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): MARCH 15, 2002 ------------------------------ 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 ------------------------------
ITEM 5. OTHER EVENTS. ANNOUNCEMENT OF 2001 RESULTS On March 15, 2002, Reliant Energy, Incorporated ("Reliant Energy" and, together with its subsidiaries, the "Company") reported fourth quarter 2001 and year 2001 earnings. For additional information regarding Reliant Energy's fourth quarter 2001 earnings and its year 2001 earnings, please refer to Reliant Energy's press release attached to this report as Exhibit 99.1 (the "Press Release"), which Press Release, other than the information therein under the caption "Outlook for 2002," is incorporated by reference herein. Reliant Energy also announced changes to its second and third quarter 2001 earnings. For additional information regarding these restated earnings, please see the Press Release under the caption "Restatement of Earnings for Second and Third Quarters of 2001" as well as "Restatement of Second and Third Quarter Results" below. RESTATEMENT OF SECOND AND THIRD QUARTER RESULTS The Company is providing information concerning a required restatement of its Quarterly Reports on Form 10-Q ("Interim Financial Statements") for the quarters ended June 30, 2001 and September 30, 2001. As a result, the previously issued financial statements for these periods should not be relied upon. Background. In early 2001, the Company's forecasts indicated a substantial increase in earnings as a result of price volatility in the California power markets. The Company did not believe that the early 2001 price levels were sustainable over subsequent years. As a result, the Company determined that its key financial metrics would be improved if it entered into physical delivery contracts with end-user customers in which the Company would sell power at a levelized price over the 2001-2003 or longer time frame. The result of this type of transaction would have provided the end-user with a favorable price in 2001 and provided the Company with a favorable price in subsequent years. This energy marketing approach would have advantages for both parties to the long-term contracts. The Company would have reduced the variability of future cash flows and the end-user would have reduced pricing volatility. The Company had been in negotiations with a large end-user customer over precisely such an arrangement since late 2000. By late Spring 2001, it became clear that a final agreement with that customer was unlikely. At this point, the Company began to look for similar deals with other end user customers, a process that evolved into the structured transactions discussed below. Discussion of Accounting Restatement. On February 5, 2002, the Company announced that it was restating its earnings for the second and third quarters of 2001. As more fully described below, the restatement relates to a correction in accounting treatment for a series of four structured transactions that were inappropriately accounted for as cash flow hedges for the period of May 2001 through September 2001. During the May 2001 through September 2001 time frame, the Company entered into a series of four structured transactions that were intended to increase future cash flow and earnings and to increase certainty associated with future cash flow and earnings, albeit at the expense of 2001 cash flow and earnings. It was contemplated that the structured transactions would qualify for hedge accounting under the Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS No. 133"). The transactions were recorded in the Company's cash flow hedge accounting records and were, in effect, overlaid on existing contracts entered into as hedges. In general, each structured transaction involved a series of forward contracts to buy and sell an energy commodity in 2001 and to buy and sell an energy commodity in 2002 or 2003. Each series of contracts in a structure were executed contemporaneously with the same counterparty and were for the same commodities, quantities and locations. The contracts in each structure were offsetting in terms of physical attributes. In two of the four structured transactions, a series of contracts were entered into with the same counterparty to mitigate credit exposure (the "credit mitigation contracts"). These credit mitigation contracts mirrored the cash flows and terms from the other contracts in the structure, except for an upfront demand payment made to the counterparty in these two transactions. In addition, in contemplation of one of the structured transactions, in August 2001, the Company entered into forward contracts with a different counterparty to buy and sell natural gas, a portion of which was inappropriately recorded in the fourth quarter of 2001. The counterparties to all of the structured transactions were independent third parties that are regularly engaged in the energy trading business. While each contract in each structure was not at market at inception, the contracts were intended to be at market in total, so the structure had little or no fair value at inception. Under the original accounting treatment, however, the Company recorded each applicable contract in its hedge accounting records on an individual basis, resulting in the recognition of a non-trading derivative asset or liability on the balance sheet with an offsetting entry in accumulated other comprehensive income at inception for each contract. Such accounting treatment resulted in a net loss being recorded in 2001 and ultimately would result in income being recorded for 2002 2
and 2003 related to these four structured transactions. In this situation, the recognition of other comprehensive income was in error, because the fair value of each contract in each structure resulted not from changes in the fair value of any anticipated transaction, but rather from the fact that the individual contracts were not at market at inception. Having further reviewed the transactions, the Company now believes the contracts should have been accounted for as a unit within each structured transaction rather than separately and that, viewed as such, they did not qualify as cash flow hedges under SFAS No. 133. Consequently, these contracts should have been accounted for as derivatives with changes in fair value recognized through the income statement. As a result, the Company's Interim Financial Statements and related disclosures as of June 30, 2001 and September 30, 2001 and for the three months ended June 30, 2001 and September 30, 2001, will be restated from amounts previously reported to appropriately account for the transactions as described above. Therefore, the Company will report an increase in net income as compared to earnings shown in previously issued Interim Financial Statements filed on Form 10-Q for the quarters ended June 30, 2001 and September 30, 2001 of $42 million and $65 million, respectively. Audit Committee Review. At the time of the Company's public announcement of its intention to restate its reporting of the structured transactions, the Audit Committee of the Company instructed the Company to conduct an internal audit review to determine whether there were any other transactions included in the asset books as cash flow hedges that failed to meet the cash flow hedge requirements under SFAS No. 133. This targeted internal audit review found no other similar transactions. The Audit Committee also directed an internal investigation by outside legal counsel of the facts and circumstances leading to the restatement, which investigation has been completed. To address the issues identified in that process, the Company expects to take remedial actions, including, among other things, changes in organizational structure and enhancement of internal controls and procedures. 3
The effects of the restatement are outlined in the tables below: RELIANT ENERGY, INCORPORATED
RELIANT ENERGY, INCORPORATED
RELIANT ENERGY, INCORPORATED
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits. The following exhibits are filed herewith: 99.1 Press Release issued March 15, 2002 regarding Reliant Energy's 2001 earnings. ITEM 9. REGULATION FD DISCLOSURE. Reliant Energy incorporates by reference into this Item 9 the information in the Press Release under the caption "Outlook for 2002." The information in Item 9 of this report is being furnished, not filed, pursuant to Regulation FD. Accordingly, the information in Item 9 of this report will not be incorporated by reference into any registration statement filed by Reliant Energy under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference. The furnishing of the information in this report is not intended to, and does not, constitute a determination or admission by Reliant Energy, that the information in this report is material or complete, or that investors should consider this information before making an investment decision with respect to any security of Reliant Energy or any of its affiliates. Some of the statements in this report and the exhibits hereto are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although Reliant Energy believes that the expectations and the underlying assumptions reflected in its forward-looking statements are reasonable, there can be no assurance 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. References in this Current Report to the terms "we," "us" or other similar terms mean the Company. In addition to the matters described in this report and the exhibits hereto, the following are some of the factors that could cause actual results to differ materially from those expressed or implied in Reliant Energy's forward-looking statements: o state, federal and international legislative and regulatory developments, including deregulation, re-regulation and restructuring of the electric utility industry, and changes in or application of environmental and other laws and regulations to which we are subject, o the timing of the implementation of the business separation plan of Reliant Energy, o the effects of competition, including the extent and timing of the entry of additional competitors in our markets, o the degree to which we are able to successfully integrate the operations and assets of Orion Power Holdings into our Wholesale Energy segment, o industrial, commercial and residential growth in our service territories, o our pursuit of potential business strategies, including acquisitions or dispositions of assets, o state, federal and other rate regulations in the United States and in foreign countries in which we operate or into which we might expand our operations, o the timing and extent of changes in commodity prices and interest rates, o weather variations and other natural phenomena, o political, legal and economic conditions and developments in the United States and in foreign countries in which we operate or into which we might expand our operations, including the effects of fluctuations in foreign currency exchange rates, o financial market conditions and the results of our financing efforts, 8
o the bankruptcy or other financial distress of our trading counterparties, o actions by rating agencies with respect to us or our competitors, o acts of terrorism or war, o the availability and price of insurance, o the reliability of the systems, procedures and other infrastructure necessary to operate our retail electric business, including the systems owned and operated by the Electric Reliability Council of Texas, Inc., o the performance of our projects undertaken and the success of our efforts to invest in and develop new opportunities, o market conditions in deregulating power markets, including the extent to which the energy crisis in the state of California is resolved, and o other factors we discuss in our other filings with the SEC. The words "anticipate," "estimate," "believe," "continue," "could," "intend," "may," "plan," "potential," "predict," "should," "will," "expect," "objective," "projection," "forecast," "goal" and other similar words are intended to identify Reliant Energy' forward-looking statements. 9
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: March 15, 2002 By: /S/ MARY P. RICCIARDELLO ----------------------------------- Mary P. Ricciardello Senior Vice President and Chief Accounting Officer 10
EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 99.1 Press Release issued March 15, 2002 regarding Reliant Energy's 2001 earnings. 11
EXHIBIT 99.1 FOR FURTHER INFORMATION: Sandy Fruhman, Media (713) 207-3123 Marianne Paulsen, Investors (713) 207-6500 Dennis Barber, Investors (713) 207-3042 FOR IMMEDIATE RELEASE: March 15, 2002 RELIANT ENERGY REPORTS 2001 EARNINGS HOUSTON, TX. - Reliant Energy, Incorporated (NYSE: REI) today reported net income for the year ended December 31, 2001, of $980 million, or $3.35 per diluted share, compared to net income of $447 million, or $1.56 per diluted share, for 2000. Reliant Energy's earnings reflect its approximately 83 percent interest in Reliant Resources, Inc. (NYSE: RRI). For the fourth quarter of 2001, reported net income was $46 million, or $.16 per diluted share, compared to a reported net loss of $299 million, or a loss of $1.04 per diluted share, for the fourth quarter of 2000. In the 2001 and 2000 periods, there were a number of unusual items that are detailed below on a diluted earnings per share, net of tax, basis. Giving effect to these items, adjusted diluted earnings per share were $3.41 for the year 2001 and $0.19 for the fourth quarter 2001. This compares to adjusted diluted earnings per share of $2.92 for the year 2000 and $0.25 for the fourth quarter 2000.
In addition to the items noted on the previous page, the company took charges related to the Enron bankruptcy of $0.18 and $0.17 during the year and the fourth quarter 2001, respectively, on a diluted per share, net of tax, basis. The increase in net income for the year ended December 31, 2001, was largely driven by improved performance from the company's wholesale and retail energy segments, partially offset by a decline in operating income from the electric operations segment due to milder weather and reduced customer usage during the second half of 2001. Operating income from the European energy segment also decreased during 2001. The company's interest expense declined in 2001 compared to the prior year resulting from decreased levels of borrowing and lower interest rates. "We're pleased that Reliant Energy was able to post strong results for 2001 despite a very challenging business environment," said Steve Letbetter, chairman, president and chief executive officer of Reliant Energy. "We're moving forward with plans to separate into two separately owned public companies. Reliant Energy received a favorable ruling from the Internal Revenue Service in late January, and we expect to complete the formation of CenterPoint Energy as the new holding company and the spin-off of Reliant Resources to Reliant Energy shareholders once we receive approval of the restructuring from the Securities and Exchange Commission. We're confident that each company has a very solid foundation on which to build value for shareholders." RESTATEMENT OF EARNINGS FOR SECOND AND THIRD QUARTERS OF 2001 The company previously announced on February 5, 2002, that earnings for the second and third quarters of 2001 would be restated. Revised earnings for the second quarter are $316 million, or $1.08 per diluted share, and for the third quarter are $355 million, or $1.21 per diluted share. The net effect of the restatement is the recording of an additional $108 million of net income for the first nine months of 2001. The restatement relates to a correction in accounting treatment for a series of structured transactions that were inappropriately accounted for as cash flow hedges for the period of May 2001 through September 2001. These transactions should have been accounted for as derivatives with changes in fair value recognized in the company's income statement. Information regarding these transactions is available in the company's report on Form 8-K filed today with the Securities and Exchange Commission. OPERATING INCOME BY SEGMENT DETAILED ELECTRIC OPERATIONS The electric operations segment generated operating income of $1.1 billion in 2001, down from $1.2 billion in 2000. Milder weather and reduced customer usage were important factors in the 2001 results, which were also impacted by a decrease in revenues resulting from lower rates charged to some governmental agencies as mandated by the Texas restructuring legislation. A pre-tax charge of $20 million, or $0.04 per diluted share, net of tax, was taken in the fourth quarter resulting from the early termination of an accounts receivable factoring agreement due to electric restructuring. Higher employee benefit costs versus last year were offset by reduced amortization of regulatory assets recorded as a result of the impairment associated with its generating assets. The electric operations segment experienced strong growth in the number of customers for the full year period.
Operating income from electric operations during the fourth quarter of 2001 was $127 million compared to $203 million for the same period of last year. The decline was due primarily to lower sales attributable to the quarter's particularly mild weather and reduced customer usage on a weather-adjusted basis. Also contributing to the decline in the fourth quarter of 2001 was the factoring termination charge as described above. Partially offsetting these impacts was continued strong growth in the number of customers. Operating expenses increased in the fourth quarter primarily related to contract maintenance services and employee benefits, partially offset by reduced System Benefit Fund expenses. WHOLESALE ENERGY Operating income for the wholesale energy segment rose $420 million in 2001 to $899 million. The increase was primarily due to increased power generation sales volumes and margins, particularly in the Western region, and strong growth in trading and marketing volumes and margins for the year. Natural gas trading margins in 2001 increased significantly compared to 2000. Partially offsetting these improvements were a charge of $68 million related to the Enron bankruptcy, increased operation and maintenance costs related to our Mid-Atlantic power generation operations, increased corporate overhead allocations, legal and other expenses related to the energy crisis in California and higher depreciation costs. For the fourth quarter of 2001, the wholesale energy segment had an operating loss of $13 million, compared to operating income of $15 million in the fourth quarter of 2000. This decrease was due primarily to reduced trading margins, the Enron charge discussed above, California legal and other expenses and increased overhead allocations. Partially offsetting this decline were a decrease in bonus expense, decreased operations and maintenance expenses, decreased emission amortization expense and increased power generation margins. In addition, in the fourth quarter of 2000, a charge of $39 million was recorded against California receivables, while no such charge was recorded in the fourth quarter of 2001. Our wholesale energy segment reported income from equity investments in 2001 of $7 million compared to $43 million in 2000. The equity income in both periods primarily resulted from an investment in the El Dorado generating plant in Nevada, which became operational in May 2000. The equity income declined in 2001 primarily due to higher plant outages and reduced power prices realized by the project company. In 2001, power volumes increased by 88% for the year 2001 and 59% for the fourth quarter, compared to the 2000 periods. Natural gas volumes also increased by 52% for the year and by 36% for the fourth quarter. NATURAL GAS DISTRIBUTION Operating income from the natural gas distribution segment rose to $130 million in 2001. This compares to operating income of $118 million in 2000 when results reflected expenses incurred in connection with exiting non-rate regulated natural gas business activities outside the company's established market areas.
For the fourth quarter of 2001, operating income from natural gas distribution was essentially flat at $68 million in comparison to the same period in 2000. The natural gas distribution segment offset a substantial negative weather impact in the fourth quarter of 2001 in part with a reduction in bad debt expenses. Collections improved during the fourth quarter, reversing the negative trend in prior quarters of 2001. The company's natural gas distribution service territories experienced record mild weather during the fourth quarter of 2001, compared to colder than normal temperatures in the same period in the prior year. PIPELINES AND GATHERING Operating income for the pipelines and gathering segment was flat at $137 million in both 2001 and 2000. The gathering business generated strong results with volume growth of 4% for the year. For the fourth quarter of 2001, the pipelines and gathering segment reported operating income of $31 million compared to $38 million for the same period in 2000. Increased franchise tax expenses and costs related to a rate case contributed to the decline in fourth quarter operating income. EUROPEAN ENERGY The European energy segment produced operating income of $56 million in 2001, a decrease of $33 million compared to 2000. The decrease in operating income was primarily the result of a previously anticipated decline in margins from our Dutch generating assets in connection with the start of wholesale competition in the Netherlands on January 1, 2001. In addition, our European energy segment took a reserve of $17 million related to the Enron bankruptcy and experienced higher general and administrative and information technology costs largely related to the rapidly growing trading operation. Operating income benefited in 2001 from a $37 million net gain recorded in the fourth quarter related to a settlement of the stranded cost indemnity obligations of the former shareholders of REPGB B.V. (formerly UNA) and $30 million in efficiency and energy payments recorded in the second quarter from NEA B.V. (formerly SEP), which was the coordinating body for the Dutch generating sector prior to wholesale competition. Operating income also benefited from increased ancillary services and district heating revenues as well as improved power trading margins, excluding the Enron charge. In addition, the European energy segment recorded a gain of $51 million related to the valuation of NEA B.V., in which the company owns a 22.5 percent interest. This item is reported as equity income. During the fourth quarter of 2001, the company received confirmation from the tax authorities that the $51 million gain would not be taxable, and accordingly, the previously recorded $18 million tax reserve was reversed.
For the fourth quarter of 2001, the European energy segment produced operating income of $33 million, an increase of $16 million over the same period of 2000. The increase was due primarily to the $37 million net gain related to the indemnity settlement discussed above, increased ancillary services revenue, and the reversal of accruals relating to the stranded cost indemnity and receivables for environmental tax assessments due to the settlement. The increase was partially offset by the effect of the start of wholesale competition in 2001 and the charge for the Enron bankruptcy. RETAIL ENERGY The company's retail energy segment reduced its operating losses to $13 million in 2001, a $57 million reduction from 2000. The improvement resulted primarily from increased sales of energy and energy services to commercial and industrial customers, which are accounted for on a mark-to-market basis. Partially offsetting these earnings were increased personnel and employee related costs as well as system costs incurred in preparing for competition in the Texas retail electricity market. In the fourth quarter of 2001, the retail energy segment produced operating income of $0.5 million compared to a $30 million operating loss for the same quarter of 2000. This improvement resulted primarily from earnings of $45 million relating to contracts with commercial and industrial customers and the timing of certain advertising costs. Partially offsetting these improvements were the increased personnel and system expenses mentioned above. LATIN AMERICA The company had been in negotiations to sell its two remaining Latin American investments in Argentina and anticipated that the sales would be concluded by year-end 2001. In its 2000 financial statements, the company reported its Latin America segment as discontinued operations. Due to the political and economic turmoil in Argentina, these negotiations were terminated, and the company has reclassified these businesses into continuing operations. Reliant Energy has recorded an after-tax impairment of $43 million in the fourth quarter of 2001 in addition to an after-tax impairment of $7 million recorded in the first quarter of 2001 related to its remaining Argentine investments. The company will continue to operate these businesses in the near term while evaluating strategic alternatives for disposal of these businesses. The carrying value of the remaining net assets in Argentina is approximately $8 million. OTHER OPERATIONS The company's other operations, which include its new ventures businesses and unallocated corporate costs, reported an operating loss for 2001 of $232 million. This compares to an operating loss of $102 million for 2000. The 2001 results include a $101 million non-cash charge related to the redesign of benefit plans for employees of the company's unregulated businesses in anticipation of the spin-off of Reliant Resources, and a charge of $54 million for the disposal of the company's communications business. For the fourth quarter of 2001, the company's other operations reported an operating loss of $30 million compared to a reported operating loss of $62 million for the same period last year.
OUTLOOK FOR 2002 After the spin-off of Reliant Resources, CenterPoint Energy will include primarily the regulated businesses of electric transmission and distribution, natural gas distribution and pipelines and gathering. CenterPoint Energy will also include the Texas power generation assets until at least 2004 when Reliant Resources has an option to purchase these assets at fair market value. Reliant Resources includes competitive energy services activities including nonregulated power generation, wholesale energy trading and marketing, retail energy services and wholesale energy in Europe. CenterPoint Energy expects 2002 earnings per share to be in the range of $1.17 to $1.22, excluding its prior interests in Reliant Resources. Reliant Resources, Inc. (NYSE: RRI), which completed its initial public offering of approximately 20 percent of its shares in May 2001, expects to achieve earnings of $1.80 to $2.00 per share. WEBCAST OF EARNINGS CONFERENCE CALL Reliant Energy has scheduled its fourth quarter and full year 2001 earnings conference call for Friday March 15, 2002, at 1:30 p.m. Central Standard Time. Interested parties may listen to a live audio broadcast of the conference call at www.reliantenergy.com/investors. A replay of the call can be accessed approximately two hours after the completion of the call. Reliant Energy, based in Houston, Texas, is an international energy services and energy delivery company with approximately $46 billion in annual revenue and total assets exceeding $29 billion. The company has nearly 31,000 megawatts of power generation in operation in the U.S. and is one of the largest marketers of both power and natural gas in North America. The company also has wholesale trading and marketing operations and nearly 3,500 megawatts of power generation in Western Europe. Reliant Energy's retail marketing and distribution operations serve approximately four million electricity and natural gas customers in the U.S. More information on Reliant Energy can be found on its web site at www.reliantenergy.com. ***** 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, effects of competition, weather variations, 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. - # # # -
Reliant Energy, Inc. and Subsidiaries Statements of Consolidated Income (Thousands of Dollars) (Unaudited)
Reliant Energy, Incorporated and Subsidiaries Selected Data From Statements of Consolidated Income (Thousands of Dollars, Except Per Share Amounts) (Unaudited)
Reliant Energy, Inc. and Subsidiaries Results of Operations by Segment (Millions of Dollars) (Unaudited)
Reliant Energy, Inc. and Subsidiaries Results of Operations by Segment (Millions of Dollars) (Unaudited)
Reliant Energy, Inc. and Subsidiaries Results of Operations by Segment (Millions of Dollars) (Unaudited)
Reliant Energy, Inc. and Subsidiaries Results of Operations by Segment (Millions of Dollars) (Unaudited)