<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 MARCH 31, 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)
<TABLE>
<S> <C>
Texas 74-0694415
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
</TABLE>
(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)
<TABLE>
<S> <C>
Delaware 76-0511406
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
</TABLE>
(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 May 5, 2000, Reliant Energy, Incorporated had 293,420,705 shares of common
stock outstanding, including 9,249,489 ESOP shares not deemed outstanding for
financial statement purposes and excluding 4,802,426 shares held as treasury
stock. As of May 5, 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.
(RESOURCES CORP.). INFORMATION CONTAINED HEREIN RELATING TO RESOURCES CORP. IS
FILED BY RELIANT ENERGY AND SEPARATELY BY RESOURCES CORP. ON ITS OWN BEHALF.
RESOURCES CORP. MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO RELIANT
ENERGY (EXCEPT AS IT MAY RELATE TO RESOURCES CORP. 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 MARCH 31, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Reliant Energy:
Financial Statements.........................................................................1
Statements of Consolidated Income
Three Months Ended March 31, 2000 and 1999..........................................1
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999................................................2
Statements of Consolidated Cash Flows
Three Months Ended March 31, 2000 and 1999..........................................4
Notes to Unaudited Consolidated Financial Statements................................5
Management's Discussion and Analysis of Financial Condition and Results of Operations
of the Company.....................................................................13
Quantitative and Qualitative Disclosures about Market Risk of the Company...................21
Resources Corp.:
Financial Statements........................................................................22
Statements of Consolidated Income
Three Months Ended March 31, 2000 and 1999.........................................22
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999...............................................23
Statements of Consolidated Cash Flows
Three Months Ended March 31, 2000 and 1999.........................................25
Notes to Unaudited Consolidated Financial Statements...............................26
Management's Narrative Analysis of the Results of Operations of Resources...................30
PART II. OTHER INFORMATION
Legal Proceedings...........................................................................32
Other Information...........................................................................32
Exhibits and Reports on Form 8-K............................................................33
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES $ 4,234,103 $ 2,642,904
EXPENSES:
Fuel and cost of gas sold ................................... 2,340,191 1,432,376
Purchased power ............................................. 784,934 328,507
Operation and maintenance ................................... 469,877 395,787
Taxes other than income taxes ............................... 111,505 107,984
Depreciation and amortization ............................... 181,501 190,585
----------- -----------
Total ................................................... 3,888,008 2,455,239
----------- -----------
OPERATING INCOME .............................................. 346,095 187,665
----------- -----------
OTHER INCOME (EXPENSE):
Unrealized gain in Time Warner investment ................... 1,523,683 --
Unrealized loss on indexed debt securities .................. (1,523,625) (331,311)
Other, net .................................................. 19,813 13,465
----------- -----------
Total ................................................... 19,871 (317,846)
----------- -----------
INTEREST AND OTHER CHARGES:
Interest .................................................... 162,985 126,263
Distribution on trust preferred securities .................. 13,892 9,791
----------- -----------
Total ................................................... 176,877 136,054
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND PREFERRED DIVIDENDS ..... 189,089 (266,235)
Income Tax Expense (Benefit) .................................. 55,936 (56,543)
----------- -----------
INCOME (LOSS) BEFORE PREFERRED DIVIDENDS ...................... 133,153 (209,692)
Preferred Dividends ........................................... 97 97
----------- -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ......... $ 133,056 $ (209,789)
=========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE ................... $ 0.47 $ (0.74)
=========== ===========
</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>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 95,032 $ 89,078
Investment in Time Warner common stock .............................. 5,503,144 3,979,461
Accounts receivable - net ........................................... 1,115,305 1,104,640
Accrued unbilled revenues ........................................... 150,927 172,629
Fuel stock and petroleum products ................................... 96,557 152,292
Materials and supplies, at average cost ............................. 206,746 188,167
Price risk management assets ........................................ 530,645 435,336
Prepayments and other current assets ................................ 70,862 131,666
----------- -----------
Total current assets .............................................. 7,769,218 6,253,269
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ....................................... 20,392,526 20,133,720
Less accumulated depreciation and amortization ...................... 6,961,431 6,866,325
----------- -----------
Property, plant and equipment - net ............................... 13,431,095 13,267,395
----------- -----------
OTHER ASSETS:
Goodwill and other intangibles - net ................................ 2,982,695 3,034,361
Equity investments and advances to unconsolidated subsidiaries ...... 1,023,658 1,022,210
Regulatory assets ................................................... 1,702,551 1,739,507
Price risk management assets ........................................ 331,681 148,722
Other ............................................................... 819,671 755,472
----------- -----------
Total other assets ................................................ 6,860,256 6,700,272
----------- -----------
Total Assets .................................................... $28,060,569 $26,220,936
=========== ===========
</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>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings ............................................ $ 3,409,603 $ 2,879,211
Current portion of long-term debt ................................ 5,788,228 4,382,136
Accounts payable ................................................. 1,033,915 1,036,839
Taxes accrued .................................................... 247,589 227,058
Interest accrued ................................................. 137,677 116,274
Dividends declared ............................................... 110,132 110,811
Price risk management liabilities ................................ 500,371 431,135
Accumulated deferred income taxes ................................ 424,094 415,591
Business purchase obligation ..................................... -- 431,570
Other ............................................................ 352,117 360,109
------------ ------------
Total current liabilities ...................................... 12,003,726 10,390,734
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes ................................ 2,469,778 2,451,619
Unamortized investment tax credits ............................... 269,480 270,243
Price risk management liabilities ................................ 308,045 117,437
Benefit obligations .............................................. 372,282 400,849
Business purchase obligation ..................................... -- 596,303
Other ............................................................ 1,066,793 1,020,837
------------ ------------
Total deferred credits and other liabilities ................... 4,486,378 4,857,288
------------ ------------
LONG-TERM DEBT ...................................................... 5,514,748 4,961,310
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 10)
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
OF THE COMPANY ................................................... 705,373 705,272
------------ ------------
STOCKHOLDERS' EQUITY:
Cumulative preferred stock ....................................... 9,740 9,740
Common stock ..................................................... 3,198,006 3,182,751
Treasury stock ................................................... (120,602) (93,296)
Unearned ESOP stock .............................................. (176,169) (199,226)
Retained earnings ................................................ 2,527,758 2,500,181
Accumulated other comprehensive loss ............................. (88,389) (93,818)
------------ ------------
Total stockholders' equity ..................................... 5,350,344 5,306,332
------------ ------------
Total Liabilities and Stockholders' Equity ................... $ 28,060,569 $ 26,220,936
============ ============
</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>
THREE MONTHS ENDED MARCH 31,
---------------------------
2000 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) attributable to common stockholders ............ $ 133,056 $ (209,789)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization .................................. 181,501 190,585
Deferred income taxes .......................................... 6,334 (123,153)
Investment tax credits ......................................... (763) (5,022)
Unrealized gain on Time Warner investment ...................... (1,523,683) --
Unrealized loss on indexed debt securities ..................... 1,523,625 331,311
Undistributed net loss of unconsolidated subsidiaries .......... 1,318 74,362
Impairment of marketable equity securities ..................... 22,185 --
Changes in other assets and liabilities:
Accounts receivable, net ..................................... 8,838 25,001
Inventories .................................................. 54,581 117,537
Accounts payable ............................................. (951) (92,532)
Federal tax refund ........................................... 52,817 --
Other, net ................................................... (8,906) (94,068)
----------- -----------
Net cash provided by operating activities .................. 449,952 214,232
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................. (403,608) (179,039)
Business acquisition ............................................. (986,539) --
Investment and advances to unconsolidated affiliates ............. (2,800) 19,361
Other, net ....................................................... 32,351 (1,716)
----------- -----------
Net cash used in investing activities ...................... (1,360,596) (161,394)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of trust preferred securities, net ............ -- 362,994
Proceeds from long-term debt, net ................................ 41,967 --
Increase (decrease) in short-term borrowing, net ................. 1,147,552 (74,736)
Payments of long-term debt ....................................... (157,537) (176,542)
Payment of common stock dividends ................................ (105,890) (106,767)
Purchase of treasury stock ....................................... (27,306) --
Other, net ....................................................... 15,565 (3,665)
----------- -----------
Net cash provided by financing activities .................... 914,351 1,284
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................ 2,247 --
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... 5,954 54,122
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 89,078 29,673
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 95,032 $ 83,795
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ............................ $ 111,309 $ 113,116
Income taxes ..................................................... 94 28,308
</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. (Resources Corp.) and its
subsidiaries (collectively, Resources) are Reliant Energy's and Resources
Corp.'s consolidated interim financial statements and notes (Interim Financial
Statements) including such 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 Resources
Corp. (Resources Corp. Form 10-K) for the year ended December 31, 1999.
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 Income 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 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 10.
The Company recognizes repair and maintenance costs incurred in
connection with planned major maintenance under the "accrual in advance" method
for its non-rate regulated power generation operations. 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 March 31, 2000 and
December 31, 1999, the Company's maintenance reserve included in other deferred
credits and in other liabilities in its Consolidated Balance Sheets was $63
million and $61 million, respectively.
(2) 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, pilot projects for 5% of each utility's combined load
of all customer classes will begin
5
<PAGE> 8
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. In addition,
the Legislation requires the Public Utility Commission of Texas (Texas Utility
Commission) 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). 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 transmission and distribution 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 Texas Utility Commission, which are to be effective on January 1, 2002 for
its transmission and distribution operations.
(3) ACQUISITION
On March 1, 2000, the Company purchased the remaining 48% of the shares
of N.V. UNA (UNA), a Dutch power generation company, for $987 million. At
December 31, 1999, the Company recorded the commitment for this purchase as a
business purchase obligation in the Company's Consolidated Balance Sheet based
on an exchange rate of 2.19 Dutch guilders (NLG) per U.S. dollar (the exchange
rate on December 31, 1999). Effective October 1, 1999, the Company recorded 100%
of the operating results of UNA. On a preliminary basis, the Company's fair
value adjustments related to the acquisition of UNA primarily included increases
in property, plant and equipment, long-term debt and related deferred taxes. The
Company expects to finalize these fair value adjustments during 2000; however,
the Company does not anticipate that any additional adjustments will be
material. For additional information regarding the acquisition of UNA, see Note
2 of the Reliant Energy 10-K Notes.
(4) DEPRECIATION AND AMORTIZATION
The Company's depreciation expense for the first quarter of 2000 was
$91 million, compared to $139 million for the same period in 1999. Goodwill
amortization relating to acquisitions was $21 million for the first quarter of
2000 compared to $14 million for the same period in 1999. Other amortization
expense, including amortization of regulatory assets, was $70 million and $38
million in the first quarter of 2000 and 1999, respectively.
In June 1998, the Texas Utility Commission 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 $13 million
of additional depreciation and redirected $51 million of transmission and
distribution depreciation to generation assets for the three months ended March
31, 1999. For information regarding the additional depreciation of electric
utility generating assets and the redirection of transmission and distribution
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 transmission and distribution 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
transmission and distribution depreciation to generation assets. As of March 31,
2000 and December 31, 1999, the cumulative amount of redirected depreciation for
regulatory purposes was $447 million and $393 million, respectively.
The Company reassessed the economic lives of Reliant Energy HL&P's
generation plant and equipment in 1999 and certain prospective depreciation
rates were revised due to changing economic circumstances as a result of the
Legislation. This change in depreciation rates reduced depreciation expense for
Reliant Energy HL&P's generation plant and equipment by $18 million for the
first quarter of 2000.
6
<PAGE> 9
In 1999, the Company determined that approximately $800 million of
Reliant Energy HL&P's electric generation assets was 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 is amortizing this
regulatory asset as it is recovered from regulated cash flows. During the three
months ended March 31, 2000, the Company recorded $52 million of amortization
expense related to the recoverable impaired plant costs and other deferred
debits created from discontinuing SFAS No. 71.
Pursuant to the Legislation, the Company is allowed to recover
generation related regulatory assets and liabilities reported in the Reliant
Energy Form 10-K as of December 31, 1998. Therefore, the Company has
discontinued amortizing certain generation related regulatory assets upon
discontinuance of SFAS No. 71. 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.
(5) COMPREHENSIVE INCOME
The Company had total comprehensive income of $138 million in the first
quarter of 2000 and a total comprehensive loss of $259 million in the first
quarter of 1999. In the first quarter of 2000, the Company recorded a $14
million after-tax impairment loss in the Company's Statement of Consolidated
Income on marketable equity securities classified as "available for sale." The
following table summarizes the components of total comprehensive income.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------
2000 1999
------------------- ----------------
(IN MILLIONS)
<S> <C> <C>
Net income (loss) ......................................................... $ 133 $(210)
Other comprehensive income (loss):
Foreign currency translation adjustments ................................ (10) (51)
Unrealized gain on available for sale securities ........................ 1 2
Plus: Reclassification adjustment for impairment loss on available ......
for sale securities realized in net income ............................ 14 --
----- -----
Comprehensive income (loss) ............................................... $ 138 $(259)
===== =====
</TABLE>
(6) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
The following table summarizes the Company's consolidated long-term
debt and short-term borrowings outstanding:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
------------------------ -------------------------
LONG-TERM CURRENT (1) LONG-TERM CURRENT (1)
----------- ------------ ----------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Short-term borrowings .................... $ -- $3,410 $ -- $2,879
Long-term debt - net:
Indexed debt securities (2) ............ -- 5,503 -- 3,980
Debentures ............................. 1,761 -- 1,795 --
First mortgage bonds ................... 1,261 -- 1,261 150
Pollution control bonds ................ 1,046 -- 1,046 --
Notes payable .......................... 1,427 284 839 251
Capital leases ......................... 12 1 12 1
Unamortized discount and premium ....... 8 -- 8 --
------ ------ ------ ------
Total long-term debt ..................... 5,515 5,788 4,961 4,382
------ ------ ------ ------
Total .................................. $5,515 $9,198 $4,961 $7,261
====== ====== ====== ======
</TABLE>
- ----------------
(1) Includes amounts due within one year.
(2) As these securities are indexed to Time Warner common stock, any
increase in the value of Time Warner common stock results in a
corresponding increase in Reliant Energy's obligation under the indexed
debt securities. For additional information, see Note 8 of the Reliant
Energy 10-K Notes.
7
<PAGE> 10
(a) Short-term Borrowings.
As of March 31, 2000, the Company had credit facilities, which included
the facilities of several financing subsidiaries, UNA and Resources Corp., that
provided for an aggregate of $5.2 billion in committed credit (including the
Euro 600 million facility discussed below) of which $1.2 billion was unused. In
addition, one of the credit facilities included a $65 million sub-facility under
which letters of credit may be obtained. Letters of credit under the
sub-facility aggregated $40 million as of March 31, 2000.
In February 2000, the Company established a $650 million revolving
credit facility that terminates on May 31, 2000. At March 31, 2000, borrowings
under this facility were $650 million at an interest rate of 6.65%. In February
2000, the Company established a $200 million revolving credit facility that will
terminate on May 31, 2000. At March 31, 2000, borrowings under this facility
were $150 million at an interest rate of 6.52%.
(b) Long-term Debt.
In February 2000, the Company established a Euro 600 million three-year
term loan facility of which $573 million (based on the exchange rate on March
31, 2000 of 0.9553 Euro per U.S. dollar) was outstanding at March 31, 2000 at an
interest rate of 4.43%. Borrowings under this facility have been classified as
long-term debt based upon the expiration date of the committed credit facility
and the Company's intent and 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.
(7) 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 MARCH 31,
--------------------------------------
2000 1999
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Basic EPS Calculation:
Income (loss) before preferred dividends ...................... $ 133,153 $(209,692)
Less: Preferred dividends ..................................... 97 97
--------- ---------
Net income (loss) attributable to common stockholders ......... $ 133,056 $(209,789)
========= =========
Weighted average shares outstanding ............................. 283,078 284,967
Basic EPS ....................................................... $ 0.47 $ (0.74)
========= =========
Diluted EPS Calculation:
Net income (loss) attributable to common stockholders ......... $ 133,056 $(209,789)
Plus: Income impact of assumed conversions
Interest on 6 1/4% trust preferred securities ............... 7 --
--------- ---------
Total effect assuming dilution ................................ $ 133,063 $(209,789)
========= =========
Weighted average shares outstanding ............................. 283,078 284,967
Plus: Incremental shares from assumed conversions (1)(2)
Stock options ............................................... 466 --
Restricted stock ............................................ 684 --
6 1/4% trust preferred securities ........................... 23 --
--------- ---------
Weighted average shares assuming dilution ..................... 284,251 284,967
========= =========
Diluted EPS ..................................................... $ 0.47 $ (0.74)
========= =========
</TABLE>
8
<PAGE> 11
- ---------
(1) For the three months ended March 31, 2000, the computation of diluted
EPS excludes purchase options for 1,153,000 shares of common stock that
have exercise prices (ranging from $22.28 to $32.22 per share) greater
than the $22.27 per share average market price.
(2) No assumed conversions were included in the computation of diluted EPS
for the 1999 period because additional shares outstanding would result
in an anti-dilutive per share amount. The computation of diluted EPS
for the 1999 period excludes 730,000 shares of restricted stock, 27,000
shares for assumed conversion of trust preferred securities and
purchase options for 661,000 shares of common stock, which would be
anti-dilutive if exercised.
(8) CAPITAL STOCK
(a) Common Stock.
Reliant Energy has 700,000,000 authorized shares of common stock. At
March 31, 2000, 298,185,768 shares of Reliant Energy common stock were issued
and 283,997,861 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 (9,379,489 and 10,679,489 at March 31,
2000 and December 31, 1999, respectively) and (b) treasury shares (4,808,418 and
3,624,618 at March 31, 2000 and December 31, 1999, respectively). Reliant Energy
declared dividends of $0.375 per share in the first quarters of 2000 and 1999.
During the first quarter of 2000, Reliant Energy purchased 1,183,800
shares of its common stock at an average price of $23.07 per share or an
aggregate purchase price of $27 million.
(b) Preference Stock.
In February 2000, Reliant Energy issued 6,825 shares of Series G
preference stock to one of its financing subsidiaries. The series G preference
stock is not deemed outstanding for financial reporting purposes because the
sole holder is a wholly owned subsidiary of Reliant Energy.
(9) TRUST PREFERRED SECURITIES
For information regarding $625 million of preferred securities and $100
million of capital securities previously issued by statutory business trusts
formed 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.
For information regarding $173 million of convertible preferred
securities previously issued to the public by a statutory business trust formed
by Resources Corp., of which $1 million was outstanding at March 31, 2000 and
December 31, 1999, see Note 11 of the Reliant Energy 10-K Notes and Note 5 of
the Resources Corp. 10-K Notes. The sole asset of the trust consists of junior
subordinated debentures of Resources Corp. having an interest rate and maturity
date corresponding to the preferred securities, and the principal amount
corresponding to the common and preferred securities issued by the trust.
(10) 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
9
<PAGE> 12
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 entered a judgment on the jury's verdict. Reliant Energy has
asked the trial court to enter a judgment in its favor and against the original
claimant cities, including the laches defense and also numerous points of law
neither disposed of nor prejudiced by the jury verdict. The original claimant
cities have asked the trial court to proceed with trials of claims relating to
additional cities instead of entering a final judgment at the present time. On
May 12, 2000, the trial court ordered the parties to mediation and requested
additional briefing from the parties over the next 45 days concerning a possible
de-certification of the class and the various other motions.
The extent to which issues eventually incorporated in the judgment 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 jury findings that support most of the actual
damages and all of the punitive damages in the three cities case depend on
theories of liability expressly disapproved by the Texas Supreme Court within
the past decade. Therefore, the Company estimates the range of possible outcomes
for the entire class to be between zero and $17 million inclusive of interest
and attorneys' fees. Regardless of the judgment entered by the trial court in
the three cities case, or as to the remaining cities, the case will be appealed
promptly following the entry of an appealable judgment or order. The Company
believes that the jury verdict in the three cities case resulted from serious
errors of law and that the entire verdict will be set aside either by the trial
court or by the appellate courts of Texas.
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.
The Company is a defendant in litigation arising out of the
environmental remediation of a site in Corpus Christi, Texas. The litigation was
instituted in 1985 by adjacent landowners. The litigation is pending before the
United States District Court for the Southern District of Texas, Corpus Christi
Division. The site was operated by third parties as a metals reclaiming
operation. Although the Company neither operated nor owned the site, certain
transformers and other equipment originally sold by the Company may have been
delivered to the site by third parties. The Company and others have remediated
the site pursuant to a plan approved by appropriate state agencies and a federal
court. To date, the Company has recovered or has commitments to recover from
other responsible parties $2.2 million of the approximately $3 million it has
spent on remediation.
In 1992, the United States Environmental Protection Agency (EPA) (a)
identified the Company, along with several other parties, as "potentially
responsible parties" (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) for the costs of cleaning up a site
located adjacent to one of the Company's transmission lines in La Marque, Texas
and (b) issued an administrative order for the remediation of the site. The
Company believes that the EPA took this action solely on the basis of
information indicating that the Company in the 1950s acquired record title to a
portion of the land on which the site is located. The Company does not believe
that it now or previously has held any ownership interest in the property
covered by the order and has obtained a judgment to that effect from a court in
Galveston County, Texas. Based on this judgment and other defenses that the
Company believes to be meritorious, the Company has elected not to adhere to the
EPA's administrative order, even though the Company understands that other PRPs
are proceeding with site remediation.
10
<PAGE> 13
To date, neither the EPA nor any other PRP has instituted an action against the
Company for any share of the remediation costs for the site. However, if the
Company was determined to be a responsible party, the Company could be jointly
and severally liable along with the other PRPs for the aggregate remediation
costs of the site (which the Company currently estimates to be approximately $80
million in the aggregate) and could be assessed substantial fines and damage
claims. Although the ultimate outcome of this matter cannot be predicted at this
time, the Company does not believe that this matter will have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
From time to time the Company 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.
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 like those 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.
(11) 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 UNA is included in the segment disclosures only for periods beginning after
its acquisition date. 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, Natural Gas
Distribution, Interstate Pipelines, Wholesale Energy, 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 business segments are as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000
---------------------------------------------------------------------------
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME (LOSS) TOTAL ASSETS
----------------- -------------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Electric Operations ................. $ 947 $ -- $ 202 $ 9,999
Natural Gas Distribution ............ 738 -- 97 3,199
Interstate Pipelines ................ 34 40 28 2,002
Wholesale Energy .................... 2,038 137 (16) 3,223
Reliant Energy Europe ............... 150 -- 33 3,081
Reliant Energy Latin America ........ 21 -- 3 1,157
Corporate ........................... 306 14 (1) 6,189
Reconciling Elimination ............. -- (191) -- (789)
---------- ---------- ---------- ----------
Consolidated ........................ $ 4,234 $ -- $ 346 $ 28,061
========== ========== ========== ==========
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------------------
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME (LOSS)
--------------- ------------ --------------
(IN MILLIONS)
<S> <C> <C> <C>
Electric Operations ................... $ 850 $ -- $ 142
Natural Gas Distribution .............. 678 -- 98
Interstate Pipelines .................. 26 40 28
Wholesale Energy ...................... 939 69 1
Reliant Energy Latin America .......... (51) -- (78)
Corporate ............................. 201 19 (3)
Reconciling Elimination ............... -- (128) --
---------- ---------- ----------
Consolidated .......................... $ 2,643 $ -- $ 188
========== ========== ==========
</TABLE>
Reconciliation of Operating Income to Net Income:
<TABLE>
<CAPTION>
THE THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 1999
------------------ ----------------
(IN MILLIONS)
<S> <C> <C>
Operating income ............................................................... $ 346 $ 188
Interest expense ............................................................... (163) (126)
Net unrealized loss on indexed debt securities and Time Warner investment ...... -- (331)
Distribution on trust securities ............................................... (14) (10)
Income tax benefit (expense) ................................................... (56) 57
Other income ................................................................... 20 12
----- -----
Net income (loss) attributable to common stockholders .......................... $ 133 $(210)
===== =====
</TABLE>
(12) SUBSEQUENT EVENT
On May 12, 2000, the Company purchased from Sithe Energies, Inc. the
entities owning non-rate regulated power generating assets and development sites
located in Pennsylvania, New Jersey and Maryland having a net generating
capacity of approximately 4,300 megawatts (MW). The purchase price for these
entities was approximately $2.1 billion. The Company accounted for the
acquisition as a purchase. Funds for the acquisition were made available through
issuances of commercial paper supported by two committed bridge facilities, one
in the amount of $1 billion and one in the amount of $1.15 billion. The $1
billion bridge facility is a 364-day revolving facility that expires in May
2001. The revolving commitment period for the $1.15 billion facility terminates
in May 2001, and any outstanding borrowings at that time convert to a one-year
term facility.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
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 company,
providing energy and energy services in North America, Western Europe and Latin
America. It operates one of the United States' largest electric utilities in
terms of kilowatt-hour (KWH) sales, and its three natural gas distribution
divisions together form the United States' third largest natural gas
distribution operation in terms of customers served. The Company invests in
international and domestic electric utility privatizations and the development
of non-rate regulated power generation projects. The Company is also an
interstate natural gas pipeline, providing gas transportation, supply, gathering
and storage. It also engages in wholesale energy marketing and trading.
The Company's financial reporting segments include: Electric
Operations, Natural Gas Distribution, Interstate Pipelines, Wholesale Energy,
Reliant Energy Europe, Reliant Energy Latin America and Corporate. For segment
reporting information, see Note 11 to the Company's Interim Financial
Statements.
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
2000 1999
------------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues ............................................................... $ 4,234 $ 2,643
Operating Expenses ..................................................... (3,888) (2,455)
------- -------
Operating Income ....................................................... 346 188
Other Income ........................................................... 20 13
Interest Expense and Other Charges ..................................... (177) (136)
Net Unrealized Loss on Indexed Debt Securities and Time Warner .........
Investment .......................................................... -- (331)
Income Tax (Expense) Benefit ........................................... (56) 56
------- -------
Net Income (Loss) Attributable to Common Stockholders .................. $ 133 $ (210)
======= =======
Basic and Diluted Earnings (Loss) Per Share ............................ $ 0.47 $ (0.74)
</TABLE>
First Quarter of 2000 Compared to First Quarter of 1999. The Company
reported consolidated net income of $133 million ($0.47 per share) for the first
quarter of 2000 compared to a consolidated net loss of $210 million ($0.74 per
share) in the first quarter of 1999. The 1999 results reflect a $215 million
after-tax, non-cash, unrealized accounting loss on indexed debt securities and a
$91 million after-tax, non-cash loss resulting from the effect of the
devaluation of the Brazilian real on equity earnings of the Company's Brazilian
investments.
After adjusting for the charges described above, the Company would have
had consolidated net income of $96 million ($0.34 per share) in the first
quarter of 1999 compared to $133 million ($0.47 per share) in the first quarter
of 2000. The $37 million increase in consolidated net income was primarily due
to increased earnings from the Electric Operations segment and the addition of
earnings from the Reliant Energy Europe segment established in the fourth
quarter of 1999 with the acquisition of UNA, a Dutch power generation company.
For additional information on the acquisition of UNA, see Note 3 to the
Company's Interim Financial Statements and Note 2 to the Reliant Energy 10-K
Notes. These effects were partially offset by lower earnings for Wholesale
Energy and Reliant Energy Latin America.
For a discussion of changes in operating income, see the discussions of
operating income (loss) by segment below.
Other income increased by approximately $7 million in the first quarter
of 2000 compared to the same period in 1999 primarily due to interest income on
an IRS refund received in February 2000 of $26 million and distributions in the
first quarter of 2000 from corporate venture capital investments of $7 million.
An impairment loss of $22 million on marketable equity securities classified as
"available for sale" recorded in the first quarter of 2000 partially offset the
interest and investment income.
13
<PAGE> 16
The Company incurred interest expense and other charges of $177 million
and $136 million for the first quarter of 2000 and 1999, respectively. The
increase resulted from higher levels of short-term borrowings and long-term debt
in the first quarter of 2000 compared to the same period in 1999 partially
offset by a decrease in the average interest rate for long-term debt in the
first quarter of 2000. These increases were associated in part with borrowings
for the acquisition of shares of UNA in the fourth quarter of 1999, the
Company's additional investment in Time Warner common stock in the third quarter
of 1999, other acquisitions and capital expenditures.
The effective tax rate for the first quarter of 2000 and 1999 was 30%
and 21%, respectively. After adjusting for the unrealized accounting loss on
indexed debt securities and the loss due to the devaluation of the Brazilian
real (discussed above), the adjusted effective tax rate for the first quarter of
1999 was 38%. The decrease in the effective tax rate for the first quarter of
2000 compared to the adjusted effective tax rate for the same period in 1999 was
primarily due to the discontinuance of SFAS No. 71 for the generation operations
of Electric Operations as well as the tax holiday relating to the Dutch
electricity industry which applies to income earned by UNA. For information
regarding the discontinuance of SFAS No. 71 for the generation operations of
Electric Operations, see Note 3 of the Reliant Energy 10-K Notes. For
information regarding the UNA tax holiday, see Note 13 of the Reliant Energy
10-K Notes and "--Reliant Energy Europe" below.
The table below shows operating income (loss) by segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
--------- --------
(IN MILLIONS)
<S> <C> <C>
Electric Operations ................. $ 202 $ 142
Natural Gas Distribution ............ 97 98
Interstate Pipelines ................ 28 28
Wholesale Energy .................... (16) 1
Reliant Energy Europe (1) ........... 33 --
Reliant Energy Latin America ........ 3 (78)
Corporate ........................... (1) (3)
----- -----
Total Consolidated ............ $ 346 $ 188
===== =====
</TABLE>
- ----------------
(1) Reliant Energy Europe does not have comparative 1999 results as it was
established in the fourth quarter of 1999.
ELECTRIC OPERATIONS
Electric Operations are conducted 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 Legislation which
substantially amended the regulatory structure governing electric utilities in
Texas in order to allow retail competition beginning on January 1, 2002. 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 Texas Utility Commission 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 2 of the Company's Interim
Financial Statements and Note 3 of the Reliant Energy 10-K Notes.
14
<PAGE> 17
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
-------- -------
(IN MILLIONS)
<S> <C> <C>
Operating Revenues:
Base Revenues ......................... $ 602 $ 568
Reconcilable Fuel Revenues ............ 345 282
------- -------
Total Operating Revenues ............ 947 850
------- -------
Operating Expenses:
Fuel and Purchased Power .............. 358 292
Operation and Maintenance ............. 210 203
Depreciation and Amortization ......... 99 136
Other Operating Expenses .............. 78 77
------- -------
Total Operating Expenses ............ 745 708
------- -------
Operating Income ........................ $ 202 $ 142
======= =======
Electric Sales Including Unbilled (MMWH):
Residential ........................... 3,677 3,518
Commercial ............................ 3,722 3,551
Industrial ............................ 8,133 7,405
Other ................................. 694 819
------- -------
Total Sales Including Unbilled ........ 16,226 15,293
------- -------
Average Cost of Fuel (Cents/MMBtu) ...... 192.1 175.4
</TABLE>
In the first quarter of 2000, Electric Operations' operating income
increased $60 million compared to the same period of 1999. Revenue growth and a
decrease in depreciation expense primarily accounted for this increase.
Primarily as a result of strong customer growth and increased customer
usage, Electric Operations increased base revenues $34 million for the three
months ended March 31, 2000, compared to the same period of 1999.
Reconcilable fuel revenues and fuel and purchased power expenses
increased as a result of the higher cost of natural gas ($2.65 and $1.95 per
MMBtu in the first quarters of 2000 and 1999, respectively), higher costs per
unit for purchased power ($26.40 and $19.27 per MWH in the first quarter of 2000
and 1999, respectively) and increased customer growth and usage, which increased
production. This was partially offset by higher lignite mine reclamation costs
of $17 million incurred in the first quarter of 1999.
Operation and maintenance expenses and other operating expenses for the
first quarter of 2000 increased by $7 million compared to the same period in
1999 largely due to increased transmission costs.
Depreciation and amortization expense decreased $37 million in the
first quarter of 2000 when compared to the same period in 1999. For information
regarding items that affect depreciation and amortization expense of Electric
Operations pursuant to the Legislation and the Transition Plan, see Note 4 of
the Company's Interim Financial Statements.
NATURAL GAS DISTRIBUTION
Natural Gas Distribution conducts operations through three divisions of
Resources Corp.: Reliant Energy Arkla, Reliant Energy Entex and Reliant Energy
Minnegasco. Natural Gas Distribution's operations consist of intrastate natural
gas sales to, and natural gas transportation for, residential, commercial and
certain industrial customers in Arkansas, Louisiana, Minnesota, Mississippi,
Oklahoma and Texas.
The Company has retained a financial advisor to assist it in evaluating
strategic alternatives for Reliant Energy Arkla and Reliant Energy Minnegasco,
including divestiture.
15
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Operating Revenues:
Base Revenues ........................... $ 269 $ 267
Recovered Gas Costs Revenues ............ 469 411
-------- --------
Total Operating Revenues .............. 738 678
-------- --------
Operating Expenses:
Natural Gas ............................. 463 414
Operation and Maintenance ............... 117 108
Depreciation and Amortization ........... 35 33
Other Operating Expenses ................ 26 25
-------- --------
Total Operating Expenses .............. 641 580
-------- --------
Operating Income .......................... $ 97 $ 98
======== ========
Throughput Data (in Bcf):
Residential and Commercial Sales ........ 122 124
Industrial Sales ........................ 14 14
Transportation .......................... 15 13
-------- --------
Total Throughput ...................... 151 151
======== ========
</TABLE>
Natural Gas Distribution's operating income decreased by $1 million in
the first quarter of 2000 compared to the same period in 1999. Recovered gas
costs revenues and natural gas expenses increased $58 million and $49 million,
respectively, primarily as a result of an increase in the price of purchased
gas. Operating revenues for the first quarter of 2000 include a $12 million
effect of financial instruments entered into to protect natural gas distribution
earnings against unseasonably warm weather during peak gas heating months.
INTERSTATE PIPELINES
Interstate Pipelines, consisting of two wholly owned subsidiaries of
Resources Corp., provides interstate gas transportation and related services.
The Company has retained a financial advisor to assist it in evaluating
strategic alternatives for Interstate Pipelines, including divestiture.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Operating Revenues ................... $ 74 $ 66
Operating Expenses:
Natural Gas ........................ 11 6
Operation and Maintenance .......... 19 16
Depreciation and Amortization ...... 12 12
Other Operating Expenses ........... 4 4
----- -----
Total Operating Expenses ......... 46 38
----- -----
Operating Income ..................... $ 28 28
===== =====
Throughput Data (in MMBtu):
Natural Gas Sales .................. 4 4
Transportation ..................... 262 231
Elimination (1) .................. (3) (4)
----- -----
Total Throughput ..................... 263 231
===== =====
</TABLE>
- ------------
(1) Elimination of volumes both transported and sold.
Interstate Pipelines' operating income remained flat at $28 million in
the first quarter of 2000 compared to the first quarter of 1999. Increases in
operating expenses offset slight increases in operating margins.
16
<PAGE> 19
WHOLESALE ENERGY
Wholesale Energy's activities include the acquisition, development,
operation, and sales of capacity, energy and ancillary services from domestic
unregulated power generation facilities; wholesale energy trading, marketing and
risk management activities in North America; and domestic natural gas gathering
activities. Wholesale Energy conducts its operations through (a) Reliant Energy
Power Generation, Inc. (collectively with its subsidiaries, Power Generation),
(b) Reliant Energy Services, Inc. (Reliant Energy Services) and (c) Reliant
Energy Field Services, Inc.
The Company has retained a financial advisor to assist it in evaluating
strategic alternatives for Reliant Energy Field Services, Inc., including
divestiture.
Power Generation acquires and develops non-rate regulated power
generation facilities. On May 12, 2000, Power Generation purchased from Sithe
Energies, Inc. the entities owning non-rate regulated power generating assets
and development sites located in Pennsylvania, New Jersey and Maryland having a
net generating capacity of approximately 4,300 MW. The purchase price for these
entities was approximately $2.1 billion. The Company expects that Power
Generation will actively pursue the acquisition of additional generation assets
as well as the development of additional non-rate regulated generation projects.
The Company believes that the timing and success of Power Generation's future
efforts could result in substantial expenditures in the future.
The Company believes its energy trading, marketing and risk management
activities complement its strategy of developing and acquiring non-rate
regulated generation assets in key markets. Reliant Energy Services purchases
fuel to supply Power Generation's existing generation assets and also sells the
electricity produced by these assets. As a result, the Company has made, and
expects to continue to make, significant investments in developing Reliant
Energy Services' infrastructure including software, trading and risk control
resources.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Operating Revenues .................... $ 2,175 $1,008
Operating Expenses:
Natural Gas ......................... 1,424 720
Purchased Power ..................... 688 241
Operation and Maintenance ........... 69 38
Depreciation and Amortization ....... 8 6
Other Operating Expenses ............ 2 2
------- ------
Total Operating Expenses .......... 2,191 1,007
------- ------
Operating Income ...................... $ (16) $ 1
======= ======
Operations Data:
Natural Gas (in Bcf):
Sales ............................... 573 363
Gathering ........................... 71 61
------- ------
Total ............................. 644 424
======= ======
Electricity (in million MWH):
Wholesale Power Sales ............... 28.4 10.3
======= ======
</TABLE>
Wholesale Energy had an operating loss of $16 million for the first
quarter of 2000 compared to operating income of $1 million for the same period
in 1999. Improved trading margins and volumes for natural gas and power as well
as improved margins from generation plants in California, Florida and Texas were
partially offset by a decline in margins from trading activities in other
commodities. Higher operating expenses at Reliant Energy Services and increased
maintenance costs, development costs and administrative and general expenses at
Power Generation also contributed to the decline in operating income. Timing
differences from planned outages in California primarily accounted for the
increased maintenance costs at Power Generation.
Wholesale Energy's operating revenues increased $1.2 billion in the
first quarter of 2000 compared to the same period in 1999 primarily due to an
increase in gas and power sales volumes. Wholesale Energy's purchased
17
<PAGE> 20
natural gas costs increased $704 million in the first quarter of 2000 due to
increased gas sales volume and a higher average cost of gas in the first quarter
of 2000. Wholesale Energy's purchased power expense increased $447 million
primarily due to higher power sales volumes in the first quarter of 2000.
Operation and maintenance expense for Wholesale Energy increased $31 million due
to the timing differences from planned outages of Power Generation's California
plants, the operation of generation plants in Florida and Texas, which did not
exist in the first quarter of 1999, and development costs and staffing increases
to support increased trading and other new business activities.
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, see Note 3 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 plans to participate in
the emerging wholesale energy trading and marketing industry in the Netherlands
and in Western Europe.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000
------------------
(IN MILLIONS)
<S> <C>
Operating Revenues ....................... $150
Operating Expenses:
Fuel and Purchased Power .............. 69
Operation and Maintenance ............. 28
Depreciation and Amortization ......... 20
----
Total Operating Expenses ............ 117
----
Operating Income ......................... $ 33
====
</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 its generation
output. Under the Cooperative Agreement (OvS Agreement), UNA and the other
generators agree to sell their generating output to a national production pool
(SEP) in exchange for a standardized remuneration. The 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 $1.6 billion U.S. dollars) 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 2001, UNA will begin operating in a deregulated market. The
Company anticipates that UNA will undergo a significant decline in revenues in
2001 attributable to the deregulation of the market. In addition, the imposition
of Dutch corporate tax rates on UNA in 2002 will affect operating results at
Reliant Energy Europe. In 2000 and prior years, UNA was not subject to a
corporate income tax.
For additional information on these and certain 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 the Company -- 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.
RELIANT ENERGY LATIN AMERICA
Reliant Energy Latin America includes the results of operations of
Reliant Energy International, Inc. (Reliant Energy International) and the
international operations of Resources. Reliant Energy Latin America participates
in the privatization of generation and distribution facilities and independent
power projects primarily in Latin America.
Reliant Energy is evaluating selling the Company's Latin American
assets in order to pursue business opportunities that are more in line with its
strategies for the U.S. and Western Europe.
18
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Operating Revenues ...................... $21 $(51)
Operating Expenses:
Fuel .................................. 8 12
Operation and Maintenance ............. 7 14
Depreciation and Amortization ......... 3 1
--- ----
Total Operating Expenses ............ 18 27
--- ----
Operating Income (Loss) ................. $ 3 $(78)
=== ====
</TABLE>
Reliant Energy Latin America had operating income of $3 million in the
first quarter of 2000 compared to an operating loss of $78 million for the same
period in 1999. The 1999 loss reflects a $91 million after-tax, non-cash charge
relating to the Company's share of foreign exchange losses incurred by its
Brazilian affiliates, with respect to their non-local currency denominated
borrowings. These devaluation losses stem from the Brazilian government's
January 1999 decision to allow the Brazilian real to float against other foreign
currencies. Excluding the losses related to the devaluation, operating income
decreased $10 million from the first quarter of 1999 primarily due to lower
earnings from equity investments.
CORPORATE
Corporate includes the operations of certain non-rate regulated retail
services businesses, a communications business offering enhanced data, voice and
other services to customers in Texas, certain real estate holdings and
unallocated corporate costs.
In the first quarter of 2000, Corporate had an operating loss of $1
million compared to an operating loss of $3 million for the same period in 1999.
The decrease in operating loss occurred primarily from decreased corporate
expenses due to the timing of corporate allocations to the other segments.
Decreased earnings from the unregulated retail business partially offset the
decrease in corporate expenses.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
For information on 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 the Company -
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 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 three months ended March
31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Cash provided by (used in):
Operating activities ............... $ 450 $ 214
Investing activities ............... (1,361) (161)
Financing activities ............... 914 1
</TABLE>
Net cash provided by operations in the three months ended March 31,
2000 increased $236 million compared to the same period in 1999 primarily due to
(a) a $78 million federal tax refund received in the first quarter of 2000, (b)
increased sales at Electric Operations due to strong customer growth and
increased customer usage, (c) incremental cash flows provided by UNA, which was
acquired in the fourth quarter of 1999, and (d) other changes in working
capital.
19
<PAGE> 22
Net cash used in investing activities increased $1.2 billion in the
three months ended March 31, 2000 compared to the same period in 1999 primarily
due to the purchase of the remaining 48% of the shares of UNA for $987 million
on March 1, 2000, as well as, increased capital expenditures related to the
construction of domestic non-rate regulated power generation projects by
Wholesale Energy.
Cash flows provided by financing activities increased $913 million in
the three months ended March 31, 2000 compared to the same period in 1999
primarily due to cash received from short-term borrowings. Purchases by Reliant
Energy of its common stock during the first quarter of 2000 totaling $27 million
partially offset this increase. The Company utilized the net borrowings incurred
during the first quarter of 2000 to fund the remaining purchase obligation of
UNA, 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) three-year term
loan facility established in February 2000 and through short-term borrowings and
excess operating cash flows. In the first quarter of 2000, a financing
subsidiary of the Company borrowed $650 million under a $650 million revolving
credit facility established in February 2000 that terminates on May 31, 2000.
This financing subsidiary used the proceeds to purchase Series G Preference
Stock of Reliant Energy. Reliant Energy used the proceeds from the sale of
Preference Stock for general corporate purposes, including the repayment of
indebtedness. In addition, in March 2000, the Company borrowed $150 million
under a $200 million revolving credit facility established in the first quarter
of 2000 that terminates on May 31, 2000. The Company used the proceeds from
these borrowings for general corporate purposes, including the repayment of
indebtedness. Borrowings under the revolving credit facilities terminating on
May 31, 2000 are expected to be refinanced with debt or repaid with internally
generated funds.
FUTURE SOURCES AND USES OF CASH FLOWS
Credit Facilities. As of March 31, 2000, the Company had credit
facilities, including the facilities of several financing subsidiaries,
Resources Corp. and UNA, which provided for an aggregate of $5.2 billion in
committed credit (including the Euro 600 million facility discussed above). As
of March 31, 2000, $4 billion was outstanding under these facilities, including
commercial paper of $1.6 billion. Unused credit facilities totaled $1.2 billion
as of March 31, 2000.
Shelf Registrations. As of March 31, 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 $353 million as of March 31, 2000 based on the closing price
of the common stock as of such date.
Securitization. Reliant Energy HL&P filed an application with the Texas
Utility Commission requesting a financing order 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 Company estimates that approximately $750 million of transition
bonds will be authorized by the Texas Utility Commission. 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, or if conditions permit, late 2000.
Acquisition of Sithe Assets. On May 12, 2000, the Company purchased
from Sithe Energies, Inc. the entities owning non-rate regulated power
generating assets and development sites located in Pennsylvania, New Jersey and
Maryland having a net generating capacity of approximately 4,300 MW. The
purchase price for these entities was approximately $2.1 billion. The Company
accounted for the acquisition as a purchase. Funds for the acquisition were made
available through issuances of commercial paper supported by two committed
bridge facilities, one in the amount of $1 billion and one in the amount of
$1.15 billion. The $1 billion bridge facility is a 364-day revolving facility
that expires in May 2001. The revolving commitment period for the $1.15 billion
facility terminates in May 2001, and any outstanding borrowings at that time
convert to a one-year term facility.
Reliant Energy Latin America Capital Contributions and Advances. As of
March 31, 2000, Reliant Energy Latin America expects to make capital
contributions or advances during the last three quarters of 2000 totaling
20
<PAGE> 23
approximately $133 million as a result of debt service payments and operating
cash flow short falls at certain of its affiliates. Of this amount, capital
contributions of $30 million were made in April 2000. The Company expects that
part of these capital contributions will be paid from a return of capital from
one of its investments, dividends from certain of its operating companies,
proceeds from the sale of certain of its investments and from additional capital
contributions from Reliant Energy.
Other Sources/Uses of Cash. The liquidity and capital requirements of
the Company are affected primarily by capital programs and debt service
requirements. The Company expects to continue to participate as a bidder in
future acquisitions of independent power projects and privatizations of
generation facilities. Any resulting capital requirements are expected to be met
with excess cash flows from operations, proceeds from project financings and
proceeds from Company borrowings. Additional capital expenditures depend upon
the nature and extent of future project commitments, some of which may be
substantial. Although 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, the Company may, when
it deems necessary, or when it develops or acquires new businesses and assets,
supplement its available cash resources by seeking funds in the equity or debt
markets.
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 hedging instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
The Company is in the process of determining the effect of adoption of SFAS No.
133 on its consolidated financial statements.
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.
21
<PAGE> 24
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUES .......................................... $ 3,099,337 $ 1,828,064
----------- -----------
EXPENSES:
Natural gas and purchased power ................. 2,704,950 1,458,695
Operation and maintenance ....................... 160,104 138,902
Depreciation and amortization ................... 52,122 50,018
Taxes other than income taxes ................... 31,352 30,272
----------- -----------
2,948,528 1,677,887
----------- -----------
OPERATING INCOME .................................. 150,809 150,177
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net ........................... (31,687) (29,662)
Distribution on trust preferred securities ...... (95) (99)
Other, net ...................................... (17,105) 3,031
----------- -----------
(48,887) (26,730)
----------- -----------
INCOME BEFORE INCOME TAXES ........................ 101,922 123,447
Income Tax Expense ................................ 46,786 52,474
----------- -----------
NET INCOME ........................................ $ 55,136 $ 70,973
=========== ===========
</TABLE>
See Notes to Resources' Interim Financial Statements
22
<PAGE> 25
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 71,189 $ 81,347
Accounts and notes receivable, principally customer... 948,059 980,560
Unbilled revenue ..................................... 122,244 150,961
Materials and supplies, at average cost .............. 34,383 35,121
Fuel, gas and petroleum products ..................... 31,376 80,135
Price risk management assets ......................... 530,645 435,336
Prepayments and other current assets ................. 37,519 46,666
---------- ----------
Total current assets ............................... 1,775,415 1,810,126
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ........................ 3,351,586 3,298,478
Less accumulated depreciation and amortization ....... 367,953 324,596
---------- ----------
Property, plant and equipment, net ................... 2,983,633 2,973,882
---------- ----------
OTHER ASSETS:
Goodwill, net ........................................ 1,969,779 1,983,004
Prepaid pension asset ................................ 105,746 110,626
Price risk management assets ......................... 331,681 148,722
Other ................................................ 196,769 186,437
---------- ----------
Total other assets ................................. 2,603,975 2,428,789
---------- ----------
TOTAL ASSETS ........................................... $7,363,023 $7,212,797
========== ==========
</TABLE>
See Notes to Resources' Interim Financial Statements
23
<PAGE> 26
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>
MARCH 31, DECEMBER 31,
2000 1999
----------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt ................................ $ 248,416 $ 223,451
Short-term borrowings ............................................ 368,200 534,584
Accounts payable, principally trade .............................. 803,548 776,546
Accounts and notes payable - affiliated companies, net ........... 19,910 95,601
Interest accrued ................................................. 28,000 27,965
Taxes accrued .................................................... 106,350 48,266
Customer deposits ................................................ 32,714 33,255
Price risk management liabilities ................................ 500,371 431,135
Other ............................................................ 99,940 119,111
----------- -----------
Total current liabilities .................................. 2,207,449 2,289,914
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes ................................ 558,316 532,725
Payable under capacity lease agreement ........................... 41,000 41,000
Benefit obligations .............................................. 140,631 161,144
Price risk management liabilities ................................ 308,045 117,437
Other ............................................................ 181,829 187,473
----------- -----------
Total deferred credits and other liabilities ................. 1,229,821 1,039,779
----------- -----------
LONG-TERM DEBT ..................................................... 1,193,111 1,220,631
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 7)
RESOURCES OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR
SUBORDINATED DEBENTURES OF RESOURCES ............................ 957 967
----------- -----------
STOCKHOLDER'S EQUITY:
Common stock ..................................................... 1 1
Paid-in capital .................................................. 2,463,831 2,463,831
Retained earnings ................................................ 270,008 214,872
Accumulated other comprehensive loss ............................. (2,155) (17,198)
----------- -----------
Total stockholder's equity ................................... 2,731,685 2,661,506
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ...................... $ 7,363,023 $ 7,212,797
=========== ===========
</TABLE>
See Notes to Resources' Interim Financial Statements
24
<PAGE> 27
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>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 55,136 $ 70,973
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................... 52,122 50,018
Deferred income taxes ........................................... 9,673 4,500
Impairment of marketable equity securities ...................... 22,185 --
Changes in other assets and liabilities:
Accounts and notes receivable ................................. 61,218 12,052
Accounts receivable/payable, affiliates ....................... 31,747 (38,293)
Inventories ................................................... 49,497 141,926
Other current assets .......................................... 9,147 (18,501)
Accounts payable .............................................. 27,002 (73,233)
Interest and taxes accrued .................................... 58,119 55,116
Other current liabilities ..................................... (19,712) (25,822)
Net price risk management assets .............................. (18,424) (18,262)
Restricted deposits ........................................... (9,770) (31,042)
Other, net .................................................... (14,719) (15,093)
--------- ---------
Net cash provided by operating activities ................... 313,221 114,339
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................. (58,119) (45,540)
Other, net ........................................................ 11,127 (1,769)
--------- ---------
Net cash used in investing activities ....................... (46,992) (47,309)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt ........................................ -- (6,042)
Decrease in short-term borrowings, net ............................ (166,384) --
Increase (decrease) in notes with affiliates, net ................. (107,438) (33,400)
Other, net ........................................................ (2,565) (3,757)
--------- ---------
Net cash used in financing activities ....................... (276,387) (43,199)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. (10,158) 23,831
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ................. 81,347 26,576
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ....................... $ 71,189 $ 50,407
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ............................. $ 33,922 $ 30,939
Income taxes ...................................................... 93 (2,549)
</TABLE>
See Notes to Resources' Interim Financial Statements
25
<PAGE> 28
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.
Resources' 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 Resources' Statements of Consolidated Income 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 Resources' presentation of
financial statements in the current year. These reclassifications do not affect
earnings of Resources.
The following notes to the financial statements in the Resources Corp. Form
10-K relate to certain contingencies. These notes, as updated herein, are
incorporated herein by reference:
Notes to Consolidated Financial Statements (Resources Corp. 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 7.
(2) DEPRECIATION AND AMORTIZATION
Resources' depreciation expense for the first quarter of 2000 was $37
million, compared to $36 million for the same period in 1999. Amortization
expense, primarily relating to goodwill amortization, was $15 million for the
first quarter of 2000 compared to $14 million for the same period in 1999.
(3) RESOURCES OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF
RESOURCES -- see Note 9 to the Company's Interim Financial Statements.
(4) COMPREHENSIVE INCOME
Resources had total comprehensive income of $70 million and $73 million in
the first quarter of 2000 and 1999, respectively. In the first quarter of 2000,
Resources recorded a $14 million after-tax impairment loss in Resources'
Statement of Consolidated Income on marketable equity securities classified as
"available for sale." The following table summarizes the components of total
comprehensive income.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2000 1999
-------- --------
(IN MILLIONS)
<S> <C> <C>
Net income ......................................................... $ 55 $ 71
Other comprehensive income:
Unrealized gain on available for sale securities ................. 1 2
Plus: Reclassification adjustment for impairment loss on available
for sale securities realized in net income ..................... 14 --
-------- --------
Comprehensive income ............................................... $ 70 $ 73
======== ========
</TABLE>
(5) RELATED PARTY TRANSACTIONS
Reliant Energy Services 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 were acquired and/or are
operated by Power Generation or its subsidiaries. For the three months ended
March 31, 2000 and 1999, the sales and services to Reliant Energy and its
affiliates totaled $44 million and $11 million, respectively. Purchases of
electricity from Reliant Energy and its affiliates were $28 million and $3
million for the three months ended March 31, 2000 and 1999, respectively.
Reliant Energy provides certain corporate services to Resources, which are
allocated to Resources or direct billed to Resources, including management
support, financial and tax accounting, information system support, treasury
support, legal services, regulatory support and other general services.
26
<PAGE> 29
Notes receivable to Reliant Energy and its subsidiaries, which are not
owned by Resources, included in accounts and notes payable-affiliated companies,
totaled $46 million at March 31, 2000. Net borrowings from Reliant Energy and
its subsidiaries, which are not owned by Resources, included in accounts and
notes payables-affiliated companies, totaled $62 million at December 31, 1999.
Interest income/expense on such receivables/ borrowings was immaterial for the
three months ended March 31, 2000 and 1999. As of March 31, 2000 and December
31, 1999, net accounts payable to Reliant Energy and its subsidiaries, which are
not owned by Resources, was $66 million and $34 million, respectively.
(6) REPORTABLE SEGMENTS
Because Resources Corp. is a wholly owned subsidiary of Reliant Energy,
Resources' 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. Subsequent to the acquisition
date, segment financial data includes information for Reliant Energy and
Resources on a combined basis, except for Electric Operations which has no
Resources operations and Reliant Energy Latin America, which has minimal
Resources operations. Reconciling items included under the caption "Elimination
of Non-Resources Operations" reduce the consolidated Reliant Energy amounts by
those operations not conducted within the Resources legal entity. Operations not
owned or operated by Resources, 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-Resources corporate expenses.
Reliant Energy has identified the following reportable segments in which
Resources has operations: Natural Gas Distribution, Interstate Pipelines,
Wholesale Energy, Reliant Energy Europe and Corporate. For descriptions of the
financial reporting segments, see Note 9 of the Resources Corp. 10-K Notes. The
following table summarizes financial data for the business segments:
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000
----------------------------------------------------------------
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME TOTAL ASSETS
----------------- ------------ ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Natural Gas Distribution ... $ 738 $ -- $ 97 $ 3,199
Interstate Pipelines ....... 34 40 28 2,002
Wholesale Energy ........... 2,038 137 (16) 3,223
Reliant Energy Europe ...... 150 -- 33 3,081
Corporate .................. 306 14 (1) 6,189
Reconciling Elimination .... -- (191) -- (789)
Elimination of Non-Resources
Operations .............. (167) -- 10 (9,542)
---------- ---------- ---------- ----------
Consolidated ............... $ 3,099 $ -- $ 151 $ 7,363
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------------
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME
----------------- ------------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Natural Gas Distribution ... $ 678 $ -- $ 98
Interstate Pipelines ....... 26 40 28
Wholesale Energy ........... 939 69 1
Corporate .................. 201 19 (3)
Reconciling Elimination .... -- (128) --
Elimination of Non-Resources
Operations .............. (16) -- 26
---------- ---------- ----------
Consolidated ............... $ 1,828 $ -- $ 150
========== ========== ==========
</TABLE>
27
<PAGE> 30
(7) ENVIRONMENTAL MATTERS AND LEGAL PROCEEDINGS
To the extent that potential environmental remediation costs are quantified
within a range, Resources 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, future costs are not
discounted to their present value and the liability is not offset by expected
insurance recoveries. If justified by circumstances within Resources' business
subject to SFAS No. 71, corresponding regulatory assets are recorded in
anticipation of recovery through the rate making process.
Manufactured Gas Plant Sites. Resources and its predecessors operated a
manufactured gas plant (MGP) adjacent to the Mississippi River in Minnesota
formerly known as Minneapolis Gas Works (FMGW) until 1960. Resources has
substantially completed remediation of the main site other than ongoing water
monitoring and treatment. The manufactured gas was stored in separate holders.
Resources 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, Resources believes that two were neither
owned nor operated by Resources; two were owned by Resources at one time but
were operated by others and are currently owned by others; and one site was
previously owned and operated by Resources but is currently owned by others.
Resources believes it has no liability with respect to the sites it neither
owned nor operated.
At March 31, 2000 and December 31, 1999, Resources had accrued $18.6
million and $18.8 million, respectively, for remediation of the Minnesota sites.
At March 31, 2000, the estimated range of possible remediation costs was $10
million to $49 million. The low end of the range was determined based on only
those sites presently owned or known to have been operated by Resources,
assuming use of Resources' proposed remediation methods. The upper end of the
range was determined based on the sites once owned by Resources, whether or not
operated by Resources. 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 March 31, 2000 and December 31, 1999, Resources
had recorded accruals of approximately $1 million (with a maximum estimated
exposure of approximately $13 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 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 March 31, 2000 and
December 31, 1999, Reliant Energy Minnegasco had over recovered $13 million,
including insurance recoveries. At March 31, 2000 and December 31, 1999, Reliant
Energy Minnegasco had recorded a liability of $19.8 million and $20.0 million,
respectively, to cover the cost of future remediation. Reliant Energy Minnegasco
expects that approximately 40% of its accrual as of March 31, 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, a regulatory asset has been recorded equal to the liability
accrued. Resources believes the difference between any cash expenditures for
these costs and the amount recovered in rates during any year will not be
material to Resources' 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. Resources has received notices from the
EPA and others regarding its status as a PRP for other sites. Based on current
information, Resources has not been able to quantify a range of environmental
expenditures for potential remediation expenditures with respect to other MGP
sites.
Mercury Contamination. Like other natural gas pipelines, Resources'
pipeline operations have in the past employed elemental mercury in meters used
on its pipelines. Although the mercury has now been removed from the meters, it
is possible that small amounts of mercury have been spilled at some of those
sites in the course of normal maintenance and replacement operations and that
such spills have contaminated the immediate area around the meters with
elemental mercury. Such contamination has been found by Resources at some sites
in the past, and Resources has conducted remediation at sites found to be
contaminated. Although Resources is not aware of
28
<PAGE> 31
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
Resources and others in the natural gas industry to date and on the current
regulations regarding remediation of such sites, Resources believes that the
cost of any remediation of such sites will not be material to Resources'
financial position, results of operations or cash flows.
Potentially Responsible Party Notifications. From time to time Resources
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 Resources in activities at these
sites, Resources does not believe that these matters will have a material
adverse effect on Resources' financial position, results of operations or cash
flows.
Resources 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 Company's financial condition, results of
operations or cash flows.
29
<PAGE> 32
MANAGEMENT'S NARRATIVE ANALYSIS OF
THE RESULTS OF OPERATIONS OF RESOURCES
The following narrative analysis should be read in combination with
Resources Corp.'s Interim Financial Statements and notes contained in this Form
10-Q.
Resources Corp. meets the conditions specified in General Instruction H to
Form 10-Q and is permitted to use the reduced disclosure format for wholly owned
subsidiaries of reporting companies. Accordingly, Resources 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 Resources between the three months ended March 31,
2000 and 1999. Reference is made to Management's Narrative Analysis of the
Results of Operations in Item 7 of Resources Corp. Form 10-K, the Resources
Corp. 10-K Notes referred to herein and Resources Corp.'s Interim Financial
Statements contained in this Form 10-Q.
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Operating Revenues ............................... $ 3,099,337 $ 1,828,064
Operating Expenses ............................... (2,948,528) (1,677,887)
----------- -----------
Operating Income - Net ........................... 150,809 150,177
Interest Expense ................................. (31,687) (29,662)
Distributions on Trust Preferred Securities ...... (95) (99)
Other Income (Expense) - Net .................... (17,105) 3,031
Income Tax Expense ............................... (46,786) (52,474)
----------- -----------
Net Income ..................................... $ 55,136 $ 70,973
=========== ===========
</TABLE>
Resources' net income decreased $16 million in the first quarter of 2000
compared to the same period in 1999. This decrease was primarily due to an
increase in interest expense and an after-tax impairment loss of $14 million on
equity marketable securities classified as "available for sale" in the first
quarter of 2000.
Resources' revenues increased $1.3 billion between the two periods
primarily due to an increase in sales volumes of natural gas and electric power
and a higher average cost of natural gas. Similar increases in operating
expenses were due primarily to increased natural gas and purchased power sales
volumes, a higher average cost of natural gas and increased general and
administrative expenses. Operating income for Resources was consistent between
the two periods. Improved trading margins in natural gas and electric power were
offset by decreased trading margins for other commodities for the Wholesale
Energy segment, while operating margins for the Interstate Pipelines and Natural
Gas Distribution segments were relatively flat between the two periods. General
and administrative expenses, included in operation and maintenance expense,
increased due to higher levels of trading and marketing staffing and increased
operating costs to support the higher sales and expanded marketing efforts of
the Wholesale Energy segment and start-up costs of the European trading and
marketing operations.
To minimize Resources' risks associated with fluctuations in the price of
natural gas and transportation, Resources, 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 Resources' accounting treatment of derivative instruments, see
Note 2 to the Resources Corp. 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. Resources' 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. Resources' 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 Resources,
competition in Resources' various business operations, debt service costs and
income tax expense.
Reliant Energy has retained a financial advisor to assist it in evaluating
strategic alternatives for Reliant Energy Arkla, Reliant Energy Minnegasco,
Reliant Energy Field Services, Inc. and Interstate Pipelines, including
divestiture.
For a discussion of certain other factors that may affect Resources' future
earnings see "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Certain Factors Affecting Future
Earnings of the Company -- Competition -- Other Operations," "--Environmental
Expenditures" and "-- Other Contingencies " in the Reliant Energy Form 10-K.
30
<PAGE> 33
NEW ACCOUNTING ISSUES
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- New Accounting Issues" in
Reliant Energy's Form 10-Q for a discussion of certain new accounting issues
affecting Resources.
31
<PAGE> 34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reliant Energy:
For a description of legal proceedings affecting the Company, please review
Note 10 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.
Resources Corp.:
For a description of legal proceedings affecting Resources, please review
Note 7 to Resources Corp.'s Interim Financial Statements, Item 3 of the
Resources Corp. Form 10-K and Note 8 of the Resources Corp. 10-K Notes, which
are incorporated herein by reference.
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements. From time to time, Reliant Energy and Resources
Corp. 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 Resources
Corp. 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 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 Resources Corp. with the Securities and Exchange Commission.
When used in Reliant Energy's or Resources Corp.'s documents or oral
presentations, the words "anticipate," "estimate," "expect," "objective,"
"projection," "forecast," "goal" and similar words are intended to identify
forward-looking statements.
On May 3, 2000, the Reliant Energy Board of Directors adopted and approved
changes to the Reliant Energy, Bylaws and amended and restated the Bylaws
effective as of May 3, 2000. See Exhibit 3 to the Reliant Energy Form 10-Q.
Extension of Shareholder Rights Plan. On May 3, 2000, the Board of
Directors of Reliant Energy approved the extension of Reliant Energy's
shareholder rights plan for an additional ten-year period, through July 11,
2010. See Exhibit 99(b) to the Reliant Energy Form 10-Q for a description of
Reliant Energy's (a) common stock and associated rights to purchase preference
stock, (b) preferred stock and (c) preference stock, which description is
incorporated herein by reference.
32
<PAGE> 35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Reliant Energy:
Exhibit 3 Amended and Restated Bylaws of Reliant Energy
as adopted and amended by the Board of Directors on
May 3, 2000.
Exhibit 4 Amendment No. 1 to Rights Agreement, dated as of May 8,
2000, between Reliant Energy and Chase Bank of Texas,
National Association, as Rights Agent.
Exhibit 12 Ratio of Earnings to Fixed Charges and Preferred
Dividends.
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) Description of Reliant Energy's (a) common stock and
associated rights to purchase preference stock, (b)
preferred stock and (c) preference stock.
Resources Corp.:
Exhibit 12 Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
Exhibit 99 Items incorporated by reference from the Reliant Energy
and Resources 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
Resources Corp. 10-K: Item 7 "Management's Narrative
Analysis of the Results of Operations of Reliant Energy
Resources Corp. and its Consolidated Subsidiaries" and
Notes 1(c) (Regulatory Assets and Regulation), 2
(Derivative Financial Instruments) and 8 (Commitments
and Contingencies) of the Resources 10-K Notes.
(b) Reports on Form 8-K.
Reliant Energy:
None.
Resources Corp.:
None.
33
<PAGE> 36
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 Ricciardello
Senior Vice President and Chief Accounting Officer
Date: May 15, 2000
<PAGE> 37
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 Ricciardello
Senior Vice President and Chief Accounting Officer
Date: May 15, 2000
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
Reliant Energy:
Exhibit 3 Amended and Restated Bylaws of Reliant Energy,
Incorporated as adopted and amended by the Board of
Directors on May 3, 2000.
Exhibit 4 Amendment No. 1 to Rights Agreement, dated as of May 8,
2000, between Reliant Energy and Chase Bank of Texas,
National Association as Rights Agent.
Exhibit 12 Ratio of Earnings to Fixed Charges and Preferred
Dividends.
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) Description of Reliant Energy's (a) common stock and
associated rights to purchase preference stock, (b)
preferred stock and (c) preference stock.
Resources Corp.:
Exhibit 12 Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
Exhibit 99 Items incorporated by reference from the Reliant Energy
and Resources 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
Resources Corp. 10-K: Item 7 "Management's Narrative
Analysis of the Results of Operations of Reliant Energy
Resources Corp. and its Consolidated Subsidiaries" and
Notes 1(c) (Regulatory Assets and Regulation), 2
(Derivative Financial Instruments) and 8 (Commitments
and Contingencies) of the Resources 10-K Notes.
</TABLE>
<PAGE> 1
EXHIBIT 3
AMENDED AND RESTATED BYLAWS
OF
RELIANT ENERGY, INCORPORATED
Adopted and Amended by Resolution of the Board of Directors on
May 3, 2000
ARTICLE I
CAPITAL STOCK
Section 1. Share Ownership. Shares for the capital stock of the Company may
be certificated or uncertificated. Owners of shares of the capital stock of the
Company shall be recorded in the share transfer records of the Company and
ownership of such shares shall be evidenced by a certificate or book entry
notation in the share transfer records of the Company. Any certificates
representing such shares shall be signed by the Chairman of the Board, if there
is one, the Chief Executive Officer, if there is one, the President or a Vice
President and either the Secretary or an Assistant Secretary and shall be sealed
with the seal of the Company, which signatures and seal may be facsimiles. In
case any officer who has signed or whose facsimile signature has been placed
upon such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Company with the same effect as
if he were such officer at the date of its issuance.
Section 2. Shareholders of Record. The Board of Directors of the Company
may appoint one or more transfer agents or registrars of any class of stock of
the Company. The Company may be its own transfer agent if so appointed by the
Board of Directors. The Company shall be entitled to treat the holder of record
of any shares of the Company as the owner thereof for all purposes, and shall
not be bound to recognize any equitable or other claim to, or interest in, such
shares or any rights deriving from such shares, on the part of any other person,
including (but without limitation) a purchaser, assignee or transferee, unless
and until such other person becomes the holder of record of such shares, whether
or not the Company shall have either actual or constructive notice of the
interest of such other person.
Section 3. Transfer of Shares. The shares of the capital stock of the
Company shall be transferable in the share transfer records of the Company by
the holder of record thereof, or his duly authorized attorney or legal
representative. All certificates representing shares surrendered for transfer,
properly endorsed, shall be canceled and new certificates for a like number of
shares shall be issued therefor. In the case of lost, stolen, destroyed or
mutilated certificates representing shares for which the Company has been
requested to issue new certificates, new certificates or other evidence of such
new shares may be issued upon such conditions as may be required by the Board of
Directors or the Secretary for the protection of the Company and any transfer
agent or registrar. Uncertificated shares shall be transferred in the share
transfer records of the Company upon the written instruction originated by the
appropriate person to transfer the shares.
Section 4. Shareholders of Record and Fixing of Record Date. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive a
distribution by the Company (other than a distribution involving a purchase or
redemption by the Company of any of its own shares) or a share dividend, or in
order to make a determination of shareholders for any other proper purpose
(other than determining shareholders entitled to consent to action by
shareholders proposed to be taken without a meeting of shareholders), the Board
of Directors may provide that the share transfer records shall be closed for a
stated period of not more than sixty days, and in the case of a meeting of
shareholders not less than ten days, immediately preceding the meeting, or it
may fix in advance a record date for any such determination of shareholders,
such date to be not more than sixty days, and in the case of a meeting of
shareholders not less than ten days, prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If the share
transfer records are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive a distribution (other than a
distribution involving a purchase or redemption by the Company of any of its own
shares) or a share dividend, the
<PAGE> 2
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such distribution or share
dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as herein provided, such
determination shall apply to any adjournment thereof except where the
determination has been made through the closing of the share transfer records
and the stated period of closing has expired.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings. All meetings of shareholders shall be held at
the registered office of the Company, in the City of Houston, Texas, or at such
other place within or without the State of Texas as may be designated by the
Board of Directors or officer calling the meeting.
Section 2. Annual Meeting. The annual meeting of the shareholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors or as may otherwise be stated in the notice of the
meeting. Failure to designate a time for the annual meeting or to hold the
annual meeting at the designated time shall not work a dissolution of the
Company.
Section 3. Special Meetings. Special meetings of the shareholders may be
called by the Chairman of the Board, if there is one, the Chief Executive
Officer, if there is one, the President, the Secretary, the Board of Directors,
the holders of not less than one-tenth of all of the shares outstanding and
entitled to vote at such meeting or such other persons as may be authorized in
the Articles of Incorporation of the Company.
Section 4. Notice of Meeting. Written or printed notice of all meetings
stating the place, day and hour of the meeting and, in case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
delivered not less than ten nor more than sixty days before the date of the
meeting, either personally or by mail, by or at the direction of the Chairman of
the Board, if there is one, the Chief Executive Officer, if there is one, the
President, the Secretary or the officer or person calling the meeting to each
shareholder of record entitled to vote at such meetings. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail
addressed to the shareholder at his address as it appears on the share transfer
records of the Company, with postage thereon prepaid.
Any notice required to be given to any shareholder, under any provision of
the Texas Business Corporation Act, as amended (TBCA), the Articles of
Incorporation of the Company or these Bylaws, need not be given to a shareholder
if notice of two consecutive annual meetings and all notices of meetings held
during the period between those annual meetings, if any, or all (but in no event
less than two) payments (if sent by first class mail) of distributions or
interest on securities during a 12-month period have been mailed to that person,
addressed at his address as shown on the share transfer records of the Company,
and have been returned undeliverable. Any action or meeting taken or held
without notice to such person shall have the same force and effect as if the
notice had been duly given. If such a person delivers to the Company a written
notice setting forth his then current address, the requirement that notice be
given to that person shall be reinstated.
Section 5. Voting List. The officer or agent having charge of the share
transfer records for shares of the Company shall make, at least ten days before
each meeting of shareholders, a complete list of the shareholders entitled to
vote at such meeting or any adjournment thereof, arranged in alphabetical order,
with the address of and the number of shares held by each, which list, for a
period of ten days prior to such meeting, shall be kept on file at the
registered office of the Company and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any shareholder during the whole time of the meeting. The
original share transfer records shall be prima facie evidence as to who are the
shareholders entitled to examine such list or to vote at any meeting of
shareholders. Failure to comply with any requirements of this Section 5 shall
not affect the validity of any action taken at such meeting.
Section 6. Voting; Proxies. Except as otherwise provided in the Articles of
Incorporation of the Company or as otherwise provided in the TBCA, each holder
of shares of capital stock of the Company entitled to vote shall
<PAGE> 3
be entitled to one vote for each share standing in his name on the records of
the Company, either in person or by proxy executed in writing by him or by his
duly authorized attorney-in-fact. A proxy shall be revocable unless expressly
provided therein to be irrevocable and the proxy is coupled with an interest. At
each election of directors, every holder of shares of the Company entitled to
vote shall have the right to vote, in person or by proxy, the number of shares
owned by him for as many persons as there are directors to be elected, and for
whose election he has a right to vote, but in no event shall he be permitted to
cumulate his votes for one or more directors.
Section 7. Quorum and Vote of Shareholders. Except as otherwise provided by
law, the Articles of Incorporation of the Company or these Bylaws, the holders
of a majority of shares entitled to vote, represented in person or by proxy,
shall constitute a quorum at a meeting of shareholders, but, if a quorum is not
represented, a majority in interest of those represented may adjourn the meeting
from time to time. Directors shall be elected by a plurality of the votes cast
by the holders of shares entitled to vote in the election of directors at a
meeting of shareholders at which a quorum is present. With respect to each
matter other than the election of directors as to which no other voting
requirement is specified by law, the Articles of Incorporation of the Company or
in this Section 7 or in Article VII of these Bylaws, the affirmative vote of the
holders of a majority of the shares entitled to vote on that matter and
represented in person or by proxy at a meeting at which a quorum is present
shall be the act of the shareholders. With respect to a matter submitted to a
vote of the shareholders as to which a shareholder approval requirement is
applicable under the shareholder approval policy of the New York Stock Exchange,
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (Exchange Act),
or any provision of the Internal Revenue Code, in each case for which no higher
voting requirement is specified by law, the Articles of Incorporation of the
Company or these Bylaws, the affirmative vote of the holders of a majority of
the shares entitled to vote on, and voted for or against, that matter at a
meeting at which a quorum is present shall be the act of the shareholders,
provided that approval of such matter shall also be conditioned on any more
restrictive requirement of such shareholder approval policy, Rule 16b-3 or
Internal Revenue Code provision, as applicable, being satisfied. With respect to
the approval of independent public accountants (if submitted for a vote of the
shareholders), the affirmative vote of the holders of a majority of the shares
entitled to vote on, and voted for or against, that matter at a meeting of
shareholders at which a quorum is present shall be the act of the shareholders.
Section 8. Presiding Officer and Conduct of Meetings. The Chairman of the
Board, if there is one, or in his absence, the Chief Executive Officer, if there
is one, or in his absence, the President shall preside at all meetings of the
shareholders or, if such officers are not present at a meeting, by such other
person as the Board of Directors shall designate or if no such person is
designated by the Board of Directors, the most senior officer of the Company
present at the meeting. The Secretary of the Company, if present, shall act as
secretary of each meeting of shareholders; if he is not present at a meeting,
then such person as may be designated by the presiding officer shall act as
secretary of the meeting. Meetings of shareholders shall follow reasonable and
fair procedure. Subject to the foregoing, the conduct of any meeting of
shareholders and the determination of procedure and rules shall be within the
absolute discretion of the officer presiding at such meeting (Chairman of the
Meeting), and there shall be no appeal from any ruling of the Chairman of the
Meeting with respect to procedure or rules. Accordingly, in any meeting of
shareholders or part thereof, the Chairman of the Meeting shall have the sole
power to determine appropriate rules or to dispense with theretofore prevailing
rules. Without limiting the foregoing, the following rules shall apply:
(a) If disorder should arise which prevents continuation of the
legitimate business of meeting, the Chairman of the Meeting may announce
the adjournment of the meeting; and upon so doing, the meeting shall be
immediately adjourned.
(b) The Chairman of the Meeting may ask or require that anyone not a
bona fide shareholder or proxy leave the meeting.
(c) A resolution or motion proposed by a shareholder shall only be
considered for vote of the shareholders if it meets the criteria of Article
II, Section 9 (Proper Business -- Annual Meeting of Shareholders) or
Article II, Section 10 (Proper Business -- Special Meeting of
Shareholders), as the case may be. The Chairman of the Meeting may propose
any resolution or motion for vote of the shareholders.
(d) The order of business at all meetings of shareholders shall be
determined by the Chairman of the Meeting.
<PAGE> 4
(e) The Chairman of the Meeting may impose any reasonable limits with
respect to participation in the meeting by shareholders, including, but not
limited to, limits on the amount of time taken up by the remarks or
questions of any shareholder, limits on the number of questions per
shareholder and limits as to the subject matter and timing of questions and
remarks by shareholders.
(f) Before any meeting of shareholders, the Board of Directors may
appoint three persons other than nominees for office to act as inspectors
of election at the meeting or its adjournment. If no inspectors of election
are so appointed, the Chairman of the Meeting may, and on the request of
any shareholder or a shareholder's proxy shall, appoint inspectors of
election at the meeting of the shareholders and the number of such
inspectors shall be three. If any person appointed as inspector fails to
appear or fails or refuses to act, the Chairman of the Meeting may, and
upon the request of any shareholder or a shareholder's proxy shall, appoint
a person to fill such vacancy.
The duties of the inspectors shall be to:
(i) determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the existence of
a quorum, and the authenticity, validity and effect of proxies and
ballots;
(ii) receive votes or ballots;
(iii) hear and determine all challenges and questions in any way
arising in connection with the vote;
(iv) count and tabulate all votes;
(v) report to the Board of Directors the results based on the
information assembled by the inspectors; and
(vi) do any other acts that may be proper to conduct the election
or vote with fairness to all shareholders.
Notwithstanding the foregoing, the final certification of the results
of the election or other matter acted upon at a meeting of
shareholders shall be made by the Board of Directors.
All determinations of the Chairman of the Meeting shall be conclusive
unless a matter is determined otherwise upon motion duly adopted by the
affirmative vote of the holders of at least 80% of the voting power of the
shares of capital stock of the Company entitled to vote in the election of
directors held by shareholders present in person or represented by proxy at such
meeting.
Section 9. Proper Business -- Annual Meeting of Shareholders. At any annual
meeting of shareholders, only such business shall be conducted as shall be a
proper subject for the meeting and shall have been properly brought before the
meeting. To be properly brought before an annual meeting of shareholders,
business (other than business relating to (i) any nomination of directors, which
is governed by Article III, Section 3, or (ii) any alteration, amendment or
repeal of the Bylaws or any adoption of new Bylaws, which is governed by Article
VII hereof) must (a) be specified in the notice of such meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise be properly brought before
the meeting by or at the direction of the Chairman of the Meeting or the Board
of Directors (or any duly authorized committee thereof) or (c) otherwise (i) be
properly requested to be brought before the meeting by a shareholder of record
entitled to vote in the election of directors generally, in compliance with the
provisions of this Section 9 and (ii) constitute a proper subject to be brought
before such meeting. For business to be properly brought before an annual
meeting of shareholders, any shareholder who intends to bring any matter (other
than a matter relating to (i) any nomination of directors, which is governed by
Article III, Section 3, or (ii) any alteration, amendment or repeal of the
Bylaws or any adoption of new Bylaws, which is governed by Article VII hereof)
before an annual meeting of shareholders and is entitled to vote on such matter
must deliver written notice of such shareholder's intent to bring such matter
before the annual meeting of shareholders, either by personal delivery or by
United States mail, postage prepaid, to the Secretary of the Company. Such
notice must be received by the Secretary not less than 90 days nor more than 180
<PAGE> 5
days prior to the date on which the immediately preceding year's annual meeting
of shareholders was held. In no event shall the public disclosure of an
adjournment of an annual meeting of shareholders commence a new time period for
the giving of a shareholder's notice as described above.
To be in proper written form, a shareholder's notice to the Secretary shall
set forth as to each matter the shareholder proposes to bring before the annual
meeting of shareholders (a) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (b) the name and address, as they appear on the Company's books and
records, of the shareholder proposing such business, (c) evidence reasonably
satisfactory to the Secretary of the Company, of such shareholder's status as
such and of the number of shares of each class of capital stock of the Company
of which such shareholder is the beneficial owner, (d) a description of all
arrangements or understandings between such shareholder and any other person or
persons (including their names) in connection with the proposal of such business
by such shareholder and any material interest of such shareholder in such
business and (e) a representation that such shareholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting. No business shall be conducted at an annual meeting of shareholders
except in accordance with the procedures set forth in this Section 9. Beneficial
ownership shall be determined in accordance with Rule 13d-3 under the Exchange
Act. When used in these Bylaws, "person" has the meaning ascribed to such term
in Section 2(a)(2) of the Securities Act of 1933, as amended, as the context may
require.
Within thirty days after such shareholder shall have submitted the
aforesaid items, the Secretary or the Board of Directors of the Company shall
determine whether the proposed business has been properly requested to be
brought before the annual meeting of shareholders and shall notify such
shareholder in writing of its determination. If such shareholder fails to submit
a required item in the form or within the time indicated, or if the Secretary or
the Board of Directors of the Company determines that the proposed business
otherwise has not been properly requested, then such proposal by such
shareholder shall not be voted upon by the shareholders of the Company at such
annual meeting of shareholders. The Chairman of the Meeting shall, if the facts
warrant, determine and declare to the meeting that a proposal made by a
shareholder of the Company pursuant to this Section 9 was not made in accordance
with the procedures prescribed by these Bylaws, and if he should so determine,
he shall so declare to the meeting and the defective proposal shall be
disregarded.
Nothing in this Section 9 shall be interpreted or construed to require the
inclusion of information about any such proposal in any proxy statement
distributed by, at the direction of, or on behalf of the Board of Directors or
the Company.
Section 10. Proper Business -- Special Meeting of Shareholders. At any
special meeting of shareholders, only such business shall be conducted as shall
have been stated in the notice of such meeting or shall otherwise have been
properly brought before the meeting by or at the direction of the Chairman of
the Meeting or the Board of Directors (or any duly authorized committee
thereof).
ARTICLE III
DIRECTORS
Section 1. Classification of Board of Directors; Qualifications. (a) The
business and affairs of the Company shall be managed by the Board of Directors.
Each director elected by the holders of Preferred Stock pursuant to Section
6 of Division A of Article VI of the Articles of Incorporation of the Company
(or elected by such directors to fill a vacancy) shall serve for a term ending
upon the earlier of the election of his successor or the termination at any time
of a right of the holders of Preferred Stock to elect members of the Board of
Directors.
At each annual election, the directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed, unless, by
reason of any intervening changes in the authorized number of directors, the
Board of Directors shall designate one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality of number of directors among the classes.
<PAGE> 6
Notwithstanding the rule that the three classes shall be as nearly equal in
number of directors as possible, in the event of any change in the authorized
number of directors, each director then continuing to serve as such shall
nevertheless continue as a director of the class of which he or she is a member
until the expiration of his or her current term, or his or her prior death,
resignation, disqualification or removal. If any newly created directorship may,
consistent with the rule that the three classes shall be as nearly equal in
number of directors as possible, be allocated to any of the three classes, the
Board of Directors shall allocate it to that available class whose term of
office is due to expire at the earliest date following such allocation. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
(b) No person shall be eligible to serve as a director of the Company
subsequent to the annual meeting of shareholders occurring on or after the first
day of the month immediately following the month of such person's seventieth
birthday. Any vacancy on the Board of Directors resulting from any director
being rendered ineligible to serve as a director of the Company by the
immediately preceding sentence shall be filled by the shareholders entitled to
vote thereon at such annual meeting of shareholders. Any director chosen to
succeed a director who is so rendered ineligible to serve as a director of the
Company shall be of the same class as the director he or she succeeds.
No person shall continue to serve as a member of the Board of Directors if
the director ceases for any reason to hold the principal employment or position
he or she held at the time first elected to the Board of Directors and does not
secure a comparable employment or position, as determined in the sole judgment
of the Board of Directors, within one year thereof.
No person who is also an employee of the Company or one of its corporate
affiliates shall continue to serve as a member of the Board of Directors after
his or her retirement, termination or downward change in status in the Company,
as determined in the sole judgment of the Board of Directors.
The Board of Directors may waive any qualification set forth above in this
Section 1(b) if it determines that the director has special skill, experience or
distinction having value to the Company that is not readily available or
transferable. Any such waiver shall be made by a majority of the Board of
Directors, excluding the director whose disqualification is being waived.
No person shall be eligible for election or reelection or to continue to
serve as a member of the Board of Directors who is an officer, director, agent,
representative, partner, employee, or nominee of, or otherwise acting at the
direction of, or acting in concert with, (a) a "public-utility company" (other
than any direct or indirect subsidiary of the Company) as such term is defined
in Section 2(a)(5) of the Public Utility Holding Company Act of 1935, as in
effect on May 1, 1996 (35 Act), or (b) an "affiliate" (as defined in either
Section 2(a)(11) of the 35 Act or in Rule 405 under the Securities Act of 1933,
as amended) of any such "public-utility company" specified in clause (a)
immediately preceding.
Any vacancies on the Board of Directors resulting from the disqualification
of a director by virtue of the above qualifications may be filled as provided in
Section 2 of this Article III.
The above qualifications and limitations notwithstanding, each director
shall serve until his successor shall have been duly elected and qualified,
unless he or she shall resign, become disqualified, disabled or shall otherwise
be removed.
Section 2. Newly Created Directorships and Vacancies. Newly created
directorships resulting from any increase in the number of directors may be
filled by the affirmative vote of a majority of the directors then in office for
a term of office continuing only until the next election of one or more
directors by the shareholders entitled to vote thereon, or may be filled by
election at an annual or special meeting of the shareholders called for that
purpose; provided, however, that the Board of Directors shall not fill more than
two such directorships during the period between two successive annual meetings
of shareholders. Except as provided in Section 1 of this Article III, any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause may be filled by the affirmative vote
of a majority of the remaining directors then in office, even though less than a
quorum of the Board of Directors, or may be filled by election at an annual or
special meeting of the shareholders called for that purpose. Any director
elected to fill any such vacancy shall hold office for the remainder of the full
<PAGE> 7
term of the director whose departure from the Board of Directors created the
vacancy and until such newly elected director's successor shall have been duly
elected and qualified.
Notwithstanding the foregoing paragraph of this Section 2, whenever holders
of outstanding shares of Preference Stock are entitled to elect members of the
Board of Directors pursuant to the provisions of Section 6 of Division A of
Article VI of the Articles of Incorporation of the Company, any vacancy or
vacancies resulting by reason of the death, resignation, disqualification or
removal of any director or directors or any increase in the number of directors
shall be filled in accordance with the provisions of such section.
Section 3. Nomination of Directors. Nominations for the election of
directors may be made by the Board of Directors or by any shareholder
(Nominator) entitled to vote in the election of directors. Such nominations,
other than those made by the Board of Directors, shall be made in writing
pursuant to timely notice delivered to or mailed and received by the Secretary
of the Company as set forth in this Section 3. To be timely in connection with
an annual meeting of shareholders, a Nominator's notice, setting forth the name
and address of the person to be nominated, shall be delivered to or mailed and
received at the principal executive offices of the Company not less than ninety
days nor more than 180 days prior to the date on which the immediately preceding
year's annual meeting of shareholders was held. To be timely in connection with
any election of a director at a special meeting of the shareholders, a
Nominator's notice, setting forth the name of the person to be nominated, shall
be delivered to or mailed and received at the principal executive offices of the
Company not less than forty days nor more than sixty days prior to the date of
such meeting; provided, however, that in the event that less than forty-seven
days' notice or prior public disclosure of the date of the special meeting of
the shareholders is given or made to the shareholders, the Nominator's notice to
be timely must be so received not later than the close of business on the
seventh day following the day on which such notice of date of the meeting was
mailed or such public disclosure was made. At such time, the Nominator shall
also submit written evidence, reasonably satisfactory to the Secretary of the
Company, that the Nominator is a shareholder of the Company and shall identify
in writing (a) the name and address of the Nominator, (b) the number of shares
of each class of capital stock of the Company owned beneficially by the
Nominator, (c) the name and address of each of the persons with whom the
Nominator is acting in concert, (d) the number of shares of capital stock
beneficially owned by each such person with whom the Nominator is acting in
concert, and (e) a description of all arrangements or understandings between the
Nominator and each nominee and any other persons with whom the Nominator is
acting in concert pursuant to which the nomination or nominations are to be
made. At such time, the Nominator shall also submit in writing (i) the
information with respect to each such proposed nominee that would be required to
be provided in a proxy statement prepared in accordance with Regulation 14A
under the Exchange Act and (ii) a notarized affidavit executed by each such
proposed nominee to the effect that, if elected as a member of the Board of
Directors, he will serve and that he is eligible for election as a member of the
Board of Directors. Within thirty days (or such shorter time period that may
exist prior to the date of the meeting) after the Nominator has submitted the
aforesaid items to the Secretary of the Company, the Secretary of the Company
shall determine whether the evidence of the Nominator's status as a shareholder
submitted by the Nominator is reasonably satisfactory and shall notify the
Nominator in writing of his determination. The failure of the Secretary of the
Company to find such evidence reasonably satisfactory, or the failure of the
Nominator to submit the requisite information in the form or within the time
indicated, shall make the person to be nominated ineligible for nomination at
the meeting at which such person is proposed to be nominated. The presiding
person at each meeting of shareholders shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by these Bylaws, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded.
Beneficial ownership shall be determined in accordance with Rule 13d-3 under the
Exchange Act.
Section 4. Place of Meetings and Meetings by Telephone. Meetings of the
Board of Directors may be held either within or without the State of Texas, at
whatever place is specified by the officer calling the meeting. Meetings of the
Board of Directors may also be held by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in such a meeting by means of
conference telephone or similar communications equipment shall constitute
presence in person at such meeting, except where a director participates in a
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened. In the
absence of specific designation by the officer calling the meeting, the meetings
shall be held at the principal office of the Company.
Section 5. Regular Meetings. The Board of Directors shall meet each year
immediately following the annual meeting of the shareholders for the transaction
of such business as may properly be brought before the
<PAGE> 8
meeting. The Board of Directors shall also meet regularly at such other times as
shall be designated by the Board of Directors. No notice of any kind to either
existing or newly elected members of the Board of Directors for such annual or
regular meetings shall be necessary.
Section 6. Special Meetings. Special meetings of the Board of Directors may
be held at any time upon the call of the Chairman of the Board, if there is one,
the Chief Executive Officer, if there is one, the President or the Secretary of
the Company or a majority of the directors then in office. Notice shall be sent
by mail, facsimile or telegram to the last known address of the director at
least two days before the meeting, or oral notice may be substituted for such
written notice if received not later than the day preceding such meeting. Notice
of the time, place and purpose of such meeting may be waived in writing before
or after such meeting, and shall be equivalent to the giving of notice.
Attendance of a director at such meeting shall also constitute a waiver of
notice thereof, except where he attends for the express purpose of objecting to
the transaction of any business on the ground that the meeting is not lawfully
called or convened. Except as otherwise provided by these Bylaws, neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Board of Directors need be specified in the notice or waiver of notice of
such meeting.
Section 7. Quorum and Voting. Except as otherwise provided by law, the
Articles of Incorporation of the Company or these Bylaws, a majority of the
number of directors fixed in the manner provided in these Bylaws as from time to
time amended shall constitute a quorum for the transaction of business. Except
as otherwise provided by law, the Articles of Incorporation of the Company or
these Bylaws, the affirmative vote of a majority of the directors present at any
meeting at which there is a quorum shall be the act of the Board of Directors.
Any regular or special directors' meeting may be adjourned from time to time by
those present, whether a quorum is present or not.
Section 8. Compensation. Directors shall receive such compensation for
their services as shall be determined by the Board of Directors.
Section 9. Removal. No director of the Company shall be removed from his
office as a director by vote or other action of the shareholders or otherwise
except (a) with cause, as defined below, by the affirmative vote of the holders
of at least a majority of the voting power of all outstanding shares of capital
stock of the Company entitled to vote in the election of directors, voting
together as a single class, or (b) without cause by (i) the affirmative vote of
at least 80% of all directors then in office at any regular or special meeting
of the Board of Directors called for that purpose or (ii) the affirmative vote
of the holders of at least 80% of the voting power of all outstanding shares of
capital stock of the Company entitled to vote in the election of directors,
voting together as a single class.
Except as may otherwise be provided by law, cause for removal of a director
shall be construed to exist only if: (a) the director whose removal is proposed
has been convicted, or where a director is granted immunity to testify where
another has been convicted, of a felony by a court of competent jurisdiction and
such conviction is no longer subject to direct appeal; (b) such director has
been found by the affirmative vote of at least 80% of all directors then in
office at any regular or special meeting of the Board of Directors called for
that purpose or by a court of competent jurisdiction to have been negligent or
guilty of misconduct in the performance of his duties to the Company in a matter
of substantial importance to the Company; or (c) such director has been
adjudicated by a court of competent jurisdiction to be mentally incompetent,
which mental incompetency directly affects his ability as a director of the
Company.
Notwithstanding the first paragraph of this Section 9, whenever holders of
outstanding shares of Preference Stock are entitled to elect members of the
Board of Directors pursuant to the provisions of Section 6 of Division A of
Article VI of the Articles of Incorporation of the Company, any director of the
Company may be removed in accordance with the provisions of such section.
No proposal by a shareholder to remove a director of the Company,
regardless of whether such director was elected by holders of outstanding shares
of Preference Stock (or elected by such directors to fill a vacancy), shall be
voted upon at a meeting of the shareholders unless such shareholder shall have
delivered or mailed in a timely manner (as set forth in this Section 9) and in
writing to the Secretary of the Company (a) notice of such proposal, (b) a
statement of the grounds, if any, on which such director is proposed to be
removed, (c) evidence, reasonably satisfactory to the Secretary of the Company,
of such shareholder's status as such and of the number of shares of each class
of the capital stock of the Company beneficially owned by such shareholder, (d)
a list of the names and
<PAGE> 9
addresses of other beneficial owners of shares of the capital stock of the
Company, if any, with whom such shareholder is acting in concert, and of the
number of shares of each class of the capital stock of the Company beneficially
owned by each such beneficial owner, and (e) an opinion of counsel, which
counsel and the form and substance of which opinion shall be reasonably
satisfactory to the Board of Directors of the Company (excluding the director
proposed to be removed), to the effect that, if adopted at a duly called special
or annual meeting of the shareholders of the Company by the required vote as set
forth in the first paragraph of this Section 9, such removal would not be in
conflict with the laws of the State of Texas, the Articles of Incorporation of
the Company or these Bylaws. To be timely in connection with an annual meeting
of shareholders, a shareholder's notice and other aforesaid items shall be
delivered to or mailed and received at the principal executive offices of the
Company not less than ninety nor more than 180 days prior to the date on which
the immediately preceding year's annual meeting of shareholders was held. To be
timely in connection with the removal of any director at a special meeting of
the shareholders, a shareholder's notice and other aforesaid items shall be
delivered to or mailed and received at the principal executive offices of the
Company not less than forty days nor more than sixty days prior to the date of
such meeting; provided, however, that in the event that less than forty-seven
days' notice or prior public disclosure of the date of the special meeting of
shareholders is given or made to the shareholders, the shareholder's notice and
other aforesaid items to be timely must be so received not later than the close
of business on the seventh day following the day on which such notice of date of
the meeting was mailed or such public disclosure was made. Within thirty days
(or such shorter period that may exist prior to the date of the meeting) after
such shareholder shall have delivered the aforesaid items to the Secretary of
the Company, the Secretary and the Board of Directors of the Company shall
respectively determine whether the items to be ruled upon by them are reasonably
satisfactory and shall notify such shareholder in writing of their respective
determinations. If such shareholder fails to submit a required item in the form
or within the time indicated, or if the Secretary or the Board of Directors of
the Company determines that the items to be ruled upon by them are not
reasonably satisfactory, then such proposal by such shareholder may not be voted
upon by the shareholders of the Company at such meeting of shareholders. The
presiding person at each meeting of shareholders shall, if the facts warrant,
determine and declare to the meeting that a proposal to remove a director of the
Company was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare to the meeting and
the defective proposal shall be disregarded. Beneficial ownership shall be
determined as specified in accordance with Rule 13d-3 under the Exchange Act.
Section 10. Executive and Other Committees. The Board of Directors, by
resolution or resolutions adopted by a majority of the full Board of Directors,
may designate one or more members of the Board of Directors to constitute an
Executive Committee, and one or more other committees, which shall in each case
be comprised of such number of directors as the Board of Directors may determine
from time to time. Subject to such restrictions as may be contained in the
Company's Articles of Incorporation or that may be imposed by the TBCA, any such
committee shall have and may exercise such powers and authority of the Board of
Directors in the management of the business and affairs of the Company as the
Board of Directors may determine by resolution and specify in the respective
resolutions appointing them, or as permitted by applicable law, including,
without limitation, the power and authority to (a) authorize a distribution, (b)
authorize the issuance of shares of the Company and (c) exercise the authority
of the Board of Directors vested in it pursuant to Article 2.13 of the TBCA or
such successor statute as may be in effect from time to time. Each
duly-authorized action taken with respect to a given matter by any such
duly-appointed committee of the Board of Directors shall have the same force and
effect as the action of the full Board of Directors and shall constitute for all
purposes the action of the full Board of Directors with respect to such matter.
The designation of any such committee and the delegation thereto of
authority shall not operate to relieve the Board of Directors, or any member
thereof, of any responsibility imposed upon it or him by law, nor shall such
committee function where action of the Board of Directors cannot be delegated to
a committee thereof under applicable law. The Board of Directors shall have the
power at any time to change the membership of any such committee and to fill
vacancies in it. A majority of the members of any such committee shall
constitute a quorum. The Board of Directors shall name a chairman at the time it
designates members to a committee. Each such committee shall appoint such
subcommittees and assistants as it may deem necessary. Except as otherwise
provided by the Board of Directors, meetings of any committee shall be conducted
in accordance with the provisions of Sections 4 and 6 of this Article III as the
same shall from time to time be amended. Any member of any such committee
elected or appointed by the Board of Directors may be removed by the Board of
Directors whenever in its judgment the best interests of the Company will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of a member of
a committee shall not of itself create contract rights.
<PAGE> 10
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Company shall consist of a
President and a Secretary and such other officers and agents as the Board of
Directors may from time to time elect or appoint. The Board of Directors may
delegate to the Chairman of the Board and/or the Chief Executive Officer the
authority to appoint additional officers and agents of the Company. Each officer
shall hold office until his successor shall have been duly elected or appointed
and shall qualify or until his death or until he shall resign or shall have been
removed in the manner hereinafter provided. Any two or more offices may be held
by the same person. Except for the Chairman of the Board, if any, no officer
need be a director.
Section 2. Vacancies; Removal. Whenever any vacancies shall occur in any
office by death, resignation, increase in the number of offices of the Company,
or otherwise, the officer so elected shall hold office until his successor is
chosen and qualified. The Board of Directors may at any time remove any officer
of the Company, whenever in its judgment the best interests of the Company will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights.
Section 3. Powers and Duties of Officers. The officers of the Company shall
have such powers and duties as generally pertain to their offices as well as
such powers and duties as from time to time shall be conferred by the Board of
Directors.
ARTICLE V
INDEMNIFICATION
Section 1. General. The Company shall indemnify and hold harmless the
Indemnitee (as this and all other capitalized words are defined in this Article
or in Article 2.02-1 of the TBCA), to the fullest extent permitted, or not
prohibited, by the TBCA or other applicable law as the same exists or may
hereafter be amended (but in the case of any such amendment, with respect to
Matters occurring before such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than said law
permitted the Company to provide prior to such amendment). The provisions set
forth below in this Article are provided as means of furtherance and
implementation of, and not in limitation on, the obligation expressed in this
Section 1.
Section 2. Advancement or Reimbursement of Expenses. The rights of the
Indemnitee provided under Section 1 of this Article shall include, but not be
limited to, the right to be indemnified and to have Expenses advanced (including
the payment of expenses before final disposition of a Proceeding) in all
Proceedings to the fullest extent permitted, or not prohibited, by the TBCA or
other applicable law. If the Indemnitee is not wholly successful, on the merits
or otherwise, in a Proceeding, but is successful, on the merits or otherwise, as
to any Matter in such Proceeding, the Company shall indemnify the Indemnitee
against all Expenses actually and reasonably incurred by him or on his behalf
relating to each Matter. The termination of any Matter in a Proceeding by
dismissal, with or without prejudice, shall be deemed to be a successful result
as to such Matter. In addition, to the extent the Indemnitee is, by reason of
his Corporate Status, a witness or otherwise participates in any Proceeding at a
time when he is not named a defendant or respondent in the Proceeding, he shall
be indemnified against all Expenses actually and reasonably incurred by him or
on his behalf in connection therewith. The Indemnitee shall be advanced
Expenses, within ten days after any request for such advancement, to the fullest
extent permitted, or not prohibited, by Article 2.02-1 of the TBCA; provided
that the Indemnitee has provided to the Company all affirmations,
acknowledgments, representations and undertakings that may be required of the
Indemnitee by Article 2.02-1 of the TBCA.
Section 3. Determination of Request. Upon written request to the Company by
an Indemnitee for indemnification pursuant to these Bylaws, a determination, if
required by applicable law, with respect to an Indemnitee's entitlement thereto
shall be made in accordance with Article 2.02-1 of the TBCA; provided, however,
<PAGE> 11
that notwithstanding the foregoing, if a Change in Control shall have occurred,
such determination shall be made by Special Legal Counsel selected by the
Indemnitee, unless the Indemnitee shall request that such determination be made
in accordance with Article 2.02-1F (1) or (2). The Company shall pay any and all
reasonable fees and expenses of Special Legal Counsel incurred in connection
with any such determination. If a Change in Control shall have occurred, the
Indemnitee shall be presumed (except as otherwise expressly provided in this
Article) to be entitled to indemnification under this Article upon submission of
a request to the Company for indemnification, and thereafter the Company shall
have the burden of proof in overcoming that presumption in reaching a
determination contrary to that presumption. The presumption shall be used by
Special Legal Counsel, or such other person or persons determining entitlement
to indemnification, as a basis for a determination of entitlement to
indemnification unless the Company provides information sufficient to overcome
such presumption by clear and convincing evidence or the investigation, review
and analysis of Special Legal Counsel or such other person or persons convinces
him or them by clear and convincing evidence that the presumption should not
apply.
Section 4. Effect of Certain Proceedings. The termination of any Proceeding
or of any Matter therein, by judgment, order, settlement or conviction, or upon
a plea of nolo contendere or its equivalent, shall not (except as otherwise
expressly provided in this Article) of itself adversely affect the right of the
Indemnitee to indemnification or create a presumption that (a) the Indemnitee
did not conduct himself in good faith and in a manner which he reasonably
believed, in the case of conduct in his official capacity as a director of the
Company, to be in the best interests of the Company, or, in all other cases,
that at least his conduct was not opposed to the Company's best interests, or
(b) with respect to any criminal Proceeding, that the Indemnitee had reasonable
cause to believe that his conduct was unlawful.
Section 5. Expenses of Enforcement of Article. In the event that an
Indemnitee, pursuant to this Article, seeks a judicial adjudication to enforce
his rights under, or to recover damages for breach of, rights created under or
pursuant to this Article, the Indemnitee shall be entitled to recover from the
Company, and shall be indemnified by the Company against, any and all Expenses
actually and reasonably incurred by him in such judicial adjudication but only
if he prevails therein. If it shall be determined in said judicial adjudication
that the Indemnitee is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by
Indemnitee in connection with such judicial adjudication shall be reasonably
prorated in good faith by counsel for the Indemnitee. Notwithstanding the
foregoing, if a Change in Control shall have occurred, Indemnitee shall be
entitled to indemnification under this Section regardless of whether indemnitee
ultimately prevails in such judicial adjudication.
Section 6. Nonexclusive Rights. The rights of indemnification and to
receive advancement of Expenses as provided by this Article shall not be deemed
exclusive of any other rights to which the Indemnitee may at any time be
entitled under applicable law, the Articles of Incorporation of the Company,
these Bylaws, agreement, insurance, arrangement, a vote of shareholders or a
resolution of directors, or otherwise. No amendment, alteration or repeal of
this Article or any provision thereof shall be effective as to any Indemnitee
for acts, events and circumstances that occurred, in whole or in part, before
such amendment, alteration or repeal. The provisions of this Article shall
continue as to an Indemnitee whose Corporate Status has ceased and shall inure
to the benefit of his heirs, executors and administrators.
Section 7. Invalidity. If any provision or provisions of this Article shall
be held to be invalid, illegal or unenforceable for any reason whatsoever, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby; and, to the fullest extent possible,
the provisions of this Article shall be construed so as to give effect to the
intent manifested by the provision held invalid, illegal or unenforceable.
Section 8. Definitions. For purposes of this Article:
"Change of Control" means a change in control of the Company occurring
after the date of adoption of these Bylaws in any of the following
circumstances: (a) there shall have occurred an event required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated
under the Exchange Act, whether or not the Company is then subject to such
reporting requirement; (b) any "person" (as such term is used in Section
13(d) and 14(d) of the Exchange Act), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company
or a corporation or other entity owned directly or indirectly by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the
<PAGE> 12
Company, shall have become the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing 30% or more of the combined voting power of the
Company's then outstanding voting securities without prior approval of at
least two-thirds of the members of the Board of Directors in office
immediately prior to such person attaining such percentage interest; (c)
the Company is a party to a merger, consolidation, share exchange, sale of
assets or other reorganization, or a proxy contest, as a consequence of
which members of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board of
Directors thereafter; (d) during any fifteen month period, individuals who
at the beginning of such period constituted the Board of Directors
(including for this purpose any new director whose election or nomination
for election by the Company's shareholders was approved by a vote of at
least two-thirds of the directors then still in office who were directors
at the beginning of such period) cease for any reason to constitute at
least a majority of the Board of Directors.
"Corporate Status" means the status of a person who is or was a
director, officer, partner, venturer, proprietor, trustee, employee
(including an employee acting in his Designated Professional Capacity), or
agent or similar functionary of the Company or of any other foreign or
domestic corporation, partnership, joint venture, sole proprietorship,
trust, employee benefit plan or other enterprise which such person is or
was serving in such capacity at the request of the Company. The Company
hereby acknowledges that unless and until the Company provides the
Indemnitee with written notice to the contrary, the Indemnitee's service as
a director, officer, partner, venturer, proprietor, trustee, employee,
agent or similar functionary of an Affiliate of the Company shall be
conclusively presumed to be at the Company's request. An Affiliate of the
Company shall be deemed to be (a) any foreign or domestic corporation in
which the Company owns or controls, directly or indirectly, 5% or more of
the shares entitled to be voted in the election of directors of such
corporation; (b) any foreign or domestic partnership, joint venture,
proprietorship or other enterprise in which the Company owns or controls,
directly or indirectly, 5% or more of the revenue interests in such
partnership, joint venture, proprietorship or other enterprise; or (c) any
trust or employee benefit plan the beneficiaries of which include the
Company, any Affiliate of the Company as defined in the foregoing clauses
(a) and (b) or any of the directors, officers, partners, venturers,
proprietors, employees, agents or similar functionaries of the Company or
of such Affiliates of the Company.
"Expenses" shall include all reasonable attorneys' fees, retainers,
court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of
the types customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, or being or preparing to
be a witness in a Proceeding.
"Indemnitee" includes any person who is, or is threatened to be made,
a witness in or a party to any Proceeding as described in Section 1 or 2 of
this Article by reason of his Corporate Status.
"Matter" is a claim, a material issue, or a substantial request for
relief.
"Proceeding" includes any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution proceeding, investigation,
administrative hearing and any other proceeding, whether civil, criminal,
administrative, investigative or other, any appeal in such action, suit,
arbitration, proceeding or hearing, or any inquiry or investigation,
whether conducted by or on behalf of the Company, a subsidiary of the
Company or any other party, formal or informal, that the Indemnitee in good
faith believes might lead to the institution of any such action, suit,
arbitration, proceeding, investigation or hearing, except one initiated by
an Indemnitee pursuant to Section 5 of this Article.
"Special Legal Counsel" means a law firm, or member of a law firm,
that is experienced in matters of corporation law and neither presently is,
nor in the five years previous to his selection or appointment has been,
retained to represent: (a) the Company or the Indemnitee in any matter
material to either such party; (b) any other party to the Proceeding giving
rise to a claim for indemnification hereunder; or (c) the beneficial owner,
directly or indirectly, of securities of the Company representing 30% or
more of the combined voting power of the Company's then outstanding voting
securities. Notwithstanding the foregoing, the term "Special Legal Counsel"
shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either
<PAGE> 13
the Company or the Indemnitee in an action to determine the Indemnitee's
rights to indemnification under these Bylaws.
For the purposes of this Article, an employee acting in his
"Designated Professional Capacity" shall include, but not be limited to, a
physician, nurse, psychologist or therapist, registered surveyor,
registered engineer, registered architect, attorney, certified public
accountant or other person who renders such professional services within
the course and scope of his employment, who is licensed by appropriate
regulatory authorities to practice such profession and who, while acting in
the course of such employment, committed or is alleged to have committed
any negligent acts, errors or omissions in rendering such professional
services at the request of the Company or pursuant to his employment
(including, without limitation, rendering written or oral opinions to third
parties).
Section 9. Notice. Any communication required or permitted to the Company
under this Article shall be addressed to the Secretary of the Company and any
such communication to the Indemnitee shall be addressed to his home address
unless he specifies otherwise and shall be personally delivered or delivered by
overnight mail or courier delivery.
Section 10. Insurance and Self-Insurance Arrangements. The Company may
procure or maintain insurance or other similar arrangements, at its expense, to
protect itself and any Indemnitee against any expense, liability or loss
asserted against or incurred by such person, incurred by him in such a capacity
or arising out of his Corporate Status as such a person, whether or not the
Company would have the power to indemnify such person against such expense or
liability. In considering the cost and availability of such insurance, the
Company (through the exercise of the business judgment of its directors and
officers) may, from time to time, purchase insurance which provides for any and
all of (a) deductibles, (b) limits on payments required to be made by the
insurer, or (c) coverage which may not be as comprehensive as that previously
included in insurance purchased by the Company. The purchase of insurance with
deductibles, limits on payments and coverage exclusions will be deemed to be in
the best interest of the Company but may not be in the best interest of certain
of the persons covered thereby. As to the Company, purchasing insurance with
deductibles, limits on payments, and coverage exclusions is similar to the
Company's practice of self-insurance in other areas. In order to protect the
Indemnitees who would otherwise be more fully or entirely covered under such
policies, the Company shall indemnify and hold each of them harmless as provided
in Section 1 or 2 of this Article, without regard to whether the Company would
otherwise be entitled to indemnify such officer or director under the other
provisions of this Article, or under any law, agreement, vote of shareholders or
directors or other arrangement, to the extent (i) of such deductibles, (ii) of
amounts exceeding payments required to be made by an insurer or (iii) that prior
policies of officer's and director's liability insurance held by the Company or
its predecessors would have provided for payment to such officer or director.
Notwithstanding the foregoing provision of this Section, no Indemnitee shall be
entitled to indemnification for the results of such person's conduct that is
intentionally adverse to the interests of the Company. This Section is
authorized by Section 2.02-1(R) of the TBCA as in effect on May 1, 1996, and
further is intended to establish an arrangement of self-insurance pursuant to
that section.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 1. Offices. The principal office of the Company shall be located in
Houston, Texas, unless and until changed by resolution of the Board of
Directors. The Company may also have offices at such other places as the Board
of Directors may designate from time to time, or as the business of the Company
may require. The principal office and registered office may be, but need not be,
the same.
Section 2. Resignations. Any director or officer may resign at any time.
Such resignations shall be made in writing and shall take effect at the time
specified therein, or, if no time be specified, at the time of its receipt by
the Chairman of the Board, if there is one, the Chief Executive Officer, if
there is one, the President or the Secretary. The acceptance of a resignation
shall not be necessary to make it effective, unless expressly so provided in the
resignation.
<PAGE> 14
Section 3. Seal. The Corporate Seal shall be circular in form, shall have
inscribed thereon the name of the Company and may be used by causing it or a
facsimile thereof to be impressed or affixed or otherwise reproduced.
Section 4. Separability. If one or more of the provisions of these Bylaws
shall be held to be invalid, illegal or unenforceable, such invalidity,
illegality or unenforceability shall not affect any other provision hereof and
these Bylaws shall be construed as if such invalid, illegal or unenforceable
provision or provisions had never been contained herein.
ARTICLE VII
AMENDMENT OF BYLAWS
Section 1. Vote Requirements. The Board of Directors shall have the power
to alter, amend or repeal the Bylaws or adopt new Bylaws by the affirmative vote
of at least 80% of all directors then in office at any regular or special
meeting of the Board of Directors, subject to repeal or change by the
affirmative vote of the holders of at least 80% of the voting power of all the
shares of the Company entitled to vote in the election of directors, voting
together as a single class.
Section 2. Shareholder Proposals. No proposal by a shareholder made
pursuant to Section 1 of this Article VII may be voted upon at an annual meeting
of shareholders unless such shareholder shall have delivered or mailed in a
timely manner (as set forth in this Section 2) and in writing to the Secretary
of the Company (a) notice of such proposal and the text of the proposed
alteration, amendment or repeal, (b) evidence reasonably satisfactory to the
Secretary of the Company, of such shareholder's status as such and of the number
of shares of each class of capital stock of the Company of which such
shareholder is the beneficial owner, (c) a list of the names and addresses of
other beneficial owners of shares of the capital stock of the Company, if any,
with whom such shareholder is acting in concert, and the number of shares of
each class of capital stock of the Company beneficially owned by each such
beneficial owner and (d) an opinion of counsel, which counsel and the form and
substance of which opinion shall be reasonably satisfactory to the Board of
Directors of the Company, to the effect that the Bylaws (if any) resulting from
the adoption of such proposal would not be in conflict with the Articles of
Incorporation of the Company or the laws of the State of Texas. To be timely in
connection with an annual meeting of shareholders, a shareholder's notice and
other aforesaid items shall be delivered to or mailed and received at the
principal executive offices of the Company not less than ninety nor more than
180 days prior to the date on which the immediately preceding year's annual
meeting of shareholders was held. In no event shall the public disclosure of an
adjournment of an annual meeting of shareholders commence a new time period for
the giving of a shareholder's notice as described above.
Within thirty days after such shareholder shall have submitted the
aforesaid items, the Secretary or the Board of Directors of the Company shall
determine whether the items to be ruled upon by them are reasonably satisfactory
and shall notify such shareholder in writing of its determination. If such
shareholder fails to submit a required item in the form or within the time
indicated, or if the Secretary or the Board of Directors of the Company
determines that the items to be ruled upon by them are not reasonably
satisfactory, then such proposal by such shareholder may not be voted upon by
the shareholders of the Company at such annual meeting of shareholders. The
Chairman of the Meeting shall, if the facts warrant, determine and declare to
the meeting that a proposal by a shareholder of the Company made pursuant to
Section 1 of this Article VII was not made in accordance with the procedures
prescribed by these Bylaws, and if he should so determine, he shall so declare
to the meeting and the defective proposal shall be disregarded. Beneficial
ownership shall be determined in accordance with Rule 13d-3 under the Exchange
Act.
Nothing in this Section 2 shall be interpreted or construed to require the
inclusion of information about any such proposal in any proxy statement
distributed by, at the direction of, or on behalf of the Board of Directors or
the Company.
No proposal by a shareholder made pursuant to Section 1 of this Article VII
shall be voted upon at a special meeting of shareholders unless such proposal
has been stated in the notice of such special meeting or shall otherwise have
been properly brought before the meeting by or at the direction of the Chairman
of the Meeting or the Board of Directors (or any duly authorized committee
thereof).
<PAGE> 1
EXHIBIT 4
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
This AMENDMENT NO. 1 TO RIGHTS AGREEMENT, dated as of May 8,
2000 (this "Amendment"), between Reliant Energy, Incorporated (formerly Houston
Industries Incorporated), a Texas corporation (the "Company"), and Chase Bank of
Texas, National Association (formerly Texas Commerce Bank National Association)
(the "Rights Agent"),
W I T N E S S E T H:
WHEREAS, on May 7, 1999, the Company changed its name from
Houston Industries Incorporated to Reliant Energy, Incorporated;
WHEREAS, in January 1998, the Rights Agent changed its name
from Texas Commerce Bank National Association to Chase Bank of Texas, National
Association;
WHEREAS, the Company and the Rights Agent are parties to a
Rights Agreement, as amended and restated as of August 6, 1997 (the "Rights
Agreement");
WHEREAS, pursuant to Section 27 of the Rights Agreement, the
Company may, and the Rights Agent shall, if the Company so directs, amend the
Rights Agreement; and
WHEREAS, the Company desires to amend the Rights Agreement as
set forth below;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereby agree as follows:
Section 1. Definition of Final Expiration Date. The definition
of "Final Expiration Date" in Section 1 of the Rights Agreement is amended to
read in its entirety as follows:
"Final Expiration Date" shall mean the close of
business on July 11, 2010.
Section 2. Severability. If any term, provision, covenant or
restriction of this Amendment is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Amendment shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 3. Governing Law. This Amendment shall be deemed to be
a contract made under the laws of the State of Texas and for all purposes shall
be governed by and construed in accordance with the laws of such State
applicable to contracts made and to be performed entirely within such State.
Section 4. Counterparts. This Amendment may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
<PAGE> 2
Section 5. Descriptive Headings. Descriptive headings of the
several Sections of this Amendment are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
Section 6. Confirmation of Rights Agreement. Except to the
extent specifically amended hereby, the provisions of the Rights Agreement shall
remain unmodified, and the Rights Agreement as amended hereby is confirmed as
being in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed all as of the day and year first above written.
RELIANT ENERGY, INCORPORATED
By: /s/ Hugh Rice Kelly
---------------------------------------
Name: Hugh Rice Kelly
Title: Executive Vice President,
General Counsel and Corporate
Secretary
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
as Rights Agent
By: /s/ Dierdre T. Green
---------------------------------------
Name: Dierdre T. Green
Title: Trust Officer
-2-
<PAGE> 1
EXHIBIT 12
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE TWELVE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
2000 2000
----------- -----------
<S> <C> <C>
Income from continuing operations ............................... $ 133,153 $ 2,008,576
Income taxes for continuing operations .......................... 55,936 1,011,596
Capitalized interest ............................................ (8,035) (25,267)
----------- -----------
181,054 2,994,905
----------- -----------
Fixed charges, as defined:
Interest ..................................................... 162,985 548,196
Capitalized interest ......................................... 8,035 25,267
Distribution on trust preferred securities ................... 13,892 55,321
Interest component of rentals charged to operating expense ... 3,123 13,472
----------- -----------
Total fixed charges .......................................... 188,035 642,256
----------- -----------
Earnings, as defined ............................................ $ 369,089 $ 3,637,161
=========== ===========
Ratio of earnings to fixed charges .............................. 1.96 5.66
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000048732
<NAME> RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 9,201,354
<OTHER-PROPERTY-AND-INVEST> 5,253,399
<TOTAL-CURRENT-ASSETS> 7,769,218
<TOTAL-DEFERRED-CHARGES> 5,836,598
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 28,060,569
<COMMON> 2,901,235
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 2,439,369
<TOTAL-COMMON-STOCKHOLDERS-EQ> 5,340,604
705,373
9,740
<LONG-TERM-DEBT-NET> 5,502,253
<SHORT-TERM-NOTES> 1,798,351
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 1,611,252
<LONG-TERM-DEBT-CURRENT-PORT> 5,787,588
0
<CAPITAL-LEASE-OBLIGATIONS> 12,495
<LEASES-CURRENT> 640
<OTHER-ITEMS-CAPITAL-AND-LIAB> 7,292,273
<TOT-CAPITALIZATION-AND-LIAB> 28,060,569
<GROSS-OPERATING-REVENUE> 4,234,103
<INCOME-TAX-EXPENSE> 55,936
<OTHER-OPERATING-EXPENSES> 3,888,008
<TOTAL-OPERATING-EXPENSES> 3,888,008
<OPERATING-INCOME-LOSS> 346,095
<OTHER-INCOME-NET> 5,979
<INCOME-BEFORE-INTEREST-EXPEN> 352,074
<TOTAL-INTEREST-EXPENSE> 162,985
<NET-INCOME> 133,153
97
<EARNINGS-AVAILABLE-FOR-COMM> 133,056
<COMMON-STOCK-DIVIDENDS> 105,479
<TOTAL-INTEREST-ON-BONDS> 138,796<F1>
<CASH-FLOW-OPERATIONS> 449,952
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.47
<FN>
<F1>Total annual interest charges on all bonds is as of year-to-date 03/31/00.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
RELIANT ENERGY INCORPORATED
Items Incorporated by Reference
ITEMS INCORPORATED BY REFERENCE FROM THE RELIANT ENERGY FORM 10-K:
o ITEM 3. LEGAL PROCEEDINGS
(a) Reliant Energy.
For a description of certain legal and regulatory proceedings affecting
the Company, see Notes 3, 4, 14(h) and 14(i) to the Company's Consolidated
Financial Statements, which notes are incorporated herein by reference.
o 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
Earnings for the past three years are not necessarily indicative of
future earnings and results. The level of future earnings depends on numerous
factors including (i) state and federal legislative or regulatory developments,
(ii) national or regional economic conditions, (iii) industrial, commercial and
residential growth in service territories of the Company, (iv) the timing and
extent of changes in commodity prices and interest rates, (v) weather variations
and other natural phenomena, (vi) growth in opportunities for the Company's
diversified operations, (vii) the results of financing efforts, (viii) the
ability to consummate and timing of consummation of pending acquisitions and
dispositions, (ix) the speed, degree and effect of continued electric industry
restructuring in North America and Western Europe, and (x) risks incidental to
the Company's overseas operations, including the effects of fluctuations in
foreign currency exchange rates.
In order to adapt to the increasingly competitive environment, the
Company continues to evaluate a wide array of potential business strategies,
including business combinations or acquisitions involving other utility or
non-utility businesses or properties, internal restructuring, reorganizations or
dispositions of currently owned businesses and new products, services and
customer strategies.
COMPETITION AND RESTRUCTURING OF THE TEXAS ELECTRIC UTILITY INDUSTRY
The electric utility industry is becoming increasingly competitive due
to changing government regulations, technological developments and the
availability of alternative energy sources.
Texas Electric Choice Plan. In June 1999, the Texas legislature adopted
legislation that substantially amends the regulatory structure governing
electric utilities in Texas in order to allow retail competition beginning with
respect to pilot projects for up to 5% of each utility's load in all customer
classes in June 2001 and for all other customers on January 1, 2002. In
preparation for that competition, the Company expects to make significant
changes in the electric utility operations it conducts through Reliant Energy
HL&P. Under the Legislation, on January 1, 2002, most retail customers of
investor-owned electric utilities in Texas will be entitled to purchase their
electricity from any of a number of "retail electric providers" which will
have been certified by the Texas Utility Commission. Power generators will sell
electric energy to wholesale purchasers, including retail electric providers, at
unregulated rates beginning January 1, 2002. For further information regarding
the Legislation, see Note 3 to the Company's Consolidated Financial Statements.
Stranded Costs. Pursuant to the Legislation, Reliant Energy HL&P will be
entitled to recover its stranded costs (i.e., the excess of net book value of
generation assets, as defined by the Legislation, over the market value of those
assets) and its regulatory assets related to generation. The Legislation
prescribes specific methods for determining the amount of stranded costs and the
details for their recovery. However, during the base rate freeze period from
1999 through 2001, earnings above the utility's authorized return formula will
be applied in a manner to accelerate depreciation of generation related plant
assets for regulatory purposes. In addition, depreciation expense for
transmission and
-1-
<PAGE> 2
distribution related assets may be redirected to generation assets for
regulatory purposes during that period. The Legislation also provides for
Reliant Energy HL&P, or a special purpose entity, to issue securitization bonds
for the recovery of generation related regulatory assets and stranded costs. Any
stranded costs not recovered through the securitization bonds will be recovered
through a non-bypassable charge to transmission and distribution customers.
Accounting. At June 30, 1999, the Company performed an impairment test
of its previously regulated electric generation assets pursuant to SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", on a plant specific basis. The Company determined that $797
million of electric generation assets were impaired as of June 30, 1999. Of such
amounts, $745 million relate to the South Texas Project and $52 million relate
to two gas-fired generation plants. The Legislation provides recovery of this
impairment through regulated cash flows during the transition period and
through non-bypassable charges to transmission and distribution customers. As
such, a regulatory asset has been recorded for an amount equal to the
impairment loss and is included on the Company's Consolidated Balance Sheets as
a regulatory asset.
The impairment analysis requires estimates of possible future market
prices, load growth, competition and many other factors over the lives of the
plants. The resulting impairment loss is highly dependent on these underlying
assumptions. In addition, after January 10, 2004, Reliant Energy HL&P must
finalize and reconcile stranded costs (as defined by the Legislation) in a
filing with the Texas Utility Commission. Any difference between the fair market
value and the regulatory net book value of the generation assets (as defined by
the Legislation) will either be refunded or collected through future
transmission and distribution rates. This final reconciliation allows
alternative methods of third party valuation of the fair market value of these
assets, including outright sale, stock valuations and asset exchanges. Because
generally accepted accounting principles require the Company to estimate fair
market values on a plant-by-plant basis in advance of the final reconciliation,
the financial impacts of the Legislation with respect to stranded costs are
subject to material changes. Factors affecting such change may include
estimation risk, uncertainty of future energy prices and the economic lives of
the plants. If events occur that make the recovery of all or a portion of the
regulatory assets associated with the generation plant impairment loss and
deferred debits created from discontinuance of SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation" pursuant to the Legislation no longer
probable, the Company will write off the corresponding balance of such assets as
a non-cash charge against earnings.
In the fourth quarter of 1999, Reliant Energy HL&P filed an application
to securitize its generation related regulatory assets as defined by the
Legislation. The Texas Utility Commission, Reliant Energy HL&P and other
interested parties have been discussing proposed methodologies for calculating
the amount of such assets to be securitized. The parties have reached an
agreement in principle as to the amount to be securitized, which reflects the
economic value of the nominal book amount which prior to the deregulation
legislation would have been collected through rates over a much longer time
period. The Company has determined that a pre-tax accounting loss of $282
million exists. Therefore, the Company recorded an after-tax extraordinary loss
of $183 million for this accounting impairment of these regulatory assets in
1999.
Transmission System Open Access. In February 1996, the Texas Utility
Commission adopted rules granting third-party users of transmission systems open
access to such systems at rates, terms and conditions comparable to those
available to utilities owning such transmission assets. Under the Texas Utility
Commission order implementing the rule, Reliant Energy HL&P was required to
separate, on an operational basis, its wholesale power marketing operations from
the operations of the transmission grid and, for purposes of transmission
pricing, to disclose each of its separate costs of generation, transmission and
distribution. Within ERCOT, an independent system operator (ISO) manages the
state's electric grid, ensuring system reliability and providing
non-discriminatory transmission access to all power producers and traders.
Transition Plan. In June 1998, the Texas Utility Commission approved the
Transition Plan filed by Reliant Energy HL&P in December 1997. Certain parties
have appealed the order approving the Transition Plan. The provisions of the
Transition Plan expired by their own terms as of December 31, 1999. For
additional information, see Note 4 to the Company's Consolidated Financial
Statements.
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COMPETITION -- RELIANT ENERGY EUROPE OPERATIONS
The European energy market is highly competitive. In addition, over the
next several years, an increasing consolidation of the participants in the Dutch
generating market is expected to occur.
Reliant Energy Europe competes in the Netherlands primarily against the
three other largest Dutch generating companies, various cogenerators of electric
power, various alternate sources of power and non-Dutch generators of electric
power, primarily from Germany. At present, the Dutch electricity system has
three operational interconnection points with Germany and two interconnection
points with Belgium. There are also a number of projects that are at various
stages of development and that may increase the number of interconnections in
the future including interconnections with Norway and the United Kingdom. The
Belgian interconnections are used to import electricity from France but a larger
portion of Dutch imports comes from Germany. In 1998, net power imports into the
Netherlands were approximately 11.7 terawatt hours. Based on current
information, it is estimated that net power imports into the Netherlands in 1999
increased significantly from 1998.
In 1999, UNA and the three other largest Dutch generators supplied
approximately 60% of the electricity consumed in the Netherlands. Smaller Dutch
producers supplied about 28% and the remainder was imported. The Dutch
electricity market is expected to be gradually opened for wholesale competition
including certain commercial and industrial customers beginning in 2001.
Competition is expected to increase in subsequent years and it is anticipated
that the market for small businesses and residential customers will become open
to competition by 2007. The timing of the opening of these markets is subject,
however, to change at the discretion of the Minister of Economic Affairs.
The trading and marketing operations of Reliant Energy Europe will also be
subject to increasing levels of competition. As of March 1, 2000, there were
approximately 25 trading and marketing companies registered with the Amsterdam
Power Exchange. Competition for marketing customers is intense and is expected
to increase with the deregulation of the market. The primary elements of
competition in both the generation and trading and marketing side of Reliant
Energy Europe's business operations are price, credit-support and supply and
delivery reliability.
COMPETITION -- OTHER OPERATIONS
Wholesale Energy. By the third quarter of 2000, Reliant Energy expects that
the Company will own and operate over 8,000 MW of non-rate regulated electric
generation assets that serve the wholesale energy markets located in the states
of California and Florida, and the Southwest, Midwest and Mid-Atlantic regions
of the United States. Competitive factors affecting the results of operations of
these generation assets include: new market entrants, construction by others of
more efficient generation assets, the actions of regulatory authorities and
weather.
Other competitors operate power generation projects in most of the regions
where the Company has invested in non-rate regulated generation assets. Although
local permitting and siting issues often reduce the risk of a rapid growth in
supply of generation capacity in any particular region, over time, projects are
likely to be built which will increase competition and lower the value of some
of the Company's non-rate regulated electric generation assets.
The regulatory environment of the wholesale energy markets in which the
Company invests may adversely affect the competitive conditions of those
markets. In several regions, notably California and in the PJM Power Pool Region
(in the Mid-Atlantic region of the United States), the independent system
operators have chosen to rely on price caps and market redesigns as a way of
minimizing market volatility.
The results of operations of the Company's non-rate regulated generation
assets are also affected by the weather conditions in the relevant wholesale
energy markets. Extreme seasonal weather conditions typically increase the
demand for wholesale energy. Conversely, mild weather conditions typically have
the opposite effect. In some regions, especially California, weather conditions
associated with hydroelectric generation resources such as rainfall and snowpack
can significantly influence market prices for electric power by increasing or
decreasing the availability and timing of hydro-based generation which is
imported into the California market.
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Competition for acquisition of international and domestic non-rate
regulated power projects is intense. The Company competes against a number of
other participants in the non-utility power generation industry, some of which
have greater financial resources and have been engaged in non-utility power
projects for periods longer than the Company and have accumulated larger
portfolios of projects. Competitive factors relevant to the non-utility power
industry include financial resources, access to non-recourse funding and
regulatory factors.
Reliant Energy Services competes for sales in its natural gas, electric
power and other energy derivatives trading and marketing business with other
energy merchants, producers and pipelines based on its ability to aggregate
supplies at competitive prices from different sources and locations and to
efficiently utilize transportation from third-party pipelines and transmission
from electric utilities. Reliant Energy Services also competes against other
energy marketers on the basis of its relative financial position and access to
credit sources. This competitive factor reflects the tendency of energy
customers, wholesale energy suppliers and transporters to seek financial
guarantees and other assurances that their energy contracts will be satisfied.
As pricing information becomes increasingly available in the energy trading and
marketing business and as deregulation in the electricity markets continues to
accelerate, the Company anticipates that Reliant Energy Services will experience
greater competition and downward pressure on per-unit profit margins in the
energy marketing industry.
Natural Gas Distribution. Natural Gas Distribution competes primarily with
alternate energy sources such as electricity and other fuel sources. In
addition, as a result of federal regulatory changes affecting interstate
pipelines, it has become possible for other natural gas suppliers and
distributors to bypass Natural Gas Distribution's facilities and market, sell
and/or transport natural gas directly to small commercial and/or large volume
customers.
Interstate Pipelines. The Interstate Pipelines segment competes with other
interstate and intrastate pipelines in the transportation and storage of natural
gas. The principal elements of competition among pipelines are rates, terms of
service, and flexibility and reliability of service. Interstate Pipelines
competes indirectly with other forms of energy available to its customers,
including electricity, coal and fuel oils. The primary competitive factor is
price. Changes in the availability of energy and pipeline capacity, the level of
business activity, conservation and governmental regulations, the capability to
convert to alternative fuels, and other factors, including weather, affect the
demand for natural gas in areas served by Interstate Pipelines and the level of
competition for transport and storage services.
FLUCTUATIONS IN COMMODITY PRICES AND DERIVATIVE INSTRUMENTS
For information regarding the Company's exposure to risk as a result of
fluctuations in commodity prices and derivative instruments, see "Quantitative
and Qualitative Disclosures About Market Risk" in Item 7A of this Report.
INDEXED DEBT SECURITIES (ACES AND ZENS) AND TIME WARNER INVESTMENT
For information on Reliant Energy's indexed debt securities and its
investment in TW Common, see "Quantitative and Qualitative Disclosures About
Market Risk" in Item 7A of this Report and Note 8 to the Company's Consolidated
Financial Statements.
IMPACT OF THE YEAR 2000 ISSUE AND OTHER SYSTEM IMPLEMENTATION ISSUES
In 1997, the Company initiated a corporate-wide Year 2000 project to
address mainframe application systems, information technology (IT) related
equipment, system software, client-developed applications, building controls and
non-IT embedded systems such as process controls for energy production and
delivery. The evaluation of Year 2000 issues included those related to
significant customers, key vendors, service suppliers and other parties material
to the Company's operations.
Remediation and testing of all systems and equipment were completed during
1999. The Company did not experience any Year 2000 problems that significantly
affected the operations of the Company. The Company will
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continue to monitor and assess potential future problems. Total direct costs of
resolving the Year 2000 issue with respect to the Company were $29 million.
The Company is in the process of implementing SAP America, Inc.'s (SAP)
proprietary R/3 enterprise software. Although the implementation of the SAP
system had the incidental effect of negating the need to modify many of the
Company's computer systems to accommodate the Year 2000 problem, the Company
does not deem the costs of the SAP system as directly related to its Year 2000
compliance program. Portions of the SAP system were implemented in December
1998, March 1999 and September 1999, and it is expected that the final portion
of the SAP system will be fully implemented by the fourth quarter of 2002. The
cost of implementing the SAP system is currently estimated to be approximately
$237 million, inclusive of internal costs. As of December 31, 1999, $192 million
has been spent on the implementation.
ENTRY INTO THE EUROPEAN MARKET
Reliant Energy Europe owns, operates and sells power from generation
facilities in the Netherlands and plans to participate in the emerging wholesale
energy trading and marketing industry in the Netherlands and other countries in
Europe. Reliant Energy expects that the Dutch electric industry will undergo
change in response to market deregulation in 2001. These expected changes
include the anticipated expiration of certain transition agreements which have
governed the basic tariff rates that UNA and other generators have charged their
customers. Based on current forecasts and other assumptions, the revenues of
UNA could decline significantly from 1999 revenues after 2000.
One of the factors that could have a significant impact on the Dutch energy
industry, including the operations of UNA, is the ultimate resolution of
stranded cost issues in the Netherlands. The Dutch government is currently
seeking to establish a transitional regime in order to solve the problem of
stranded costs, which relate primarily to investments and contracts entered into
by SEP and certain licensed generators prior to the liberalization of the
market. SEP is owned in equal shares by each of the four large Dutch generating
companies, including UNA.
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 $639 million based on an exchange rate of 2.19
NLG per U.S. dollar as of December 31, 1999), which may be increased in certain
circumstances at the option of the Company up to NLG 1.9 billion (approximately
$868 million). Of the total consideration paid by the Company for the shares of
UNA, NLG 900 million (approximately $411 million) has been placed by the selling
shareholders in an escrow account to secure the indemnity obligations. Although
Reliant Energy 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 existing shareholders timely performance of
their obligations under the indemnity arrangement, and the amount of stranded
costs which at present is not determinable.
The Dutch government is expected to propose a legislative initiative
regarding stranded costs to the Dutch cabinet in March 2000. The proposed
legislation will be sent to the Dutch council of state for review. It is not
anticipated that the legislation will be reviewed by parliament until late in
the summer of 2000.
For information about the Company's exposure through its investment in
Reliant Energy Europe to losses resulting from fluctuations in currency rates,
see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of
this Form 10-K.
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RISK OF OPERATIONS IN EMERGING MARKETS
Reliant Energy Latin America's operations are subject to various risks
incidental to investing or operating in emerging market countries. These risks
include political risks, such as governmental instability, and economic risks,
such as fluctuations in currency exchange rates, restrictions on the
repatriation of foreign earnings and/or restrictions on the conversion of local
currency earnings into U.S. dollars. The Company's Latin American operations are
also highly capital intensive and, thus, dependent to a significant extent on
the continued availability of bank financing and other sources of capital on
commercially acceptable terms.
Impact of Currency Fluctuations on Company Earnings. The Company owns
11.78% of the stock of Light Servicos de Eletricidade S.A. (Light) and, through
its investment in Light, a 9.2% interest in the stock of Metropolitana
Electricidade de Sao Paulo S.A. (Metropolitana). As of December 31, 1999 and
1998, Light and Metropolitana had total borrowings of $2.9 billion and $3.2
billion, respectively, denominated in non-local currencies. During the first
quarter of 1999, the Brazilian real was devalued and allowed to float against
other major currencies. The effects of devaluation on the non-local currency
denominated borrowings caused the Company to record an after-tax charge for the
year ended December 31, 1999 of $102 million as a result of foreign currency
transaction losses recorded by both Light and Metropolitana in such periods. For
additional information regarding the effect of the devaluation of the Brazilian
real, see Note 7(a) in the Company's Consolidated Financial Statements.
Light's and Metropolitana's tariff adjustment mechanisms are not directly
indexed to the U.S. dollar or other non-local currencies. To partially offset
the devaluation of the Brazilian real, and the resulting increased operating
costs and inflation, Light and Metropolitana received tariff rate increases of
16% and 21%, respectively, which were phased in during June and July 1999. Light
also received its annual rate adjustment in November 1999 resulting in a tariff
rate increase of 11%. The Company is pursuing additional tariff increases to
mitigate the impact of the devaluation; however, there can be no assurance that
such adjustments will be timely or that they will permit substantial recovery of
the impact of the devaluation.
Certain of Reliant Energy Latin America's other foreign electric
distribution companies have incurred U.S. dollar and other non-local currency
indebtedness (approximately $600 million at December 31, 1999). For further
analysis of foreign currency fluctuations in the Company's earnings and cash
flows, see "Quantitative and Qualitative Disclosures About Market Risk --
Foreign Currency Exchange Rate Risk" in Item 7A of this Form 10-K.
Impact of Foreign Currency Devaluation on Projected Capital Resources. The
ability of Light and Metropolitana to repay or refinance their debt obligations
at maturity is dependent on many factors, including local and international
economic conditions prevailing at the time such debt matures. If economic
conditions in the international markets continue to be unsettled or deteriorate,
it is possible that Light, Metropolitana and the other foreign electric
distribution companies in which the Company holds investments might encounter
difficulties in refinancing their debt (both local currency and non-local
currency borrowings) on terms and conditions that are commercially acceptable to
them and their shareholders. In such circumstances, in lieu of declaring a
default or extending the maturity, it is possible that lenders might seek to
require, among other things, higher borrowing rates, and additional equity
contributions and/or increased levels of credit support from the shareholders of
such entities. For a discussion of the Company's anticipated capital
contributions in 2000, see "-- Liquidity and Capital Resources -- Future Sources
and Uses of Cash Flows -- Reliant Energy Latin America Capital Contributions and
Advances." In 2000, $1.6 billion of debt obligations of Light and Metropolitana
will mature. The availability or terms of refinancing such debt cannot be
assured. Currency fluctuation and instability affecting Latin America may also
adversely affect the Company's ability to refinance its equity investments with
debt.
ENVIRONMENTAL EXPENDITURES
The Company is subject to numerous environmental laws and regulations,
which require it to incur substantial costs to operate existing facilities,
construct and operate new facilities, and mitigate or remove the effect of past
operations on the environment.
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Clean Air Act Expenditures. The Company expects the majority of capital
expenditures associated with environmental matters to be incurred by Electric
Operations in connection with new emission limitations under the Federal Clean
Air Act (Clean Air Act) for oxides of nitrogen (NOx). NOx reduction costs
incurred by Electric Operations generating units in the Houston, Texas area
totaled approximately $7 million in 1999 and $7 million in 1998. The Texas
Natural Resources Conservation Commission (TNRCC) is currently considering
additional NOx reduction requirements for electric generating units and other
industrial sources located in the Houston metropolitan area and the eastern half
of Texas as a means to attain the Clean Air Act standard for ozone. Although the
magnitude and timing of these requirements will not be established by the TNRCC
until November, 2000, NOx reductions approaching 90% of the emissions level are
anticipated. Expenditures for NOx controls on Electric Operations' generating
units have been estimated at $500 million to $600 million during the period 2000
through 2003, with an estimated $80 million to be incurred during 2000. In
addition, the Legislation created a program mandating air emissions reductions
for certain generating facilities of Electric Operations. The Legislation
provides for stranded cost recovery for costs associated with this obligation
incurred before May 1, 2003. For further information regarding the Legislation,
see Note 3 to the Company's Consolidated Financial Statements.
Site Remediation Expenditures. From time to time the Company has received
notices from regulatory authorities or others regarding its status as a
potentially responsible party in connection with sites found to require
remediation due to the presence of environmental contaminants. Based on
currently available information, Reliant Energy believes that remediation costs
will not materially affect its financial position, results of operations or cash
flows. There can be no assurance, however, that future developments, including
additional information about existing sites or the identification of new sites,
will not require material revisions to Reliant Energy's estimates. For
information about specific sites that are the subject of remediation claims,
see Note 14(h) to the Company's Consolidated Financial Statements and Note 8(d)
to Resources' Consolidated Financial Statements.
Mercury Contamination. Like other natural gas pipelines, the Company's
pipeline operations have in the past employed elemental mercury in meters used
on its pipelines. Although the mercury has now been removed from the meters, it
is possible that small amounts of mercury have been spilled at some of those
sites in the course of normal maintenance and replacement operations and that
such spills have contaminated the immediate area around the meters with
elemental mercury. Such contamination has been found by Resources at some sites
in the past, and the Company has conducted remediation at sites found to be
contaminated. Although the Company 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 experience of the Company and others in the natural
gas industry to date and on the current regulations regarding remediation of
such sites, the Company believes that the cost of any remediation of such sites
will not be material to the Company's or Resources' financial position, results
of operations or cash flows.
Other. In addition, the Company has been named as a 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 like those received may be
asserted in the future and intends to continue its practice of vigorously
contesting claims which 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.
OTHER CONTINGENCIES
For a description of certain other legal and regulatory proceedings
affecting the Company, see Notes 3, 4 and 14 to the Company's Consolidated
Financial Statements and Note 8 to Resources' Consolidated Financial Statements.
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o Item 7.A QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company has long-term debt, Company obligated mandatorily
redeemable preferred securities of subsidiary trusts holding solely junior
subordinated debentures of the Company (Trust Preferred Securities), securities
held in the Company's nuclear decommissioning trust, bank facilities, certain
lease obligations and interest rate swaps which subject the Company to the risk
of loss associated with movements in market interest rates.
At December 31, 1999, the Company had issued fixed-rate debt (excluding
indexed debt securities) and Trust Preferred Securities aggregating $5.8 billion
in principal amount and having a fair value of $5.6 billion. These instruments
are fixed-rate and, therefore, do not expose the Company to the risk of loss in
earnings due to changes in market interest rates (see Notes 10 and 11 to the
Company's Consolidated Financial Statements). However, the fair value of these
instruments would increase by approximately $305 million if interest rates were
to decline by 10% from their levels at December 31, 1999. In general, such an
increase in fair value would impact earnings and cash flows only if the Company
were to reacquire all or a portion of these instruments in the open market prior
to their maturity.
The Company's floating-rate obligations aggregated $3.1 billion at
December 31, 1999 (see Note 10 to the Company's Consolidated Financial
Statements), inclusive of (i) amounts borrowed under short-term and long-term
credit facilities of the Company (including the issuance of commercial paper
supported by such facilities), (ii) borrowings underlying a receivables facility
and (iii) amounts subject to a master leasing agreement under which lease
payments vary depending on short-term interest rates. These floating-rate
obligations expose the Company to the risk of increased interest and lease
expense in the event of increases in short-term interest rates. If the floating
rates were to increase by 10% from December 31, 1999 levels, the Company's
consolidated interest expense and expense under operating leases would increase
by a total of approximately $1.6 million each month in which such increase
continued.
As discussed in Notes 1(l) and 6(c) to the Company's Consolidated
Financial Statements, the Company contributes $14.8 million per year to a trust
established to fund the Company's share of the decommissioning costs for the
South Texas Project. The securities held by the trust for decommissioning costs
had an estimated fair value of $145 million as of December 31, 1999, of which
approximately 40% were fixed-rate debt securities that subject the Company to
risk of loss of fair value with movements in market interest rates. If interest
rates were to increase by 10% from their levels at December 31, 1999, the
decrease in fair value of the fixed-rate debt securities would not be material
to the Company. In addition, the risk of an economic loss is mitigated. Any
unrealized gains or losses are accounted for in accordance with SFAS No. 71 as a
regulatory asset/liability because the Company believes that its future
contributions which are currently recovered through the rate-making process will
be adjusted for these gains and losses. For further discussion regarding the
recovery of decommissioning costs pursuant to the Legislation, see Note 3 to the
Consolidated Financial Statements.
As discussed in Note 1(l) to the Company's Consolidated Financial
Statements, UNA holds fixed-rate debt securities, which had an estimated fair
value of $133 million as of December 31, 1999, that subject the Company to risk
of loss of fair value and earnings with movements in market interest rates. If
interest rates were to increase by 10% from their levels at December 31, 1999,
the decrease in fair value and loss in earnings from this investment would not
be material to the Company.
The Company has entered into interest rate swaps for the purpose of
decreasing the amount of debt subject to interest rate fluctuations. At
December 31, 1999, these interest rate swaps had an aggregate notional amount of
$64 million and the cost to terminate would not result in a material loss in
earnings and cash flows to the Company (see Note 5 to the Company's Consolidated
Financial Statements). An increase of 10% in the December 31, 1999 level of
interest rates would not increase the cost of termination of the swaps by a
material amount to the Company. Swap termination costs would impact the
Company's earnings and cash flows only if all or a portion of the swap
instruments were terminated prior to their expiration.
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As discussed in Note 10(b) to the Company's Consolidated Financial
Statements, in November 1998, Resources sold $500 million aggregate principal
amount of its 6 3/8% TERM Notes which included an embedded option to remarket
the securities. The option is expected to be exercised in the event that the
ten-year Treasury rate in 2003 is below 5.66%. At December 31, 1999, the Company
could terminate the option at a cost of $11 million. A decrease of 10% in the
December 31, 1999 level of interest rates would increase the cost of
termination of the option by approximately $5 million.
EQUITY MARKET RISK
As discussed in Note 8 to the Company's Consolidated Financial
Statements, the Company owns approximately 55 million shares of TW Common, of
which approximately 38 million and 17 million shares are held by the Company to
facilitate its ability to meet its obligations under the ACES and ZENS,
respectively. Unrealized gains and losses resulting from changes in the market
value of the Company's TW Common are recorded in the Consolidated Statement of
Operations. IncreaseS in the market value of TW Common result in an increase in
the liability for the ZENS and ACES and are recorded as a non-cash expense. Such
non-cash expense will be offset by an unrealized gain on the Company's TW Common
investment. However, if the market value of TW Common declines below $58.25, the
ZENS payment obligation will not decline below its original principal amount. As
of December 31, 1999, the market value of TW Common was $72.31 per share. A
decrease of 10% from the December 31, 1999 market value of TW Common would not
result in a loss. As of March 1, 2000, the market value of TW Common was $84.38
per share. In addition, the Company has a $14 million investment in Cisco
Systems, Inc. as of December 31, 1999, which is classified as trading under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). In January 2000, the Company entered into financial instruments
(a put option and a call option) to manage price risks related to the Company's
investment in Cisco Systems, Inc. A decline in the market value of this
investment would not materially impact the Company's earnings and cash flows.
The Company also has a $9 million investment in Itron, Inc. (Itron) which is
classified as "available for sale" under SFAS No. 115. The Itron investment
exposes the Company to losses in the fair value of Itron common stock. A 10%
decline in the market value per share of Itron common stock from the December
31, 1999 levels would not result in a material loss in fair value to the
Company.
As discussed above under "-- Interest Rate Risk," the Company
contributes to a trust established to fund the Company's share of the
decommissioning costs for the South Texas Project which held debt and equity
securities as of December 31, 1999. The equity securities expose the Company to
losses in fair value. If the market prices of the individual equity securities
were to decrease by 10% from their levels at December 31, 1999, the resulting
loss in fair value of these securities would, not be material to the Company.
Currently, the risk of an economic loss is mitigated as discussed above under
"--Interest Rate Risk."
FOREIGN CURRENCY EXCHANGE RATE RISK
As further described in "Certain Factors Affecting Future Earnings of
the Company -- Risks of Operations in Emerging Markets" in Item 7 of this Form
10-K, the Company has investments in electric generation and distribution
facilities in Latin America with a substantial portion accounted for under the
equity method. In addition, as further discussed in Note 2 of the Company's
Consolidated Financial Statements, during the fourth quarter of 1999, the
Company completed the first and second phases of the acquisition of 52% of the
shares UNA, a Dutch power generation company and completed the final phase of
the acquisition on March 1, 2000. These foreign operations expose the Company to
risk of loss in earnings and cash flows due to the fluctuation in foreign
currencies relative to the Company's consolidated reporting currency, the U.S.
dollar. The Company accounts for adjustments resulting from translation of its
investments with functional currencies other than the U.S. dollar as a charge or
credit directly to a separate component of stockholders' equity. The Company has
entered into foreign currency swaps and has issued Euro denominated debt to
hedge its net investment in UNA. Changes in the value of the swap and debt are
recorded as foreign currency translation adjustments as a component of
stockholders' equity. For further discussion of the accounting for foreign
currency adjustments, see Note 1(m) in the Company's Consolidated Financial
Statements. The cumulative translation loss of $77 million, recorded as of
December 31, 1999, will be realized as a loss in earnings and cash flows only
upon the disposition of the related investments. The cumulative translation loss
was $34 million as of
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December 31, 1998. The increase in cumulative translation loss from December 31,
1998 to December 31, 1999, was primarily due to the impact of devaluation of the
Brazilian real on the Company's investments in Light and Metropolitana.
In addition, certain of Reliant Energy Latin America's foreign
operations have entered into obligations in currencies other than their own
functional currencies which expose the Company to a loss in earnings. In such
cases, as the respective investment's functional currency devalues relative to
the non-local currencies, the Company will record its proportionate share of its
investments' foreign currency transaction losses related to the non-local
currency denominated debt. At December 31, 1999, Light and Metropolitana of
which the Company owns 11.78% and 9.2%, respectively, had total borrowings of
approximately $2.9 billion denominated in non-local currencies. As described in
Note 7 to the Company's Consolidated Financial Statements, in 1999 the Company
reported a $102 million (after-tax) charge to net income and a $43 million
charge to other comprehensive income, due to the devaluation of the Brazilian
real. The charge to net income reflects increases in the liabilities at Light
and Metropolitana for their non-local currency denominated borrowings using the
exchange rate in effect at December 31, 1999 and a monthly weighted average
exchange rate for the year then ended. The charge to other comprehensive income
reflects the translation effect on the local currency denominated net assets
underlying the Company's investment in Light. As of December 31, 1999, the
Brazilian real exchange rate was 1.79 per U.S. dollar. An increase of 10% from
the December 31, 1999 exchange rate would result in the Company recording an
additional charge of $20 million and $23 million to net income and other
comprehensive income, respectively. As of March 1, 2000, the Brazilian real
exchange rate was 1.77 per U.S. dollar.
The Company attempts to manage and mitigate this foreign currency risk
by balancing the cost of financing with local denominated debt against the risk
of devaluation of that local currency and including a measure of the risk of
devaluation in its financial plans. In addition, where possible, Reliant Energy
Latin America attempts to structure its tariffs and revenue contracts to
ensure some measure of adjustment due to changes in inflation and currency
exchange rates; however, there can be no assurance that such efforts will
compensate for the full effect of currency devaluation, if any.
ENERGY COMMODITY PRICE RISK
As further described in Note 5 to the Company's Consolidated Financial
Statements, the Company utilizes a variety of derivative financial instruments
(Derivatives), including swaps, over-the-counter options and exchange-traded
futures and options, as part of the Company's overall hedging strategies and
for trading purposes. To reduce the risk from the adverse effect of market
fluctuations in the price of electric power, natural gas, crude oil and refined
Products and related transportation and transmission, the Company enters into
futures transactions, forward contracts, swaps and options (Energy Derivatives)
in order to hedge certain commodities in storage, as well as certain expected
purchases, sales, transportation and transmission of energy commodities (a
portion of which are firm commitments at the inception of the hedge). The
Company's policies prohibit the use of leveraged financial instruments. In
addition, Reliant Energy Services maintains a portfolio of Energy Derivatives to
provide price risk management services and for trading purposes (Trading
Derivatives).
The Company uses value-at-risk and a sensitivity analysis method for
assessing the market risk of its derivatives.
With respect to the Energy Derivatives (other than Trading Derivatives)
held by the Company as of December 31, 1999, an increase of 10% in the market
prices of natural gas and electric power from year-end levels would have
decreased the fair value of these instruments by approximately $12 million. As
of December 31, 1998, a decrease of 10% in the market prices of natural gas and
electric power from year-end levels would have decreased the fair value of these
instruments by approximately $3 million.
The above analysis of the Energy Derivatives utilized for hedging
purposes does not include the favorable impact that the same hypothetical price
movement would have on the Company's physical purchases and sales of natural gas
and electric power to which the hedges relate. Furthermore, the Energy
Derivative portfolio is managed to complement the physical transaction
portfolio, reducing overall risks within limits. Therefore, the adverse impact
to the fair value
-10-
<PAGE> 11
of the portfolio of Energy Derivatives held for hedging purposes associated with
the hypothetical changes in commodity prices referenced above would be offset by
a favorable impact on the underlying hedged physical transactions, assuming (i)
the Energy Derivatives are not closed out in advance of their expected term,
(ii) the Energy Derivatives continue to function effectively as hedges of the
underlying risk and (iii) as applicable, anticipated transactions occur as
expected.
The disclosure with respect to the Energy Derivatives relies on the
assumption that the contracts will exist parallel to the underlying physical
transactions. If the underlying transactions or positions are liquidated prior
to the maturity of the Energy Derivatives, a loss on the financial instruments
may occur, or the options might be worthless as determined by the prevailing
market value on their termination or maturity date, whichever comes first.
With respect to the Trading Derivatives held by Reliant Energy Services,
consisting of natural gas, electric power, crude oil and refined products,
weather derivatives, physical forwards, swaps, options and exchange-traded
futures and options, the Company is exposed to losses in fair value due to
changes in the price and volatility of the underlying derivatives. During the
years ended December 31, 1999 and 1998, the highest, lowest and average monthly
value-at-risk in the Trading Derivative portfolio was less than $10 million at a
95% confidence level and for a holding period of one business day. The Company
uses the variance/covariance method for calculating the value-at-risk and
includes delta approximation for option positions.
The Company has established a Risk Oversight Committee comprised of
corporate and business segment officers that oversees all commodity price and
credit risk activities, including derivative trading and hedging activities
discussed above. The committee's duties are to establish the Company's commodity
risk policies, allocate risk capital within limits established by the Company's
board of directors, approve trading of new products and commodities, monitor
risk positions and ensure compliance with the Company's risk management policies
and procedures and the trading limits established by the Company's board of
directors.
-11-
<PAGE> 12
ITEMS INCORPORATED BY REFERENCE FROM THE RELIANT ENERGY 10-K NOTES:
o (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(d) Regulatory Assets.
The Company applies the accounting policies established in SFAS No. 71 to
the accounts of transmission and distribution operations of Reliant Energy HL&P
and Natural Gas Distribution and to certain of the accounts of Interstate
Pipelines. For information regarding Reliant Energy HL&P's electric generation
operations' discontinuance of the application of SFAS No. 71 and the effect on
its regulatory assets, see Note 3.
The following is a list of regulatory assets/liabilities reflected on the
Company's Consolidated Balance Sheet as of December 31, 1999, detailed by
Electric Operations and other segments.
<TABLE>
<CAPTION>
ELECTRIC TOTAL
OPERATIONS OTHER COMPANY
------------ ------------ ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Recoverable impaired plant costs -- net ................................... $ 587 $ $ 587
Recoverable electric generation related regulatory assets -- net .......... 952 952
Regulatory tax liability -- net ........................................... (45) (45)
Unamortized loss on reacquired debt ....................................... 69 69
Other deferred debits/credits ............................................. (18) 4 (14)
------------ ------------ ------------
Total ................................................................ $ 1,545 $ 4 $ 1,549
============ ============ ============
</TABLE>
Included in the above table is $191 million of regulatory liabilities
recorded as other deferred credits in the Company's Consolidated Balance Sheet
as of December 31, 1999, which primarily relates to the over recovery of
Electric Operations' fuel costs, gains on nuclear decommissioning trust funds,
regulatory tax liabilities and excess deferred income taxes.
Under a "deferred accounting" plan authorized by the Public Utility
Commission of Texas (Texas Utility Commission), Electric Operations was
permitted for regulatory purposes to accrue carrying costs in the form of
allowance for funds used during construction (AFUDC) on its investment in the
South Texas Project Electric Generating Station (South Texas Project) and to
defer and capitalize depreciation and other operating costs on its investment
after commercial operation until such costs were reflected in rates. In
addition, the Texas Utility Commission authorized Electric Operations under a
"qualified phase-in plan" to capitalize allowable costs (including return)
deferred for future recovery as deferred charges. These costs are included in
recoverable electric generation related regulatory assets.
In 1991, Electric Operations ceased all cost deferrals related to the South
Texas Project and began amortizing such amounts on a straight-line basis. Prior
to January 1, 1999, the accumulated deferrals for "deferred accounting" were
being amortized over the estimated depreciable life of the South Texas Project.
Starting in 1991, the accumulated deferrals for the "qualified phase-in plan"
were amortized over a ten-year phase-in period. The amortization of all deferred
plant costs (which totaled $26 million for each of the years 1998 and 1997) is
included on the Company's Statements of Consolidated Income as depreciation and
amortization expense. Pursuant to the Legislation (see Note 3), the Company
discontinued amortizing deferred plant costs effective January 1, 1999.
In 1999, 1998 and 1997, the Company, as permitted by the 1995 rate case
settlement (Rate Case Settlement), also amortized $22 million, $4 million and
$66 million (pre-tax), respectively, of its investment in certain lignite
reserves associated with a canceled generating station. The remaining investment
in these reserves of $14 million is included in the above table as a component
of recoverable electric generation related regulatory assets and will be
amortized fully by December 31, 2001.
For additional information regarding recoverable impaired plant costs and
recoverable electric generation related assets, see Note 3.
If, as a result of changes in regulation or competition, the Company's
ability to recover these assets and liabilities would not be assured, then
pursuant to SFAS No. 101, "Regulated Enterprises Accounting for the
Discontinuation of Application of SFAS No. 71" (SFAS No. 101) and SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS No. 121), the Company would be required to write off or
write down such regulatory assets and liabilities, unless some form of
transition costs recovery continues through rates established and collected
for their remaining regulated operations. In addition, the Company would be
required to determine any impairment to the carrying costs of plant and
inventory assets.
-12-
<PAGE> 13
(m) Foreign Currency Adjustments.
Foreign subsidiaries' assets and liabilities where the local currency is
the functional currency have been translated into U.S. dollars using the
exchange rate at the balance sheet date. Revenues, expenses, gains and losses
have been translated using the weighted average exchange rate for each month
prevailing during the periods reported. Cumulative adjustments resulting from
translation have been recorded in stockholders' equity in other comprehensive
income. However, fluctuations in foreign currency exchange rates relative to the
U.S. dollar can have an impact on the reported equity earnings of the Company's
foreign investments. For additional information about the Company's investments
in Brazil and the devaluation of the Brazilian real in 1999, see Note 7.
When the U.S. dollar is the functional currency, the financial statements
of such foreign subsidiaries are remeasured in U.S. dollars using historical
exchange rates for non-monetary accounts and the current rate at the respective
balance sheet date and the weighted average exchange rate for all other balance
sheet and income statement accounts, respectively. All exchange gains and losses
from remeasurement and foreign currency transactions are included in
consolidated net income.
(2) BUSINESS ACQUISITIONS
During 1999, the Company completed the first two phases of the acquisition
of UNA, a Dutch power generation company. The Company acquired 40% and 12% of
UNA's capital stock on October 7, 1999 and December 1, 1999, respectively. The
aggregate purchase price paid by the Company in connection with the first two
phases consisted of a total of $833 million in cash and $426 million in a
five-year promissory note to UNA. Under the terms of the acquisition agreement,
the Company purchased the remaining shares of UNA on March 1, 2000 for
approximately $975 million. The commitment for this purchase was recorded as a
business purchase obligation in the Consolidated Balance Sheet as of December
31, 1999 based on an exchange rate of 2.19 Dutch guilders (NLG) per U.S. dollar
(the exchange rate on December 31, 1999). A portion ($596 million) of the
business purchase obligation was recorded as a non-current liability as this
portion of the obligation was financed with a three-year term loan facility (see
Note 19). Effective October 1, 1999, the Company has recorded 100% of the
operating results of UNA. The total purchase price, payable in NLG, of
approximately $2.4 billion includes the $426 million promissory note to UNA and
assumes an exchange rate of 2.0565 NLG per U.S. dollar (the exchange rate on
October 7, 1999). The Company recorded the acquisition under the purchase method
of accounting with assets and liabilities of UNA reflected at their estimated
fair values. The excess of the purchase price over the fair value of net assets
acquired of approximately $840 million was recorded as goodwill and is being
amortized over 35 years. On a preliminary basis, the Company's fair value
adjustments included increases in property, plant and equipment, long-term debt,
and related deferred taxes. The Company expects to finalize these fair value
adjustments during 2000; however, it is not anticipated that any additional
adjustments will be material.
In August 1997 , the former parent corporation (Former Parent) of the
Company, merged with and into Reliant Energy, and NorAm Energy Corp., a natural
gas gathering, transmission, marketing and distribution company (Former NorAm),
merged with and into Resources Corp. Effective upon the mergers (collectively,
the Merger), each outstanding share of common stock of Former Parent was
converted into one share of common stock (including associated preference stock
purchase rights) of the Company, and each outstanding share of common stock of
Former NorAm was converted into the right to receive $16.3051 cash or 0.74963
shares of common stock of the Company. The aggregate consideration paid to
Former NorAm stockholders in connection with the Merger consisted of $1.4
billion in cash and 47.8 million shares of the Company's common stock valued at
approximately $1.0 billion. The overall transaction was valued at $4.0 billion
consisting of $2.4 billion for Former NorAm's common stock and common stock
equivalents and $1.6 billion of Former NorAm debt. The Company recorded the
acquisition under the purchase method of accounting with assets and liabilities
of Former NorAm reflected at their estimated fair values. The Company recorded
the excess of the acquisition cost over the fair value of the net assets
acquired of $2.1 billion as goodwill and is amortizing this amount over 40
years. The Company's fair value adjustments included increases in property,
plant and equipment, long-term debt, unrecognized pension and postretirement
benefits liabilities and related deferred taxes.
The Company's results of operations incorporate UNA's and Resources'
results of operations only for the period beginning with the effective date of
their respective acquisition. The following tables present certain actual
financial information for the years ended December 31, 1999, 1998 and 1997;
unaudited pro forma information for the years ended December 31, 1999 and 1998,
as if the acquisition of UNA had occurred on January 1, 1999 and 1998; and
unaudited pro forma information for the year ended December 31, 1997, as if the
Merger with Resources had occurred on January 1, 1997.
ACTUAL AND PRO FORMA COMBINED RESULTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- ----------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- --------- -------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ 15,303 $15,784 $ 11,488 $ 12,320 $ 6,878 $ 10,191
Net income (loss) attributable to
common stockholders................... 1,482 1,525 (141) (61) 421 437
Basic earnings per share................. 5.20 5.35 (.50) (.21) 1.66 1.55
Diluted earnings per share............... 5.18 5.33 (.50) (.21) 1.66 1.55
</TABLE>
These pro forma results are based on assumptions deemed appropriate by the
Company's management, have been prepared for informational purposes only and are
not necessarily indicative of the combined results that would have resulted if
the acquisition of UNA had occurred on January 1, 1999 and 1998 and the Merger
with Resources had occurred on January 1, 1997. Purchase related adjustments to
results of operations include amortization of goodwill and the effects on
depreciation, amortization, interest expense and deferred income taxes of the
assessed fair value of certain UNA and Resources assets and liabilities.
-13-
<PAGE> 14
(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
beginning with respect to pilot projects for up to 5% of each utility's load in
all customer classes in June 2001 and for all other customers on January 1,
2002. In preparation for that competition, the Company expects to make
significant changes in the electric utility operations it conducts through
Reliant Energy HL&P. In addition, the Legislation requires the Texas Utility
Commission to issue a number of new rules and determinations in implementing the
Legislation.
The Legislation defines the process for competition and creates a
transition period during which most utility rates are frozen at rates not in
excess of their present levels. The Legislation provides for utilities to
recover their generation related stranded costs and regulatory assets (as
defined in the Legislation).
Retail Choice. Under the Legislation, on January 1, 2002, most retail
customers of investor-owned electric utilities in Texas will be entitled to
purchase their electricity from any of a number of "retail electric providers"
which will have been certified by the Texas Utility Commission. Retail electric
providers will not own or operate generation assets and their sales rates will
not be subject to traditional cost-of-service rate regulation. Retail electric
providers which are affiliates of electric utilities may compete substantially
statewide for these sales, but rates they charge within the affiliated electric
utility's traditional service territory are subject to certain limitations at
the outset of retail choice, as described below. The Texas Utility Commission
will prescribe regulations governing quality, reliability and other aspects of
service from retail electric providers. Transmission between the regulated
utility and its current and future competitive affiliates is subject to
regulatory scrutiny and must comply with a code of conduct established by the
Texas Utility Commission. The code of conduct governs interactions between
employees of
-14-
<PAGE> 15
regulated and current and future unregulated affiliates as well as the exchange
of information between such affiliates.
Unbundling. 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, and retail activities into different
units. Pursuant to the Legislation, the Company submitted a plan in January 2000
to accomplish the required separation of its regulated operations into separate
units and is awaiting approval from the Texas Utility Commission. The
transmission and distribution business will continue to be subject to
cost-of-service rate regulation and will be responsible for the delivery of
electricity to retail consumers.
Generation. Power generators will sell electric energy to wholesale
purchasers, including retail electric providers, at unregulated rates beginning
January 1, 2002. To facilitate a competitive market, Reliant Energy HL&P and
most other electric utilities will be required to sell at auction entitlements
to 15% of their installed generating capacity no later than 60 days before
January 1, 2002. That obligation to auction entitlements continues until the
earlier of January 1, 2007 or the date the Texas Utility Commission determines
that at least 40% of the residential and small commercial load served in the
electric utility's service area is being served by non-affiliated retail
electric providers. In addition, a power generator that owns and controls more
than 20% of the power generation in, or capable of delivering power to, a power
region after the reductions from the capacity auction (calculated as prescribed
in the Legislation) must submit a mitigation plan to reduce generation that it
owns and controls to no more than 20% in the power region. The Legislation also
creates a program mandating air emissions reductions for non-permitted
generating facilities. The Company anticipates that any stranded costs
associated with this obligation incurred before May 1, 2003 will be recoverable
through the stranded cost recovery mechanisms contained in the Legislation.
Rates. Base rates charged by Reliant Energy HL&P on September 1, 1999 will
be frozen until January 1, 2002. Effective January 1, 2002, retail rates charged
to residential and small commercial customers by the utility's affiliated retail
electric provider will be reduced by 6% from the average rates (on a bundled
basis) in effect on January 1, 1999. That reduced rate will be known as the
"price to beat" and will be charged by the affiliated retail electric provider
to residential and small commercial customers in Reliant Energy HL&P's service
area who have not elected service from another retail electric provider. The
affiliated retail electric provider may not offer different rates to residential
or small commercial customer classes in the utility's service area until the
earlier of the date the Texas Utility Commission determines that 40% of power
consumed by that class is being served by non-affiliated retail electric
providers or January 1, 2005. In addition, the affiliated retail electric
provider must make the price to beat available to eligible consumers until
January 1, 2007.
Stranded Costs. Reliant Energy HL&P will be entitled to recover its
stranded costs (i.e., the excess of net book value of generation assets (as
defined by the Legislation) over the market value of those assets) and its
regulatory assets related to generation. The Legislation prescribes specific
methods for determining the amount of stranded costs and the details for their
recovery. However, during the base rate freeze period from 1999 through 2001,
earnings above the utility's authorized return formula will be applied in a
manner to accelerate depreciation of generation related plant assets for
regulatory purposes. In addition, depreciation expense for transmission and
distribution related assets may be redirected to generation assets for
regulatory purposes during that period.
The Legislation provides for Reliant Energy HL&P, or a special purpose
entity, to issue securitization bonds for the recovery of generation related
regulatory assets and stranded costs. These bonds will be sold to third parties
and will be amortized through non-bypassable charges to transmission and
distribution customers. Any stranded costs not recovered through the
securitization bonds will be recovered through a non-bypassable charge to
transmission and distribution customers. Costs associated with nuclear
decommissioning that have not been recovered as of January 1, 2002, will
continue to be subject to cost-of-service rate regulation and will be included
in a non-bypassable charge to transmission and distribution customers.
-15-
<PAGE> 16
In November 1999, Reliant Energy HL&P filed an application with the Texas
Utility Commission requesting a financing order authorizing the issuance by a
special purpose entity organized by the Company, pursuant to the Legislation, of
transition bonds related to Reliant Energy HL&P's generation-related regulatory
assets. The Company believes the Texas Utility Commission will authorize the
issuance of approximately $750 million of transition bonds. Payments on the
transition bonds will be made out of funds derived from non-bypassable
transition charges to Reliant Energy HL&P's transmission and distribution
customers. The offering and sale of the transition bonds will be registered
under the Securities Act of 1933 and, absent any appeals, are expected to be
consummated in the second or third quarter of 2000.
Accounting. Historically, Reliant Energy HL&P has applied the accounting
policies established in SFAS No. 71. In general, SFAS No. 71 permits a company
with cost-based rates to defer certain costs that would otherwise be expensed to
the extent that it meets the following requirements: (1) its rates are regulated
by a third party; (2) its rates are cost-based; and (3) there exists a
reasonable assumption that all costs will be recoverable from customers through
rates. When a company determines that it no longer meets the requirements of
SFAS No. 71, pursuant to SFAS No. 101 and SFAS No. 121, it is required to write
off regulatory assets and liabilities unless some form of recovery continues
through rates established and collected from remaining regulated operations. In
addition, such company is required to determine any impairment to the carrying
costs of deregulated plant and inventory assets in accordance with SFAS No. 121.
In July 1997, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on Issue No. 97-4, "Deregulation
of the Pricing of Electricity - Issues Related to the Application of FASB
Statements No. 71, Accounting for the Effects of Certain Types of Regulation,
and No. 101, Regulated Enterprises Accounting for the Discontinuation of
Application of FASB Statement No. 71" (EITF No. 97-4). EITF No. 97-4 concluded
that a company should stop applying SFAS No. 71 to a segment which is subject to
a deregulation plan at the time the deregulation legislation or enabling rate
order contains sufficient detail for the utility to reasonably determine how the
plan will affect the segment to be deregulated. In addition, EITF No. 97-4
requires that regulatory assets and liabilities be allocated to the applicable
portion of the electric utility from which the source of the regulated cash
flows will be derived.
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 applied SFAS No. 101 to its electric generation
operations. Reliant Energy HL&P's transmission and distribution operations
continue to meet the criteria of SFAS No. 71.
In 1999, the Company evaluated the recovery of its generation related
regulatory assets and liabilities. The Company determined that a pre-tax
accounting loss of $282 million exists because it believes only the economic
value of its generation related regulatory assets (as defined by the
Legislation) will be recovered. Therefore, the Company recorded a $183 million
after-tax extraordinary loss in the fourth quarter of 1999. If events were to
occur that made the recovery of certain of the remaining generation related
regulatory assets no longer probable, the Company would write off the remaining
balance of such assets as a non-cash charge against earnings. Pursuant to EITF
No. 97-4, the remaining recoverable regulatory assets will not be written off
and will become associated with the transmission and distribution portion of the
Company's electric utility business. For details regarding the Reliant Energy
HL&P's regulatory assets, see Note 1 (d).
At June 30, 1999, the Company performed an impairment test of its
previously regulated electric generation assets pursuant to SFAS No. 121 on a
plant specific basis. Under SFAS No. 121, an asset is considered impaired, and
should be written down to fair value, if the future undiscounted net cash flows
expected to be generated by the use of the asset are insufficient to recover the
carrying amount of the asset. For assets that are impaired pursuant to SFAS No.
121, the Company determined the fair value for each generating plant by
estimating the net present value of future cash inflows and outflows over the
estimated life of each plant. The difference between fair value and net book
value was recorded as a reduction in the current book value. The Company
determined that $797 million of
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<PAGE> 17
electric generation assets were impaired as of June 30, 1999. Of such amounts,
$745 million relates to the South Texas Project and $52 million relates to two
gas-fired generation plants. The Legislation provides recovery of this
impairment through regulated cash flows during the transition period and through
non-bypassable charges to transmission and distribution customers. As such, a
regulatory asset has been recorded for an amount equal to the impairment loss
and is included on the Company's Consolidated Balance Sheets as a regulatory
asset. In addition, the Company recorded an additional $12 million of
recoverable impaired plant costs in the third quarter of 1999 related to
previously incurred costs that are now estimated to be recoverable pursuant to
the Legislation. During the third and fourth quarter of 1999, the Company
recorded amortization expense relate to the recoverable impaired plant costs and
other deferred debits created from discontinuing SFAS No. 71 of $221 million.
The Company will continue to amortize this regulatory asset as it is recovered
from regulated cash flows.
The impairment analysis requires estimates of possible future market
prices, load growth, competition and many other factors over the lives of the
plants. The resulting impairment loss is highly dependent on these underlying
assumptions. In addition, after January 10, 2004, Reliant Energy HL&P must
finalize and reconcile stranded costs (as defined by the Legislation) in a
filing with the Texas Utility Commission. Any difference between the fair market
value and the regulatory net book value of the generation assets (as defined by
the Legislation) will either be refunded or collected through future
non-bypassable charges. This final reconciliation allows alternative methods of
third party valuation of the fair market value of these assets, including
outright sale, stock valuations and asset exchanges. Because generally accepted
accounting principles require the Company to estimate fair market values on a
plant-by-plant basis in advance of the final reconciliation, the financial
impacts of the Legislation with respect to stranded costs are subject to
material changes. Factors affecting such change may include estimation risk,
uncertainty of future energy prices and the economic lives of the plants. If
events occur that make the recovery of all or a portion of the regulatory assets
associated with the generation plant impairment loss and deferred debits created
from discontinuance of SFAS No. 71 pursuant to the Legislation no longer
probable, the Company will write off the corresponding balance of such assets as
a non-cash charge against earnings. One of the results of discontinuing the
application of SFAS No. 71 for the generation operations is the elimination of
the regulatory accounting effects of excess deferred income taxes and investment
tax credits related to such operations. The Company believes it is probable that
some parties will seek to return such amounts to ratepayers and accordingly, the
Company has recorded an offsetting liability.
Following are the classes of electric property, plant and equipment at
cost, with associated accumulated depreciation at December 31, 1999 (including
the impairment loss discussed above) and December 31, 1998.
<TABLE>
<CAPTION>
Transmission General Consolidated Electric
Generation and Distribution and Intangible Plant in Service
------------ ---------------- -------------- ---------------------
(Millions of Dollars)
<S> <C> <C> <C> <C>
December 31, 1999:
Original cost .................................. $ 11,202 $ 4,531 $ 992 $ 16,725
Accumulated depreciation ....................... 4,767 1,263 251 6,281
------------ ------------ ------------ ------------
Property, plant and equipment - net(1) ......... $ 6,435 $ 3,268 741 10,444
============ ============ ============ ============
December 31, 1998:
Original cost .................................. $ 8,843 $ 4,196 $ 902 $ 13,941
Accumulated depreciation ....................... 3,822 1,276 207 5,305
------------ ------------ ------------ ------------
Property, plant and equipment - net(1) ......... $ 5,021 $ 2,920 $ 695 $ 8,636
============ ============ ============ ============
</TABLE>
- ------------------------
(1) Includes non-rate regulated domestic and international generation
facilities of $696 million and $338 million at December 31, 1999 and 1998,
respectively, and international distribution facilities of $32 million and
$19 million at December 31, 1999 and 1998, respectively. Also, includes
property, plant and equipment of UNA of $1.8 billion at December 31, 1999.
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<PAGE> 18
arose when long term debt was [ILLEGIBLE] issued, these costs were amortized
over the remaining original life of the retired debt. Effective July 1, 1999,
costs resulting from the retirement of debt attributable to the [ILLEGIBLE] HL&P
will be recorded in accordance with SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," unless such costs will be recovered through regulated
cash flows. In that case, these costs will be deferred and recorded as a
regulatory asset by the entity through which the source of the regulated cash
flows will be derived. During the third and fourth quarters of 1999, the
generation portion of Reliant Energy HL&P incurred $11 million of losses from
extinguishment of debt which Reliant Energy HL&P's transmission and distribution
operations have recorded as a regulatory asset. This regulatory asset will be
amortized along with recoverable impaired plant costs as the assets are
recovered pursuant to the Legislation.
o (4) TRANSITION PLAN
In June 1998, the Texas Utility Commission issued an order in Docket No.
18465 approving the Company's Transition Plan filed by Electric Operations in
December 1997. The Transition Plan included base rate credits to residential
customers of 4% in 1998 and an additional 2% in 1999. Commercial customers whose
monthly billing is 1,000 kva or less are entitled to receive base rate credits
of 2% in each of 1998 and 1999. The Company implemented the Transition Plan
effective January 1, 1998. For additional information regarding the Transition
Plan, see Note 1(g).
Review of the Texas Utility Commission's order in Docket No. 18465 is
currently pending before the Travis County District Court. In August 1998, the
Office of the Attorney General for the State of Texas and a Texas municipality
filed an appeal seeking, among other things, to reverse the portion of the Texas
Utility Commission's order relating to the redirection of depreciation expenses
under the Transition Plan. The Office of the Attorney General has withdrawn its
appeal, but the Texas municipality continues to maintain its appeal. Because of
the number of variables that can affect the ultimate resolution of an appeal of
Texas Utility Commission orders, the Company cannot predict the outcome of this
matter or the ultimate effect that adverse action by the courts could have on
the Company.
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<PAGE> 19
o (5) DERIVATIVE FINANCIAL INSTRUMENTS
(a) Price Risk Management and Trading Activities.
The Company offers energy price risk management services primarily related
to natural gas, electricity, crude oil and refined products, weather, coal and
certain air emissions regulatory credits. The Company provides these services by
utilizing a variety of derivative financial instruments, including fixed and
variable-priced physical forward contracts, fixed and variable-priced swap
agreements and options traded in the over-the-counter financial markets and
exchange-traded energy futures and option contracts (Trading Derivatives).
Fixed-price swap agreements require payments to, or receipts of payments from,
counterparties based on the differential between a fixed and variable price for
the commodity. Variable-price swap agreements require payments to, or receipts
of payments from, counterparties based on the differential between industry
pricing publications or exchange quotations.
Prior to 1998, the Company applied hedge accounting to certain physical
commodity activities that qualified for hedge accounting. In 1998, the Company
adopted mark-to-market accounting for all of its price risk management and
trading activities. Accordingly, since 1998, such Trading Derivatives are
recorded at fair value with realized and unrealized gains (losses) recorded as a
component of revenues. The recognized, unrealized balance is included in price
risk management assets/liabilities (See Note 1(o)).
The notional quantities, maximum terms and the estimated fair value of
Trading Derivatives at December 31, 1999 and 1998 are presented below (volumes
in billions of British thermal units equivalent (Bbtue) and dollars in
millions):
<TABLE>
<CAPTION>
VOLUME-FIXED
VOLUME-FIXED PRICE MAXIMUM
1999 PRICE PAYOR RECEIVER TERM (YEARS)
---- ------------ ------------ ------------
<S> <C> <C> <C>
Natural gas .................................................... 936,716 939,416 9
Electricity .................................................... 251,592 248,176 10
Crude oil and refined products ................................. 143,857 144,554 3
1998
----
Natural gas .................................................... 937,264 977,293 9
Electricity .................................................... 122,950 124,878 3
Crude oil and refined products ................................. 205,499 204,223 3
</TABLE>
<TABLE>
<CAPTION>
FAIR VALUE AVERAGE FAIR VALUE(A)
------------------------------ ------------------------------
1999 ASSET LIABILITIES ASSETS LIABILITIES
- ---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Natural gas ............................ $ 319 $ 299 $ 302 $ 283
Electricity ............................ 131 98 103 80
Crude oil and refined products ......... 134 145 127 132
------------ ------------ ------------ ------------
$ 584 $ 542 $ 532 $ 495
============ ============ ============ ============
1998
- ----
Natural gas ............................ $ 224 $ 212 $ 124 $ 108
Electricity ............................ 34 33 186 186
Crude oil and refined products ......... 29 23 21 17
------------ ------------ ------------ ------------
$ 287 $ 268 $ 331 $ 311
============ ============ ============ ============
</TABLE>
- -------------------
(a) Computed using the ending balance of each quarter.
-19-
<PAGE> 20
In addition to the fixed-price notional volumes above, the Company also has
variable-priced agreements, as discussed above, totaling 3,797,824 and 1,702,977
Bbtue as of December 31, 1999 and 1998, respectively. Notional amounts reflect
the volume of transactions but do not represent the amounts exchanged by the
parties to the financial instruments. Accordingly, notional amounts do not
accurately measure the Company's exposure to market or credit risks.
All of the fair values shown in the tables above at December 31, 1999 and
1998 have been recognized in income. The fair value as of December 31, 1999 and
1998 was estimated using quoted prices where available and considering the
liquidity of the market for the Trading Derivatives. The prices and fair values
are subject to significant changes based on changing market conditions.
The weighted-average term of the trading portfolio, based on volumes, is
less than one year. The maximum and average terms disclosed herein are not
indicative of likely future cash flows, as these positions may be changed by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity and the Company's risk management portfolio needs
and strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
In addition to the risk associated with price movements, credit risk is
also inherent in the Company's risk management activities. Credit risk relates
to the risk of loss resulting from non-performance of contractual obligations by
a counterparty. The following table shows the composition of the total
price risk management assets of the Company as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------- --------------------------
Investment Investment
Grade (1) Total Grade (1) Total
---------- ---------- ---------- ----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Energy marketers ......................... $ 172 183 $ 103 $ 124
Financial institutions ................... 119 119 62 62
Gas and electric utilities ............... 184 186 47 48
Oil and gas producers .................... 6 30 7 8
Industrials .............................. 4 5 2 3
Independent power producers .............. 4 6 1 1
Others ................................... 64 67 45 47
---------- ---------- ---------- ----------
Total ............................ $ 553 $ 596 $ 267 $ 293
========== ==========
Credit and other reserves ................ (12) (6)
---------- ----------
Energy price risk management assets (2) .. $ 584 $ 287
========== ==========
</TABLE>
(1) "Investment Grade" is primarily determined using publicly available credit
ratings along with the consideration of credit support (e.g., parent
company guarantees) and collateral, which encompass cash and standby
letters of credit.
(2) As of December 31, 1999, the Company had no credit risk exposure to any
single counterparty that represents greater than 5% of price risk
management assets.
(b) Non-Trading Activities.
To reduce the risk from market fluctuations in the revenues derived from
electric power, natural gas and related transportation, the Company enters into
futures transactions, swaps and options (Energy Derivatives) in order to hedge
certain natural gas in storage, as well as certain expected purchases, sales and
transportation of natural gas and electric power (a portion of which are firm
commitments at the inception of the hedge). Energy Derivatives are
-20-
<PAGE> 21
also utilized to fix the price of compressor fuel or other future operational
gas requirements and to protect natural gas distribution earnings against
unseasonably warm weather during peak gas heating months, although usage to
date for this purpose has not been material. The Company applies hedge
accounting with respect to its derivative financial instruments utilized in
non-trading activities.
The Company utilizes interest-rate derivatives (principally interest-rate
swaps) in order to adjust the portion of its overall borrowings which are
subject to interest rate risk and also utilizes such derivatives to effectively
fix the interest rate on debt expected to be issued for refunding purposes. In
addition, in 1999, the Company entered into foreign currency swaps to hedge a
portion of its investment in UNA.
For transactions involving either Energy Derivatives or interest-rate and
foreign currency derivatives, hedge accounting is applied only if the derivative
(i) reduces the risk of the underlying hedged item and (ii) is designated as a
hedge at its inception. Additionally, the derivatives must be expected to result
in financial impacts which are inversely correlated to those of the item(s) to
be hedged. This correlation (a measure of hedge effectiveness) is measured both
at the inception of the hedge and on an ongoing basis, with an acceptable level
of correlation of at least 80% for hedge designation. If and when correlation
ceases to exist at an acceptable level, hedge accounting ceases and
mark-to-market accounting is applied.
In the case of interest-rate swaps associated with existing obligations,
cash flows and expenses associated with the interest-rate derivative
transactions are matched with the cash flows and interest expense of the
obligation being hedged, resulting in an adjustment to the effective interest
rate. When interest rate swaps are utilized to effectively fix the interest
rate for an anticipated debt issuance, changes in the market value of the
interest-rate derivatives are deferred and recognized as an adjustment to the
effective interest rate on the newly issued debt.
In the case of the foreign currency swaps which hedge a portion of the
Company's investment in UNA, income or loss associated with the foreign currency
derivative transactions is recorded as foreign currency translation adjustments
as a component of stockholders' equity. Such amounts generally offset amounts
recorded in stockholders' equity as adjustments resulting from translation of
the hedged investment into U.S. dollars.
Unrealized changes in the market value of Energy Derivatives utilized as
hedges are not generally recognized in the Company's Statements of Consolidated
Income until the underlying hedged transaction occurs. Once it becomes probable
that an anticipated transaction will not occur, deferred gains and losses are
recognized. In general, the financial impact of transactions involving these
Energy Derivatives is included in the Company's Statements of Consolidated
Income under the captions (i) fuel expenses, in the case of natural gas
transactions and (ii) purchased power, in the case of electric power
transactions. Cash flows resulting from these transactions in Energy Derivatives
are included in the Company's Statements of Consolidated Cash Flows in the same
category as the item being hedged.
At December 31, 1999, the Company was fixed-price payors and fixed-price
receivers in Energy Derivatives covering 33,108 billion British thermal units
(Bbtu) and 5,481 Bbtu of natural gas, respectively. At December 31, 1998, the
Company was fixed-price payors and fixed-price receivers in Energy Derivatives
covering 42,498 Bbtu and 3,930 Bbtu of natural gas, respectively. Also, at
December 31, 1999 and 1998, the Company was a party to variable-priced Energy
Derivatives totaling 44,958 Bbtu and 21,437 Bbtu of natural gas, respectively.
The weighted average maturity of these instruments is less than one year.
The notional amount is intended to be indicative of the Company's level of
activity in such derivatives, although the amounts at risk are significantly
smaller because, in view of the price movement correlation required for hedge
accounting, changes in the market value of these derivatives generally are
offset by changes in the value associated with the underlying physical
transactions or in other derivatives. When Energy Derivatives are closed out in
advance of the underlying commitment or anticipated transaction, however, the
market value changes may not offset due to the fact that price movement
correlation ceases to exist when the positions are closed, as further
-21-
<PAGE> 22
discussed below. Under such circumstances, gains (losses) are deferred and
recognized as a component of income when the underlying hedged item is
recognized in income.
The average maturity discussed above and the fair value discussed in Note
15 are not necessarily indicative of likely future cash flows as these positions
may be changed by new transactions in the trading portfolio at any time in
response to changing market conditions, market liquidity and the Company's risk
management portfolio needs and strategies. Terms regarding cash settlements of
these contracts vary with respect to the actual timing of cash receipts and
payments.
(c) Trading and Non-trading -- General Policy.
In addition to the risk associated with price movements, credit risk is
also inherent in the Company's risk management activities. Credit risk relates
to the risk of loss resulting from non-performance of contractual obligations by
a counterparty. While as yet the Company has experienced only minor losses due
to the credit risk associated with these arrangements, the Company has
off-balance sheet risk to the extent that the counterparties to these
transactions may fail to perform as required by the terms of each such contract.
In order to minimize this risk, the Company enters into such contracts primarily
with counterparties having a minimum Standard & Poor's or Moody's rating of BBB-
or Baa3, respectively. For long-term arrangements, the Company periodically
reviews the financial condition of such firms in addition to monitoring the
effectiveness of these financial contracts in achieving the Company's
objectives. Should the counterparties to these arrangements fail to perform, the
Company would seek to compel performance at law or otherwise obtain compensatory
damages in lieu thereof. The Company might be forced to acquire alternative
hedging arrangements or be required to honor the underlying commitment at then
current market prices. In such event, the Company might incur additional losses
to the extent of amounts, if any, already paid to the counterparties. In view of
its criteria for selecting counterparties, its process for monitoring the
financial strength of these counterparties and its experience to date in
successfully completing these transactions, the Company believes that the risk
of incurring a significant financial statement loss due to the non-performance
of counterparties to these transactions is minimal.
The Company's policies also prohibit the use of leveraged financial
instruments.
The Company has established a Risk Oversight Committee, comprised of
corporate and business segment officers that oversees all commodity price and
credit risk activities, including the Company's trading, marketing and risk
management activities. The committee's duties are to establish the Company's
commodity risk policies, allocate risk capital within limits established by the
Company's board of directors, approve trading of new products and commodities,
monitor risk positions and ensure compliance with the Company's risk management
policies and procedures and trading limits established by the Company's board of
directors.
-22-
<PAGE> 23
o (6) JOINTLY OWNED ELECTRIC UTILITY PLANT
(a) Investment in South Texas Project.
The Company has a 30.8% interest in the South Texas Project, which consists
of two 1,250 megawatt (MW) nuclear generating units and bears a corresponding
30.8% share of capital and operating costs associated with the project. As of
December 31, 1999, the Company's investment in the South Texas Project was $382
million (net of $2.1 billion accumulated depreciation which includes an
impairment loss recorded in 1999 of $745 million). For additional information
regarding the impairment loss, see Note 3. The Company's investment in nuclear
fuel was $44 million (net of $251 million amortization) as of such date.
The South Texas Project is owned as a tenancy in common among its four
co-owners, with each owner retaining its undivided ownership interest in the two
nuclear-fueled generating units and the electrical output from those units. The
four co-owners have delegated management and operating responsibility for the
South Texas Project to the South Texas Project Nuclear Operating Company
(STPNOC). STPNOC is managed by a board of
-23-
<PAGE> 24
directors comprised of one director from each of the four owners, along with the
chief executive officer of STPNOC. The four owners provide oversight through an
owners' committee comprised of representatives of each of the owners and through
the board of directors of STPNOC. Prior to November 1997, the Company was the
operator of the South Texas Project.
(b) Nuclear Insurance.
The Company and the other owners of the South Texas Project maintain
nuclear property and nuclear liability insurance coverage as required by law and
periodically review available limits and coverage for additional protection. The
owners of the South Texas Project currently maintain $2.75 billion in property
damage insurance coverage, which is above the legally required minimum, but is
less than the total amount of insurance currently available for such losses.
This coverage consists of $500 million in primary property damage insurance and
excess property insurance in the amount of $2.25 billion. With respect to excess
property insurance, the Company and the other owners of the South Texas Project
are subject to assessments, the maximum aggregate assessment under current
policies being $17 million during any one policy year. The application of the
proceeds of such property insurance is subject to the priorities established by
the Nuclear Regulatory Commission (NRC) regulations relating to the safety of
licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act, the maximum liability to the public of
owners of nuclear power plants was $8.9 billion as of December 31, 1999. Owners
are required under the Price Anderson Act to insure their liability for nuclear
incidents and protective evacuations by maintaining the maximum amount of
financial protection available from private sources and by maintaining secondary
financial protection through an industry retrospective rating plan. The
assessment of deferred premiums provided by the plan for each nuclear incident
is up to $84 million per reactor, subject to indexing for inflation, a possible
5% surcharge (but no more than $10 million per reactor per incident in any one
year) and a 3% state premium tax. The Company and the other owners of the South
Texas Project currently maintain the required nuclear liability insurance and
participate in the industry retrospective rating plan.
There can be no assurance that all potential losses or liabilities will be
insurable, or that the amount of insurance will be sufficient to cover them. Any
substantial losses not covered by insurance would have a material effect on the
Company's financial condition, results of operations and cash flows.
(c) Nuclear Decommissioning.
The Company contributes $14.8 million per year to a trust established to
fund its share of the decommissioning costs for the South Texas Project. For a
discussion of the accounting treatment for the securities held in the Company's
nuclear decommissioning trust, see Note 1(l). In July 1999, an outside
consultant estimated the Company's portion of decommissioning costs to be
approximately $363 million. The consultant's calculation of decommissioning
costs for financial planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the NRC and
assumed deactivation of Units Nos. 1 and 2 upon the expiration of their 40-year
operating licenses. While the current and projected funding levels currently
exceed minimum NRC requirements, no assurance can be given that the amounts held
in trust will be adequate to cover the actual decommissioning costs of the South
Texas Project. Such costs may vary because of changes in the assumed date of
decommissioning and changes in regulatory requirements, technology and costs of
labor, materials and equipment. Pursuant to the Legislation, costs associated
with nuclear decommissioning that have not been recovered as of January 1, 2002,
will continue to be subject to cost-of-service rate regulation and will be
included in a non-bypassable charge to transmission and distribution customers.
-24-
<PAGE> 25
o (7) EQUITY INVESTMENTS AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
The Company accounts for investments in unconsolidated subsidiaries under
the equity method of accounting where (i) the ownership interest in the
affiliate ranges from 20% to 50%, (ii) the ownership interest is less than 20%
but the Company exercises significant influence over operating and financial
policies of such affiliate or (iii) the interest in the affiliate exceeds 50%
but the Company does not exercise control over the affiliate.
The Company's equity investments and advances in unconsolidated
subsidiaries at December 31, 1999 and 1998 were $1 billion and $1.1 billion,
respectively. The Company's equity loss from these investments, was $14 million
in 1999. For 1998 and 1997, the Company's equity income from these investments
was $71 million and $49 million, respectively. Dividends received from these
investments amounted to $14 million, $44 million and $46 million in 1999, 1998,
and 1997, respectively.
(a) Reliant Energy Latin America.
Reliant Energy is evaluating the sale of the Company's Latin American
assets in order to pursue business opportunities that are in line with its
strategies for the U.S. and Western Europe.
As of December 31, 1999, Reliant Energy Latin America indirectly holds
interests in Light Servicos de Electricidade S.A. (Light) (11.78%) which
transmits and distributes electricity in Rio De Janeiro, Brazil and holds 77.81%
of the common stock of Metropolitana Electricidade de Sao Paulo S.A.
(Metroplitana) which transmits and distributes electricity in Sao Paulo, Brazil;
three Columbian electric systems, Empresa de Energia del Pacifico S.A.E.S.P
(EPSA) (28.35%), Electricaribe (34.61%), and Electrocosta (35.17%); and three
electric systems in El Salvador (ranging from approximately 37% to 45%). In
addition, Reliant Energy Latin America indirectly holds interests in natural gas
systems in Columbia and a power generation plant in India.
As of December 31, 1999 and 1998, Light and Metropolitana had total
borrowings of $2.29 billion and $3.2 billion denominated in non-local
currencies. During the first quarter of 1999, the Brazilian real was devalued
and allowed to float against other major currencies. The effects of devaluation
on the non-local currency denominated borrowings caused the Company to record,
as a component of its equity earnings, an after-tax charge for the year ended
December 31, 1999 of $102 million as a result of foreign currency transaction
losses recorded by both Light and Metropolitana. At December 31, 1999 and 1998,
one U.S. dollar could be exchanged for 1.79 Brazilian real and 1.21 Brazilian
real, respectively. Because the Company uses the Brazilian real as the
functional currency to report Light's equity earnings, any decrease in the value
of the Brazilian real below its December 31, 1999 level will increase Light's
liability represented by the non-local currency denominated borrowings. This
amount will also be reflected in the Company's consolidated earnings, to the
extent of the Company's ownership interest in Light. Similarly, any increase in
the value of the Brazilian real above its December 31, 1999 level will decrease
Light's liability represented by such borrowings.
In April 1998, Light purchased 74.88% of the common stock of Metropolitana.
The purchase price for the shares was approximately $1.8 billion and was
financed with proceeds from bank borrowings. In August 1998, Reliant Energy
Latin America and another unrelated entity jointly acquired, through
subsidiaries, 65% of the stock of two Colombian electric distribution companies,
Electricaribe and Electrocosta, for approximately $522 million. The shares of
these companies are indirectly held by an offshore holding company jointly owned
by the Company and the other entity. In addition, in 1998, the Company acquired,
for approximately $150 million, equity interests in three electric distribution
systems located in El Salvador.
In June 1997, a consortium of investors which included Reliant Energy Latin
America acquired for $496 million a 56.7% controlling ownership interest in
EPSA. Reliant Energy Latin America contributed $152 million of the purchase
price for a 28.35% ownership interest in EPSA.
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<PAGE> 26
In May 1997, Reliant Energy Latin America increased its indirect ownership
interest in an Argentine electric utility from 48% to 63%. The purchase price of
the additional interest was $28 million. On June 30, 1998, Reliant Energy Latin
America sold its 63% ownership interest in this Argentine affiliate and certain
related assets for approximately $243 million, Reliant Energy Latin America
acquired its initial ownership interests in the electric utility in 1992. The
Company recorded an $80 million after-tax gain from this sale in the second
quarter of 1998.
(b) Wholesale Energy Domestic.
In April 1998, the Company formed a limited liability corporation to
construct and operate a 490 MW electric generation plant in Boulder City, Nevada
in which the Company retained a 50% interest. The plant is anticipated to be
operational in the second quarter of 2000. In October 1998, the Company entered
into a partnership to construct and operate a 100 MW cogeneration plant in
Orange, Texas in which its ownership interest is 50%. The plant began commercial
operation in December, 1999. As of December 31, 1999, the Company's net
investment in these projects is $78 million and its total projected net
investment is approximately $90 million.
(c) Combined Financial Statement Data of Equity Investees and Advances to
Unconsolidated Subsidiaries.
The following tables set forth certain summarized financial information of
the Company's unconsolidated affiliates as of December 31, 1999 and 1998 and for
the years then ended or periods from the respective affiliates' acquisition date
through December 31, 1999, 1998 and 1997, if shorter:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income Statement:
Revenues .................. $ 4,421,942 $ 2,449,335 $ 2,011,927
Operating expenses ........ 3,329,559 1,762,166 1,460,248
Net income ................ (310,667) 514,005 403,323
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Balance Sheet:
Current assets ................. $ 1,553,166 $ 1,841,856
Noncurrent assets .............. 10,379,306 13,643,747
Current liabilities ............ 2,714,621 4,074,603
Noncurrent liabilities ......... 4,440,985 6,284,821
Owners' equity ................. 4,776,866 5,126,180
</TABLE>
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<PAGE> 27
o (8) INDEXED DEBT SECURITIES (ACES AND ZENS) AND TIME WARNER SECURITIES
(a) Original investment in Time Warner Securities.
On July 6, 1999, the Company converted its 11 million shares of Time
Warner Inc. (TW) convertible preferred stock (TW Preferred) into 45.8 million
shares of Time Warner common stock (TW Common). Prior to the conversion, the
Company's investment in the TW Preferred was accounted for under the cost method
at a value of $990 million in the Company's Consolidated Balance Sheets. The TW
Preferred was redeemable after July 6, 2000) had an aggregate liquidation
preference of $100 per share (plus accrued and unpaid dividends), was entitled
to annual dividends of $3.75 per share until July 6, 1999 and was convertible by
the Company. The Company recorded pre-tax dividend income with respect to the TW
Preferred of $20.6 million in 1999 prior to the conversion and $41.3 million in
both 1998 and 1997. Due to the conversion, the Company will no longer receive
the quarterly dividend of $10.3 million that was paid on the TW Preferred but
will receive dividends, if declared and paid, on its investments in TW Common.
Effective on the conversion date, the shares of TW Common were classified as
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<PAGE> 28
trading securities under SFAS No. 115 and an unrealized gain was recorded in the
amount of $2.4 billion ($1.5 billion after tax) to reflect the cumulative
appreciation in the fair value of the Company's investment in Time Warner
securities.
(b) ACES.
In July 1997, in order to monetize a portion of the cash value of its
investment in TW Preferred, the Company issued 22.9 million of its unsecured 7%
Automatic Common Exchange Securities (ACES) having an original principal amount
of approximately $1.052 billion. The market value of ACES is indexed to the
market value of TW Common. In July 2000, the ACES will be mandatorily
exchangeable for, at the Company's option, either shares of TW Common at the
exchange rate set forth below or cash with an equal value. The current exchange
rate is as follows:
<TABLE>
<CAPTION>
Market Price of TW Common Exchange Rate
------------------------- -------------
<S> <C> <C>
Below $22.96875 2.0 shares of TW Common
$22.96875 - $27.7922 Share equivalent of $45.9375
Above $27.7922 1.6528 shares of TW Common
</TABLE>
Prior to maturity, the Company has the option of redeeming the ACES if (i)
changes in federal tax regulations require recognition of a taxable gain on the
Company's TW investment and (ii) the Company could defer such gain by redeeming
the ACES. The redemption price is 105% of the closing sales price of the ACES as
determined over a period prior to the day redemption notice is given. The
redemption price may be paid in cash or in shares of TW Common or a combination
of the two.
By issuing the ACES, the Company effectively eliminated the economic
exposure of its investment in TW securities to decreases in the price of TW
Common below $22.96875. In addition, the Company retained 100% of any increase
in TW Common price up to $27.7922 per share and 17% of any increase in market
price above $27.7922.
Prior to the July 1999 conversion of the TW Preferred, any increase in the
market value of TW Common above $27.7922 was treated for accounting purposes as
an increase in the payment amount of the ACES equal to 83% of the increase in
the market price per share and was recorded by the Company as a non-cash
expense. As a result, the Company recorded in 1999 (prior to conversion), 1998
and 1997 a non-cash, unrealized accounting loss of $435 million, $1.2 billion
and $121 million, respectively (which resulted in an after-tax earnings
reduction of $283 million, or $0.99 per share, $764 million, or $2.69 per share,
and $79 million, or $0.31 per share, respectively). Following the conversion of
TW Preferred into TW Common, changes in the market value of the Company's TW
Common and the related offsetting changes in the liability related to the
Company's obligation under the ACES will be recorded in the Company's Statement
of Consolidated Income.
(c) ZENS.
On September 21, 1999, the Company issued approximately 17.2 million of its
2.0% Zero-Premium Exchangeable Subordinated Notes due 2029 (ZENS) having an
original principal amount of approximately $1.0 billion. At maturity the holders
of the ZENS will receive in cash the higher of the original principal amount of
the ZENS or an amount based on the then-current market value of TW Common, or
other securities distributed with respect to TW Common (one share of TW Common
and such other securities, if any, are referred to as reference shares). Each
ZENS has an original principal amount of $58.25 (the closing market price of the
TW Common on September 15, 1999) and is exchangeable at any time at the option
of the holder for cash equal to 95% (100% in certain cases) of the market value
of the reference shares attributable to one ZENS. The Company pays interest on
each ZENS at an annual rate of 2% plus the amount of any quarterly cash
dividends paid in respect of the quarterly interest period on the reference
shares attributable to each ZENS. Subject to certain conditions, the Company has
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<PAGE> 29
the right to defer interest payments from time to time on the ZENS for up to 20
consecutive quarterly periods. As of December 31, 1999, no interest Payments on
the ZENS had been deferred.
Of the $980 million net proceeds from the Offering, the Company used $443
million for general corporate purposes, including repayment of Company
indebtedness. The Company used $537 million of the net proceeds to purchase 9.2
million shares of TW Common, which are classified as trading securities under
SFAS No. 115. Unrealized gains and losses resulting from changes in the market
value of the TW Common are recorded in the Company's Statements of Consolidated
Income.
An increase above $58.25 (subject to certain adjustments) in the market
value per share of TW Common results in an increase in the Company's liability
for the ZENS and is recorded by the Company as a non-cash expense. If the market
value per share of TW Common declines below $58.25 (subject to certain
adjustments), the liability for the ZENS would not decline below the original
principal amount. However, the decline in market value of the Company's
investment in the TW Common would be recorded as an unrealized loss as discussed
above.
Prior to the purchase of additional shares of TW Common on September 21,
1999, the Company owned approximately 8 million shares of TW Common that were in
excess of the 38 million shares needed to economically hedge its ACES
obligation. For the period from July 6, 1999 to the ZENS issuance date, losses
(due to the decline in the market value of the TW Common during such period) on
these 8 million shares were $122 million ($79 million after tax). The 8 million
shares of TW Common combined with the additional 9.2 million shares purchased
are expected to be held to facilitate the Company's ability to meet its
obligation under the ZENS.
The following table sets forth certain summarized financial information of
the Company's investment in TW securities and the Company's ACES and ZENS
obligations.
<TABLE>
<CAPTION>
TW Investment ACES ZENS
------------ ------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Balance at January 1, 1997 .................. $ 990,000
Issuance of indexed debt securities ......... $ 1,052,384
Loss on indexed debt securities ............. 121,402
------------ ------------
Balance at December 31, 1997 ................ 990,000 1,173,786
Loss on indexed debt securities ............. 1,176,211
------------ ------------
Balance at December 31, 1998 ................ 990,000 2,349,997
Issuance of indexed debt securities ......... $ 1,000,000
Purchase of TW Common ....................... 537,055
Loss on indexed debt securities ............. 388,107 241,416
Gain on TW Common ........................... 2,452,406
------------ ------------ ------------
Balance at December 31, 1999 ................ $ 3,979,461 $ 2,738,104 $ 1,241,416
============ ============ ============
</TABLE>
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<PAGE> 30
o (14) COMMITMENTS AND CONTINGENCIES
(a) Commitments.
The Company has various commitments for capital expenditures, fuel,
purchased power and operating leases. Commitments in connection with Electric
Operations' capital program are generally revocable by the Company, subject to
reimbursement to manufacturers for expenditures incurred or other cancellation
penalties, Wholesale Energy has entered into commitments associated with various
non-rate regulated generating projects aggregating S324 million along with
various generating equipment purchases aggregating $318 million for delivery
from 2000 to 2001 that are anticipated to be used for future development
projects. The Company's other commitments have various quantity requirements and
durations. However, if these requirements could not be met, various alternatives
are available to mitigate the cost associated with the contracts' commitments.
(b) Fuel and Purchased Power.
Reliant Energy HL&P is a party to several long-term coal, lignite and
natural gas contracts which have various quantity requirements and durations.
Minimum payment obligations for coal and transportation agreements that extend
through 2011 are approximately $187 million in 2000, $188 million in 2001 and
$188 million in 2002. Purchase commitments related to lignite mining and lease
agreements, natural gas purchases and storage contracts, and purchased power are
not material to the operations of the Company,
Currently Reliant Energy HL&P is allowed recovery of these costs through
base rates for electric service. As of December 31, 1999, certain of these
contracts are above market. The Company anticipates that stranded cost
associated with these obligations will be recoverable through the stranded cost
recovery mechanisms contained in the Legislation. For information regarding the
Legislation, see Note 3.
(c) Operations Agreement with City of San Antonio.
As part of the 1996 settlement of certain litigation claims asserted by the
City of San Antonio with respect to the South Texas Project, the Company entered
into a 10-year joint operations agreement under which the Company and the City
of San Antonio, acting through the City Public Service Board of San Antonio
(CPS), share savings resulting from the joint dispatching of their respective
generating assets in order to take advantage of each system's lower cost
resources. Under the terms of the joint operations agreement entered into
between CPS and Electric Operations, the Company has guaranteed CPS minimum
annual savings of $10 million and a minimum cumulative savings of $150 million
over the 10-year term of the agreement. Based on current forecasts and other
assumptions regarding
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<PAGE> 31
the combined operation of the two generating systems, the Company anticipates
that the savings resulting from joint operations will equal or exceed the
minimum savings guaranteed under the joint operating agreement. In 1999, 1998
and 1997, savings generated for CPS' account were approximately $14 million, $14
million and S22 million, respectively. Through December 31, 1999, cumulative
earnings generated for CPS' account were approximately $64 million.
(d) Transportation Agreement.
Resources had an agreement (ANR Agreement) with ANR Pipeline Company (ANR)
which contemplated that Resources would transfer to ANR an interest in certain
of Resources' pipeline and related assets. The interest represented capacity of
250 Mmcf/day. Under the ANR Agreement, an ANR affiliate advanced $125 million to
Resources. Subsequently, the parties restructured the ANR Agreement and
Resources refunded in 1995 and 1993, $50 million and $34 million, respectively,
to ANR. Resources recorded $41 million as a liability reflecting ANR's use of
130 Mmcf/day of capacity in certain of Resources' transportation facilities. The
level of transportation will decline to 100 Mmcf/day in the year 2003 with a
refund of $5 million to ANR. The ANR Agreement will terminate in 2005 with a
refund of the remaining balance.
(e) Lease Commitments.
The following table sets forth certain information concerning the Company's
obligations under non-cancelable long-term operating leases at December 31, 1999
which primarily relate to Resources principally consisting of rental agreements
for building space, data processing equipment and vehicles, including major work
equipment (in millions):
<TABLE>
<S> <C>
2000 .......................... $ 16
2001 .......................... 15
2002 .......................... 10
2003 .......................... 8
2004 .......................... 7
2005 and beyond ............... 25
----
Total .................... $ 81
====
</TABLE>
(f) Letters of Credit.
At December 31, 1999, the Company had letters of credit totaling
approximately $14 million under which it is obligated to reimburse drawings, if
any.
(g) Cross Border Leases.
During the period from 1994 through 1997, under cross border lease
transactions, UNA leased several of its power plants and related equipment and
turbines to non-Netherlands based investors and concurrently leased the
facilities back under sublease arrangements with remaining terms as of December
31, 1999 of two to 25 years. Such transactions involve the Company providing to
a foreign investor an ownership right in (but not necessarily title to) an
asset, with a leaseback of the asset. The net proceeds to UNA of the
transactions are being amortized to income over the lease terms. At December 31,
1999, the deferred gain on these transactions totaled $87 million assuming an
exchange rate of 2.19 NLG per U.S. dollar (the exchange rate on December 31,
1999). UNA utilized proceeds from the head lease transactions to prepay sublease
obligations as well as provide a source for payment of end of term purchase
options and other financial undertakings. The leased property remains on the
financial statements of UNA and continues to be depreciated. In the case of
early termination of the cross border leases, UNA would be contingently liable
for certain payments to the sublessors, which at December 31, 1999 are estimated
to be $254 million. Prior to March 1, 2000, UNA will be required by some of the
lease agreements to obtain standby letters of credit in favor of the sublessors
in the event of early termination in the amount of $205 million (assumes an
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<PAGE> 32
exchange rate of 2.19 NLG per U.S. dollar, the exchange rate on December 31,
1999). Commitments for such letters of credit have been obtained as of December
31, 1999.
(h) Environmental Matters.
The Company is a defendant in litigation arising out of the environmental
remediation of a site in Corpus Christi, Texas. The litigation was instituted in
1985 by adjacent landowners. The litigation is pending before the United States
District Court for the Southern District of Texas, Corpus Christi Division. The
site was operated by third parties as a metals reclaiming operation. Although
the Company neither operated nor owned the site, certain transformers and other
equipment originally sold by the Company may have been delivered to the site by
third parties. The Company and others have remediated the site pursuant to a
plan approved by appropriate state agencies and a federal court. To date, the
Company has recovered or has commitments to recover from other responsible
parties $2.2 million of the more than $3 million it has spent on remediation.
In 1992, the United States Environmental Protection Agency (EPA) (i)
identified the Company, along with several other parties, as "potentially
responsible parties" (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) for the costs of cleaning up a site
located adjacent to one of the Company's transmission lines in La Marque, Texas
and (ii) issued an administrative order for the remediation of the site. The
Company believes that the EPA took this action solely on the basis of
information indicating that the Company in the 1950s acquired record title to a
portion of the land on which the site is located. The Company does not believe
that it now or previously has held any ownership interest in the property
covered by the order and has obtained a judgment to that effect from a court in
Galveston County, Texas. Based on this judgment and other defenses that the
Company believes to be meritorious, the Company has elected not to adhere to the
EPA's administrative order, even though the Company understands that other PRPs
are proceeding with site remediation. To date, neither the EPA nor any other PRP
has instituted an action against the Company for any share of the remediation
costs for the site. However, if the Company was determined to be a responsible
party, the Company could be jointly and severally liable along with the other
PRPs for the aggregate remediation costs of the site (which the Company
currently estimates to be approximately $80 million in the aggregate) and could
be assessed substantial fines and damage claims. Although the ultimate outcome
of this matter cannot currently be predicted at this time, the Company does not
believe that this matter will have a material adverse effect on the Company's
financial condition, or results of operations or cash flows.
From time to time the Company 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.
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 like those received may be asserted in the
future and intends to continue vigorously contesting claims which 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.
(i) Other.
The Company is involved in legal, tax and regulatory proceedings before
various courts, regulatory commissions, and governmental agencies regarding
matters arising in the ordinary course of business, some of which 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 effect on the Company's respective financial statements, if any, from the
disposition of these matters will not be material.
In February 1996, the cities of Wharton, Galveston and Pasadena filed suit,
for themselves and a proposed class of all similarly situated cities in Reliant
Energy HL&P's service area, against the Company and Houston Industries Finance
Inc. (formerly a wholly owned subsidiary of the Company) alleging underpayment
of municipal franchise fees. Plaintiffs in essence claim that they are entitled
to 4% of all receipts of any kind for business conducted within city limits or
with use of city rights-of-way. Plaintiffs advance their claims notwithstanding
their failure to assert such claims over the previous four decades. Because all
of the franchise ordinances affecting Electric Operations expressly impose fees
only on the Company's own receipts and only from sales of electricity for
consumption within a city, the Company regards plaintiffs' allegations as
spurious and is vigorously contesting the case. The plaintiffs' pleadings assert
that their damages exceed $250 million. The 269th Judicial District Court for
Harris County has granted a partial summary judgment in favor of the Company
dismissing all claims for franchise fees based on sales tax collections. Other
motions for partial summary judgment were denied. A jury trial of the remaining
individual claims of the three named cities (but not the entire class) began on
February 14, 2000 and is expected to conclude by the end of March 2000. The
extent to which issues resolved in this trial may affect the claims of the other
class member cities cannot be determined until final judgment is rendered. The
Company believes that it is very unlikely that resolution of this case will have
a material adverse effect on the Company's financial condition, results of
operations or cash flows.
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<PAGE> 1
EXHIBIT 99(b)
DESCRIPTION OF RELIANT ENERGY, INCORPORATED CAPITAL STOCK
COMMON STOCK
The authorized capital stock of Reliant Energy, Incorporated ("Reliant
Energy") consists of (i) 700,000,000 shares of Common Stock, without par value,
10,000,000 shares of Preferred Stock, without par value, and 10,000,000 shares
of Preference Stock, without par value.
VOTING RIGHTS. Holders of Common Stock are entitled to one vote for
each share at all meetings of shareholders. Such holders do not have cumulative
rights in the election of directors. No director of Reliant Energy may be
removed from office by vote or other action of the shareholders or otherwise
except (a) with cause, as defined in the Reliant Energy Bylaws, by the
affirmative vote of the holders of at least a majority of the voting power of
all outstanding shares of capital stock of Reliant Energy entitled to vote in
the election of directors, voting together as a single class, or (b) without
cause by (i) the affirmative vote of at least 80% of all directors then in
office at any regular or special meeting of the Reliant Energy Board of
Directors called for that purpose or (ii) the affirmative vote of the holders of
at least 80% of the voting power of all outstanding shares of capital stock of
Reliant Energy entitled to vote in the election of directors, voting together as
a single class. The Reliant Energy Board of Directors shall have the power to
alter, amend or repeal the Reliant Energy Bylaws or adopt new Bylaws by the
affirmative vote of at least 80% of all directors then in office at any regular
or special meeting of the Reliant Energy Board of Directors called for that
purpose, subject to repeal or change by the affirmative vote of the holders of
at least 80% of the voting power of all the shares of Reliant Energy entitled to
vote in the election of directors, voting together as a single class. The
Reliant Energy Articles of Incorporation provide that an amendment of the
articles of incorporation of, certain mergers and consolidations involving, the
sale of all or substantially all of the assets of or the dissolution of Reliant
Energy requires the approval of the holders of a majority (rather than the
two-thirds normally required by Texas law) of the outstanding shares entitled to
vote on such matters.
DIVIDENDS. Dividends may be paid on Common Stock out of any assets of
Reliant Energy available for such dividends after full cumulative dividends on
all outstanding shares of capital stock of all series ranking senior to Common
Stock in respect of dividends and liquidation rights have been paid, or declared
and a sum sufficient for the payment thereof set apart, for all past quarterly
dividend periods, and after or concurrently with making payment of or provision
for dividends on the stock ranking senior to Common Stock for the then-current
quarterly dividend period. The rights of holders of Common Stock to receive
dividends are further subject to the prior rights of holders of any outstanding
shares of capital stock of all series ranking senior to Common Stock to have
contributions made to any sinking fund that may be established for any such
series.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding-up of Reliant Energy, or any reduction or decrease of its capital stock
resulting in a distribution of assets to the holders of Common Stock, the
holders of Common Stock shall be entitled to receive, pro rata, all of the
remaining assets of Reliant Energy available for distribution to its
shareholders but only after there shall have been paid to or set aside for the
holders of the stock ranking senior to the Common Stock the full preferential
amounts fixed for each series thereof plus any dividends accrued or in arrears
thereon.
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<PAGE> 2
CLASSIFICATION OF BOARD OF DIRECTORS. The Reliant Energy Board of
Directors is divided into three classes, Class I, Class II and Class III. Such
classes shall be as nearly equal in number of directors as possible. At each
annual meeting, the number of directors equal to the number constituting the
class whose term expires at the time of such meeting shall be elected to hold
office until the third succeeding annual meeting.
OTHER PROVISIONS. Subject to the provisions of the Reliant Energy
Bylaws imposing certain supermajority voting provisions, the rights of the
holders of shares of Common Stock may not be modified otherwise than by a vote
of a majority of the shares outstanding, voting together as a single class.
PREFERRED STOCK
The authorized Preferred Stock is issuable in series having such
designations, dividend rates, general voting rights, liquidation prices,
redemption prices, sinking fund provisions and other terms as provided in the
Reliant Energy Articles of Incorporation or as may be established from time to
time by the Reliant Energy Board of Directors. The rights evidenced by, or
amounts payable with respect to, the shares of Common Stock may be materially
limited or qualified by the Preferred Stock.
VOTING RIGHTS. The holders of Preferred Stock have special voting
rights with respect to certain matters affecting the powers, preferences and
privileges of the Preferred Stock of each respective series. Holders of
Preferred Stock generally have the right to elect one-third of the members of
the Reliant Energy Board of Directors whenever dividends on any outstanding
Preferred Stock are in arrears in an amount equal to the aggregate dividends
required to be paid on such Preferred Stock in any 12-month period, until no
dividends are in arrears. However, holders of Preferred Stock have the right to
elect a majority of the members of the Reliant Energy Board of Directors
whenever dividends on any outstanding Preferred Stock are in arrears in an
amount equal to the aggregate dividends required to be paid on such Preferred
Stock in any 24-month period, until no dividends are in arrears. Whenever
holders of any outstanding shares of Preferred Stock are entitled to elect
members of the Reliant Energy Board of Directors pursuant to the Reliant Energy
Articles of Incorporation, a director elected by the holders of Preferred Stock
as a class or of such other stock entitled to vote as a class (or a director
elected to fill a vacancy) shall be subject to removal by the vote of the
holders of a majority of the Preferred Stock as a class or of such other stock
entitled to vote as a class for the election of directors, as the case may be.
Directors elected by the holders of Preferred Stock (or any directors
elected by such directors to fill a vacancy) shall not be classified and shall
serve for a term ending upon the election and qualification of their successors
following the termination at any time of a right of the holders of Preferred
Stock to elect members of the Reliant Energy Board of Directors.
DIVIDENDS. Holders of Preferred Stock are entitled to receive
cumulative dividends at the rate fixed for each such series and to have
contributions made to any sinking fund that may be established for any such
series before any dividends shall be paid or set apart for any shares of Common
Stock.
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<PAGE> 3
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of Reliant Energy, or any reduction or decrease of its capital stock
resulting in a distribution of assets to the holders of Common Stock, payment to
the holders of any outstanding Preferred Stock of the full preferential amounts
fixed for each series thereof, plus an amount equal to any dividends accrued or
in arrears thereon, shall be made prior to the pro rata distribution of the
remaining assets of Reliant Energy to the holders of Common Stock.
PREFERENCE STOCK
The Reliant Energy Board of Directors, without further action by the
Reliant Energy shareholders, is authorized to issue the Preference Stock in
one or more series and to fix and determine as to any series all the relative
rights and preferences of shares of such series so established, including,
without limitation, preferences, limitations or relative rights with respect to
redemption rights, conversion rights, if any, voting rights, if any, dividend
rights and any preferences on liquidation; provided, however, that the relative
rights of priority of Preference Stock must rank junior to the relative rights
of priority of Preferred Stock. One series of Preference Stock, the Series A
Preference Stock, will be purchasable upon the exercise of a Right (as
hereinafter defined). See "--Rights Plan."
CERTAIN PROVISIONS OF THE RELIANT ENERGY ARTICLES OF INCORPORATION AND BYLAWS
Neither the Reliant Energy Articles of Incorporation nor the Reliant
Energy Bylaws contain any provision that would have an effect of delaying,
deferring or preventing a change in control of Reliant Energy and that would
operate only with respect to an extraordinary corporate transaction including
Reliant Energy or any of its subsidiaries. However, the Reliant Energy Articles
of Incorporation and the Reliant Energy Bylaws do contain certain provisions
that may have the effect of rendering more difficult certain possible takeover
proposals to acquire control of Reliant Energy and of making removal of
management of Reliant Energy more difficult. The Reliant Energy Articles of
Incorporation provide that the Reliant Energy Board of Directors is divided into
three classes serving staggered three-year terms such that approximately
one-third of the Reliant Energy Board of Directors is elected each year. The
Reliant Energy Bylaws provide that no director may be removed except (a) with
cause, as defined in the Bylaws, by a majority vote of the shareholders, or (b)
without cause by the affirmative vote of 80% of the directors or 80% of the
shareholders. The Reliant Energy Bylaws further provide that no person shall be
eligible for election or reelection or to continue to serve as a member of the
Reliant Energy Board of Directors if such person is an officer, director, agent,
representative, partner, employee, nominee or affiliate of another public
utility company other than Reliant Energy or any of Reliant Energy's
subsidiaries that is a public utility company. The Reliant Energy Bylaws also
provide that they may be amended or repealed, or new Reliant Energy Bylaws may
be adopted, only upon the affirmative vote of 80% of the directors or 80% of the
shareholders. The Reliant Energy Bylaws also impose certain procedural
requirements on shareholders who wish (i) to make nominations in the election of
directors, (ii) to propose that a director be removed and (iii) to propose any
repeal or change in the Reliant Energy Bylaws. The requirements include, among
other things, the timely delivery to Reliant Energy's Corporate Secretary of
notice of the nomination or proposal and evidence of (a) the shareholder's
status as such, (b) the number of shares he beneficially owns, (c) a list of the
persons with whom the shareholder is acting in concert and (d) the number of
shares such persons beneficially own. The Reliant Energy Bylaws further provide
that when nominating directors, the shareholder must also submit such
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<PAGE> 4
information with respect to the nominee as would be required by a proxy
statement and certain other information. The Reliant Energy Bylaws provide that
failure to follow the required procedures renders the nominee or proposal
ineligible to be voted upon by the shareholders.
RIGHTS PLAN
On July 11, 1990, the Board of Directors of Houston Industries
Incorporated (a predecessor of Reliant Energy) declared a dividend of one right
to purchase preference stock for each outstanding share of its common stock to
shareholders of record at the close of business on August 16, 1990 ("HII
Rights"). Each share of Common Stock includes one right, which will entitle the
registered holder of Common Stock to purchase from Reliant Energy a unit
consisting of one-thousandth of a share (a "Fractional Share") of Series A
Preference Stock, without par value (the "Series A Preference Stock"), at a
purchase price of $42.50 per Fractional Share, subject to adjustment ("Rights").
The description and terms of the HII Rights and the Rights are set forth in the
Rights Agreement dated as of July 11, 1990 between Reliant Energy (formerly
Houston Industries Incorporated) and Chase Bank of Texas, National Association
(formerly Texas Commerce Bank National Association), as Rights Agent (the
"Rights Agent"), as amended and restated as of August 6, 1997, and as further
amended by Amendment No. 1 to Rights Agreement, dated as of May 8, 2000 (the
"Rights Agreement").
DETACHMENT OF RIGHTS; EXERCISABILITY. The Rights are attached to
all Common Stock certificates, and no separate Rights Certificates (as defined
in the Rights Agreement) will be distributed initially. The Rights will separate
from the Common Stock and a "Distribution Date" will occur, with certain
exceptions, upon the earlier of (i) ten days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired, or obtained the right to acquire, beneficial ownership of
20% or more of the outstanding shares of Common Stock (the date of the
announcement being the "Stock Acquisition Date"), or (ii) ten business days
following the commencement of a tender offer or exchange offer that would result
in a person's becoming an Acquiring Person. In certain circumstances, the
Distribution Date may be deferred by the Reliant Energy Board of Directors.
Certain inadvertent acquisitions will not result in a person's becoming an
Acquiring Person if the person promptly divests itself of sufficient Common
Stock. Until the Distribution Date (or earlier redemption or expiration of the
Rights), (a) the Rights will be evidenced by the Common Stock certificates and
will be transferred with and only with such Common Stock certificates, (b) new
Common Stock certificates will contain a notation incorporating the Rights
Agreement by reference and (c) the surrender for transfer of any certificate
representing outstanding shares of Common Stock will also constitute the
transfer of the Rights associated with the Common Stock represented by such
certificate.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on July 11, 2010 unless earlier redeemed or
exchanged by Reliant Energy as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of business
on the Distribution Date and, from and after the Distribution Date, the separate
Rights Certificates alone will represent the Rights. All shares of Common Stock
issued prior to the Distribution Date will be issued with Rights. Shares
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<PAGE> 5
of Common Stock issued after the Distribution Date in connection with certain
employee benefit plans or upon conversion of certain securities will be issued
with Rights. Except as otherwise determined by the Reliant Energy Board of
Directors, no other shares of Common Stock issued after the Distribution Date
will be issued with Rights.
FLIP-IN. In the event (a "Flip-In Event") that a person becomes an
Acquiring Person, except pursuant to a tender or exchange offer for all
outstanding shares of Common Stock at a price and on terms that a majority of
the independent directors of Reliant Energy determines to be fair to and
otherwise in the best interests of Reliant Energy and its shareholders (a
"Permitted Offer"), each holder of a Right will thereafter have the right to
receive, upon exercise of such Right, a number of shares of Common Stock (or, in
certain circumstances, cash, property or other securities of Reliant Energy)
having a Current Market Price (as defined in the Rights Agreement) equal to two
times the exercise price of the Right. Notwithstanding the foregoing, following
the occurrence of any Triggering Event, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by or
transferred to an Acquiring Person (or by certain related parties) will be null
and void in the circumstances set forth in the Rights Agreement.
FLIP-OVER. In the event (a "Flip-Over Event") that, at any time from
and after the time an Acquiring Person becomes such, (i) Reliant Energy is
acquired in a merger or other business combination transaction (other than
certain mergers that follow a Permitted Offer), or (ii) 50% or more of Reliant
Energy's assets or earning power is sold or transferred, each holder of a Right
(except Rights that are voided as set forth above) shall thereafter have the
right to receive, upon exercise, a number of shares of common stock of the
acquiring company having a Current Market Price equal to two times the exercise
price of the Right. Flip-In Events and Flip-Over Events are collectively
referred to as "Triggering Events."
SERIES A PREFERENCE STOCK. After the Distribution Date, each Right will
entitle the holder to purchase a Fractional Share of Series A Preference Stock,
which will be essentially the economic equivalent of one share of Common Stock.
ANTIDILUTION. The number of outstanding Rights associated with a share
of Common Stock, or the number of Fractional Shares of Series A Preference Stock
issuable upon exercise of Right and the exercise price, are subject to
adjustment in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Common Stock occurring prior to the Distribution Date.
The exercise price payable, and the number of Fractional Shares of Series A
Preference Stock or other securities or property issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution in the
event of certain transactions affecting the Series A Preference Stock.
With certain exceptions, no adjustment in the exercise price will be
required until cumulative adjustments amount to at least 1% of the exercise
price. No fractional shares of Series A Preference Stock that are not integral
multiples of a Fractional Share are required to be issued and, in lieu thereof,
an adjustment in cash may be made based on the market price of the Series A
Preference Stock on the last trading date prior to the date of exercise.
Pursuant to the Rights Agreement, Reliant Energy reserves the right to require
prior to the occurrence of a Triggering Event that, upon any exercise of Rights,
a number of Rights be exercised so that only whole shares of Series A Preference
Stock will be issued.
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<PAGE> 6
REDEMPTION OF RIGHTS. At any time until the time a person becomes an
Acquiring Person, Reliant Energy may redeem the Rights in whole, but not in
part, at a price of $.005 per Right, payable, at the option of Reliant Energy,
in cash, shares of Common Stock or such other consideration as the Reliant
Energy Board of Directors may determine. Immediately upon the effectiveness of
the action of the Reliant Energy Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.005 redemption price.
EXCHANGE OF RIGHTS. At any time after the occurrence of a Flip-In Event
and prior to a person's becoming the beneficial owner of 50% or more of the
shares of Common Stock then outstanding or the occurrence of a Flip-Over Event,
Reliant Energy may exchange the Rights (other than Rights owned by an Acquiring
Person or an affiliate or an associate of an Acquiring Person, which will have
become void), in whole or in part, at an exchange ratio of one share of Common
Stock, and/or other equity securities deemed to have the same value as one share
of Common Stock, per Right, subject to adjustment.
SUBSTITUTION. If Reliant Energy has an insufficient number of
authorized but unissued shares of Common Stock available to permit an exercise
or exchange of Rights upon the occurrence of a Flip-In Event, it may substitute
certain other types of property for the Common Stock so long as the total value
received by the holder of the Rights is equivalent to the value of the Common
Stock that would otherwise have been received. Reliant Energy may substitute
cash, property, equity securities or debt of Reliant Energy, effect a reduction
in the exercise price of the Rights or use any combination of the foregoing.
NO RIGHTS AS A SHAREHOLDER; TAXES. Until a Right is exercised, the
holder thereof, as such, will have no rights as a shareholder of Reliant Energy,
including, without limitation, the right to vote or to receive dividends.
Shareholders may, depending upon the circumstances, recognize taxable income in
the event that the Rights become exercisable for Common Stock (or other
consideration) or for the common stock of the acquiring company or are exchanged
as set forth above.
AMENDMENT OF TERMS OF RIGHTS. Other than certain provisions relating to
the principal economic terms of the Rights, any of the provisions of the Rights
Agreement may be amended by the Reliant Energy Board of Directors prior to the
time a person becomes an Acquiring Person. Thereafter, the provisions of the
Rights Agreement may be amended by the Board of Directors in order to cure any
ambiguity, defect or inconsistency or to make changes that do not materially and
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person).
RIGHTS AGENT. Chase Bank of Texas, National Association (formerly Texas
Commerce Bank National Association) serves as Rights Agent with regard to
the Rights. Because Reliant Energy serves as the transfer agent and
registrar for the Common Stock, Reliant Energy, at the request of the Rights
Agent, may agree to perform certain ministerial functions relating to the Rights
on behalf of the Rights Agent.
CERTAIN ANTI-TAKEOVER EFFECTS. The Rights have certain anti-takeover
effects. The Rights will cause substantial dilution to any person or group that
attempts to acquire Reliant Energy without the approval of the Reliant Energy
Board of Directors. As a result, the overall effect of the
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<PAGE> 7
Rights may be to render more difficult or discourage any attempt to acquire
Reliant Energy even if such acquisition may be favorable to the interests of
Reliant Energy's shareholders. Because the Reliant Energy Board of Directors can
redeem the Rights or approve a Permitted Offer, the Rights should not interfere
with a merger or other business combination approved by the Reliant Energy Board
of Directors.
RIGHTS AGREEMENT; SUMMARY. A copy of the Rights Agreement is available
to shareholders free of charge from Reliant Energy. This summary description of
the Rights does not purport to be complete and is qualified by reference to the
Rights Agreement, which is incorporated herein by reference.
-7-
<PAGE> 1
EXHIBIT 12
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 2000
------------ -------------
<S> <C> <C>
Income from continuing operations ............................... $ 55,136 $ 84,364
Income taxes for continuing operations .......................... 46,786 83,083
-------- --------
101,922 167,447
-------- --------
Fixed charges, as defined:
Interest expense ............................................. 31,687 121,517
Distribution on trust preferred securities ................... 95 353
Interest component of rentals charged to operating expense ... 2,445 11,278
-------- --------
Total fixed charges .......................................... 34,227 133,148
-------- --------
Earnings, as defined ............................................ $136,149 $300,595
======== ========
Ratio of earnings to fixed charges .............................. 3.98 2.26
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RESOURCES'
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001042773
<NAME> RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,458,419
<OTHER-PROPERTY-AND-INVEST> 1,525,214
<TOTAL-CURRENT-ASSETS> 1,775,415
<TOTAL-DEFERRED-CHARGES> 2,603,975
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,363,023
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,463,831
<RETAINED-EARNINGS> 267,853
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,731,685
957
0
<LONG-TERM-DEBT-NET> 1,193,111
<SHORT-TERM-NOTES> 350,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 18,200
<LONG-TERM-DEBT-CURRENT-PORT> 248,416
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,820,654
<TOT-CAPITALIZATION-AND-LIAB> 7,363,023
<GROSS-OPERATING-REVENUE> 3,099,337
<INCOME-TAX-EXPENSE> 46,786
<OTHER-OPERATING-EXPENSES> 2,948,528
<TOTAL-OPERATING-EXPENSES> 2,948,528
<OPERATING-INCOME-LOSS> 150,809
<OTHER-INCOME-NET> (17,200)
<INCOME-BEFORE-INTEREST-EXPEN> 133,609
<TOTAL-INTEREST-EXPENSE> 31,687
<NET-INCOME> 55,136
0
<EARNINGS-AVAILABLE-FOR-COMM> 55,136
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 23,711<F1>
<CASH-FLOW-OPERATIONS> 313,221
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>Total annual interest charges on all bonds is as of year-to-date 3/31/00.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99
RELIANT ENERGY RESOURCES CORP.
Items Incorporated by Reference
ITEMS INCORPORATED BY REFERENCE FROM THE RELIANT ENERGY AND RESOURCES FORM 10-K:
o Item 3. LEGAL PROCEEDINGS
(b) Resources Corp.
For a description of certain legal and regulatory proceedings affecting
Resources, see Note 8(d) to Resources' Consolidated Financial Statements, which
note is incorporated herein by reference.
o 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
Earnings for the past three years are not necessarily indicative of
future earnings and results. The level of future earnings depends on numerous
factors including (i) state and federal legislative or regulatory developments,
(ii) national or regional economic conditions, (iii) industrial, commercial and
residential growth in service territories of the Company, (iv) the timing and
extent of changes in commodity prices and interest rates, (v) weather variations
and other natural phenomena, (vi) growth in opportunities for the Company's
diversified operations, (vii) the results of financing efforts, (viii) the
ability to consummate and timing of consummation of pending acquisitions and
dispositions, (ix) the speed, degree and effect of continued electric industry
restructuring in North America and Western Europe, and (x) risks incidental to
the Company's overseas operations, including the effects of fluctuations in
foreign currency exchange rates.
In order to adapt to the increasingly competitive environment, the
Company continues to evaluate a wide array of potential business strategies,
including business combinations or acquisitions involving other utility or
non-utility businesses or properties, internal restructuring, reorganizations or
dispositions of currently owned businesses and new products, services and
customer strategies.
COMPETITION AND RESTRUCTURING OF THE TEXAS ELECTRIC UTILITY INDUSTRY
The electric utility industry is becoming increasingly competitive due
to changing government regulations, technological developments and the
availability of alternative energy sources.
Texas Electric Choice Plan. In June 1999, the Texas legislature adopted
legislation that substantially amends the regulatory structure governing
electric utilities in Texas in order to allow retail competition beginning with
respect to pilot projects for up to 5% of each utility's load in all customer
classes in June 2001 and for all other customers on January 1,2002. In
preparation for that competition, the Company expects to make significant
changes in the electric utility operations it conducts through Reliant Energy
HL&P. Under the Legislation, on January 1, 2002, most retail customers of
investor-owned electric utilities in Texas will be entitled to purchase their
electricity from any of a number of "retail electric providers" which will
have been certified by the Texas Utility Commission. Power generators will sell
electric energy to wholesale purchasers, including retail electric providers, at
unregulated rates beginning January 1, 2002. For further information regarding
the Legislation, see Note 3 to the Company's Consolidated Financial Statements.
Stranded Costs. Pursuant to the Legislation, Reliant Energy HL&P will be
entitled to recover its stranded costs (i.e., the excess of net book value of
generation assets, as defined by the Legislation, over the market value of those
assets) and its regulatory assets related to generation. The Legislation
prescribes specific methods for determining the amount of stranded costs and the
details for their recovery. However, during the base rate freeze period from
1999 through 2001, earnings above the utility's authorized return formula will
be applied in a manner to accelerate depreciation of generation related plant
assets for regulatory purposes. In addition, depreciation expense for
transmission and
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<PAGE> 2
distribution related assets may be redirected to generation assets for
regulatory purposes during that period. The Legislation also provides for
Reliant Energy HL&P, or a special purpose entity, to issue securitization bonds
for the recovery of generation related regulatory assets and stranded costs. Any
stranded costs not recovered through the securitization bonds will be recovered
through a non-bypassable charge to transmission and distribution customers.
Accounting. At June 30, 1999, the Company performed an impairment test
of its previously regulated electric generation assets pursuant to SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", on a plant specific basis. The Company determined that $797
million of electric generation assets were impaired as of June 30, 1999. Of such
amounts, $745 million relate to the South Texas Project and $52 million relate
to two gas-fired generation plants. The Legislation provides recovery of this
impairment through regulated cash flows during the transition period and
through non-bypassable charges to transmission and distribution customers. As
such, a regulatory asset has been recorded for an amount equal to the
impairment loss and is included on the Company's Consolidated Balance Sheets as
a regulatory asset.
The impairment analysis requires estimates of possible future market
prices, load growth, competition and many other factors over the lives of the
plants. The resulting impairment loss is highly dependent on these underlying
assumptions. In addition, after January 10,2004, Reliant Energy HL&P must
finalize and reconcile stranded costs (as defined by the Legislation) in a
filing with the Texas Utility Commission. Any difference between the fair market
value and the regulatory net book value of the generation assets (as defined by
the Legislation) will either be refunded or collected through future
transmission and distribution rates. This final reconciliation allows
alternative methods of third party valuation of the fair market value of these
assets, including outright sale, stock valuations and asset exchanges. Because
generally accepted accounting principles require the Company to estimate fair
market values on a plant-by-plant basis in advance of the final reconciliation,
the financial impacts of the Legislation with respect to stranded costs are
subject to material changes. Factors affecting such change may include
estimation risk, uncertainty of future energy prices and the economic lives of
the plants. If events occur that make the recovery of all or a portion of the
regulatory assets associated with the generation plant impairment loss and
deferred debits created from discontinuance of SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation" pursuant to the Legislation no longer
probable, the Company will write off the corresponding balance of such assets as
a non-cash charge against earnings.
In the fourth quarter of 1999, Reliant Energy HL&P filed an application
to securitize its generation related regulatory assets as defined by the
Legislation. The Texas Utility Commission, Reliant Energy HL&P and other
interested parties have been discussing proposed methodologies for calculating
the amount of such assets to be securitized. The parties have reached an
agreement in principle as to the amount to be securitized, which reflects the
economic value of the nominal book amount which prior to the deregulation
legislation would have been collected through rates over a much longer time
period. The Company has determined that a pre-tax accounting loss of $282
million exists. Therefore, the Company recorded an after-tax extraordinary loss
of $183 million for this accounting impairment of these regulatory assets in
1999.
Transmission System Open Access. In February 1996, the Texas Utility
Commission adopted rules granting third-party users of transmission systems open
access to such systems at rates, terms and conditions comparable to those
available to utilities owning such transmission assets. Under the Texas Utility
Commission order implementing the rule, Reliant Energy HL&P was required to
separate, on an operational basis, its wholesale power marketing operations from
the operations of the transmission grid and, for purposes of transmission
pricing, to disclose each of its separate costs of generation, transmission and
distribution. Within ERCOT, an independent system operator (ISO) manages the
state's electric grid, ensuring system reliability and providing
non-discriminatory transmission access to all power producers and traders.
Transition Plan. In June 1998, the Texas Utility Commission approved the
Transition Plan filed by Reliant Energy HL&P in December 1997. Certain parties
have appealed the order approving the Transition Plan. The provisions of the
Transition Plan expired by their own terms as of December 31, 1999. For
additional information, see Note 4 to the Company's Consolidated Financial
Statements.
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<PAGE> 3
COMPETITION -- RELIANT ENERGY EUROPE OPERATIONS
The European energy market is highly competitive. In addition, over the
next several years, an increasing consolidation of the participants in the Dutch
generating market is expected to occur.
Reliant Energy Europe competes in the Netherlands primarily against the
three other largest Dutch generating companies, various cogenerators of electric
power, various alternate sources of power and non-Dutch generators of electric
power, primarily from Germany. At present, the Dutch electricity system has
three operational interconnection points with Germany and two interconnection
points with Belgium. There are also a number of projects that are at various
stages of development and that may increase the number of interconnections in
the future including interconnections with Norway and the United Kingdom. The
Belgian interconnections are used to import electricity from France but a larger
portion of Dutch imports comes from Germany. In 1998, net power imports into the
Netherlands were approximately 11.7 terawatt hours. Based on current
information, it is estimated that net power imports into the Netherlands in 1999
increased significantly from 1998.
In 1999, UNA and the three other largest Dutch generators supplied
approximately 60% of the electricity consumed in the Netherlands. Smaller Dutch
producers supplied about 28% and the remainder was imported. The Dutch
electricity market is expected to be gradually opened for wholesale competition
including certain commercial and industrial customers beginning in 2001.
Competition is expected to increase in subsequent years and it is anticipated
that the market for small businesses and residential customers will become open
to competition by 2007. The timing of the opening of these markets is subject,
however, to change at the discretion of the Minister of Economic Affairs.
The trading and marketing operations of Reliant Energy Europe will also be
subject to increasing levels of competition. As of March 1,2000, there were
approximately 25 trading and marketing companies registered with the Amsterdam
Power Exchange. Competition for marketing customers is intense and is expected
to increase with the deregulation of the market. The primary elements of
competition in both the generation and trading and marketing side of Reliant
Energy Europe's business operations are price, credit-support and supply and
delivery reliability.
COMPETITION -- OTHER OPERATIONS
Wholesale Energy By the third quarter of 2000, Reliant Energy expects that
the Company will own and operate over 8,000 MW of non-rate regulated electric
generation assets that serve the wholesale energy markets located in the states
of California and Florida, and the Southwest, Midwest and Mid-Atlantic regions
of the United States. Competitive factors affecting the results of operations of
these generation assets include: new market entrants, construction by others of
more efficient generation assets, the actions of regulatory authorities and
weather.
Other competitors operate power generation projects in most of the regions
where the Company has invested in non-rate regulated generation assets. Although
local permitting and siting issues often reduce the risk of a rapid growth in
supply of generation capacity in any particular region, over time, projects are
likely to be built which will increase competition and lower the value of some
of the Company's non-rate regulated electric generation assets.
The regulatory environment of the wholesale energy markets in which the
Company invests may adversely affect the competitive conditions of those
markets. In several regions, notably California and in the PJM Power Pool Region
(in the Mid-Atlantic region of the United States), the independent system
operators have chosen to rely on price caps and market redesigns as a way of
minimizing market volatility.
The results of operations of the Company's non-rate regulated generation
assets are also affected by the weather conditions in the relevant wholesale
energy markets. Extreme seasonal weather conditions typically increase the
demand for wholesale energy. Conversely, mild weather conditions typically have
the opposite effect. In some regions, especially California, weather conditions
associated with hydroelectric generation resources such as rainfall and snowpack
can significantly influence market prices for electric power by increasing or
decreasing the availability and timing of hydro-based generation which is
imported into the California market.
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<PAGE> 4
Competition for acquisition of international and domestic non-rate
regulated power projects is intense. The Company competes against a number of
other participants in the non-utility power generation industry, some of which
have greater financial resources and have been engaged in non-utility power
projects for periods longer than the Company and have accumulated larger
portfolios of projects. Competitive factors relevant to the non-utility power
industry include financial resources, access to non-recourse funding and
regulatory factors.
Reliant Energy Services competes for sales in its natural gas, electric
power and other energy derivatives trading and marketing business with other
energy merchants, producers and pipelines based on its ability to aggregate
supplies at competitive prices from different sources and locations and to
efficiently utilize transportation from third-party pipelines and transmission
from electric utilities. Reliant Energy Services also competes against other
energy marketers on the basis of its relative financial position and access to
credit sources. This competitive factor reflects the tendency of energy
customers, wholesale energy suppliers and transporters to seek financial
guarantees and other assurances that their energy contracts will be satisfied.
As pricing information becomes increasingly available in the energy trading and
marketing business and as deregulation in the electricity markets continues to
accelerate, the Company anticipates that Reliant Energy Services will experience
greater competition and downward pressure on per-unit profit margins in the
energy marketing industry.
Natural Gas Distribution. Natural Gas Distribution competes primarily
with alternate energy sources such as electricity and other fuel sources. In
addition, as a result of federal regulatory changes affecting interstate
pipelines, it has become possible for other natural gas suppliers and
distributors to bypass Natural Gas Distribution's facilities and market, sell
and/or transport natural gas directly to small commercial and/or large volume
customers.
Interstate Pipelines. The Interstate Pipelines segment competes with
other interstate and intrastate pipelines in the transportation and storage of
natural gas. The principal elements of competition among pipelines are rates,
terms of service, and flexibility and reliability of service. Interstate
Pipelines competes indirectly with other forms of energy available to its
customers, including electricity, coal and fuel oils. The primary competitive
factor is price. Changes in the availability of energy and pipeline capacity,
the level of business activity, conservation and governmental regulations, the
capability to convert to alternative fuels, and other factors, including
weather, affect the demand for natural gas in areas served by Interstate
Pipelines and the level of competition for transport and storage services.
FLUCTUATIONS IN COMMODITY PRICES AND DERIVATIVE INSTRUMENTS
For information regarding the Company's exposure to risk as a result of
fluctuations in commodity prices and derivative instruments, see "Quantitative
and Qualitative Disclosures About Market Risk" in Item 7A of this Report.
INDEXED DEBT SECURITIES (ACES AND ZENS) AND TIME WARNER INVESTMENT
For information on Reliant Energy's indexed debt securities and its
investment in TW Common, see "Quantitative and Qualitative Disclosures About
Market Risk" in Item 7A of this Report and Note 8 to the Company's Consolidated
Financial Statements.
IMPACT OF THE YEAR 2000 ISSUE AND OTHER SYSTEM IMPLEMENTATION ISSUES
In 1997, the Company initiated a corporate wide Year 2000 project to
address mainframe application systems, information technology (IT) related
equipment, system software, client-developed applications, building controls and
non-IT embedded systems such as process controls for energy production and
delivery. The evaluation of Year 2000 issues included those related to
significant customers, key vendors, service suppliers and other parties material
to the Company's operations.
Remediation and testing of all systems and equipment were completed
during 1999. The Company did not experience any Year 2000 problems that
significantly affected the operations of the Company. The Company will
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<PAGE> 5
continue to monitor and assess potential future problems. Total direct costs of
resolving the Year 2000 issue with respect to the Company were $29 million.
The Company is in the process of implementing SAP America, Inc.'s (SAP)
proprietary R/3 enterprise software. Although the implementation of the SAP
system had the incidental effect of negating the need to modify many of the
Company's computer systems to accommodate the Year 2000 problem, the Company
does not deem the costs of the SAP system as directly related to its Year 2000
compliance program. Portions of the SAP system were implemented in December
1998, March 1999 and September 1999, and it is expected that the final portion
of the SAP system will be fully implemented by the fourth quarter of 2002. The
cost of implementing the SAP system is currently estimated to be approximately
$237 million, inclusive of internal costs. As of December 31, 1999, $192 million
has been spent on the implementation.
ENTRY INTO THE EUROPEAN MARKET
Reliant Energy Europe owns, operates and sells power from generation
facilities in the Netherlands and plans to participate in the emerging wholesale
energy trading and marketing industry in the Netherlands and other countries in
Europe. Reliant Energy expects that the Dutch electric industry will undergo
change in response to market deregulation in 2001. These expected changes
include the anticipated expiration of certain transition agreements which have
governed the basic tariff rates that UNA and other generators have charged their
customers. Based on current forecasts and other assumptions, the revenues of
UNA could decline significantly from 1999 revenues after 2000.
One of the factors that could have a significant impact on the Dutch energy
industry, including the operations of UNA, is the ultimate resolution of
stranded cost issues in the Netherlands. The Dutch government is currently
seeking to establish a transitional regime in order to solve the problem of
stranded costs, which relate primarily to investments and contracts entered into
by SEP and certain licensed generators prior to the liberalization of the
market. SEP is owned in equal shares by each of the four large Dutch generating
companies, including UNA.
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 $639 million based on an exchange rate of 2.19
NLG per U.S. dollar as of December 31, 1999), which may be increased in certain
circumstances at the option of the Company up to NLG 1.9 billion (approximately
$868 million). Of the total consideration paid by the Company for the shares of
UNA, NLG 900 million (approximately $411 million) has been placed by the
selling shareholders in an escrow account to secure the indemnity obligations.
Although Reliant Energy 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 existing shareholders timely
performance of their obligations under the indemnity arrangement, and the amount
of stranded costs which at present is not determinable.
The Dutch government is expected to propose a legislative initiative
regarding stranded costs to the Dutch cabinet in March 2000. The proposed
legislation will be sent to the Dutch council of state for review. It is not
anticipated that the legislation will be reviewed by parliament until late in
the summer of 2000.
For information about the Company's exposure through its investment in
Reliant Energy Europe to losses resulting from fluctuations in currency rates,
see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of
this Form 10-K.
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<PAGE> 6
RISK OF OPERATIONS IN EMERGING MARKETS
Reliant Energy Latin America's operations are subject to various risks
incidental to investing or operating in emerging market countries. These risks
include political risks, such as governmental instability, and economic risks,
such as fluctuations in currency exchange rates, restrictions on the
repatriation of foreign earnings and/or restrictions on the conversion of local
currency earnings into U.S. dollars. The Company's Latin American operations are
also highly capital intensive and, thus, dependent to a significant extent on
the continued availability of bank financing and other sources of capital on
commercially acceptable terms.
Impact of Currency Fluctuations on Company Earnings. The Company owns
11.78% of the stock of Light Servicos de Eletricidade S.A. (Light) and, through
its investment in Light, a 9.2% interest in the stock of Metropolitana
Electricidade de Sao Paulo S.A. (Metropolitana). As of December 31, 1999 and
1998, Light and Metropolitana had total borrowings of $2.9 billion and $3.2
billion, respectively, denominated in non-local currencies. During the first
quarter of 1999, the Brazilian real was devalued and allowed to float against
other major currencies. The effects of devaluation on the non-local currency
denominated borrowings caused the Company to record an after-tax charge for the
year ended December 31, 1999 of $102 million as a result of foreign currency
transaction losses recorded by both Light and Metropolitana in such periods. For
additional information regarding the effect of the devaluation of the Brazilian
real, see Note 7(a) in the Company's Consolidated Financial Statements.
Light's and Metropolitana's tariff adjustment mechanisms are not
directly indexed to the U.S. dollar or other non-local currencies. To partially
offset the devaluation of the Brazilian real, and the resulting increased
operating costs and inflation, Light and Metropolitana received tariff rate
increases of 16% and 21%, respectively, which were phased in during June and
July 1999. Light also received its annual rate adjustment in November 1999
resulting in a tariff rate increase of 11%. The Company is pursuing additional
tariff increases to mitigate the impact of the devaluation; however, there can
be no assurance that such adjustments will be timely or that they will permit
substantial recovery of the impact of the devaluation.
Certain of Reliant Energy Latin America's other foreign electric
distribution companies have incurred U.S. dollar and other non-local currency
indebtedness (approximately $600 million at December 31, 1999). For further
analysis of foreign currency fluctuations in the Company's earnings and cash
flows, see "Quantitative and Qualitative Disclosures About Market Risk --
Foreign Currency Exchange Rate Risk" in Item 7A of this Form 10-K.
Impact of Foreign Currency Devaluation on Projected Capital Resources.
The ability of Light and Metropolitana to repay or refinance their debt
obligations at maturity is dependent on many factors, including local and
international economic conditions prevailing at the time such debt matures. If
economic conditions in the international markets continue to be unsettled or
deteriorate, it is possible that Light, Metropolitana and the other foreign
electric distribution companies in which the Company holds investments might
encounter difficulties in refinancing their debt (both local currency and
non-local currency borrowings) on terms and conditions that are commercially
acceptable to them and their shareholders. In such circumstances, in lieu of
declaring a default or extending the maturity, it is possible that lenders
might seek to require, among other things, higher borrowing rates, and
additional equity contributions and/or increased levels of credit support from
the shareholders of such entities. For a discussion of the Company's anticipated
capital contributions in 2000, see "-- Liquidity and Capital Resources -- Future
Sources and Uses of Cash Flows -- Reliant Energy Latin America Capital
Contributions and Advances." In 2000, $1.6 billion of debt obligations of Light
and Metropolitana will mature. The availability or terms of refinancing such
debt cannot be assured. Currency fluctuation and instability affecting Latin
America may also adversely affect the Company's ability to refinance its equity
investments with debt.
ENVIRONMENTAL EXPENDITURES
The Company is subject to numerous environmental laws and regulations,
which require it to incur substantial costs to operate existing facilities,
construct and operate new facilities, and mitigate or remove the effect of past
operations on the environment.
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<PAGE> 7
Clean Air Act Expenditures. The Company expects the majority of capital
expenditures associated with environmental matters to be incurred by Electric
Operations in connection with new emission limitations under the Federal Clean
Air Act (Clean Air Act) for oxides of nitrogen (NOx). NOx reduction costs
incurred by Electric Operations generating units in the Houston, Texas area
totaled approximately $7 million in 1999 and $7 million in 1998. The Texas
Natural Resources Conservation Commission (TNRCC) is currently considering
additional NOx reduction requirements for electric generating units and other
industrial sources located in the Houston metropolitan area and the eastern half
of Texas as a means to attain the Clean Air Act standard for ozone. Although the
magnitude and timing of these requirements will not be established by the TNRCC
until November, 2000, NOx reductions approaching 90% of the emissions level are
anticipated. Expenditures for NOx controls on Electric Operations' generating
units have been estimated at $500 million to $600 million during the period 2000
through 2003, with an estimated $80 million to be incurred during 2000. In
addition, the Legislation created a program mandating air emissions reductions
for certain generating facilities of Electric Operations. The Legislation
provides for stranded cost recovery for costs associated with this obligation
incurred before May 1, 2003. For further information regarding the Legislation,
see Note 3 to the Company's Consolidated Financial Statements.
Site Remediation Expenditures. From time to time the Company has received
notices from regulatory authorities or others regarding its status as a
potentially responsible party in connection with sites found to require
remediation due to the presence of environmental contaminants. Based on
currently available information, Reliant Energy believes that remediation costs
will not materially affect its financial position, results of operations or cash
flows. There can be no assurance, however, that future developments, including
additional information about existing sites or the identification of new sites,
will not require material revisions to Reliant Energy's estimates. For
information about specific sites that are the subject of remediation claims,
see Note 14(h) to the Company's Consolidated Financial Statements and Note 8(d)
to Resources' Consolidated Financial Statements.
Mercury Contamination. Like other natural gas pipelines, the Company's
pipeline operations have in the past employed elemental mercury in meters used
on its pipelines. Although the mercury has now been removed from the meters, it
is possible that small amounts of mercury have been spilled at some of those
sites in the course of normal maintenance and replacement operations and that
such spills have contaminated the immediate area around the meters with
elemental mercury. Such contamination has been found by Resources at some sites
in the past, and the Company has conducted remediation at sites found to be
contaminated. Although the Company 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 experience of the Company and others in the natural
gas industry to date and on the current regulations regarding remediation of
such sites, the Company believes that the cost of any remediation of such sites
will not be material to the Company's or Resources' financial position,
results of operations or cash flows.
Other. In addition, the Company has been named as a 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 like those received may be
asserted in the future and intends to continue its practice of vigorously
contesting claims which 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.
OTHER CONTINGENCIES
For a description of certain other legal and regulatory proceedings
affecting the Company, see Notes 3, 4 and 14 to the Company's Consolidated
Financial Statements and Note 8 to Resources' Consolidated Financial Statements.
-7-
<PAGE> 8
o ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company has long-term debt, Company obligated mandatorily
redeemable preferred securities of subsidiary, trusts holding solely junior
subordinated debentures of the Company (Trust Preferred Securities), securities
held in the Company's nuclear decommissioning trust, bank facilities, certain
lease obligations and interest rate swaps which subject the Company to the risk
of loss associated with movements in market interest rates.
At December 31, 1999, the Company had issued fixed-rate debt (excluding
indexed debt securities) and Trust Preferred Securities aggregating $5.8 billion
in principal amount and having a fair value of $5.6 billion. These instruments
are fixed-rate and, therefore, do not expose the Company to the risk of loss in
earnings due to changes in market interest rates (see Notes 10 and 11 to the
Company's Consolidated Financial Statements). However, the fair value of these
instruments would increase by approximately $305 million if interest rates were
to decline by 10% from their levels at December 31, 1999. In general, such an
increase in fair value would impact earnings and cash flows only if the Company
were to reacquire all or a portion of these instruments in the open market prior
to their maturity.
The Company's floating-rate obligations aggregated $3.1 billion at
December 31, 1999 (see Note 10 to the Company's Consolidated Financial
Statements), inclusive of (i) amounts borrowed under short-term and long-term
credit facilities of the Company (including the issuance of commercial paper
supported by such facilities), (ii) borrowings underlying a receivables facility
and (iii) amounts subject to a master leasing agreement under which lease
payments vary depending on short-term interest rates. These floating-rate
obligations expose the Company to the risk of increased interest and lease
expense in the event of increases in short-term interest rates. If the floating
rates were to increase by 10% from December 31, 1999 levels, the Company's
consolidated interest expense and expense under operating leases would increase
by a total of approximately $1.6 million each month in which such increase
continued.
As discussed in Notes 1(l) and 6(c) to the Company's Consolidated
Financial Statements, the Company contributes $14.8 million per year to a trust
established to fund the Company's share of the decommissioning costs for the
South Texas Project. The securities held by the trust for decommissioning costs
had an estimated fair value of $145 million as of December 31, 1999, of which
approximately 40% were fixed-rate debt securities that subject the Company to
risk of loss of fair value with movements in market interest rates. If interest
rates were to increase by 10% from their levels at December 31, 1999,
the decrease in fair value of the fixed-rate debt securities would not be
material to the Company. In addition, the risk of an economic loss is mitigated.
Any unrealized gains or losses are accounted for in accordance with SFAS No. 71
as a regulatory asset/liability because the Company believes that its future
contributions which are currently recovered through the rate-making process will
be adjusted for these gains and losses. For further discussion regarding the
recovery of decommissioning costs pursuant to the Legislation, see Note 3 to the
Consolidated Financial Statements.
As discussed in Note 1(l) to the Company's Consolidated Financial
Statements, UNA holds fixed-rate debt securities, which had an estimated fair
value of $133 million as of December 31, 1999, that subject the Company to risk
of loss of fair value and earnings with movements in market interest rates. If
interest rates were to increase by 10% from their levels at December 31, 1999,
the decrease in fair value and loss in earnings from this investment would not
be material to the Company.
The Company has entered into interest rate swaps for the purpose of
decreasing the amount of debt subject to interest rate fluctuations. At
December 31, 1999, these interest rate swaps had an aggregate notional amount of
$64 million and the cost to terminate would not result in a material loss in
earnings and cash flows to the Company (see Note 5 to the Company's Consolidated
Financial Statements). An increase of 10% in the December 31, 1999 level of
interest rates would not increase the cost of termination of the swaps by a
material amount to the Company. Swap termination costs would impact the
Company's earnings and cash flows only if all or a portion of the swap
instruments were terminated prior to their expiration.
-8-
<PAGE> 9
As discussed in Note 10(b) to the Company's Consolidated Financial
Statements, in November 1998, Resources sold $500 million aggregate principal
amount of its 6 3/8% TERM Notes which included an embedded option to remarket
the securities. The option is expected to be exercised in the event that the
ten-year Treasury rate in 2003 is below 5.66%. At December 31, 1999, the Company
could terminate the option at a cost of $11 million. A decrease of 10% in the
December 31, 1999 level of interest rates would increase the cost of termination
of the option by approximately $5 million.
EQUITY MARKET RISK
As discussed in Note 8 to the Company's Consolidated Financial
Statements, the Company owns approximately 55 million shares of TW Common, of
which approximately 38 million and 17 million shares are held by the Company to
facilitate its ability to meet its obligations under the ACES and ZENS,
respectively. Unrealized gains and losses resulting from changes in the market
value of the Company's TW Common are recorded in the Consolidated Statement of
Operations. Increases in the market value of TW Common result in an increase in
the liability for the ZENS and ACES and are recorded as a non-cash expense. Such
non-cash expense will be offset by an unrealized gain on the Company's TW Common
investment. However, if the market value of TW Common declines below $58.25, the
ZENS payment obligation will not decline below its original principal amount. As
of December 31, 1999, the market value of TW Common was $72.31 per share. A
decrease of 10% from the December 31, 1999 market value of TW Common would not
result in a loss. As of March 1, 2000, the market value of TW Common was $84.38
per share. In addition, the Company has a $14 million investment in Cisco
Systems, Inc. as of December 31, 1999, which is classified as trading under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). In January 2000, the Company entered into financial instruments
(a put option and a call option) to manage price risks related to the Company's
investment in Cisco Systems, Inc. A decline in the market value of this
investment would not materially impact the Company's earnings and cash flows.
The Company also has a $9 million investment in Itron, Inc. (Itron) which is
classified as "available for sale" under SFAS No. 115. The Itron investment
exposes the Company to losses in the fair value of Itron common stock. A 10%
decline in the market value per share of Itron common stock from the December
31, 1999 levels would not result in a material loss in fair value to the
Company.
As discussed above under "-- Interest Rate Risk," the Company
contributes to a trust established to fund the Company's share of the
decommissioning costs for the South Texas Project which held debt and equity
securities as of December 31, 1999. The equity securities expose the Company to
losses in fair value. If the market prices of the individual equity securities
were to decrease by 10% from their levels at December 31, 1999, the resulting
loss in fair value of these securities would not be material to the Company.
Currently, the risk of an economic loss is mitigated as discussed above under
"--Interest Rate Risk."
FOREIGN CURRENCY EXCHANGE RATE RISK
As further described in "Certain Factors Affecting Future Earnings of
the Company -- Risks of Operations in Emerging Markets" in Item 7 of this Form
10-K, the Company has investments in electric generation and distribution
facilities in Latin America with a substantial portion accounted for under the
equity method. In addition, as further discussed in Note 2 of the Company's
Consolidated Financial Statements, during the fourth quarter of 1999, the
Company completed the first and second phases of the acquisition of 52% of the
shares UNA, a Dutch power generation company and completed the final phase of
the acquisition on March 1, 2000. These foreign operations expose the Company to
risk of loss in earnings and cash flows due to the fluctuation in foreign
currencies relative to the Company's consolidated reporting currency, the U.S.
dollar. The Company accounts for adjustments resulting from translation of its
investments with functional currencies other than the U.S. dollar as a charge or
credit directly to a separate component of stockholders' equity. The Company has
entered into foreign currency swaps and has issued Euro denominated debt to
hedge its net investment in UNA. Changes in the value of the swap and debt are
recorded as foreign currency translation adjustments as a component of
stockholders' equity. For further discussion of the accounting for foreign
currency adjustments, see Note 1(m) in the Company's Consolidated Financial
Statements. The cumulative translation loss of $77 million, recorded as of
December 31, 1999, will be realized as a loss in earnings and cash flows only
upon the disposition of the related investments. The cumulative translation loss
was $34 million as of
-9-
<PAGE> 10
December 31, 1998. The increase in cumulative translation loss from December 31,
1998 to December 31, 1999, was primarily due to the impact of devaluation of the
Brazilian real on the Company's investments in Light and Metropolitana.
In addition, certain of Reliant Energy Latin America's foreign
operations have entered into obligations in currencies other than their own
functional currencies which expose the Company to a loss in earnings. In such
cases, as the respective investment's functional currency devalues relative to
the non-local currencies, the Company will record its proportionate share of its
investments' foreign currency transaction losses related to the non-local
currency denominated debt. At December 31, 1999, Light and Metropolitana of
which the Company owns 11.78% and 9.2%, respectively, had total borrowings of
approximately $2.9 billion denominated in non-local currencies. As described in
Note 7 to the Company's Consolidated Financial Statements, in 1999 the Company
reported a $102 million (after-tax) charge to net income and a $43 million
charge to other comprehensive income, due to the devaluation of the Brazilian
real. The charge to net income reflects increases in the liabilities at Light
and Metropolitana for their non-local currency denominated borrowings using the
exchange rate in effect at December 31, 1999 and a monthly weighted average
exchange rate for the year then ended. The charge to other comprehensive income
reflects the translation effect on the local currency denominated net assets
underlying the Company's investment in Light. As of December 31, 1999, the
Brazilian real exchange rate was 1.79 per U.S. dollar. An increase of 10% from
the December 31, 1999 exchange rate would result in the Company recording an
additional charge of $20 million and $23 million to net income and other
comprehensive income, respectively. As of March 1, 2000, the Brazilian real
exchange rate was 1.77 per U.S. dollar.
The Company attempts to manage and mitigate this foreign currency risk
by balancing the cost of financing with local denominated debt against the risk
of devaluation of that local currency and including a measure of the risk of
devaluation in its financial plans. In addition, where possible, Reliant Energy
Latin America attempts to structure its tariffs and revenue contracts to
ensure some measure of adjustment due to changes in inflation and currency
exchange rates; however, there can be no assurance that such efforts will
compensate for the full effect of currency devaluation, if any.
ENERGY COMMODITY PRICE RISK
As further described in Note 5 to the Company's Consolidated Financial
Statements, the Company utilizes a variety of derivative financial instruments
(Derivatives), including swaps, over-the-counter options and exchange-traded
futures and options, as part of the Company's overall hedging strategies and
for trading purposes. To reduce the risk from the adverse effect of market
fluctuations in the price of electric power, natural gas, crude oil and refined
products and related transportation and transmission, the Company enters into
futures transactions, forward contracts, swaps and options (Energy Derivatives)
in order to hedge certain commodities in storage, as well as certain expected
purchases, sales, transportation and transmission of energy commodities (a
portion of which are firm commitments at the inception of the hedge). The
Company's policies prohibit the use of leveraged financial instruments. In
addition, Reliant Energy Services maintains a portfolio of Energy Derivatives to
provide price risk management services and for trading purposes (Trading
Derivatives).
The Company uses value-at-risk and a sensitivity analysis method for
assessing the market risk of its derivatives.
With respect to the Energy Derivatives (other than Trading Derivatives)
held by the Company as of December 31, 1999, an increase of 10% in the market
prices of natural gas and electric power from year-end levels would have
decreased the fair value of these instruments by approximately $12 million. As
of December 31, 1998, a decrease of 10% in the market prices of natural gas and
electric power from year-end levels would have decreased the fair value of these
instruments by approximately $3 million.
The above analysis of the Energy Derivatives utilized for hedging
purposes does not include the favorable impact that the same hypothetical price
movement would have on the Company's physical purchases and sales of natural gas
and electric power to which the hedges relate. Furthermore, the Energy
Derivative portfolio is managed to complement the physical transaction
portfolio, reducing overall risks within limits. Therefore, the adverse impact
to the fair value
-10-
<PAGE> 11
of the portfolio of Energy Derivatives held for hedging purposes associated with
the hypothetical changes in commodity prices referenced above would be offset by
a favorable impact on the underlying hedged physical transactions, assuming (i)
the Energy Derivatives are not closed out in advance of their expected term,
(ii) the Energy Derivatives continue to function effectively as hedges of the
underlying risk and (iii) as applicable, anticipated transactions occur as
expected.
The disclosure with respect to the Energy Derivatives relies on the
assumption that the contracts will exist parallel to the underlying physical
transactions. If the underlying transactions or positions are liquidated prior
to the maturity of the Energy Derivatives, a loss on the financial instruments
may occur, or the options might be worthless as determined by the prevailing
market value on their termination or maturity date, whichever comes first.
With respect to the Trading Derivatives held by Reliant Energy Services,
consisting of natural gas, electric power, crude oil and refined products,
weather derivatives, physical forwards, swaps, options and exchange-traded
futures and options, the Company is exposed to losses in fair value due to
changes in the price and volatility of the underlying derivatives. During the
years ended December 31, 1999 and 1998, the highest, lowest and average monthly
value-at-risk in the Trading Derivative portfolio was less than $10 million at a
95% confidence level and for a holding period of one business day. The Company
uses the variance/covariance method for calculating the value-at-risk and
includes delta approximation for option positions.
The Company has established a Risk Oversight Committee comprised of
corporate and business segment officers that oversees all commodity price and
credit risk activities, including derivative trading and hedging activities
discussed above. The committee's duties are to establish the Company's commodity
risk policies, allocate risk capital within limits established by the
Company's board of directors, approve trading of new products and commodities,
monitor risk positions and ensure compliance with the Company's risk management
policies and procedures and the trading limits established by the Company's
board of directors.
-11-
<PAGE> 12
ITEMS INCORPORATED BY REFERENCE FROM THE RESOURCES 10-K NOTES:
o (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(c) Regulatory Assets and Regulation.
Resources applies the accounting policies established in SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71) to the
accounts of its Natural Gas Distribution operations and to MRT. Resources'
Natural Gas Distribution operations are subject to regulation at the state or
municipal level and the Interstate Pipelines operations of MRT are subject to
regulation by the Federal Energy Regulatory Commission. As of December 31, 1999
and 1998, Resources had recorded as deferred debits and other deferred credits
approximately $4 million and $12 million, respectively, of net regulatory
assets.
If, as a result of changes in regulation or competition, Resources'
ability to recover these assets and liabilities would not be assured, then
pursuant to SFAS No. 101, "Regulated Enterprises Accounting for the
Discontinuation of Application of SFAS No. 71" and SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," Resources would be required to write off or write down such regulatory
assets and liabilities.
o (2) DERIVATIVE FINANCIAL INSTRUMENTS
(a) Price Risk Management and Trading Activities.
Resources offers energy price risk management services primarily related to
natural gas, electricity, crude oil and refined products, weather, coal and
certain air emissions regulatory credits. Resources provides these services by
utilizing a variety of derivative financial instruments, including fixed and
variable-priced physical forward contracts, fixed and variable-priced swap
agreements and options traded in the over-the-counter financial markets and
exchange-traded energy futures and option contracts (Trading Derivatives).
Fixed-price swap agreements require payments to, or receipts of payments from,
counterparties based on the differential between a fixed and variable price for
the commodity. Variable-price swap agreements require payments to, or receipts
of payments from, counterparties based on the differential between industry
pricing publications or exchange quotations.
Prior to 1998, Resources applied hedge accounting to certain physical
commodity activities that qualified for hedge accounting. In 1998, Resources
adopted mark-to-market accounting for all of its price risk management and
trading activities. Accordingly, since 1998, such Trading Derivatives are
recorded at fair value with realized and unrealized gains (losses) recorded as a
component of revenues. The recognized, unrealized balance is included in price
risk management assets/liabilities (See Note 1(q)).
-12-
<PAGE> 13
The notional quantities, maximum terms and the estimated fair value of
Trading Derivatives at December 31, 1999 and 1998 are presented below (volumes
in billions of British thermal units equivalent (Bbtue) and dollars in
millions):
<TABLE>
<CAPTION>
VOLUME-FIXED VOLUME-FIXED MAXIMUM
PRICE PAYOR PRICE RECEIVER TERM (YEARS)
------------ -------------- ------------
1999
<S> <C> <C> <C>
Natural gas .................................. 936,716 939,416 9
Electricity .................................. 251,592 248,176 10
Crude oil and refined products ............... 143,857 144,554 3
1998
Natural gas .................................. 937,264 977,293 9
Electricity .................................. 122,950 124,878 3
Crude oil and refined products ............... 205,499 204,223 3
</TABLE>
<TABLE>
<CAPTION>
AVERAGE FAIR
FAIR VALUE VALUE(a)
----------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
---------- ----------- ---------- -----------
1999
<S> <C> <C> <C> <C>
Natural gas ....................... $ 319 $ 299 $ 302 $ 283
Electricity ....................... 131 98 103 80
Crude oil and refined products .... 134 145 127 132
---------- ---------- ---------- ----------
$ 584 $ 542 $ 532 $ 495
========== ========== ========== ==========
1998
Natural gas ....................... $ 224 $ 212 $ 124 $ 108
Electricity ....................... 34 33 186 186
Crude oil and refined products .... 29 23 21 17
---------- ---------- ---------- ----------
$ 287 $ 268 $ 331 $ 311
========== ========== ========== ==========
</TABLE>
- ---------------
(a) Computed using the ending balance of each quarter.
In addition to the fixed-price notional volumes above, Resources also has
variable-priced agreements, as discussed above, totaling 3,797,824 and 1,702,977
Bbtue as of December 31, 1999 and 1998, respectively. Notional amounts reflect
the volume of transactions but do not represent the amounts exchanged by the
parties to the financial instruments. Accordingly, notional amounts do not
accurately measure Resources' exposure to market or credit risks.
All of the fair values shown in the tables above at December 31, 1999 and
December 31, 1998 have been recognized in income. The fair value as of December
31, 1999 and 1998 was estimated using quoted prices where available and
considering the liquidity of the market for the Trading Derivatives. The prices
and fair values are subject to significant changes based on changing market
conditions.
The weighted-average term of the trading portfolio, based on volumes, is
less than one year. The maximum and average terms disclosed herein are not
indicative of likely future cash flows, as these positions may be changed by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity and Resources' risk management portfolio needs and
strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
-13-
<PAGE> 14
In addition to the risk associated with price movements, credit risk is
also inherent in Resources' risk management activities. Credit risk relates to
the risk of loss resulting from non-performance of contractual obligations by a
counterparty. The following table shows the composition of the total price risk
management assets of Resources as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
INVESTMENT INVESTMENT
GRADE(1) TOTAL GRADE(1) TOTAL
---------- ---------- ---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Energy marketers ................................ $ 172 $ 183 $ 103 $ 124
Financial institutions .......................... 119 119 62 62
Gas and electric utilities ...................... 184 186 47 48
Oil and gas producers ........................... 6 30 7 8
Industrials ..................................... 4 5 2 3
Independent power producers ..................... 4 6 1 1
Others .......................................... 64 67 45 47
---------- ---------- ---------- ----------
Total ........................................ $ 553 596 $ 267 293
========== ==========
Credit and other reserves ....................... 12 (6)
---------- ----------
Energy price risk management assets(2) .......... $ 584 $ 287
========== ==========
</TABLE>
- ----------
(1) "Investment Grade" is primarily determined using publicly available credit
ratings along with the consideration of credit support (e.g., parent
company guarantees) and collateral, which encompass cash and standby
letters of credit.
(2) As of December 31, 1999, Resources had no credit risk exposure to any
single counterparty that represents greater than 5% of price risk
management assets.
(b) Non-Trading Activities.
To reduce the risk from market fluctuations in the revenues derived from
electric power, natural gas and related transportation, Resources enters into
futures transactions, swaps and options (Energy Derivatives) in order to hedge
certain natural gas in storage, as well as certain expected purchases, sales and
transportation of natural gas and electric power (a portion of which are firm
commitments at the inception of the hedge). Energy Derivatives are also utilized
to fix the price of compressor fuel or other future operational gas
requirements and to protect natural gas distribution earnings against
unseasonably warm weather during peak gas heating months, although usage to date
for this purpose has not been material. Resources applies hedge accounting with
respect to its derivative financial instruments utilized in non-trading
activities.
For transactions involving Energy Derivatives, hedge accounting is applied
only if the derivative (i) reduces the risk of the underlying hedged item and
(ii) is designated as a hedge at its inception. Additionally, the derivatives
must be expected to result in financial impacts which are inversely correlated
to those of the item(s) to be hedged. This correlation (a measure of hedge
effectiveness) is measured both at the inception of the hedge and on an ongoing
basis, with an acceptable level of correlation of at least 80% for hedge
designation. If and when correlation ceases to exist at an acceptable level,
hedge accounting ceases and mark-to-market accounting is applied.
Unrealized changes in the market value of Energy Derivatives utilized as
hedges are not generally recognized in Resources' Statements of Consolidated
Income until the underlying hedged transaction occurs. Once it becomes probable
that an anticipated transaction will not occur, deferred gains and losses are
recognized. In general, the financial impact of transactions involving these
Energy Derivatives is included in Resources' Statements of Consolidated Income
under the captions (i) fuel expenses, in the case of natural gas transactions
and (ii) purchased
-14-
<PAGE> 15
power, in the case of electric power transactions. Cash flows resulting from
these transactions in Energy Derivatives are included in Resources' Statements
of Consolidated Cash Flows in the same category as the item being hedged.
At December 31, 1999, Resources was fixed-price payors and fixed-price
receivers in Energy Derivatives covering 33,108 billion British thermal units
(Bbtu) and 5,481 Bbtu of natural gas, respectively. At December 31, 1998,
Resources was fixed-price payors and fixed-price receivers in Energy Derivatives
covering 42,498 Bbtu and 3,930 Bbtu of natural gas, respectively. Also, at
December 31, 1999 and 1998, Resources was a party to variable-priced Energy
Derivatives totaling 44,958 Bbtu and 21,437 Bbtu of natural gas, respectively.
The weighted average maturity of these instruments is less than one year.
The notional amount is intended to be indicative of Resources' level of
activity in such derivatives, although the amounts at risk are significantly
smaller because, in view of the price movement correlation required for hedge
accounting, changes in the market value of these derivatives generally are
offset by changes in the value associated with the underlying physical
transactions or in other derivatives. When Energy Derivatives are closed out in
advance of the underlying commitment or anticipated transaction, however, the
market value changes may not offset due to the fact that price movement
correlation ceases to exist when the positions are closed, as further discussed
below. Under such circumstances, gains (losses) are deferred and recognized as a
component of income when the underlying hedged item is recognized in income.
The average maturity discussed above and the fair value discussed in Note
10 are not necessarily indicative of likely future cash flows as these positions
may be changed by new transactions in the trading portfolio at any time in
response to changing market conditions, market liquidity and Resources' risk
management portfolio needs and strategies. Terms regarding cash settlements of
these contracts vary with respect to the actual timing of cash receipts and
payments.
(c) Trading and Non-trading -- General Policy.
In addition to the risk associated with price movements, credit risk is
also inherent in Resources' risk management activities. Credit risk relates to
the risk of loss resulting from non-performance of contractual obligations by a
counterparty. While as yet Resources has experienced only minor losses due to
the credit risk associated with these arrangements, Resources has off-balance
sheet risk to the extent that the counterparties to these transactions may fail
to perform as required by the terms of each such contract. In order to minimize
this risk, Resources enters into such contracts primarily with counterparties
having a minimum Standard & Poor's or Moody's rating of BBB- or Baa3,
respectively. For long-term arrangements, Resources periodically reviews the
financial condition of such firms in addition to monitoring the effectiveness of
these financial contracts in achieving Resources' objectives. Should the
counterparties to these arrangements fail to perform, Resources would seek to
compel performance at law or otherwise obtain compensatory damages in lieu
thereof. Resources might be forced to acquire alternative hedging arrangements
or be required to honor the underlying commitment at then-current market prices.
In such event, Resources might incur additional losses to the extent of amounts,
if any, already paid to the counterparties. In view of its criteria for
selecting counterparties, its process for monitoring the financial strength of
these counterparties and its experience to date in successfully completing these
transactions, Resources believes that the risk of incurring a significant
financial statement loss due to the non-performance of counterparties to these
transactions is minimal.
Reliant Energy's policies prohibit the use of leveraged financial
instruments.
Reliant Energy has established a Risk Oversight Committee, comprised of
corporate and business segment officers that oversees all commodity price and
credit risk activities, including Resources' trading, marketing and risk
management activities. The Committee's duties are to establish Reliant Energy's
and Resources' commodity risk policies, allocate risk capital within limits
established by Reliant Energy's board of directors, approve trading of new
products and commodities, monitor risk positions and ensure compliance with
Reliant Energy's risk management policies and procedures and trading limits
established by Reliant Energy's board of directors.
-15-
<PAGE> 16
o (8) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments.
The following table sets forth certain information concerning
Resources' obligations under non-cancelable long-term operating leases
principally consisting of rental agreements for building space and data
processing equipment and vehicles, including major work equipment (in millions):
<TABLE>
<S> <C>
2000 .............................................. $ 15
2001 .............................................. 14
2002 .............................................. 9
2003 .............................................. 8
2004 .............................................. 6
2005 and beyond ................................... 18
-------
Total ............................................. $ 70
=======
</TABLE>
Resources has a master leasing agreement which provides for the lease of
vehicles, construction equipment, office furniture, data processing equipment
and other property. For accounting purposes, the lease is treated as an
operating lease. At December 31, 1999, the unamortized value of equipment
covered by the master leasing agreement was $17 million. Resources does not
expect to lease additional property under this lease agreement.
Total rental expense for all was $33 million, $25 million and $24
million in 1999, 1998 and 1997, respectively.
(b) Indemnity Provisions.
At December 31, 1999 and 1998, Resources had a $0.5 million and $5.8
million, accounting reserve on its Consolidated Balance Sheets in other deferred
credits for possible indemnity claims asserted in connection with its
disposition of Resources' former subsidiaries or divisions, including the sale
of (i) Louisiana Intrastate Gas Corporation, a former Resources subsidiary
engaged in the intrastate pipeline and liquids extraction business; (ii) Arkla
Exploration Company, a former Resources subsidiary engaged in oil and gas
exploration and production activities; and (iii) Dyco Petroleum Company, a
former Resources subsidiary engaged in oil and gas exploration and production.
(c) Transportation Agreement.
Resources had an agreement (ANR Agreement) with ANR Pipeline Company
(ANR) which contemplated that Resources would transfer to ANR an interest in
certain of Resources' pipeline and related assets. The interest represented
capacity of 250 Mmcf/day. Under the ANR Agreement, an ANR affiliate advanced
$125 million to Resources. Subsequently, the parties restructed the ANR
Agreement and Resources refunded in 1995 and 1993, respectively, $50 million and
$34 million to ANR or an affiliate. Resources recorded $41 million as a
liability reflecting ANR's or its affiliates' use of 130 Mmcf/day of capacity in
certain of Resources' transportation facilities. The level of transportation
will decline to 100 Mmcf/day in the year 2003 with refund of $5 million to an
ANR affiliate. The ANR Agreement will terminate in 2005 with a refund of the
remaining balance.
(d) Environmental Matters.
To the extent that potential environmental remediation costs are
quantified within a range, Resources 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,
future costs are not discounted to their present value and the liability is not
offset by expected insurance recoveries. If justified by circumstances within
Resources' business subject to SFAS No. 71, corresponding regulatory assets are
recorded in anticipation of recovery through the rate making process.
Manufactured Gas Plant Sites. Resources and its predecessors operated a
manufactured gas plant (MGP) adjacent to the Mississippi River in Minnesota
formerly known as Minneapolis Gas Works (FMGW) until 1960. Resources has
substantially completed remediation of the main site other than ongoing water
monitoring and treatment. The manufactured gas was stored in separate holders.
Resources 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, Resources believes that two were neither
owned nor operated by Resources; two were owned by Resources at one time but
were operated by others and currently owned by others; and one site was
previously owned and operated by Resources but is currently owned by others.
Resources believes it has no liability with respect to the sites it neither
owned nor operated.
At December 31, 1999 and 1998, Resources had accrued $18.8 million and
$15.2 million, respectively, for remediation of the Minnesota sites. At December
31, 1999, the estimated range of possible remediation costs was $10 million to
$49 million. The low end of the range was determined based on only those sites
presently, owned or known to have been operated by Resources, assuming use of
Resources proposed remediation methods. The upper end of the range was
determined based on the sites once owned by Resources, whether or not operated
by
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Resources. The cost estimate 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 December 31, 1999 and 1998, Resources had
recorded accruals of $1.2 million and $5.4 million, respectively (with a maximum
estimated exposure of approximately $13 million and $8 million at December 31,
1999 and 1998, respectively), 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 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 December 31, 1999
and 1998, Reliant Energy Minnegasco had over recovered $13 million, including
insurance recoveries. At December 31, 1999 and 1998, Reliant Energy Minnegasco
had recorded a liability of $20.0 million and $20.6 million, respectively, to
cover the cost of future remediation. Reliant Energy Minnegasco expects that
approximately 40% of its accrual as of December 31, 1999 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, a
regulatory asset has been recorded equal to the liability accrued. Resources
believes the difference between any cash expenditures for these costs and the
amount recovered in rates during any year will not be material to Resources'
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. Resources has received notices
from the United States Environmental Protection Agency (EPA) and others
regarding its status as a potentially responsible party (PRP) for other sites.
Based on current information, Resources has not been able to quantify a range of
environmental expenditures for potential remediation expenditures with respect
to other MGP sites.
Mercury Contamination. Like other natural gas pipelines, Resources'
pipeline operations have in the past employed elemental mercury in meters used
on its pipelines. Although the mercury has now been removed from the meters, it
is possible that small amounts of mercury have been spilled at some of those
sites in the course of normal maintenance and replacement operations and that
such spills have contaminated the immediate area around the meters with
elemental mercury. Such contamination has been found by Resources at some sites
in the past, and Resources has conducted remediation at sites found to be
contaminated. Although Resources 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 experience by Resources and others in the natural
gas industry to date and on the current regulations regarding remediation of
such sites, Resources believes that the cost of any remediation of such sites
will not be material to Resources' financial position, results of operations or
cash flows.
Potentially Responsible Party Notifications. From time to time Resources
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 Resources in activities at these
sites, Resources does not believe that these matters will have a material
adverse effect on Resources' financial position, results of operations or cash
flows.
Resources is a party to litigation (other than that specifically noted)
which 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 on Resources' Consolidated Financial Statements, if any, from
the disposition of these matters will not be material.
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