<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
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
----------
Commission file number 1-3187
RELIANT ENERGY, INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-0694415
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-3000
(Registrant's telephone number, including area code)
Commission file number 1-13265
RELIANT ENERGY RESOURCES CORP.
(Exact name of registrant as specified in its charter)
Delaware 76-0511406
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-3000
(Registrant's telephone number, including area code)
----------
RELIANT ENERGY RESOURCES CORP. MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q
WITH THE REDUCED DISCLOSURE FORMAT.
Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of November 3, 2000, Reliant Energy, Incorporated had 294,749,996 shares of
common stock outstanding, including 8,748,889 ESOP shares not deemed
outstanding for financial statement purposes and excluding 4,811,193 shares
held as treasury stock. As of November 3, 2000, all 1,000 shares of Reliant
Energy Resources Corp. common stock were held by Reliant Energy, Incorporated.
<PAGE> 2
THIS COMBINED QUARTERLY REPORT ON FORM 10-Q IS SEPARATELY FILED BY RELIANT
ENERGY, INCORPORATED (RELIANT ENERGY) AND RELIANT ENERGY RESOURCES CORP.
(RERC). INFORMATION CONTAINED HEREIN RELATING TO RERC IS FILED BY RELIANT
ENERGY AND SEPARATELY BY RERC ON ITS OWN BEHALF. RERC MAKES NO REPRESENTATION
AS TO INFORMATION RELATING TO RELIANT ENERGY (EXCEPT AS IT MAY RELATE TO RERC
AND ITS SUBSIDIARIES) OR ANY OTHER AFFILIATE OR SUBSIDIARY OF RELIANT ENERGY.
RELIANT ENERGY, INCORPORATED
AND RELIANT ENERGY RESOURCES CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
PART I. FINANCIAL INFORMATION
<S> <C>
Reliant Energy:
Financial Statements.........................................................................1
Statements of Consolidated Operations
Three and Nine Months Ended September 30, 2000 and 1999 (unaudited).................1
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 (unaudited)................................2
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 2000 and 1999 (unaudited)...........................4
Notes to Unaudited Consolidated Financial Statements................................5
Management's Discussion and Analysis of Financial Condition and Results of Operations of
Reliant Energy and subsidiaries....................................................19
Quantitative and Qualitative Disclosures about Market Risk of Reliant Energy................31
RERC:
Financial Statements........................................................................32
Statements of Consolidated Operations
Three and Nine Months Ended September 30, 2000 and 1999 (unaudited)................32
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 (unaudited)...............................33
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 2000 and 1999 (unaudited)..........................35
Notes to Unaudited Consolidated Financial Statements...............................36
Management's Narrative Analysis of the Results of Operations of RERC and subsidiaries.......41
PART II. OTHER INFORMATION
Legal Proceedings.........................................................................II-1
Other Information.........................................................................II-1
Exhibits and Reports on Form 8-K..........................................................II-2
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------ ------------ ------------ ------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES ............................................ $ 9,522,727 $ 4,947,192 $ 19,521,316 $ 11,247,924
EXPENSES:
Fuel and cost of gas sold ......................... 3,901,470 1,564,652 9,176,654 4,634,247
Purchased power ................................... 3,808,783 2,062,679 6,001,305 3,315,667
Operation and maintenance ......................... 595,423 454,587 1,641,063 1,278,798
Taxes other than income taxes ..................... 144,898 113,643 372,124 340,800
Depreciation and amortization ..................... 295,174 257,343 712,644 705,337
------------ ------------ ------------ ------------
Total ......................................... 8,745,748 4,452,904 17,903,790 10,274,849
------------ ------------ ------------ ------------
OPERATING INCOME .................................... 776,979 494,288 1,617,526 973,075
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Unrealized gain on Time Warner investment ......... 40,000 1,816,105 242,928 1,816,105
Unrealized (loss) gain on indexed debt securities.. (40,000) 406,717 (242,870) 6,778
Other, net ........................................ 37,762 12,667 87,334 38,695
------------ ------------ ------------ ------------
Total ......................................... 37,762 2,235,489 87,392 1,861,578
------------ ------------ ------------ ------------
INTEREST AND OTHER CHARGES:
Interest .......................................... 186,289 116,176 536,780 368,759
Distribution on trust preferred securities ........ 13,754 14,652 40,458 38,433
------------ ------------ ------------ ------------
Total ......................................... 200,043 130,828 577,238 407,192
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
PREFERRED DIVIDENDS ............................... 614,698 2,598,949 1,127,680 2,427,461
Income Tax Expense .................................. 225,635 908,862 388,978 872,304
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM AND PREFERRED
DIVIDENDS ......................................... 389,063 1,690,087 738,702 1,555,157
Extraordinary Item, net of tax ...................... -- -- 7,445 --
------------ ------------ ------------ ------------
INCOME BEFORE PREFERRED DIVIDENDS ................... 389,063 1,690,087 746,147 1,555,157
Preferred Dividends ................................. 97 97 292 292
------------ ------------ ------------ ------------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS ...... $ 388,966 $ 1,689,990 $ 745,855 $ 1,554,865
============ ============ ============ ============
BASIC EARNINGS PER SHARE ............................ $ 1.36 $ 5.92 $ 2.62 $ 5.45
============ ============ ============ ============
DILUTED EARNINGS PER SHARE .......................... $ 1.34 $ 5.90 $ 2.60 $ 5.43
============ ============ ============ ============
</TABLE>
See Notes to the Company's Interim Financial Statements
1
<PAGE> 4
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 246,186 $ 89,078
Investment in Time Warner common stock ......................... 1,344,721 3,979,461
Accounts receivable, net ....................................... 1,742,306 1,104,640
Accrued unbilled revenues ...................................... 217,632 172,629
Fuel stock and petroleum products .............................. 254,705 152,292
Materials and supplies, at average cost ........................ 262,604 188,167
Price risk management assets ................................... 1,917,680 722,429
Prepayments and other current assets ........................... 270,026 131,666
----------- -----------
Total current assets ......................................... 6,255,860 6,540,362
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment .................................. 21,953,430 20,126,330
Less accumulated depreciation and amortization ................. 7,129,042 6,866,325
----------- -----------
Property, plant and equipment, net ........................... 14,824,388 13,260,005
----------- -----------
OTHER ASSETS:
Goodwill and other intangibles, net ............................ 3,126,894 3,041,751
Equity investments and advances to unconsolidated subsidiaries.. 1,025,526 1,022,210
Regulatory assets .............................................. 1,928,817 1,739,507
Price risk management assets ................................... 615,883 173,590
Other .......................................................... 861,707 755,472
----------- -----------
Total other assets ........................................... 7,558,827 6,732,530
----------- -----------
Total Assets ............................................... $28,639,075 $26,532,897
=========== ===========
</TABLE>
See Notes to the Company's Interim Financial Statements
2
<PAGE> 5
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings ............................................ $ 5,176,092 $ 2,879,211
Current portion of long-term debt ................................ 1,567,903 4,382,136
Accounts payable ................................................. 1,647,083 1,036,839
Taxes accrued .................................................... 508,696 227,058
Interest accrued ................................................. 133,001 116,274
Dividends declared ............................................... 110,676 110,811
Price risk management liabilities ................................ 1,880,983 718,228
Accumulated deferred income taxes ................................ 331,480 415,591
Business purchase obligation ..................................... -- 431,570
Other ............................................................ 603,384 360,109
------------ ------------
Total current liabilities ...................................... 11,959,298 10,677,827
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes ................................ 2,246,731 2,451,619
Unamortized investment tax credits ............................... 270,319 270,243
Price risk management liabilities ................................ 592,658 142,305
Benefit obligations .............................................. 376,422 400,849
Business purchase obligation ..................................... -- 596,303
Other ............................................................ 1,260,731 1,020,837
------------ ------------
Total deferred credits and other liabilities ................... 4,746,861 4,882,156
------------ ------------
LONG-TERM DEBT ...................................................... 5,461,073 4,961,310
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 11)
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF
THE COMPANY ...................................................... 705,244 705,272
------------ ------------
STOCKHOLDERS' EQUITY:
Cumulative preferred stock ....................................... 9,740 9,740
Common stock ..................................................... 3,236,609 3,182,751
Treasury stock ................................................... (120,856) (93,296)
Unearned ESOP stock .............................................. (165,617) (199,226)
Retained earnings ................................................ 2,926,569 2,500,181
Accumulated other comprehensive loss ............................. (119,846) (93,818)
------------ ------------
Total stockholders' equity ..................................... 5,766,599 5,306,332
------------ ------------
Total Liabilities and Stockholders' Equity ................... $ 28,639,075 $ 26,532,897
============ ============
</TABLE>
See Notes to the Company's Interim Financial Statements
3
<PAGE> 6
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to common stockholders ...................... $ 745,855 $ 1,554,865
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 712,644 705,337
Deferred income taxes ............................................. (131,680) 606,786
Investment tax credits ............................................ (13,748) (54,552)
Unrealized gain on Time Warner investment ......................... (242,928) (1,816,105)
Unrealized loss (gain) on indexed debt securities ................. 242,870 (6,778)
Undistributed net loss of unconsolidated subsidiaries ............. 876 65,401
Impairment of marketable equity securities ........................ 26,504 --
Extraordinary item ................................................ (7,445) --
Changes in other assets and liabilities:
Accounts receivable, net ........................................ (654,643) (91,348)
Inventories ..................................................... (101,734) (12,026)
Accounts payable ................................................ 602,186 91,442
Federal tax refund .............................................. 52,817 --
Fuel cost under-recovery ........................................ (506,439) (95,453)
Restricted deposits ............................................. (109,032) (73,371)
Accrued interest and taxes ...................................... 299,866 (44,821)
Other current assets ............................................ (115,590) (589)
Other current liabilities ....................................... 229,218 122,936
Other, net ...................................................... (77,908) 174,665
----------- -----------
Net cash provided by operating activities ..................... 951,689 1,126,389
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................ (1,244,091) (708,542)
Proceeds from sale-leaseback transactions ........................... 1,000,000 --
Investment in Time Warner securities ................................ -- (537,055)
Business acquisitions ............................................... (3,101,456) --
Investments and advances to unconsolidated subsidiaries ............. (64,708) (97,080)
Proceeds from sale of debt securities ............................... 123,428 --
Proceeds from foreign currency exchange contract, net ............... 99,251 --
Other, net .......................................................... 9,712 35,422
----------- -----------
Net cash used in investing activities ......................... (3,177,864) (1,307,255)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of indexed debt securities ................... -- 980,000
Proceeds from sale of trust preferred securities, net ............... -- 362,994
Proceeds from long-term debt, net ................................... 467,285 284,102
Increase (decrease) in short-term borrowing, net .................... 2,870,646 (153,835)
Restricted deposit for bond redemption .............................. -- (70,315)
Payments of long-term debt .......................................... (659,033) (407,678)
Payment of common stock dividends ................................... (319,467) (320,461)
Purchase of treasury stock .......................................... (27,561) (38,757)
Other, net .......................................................... 41,732 5,021
----------- -----------
Net cash provided by financing activities ....................... 2,373,602 641,071
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................... 9,681 --
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................. 157,108 460,205
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...................... 89,078 29,673
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 246,186 $ 489,878
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ............................... $ 560,922 $ 364,664
Income taxes ........................................................ 266,841 277,725
</TABLE>
See Notes to the Company's Interim Financial Statements
4
<PAGE> 7
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Included in this combined Quarterly Report on Form 10-Q (Form 10-Q) for
Reliant Energy, Incorporated (Reliant Energy), together with its subsidiaries
(the Company), and for Reliant Energy Resources Corp. (RERC) and its
subsidiaries (collectively, RER) are Reliant Energy's and RERC's consolidated
interim financial statements and notes (Interim Financial Statements) including
these companies' wholly owned and majority owned subsidiaries. The Interim
Financial Statements are unaudited, omit certain financial statement disclosures
and should be read with the combined Annual Report on Form 10-K of Reliant
Energy (Reliant Energy Form 10-K) and RERC (RERC Form 10-K) for the year ended
December 31, 1999 and the combined First Quarter Report and combined Second
Quarter Report on Form 10-Q of Reliant Energy (Reliant Energy First and Second
Quarter 10-Q, respectively) and RERC (RERC First and Second Quarter 10-Q,
respectively) for the quarters ended March 31, 2000 and June 30, 2000,
respectively.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's Interim Financial Statements reflect all normal
recurring adjustments that are, in the opinion of management, necessary to
present fairly the financial position and results of operations for the
respective periods. Amounts reported in the Company's Statements of
Consolidated Operations are not necessarily indicative of amounts expected for
a full year period due to the effects of, among other things, (a) seasonal
variations in energy consumption, (b) timing of maintenance and other
expenditures and (c) acquisitions and dispositions of businesses, assets and
other interests. In addition, certain amounts from the prior year have been
reclassified to conform to the Company's presentation of financial statements
in the current year. These reclassifications do not affect the earnings of the
Company.
The following notes to the consolidated financial statements in the
Reliant Energy Form 10-K relate to certain contingencies. These notes, as
updated herein, are incorporated herein by reference:
Notes to Consolidated Financial Statements of Reliant Energy (Reliant
Energy 10-K Notes): Note 1(d) (Regulatory Assets), Note 1(m) (Foreign
Currency Adjustments), Note 2 (Business Acquisitions), Note 3 (Texas
Electric Choice Plan and Discontinuance of SFAS No. 71 for Electric
Generation Operations), Note 4 (Transition Plan), Note 5 (Derivative
Financial Instruments), Note 6 (Jointly Owned Electric Utility Plant),
Note 7 (Equity Investments and Advances to Unconsolidated
Subsidiaries), Note 8 (Indexed Debt Securities (ACES and ZENS) and
Time Warner Securities) and Note 14 (Commitments and Contingencies).
For information regarding certain legal, tax and regulatory
proceedings and environmental matters, see Note 11.
The Company recognizes repair and maintenance costs incurred in
connection with planned major maintenance, such as turbine and generator
overhauls, control system upgrades and air-conditioner replacements, under the
"accrual in advance" method for its non-rate regulated power generation
operations. Planned major maintenance cycles primarily range from two to ten
years. Under the accrual in advance method, the Company estimates the costs of
planned major maintenance and accrues the related expense over the maintenance
cycle. As of September 30, 2000 and December 31, 1999, the Company's
maintenance reserve included in current and long-term other liabilities in its
Consolidated Balance Sheets was $141 million and $84 million, respectively.
(2) BUSINESS SEPARATION
On August 9, 2000, Reliant Energy filed an amended business separation
plan with the Public Utility Commission of Texas (PUC) under which it would
divide into two publicly traded companies in order to separate its
5
<PAGE> 8
unregulated businesses from its regulated businesses. For additional information
regarding Reliant Energy's amended business separation plan, see the Reliant
Energy and RERC combined current report on Form 8-K dated July 27, 2000, which
information is incorporated herein by reference. The amended business separation
plan that was actually filed follows the proposed plan described in the Form 8-K
except that the provision for the cash payment that the unregulated company was
to receive from the regulated company in 2004 was deleted from the plan. The
amended business separation plan is subject to PUC approval. The Company
anticipates receiving a PUC approval during December 2000.
On October 17, 2000, a wholly owned subsidiary of the Company, Reliant
Resources, Inc. (RRI), filed a registration statement on Form S-1 with the
Securities and Exchange Commission for the initial public offering of
approximately 20% of the common stock of RRI.
(3) TEXAS ELECTRIC CHOICE PLAN AND DISCONTINUANCE OF SFAS NO. 71 FOR
ELECTRIC GENERATION OPERATIONS
In June 1999, the Texas legislature adopted the Texas Electric Choice
Plan (Legislation). The Legislation substantially amends the regulatory
structure governing electric utilities in Texas in order to allow retail
competition. In June 2001, retail competition pilot projects for 5% of each
utility's combined load of all customer classes will begin under the
Legislation. Retail competition for all other customers will begin on January 1,
2002. In preparation for that competition, the Company expects to make
significant changes in the electric utility operations conducted through Reliant
Energy HL&P, an unincorporated division of Reliant Energy. By January 1, 2002,
electric utilities in Texas such as Reliant Energy HL&P will restructure their
businesses in order to separate power generation, transmission and distribution
(T&D), and retail activities into different units. Pursuant to the Legislation,
on August 9, 2000, the Company submitted an amended business separation plan
with the PUC to accomplish the required separation of its regulated operations
into separate units. See Note 2 for further information regarding the filing of
the amended business separation plan. In addition, the Legislation requires the
PUC to issue a number of new rules and determinations in implementing the
Legislation. For additional information on the Legislation, see Note 3 of the
Reliant Energy 10-K Notes.
Historically, Reliant Energy HL&P has applied the accounting policies
established in Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71) to its
electric generation and T&D operations. The Company believes that the
Legislation provides sufficient detail regarding the deregulation of the
Company's electric generation operations to require it to discontinue the use of
SFAS No. 71 for those operations. Effective June 30, 1999, the Company
discontinued SFAS No. 71 for its electric generation operations. For additional
information on the effect on the Company's consolidated financial statements due
to the discontinuance of SFAS No. 71 for electric generation operations, see
Notes 1(d), 1(g) and 3 of the Reliant Energy 10-K Notes.
The T&D business of Reliant Energy HL&P will continue to be subject to
cost-of-service rate regulation and will be responsible for the delivery of
electricity to retail customers. Pursuant to the Legislation, on March 31, 2000,
Reliant Energy HL&P filed proposed tariffs with the PUC, which are to be
effective on January 1, 2002 for its T&D operations. The final phase of the
Company's T&D rate case is scheduled to be heard beginning January 2001 and a
final appealable order is not expected until the third quarter of 2001.
(4) ACQUISITIONS AND DIVESTITURES
On August 8, 2000, Reliant Energy International, Inc. (Reliant Energy
International) and Reliant Energy Salvador Holding Company Ltd. (Salvador
Holding) entered into an agreement with a third party to sell its interests in
Salvador Holding. For further information, see Note 13.
On May 12, 2000, a subsidiary of the Company purchased entities owning
electric power generating assets and development sites located in Pennsylvania,
New Jersey and Maryland having an aggregate net generating capacity of
approximately 4,262 megawatts (MW). With the exception of development entities
that were sold to another subsidiary of the Company in July 2000, the assets of
the entities acquired are held by Reliant Energy Mid-Atlantic Power Holdings,
LLC or its subsidiaries (collectively, REMA), which are all indirect
subsidiaries of Reliant Energy. The purchase price for the May 2000 transaction
was approximately $2.1 billion. The Company accounted for the acquisition as a
purchase with assets and liabilities of REMA reflected at their estimated fair
values. On a preliminary basis, the Company's fair value adjustments related to
the acquisition primarily included adjustments in property, plant and equipment,
air emissions regulatory allowances, materials and supplies inventory, major
maintenance reserves, environmental reserves and related deferred taxes. The air
emissions regulatory allowances
6
<PAGE> 9
of $150 million are being amortized on a units-of-production basis as utilized.
The excess of the purchase price over the fair value of net assets acquired of
approximately $58 million was recorded as goodwill and is being amortized over
35 years. The Company expects to finalize these fair value adjustments no later
than May 2001, based on valuation reports for property, plant and equipment and
intangible assets and analysis of contingent liabilities that will be finalized
by May 2001. Funds for the acquisition were made available through issuances of
commercial paper supported by two bank facilities, one in the amount of $1.0
billion and another in the amount of $1.15 billion.
In August 2000, the Company sold to and leased back from each of three
owner lessors in separate lease transactions the Company's respective interests
in three REMA generation stations acquired in connection with the REMA
acquisition. As lessee, the Company leases an interest in each of these
facilities from each owner lessor under a facility lease agreement. The equity
interests in all the subsidiaries of REMA are pledged as collateral for REMA's
lease obligations. In addition, the subsidiaries have guaranteed the lease
obligations. The lease documents contain some restrictive covenants that
restrict REMA's ability to, among other things, make dividend distributions
unless REMA satisfies certain conditions. The covenant restricting dividends
would be suspended if the direct or indirect parent of REMA, meeting certain
criteria, guarantees the lease obligations. As consideration for the sale of the
Company's interest in the facilities, the Company received $1.0 billion in cash.
The Company used the $1.0 billion of sale proceeds to repay commercial paper
supported by the $1.0 billion bank facility discussed above. The following table
sets forth the Company's payment obligation under these long-term operating
leases (in millions):
<TABLE>
<S> <C>
November 1, 2000 to December 31, 2000.. $ 1
2001 .................................. 259
2002 .................................. 137
2003 .................................. 77
2004 .................................. 84
2005 and beyond ....................... 1,262
------
$1,820
======
</TABLE>
The Company's results of operations include the results of REMA only
for the period beginning May 12, 2000. The following table presents certain pro
forma information for the third quarter and first nine months of 2000, as if the
acquisition had occurred on January 1, 2000. Pro forma information has not been
presented for REMA for the third quarter and first nine months of 1999 due to
the fact that the acquired assets and related operations did not constitute a
business prior to November 24, 1999. Prior to November 24, 1999, the acquired
entities' operations were fully integrated with, and their results of operations
were consolidated into, the regulated electric utility operations of the former
owner of the facilities. In addition, prior to November 24, 1999, the electric
output of the facilities was sold based on rates set by regulatory authorities
and those rates are not indicative of REMA's future results. Pro forma amounts
also give effect to the sale-leaseback transactions described above.
PRO FORMA COMBINED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-----------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues ............................................. $ 9,523 $ 19,688
Net income before extraordinary item ................. 391 716
Net income attributable to common stockholders ....... 391 723
Basic earnings before extraordinary item per share ... 1.37 2.52
Diluted earnings before extraordinary item per share.. 1.35 2.49
Basic earnings per share ............................. 1.37 2.55
Diluted earnings per share ........................... 1.35 2.52
</TABLE>
These pro forma results, based on assumptions deemed appropriate by
the Company's management, have been prepared for informational purposes only
and are not necessarily indicative of the amounts that would have resulted had
the acquisition of the REMA entities occurred on January 1, 2000.
Purchase-related adjustments to the results of operations include the effects
on depreciation, amortization, interest expense and income taxes.
On March 1, 2000, the Company funded the remaining N. V. UNA (UNA)
purchase obligation for $982 million. At December 31, 1999, the Company
recorded the business purchase obligation in the Company's
7
<PAGE> 10
Combined Balance Sheet based on the December 31, 1999 exchange rate of 2.19
Dutch guilders (NLG) per U.S. dollar. The Company accounted for the acquisition
of UNA as a purchase with assets and liabilities reflected at their estimated
fair values. The excess of the purchase price over the fair value of net assets
acquired of approximately $835 million was recorded as goodwill and will be
amortized over 30 years. The Company's fair value adjustments related to the
acquisition of UNA primarily included increases in property, plant and
equipment, long-term debt, major maintenance reserves, plant dismantling
reserves and related deferred taxes. The Company finalized these fair value
adjustments during September 2000. There were no material adjustments made to
the purchase allocation subsequent to December 31, 1999. Purchase related
adjustments to results of operations include amortization of goodwill, interest
expense and the effects on depreciation and amortization of the assessed fair
value of some of UNA's net assets and liabilities. The Company finalized a
severance plan in connection with the UNA acquisition in September 2000, the
commitment date and, in accordance with Emerging Issues Task Force Issue 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination,"
recorded this liability of $24 million in the September 2000 financial
statements. For additional information regarding the acquisition of UNA, see
Note 2 of the Reliant Energy 10-K Notes. The Company's results of operations
incorporate UNA's results of operations only from October 1, 1999.
(5) DEPRECIATION AND AMORTIZATION
The Company's depreciation expense for the third quarter and first nine
months of 2000 was $106 million and $297 million, respectively, compared to $92
million and $458 million for the same periods in 1999. Goodwill amortization
related to acquisitions was $41 million and $85 million for the third quarter
and first nine months of 2000, respectively, compared to $14 million and $42
million for the same periods in 1999. Other amortization expense, including
amortization of regulatory assets, was $148 million and $331 million for the
third quarter and first nine months of 2000, respectively, compared to $151
million and $205 million for the same periods in 1999.
In June 1998, the PUC issued an order approving a transition to
competition plan (Transition Plan) filed by Reliant Energy HL&P in December
1997. Pursuant to the Transition Plan, the Company recorded $89 million of
additional depreciation for the first six months of 1999 and redirected $102
million of T&D depreciation to generation assets for the first six months of
1999. For information regarding the additional depreciation of electric utility
generating assets and the redirection of T&D depreciation to generation assets
under the Transition Plan, see Note 1(g) of the Reliant Energy 10-K Notes. The
Legislation provides that depreciation expense for T&D related assets may be
redirected to generation assets from 1999 through 2001 for regulatory purposes.
Because the electric generation operations portion of Reliant Energy HL&P
discontinued application of SFAS No. 71 effective June 30, 1999, such
operations can no longer record additional or redirected depreciation for
financial reporting purposes. However, for regulatory purposes, the Company
continues to redirect T&D depreciation to generation assets. As of September
30, 2000 and December 31, 1999, the cumulative amount of redirected
depreciation for regulatory purposes was $555 million and $393 million,
respectively.
In connection with the discontinuation of SFAS No. 71 in June 1999, the
Company reassessed the economic lives of Reliant Energy HL&P's generation plant
and equipment. Certain prospective depreciation rates were revised as a result
of the Legislation. These changes in depreciation rates reduced depreciation
expense for Reliant Energy HL&P's generation plant and equipment by $36 million
for the first nine months of 2000. The effect on both basic and diluted earnings
per share for the first nine months of 2000 was $0.08.
In 1999, the Company determined that approximately $800 million of
Reliant Energy HL&P's electric generation assets were impaired. The Legislation
provides for recovery of this impairment through regulated cash flows.
Therefore, a regulatory asset was recorded for an amount equal to the
impairment in the Company's Consolidated Balance Sheets. The Company amortizes
this regulatory asset as it is recovered from regulated cash flows. During the
third quarter and first nine months of 2000, the Company recorded $135 million
and $282 million, respectively, of amortization expense related to the
recoverable impaired plant costs and other deferred debits created from
discontinuing SFAS No. 71. During the third quarter and first nine months of
1999, the Company recorded $144 million in both periods of amortization expense
related to the recoverable impaired plant costs and other deferred debits
created from the discontinuation of SFAS No. 71.
Pursuant to the Legislation, through securitization, the Company is
allowed to recover generation-related regulatory asset and liability balances
as reported in the December 31, 1998 Reliant Energy Form 10-K. On May
8
<PAGE> 11
31, 2000, the PUC issued a financing order to the Company authorizing the
issuance of transition bonds in an amount not to exceed $740 million plus
actual up-front qualified costs. The Company has discontinued amortizing
certain generation-related regulatory assets effective January 1, 1999. For
additional information regarding the discontinuance of SFAS No. 71 for electric
generation operations, see Notes 1(d) and 3 of the Reliant Energy 10-K Notes.
(6) COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive
income.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2000 1999 2000 1999
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net income .......................................... $ 389 $ 1,690 $ 746 $ 1,555
Other comprehensive income (loss):
Foreign currency translation adjustments .......... (10) (23) (43) (66)
Unrealized loss on available for sale securities .. (2) (2) -- (1)
Plus: Reclassification adjustment for impairment
loss on available for sale securities realized
in net income ................................... 3 -- 17 --
------- ------- ------- -------
Comprehensive income ................................ $ 380 $ 1,665 $ 720 $ 1,488
======= ======= ======= =======
</TABLE>
(7) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
(a) Short-term Borrowings.
As of September 30, 2000, the Company had credit facilities, which
included the facilities of several financing subsidiaries, UNA, RERC and Reliant
Energy International that provided for an aggregate of $7.1 billion in committed
credit (including the Euro 600 million facility discussed below) of which $1.0
billion was unused. Interest rates on borrowings are based on the London
interbank offered rate (LIBOR) plus a margin, Euro interbank deposits (EURIBOR)
plus a margin, a base rate or at a rate determined through a bidding process.
Credit facilities aggregating $1.6 billion are unsecured. The credit facilities
contain covenants and requirements which must be met to borrow funds and issue
letters of credit, as applicable. Such covenants are not anticipated to
materially restrict the Company from borrowing funds or issuing letters of
credit, as applicable, under such facilities. One of the credit facilities
includes a $65 million sub-facility under which letters of credit may be
obtained. Letters of credit under this sub-facility aggregate $63 million as of
September 30, 2000. Two additional credit facilities aggregating $530 million
may be used for letters of credit of which $385 million were outstanding as of
September 30, 2000.
In February 2000, a financing subsidiary of the Company established a
$650 million revolving credit facility that was replaced in August 2000 with a
$1.1 billion revolving credit facility that terminates in August 2001 and
supports outstanding commercial paper.
In April 2000, a subsidiary of the Company arranged for unsecured
borrowings aggregating $54 million. These borrowings were repaid in October
2000.
In connection with the REMA acquisition in May 2000, a financing
subsidiary of the Company established two credit facilities aggregating $2.15
billion to support commercial paper borrowings. See Note 4 for additional
information regarding the acquisition of the REMA entities. In August 2000,
commercial paper borrowings supported by the $1.0 billion facility were repaid
with proceeds from the REMA sale-leaseback transactions (see Note 4) and the
facility was terminated. The revolving commitment period for the $1.15 billion
facility terminates in May 2001, at which time outstanding borrowings under
this facility convert to a one-year term facility. The $1.15 billion facility
and three other facilities aggregating $3.2 billion are subject to partial
repayment and mandatory commitment reductions in the event that certain
corporate transactions occur.
In June 2000, a financing subsidiary of the Company established a $250
million credit facility which was to terminate on October 23, 2000. In October,
the maturity date of this facility was extended to April 2001 and the
9
<PAGE> 12
facility was increased to $350 million. At September 30, 2000, there were no
borrowings outstanding under this facility.
In July 2000, UNA entered into two new credit facilities to refinance
the existing 1.5 billion NLG multi-currency credit agreement that was scheduled
to mature in October 2000. The two new credit facilities include (a) a 364-day
revolving credit facility for Euro 250 million ($221 million assuming the
September 30, 2000 exchange rate of 0.8823 U.S. dollar per Euro) and (b) a
three-year letter of credit facility for $420 million. These credit facilities
will be used by UNA for working capital purposes and to support UNA's
contingent obligations under its cross-border leases. See Note 14(g) to the
Reliant Energy 10-K Notes. Under the two facilities, there is no recourse to
any affiliate of the Company other than UNA.
In August 2000, the Company: (a) increased its revolving credit
facility which supports commercial paper from $200 million to $400 million and
also extended the termination date of this facility to August 2001, (b)
extended the termination date of RERC's $350 million receivables
facility to August 2001, (c) extended the termination date of a financing
subsidiary's Euro 560 million credit facility to August 2001, and (d) entered
into a new $110 million letter of credit facility, which expires in January
2001, to support REMA's lease obligations discussed in Note 4.
(b) Long-term Debt.
In February 2000, a subsidiary of the Company established a Euro 600
million term loan facility which terminates in March 2003. At September 30,
2000, $529 million (based on the September 30, 2000 exchange rate of 0.8823
U.S. dollar per Euro) was outstanding under this facility at an interest rate
of 6.65%. Borrowings under this facility have been classified as long-term debt
based upon the Company's intent and its ability to borrow under such facility
for more than one year.
In March 2000, the Company repaid $150 million of its 6.1% first
mortgage bonds at maturity.
In July 2000, RERC issued $325 million of notes having an interest
rate of 8.125% and a maturity date of July 15, 2005. RERC used the proceeds
from the sale of the notes for general corporate purposes, including the
repayment of $200 million of RERC's 7.5% notes that matured on August 1, 2000
and the repayment of a portion of its short-term indebtedness.
On July 1, 2000, the Company exercised its option and exchanged 37.9
million shares of Time Warner, Inc. common stock in satisfaction of the full
maturity value of $2.9 billion of its unsecured 7% Automatic Common Exchange
Securities (ACES). For additional information regarding ACES, see Note 8 of the
Reliant Energy 10-K Notes.
During the second quarter of 2000, UNA negotiated the repurchase of
$272 million aggregate principal amount of its long-term debt for a total cost
of $286 million, including $14 million of expenses. The book value of the debt
repurchased was approximately $293 million, resulting in an extraordinary gain
in the second quarter of 2000 on the early extinguishment of long-term debt of
approximately $7 million. Borrowings under a short-term banking facility and
proceeds from the sale of debt securities were used to finance the
reacquisition of such debt.
10
<PAGE> 13
(8) EARNINGS PER SHARE
The following table presents Reliant Energy's basic and diluted
earnings per share (EPS) calculation:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999(1) 2000(2) 1999(2)
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Basic EPS Calculation:
Income before extraordinary item and preferred
dividends ..................................... $ 389,063 $1,690,087 $ 738,702 $1,555,157
Less: Preferred dividends ....................... 97 97 292 292
---------- ---------- ---------- ----------
Net income before extraordinary item ............ 388,966 1,689,990 738,410 1,554,865
Extraordinary item .............................. -- -- 7,445 --
---------- ---------- ---------- ----------
Net income attributable to common stockholders... $ 388,966 $1,689,990 $ 745,855 $1,554,865
========== ========== ========== ==========
Weighted average shares outstanding ............... 285,183 285,287 284,170 285,247
Basic EPS:
Net income before extraordinary item ............ $ 1.36 $ 5.92 $ 2.59 $ 5.45
Extraordinary item .............................. -- -- 0.03 --
---------- ---------- ---------- ----------
Net income ...................................... $ 1.36 $ 5.92 $ 2.62 $ 5.45
========== ========== ========== ==========
Diluted EPS Calculation:
Net income attributable to common stockholders... $ 388,966 $1,689,990 $ 745,855 $1,554,865
Plus: Income impact of assumed conversions:
Interest on 6 1/4% trust preferred securities.. 5 8 9 25
---------- ---------- ---------- ----------
Total effect assuming dilution .................. $ 388,971 $1,689,998 $ 745,864 $1,554,890
========== ========== ========== ==========
Weighted average shares outstanding ............... 285,183 285,287 284,170 285,247
Plus: Incremental shares from assumed
conversions(1)(2):
Stock options ................................. 3,595 362 1,837 525
Restricted stock .............................. 807 740 807 740
6 1/4% trust preferred securities ............. 14 25 14 25
---------- ---------- ---------- ----------
Weighted average shares assuming dilution ....... 289,599 286,414 286,828 286,537
========== ========== ========== ==========
Diluted EPS:
Net income before extraordinary item ........... $ 1.34 $ 5.90 $ 2.57 $ 5.43
Extraordinary item ............................. -- -- 0.03 --
---------- ---------- ---------- ----------
Net income ..................................... $ 1.34 $ 5.90 $ 2.60 $ 5.43
========== ========== ========== ==========
</TABLE>
----------
(1) For the three months ended September 30, 1999, the computation of
diluted EPS excludes 678,134 purchase options for shares of common
stock that have exercise prices (ranging from $28.71 to $35.18 per
share) greater than the $27.41 per share average market price for the
period and would thus be anti-dilutive if exercised.
(2) For the nine months ended September 30, 2000, the computation of
diluted EPS excludes 485,119 purchase options for shares of common
stock that have exercise prices (ranging from $28.72 to $32.22 per
share) greater than the $28.60 per share average market price for the
period and would thus be anti-dilutive if exercised.
For the nine months ended September 30, 1999, the computation of
diluted EPS excludes 678,134 purchase options for shares of common
stock that have exercise prices (ranging from $28.71 to $35.18 per
share) greater than the $28.26 per share average market price for the
period and would thus be anti-dilutive if exercised.
11
<PAGE> 14
(9) CAPITAL STOCK
(a) Common Stock.
Reliant Energy has 700,000,000 authorized shares of common stock. At
September 30, 2000, 299,478,678 shares of Reliant Energy common stock were
issued and 285,862,004 shares of Reliant Energy common stock were outstanding.
At December 31, 1999, 297,612,478 shares of Reliant Energy common stock were
issued and 283,308,371 shares of Reliant Energy common stock were outstanding.
Outstanding common shares exclude (a) shares pledged to secure a loan to
Reliant Energy's Employee Stock Ownership Plan (8,799,489 and 10,679,489 at
September 30, 2000 and December 31, 1999, respectively) and (b) treasury shares
(4,817,185 and 3,624,618 at September 30, 2000 and December 31, 1999,
respectively). Reliant Energy declared dividends of $0.375 per share in each of
the third quarters of 2000 and 1999. Also, Reliant Energy declared dividends
totaling $1.125 per share in each of the nine-month periods ending September
30, 2000 and 1999.
During the first nine months of 2000, Reliant Energy purchased
1,183,800 shares of Reliant Energy common stock at an average price of $23.07
per share for an aggregate purchase price of $27 million. As of September 30,
2000, Reliant Energy was authorized to purchase an additional $271 million of
Reliant Energy common stock.
(b) Preference Stock.
During the nine months ended September 30, 2000, Reliant Energy issued
and redeemed, as applicable, the following shares of preference stock now owned
by certain financing subsidiaries on the dates indicated:
<TABLE>
<CAPTION>
NUMBER OF ISSUED DATE NUMBER OF
PREFERENCE SERIES DATE ISSUED SHARES REDEEMED SHARES REDEEMED
----------------- ------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
Series G February 2000 6,825 August 2000 6,825
Series H May 2000 12,100 -- --
Series I May 2000 10,525 August 2000 10,525
Series J June 2000 2,100 -- --
Series J July 2000 530 -- --
Series K August 2000 11,580 -- --
</TABLE>
Series H, J and K preference stock are not deemed outstanding for
financial reporting purposes because the sole shareholder of each series is a
wholly owned subsidiary of Reliant Energy.
(10) TRUST PREFERRED SECURITIES
(a) Reliant Energy
Statutory business trusts created by Reliant Energy have issued trust
preferred securities, the terms of which, and the related series of junior
subordinated debentures, are described below:
<TABLE>
<CAPTION>
AGGREGATE
LIQUIDATION AMOUNT
--------------------------- MANDATORY
SEPTEMBER 30, DECEMBER 31, DISTRIBUTION RATE/ REDEMPTION DATE/ JUNIOR SUBORDINATED
TRUST 2000 1999 INTEREST RATE MATURITY DATE DEBENTURES
----- ------------- ------------ ------------------ ---------------- --------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REI Trust I $ 375 $ 375 7.20% March 2048 7.20% Junior Subordinated
Debentures due 2048
HL&P Capital Trust I $ 250 $ 250 8.125% March 2046 8.125% Junior Subordinated
Deferrable Interest
Debentures Series A
HL&P Capital Trust II $ 100 $ 100 8.257% February 2037 8.257% Junior Subordinated
Deferrable Interest
Debentures Series B
</TABLE>
12
<PAGE> 15
For additional information regarding the $625 million of preferred
securities and the $100 million of capital securities previously issued to the
public by statutory business trusts created by Reliant Energy, see Note 11 of
the Reliant Energy 10-K Notes. The sole asset of each trust consists of junior
subordinated debentures of Reliant Energy having interest rates and maturity
dates corresponding to each issue of preferred or capital securities, and the
principal amounts corresponding to the common and preferred or capital
securities issued by that trust.
(b) RERC
A statutory business trust created by RERC has issued convertible
trust preferred securities, the terms of which, and the related series of
convertible junior subordinated debentures, are described below:
<TABLE>
<CAPTION>
AGGREGATE
LIQUIDATION AMOUNT
-------------------------- MANDATORY
SEPTEMBER 30, DECEMBER 31, DISTRIBUTION RATE/ REDEMPTION DATE/ JUNIOR SUBORDINATED
TRUST 2000 1999 INTEREST RATE MATURITY DATE DEBENTURES
----- ------------ ----------- ----------------- ---------------- ------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Resources Trust $ 1 $ 1 6.25% June 2026 6.25% Convertible Junior
Subordinated Debentures
due 2026
</TABLE>
For additional information regarding the $173 million of convertible
preferred securities previously issued to the public by a statutory business
trust created by RERC, see Note 11 of the Reliant Energy 10-K Notes and Note 5
of the RERC 10-K Notes. The sole asset of the trust consists of convertible
junior subordinated debentures of RERC having an interest rate and maturity
date corresponding to the convertible preferred securities, and the principal
amount corresponding to the common and convertible preferred securities issued
by the trust.
(11) COMMITMENTS AND CONTINGENCIES
(a) Legal, Tax and Regulatory Proceedings
In February 1996, the cities of Wharton, Galveston and Pasadena
(original claimant cities) filed suit, for themselves and a class of all
similarly situated cities in Reliant Energy HL&P's service area, against
Reliant Energy and Houston Industries Finance, Inc. (formerly a wholly owned
subsidiary of Reliant Energy) alleging underpayment of municipal franchise
fees. Plaintiffs claim that they are entitled to 4% of all receipts of any kind
for business conducted within these cities over the previous four decades.
Because the franchise ordinances at issue affecting Reliant Energy HL&P
expressly impose fees only on its own receipts and only from sales of
electricity for consumption within a city, the Company regards all of
plaintiffs' allegations as spurious and is vigorously contesting the case. The
plaintiffs' pleadings asserted that their damages exceeded $250 million. The
269th Judicial District Court for Harris County granted partial summary
judgment in favor of Reliant Energy dismissing all claims for franchise fees
based on sales tax collections. Other motions for partial summary judgment were
denied. A six week jury trial of the original claimant cities (but not the
class of cities) ended on April 4, 2000 (three cities case). Although the jury
found for Reliant Energy on many issues, they found in favor of the original
claimant cities on three issues, and assessed a total of $4 million in actual
and $30 million in punitive damages. However, the jury also found in favor of
Reliant Energy on the affirmative defense of laches, a defense similar to a
statute of limitations defense, due to the original claimant cities having
unreasonably delayed bringing their claims during the 43 years since the
alleged wrongs began.
The trial court in the three cities case has not yet entered a
judgment on the jury's verdict but has announced oral rulings granting most of
Reliant Energy's motions to disregard the jury's findings. The trial court's
rulings would reduce the judgment to $1.7 million, including interest, plus an
award of $13.7 million in legal fees. In addition, the trial court orally
granted Reliant Energy's motion to decertify the class and said that it will
vacate its
13
<PAGE> 16
prior orders certifying a class. Following this ruling, 45 cities
filed individual suits against Reliant Energy in the District Court of Harris
County.
The extent to which issues in the three cities case may affect the
claims of the other cities served by Reliant Energy HL&P cannot be assessed
until judgments are final and no longer subject to appeal. However, the trial
court's rulings disregarding most of the jury's findings are consistent with
Texas Supreme Court opinions over the past decade. The Company estimates the
range of possible outcomes for the plaintiffs to be between zero and $17
million inclusive of interest and attorneys' fees.
The three cities case will be appealed promptly following entry of an
appealable judgment. The Company believes that the $1.7 million damage award
resulted from serious errors of law and that it will be set aside by the Texas
appellate courts. In addition, the Company believes that because of a pre-trial
agreement between the parties limiting fees to a percentage of the damages,
reversal of the award of approximately $13.7 million in attorneys' fees in the
three cities case is probable.
The Company is involved in other legal, tax and regulatory proceedings
before various courts, regulatory commissions and governmental agencies
regarding matters arising in the ordinary course of business. Some of these
proceedings involve substantial amounts. The Company's management regularly
analyzes current information and, as necessary, provides accruals for probable
liabilities on the eventual disposition of these matters. The Company's
management believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
(b) Environmental Matters
Under the agreement to acquire REMA, the Company became responsible
for liabilities associated with ash disposal site closures and site
contamination at the acquired facilities in Pennsylvania and New Jersey prior
to plant closing except for the first $6 million of remediation costs at the
Seward Generating Station. A prior owner retained liabilities associated with
the disposal of hazardous substances to off-site locations prior to November
24, 1999. As of September 30, 2000, REMA has liabilities associated with six
ash disposal site closures and six site investigations and environmental
remediations. The Company has recorded its estimate of these environmental
liabilities in the amount of $36 million as of September 30, 2000. The Company
expects approximately $13 million will be paid over the next five years.
In connection with the acquisition of UNA (see Note 2 of Reliant Energy
Form 10-K Notes), the Company assumed a $25 million obligation primarily related
to asbestos abatement, as required by Dutch law, and soil remediation at six
sites. During 2000, the Company initiated a review of potential environmental
matters associated with the UNA properties. UNA began remediation in 2000 of the
properties identified to have exposed asbestos and soil contamination, as
required by Dutch law and the terms of certain leasehold agreements with
municipalities in which the contaminated properties are located. All remediation
efforts are to be fully completed by 2005. As of September 30, 2000, the
undiscounted liability for this asbestos abatement and soil remediation was $25
million.
From time to time the Company has received notices from regulatory
authorities or others regarding its status as a potentially responsible party
(PRP) in connection with sites found to require remediation due to the presence
of environmental contaminants. In addition, the Company has been named as
defendant in litigation related to such sites and in recent years has been
named, along with numerous others, as a defendant in several lawsuits filed by
a large number of individuals who claim injury due to exposure to asbestos
while working at sites along the Texas Gulf Coast. Most of these claimants have
been workers who participated in construction of various industrial facilities,
including power plants, and some of the claimants have worked at locations
owned by the Company. The Company anticipates that additional claims similar to
those previously received may be asserted in the future and intends to continue
vigorously contesting claims that it does not consider to have merit. Although
their ultimate outcome cannot be predicted at this time, the Company does not
believe, based on its experience to date, that these matters, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
14
<PAGE> 17
(c) Indemnification of Stranded Costs.
The stranded costs in the Dutch electricity market are considered to
be the liabilities, uneconomical contractual commitments, and other costs
associated with obligations entered into by the coordinating body for the Dutch
electricity generating sector, N.V. Samenwerkende
elecktriciteits-produktiebedrijven (SEP), plus certain district heating
contracts with certain municipalities within Holland.
SEP was incorporated as the coordinating body for the four large-scale
Dutch electricity generation companies, including UNA, which currently has an
interest in the stranded costs of SEP of 22.5%. Among other things, SEP manages
the dispatch for the national transmission grid, coordinates the fuel supply,
manages the import and the export of electricity, and settles production costs
for the electricity generation companies. SEP will cease performing the above
activities in 2001 as a consequence of the forthcoming deregulation of the Dutch
electricity market.
Under the Cooperative Agreement, UNA and the other Dutch generators
agreed to sell their generating output through SEP. Over the years, SEP has
incurred stranded costs as a result of a perceived need to cover anticipated
shortages in energy production supply. SEP stranded costs consist primarily of
investments in alternative energy sources and fuel and power purchase contracts
currently estimated to be uneconomical. Legislation is pending in the Dutch
parliament which would transfer the liability for the stranded costs from SEP to
its four shareholders and specify the allocation percentage of the stranded
cost. The outcome of this legislation is currently unknown.
In connection with the acquisition of UNA, the selling shareholders of
UNA agreed to indemnify UNA for certain stranded costs in an amount not to
exceed NLG 1.4 billion (approximately $560 million based on the September 30,
2000 exchange rate of 2.50 NLG per U.S. dollar), which may be increased in
certain circumstances at the option of the Company up to NLG 1.9 billion
(approximately $760 million). Of the total consideration paid by the Company
for the shares of UNA, NLG 900 million (approximately $360 million) has been
placed by the selling shareholders in an escrow account to secure the indemnity
obligations. Although the Company's management believes that the indemnity
provision will be sufficient to fully satisfy UNA's ultimate share of any
stranded cost obligation, this judgment is based on numerous assumptions
regarding the ultimate outcome and timing of the resolution of the stranded
cost issue, the former shareholders timely performance of their obligations
under the indemnity arrangement, and the amount of stranded costs which at
present is not determinable.
15
<PAGE> 18
(12) REPORTABLE SEGMENTS
The Company's determination of reportable segments considers the
strategic operating units under which the Company manages sales, allocates
resources and assesses performance of various products and services to
wholesale or retail customers in differing regulatory environments. Financial
information for REMA and UNA is included in the segment disclosures only for
periods beginning with their respective acquisition dates. For additional
information regarding the acquisition date of UNA, see Note 2 of the Reliant
Energy 10-K Notes. The Company has identified the following reportable
segments: Electric Operations, Wholesale Energy, Natural Gas Distribution,
Interstate Pipelines, Reliant Energy Europe, Reliant Energy Latin America and
Corporate. For descriptions of the financial reporting segments, see Note 1(a)
of the Reliant Energy 10-K Notes. Financial data for the business segments are
as follows:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 2000
--------------------------------------------- -------------
NET
INTERSEGMENT
REVENUES FROM REVENUES OPERATING TOTAL
NON-AFFILIATES (EXPENSES) INCOME (LOSS) ASSETS
-------------- ------------ ------------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Electric Operations ........... $ 1,827 $ -- $ 500 $ 10,561
Wholesale Energy .............. 6,673 103 319 7,405
Natural Gas Distribution ...... 764 8 (15) 3,508
Interstate Pipelines .......... 29 42 28 2,028
Reliant Energy Europe(1) ...... 129 -- 15 2,672
Reliant Energy Latin America... 20 -- -- 1,126
Corporate ..................... 81 (1) (70) 1,984
Reconciling Elimination ....... -- (152) -- (645)
-------- -------- -------- --------
Consolidated .................. $ 9,523 $ -- $ 777 $ 28,639
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------
NET
INTERSEGMENT
REVENUES FROM REVENUES OPERATING
NON-AFFILIATES (EXPENSES) INCOME (LOSS)
-------------- ------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Electric Operations............................... $ 4,195 $ -- $ 1,027
Wholesale Energy.................................. 12,087 324 481
Natural Gas Distribution.......................... 2,383 24 82
Interstate Pipelines.............................. 90 134 84
Reliant Energy Europe(1).......................... 415 -- 72
Reliant Energy Latin America...................... 51 -- (16)
Corporate......................................... 300 -- (112)
Reconciling Elimination........................... -- (482) --
------------- ------------- -------------
Consolidated...................................... $ 19,521 $ -- $ 1,618
============= ============= =============
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 1999
--------------------------------------------- ------------
NET
INTERSEGMENT
REVENUES FROM REVENUES OPERATING TOTAL
NON-AFFILIATES (EXPENSES) INCOME (LOSS) ASSETS
-------------- ------------- ------------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Electric Operations ........... $ 1,496 $ -- $ 442 $ 9,941
Wholesale Energy .............. 2,847 61 43 3,085
Natural Gas Distribution ...... 507 (6) (5) 3,683
Interstate Pipelines .......... 37 33 29 2,212
Reliant Energy Europe(1)....... -- -- -- 3,247
Reliant Energy Latin America... 34 -- 10 1,156
Corporate ..................... 26 20 (25) 4,349
Reconciling Elimination ....... -- (108) -- (1,140)
-------- -------- -------- --------
Consolidated ............... $ 4,947 $ -- $ 494 $ 26,533
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------ ---------------
NET
INTERSEGMENT
REVENUES FROM REVENUES OPERATING
NON-AFFILIATES (EXPENSES) INCOME (LOSS)
--------------- ---------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
Electric Operations ........... $ 3,513 $ -- $ 837
Wholesale Energy .............. 5,692 162 53
Natural Gas Distribution ...... 1,802 (21) 101
Interstate Pipelines .......... 90 112 84
Reliant Energy Latin America... 26 -- (53)
Corporate ..................... 125 55 (49)
Reconciling Elimination ....... -- (308) --
------- ------- -------
Consolidated .................. $11,248 $ -- $ 973
======= ======= =======
</TABLE>
----------
(1) Reliant Energy Europe was created in the fourth quarter of 1999.
Reconciliation of Operating Income to Net Income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating income ................................ $ 777 $ 494 $ 1,618 $ 973
Interest expense ................................ 186 116 537 369
Net unrealized gain on indexed debt securities
and Time Warner investment .................... -- (2,223) -- (1,822)
Distribution on trust preferred securities ...... 14 15 40 38
Income tax expense .............................. 226 909 389 872
Extraordinary gain, net of tax .................. -- -- (7) --
Other income .................................... (38) (13) (87) (39)
------- ------- ------- -------
Net income attributable to common stockholders... $ 389 $ 1,690 $ 746 $ 1,555
======= ======= ======= =======
</TABLE>
(13) SUBSEQUENT EVENTS
In October 2000, the Company sold its interest in Salvador Holding to
a subsidiary of AES Corporation (AES) and signed an agreement to sell its
interest in Light Servicos de Electricidade S.A. (Light), an electricity and
distribution utility in Brazil, to AES and EDF International S.A. The sale of
Light is expected to close by the end of the year. In November 2000, the Company
sold 100% of its interest in its wholly owned subsidiary Reliant Energy Caribe
Ltd. (Caribe), a Cayman holding company, which indirectly owned interests in
Electrificadora del Caribe
17
<PAGE> 20
SAESP and Electrificadora de la Costa Atlantica SAESP, both Colombian
companies, to Union Fenosa Desarrollo y Accion Exterior, S.A. of Spain. In
addition, the Company expects to transfer its interest in its remaining
Colombian investments to Union Fenosa Desarrollo y Accion Exterior, S.A. by
year end. The aggregate after-tax proceeds for all of these Latin American
transactions are estimated to be $800 million. The loss on the sale of the
Company's interest in Salvador Holding was immaterial. The Company recorded a
$125 million after-tax loss in connection with the sale of Caribe and expects to
record an additional $125 million after-tax loss in connection with the
remaining transactions.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELIANT ENERGY AND SUBSIDIARIES
The following discussion and analysis should be read in combination
with the Company's Interim Financial Statements contained in this Form 10-Q.
The Company is a diversified international energy services and
delivery company, providing energy and energy services in North America and
Western Europe. The Company operates one of the United States' largest electric
utilities in terms of kilowatt-hour sales, and its three natural gas
distribution divisions together form the United States' third largest natural
gas distribution operation in terms of customers served. As of June 30, 2000,
the Company's wholesale energy trading and marketing business was one of only
five companies to rank among both the ten largest power marketers and the ten
largest natural gas marketers in the United States. It also has power
generation and wholesale trading and marketing operations in Western Europe.
The Company invests in the development of non-rate regulated domestic power
generation projects. Additionally, the Company owns interstate natural gas
pipelines which provide gas transportation, supply, gathering and storage
services.
The Company's financial reporting segments include: Electric
Operations, Wholesale Energy, Natural Gas Distribution, Interstate Pipelines,
Reliant Energy Europe, Reliant Energy Latin America and Corporate. For segment
reporting information, see Note 12 to the Company's Interim Financial
Statements.
On August 9, 2000, Reliant Energy filed an amended business separation
plan with the PUC under which it would divide into two publicly traded
companies in order to separate its unregulated businesses from its regulated
businesses. On October 17, 2000, a wholly owned subsidiary of the Company, RRI,
filed a registration statement on Form S-1 with the Securities and Exchange
Commission for the initial public offering of RRI common stock. For additional
information regarding the amended business separation plan, see Note 2 to the
Company's Interim Financial Statements.
19
<PAGE> 22
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues ........................................ $ 9,523 $ 4,947 $19,521 $11,248
Operating Expenses .............................. 8,746 4,453 17,903 10,275
------- ------- ------- -------
Operating Income ................................ 777 494 1,618 973
Other Income .................................... (38) (13) (87) (39)
Interest Expense and Other Charges .............. 200 131 577 407
Net Unrealized Gain on Indexed Debt Securities
and Time Warner Investment .................. -- (2,223) -- (1,822)
Income Tax Expense .............................. 226 909 389 872
Extraordinary Gain, Net of Tax .................. -- -- (7) --
------- ------- ------- -------
Net Income Attributable to Common Stockholders... $ 389 $ 1,690 $ 746 $ 1,555
======= ======= ======= =======
Basic Earnings Per Share ........................ $ 1.36 $ 5.92 $ 2.62 $ 5.45
Diluted Earnings Per Share ...................... $ 1.34 $ 5.90 $ 2.60 $ 5.43
</TABLE>
Three months ended September 30, 2000 compared to three months ended
September 30, 1999
The Company reported consolidated net income of $389 million ($1.36
per basic share) for the three months ended September 30, 2000 compared to
consolidated net income of $1,690 million ($5.92 per basic share) for the same
period in 1999. The 1999 results included an aggregate $1,426 million
after-tax, non-cash, unrealized accounting gain on its indexed debt securities
and its Time Warner investment and a $19 million after-tax loss resulting from
the effect of the devaluation of the Brazilian real on equity earnings of the
Company's Brazilian investments.
The Company's consolidated net income, after adjusting for the charges
described above, was $389 million ($1.36 per basic share) for the third quarter
of 2000 compared to $283 million ($0.99 per basic share) for the third quarter
of 1999. The $106 million increase was primarily due to increased earnings from
the Wholesale Energy and the Electric Operations segments and additional
earnings from the Reliant Energy Europe segment, which was established in the
fourth quarter of 1999 with the acquisition of UNA, offset slightly by lower
earnings in 2000 versus 1999 of the Corporate, Natural Gas Distribution and
Reliant Energy Latin America segments. For additional information on the
acquisition of UNA, see Note 4 to the Company's Interim Financial Statements
and Note 2 to the Reliant Energy 10-K Notes.
For an explanation of changes in operating income for the third
quarter 2000 versus 1999, see the discussion below of operating income (loss)
by segment.
Other income increased by $25 million during the third quarter of 2000
compared to the same period in 1999 primarily due to increased earnings from
unconsolidated subsidiaries of the Wholesale Energy segment.
The Company incurred interest expense and other charges of $200
million and $131 million for the third quarters of 2000 and 1999, respectively.
The 2000 increase was a result of increased levels of both short-term
borrowings and long-term debt in the third quarter of 2000 compared to the same
period in 1999. The increase in debt levels was associated with borrowings to
fund the purchase obligation for the acquisition of UNA in the fourth quarter
of 1999 and the first quarter of 2000, the acquisition of the REMA entities in
the second quarter of 2000, and other acquisitions and capital expenditures.
The effective tax rate for the third quarter of 2000 and 1999 was 37%
and 35%, respectively.
Nine months ended September 30, 2000 compared to nine months ended
September 30, 1999
The Company reported consolidated net income of $746 million ($2.62
per basic share) and $1,555 million ($5.45 per basic share) for the first nine
months of 2000 and 1999, respectively. The 2000 results included an
extraordinary gain of $7 million related to the early extinguishment of
long-term debt. The 1999 results included an
20
<PAGE> 23
aggregate $1,166 million after-tax, non-cash, unrealized accounting gain on its
indexed debt securities and its Time Warner investment and a $114 million
after-tax loss resulting from the effect of the devaluation of the Brazilian
real on equity earnings of the Company's Brazilian investments.
The Company's consolidated net income, after adjusting to eliminate
the extraordinary and unusual charges described above, was $738 million
($2.59 per basic share) for the first nine months of 2000 compared to $504
million ($1.77 per basic share) for the first nine months of 1999. The $234
million increase was primarily due to increased earnings from the Wholesale
Energy and the Electric Operations segments and additional earnings from the
Reliant Energy Europe segment, which was established in the fourth quarter of
1999, offset by lower earnings in 2000 versus 1999 from the Natural Gas
Distribution segment and the Reliant Energy Latin America segment and increased
losses from the Corporate segment.
For an explanation of changes in operating income for the first nine
months of 2000 versus 1999, see the discussion below of operating income (loss)
by segment.
Other income increased by approximately $48 million during the first
nine months of 2000 compared to the same period in 1999 primarily due to
increased earnings from unconsolidated subsidiaries of $33 million, the pre-tax
gain on the sale of the Company's investment in one of its development stage,
non-rate regulated electric generation project companies of $15 million,
interest income on an IRS refund received in February 2000 of $26 million and
distributions from corporate venture capital investments. The increase in other
income was partially offset by an impairment loss of $27 million on marketable
equity securities classified as "available for sale" recorded in the second and
third quarters of 2000.
The Company incurred interest expense and other charges of $577 million
and $407 million for the first nine months of 2000 and 1999, respectively. The
increase was primarily a result of increased levels of both short-term
borrowings and long-term debt in the first nine months of 2000 compared to 1999.
Increased debt levels were associated in part with borrowings to fund the
purchase obligation for the acquisition of UNA in the fourth quarter of 1999 and
the first quarter of 2000, the acquisition of the REMA entities in the second
quarter of 2000, other acquisitions and capital expenditures.
The effective tax rate for the first nine months of 2000 and 1999 was
35% and 36%, respectively.
The table below shows operating income (loss) by segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Electric Operations ........... $ 500 $ 442 $ 1,027 $ 837
Wholesale Energy .............. 319 43 481 53
Natural Gas Distribution ...... (15) (5) 82 101
Interstate Pipelines .......... 28 29 84 84
Reliant Energy Europe(1) ...... 15 -- 72 --
Reliant Energy Latin America... -- 10 (16) (53)
Corporate ..................... (70) (25) (112) (49)
------- ------- ------- -------
Total Consolidated ...... $ 777 $ 494 $ 1,618 $ 973
======= ======= ======= =======
</TABLE>
--------------
(1) Reliant Energy Europe does not have comparative 1999 results because
it was established in the fourth quarter of 1999.
ELECTRIC OPERATIONS
Electric Operations conducts operations under the name Reliant Energy
HL&P. Electric Operations provides electric generation, transmission,
distribution and sales to approximately 1.7 million customers in a 5,000 square
mile area on the Texas Gulf Coast, including Houston, the nation's fourth
largest city.
In June 1999, the Texas legislature adopted the Legislation which
substantially amended the regulatory structure governing electric utilities in
Texas in order to allow retail competition beginning on January 1, 2002.
21
<PAGE> 24
Prior to the adoption of the Legislation, Electric Operations' earnings were
capped at an agreed overall rate of return formula on a calendar year basis as
part of the Transition Plan approved by the PUC effective January 1, 1998. As a
result of the Transition Plan, any earnings prior to the Legislation above the
maximum allowed return cap on invested capital were offset by additional
depreciation of Electric Operations' electric generation assets. For more
information regarding the Legislation, see Note 3 of the Company's Interim
Financial Statements and Note 3 of the Reliant Energy 10-K Notes.
<TABLE>
<CAPTION>
ELECTRIC OPERATIONS SEGMENT
------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating Revenues:
Base Revenues ............................ $ 1,041 $ 974 $ 2,477 $ 2,330
Reconcilable Fuel Revenues ............... 786 522 1,718 1,183
------- ------- ------- -------
Total Operating Revenues ............... 1,827 1,496 4,195 3,513
------- ------- ------- -------
Operating Expenses:
Fuel and Purchased Power ................. 804 536 1,763 1,224
Operation and Maintenance ................ 230 214 696 640
Depreciation and Amortization ............ 177 202 420 541
Other Operating Expenses ................. 116 102 289 271
------- ------- ------- -------
Total Operating Expenses ............... 1,327 1,054 3,168 2,676
------- ------- ------- -------
Operating Income ........................... $ 500 $ 442 $ 1,027 $ 837
======= ======= ======= =======
Electric Sales Including Unbilled (MMWh(1)):
Residential .............................. 8,534 7,744 17,967 16,895
Commercial ............................... 5,291 4,982 13,526 12,790
Industrial ............................... 6,847 6,782 21,132 19,584
Industrial - Interruptible ............... 1,550 1,817 4,232 4,420
Other .................................... 381 551 1,407 2,220
------- ------- ------- -------
Total Sales Including Unbilled ........... 22,603 21,876 58,264 55,909
------- ------- ------- -------
Average Cost of Fuel (Cents/MMBtu(2))....... 288.8 201.0 254.1 190.8
</TABLE>
-------------
(1) Million Megawatt hours
(2) Million British thermal units
2000 versus 1999
Electric Operations' operating income for the third quarter and first
nine months of 2000 increased $58 million and $190 million, respectively. For
both periods, the primary contributors to the increase in operating income were
strong customer growth, decreased depreciation expense and increased customer
demand.
Electric Operations' base revenues increased $67 million and $147
million for the third quarter and first nine months of 2000 due to both
customer growth and increased customer demand.
Reconcilable fuel revenues and fuel and purchased power expenses for
the third quarter and the first nine months of 2000 increased as a result of
the higher cost of natural gas ($4.40 and $2.64 per MMBtu in the third quarters
of 2000 and 1999, respectively, and $3.71 and $2.41 per MMBtu for the first
nine months of 2000 and 1999, respectively), higher costs per unit for
purchased power ($47.29 and $44.53 per megawatt hour (MWH) in the third quarter
of 2000 and 1999, respectively, and $39.05 and $27.29 MWH for the first nine
months of 2000 and 1999, respectively) and higher volumes due to customer
growth and increased demand, which led to increased production.
Operation and maintenance expenses and other operating expenses for
the third quarter and first nine months of 2000 increased by $30 million and
$74 million, respectively when compared to the same periods in 1999. The
increases in both periods were largely due to higher state franchise taxes and
increased transmission costs.
22
<PAGE> 25
Depreciation and amortization expense in the third quarter and first
nine months of 2000 decreased $25 million and $121 million, respectively. For
information regarding items that affect depreciation and amortization expense
of Electric Operations pursuant to the Legislation and the Transition Plan, see
Note 5 of the Company's Interim Financial Statements.
WHOLESALE ENERGY
Wholesale Energy's activities include (a) the acquisition, development
and operation of domestic non-rate regulated power generation facilities, (b)
the sale of energy, capacity and ancillary services from those facilities, (c)
wholesale energy trading, marketing and risk management activities in North
America and (d) domestic natural gas gathering activities.
For information regarding the Wholesale Energy sale-leaseback
transactions, see Note 4 to the Interim Financial Statements.
The Company believes its energy trading, marketing and risk management
activities (trading and marketing) complement Wholesale Energy's strategy of
acquiring, developing and operating non-rate regulated generation assets in key
domestic markets. Trading and marketing purchases fuel to supply existing
generation assets, sells the electricity produced by these assets, and manages
the day-to-day trading and dispatch associated with these portfolios. As a
result, the Company has made, and expects to continue to make, significant
investments in developing the trading and marketing infrastructure including
software, trading and risk control resources.
<TABLE>
<CAPTION>
WHOLESALE ENERGY SEGMENT
-----------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
---------------- -------------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating Revenues............................... $ 6,776 $ 2,908 $ 12,411 $ 5,854
Operating Expenses:
Natural Gas.................................... 2,727 945 6,089 2,703
Purchased Power................................ 3,575 1,861 5,506 2,936
Operation and Maintenance...................... 104 52 251 139
Depreciation and Amortization.................. 47 6 74 18
Other Operating Expenses....................... 4 1 10 5
---------------- -------------- -------------- ---------------
Total Operating Expenses..................... 6,457 2,865 11,930 5,801
---------------- -------------- -------------- ---------------
Operating Income................................. $ 319 $ 43 $ 481 $ 53
================ ============== ============== ===============
Operations Data:
Natural Gas (in Bcf(1)):
Sales ......................................... 645 433 1,769 1,317
Gathering...................................... 72 69 213 198
---------------- -------------- -------------- ---------------
Total........................................ 717 502 1,982 1,515
================ ============== ============== ===============
Electricity (MMWh):
Wholesale Power Sales.......................... 68,614 43,856 133,095 77,624
================ ============== ============== ===============
</TABLE>
-----------------
(1) Billion cubic feet.
23
<PAGE> 26
2000 versus 1999
Wholesale Energy's operating income increased $276 million and $428
million for the third quarter and first nine months of 2000, respectively,
primarily due to the expansion of commercial operations and trading in key U.S.
wholesale regions (Mid-Atlantic, Florida, Southwest, and Mid-Continent) and
unique seasonal dynamics in the Western markets resulting in higher energy
sales and prices. Increased operating margins were partially offset by higher
operating expenses to support the infrastructure of the expanding business.
Wholesale Energy's operating revenues increased $3.9 billion and $6.6
billion for the third quarter and first nine months of 2000, respectively.
These increases were primarily due to increases in gas and power sales volumes
and commodity prices. Wholesale Energy's purchased natural gas costs increased
$1.8 billion and $3.4 billion in the third quarter and first nine months of
2000, respectively, largely due to a higher average cost of gas and increased
gas sales volume. Wholesale Energy's purchased power expense increased $1.7
billion and $2.6 billion in the third quarter and first nine months of 2000,
respectively, primarily due to higher power sales volumes and higher average
cost of power. Operation and maintenance expenses for Wholesale Energy
increased $52 million and $112 million in the third quarter and first nine
months of 2000, respectively, primarily due to costs associated with the
maintenance of facilities acquired or placed into commercial operations after
the third quarter of 1999, increased costs associated with developing new power
generation projects and higher staffing levels to support increased sales and
expanded marketing efforts. Depreciation and amortization expense for the third
quarter and first nine months of 2000 increased as a result of the acquisition
of REMA and other generating facilities.
NATURAL GAS DISTRIBUTION
Natural Gas Distribution's operations consist of intrastate natural
gas sales to, and transportation for, residential, commercial and industrial
customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas.
<TABLE>
<CAPTION>
NATURAL GAS DISTRIBUTION SEGMENT
-------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- -------------------------------
2000 1999 2000 1999
---------------- --------------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating Revenues..................................$ 772 $ 501 $ 2,407 $ 1,781
Operating Expenses:
Natural Gas....................................... 606 346 1,785 1,189
Operation and Maintenance......................... 124 108 363 326
Depreciation and Amortization..................... 37 34 110 99
Other Operating Expenses.......................... 20 18 67 66
---------------- --------------- --------------- ---------------
Total Operating Expenses........................ 787 506 2,325 1,680
---------------- --------------- --------------- ---------------
Operating Income (Loss).............................$ (15) $ (5) $ 82 $ 101
================ =============== =============== ===============
Throughput Data (in Bcf):
Residential and Commercial Sales.................. 34 33 200 199
Industrial Sales.................................. 12 13 38 40
Transportation.................................... 11 10 37 34
Retail Major Account Sales........................ 102 73 280 231
---------------- --------------- --------------- ---------------
Total Throughput................................ 159 129 555 504
================ =============== =============== ===============
</TABLE>
2000 versus 1999
Natural Gas Distribution's operating results decreased for the third
quarter and first nine months of 2000 by $10 million and $19 million,
respectively. Increases in revenues and natural gas expense for the third
quarter and first nine months of 2000 were due primarily to the increase in the
price of natural gas. In addition, operating revenues for the first nine months
of 2000 included a $12 million gain from the effect of a financial hedge of
Natural Gas Distribution earnings against unseasonably warm weather during peak
gas heating months. The weather hedge expired in March 2000. For both periods,
slightly increased operating margins (revenues less fuel costs) in 2000 were
offset by higher operating expenses and higher depreciation expense in 2000.
Operating expenses for both
24
<PAGE> 27
periods in 2000 increased primarily as a result of increased information
system-related costs, employee benefit costs, depreciation expense and general
and administrative expenses.
INTERSTATE PIPELINES
Interstate Pipelines provides interstate gas transportation and
related services.
<TABLE>
<CAPTION>
INTERSTATE PIPELINES SEGMENT
------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---------------- --------------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating Revenues..................................$ 71 $ 70 $ 224 $ 202
Operating Expenses:
Natural Gas....................................... 10 9 37 21
Operation and Maintenance......................... 17 15 54 48
Depreciation and Amortization..................... 13 13 38 37
Other Operating Expenses.......................... 3 4 11 12
---------------- --------------- --------------- ---------------
Total Operating Expenses........................ 43 41 140 118
---------------- --------------- --------------- ---------------
Operating Income....................................$ 28 $ 29 $ 84 $ 84
================ =============== =============== ===============
Throughput Data (in MMBtu):
Natural Gas Sales................................. 4 4 11 11
Transportation.................................... 181 202 653 637
Elimination(1).................................. (3) (5) (9) (11)
---------------- --------------- --------------- ---------------
Total Throughput.................................... 182 201 655 637
---------------- --------------- --------------- ---------------
</TABLE>
-------------
(1) Elimination of volumes both transported and sold.
Interstate Pipelines' operating income for the third quarter and the
first nine months of 2000 remained relatively consistent with those same
periods in 1999. For the nine-month period, slight increases in operating
margins in 2000 were offset by slight increases in operating expenses in 2000.
RELIANT ENERGY EUROPE
The Company established its Reliant Energy Europe business segment in
the fourth quarter of 1999 with the acquisition of UNA. For additional
information regarding the acquisition of UNA, see Note 4 of the Company's
Interim Financial Statements and Note 2 of the Reliant Energy 10-K Notes.
Reliant Energy Europe owns, operates and sells power from generation facilities
in the Netherlands and participates in the wholesale energy trading and
marketing industry in the Netherlands and Western Europe.
<TABLE>
<CAPTION>
RELIANT ENERGY EUROPE SEGMENT
----------------------------------------
THREE MONTHS ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ -------------------
2000 2000
------------------ -------------------
(IN MILLIONS)
<S> <C> <C>
Operating Revenues ...................... $129 $415
Operating Expenses:
Fuel and Purchased Power ............. 68 199
Operation and Maintenance and Other .. 31 90
Depreciation and Amortization ........ 15 54
---- ----
Total Operating Expenses ........... 114 343
---- ----
Operating Income ........................ $ 15 $ 72
==== ====
</TABLE>
UNA, the other large unaffiliated Dutch generating companies and the
Dutch distribution companies currently operate under various agreements which
regulate, among other things, the rates UNA may charge for generation output.
Under the Cooperative Agreement (OvS Agreement), UNA and the other Dutch
generators agree
25
<PAGE> 28
to sell their generating output to a national production pool in exchange for a
standardized remuneration. This remuneration includes fuel cost, capital cost
and the cost of operations and maintenance expenses. UNA operates under the
protocol (Protocol), an agreement under which the generators agree to provide
capacity and energy to distributors for a total payment of NLG 3.4 billion
(approximately $1.4 billion U.S. dollars) annually over the period 1997 through
2000, plus compensation of actual fuel costs. The OvS Agreement will
substantially expire by the beginning of 2001. The Protocol, which was entered
into in order to facilitate the transition from a regulated energy market into
an unregulated energy market, will also substantially expire by the beginning
of 2001.
Beginning in 2001, UNA will begin operating in a deregulated market.
Consistent with the Company's expectations upon the acquisition of UNA, the
Company anticipates that UNA will experience a significant decline in revenues
in 2001 attributable to the deregulation of that market and the termination of
the Protocol. Under a 1998 Dutch tax law relating to the Dutch electricity
industry, UNA qualifies for a zero percent tax rate through December 31, 2001.
This tax holiday applies only to the Dutch income earned by UNA. Beginning
January 1, 2002, UNA will be subject to Dutch corporate income tax at standard
statutory rates which are currently 35%.
For additional information on these and other factors that may affect
the future results of operations of Reliant Energy Europe, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Reliant Energy and subsidiaries -- Certain Factors Affecting Future Earnings of
the Company -- Competition -- Reliant Energy Europe Operations" and -- "Entry
into the European Market" in the Reliant Energy Form 10-K, which information is
incorporated herein by reference.
RELIANT ENERGY LATIN AMERICA
Reliant Energy Latin America participated in the privatization of
generation and distribution facilities and independent power projects primarily
in Latin America.
Reliant Energy continues to pursue its previously announced strategy
to divest its interests in its Latin American investments in order to pursue
business opportunities that are more in line with its strategies for the United
States and Western Europe.
For information regarding the divestiture of Reliant Energy Latin
America's investments in El Salvador, Brazil and Colombia, see Note 13 to the
Interim Financial Statements. The divestiture of these investments represent
almost all of Reliant Energy Latin America's investments. After the completion
of the transactions discussed above, Reliant Energy Latin America's remaining
investments will include a wholly owned cogeneration facility and a distribution
company both located in Argentina, and a coke calcining plant in India. The
combined book value of these three investments as of September 30, 2000 was $155
million.
26
<PAGE> 29
<TABLE>
<CAPTION>
RELIANT ENERGY LATIN AMERICA SEGMENT
------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating Revenues ............... $ 20 $ 34 $ 51 $ 26
Operating Expenses:
Fuel ........................... 8 11 30 36
Operation and Maintenance ...... 11 12 31 40
Depreciation and Amortization .. 1 1 6 3
Total Operating Expenses ..... 20 24 67 79
---- ---- ---- ----
Operating Income (Loss) .......... $ -- $ 10 $(16) $(53)
==== ==== ==== ====
</TABLE>
2000 versus 1999
Reliant Energy Latin America had a decrease in operating income of $10
million for the third quarter of 2000 and a decrease in operating loss of $37
million for the first nine months of 2000. The third quarter and first nine
months operating results for 1999 included after-tax charges of $19 million
and $114 million, respectively, related to the Company's share of foreign
exchange losses incurred by its Brazilian affiliates in connection with
non-local currency denominated borrowings. These devaluation losses were a
result of the Brazilian government's January 1999 decision to allow the
Brazilian real to float against other foreign currencies. Excluding the losses
related to the real devaluation in 1999, operating income decreased by $29
million and $77 million for the third quarter and first nine months of 2000,
respectively. Decreased earnings from equity investments in Brazil and Colombia
were the primary cause of reduced earnings in both periods.
CORPORATE
Corporate includes the operations of certain non-rate regulated retail
electric and gas services businesses, a communications business which offers
enhanced data, voice and other services to customers in Texas, an eBusiness
group, venture capital operations, certain real estate holdings and unallocated
corporate costs.
Corporate had operating losses of $70 million and $112 million for the
third quarter and first nine months of 2000, respectively, compared to
operating losses of $25 million and $49 million for the same periods of 1999,
respectively. The decline for both periods was primarily due to costs
associated with exiting certain retail gas markets, increased franchise taxes
and unregulated electric retail business, eBusiness and communication business
startup costs. The startup costs of the unregulated electric retail business
were primarily a result of increased operating expenses due to additional
staffing, increased marketing support and other expenditures to prepare for
entrance into the deregulated electricity market in Texas beginning January
2002. Management expects to continue to make substantial capital investments in
its unregulated electric retail, eBusiness and communications businesses
to fulfill its overall business strategy.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
CALIFORNIA MARKET PRICING CAPS
The California market is currently experiencing shortages of
generation capacity at peak periods. As a result, it is highly dependent on
imports from both the Pacific Northwest and the Desert Southwest. Because of
this heavy dependence on imported power and the slow pace of new plant
construction, the California market experienced dramatically higher prices for
electricity during the summer of 2000. The California independent system
operator (Cal ISO), which has authority to establish buyer's caps that limit
the price a buyer pays for power, reduced the buyer's cap in the spot market
during the summer of 2000 from $750 per MWh to $250 per MWh. In addition to
selling to the California power exchange (Cal PX) and in the Cal ISO markets,
the Company sells its output in negotiated transactions to customers. Prices
for negotiated contracts may also be affected by the buyer's caps prevailing in
the Cal ISO markets.
The continued use of buyer's caps in the California marketplace, as
well as other market restructuring alternatives, is currently under review by
the Federal Energy Regulatory Commission (FERC), Cal ISO, Cal PX, the
27
<PAGE> 30
California Public Utility Commission (CPUC) and other state legislative and
regulatory agencies. On November 1, 2000, the FERC released findings which found
no specific exercises of market power existed in California's electricity
marketplace. The report recommends a series of changes to be taken to reform the
market structure of California. The FERC's findings, as well as a draft report
by the Cal PX, conclude that the CPUC must address hurdles in the contracting
and siting of generation, as well as the need for additional demand
responsiveness in California.
The Company cannot predict what effect this California experience and
these reviews will have on the pace of deregulation in other parts of the
country. Moreover, existing regulations may be revised or reinterpreted, new
laws and regulations may be adopted or become applicable to the Company or its
facilities, and future changes in laws and regulations may have a detrimental
effect on the Company's business. In some markets which have been restructured,
governmental agencies and other interested parties may attempt to re-regulate
areas of the Company's business which have previously been deregulated.
GENERAL
For information on other developments, factors and trends that may have
an impact on the Company's future earnings, please read "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Reliant Energy
and subsidiaries -- Certain Factors Affecting Future Earnings of the Company" in
the Reliant Energy Form 10-K, which is incorporated herein by reference. For
information regarding proposed tariffs filed by Reliant Energy HL&P relating to
its transmission and distribution operations, see Note 3 of the Company's
Interim Financial Statements. For additional information regarding the filing of
an amended business separation plan with the PUC, see Note 2 of the Company's
Interim Financial Statements.
FINANCIAL CONDITION
The following table summarizes the net cash provided by (used in)
operating, investing and financing activities for the nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
2000 1999
-------------------------------------
(IN MILLIONS)
<S> <C> <C>
Cash provided by (used in):
Operating activities..................................................... $ 952 $ 1,126
Investing activities..................................................... (3,178) (1,307)
Financing activities..................................................... 2,374 641
</TABLE>
Net cash provided by operating activities in the nine months ended
September 30, 2000 decreased $174 million compared to the same period in 1999
primarily due to an increase in fuel cost under-recovery, offset by (a) a $78
million federal tax refund received in the first quarter of 2000, (b) increased
sales at Electric Operations due to customer growth and increased customer
demand, (c) improved operating results of Wholesale Energy's Western market
operations and (d) incremental cash flows provided by UNA (acquired in the
fourth quarter of 1999) and REMA (acquired in the second quarter of 2000).
Net cash used in investing activities increased $1.9 billion in the
nine months ended September 30, 2000 compared to the same period in 1999
primarily due to the funding of the remaining purchase obligation for UNA for
$982 million on March 1, 2000, and the purchase of the REMA Mid-Atlantic
generating facilities for $2.1 billion on May 12, 2000, as well as increased
capital expenditures related to the construction of domestic non-rate regulated
power generation projects by Wholesale Energy. Proceeds from the sale-leaseback
transactions of REMA generating assets, the sale of debt securities by UNA and
foreign currency exchange contracts, partially offset these increases.
Cash flows provided by financing activities increased $1.7 billion in
the nine months ended September 30, 2000 compared to the same period in 1999
primarily due to an increase in cash received from short and long-term
borrowings. An increase in payments of long-term debt during the first nine
months of 2000 partially offset the increase. The Company utilized the net
borrowings incurred during the first nine months of 2000 to fund the
28
<PAGE> 31
remaining UNA purchase obligation, to fund the acquisition of the REMA
Mid-Atlantic generating facilities, to support increased capital expenditures by
Wholesale Energy and for general corporate purposes, including the repayment of
indebtedness. The Company obtained the funds for the remaining UNA purchase
obligation on March 1, 2000, in part from a Euro 600 million (approximately $584
million) term loan facility which expires in March 2003 and through short-term
borrowings and excess operating cash flows. Funds for the acquisition of the
operations held by REMA were made available through issuances of commercial
paper supported by two bank facilities, one in the amount of $1.0 billion and
one in the amount of $1.15 billion. The $1.0 billion facility was repaid with
the proceeds from the REMA sale-leaseback transactions and was terminated in
August 2000.
FUTURE SOURCES AND USES OF CASH FLOWS
Credit Facilities. As of September 30, 2000, the Company had credit
facilities, including the facilities of RERC, several financing subsidiaries,
UNA and Reliant Energy International, which provided for an aggregate of $7.1
billion in committed credit (including the Euro 600 million facility discussed
above). As of September 30, 2000, $6.1 billion was outstanding under these
facilities, including commercial paper of $4.1 billion and letters of credit of
$448 million. Unused credit facilities totaled $1 billion as of September 30,
2000.
Shelf Registrations. As of September 30, 2000, the Company had shelf
registration statements providing for the issuance of $230 million aggregate
liquidation value of its preferred stock, $580 million aggregate principal
amount of its debt securities and $125 million of trust preferred securities
and related junior subordinated debt securities. In addition, the Company has a
shelf registration for 15 million shares of common stock, which would have been
worth approximately $698 million as of September 30, 2000 based on the closing
price of the common stock as of such date.
Securitization. On May 31, 2000, Reliant Energy HL&P received a
financing order from the PUC authorizing the issuance of transition bonds
relating to Reliant Energy HL&P's generation-related regulatory assets by a
special purpose entity organized by the Company, pursuant to the Legislation.
The financing order authorizes the issuance of transition bonds in an amount
not to exceed $740 million plus actual up-front qualified costs. The offering
and sale of the transition bonds will be registered under the Securities Act of
1933 and are expected to be consummated in 2001.
Reliant Energy Latin America Divestitures. The Company expects to
receive an aggregate of approximately $800 million in after-tax proceeds from
the sale of certain investments held by the Reliant Energy Latin American
segment. See Note 13 to the Company's Interim Financial Statements for
further information.
Fuel Filing. As of September 2000, Reliant Energy HL&P was
under-collected on fuel recovery by approximately $526 million. In two separate
filings with the PUC, Reliant Energy HL&P has filed to implement a fuel
surcharge to collect the under recovery of fuel expenses, as well as to adjust
the fuel factor to compensate for significant increases in the price of natural
gas. The first petition was filed on June 9, 2000 and covered activity through
the first quarter of 2000. On August 1, 2000, a unanimous settlement was filed
with the State Office of Administrative Hearings (SOAH) based on the
under-recovery amount as of June 30, 2000, which was approximately $278 million.
On August 7, 2000, the Administrative Law Judge (ALJ) with SOAH approved a
surcharge and increased fuel factor on an interim basis, thereby allowing
Reliant Energy HL&P to apply the surcharge and revised fuel factor to the
September 2000 billing month (which began on August 18, 2000). The PUC approved
the settlement at its August 24, 2000 open meeting.
As the cost of natural gas continued to increase substantially after
the June 9, 2000 filing, the under-collection on fuel recovery increased to $526
million as of September 30, 2000, necessitating a second petition, which was
filed on October 2, 2000. The second petition requested a surcharge beginning
with the December 2000 billing month (on or about November 16, 2000) through
December 2001, and a revised fuel factor beginning with the December 2000
billing month. On October 11, 2000, the ALJ approved the proposed surcharge and
revised fuel factor of the second petition on an interim basis. On November 2,
2000, a non-unanimous unopposed settlement was filed with SOAH to put the
surcharge and revised factor into place beginning with the December 2000 billing
month. It is expected the PUC will rule on this settlement at its December 13,
2000 open meeting.
Indemnification of UNA Stranded Costs. In connection with the
acquisition of UNA, the selling shareholders of UNA agreed to indemnify UNA for
some specified stranded costs in an amount not to exceed NLG
29
<PAGE> 32
1.4 billion ($560 million based on a September 30, 2000 exchange rate of 2.50
NLG). This amount may be increased in some circumstances at our option up to
NLG 1.9 billion ($760 million). Of the total consideration the Company paid for
the shares of UNA, NLG 900 million ($360 million) has been placed in an escrow
account to secure these indemnity obligations. The Company believes that the
indemnity provision will be sufficient to cover UNA's ultimate share of any
stranded cost obligation. This belief is based on numerous assumptions
regarding the ultimate outcome and timing of the resolution of the stranded
cost issue, the former shareholders' timely performance of their obligations
under the indemnity arrangement, and the amount of stranded costs, which at
present is not determinable. Resolution of stranded costs for the Netherlands
is currently being addressed in the Dutch parliament. The outcome of this
legislation is currently unknown.
Acquisition of Mid-Atlantic Assets. On May 12, 2000, the Company
completed the acquisition of the Mid-Atlantic assets from Sithe Energies, Inc.
for an aggregate purchase price of $2.1 billion. The acquisition was financed
through commercial paper borrowings supported by two credit facilities. In
August 2000, the Company sold to, and leased back from, each of the three
owner-lessors in separate lease transactions, its respective 16.45%, 16.67% and
100% interests in the Conemaugh, Keystone and Shawville generating stations.
For further discussion of these lease transactions, see Note 4 to the
Interim Financial Statements. As consideration for the sale of the Company's
interest in each of the facilities, the Company received a total of $1.0
billion in cash that was used to repay $1.0 billion in commercial paper. The
Company will continue to make lease payments through 2029. The lease terms
expire in 2034. Cash lease payments are scheduled as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
November 1, 2000 to December 31, 2000..... $ 1
2001 ..................................... 259
2002 ..................................... 137
2003 ..................................... 77
2004 ..................................... 84
2005 and beyond .......................... 1,262
------
$1,820
======
</TABLE>
Electric Generating Projects. As of September 30, 2000, the Company
had five generating facilities under construction. Total estimated costs of
constructing these facilities are $1.5 billion. As of September 30, 2000, the
Company had incurred $864 million of the total projected costs of these
projects. The Company expects to spend $208 million during the remainder of
2000 on these projects. In addition, as of September 30, 2000, the Company had
$223 million in commitments to purchase combustion turbines that are associated
with projects not currently under construction.
Other Sources/Uses of Cash. The liquidity and capital requirements of
the Company are affected primarily by capital expenditures, debt service
requirements and varied working capital needs associated with trading,
marketing and risk management activities. The Company expects to continue to
participate as a bidder in future acquisitions of independent power projects
and privatizations of generation facilities. The Company expects any resulting
capital requirements to be met with excess cash flows from operations, as well
as proceeds from debt and equity offerings, project financings and other
borrowings. Additional capital expenditures depend upon the nature and extent
of future project commitments, some of which may be substantial. The Company
believes that its current level of cash and borrowing capability, along with
future cash flows from operations, are sufficient to meet the existing
operational needs of its businesses.
NEW ACCOUNTING ISSUES
Effective January 1, 2001, the Company is required to adopt SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
(SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. This statement requires that
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. In addition, in
June 2000, the Financial Accounting Standards Board issued an amendment that
narrows the applicability of the pronouncement to some purchase and sales
contracts and allows hedge accounting for some other specific hedging
relationships. The Company is in the process of determining the effect of
adoption of SFAS No. 133 on its consolidated financial statements. The Company
is unable to provide an estimate or range
30
<PAGE> 33
of estimates of the effect of adoption at this time, because the derivatives
implementation group (DIG) continues to address issues affecting the power
industry which may have a significant impact on our implementation. Further
guidance on these issues is expected from the mid-December 2000 meeting of the
DIG.
Staff Accounting Bulletin 101, "Revenue Recognition" (SAB No. 101),
was issued by the SEC on December 3, 1999. SAB No. 101 summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. On June 26, 2000, the SEC staff
announced that it is delaying the required implementation date for SAB No. 101
no later than a registrants fourth fiscal quarter of their fiscal year
beginning after December 15, 1999. The Company believes the adoption of SAB No.
101 will not have a material effect on its results of operations.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK OF THE COMPANY
The Company has financial instruments that involve various market
risks and uncertainties. For information regarding the Company's exposure to
risks associated with interest rates, equity market prices, foreign currency
exchange rate risk and energy commodity prices, see Item 7A of the Reliant
Energy Form 10-K, which is incorporated herein by reference. These risks have
not materially changed from the market risks disclosed in the Reliant Energy
Form 10-K.
31
<PAGE> 34
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
STATEMENTS OF CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES ......................................... $ 7,272,857 $ 3,446,925 $ 14,381,921 $ 7,705,879
------------ ------------ ------------ ------------
EXPENSES:
Natural gas and purchased power ................ 6,975,995 3,172,585 13,419,478 6,797,015
Operation and maintenance ...................... 212,830 175,422 554,634 458,797
Depreciation and amortization .................. 58,582 50,045 164,068 148,159
Taxes other than income taxes .................. 24,491 21,145 80,147 79,054
------------ ------------ ------------ ------------
Total ...................................... 7,271,898 3,419,197 14,218,327 7,483,025
------------ ------------ ------------ ------------
OPERATING INCOME ................................. 959 27,728 163,594 222,854
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net .......................... (38,951) (30,378) (100,108) (90,231)
Distribution on trust preferred securities ..... (7) (64) (22) (261)
Other, net ..................................... 5,544 1,846 (7,584) 8,604
------------ ------------ ------------ ------------
Total ...................................... (33,414) (28,596) (107,714) (81,888)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES ................ (32,455) (868) 55,880 140,966
Income Tax (Benefit) Expense ..................... (5,577) 5,664 41,119 70,569
------------ ------------ ------------ ------------
NET (LOSS) INCOME ................................ $ (26,878) $ (6,532) $ 14,761 $ 70,397
============ ============ ============ ============
</TABLE>
See Notes to RER's Interim Financial Statements
32
<PAGE> 35
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 24,373 $ 81,347
Accounts and notes receivable, principally customer ... 1,585,371 980,560
Unbilled revenue ...................................... 117,115 150,961
Materials and supplies, at average cost ............... 35,751 35,121
Fuel, gas and petroleum products ...................... 151,131 80,135
Price risk management assets .......................... 1,917,680 722,429
Prepayments and other current assets .................. 166,200 46,666
------------ ------------
Total current assets ................................ 3,997,621 2,097,219
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ......................... 3,452,182 3,291,088
Less accumulated depreciation and amortization ........ 439,807 324,596
------------ ------------
Property, plant and equipment, net .................... 3,012,375 2,966,492
------------ ------------
OTHER ASSETS:
Goodwill, net ......................................... 1,950,972 1,990,394
Prepaid pension asset ................................. 125,264 110,626
Price risk management assets .......................... 615,883 173,590
Other ................................................. 229,037 186,437
------------ ------------
Total other assets .................................. 2,921,156 2,461,047
------------ ------------
TOTAL ASSETS ............................................ $ 9,931,152 $ 7,524,758
============ ============
</TABLE>
See Notes to RER's Interim Financial Statements
33
<PAGE> 36
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS) -- (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt ........................ $ 168,890 $ 223,451
Short-term borrowings .................................... 635,000 534,584
Accounts payable, principally trade ...................... 1,252,450 776,546
Accounts and notes payable - affiliated companies, net ... 44,973 95,601
Interest accrued ......................................... 31,970 27,965
Taxes accrued ............................................ 44,525 48,266
Customer deposits ........................................ 30,224 33,255
Price risk management liabilities ........................ 1,880,983 718,228
Other .................................................... 245,934 119,111
------------ ------------
Total current liabilities .......................... 4,334,949 2,577,007
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes ........................ 559,463 532,725
Payable under capacity lease agreement ................... 41,000 41,000
Benefit obligations ...................................... 141,257 161,144
Price risk management liabilities ........................ 592,658 142,305
Other .................................................... 174,537 187,473
------------ ------------
Total deferred credits and other liabilities ......... 1,508,915 1,064,647
------------ ------------
LONG-TERM DEBT ............................................. 1,393,602 1,220,631
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 9)
RERC OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING
SOLELY JUNIOR SUBORDINATED DEBENTURES OF RERC ........... 608 967
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock ............................................. 1 1
Paid-in capital .......................................... 2,463,831 2,463,831
Retained earnings ........................................ 229,633 214,872
Accumulated other comprehensive loss ..................... (387) (17,198)
------------ ------------
Total stockholder's equity ........................... 2,693,078 2,661,506
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY .............. $ 9,931,152 $ 7,524,758
============ ============
</TABLE>
See Notes to RER's Interim Financial Statements
34
<PAGE> 37
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 14,761 $ 70,397
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 164,068 148,159
Deferred income taxes ....................................... 9,093 46,356
Impairment of marketable equity securities .................. 26,504 --
Changes in other assets and liabilities:
Accounts and notes receivable ............................. (570,965) (91,492)
Accounts receivable/payable, affiliates ................... 30,944 19,445
Inventories ............................................... (74,626) 11,917
Other current assets ...................................... (116,534) 41,047
Accounts payable .......................................... 475,904 134,226
Interest and taxes accrued ................................ 264 (59,665)
Other current liabilities ................................. 123,792 78,758
Net price risk management assets .......................... (24,436) 1,031
Restricted deposits ....................................... (59,032) (73,371)
Other, net ................................................ 2,138 (118,286)
-------------- --------------
Net cash (used in) provided by operating activities ..... 1,875 208,522
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................................... (200,497) (200,858)
Other, net .................................................... 763 (7,950)
-------------- --------------
Net cash used in investing activities ................... (199,734) (208,808)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt .................................... (200,000) (212,042)
Proceeds from long-term debt .................................. 322,400 --
Proceeds from receivables facilities .......................... -- 50,000
Increase in short-term borrowings, net ........................ 100,416 34,200
Decrease (increase) in notes with affiliates, net ............. (81,572) 181,684
Other, net .................................................... (359) (10,625)
-------------- --------------
Net cash provided by financing activities ............... 140,885 43,217
-------------- --------------
NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS ............... (56,974) 42,931
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ............. 81,347 26,576
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ................... $ 24,373 $ 69,507
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ......................... $ 101,165 $ 93,493
Income taxes .................................................. 54,328 66,095
</TABLE>
See Notes to RER's Interim Financial Statements
35
<PAGE> 38
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION --
See Note 1 to the Company's Interim Financial Statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RER's Interim Financial Statements reflect all normal recurring
adjustments that are, in the opinion of management, necessary to present fairly
the financial position and results of operations for the respective periods.
Amounts reported in RERC's Statements of Consolidated Operations are not
necessarily indicative of amounts expected for a full year period due to the
effects of, among other things, (a) seasonal variations in energy consumption,
(b) timing of maintenance and other expenditures and (c) acquisitions and
dispositions of assets and other interests. In addition, certain amounts from
the prior year have been reclassified to conform to RERC's presentation of
financial statements in the current year. These reclassifications do not affect
earnings of RERC. RERC Interim Financial Statements are unaudited, omit certain
financial statement disclosures and should be read with the Reliant Energy Form
10-K and RERC Form 10-K for the year ended December 31, 1999 and the Reliant
Energy First and Second Quarter 10-Q, and RERC First and Second Quarter 10-Q
for the quarters ended March 31 and June 30, 2000, respectively.
The following notes to the financial statements in the RERC Form 10-K
relate to certain contingencies. These notes, as updated herein, are
incorporated herein by reference:
Notes to Consolidated Financial Statements (RERC 10-K Notes): Note
1(c) (Regulatory Assets and Regulation), Note 2 (Derivative Financial
Instruments) and Note 8 (Commitments and Contingencies).
For information regarding environmental matters and legal proceedings,
see Note 9.
(2) SEPARATION FROM RELIANT ENERGY
On August 9, 2000, Reliant Energy filed an amended business separation
plan with the PUC under which it would divide into two publicly traded
companies in order to separate its unregulated businesses from its regulated
businesses.
As part of this separation, the trading and marketing operations of
RER, as well as a company that holds an investment in marketable equity
securities, will be transferred to the unregulated business. For additional
information regarding Reliant Energy's amended business separation plan, see the
Reliant Energy and RERC combined current report on Form 8-K dated July 27, 2000,
which information is incorporated herein by reference. The amended business
separation plan that was actually filed follows the proposed plan described in
the Form 8-K except that the provision for the cash payment that the unregulated
company was to receive from the regulated company in 2004 was deleted from the
plan. The amended business separation plan is subject to PUC approval. The
Company anticipates receiving a PUC approval during December 2000.
On October 17, 2000, a wholly owned subsidiary of the Company, RRI,
filed a registration statement on Form S-1 with the Securities and Exchange
Commission for the initial public offering of approximately 20% of the RRI
common stock.
(3) DEPRECIATION AND AMORTIZATION
RER's depreciation expense for the third quarter and first nine months
of 2000 was $43 million and $118 million, respectively, compared to $35 million
and $106 million for the same periods in 1999. Amortization expense, primarily
relating to goodwill amortization, was $16 million and $46 million for the
third quarter and first nine months of 2000 compared to $15 million and $42
million for the same periods in 1999.
36
<PAGE> 39
(4) LONG-TERM DEBT
In July 2000, RERC issued $325 million of notes having an interest
rate of 8.125% and a maturity date of July 15, 2005. RERC used the proceeds
from the sale of the notes for general corporate purposes, including the
repayment of $200 million of RERC's 7.5% notes that matured on August 1, 2000
and the repayment of a portion of its short-term indebtedness.
(5) RERC OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF RERC -- see
Note 10 (b) to the Company's Interim Financial Statements.
(6) COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive
income.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net (loss) income ..................................... $ (27) $ (7) $ 15 $ 70
Other comprehensive income:
Unrealized loss on available for sale securities .... (2) (3) -- (1)
Plus: Reclassification adjustment for impairment
loss on available for sale securities realized
in net (loss) income .............................. 3 -- 17 --
------------ ------------ ------------ ------------
Comprehensive (loss) income ........................... $ (26) $ (10) $ 32 $ 69
============ ============ ============ ============
</TABLE>
(7) RELATED PARTY TRANSACTIONS
Reliant Energy Services, Inc. supplies natural gas to, purchases
electricity for resale from, and provides marketing and risk management
services to unregulated power plants in deregulated markets. These power plants
are owned and operated by Reliant Energy Power Generation, Inc. or its
subsidiaries. For the three months ended September 30, 2000 and 1999, the sales
and services to Reliant Energy and its affiliates totaled $268 million and $101
million, respectively. Purchases from Reliant Energy and its affiliates were
$192 million and $75 million for the third quarter of 2000 and 1999,
respectively. For the nine months ended September 30, 2000 and 1999, the sales
and services to Reliant Energy and its affiliates totaled $452 million and $143
million, respectively. Purchases from Reliant Energy and its affiliates were
$318 million and $86 million for the nine months ended September 30, 2000 and
1999, respectively.
Reliant Energy provides certain corporate services to RER which are
allocated or directly billed to RER, including management support, financial
and tax accounting, information system support, treasury support, legal
services, regulatory support and other general services.
Net advances to Reliant Energy and those subsidiaries not owned by RER
included in accounts and notes payables-affiliated companies, totaled $20
million at September 30, 2000, compared to net borrowings from Reliant Energy
and its subsidiaries of $62 million at December 31, 1999. Interest
income/expense on such receivables/borrowings was nominal for the nine months
ended September 30, 2000 and 1999. As of September 30, 2000 and December 31,
1999, net accounts payable to Reliant Energy and those subsidiaries not owned by
RER were $65 million and $34 million, respectively.
(8) REPORTABLE SEGMENTS
Because RERC is a wholly owned subsidiary of Reliant Energy, RERC's
determination of reportable segments considers the strategic operating units
under which Reliant Energy manages sales, allocates resources and assesses
performance of various products and services to wholesale or retail customers
in differing regulatory environments. Segment financial data includes
information for Reliant Energy and RER on a combined basis, except for Electric
Operations which has no RER operations and Reliant Energy Latin America, which
has minimal RER operations. Reconciling items included under the caption
"Elimination of Non-RER Operations" reduce the consolidated Reliant Energy
amounts by those operations not conducted within the RER legal entity.
Operations not
37
<PAGE> 40
owned or operated by RER, but included in segment information before
elimination include primarily the operations and assets of Reliant Energy's
non-rate regulated power generation business, Reliant Energy's Dutch power
generation operation, Reliant Energy's investment in Time Warner securities and
non-RER corporate expenses.
Reliant Energy has identified the following reportable segments in
which RER has operations: Wholesale Energy, Natural Gas Distribution,
Interstate Pipelines, Reliant Energy Europe and Corporate. For descriptions of
the financial reporting segments, see Note 9 of the RERC 10-K Notes. The
following table summarizes financial data for the business segments:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 2000
------------------------------------------------- --------------
NET
INTERSEGMENT
REVENUES FROM REVENUES OPERATING TOTAL
NON-AFFILIATES (EXPENSES) INCOME ASSETS
-------------- -------------- ------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Wholesale Energy .................... $ 6,673 $ 103 $ 319 $ 7,405
Natural Gas Distribution ............ 764 8 (15) 3,508
Interstate Pipelines ................ 29 42 28 2,028
Reliant Energy Europe(1) ............ 129 -- 15 2,672
Corporate ........................... 81 (1) (70) 1,984
Reconciling Elimination ............. -- (152) -- (645)
Elimination of Non-RER Operations ... (403) -- (276) (7,021)
-------------- -------------- ------------- --------------
Consolidated ........................ $ 7,273 $ -- $ 1 $ 9,931
============== ============== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------
NET
INTERSEGMENT
REVENUES FROM REVENUES OPERATING
NON-AFFILIATES (EXPENSES) INCOME
-------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Wholesale Energy .................... $ 12,087 $ 324 $ 481
Natural Gas Distribution ............ 2,383 24 82
Interstate Pipelines ................ 90 134 84
Reliant Energy Europe(1) ............ 415 -- 72
Corporate ........................... 300 -- (112)
Reconciling Elimination ............. -- (482) --
Elimination of Non-RER Operations ... (893) -- (443)
-------------- -------------- --------------
Consolidated ........................ $ 14,382 $ -- $ 164
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 1999
------------------------------------------------- --------------
NET
INTERSEGMENT
REVENUES FROM REVENUES OPERATING TOTAL
NON-AFFILIATES (EXPENSES) INCOME ASSETS
-------------- -------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Wholesale Energy .................... $ 2,847 $ 61 $ 43 $ 3,085
Natural Gas Distribution ............ 507 (6) (5) 3,683
Interstate Pipelines ................ 37 33 29 2,212
Reliant Energy Europe(1) ............ -- -- -- 3,247
Corporate ........................... 26 20 (25) 4,349
Reconciling Elimination ............. -- (108) -- (1,140)
Elimination of Non-RER Operations ... 30 -- (14) (7,911)
-------------- -------------- -------------- --------------
Consolidated ........................ $ 3,447 $ -- $ 28 $ 7,525
============== ============== ============== ==============
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------
NET
INTERSEGMENT
REVENUES FROM REVENUES OPERATING
NON-AFFILIATES (EXPENSES) INCOME
-------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Wholesale Energy .................... $ 5,692 $ 162 $ 53
Natural Gas Distribution ............ 1,802 (21) 101
Interstate Pipelines ................ 90 112 84
Corporate ........................... 125 55 (49)
Reconciling Elimination ............. -- (308) --
Elimination of Non-RER Operations ... (3) -- 34
-------------- -------------- --------------
Consolidated ........................ $ 7,706 $ -- $ 223
============== ============== ==============
</TABLE>
----------
(1) Reliant Energy Europe was created in the fourth quarter of 1999.
(9) ENVIRONMENTAL MATTERS AND LEGAL PROCEEDINGS
To the extent that potential environmental remediation costs are
quantifiable within a range, RER establishes reserves equal to the most likely
level of costs within the range and adjusts such accruals as better information
becomes available. In determining the amount of the liability, RER does not
discount future costs to their present value and does not offset the liability
by the amount of expected insurance recoveries. If justified by circumstances
within RER's business, subject to SFAS No. 71, RER records corresponding
regulatory assets in anticipation of recovery through the rate making process.
Manufactured Gas Plant Sites. Until 1960 RER and its predecessors
operated a manufactured gas plant (MGP) adjacent to the Mississippi River in
Minnesota, formerly known as Minneapolis Gas Works (FMGW). RER has substantially
completed remediation of the main site other than ongoing water monitoring and
treatment. The manufactured gas was stored in separate holders. RER is
negotiating clean-up of one such holder. There are six other former MGP sites in
the Minnesota service territory. Remediation has been completed on one site. Of
the remaining five sites, RER believes that two were neither owned nor operated
by RER; two were owned by RER at one time but were operated by others and are
currently owned by others; and one site was previously owned and operated by RER
but is currently owned by others. RER believes it has no liability with respect
to the sites it neither owned nor operated.
At September 30, 2000 and December 31, 1999, RER had accrued $18.2
million and $18.8 million, respectively, for remediation of the Minnesota
sites. At September 30, 2000, RER estimated the range of possible remediation
costs to be $10 million to $47 million. The low end of the range was determined
based on only those sites presently owned or known to have been operated by
RER, assuming use of RER's proposed remediation methods. The upper end of the
range was determined based on the sites once owned by RER, whether or not
operated by RER. The cost estimates of the FMGW site are based on studies of
that site. The remediation costs for the other sites are based on industry
average costs for remediation of sites of similar size. The actual remediation
costs will be dependent upon the number of sites remediated, the participation
of other potentially responsible parties, if any, and the remediation methods
used.
Other Minnesota Matters. At September 30, 2000 and December 31, 1999,
RER had recorded accruals of approximately $1.2 million (with a maximum
estimated exposure of approximately $18 million) for other environmental
matters for which remediation may be required.
In its 1995 rate case, Reliant Energy Minnegasco was allowed to
recover approximately $7 million annually for environmental remediation costs.
In 1998, Reliant Energy Minnegasco received approval to reduce its annual
recovery rate to zero. Remediation costs are subject to a true-up mechanism
whereby any over or under recovered amounts, net of certain insurance
recoveries, plus carrying charges, are deferred for recovery or refund in the
next rate case. At both September 30, 2000 and December 31, 1999, Reliant
Energy Minnegasco had recovered approximately $13 million, including insurance
recoveries. At September 30, 2000 and December 31, 1999, Reliant Energy
Minnegasco had recorded a liability of $19.4 million and $20 million,
respectively, to cover the cost of future remediation. Reliant Energy
Minnegasco expects that approximately 40% of its accrual as of September 30,
39
<PAGE> 42
2000 will be expended within the next five years. The remainder will be
expended on an ongoing basis for an estimated 40 years. In accordance with the
provisions of SFAS No. 71, RER recorded a regulatory asset equal to the
liability accrued. RER believes the difference between any cash expenditures
for these costs and the amount recovered in rates during any year will not be
material to RER's financial position, results of operations or cash flows.
Issues relating to the identification and remediation of MGPs are
common in the natural gas distribution industry. RER has received notices from
the EPA and others regarding its status as a PRP for other sites. Based on
current information, RER has not been able to quantify a range of environmental
expenditures for potential remediation expenditures with respect to other MGP
sites.
Other Environmental Matters. RER from time to time identifies during
its operations sources of environmental contamination which require remediation.
Sources of contamination can include substances in gas purchased from others as
well as contamination caused from equipment and maintenance activities located
on RER's system. For example, pipeline and distribution operations have in the
past employed elemental mercury in measuring and regulating equipment. It is
possible that small amounts of mercury have been spilled in the course of normal
maintenance and replacement operations and that such spills have contaminated
the immediate area with elemental mercury. RER has found such contamination at
some sites in the past, and RER has conducted remediation at sites found to be
contaminated. Although RER is not aware of additional specific sites, it is
possible that other contaminated sites exist and that remediation costs will be
incurred for such sites. Although the total amount of such costs cannot be known
at this time, based on the experience of RER and others in the natural gas
industry to date and on the current regulations regarding remediation of such
sites, RER believes that the cost of any remediation of such sites will not be
material to RER's financial position, results of operations or cash flows.
Potentially Responsible Party Notifications. From time to time, RER
has received notices from regulatory authorities or others regarding its status
as a PRP in connection with sites found to require remediation due to the
presence of environmental contaminants. Considering the information currently
known about such sites and the involvement of RER in activities at these sites,
RER does not believe that these matters will have a material adverse effect on
RER's financial position, results of operations or cash flows.
Other Litigation. RER is a party to litigation (other than that
specifically noted) that arises in the normal course of business. Management
regularly analyzes current information and, as necessary, provides accruals for
probable liabilities on the eventual disposition of these matters. Management
believes that the effect, if any, from the disposition of these matters will not
have a material adverse effect on the RER's financial condition, results of
operations or cash flows.
40
<PAGE> 43
MANAGEMENT'S NARRATIVE ANALYSIS OF
THE RESULTS OF OPERATIONS OF RERC AND SUBSIDIARIES
The following narrative analysis should be read in combination with
RERC's Interim Financial Statements and notes contained in this Form 10-Q.
RERC meets the conditions specified in General Instruction H(1)(a) and
(b) to Form 10-Q and is therefore permitted to use the reduced disclosure
format for wholly owned subsidiaries of reporting companies. Accordingly, RER
has omitted from this report the information called for by Item 3 (Quantitative
and Qualitative Disclosure About Market Risk) of Part I and the following Part
II items of Form 10-Q: Item 2 (Changes in Securities and Use of Proceeds), Item
3 (Defaults Upon Senior Securities) and Item 4 (Submission of Matters to a Vote
of Security Holders). The following discussion explains material changes in the
amount of revenue and expense items of RER between the third quarter and first
nine months of 2000 and the third quarter and first nine months of 1999.
Reference is made to Management's Narrative Analysis of the Results of
Operations in Item 7 of the RERC Form 10-K, the RERC 10-K Notes referred to
herein, and RERC First and Second Quarter 10-Q and RERC's Interim Financial
Statements contained in this Form 10-Q.
On August 9, 2000, Reliant Energy filed an amended business separation
plan with the PUC under which it would divide into two publicly traded
companies in order to separate its unregulated businesses from its regulated
businesses. For additional information regarding the amended plan, see Note 2
to Reliant Energy's Interim Financial Statements and Note 2 to RERC's Interim
Financial Statements.
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating Revenues ................ $ 7,273 $ 3,447 $ 14,382 $ 7,706
Operating Expenses ................ 7,272 3,419 14,218 7,483
------------ ------------ ------------ ------------
Operating Income, Net ............. 1 28 164 223
Interest Expense .................. 39 30 100 90
Other (Income) Expense, Net ....... (5) (1) 8 (8)
Income Tax (Benefit) Expense ...... (6) 6 41 71
------------ ------------ ------------ ------------
Net (Loss) Income ............... $ (27) $ (7) $ 15 $ 70
============ ============ ============ ============
</TABLE>
For the third quarter 2000, RER's net loss was $27 million compared to
net loss of $7 million for the same period in 1999. The increased loss was
primarily a result of increases in operating losses of the Natural Gas
Distribution segment and the unregulated gas retail business of the Corporate
segment due to costs associated with exiting certain retail gas markets,
coupled with start-up cost of the European trading and marketing operations and
increased staffing costs to support expanded sales and marketing efforts of the
trading and marketing business of the Wholesale Energy segment.
For the first nine months of 2000, RER's net income was $15 million
compared to $70 million for the same period in 1999. The decrease was primarily
a result of a decrease in operating income of the Natural Gas Distribution
segment and the unregulated gas retail business of the Corporate segment due to
costs associated with exiting certain retail gas markets, a decrease in other
income of $15 million which was primarily caused by a 2000 after-tax impairment
loss of $17 million on equity marketable securities classified as "available
for sale" and those factors that affected the third quarter earnings.
RER's revenue increased $3.8 billion and $6.7 billion for the third
quarter and first nine months of 2000, respectively, compared to the same
periods in 1999. The increase for both periods was primarily a result of an
increase in sales volumes of natural gas and electricity from trading,
marketing and risk management activities and a higher average price for both
commodities. Total operating expenses increased by $3.8 billion and $6.7
billion for the third quarter and first nine months of 2000 as compared to
those same periods in 1999. The increase was primarily a result of increased
natural gas and purchased power usage to support the increase in sales volumes,
as well as an increase in the average cost of those commodities. In addition,
RER experienced increased levels of operations and maintenance costs as a
result of (a) costs associated with exiting certain retail gas markets, (b)
increased sales and marketing efforts to support the trading and marketing
business of the Wholesale Energy
41
<PAGE> 44
segment, (c) start-up cost of the European trading and marketing operations and
(d) increased information technology costs to support the Natural Gas
Distribution and Wholesale Energy segments. The increase in depreciation
expense for the third quarter and first nine months of 2000 as compared to
those same periods in 1999 was primarily related to the capital expenditures at
the Natural Gas Distribution segment. Weather had very little effect on the
third quarter earnings of the Natural Gas Distribution segment; however, after
giving effect to a partial weather hedge gain of $12 million, weather had a
positive effect of approximately $8 million on the first nine months' earnings
of 2000 as compared to the same period in 1999. The weather hedge expired in
March 2000.
To minimize RER's risks associated with fluctuations in the price of
natural gas and transportation, RER, primarily through Reliant Energy Services,
enters into futures transactions, swaps and options in order to hedge against
market price changes affecting (a) certain commitments to buy, sell and move
electric power, natural gas, crude oil and refined products, (b) existing
natural gas storage and heating oil inventory, (c) future power sales and
natural gas purchases by generation facilities, (d) crude oil and refined
products and (e) certain anticipated transactions, some of which carry
off-balance sheet risk. Reliant Energy Services also enters into commodity and
weather derivatives in its trading and price risk management activities. For a
discussion of RER's accounting treatment of derivative instruments, see Note 2
to the RERC 10-K Notes and "Quantitative and Qualitative Disclosures About
Market Risk" in Item 7A of the Reliant Energy Form 10-K.
Seasonality and Other Factors. RER's results of operations are
affected by seasonal fluctuations in the demand for and, to a lesser extent,
the price of natural gas and electric power. RER's results of operations are
also affected by, among other things, the actions of various federal and state
governmental authorities having jurisdiction over rates charged by RER,
competition in RER's various business operations, debt service costs and income
tax expense.
For a discussion of certain other factors that may affect RER's future
earnings see "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Reliant Energy and subsidiaries -- Certain Factors
Affecting Future Earnings of the Company -- Competition -- Other Operations,"
"-- Environmental Expenditures" and "-- Other Contingencies" in the Reliant
Energy Form 10-K.
NEW ACCOUNTING ISSUES
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Reliant Energy and subsidiaries -- New
Accounting Issues" in Reliant Energy's Form 10-Q for a discussion of certain new
accounting issues affecting RER.
42
<PAGE> 45
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reliant Energy:
For a description of legal proceedings affecting the Company, please
review Note 11 to the Company's Interim Financial Statements, Item 3 of the
Reliant Energy Form 10-K and Notes 3, 4 and 14 of the Reliant Energy 10-K
Notes, all of which are incorporated herein by reference.
RERC:
For a description of legal proceedings affecting RER, please review
Note 9 to RERC's Interim Financial Statements, Item 3 of the RERC Form 10-K and
Note 8 of the RERC 10-K Notes, which are incorporated herein by reference.
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements. From time to time, Reliant Energy and RERC
make statements concerning their respective expectations, beliefs, plans,
objectives, goals, strategies, future events or performance and underlying
assumptions and other statements, which are not historical facts. These
statements are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although Reliant Energy and RERC
believe that the expectations and the underlying assumptions reflected in their
respective forward-looking statements are reasonable, they cannot assure you
that these expectations will prove to be correct. Forward-looking statements
involve a number of risks and uncertainties, and actual results may differ
materially from the results discussed in the forward-looking statements.
The following are some of the factors that could cause actual results
to differ materially from those expressed or implied in forward-looking
statements:
o approval and implementation of the Company's business separation plan,
o state and federal legislative or regulatory developments,
o national or regional economic conditions,
o industrial, commercial and residential growth in service territories
of the Company,
o the timing and extent of changes in commodity prices and interest
rates,
o weather variations and other natural phenomena,
o growth in opportunities for the Company's diversified operations,
o the results of financing efforts,
o the ability to consummate and the timing of the consummation of
pending acquisitions and dispositions,
o the speed, degree and effect of continued electric industry
restructuring in North America and Western Europe,
o risks incidental to the Company's overseas operations, including the
effects of fluctuations in foreign currency exchange rates, and
o other factors discussed in this and other filings by Reliant Energy
and RERC with the Securities and Exchange Commission.
When used in Reliant Energy's or RERC's documents or oral
presentations, the words "anticipate," "estimate," "expect," "objective,"
"projection," "forecast," "goal" and similar words are intended to identify
forward-looking statements.
II-1
<PAGE> 46
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Reliant Energy:
Exhibit 3 Statement of Resolution Establishing Series of
Shares designated Series K Preference Stock.
Exhibit 10 Separation Agreement between Reliant Energy,
Incorporated and Lee W. Hogan dated July 28, 2000.
Exhibit 12 Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
Exhibit 99(a) Items incorporated by reference from the
Reliant Energy Form 10-K: Item 3 "Legal
Proceedings," Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of
Operations of the Company - Certain Factors
Affecting Future Earnings of the Company," Item 7A
"Quantitative and Qualitative Disclosures About
Market Risk" and Notes 1(d) (Regulatory Assets),
1(m) (Foreign Currency Adjustments), 2 (Business
Acquisitions), 3 (Texas Electric Choice Plan and
Discontinuance of SFAS No. 71 for Electric
Generation Operations), 4 (Transition Plan), 5
(Derivative Financial Instruments), 6 (Jointly
Owned Electric Utility Plant), 7 (Equity
Investments and Advances to Unconsolidated
Subsidiaries), 8 (Indexed Debt Securities (ACES
and ZENS) and Time Warner Securities) and 14
(Commitments and Contingencies) of the Reliant
Energy 10-K Notes.
Exhibit 99(b) Combined Form 8-K of Reliant Energy and
RERC filed July 27, 2000, regarding the proposed
restructuring of the Company.
RERC:
Exhibit 12 Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
Exhibit 99(a) Items incorporated by reference from the
Reliant Energy and RER Form 10-K: Item 3 "Legal
Proceedings," Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of
Operations of the Company - Certain Factors
Affecting Future Earnings of the Company and its
Subsidiaries" and Item 7A "Quantitative and
Qualitative Disclosures About Market Risk." Items
incorporated by reference from the RERC 10-K: Item
7 "Management's Narrative Analysis of the Results
of Operations of RERC and its Consolidated
Subsidiaries" and Notes 1(c) (Regulatory Assets
and Regulation), 2 (Derivative Financial
Instruments) and 8 (Commitments and Contingencies)
of the RER 10-K Notes.
Exhibit 99(b) Combined Form 8-K of Reliant Energy and
RERC filed July 27, 2000, regarding the proposed
restructuring of the Company.
(b) Reports on Form 8-K.
Reliant Energy:
Combined Form 8-K of Reliant Energy and RERC filed October 25, 2000,
regarding the quarterly earnings of the Company.
RERC:
Combined Form 8-K of Reliant Energy and RERC filed October 25, 2000,
regarding the quarterly earnings of the Company.
II-2
<PAGE> 47
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANT ENERGY, INCORPORATED
(Registrant)
By: /s/ Mary P. Ricciardello
---------------------------------------
Mary P. Ricciardello
Senior Vice President and Chief Accounting Officer
Date: November 14, 2000
II-3
<PAGE> 48
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANT ENERGY RESOURCES CORP.
(Registrant)
By: /s/ Mary P. Ricciardello
----------------------------------------
Mary P. Ricciardello
Senior Vice President
Date: November 14, 2000
II-4
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
Reliant Energy:
Exhibit 3 Statement of Resolution Establishing Series of
Shares designated Series K Preference Stock.
Exhibit 10 Separation Agreement between Reliant Energy,
Incorporated and Lee W. Hogan dated July 28, 2000.
Exhibit 12 Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
Exhibit 99(a) Items incorporated by reference from the
Reliant Energy Form 10-K: Item 3 "Legal
Proceedings," Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of
Operations of the Company -- Certain Factors
Affecting Future Earnings of the Company," Item 7A
"Quantitative and Qualitative Disclosures About
Market Risk" and Notes 1(d) (Regulatory Assets),
1(m) (Foreign Currency Adjustments), 2 (Business
Acquisitions), 3 (Texas Electric Choice Plan and
Discontinuance of SFAS No. 71 for Electric
Generation Operations), 4 (Transition Plan), 5
(Derivative Financial Instruments), 6 (Jointly
Owned Electric Utility Plant), 7 (Equity
Investments and Advances to Unconsolidated
Subsidiaries), 8 (Indexed Debt Securities (ACES
and ZENS) and Time Warner Securities) and 14
(Commitments and Contingencies) of the Reliant
Energy 10-K Notes.
Exhibit 99(b) Combined Form 8-K of Reliant Energy and
RERC filed July 27, 2000, regarding the proposed
restructuring of the Company.
RERC:
Exhibit 12 Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
Exhibit 99(a) Items incorporated by reference from the
Reliant Energy and RER Form 10-K: Item 3 "Legal
Proceedings," Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of
Operations of the Company -- Certain Factors
Affecting Future Earnings of the Company and its
Subsidiaries" and Item 7A "Quantitative and
Qualitative Disclosures About Market Risk." Items
incorporated by reference from the RERC 10-K: Item
7 "Management's Narrative Analysis of the Results
of Operations of RERC and its Consolidated
Subsidiaries" and Notes 1(c) (Regulatory Assets
and Regulation), 2 (Derivative Financial
Instruments) and 8 (Commitments and Contingencies)
of the RER 10-K Notes.
Exhibit 99(b) Combined Form 8-K of Reliant Energy and
RERC filed July 27, 2000, regarding the proposed
restructuring of the Company.
</TABLE>
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