999.
Certain prior year amounts have been reclassified for comparative purposes.
These reclassifications had no effect on net income or stockholders' equity as
previously reported.
1. BUSINESS DEVELOPMENTS
In January 2000, the Company executed a memorandum of understanding with
GE Power Systems, a division of General Electric Company, to purchase 11
gas turbine generators and five steam turbine generators, with an option to
purchase additional units. The purchases will take place over the next five
years with the first delivery scheduled to be made in 2002. The 16 turbines
have an equivalent generation output of approximately 3,000 MW and an
acquisition cost of approximately $500 million.
In March 2000, the Company entered into an agreement with Great River
Energy under which Great River assigned to the Company all of its rights
and obligations with respect to two 135 MW turbines being built for it by
Siemens Westinghouse. The Company's total cost for the turbines, which are
scheduled for delivery in the first or second quarter of 2001, will be
approximately $43 million.
In March 2000, the Company acquired the Killingholme A generation facility
from National Power plc for (pound)390 million (approximately $615 million
at the time of acquisition), subject to post-closing adjustments.
Killingholme is a combined cycle gas-fired baseload facility located in
North Lincolnshire, England. The facility comprises three units with a
total generating capacity of 680 MW. The Company owns and operates the
facility, which sells its power into the wholesale electricity market of
England and Wales.
In March 2000, the Company acquired 1,708 MW of coal and gas-fired
generation assets in Louisiana for approximately $1,026 million (the Cajun
facilities). These assets were formally owned by Cajun Electric Power
Cooperative, Inc. (Cajun Electric). The Company sells a significant amount
of the energy and capacity of the Cajun facilities to 11 of Cajun
Electric's former power cooperative members. Seven of these cooperatives
have entered into 25-year power purchase agreements with the Company, and
four have entered into two to four year power purchase agreements. In
addition, the Company sells power under contract to two municipal power
authorities and one investor-owned utility that were former customers of
Cajun Electric. The Company estimates that payments under the contracts
with the 11 cooperatives will account for approximately 72% of the Cajun
facilities' projected 2001 revenues, and that payments under the contracts
with the municipal power authorities and the investor-owned utility will
account for approximately an additional 7% of such revenues. See Note 10 of
Notes to the Financial Statements for pro forma results of operations as
if the acquisition of the Cajun facilities had occurred at the beginning of
the periods disclosed.
6
<PAGE> 9
In June 2000, the Company successfully completed the initial public
offering of 32,395,500 shares of its common stock.
Gross proceeds raised from the offering, including exercise of the
over-allotment option, were approximately $485.9 million. The shares sold
in the offering represent approximately 18 percent of the common equity of
the Company. NSP owns 147,604,500 shares of the Company's Class A common
stock which represents an 82% interest in the Company.
In June 2000, the Estonian cabinet approved the terms under which the
Company may proceed to purchase a 49% interest in Narva Power, which owns
approximately 3,000 MW of oil shale-fired generation plants and a 51%
interest in state-owned oil shale mines. A government-owned entity,
Eesti-Energia, will retain 51% ownership of Narva Power. The terms of the
Company's purchase include a commitment by Narva Power to invest
approximately $361 million for reconstructing and refurbishing the
generation plants and making environmental improvements. The Company will
make an initial $65-70 million equity commitment. Narva Power's two
stations, Balti and Eestia, currently supply more than 90% of Estonia's
electricity. Narva Power will enter into a 15-year power purchase agreement
with Eesti Energia.
In July 2000, the Company and Dynegy Inc., completed a 100 MW expansion
of the Rocky Road Power Plant, a natural gas fired simple cycle peaking
facility in East Dundee, Illiniois. The installation of the additional 100
MW natural gas fired combustion turbine increases that facility's
generating capacity to 350 MW. The Company acquired a 50% interest in the
Rocky Road Power Plant in December 1999.
In July 2000, the Company completed its $11.7 million purchase of
Harrisburg Steam Works and Statoil Energy Power/Paxton L.P. located in
Harrisburg, PA from Statoil Energy Inc. Harrisburg Steam Works provides
steam to more than 300 residential, commercial and industrial customers,
including the City of Harrisburg, Pennsylvania and the Commonwealth of
Pennsylvania. Statoil Energy Power/Paxton L.P. is a cogeneration facility
capable of producing 12 MW of electrical power while supplying nearly 30%
of the steam requirements for Harrisburg Steam Works. Also included in the
purchase was a nationwide diesel engine service business and a chiller
plant that serves the Harrisburg Hospital.
In July 2000, the Company signed a purchase agreement with Statoil Energy,
Inc. to acquire a 190,000 pounds of steam per hour, 18 MW coal fired
cogeneration facility that provides steam and electricity to a major
manufacturing facility located in Dover, Delaware. Excess electrical energy
is sold through the Dover municipal electric utility. In a separate
purchase agreement, the Company agreed to purchase Statoil's Distributed
Generation and Engineering Services Group, which consists of three
generation projects totaling 6.2 MW as well as a diesel-services group. The
Company expects to complete the acquisition of these facilities in the
third quarter of 2000.
During August 2000, the Company was named the successful bidder in the
South Australian Government's electricity privatization auction for
Flinders Power, South Australian's final generation company to be
privatized. The Company agreed to pay AUS $313 million ($180 million US
as of August 2000) for a 100 year lease of the Flinders Power assets.
Flinders Power includes two power stations totaling 760 MW, the Leigh Creek
coal mine and a dedicated rail line. The lease agreement also includes
managing the long-term fuel supply and power purchase agreement of the 180
MW Osborne Cogeneration Station. The transaction is expected to close in
the third quarter of 2000.
7
<PAGE> 10
2. SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATES
The Company has 20-50% investments in the four companies reported in Part
IV - Item 14 - Exhibits, Financial Statement Schedules and Reports on Form
8-K of Form 10-K 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands) 2000 1999 2000 1999
---------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $ 302,500 $ 185,174 $ 488,271 $ 339,563
Other income 6,529 10,001 7,225 12,057
Costs and expenses:
Cost of sales 188,123 132,961 357,644 262,807
General and administrative 9,128 12,501 15,140 18,855
Other 5,362 29,170 12,027 30,886
---------------- ----------------- ------------------ -----------------
Total Costs and expenses 202,613 174,632 384,811 312,548
---------------- ----------------- ------------------ -----------------
Income before income taxes 106,416 20,543 110,685 39,072
Income taxes 5,599 6,803 11,400 11,836
---------------- ----------------- ------------------ -----------------
Net income $100,817 $ 13,740 $ 99,285 $ 27,236
================ ================= ================== =================
Company's share of net income $ 49,188 $ 5,633 $ 46,317 $ 10,908
================ ================= ================== =================
</TABLE>
3. SHORT TERM BORROWINGS
The Company has a $500 million revolving credit facility under a commitment
fee arrangement that matures in March 9, 2001. This facility provides
short-term financing in the form of bank loans. At June 30, 2000 the
Company had $166 million outstanding under this facility, which had a
weighted average interest rate of 7.7% during the six month period.
In March 2000, the Company borrowed $300 million under a short-term bridge
facility that was terminated in June, 2000, bore interest at a floating
rate, and had a weighted average interest rate of 6.5% for the period ended
June 30, 2000. Proceeds from this loan were used to fund the acquisition of
the Cajun facilities. In June 2000, a portion of the proceeds raised by the
Company's initial public offering of its common stock were used to pay off
and terminate this short-term bridge facility.
4. LONG TERM DEBT
In February 2000, NRG Northeast Generating LLC, an indirect wholly-owned
subsidiary of the Company, issued $750 million of senior secured bonds to
refinance short-term project borrowings and for certain other purposes. The
bond offering included three tranches: $320 million with an interest rate
of 8.065% due in 2004, $130 million with an interest rate of 8.842% due
in 2015 and $300 million with an interest rate of 9.292% due in 2024.
In March 2000, the Company issued (pound)160 million (approximately $250
million at the time of issuance) of 7.97% reset senior notes due 2020,
principally to finance its equity investment in the Killingholme facility.
On March 15, 2005, these senior notes may be remarketed by Bank of America,
N.A. at a fixed rate of interest through the maturity date or at a floating
rate of interest for up to one year and then at a fixed rate of interest
through 2020. Interest is payable semi-annually on these securities
beginning September 15, 2000 through March 15, 2005, and then at intervals
and interest rates established in the remarketing process.
In March 2000, NRG South Central Generating LLC, a subsidiary of the
Company, issued $800 million of senior secured bonds in a two-part
offering. The first tranche was for $500 million with a coupon of 8.962%
and a maturity of 2016. The second tranche was for $300 million with a
coupon of 9.479% and a
8
<PAGE> 11
maturity of 2024. During March 2000, the proceeds from these bonds were
used to finance the Company's investment in the Cajun generating
facilities.
In March 2000, three of the Company's foreign subsidiaries entered into a
(pound)325 million (approximately $493 million at June 30, 2000) secured
borrowing facility agreement with Bank of America International Limited, as
arranger. Under this facility, the financial institutions have made
available to the Company's subsidiaries various term loans totaling
(pound)235 million (approximately $357 million at June 30, 2000) for the
purpose of financing the acquisition of the Killingholme facility and
(pound)90 million ($137 million at June 30, 2000) of revolving credit and
letter of credit facilities to provide working capital for operating the
Killingholme facility. The final maturity date of the facility is the
earlier of June 30, 2019, or the date on which all borrowings and
commitments under the largest tranche of the term facility have been repaid
or cancelled.
GUARANTEES
The Company may become directly liable for the obligations of certain of
its project affiliates and other subsidiaries pursuant to guarantees
relating to certain of their indebtedness, equity and operating
obligations. As of June 30, 2000, the Company's obligations pursuant to its
guarantees of the performance, equity and indebtedness obligations of its
subsidiaries totaled approximately $379.5 million.
5. FINANCIAL INSTRUMENTS
As of June 30, 2000, the Company had outstanding seven interest rate swap
agreements with notional amounts totaling approximately $880 million. If
the swaps had been discontinued on June 30, 2000, the Company would have
owed the counter-parties approximately $4.4 million. Based on the
investment grade rating of the counter-parties, the Company believes that
its exposure to credit risk due to nonperformance by the counter-parties to
our hedging contracts is insignificant.
- The Company entered into a swap agreement effectively converting
the 7.5% fixed rate on $200 million of our Senior Notes due 2007 to
a variable rate based on the London Interbank Offered Rate. The
swap expires on June 1, 2009.
- A second swap effectively converts a $16 million issue of
non-recourse variable rate debt into a fixed rate debt. The swap
expires on September 30, 2002 and is secured by the Camas Power
Boiler assets.
- A third swap converts $177 million of non-recourse variable rate
debt into fixed rate debt. The swap expires on December 17, 2014
and is secured by the Crockett Cogeneration assets.
- A fourth swap converts (pound)188 million of non-recourse variable
rate debt into fixed rate debt. The swap expires on June 30, 2019
and is secured by the Killingholme assets.
- The Company entered into three additional forward swap agreements
to hedge against interest rate risk associated with future
corporate bond offerings. These swaps expire on December 31, 2000.
9
<PAGE> 12
6. SEGMENT REPORTING
NRG conducts its business within three segments: Independent Power
Generation, Alternative Energy (Resource Recovery and Landfill Gas) and
Thermal projects. These segments are distinct components of NRG with
separate operating results and management structures in place. The "Other"
category includes operations that do not meet the threshold for separate
disclosure and corporate charges that have not been allocated to the
operating segments. Segment information for the three and six months ended
June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
INDEPENDENT
FOR THE THREE MONTHS ENDED JUNE 30, 2000 POWER ALTERNATIVE
(In thousands) GENERATION ENERGY THERMAL OTHER TOTAL
-------------- -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 442,513 $ 8,221 $18,833 $ 3,969 $ 473,536
Intersegment revenues - 300 - - 300
Equity in earnings of unconsolidated
affiliates 52,163 (3,995) 5 - 48,173
-------------- -------------- ------------ ----------- ----------
Total operating revenues 494,676 4,526 18,838 3,969 522,009
-------------- -------------- ------------ ----------- ----------
NET INCOME (LOSS) $ 65,374 $ 4,459 $ 1,228 $ (27,480) $ 43,581
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(In thousands) INDEPENDENT
POWER ALTERNATIVE
GENERATION ENERGY THERMAL OTHER TOTAL
-------------- -------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 28,068 $ 8,862 $21,410 $ 1,270 $ 59,610
Intersegment revenues - 424 - - 424
Equity in earnings of unconsolidated
affiliates 12,297 1,087 (79) (6,680) 6,625
--------- -------- ------- --------- ---------
Total operating revenues 40,365 10,373 21,331 (5,410) 66,659
--------- -------- ------- --------- ---------
NET INCOME (LOSS) $ 6,578 $ 2,651 $ 1,022 $ (7,910) $ 2,341
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In thousands) INDEPENDENT
POWER ALTERNATIVE
GENERATION ENERGY THERMAL OTHER TOTAL
-------------- -------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 742,575 $ 15,238 $40,408 $ 7,685 $ 805,906
Intersegment revenues - 601 - - 601
Equity in earnings of unconsolidated
affiliates 45,012 (6,493) 10 - 38,529
--------- -------- ------- --------- ---------
Total operating revenues 787,587 9,346 40,418 7,685 845,036
--------- -------- ------- --------- ---------
NET INCOME (LOSS) $ 91,054 $ 7,833 $ 3,231 $ (49,791) $ 52,327
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(In thousands) INDEPENDENT
POWER ALTERNATIVE
GENERATION ENERGY THERMAL OTHER TOTAL
-------------- -------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 41,132 $ 15,142 $36,555 $ 4,304 $ 97,133
Intersegment revenues - 748 - - 748
Equity in earnings of unconsolidated
affiliates 20,126 1,336 1,083 (7,253) 15,292
--------- -------- ------- --------- ---------
Total operating revenues 61,258 17,226 37,638 (2,949) 113,173
--------- -------- ------- --------- ---------
NET INCOME (LOSS) $ 7,527 $ 6,164 $ 3,184 $ (15,474) $ 1,401
</TABLE>
10
<PAGE> 13
The Company is a leading global energy company primarily engaged in the
construction, development, acquisition, ownership and operation of power
generation facilities and the sale of energy, capacity and related
products. The following geographic information for the three and six months
ended June 30, 2000 and 1999 presents the Company's results of operations
on a geographic basis:
<TABLE>
<CAPTION>
ASIA OTHER
FOR THE THREE MONTHS ENDED JUNE 30, 2000
(In thousands) U.S. EUROPE PACIFIC AMERICAS TOTAL
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 431,354 $ 41,800 $ 355 $ 27 $ 473,536
Intersegment Revenues 300 - - - 300
Equity in earnings of unconsolidated
affiliates 41,594 821 2,823 2,935 48,173
-----------------------------------------------------------------------
Total operating revenues 473,248 42,621 3,178 2,962 522,009
-----------------------------------------------------------------------
NET INCOME $ 38,031 $ 2,205 $ 955 $ 2,390 $ 43,581
-----------------------------------------------------------------------
<CAPTION>
ASIA OTHER
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(In thousands) U.S. EUROPE PACIFIC AMERICAS TOTAL
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 59,079 $ 147 $ 384 $ - $ 59,610
Intersegment Revenues 424 - - - 424
Equity in earnings of unconsolidated
affiliates 1,678 5,409 (623) 161 6,625
-----------------------------------------------------------------------
Total operating revenues 61,181 5,556 (239) 161 66,659
-----------------------------------------------------------------------
NET INCOME (LOSS) $ (6,025) $ 3,422 $ 2,299 $ 2,645 $ 2,341
-----------------------------------------------------------------------
<CAPTION>
ASIA OTHER
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In thousands) U.S. EUROPE PACIFIC AMERICAS TOTAL
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 726,657 $ 78,505 $ 648 $ 96 $ 805,906
Intersegment Revenues 601 - - - 601
Equity in earnings of unconsolidated
affiliates 29,592 2,686 1,585 4,666 38,529
-----------------------------------------------------------------------
Total operating revenues 756,850 81,191 2,233 4,762 845,036
-----------------------------------------------------------------------
NET INCOME (LOSS) $ 44,630 $ 5,802 $(1,462) $ 3,357 $ 52,327
-----------------------------------------------------------------------
<CAPTION>
ASIA OTHER
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(In thousands) U.S. EUROPE PACIFIC AMERICAS TOTAL
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 96,112 $ 204 $ 817 $ - $ 97,133
Intersegment Revenues 748 - - - 748
Equity in earnings of unconsolidated
affiliates 8,143 6,024 42 1,083 15,292
-----------------------------------------------------------------------
Total operating revenues 105,003 6,228 859 1,083 113,173
-----------------------------------------------------------------------
NET INCOME (LOSS) $ (10,399) $ 2,075 $ 5,380 $ 4,345 $ 1,401
-----------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
7. NEW ACCOUNTING PRONOUNCEMENTS
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 the derivative, its resulting designation and its
effectiveness. The Company plans to adopt this standard in 2001, as
required. The potential impact of implementing this statement has not yet
been determined.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an Amendment to FASB
Statement No. 133." This Statement amends SFAS No. 133 in four areas,
normal purchases and sales contracts, definition of interest rate risk,
hedging recognized foreign currency denominated assets and liabilities and
hedging foreign currency risk and intercompany derivatives. The Company
plans to adopt the standard, as required. The potential impact of
implementing this standard has not been determined.
8. COMMITMENTS AND CONTINGENCIES
In January 2000, the Company executed a memorandum of understanding with
GE Power Systems, a division of General Electric Company, to purchase 11
gas turbine generators and five steam turbine generators, with an option to
purchase additional units. The purchases will take place over the next five
years with the first delivery scheduled to be made in 2002. The 16 turbines
have an equivalent generation output of approximately 3,000 MW and an
acquisition cost of approximately $500 million.
In March 2000, the Company entered into an agreement with Great River
Energy under which Great River assigned to the Company all of its rights
and obligations with respect to two 135 MW turbines being built for it by
Siemens Westinghouse. The Company's total cost for the turbines, which are
scheduled for delivery in the first or second quarter of 2001, will be
approximately $43 million. The Company expects to install these turbines at
either existing plant sites in the United States or new greenfield sites.
In July 2000, the Company completed its $11.7 million purchase of
Harrisburg Steam Works and Statoil Energy Power/Paxton L.P. located in
Harrisburg, PA from Statoil Energy Inc. Harrisburg Steam Works provides
steam to more than 300 residential, commercial and industrial customers
including the City of Harrisburg, Pennsylvania and the Commonwealth of
Pennsylvania. Statoil Energy Power/Paxton L.P. is a cogeneration facility
capable of producing 12 MW of electrical power while supplying nearly 30%
of the steam requirements for Harrisburg Steam Works. Also included in the
purchase was a nationwide diesel engine service business and a chiller
plant that serves the Harrisburg Hospital.
In July 2000, the Company signed a purchase agreement with Statoil Energy,
Inc. to acquire 190,000 pounds of steam per hour, 18 MW coal fired
cogeneration facility that provides steam and electricity to a
major manufacturing facility located in Dover, Delaware. Excess electrical
energy is sold through the Dover municipal electric utility. In a separate
purchase agreement, the Company agreed to purchase Statoil's Distributed
Generation and Engineering Services Group, which consists of three
generation projects totaling 6.2 MW as well as a diesel-services group.
The Company expects to complete the acquisition of these facilities in the
third quarter of 2000.
In August 2000, the Company was named the successful bidder in the
South Australian Government's electricity privatization auction for
Flinders Power, South Australian's final generation company to be
privatized. The Company agreed to pay AUS $313 million ($180 million US
as of August 2000) for a 100 year lease of the Flinders Power assets.
Flinders Power includes two power stations totaling 760 MW, the
12
<PAGE> 15
Leigh Creek coal mine and a dedicated rail line. The lease agreement also
includes managing the long-term fuel supply and power purchase agreement of
the 180 MW Osborne Cogeneration Station. The transaction is expected to
close in the third quarter of 2000.
Regulatory Issue
On March 30, 2000 the Company received notification from the New York
Independent System Operator (NYISO) of their petition to the Federal Energy
Regulatory Commission (FERC) to place a $2.52 per megawatt hour market cap
on ancillary service revenues. The NYISO also requested authority to impose
this cap on a retroactive basis to March 1, 2000.
On May 31, 2000, the FERC approved the NYISO's request to impose price
limitations on one ancillary service, Ten Minute Non-Synchronized Reserves
(TMNSR) on a prospective basis only, effective March 28, 2000. The FERC
rejected the NYISO's request for authority to adjust the market-clearing
prices for TMNSR on a retroactive basis. As a result of the FERC order
(unless the NYISO or other party successfully appeals the order), the
Company will retain the approximately $8.0 million of revenues collected in
February 2000 and approximately $8.2 million included in revenues, but not
yet collected for March 2000. On June 30, 2000, the NYISO sought
reconsideration of the FERC order.
The Company plans to adjust its business operations to mitigate any future
impact of the order.
Disputed Revenues
During the six month period ended June 30, 2000, the Company had claims
related to certain revenues earned prior to May 31, 2000. The Company is
actively pursuing resolution and/or collection of these amounts, which
totaled approximately $41.7 million. The contingent revenues relate to the
interpretation of certain transition power sales agreements and to sales to
the New York Power Pool and New England Power Pool, conflicting meter
readings, pricing of firm sales and other power pool reporting issues.
These amounts have not been recorded in the financial statements and will
not be recognized as income until disputes are resolved and collection is
assured. The Company anticipates that these disputes will be resolved
during the third and fourth quarter of 2000.
9. EARNINGS PER SHARE
In June 2000, the Company successfully completed the initial public
offering of 32,395,500 shares of its common stock (including 4,225,500
shares sold upon the exercise of the underwriters over-allotment option).
Diluted earnings per average common share is calculated by dividing Net
Income by the weighted average shares of common stock outstanding including
stock options outstanding under the Company's stock option plans considered
to be common stock equivalents. The following table shows the effect of
those stock options on the weighted average number of shares outstanding
used in calculating diluted earnings per average common share.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------- ----------- ----------- ----------
(In thousands) 2000 1999 2000 1999
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Average Common Shares Outstanding 155,529 147,605 151,567 147,605
Assumed Conversion of Stock Options 662 - 331 -
------------- ----------- ----------- ----------
Potential Average Diluted Common Shares Outstanding 156,191 147,605 151,898 147,605
------------- ----------- ----------- ----------
</TABLE>
13
<PAGE> 16
10. PRO FORMA RESULTS OF OPERATIONS - CAJUN ACQUISITION
During March 2000, the Company completed the acquisition of two fossil
fueled generating plants from Cajun Electric Power Cooperative, Inc. for
approximately $1,026 million. The following information summarizes actual
results for the three months ended June 30, 2000, and the pro forma results
of operations as if the acquisition had occurred as of the beginning of the
three and six month periods ended June 30, 2000 and 1999. The pro forma
information presented is for informational purposes only and is not
necessarily indicative of future earnings or financial position or of what
the earnings and financial position would have been had the acquisition of
the Cajun facilities been consummated at the beginning of the
respective periods or as of the date for which pro forma financial
information is presented.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
THREE MONTHS ENDED THREE MONTHS ENDED
(In thousands except per share amounts) JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 473,836 $ 154,825
Equity in earnings of unconsolidated
affiliates 48,173 6,625
--------------------------- ------------------------
TOTAL OPERATING REVENUES 522,009 161,450
Total operating costs and expenses 367,881 138,382
--------------------------- ------------------------
OPERATING INCOME 154,128 23,068
Other expense (84,107) (32,987)
--------------------------- ------------------------
INCOME (LOSS) BEFORE INCOME TAXES 70,021 (9,919)
Income tax expense (benefit) 26,440 (12,864)
--------------------------- ------------------------
NET INCOME $ 43,581 $ 2,945
--------------------------- ------------------------
EARNINGS PER AVERAGE COMMON SHARE - DILUTED $0.28 $0.02
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED
(In thousands except for per share amounts) JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations $ 886,489 $ 271,275
Equity in earnings of unconsolidated affiliates 38,529 15,292
--------------------- ----------------------
TOTAL OPERATING REVENUES 925,018 286,567
Total operating costs and expenses 696,079 252,762
--------------------- ----------------------
OPERATING INCOME 228,939 33,805
Other expense (154,482) (62,862)
--------------------- ----------------------
INCOME (LOSS) BEFORE INCOME TAXES 74,457 (29,057)
Income tax expense (benefit) 25,599 (27,425)
--------------------- ----------------------
NET INCOME (LOSS) $ 48,858 $ (1,632)
--------------------- ----------------------
EARNINGS (LOSS) PER AVERAGE COMMON SHARE - DILUTED $0.32 $ (0.01)
</TABLE>
11. INVENTORY
At June 30, 2000, inventory, which is stated at the lower of weighted
average cost or market, consisted of:
<TABLE>
<CAPTION>
(In Thousands)
-----------------
<S> <C>
Fuel oil $ 58,023
Spare parts 81,713
Coal 39,672
Kerosene 1,182
Other 17,874
-----------------
Total $198,464
-----------------
</TABLE>
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table shows each revenue and expense category as a percentage of
total operating revenues :
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES
91% 90% Revenues from wholly-owned operations 95% 86%
9% 10% Equity in earnings of unconsolidated affiliates 5% 14%
---------------- ------------ ---------------------------------------------------- -------------- --------------
100% 100% TOTAL OPERATING REVENUES 100% 100%
---------------- ------------ ---------------------------------------------------- -------------- --------------
OPERATING COSTS AND EXPENSES
58% 63% Cost of wholly-owned operations 61% 61%
6% 9% Depreciation and amortization 6% 10%
6% 24% General, administrative and development 7% 28%
---------------- ------------ ---------------------------------------------------- -------------- --------------
70% 96% TOTAL OPERATING COSTS AND EXPENSES 74% 99%
---------------- ------------ ---------------------------------------------------- -------------- --------------
30% 4% OPERATING INCOME 26% 1%
---------------- ------------ ---------------------------------------------------- -------------- --------------
OTHER INCOME AND (EXPENSE)
(1%) (1%) Minority interest in earnings of consolidated - (1%)
subsidiary
- 4% Other income, net - 3%
(16%) (24%) Interest expense (16%) (24%)
---------------- ------------ ---------------------------------------------------- -------------- --------------
(17%) (21%) TOTAL OTHER EXPENSE (16%) (22%)
---------------- ------------ ---------------------------------------------------- -------------- --------------
13% (17%) INCOME (LOSS) BEFORE INCOME TAXES 10% (21%)
5% (20%) INCOME TAX EXPENSE (BENEFIT) 4% (22%)
---------------- ------------ ---------------------------------------------------- -------------- --------------
8% 3% NET INCOME 6% 1%
---------------- ------------ ---------------------------------------------------- -------------- --------------
</TABLE>
Net income for the three and six months ended June 30, 2000, was $43.6
million and $52.3 million, respectively, compared to $2.3 million and $1.4
million, for the same periods in 1999. The increases of $41.3 million and $50.9
million, respectively, were due to the following factors described below.
OPERATING REVENUES
For the three and six months ended June 30, 2000, total operating
revenues were $522.0 million and $845.0 million, respectively, an increase of
$455.4 million and $731.9 million over the same periods in 1999. For the three
and six months ended June 30, 2000 and 1999, revenues from wholly-owned
operations contributed approximately 91% and 95% to total operating revenues,
compared to 90% and 86% for the same periods in 1999. For the three and six
months ended June 30, 2000, Equity in operating earnings of unconsolidated
affiliates contributed approximately 9% and 5% to total operating revenues
compared to 10% and 14% for the same periods in 1999.
Revenues from wholly-owned operations, for the three and six months
ended June 30, 2000 were $473.8 million and $806.5 million, respectively,
compared to $60.0 million and $97.9 million for the same periods in 1999.
Revenues from wholly-owned operations for the three and six months ended June
30, 2000 increased $413.8 million and $708.6 million, respectively, compared to
the same periods in 1999.
The increases of $413.8 million and $708.6 million for the three and six
months ended June 30, 2000 as compared to the same periods in 1999 are due
primarily to the Company's acquisitions of electric generating assets during the
later portion of 1999 and the first quarter of 2000. During the later portion of
1999, the Company acquired certain electric generating facilities from Niagara
Mohawk Power Corporation (NIMO), Consolidated Edison Company of New York, Inc.
(ConEd) and Connecticut Light and Power Company (CL&P). In addition, the Company
acquired electric generating facilities from Cajun Electric Power Cooperative,
Inc. (Cajun Electric) and National Power plc at the end of the first
15
<PAGE> 18
quarter of 2000. These newly acquired generating facilities have contributed
significantly to the Company's growth in revenues during these periods as
compared to the same periods in 1999. In addition, overall revenues increased
due to warmer weather conditions in the northeastern portion of the United
States as compared to the same period in 1999.
Equity in earnings of affiliates, for the three and six months ended
June 30, 2000 was $48.2 million and $38.5 million, respectively, compared to
$6.6 million and $15.3 million for the same periods in 1999. Revenues from
wholly-owned operations for the three and six months ended June 30, 2000
increased $41.6 million and $23.2 million, respectively, compared to the same
periods in 1999.
The increases of $41.6 million and $23.2 million, for the three and six
months ended June 30, 2000 as compared to the same period in 1999 are due
primarily to increased earnings from the Company's investment in West Coast
Power LLC due to warmer weather conditions experienced in the western portion of
the United States in 2000. These increases were partially offset by increased
operating losses attributable to NEO Corporation which derives a significant
portion of its net income from Section 29 tax credits.
OPERATING COSTS AND EXPENSES
Cost of wholly owned operations for the three and six months ended June
30, 2000, was $305.9 million and $520.8 million, respectively. These are
increases of $264.8 million and $451.8 million, over the same periods in 1999.
Cost of wholly owned operations for the three and six months ended June 30, 2000
represented 58% and 61% of total operating revenues, respectively, and
represented 63% and 61% for the same periods in 1999.
The increases of $264.8 million and $451.8 million for the three and six
months ended June 30, 2000 as compared to the same periods in 1999 are due to
the Company's acquisitions of electric generating assets during the later
portion of 1999 and the first quarter of 2000. During the later portion of 1999,
the Company acquired certain electric generating facilities from NIMO, ConEd and
CL&P. In addition, the Company acquired electric generating facilities from
Cajun Electric and National Power plc at the end of the first quarter of 2000.
The addition of these generating facilities and their respective costs of
operations, including fuel and other operating and maintenance costs, have
contributed significantly to the increase in the cost of wholly owned
operations.
Depreciation and amortization costs for the three and six months ended
June 30, 2000 were $30.9 million and $50.9 million, respectively, representing
increases of $24.6 million and $39.8 million, over the same periods in 1999.
Depreciation and amortization costs represented 6% of total operating revenues
for both the three and six months ended June 30, 2000 and 9% and 10%, for the
same periods in 1999.
The increases of $24.6 million and $39.8 million for the three and six
months ended June 30, 2000 as compared to the same periods in 1999, are due
primarily to the addition of property, plant and equipment related to the
Company's recently completed acquisitions of electric generating facilities. For
the three and six months ended June 30, 2000 as compared to the same periods in
1999, $10.6 million and $22.9 million of the respective increases relate to the
generating facilities acquired in the northeastern portion of the United States,
$6.9 million of the increase for both periods relates to the generating
facilities acquired in the southern portion of the United States, $4.3 million
of the increase for both periods relates to the Killingholme generating facility
and $2.3 million and $4.6 million of the respective increases relate to the
increase in the Company's ownership in the Crockett Cogeneration project.
General, administrative and development costs for the three and six months
ended June 30, 2000 were $31.1 million and $56.3 million, respectively,
representing increases of $14.8 million and $24.0 million, over the same periods
in 1999. General, administrative and development costs represented 6% and 7% of
total operating revenues for the three and six months ended June 30, 2000 and
24% and 28%, respectively, for the same periods in 1999.
The increases of $14.8 million and $24.0 million for the three and six
months ended June 30, 2000 as compared to the same periods in 1999 are due to
increased business development activities, associated legal, technical, and
accounting expenses, employees and equipment resulting from expanded operations
and pending acquisitions. The Company's asset base increased from $3.4 billion
to $5.5 billion during the first six months of 2000.
16
<PAGE> 19
OTHER INCOME (EXPENSE)
Total other expense for the three and six months ended June 30, 2000 was
$84.1 million and $136.7 million, respectively. These are increases of $70.2
million and $112.0 million compared to the same periods in 1999. Total other
expense represented 17% and 16% of total operating revenues for the three and
six months ended June 30, 2000, and 21% and 22%, respectively, for the same
periods in 1999.
The increase in total other expense of $70.2 million and $112.0 million
for the three and six months ended June 30, 2000, respectively as compared to
the same period in 1999 consisted primarily of interest expense, minority
interest in earnings of consolidated subsidiaries, and other income, net.
Interest expense for the three and six months ended June 30, 2000 was $81.9
million and $134.2 million, respectively, compared to $15.8 million and $26.9
million for the same periods in 1999, increases of $66.1 million and $107.3
million. Interest expense represented 16% of total operating revenues, for both
the three and six months ended June 30, 2000 and 24% for the same periods in
1999. The increases of $66.1 million and $107.3 million were due to increased
corporate and project level debt issued during the three and six months ended
June 30, 2000 as compared to the same periods in 1999. During the later portion
of 1999, the Company acquired significant electric generating facilities that
were financed, in part, through a combination of corporate level long term debt
issuances, short term credit facilities, proceeds from the Company's initial
public offering and equity infusions from NSP.
Minority interest in earnings of consolidated subsidiaries for the three
and six months ended June 30, 2000 was $2.3 million and $4.1 million,
respectively, compared to $0.7 million and $1.2 million for the same periods in
1999, increases of $1.6 million and $2.9 million. Minority interest in earnings
of consolidated subsidiaries represented 1% of total operating revenues for the
three months ended June 30, 2000 and 1999, respectively. The increase of $1.6
million and $2.9 million for the three and six months ended June 30, 2000 is
primarily due to the Company's increased ownership interest in the Crockett
Cogeneration project.
Other income, net for the three and six months ended June 30, 2000, was
$0.03 million and $1.6 million, respectively, compared to $2.6 million and $3.3
million for the same periods in 1999, decreases of $2.5 million and $1.7
million. Other income, net represented less than 1% and 4% and less than 1% and
3 % of total operating revenues for the three and six months ended June 30,
2000 and 1999, respectively. Other income, net consists primarily of interest
income on loans to affiliates and miscellaneous other items including the income
statement impact of certain foreign currency translation adjustments. During the
six months ended June 30, 2000 interest income decreased approximately $1.2
million as compared to the same period in 1999, primarily due to a reduction in
loans to unconsolidated affiliates.
INCOME TAX
Income tax expense for the three and six months ended June 30, 2000 was
$26.4 million and $28.0 million respectively. These are increases of $39.7
million and $53.3 million compared to the same periods in 1999. Income tax
expense represented 5% and 4% of total operating revenues for the three and six
months ended June 30, 2000 and (20%) and (22%), respectively, for the same
periods in 1999.
The increases in income tax expense of $39.7 million and $53.3 million for
the three and six months ended June 30, 2000 as compared to the same periods in
1999 were due primarily to higher domestic taxable income verses foreign taxable
income. In addition, the Company no longer recognizes tax benefits related to
the losses generated by the Loy Yang facility. These increases were partially
offset by additional Section 29 tax credits generated by the growth of NEO
Corporation.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2000, the Company's cash balance
increased $39.4 million to $70.8 million. During this period, the Company's
financing activities have provided cash totaling $1.7 billion. The Company's
financing activities raised $2.5 billion of gross proceeds from the issuance of
long-term debt partially offset by $1.1 billion of principal repayments and $0.2
billion of reductions in the Company's revolving line of credit balance. The
Company also raised $453.7 million of net proceeds through its initial public
offering of 32,395,500 shares of common stock.
17
<PAGE> 20
In addition to the Company's financing activities, the Company generated
$0.2 billion in cash from operations. The Company utilized $1.9 billion of
cash to complete the acquisition of the Killingholme A and Cajun Electric
Power Cooperative, Inc. electric generating assets and to fund other
capital expenditures.
During the six month period ended June 30, 2000, the Company and its
subsidiaries completed the following long term financing activities, for a
discussion of short term borrowings, see Note 3 to the Financial Statements:
- In February 2000, NRG Northeast Generating LLC, a subsidiary of the
Company, issued $750 million of senior secured bonds to refinance
short-term project borrowings and for general funding purposes. The
bond offering included three tranches: $320 million with an interest
rate of 8.065% due in 2004, $130 million with an interest rate of
8.842% due in 2015 and $300 million with an interest rate of 9.292% due
in 2024.
- In March 2000, the Company issued (pound)160 million (approximately
$250 million at the time of issuance) of 7.97% reset senior notes due
2020, principally to finance its equity investment in the Killingholme
facility. On March 15, 2005, these senior notes may be remarketed by
Bank of America, N.A. at a fixed rate of interest through the maturity
date or, at a floating rate of interest for up to one year and then at
a fixed rate of interest through 2020. Interest is payable
semi-annually on these securities beginning September 15, 2000 through
March 15, 2005, and then at intervals and interest rates established in
the remarketing process.
- In March 2000, NRG South Central Generating LLC, a subsidiary of the
Company, issued $800 million of senior secured bonds in a two-part
offering. The first tranche was for $500 million with a coupon of 8.962
percent and a maturity of 2016. The second tranche was for $300 million
with a coupon of 9.479 percent and a maturity of 2024. The proceeds of
these bonds were used to finance the Company's investment in the Cajun
generating facilities.
- In March 2000, three of the Company's foreign subsidiaries entered into
a (pound)325 million (approximately $493 million at June 30, 2000)
secured borrowing facility agreement with Bank of America International
Limited, as arranger. Under this facility, the financial institutions
made available to our subsidiaries various term loans totaling
(pound)235 million (approximately $357 million at June 30, 2000) for
the purpose of financing the acquisition of the Killingholme facility
and (pound)90 million ($137 million at June 30, 2000) of revolving
credit and letter of credit facilities to provide working capital for
operating the Killingholme facility. The final maturity date of the
facility is the earlier of June 30, 2019, or the date on which all
borrowings and commitments under the largest tranche of the term
facility have been repaid or cancelled.
- During the second quarter of 2000, the Company completed an initial
public offering of 32,395,500 shares of its Common Stock priced at
$15 per share. The net proceeds were $453.7 million. $300 million of
the proceeds were used to repay the Company's short-term bridge loan
that was used to finance a portion of the acquisition of the Cajun
facilities. The remaining proceeds were used for general corporate
purposes including the reduction of the outstanding balance of the
Company's revolving line of credit.
The Company has committed to purchasing the Conectiv assets for
approximately $800 million in late 2000 and intends to finance this purchase
with a combination of project-level and corporate level debt. Additionally, the
Company has contracted to purchase 16 turbine generators from General Electric
for approximately $500 million, payable over five years, as well as two turbines
from Great River Energy for approximately $43 million and certain thermal and
cogeneration facilities from Statoil Energy, Inc. for $11.7 million. The
Company is also expected to purchase from Statoil Energy, Inc., First State
Power Management, Inc. and its Distributed Generation and Engineering Services
Group's three generation projects and diesel-services group. The Company has
also agreed to enter into a 100 year lease for AUS $313 million ($180 million
US as of August 2000) the Flinders Power assets which includes two power
stations totaling 760 MW.
The Company expects to finance its future capital requirements with a
combination of project-level debt, internally generated funds, corporate level
debt and additional equity. The Company's ability to arrange future financing
is dependent on a number of factors. To the extent the Company is unable to
raise additional capital on attractive terms either at the corporate level or
on a non-recourse project level, it would have a material adverse affect on the
Company's ability to grow.
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NEW ACCOUNTING PRONOUNCEMENTS
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 the
derivative, its resulting designation and its effectiveness. The Company plans
to adopt this standard in 2001, as required. The potential impact of
implementing this statement has not yet been determined
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an Amendment to FASB
Statement No. 133." This Statement amends SFAS No. 133 in four areas, normal
purchases and sales contracts, definition of interest rate risk, hedging
recognized foreign currency denominated assets and liabilities and hedging
foreign currency risk and intercompany derivatives. The Company plans to adopt
the standard, as required. The potential impact of implementing this standard
has not been determined.
ENVIRONMENTAL AND OTHER CONTINGENCIES
The Commonwealth of Massachusetts is seeking additional emissions
reductions beyond current requirements. The Massachusetts Department of
Environmental Protection has issued proposed regulations that would require
significant emissions reductions from certain coal-fired power plants in the
state, including the Company's Somerset facility. The Massachusetts Department
of Environmental Protection has proposed that such facilities comply with
stringent limits on emissions of nitrogen oxides by December 1, 2003; on
emissions of sulfur dioxides commencing on December 1, 2003, with further
reductions required by December 1, 2005; and on emissions of carbon dioxide by
December 1, 2005. In addition to output based limits (that is, a standard which
limits emissions to a certain rate per net megawatt hour), the proposed
regulations also would limit by December 1, 2003 the total emissions of nitrogen
oxides and sulfur dioxide at the Somerset facility to no more than 75% of the
average annual emissions from the Somerset facility for 1997-1999. Finally, the
proposed regulations require the Massachusetts Department of Environmental
Protection to evaluate, by December 1, 2002, the technical and economic
feasibility of controlling or eliminating mercury emissions by the year 2010,
and to propose mercury emission standards within 18 months of completion of
the feasibility evaluation. Compliance with these proposed regulations, if such
regulations become effective, could have a material impact on the operation of
the Company's Somerset facility. The Company believes that the annual average
carbon dioxide emission rate identified in the draft regulations cannot be met
by the Somerset facility.
REGULATORY ISSUE
The independent system operators who oversee most of the wholesale power
markets in which the Company operates have in the past imposed, and may in the
future continue to impose, price limitations and other mechanisms to address
some of the volatility in these markets. These types of price limitations and
other mechanisms may adversely impact the profitability of our generation
facilities that sell energy into the wholesale power markets. Given the extreme
volatility and lack of meaningful long-term price history in many of these
markets, the Company cannot quantify the impact on profitability with any
certainty. The Company will attempt to adjust its business operations to
mitigate the future impact of such limitations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses derivative financial instruments to mitigate the impact
of changes in foreign currency exchange rates on its international project cash
flows, electricity and fuel prices on margins and interest rates on the cost of
borrowing.
The fair value of the Company's interest rate hedging contracts is
sensitive to changes in interest rates. As of June 30, 2000 a 10 percent
increase in interest rates from then prevailing market rates would have
increased the market value of the Company's interest rate hedging contracts by
approximately $23 million. Conversely, a 10 percent decrease in interest rates
from the prevailing market rates would have decreased the market value by
approximately $23 million. See Note 5 to the Financial Statements under Item 1
for further discussion of this matter.
- The Company entered into a swap agreement effectively converting the
7.5% fixed rate on $200 million of our Senior Notes due 2007 to a
variable rate based on the London Interbank Offered Rate. The swap
expires on June 1, 2009.
- A second swap effectively converts a $16 million issue of non-recourse
variable rate debt into a fixed rate debt. The swap expires on
September 30, 2002 and is secured by the Camas Power Boiler assets.
- A third swap converts $177 million of non-recourse variable rate debt
into fixed rate debt. The swap expires on December 17, 2014 and is
secured by the Crockett Cogeneration assets.
- A fourth swap converts (pound)188 million of non-recourse variable rate
debt into fixed rate debt. The swap expires on June 30, 2019 and is
secured by the Killingholme assets.
- The Company entered into three additional forward swap agreements to
hedge against interest rate risk associated with future corporate bond
offerings. The swaps expire on December 31, 2000.
The Company has an investment in the Kladno project in the Czech
Republic. Statement of Financial Accounting Standard (SFAS) No. 52, Foreign
Currency Translation, requires foreign currency gains and losses to flow through
the income statement if settlement of an obligation is in a currency other than
the local currency of the entity. A portion of the Kladno project debt is in a
non-local currency (U.S. dollars and German deutsche marks). As of June 30,
2000, if the value of the Czech koruna decreases by 10 percent in relation to
the U.S. dollar and the German deutsche mark, the Company would record a $4.9
million loss (after tax) on the currency transaction adjustment. If the value of
the Czech koruna increased by 10 percent, the Company would record a $4.9
million gain (after tax) on the currency transaction adjustment. These currency
fluctuations are inherent to the debt structure of the project and not
indicative of the long-term earnings potential of the investment. Kladno is the
only project the Company has at this time with this type of debt structure.
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
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 we have 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;
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- 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 our 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. 333-93055, as amended.
We have 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about July 12, 1999, Fortistar Capital Inc., a Delaware corporation, filed
a complaint in District Court (Fourth Judicial District, Hennepin County) in
Minnesota against the Company asserting claims for injunctive relief and for
damages as a result of the Company's alleged breach of a confidentiality letter
agreement with Fortistar relating to the Oswego facility.
The Company disputed Fortistar's allegations and has asserted numerous
counterclaims. The Company has counterclaimed against Fortistar for breach of
contract, fraud and negligent misrepresentations and omissions, unfair
competition and breach of the covenant of good faith and fair dealing. The
Company seeks, among other things, dismissal of Fortistar's complaint with
prejudice and rescission of the letter agreement.
A temporary injunction hearing was held on September 27, 1999. The acquisition
of the Oswego facility was closed on October 22, 1999, following notification to
the court of Oswego Power LLC's and NIMO's intention to close on that date. On
January 14, 2000, the court denied Fortistar's request for a temporary
injunction. In April 2000, the Company filed a summary judgement motion to
dispose of the litigation. A hearing on this motion has not yet been scheduled.
The Company intends to continue to vigorously defend the suit and believes
Fortistar's complaint to be with out merit. A trial date has been set for
March 2, 2001.
On May 25, 2000 the New York Department of Environmental Conservation issued a
Notice of Violation to the Company and the prior owner of the Huntley and
Dunkirk facilities relating to physical changes made at those facilities prior
to our assumption of ownership. The Notice of Violation alleges that these
changes represent major modifications undertaken without obtaining the required
permits. Although the Company has a right to indemnification by the previous
owner for fines, penalties, assessments, and related losses resulting from the
previous owner's failure to comply with environmental laws and regulations, if
these facilities did not comply with the applicable permit requirements, the
Company could be required, among other things, to install specified pollution
control technology to further reduce air emissions from the Dunkirk and Huntley
facilities and the Company could become subject to fines and penalties
associated with the current and prior operation of the facilities.
On May 31, 2000, FERC approved a request of the New York Independent System
Operator, to impose price limitations on one ancillary service, Ten Minute
Non-synchronize Reserves, on a prospective basis only, effective March 28, 2000;
the date the NYISO began capping bids for that service. FERC rejected the
NYISO's request for authority to adjust the market clearing prices for that
service on a retroactive basis. As a result of the FERC order (unless the NYISO
or another party successfully appeals the order), the Company will retain the
approximately $8.0 million of revenues collected in February 2000 and
approximately $8.2 million included in revenues, but not collected, for March
2000. The NYISO sought reconsideration of the FERC order on June 30, 2000. The
Company will attempt to adjust its business operations to mitigate the future
impact of the order.
There are no other material legal proceedings pending, other than ordinary
routine litigation incidental to the Company's business, to which the Company is
a party. There are no material legal proceedings to which an officer or director
is a party or has a material interest adverse to the Company or its
subsidiaries. There are no other material administrative or judicial proceedings
arising under environmental quality or civil rights statutes pending or known to
be contemplated by governmental agencies to which the Company is or would be a
party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's registration statement for the sale of its common stock (SEC File
No. 333-35096) was declared effective by the SEC on May 30, 2000. On May 31,
2000, the Company began the initial public offering of 28,170,000 shares of its
common stock for an initial price of $15.00 per share. Salomon Smith Barney
acted as the managing underwriter for the offering. The offering was completed
with all shares of common stock having been sold on June 5, 2000. Subsequently,
the underwriters exercised an option to purchase from the Company an additional
4,225,500 shares of common stock at the initial offering price of $15.00 per
share. This transaction was completed on June 26, 2000, whereupon, the Company
received an additional $59.6 million in net proceeds for a total net proceeds of
approximately $453.7 million. Underwriter commissions and
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PART II - OTHER INFORMATION
miscellaneous other expenses were estimated to be approximately $29.2 million
and $1.6 million, respectively. As described in the Company's prospectus dated
May 30, 2000, the net proceeds of the offering were used to repay the Company's
$300 million bridge loan that was due in August 2000, remaining proceeds were
used for general corporate purposes including the reduction of the outstanding
balance of the Company's revolving line of credit.
ITEM 5. OTHER
As previously reported in the Company's 1999 Form 10-K, on March 24, 1999
Northern States Power Company (NSP) and New Century Energies, Inc., agreed to
merge. Following the merger, NSP's utility assets will be held in a subsidiary
of the surviving corporation in the merger which will be renamed "Xcel Energy,
Inc." and the shares of the Company's Class A Common Stock that were owned by
NSP will be transferred to a wholly-owned subsidiary of Xcel Energy, Inc. The
merger has been approved by all the required states, the Federal Energy
Regulatory Commission, the US Justice Department and the Nuclear Regulatory
Commission. The merger is expected to be approved during the third quarter by
the Securities and Exchange Commission and the Federal Communications
Commission.
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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule for the period ended June 30, 2000.
(b) REPORTS ON FORM 8-K:
On June 21, 2000, the Company filed a Form 8-K reporting under Item 5 -
Other Events.
The Company announced its election of six new members to its Board of
Directors - bringing the total number of members to ten.
On June 28, 2000, the Company filed a Form 8-K reporting under Item 5 -
Other Events.
The Company announced that the underwriters of its recently completed
initial public offering purchased an additional 4,225,500 shares of
common stock at $15 per share pursuant to an over allotment option
granted in connection with the offering.
On July 18, 2000, the Company filed a Form 8-K reporting under Item 5 -
Other Events.
The Company reported its financial results for the quarter and six
months ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NRG ENERGY, INC.
----------------
(Registrant)
/s/ Leonard A. Bluhm
----------------------------------
Leonard A. Bluhm
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ William T. Pieper
--------------------------------
William T. Pieper
Controller
(Principal Accounting Officer)
Date: August 14, 2000
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