UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
------------------------------
Commission file number 1-13265
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)
-----------------------------
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 registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 9, 2002, all 1,000 shares of Reliant Energy Resources Corp. common
stock were held by Reliant Energy, Incorporated.
RELIANT ENERGY RESOURCES CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................1
Statements of Consolidated Income
Three Months Ended March 31, 2001 and 2002 (unaudited)................................1
Consolidated Balance Sheets
December 31, 2001 and March 31, 2002 (unaudited)......................................2
Statements of Consolidated Cash Flows
Three Months Ended March 31, 2001 and 2002 (unaudited)................................4
Notes to Unaudited Consolidated Financial Statements.....................................5
Item 2. Management's Narrative Analysis of the Results of Operations of
Reliant Energy Resources Corp. and Subsidiaries.........................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................15
Item 5. Other Information...................................................................15
Item 6. Exhibits and Reports on Form 8-K....................................................16
i
PART I. FINANCIAL INFORMATION
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF
RELIANT ENERGY, INCORPORATED)
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2001 2002
-------------- --------------
REVENUES..................................................................... $ 2,422,853 $ 1,242,279
EXPENSES:
Natural gas................................................................ 1,991,523 861,579
Operation and maintenance.................................................. 159,745 164,713
Depreciation .............................................................. 35,825 36,577
Amortization............................................................... 15,396 3,694
Taxes other than income taxes.............................................. 46,433 32,520
--------------- --------------
Total.................................................................. 2,248,922 1,099,083
--------------- --------------
OPERATING INCOME............................................................. 173,931 143,196
--------------- --------------
OTHER INCOME (EXPENSE):
Interest expense........................................................... (38,134) (35,577)
Distribution on trust preferred securities................................. (7) (6)
Other, net................................................................. 3,395 2,256
--------------- --------------
Total.................................................................. (34,746) (33,327)
--------------- --------------
INCOME BEFORE INCOME TAXES................................................... 139,185 109,869
Income Tax Expense........................................................ 58,828 40,700
--------------- --------------
NET INCOME................................................................... $ 80,357 $ 69,169
============== ==============
See Notes to RERC's Interim Financial Statements
1
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
DECEMBER 31, MARCH 31,
2001 2002
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 16,425 $ 30,670
Accounts and notes receivable, principally customer, net.................. 479,279 504,402
Accrued unbilled revenue.................................................. 188,425 63,218
Accounts and notes receivable - affiliated companies, net................. 39,393 54,585
Materials and supplies.................................................... 33,276 32,442
Fuel and petroleum products............................................... 111,193 30,208
Non-trading derivative assets............................................. 6,996 18,363
Other..................................................................... 24,104 20,622
-------------- -------------
Total current assets.................................................... 899,091 754,510
-------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment............................................. 3,662,865 3,707,793
Less accumulated depreciation............................................. (521,960) (551,517)
-------------- -------------
Property, plant and equipment, net...................................... 3,140,905 3,156,276
-------------- -------------
OTHER ASSETS:
Goodwill, net............................................................. 1,740,510 1,740,510
Other intangibles, net.................................................... 17,980 18,690
Prepaid pension asset..................................................... 94,022 90,868
Non-trading derivative assets............................................. 2,234 995
Other..................................................................... 94,221 61,959
-------------- -------------
Total other assets...................................................... 1,948,967 1,913,022
-------------- -------------
TOTAL ASSETS................................................................ $ 5,988,963 $ 5,823,808
============== ==============
See Notes to RERC's Interim Financial Statements
2
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
DECEMBER 31, MARCH 31,
2001 2002
-------------- -------------
CURRENT LIABILITIES:
Short-term borrowings..................................................... $ 345,527 $ 150,000
Accounts payable.......................................................... 267,649 256,645
Interest accrued.......................................................... 44,795 31,222
Taxes accrued............................................................. 53,693 153,521
Customer deposits......................................................... 52,089 39,870
Non-trading derivative liabilities........................................ 59,075 13,835
Other..................................................................... 95,180 61,684
-------------- --------------
Total current liabilities........................................... 918,008 706,777
-------------- --------------
OTHER LIABILITIES:
Accumulated deferred income taxes......................................... 555,387 518,443
Benefit obligations....................................................... 177,559 172,816
Non-trading derivative liabilities........................................ 9,826 343
Notes payable - affiliated companies, net................................. 27,311 27,424
Other..................................................................... 152,696 137,456
-------------- --------------
Total other liabilities............................................... 922,779 856,482
-------------- --------------
LONG-TERM DEBT.............................................................. 1,927,039 1,919,780
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 10)
RERC OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF RERC... 555 555
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock.............................................................. 1 1
Paid-in capital........................................................... 2,255,395 2,255,395
Retained earnings......................................................... 1,837 71,006
Accumulated other comprehensive (loss) income............................. (36,651) 13,812
-------------- --------------
Total stockholder's equity............................................ 2,220,582 2,340,214
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............................... $ 5,988,963 $ 5,823,808
============== ==============
See Notes to RERC's Interim Financial Statements
3
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF RELIANT ENERGY, INCORPORATED)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2001 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 80,357 $ 69,169
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 51,221 40,271
Deferred income taxes.................................................. (2,550) (44,997)
Changes in other assets and liabilities:
Accounts and notes receivable, net................................... 164,694 100,084
Accounts receivable/payable, affiliates.............................. (20,677) (25,872)
Inventory............................................................ 63,711 81,819
Accounts payable..................................................... (301,180) (11,004)
Fuel cost recovery................................................... 71,393 40,438
Interest and taxes accrued........................................... 64,685 86,255
Net non-trading derivative assets and liabilities.................... (7,755) (26,544)
Other current assets................................................. 25,676 3,678
Other current liabilities............................................ (21,277) (44,569)
Other assets......................................................... 12,390 (15,006)
Other liabilities.................................................... (4,677) (1,116)
-------------- --------------
Net cash provided by operating activities.......................... 176,011 252,606
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (45,033) (48,655)
Other, net............................................................... (18,461) 2,287
-------------- --------------
Net cash used in investing activities.............................. (63,494) (46,368)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt............................................... (25,000) (6,633)
Proceeds from long-term debt............................................. 544,632 --
Decrease in short-term borrowings, net................................... (285,000) (195,527)
Increase in notes with affiliates, net................................... 60,612 10,793
Dividend................................................................. (400,000) --
Other, net............................................................... (1,663) (626)
-------------- --------------
Net cash used in financing activities.............................. (106,419) (191,993)
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................... 6,098 14,245
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD........................ 22,576 16,425
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.............................. $ 28,674 $ 30,670
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized).................................... $ 39,110 $ 49,063
Income taxes............................................................. 358 166
See Notes to RERC's Interim Financial Statements
4
RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Included in this Quarterly Report on Form 10-Q (Form 10-Q) for Reliant
Energy Resources Corp. (RERC Corp.), together with its subsidiaries (RERC), are
RERC's consolidated interim financial statements and notes (Interim Financial
Statements) including its wholly owned and majority owned subsidiaries. The
Interim Financial Statements are unaudited, omit certain financial statement
disclosures and should be read with the Annual Report on Form 10-K of RERC Corp.
(RERC Corp. Form 10-K) for the year ended December 31, 2001.
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.
RERC's Interim Financial Statements reflect all normal recurring
adjustments that are, in the opinion of management, necessary to present fairly
the financial position and results of operations for the respective periods.
Amounts reported in RERC's Statements of Consolidated Income are not necessarily
indicative of amounts expected for a full year period due to the effects of,
among other things, (a) seasonal variations in energy consumption, (b) timing of
maintenance and other expenditures and (c) acquisitions and dispositions of
assets and other interests. In addition, certain amounts from the prior year
have been reclassified to conform to RERC's presentation of financial statements
in the current year. These reclassifications do not affect earnings of RERC.
The following notes to the consolidated financial statements in the RERC
Corp. Form 10-K relate to certain contingencies. These notes, as updated herein,
are incorporated herein by reference:
Notes to Consolidated Financial Statements (RERC Corp. 10-K Notes): Note
3(f) (Regulatory Assets), Note 5 (Derivative Instruments) and Note 10
(Commitments and Contingencies).
For information regarding environmental matters and legal proceedings, see
Note 10.
(2) NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144
provides new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of and also broadens the definition
of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS No. 144 supercedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," while retaining many of the requirements of these two
statements. Under SFAS No. 144, assets held for sale that are a component of an
entity will be included in discontinued operations if the operations and cash
flows will be or have been eliminated from the ongoing operations of the entity
and the entity will not have any significant continuing involvement in the
operations prospectively. SFAS No. 144 did not materially change the methods
used by RERC to measure impairment losses on long-lived assets, but may result
in additional future dispositions being reported as discontinued operations than
was previously permitted. RERC adopted SFAS No. 144 on January 1, 2002.
See Note 3 for a discussion of RERC's adoption of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133) on
January 1, 2001. See Note 5 for a discussion of RERC's adoption of SFAS No. 142
"Goodwill and Other Intangible Assets" (SFAS No. 142) on January 1, 2002.
5
(3) DERIVATIVE INSTRUMENTS
Adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
after-tax increase in accumulated other comprehensive income of $38 million.
Cash Flow Hedges. During the three months ended March 31, 2002, there was
no hedge ineffectiveness recognized in earnings from derivatives that are
designated and qualify as cash flow hedges. No component of the derivative
instruments' gain or loss was excluded from the assessment of effectiveness.
During the three months ended March 31, 2002, a $0.9 million deferred loss was
recognized in earnings as a result of the discontinuance of cash flow hedges
because it was no longer probable that the forecasted transaction would occur
due to credit problems of a customer. As of March 31, 2002, RERC expects a loss
of $5 million in accumulated other comprehensive income to be reclassified into
net income during the next twelve months.
(4) RELIANT ENERGY'S SEPARATION PLAN
Reliant Energy, Incorporated (Reliant Energy) is in the process of
separating its regulated and unregulated businesses into two publicly traded
companies. In December 2000, Reliant Energy transferred a significant portion of
its unregulated businesses to Reliant Resources, Inc. (Reliant Resources),
which, at the time, was a wholly owned subsidiary of Reliant Energy. Reliant
Resources conducted an initial public offering of approximately 20% of its
common stock in May 2001. In December 2001, Reliant Energy's shareholders
approved an agreement and plan of merger by which the following will occur
(which is referred to as the Restructuring):
o CenterPoint Energy, Inc. (CenterPoint Energy), currently a wholly owned
subsidiary of Reliant Energy, will become the holding company for
Reliant Energy and its subsidiaries;
o Reliant Energy and its subsidiaries will become subsidiaries of
CenterPoint Energy; and
o each share of Reliant Energy common stock will be converted into one
share of CenterPoint Energy common stock.
After the Restructuring, Reliant Energy plans, subject to further corporate
approvals, market and other conditions, to complete the separation of its
regulated and unregulated businesses by distributing its remaining equity
interest in the common stock of Reliant Resources to its shareholders
(Distribution). Reliant Energy's goal is to complete the Restructuring and
subsequent Distribution as quickly as possible after all the necessary
conditions are fulfilled, including receipt of an order from the Securities and
Exchange Commission granting the required approvals under the Public Utility
Holding Company Act of 1935 (1935 Act) and an extension from the Internal
Revenue Service of a private letter ruling that Reliant Energy has obtained
regarding the tax-free treatment of the Distribution. Reliant Energy believes it
will receive the necessary approvals. RERC currently expects Reliant Energy to
complete the Restructuring and Distribution in the summer of 2002. However,
until regulatory approvals are received, no assurance can be provided that the
Distribution will occur as described above or that it will occur within this
time period. Upon receipt of approval under the 1935 Act, CenterPoint Energy
expects to register and become subject, with its subsidiaries, to regulation as
a registered holding company system under the 1935 Act.
Thereafter, in order to enable CenterPoint Energy ultimately to comply with
the requirements for exemption from registration in Section 3(a)(1) of the 1935
Act, Reliant Energy plans to divide the gas distribution businesses conducted by
RERC Corp.'s three unincorporated divisions, Reliant Energy Entex, Reliant
Energy Arkla and Reliant Energy Minnegasco among three separate entities. The
entity that will hold the Reliant Energy Entex assets will also hold RERC
Corp.'s natural gas pipelines and gathering businesses. In addition to
regulatory approvals Reliant Energy has obtained, this restructuring will
require approval of the public service commissions of Louisiana, Mississippi,
Oklahoma and Arkansas.
Although RERC Corp. believes that this business restructuring will be
completed, RERC Corp. can provide no assurance that this will, in fact, occur,
or that CenterPoint will ultimately be exempt from registration under the 1935
Act. For further information on the RERC restructuring, see "Our Business" in
Item 1 of the RERC Corp. Form 10-K.
6
(5) GOODWILL AND INTANGIBLES
In July 2001, the FASB issued SFAS No. 142, which provides for a
nonamortization approach, whereby goodwill and certain intangibles with
indefinite lives will not be amortized into results of operations, but instead
will be reviewed periodically for impairment and written down and charged to
results of operations only in the periods in which the recorded value of
goodwill and certain intangibles with indefinite lives is more than its fair
value. RERC adopted the provisions of the statement which apply to goodwill and
intangible assets acquired prior to June 30, 2001 on January 1, 2002.
With the adoption of SFAS No. 142, RERC ceased amortization of goodwill as
of January 1, 2002. A reconciliation of previously reported net income to the
amounts adjusted for the exclusion of goodwill amortization follows:
THREE MONTHS ENDED MARCH 31,
---------------------------------
2001 2002
-------------- --------------
(IN MILLIONS)
Reported net income......................................................... $ 80 $ 69
Add: Goodwill amortization, net of tax...................................... 12 --
-------------- --------------
Adjusted net income......................................................... $ 92 $ 69
============== ==============
The components of RERC's other intangible assets consist of the following:
DECEMBER 31, 2001 MARCH 31, 2002
------------------------------- ---------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
--------- ------------ -------- ------------
(IN MILLIONS)
Land Use Rights.................................... $ 7 $ (2) $ 7 $ (2)
Other.............................................. 15 (2) 16 (2)
------ ------- ------ -----
Total.............................................. $ 22 $ (4) $ 23 $ (4)
====== ======= ====== =====
RERC recognizes specifically identifiable intangibles when specific rights
and contracts are acquired. RERC amortizes other acquired intangibles on a
straight-line basis over the lesser of their contractual or estimated useful
lives. RERC has no intangible assets with indefinite lives recorded as of March
31, 2002.
Amortization expense for other intangibles for the three months ended March
31, 2001 and 2002 was $0.2 million and $0.3 million, respectively. Estimated
amortization expense for the remainder of 2002 and the five succeeding fiscal
years is approximately $1 million per year.
Goodwill as of March 31, 2002 by reportable business segment is as follows
(in millions):
AS OF
MARCH 31, 2002
--------------
Natural Gas Distribution....... $ 1,085
Pipelines and Gathering........ 601
Other Operations............... 54
--------------
Total........................ $ 1,740
==============
RERC is in the process of determining further effects of adoption of SFAS
No. 142 on its consolidated financial statements, including the review of
goodwill for impairment. RERC has not completed its review pursuant to SFAS No.
142. RERC has retained an outside valuation firm to assist in completion of the
review and will finalize its review of goodwill for its reporting units during
the second quarter of 2002. Any impairment loss resulting from the transitional
impairment test will be recorded retroactively as a cumulative effect of a
change in accounting principle for the quarter ended March 31, 2002. As of March
31, 2002, RERC has completed its assessment of intangible assets and no
indefinite lived intangible assets were identified. No impairment losses were
recorded in the first quarter of 2002 and no changes were made to the expected
useful lives of RERC's intangible assets as a result of this assessment.
7
(6) SHORT-TERM BORROWINGS
RERC Corp. has a receivables facility under which it sells its customer
accounts receivable. Advances under this facility are reflected in the
Consolidated Balance Sheets as short-term debt. In the first quarter of 2002,
RERC reduced its trade receivables facility from $350 million to $150 million.
Borrowings under the receivables facility aggregating $196 million were repaid
in January 2002 with proceeds from the issuance of commercial paper under RERC's
$350 million revolving credit facility and from the liquidation of short-term
investments. At March 31, 2002, RERC Corp. had letters of credit outstanding
under this facility of $2.5 million.
(7) TRUST PREFERRED SECURITIES
A statutory business trust created by RERC Corp. (RERC Trust) has issued
convertible trust preferred securities, the terms of which, and the related
series of convertible junior subordinated debentures, are described below (in
millions):
AGGREGATE LIQUIDATION
AMOUNT
--------------------------- DISTRIBUTION MANDATORY
DECEMBER 31, MARCH 31, RATE/ REDEMPTION DATE/ JUNIOR SUBORDINATED
TRUST 2001 2002 INTEREST RATE MATURITY DATE DEBENTURES
- ------------------------ ----------- --------- ------------- ---------------- ----------------------------
RERC Trust $ 1 $ 1 6.25% June 2026 6.25% Convertible Junior
Subordinated Debentures due
2026
For additional information regarding the convertible preferred securities,
see Note 7 to RERC Corp. 10-K Notes, which is incorporated herein by reference.
The sole asset of the trust consists of convertible junior subordinated
debentures of RERC Corp. having an interest rate and maturity date that
correspond to the distribution rate and mandatory redemption date of the
convertible preferred securities, and a principal amount corresponding to the
common and convertible preferred securities issued by the trust.
(8) COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive
income:
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
2001 2002
---------- ---------------
(IN MILLIONS)
Net income.................................................................. $ 80 $ 69
Other comprehensive income:
Additional minimum non-qualified pension liability adjustment............. 1 --
Cumulative effect of adoption of SFAS No. 133............................. 38 --
Net deferred (loss) gain from cash flow hedges............................ (10) 46
Reclassification of deferred gain (loss) on derivatives realized in net
income.................................................................. (13) 4
--------- ---------
Other comprehensive income.................................................. 16 50
--------- ---------
Comprehensive income........................................................ $ 96 $ 119
========= =========
(9) RELATED PARTY TRANSACTIONS
From time to time, RERC has advanced money to, or borrowed money from,
Reliant Energy or its subsidiaries. As of December 31, 2001 and March 31, 2002,
RERC had net short-term receivables, included in accounts and notes
receivable-affiliated companies, totaling $132 million and $122 million,
respectively, partially offset by net accounts payable of $93 million and $67
million, respectively. As of December 31, 2001 and March 31, 2002, RERC had net
long-term borrowings, included in notes payable - affiliated companies, totaling
$27 million. For the
8
three months ended March 31, 2001 and 2002, RERC had net interest income of $1.7
million and net interest expense of $ 0.1 million, respectively.
In 2001 and 2002, RERC supplied natural gas to Reliant Energy Services,
Inc., now a subsidiary of Reliant Resources. For the three months ended March
31, 2001 and 2002, the sales and services to Reliant Energy and its affiliates
totaled $79 million and $13 million, respectively. Purchases from Reliant Energy
and its affiliates were $302 million and $107 million for the three months ended
March 31, 2001 and 2002, respectively.
Reliant Energy provides some corporate services to RERC, including various
corporate support services (including accounting, finance, investor relations,
planning, legal, communications, governmental and regulatory affairs and human
resources), information technology services and other shared services such as
corporate security, facilities management, accounts receivable, accounts
payable, payroll, office support services, customer care services and purchasing
and logistics. The costs of services have been directly charged or allocated to
RERC using methods that management believes are reasonable. These methods
include negotiated usage rates, dedicated asset assignment, and proportionate
corporate formulas based on assets, operating expenses and employees. These
charges and allocations are not necessarily indicative of what would have been
incurred had RERC been a separate entity. Amounts charged and allocated to RERC
for these services were $7 million and $10 million for the three months ended
March 31, 2001 and 2002, respectively, and are included primarily in operation
and maintenance expenses.
(10) ENVIRONMENTAL MATTERS AND LEGAL PROCEEDINGS
(a) Environmental Matters.
Hydrocarbon Contamination. On August 24, 2001, 37 plaintiffs filed suit
against Reliant Energy Gas Transmission Company, Inc. (REGT), Reliant Energy
Pipeline Services, Inc., RERC, Reliant Energy Services, Inc. (RES), other
Reliant Energy entities and third parties (Docket No. 460, 916-Div. "B"), in the
1st Judicial District Court, Caddo Parish, Louisiana. The petition has now been
supplemented five times. As of May 13, 2002, there were 534 plaintiffs, a
majority of whom are Louisiana residents who live near the Wilcox Aquifer. In
addition to the Reliant Energy entities, the plaintiffs have sued the State of
Louisiana through its Department of Environmental Quality, several individuals,
some of whom are present employees of the State of Louisiana, the Bayou South
Gas Gathering Company, L.L.C., Martin Timber Company, Inc., and several trusts.
The suit alleges that, at some unspecified date prior to 1985, the
defendants allowed or caused hydrocarbon or chemical contamination of the Wilcox
Aquifer which lies beneath property owned or leased by the defendants and which
is the sole or primary drinking water aquifer in the area. The primary source of
the contamination is alleged by the plaintiffs to be a gas processing facility
in Haughton, Bossier Parish, Louisiana known as the "Sligo Facility." This
facility was purportedly used for gathering natural gas from surrounding wells,
separating gasoline and hydrocarbons from the natural gas for marketing, and
transmission of natural gas for distribution. This site was originally leased
and operated by predecessors of REGT in the late 1940s and was operated until
Arkansas Louisiana Gas Company ceased operations of the plant in the late 1970s.
Beginning about 1985, the predecessors of certain Reliant Energy defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they own or lease. This work has been done in
conjunction with and under the direction of the Louisiana Department of
Environmental Quality. The plaintiffs seek monetary damages for alleged damage
to the aquifer underlying their property, unspecified alleged personal injuries,
alleged fear of cancer, alleged property damage or dimunition of value of their
property, and in addition seek damages for trespass, punitive, and exemplary
damages. The quantity of monetary damages sought is unspecified. As of March 31,
2002, RERC is unable to estimate the monetary damages, if any, that the
plaintiffs may be awarded in this matter.
Manufactured Gas Plant Sites. RERC and its predecessors operated a
manufactured gas plant (MGP) until 1960 adjacent to the Mississippi River in
Minnesota, formerly known as Minneapolis Gas Works (MGW). RERC has substantially
completed remediation of the main site other than ongoing water monitoring and
treatment. The manufactured gas was stored in separate holders. RERC 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
9
remaining five sites, RERC believes that two were neither owned nor operated
by RERC. RERC believes it has no liability with respect to the sites it neither
owned nor operated.
At March 31, 2002, RERC had accrued $23 million for remediation of the
Minnesota sites. At March 31, 2002, the estimated range of possible remediation
costs was $11 million to $49 million. The cost estimates of the MGW 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 (PRP), if any, and
the remediation methods used.
Issues relating to the identification and remediation of MGPs are common in
the natural gas distribution industry. RERC has received notices from the United
States Environmental Protection Agency and others regarding its status as a PRP
for other sites. Based on current information, RERC has not been able to
quantify a range of environmental expenditures for potential remediation
expenditures with respect to other MGP sites.
Mercury Contamination. RERC's pipeline and distribution operations have in
the past employed elemental mercury in measuring and regulating equipment. It is
possible that small amounts of mercury may have been spilled in the course of
normal maintenance and replacement operations and that these spills may have
contaminated the immediate area with elemental mercury. This type of
contamination has been found by RERC at some sites in the past, and RERC has
conducted remediation at these sites. It is possible that other contaminated
sites may exist and that remediation costs may be incurred for these sites.
Although the total amount of these costs cannot be known at this time, based on
experience by RERC and that of others in the natural gas industry to date and on
the current regulations regarding remediation of these sites, RERC believes that
the costs of any remediation of these sites will not be material to RERC's
financial position, results of operations or cash flows.
Potentially Responsible Party Notifications. From time to time RERC 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 RERC in activities at these sites, RERC does
not believe that these matters will have a material adverse effect on RERC's
financial position, results of operations or cash flows.
(b) Other Legal Matters.
California Wholesale Market. Reliant Energy, RES, Reliant Energy Power
Generation, Inc. (a wholly owned subsidiary of Reliant Resources) and several
other subsidiaries of Reliant Resources, as well as three officers of some of
these companies, have been named as defendants in class action lawsuits and
other lawsuits filed against a number of companies that own generation plants in
California and other sellers of electricity in California markets. RERC had also
been named as a defendant in one of these actions. Plaintiffs have voluntarily
dismissed Reliant Energy from two of the three class actions in which it was
named as a defendant. Plaintiffs have also voluntarily dismissed RERC from the
one action in which it was named as a defendant.
Natural Gas Measurement Lawsuits. In 1997, a suit was filed under the
Federal False Claim Act against RERC, REGT and Reliant Energy Field Services,
Inc. (REFS) alleging mismeasurement of natural gas produced from federal and
Indian lands. The suit seeks undisclosed damages, along with statutory
penalties, interest, costs, and fees. The complaint is part of a larger series
of complaints filed against 77 natural gas pipelines and their subsidiaries and
affiliates. An earlier single action making substantially similar allegations
against the pipelines was dismissed by the U.S. District Court for the District
of Columbia on grounds of improper joinder and lack of jurisdiction. As a
result, the various individual complaints were filed in numerous courts
throughout the country. This case was consolidated, together with the other
similar False Claim Act cases filed and transferred to the District of Wyoming.
Motions to dismiss were denied. The defendants intend to vigorously contest this
case.
In addition, RERC, REGT, REFS and Mississippi River Transmission
Corporation (MRT) have been named as defendants in a class action filed in May
1999 against approximately 245 pipeline companies and their affiliates. The
plaintiffs in the case purport to represent a class of natural gas producers and
fee royalty owners who allege that they have been subject to systematic gas
mismeasurement by the defendants, including certain Reliant Energy entities, for
more than 25 years. The plaintiffs seek compensatory damages, along with
statutory penalties, treble
10
damages, interest, costs and fees. The action is currently pending in state
court in Stevens County, Kansas. Plaintiffs initially sued RES, but that company
was dismissed without prejudice on June 8, 2001. Other Reliant Energy entities
that were misnamed or duplicative have also been dismissed. MRT and REFS have
filed motions to dismiss for lack of personal jurisdiction and are currently
responding to discovery on personal jurisdiction. All of the defendants have
joined in a motion to dismiss.
The defendants plan to raise significant affirmative defenses based on the
terms of the applicable contracts, as well as on the broad waivers and releases
in take or pay settlements that were granted by the producer-sellers of natural
gas who are putative class members.
Other. RERC 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 effects, if any, from the disposition of these matters will not have a
material adverse effect on RERC's financial position, results of operations or
cash flows.
(11) REPORTABLE BUSINESS SEGMENTS
Because RERC Corp. is a wholly owned subsidiary of Reliant Energy, RERC's
determination of reportable business 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.
RERC's reportable business segments include the following: Natural Gas
Distribution, Pipelines and Gathering and Other Operations. For descriptions of
the reportable business segments, see Note 13 to the RERC Corp. 10-K Notes,
which is incorporated herein by reference.
Beginning in the first quarter of 2002, RERC began to evaluate performance
on an earnings (loss) before interest expense, interest income and income taxes
(EBIT) basis. Prior to 2002, RERC evaluated performance on operating income.
EBIT, as defined, is shown because it is a widely accepted measure of financial
performance used by analysts and investors to analyze and compare companies on
the basis of operating performance. EBIT is not defined under accounting
principles generally accepted in the United States (GAAP), and should not be
considered in isolation or as a substitute for a measure of performance prepared
in accordance with GAAP and is not indicative of operating income from
operations as determined under GAAP. Reportable business segments from previous
years have been restated to conform to the 2002 presentation.
The following table summarizes financial data for the reportable business
segments:
AS OF
DECEMBER 31,
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2001
----------------------------------------------- ---------------
REVENUES FROM
THIRD PARTIES NET
AND NON-RERC INTERSEGMENT
AFFILIATES REVENUES EBIT TOTAL ASSETS
------------- ------------ ------------- ------------
(IN MILLIONS)
Natural Gas Distribution............... $ 2,269 $ 54 $ 137 $ 3,732
Pipelines and Gathering................ 75 55 39 2,361
Other Operations....................... -- -- 1 495
Reconciling Eliminations............... -- (109) -- (599)
Sales to Non-RERC Affiliates........... 79 -- -- --
----------- ----------- ------------- -------------
Consolidated........................... $ 2,423 $ -- $ 177 $ 5,989
=========== =========== ============= =============
11
AS OF
MARCH 31,
FOR THE THREE MONTHS ENDED MARCH 31, 2002 2002
----------------------------------------------- ---------------
REVENUES FROM
THIRD PARTIES NET
AND NON-RERC INTERSEGMENT
AFFILIATES REVENUES EBIT TOTAL ASSETS
------------- ------------ ----------- ------------
(IN MILLIONS)
Natural Gas Distribution............... $ 1,178 $ 2 $ 110 $ 3,589
Pipelines and Gathering................ 51 41 38 2,362
Other Operations....................... -- -- 1 90
Reconciling Eliminations............... -- (43) (3) (217)
Sales to Non-RERC Affiliates........... 13 -- -- --
----------- ----------- -------- -----------
Consolidated........................... $ 1,242 $ -- $ 146 $ 5,824
=========== =========== ======== ===========
Reconciliation of Operating Income to EBIT and EBIT to Net Income:
FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------
2001 2002
------------------ -------------------
(IN MILLIONS)
Operating Income.......................................................... $ 174 $ 143
Other Income, net......................................................... 3 3
-------- ------
Earnings Before Interest and Taxes........................................ 177 146
Interest Expense.......................................................... (38) (36)
-------- ------
Income Before Income Taxes ............................................... 139 110
Income Tax Expense........................................................ (59) (41)
-------- ------
Net Income................................................................ $ 80 $ 69
========= =======
12
MANAGEMENT'S NARRATIVE ANALYSIS OF
THE RESULTS OF OPERATIONS OF RELIANT ENERGY RESOURCES CORP. AND SUBSIDIARIES
The following narrative analysis should be read in combination with RERC
Corp.'s Interim Financial Statements and notes contained in this Form 10-Q.
Reliant Energy, Incorporated (Reliant Energy) is in the process of
separating its regulated and unregulated businesses into two publicly traded
companies. In December 2000, Reliant Energy transferred a significant portion of
its unregulated businesses to Reliant Resources, Inc. (Reliant Resources),
which, at the time, was a wholly owned subsidiary of Reliant Energy. Reliant
Resources conducted an initial public offering (Offering) of approximately 20%
of its common stock in May 2001. In December 2001, Reliant Energy's shareholders
approved an agreement and plan of merger by which, subject to regulatory
approvals, the following will occur (which we refer to herein as the
Restructuring):
o CenterPoint Energy, Inc. (CenterPoint Energy) will become the holding
company for the Reliant Energy group of companies;
o Reliant Energy and its subsidiaries will become subsidiaries of
CenterPoint Energy; and
o each share of Reliant Energy common stock will be converted into one
share of CenterPoint Energy common stock.
After the Restructuring, Reliant Energy plans, subject to further corporate
approvals, market and other conditions, to complete the separation of its
regulated and unregulated businesses by distributing the shares of common stock
of Reliant Resources that Reliant Energy owns to its shareholders (which we
refer to herein as the Distribution). Reliant Energy's goal is to complete the
Restructuring and subsequent Distribution as quickly as possible after all the
necessary conditions are fulfilled, including receipt of an order from the
Securities and Exchange Commission (SEC) granting the required approvals under
the Public Utility Holding Company Act of 1935 (1935 Act) and an extension from
the Internal Revenue Service of a private letter ruling that Reliant Energy has
obtained regarding the tax-free treatment of the Distribution. Reliant Energy
believes it will receive the necessary approvals. RERC currently expects Reliant
Energy to complete the Restructuring and Distribution in the summer of 2002.
However, until regulatory approvals are received, no assurance can be provided
that the Distribution will occur as described above or that it will occur within
this time period. Upon receipt of approval under the 1935 Act, CenterPoint
Energy expects to register and become subject, with its subsidiaries, to
regulation as a registered holding company system under the 1935 Act.
Thereafter, in order to enable CenterPoint Energy ultimately to comply with
the requirements for exemption from registration in Section 3(a)(1) of the 1935
Act, Reliant Energy plans to divide the gas distribution businesses conducted by
RERC Corp.'s three unincorporated divisions, Reliant Energy Entex, Reliant
Energy Arkla and Reliant Energy Minnegasco among three separate entities.
The entity that will hold the Reliant Energy Entex assets will also hold RERC
Corp.'s natural gas pipelines and gathering businesses. In addition to
regulatory approvals Reliant Energy has obtained, this restructuring will
require approval of the public service commissions of Louisiana, Mississippi,
Oklahoma and Arkansas.
Although RERC Corp. believes that this business restructuring will be
completed, RERC Corp. can provide no assurance that this will, in fact, occur,
or that CenterPoint will ultimately be exempt from registration under the 1935
Act. For further information on the RERC restructuring, see "Our Business" in
Item 1 of the RERC Corp. Form 10-K.
RERC Corp. meets the conditions specified in General Instruction H(1)(a)
and (b) to Form 10-Q and is therefore permitted to use the reduced disclosure
format for wholly owned subsidiaries of reporting companies. Accordingly, RERC
Corp. has omitted from this report the information called for by Item 3
(Quantitative and Qualitative Disclosures 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 RERC between the
first quarter of 2002 and the first quarter of 2001. Reference is made to
Management's Narrative Analysis of the Results of Operations of Reliant Energy
Resources Corp. and its Subsidiaries in Item 7 of the RERC Corp. Form 10-K.
13
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2001 2002
------------------ -------------------
(IN MILLIONS)
Operating Revenues.......................................................... $ 2,423 $ 1,242
Operating Expenses.......................................................... (2,249) (1,099)
--------- ---------
Operating Income, net....................................................... 174 143
Other Income, net........................................................... 3 3
--------- ---------
Earnings Before Interest and Taxes.......................................... 177 146
Interest Expense ........................................................... (38) (36)
--------- ---------
Income before income taxes.................................................. 139 110
Income Tax Expense.......................................................... (59) (41)
--------- ---------
Net Income................................................................ $ 80 $ 69
========= =========
For the three months ended March 31, 2002, RERC's net income was $69
million compared to net income of $80 million for the same period in 2001. The
$11 million decrease was primarily due to significantly milder weather and
decreased usage in 2002 as compared to 2001 and related decreases in forfeited
discounts and late payment fees experienced by our Natural Gas Distribution
business segment. This decrease was partially offset by decreased amortization
expense of approximately $12 million as a result of the discontinuance of
goodwill amortization in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, "Accounting for Goodwill and Intangible Assets" (SFAS
No. 142). For additional information on the adoption of SFAS No. 142, please
read Note 5 to RERC's Interim Financial Statements.
RERC's operating revenues for the three months ended March 31, 2002 were
$1.2 billion compared to $2.4 billion for the same period in 2001. The $1.2
billion, or 48.7%, decrease was primarily due to significantly milder weather,
decreased usage and lower gas prices in 2002 as compared to 2001.
RERC's operating expenses for the three months ended March 31, 2002 were
$1.1 billion compared to $2.2 billion for the same period in 2001. The $1.1
billion, or 51.1% decrease, was primarily due to the same reasons for the
decrease in revenues discussed above.
RERC's effective tax rate in first quarter of 2002 was 37.0% compared to
42.3% in the same period in 2001. This decrease was primarily due to a decrease
in state income taxes in 2002 as compared to 2001 and the discontinuance of
goodwill amortization in accordance with SFAS No. 142.
Seasonality and Other Factors. RERC's results of operations are affected by
seasonal fluctuations in the demand for and, to a lesser extent, the price of
natural gas. RERC's results of operations are also affected by, among other
things, the actions of various federal and state governmental authorities having
jurisdiction over rates charged by RERC, competition in RERC's various business
operations, debt service costs and income tax expense.
For a discussion of certain other factors that may affect RERC's future
earnings please read "Management's Narrative Analysis of the Results of
Operations of Reliant Energy Resources Corp. and its Consolidated Subsidiaries
- -- Certain Factors Affecting Our Future Earnings -- Factors Affecting the
Results of RERC Operations" in the RERC Form 10-K, which information is
incorporated herein by reference.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting RERC, please review Note
10 to RERC's Interim Financial Statements, Item 3 of the RERC Corp. Form 10-K
and Note 10 to the RERC Corp. 10-K Notes, which are incorporated herein by
reference.
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements. From time to time, RERC Corp. makes statements
concerning its expectations, beliefs, plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements,
which are not historical facts. These statements are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Actual results may differ materially from those expressed or implied by
these statements. You can generally identify the forward-looking statements by
the words "anticipate," "believe," "continue," "could," "estimate," "expect,"
"intend," "may," "plan," "potential," "predict," "should," "will," "forecast,"
"goal," "objective," "projection," or other similar words.
RERC Corp. has based its forward-looking statements on its management's
beliefs and assumptions based on information available to its management at the
time the statements are made. RERC Corp. cautions you that assumptions, beliefs,
expectations, intentions and projections about future events may and often do
vary materially from actual results. Therefore, RERC Corp. cannot assure you
that actual results will not differ materially from those expressed or implied
by its forward-looking statements.
The following are some of the factors that could cause actual results to
differ materially from those expressed or implied in forward-looking statements:
o state, federal and international legislative and regulatory developments
and changes in, or application of environmental, siting and other laws
and regulations to which RERC Corp. is subject;
o timing of the implementation of our parent company's business separation
plan, including the receipt of necessary approvals from the Securities
and Exchange Commission and an extension relating to a private letter
ruling from the Internal Revenue Service;
o the effects of competition, including the extent and timing of the entry
of additional competitors in our markets;
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;
o the timing and extent of changes in commodity prices, particularly
natural gas;
o weather variations and other natural phenomena;
o political, legal and economic conditions and developments in the United
States;
o financial market conditions and the results of our financing efforts;
o any direct or indirect effect on our business resulting from the
September 11, 2001 terrorist attacks or any similar incidents or
responses to such incidents; and
o other factors we discuss in the RERC Corp. Form 10-K, including those
outlined in "Management's Narrative Analysis of Results of Operations of
Reliant Energy Resources Corp. and its Consolidated Subsidiaries --
Certain Factors Affecting Our Future Earnings."
15
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and RERC Corp. undertakes no obligation to publicly update or revise
any forward-looking statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 99 Items incorporated by reference from the RERC Corp.
Form 10-K: Item 3 "Legal Proceedings," Item 7
"Management's Narrative Analysis of the Results of
Operations of Reliant Energy Resources Corp. and its
Consolidated Subsidiaries" and Notes 3(f) (Regulatory
Assets), 5 (Derivative Instruments), 7 (Trust Preferred
Securities), 10 (Commitments and Contingencies) and 13
(Reportable Segments) of the RERC Corp. 10-K Notes.
(b) Reports on Form 8-K.
None.
16
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/ R. Steve Letbetter
-------------------------------
R. Steve Letbetter
Chairman, President and Chief
Executive Officer (Principal
Executive Officer and Principal
Financial Officer)
Date: May 15, 2002
17
