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 JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
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Commission file number 1-3187
RELIANT ENERGY, INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-0694415
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-3000
(Registrant's telephone number, including area code)
Commission file number 1-13265
RELIANT ENERGY RESOURCES CORP.
(Exact name of registrant as specified in its charter)
Delaware 76-0511406
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-3000
(Registrant's telephone number, including area code)
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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 August 4, 2000, Reliant Energy, Incorporated had 293,970,127 shares of
common stock outstanding, including 8,899,489 ESOP shares not deemed outstanding
for financial statement purposes and excluding 4,811,193 shares held as treasury
stock. As of August 4, 2000, all 1,000 shares of Reliant Energy Resources Corp.
common stock were held by Reliant Energy, Incorporated.
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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 JUNE 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Reliant Energy:
Financial Statements.........................................................................1
Statements of Consolidated Operations
Three and Six Months Ended June 30, 2000 and 1999 (unaudited).......................1
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 (unaudited).....................................2
Statements of Consolidated Cash Flows
Six Months Ended June 30, 2000 and 1999 (unaudited).................................4
Notes to Unaudited Consolidated Financial Statements................................5
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company.......................................................17
Quantitative and Qualitative Disclosures about Market Risk of Reliant Energy................27
Resources Corp.:
Financial Statements........................................................................28
Statements of Consolidated Operations
Three and Six Months Ended June 30, 2000 and 1999 (unaudited)......................28
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 (unaudited)....................................29
Statements of Consolidated Cash Flows
Six Months Ended June 30, 2000 and 1999 (unaudited)................................31
Notes to Unaudited Consolidated Financial Statements...............................32
Management's Narrative Analysis of the Results of Operations of Resources...................37
PART II. OTHER INFORMATION
Legal Proceedings...........................................................................39
Other Information...........................................................................39
Exhibits and Reports on Form 8-K............................................................40
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PART I. FINANCIAL INFORMATION
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUES .............................................. $ 5,770,452 $ 3,657,828 $ 10,004,555 $ 6,300,732
EXPENSES:
Fuel and cost of gas sold ........................... 2,934,993 1,637,219 5,275,184 3,069,595
Purchased power ..................................... 1,407,588 924,481 2,192,522 1,252,988
Operation and maintenance ........................... 575,763 428,424 1,045,640 824,211
Taxes other than income taxes ....................... 115,721 119,173 227,226 227,157
Depreciation and amortization ....................... 235,969 257,409 417,470 447,994
------------ ------------ ------------ ------------
Total ........................................... 5,270,034 3,366,706 9,158,042 5,821,945
------------ ------------ ------------ ------------
OPERATING INCOME ...................................... 500,418 291,122 846,513 478,787
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Unrealized (loss) gain on Time Warner investment .... (1,320,755) -- 202,928 --
Unrealized gain (loss) on indexed debt securities ... 1,320,755 (68,628) (202,870) (399,939)
Other, net .......................................... 23,793 12,563 43,606 26,028
------------ ------------ ------------ ------------
Total ........................................... 23,793 (56,065) 43,664 (373,911)
------------ ------------ ------------ ------------
INTEREST AND OTHER CHARGES:
Interest ............................................ 187,506 126,320 350,491 252,583
Distribution on trust preferred securities .......... 12,812 13,990 26,704 23,781
------------ ------------ ------------ ------------
Total ........................................... 200,318 140,310 377,195 276,364
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND PREFERRED DIVIDENDS ........................ 323,893 94,747 512,982 (171,488)
Income Tax Expense (Benefit) .......................... 107,407 19,985 163,343 (36,558)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
PREFERRED DIVIDENDS ................................. 216,486 74,762 349,639 (134,930)
Extraordinary Item, net of tax ........................ 7,445 -- 7,445 --
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PREFERRED DIVIDENDS .............. 223,931 74,762 357,084 (134,930)
Preferred Dividends ................................... 98 98 195 195
------------ ------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS ........................................ $ 223,833 $ 74,664 $ 356,889 $ (135,125)
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE ....................... $ 0.79 $ 0.26 $ 1.26 $ (0.47)
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE ..................... $ 0.78 $ 0.26 $ 1.25 $ (0.47)
============ ============ ============ ============
See Notes to the Company's Interim Financial Statements
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RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 105,314 $ 89,078
Investment in Time Warner common stock ............................ 4,182,389 3,979,461
Accounts receivable, net .......................................... 1,674,871 1,104,640
Accrued unbilled revenues ......................................... 128,232 172,629
Fuel stock and petroleum products ................................. 164,451 152,292
Materials and supplies, at average cost ........................... 257,324 188,167
Price risk management assets ...................................... 588,310 435,336
Prepayments and other current assets .............................. 91,937 131,666
------------ ------------
Total current assets ............................................ 7,192,828 6,253,269
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ..................................... 22,751,998 20,126,330
Less accumulated depreciation and amortization .................... 7,056,469 6,866,325
------------ ------------
Property, plant and equipment, net .............................. 15,695,529 13,260,005
------------ ------------
OTHER ASSETS:
Goodwill and other intangibles, net ............................... 3,125,638 3,041,751
Equity investments and advances to unconsolidated subsidiaries .... 1,017,268 1,022,210
Regulatory assets ................................................. 1,846,663 1,739,507
Price risk management assets ...................................... 549,332 148,722
Other ............................................................. 829,223 755,472
------------ ------------
Total other assets .............................................. 7,368,124 6,707,662
------------ ------------
Total Assets .................................................. $ 30,256,481 $ 26,220,936
============ ============
See Notes to the Company's Interim Financial Statements
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5
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
CURRENT LIABILITIES:
Short-term borrowings ..................................................... $ 6,110,929 $ 2,879,211
Current portion of long-term debt ......................................... 4,555,404 4,382,136
Accounts payable .......................................................... 1,590,470 1,036,839
Taxes accrued ............................................................. 322,292 227,058
Interest accrued .......................................................... 108,294 116,274
Dividends declared ........................................................ 110,383 110,811
Price risk management liabilities ......................................... 551,715 431,135
Accumulated deferred income taxes ......................................... 429,640 415,591
Business purchase obligation .............................................. -- 431,570
Other ..................................................................... 470,236 360,109
------------ ------------
Total current liabilities ............................................... 14,249,363 10,390,734
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes ......................................... 2,392,595 2,451,619
Unamortized investment tax credits ........................................ 274,902 270,243
Price risk management liabilities ......................................... 523,791 117,437
Benefit obligations ....................................................... 341,095 400,849
Business purchase obligation .............................................. -- 596,303
Other ..................................................................... 1,140,033 1,020,837
------------ ------------
Total deferred credits and other liabilities ............................ 4,672,416 4,857,288
------------ ------------
LONG-TERM DEBT ............................................................... 5,167,122 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 ............................................................... 705,166 705,272
------------ ------------
STOCKHOLDERS' EQUITY:
Cumulative preferred stock ................................................ 9,740 9,740
Common stock .............................................................. 3,209,401 3,182,751
Treasury stock ............................................................ (120,602) (93,296)
Unearned ESOP stock ....................................................... (170,374) (199,226)
Retained earnings ......................................................... 2,644,888 2,500,181
Accumulated other comprehensive loss ...................................... (110,639) (93,818)
------------ ------------
Total stockholders' equity .............................................. 5,462,414 5,306,332
------------ ------------
Total Liabilities and Stockholders' Equity ............................ $ 30,256,481 $ 26,220,936
============ ============
See Notes to the Company's Interim Financial Statements
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RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) attributable to common stockholders ............ $ 356,889 $ (135,125)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization .................................. 417,470 447,994
Deferred income taxes .......................................... (15,039) (182,876)
Investment tax credits ......................................... (9,142) (50,951)
Unrealized gain on Time Warner investment ...................... (202,928) --
Unrealized loss on indexed debt securities ..................... 202,870 399,939
Undistributed net loss of unconsolidated subsidiaries .......... 17,590 64,654
Impairment of marketable equity securities ..................... 22,185 --
Extraordinary item.............................................. (7,445) --
Changes in other assets and liabilities:
Accounts receivable, net ..................................... (514,798) 70,899
Inventories .................................................. (8,669) (8,693)
Accounts payable ............................................. 542,048 (33,131)
Federal tax refund ........................................... 52,817 --
Fuel cost under recovery ..................................... (261,094) (12,915)
Restricted deposits .......................................... (125,084) (51,035)
Other, net ................................................... 75,938 47,241
------------ ------------
Net cash provided by operating activities .................. 543,608 556,001
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................. (827,136) (441,296)
Business acquisitions ............................................ (3,102,101) --
Investments and advances to unconsolidated subsidiaries .......... (54,893) (20,458)
Proceeds from sale of debt securities............................. 123,428 --
Other, net ....................................................... 54,163 7,980
------------ ------------
Net cash used in investing activities ...................... (3,806,539) (453,774)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of trust preferred securities, net ............ -- 362,994
Proceeds from long-term debt, net ................................ 92,098 215,023
Increase (decrease) in short-term borrowing, net ................. 3,852,146 (6,725)
Restricted deposit for bond redemption ........................... -- (200,000)
Payments of long-term debt ....................................... (462,145) (208,354)
Payment of common stock dividends ................................ (212,423) (213,641)
Purchase of treasury stock ....................................... (27,306) --
Other, net ....................................................... 27,278 (14,558)
------------ ------------
Net cash provided by (used in) financing activities .......... 3,269,648 (65,261)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................ 9,519 --
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... 16,236 36,966
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 89,078 29,673
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 105,314 $ 66,639
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ............................ $ 374,015 $ 219,790
Income taxes ..................................................... 72,195 181,210
See Notes to the Company's Interim Financial Statements
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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 and the
combined First Quarter Report on Form 10-Q of Reliant Energy (Reliant Energy
First Quarter 10-Q) and Resources Corp. (Resources Corp. First Quarter 10-Q) for
the quarter ended March 31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's Interim Financial Statements reflect all normal recurring
adjustments that are, in the opinion of management, necessary to present fairly
the financial position and results of operations for the respective periods.
Amounts reported in the Company's Statements of Consolidated Operations are not
necessarily indicative of amounts expected for a full year period due to the
effects of, among other things, (a) seasonal variations in energy consumption,
(b) timing of maintenance and other expenditures and (c) acquisitions and
dispositions of 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 June 30, 2000 and
December 31, 1999, the Company's maintenance reserve included in Other Deferred
Credits and Other Liabilities in its Consolidated Balance Sheets was $92 million
and $84 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, retail competition pilot projects for 5% of each
utility's combined load of all customer
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8
classes will begin under the Legislation. Retail competition for all other
customers will begin on January 1, 2002. In preparation for that competition,
the Company expects to make significant changes in the electric utility
operations conducted through Reliant Energy HL&P, an unincorporated division of
Reliant Energy. By January 1, 2002, electric utilities in Texas such as Reliant
Energy HL&P will restructure their businesses in order to separate power
generation, transmission and distribution, and retail activities into different
units. Pursuant to the Legislation, the Company submitted an amended plan on
August 9, 2000 to accomplish the required separation of its regulated operations
into separate units. See Note 12 for further information regarding the filing of
an amended business separation plan. In addition, the Legislation requires the
Public Utility Commission of Texas (PUC) to issue a number of new rules and
determinations in implementing the Legislation. For additional information on
the Legislation, see Note 3 of the Reliant Energy 10-K Notes.
Historically, Reliant Energy HL&P has applied the accounting policies
established in Statement of Financial Accounting Standards 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 (T&D) business of Reliant Energy HL&P
will continue to be subject to cost-of-service rate regulation and will be
responsible for the delivery of electricity to retail customers. Pursuant to the
Legislation, on March 31, 2000, Reliant Energy HL&P filed proposed tariffs with
the PUC, which are to be effective on January 1, 2002 for its transmission and
distribution operations. The Company's final phase of the T&D rate case is not
expected to be heard until January 2001.
(3) ACQUISITIONS
On May 12, 2000, a subsidiary of the Company purchased entities owning
non-rate regulated power generating assets and development sites located in
Pennsylvania, New Jersey and Maryland having an annual average net generating
capacity of approximately 4,300 megawatts (MW). With the exception of certain
development entities which were sold to another subsidiary of the Company in
July 2000, the assets are held by Reliant Energy Mid-Atlantic Power Holdings,
LLC or its subsidiaries (collectively REMA), which are all indirect subsidiaries
of Reliant Energy. The purchase price was approximately $2.1 billion. The
Company accounted for the acquisition as a purchase with assets and liabilities
of REMA reflected at their estimated fair values. On a preliminary basis, the
Company's fair value adjustments related to the acquisition primarily included
increases in property, plant and equipment, regulatory emission credits,
materials and supplies inventory, major maintenance reserves and related
deferred taxes. The Company expects to finalize these fair value adjustments
prior to May 2001 and does not anticipate material additional modifications to
the preliminary adjustments. Funds for the acquisition were made available
through issuances of commercial paper supported by two bank facilities, one in
the amount of $1.0 billion and another in the amount of $1.15 billion. The $1.0
billion facility 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.
The Company's results of operations include the results of REMA only
for the period beginning May 12, 2000. The following table presents certain pro
forma information for the second quarter and first six months of 2000, as if the
acquisition had occurred on January 1, 2000. Pro forma information has not been
presented for REMA for the second quarter and first six months of 1999 due to
the fact that the acquired assets and related operations did not constitute a
business prior to November 24, 1999. Prior to November 24, 1999, the acquired
entities' operations were fully integrated with, and their results of operations
were consolidated into, the regulated electric utility operations of the former
owner of the facilities. In addition, prior to November 24, 1999, the electric
output of the facilities was sold based on rates set by regulatory authorities
and are not indicative of REMA's future results.
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PRO FORMA COMBINED RESULTS OF OPERATIONS
JUNE 30, 2000
-------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues ......................................... $ 5,830 $ 10,171
Net income attributable to common stockholders ... 222 344
Basic and diluted earnings per share ............. 0.78 1.21
These pro forma results, based on assumptions deemed appropriate by the
Company's management, have been prepared for informational purposes only and are
not necessarily indicative of the amounts that would have resulted if the
acquisition of the REMA entities had occurred on January 1, 2000.
Purchase-related adjustments to the results of operations include the effects on
depreciation, interest expense and income taxes.
Included in the REMA acquisition are partial undivided interests in the
Conemaugh and Keystone generating stations (Conemaugh and Keystone,
respectively), two jointly owned generation stations. Conemaugh and Keystone are
each owned as a tenancy in common among their co-owners, with each owner
retaining its undivided ownership interest in the generating units and the
electrical output from those units. The Company's share of ownership interest in
Conemaugh and Keystone is 16.45% and 16.67%, respectively. The Company bears a
corresponding share of the capital and operating costs associated with these
facilities. Reliant Energy Northeast Management Company, a subsidiary of REMA,
operates and manages Conemaugh and Keystone under separate operating agreements
which the owners have elected to terminate effective December 31, 2002. No
decisions have been made as yet regarding operating arrangements subsequent to
the termination date. The Company's net investment in Conemaugh and Keystone is
$644 million as of June 30, 2000.
On March 1, 2000, the Company funded the remaining obligation of $987
million to purchase the shares of N.V. UNA (UNA), a Dutch power generation
company. 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. The Company accounted for the
acquisition as a purchase 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 related to the acquisition of UNA primarily included increases
in property, plant and equipment, long-term debt, major maintenance reserves and
related deferred taxes. The Company expects to finalize these fair value
adjustments during 2000. The Company, however, 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 second quarter and first six
months of 2000 was $99 million and $190 million, respectively, compared to $227
million and $366 million for the same periods in 1999. Goodwill amortization
relating to acquisitions was $23 million and $44 million for the three and six
months ended June 30, 2000, respectively, compared to $14 million and $28
million for the same periods in 1999. Other amortization expense, including
amortization of regulatory assets, was $114 million and $183 million for the
second quarter and first six months of 2000, respectively, compared to $16
million and $54 million for the same periods in 1999.
In June 1998, the PUC issued an order approving a transition to
competition plan (Transition Plan) filed by Reliant Energy HL&P in December
1997. Pursuant to the Transition Plan, the Company recorded $76 million and $89
million of additional depreciation for the second quarter and first six months
of 1999, respectively, and redirected $51 million and $102 million of
transmission and distribution depreciation to generation assets for the second
quarter and first six months of 1999, respectively. 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
7
10
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 June 30, 2000 and December
31, 1999, the cumulative amount of redirected depreciation for regulatory
purposes was $501 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 and $36
million for the second quarter and first six months of 2000, respectively. The
effect on basic and diluted earnings per share for the second quarter and first
six months of 2000 is $0.04 and $0.08, respectively.
In 1999, the Company determined that approximately $800 million of
Reliant Energy HL&P's electric generation assets were impaired. The Legislation
provides for recovery of this impairment through regulated cash flows.
Therefore, a regulatory asset was recorded for an amount equal to the impairment
in the Company's Consolidated Balance Sheets. The Company amortizes this
regulatory asset as it is recovered from regulated cash flows. During the second
quarter and first six months of 2000, the Company recorded $95 million and $147
million, respectively, of amortization expense related to the recoverable
impaired plant costs and other deferred debits created from discontinuing SFAS
No. 71.
Pursuant to the Legislation, through securitization, the Company is
allowed to recover generation-related regulatory assets and liabilities reported
in the December 31, 1998 Reliant Energy Form 10-K. On May 31, 2000, the PUC
issued a financing order to the Company authorizing the issuance of transition
bonds in an amount not to exceed $740 million plus actual up-front qualified
costs. The Company has discontinued amortizing certain generation-related
regulatory assets effective January 1, 1999. For additional information
regarding the discontinuance of SFAS No. 71 for electric generation operations,
see Notes 1(d) and 3 of the Reliant Energy 10-K Notes.
(5) COMPREHENSIVE INCOME
The Company had total comprehensive income of $202 million and $340
million, respectively, for the second quarter and first six months of 2000, and
total comprehensive income of $82 million and total comprehensive loss of $177
million, respectively, for the second quarter and first six months of 1999. The
following table summarizes the components of total comprehensive income.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS)
Net income (loss) ..................................... $ 224 $ 75 $ 357 $ (135)
Other comprehensive income (loss):
Foreign currency translation adjustments ............ (23) 8 (33) (43)
Unrealized gain (loss) on available for sale
securities ........................................ 1 (1) 2 1
Plus: Reclassification adjustment for impairment
loss on available for sale securities realized
in net income ..................................... -- -- 14 --
-------- -------- -------- --------
Comprehensive income (loss) ........................... $ 202 $ 82 $ 340 $ (177)
======== ======== ======== ========
8
11
(6) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
(a) Short-term Borrowings.
As of June 30, 2000, the Company had credit facilities, which included
the facilities of several financing subsidiaries, UNA, Resources Corp. and
Reliant Energy International, Inc., that provided for an aggregate of $7.4
billion in committed credit (including the Euro 600 million facility discussed
below) of which $0.7 billion was unused. 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 $63 million as of
June 30, 2000.
In February 2000, a financing subsidiary of the Company established a
$650 million revolving credit facility that originally terminated on May 31,
2000. The $650 million revolving credit facility was extended and now terminates
on the earlier of September 1, 2000 or the date on which a replacement credit
facility is established. In February 2000, the Company established a $200
million revolving credit facility. In June 2000, all borrowings under the $200
million credit facility were repaid and the facility was terminated.
In April 2000, a subsidiary of the Company arranged for unsecured
borrowings aggregating $54 million.
In connection with the REMA acquisition in May 2000, a financing
subsidiary of the Company established two credit facilities aggregating $2.15
billion which support outstanding commercial paper in the amount of $2.15
billion. The $1.0 billion facility expires in May 2001. The revolving commitment
period for the $1.15 billion facility terminates in May 2001, at which time
outstanding borrowings under this facility convert to a one-year term facility.
These facilities are subject to partial repayment and mandatory commitment
reductions in the event that certain corporate transactions occur. See Note 3
for additional information regarding the acquisition of the REMA entities.
In June 2000, a financing subsidiary of the Company established
$250 million credit facility which terminates on October 23, 2000. At June 30,
2000, $200 million of this facility was borrowed at an interest rate of 7.5%.
(b) Long-term Debt.
In February 2000, a subsidiary of the Company established a Euro 600
million term loan facility which terminates in March 2003. At June 30, 2000,
$572 million (based on the exchange rate on June 30, 2000 of 0.9525 Euro per
U.S. dollar) under this facility was outstanding at an interest rate of 6.65%.
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.
During the second quarter of 2000, UNA negotiated the repurchase of
approximately $272 million in aggregate principal amount of its long-term debt
for a total cost of approximately $14 million. The book value of the debt
repurchased was approximately $293 million resulting in an extraordinary gain
on the early extinguishment of long-term debt of approximately $7 million.
Borrowings under a short-term banking facility and proceeds from sale of debt
securities were used to finance the reacquisition of such debt.
9
12
(7) EARNINGS PER SHARE
The following table presents Reliant Energy's basic and diluted
earnings per share (EPS) calculation:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic EPS Calculation:
Income (loss) before extraordinary item and
preferred dividends ........................... $ 216,486 $ 74,762 349,639 (134,930)
Less: Preferred dividends ....................... 98 98 195 195
------------ ------------ ------------ ------------
Net income (loss) before extraordinary item ..... 216,388 74,664 349,444 (135,125)
Extraordinary item .............................. 7,445 -- 7,445 --
------------ ------------ ------------ ------------
Net income (loss) attributable to common
stockholders .................................. $ 223,833 $ 74,664 $ 356,889 $ (135,125)
============ ============ ============ ============
Weighted average shares outstanding ............... 284,238 285,474 283,658 285,222
Basic EPS:
Net income (loss) before extraordinary item ..... $ 0.76 $ 0.26 $ 1.23 $ (0.47)
Extraordinary item .............................. 0.03 -- 0.03 --
------------ ------------ ------------ ------------
Net income (loss) ............................... $ 0.79 $ 0.26 $ 1.26 $ (0.47)
============ ============ ============ ============
Diluted EPS Calculation:
Net income (loss) attributable to common
stockholders .................................. $ 223,833 $ 74,664 $ 356,889 $ (135,125)
Plus: Income impact of assumed conversions:
Interest on 6 1/4% trust preferred securities . 5 9 10 --
------------ ------------ ------------ ------------
Total effect assuming dilution .................. $ 223,838 $ 74,673 $ 356,899 $ (135,125)
============ ============ ============ ============
Weighted average shares outstanding ............... 284,238 285,474 283,658 285,222
Plus: Incremental shares from assumed
conversions (1)(2):
Stock options ................................. 1,562 576 979 --
Restricted stock .............................. 753 740 753 --
6 1/4% trust preferred securities ............. 15 27 15 --
------------ ------------ ------------ ------------
Weighted average shares assuming dilution ....... 286,568 286,817 285,405 285,222
============ ============ ============ ============
Diluted EPS:
Net income (loss) before extraordinary item ..... $ 0.75 $ 0.26 $ 1.22 $ (0.47)
Extraordinary item .............................. 0.03 -- 0.03 --
------------ ------------ ------------ ------------
Net income (loss) ............................... $ 0.78 $ 0.26 $ 1.25 $ (0.47)
============ ============ ============ ============
- ----------
(1) For the three months ended June 30, 2000, the computation of diluted
EPS excludes purchase options for 52,307 shares of common stock that
have exercise prices (ranging from $28.72 to $32.22 per share) greater
than the $27.21 per share average market price. For the three months
ended June 30, 1999, the computation of diluted EPS excludes purchase
options for 23,334 shares of common stock that have exercise prices
(ranging from $28.71 to $35.18 per share) greater than the $28.52 per
share average market price for the period and would thus be
anti-dilutive if exercised.
(2) For the six months ended June 30, 2000, the computation of diluted EPS
excludes purchase options for 452,327 shares of common stock that have
exercise prices (ranging from $25.81 to $32.22 per share) greater than
the $24.74 per share average market price. Assumed conversions were not
included in the computation of diluted earnings per share for the six
months ended June 30, 1999 because additional shares outstanding would
result in an anti-dilutive per share amount. The computation for the
six months ended June 30, 1999 excludes 740,000 shares of restricted
stock, 27,000 shares for assumed conversion of debentures and purchase
options for 628,000 shares of common stock, which would be
anti-dilutive if exercised.
10
13
(8) CAPITAL STOCK
(a) Common Stock.
Reliant Energy has 700,000,000 authorized shares of common stock. At
June 30, 2000, 298,558,239 shares of Reliant Energy common stock were issued and
284,711,565 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 (9,029,489 and 10,679,489 at June 30, 2000 and
December 31, 1999, respectively) and (b) treasury shares (4,817,185 and
3,624,618 at June 30, 2000 and December 31, 1999, respectively). Reliant Energy
declared dividends of $0.375 per share in each of the second quarters of 2000
and 1999. Also, Reliant Energy declared dividends totaling $0.750 per share in
each of the six month periods ending June 30, 2000 and 1999.
During the first six months of 2000, Reliant Energy purchased 1,183,800
shares of Reliant Energy common stock at an average price of $23.07 per share or
an aggregate purchase price of $27 million. As of June 30, 2000, Reliant Energy
was authorized to purchase an additional $271 million of Reliant Energy common
stock.
(b) Preference Stock.
Reliant Energy issued the following shares of preference stock now
owned by one of its financing subsidiaries on the dates indicated:
DATE PREFERENCE SERIES NUMBER OF SHARES
---- ----------------- ----------------
February 2000 Series G 6,825
May 2000 Series H 12,100
May 2000 Series I 10,525
June 2000 Series J 2,100
Series G, H, I and J preference stock are not deemed outstanding for
financial reporting purposes because the sole shareholder of each series is a
wholly owned subsidiary of Reliant Energy.
(9) TRUST PREFERRED SECURITIES
(a) Reliant Energy
Statutory business trusts created by Reliant Energy have issued trust
preferred securities, the terms of which, and the related series of junior
subordinated debentures, are described below:
AGGREGATE
LIQUIDATION AMOUNT
--------------------- MANDATORY
JUNE 30, DECEMBER 31, DISTRIBUTION RATE/ REDEMPTION DATE/ JUNIOR SUBORDINATED
TRUST 2000 1999 INTEREST RATE MATURITY DATE DEBENTURES
----- -------- ------------ ------------------ ---------------- -------------------
(IN MILLIONS)
REI Trust I $ 375 $ 375 7.20% March 2048 7.20% Junior Subordinated
Debentures due 2048
HL&P Capital Trust I $ 250 $ 250 8.125% March 2046 8.125% Junior Subordinated
Deferrable Interest
Debentures Series A
HL&P Capital Trust II $ 100 $ 100 8.257% February 2037 8.257% Junior Subordinated
Deferrable Interest
Debentures Series B
11
14
For additional information regarding the $625 million of preferred
securities and the $100 million of capital securities previously issued to the
public by statutory business trusts created by Reliant Energy, see Note 11 of
the Reliant Energy 10-K Notes. The sole asset of each trust consists of junior
subordinated debentures of Reliant Energy having interest rates and maturity
dates corresponding to each issue of preferred or capital securities, and the
principal amounts corresponding to the common and preferred or capital
securities issued by that trust.
(b) Resources Corp.
A statutory business trust created by Resources Corp. has issued
convertible trust preferred securities, the terms of which, and the related
series of convertible junior subordinated debentures, are described below:
AGGREGATE
LIQUIDATION AMOUNT
--------------------- MANDATORY
JUNE 30, DECEMBER 31, DISTRIBUTION RATE/ REDEMPTION DATE/ JUNIOR SUBORDINATED
TRUST 2000 1999 INTEREST RATE MATURITY DATE DEBENTURES
----- -------- ------------ ------------------ ---------------- -------------------
(IN MILLIONS)
Resources Trust $ 1 $ 1 6.25% June 2026 6.25% Convertible Junior
Subordinated Debentures
due 2026
For additional information regarding the $173 million of convertible
preferred securities previously issued to the public by a statutory business
trust created by Resources Corp., 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 convertible junior subordinated debentures of Resources Corp. having
an interest rate and maturity date corresponding to the convertible preferred
securities, and the principal amount corresponding to the common and convertible
preferred securities issued by the trust.
(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 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 case was not
resolved during mediation, and the parties' post-verdict motions remain pending
before the court.
12
15
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. 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 suit was
instituted by the State of Texas in an effort to recover money it expended in
the oversight of the remedial work at the site performed by the Company and
others. Third parties operated the site as a metals reclaiming operation.
Although the Company neither operated nor owned the site, third parties may have
delivered various transformers and other equipment originally sold by the
Company to the site. The Company and others have remediated the site pursuant to
a plan approved by appropriate state agencies and a federal court. On the basis
of third party claims filed by the Company in the State's loss recovery action,
the Company has recovered or has commitments to recover from other responsible
parties $2.7 million of the approximately $3 million (including recoverable
legal fees) it spent on remediation of the site.
Under the agreement to acquire REMA, the Company assumed liabilities
associated with site contamination at certain of the acquired facilities in
Pennsylvania and New Jersey. The Company has recorded accruals of approximately
$24 million for these environmental liabilities as of June 30, 2000.
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 similar to those previously received may be
asserted in the future and intends to continue vigorously contesting claims that
it does not consider to have merit. Although their ultimate outcome cannot be
predicted at this time, the Company does not believe, based on its experience to
date, that these matters, either individually or in the aggregate, will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
13
16
(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 REMA and UNA is included in the segment disclosures only for periods
beginning with their respective acquisition dates. For additional information
regarding the acquisition date of UNA, see Note 2 of the Reliant Energy 10-K
Notes. The Company has identified the following reportable segments: Electric
Operations, Wholesale Energy, Natural Gas Distribution, Interstate Pipelines,
Reliant Energy Europe, Reliant Energy Latin America and Corporate. For
descriptions of the financial reporting segments, see Note 1(a) of the Reliant
Energy 10-K Notes. Financial data for the business segments are as follows:
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 2000
------------------------------------------------------------------
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME (LOSS) TOTAL ASSETS
-------------- ------------ ------------- ------------
(IN MILLIONS)
Electric Operations ............... $ 1,421 $ -- $ 325 $ 10,235
Wholesale Energy .................. 3,382 84 184 6,505
Natural Gas Distribution .......... 705 16 (6) 3,369
Interstate Pipelines .............. 27 52 28 2,002
Reliant Energy Europe (1) ......... 136 -- 24 2,937
Reliant Energy Latin America ...... 10 -- (20) 1,153
Corporate ......................... 89 (7) (35) 4,698
Reconciling Elimination ........... -- (145) -- (643)
------------ ------------ ------------ ------------
Consolidated ...................... $ 5,770 $ -- $ 500 $ 30,256
============ ============ ============ ============
FOR THE SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------------
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME (LOSS)
------------- ------------ -------------
(IN MILLIONS)
Electric Operations ............... $ 2,368 $ -- $ 527
Wholesale Energy .................. 5,420 221 168
Natural Gas Distribution .......... 1,619 16 97
Interstate Pipelines .............. 61 92 56
Reliant Energy Europe (1) ......... 286 -- 57
Reliant Energy Latin America ...... 31 -- (16)
Corporate ......................... 220 1 (42)
Reconciling Elimination ........... -- (330) --
------------ ------------ ------------
Consolidated ...................... $ 10,005 $ -- $ 847
============ ============ ============
AS OF
FOR THE THREE MONTHS ENDED JUNE 30, 1999 DECEMBER 31,
------------------------------------------------- 1999
REVENUES FROM INTERSEGMENT OPERATING ------------
NON-AFFILIATES REVENUES INCOME (LOSS) TOTAL ASSETS
-------------- ------------ ------------- ------------
(IN MILLIONS)
Electric Operations ............... $ 1,167 $ -- $ 253 $ 9,941
Wholesale Energy .................. 1,906 32 9 2,773
Natural Gas Distribution .......... 475 -- 1 3,683
Interstate Pipelines .............. 27 39 27 2,212
Reliant Energy Europe (1) ......... -- -- -- 3,247
Reliant Energy Latin America ...... 43 -- 15 1,156
Corporate ......................... 40 17 (14) 4,349
Reconciling Elimination ........... -- (88) -- (1,140)
------------ ------------ ------------ ------------
Consolidated ...................... $ 3,658 $ -- $ 291 $ 26,221
============ ============ ============ ============
14
17
FOR THE SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME (LOSS)
------------- ------------ -------------
(IN MILLIONS)
Electric Operations ............... $ 2,017 $ -- $ 395
Wholesale Energy .................. 2,845 101 10
Natural Gas Distribution .......... 1,279 1 106
Interstate Pipelines .............. 53 79 55
Reliant Energy Latin America ...... (8) -- (63)
Corporate ......................... 115 36 (24)
Reconciling Elimination ........... -- (217) --
------------ ------------ ------------
Consolidated ...................... $ 6,301 $ -- $ 479
============ ============ ============
- ----------
(1) Reliant Energy Europe was created in the fourth quarter of 1999.
Reconciliation of Operating Income to Net Income:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
Operating income ....................................... $ 500 $ 291 $ 847 $ 479
Interest expense ....................................... 188 126 350 253
Net unrealized loss on indexed debt securities and
Time Warner investment ............................... -- 69 -- 400
Distribution on trust preferred securities ............. 13 14 27 24
Income tax expense (benefit) ........................... 107 20 163 (37)
Extraordinary gain, net of tax ......................... (7) -- (7) --
Other income ........................................... (25) (13) (43) (26)
------------ ------------ ------------ ------------
Net income (loss) attributable to common stockholders .. $ 224 $ 75 $ 357 $ (135)
============ ============ ============ ============
(12) SUBSEQUENT EVENTS
On August 9, 2000, Reliant Energy filed an amended business separation
plan with the PUC under which it would divide into two publicly traded companies
in order to separate its unregulated businesses from its regulated businesses.
For additional information regarding Reliant Energy's plan to file the amended
business separation plan, see the Reliant Energy and Resources Corp. combined
current report on Form 8-K dated July 27, 2000, which information is
incorporated herein by reference. The amended plan actually filed follows the
proposed plan described in the Form 8-K other than the cash payment that the
unregulated company will receive from the regulated company in 2004 will have a
"collar" placed on it such that the cash amount will not equal the market value
of the regulated company's interest in the Texas regulated generation operations
if the market value is outside of the collar. If the market value is above the
collar, the cash amount will be less than the market value. If the market value
is below the collar, the cash amount will be greater than the market value. The
amended plan is subject to PUC approval.
On August 8, 2000, Reliant Energy International, Inc. (Reliant Energy
International) and Reliant Energy Salvador Holding Company Ltd. (Salvador
Holding) entered into an agreement to sell the interests held by Salvador
Holding in El Salvador, subject to the satisfaction of certain conditions
precedent provided for in the purchase agreement. The sale of the Company's
interests held by Salvador Holding is not expected to have a material impact on
the results of operations of the Company.
On July 6, 2000, Resources Corp. issued $325 million of notes having an
interest rate of 8.125% and a maturity date of July 15, 2005. Resources Corp.
used the proceeds from the sale of the notes for general corporate purposes,
including the repayment of $200 million of Resources Corp.'s 7.5% notes that
matured on August 1, 2000 and the repayment of a portion of its short-term
indebtedness.
15
18
On July 1, 2000, the Company exercised its option and exchanged 37.9
million shares of Time Warner, Inc. common stock for satisfaction of the full
maturity value (and its value at June 30, 2000), of $2.9 billion of its
unsecured 7% Automatic Common Exchange Securities (ACES). For additional
information regarding ACES, see Note 8 of the Reliant Energy 10-K notes.
In July 2000, a financing subsidiary of the Company borrowed an
additional $50 million under a $250 million revolving credit facility that was
established in June 2000. Proceeds were used by the financing subsidiary to
purchase Series K Preference Stock of Reliant Energy. The Company used the
proceeds for general corporate purposes.
16
19
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 and delivery
company, providing energy and energy services in North America, Western Europe
and Latin America. The Company operates one of the United States' largest
electric utilities in terms of kilowatt-hour sales, and its three natural gas
distribution divisions together form the United States' third largest natural
gas distribution operation in terms of customers served. The Company's wholesale
energy trading and marketing business ranks among the top five in the United
States in combined electricity and natural gas volume sales and has a presence
in most of the major power regions of the United States. It also has power
generation and wholesale trading and marketing operations in Western Europe. The
Company invests in international electric utility privatizations and the
development of non-rate regulated domestic power generation projects.
Additionally, the Company owns an interstate natural gas pipeline which provides
gas transportation, supply, gathering and storage services.
The Company's financial reporting segments include: Electric
Operations, Wholesale Energy, Natural Gas Distribution, Interstate Pipelines,
Reliant Energy Europe, Reliant Energy Latin America and Corporate. For segment
reporting information, see Note 11 to the Company's Interim Financial
Statements.
In March 2000, the Company announced that it had retained an investment
banking firm to assist it in evaluating strategic alternatives, including
divestiture, for (a) two of its natural gas distribution divisions, Reliant
Energy Arkla and Reliant Energy Minnegasco, (b) its Interstate Pipelines'
operation and (c) its natural gas gathering and pipeline services operations.
The evaluation has been completed and the Company has no current plans to sell
or otherwise dispose of these businesses.
On August 9, 2000, Reliant Energy filed an amended business separation
plan with the PUC under which it would divide into two publicly traded companies
in order to separate its unregulated businesses from its regulated businesses.
For additional information regarding the amended plan, see Note 12 to the
Company's Interim Financial Statements.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues ................................................ $ 5,770 $ 3,658 $ 10,005 $ 6,301
Operating Expenses ...................................... 5,270 3,367 9,158 5,822
------------ ------------ ------------ ------------
Operating Income ........................................ 500 291 847 479
Other Income ............................................ 24 13 43 26
Interest Expense and Other Charges ...................... 200 140 377 277
Net Unrealized Loss on Indexed Debt Securities and
Time Warner Investment ................................ -- 69 -- 400
Income Tax Expense (Benefit) ............................ 107 20 163 (37)
Extraordinary Gain, Net of Tax .......................... 7 -- 7 --
------------ ------------ ------------ ------------
Net Income (Loss) Attributable to Common Stockholders$ .. $ 224 $ 75 $ 357 $ (135)
============ ============ ============ ============
Basic Earnings (Loss) Per Share ......................... $ 0.79 $ 0.26 $ 1.26 $ (0.47)
Diluted Earnings (Loss) Per Share ....................... $ 0.78 $ 0.26 $ 1.25 $ (0.47)
17
20
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1999
The Company reported consolidated net income of $224 million ($0.79 per
basic share) for the three months ended June 30, 2000 compared to consolidated
net income of $75 million ($0.26 per basic share) for the same period in 1999.
The 2000 results included an extraordinary gain of $7 million related to the
early extinguishment of long-term debt. The 1999 results included a $45 million
after-tax, non-cash, unrealized accounting loss on indexed debt securities and a
$4 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.
The Company's consolidated net income, after adjusting for the charges
described above, was $216 million ($0.76 per share) for the second quarter of
2000 compared to $123 million ($0.43 per share) for the second quarter of 1999.
The $93 million increase in consolidated net income was primarily due to
increased earnings from the Electric Operations and Wholesale Energy segments
and additional earnings from the Reliant Energy Europe segment which was
established in the fourth quarter of 1999 with the acquisition of UNA, a Dutch
power generation company. Quarter-to-quarter earnings increases were slightly
offset by lower earnings in 2000 versus 1999 of both the Reliant Energy Latin
America and Corporate segments. 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.
For an explanation of changes in operating income, see the discussion
below of operating income (loss) by segment.
Other income increased by approximately $11 million during the second
quarter of 2000 compared to the same period in 1999 primarily due to a $15
million pre-tax gain on the sale of the Company's investment in one of its
development stage, non-rate regulated electric generating project companies
located in Rhode Island.
The Company incurred interest expense and other charges of $200 million
and $140 million for the second quarters of 2000 and 1999, respectively. The
2000 increase was a result of increased levels of both short-term borrowings and
long-term debt in the second quarter of 2000 compared to the same period in
1999. The increase in borrowings was associated with borrowings for funding the
acquisition of shares of UNA in the fourth quarter of 1999 and the first quarter
of 2000, the Company's additional investment in Time Warner common stock in the
third quarter of 1999, the acquisition of the REMA entities in the second
quarter of 2000, other acquisitions and capital expenditures.
The effective tax rate for the second quarter of 2000 and 1999 was 33%
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, previously discussed, the adjusted effective tax rate for the second
quarter of 1999 was 26%. The increase in the effective tax rate for the second
quarter of 2000 compared to the adjusted effective tax rate for the same period
in 1999 was a result of a one-time adjustment to tax expense related to the
reversal of amortization of generation-related regulatory tax assets incurred in
the first half of 1999, partially offset by the effect of the tax holiday
relating to the Dutch electric industry which applies to income earned by UNA.
Pursuant to the Legislation, the Company is allowed to recover the amount of
generation-related regulatory assets as of December 31, 1998. The reversal of
amortization of generation-related regulatory tax assets recorded in the first
half of 1999 and its resulting effect on tax expense was offset by additional
depreciation pursuant to the Transition Plan. 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.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1999
The Company reported consolidated net income of $357 million ($1.26 per
basic share) for the first six months of 2000 compared to a consolidated net
loss of $135 million ($0.47 per basic share) for the first six months of 1999.
The 2000 results included an extraordinary gain of $7 million related to the
early extinguishment of long-term debt. The 1999 results included a $260 million
after-tax, non-cash, unrealized accounting loss on indexed debt securities and a
$95 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.
18
21
The Company's consolidated net income, after adjusting for the charges
described above, was $349 million ($1.23 per basic share) for the first six
months of 2000 compared to $220 million ($0.77 per basic share) for the first
six months of 1999. The $129 million increase was primarily due to increased
earnings from the Electric Operations and Wholesale Energy segments, and
additional earnings from the Reliant Energy Europe segment which was established
in the fourth quarter of 1999. Increases were offset by lower adjusted earnings
in 2000 versus 1999 from the Reliant Energy Latin America and Corporate
segments.
Other income increased by approximately $17 million during the first
six months of 2000 compared to the same period in 1999 primarily due to the
pre-tax gain on the sale of the Company's investment in one of its development
stage, non-rate regulated electric generation project companies of $15 million,
interest income on an IRS refund received in February 2000 of $26 million and
distributions from corporate venture capital investments. The increase in other
income was partially offset by an impairment loss of $22 million on marketable
equity securities classified as "available for sale" recorded in 2000.
The Company incurred interest expense and other charges of $377 million
and $277 million for the first six months of 2000 and 1999, respectively. The
increase was primarily a result of increased levels of both short-term
borrowings and long-term debt in the first six months of 2000 compared to 1999.
Increased debt levels were associated in part with borrowings for the funding of
the acquisition of shares of UNA in the fourth quarter of 1999 and the first
quarter of 2000, the Company's additional investment in Time Warner common stock
in the third quarter of 1999, the acquisition of the entities held by REMA in
the second quarter of 2000, other acquisitions and capital expenditures.
The effective tax rate for the first six months of 2000 and 1999 was
32% 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 six months
of 1999 was 32%.
The table below shows operating income (loss) by segment:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
Electric Operations ............... $ 325 $ 253 $ 527 $ 395
Wholesale Energy .................. 184 9 168 10
Natural Gas Distribution .......... (6) 1 97 106
Interstate Pipelines .............. 28 27 56 55
Reliant Energy Europe (1) ......... 24 -- 57 --
Reliant Energy Latin America ...... (20) 15 (16) (63)
Corporate ......................... (35) (14) (42) (24)
------------ ------------ ------------ ------------
Total Consolidated .......... $ 500 $ 291 $ 847 $ 479
============ ============ ============ ============
- ----------
(1) Reliant Energy Europe does not have comparative 1999 results because 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 the 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 PUC effective January 1, 1998. As a result of
the Transition Plan, any earnings prior to the Legislation above the maximum
allowed return cap on invested capital were offset by additional depreciation of
Electric Operations' electric generation assets. For more information regarding
the Legislation, see Note 2 of the Company's Interim Financial Statements and
Note 3 of the Reliant Energy 10-K Notes.
19
22
ELECTRIC OPERATIONS SEGMENT
---------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
Operating Revenues:
Base Revenues ............................. $ 834 $ 788 $ 1,436 $ 1,356
Reconcilable Fuel Revenues ................ 587 379 932 661
------------ ------------ ------------ ------------
Total Operating Revenues ................ 1,421 1,167 2,368 2,017
------------ ------------ ------------ ------------
Operating Expenses:
Fuel and Purchased Power .................. 601 396 959 688
Operation and Maintenance ................. 256 223 466 426
Depreciation and Amortization ............. 144 203 243 339
Other Operating Expenses .................. 95 92 173 169
------------ ------------ ------------ ------------
Total Operating Expenses ................ 1,096 914 1,841 1,622
------------ ------------ ------------ ------------
Operating Income ............................ $ 325 $ 253 $ 527 $ 395
============ ============ ============ ============
Electric Sales Including Unbilled (MMWH):
Residential ............................... 5,987 5,746 9,433 9,150
Commercial ................................ 4,497 4,246 8,235 7,809
Industrial ................................ 8,645 8,097 16,967 15,406
Other ..................................... 306 652 1,026 1,669
------------ ------------ ------------ ------------
Total Sales Including Unbilled ............ 19,435 18,741 35,661 34,034
------------ ------------ ------------ ------------
Average Cost of Fuel (Cents/MMBtu (1)) ...... 263.5 181.8 231.3 169.1
- ----------
(1) Million British thermal units.
2000 versus 1999
Electric Operations' operating income for the second quarter and first
six months of 2000 increased $72 million and $132 million, respectively. For
both periods, the primary contributors to the increase in operating income were
strong customer growth, increased customer demand and decreased depreciation
expense.
Electric Operations' base revenues increased $46 million and $80
million for the second quarter and first six months of 2000 due to both customer
growth and increased customer demand.
Reconcilable fuel revenues and fuel and purchased power expenses for
the second quarter and the first six months of 2000 increased as a result of the
higher cost of natural gas ($3.59 and $2.28 per MMBtu in the second quarters of
2000 and 1999, respectively, and $3.24 and $2.16 per MMBtu for the first six
months of 2000 and 1999, respectively), higher costs per unit for purchased
power ($40.29 and $24.20 per megawatt hour (MWH) in the second quarter of 2000
and 1999, respectively, and $33.75 and $21.50 per MWH for the first six months
of 2000 and 1999, respectively) and higher volumes due to customer growth and
increased demand, which led to increased production.
Operation and maintenance expenses and other operating expenses for the
second quarter and first six months of 2000 increased by $36 million and $44
million, respectively. The second quarter increase was largely due to increased
labor costs and transmission costs. The six month increase was primarily due to
increased labor, legal and transmission costs.
Depreciation and amortization expense in the second quarter and first
six months of 2000 decreased $59 million and $96 million, respectively. For
information regarding items that affect depreciation and amortization expense of
Electric Operations pursuant to the Legislation and the Transition Plan, see
Note 4 of the Company's Interim Financial Statements.
20
23
WHOLESALE ENERGY
Wholesale Energy's activities include (a) the acquisition, development
and operation of domestic non-rate regulated power generation facilities, (b)
the sale of energy, capacity and ancillary services from those facilities, (c)
wholesale energy trading, marketing and risk management activities in North
America and (d) domestic natural gas gathering activities. Wholesale Energy
conducts its operations through Reliant Energy Power Generation, Inc.
(collectively with its subsidiaries, "Power Generation"), Reliant Energy
Services, Inc. (Reliant Energy Services) and Reliant Energy Field Services, Inc.
Power Generation acquires, develops and operates non-rate regulated
power generation facilities in key domestic market locations. On May 12, 2000,
Power Generation purchased entities owning non-rate regulated power generating
assets and development sites located in Pennsylvania, New Jersey and Maryland
having an annual average net generating capacity of approximately 4,300 MW. With
the exception of certain development entities which were sold to another
subsidiary of the Company in July 2000, the assets are held by REMA. 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 and may incur substantial acquisition and development
expenditures in the future.
The Company believes its energy trading, marketing and risk management
activities maintained by Reliant Energy Services complement Power Generation's
strategy of acquiring, developing and operating non-rate regulated generation
assets in key domestic 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.
WHOLESALE ENERGY SEGMENT
---------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
Operating Revenues ................ $ 3,466 $ 1,938 $ 5,641 $ 2,946
Operating Expenses:
Natural Gas ..................... 1,938 1,038 3,362 1,758
Purchased Power ................. 1,243 834 1,931 1,075
Operation and Maintenance ....... 78 49 147 87
Depreciation and Amortization ... 19 6 27 12
Other Operating Expenses ........ 4 2 6 4
------------ ------------ ------------ ------------
Total Operating Expenses ...... 3,282 1,929 5,473 2,936
------------ ------------ ------------ ------------
Operating Income .................. $ 184 $ 9 $ 168 $ 10
============ ============ ============ ============
Operations Data:
Natural Gas (in Bcf (1)):
Sales ........................... 551 528 1,124 884
Gathering ....................... 70 67 141 128
------------ ------------ ------------ ------------
Total ......................... 621 595 1,265 1,012
============ ============ ============ ============
Electricity (MMWH (2)):
Wholesale Power Sales ........... 36.1 23.5 64.5 33.8
============ ============ ============ ============
- ----------
(1) Billion cubic feet.
(2) Million megawatt hours.
2000 versus 1999
Wholesale Energy's operating income increased $175 million and $158
million for the second quarter and first six months of 2000, respectively,
primarily due to increased energy sales, higher prices for energy and ancillary
services, and improved operating results from trading and marketing activity in
the western U.S. market (primarily
21
24
California and Nevada), as well as expansion of operations into other regions
including the Mid-Atlantic, Florida and Texas regions.
Wholesale Energy's operating revenues increased $1.5 billion and $2.7
billion for the second quarter and first six months of 2000, respectively. The
increase was primarily due to an increase in gas and power sales volumes and
commodity prices. Wholesale Energy's purchased natural gas costs increased $900
million and $1.6 billion in the second quarter and first six months of 2000,
respectively, largely due to increased gas sales volume and a higher average
cost of gas. Wholesale Energy's purchased power expense increased $409 million
and $856 million in the second quarter and first six months of 2000,
respectively, primarily due to higher power sales volumes and higher average
cost of power. Operation and maintenance expenses for Wholesale Energy increased
$29 million and $60 million in the second quarter and first six months of 2000,
respectively, primarily due to costs associated with the maintenance of
facilities acquired or placed into commercial operations after the second
quarter of 1999, increased costs associated with developing new power generation
projects and higher staffing levels to support increased sales and expanded
marketing efforts. Depreciation and amortization expense for the second quarter
and first six months of 2000 increased as a result of the acquisition of REMA
and other generating facilities.
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 transportation for, residential, commercial and industrial
customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas.
NATURAL GAS DISTRIBUTION SEGMENT
----------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
Operating Revenues .................. $ 721 $ 475 $ 1,635 $ 1,280
Operating Expenses:
Natural Gas ....................... 548 310 1,179 843
Operation and Maintenance ......... 120 109 239 218
Depreciation and Amortization ..... 38 32 73 65
Other Operating Expenses .......... 21 23 47 48
------------ ------------ ------------ ------------
Total Operating Expenses ........ 727 474 1,538 1,174
------------ ------------ ------------ ------------
Operating Income (Loss) ............. $ (6) $ 1 $ 97 $ 106
============ ============ ============ ============
Throughput Data (in Bcf):
Residential and Commercial Sales .. 46 43 166 167
Industrial Sales .................. 13 13 27 27
Transportation .................... 11 10 27 23
Retail Major Account Sales ........ 97 78 176 158
------------ ------------ ------------ ------------
Total Throughput ................ 167 144 396 375
============ ============ ============ ============
2000 versus 1999
Natural Gas Distribution's operating income decreased for the second
quarter and first six months of 2000 by $7 million and $9 million, respectively.
Increases in revenues and natural gas expense for the second quarter and first
six months of 2000 were due primarily to the increase in the price of natural
gas. In addition, operating revenues for the first six months of 2000 included a
$12 million gain from the effect of a financial hedge of Natural Gas
Distribution earnings against unseasonably warm weather during peak gas heating
months. The weather hedge expired in March 2000. For both periods, slightly
increased operating margins (revenues less fuel costs) in 2000 were offset by
higher operating expenses and higher depreciation expense in 2000. Operating
expenses for both periods in 2000 increased primarily as a result of increased
information system-related costs, employee benefit costs, depreciation expense
and general and administrative expenses.
22
25
INTERSTATE PIPELINES
Interstate Pipelines, consists of two wholly owned subsidiaries of
Resources Corp., and provides interstate gas transportation and related
services.
INTERSTATE PIPELINES SEGMENT
------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
Operating Revenues ................ $ 79 $ 66 $ 153 $ 132
Operating Expenses:
Natural Gas ..................... 16 6 27 12
Operation and Maintenance ....... 18 17 37 33
Depreciation and Amortization ... 13 12 25 24
Other Operating Expenses ........ 4 4 8 8
------------ ------------ ------------ ------------
Total Operating Expenses ...... 51 39 97 77
------------ ------------ ------------ ------------
Operating Income .................. $ 28 $ 27 $ 56 $ 55
============ ============ ============ ============
Throughput Data (in MMBtu):
Natural Gas Sales ............... 3 4 7 7
Transportation .................. 210 204 472 435
Elimination (1) ............... (3) (4) (6) (6)
------------ ------------ ------------ ------------
Total Throughput .................. 210 204 473 436
============ ============ ============ ============
- ----------
(1) Elimination of volumes both transported and sold.
Interstate Pipelines' operating income for the second quarter and the
first six months of 2000 remained relatively consistent with those same periods
in 1999. For both periods, slight increases in operating margins in 2000 were
offset by slight increases in operating expenses in 2000.
RELIANT ENERGY EUROPE
The Company established its Reliant Energy Europe business segment in
the fourth quarter of 1999 with the acquisition of UNA. For additional
information regarding the acquisition of UNA, see Note 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 Western Europe.
RELIANT ENERGY EUROPE SEGMENT
-------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 2000
------------ ------------
(IN MILLIONS)
Operating Revenues ...................... $ 136 $ 286
Operating Expenses:
Fuel and Purchased Power ............. 62 131
Operation and Maintenance and Other .. 31 59
Depreciation and Amortization ........ 19 39
------------ ------------
Total Operating Expenses ........... 112 229
------------ ------------
Operating Income ........................ $ 24 $ 57
============ ============
The decline in the second quarter of 2000 from the first quarter of
2000 was due primarily to the weakening of the exchange rate between the Dutch
guilder and the U.S. dollar and to normal seasonal fluctuations in the sale of
steam.
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
23
26
generation output. Under the Cooperative Agreement (OvS Agreement), UNA and the
other generators agree to sell their generating output to a national production
pool in exchange for a standardized remuneration. This remuneration includes
fuel cost, capital cost and the cost of operations and maintenance expenses. UNA
operates under the protocol (Protocol), an agreement under which the generators
agree to provide capacity and energy to distributors for a total payment of NLG
3.4 billion (approximately $1.6 billion U.S. dollars) annually over the period
1997 through 2000, plus compensation of actual fuel costs. The OvS Agreement
will substantially expire by the beginning of 2001. The Protocol, which was
entered into in order to facilitate the transition from a regulated energy
market into an unregulated energy market, will also substantially expire by the
beginning of 2001.
Beginning in 2001, UNA will begin operating in a deregulated market.
The Company anticipates that UNA will experience a significant decline in
revenues in 2001 attributable to the deregulation of that 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 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 as well as 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 continues to pursue its previously announced strategy to
divest its interest in its Latin American investments in order to pursue
business opportunities that are more in line with its strategies for the United
States and Western Europe.
On August 8, 2000, Reliant Energy International and Salvador Holding
entered into an agreement to sell the interests held by Salvador Holding in
El Salvador, subject to the satisfaction of certain conditions precedent
provided for in the purchase agreement. The sale of the Company's interests
held by Salvador Holding is not expected to have a material impact on the
results of operations of the Company.
RELIANT ENERGY LATIN AMERICA SEGMENT
-----------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
Operating Revenues (Loss) ......... $ 10 $ 43 $ 31 $ (8)
Operating Expenses:
Fuel ............................ 14 13 22 25
Operation and Maintenance ....... 14 14 20 28
Depreciation and Amortization ... 2 1 5 2
------------ ------------ ------------ ------------
Total Operating Expenses ...... 30 28 47 55
------------ ------------ ------------ ------------
Operating (Loss) Income ........... $ (20) $ 15 $ (16) $ (63)
============ ============ ============ ============
2000 versus 1999
Reliant Energy Latin America had a decrease in operating income of $35
million for the second quarter of 2000 and a decrease in operating loss of $47
million for the first six months of 2000. The second quarter and first six
months operating results for 1999 included after-tax, non-cash charges of $4
million and $95 million, respectively, related 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 were a
result of the Brazilian government's January 1999 decision to allow the
Brazilian real to float against other foreign currencies. Excluding the losses
related to the real devaluation in 1999, operating income decreased by $39
million and $48 million for the second quarter and first six months of 2000,
respectively. Decreased earnings from equity investments in Brazil and Colombia
were the primary cause of reduced earnings in both periods.
24
27
CORPORATE
Corporate includes the operations of certain non-rate regulated retail
services businesses, a communications business which offers enhanced data, voice
and other services to customers in Texas, the startup of an e-commerce business,
certain real estate holdings and unallocated corporate costs.
Corporate had operating losses of $35 million and $42 million for the
second quarter and first six months of 2000, respectively, compared to operating
losses of $14 million and $24 million for the same periods of 1999,
respectively. The decline for both periods was primarily due to unregulated
electric retail business, e-business and telecommunication business startup
costs, partially offset by decreases in corporate expenses due to the timing of
corporate billings for both periods. The startup costs of the unregulated
electric retail business was primarily a result of increased operating expenses
due to additional staffing, increased marketing support and other expenditures
to prepare for entrance into the deregulated electricity market in Texas.
Management expects to continue to make substantial capital investments in its
unregulated electric retail, e-business and telecommunications businesses to
fulfill its overall business strategy.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
CALIFORNIA MARKET PRICING CAPS
The California Independent System Operator (CAISO) board voted to lower
its price cap in the California real-time electricity, day-ahead and hour-ahead
ancillary services markets first from $750 per MWh to $500 per MWh and effective
August 7, 2000, from $500 per MWh to $250 per MWh. These caps do not apply to
replacement power ancillary service, which is capped at $100 per MWh. The latest
reduction will remain in effect until at least October 15, 2000. These changes
have been made in response to concerns that the current market structure is not
functioning competitively.
The continued use of price caps in the California marketplace, as well
as other market restructuring alternatives, is currently under review by the
CAISO, the California Public Utility Commission and other state legislative and
regulatory agencies. Future changes implemented as a result of such review,
including the continued utilization of price caps could have an adverse impact
on future earnings of the Company.
GENERAL
For information on other developments, factors and trends that may have
an impact on the Company's future earnings, please read "Management's Discussion
and Analysis of Financial Condition and Results of Operations of 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. For additional information regarding the filing of an amended
business separation plan with the PUC, see Note 12 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 six months ended June 30,
2000 and 1999:
SIX MONTHS ENDED JUNE 30,
--------------------------
2000 1999
---------- ----------
(IN MILLIONS)
Cash provided by (used in):
Operating activities ........... $ 544 $ 556
Investing activities ........... (3,807) (454)
Financing activities ........... 3,270 (65)
Net cash provided by operations in the six months ended June 30, 2000
decreased $12 million compared to the same period in 1999 primarily due to an
increase in fuel cost under recovery and restricted deposits, offset by (a) a
$78 million federal tax refund received in the first quarter of 2000, (b)
increased sales at Electric Operations due to customer growth and increased
customer usage, (c) improved operating results of Wholesale Energy's western
market operations, (d) incremental cash flows provided by UNA (acquired in the
fourth quarter of 1999) and REMA (acquired in the second quarter of 2000) and
(e) other changes in working capital.
25
28
Net cash used in investing activities increased $3.4 billion in the six
months ended June 30, 2000 compared to the same period in 1999 primarily due to
the funding of the remaining purchase obligation of the 48% shares of UNA for
$987 million on March 1, 2000, and the purchase of the operations held by REMA
for $2.1 billion on May 12, 2000, as well as increased capital expenditures
related to the construction of domestic non-rate regulated power generation
projects by Wholesale Energy. Proceeds from the sale of debt securities by UNA
partially offset these increases.
Cash flows provided by financing activities increased $3.3 billion in
the six months ended June 30, 2000 compared to the same period in 1999 primarily
due to an increase in cash received from short-term borrowings. An increase in
payments of long-term debt including restricted deposits for bond redemption and
purchases by Reliant Energy of Reliant Energy common stock during the first six
months of 2000 partially offset the increase. The Company utilized the net
borrowings incurred during the first six months of 2000 to fund the remaining
purchase obligation of UNA, to fund the acquisition of REMA operations, to
support increased capital expenditures by Wholesale Energy and for general
corporate purposes, including the repayment of indebtedness. The Company
obtained the funds for the remaining UNA purchase obligation on March 1, 2000,
in part from a Euro 600 million (approximately $584 million) term loan facility
which expires in March 2003 and through short-term borrowings and excess
operating cash flows. Funds for the acquisition of the operations held by REMA
were made available through issuances of commercial paper supported by two bank
facilities, one in the amount of $1.0 billion and one in the amount of $1.15
billion. The $1.0 billion facility 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.
FUTURE SOURCES AND USES OF CASH FLOWS
Credit Facilities. As of June 30, 2000, the Company had credit
facilities, including the facilities of Resources Corp., several financing
subsidiaries, UNA and Reliant Energy International, which provided for an
aggregate of $7.4 billion in committed credit (including the Euro 600 million
facility discussed above). As of June 30, 2000, $6.7 billion was outstanding
under these facilities, including commercial paper of $4.7 billion. Unused
credit facilities totaled $0.7 billion as of June 30, 2000.
Shelf Registrations. As of June 30, 2000, the Company had shelf
registration statements providing for the issuance of $230 million aggregate
liquidation value of its preferred stock, $580 million aggregate principal
amount of its debt securities and $125 million of trust preferred securities and
related junior subordinated debt securities. In addition, the Company has a
shelf registration for 15 million shares of common stock, which would have been
worth approximately $443 million as of June 30, 2000 based on the closing price
of the common stock as of such date.
Securitization. On May 31, 2000 Reliant Energy HL&P received a
financing order from the PUC authorizing the issuance of transition bonds
relating to Reliant Energy HL&P's generation-related regulatory assets by a
special purpose entity organized by the Company, pursuant to the Legislation.
The financing order authorizes the issuance of transition bonds in an amount not
to exceed $740 million plus actual up-front qualified costs. The offering and
sale of the transition bonds will be registered under the Securities Act of 1933
and are expected to be consummated in 2001, or if conditions permit, late 2000.
Reliant Energy Latin America Capital Contributions and Advances. As of
June 30, 2000, Reliant Energy Latin America expects to make capital
contributions or advances during the second half of 2000 totaling approximately
$12 million as a result of debt service payments and operating cash flow
shortfalls at certain of its affiliates. Capital contributions of $51 million
were made during the first six months of 2000. The Company expects that capital
contributions will be paid from proceeds from the sale of certain investments.
Fuel Filing. Through June 2000, Reliant Energy HL&P was undercollected
on fuel recovery by $278 million. This is primarily the result of significant
increases in the price of natural gas since the end of the first quarter of
2000. On June 9, 2000, Reliant Energy HL&P filed to implement a fuel surcharge
to collect this under recovery and adjust the fuel factor to compensate for this
increased cost of natural gas. On August 1, 2000, a unanimous settlement was
filed with the State Office of Administrative Hearings (SOAH) to put a surcharge
into place to collect this under recovery over the period of time from September
2000 through December 2001. In addition, the parties agreed to increase the fuel
factor beginning with the September 2000 billing month which
26
29
begins on August 18, 2000. On August 7, 2000, the Administrative Law Judge with
SOAH approved the settlement on an interim basis. It is expected that the PUC
will rule on this settlement at its Open Meeting on August 24, 2000.
Other Sources/Uses of Cash. The liquidity and capital requirements of
the Company are affected primarily by capital expenditures 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. The Company expects any resulting capital requirements to
be met with excess cash flows from operations, as well as proceeds from project
financings and other borrowings. Additional capital expenditures depend upon
the nature and extent of future project commitments, some of which may be
substantial. The Company believes that its current level of cash and borrowing
capability, along with future cash flows from operations, are sufficient to meet
the existing operational needs of its businesses. The Company may, however, 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 derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. This pronouncement requires classification of derivatives as either
assets or liabilities on the balance sheet and measurement of those instruments
at fair value. The Company is in the process of determining the effect of
adoption of SFAS No. 133 on its consolidated financial statements.
Staff Accounting Bulletin 101, "Revenue Recognition" (SAB 101), was
issued by the SEC on December 3, 1999 which summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. On June 26, 2000, the SEC staff announced
that they are delaying the required implementation date for SAB 101 no later
than a registrants fourth fiscal quarter of their fiscal year beginning after
December 15, 1999. The Company believes the adoption of SAB 101 will not have
a material effect on its results of operations.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK OF THE COMPANY
The Company has financial instruments that involve various market risks
and uncertainties. For information regarding the Company's exposure to risks
associated with interest rates, equity market prices, foreign currency exchange
rate risk and energy commodity prices, see Item 7A of the Reliant Energy Form
10-K which is incorporated herein by reference. These risks have not materially
changed from the market risks disclosed in the Reliant Energy Form 10-K.
27
30
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
STATEMENTS OF CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUES ......................................... $ 4,009,727 $ 2,430,890 $ 7,109,064 $ 4,258,954
------------ ------------ ------------ ------------
EXPENSES:
Natural gas and purchased power ................ 3,738,533 2,165,735 6,443,483 3,624,430
Operation and maintenance ...................... 181,700 144,473 341,804 283,375
Depreciation and amortization .................. 53,364 48,096 105,486 98,114
Taxes other than income taxes .................. 24,304 27,637 55,656 57,909
------------ ------------ ------------ ------------
Total ...................................... 3,997,901 2,385,941 6,946,429 4,063,828
------------ ------------ ------------ ------------
OPERATING INCOME ................................. 11,826 44,949 162,635 195,126
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net .......................... (29,383) (30,191) (61,157) (59,853)
Distribution on trust preferred securities ..... (7) (98) (15) (197)
Other, net ..................................... 3,977 3,727 (13,128) 6,758
------------ ------------ ------------ ------------
Total ...................................... (25,413) (26,562) (74,300) (53,292)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES ................ (13,587) 18,387 88,335 141,834
Income Tax (Benefit) Expense ..................... (90) 12,431 46,696 64,905
------------ ------------ ------------ ------------
NET (LOSS) INCOME ................................ $ (13,497) $ 5,956 $ 41,639 $ 76,929
============ ============ ============ ============
See Notes to Resources' Interim Financial Statements
28
31
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 67,016 $ 81,347
Accounts and notes receivable, principally customer .. 1,542,645 980,560
Unbilled revenue ..................................... 103,453 150,961
Materials and supplies, at average cost .............. 36,601 35,121
Fuel, gas and petroleum products ..................... 64,172 80,135
Price risk management assets ......................... 588,310 435,336
Prepayments and other current assets ................. 41,282 46,666
------------ ------------
Total current assets ............................... 2,443,479 1,810,126
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ........................ 3,395,328 3,291,088
Less accumulated depreciation and amortization ....... 404,143 324,596
------------ ------------
Property, plant and equipment, net ................... 2,991,185 2,966,492
------------ ------------
OTHER ASSETS:
Goodwill, net ........................................ 1,973,505 1,990,394
Prepaid pension asset ................................ 100,867 110,626
Price risk management assets ......................... 549,332 148,722
Other ................................................ 296,471 186,437
------------ ------------
Total other assets ................................. 2,920,175 2,436,179
------------ ------------
TOTAL ASSETS ........................................... $ 8,354,839 $ 7,212,797
============ ============
See Notes to Resources' Interim Financial Statements
29
32
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
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt .................................. $ 339,863 $ 223,451
Short-term borrowings .............................................. 566,679 534,584
Accounts payable, principally trade ................................ 1,213,818 776,546
Accounts and notes payable - affiliated companies, net ............. 173,078 95,601
Interest accrued ................................................... 28,628 27,965
Taxes accrued ...................................................... 42,452 48,266
Customer deposits .................................................. 31,667 33,255
Price risk management liabilities .................................. 551,715 431,135
Other .............................................................. 157,422 119,111
------------ ------------
Total current liabilities .................................... 3,105,322 2,289,914
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes .................................. 562,937 532,725
Payable under capacity lease agreement ............................. 41,000 41,000
Benefit obligations ................................................ 127,929 161,144
Price risk management liabilities .................................. 523,791 117,437
Other .............................................................. 174,516 187,473
------------ ------------
Total deferred credits and other liabilities ................... 1,430,173 1,039,779
------------ ------------
LONG-TERM DEBT ....................................................... 1,099,542 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 ........................................... 640 967
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock ....................................................... 1 1
Paid-in capital .................................................... 2,463,831 2,463,831
Retained earnings .................................................. 256,511 214,872
Accumulated other comprehensive loss ............................... (1,181) (17,198)
------------ ------------
Total stockholder's equity ..................................... 2,719,162 2,661,506
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ........................ $ 8,354,839 $ 7,212,797
============ ============
See Notes to Resources' Interim Financial Statements
30
33
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 41,639 $ 76,929
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .............................. 105,486 98,114
Deferred income taxes ...................................... 13,481 28,027
Impairment of marketable equity securities ................. 22,185 --
Changes in other assets and liabilities:
Accounts and notes receivable ............................ (514,577) 67,832
Accounts receivable/payable, affiliates .................. 99,311 12,707
Inventories .............................................. 14,483 17,300
Other current assets ..................................... 5,384 (54,479)
Accounts payable ......................................... 437,272 17,646
Interest and taxes accrued ............................... (5,151) (9,802)
Other current liabilities ................................ 36,723 (44,346)
Net price risk management assets ......................... (26,650) (16,734)
Restricted deposits ...................................... (125,084) (51,035)
Other, net ............................................... (1,466) 16,447
------------ ------------
Net cash provided by operating activities .............. 103,036 158,606
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................... (123,387) (135,467)
Other, net ................................................... 763 5,752
------------ ------------
Net cash used in investing activities .................. (122,624) (129,715)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt ................................... -- (12,042)
Increase in short-term borrowings, net ....................... 32,095 --
Decrease in notes with affiliates, net ....................... (21,834) (21,300)
Other, net ................................................... (5,004) (7,677)
------------ ------------
Net cash provided by (used in) financing activities .... 5,257 (41,019)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ....................... (14,331) (12,128)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ............ 81,347 26,576
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD .................. $ 67,016 $ 14,448
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ........................ $ 64,260 $ 46,359
Income taxes ................................................. 31,844 62,606
See Notes to Resources' Interim Financial Statements
31
34
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 Operations are not
necessarily indicative of amounts expected for a full year period due to the
effects of, among other things, (a) seasonal variations in energy consumption,
(b) timing of maintenance and other expenditures and (c) acquisitions and
dispositions of assets and other interests. In addition, certain amounts from
the prior year have been reclassified to conform to Resources' presentation of
financial statements in the current year. These reclassifications do not affect
earnings of Resources. Resources 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 and the combined First Quarter Report on Form 10-Q of Reliant Energy
(Reliant Energy First Quarter 10-Q) and Resources Corp. (Resources Corp. First
Quarter 10-Q) for the quarter ended March 31, 2000.
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 second quarter and first six
months of 2000 was $38 million and $75 million, respectively, compared to $35
million and $71 million for the same periods in 1999. Amortization expense,
primarily relating to goodwill amortization, was $15 million and $30 million for
the second quarter and first six months of 2000 compared to $13 million and $27
million for the same periods in 1999.
(3) RESOURCES OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF
RESOURCES -- see Note 9 (b) to the Company's Interim Financial
Statements.
(4) COMPREHENSIVE INCOME
Resources had a total comprehensive loss of $12 million for the second
quarter of 2000 and total comprehensive income of $58 million for the first six
months of 2000, and total comprehensive income of $5 million and $78 million in
the second quarter and first six months of 1999, respectively. The following
table summarizes the components of total comprehensive income.
32
35
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
Net (loss) income ..................................... $ (13) $ 6 $ 42 $ 77
Other comprehensive income:
Unrealized gain (loss) on available for sale
securities ........................................ 1 (1) 2 1
Plus: Reclassification adjustment for impairment
loss on available for sale securities realized
in net income ..................................... -- -- 14 --
------------ ------------ ------------ ------------
Comprehensive (loss) income ........................... $ (12) $ 5 $ 58 $ 78
============ ============ ============ ============
(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 are owned
and operated by Power Generation or its subsidiaries. For the three months ended
June 30, 2000 and 1999, the sales and services to Reliant Energy and its
affiliates totaled $140 million and $32 million, respectively. Purchases from
Reliant Energy and its affiliates were $97 million and $8 million for the second
quarter of 2000 and 1999, respectively. For the six months ended June 30, 2000
and 1999, the sales and services to Reliant Energy and its affiliates totaled
$184 million and $43 million, respectively. Purchases from Reliant Energy and
its affiliates were $126 million and $11 million for the six months ended June
30, 2000 and 1999, respectively.
Reliant Energy provides certain corporate services to Resources which
are allocated or directly billed to Resources, including management support,
financial and tax accounting, information system support, treasury support,
legal services, regulatory support and other general services.
Net borrowings from Reliant Energy and its subsidiaries, which are not
owned by Resources, included in accounts and notes payables-affiliated
companies, totaled $40 million and $62 million at June 30, 2000 and December 31,
1999, respectively. Interest income/expense on such receivables/borrowings was
nominal for the six months ended June 30, 2000 and 1999. As of June 30, 2000 and
December 31, 1999, net accounts payable to Reliant Energy and its subsidiaries,
which are not owned by Resources, were $133 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: Wholesale Energy, Natural Gas Distribution,
Interstate Pipelines, 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:
33
36
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 2000
-------------------------------------------------------------------
REVENUES FROM INTERSEGMENT OPERATING TOTAL
NON-AFFILIATES REVENUES INCOME ASSETS
-------------- ------------ ------------ ------------
(IN MILLIONS)
Wholesale Energy ........................... $ 3,382 $ 84 $ 184 $ 6,505
Natural Gas Distribution ................... 705 16 (6) 3,369
Interstate Pipelines ....................... 27 52 28 2,002
Reliant Energy Europe (1) .................. 136 -- 24 2,937
Corporate .................................. 89 (7) (35) 4,698
Reconciling Elimination .................... -- (145) -- (643)
Elimination of Non-Resources Operations .... (329) -- (183) (10,513)
------------ ------------ ------------ ------------
Consolidated ............................... $ 4,010 $ -- $ 12 $ 8,355
============ ============ ============ ============
FOR THE SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------------
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME
-------------- ------------ ------------
(IN MILLIONS)
Wholesale Energy ............................ $ 5,420 $ 221 $ 168
Natural Gas Distribution .................... 1,619 16 97
Interstate Pipelines ........................ 61 92 56
Reliant Energy Europe (1) ................... 286 -- 57
Corporate ................................... 220 1 (42)
Reconciling Elimination ..................... -- (330) --
Elimination of Non-Resources Operations ..... (497) -- (173)
------------ ------------ ------------
Consolidated ................................ $ 7,109 $ -- $ 163
============ ============ ============
AS OF
DECEMBER 31,
FOR THE THREE MONTHS ENDED JUNE 30, 1999 1999
------------------------------------------------- ------------
REVENUES FROM INTERSEGMENT OPERATING TOTAL
NON-AFFILIATES REVENUES INCOME ASSETS
-------------- ------------ ------------ ------------
(IN MILLIONS)
Wholesale Energy ............................ $ 1,906 $ 32 $ 9 $ 2,773
Natural Gas Distribution .................... 475 -- 1 3,683
Interstate Pipelines ........................ 27 39 27 2,212
Reliant Energy Europe (1) ................... -- -- -- 3,247
Corporate ................................... 40 17 (14) 4,349
Reconciling Elimination ..................... -- (88) -- (1,140)
Elimination of Non-Resources Operations ..... (17) -- 22 (7,911)
------------ ------------ ------------ ------------
Consolidated ................................ $ 2,431 $ -- $ 45 $ 7,213
============ ============ ============ ============
FOR THE SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME
-------------- ------------ ------------
(IN MILLIONS)
Wholesale Energy ............................ $ 2,845 $ 101 $ 10
Natural Gas Distribution .................... 1,279 1 106
Interstate Pipelines ........................ 53 79 55
Corporate ................................... 115 36 (24)
Reconciling Elimination ..................... -- (217) --
Elimination of Non-Resources Operations ..... (33) -- 48
------------ ------------ ------------
Consolidated ................................ $ 4,259 $ -- $ 195
============ ============ ============
- ----------
(1) Reliant Energy Europe was created in the fourth quarter of 1999.
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(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,
Resources does not discount future costs to their present value and does not
offset the liability by expected insurance recoveries. If justified by
circumstances within Resources' business, subject to SFAS No. 71, Resources
records corresponding regulatory assets 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. To date, 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 June 30, 2000 and December 31, 1999, Resources had accrued $18.4
million and $18.8 million, respectively, for remediation of the Minnesota sites.
At June 30, 2000, Resources estimated the range of possible remediation costs to
be $10.0 million to $49.0 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 June 30, 2000 and December 31, 1999,
Resources had recorded accruals of approximately $1.2 million (with a maximum
estimated exposure of approximately $13.0 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 both June 30, 2000
and December 31, 1999, Reliant Energy Minnegasco had recovered approximately
$13.0 million, including insurance recoveries. At June 30, 2000 and December 31,
1999, Reliant Energy Minnegasco had recorded a liability of $19.6 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 June 30,
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, Resources recorded a regulatory asset 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
from time to time identifies during its operations sources of environmental
contamination which require remediation. Sources of contamination can include
substances in gas purchased from others as well as contamination caused from
equipment and maintenance activities located on Resources' system. For example,
pipeline operations have in the past employed elemental mercury in meters used
on its pipelines. Although Resources has now removed the mercury 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. Resources has found such contamination at some sites in the
past, and Resources has conducted remediation at sites found to be contaminated.
Although Resources is not aware of
35
38
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.
Other Litigation. 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.
(8) SUBSEQUENT EVENTS
On August 9, 2000, Reliant Energy filed an amended business separation
plan with the PUC under which it would divide into two publicly traded companies
in order to separate its unregulated businesses from its regulated businesses.
As part of this separation, the trading and marketing operations of Resources,
as well as certain unregulated retail operations, will be transferred to the
unregulated business. For additional information regarding Reliant Energy's plan
to file the amended business separation plan, see the Reliant Energy and
Resources Corp. combined current report on Form 8-K dated July 27, 2000, which
information is incorporated herein by reference. The amended plan actually filed
follows the proposed plan described in the Form 8-K other than the cash payment
that the unregulated company will receive from the regulated company in 2004
will have a "collar" placed on it such that the cash amount will not equal the
market value of the regulated company's interest in the Texas regulated
generation operations if the market value is outside of the collar. If the
market value is above the collar, the cash amount will be less than the market
value. If the market value is below the collar, the cash amount will be greater
than the market value. The amended plan is subject to PUC approval.
On July 6, 2000, Resources Corp. issued $325 million of notes having an
interest rate of 8.125% and a maturity date of July 15, 2005. Resources Corp.
used the proceeds from the sale of the notes for general corporate purposes,
including the repayment of $200 million of Resources Corp.'s 7.5% notes due 2000
that matured on August 1, 2000 and the repayment of a portion of its short-term
indebtedness.
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39
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 second quarter and
first six months of 2000 and the second quarter and first six months of 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, Resources Corp.'s Interim Financial Statements
contained in this Form 10-Q and Resources Corp. First Quarter 10-Q.
On August 9, 2000, Reliant Energy filed an amended business separation
plan with the PUC under which it would divide into two publicly traded companies
in order to separate its unregulated businesses from its regulated businesses.
For additional information regarding the amended plan, See Note 12 to Reliant
Energy's Interim Financial Statements and Note 8 to Resources Corp.'s Interim
Financial Statements.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN MILLIONS)
Operating Revenues ................ $ 4,010 $ 2,431 $ 7,109 $ 4,259
Operating Expenses ................ 3,998 2,386 6,946 4,064
------------ ------------ ------------ ------------
Operating Income, Net ............. 12 45 163 195
Interest Expense .................. (29) (30) (61) (60)
Other Income/(Expense), Net ....... 4 3 (13) 7
Income Tax Expense ................ -- (12) (47) (65)
------------ ------------ ------------ ------------
Net (Loss) Income ............... $ (13) $ 6 $ 42 $ 77
============ ============ ============ ============
For the second quarter 2000, Resources net loss was $13 million
compared to net income of $6 million for the same period in 1999. The decrease
was primarily a result of decreases in operating income of the Natural Gas
Distribution segment and the unregulated gas retail business of the Corporate
segment, coupled with startup cost of the European trading and marketing
operations and increased staffing costs to support expanded sales and marketing
efforts of the trading and marketing business of the Wholesale Energy segment.
For the first six months of 2000, Resources net income was $42 million
compared to $77 million for the same period in 1999. The decrease was primarily
a result of the same factors discussed above, as well as, a decrease in other
income of $20 million which was primarily caused by a 2000 after-tax impairment
loss of $14 million on equity marketable securities classified as "available for
sale."
Resources' revenue increased $1.6 billion and $2.9 billion for the
second quarter and first six months of 2000, respectively, compared to the same
periods in 1999. The increase for both periods was primarily a result of an
increase in sales volumes of natural gas and electricity and a higher average
price for both commodities. Total operating expenses increased by $1.6 billion
and $2.9 billion for the second quarter and first half of 2000 as compared to
those same periods in 1999. The increase was primarily a result of increased
natural gas and purchased power usage to support the increase in sales volumes,
as well as an increase in the average cost of those commodities. In addition,
Resources experienced increased levels of operations and maintenance costs as a
result of (a) increased sales and marketing efforts to support the trading and
marketing business of the Wholesale Energy segment, (b) startup cost of the
European trading and marketing operations and (c) increased information
technology costs to support the Natural Gas Distribution segment. The increase
in depreciation expense for the second quarter and first half of 2000 as
compared to those same periods in 1999 was primarily related to the capital
expenditures at the Natural Gas Distribution segment. Weather had very little
effect on the second quarter earnings of the Natural Gas Distribution segment;
however, after giving effect to a partial weather hedge gain of $12 million,
weather had a positive effect of approximately $8 million on the first six
months earnings of 2000 as compared to the same period in 1999. The weather
hedge expired in March 2000.
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40
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.
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.
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.
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41
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Reliant Energy:
At the annual meeting of the Company's shareholders held on May 3,
2000, the matters voted upon and the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes as to such
matters (including a separate tabulation with respect to each nominee for
office) were as stated below:
The following four nominees for Class I directors were elected to serve
three-year terms expiring 2003:
For Withheld
----------- ---------
Robert J. Kruikshank 246,778,396 5,224,545
Linnet F. Deily 247,087,647 4,915,294
T. Milton Honea 246,950,198 5,052,743
Laree E. Perez 246,691,005 5,311,936
The following nominee for Class III director was elected to serve a
two-year term expiring in 2002:
For Withheld
----------- ---------
Lee W. Hogan 246,691,000 5,311,936
The proposal to adopt the Reliant Energy, Incorporated Annual Incentive
Compensation Plan, including provisions relating to performance-based
compensation necessary to satisfy requirements under Section 162(m) of the
Internal Revenue Code was approved with 234,128,902 votes for, 14,078,428 votes
against and 3,795,602 abstentions.
The ratification of the appointment of Deloitte & Touche LLP as
independent accountants and auditors for the Company for 2000 was approved with
247,579,319 for, 2,304,149 votes against and 2,040,672 abstentions.
There were no broker non-votes.
Resources Corp.:
Omitted pursuant to Instruction H(2)(b).
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
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"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 approval and implementation of the Company's business separation plan,
o state and federal legislative or regulatory developments,
o national or regional economic conditions,
o industrial, commercial and residential growth in service territories of the
Company,
o the timing and extent of changes in commodity prices and interest rates,
o weather variations and other natural phenomena,
o growth in opportunities for the Company's diversified operations,
o the results of financing efforts,
o the ability to consummate and the timing of the consummation of pending
acquisitions and dispositions,
o the speed, degree and effect of continued electric industry restructuring
in North America and Western Europe,
o risks incidental to the Company's overseas operations, including the
effects of fluctuations in foreign currency exchange rates, and
o other factors discussed in this and other filings by Reliant Energy and
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Reliant Energy:
Exhibit 3(a) Statement of Resolution Establishing Series of
Shares designated Series H Preference Stock.
Exhibit 3(b) Statement of Resolution Establishing Series of
Shares designated Series I Preference Stock.
Exhibit 3(c) Statement of Resolution Establishing Series of
Shares designated Series J Preference Stock.
Exhibit 10 Employment Agreement dated as of July 30, 2000,
between Reliant Energy Europe, Inc. and G.L.M.A.
van Lanschot.
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.
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Exhibit 99(b) Combined Form 8-K of Reliant Energy and Resources
Corp. filed July 27, 2000, regarding the proposed
restructuring of the Company.
Resources Corp.:
Exhibit 12 Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
Exhibit 99(a) Items incorporated by reference from the Reliant
Energy and 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.
Exhibit 99(b) Combined Form 8-K of Reliant Energy and Resources
Corp. filed July 27, 2000, regarding the proposed
restructuring of the Company.
(b) Reports on Form 8-K.
Reliant Energy:
Combined Form 8-K of Reliant Energy and Resources Corp. filed July 27,
2000, regarding the proposed restructuring of the Company.
Resources Corp.:
Combined Form 8-K of Reliant Energy and Resources Corp. filed July 27,
2000, regarding the proposed restructuring of the Company.
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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: August 14, 2000
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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: August 14, 2000
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
Reliant Energy:
Exhibit 3(a) Statement of Resolution Establishing Series of
Shares designated Series H Preference Stock.
Exhibit 3(b) Statement of Resolution Establishing Series of
Shares designated Series I Preference Stock.
Exhibit 3(c) Statement of Resolution Establishing Series of
Shares designated Series J Preference Stock.
Exhibit 10 Employment Agreement dated as of July 30, 2000,
between Reliant Energy Europe, Inc. and G.L.M.A.
van Lanschot.
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) Combined Form 8-K of Reliant Energy and Resources
Corp. filed July 27, 2000, regarding the proposed
restructuring of the Company.
Resources Corp.:
Exhibit 12 Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
Exhibit 99(a) Items incorporated by reference from the Reliant
Energy and 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.
Exhibit 99(b) Combined Form 8-K of Reliant Energy and Resources
Corp. filed July 27, 2000, regarding the proposed
restructuring of the Company.
1
EXHIBIT 3(a)
STATEMENT OF RESOLUTION ESTABLISHING SERIES OF SHARES
designated
SERIES H PREFERENCE STOCK
of
RELIANT ENERGY, INCORPORATED
Pursuant to Article 2.13D of
the Texas Business Corporation Act
Pursuant to the provisions of Article 2.13D of the Texas
Business Corporation Act, the undersigned corporation submits the following
statement for the purpose of establishing and designating a series of shares of
its Preference Stock, without par value, designated "Series H Preference Stock"
and fixing and determining the relative rights and preferences thereof:
1. The name of the corporation is RELIANT ENERGY, INCORPORATED
(the "Company").
2. The following resolution establishing and designating a
series of shares and fixing and determining the relative rights and preferences
thereof, was duly adopted by all necessary action on the part of the Company on
May 5, 2000:
RESOLVED, that pursuant to the authority vested in the Finance
Committee and the Preference Stock Committee, acting separately and/or
concurrently, by the Board of Directors of this Company in accordance
with the provisions of the Restated Articles of Incorporation, a series
of Preference Stock, without par value, of the Company be and hereby is
created, and that the designation and number of shares thereof and the
preferences, limitations and relative rights, including voting rights,
of the shares of such series and the qualifications, limitations and
restrictions thereof are as follows:
SERIES H PREFERENCE STOCK
1. Designation and Amount. There shall be a series of
Preference Stock that shall be designated as "Series H Preference Stock," and
the number of shares constituting such series shall be 12,100. Such number of
shares may be increased or decreased by resolution of the Finance Committee and
the Preference Stock Committee, acting separately and/or concurrently; provided,
however, that no decrease shall reduce the number of shares of Series H
Preference Stock to less than the number of shares then issued and outstanding
plus the number of shares issuable upon exercise of outstanding rights, options
or warrants or upon conversion of outstanding securities issued by the Company.
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2. Certain Defined Terms.
Capitalized terms not otherwise defined herein shall have the
respective meanings ascribed to them in that certain Senior A Credit Agreement
(the "Credit Agreement") to be entered into among Houston Industries FinanceCo,
LP, a Delaware limited partnership to be the initial Borrower thereunder, the
Company, the lenders parties thereto and The Chase Manhattan Bank, as the
Administrative Agent thereunder on or after May 10, 2000. In addition, the
following terms are used herein as defined below:
(i) "Computed Dividend Portion" means, within any
Dividend Interval Period, an amount equal to the interest expense
accrued on the indebtedness for borrowed money of the Borrower from the
prior Dividend Payment Date to the Determination Date for the current
Dividend Interval Period.
(ii) "Determination Date" means the date occurring
five Business Days prior to a Dividend Declaration Date.
(iii) "Dividend" means the dividend on the Series H
Preference Stock declared by the Company's Board of Directors with
respect to a Dividend Interval Period.
(iv) "Dividend Declaration Amount" means, as of any
Determination Date, the Preliminary Dividend Amount, less the sum of
(a) the Interest Reconciliation Amount, (b) the Support Agreement
Reconciliation Amount, and (c) the Other Sources Reconciliation Amount.
The Dividend Declaration Amount may be greater than or less than the
Preliminary Dividend Amount.
(v) "Dividend Declaration Date" means the date on
which Dividends on the Series H Preference Stock are declared (or would
have been declared but for the fact that the amount of the Dividend
determined in accordance herewith would have been zero) during a
Dividend Interval Period by the Company's Board of Directors.
(vi) "Dividend Interval Period" means the period
beginning on a Dividend Payment Date and extending to the next Dividend
Payment Date.
(vii) "Dividend Payment Date" means the date
occurring five Business Days after a Dividend Declaration Date.
(viii) "Interest Reconciliation Amount" means an
amount equal to (a) the Preliminary Dividend Amount computed for the
prior Dividend Interval Period, less (b) the actual interest expense
accrued on the indebtedness for borrowed money of the Borrower during
such period.
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3
(ix) "Other Sources Reconciliation Amount" means the
sum of (a) to the extent applied to pay interest on the indebtedness
for borrowed money of the Borrower or available in cash on the current
Determination Date therefor, the amount of income or cash proceeds
received by the Borrower from sources other than pursuant to the
Support Agreement (including, without limitation, interest received on
loans to Affiliates), and (b) the cash proceeds of new borrowings under
the Credit Agreement or any other Permitted Facility that are utilized
to pay interest on outstanding borrowings thereunder, from the
Determination Date occurring in the Prior Dividend Interval Period to
the Determination Date occurring in the current Dividend Interval
Period.
(x) "Preliminary Dividend Amount" means the sum of
the Computed Dividend Portion and the Projected Dividend Portion.
(xi) "Projected Dividend Portion" means, within any
Dividend Interval Period, an amount equal to the projected interest
expense that will be accrued on the indebtedness for borrowed money of
the Borrower from the Determination Date for such Dividend Interval
Period to the Dividend Payment Date.
(xii) "Support Agreement Reconciliation Amount" means
the amount of cash payments made pursuant to the Support Agreement by
the Company to the Borrower from the Determination Date occurring in
the immediately prior Dividend Interval Period to the Determination
Date occurring in the current Dividend Interval Period.
3. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of
(i) any shares of any series of Preference Stock ranking prior and superior to
the shares of Series H Preference Stock with respect to dividends and (ii) any
shares of Preferred Stock, the holders of shares of Series H Preference Stock,
in preference to the holders of shares of any class or series of stock of the
Company ranking junior to the Series H Preference Stock, shall be entitled to
receive the amounts set forth below, when, as and if declared by the Board of
Directors in the manner described below out of assets of the Company legally
available for the purpose:
(i) On every regularly scheduled meeting of the
Company's Board of Directors while any shares of Series H Preference
Stock remain outstanding, the Board of Directors shall declare an
aggregate Dividend (if a positive amount) equal to the lesser of (a)
the Dividend Declaration Amount or (b) the Excess Cash Flow projected
to be available as of the applicable Dividend Payment Date with respect
to the then current Dividend Interval Period.
(ii) If, with respect to any Dividend Interval
Period, the aggregate Dividend declared by the Company's Board of
Directors is less than the Dividend Declaration Amount for such
Dividend Interval Period because the Excess Cash Flow projected to be
available as of the applicable Dividend Payment Date is less than the
Dividend Declaration Amount, the amount of such deficiency shall be
added to the Dividend Declaration Amount computed for the next Dividend
Interval Period and such aggregate amount shall become the Dividend
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4
Declaration Amount for such period. The Dividend for such succeeding
Dividend Interval Period shall equal the Dividend Declaration Amount
unless such amount would exceed the Excess Cash Flow projected to be
available as of the applicable Dividend Payment Date, in which case the
Dividend shall be the amount of the projected Excess Cash Flow.
(iii) The aggregate Dividends paid on the shares of
Series H Preference Stock in accordance with this Section 3(A) shall be
allocated pro rata on a share-by-share basis among all such shares at
the time outstanding.
(B) Accrued but unpaid dividends shall not bear interest. The
Board of Directors may fix a record date for the determination of holders of
shares of Series H Preference Stock entitled to receive payment of a dividend or
distribution declared thereon.
4. Voting Rights. Except as otherwise required by law or the
Restated Articles of Incorporation of the Company or as otherwise provided
herein, the holders of shares of Series H Preference Stock shall have no voting
rights.
5. Certain Restrictions. At any time when dividends or
distributions payable on the Series H Preference Stock as provided in Section 3
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series H Preference Stock
outstanding shall have been paid in full, the Company shall not:
(i) declare dividends on, or redeem or purchase or
otherwise acquire for consideration any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up)
to the Series H Preference Stock; or
(ii) declare dividends on any shares of stock ranking
on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series H Preference Stock, except dividends
declared ratably on the Series H Preference Stock and all such parity
stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled.
6. Reacquired Shares. Any shares of Series H Preference Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of
Preference Stock and may be reissued as part of a new series of Preference Stock
to be created by resolution or resolutions of the Board of Directors, subject to
any conditions and restrictions on issuance set forth herein.
7. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution
or winding up of the Company, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series H Preference Stock unless, prior
thereto, the holders of shares of Series H Preference Stock shall have received
$100,000 per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or
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not declared, to the date of such payment (the "Series H Liquidation
Preference"). Following the payment of the full amount of the Series H
Liquidation Preference, no additional distributions shall be made to the holders
of shares of Series H Preference Stock.
(B) In the event that there are not sufficient assets
available to permit payment in full of the Series H Liquidation Preference and
the liquidation preferences of all other series of Preference Stock, if any,
that rank on a parity with the Series H Preference Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences.
(C) Neither the merger or consolidation of the Company into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Company shall be deemed to be a liquidation,
dissolution or winding up of the Company within the meaning of this Section 7,
but the sale, lease or conveyance of all or substantially all of the Company's
assets shall be deemed to be a liquidation, dissolution or winding up of the
Company within the meaning of this Section 7.
8. Redemption.
(A) The Company, at its option, may redeem shares of the
Series H Preference Stock in whole at any time and in part from time to time, at
a redemption price equal to $100,000 per share plus, in the event all
outstanding shares of the Series H Preference Stock are to be redeemed, unpaid
accumulated dividends to the date of redemption.
(B) In the event that fewer than all the outstanding shares of
the Series H Preference Stock are to be redeemed, (i) the number of shares to be
redeemed shall be determined by the Board of Directors and the shares to be
redeemed shall be determined by lot or pro rata as may be determined by the
Board of Directors or by any other method that may be determined by the Board of
Directors in its sole discretion to be equitable.
(C) Except to the extent notice is waived in accordance with
applicable law, notice of any such redemption shall be given by mailing to the
holders of the shares of Series H Preference Stock to be redeemed a notice of
such redemption, first class postage prepaid, not later than the twentieth day
and not earlier than the sixtieth day before the date fixed for redemption, at
their last address as the same shall appear upon the books of the Company. Each
such notice shall state: (i) the redemption date; (ii) the number of shares to
be redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on the close of
business on such redemption date. Any notice that is mailed in the manner herein
provided shall be conclusively presumed to have been duly given, whether or not
the shareholder received such notice, and failure duly to give such notice by
mail, or any defect in such notice, to any holder of Series H Preference Stock
shall not affect the validity of the proceedings for the redemption of any other
shares of Series H Preference Stock that are to be redeemed. On or after the
date fixed for redemption as stated in such notice, each holder of the shares
called for redemption shall surrender the certificate evidencing such shares to
the Company
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6
at the place designated in such notice and shall thereupon be entitled to
receive payment of the redemption price. If fewer than all the shares
represented by any such surrendered certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares.
(D) The shares of Series H Preference Stock shall not be
subject to the operation of any purchase, retirement or sinking fund.
9. Ranking. The Series H Preference Stock shall rank junior to
all series of the Company's Preferred Stock and pari passu with all other series
of the Company's Preference Stock (other than any such series of Preference
Stock the terms of which shall provide otherwise) in respect to dividend and
liquidation rights and shall rank senior to the Common Stock as to such matters.
10. Amendment. At any time that any shares of Series H
Preference Stock are outstanding, the Restated Articles of Incorporation of the
Company shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series H Preference
Stock so as to affect them adversely without the affirmative vote of the holders
of two-thirds or more of the outstanding shares of Series H Preference Stock,
voting separately as a class.
11. Fractional Shares. Series H Preference Stock may be issued
in fractions of a share that shall entitle the holder, in proportion to such
holder's fractional shares, to exercise any voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series H Preference Stock.
REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
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IN WITNESS WHEREOF, RELIANT ENERGY, INCORPORATED has caused
this Statement to be executed on its behalf by the undersigned officer this
8th day of May, 2000.
RELIANT ENERGY, INCORPORATED
/s/ MARC KILBRIDE
-----------------------------------------
Name: Marc Kilbride
Title: Treasurer
1
EXHIBIT 3(b)
STATEMENT OF RESOLUTION ESTABLISHING SERIES OF SHARES
designated
SERIES I PREFERENCE STOCK
of
RELIANT ENERGY, INCORPORATED
Pursuant to Article 2.13D of
the Texas Business Corporation Act
Pursuant to the provisions of Article 2.13D of the Texas
Business Corporation Act, the undersigned corporation submits the following
statement for the purpose of establishing and designating a series of shares of
its Preference Stock, without par value, designated "Series I Preference Stock"
and fixing and determining the relative rights and preferences thereof:
1. The name of the corporation is RELIANT ENERGY, INCORPORATED
(the "Company").
2. The following resolution establishing and designating a
series of shares and fixing and determining the relative rights and preferences
thereof, was duly adopted by all necessary action on the part of the Company on
May 5, 2000:
RESOLVED, that pursuant to the authority vested in the Finance
Committee and the Preference Stock Committee, acting separately and/or
concurrently, by the Board of Directors of this Company in accordance
with the provisions of the Restated Articles of Incorporation, a series
of Preference Stock, without par value, of the Company be and hereby is
created, and that the designation and number of shares thereof and the
preferences, limitations and relative rights, including voting rights,
of the shares of such series and the qualifications, limitations and
restrictions thereof are as follows:
SERIES I PREFERENCE STOCK
1. Designation and Amount. There shall be a series of
Preference Stock that shall be designated as "Series I Preference Stock," and
the number of shares constituting such series shall be 10,525. Such number of
shares may be increased or decreased by resolution of the Finance Committee and
the Preference Stock Committee, acting separately and/or concurrently; provided,
however, that no decrease shall reduce the number of shares of Series I
Preference Stock to less than the number of shares then issued and outstanding
plus the number of shares issuable upon exercise of outstanding rights, options
or warrants or upon conversion of outstanding securities issued by the Company.
-1-
2
2. Certain Defined Terms.
Capitalized terms not otherwise defined herein shall have the
respective meanings ascribed to them in that certain Senior B Credit Agreement
(the "Credit Agreement") to be entered into among Houston Industries FinanceCo
LP, a Delaware limited partnership to be the Borrower thereunder, the Company,
the lenders parties thereto and The Chase Manhattan Bank, as the Administrative
Agent thereunder on or after May 10, 2000. In addition, the following terms are
used herein as defined below:
(i) "Computed Dividend Portion" means, within any
Dividend Interval Period, an amount equal to the interest expense
accrued on the indebtedness for borrowed money of the Borrower from the
prior Dividend Payment Date to the Determination Date for the current
Dividend Interval Period.
(ii) "Determination Date" means the date occurring
five Business Days prior to a Dividend Declaration Date.
(iii) "Dividend" means the dividend on the Series I
Preference Stock declared by the Company's Board of Directors with
respect to a Dividend Interval Period.
(iv) "Dividend Declaration Amount" means, as of any
Determination Date, the Preliminary Dividend Amount, less the sum of
(a) the Interest Reconciliation Amount, (b) the Support Agreement
Reconciliation Amount, and (c) the Other Sources Reconciliation Amount.
The Dividend Declaration Amount may be greater than or less than the
Preliminary Dividend Amount.
(v) "Dividend Declaration Date" means the date on
which Dividends on the Series I Preference Stock are declared (or would
have been declared but for the fact that the amount of the Dividend
determined in accordance herewith would have been zero) during a
Dividend Interval Period by the Company's Board of Directors.
(vi) "Dividend Interval Period" means the period
beginning on a Dividend Payment Date and extending to the next Dividend
Payment Date.
(vii) "Dividend Payment Date" means the date
occurring five Business Days after a Dividend Declaration Date.
(viii) "Interest Reconciliation Amount" means an
amount equal to (a) the Preliminary Dividend Amount computed for the
prior Dividend Interval Period, less (b) the actual interest expense
accrued on the indebtedness for borrowed money of the Borrower during
such period.
-2-
3
(ix) "Other Sources Reconciliation Amount" means the
sum of (a) to the extent applied to pay interest on the indebtedness
for borrowed money of the Borrower or available in cash on the current
Determination Date therefor, the amount of income or cash proceeds
received by the Borrower from sources other than pursuant to the
Support Agreement (including, without limitation, interest received on
loans to Affiliates), and (b) the cash proceeds of new borrowings under
the Credit Agreement or any other Permitted Facility that are utilized
to pay interest on outstanding borrowings thereunder, from the
Determination Date occurring in the Prior Dividend Interval Period to
the Determination Date occurring in the current Dividend Interval
Period.
(x) "Preliminary Dividend Amount" means the sum of
the Computed Dividend Portion and the Projected Dividend Portion.
(xi) "Projected Dividend Portion" means, within any
Dividend Interval Period, an amount equal to the projected interest
expense that will be accrued on the indebtedness for borrowed money of
the Borrower from the Determination Date for such Dividend Interval
Period to the Dividend Payment Date.
(xii) "Support Agreement Reconciliation Amount" means
the amount of cash payments made pursuant to the Support Agreement by
the Company to the Borrower from the Determination Date occurring in
the immediately prior Dividend Interval Period to the Determination
Date occurring in the current Dividend Interval Period.
3. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of
(i) any shares of any series of Preference Stock ranking prior and superior to
the shares of Series I Preference Stock with respect to dividends and (ii) any
shares of Preferred Stock, the holders of shares of Series I Preference Stock,
in preference to the holders of shares of any class or series of stock of the
Company ranking junior to the Series I Preference Stock, shall be entitled to
receive the amounts set forth below, when, as and if declared by the Board of
Directors in the manner described below out of assets of the Company legally
available for the purpose:
(i) On every regularly scheduled meeting of the
Company's Board of Directors while any shares of Series I Preference
Stock remain outstanding, the Board of Directors shall declare an
aggregate Dividend (if a positive amount) equal to the lesser of (a)
the Dividend Declaration Amount or (b) the Excess Cash Flow projected
to be available as of the applicable Dividend Payment Date with respect
to the then current Dividend Interval Period.
(ii) If, with respect to any Dividend Interval
Period, the aggregate Dividend declared by the Company's Board of
Directors is less than the Dividend Declaration Amount for such
Dividend Interval Period because the Excess Cash Flow projected to be
available as of the applicable Dividend Payment Date is less than the
Dividend Declaration Amount, the amount of such deficiency shall be
added to the Dividend Declaration Amount computed for the next Dividend
Interval Period and such aggregate amount shall become the Dividend
Declaration Amount for such period. The Dividend for such succeeding
Dividend Interval
-3-
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Period shall equal the Dividend Declaration Amount unless such amount
would exceed the Excess Cash Flow projected to be available as of the
applicable Dividend Payment Date, in which case the Dividend shall be
the amount of the projected Excess Cash Flow.
(iii) The aggregate Dividends paid on the shares of
Series I Preference Stock in accordance with this Section 3(A) shall be
allocated pro rata on a share-by-share basis among all such shares at
the time outstanding.
(B) Accrued but unpaid dividends shall not bear interest. The
Board of Directors may fix a record date for the determination of holders of
shares of Series I Preference Stock entitled to receive payment of a dividend or
distribution declared thereon.
4. Voting Rights. Except as otherwise required by law or the
Restated Articles of Incorporation of the Company or as otherwise provided
herein, the holders of shares of Series I Preference Stock shall have no voting
rights.
5. Certain Restrictions. At any time when dividends or
distributions payable on the Series I Preference Stock as provided in Section 3
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series I Preference Stock
outstanding shall have been paid in full, the Company shall not:
(i) declare dividends on, or redeem or purchase or
otherwise acquire for consideration any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up)
to the Series I Preference Stock; or
(ii) declare dividends on any shares of stock ranking
on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series I Preference Stock, except dividends
declared ratably on the Series I Preference Stock and all such parity
stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled.
6. Reacquired Shares. Any shares of Series I Preference Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of
Preference Stock and may be reissued as part of a new series of Preference Stock
to be created by resolution or resolutions of the Board of Directors, subject to
any conditions and restrictions on issuance set forth herein.
7. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution
or winding up of the Company, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series I Preference Stock unless, prior
thereto, the holders of shares of Series I Preference Stock shall have received
$100,000 per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment (the
"Series I Liquidation Preference"). Following the
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5
payment of the full amount of the Series I Liquidation Preference, no additional
distributions shall be made to the holders of shares of Series I Preference
Stock.
(B) In the event that there are not sufficient assets
available to permit payment in full of the Series I Liquidation Preference and
the liquidation preferences of all other series of Preference Stock, if any,
that rank on a parity with the Series I Preference Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences.
(C) Neither the merger or consolidation of the Company into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Company shall be deemed to be a liquidation,
dissolution or winding up of the Company within the meaning of this Section 7,
but the sale, lease or conveyance of all or substantially all of the Company's
assets shall be deemed to be a liquidation, dissolution or winding up of the
Company within the meaning of this Section 7.
8. Redemption.
(A) The Company, at its option, may redeem shares of the
Series I Preference Stock in whole at any time and in part from time to time, at
a redemption price equal to $100,000 per share plus, in the event all
outstanding shares of the Series I Preference Stock are to be redeemed, unpaid
accumulated dividends to the date of redemption.
(B) In the event that fewer than all the outstanding shares of
the Series I Preference Stock are to be redeemed, (i) the number of shares to be
redeemed shall be determined by the Board of Directors and the shares to be
redeemed shall be determined by lot or pro rata as may be determined by the
Board of Directors or by any other method that may be determined by the Board of
Directors in its sole discretion to be equitable.
(C) Except to the extent notice is waived in accordance with
applicable law, notice of any such redemption shall be given by mailing to the
holders of the shares of Series I Preference Stock to be redeemed a notice of
such redemption, first class postage prepaid, not later than the twentieth day
and not earlier than the sixtieth day before the date fixed for redemption, at
their last address as the same shall appear upon the books of the Company. Each
such notice shall state: (i) the redemption date; (ii) the number of shares to
be redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on the close of
business on such redemption date. Any notice that is mailed in the manner herein
provided shall be conclusively presumed to have been duly given, whether or not
the shareholder received such notice, and failure duly to give such notice by
mail, or any defect in such notice, to any holder of Series I Preference Stock
shall not affect the validity of the proceedings for the redemption of any other
shares of Series I Preference Stock that are to be redeemed. On or after the
date fixed for redemption as stated in such notice, each holder of the shares
called for redemption shall surrender the certificate evidencing such shares to
the Company at the place designated in such notice and shall thereupon be
entitled to receive payment of the redemption price.
-5-
6
If fewer than all the shares represented by any such surrendered certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares.
(D) The shares of Series I Preference Stock shall not be
subject to the operation of any purchase, retirement or sinking fund.
9. Ranking. The Series I Preference Stock shall rank junior to
all series of the Company's Preferred Stock and pari passu with all other series
of the Company's Preference Stock (other than any such series of Preference
Stock the terms of which shall provide otherwise) in respect to dividend and
liquidation rights and shall rank senior to the Common Stock as to such matters.
10. Amendment. At any time that any shares of Series I
Preference Stock are outstanding, the Restated Articles of Incorporation of the
Company shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series I Preference
Stock so as to affect them adversely without the affirmative vote of the holders
of two-thirds or more of the outstanding shares of Series I Preference Stock,
voting separately as a class.
11. Fractional Shares. Series I Preference Stock may be issued
in fractions of a share that shall entitle the holder, in proportion to such
holder's fractional shares, to exercise any voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series I Preference Stock.
REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
-6-
7
IN WITNESS WHEREOF, RELIANT ENERGY, INCORPORATED has caused
this Statement to be executed on its behalf by the undersigned officer this 8th
day of May, 2000.
RELIANT ENERGY, INCORPORATED
/s/ MARC KILBRIDE
-----------------------------------------
Name: Marc Kilbride
Title: Treasurer
-7-
1
EXHIBIT 3(c)
STATEMENT OF RESOLUTION ESTABLISHING SERIES OF SHARES
designated
SERIES J PREFERENCE STOCK
of
RELIANT ENERGY, INCORPORATED
Pursuant to Article 2.13D of
the Texas Business Corporation Act
Pursuant to the provisions of Article 2.13D of the Texas
Business Corporation Act, the undersigned corporation submits the following
statement for the purpose of establishing and designating a series of shares of
its Preference Stock, without par value, designated "Series J Preference Stock"
and fixing and determining the relative rights and preferences thereof:
1. The name of the corporation is RELIANT ENERGY, INCORPORATED
(the "Company").
2. The following resolution establishing and designating a
series of shares and fixing and determining the relative rights and preferences
thereof, was duly adopted by all necessary action on the part of the Company on
June 21, 2000:
RESOLVED, that pursuant to the authority vested in the Finance
Committee and the Preference Stock Committee, acting separately and/or
concurrently, by the Board of Directors of this Company in accordance
with the provisions of the Restated Articles of Incorporation, a series
of Preference Stock, without par value, of the Company be and hereby is
created, and that the designation and number of shares thereof and the
preferences, limitations and relative rights, including voting rights,
of the shares of such series and the qualifications, limitations and
restrictions thereof are as follows:
SERIES J PREFERENCE STOCK
1. Designation and Amount. There shall be a series of
Preference Stock that shall be designated as "Series J Preference Stock," and
the number of shares constituting such series shall be 2,630. Such number of
shares may be increased or decreased by resolution of the Finance Committee and
the Preference Stock Committee, acting separately and/or concurrently; provided,
however, that no decrease shall reduce the number of shares of Series J
Preference Stock to less than the number of shares then issued and outstanding
plus the number of shares issuable upon exercise of outstanding rights, options
or warrants or upon conversion of outstanding securities issued by the Company.
-1-
2
2. Certain Defined Terms.
Capitalized terms not otherwise defined herein shall have the
respective meanings ascribed to them in that certain Interim Senior Credit
Agreement (the "Credit Agreement") to be entered into among Houston Industries
FinanceCo, LP, a Delaware limited partnership to be the initial Borrower
thereunder, the Company, the lenders parties thereto and Bank of America, N.A.,
as the Administrative Agent thereunder on or after June 22, 2000. In addition,
the following terms are used herein as defined below:
(i) "Computed Dividend Portion" means, within any
Dividend Interval Period, an amount equal to the interest expense
accrued on the indebtedness for borrowed money of the Borrower from the
prior Dividend Payment Date to the Determination Date for the current
Dividend Interval Period.
(ii) "Determination Date" means the date occurring
five Business Days prior to a Dividend Declaration Date.
(iii) "Dividend" means the dividend on the Series J
Preference Stock declared by the Company's Board of Directors with
respect to a Dividend Interval Period.
(iv) "Dividend Declaration Amount" means, as of any
Determination Date, the Preliminary Dividend Amount, less the sum of
(a) the Interest Reconciliation Amount, (b) the Support Agreement
Reconciliation Amount, and (c) the Other Sources Reconciliation Amount.
The Dividend Declaration Amount may be greater than or less than the
Preliminary Dividend Amount.
(v) "Dividend Declaration Date" means the date on
which Dividends on the Series J Preference Stock are declared (or would
have been declared but for the fact that the amount of the Dividend
determined in accordance herewith would have been zero) during a
Dividend Interval Period by the Company's Board of Directors.
(vi) "Dividend Interval Period" means the period
beginning on a Dividend Payment Date and extending to the next Dividend
Payment Date.
(vii) "Dividend Payment Date" means the date
occurring five Business Days after a Dividend Declaration Date.
(viii) "Interest Reconciliation Amount" means an
amount equal to (a) the Preliminary Dividend Amount computed for the
prior Dividend Interval Period, less (b) the actual interest expense
accrued on the indebtedness for borrowed money of the Borrower during
such period.
-2-
3
(ix) "Other Sources Reconciliation Amount" means the
sum of (a) to the extent applied to pay interest on the indebtedness
for borrowed money of the Borrower or available in cash on the current
Determination Date therefor, the amount of income or cash proceeds
received by the Borrower from sources other than pursuant to the
Support Agreement (including, without limitation, interest received on
loans to Affiliates), and (b) the cash proceeds of new borrowings under
the Credit Agreement or any other Permitted Facility that are utilized
to pay interest on outstanding borrowings thereunder, from the
Determination Date occurring in the Prior Dividend Interval Period to
the Determination Date occurring in the current Dividend Interval
Period.
(x) "Preliminary Dividend Amount" means the sum of
the Computed Dividend Portion and the Projected Dividend Portion.
(xi) "Projected Dividend Portion" means, within any
Dividend Interval Period, an amount equal to the projected interest
expense that will be accrued on the indebtedness for borrowed money of
the Borrower from the Determination Date for such Dividend Interval
Period to the Dividend Payment Date.
(xii) "Support Agreement Reconciliation Amount" means
the amount of cash payments made pursuant to the Support Agreement by
the Company to the Borrower from the Determination Date occurring in
the immediately prior Dividend Interval Period to the Determination
Date occurring in the current Dividend Interval Period.
3. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of
(i) any shares of any series of Preference Stock ranking prior and superior to
the shares of Series J Preference Stock with respect to dividends and (ii) any
shares of Preferred Stock, the holders of shares of Series J Preference Stock,
in preference to the holders of shares of any class or series of stock of the
Company ranking junior to the Series J Preference Stock, shall be entitled to
receive the amounts set forth below, when, as and if declared by the Board of
Directors in the manner described below out of assets of the Company legally
available for the purpose:
(i) On every regularly scheduled meeting of the
Company's Board of Directors while any shares of Series J Preference
Stock remain outstanding, the Board of Directors shall declare an
aggregate Dividend (if a positive amount) equal to the lesser of (a)
the Dividend Declaration Amount or (b) the Excess Cash Flow projected
to be available as of the applicable Dividend Payment Date with respect
to the then current Dividend Interval Period.
(ii) If, with respect to any Dividend Interval
Period, the aggregate Dividend declared by the Company's Board of
Directors is less than the Dividend Declaration Amount for such
Dividend Interval Period because the Excess Cash Flow projected to be
available as of the applicable Dividend Payment Date is less than the
Dividend Declaration Amount, the amount of such deficiency shall be
added to the Dividend Declaration Amount computed for the next Dividend
Interval Period and such aggregate amount shall become the Dividend
-3-
4
Declaration Amount for such period. The Dividend for such succeeding
Dividend Interval Period shall equal the Dividend Declaration Amount
unless such amount would exceed the Excess Cash Flow projected to be
available as of the applicable Dividend Payment Date, in which case the
Dividend shall be the amount of the projected Excess Cash Flow.
(iii) The aggregate Dividends paid on the shares of
Series J Preference Stock in accordance with this Section 3(A) shall be
allocated pro rata on a share-by-share basis among all such shares at
the time outstanding.
(B) Accrued but unpaid dividends shall not bear interest. The
Board of Directors may fix a record date for the determination of holders of
shares of Series J Preference Stock entitled to receive payment of a dividend or
distribution declared thereon.
4. Voting Rights. Except as otherwise required by law or the
Restated Articles of Incorporation of the Company or as otherwise provided
herein, the holders of shares of Series J Preference Stock shall have no voting
rights.
5. Certain Restrictions. At any time when dividends or
distributions payable on the Series J Preference Stock as provided in Section 3
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series J Preference Stock
outstanding shall have been paid in full, the Company shall not:
(i) declare dividends on, or redeem or purchase or
otherwise acquire for consideration any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up)
to the Series J Preference Stock; or
(ii) declare dividends on any shares of stock ranking
on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series J Preference Stock, except dividends
declared ratably on the Series J Preference Stock and all such parity
stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled.
6. Reacquired Shares. Any shares of Series J Preference Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of
Preference Stock and may be reissued as part of a new series of Preference Stock
to be created by resolution or resolutions of the Board of Directors, subject to
any conditions and restrictions on issuance set forth herein.
7. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution
or winding up of the Company, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series J Preference Stock unless, prior
thereto, the holders of shares of Series J Preference Stock shall have received
$100,000 per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or
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5
not declared, to the date of such payment (the "Series J Liquidation
Preference"). Following the payment of the full amount of the Series J
Liquidation Preference, no additional distributions shall be made to the holders
of shares of Series J Preference Stock.
(B) In the event that there are not sufficient assets
available to permit payment in full of the Series J Liquidation Preference and
the liquidation preferences of all other series of Preference Stock, if any,
that rank on a parity with the Series J Preference Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences.
(C) Neither the merger or consolidation of the Company into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Company shall be deemed to be a liquidation,
dissolution or winding up of the Company within the meaning of this Section 7,
but the sale, lease or conveyance of all or substantially all of the Company's
assets shall be deemed to be a liquidation, dissolution or winding up of the
Company within the meaning of this Section 7.
8. Redemption.
(A) The Company, at its option, may redeem shares of the
Series J Preference Stock in whole at any time and in part from time to time, at
a redemption price equal to $100,000 per share plus, in the event all
outstanding shares of the Series J Preference Stock are to be redeemed, unpaid
accumulated dividends to the date of redemption.
(B) In the event that fewer than all the outstanding shares of
the Series J Preference Stock are to be redeemed, the number of shares to be
redeemed shall be determined by the Board of Directors and the shares to be
redeemed shall be determined by lot or pro rata as may be determined by the
Board of Directors or by any other method that may be determined by the Board of
Directors in its sole discretion to be equitable.
(C) Except to the extent notice is waived in accordance with
applicable law, notice of any such redemption shall be given by mailing to the
holders of the shares of Series J Preference Stock to be redeemed a notice of
such redemption, first class postage prepaid, not later than the twentieth day
and not earlier than the sixtieth day before the date fixed for redemption, at
their last address as the same shall appear upon the books of the Company. Each
such notice shall state: (i) the redemption date; (ii) the number of shares to
be redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on the close of
business on such redemption date. Any notice that is mailed in the manner herein
provided shall be conclusively presumed to have been duly given, whether or not
the shareholder received such notice, and failure duly to give such notice by
mail, or any defect in such notice, to any holder of Series J Preference Stock
shall not affect the validity of the proceedings for the redemption of any other
shares of Series J Preference Stock that are to be redeemed. On or after the
date fixed for redemption as stated in such notice, each holder of the shares
called for redemption shall surrender the certificate evidencing such shares to
the Company at the place
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6
designated in such notice and shall thereupon be entitled to receive payment of
the redemption price. If fewer than all the shares represented by any such
surrendered certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(D) The shares of Series J Preference Stock shall not be
subject to the operation of any purchase, retirement or sinking fund.
9. Ranking. The Series J Preference Stock shall rank junior to
all series of the Company's Preferred Stock and pari passu with all other series
of the Company's Preference Stock (other than any such series of Preference
Stock the terms of which shall provide otherwise) in respect to dividend and
liquidation rights and shall rank senior to the Common Stock as to such matters.
10. Amendment. At any time that any shares of Series J
Preference Stock are outstanding, the Restated Articles of Incorporation of the
Company shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series J Preference
Stock so as to affect them adversely without the affirmative vote of the holders
of two-thirds or more of the outstanding shares of Series J Preference Stock,
voting separately as a class.
11. Fractional Shares. Series J Preference Stock may be issued
in fractions of a share that shall entitle the holder, in proportion to such
holder's fractional shares, to exercise any voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series J Preference Stock.
REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
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IN WITNESS WHEREOF, RELIANT ENERGY, INCORPORATED has caused
this Statement to be executed on its behalf by the undersigned officer this
22nd day of June, 2000.
RELIANT ENERGY, INCORPORATED
/s/ MARC KILBRIDE
----------------------------------------
Name: Marc Kilbride
Title: Treasurer
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EXHIBIT 10
EMPLOYMENT AGREEMENT
THE UNDERSIGNED:
1. RELIANT ENERGY EUROPE, INC., a Delaware corporation registered in the
Netherlands as a Dutch branch, having its corporate seat at 1111 Louisiana,
Houston, Texas 77002, and its registered address in the Netherlands at
Strawinskylaan 2001, 1077 ZZ Amsterdam, hereinafter referred to as: "the
Company"; for this reason duly represented by Robert W. Harvey;
and
2. MR G.L.M.A. VAN LANSCHOT, residing at Tapijtweg 1 NL-2591 KG Den Haag,
hereinafter referred to as: "the Executive".
WHEREAS
o The Executive will be employed as President of the Company and will perform
services for the Company in its Dutch branch.
o The Executive will be appointed by the general meeting of shareholders ("de
algemene vergadering van aandeelhouders") of Reliant Energy Trading &
Marketing B.V., a private company with limited liability, incorporated
under the law of the Netherlands, having its corporate seat at Siriusdreef
32, 2132 WT Hoofddorp, the Netherlands and its registered address at the
Netherlands, hereinafter referred to as: "RETM", as chairman of
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the Board of Managing Directors of RETM ("Voorzitter van de Raad van
Bestuur") at its first meeting after August 1, 2000.
o The Executive in his position as President of the Company and chairman of
the Board of Managing Directors of RETM will be responsible for the
business unit Reliant Energy Europe. At the date of signing this agreement
the position entails oversight over N.V. UNA and RETM. Over time it is
expected that business will be expanded to other countries within Europe
which will fall under his responsibility as well.
HEREBY AGREE AS FOLLOWS:
ARTICLE 1: TASKS AND DUTIES
1.1. The Company hereby employs the Executive as President of the Company and as
chairman of the Board of Managing Directors of RETM ("Voorzitter van de
Raad van Bestuur") and the Executive hereby accepts such employment, upon
the terms and conditions as set forth in this Agreement. The Executive's
initial responsibilities are generally described in the job description set
forth in Annex A, provided that the Company may alter the Executive's
duties and the Company's organizational structure in its discretion from
time to time, so long as the Executive's duties and responsibilities are
not materially reduced.
1.2. The Executive shall, as President of the Company and chairman of the Board
of Managing Directors of RETM, have all the rights and obligations
associated with such position with the Company and in accordance with the
articles of association of RETM ("statuten"). The Executive agrees to
devote at all times his best efforts, attentions and abilities to the
business and to the affairs of the Company, RETM and their affiliates and
to the business unit Reliant Energy Europe.
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1.3. The Executive shall not undertake any other paid or time consuming unpaid
duties or activities without the previous consent of the Chairman of the
Board of Directors of the Company.
ARTICLE 2: DURATION OF THE AGREEMENT AND TERMINATION
2.1. This Agreement shall last for an indefinite period of time. The effective
date of this Agreement is 1 August 2000. This Agreement shall terminate by
operation of law when the Executive has reached the age of 62 years.
2.2. Subject to the limitations set forth in Article 2.3, each party can
terminate the Agreement by giving the other party written notice of the
termination. The Company shall observe a notice period of at least 4
months. The Executive shall observe a notice period of at least 2 months.
If the Company provides the Executive written notice of termination
pursuant to this article (for reasons other than urgent cause ("dringende
reden") within the meaning of articles 7:677, section 1 and 7:678 of the
Dutch Civil Code) after August 1, 2001, then the Executive shall continue
to receive only his base salary as provided in Article 3 and the emoluments
set forth in Articles 6, 7, and 8 of this Agreement during the notice
period until the date of termination of the Agreement, and, upon
termination of the Agreement, the Executive shall receive a lump sum
payment equal to the sum of (i) his gross annual base salary as provided in
Article 3 and in effect at the time of termination, (ii) his target annual
bonus as provided in Article 4 (67% of gross annual base salary) in effect
at the time of termination and (iii) for each whole year of employment that
has elapsed since August 1, 2000, two months of gross base salary as
provided in Article 3 and in effect at the time of termination.
Notwithstanding the foregoing, the number of months of gross base salary
that will be paid to the Executive under subparagraph (iii) above shall not
be less than 8 months and shall not be more than 20 months; provided,
however, that the number of months of base salary payable under
subparagraph (iii) above shall not exceed the number of months between the
date of termination of the Agreement and the date the
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Executive will reach age 62. In addition, if the Company's written notice
of termination is given after August 1, 2001 and before December 1, 2001,
then the Executive shall also receive a lump sum payment equal to a month
of gross base salary as provided in Article 3 for each whole month between
the date of the written notice of termination and December 1, 2001.
If the Executive provides the Company written notice of termination
pursuant to this article, then the Executive shall continue to receive only
his base salary as provided in Article 3 and the emoluments set forth in
Articles 6, 7, and 8 of this Agreement until the date of termination of the
Agreement; provided that the Executive shall be entitled to receive payment
of any bonus for which the applicable bonus period has been completed prior
to the date that notice is given.
Should the Executive be removed from his position as President of the
Company and chairman of the Board of Managing Directors of RETM, the
Executive shall not be entitled to any annual bonus payments pursuant to
Article 4.1 nor any new long-term incentive awards or payments, and any
outstanding option shall be treated as provided in the applicable option
plan and agreement; provided that the Executive shall be entitled to
receive payment of any bonus for which the applicable bonus period has been
completed prior to the date that notice is given.
The Executive waives his rights to other or higher payments, entitlements
or benefits during the term of notice or in connection with the
termination, except as provided in Article 2.5 in connection with a Change
in Control. In no event shall the Executive be entitled to both the
benefits provided in this Article 2.2 and the benefits provided in Article
2.5.
2.3. The Company cannot terminate or have the Agreement terminated before August
1, 2001 other than on the basis of an urgent cause ("dringende reden")
within the meaning of articles 7:677, section 1 and 7:678 of the Dutch
Civil Code.
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2.4. Within 90 days after August 1, 2002, the Company and the Executive shall
enter into negotiations about a possible improvement of the terms and
conditions of employment.
2.5. If the Agreement is terminated by or at the initiative of the Executive
after August 1, 2000 or by or at the initiative of the Company after August
1, 2001, and such termination of employment (i) occurs within one year
after a Change in Control (as defined in Annex B) and (ii) is preceded by,
or occurs in combination with, a Change in Employment (as defined in Annex
B), the Executive shall be entitled to a fixed severance payment of 2.0
times the sum of (A) the Executive's fixed gross annual base salary as
provided in Article 3 and in effect at the time of termination and (B) the
Executive's target annual bonus as stated in Article 4 (67% of gross annual
base salary) in effect at the time of the termination of the Agreement. The
Executive waives his rights to other or higher severance payments,
indemnities or compensations. In case of conflict, the provisions of this
Article 2.5 shall prevail over those of Article 2.2, but without prejudice
to Article 2.2 if the circumstances set forth in this Article 2.5 do not
occur.
2.6. Payments to which the Executive may be entitled in accordance with Articles
2.2. or 2.5 are to be paid by the Company as soon as practicable after the
day on which this Agreement terminates in a manner to be specified by the
Executive, so long as it is not 'contra legem'. In accordance with the
Ruling, as defined in Article 3.2, the Company and the Executive will
jointly request that the tax authorities approve that an amount equivalent
to 35% (thirty-five percent) of the Executive's payments pursuant to
Articles 2.2 or 2.5 shall be deemed to be a tax-exempt reimbursement of
additional expenses incurred by the Executive in relation to his employment
in the Netherlands, provided that the Company is not required to incur any
substantial expenses in assisting with this request.
ARTICLE 3: SALARY
3.1. The Executive shall be entitled to a fixed gross annual base salary
(hereafter: "the gross annual base salary") of $475,000, to be paid in 12
equal monthly installments at the end of each calendar month. Payment will
be made according to the instructions of the Executive
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as long as this is not `contra legem'. The aforementioned gross annual base
salary includes an 8% holiday allowance. Gross annual base salary will be
reviewed periodically by the Company and may be increased in the Company's
discretion.
3.2. In accordance with the Decree of the Deputy Minister of Finance, number
DB95/119M, of 29 May 1995, the Company and the Executive will jointly
request that the tax authorities approve that an amount equivalent to 35%
(thirty-five percent) of the Executive's remuneration (the gross annual
base salary referred to in Article 3 plus the bonus and incentives referred
to in Article 4) shall be deemed to be a tax-exempt reimbursement of
additional expenses incurred by the Executive in relation to his employment
in the Netherlands (the "Ruling"); provided, however, that the application
of the Ruling shall not reduce the Executive's pensionable salary. The
Company shall assist the Executive in the preparation and submission of
documentation necessary to obtain an extension of the Ruling.
3.3. The gross annual base salary payments shall be subject to normal statutory
withholdings such as taxes and social security contributions, but taking
into account the Ruling.
3.4. The base salary and annual bonus amounts denominated in U.S. dollars in
this Agreement will be payable to the Executive in EUROs. Prior to August
1, 2003, the conversion rate for converting U.S. dollar amounts to EUROs
will be 0.95 USD/EURO. Effective August 1, 2003, the exchange rate for
salary and bonus payments under the contract from each August 1 to July 31
shall be based on the average of the conversion rates determined by the
Company for the five business days immediately prior to each August 1.
Notwithstanding the foregoing, amounts payable in EUROs pursuant to the
preceding sentences before January 1, 2002 may be paid to the Executive in
Dutch Guilders.
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ARTICLE 4: BONUS AND INCENTIVES
4.1. The Executive shall be eligible for an annual bonus at a target level of
67% of gross annual base salary. For the first year of his employment, a
bonus of $318,250, or 67% of gross annual base salary is guaranteed
(hereafter: the "initial guaranteed bonus"). The first portion of this
initial guaranteed bonus over the period from entering into employment of
the Company through December 31, 2000 will be payable in March 2001 and
shall be at least $132,604. The remainder of the initial guaranteed bonus
($185,646, the bonus for the period from January 1, 2001 through July 31,
2001) will be included in the bonus over the year 2001, which bonus will be
payable in March 2002.
For the second and third years of the Executive's employment, a bonus of
$225,000 per year is guaranteed (hereafter: the "secondary guaranteed
bonus") so long as the Executive remains employed and in his position
performing his duties through the applicable bonus period described below.
The first portion of this secondary guaranteed bonus over the period from
August 1, 2001 through December 31, 2001 will be included in the bonus over
the year 2001, which bonus will be payable in March 2002 and shall be at
least $93,750. Thus, combining the initial guaranteed bonus and secondary
guaranteed bonus, the bonus over the year 2001 will be no less than
$279,396. The second portion of this secondary guaranteed bonus (the bonus
for the year 2002) will be payable in March 2003, and shall be at least
$225,000. The final portion of this secondary guaranteed bonus ($131,250,
the bonus for the period from January 1, 2003 through July 31, 2003) will
be included in the bonus over the year 2003, which bonus will be payable in
March 2004. For years after 2003 any bonuses over a particular calendar
year will be paid in March of the subsequent year.
The annual bonus target is 67% of annual gross base salary but can range
from 0 - 134% of the then applicable annual gross base salary depending on
performance, except for the first year of employment (during which it can
range between 67% - 134% of the applicable gross annual base salary:
$475,000) and the second and third years of employment (during which it can
range between $225,000 and 134% of the applicable gross annual
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base salary). The annual bonus payout will depend on achievement of overall
business objectives, business unit objectives and individual performance.
The percentage of the bonus will be determined at the sole discretion of
the Chairman of the Board of Directors of the Company and will be dependent
on the performances of REI (as defined below), the business unit Reliant
Energy Europe, the Company and the Executive.
4.2. The Executive shall be eligible for a long term incentive in the form of a
annual grant of a certain amount of options to purchase shares of common
stock of Reliant Energy, Incorporated, a Texas corporation (hereafter:
"REI"), as approved by the Special Stock Award Committee of REI (or other
appropriate committee as determined by the Board of REI) (hereafter: "the
Committee") from time to time, or such other form of award as may be
determined by the Committee. The granting of these awards is at the sole
discretion of the Committee and is dependent on the performances of REI,
the Company and the Executive, and the terms of such awards will be
determined by the Committee at the time of grant. The long-term incentive
target shall be based on 44% of Executive's gross annual base salary.
The long-term incentive grant for the calendar year 2000 shall be made in
the form of immediately exercisable options to purchase 38,000 shares of
common stock of REI. This option grant will be made effective as of the
date specified in a Stock Option Agreement to be entered into by the
Company and the Executive. The Company and the Executive will use all best
efforts to enter into a Stock Option Agreement and take all other actions
necessary to effectuate the grant of options as soon as possible.
4.3. All payments shall be subject to the normal statutory withholdings such as
tax on wages and social security contributions.
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ARTICLE 5: ILLNESS
In the event that the Executive is unable to perform his duties due to illness
or disability, the Company shall continue to pay 100% of the fixed gross annual
base salary and the emoluments set forth in Articles 6, 7, and 8 of this
Agreement for a period of the first 52 weeks following the day on which the
Executive ceased to perform his duties due to illness. Notwithstanding the
provisions of Article 4.1, if the Executive is unable to perform his duties due
to illness or disability for a period of less than 3 consecutive months, he will
remain eligible for annual bonus payments covering such period of illness or
disability. For this purpose, two periods of absence separated by a period of
two weeks or less shall be considered one consecutive period.
ARTICLE 6: MEDICAL COVERAGE AND ALLOWANCE
RETM has a group medical plan with NVS, which will provide medical coverage on
the basis of the NVS policy with surplus supplement, at class 2b level without
own risk deductible. The contribution of the Company to the NVS policy will be
50% of the premium for the Executive and the Executive's family. Should the
Executive decide not to make use of the NVS policy the Company will contribute
to the Executive's private medical plan up to the maximum amount the Company
would have contributed with NVS. The Executive will have 30 days after signing
of this Agreement to inform the Company which policy he will elect.
ARTICLE 7: DISABILITY ALLOWANCE
7.1. RETM has established a disability plan with Amev, the insurer of the
pension plan. This will provide cover on gross annual base salary up to
EURO 158,823 without medical evidence of good health.
The disability plan comprises two parts:
o WAO Gap insurance
o Long term disability
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7.2. WAO GAP
The Company will pay 50% of the premium payable for the WAO-gap insurance
taken out with Amev. The remaining 50% of the premium will be paid by the
Executive.
7.3. LONG TERM DISABILITY
The RETM long term disability policy provides coverage on annual salary in
excess of EURO 37,789 (WAO ceiling--year 2000). The RETM long term
disability plan will provide on full disability, 70% of excess salary up to
an annual salary cap of EURO 158,823, with proportional amounts for partial
disability. This will be paid for entirely by the Company.
The Company will also provide to the Executive 70% cover on the Executive's
full gross annual base salary exceeding EURO 158,823, on the condition that
an insurer is willing to cover this risk, up to a maximum premium of EURO
25 per EURO 454 insured disability benefit with proportional amounts per
partial disability.
In case the insurer is not willing to cover the risk or should the
Executive decide to insure the whole benefit elsewhere, the Company's
contribution to that policy will be limited to a maximum premium of EURO 25
per EURO 454 insured disability benefit. The Executive will have until the
earlier of (i) 90 days after signing of this Agreement or (ii) 30 days
after the receipt of a completely documented quotation from an insurance
company to inform the Company whether he will decide to insure the whole
benefit elsewhere or not.
ARTICLE 8: PENSION ALLOWANCE
8.1. A pension contribution will be paid by the Company over the gross annual
base salary as per January 1 of each year as far as the gross annual base
salary is payable in The Netherlands, less an offset of EURO 13,908
(indexed annually to CPI all households), and the annual bonus (as stated
in article 3.2), as described in the separate letter agreement
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between the Company and the Executive regarding pension issues (the
"Pension Letter"). The contribution will be based on the age-bracketed
table percentages shown below. Such amounts will be paid dependent on the
election of the Executive either into RETM's group pension plan insured
with Amev (hereafter: the "RETM Pension Plan"), or a qualified individual C
Policy selected by the Executive.
The Executive will have until the earlier of (i) 90 days after signing of
this Agreement or (ii) 30 days after the receipt of a completely documented
quotation from an insurance company to inform the Company which policy he
will elect. Amounts will be paid annually in advance, as soon as
administratively feasible after January 1 of each year.
Should the Executive leave during the course of the year he will ensure
that pro rata contributions paid in advance will be refunded to the
Company.
Age Base pensionable salary Bonus
50 - 54 13% 7%
55 - 59 14% 9%
60 - 64 15% 12%
The above contributions are deemed to be sufficient to cover retirement,
death and waiver of premium on disability benefits. Upon the termination of
this Agreement, Company contributions to the RETM Pension Plan (or
Executive's own C Policy) shall cease, and Executive's retirement benefit
shall be determined in accordance with the terms of the RETM Pension Plan
(or Executive's own C Policy), and Executive shall not be entitled to
compensation for the termination of this Agreement prior to the Executive
attaining the target retirement age set forth in the Pension Letter (other
than as specifically set forth in Article 2).
8.2. Should the Executive decide to elect his own C Policy rather than the RETM
Pension Plan, the Executive waives any rights or entitlement he or his
dependants, or survivors, may have to benefits under the RETM Pension Plan.
Should the Executive decide to
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participate in the RETM Pension Plan, all provisions of the RETM Pension
Plan are deemed applicable (summary hereof see Annex C).
ARTICLE 9: COMPANY LEASE CAR
The Company will make available a company lease car with a catalogue value of
approximately NLG 125,000, inclusive of VAT, as well as a driver for business
purposes. The Company will provide the Executive with a company car lease
arrangement that specifies the terms and conditions under which the company car
will be made available. Subject to the terms and conditions of this Agreement,
the Executive has entered, or will enter into, a company car user agreement, a
copy of which will be made available to the Executive. The Executive may use the
company car for private purposes. The Company shall reimburse all costs
(including the costs for private purposes) incurred by the Executive concerning
the use of the company car but shall not reimburse the Executive for the flat
rate charge referred to in Section 42 of the Wet op de inkomstenbelasting 1964
(the so-called fictitious motor vehicle cost).
ARTICLE 10: EXPENSE REIMBURSEMENTS
10.1. The Company shall reimburse all expenses (including mobile phone expenses)
incurred by the Executive with respect to the performance of his duties
hereunder on a monthly basis upon provision of relevant receipts. These
expenses also cover private telephone expenses.
10.2. Furthermore, the Company shall pay a monthly allowance of EURO 400 for
representation expenses.
10.3. Notwithstanding the foregoing, the expenses reimbursed in this Article 10
will be paid to the Executive only to the extent the reimbursements are
tax-deductible to the Company or an affiliate.
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ARTICLE 11: HOLIDAYS
The Executive shall annually be entitled to 30 holidays (public holidays
excluded). Holidays shall be taken in mutual consultation between the Executive
and the Chairman of the Board of Directors of the Company.
ARTICLE 12: CONFIDENTIALITY AND RETURN OF COMPANY PROPERTY
12.1. The Executive agrees during the employment and thereafter to maintain the
confidentiality of all Confidential Information (as hereinafter defined)
that he obtains or develops in the course of his employment with the
Company or any of its affiliates. Confidential Information shall mean for
purposes of this Agreement any non-public, proprietary or commercially
sensitive information relating to or pertaining to Company or any of its
affiliates within the business unit Reliant Energy Europe or customers,
including but not limited to, information about business and commercial
affairs, business plans, forecasts, economic models, credit policies,
labor relations, governmental relations, compensation programs, condition
of assets and liabilities, acquisitions, mergers or other transactions,
business relationships, trading policies (including option and hedge
strategies utilized in the business and operations of trading and
marketing operations of the Company or any of its affiliates within the
business unit Reliant Energy Europe) and/or any other aspect of the
business and operations the Company or any of its affiliates within the
business unit Reliant Energy Europe.
12.2. When leaving the Company, the Executive shall return to the Company in
their entirety, all objects belonging to the Company and/or its affiliates
which are still in his possession, as well as all documents concerning
matters of the aforementioned companies specifically, documents, printed
matter, notes, drafts, sketches, samples as well as all copies, carbon
copies or other copies. The Executive has no right to withhold such
objects and documents.
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12.3. If the Executive violates the obligations pursuant to Article 12.1 and
12.2, the Company shall have the option of either requiring that the
Executive to pay to the Company a penalty of EURO 100,000 as liquidated
damages for each violation of the obligations contained in this Article 12
or recovering through judicial proceedings, in lieu of such liquidated
damages, the amount representing any direct or indirect damages incurred
by the Company as a result of such breach.
12.4. The Executive shall treat all items of the Company such as books,
documents, computer floppy disks, other information carriers, resolutions,
drawings, computations and similar material as well as his business notes
as property of the Company, and he will keep such materials and documents
as well as the copies thereof locked away. The Executive will not use any
item in an other way or keep any item longer than necessary for the proper
performance of his duties.
ARTICLE 13: NON-COMPETITION
13.1. During the term of this Agreement and for a period of one year after the
date that the Company or the Executive gives notice of intent to terminate
the Agreement pursuant to Article 2.2 (or, if no such notice has been
given, the date that the Agreement has come to an end), the Executive will
not, without the prior written consent of the Company, engage in any
activities in competition with the Company, or any of its affiliates in
the business unit Reliant Energy Europe as described in Annex A, including
without limitation, accepting employment with or performing services for a
firm, company, partnership or group of individuals engage in activities
that are in competition with the business of the Company or any of its
affiliates in the business unit Reliant Energy Europe as described in
Annex A.
13.2. If the Executive violates the obligations pursuant to Article 13.1 the
Company shall have the option of either requiring that the Executive pay
to the Company a penalty of EURO 100,000 as liquidated damages for each
violation of the obligations contained in this Article 13 or recovering
through judicial proceedings, in lieu of such liquidated damages,
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an amount representing any direct or indirect damages incurred by the
Company as a result of such breach.
13.3. The Executive shall not at any time, whether during or after the
termination of his employment, except at the explicit request or after
having obtained the prior written consent of the Company, use, disclose or
permit others to disclose to any third party any technical, commercial and
financial information, directly or indirectly related to the business of
the Company or information with respect to any affiliate within the
business unit Reliant Energy Europe, including information related to
suppliers, customers or other relations, or any other details relating
thereto, which he knows or reasonably can assume to be secret or
confidential, or of which he reasonably can assume to be harmful to the
Company or any affiliate within the business unit Reliant Energy Europe,
unless and to the extent that disclosure is necessary in the performance
of the Executive's duties, or is required by law.
ARTICLE 14: INDEMNIFICATION
The Company (or RETM, as determined in the Company's discretion) shall take out
a managing director's liability policy on behalf of the Executive in
consultation with the Executive. The annual premium for this insurance policy
shall be paid by the Company. In addition and to the extent not covered by the
director's liability policy or otherwise, the Company shall compensate the
Executive for taxes owed by the Company for which the Executive becomes liable
solely by reason of his position as an executive of the Company, provided and to
the extent that the Executive substantiates that the Company's nonpayment is not
the result of the Executive's misconduct.
ARTICLE 15: GUARANTEE BY RELIANT ENERGY POWER GENERATION, INC. AND RETM
All obligations of the Company under this Agreement are unconditionally and
irrevocably guaranteed by RETM and by Reliant Energy Power Generation, Inc. a
Delaware corporation ("REPG") which is a subsidiary of REI. Notwithstanding the
foregoing, the Company may substitute any other related credit-worthy party as
the guarantor of the Company's obligations under
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this Agreement, subject to the consent of the Executive, which consent shall not
be unreasonably withheld.
ARTICLE 16: GENERAL
16.1. This Agreement contains the entire agreement between the parties relating
to the subject matter thereof and supersedes all prior agreements and
understandings whether oral or written between all parties.
16.2. This Agreement is in substitution for all previous contracts of employment
or service agreements between the Executive and the Company or any
associated company, which shall be deemed to have been terminated by
mutual consent as from the date on which this contract is executed.
16.3. The expiration or termination of this Agreement, howsoever arising shall
not operate to affect such of the provisions of this Agreement as are
expressed or have effect thereafter.
16.4. Neither this Agreement nor any term thereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of such change, waiver,
discharge or termination is sought.
16.5. The Executive acknowledges that, by signing this Agreement or otherwise,
he is not nor will he become an employee of REI, REPG, RETM or any of
their respective affiliates (other than the Company), and that nothing in
this Agreement will entitle the Executive to benefits under any employee
benefit plan or arrangement offered or sponsored by REI, REPG, RETM or any
of their respective affiliates (other than the Company), other than as
specifically provided with respect to certain benefits outlined in Article
6, 7 and 8.
ARTICLE 17: GOVERNING LAW
This Agreement shall be governed by and construed in accordance with Dutch law.
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ARTICLE 18: COMPETENT COURT
All conflicts arising with regard to this Agreement will be submitted to the
competent Dutch court.
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This Agreement is signed in twofold by the parties, the 30th day of July, 2000.
ON BEHALF OF RELIANT ENERGY EUROPE, INC.
/s/ ROBERT HARVEY /s/ G.L.M.A. van LANSCHOT
- ------------------------------- ------------------------------
MR. R.W. HARVEY MR. G.L.M.A. VAN LANSCHOT
ON BEHALF OF RELIANT ENERGY POWER GENERATION, INC.
/s/ ROBERT HARVEY
- -------------------------------
MR. R.W. HARVEY
ON BEHALF OF RELIANT ENERGY TRADING AND MARKETING, B.V.
/s/ ROBERT HARVEY
- -------------------------------
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ANNEX A
POSITION DESCRIPTION
PRESIDENT & CHIEF OPERATING OFFICER
RELIANT ENERGY EUROPE
Principal operating officer for Reliant Energy's business presence in Europe,
currently styled "Reliant Energy Europe".
Key member of Reliant Energy's overall management team, with membership on the
Reliant Energy Executive Committee.
Reporting directly to the Office of the CEO of REI, with direct access to the
Chairman, President & CEO (R. Steve Letbetter), and day-to-day oversight from
and consultation with a vice chairman (R. Harvey).
Responsible for developing and executing a strategy for building Reliant's
overall presence in Europe in a manner that contributes near-term operating
profits, earnings growth, and shareholder value. The general strategic focus is
on establishing a "wholesale energy merchant" position across much of Europe,
complete with requisite assets, trading and marketing skills, and commercial
relationships.
All operating units in Europe report directly or indirectly to this position, as
do all staff functions physically located in Europe (with the exception,
currently, of risk control and legal). Also, most staff functions would retain a
"dotted line" (i.e., secondary) reporting relationship to functional leadership
at corporate. These include financial and accounting, and human resources.
Note: some corporate services are provided from the corporate headquarters in
Houston and report, solid-line, to Reliant corporate management in Houston.
These include, for example, Information Technology, Purchasing, Corporate
Security, Accounts Payable, and Cash Management functions.
Currently, the position entails oversight of two key operating units, NV UNA
(the Dutch generating company) and RETM BV (Reliant's trading and marketing unit
for Europe). Over time, the business is expected to expand to other countries in
Europe, with both assets (principally generation, possibly including electric
transmission or distribution, gas transmission and storage) and
trading/commercial presence. If the expansion of the business so requires, the
Executive may be offered a position as a director of a company or branch in any
of the other countries in the discretion of the Company.
Strategic and operating plans are developed by the unit in consultation with,
and ultimately with the approval of, the Office of the CEO. Capital budgets are
also developed in a similar fashion. Major capital transactions and/or other
corporate commitments require the approval of the Office of the CEO.
NOTE: major "corporate transactions" are typically developed and executed from
corporate with participation from the business unit (in this case Reliant Energy
Europe) as appropriate.
19
20
ANNEX B
A "Change of Control" shall be deemed to have occurred if Reliant Energy,
Incorporated, or any successor corporation ("Reliant Energy"), shall:
1. Sell all or substantially all of the assets of its business unit known as
Reliant Energy Europe in connection with, or pursuant to, a general
discontinuation of the business operations of Reliant Energy in Europe; or
2. Effect a sale of the capital stock of, or a merger of, any subsidiary of
Reliant Energy that owns all or substantially all of the assets of Reliant
Energy Europe to, or with, a third party; provided, however, that a
"Change of Control" shall not be deemed to have occurred if the assets and
operations of the business unit are sold or transferred to, or merged
with, a corporation, partnership, joint venture or other entity in which
Reliant Energy retains a majority or controlling ownership interest.
A "Change in Employment" shall mean any one or more of the following events
which occurs without the consent of the Executive after or in connection with a
Change in Control:
1. A material and significant reduction in the duties or responsibilities of
Executive from those applicable to him immediately prior to the date on
which a Change in Control occurs; or
2. Any significant reduction in Executive's total remuneration (including
salary, bonus, retirement benefits, welfare benefits and any other
executive benefits) from that provided to Executive immediately prior to
the date on which a Change in Control occurs; provided, however, that a
diminution of or reduction in retirement benefits and/or welfare benefits
which is of general application and which uniformly and contemporaneously
reduces or diminishes the benefits of all covered executives shall be
ignored and not be considered a reduction in total remuneration for
purposes of this paragraph 2.
20
21
ANNEX C
DESCRIPTION OF PENSION PLAN
DUTCH PENSION PLAN SUMMARY
FOR
RELIANT ENERGY TRADING AND MARKETING, B.V.
Type of Plan : Flexible defined contribution plan
Insurer : Amev
GENERAL TERMS
Eligibility : All employees of (Client) who
have attained the age of 21, and
have a contract for a period that
exceeds 6 months. Eligibility
commences on the first day of the
month in which age 21 is attained
or actual date of joining if later.
Normal Retirement Date : First day of the month in which
the (former) participant reaches
the age of 65.
Flexible Retirement Date : The individual employee may elect
for a retirement date between age
55 and 65.
DEFINITIONS
Annual Salary : 12 times fixed monthly salary at
the key date, increased with
holiday allowance.
Pensionable Salary : Annual salary less an offset NLG
30,649 in 2000. Thereafter this
offset will rise in line with the
CPI, adjusted per 1 January
reflecting the price index increase
over the preceding year (CPI all
households period Dec till Dec).
Bonus : The total of fluctuating emoluments
received over the 12 months
preceding the key date
Key Date : January 1 or date of entry in first
year.
21
22
Credited Service : Years and full months of service
between the date of entry into the
plan and normal retirement date.
Partial months will be ignored.
Defined Contribution Table :
EMPLOYEE
CONTRIBUTION
AGE RANGE EMPLOYER CORE RANGE EMPLOYER MATCH TOTAL RANGE
--------- ------------- ------------ -------------- -----------
21 - 29 2.0% 0% - 2.0% 0% - 2.0% 6.0% of PS
30 - 34 2.5% 0% - 2.5% 0% - 2.5% 7.5% of PS
35 - 39 3.5% 0% - 3.5% 0% - 3.5% 10.5% of PS
40 - 44 4.5% 0% - 4.5% 0% - 4.5% 13.5% of PS
45 - 49 5.5% 0% - 5.5% 0% - 5.5% 16.5% of PS
50 - 54 6.5% 0% - 6.5% 0% - 6.5% 19.5% of PS
55 - 59 7.0% 0% - 7.0% 0% - 7.0% 21.0% of PS
60 - 65 7.5% 0% - 7.5% 0% - 7.5% 22.5% of PS
Defined contribution table over bonus:
EMPLOYEE
CONTRIBUTION MULTIPLE FOR
AGE RANGE RANGE MATCH EMPLOYER MATCH TOTAL RANGE
--------- ------------ ------------ -------------- -----------
21 - 29 0% - 1% 2 0% - 2.0% 3.0% of Bonus
30 - 34 0% - 1% 2 0% - 2.0% 3.0% of Bonus
35 - 39 0% - 1.5% 2 0% - 3.0% 4.5% of Bonus
40 - 44 0% - 2% 2 0% - 4.0% 6.0% of Bonus
45 - 49 0% - 2.5% 2 0% - 5.0% 7.5% of Bonus
50 - 54 0% - 3.5% 2 0% - 7.0% 10.5% of Bonus
55 - 59 0% - 4.5% 2 0% - 9.0% 13.5% of Bonus
60 - 65 0% - 6% 2 0% - 12% 18% of Bonus
Comment:
o Should an employee fail to make a choice the maximum contribution will be
assumed.
o The age of all employees, both existing and new, will be assessed per the
key date to determine the contribution payable.
o In the event of new entrants who join mid-month a partial contribution
will be paid, whereby all months are assumed to be 30 days.
o Contributions paid over the bonus and pensionable salary will be invested
in separate accounts over which differing investment choices can apply.
22
23
BENEFITS
Retirement Benefit : The accumulated value of all
contributions will be used to
purchase retirement pension (and -
if desired - survivors pension)
Death in Service Benefit : For married and cohabiting
employees a death-in-service
benefit is insured on a risk
premium basis, of 1.4% of the
pensionable salary plus the average
bonus received over the preceding
three years, at date of death per
year of potential service (max 35).
Orphan's pension amounts per child
to 0.28% of the pensionable salary
plus the average bonus received
over the preceding three years, per
year of potential service (max 35)
Note: cohabiting partners (same
sex/different sex) are only covered
if there is a co-habitation
agreement in place, or if the
co-habitation period is longer than
five years.
The risk premiums necessary to finance this benefit are deducted from the
defined contribution.
Death after Retirement : The employee is free to choose
whether or not to apply part of the
accumulated capital for post
retirement dependant's benefits.
Disability Benefit :* For all employees a waiver of
premium will be insured. The cost
of the premium waiver will be
deducted from the defined
contribution.
* For all employees a so-called
WAO-Shortfall insurance is provided.
This insurance supplements the
state WAO benefit to secures a
continuation of income of up to 70%
of last salary up to a maximum
salary NLG 83,275 in 2000 (State
ceiling)
* For employees with an annual salary
above the State ceiling an
additional disability pension of up
to 70% of the excess salary is
provided.
Preliminary coverage : For employees who do not fulfil the
eligibility requirements temporary
death-in-service risk coverage is
provided. Additionally if candidate
employees have a contract for an
indefinite period disability
coverage will be provided.
23
24
CONTRIBUTIONS
Employee Contributions : 1. Voluntary defined contribution
expressed in the table.
2. Half of the premium for the
WAO-Shortfall insurance.
Employer Contributions : Total premium excluding employee
contributions. This includes the
cost of supplemental disability
pension that will be paid in
addition to the DC table.
Additional Voluntary Contributions : Encouraged. Level dependent on
individual circumstances and chosen
retirement date, subject to fiscal
restrictions.
MISCELLANEOUS
Investment : The defined contribution plus
additional voluntary contributions
are invested in the investment fund
of the employee's choice. All
investment returns are credited to
the employees accrued capital.
Early Leavers : Benefits vest immediately. The
invested capital will continue to
grow in line with investment
returns over the period from
leaving to retirement. The employee
may chose to continue the policy on
an individual basis or transfer the
accumulated value to the new
employers pension plan.
Upon leaving the death in service
and disability cover will lapse.
The employee may however, elect to
convert his capital to a form with
restitution on death.
Wage Savings Plan: : A wage savings plan will be
established alongside the pension
plan. An employee may save annually
from gross salary NLG 1,736 in
2000. The saved amounts may be
de-blocked and applied to the
company pension plan so long as
legislation facilitates this.
24
1
EXHIBIT 12
RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
SIX TWELVE
MONTHS ENDED MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------- -------------
Income from continuing operations ............................... $ 349,639 $ 2,150,300
Income taxes for continuing operations .......................... 163,343 1,099,018
Capitalized interest ............................................ (18,848) (33,802)
------------ ------------
494,134 3,215,516
------------ ------------
Fixed charges, as defined:
Interest ..................................................... 350,491 609,382
Capitalized interest ......................................... 18,848 33,802
Distribution on trust preferred securities ................... 26,704 54,143
Interest component of rentals charged to operating expense ... 6,670 14,137
------------ ------------
Total fixed charges .......................................... 402,713 711,464
------------ ------------
Earnings, as defined ............................................ $ 896,847 $ 3,926,980
============ ============
Ratio of earnings ............................................... 2.23 5.52
============ ============
UT
0000048732
RELIANT ENERGY, INCORPORATED
1,000
3-MOS
DEC-31-2000
JUN-30-2000
PER-BOOK
9,311,473
7,401,324
7,192,828
6,350,856
0
30,256,481
2,918,425
0
2,534,249
5,452,674
705,166
9,740
5,155,241
0
1,385,184
4,725,745
4,554,116
0
11,881
1,288
8,255,446
30,256,481
10,004,555
163,343
9,158,042
9,158,042
846,513
24,405
870,918
350,491
357,084
195
356,889
212,182
313,658
543,608
1.26
1.25
TOTAL ANNUAL INTEREST CHARGES ON ALL BONDS IS AS OF YEAR-TO-DATE 06/30/00.
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
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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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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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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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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.
-5-
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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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
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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.
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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.
ELECTRIC TOTAL
OPERATIONS OTHER COMPANY
------------ ------------ ------------
(MILLIONS OF DOLLARS)
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
============ ============ ============
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.
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(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)
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- ----------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- --------- -------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
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
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.
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o (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
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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.
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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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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.
Transmission General Consolidated Electric
Generation and Distribution and Intangible Plant in Service
------------ ---------------- -------------- ---------------------
(Millions of Dollars)
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
============ ============ ============ ============
- ------------------------
(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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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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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):
VOLUME-FIXED
VOLUME-FIXED PRICE MAXIMUM
1999 PRICE PAYOR RECEIVER TERM (YEARS)
---- ------------ ------------ ------------
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
FAIR VALUE AVERAGE FAIR VALUE(A)
------------------------------ ------------------------------
1999 ASSET LIABILITIES ASSETS LIABILITIES
- ---- ------------ ------------ ------------ ------------
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
============ ============ ============ ============
- -------------------
(a) Computed using the ending balance of each quarter.
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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.
December 31, 1999 December 31, 1998
--------------------------- --------------------------
Investment Investment
Grade (1) Total Grade (1) Total
---------- ---------- ---------- ----------
(Millions of Dollars)
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
========== ==========
(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
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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
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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.
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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
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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.
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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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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:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(THOUSANDS OF DOLLARS)
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
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
(THOUSANDS OF DOLLARS)
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
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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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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:
Market Price of TW Common Exchange Rate
------------------------- -------------
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
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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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.
TW Investment ACES ZENS
------------ ------------ ------------
(THOUSANDS OF DOLLARS)
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
============ ============ ============
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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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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):
2000 .......................... $ 16
2001 .......................... 15
2002 .......................... 10
2003 .......................... 8
2004 .......................... 7
2005 and beyond ............... 25
----
Total .................... $ 81
====
(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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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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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): JULY 27, 2000
______________________________
RELIANT ENERGY, INCORPORATED
(Exact name of registrant as specified in its charter)
TEXAS 1-3187 74-0694415
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 207-3000
______________________________
RELIANT ENERGY RESOURCES CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 1-13265 76-0511406
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 207-3000
______________________________
2
This combined current report on Form 8-K 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 of Reliant Energy. References herein to the businesses and operations
of Reliant Energy include the businesses and operations of Reliant Energy's
subsidiaries, including Resources Corp.
ITEM 5. OTHER EVENTS.
On July 27, 2000, Reliant Energy announced that it plans to file a
business separation plan with the Texas Public Utility Commission under which it
would divide into two publicly traded companies in order to separate its
unregulated businesses from its regulated businesses. Upon receipt of necessary
regulatory approvals, Reliant Energy plans an initial public offering (IPO) of
approximately 20 percent of the common stock of a subsidiary that will hold its
unregulated operations late this year or early in 2001, assuming market
conditions remain favorable. Reliant Energy expects the IPO to be followed by a
distribution to Reliant Energy's shareholders of the remaining stock of the
unregulated company within twelve months after the IPO.
The unregulated company is expected to own Reliant Energy's:
. domestic unregulated power generation and energy trading and marketing
operations,
. retail electric, telecommunications and internet services businesses,
and
. European power generation and energy trading and marketing operations.
These businesses are expected to include the trading and marketing and certain
electric and gas retail operations of Resources Corp., which are expected to be
merged into wholly owned subsidiaries of the unregulated company. The business
separation plan also contemplates that in 2004 the unregulated company will
receive from the regulated company cash equal to the market value of the
regulated company's interest in its Texas regulated generation operations. In
addition, the unregulated company will have an option to purchase the regulated
company's interest in these operations at a price equal to the market value.
Under the business separation plan, Reliant Energy would restructure
its regulated operations into a holding company structure in which a new
corporate entity would be formed as the parent with Reliant Energy's regulated
businesses as subsidiaries. The regulated company is expected to own Reliant
Energy's:
. electric transmission and distribution operations, its natural gas
distribution businesses and, initially, its regulated electric
generating assets in Texas,
. U.S. interstate pipelines and gas gathering operations, and
2
3
. interests in energy distribution companies in Latin America.
In connection with the formation of the new holding company for
regulated businesses, Reliant Energy would transfer the stock of all of its
subsidiaries to the new holding company and would transfer its regulated
electric generating assets in Texas to a separate subsidiary of the new holding
company until the stranded costs associated with those assets are valued in
2004. At that time, the unregulated company will have the right to exercise the
option discussed above. As a result of the stock and asset transfers described
above, Reliant Energy would become solely a transmission and distribution
company, with its other businesses transferred to separate subsidiaries of the
new holding company. Reliant Energy expects that the regulated holding company
would be required to assume all of Reliant Energy's debt other than its first
mortgage bonds, which would remain with Reliant Energy. The indebtedness of
Reliant Energy's FinanceCo financing subsidiaries is expected to initially
remain in place and be refinanced by the regulated holding company by the end of
2002.
For additional information, please refer to Reliant Energy's press
release filed with this current report as Exhibit 99.1 and the simplified
organizational chart of the proposed business separation plan filed with this
current report as Exhibit 99.2, which press release and organizational chart are
incorporated herein by reference.
The IPO and ultimate distribution of the stock of the unregulated
company are subject to the development of definitive separation terms, further
corporate approvals, market and other conditions, and government actions,
including approval of the business separation plan by the Texas Public Utility
Commission and receipt of a favorable Internal Revenue Service ruling that the
distribution of stock would be tax-free to Reliant Energy and its shareholders
for U.S. federal income tax purposes, as applicable. Aspects of the
restructuring of Reliant Energy's regulated businesses would be subject to the
approval of Reliant Energy's shareholders and approvals from the Securities and
Exchange Commission under the Public Utility Holding Company Act and from the
Nuclear Regulatory Commission. There can be no assurance that the IPO, the
separation of Reliant Energy's unregulated and regulated businesses or the
ultimate restructuring of Reliant Energy's regulated businesses will be
completed as described or within the time periods outlined above.
The IPO of Reliant Energy's unregulated businesses will be registered
under the Securities Act of 1933 and such shares of common stock will only be
offered and sold by means of a prospectus. This current report does not
constitute an offer to sell or the solicitation of any offer to buy any
securities of Reliant Energy's unregulated businesses, nor will there be any
sale of any such securities in any state in which such offer, solicitation or
sale would be unlawful prior to registration or qualification under the
securities laws of such state.
This current report includes forward-looking statements. Actual
events and results may differ materially from those projected. Factors that
could affect actual results include the timing and impact of future regulatory
and legislative decisions, changes in Reliant Energy's business plans, financial
market conditions and other factors discussed in Reliant Energy's filings with
the Securities and Exchange Commission.
3
4
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
The following exhibits are filed herewith:
99.1 Press Release issued July 27, 2000
99.2 Simplified Organizational Chart of Reliant Energy's proposed
Business Separation Plan
4
5
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 hereunto duly authorized.
RELIANT ENERGY, INCORPORATED
Date: July 27, 2000 By: /s/ Mary P. Ricciardello
___________________________________
Mary P. Ricciardello
Senior Vice President and
Chief Accounting Officer
5
6
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 hereunto duly authorized.
RELIANT ENERGY RESOURCES CORP.
Date: July 27, 2000 By: /s/ Mary P. Ricciardello
_______________________________________
Mary P. Ricciardello
Senior Vice President
6
7
EXHIBIT INDEX
Exhibit
Number Exhibit Description
--------- -------------------
99.1 Press Release issued July 27, 2000
99.2 Simplified Organizational Chart of
Reliant Energy's proposed Business
Separation Plan
7
8
Exhibit 99.1
FOR FURTHER INFORMATION: (Media) Sandy Fruhman (713) 207-3123
(Investors) Randy Burkhalter (713) 207-3115
FOR IMMEDIATE RELEASE: Thursday, July 27, 2000
RELIANT ENERGY ANNOUNCES FILING OF BUSINESS SEPARATION PLAN
(Houston, TX) -- Reliant Energy announced today that it plans to file with
the Texas Public Utility Commission a business separation plan under which it
would divide into two publicly traded companies in order to separate its
unregulated businesses from its regulated businesses. Upon receipt of necessary
regulatory approvals, the company plans an initial public offering (IPO) of
approximately 20 percent of the common stock of its unregulated operations late
this year or early in 2001, assuming market conditions remain favorable. The
company expects the IPO to be followed by a distribution to shareholders of the
remaining stock of the unregulated company within 12 months. The remaining
businesses which are predominantly regulated will be structured as a holding
company.
The initiative is intended to satisfy regulatory requirements under Texas
restructuring legislation, to enhance shareholder value, to highlight the
specific investment appeals of each resulting entity, and to permit the
individual units to focus on their respective business and market opportunities.
The unregulated company will own Reliant Energy's unregulated power
generation and related energy trading and marketing operations, its unregulated
retail businesses, which currently include energy, telecommunications and
internet services and the company's European electric generating and
trading/marketing operations. The plan also contemplates that in 2004 the
unregulated company will receive from the regulated company cash equal to the
market value of the regulated company's interest in its Texas regulated
generation operations. In addition, the unregulated company will have an option
to purchase the regulated company's interest in these operations at a price
equal to the market value.
1
9
The regulated company will include Reliant Energy's electricity and natural
gas companies, which serve about four million customers in the U.S. and include
Reliant Energy HL&P/Entex, Reliant Energy Arkla, Reliant Energy Entex and
Reliant Energy Minnegasco. Other operations in the entity will include its U.S.
interstate pipelines, its interests in Latin America and, initially, its Texas
regulated generation.
"Reliant Energy has undergone a fundamental transformation from a Texas-
based utility into a leading energy services company," said Steve Letbetter,
chairman, president and CEO. "In addition to our successful regulated energy
delivery operations, we now have sizeable and very attractive growth businesses
operating in competitive markets. Our primary business objective is to create
shareholder value while also providing high-quality service to our customers.
The restructuring initiative we are announcing today is another step in meeting
that objective.
"Our growth businesses appeal to a different set of investors than do our
regulated activities," Letbetter explained. "We expect the regulated company to
be very similar to the company we have been for most of our history, and it
should appeal to our traditional type of investor. "As a growth company, the new
unregulated entity will be able to capitalize on existing and future investment
opportunities more effectively, and should appeal to investors who are more
growth-oriented and tolerant of risk," Letbetter continued. "Overall, this
restructuring will allow us to better align our businesses with the interests of
investors and allow the market to more effectively reflect the overall value of
Reliant Energy's expanded business portfolio."
Letbetter added that Reliant Energy is committed to maintaining its current
annual dividend of $1.50 per share until the time of the separation.
In addition to advancing shareholder interests, the initiative will satisfy
competitive market and restructuring requirements of the Texas electric
restructuring legislation, which calls for the Texas electric market to open to
full competition on January 1, 2002. The new structure is an integral part of a
separation plan which Reliant Energy HL&P will file in August for approval of
the Public Utility Commission of Texas.
2
10
"As businesses that will remain regulated, Reliant Energy's electricity and
natural gas distribution companies will continue to focus on providing reliable
service at a reasonable cost, as we have been doing for more than 100 years,"
Letbetter said.
Reliant Energy (NYSE: REI), based in Houston, Texas, is an international
energy delivery and energy services company with more than $15 billion in annual
revenue and assets totaling $30 billion. The company has a wholesale energy
trading and marketing business that ranks among the top five in the U.S. in
combined electricity and natural gas volumes and has a presence in most of the
major power regions of the U.S. It also has power generation and wholesale
trading and marketing operations in Western Europe. The company has nearly
27,000 megawatts of power generation in operation in the U.S. and Western Europe
and has announced development projects that will add another 5,000 megawatts.
Reliant Energy also has marketing and distribution operations serving nearly
four million electricity and natural gas customers in the U.S., has significant
interests in power distribution operations serving more than 10 million
customers in Latin America and has a telecommunications business serving the
Houston area.
The IPO of the company's unregulated businesses will be registered under
the Securities Act of 1933 and such shares of common stock will only be offered
and sold by means of a prospectus. This news release does not constitute an
offer to sell or the solicitation of any offer to buy any securities of the
Company's unregulated businesses, nor will there be any sale of any such
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
such state.
This news release includes forward-looking statements. Actual events and
results may differ materially from those projected. Factors that could affect
actual results include the timing and impact of future regulatory and
legislative decisions, changes in Reliant Energy's business plans, financial
market conditions and other factors discussed in Reliant Energy's filings with
the Securities and Exchange Commission.
3
11
EXHIBIT 99.2
EXISTING STRUCTURE
(simplified)
_______________________________
| REI |
| |
| HL&P Division: |
| Generation ("ERCOT Genco") |
| Distribution ("WiresCo") |
| Retail |
|_____________________________|
|
____________________________________________________________________________________________________
| | | | |
| | | | |
___________________________ _______________ ______________ ______________ ____________
| | | Telecom | | FinanceCos | | Resources | | Latin |
| (REPG) | | & | | | | (Formerly | | America |
| Unregulated Generation | | E-Business | | | | NorAm) | | |
|_________________________| |_____________| |____________| |____________| |__________|
| |
_______________________________________ |
| | | |
_____________ ______________ ______________ ______________
| Other | | Wholesale | | RE Mid | | (RES) |
| Merchant | | Europe | | Atlantic | | Trading |
| Plants | | | | (Sithe) | | & |
| | | | | | | Marketing |
|___________| |____________| |____________| |____________|
___________________________________________________________________________________________________________________________________
PROPOSED BUSINESS SEPARATION PLAN
(simplified)
________________________________________
| Regulated Holding Company |
| |
___________________________________ | (Will assume all former non-FMB |
| Unregulated Holding Company | | debt of REI and HL&P) |
|_________________________________| |______________________________________|
| |
____________________________________________________ ______________________________________
| | | | | | | |
________________ ______________ ______________ ____________ __________ | ______________ ____________
| (REPG) | | Telecom | | (RES) | | Retail | | ERCOT | | | Resources | | Latin |
| Unregulated | | & | | Trading | | Electric | | Genco | | | (formerly | | America |
| Generation | | E-Business | | & | | Provider | --------| | | | NorAm) | | |
| | | | | Marketing | | | | | | | | | | |
|______________| |____________| |____________| |__________| |________| | |____________| |__________|
| | |
____________________________________________________ |
| | | | | |
_____________ ______________ _____________ ----------------------- ____________________________ ___________________________
| Other | | Wholesale | | RE Mid | | ERCOT Genco | | REI (WiresCo) | | FinanceCos |
| Merchant | | Europe | | Atlantic | (option exercisable | | | |
| Plants | | | | (Sithe) | | in 2004) | | Remaining debt: FMBs | | (Debt is expected to |
|___________| |____________| |___________| ----------------------- | (including obligations |__| be refinanced at the |
| under FMBs securing | | Regulated Holding |
| PCBs and MTNs) | | Company by |
| | | December 2002) |
|__________________________| |_________________________|
Definitions: FMBs: First Mortgage Bonds
PCBs: Pollution Control Bonds
MTNs: Medium Term Notes
1
EXHIBIT 12
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
SIX TWELVE
MONTHS ENDED MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------- -------------
Income from continuing operations ............................... $ 41,639 $ 64,911
Income taxes for continuing operations .......................... 46,696 70,562
------------ ------------
88,335 135,473
------------ ------------
Fixed charges, as defined:
Interest expense ............................................. 61,157 120,796
Distribution on trust preferred securities ................... 15 175
Interest component of rentals charged to operating expense ... 5,358 11,796
------------ ------------
Total fixed charges .......................................... 66,530 132,767
------------ ------------
Earnings, as defined ............................................ $ 154,865 $ 268,240
============ ============
Ratio of earnings to fixed charges .............................. 2.33 2.02
============ ============
UT
0001042773
RELIANT ENERGY RESOURCES CORP.
1,000
6-MOS
DEC-31-2000
JUN-30-2000
PER-BOOK
1,485,025
1,506,160
2,443,479
2,920,175
0
8,354,839
1
2,463,831
255,330
2,719,162
640
0
1,099,542
350,000
0
216,679
339,863
0
0
0
3,628,953
8,354,839
7,109,064
46,696
0
6,946,429
162,635
(13,143)
149,492
61,157
41,639
0
41,639
0
46,689
103,036
0.00
0.00
TOTAL ANNUAL INTEREST CHARGES ON ALL BONDS IS AS OF YEAR-TO-DATE 6/30/00.
1
EXHIBIT 99.a
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
-1-
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.
-2-
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.
-3-
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
-4-
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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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 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.
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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
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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.
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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)).
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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):
VOLUME-FIXED VOLUME-FIXED MAXIMUM
PRICE PAYOR PRICE RECEIVER TERM (YEARS)
------------ -------------- ------------
1999
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
AVERAGE FAIR
FAIR VALUE VALUE(a)
----------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
---------- ----------- ---------- -----------
1999
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
========== ========== ========== ==========
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(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-
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.
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
INVESTMENT INVESTMENT
GRADE(1) TOTAL GRADE(1) TOTAL
---------- ---------- ---------- ----------
(MILLIONS OF DOLLARS)
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
========== ==========
- ----------
(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-
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-
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):
2000 .............................................. $ 15
2001 .............................................. 14
2002 .............................................. 9
2003 .............................................. 8
2004 .............................................. 6
2005 and beyond ................................... 18
-------
Total ............................................. $ 70
=======
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
-16-
17
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.
-17-
1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): JULY 27, 2000
______________________________
RELIANT ENERGY, INCORPORATED
(Exact name of registrant as specified in its charter)
TEXAS 1-3187 74-0694415
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 207-3000
______________________________
RELIANT ENERGY RESOURCES CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 1-13265 76-0511406
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 207-3000
______________________________
2
This combined current report on Form 8-K 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 of Reliant Energy. References herein to the businesses and operations
of Reliant Energy include the businesses and operations of Reliant Energy's
subsidiaries, including Resources Corp.
ITEM 5. OTHER EVENTS.
On July 27, 2000, Reliant Energy announced that it plans to file a
business separation plan with the Texas Public Utility Commission under which it
would divide into two publicly traded companies in order to separate its
unregulated businesses from its regulated businesses. Upon receipt of necessary
regulatory approvals, Reliant Energy plans an initial public offering (IPO) of
approximately 20 percent of the common stock of a subsidiary that will hold its
unregulated operations late this year or early in 2001, assuming market
conditions remain favorable. Reliant Energy expects the IPO to be followed by a
distribution to Reliant Energy's shareholders of the remaining stock of the
unregulated company within twelve months after the IPO.
The unregulated company is expected to own Reliant Energy's:
. domestic unregulated power generation and energy trading and marketing
operations,
. retail electric, telecommunications and internet services businesses,
and
. European power generation and energy trading and marketing operations.
These businesses are expected to include the trading and marketing and certain
electric and gas retail operations of Resources Corp., which are expected to be
merged into wholly owned subsidiaries of the unregulated company. The business
separation plan also contemplates that in 2004 the unregulated company will
receive from the regulated company cash equal to the market value of the
regulated company's interest in its Texas regulated generation operations. In
addition, the unregulated company will have an option to purchase the regulated
company's interest in these operations at a price equal to the market value.
Under the business separation plan, Reliant Energy would restructure
its regulated operations into a holding company structure in which a new
corporate entity would be formed as the parent with Reliant Energy's regulated
businesses as subsidiaries. The regulated company is expected to own Reliant
Energy's:
. electric transmission and distribution operations, its natural gas
distribution businesses and, initially, its regulated electric
generating assets in Texas,
. U.S. interstate pipelines and gas gathering operations, and
2
3
. interests in energy distribution companies in Latin America.
In connection with the formation of the new holding company for
regulated businesses, Reliant Energy would transfer the stock of all of its
subsidiaries to the new holding company and would transfer its regulated
electric generating assets in Texas to a separate subsidiary of the new holding
company until the stranded costs associated with those assets are valued in
2004. At that time, the unregulated company will have the right to exercise the
option discussed above. As a result of the stock and asset transfers described
above, Reliant Energy would become solely a transmission and distribution
company, with its other businesses transferred to separate subsidiaries of the
new holding company. Reliant Energy expects that the regulated holding company
would be required to assume all of Reliant Energy's debt other than its first
mortgage bonds, which would remain with Reliant Energy. The indebtedness of
Reliant Energy's FinanceCo financing subsidiaries is expected to initially
remain in place and be refinanced by the regulated holding company by the end of
2002.
For additional information, please refer to Reliant Energy's press
release filed with this current report as Exhibit 99.1 and the simplified
organizational chart of the proposed business separation plan filed with this
current report as Exhibit 99.2, which press release and organizational chart are
incorporated herein by reference.
The IPO and ultimate distribution of the stock of the unregulated
company are subject to the development of definitive separation terms, further
corporate approvals, market and other conditions, and government actions,
including approval of the business separation plan by the Texas Public Utility
Commission and receipt of a favorable Internal Revenue Service ruling that the
distribution of stock would be tax-free to Reliant Energy and its shareholders
for U.S. federal income tax purposes, as applicable. Aspects of the
restructuring of Reliant Energy's regulated businesses would be subject to the
approval of Reliant Energy's shareholders and approvals from the Securities and
Exchange Commission under the Public Utility Holding Company Act and from the
Nuclear Regulatory Commission. There can be no assurance that the IPO, the
separation of Reliant Energy's unregulated and regulated businesses or the
ultimate restructuring of Reliant Energy's regulated businesses will be
completed as described or within the time periods outlined above.
The IPO of Reliant Energy's unregulated businesses will be registered
under the Securities Act of 1933 and such shares of common stock will only be
offered and sold by means of a prospectus. This current report does not
constitute an offer to sell or the solicitation of any offer to buy any
securities of Reliant Energy's unregulated businesses, nor will there be any
sale of any such securities in any state in which such offer, solicitation or
sale would be unlawful prior to registration or qualification under the
securities laws of such state.
This current report includes forward-looking statements. Actual
events and results may differ materially from those projected. Factors that
could affect actual results include the timing and impact of future regulatory
and legislative decisions, changes in Reliant Energy's business plans, financial
market conditions and other factors discussed in Reliant Energy's filings with
the Securities and Exchange Commission.
3
4
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
The following exhibits are filed herewith:
99.1 Press Release issued July 27, 2000
99.2 Simplified Organizational Chart of Reliant Energy's proposed
Business Separation Plan
4
5
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 hereunto duly authorized.
RELIANT ENERGY, INCORPORATED
Date: July 27, 2000 By: /s/ Mary P. Ricciardello
___________________________________
Mary P. Ricciardello
Senior Vice President and
Chief Accounting Officer
5
6
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 hereunto duly authorized.
RELIANT ENERGY RESOURCES CORP.
Date: July 27, 2000 By: /s/ Mary P. Ricciardello
_______________________________________
Mary P. Ricciardello
Senior Vice President
6
7
EXHIBIT INDEX
Exhibit
Number Exhibit Description
--------- -------------------
99.1 Press Release issued July 27, 2000
99.2 Simplified Organizational Chart of
Reliant Energy's proposed Business
Separation Plan
7
8
Exhibit 99.1
FOR FURTHER INFORMATION: (Media) Sandy Fruhman (713) 207-3123
(Investors) Randy Burkhalter (713) 207-3115
FOR IMMEDIATE RELEASE: Thursday, July 27, 2000
RELIANT ENERGY ANNOUNCES FILING OF BUSINESS SEPARATION PLAN
(Houston, TX) -- Reliant Energy announced today that it plans to file with
the Texas Public Utility Commission a business separation plan under which it
would divide into two publicly traded companies in order to separate its
unregulated businesses from its regulated businesses. Upon receipt of necessary
regulatory approvals, the company plans an initial public offering (IPO) of
approximately 20 percent of the common stock of its unregulated operations late
this year or early in 2001, assuming market conditions remain favorable. The
company expects the IPO to be followed by a distribution to shareholders of the
remaining stock of the unregulated company within 12 months. The remaining
businesses which are predominantly regulated will be structured as a holding
company.
The initiative is intended to satisfy regulatory requirements under Texas
restructuring legislation, to enhance shareholder value, to highlight the
specific investment appeals of each resulting entity, and to permit the
individual units to focus on their respective business and market opportunities.
The unregulated company will own Reliant Energy's unregulated power
generation and related energy trading and marketing operations, its unregulated
retail businesses, which currently include energy, telecommunications and
internet services and the company's European electric generating and
trading/marketing operations. The plan also contemplates that in 2004 the
unregulated company will receive from the regulated company cash equal to the
market value of the regulated company's interest in its Texas regulated
generation operations. In addition, the unregulated company will have an option
to purchase the regulated company's interest in these operations at a price
equal to the market value.
1
9
The regulated company will include Reliant Energy's electricity and natural
gas companies, which serve about four million customers in the U.S. and include
Reliant Energy HL&P/Entex, Reliant Energy Arkla, Reliant Energy Entex and
Reliant Energy Minnegasco. Other operations in the entity will include its U.S.
interstate pipelines, its interests in Latin America and, initially, its Texas
regulated generation.
"Reliant Energy has undergone a fundamental transformation from a Texas-
based utility into a leading energy services company," said Steve Letbetter,
chairman, president and CEO. "In addition to our successful regulated energy
delivery operations, we now have sizeable and very attractive growth businesses
operating in competitive markets. Our primary business objective is to create
shareholder value while also providing high-quality service to our customers.
The restructuring initiative we are announcing today is another step in meeting
that objective.
"Our growth businesses appeal to a different set of investors than do our
regulated activities," Letbetter explained. "We expect the regulated company to
be very similar to the company we have been for most of our history, and it
should appeal to our traditional type of investor. "As a growth company, the new
unregulated entity will be able to capitalize on existing and future investment
opportunities more effectively, and should appeal to investors who are more
growth-oriented and tolerant of risk," Letbetter continued. "Overall, this
restructuring will allow us to better align our businesses with the interests of
investors and allow the market to more effectively reflect the overall value of
Reliant Energy's expanded business portfolio."
Letbetter added that Reliant Energy is committed to maintaining its current
annual dividend of $1.50 per share until the time of the separation.
In addition to advancing shareholder interests, the initiative will satisfy
competitive market and restructuring requirements of the Texas electric
restructuring legislation, which calls for the Texas electric market to open to
full competition on January 1, 2002. The new structure is an integral part of a
separation plan which Reliant Energy HL&P will file in August for approval of
the Public Utility Commission of Texas.
2
10
"As businesses that will remain regulated, Reliant Energy's electricity and
natural gas distribution companies will continue to focus on providing reliable
service at a reasonable cost, as we have been doing for more than 100 years,"
Letbetter said.
Reliant Energy (NYSE: REI), based in Houston, Texas, is an international
energy delivery and energy services company with more than $15 billion in annual
revenue and assets totaling $30 billion. The company has a wholesale energy
trading and marketing business that ranks among the top five in the U.S. in
combined electricity and natural gas volumes and has a presence in most of the
major power regions of the U.S. It also has power generation and wholesale
trading and marketing operations in Western Europe. The company has nearly
27,000 megawatts of power generation in operation in the U.S. and Western Europe
and has announced development projects that will add another 5,000 megawatts.
Reliant Energy also has marketing and distribution operations serving nearly
four million electricity and natural gas customers in the U.S., has significant
interests in power distribution operations serving more than 10 million
customers in Latin America and has a telecommunications business serving the
Houston area.
The IPO of the company's unregulated businesses will be registered under
the Securities Act of 1933 and such shares of common stock will only be offered
and sold by means of a prospectus. This news release does not constitute an
offer to sell or the solicitation of any offer to buy any securities of the
Company's unregulated businesses, nor will there be any sale of any such
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
such state.
This news release includes forward-looking statements. Actual events and
results may differ materially from those projected. Factors that could affect
actual results include the timing and impact of future regulatory and
legislative decisions, changes in Reliant Energy's business plans, financial
market conditions and other factors discussed in Reliant Energy's filings with
the Securities and Exchange Commission.
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EXHIBIT 99.2
EXISTING STRUCTURE
(simplified)
_______________________________
| REI |
| |
| HL&P Division: |
| Generation ("ERCOT Genco") |
| Distribution ("WiresCo") |
| Retail |
|_____________________________|
|
____________________________________________________________________________________________________
| | | | |
| | | | |
___________________________ _______________ ______________ ______________ ____________
| | | Telecom | | FinanceCos | | Resources | | Latin |
| (REPG) | | & | | | | (Formerly | | America |
| Unregulated Generation | | E-Business | | | | NorAm) | | |
|_________________________| |_____________| |____________| |____________| |__________|
| |
_______________________________________ |
| | | |
_____________ ______________ ______________ ______________
| Other | | Wholesale | | RE Mid | | (RES) |
| Merchant | | Europe | | Atlantic | | Trading |
| Plants | | | | (Sithe) | | & |
| | | | | | | Marketing |
|___________| |____________| |____________| |____________|
___________________________________________________________________________________________________________________________________
PROPOSED BUSINESS SEPARATION PLAN
(simplified)
________________________________________
| Regulated Holding Company |
| |
___________________________________ | (Will assume all former non-FMB |
| Unregulated Holding Company | | debt of REI and HL&P) |
|_________________________________| |______________________________________|
| |
____________________________________________________ ______________________________________
| | | | | | | |
________________ ______________ ______________ ____________ __________ | ______________ ____________
| (REPG) | | Telecom | | (RES) | | Retail | | ERCOT | | | Resources | | Latin |
| Unregulated | | & | | Trading | | Electric | | Genco | | | (formerly | | America |
| Generation | | E-Business | | & | | Provider | --------| | | | NorAm) | | |
| | | | | Marketing | | | | | | | | | | |
|______________| |____________| |____________| |__________| |________| | |____________| |__________|
| | |
____________________________________________________ |
| | | | | |
_____________ ______________ _____________ ----------------------- ____________________________ ___________________________
| Other | | Wholesale | | RE Mid | | ERCOT Genco | | REI (WiresCo) | | FinanceCos |
| Merchant | | Europe | | Atlantic | (option exercisable | | | |
| Plants | | | | (Sithe) | | in 2004) | | Remaining debt: FMBs | | (Debt is expected to |
|___________| |____________| |___________| ----------------------- | (including obligations |__| be refinanced at the |
| under FMBs securing | | Regulated Holding |
| PCBs and MTNs) | | Company by |
| | | December 2002) |
|__________________________| |_________________________|
Definitions: FMBs: First Mortgage Bonds
PCBs: Pollution Control Bonds
MTNs: Medium Term Notes
