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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 001-15891
NRG ENERGY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1724239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 MARQUETTE AVENUE 55402
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal executive offices)
(612) 373-5300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common stock -- $.01 par value (Listed on the New York Stock Exchange)
Corporate Units -- (Listed on the New York Stock Exchange)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports 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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT WAS $659,505,775 AT MARCH 19, 2002.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT MARCH 19, 2002
---------------------------------------- --------------------------------------
Class A - Common Stock, $0.01 par value 147,604,500 shares
Common Stock, $0.01 par value 51,084,878 shares
Documents Incorporated by Reference: None.
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NRG ENERGY, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 22
Item 3 Legal Proceedings........................................... 26
Item 4 Submission of Matters to a Vote of Security Holders......... 28
PART II
Item 5 Market Price for the Registrant's Common Equity and Related
Stockholder Matters....................................... 28
Item 6 Selected Financial Data..................................... 29
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Item 7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 49
Item 8 Financial Statements and Supplementary Data................. 50
Item 9 Changes in & Disagreements with Accountants on Accounting
and Financial Disclosures................................. 94
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 94
Item 11 Executive Compensation...................................... 97
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 108
Item 13 Certain Relationships and Related Transactions.............. 109
PART IV
Item 14 Exhibits, Financial Statements Schedules and Reports on Form
8-K....................................................... 112
SIGNATURES............................................................. 118
PART I
ITEM 1 -- BUSINESS
GENERAL
NRG Energy, Inc. (NRG Energy or the Company) is a leading global energy
company, primarily engaged in the acquisition, development, ownership, and
operation of power generation facilities and the sale of energy, capacity and
related products in the United States and internationally. NRG Energy believes
it is one of the three largest independent power generation companies in the
world, measured by its net ownership interest in power generation facilities. As
of December 31, 2001, NRG Energy owned all or a portion of 76 generation
projects, including projects under construction, that have a total generating
capacity of 38,388 megawatts (MW). Its current net ownership interest in those
projects is 24,357 MW, of which 19,077 MW are located in the United States.
As the following table illustrates, NRG Energy has grown significantly
during recent years, primarily as a result of its success in acquiring domestic
power generation facilities:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999 2000 2001 CAGR
------- ------- -------- -------- -------- ----
(IN THOUSANDS, EXCEPT MW DATA)
Net Ownership Interest
(In MW at end of period)(1)..... 2,637 3,300 10,990 15,007 24,357 74%
Operating Income................ $18,109 $57,012 $109,520 $573,073 $714,822 151%
EBITDA(2)....................... $39,790 $82,711 $161,516 $692,548 $954,835 121%
Net Income...................... $21,982 $41,732 $ 57,195 $182,935 $265,204 86%
---------------
(1) Includes projects under construction; MW under construction for the years
1997, 1998, 1999, 2000 and 2001 were 616, 284, 252, 747, and 4,775,
respectively.
(2) EBITDA is the sum of income (loss) before income taxes, interest expense
(net of capitalized interest) and depreciation and amortization expense.
EBITDA is a measure of financial performance not defined under generally
accepted accounting principles, which should not be considered in isolation
or as a substitute for net income, cash flows from operations or other
income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. In addition, EBITDA as calculated by NRG Energy may not be
comparable to similarly titled measures presented by other companies, and
therefore could be misleading because all companies and analysts do not
calculate it in the same fashion.
NRG Energy has experienced significant growth in the last year, expanding
from 15,007 MW of net ownership interests in power generation facilities
(including those under construction) as of December 31, 2000, to 24,357 MW of
net ownership interests as of December 31, 2001. NRG Energy has a well
diversified portfolio in terms of location, fuel and dispatch mode.
NRG Energy is organized into four regionally-based divisions: NRG North
America, based in Minneapolis, Minnesota; NRG Europe, based in London; NRG
Asia-Pacific based in Brisbane, Australia and NRG Latin America, based in Miami,
Florida. Most of NRG Energy's North American projects are grouped under regional
holding companies corresponding to their domestic core market. NRG Energy
operates its generation facilities within each region as a separate operating
unit within its power generation business. This regional portfolio structure
allows NRG Energy to coordinate the operations of its assets to take advantage
of regional opportunities, reduce risks related to outages, whether planned or
unplanned, and pursue expansion plans on a regional basis.
NRG Energy's international power generation projects are managed as three
distinct markets, Asia-Pacific, Europe and Other Americas.
1
In addition to NRG Energy's power generation projects, NRG Energy also has
interests in district heating and cooling systems and steam transmission
operations.
NRG Energy intends to continue its growth through a combination of targeted
acquisitions in selected core markets, the expansion or repowering of existing
facilities and the development of new greenfield projects. However, in the short
term, recognizing market conditions, NRG Energy anticipates that its growth
level will be lower than in recent years. As of December 31, 2001, NRG Energy
had signed agreements to acquire an additional 3,571 MW of net ownership
interest in existing generation projects. Currently, NRG Energy has scheduled
expansion, repowering or greenfield generation projects that would add 5,308 MW
of net ownership interest.
NRG Energy has also expanded its power marketing activities, which allow
NRG Energy to optimize the value of its power generation assets and enable it to
better meet its customers' energy requirements. By linking NRG Energy's
capabilities and access to fuel supplies with its power marketing and risk
management expertise, NRG Energy believes that it effectively manages risk, and
has secured and will continue to secure favorable pricing for its fuel purchases
and power sales.
NRG Energy was incorporated as a Delaware corporation on May 29, 1992. Its
headquarters and principal executive offices are located at 901 Marquette
Avenue, Suite 2300, Minneapolis, Minnesota 55402. NRG Energy's telephone number
is (612) 373-5300.
On June 5, 2000, NRG Energy completed its initial public offering. Prior to
its initial public offering, NRG Energy was a wholly owned subsidiary of
Northern States Power (NSP). In August 2000, NSP merged with New Century
Energies, Inc. (NCE), a Colorado-based public utility holding company. The
surviving corporation in the merger was renamed Xcel Energy Inc. (Xcel Energy),
and the shares of NRG Energy's class A common stock previously owned by NSP are
now owned by a wholly-owned subsidiary of Xcel Energy. As of December 31, 2000,
Xcel Energy indirectly owned an 82% interest in NRG Energy's outstanding common
and class A common stock, representing 98% of the total voting power of NRG
Energy's common stock and class A common stock. Xcel Energy directly owns six
utility subsidiaries that serve electric and natural gas customers in 12 states.
Xcel Energy also owns or has interest in a number of nonregulated businesses,
the largest of which is NRG Energy.
In March 2001, NRG Energy completed a public offering of 18.4 million
shares of its common stock. Following this offering, Xcel Energy indirectly owns
a 74% interest in NRG Energy's common stock and class A common stock,
representing 96.7% of the total voting power of NRG Energy's common stock and
class A common stock.
XCEL ENERGY EXCHANGE OFFER
In February 2002, Xcel Energy announced its intention to commence an
exchange offer by which Xcel Energy would acquire all of the outstanding
publicly held shares of NRG Energy. In its announcement, Xcel Energy stated its
intention to close the transaction in April 2002, and stated that NRG Energy
shareholders would receive 0.4846 shares of Xcel Energy common stock in a
tax-free exchange for each outstanding share of NRG Energy common stock.
After completion of the merger, NRG Energy would be an indirect, wholly
owned subsidiary of Xcel Energy. NRG Energy's debt and other obligations will
continue to be the sole obligation of NRG Energy.
On March 13, 2002, Xcel Energy filed a registration statement on Form S-4
with the Securities and Exchange Commission and commenced the exchange offer. In
its registration statement, Xcel Energy stated that, if the exchange offer and
merger are completed, its plans for NRG Energy in 2002 include: infusing an
additional $300 million of equity into NRG Energy, in addition to an initial
loan of $300 million recently made to NRG Energy; slowing NRG Energy's growth in
megawatt capacity and the possible sale of $1.9 billion of existing generating
assets; canceling or deferring approximately $1.6 billion of planned projects;
and beginning the process of selling unassigned turbines and deferring
installment of additional unassigned turbines.
2
In addition, Xcel Energy stated in its registration statement that if the
offer and merger are completed and its plans for NRG Energy are implemented, it
expects to reduce NRG Energy's business development activities and
administrative and general costs, with annual estimated cost savings of
approximately $45 million, and to capture infrastructure savings by
consolidating trading and marketing organizations, where appropriate.
MARKET OPPORTUNITY
The power industry is one of the largest industries in the world,
accounting for approximately $225 billion in annual revenues and approximately
830,000 MW of installed generating capacity in the United States alone. The
generation segment of the industry historically has been characterized by
regulated electric utilities producing and selling electricity to a captive
customer base. However, the power generation market has been evolving from a
regulated market based on cost of service pricing to a competitive market. In
response to increasing customer demand for access to low-cost electricity and
enhanced services, new regulatory initiatives have been and are continuing to be
adopted to increase competition in the power industry.
Outside of the United States, governments in developed economies are
privatizing their utilities and developing regulatory structures that are
expected to encourage competition in the electricity sector, having realized
that their energy assets can be sold to raise capital without hindering system
reliability. In developing countries, the demand for electricity is expected to
grow rapidly. In order to satisfy this anticipated increase in demand, many
countries have adopted active government programs designed to encourage private
investment in power generation facilities. NRG Energy believes that these market
trends will continue to create opportunities to acquire and develop power
generation facilities globally.
STRATEGY
NRG Energy's vision has been to be a leading global generation company with
a top three position in selected core markets, which provides superior
performance to all stakeholders. Central to this vision is the development and
management of diverse regional portfolios of competitive power generating
facilities. This diversity incudes geographic location, fuel type and dispatch
profile. Currently, approximately 78% of NRG Energy's net MW of generation in
operation and under construction is located in the United States in five core
markets: Northeast, South Central and West Coast regions and the recently added
North Central and Mid Atlantic regions. With NRG Energy's diversified asset
base, NRG Energy seeks to have generating capacity available to back up any
given facility during its outages, whether planned or unplanned, while having
ample resources to take advantage of peak power market price opportunities and
periods of constrained availability of generating capacity, fuels and
transmission. NRG Energy's primary focus has been on generation assets powered
primarily by natural gas, coal, oil and to a lesser extent landfill gas, hydro,
refuse derived fuel and biomass technologies.
NRG Energy's strategy is to capitalize on its acquisition, development,
construction and operating skills to build a balanced portfolio of power
generation assets. NRG Energy intends to implement this strategy by continuing a
disciplined acquisition program, recognizing current market conditions. NRG
Energy believes that its facility operations and engineering expertise, fuel and
environmental strategies, labor and governmental relations expertise, legal and
financial skills give it a competitive advantage in the independent power
market.
NORTH AMERICAN POWER GENERATION
While NRG Energy expects the North American power generation market to
continue to evolve from a regulated, utility dominated market based upon
cost-of-service pricing to an independent power generation market based on
competitive market pricing, the pace of this evolution slowed in 2001 as a
result of the energy crisis in California, and more recently, the Enron
bankruptcy. Most domestic generation capacity is still utility owned and subject
to cost-of-service regulation. NRG Energy expects the evolution to continue as
non-regulated power generators build new capacity to meet demand, but, in view
of current market and forward
3
prices, and the credit and liquidity constraints reported by many competitive
power producers in recent months, NRG Energy expects such new capacity
development to be less than has been forecast.
Most of NRG Energy's North American projects are grouped under regional
holding companies corresponding to their domestic core markets. In order to
better manage NRG Energy's North American projects and to develop new projects
in these regions more effectively, NRG Energy has established regional offices
in Pittsburgh, Pennsylvania (Northeast region), Baton Rouge, Louisiana (South
Central region) and San Diego, California (West Coast region). NRG Energy's
recently added North Central and Mid Atlantic regions are managed from its
Minneapolis headquarters and Wilmington, Delaware offices, respectively.
NRG Energy operates its generation facilities within each region as a
separate operating unit within its power generation business. This regional
portfolio structure allows NRG Energy to coordinate the operations of its assets
to take advantage of regional opportunities, reduce risks related to outages,
whether planned or unplanned, and pursue expansion plans on a regional basis.
NORTHEAST REGION
As of December 31, 2001, NRG Energy owned approximately 7,676 MW of net
generating capacity (including projects under construction) in the Northeast
United States and Canada, primarily in New York, Connecticut and Massachusetts.
These generation facilities are well diversified in terms of dispatch level
(base-load, intermediate and peaking), fuel type (coal, natural gas and oil) and
customers. In addition, NRG Energy believes certain of its facilities and
facility sites in the Northeast provide opportunities for repowering or
expanding existing generating capacity.
NRG Energy's Northeast facilities are generally competitively positioned
within their respective market dispatch levels with favorable market dynamics
and locations close to the major load centers in the New York Power Pool (NYPP)
and New England Power Pool (NEPOOL).
SOUTH CENTRAL REGION
As of December 31, 2001, NRG Energy owned approximately 4,716 MW of net
generating capacity (including projects under construction) in the South Central
United States, primarily in Louisiana, Oklahoma, Texas and Mississippi. NRG
Energy's South Central generating assets consist primarily of its net ownership
of 1,947 MW of power generation facilities in New Roads, Louisiana (which are
referred to as the Cajun facilities) that were acquired in March 2000 and the
recently completed Big Cajun Peakers (238 MW). The South Central region also
includes the Sterlington (202 MW), McClain (400 MW), Batesville (837 MW),
Mustang (122 MW), and Sabine River (210 MW) generating facilities. In addition,
the Bayou Cove (320 MW) and Brazos Valley (633 MW) facilities are under
construction. The construction of the following additional facilities with a net
generating capacity of 2,680 MW is planned: Kaufman (545 MW), Batesville
expansion (292 MW), Big Cajun II, Unit 4 (675 MW) and Pike (1,168 MW).
WEST COAST REGION
As of December 31, 2001, NRG Energy owned approximately 1,596 MW of net
generating capacity on the West Coast of the United States, primarily California
and Nevada. NRG Energy's West Coast generation assets consist primarily of a 50%
interest in West Coast Power LLC (West Coast Power), a 58% interest in the
Crockett Cogeneration facility (138 MW)and a 50% interest in the Saguaro
generation facility (53 MW). In May 1999, Dynegy Power Corporation (Dynegy) and
NRG Energy formed West Coast Power to serve as the holding company for a
portfolio of operating companies that own generation assets in Southern
California. This portfolio currently is comprised of the El Segundo Generating
Station (510 MW), the Long Beach Generating Station (265 MW), the Encina
Generating Station (483 MW) and 17 combustion turbines in the San Diego area
(127 MW). Dynegy provides power marketing and fuel procurement services to West
Coast Power, and NRG Energy provides operations and management services. NRG
Energy believes certain of its facilities and facility sites on the West Coast
provide opportunities for repowering or expanding generating capacity.
4
NORTH CENTRAL REGION
As of December 31, 2001, NRG Energy owned approximately 3,706 MW of net
generating capacity in the north central United States, primarily in Illinois,
Missouri and Michigan. NRG Energy's North Central portfolio includes the 640 MW
simple cycle, gas-fired Audrain power generation facility, located in Vandalia,
Missouri. In August 2001, NRG Energy purchased a project portfolio from Indeck
Energy Services which includes the Rockford I (342 MW) and Rockford II (171 MW)
Energy Centers, located 75 miles west of Rockford, Illinois. Rockford II is
currently under construction with commercial operation expected in June 2002.
Other North Central projects in operation include Rocky Road (175 MW), Morris
Cogeneration (23 MW) and Cadillac Renewable Energy (19 MW). Two additional
projects in Illinois currently under construction will add 1,168 MW each to NRG
Energy's North Central portfolio. Kendall is estimated to be in commercial
operation in May 2002, and Nelson in the third quarter of 2003.
MID-ATLANTIC REGION
As of December 31, 2001, NRG Energy owned approximately 1,199 MW of net
generating capacity in the Mid-Atlantic region of the United States, primarily
Delaware, Maryland, Ohio and Pennsylvania. In June 2001, NRG Energy completed
the acquisition of approximately 1,081 MW of operational generating facilities
from Conectiv. In January 2002, NRG Energy closed the acquisition of the
Commonwealth Atlantic generating facility (188 MW) and the James River
generating facility (55 MW) from Edison Mission and expects to close on the
FirstEnergy acquisition of approximately 2,535 MW of generating facilities
during the second quarter of 2002.
COMPETITIVE POWER GENERATION -- INTERNATIONAL
Historically, the majority of power generating capacity outside of the
United States has been owned and controlled by governments. During the past
decade, however, many foreign governments moved to privatize power generation
plant ownership through sales to third parties and by encouraging new capacity
development and refurbishment of existing assets by independent power
developers. Governments have taken a variety of approaches to encourage the
development of competitive power markets, from awarding long-term contracts for
energy and capacity to purchasers of power generation to creating competitive
wholesale markets for selling and trading energy, capacity and related products.
NRG Energy has taken advantage of opportunities to invest in attractive
projects in international markets. To manage NRG Energy's international asset
portfolio risks, NRG Energy utilizes a portfolio risk management discipline
based upon country risk, as identified by an independent, internationally
recognized organization. Using this tool, NRG Energy is able to monitor the
exposure it is taking in emerging markets to maintain an appropriate balance in
its asset portfolio. NRG Energy's international power generation projects are
managed as three distinct markets, Asia Pacific, Europe and Other Americas.
ASIA PACIFIC
NRG Energy is one of the largest competitive power producers in Australia
and, with its 2001 acquisitions in Taiwan and India, now has a net ownership
interest of 2,297 MW, as of December 31, 2001, in power generation facilities.
EUROPE
NRG Energy is a participant in the competitive power generation markets in
Germany, the Czech Republic, the United Kingdom, and Hungary. As of December 31,
2001, NRG Energy has a net ownership interest of 1,854 MW in power generation
facilities (including projects under construction) in Europe. During 2001, NRG
Energy increased its ownership interest in the MIBRAG and Schkopau projects in
April 2001, both of which are located in Germany and completed its acquisition
of the Csepel facility located in Hungary in June 2001.
5
OTHER AMERICAS
NRG Energy has pursued acquisition and development opportunities in Latin
America since the mid-1990s. Initially, NRG Energy participated as one of four
original sponsors of the Latin Power Fund, a private equity investment fund
managed by Scudder. As of December 31, 2001, NRG Energy has ownership of 1,107
MW in Latin America. NRG Energy currently owns and operates 270 MW of hydro and
thermal electric operating assets in Bolivia and is the second largest generator
in that country. Similarly, NRG Energy owns and operates 111 MW of hydro and
thermal electric operating assets in Peru. NRG Energy owns a 99% interest in a
156 MW hydro facility under construction in Brazil set to enter commercial
operation in the third quarter 2002. In addition, NRG Energy recently formed a
partnership venture with Petrobras Brazileros SA, the large state owned
Brazilian oil company, to construct, own and operate a 1,040 MW gas-fired
thermal facility in which it will own a 50% share. The TermoRio Project,
currently under construction, is expected to enter full commercial operations in
March 2004.
ALTERNATIVE ENERGY
NRG Energy provides alternative energy through NEO Corporation (NEO), one
of the largest landfill gas generation companies in the United States, and NRG
Resource Recovery, which processes municipal solid waste as fuel used to
generate power.
NEO CORPORATION
NEO is a wholly owned subsidiary of NRG Energy that was formed to develop
power generation facilities, ranging in size from 1 to 50 MW, in the United
States. NEO is currently focusing on the development and acquisition of
distributed generation and peaking facilities and the acquisition of small
hydroelectric projects. NEO owns and operates 31 landfill gas collection systems
and has 46 MW of net ownership interests in related electric generation
facilities utilizing landfill gas as fuel. NEO also has 42 MW of net ownership
interests in 18 hydroelectric facilities and 109 MW of net ownership interests
in seven distributed generation facilities. The company's operations are located
primarily in the east and west coast regions of the United States. NEO derives a
substantial portion of its income as a result of the generation of Section 29
tax credits, which, for 2001, totaled $48.6 million. The existing tax law
authorizing these credits is scheduled to expire after 2007.
RESOURCE RECOVERY FACILITIES
NRG Energy's Resource Recovery business is focused on owning and operating
alternative fuel/"green power" generation and fuels processing projects. The
alternative fuels currently processed and combusted are municipal solid waste
(MSW), of which more than 90% is processed into refuse derived fuel (RDF), urban
wood waste (pallets, clean construction debris, etc.), forest industry waste
wood (bark, sawmill waste, tree trimmings, etc.), agricultural waste (walnut
shells, olive pits, peanut shells, etc.), and non-recyclable waste paper and
compost. Processing and recovery for generation into electricity and other
products is an environmentally superior method of waste management when compared
to adding to existing or creating new landfills. NRG Energy's Resource Recovery
business has MSW processing capacity of over 4,000 tons per day and generation
capacity of 35 MW, of which its net ownership interest is 26 MW.
NRG Energy's Resource Recovery business owns and operates MSW processing
and/or generation facilities in Maine and Minnesota. This business also owns and
operates a biomass fired generation facility in Florida and a wood processing
facility in Georgia, which supplies a portion of the biomass fuel to the power
plant in Florida. In addition to the fuels processing and generation portfolio,
Resource Recovery owns and operates several mono-ash landfills that receive ash
from the biomass and waste-to-energy power plants that are owned and operated.
Resource Recovery also owns and operates NRG Processing Solutions that includes
thirteen composting and biomass fuel processing sites in Minnesota of which
three sites are permitted to operate as MSW transfer stations. A majority of
Resource Recovery's facilities are under long-term contract for either the fuel
processing and/or its generation capacity.
6
THERMAL
NRG Energy has interests in district heating and cooling systems and steam
transmission operations. NRG Energy's thermal and chilled water businesses have
a steam and chilled water capacity equivalent to approximately of 1,641 MWt, of
which its net ownership interest is 1,514 MWt.
NRG Energy owns and operates, through its holding company NRG Thermal
Corporation, five district heating and cooling systems in Minneapolis,
Minnesota, San Francisco, California, Pittsburgh, Pennsylvania, Harrisburg,
Pennsylvania and San Diego, California. These systems provide steam heating to
approximately 600 customers and chilled water to 90 customers. In addition, NRG
Energy's thermal division operates five projects that serve
industrial/government customers with high-pressure steam and hot water. NRG
Thermal also owns and operates an 88 MW combustion turbine peaking generation
facility and an 18 MW coal-fired cogeneration facility in Dover, Delaware.
POWER MARKETING
NRG Energy's energy marketing subsidiary, NRG Power Marketing, Inc. (NRG
Power Marketing), began operations in 1998 to maximize the utilization of and
return from its domestic generation assets and to mitigate the risks associated
with those assets. This subsidiary markets energy and energy related
commodities, including electricity, natural gas, oil, coal and emission
allowance credits. By using internal resources to acquire fuel and market
electricity, NRG Energy believes it can secure the best pricing available in the
markets in which it sells power and enhance its ability to compete. NRG Power
Marketing provides a full range of energy management services for NRG Energy's
generation facilities in its Northeast, South Central, North Central and Mid
Atlantic regions. These services are provided under power sales and agency
agreements pursuant to which NRG Power Marketing manages the sales and marketing
of energy, capacity and ancillary services from these facilities and also
manages the purchase and sale of fuel and emission allowance credits needed to
operate these facilities.
NRG Energy is very disciplined in its approach to power marketing risk
management. NRG Power Marketing conducts its activities in accordance with risk
management guidelines approved by the NRG Power Marketing Board of Directors,
which has primary responsibility for oversight of NRG Power Marketing
activities. Accordingly, NRG Energy has established counter-party concentration
limits and portfolio VaR limits. NRG Energy's risk management guidelines require
that its treasury department perform a credit review and approve all
counter-parties and credit limits prior to NRG Power Marketing entering into a
transaction with such counter-parties. NRG Energy attempts to balance its
fixed-price physical and financial purchases and sales commitments in terms of
contract volumes and the timing of performance and delivery obligations.
However, uncovered market positions are taken within guidelines established by
the board of directors of NRG Power Marketing. Contracts for the transmission
and transportation of these commodities are also authorized, as necessary, in
order to meet physical delivery requirements and obligations.
HOW NRG ENERGY SELLS ITS GENERATING CAPACITY AND ENERGY
NRG Energy's operating revenues are derived primarily from the sale of
electrical energy, capacity and other energy products from its power generation
facilities. Revenues from these facilities are received pursuant to:
- long-term contracts of more than one year including:
- power purchase agreements with utilities and other third parties
(generally 2-25 years);
- standard offer agreements to provide load serving entities with a
percentage of their requirements (generally 4-9 years); and
- "transition" power purchase agreements with the former owners of
acquired facilities (generally 3-5 years).
7
- short-term contracts or other commitments of one year or less and spot
sales including:
- spot market and other sales into various wholesale power markets; and
- bilateral contracts with third parties.
NRG Energy strives to mitigate variability in its earnings by having
approximately 50% of its capacity contracted for under contracts with lengths of
greater than one year, generally seeking to enter into contracts with lengths of
1-5 years, selling half of its remaining capacity (25%) in the forward market
for 30-365 days, and selling the other half of its remaining capacity (25%) in
the spot market to capture opportunities in the market when prices are higher.
By following this strategy, NRG Energy seeks to achieve positive, stable returns
while retaining the flexibility to capture premium returns when available.
NRG Power Marketing handles fuel procurement and trading of emissions
allowances in order to support NRG Energy's overall needs. Generally, NRG Energy
seeks to hedge prices for 50% to 70% of its expected fuel requirements during
the succeeding 12 to 24 month period. This provides NRG Energy with certainty as
to a portion of its fuel costs while allowing it to maintain flexibility to
address lower than expected dispatch rates and to take advantage of the dual
fuel capabilities at many of its facilities.
SIGNIFICANT CUSTOMERS
During 2001, NRG Energy derived approximately 40.5% of its 2001 revenues
from majority owned operations from two customers: New York Independent System
Operator (26.7%) and Connecticut Light and Power Company (13.8%). During 2000,
NRG Energy derived approximately 34.4% of its 2000 revenues from majority owned
operations from two customers: New York Independent System Operator (22.2%) and
Connecticut Light and Power Company (12.2%). During 1999, NRG Energy derived
approximately 51.2% of total revenues from wholly owned operations from three
customers: Niagara Mohawk Power Corporation (21%), Consolidated Edison Company
of New York, Inc. (19.7%) and Eastern Utilities Associates (10.5%).
SEGMENT INFORMATION
For financial information on NRG Energy's operations on a geographical and
on a segment basis, see Item 8 -- Note 18 to the Consolidated Financial
Statements.
PLANT OPERATIONS
NRG Energy's success depends on its ability to achieve operational
efficiencies and high availability at its generation facilities. In the new
unregulated energy industries, minimizing operating costs without compromising
safety or environmental standards while maximizing plant flexibility and
maintaining high reliability is critical to maximizing profit margins. NRG
Energy's operations and maintenance practices are designed to achieve these
goals.
NRG Energy's overall corporate strategy of establishing a top three
presence in certain core markets is in part driven by its operational strategy.
NRG Energy's approach to plant management emphasizes the operational autonomy of
its individual plant managers and staff to identify and resolve operational and
maintenance issues at their respective facilities. NRG Energy has also
implemented a regional shared practices system in order to facilitate the
exchange of information and best practices among the plants in its various
regions. NRG Energy has organized its operations geographically such that
inventories, maintenance, backup and other operational functions are pooled
within a region. This approach enables NRG Energy to realize cost savings and
enhances its ability to meet its facility availability goals.
SIGNIFICANT ASSET AND BUSINESS ACQUISITIONS
GRANITE POWER PARTNERS
In January 2001, NRG Energy purchased from LS Power LLC a 5,339 MW
portfolio of operating projects and projects in construction and advanced
development that are located primarily in the north central
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and south central United States. Approximately 3,295 MW are currently in
operation or under construction. Each facility employs natural gas-fired,
combined-cycle technology. Through December 31, 2005, NRG Energy also has the
opportunity to acquire ownership interests in an additional 3,000 MW of
generation projects developed and offered for sale by LS Power and its partners.
BATESVILLE
In March 2001, NRG Energy purchased from Cogentrix the remaining 430 MW or
51.37% interest, in a 837 MW natural gas-fired combined-cycle plant in
Batesville, Mississippi. NRG Energy acquired a 48.63% interest in the plant in
January 2001 from LS Power.
AUDRAIN
In June 2001, NRG Energy purchased a 640 MW natural gas-fired power plant
in Audrain County, Missouri from Duke Energy North America LLC.
BRAZOS VALLEY
In June 2001, NRG Energy closed on the construction financing for the
Brazos Valley generating facility a 633 MW gas-fired power plant in Fort Bend
County, Texas that NRG Energy will build, operate and manage. At the time of the
closing, NRG Energy also became 100% owner of the project by purchasing STEAG
Power LLC's 50% interest in the project. Commercial operation is expected in
June 2003.
CONECTIV
In June 2001, NRG Energy purchased 1,081 MW of interests in power
generation plants from a subsidiary of Conectiv. NRG Energy acquired a 100%
interest in the 784 MW coal-fired Indian River Generating Station located near
Millsboro, Delaware and in the 170 MW oil-fired Vienna Generating Station
located in Vienna, Maryland. In addition, NRG Energy acquired 64 MW of the 1,711
MW coal-fired Conemaugh Generating Station located approximately 60 miles east
of Pittsburgh, Pennsylvania and 63 MW of the 1,711 MW coal-fired Keystone
Generating Station located approximately 50 miles east of Pittsburgh,
Pennsylvania.
POWERGEN
In June 2001, NRG Energy purchased a 389 MW gas-fired power plant and a 116
MW thermal power plant, both of which are located on Csepel Island in Budapest,
Hungary, from PowerGen. In April 2001, NRG Energy also purchased from PowerGen
its interest in Saale Energie GmbH and its 33.3% interest in MIBRAG BV. By
acquiring PowerGen's interest in Saale Energie, NRG Energy increased its
ownership interest in the 960 MW coal-fired Schkopau power station located near
Halle, Germany from 200 MW to 400 MW. By acquiring PowerGen's interest in
MIBRAG, an integrated energy business in eastern Germany consisting primarily of
two lignite mines and three power stations, and following MIBRAG's buy back of
the shares NRG Energy acquired from PowerGen, NRG Energy increased its ownership
of MIBRAG from 33.3% to 50%. The Washington Group International, Inc., MIBRAG's
other shareholder, owns the remaining 50% of MIBRAG.
INDECK
In August 2001, NRG Energy acquired an approximately 2,255 MW portfolio of
operating projects and projects in advanced development, including projects that
NRG Energy intends to develop, that are located in Illinois and upstate New York
from Indeck Energy Services, Inc. Approximately 402 MW are currently in
operation.
9
MCCLAIN
In August 2001, NRG Energy acquired Duke Energy's 77% interest in the
approximately 520 MW natural gas-fired McClain Energy Generating facility
located near Oklahoma City, Oklahoma. The Oklahoma Municipal Power Authority
owns the remaining 23% interest. The McClain facility became operational in June
2001.
TERMORIO
In September 2001, NRG Energy acquired a 50% interest in TermoRio SA, a
1,040 MW gas-fired cogeneration facility currently under construction in Rio de
Janeiro State, Brazil from Petroleos Brazileiros SA. Commercial operation is
expected to begin in March 2004. NRG Energy has the option to put its interest
in the project back to Petrobras after March 2002 if by that time certain
milestones have not been met, including final agreement on the terms of all
project documents.
MERIDEN
In December 2001, NRG Energy acquired a 540 MW natural gas fired generation
facility being developed in Meriden, Connecticut. The plant has a planned
commercial operation date of August 2003.
COMMONWEALTH ATLANTIC AND JAMES RIVER
In July 2001, NRG Energy signed agreements to acquire from Edison Mission
Energy a 50% interest in the 375 MW Commonwealth Atlantic gas and oil-fired
generating station located near Chesapeake, Virginia, and a 50% interest in the
110 MW James River coal-fired generating facility in Hopewell, Virginia. NRG
Energy closed the acquisition of the Commonwealth Atlantic and James River
generating facilities in January 2002.
OTHER PROJECTS
During fiscal year 2001, NRG Energy also acquired interests in projects in
Taiwan, India, Peru and the State of Nevada.
SIGNIFICANT EQUITY INVESTMENTS
The following are the more significant equity investments included in NRG
Energy's Power Generation Segment.
MIBRAG
NRG Energy indirectly purchased a 33 1/3% interest in the equity of
Mitteldeutsche Braunkohlengesellschaft mbH (MIBRAG) in 1994 for $10.6 million.
In April 2001, NRG Energy purchased from PowerGen its 33.3% interest in MIBRAG
Bv for $35.3 million which was repaid by the project company in June 2001. By
acquiring PowerGen's interest in MIBRAG, and following MIBRAG's buy back of the
shares, NRG Energy acquired from PowerGen, NRG Energy increased its ownership of
MIBRAG from 33.3% to 50%. The Washington Group International, Inc., MIBRAG's
other shareholder owns the remaining 50% of MIBRAG. MIBRAG owns coal mining,
power generation and associated operations, all of which are located south of
Leipzig, Germany. MIBRAG was formed by the German government following the
reunification of East and West Germany to hold two open-cast brown coal
(lignite) mining operations, a lease on an additional mine, three lignite-fired
industrial cogeneration facilities and briquette manufacturing and coal dust
plants, all located in the former East Germany. MIBRAG's cogeneration operations
consist of the 115 MW Mumsdorf facility, the 86 MW Deuben facility and the 37 MW
Wahlitz facility. These facilities provide power and thermal energy for MIBRAG's
coal mining operations and its briquette manufacturing plants. All power not
consumed by MIBRAG's internal operations is sold under an eight-year power
purchase agreement with
10
ENVIA the regional energy provider. MIBRAG's lignite mine operations include
Profen and Schleenhain with total estimated reserves of 776 million metric tons,
which are expected to last for more than 40 years. A dispute has arisen as to
coal transportation compensation payments to be made to MIBRAG pursuant to the
acquisition agreement by Bundesanstalt fur vereinigungsbedingte Sonderaufgaben
(BvS), a German governmental entity that facilitated the privatization of
MIBRAG. The size of the annual coal transportation compensation payments
fluctuates based on the volume of coal transported to the Schkopau facility. The
parties have reached a settlement, pending approval by the European Union. The
settlement is not expected to have a material adverse impact on MIBRAG's
operations.
GLADSTONE POWER STATION
The Gladstone facility is a 1,680 MW coal-fired power generation facility
located in Gladstone, Australia. NRG Energy acquired a 37.5% ownership interest
in the Gladstone facility for $64.9 million when the facility was privatized in
March 1994.
NRG Energy is responsible for the operation and maintenance of the
Gladstone facility pursuant to a 17-year operation and maintenance agreement
that commenced in 1994, which includes an annual bonus based on availability
targets. The Gladstone facility sells electricity to the Enertrade, a government
owned entity, and to Boyne Smelters Limited. Pursuant to an interconnection and
power pooling agreement, Enertrade is obligated to accept all electricity
generated by the facility, subject to merit order dispatch, for an initial term
of 35 years.
Enertrade also entered into a 35-year capacity purchase agreement with each
of the project's owners for such owner's percentage of the capacity of the
Gladstone facility, excluding that sold directly to Boyne Smelters. Under the
capacity purchase agreements, Enertrade pays the facility owners both a capacity
and an energy charge. The capacity charge is designed to cover the projected
fixed costs allocable to Enertrade, including debt service and an equity return,
and is adjusted to reflect variations in interest rates.
The owners of Boyne Smelters have also entered into a power purchase
agreement with each of the project's owners, providing for the sale and purchase
of such owner's percentage share of capacity allocated to Boyne Smelters. The
term of each of these power purchase agreements is 35 years. The owners of Boyne
Smelters are obligated to pay to each of the project's owners a demand charge
that is intended to cover the fixed costs of supplying capacity to Boyne
Smelters, including debt service and return on equity. The owners of Boyne
Smelters are also obligated to pay an energy charge based on the fuel cost
associated with the production of energy from the Gladstone facility.
ENERGY CENTER KLADNO
The Energy Center Kladno project, located in Kladno, the Czech Republic
consists of two phases. In 1994, NRG Energy acquired an interest in the existing
coal-fired electricity and thermal energy facility that can supply 28 MW of
electrical energy and 150 MW equivalent of steam and heated water. This facility
historically supplied electrical and thermal energy to a nearby industrial
complex and to a municipal heating company. The second phase was the expansion
of the existing facility, which started commercial operation in January 2000, by
the addition of 345 MW of new capacity, 271 MW of which is coal-fired and 74 MW
of which is gas/oil-fired, facility acceptance was awarded in December 2001. The
original project is owned by Energy Center Kladno, a Czech limited liability
company in which NRG Energy owns a 44.5% interest. The expansion is held
separately through ECK Generating, a Czech limited liability company in which
NRG Energy owns a 44.5% interest.
COLLINSVILLE POWER STATION
The Collinsville Power Station is a 192 MW coal-fired power generation
facility located in Collinsville, Australia. In March 1996, NRG Energy acquired
a 50% ownership interest in the idled Collinsville facility for $11.9 million
when the Queensland State government privatized it. The Collinsville facility
was recommis-
11
sioned and commenced operations on August 11, 1998. Transfield Holdings Pty Ltd,
the project's other 50% owner, and NRG Energy have entered into an 18-year power
purchase agreement with Enertrade under which Enertrade will pay both a capacity
and an energy charge to the project's owners. The capacity charge is designed to
cover the projected fixed costs allocable to Enertrade, including debt service
and an equity return. The energy charge is based on the fuel costs associated
with the production of energy from the facility.
ENERGY DEVELOPMENTS LTD
Energy Developments Limited, a publicly traded company listed on the
Australian Stock Exchange, owns and operates approximately 357 MW of generation
with 77% of that generation located in Australia. Between February 1997 and
April 1998, NRG Energy acquired a total of 14,609,670 common shares and
16,800,000 convertible, non- voting preference shares of Energy Developments.
NRG Energy paid a total of approximately AUD$69.1 million (US$44.5 million at
the time of acquisition), or AUD$2.20 (US$1.42) per share, for the shares, which
represented approximately 29.1% ownership interest in Energy Developments. Since
the acquisition NRG Energy's holding has been diluted to 26.3%. NRG Energy has
agreed to restrictions on its ability to purchase more shares or to dispose of
any existing shares of Energy Developments. The preference shares do not become
convertible into common shares unless a takeover bid is made for Energy
Developments. In such event, if Energy Developments fails to comply with an
obligation to appoint directors, NRG Energy is entitled to nominate under the
terms of the agreement with Energy Developments. In either of those
circumstances, the preference shares can be converted at the option of the owner
to common shares on a share-for-share basis.
LOY YANG POWER
NRG Energy has a 25.4% interest in Loy Yang Power, which owns and operates
the 2,000 MW Loy Yang A brown coal fired thermal power station and the adjacent
Loy Yang coal mine located in Victoria, Australia. This interest was purchased
for AUD $340 million (approximately US $264.3 million at the time of the
acquisition) in 1997. The power station has four units, each with a 500 MW
boiler and turbo generator, which commenced commercial operation between July
1984 and December 1988. In addition, Loy Yang manages the common infrastructure
facilities that are located on the Loy Yang site, which service not only the Loy
Yang A facility, but also non-NRG facilities such as the adjacent Loy Yang B
1,000 MW power station, a pulverized dried brown coal plant, and several other
nearby power stations.
The wholesale electricity market in Australia is regulated under the
National Electricity Law, which provides for a legally enforceable National
Electricity Code, which defines the market rules. The code also makes provision
for the establishment of the National Electricity Market Management Company to
manage the power system, maintain system security and administer the spot
market. Under the rules of the National Electricity Market, the Loy Yang
facility is required to sell all of its output of electricity through the
competitive wholesale market for electricity operated and administered by the
National Electricity Market. In the National Electricity Market power pool
system, it is not possible for a generator such as Loy Yang to enter into
traditional power purchase agreements. In order to provide a hedge against pool
price volatility, generators have entered into "contracts for differences" with
distribution companies, electricity retailers, industrial customers and other
generators. These contracts for differences are financial hedging instruments,
which have the effect of fixing the price for a specified quantity of
electricity for a particular seller and purchaser over a defined period.
Energy prices in the Victoria region of the National Electricity Market of
Australia into which the Loy Yang facility sells its power have been
significantly lower than NRG Energy expected when it acquired its interest in
the facility. Prices improved during 2001 producing a 14% increase in revenue
improvement over the prior year.
Despite this improvement, a significant unplanned outage, beginning in late
December 2001 and expected to last until April 2002, will result in a reduction
in 2002 revenues and cash flows, and may cause the Loy Yang project company to
fail its required coverage ratios under its loan agreements during the next 12
months,
12
which would constitute an event of default. In the case of default, the project
company's lenders would be allowed to accelerate the project company's
indebtedness. The ultimate financial impact of the outage is subject to
continuing investigation, and is also subject to several events including; the
receipt and timing of insurance proceeds, the cost and timing of repairs to the
damaged unit, the potential installation of a replacement unit while repairs are
carried out to the original unit and electricity market conditions. Management
is actively pursuing each of these options to mitigate the impact of the outage.
However, in the event all factors are unfavorable, NRG Energy may be required to
infuse equity or write-off all or a portion of its $250 million investment in
this project as a result of such acceleration.
In its current circumstances, Loy Yang Power is prohibited by its loan
agreements from making equity distributions to the project owners.
In February 2000, CMS Energy announced its intention to divest its 49.6%
ownership in the Loy Yang project but has established no deadline for completion
of the sale. CMS Energy indicated that it intended to sell its interest because
the project was no longer of strategic value to its portfolio and had not met
its financial expectations. Under certain circumstances CMS will require the
approval of Loy Yang Power's lenders and other parties to enable the sale to
proceed. The impact (if any) of the proposed sale on NRG Energy's existing
investment in Loy Yang Power is not known at the date of this report.
WEST COAST POWER
In May 1999, Dynegy and NRG Energy formed West Coast Power LLC (West Coast
Power), 50% owned by affiliates of each sponsor. West Coast Power serves as the
holding company for a portfolio of operating companies that own generating
assets in Southern California. These assets are currently comprised of the El
Segundo Generating Station, the Long Beach Generating Station, the Encina
Generating Station and 17 Combustion Turbines in the San Diego area (the San
Diego Combustion Turbines).
El Segundo Generating Station: The El Segundo Generating Station is a 1,020
MW plant consisting of four units: two units at 175 MW each and two units at 335
MW each. El Segundo was purchased from the Southern California Edison Company
through a competitive bid process for $88.3 million during April 1998.
Long Beach Generating Station: The Long Beach Generating Station is a 530
MW combined cycle plant with seven 56 MW gas turbine generators and, one 80 MW
steam turbine unit and one 58 MW steam turbine unit. The Long Beach plant was
purchased from Southern California Edison Company during April 1998 through a
competitive bid process for $29.9 million.
Encina Generating Station: The Encina Generating Station is located in
Carlsbad, California and consists of five steam-electric generating units and
one combustion turbine with net generating capacity of 965 MW. The Encina
Generating Station was purchased from San Diego Gas & Electric during May 1999,
at a purchase price of $283.2 million.
San Diego Combustion Turbines: The San Diego Combustion Turbine assets
consist of 17 combustion turbine generator sets (the CT's) with an aggregate
capacity of 253 MW, located on seven different sites in San Diego County. During
May 1999, Dynegy and NRG Energy purchased the CT's from San Diego Gas & Electric
through a competitive bid process. The CT's acquisition had a purchase price of
$69.1 million. The CT's have the ability to provide spinning reserve, black
start capability, quick start capability, voltage support and quick load
capability for the ancillary services market.
In December 2000, NRG Energy and its partner submitted permit applications
in respect of a planned repowering of the jointly-owned El Segundo station. The
planned repowering will add approximately 621 MW of generating capacity to the
facility at a cost of approximately $368 million. Prior to the repowering,
approximately 350 MW at the El Segundo Station will be decommissioned. The
repowering project is expected to be permitted by the third quarter of 2003.
For additional information regarding the California utility liquidity
crisis see Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations -- California Liquidity Crisis.
13
KONDAPALLI
During 2001, NRG Energy acquired a 30% interest in Lanco Kondapalli Power
Private Limited and 100% of Eastern Generation Services (India) Private Limited
for US $27 million. Kondapalli is a 355 MW combined cycle power plant located in
Andhra Pradesh, India. Eastern Generation Services is the plant operator.
Kondapalli earns revenue under a 15 year power purchase agreement with the
state owned distributor and retailer Andhra Pradesh Transmission Corporation.
The plant is natural gas fired and uses diesel/naptha as a backup fuel supply.
NRG Energy is responsible for the operation and maintenance of the
Kondapalli facility via Eastern Generation Services. The Operations and
Management Agreement is a cost plus contract that provides financial incentives
to ensure the plant is operated efficiently.
SAGUARO POWER COMPANY
In September 2001, NRG Energy, acquired, for $66 million, a 50% interest in
Saguaro Power Company, L.P. Other partners include Manga Energy Systems, Inc and
Black Mountain Power Company, a wholly owned subsidiary of Boulder Power, LLC.
The partnership owns a 105 MW natural gas fired cogeneration facility in
Hendersen, Nevada, a suburb of Las Vegas. Nevada Power Company is obligated to
purchase 90 MW per hour of electric energy under a long-term power purchase
agreement. The facility is also capable of generating 50 to 160 thousand pounds
per hour of export steam. Under long-term steam purchase and sales agreements, a
combined total of 50 thousand pounds per hour of high-pressure steam is
committed to be sold to both Pioneer Chlor Akali Company, Inc. and Ocean Spray
Cranberries, Inc. Fuel gas requirements are provided to the facility under a
long-term purchase agreement with Burlington.
SIGNIFICANT MAJORITY- AND WHOLLY-OWNED OPERATIONS
The following are the more significant majority- and wholly-owned
operations included in NRG Energy's Independent Power Generation segment.
CROCKETT COGENERATION
Pacific Crockett Energy, Inc., an indirect, wholly owned subsidiary of NRG
Energy, is the general partner of the Crockett Cogeneration Project (Crockett).
Crockett, a 240 MW gas fired plant, began operations in May 1996. Pacific
Generation Company, another wholly owned subsidiary of NRG Energy, owns a 56.67
percent limited partnership interest in Crockett through ENI Crockett LP (ENI
Crockett). ENI Crockett is a limited partnership in which Pacific Generation
Company is the general partner and El Paso Energy is a limited partner. The
project sells 240 MW of capacity and energy to Pacific Gas & Electric Company
under a modified Standard Offer No. 4 Purchase Power Agreement (PPA) extending
to 2026. The PPA provides for a fixed capacity payment and a variable energy
payment based on the market price of gas. In addition, Crockett provides up to
450,000 lbs/hr of steam to the adjacent C&H Sugar refinery under a steam sales
agreement that expires in 2026. Natural gas is supplied to the project by BP
Canada Energy Marketing. ESOCO operates the project under a renewable 15-year
contract that provides for reimbursement of all costs within an approved budget,
plus a fee and provision for a performance bonus. Other limited partners include
Energy Investors Fund LP and Energy Investors Fund II, LP and a subsidiary of
Tomen Power Corp. Crockett was originally financed with a $260 million
construction and term loan facility provided by a commercial bank syndicate led
by ABN-AMRO. On December 15, 1999, Crockett was refinanced with a $255 million
term loan facility provided by a commercial bank syndicate led by ABN-AMRO,
maturing in December 31, 2014.
14
NRG NORTHEAST GENERATING LLC
NRG Energy has acquired, through subsidiaries, in five separate
transactions, certain generating assets from Niagara Mohawk Power Corporation
(NIMO), Consolidated Edison Company of New York (ConEd), Montaup Electric
Company (MEC), a wholly owned subsidiary of Eastern Utilities Association (EUA),
and Connecticut Light & Power Company (CL&P) for a total cost of approximately
$1.5 billion. NRG Energy has aggregated these assets into a regional generating
company, NRG Northeast Generating LLC (NRG Northeast) (collectively, the NRG
Northeast assets).
The NRG Northeast assets represent competitive, low cost units with
favorable market dynamics and locations close to major load centers in the NYPP
and NEPOOL.
Huntley and Dunkirk: In June 1999, NRG Energy completed the acquisition of
the Huntley and Dunkirk generating stations from NIMO for $355 million. The two
coal-fired power generation facilities are located near Buffalo, New York and
have a combined capacity rating of 1,360 MW. In connection with this
acquisition, NRG Energy entered into a 4-year agreement with NIMO that requires
NRG Energy to provide to NIMO, pursuant to a predetermined schedule, fixed
quantities of energy and capacity at a fixed price.
Oswego: In October 1999, NRG Energy completed the acquisition of the 1,700
MW oil and gas fired Oswego generating station for approximately $85 million
from NIMO and Rochester Gas and Electric Corporation.
Astoria Gas Turbines and Arthur Kill: In June 1999, NRG Energy completed
the acquisition of the Astoria gas turbine facility and the Arthur Kill
Generating Station from ConEd for $505 million. These facilities, which are
located in the New York City area, have a combined capacity rating of 1,456 MW.
Somerset: In April 1999, NRG Energy completed the acquisition of the
Somerset power station for approximately $55 million from MEC. The Somerset
station includes two coal fired base-load generating facilities supplying a
total of 181 MW and two aeroderivative combustion turbine peaking units
supplying a total of 48 MW, including 69 MW on deactivated reserve. It is
located on the west bank of the Taunton River in Somerset, Massachusetts and is
interconnected with the NEPOOL market.
Connecticut stations: In December 1999, NRG Energy completed the
acquisition of four fossil fuel electric generating stations and six remote gas
turbines totaling 2,235 MW from CL&P for $460 million, plus adjustments for
working capital. The assets acquired from CL&P (CL&P Assets) are comprised of
the Middletown, Montville, Devon and Norwalk Harbor gas- and oil-fired steam
generating stations totaling 2,108 MW and 127 MW of remote gas turbines at
Branford, Torrington and Cos Cob, Connecticut. NRG Energy also entered into a
4-year standard offer agreement that requires NRG Energy to provide to CL&P a
portion of its load requirements through the year 2003 at a substantially fixed
price.
Middletown station, an 856 MW gas- and oil-fired plant, is located in
Middletown, Connecticut. The 498 MW Montville Station in Uncasville, Connecticut
is composed of one gas- or oil-fired unit, one oil-fired unit and two diesel
generators. Norwalk Station, with 353 MW of capacity from two oil-fired units
and one gas turbine, is located on Manresa Island at the mouth of Norwalk
Harbor. Devon Station, consisting of 401 MW of generation capacity derived from
two gas- or oil-fired units and five gas turbines, is located at Milford,
Connecticut.
NRG SOUTH CENTRAL GENERATING LLC
In March 2000, the South Central facilities were acquired in a competitive
bidding process following a Chapter 11 bankruptcy filing by their former owner,
Cajun Electric. NRG Energy paid approximately $1,055.9 million for these
facilities. NRG South Central Generating LLC, an indirect wholly-owned
subsidiary of NRG Energy, Inc, through its wholly-owned subsidiaries, Louisiana
Generating LLC (Louisiana Generating), NRG New Roads Holdings LLC, NRG
Sterlington Power LLC, Big Cajun I Peaking Power LLC (Big Cajun 1 Peakers), NRG
Sabine River Works GP LLC, NRG Sabine River Works LP LLC and NRG Bayou Cove LLC
owns approximately 2,679 MW of net electric generating capacity as of December
31, 2001 (including projects under construction).
15
Through its subsidiaries, Louisiana Generating and Big Cajun 1 Peakers, NRG
South Central owns the Big Cajun I and Big Cajun II generating facilities in New
Roads, Louisiana (the Cajun facilities). The Cajun facilities consist of 100%
ownership of four gas-fired intermediate/peaking power generation units which
NRG Energy collectively refers to as Big Cajun I. Two of these units were
completed and commenced commercial operation in May and June 2001. The Cajun
facilities also include 100% interest of two coal-fired, base-load power
generation units, and a 58% interest in a third coal-fired, base load unit,
which NRG Energy refers to collectively as Big Cajun II. The Cajun facilities
were acquired through a competitive bidding process following a Chapter 11
bankruptcy filing by Cajun Electric Power Cooperative, Inc., a non-profit
Louisiana electric membership cooperative corporation. Cajun Electric sold
wholesale energy and capacity generated by the Cajun facilities to its
cooperative members for more than 20 years under long-term, all-requirements
power supply agreements. NRG Energy sells most of the energy and capacity of the
Cajun facilities to 11 of Cajun Electric's former power cooperative members.
Seven of these cooperatives have entered into 25-year power purchase agreements
with NRG Energy, and four have entered into two to four year power purchase
agreements. In addition, NRG Energy sells power under contract to two municipal
power authorities and one investor-owned utility that were former customers of
Cajun Electric.
In March 2000, NRG South Central formed NRG New Roads Holdings LLC (New
Roads) to hold certain assets that were acquired in conjunction with the
purchase of the Cajun facilities but which are not necessary for the operation
of the Cajun facilities. NRG Sterlington Power LLC (Sterlington), which was
acquired by NRG Energy and contributed to NRG South Central in August 2000, was
formed for the purpose of developing, constructing, owning and operating an
approximately 202 MW simple cycle gas peaking facility in Sterlington,
Louisiana. Louisiana Generating has a right of first refusal on any sale of
capacity or energy by Sterlington. In December 2000, NRG Sabine River Works LP
and NRG Sabine River Works GP acquired, respectively, a 49% limited partnership
interest and a 1% general partnership interest in SRW Cogeneration Limited
Partnership, that owns and operates an approximately 420 MW natural gas-fired
cogeneration plant at the DuPont Company's Sabine River Works petrochemical
facility near Orange, Texas. Subsidiaries of Conoco, Inc. own the other 50%
interest in SRW Cogeneration Limited Partnership. Commercial operation of the
plant commenced in November 2001.
KILLINGHOLME
In March 2000, NRG Energy acquired the 680 MW gas-fired Killingholme
combined cycle, baseload facility in North Lincolnshire, England from National
Power plc. The purchase price was L390 million (approximately U.S. $615.0
million at the time of acquisition), subject to post closing adjustments. NRG
Energy financed the acquisition with a 19-year non-recourse credit facility that
provides for L235 million (approximately U.S. $374 million at the time of
acquisition) for the costs of the acquisition and L90 million (approximately
U.S. $143 million at the time of acquisition) for letters of credit and working
capital needs. NRG Energy sells power from the facility into the wholesale
electricity market of England and Wales. The facility has a ten and one half
year contract to purchase up to 70% of its natural gas requirements from a
subsidiary of Centrica plc. From January 1, 2000 through the date of the
acquisition, NRG Energy entered into a tolling agreement with National Power
pursuant to which NRG Energy received revenues based on the prevailing market
prices for electricity in exchange for payments to National Power based on the
incremental operating costs of the facility.
Prices for power in the wholesale electricity market of England and Wales
have decreased since the acquisition date due to new trading rules that are
expected to come into effect and increase competition in this market. NRG Energy
has entered into short-term agreements to sell a portion of the output of the
Killingholme facility, and, in the future, NRG Energy intends to enter into
similar short-term and long-term agreements that will provide a degree of
stability to its revenues from the facility.
FLINDERS POWER
In September 2000, NRG Energy completed the acquisition of Flinders Power,
South Australia's final generation company to be privatized. NRG Energy paid
approximately AUD $314.4 million (approximately
16
U.S. $180 million at the date of acquisition) for a 100-year lease of certain
Flinders Power assets, including two power stations totaling 760 MW. In
addition, NRG Energy received a 20-year lease, renewable for additional 10-year
terms, for the Leigh Creek coal mine and a dedicated rail line. The 100-year
lease agreement also includes managing the long-term fuel supply and power
purchase agreement of the 180 MW Osborne Cogeneration Station. Since that
original acquisition, NRG Energy has also announced that it will undertake a
refurbishment of its 240 MW Playford Power Station, being one of the two
coal-fired plants that form the central part of the Flinders business.
GRANITE POWER PARTNERS
NRG Energy has acquired, in two separate transactions a 5,339 MW portfolio
of operating projects and projects in construction and advanced development from
LS Power, LLC and Cogentrix for a total cost of approximately $830 million.
Through 2005, NRG has the opportunity to acquire ownership interests in an
additional 3,000 MW of generation projects developed and offered for sale by LS
Power and its partners.
Batesville: NRG Energy, through subsidiaries acquired approximately 100%
ownership of a natural gas-fired combined-cycle electric generating facility
with a design capacity of approximately 837 megawatts located in Batesville,
Mississippi. All of the electric power generation is sold under long-term
tolling agreements with Virginia Electric and Power and Aquila. Additionally, a
292 MW expansion scheduled for operation in 2005 is currently in development.
Mustang: NRG Energy acquired a 25% ownership interest in an approximately
122 MW electric generating facility located in Texas. The facility sells its
energy under a long-term power purchase agreement.
Kendall: Scheduled to be commercially operable in the second quarter 2002,
the Kendall facility located just south of Chicago, Illinois will generate
approximately 1,168 MW of electric power utilizing combined cycle gas turbines.
Tolling agreements with Dynegy and Minnesota Power are in place for 870 MW with
the remaining generation available for merchant markets. Additionally, a 584 MW
expansion scheduled for operation in 2006 is currently in development.
Pike: Construction began in February 2002 for a 1,168 MW natural gas fired
facility located near McComb, Mississippi. This facility will use combined cycle
gas turbines and is scheduled to be commercially operable in 2003.
Nelson: Scheduled to be commercially operable in 2003, the Nelson facility
to be located just west of Chicago, Illinois will generate approximately 1,168
MW of electric power utilizing combined cycle gas turbines.
SCHKOPAU POWER STATION
In 1993, NRG Energy acquired for $18.2 million an indirect 50% interest in
a German limited liability company, Saale Energie GmbH, which then acquired a
41.9% participation interest in a 960 MW coal-fired power plant that was under
construction in the East German city of Schkopau. The first 425 MW unit of the
Schkopau plant began operation in January 1996, the 110 MW turbine in February
1996, and the second 425 MW unit in July 1996. The coal is provided under a
long-term contract by MIBRAG's Profen lignite mine.
Saale Energie sells its allocated 400 MW portion of the plant's capacity
under a 25-year contract with VEAG, a major German utility that controls the
high-voltage transmission of electricity in the former East Germany. VEAG pays a
price that is made up of three components, the first of which is designed to
recover installation and capital costs, the second to recover operating and
other variable costs, and the third to cover fuel supply and transportation
costs. In April 2001, NRG Energy acquired the remaining 50% of Saale Energie
GmbH for $37.3 million which effectively increased NRG Energy's participation
interest in Schkopau to 41.9% totaling 400 MW.
17
COBEE
In December 1996, NRG Energy acquired for $81.8 million a 49.1% interest in
COBEE, the second largest generator of electricity in Bolivia. In June 2001, NRG
Energy increased its interest in COBEE as part of a large portfolio acquisition
of assets. COBEE has entered into contracts, which expire in 2008, with two
Bolivian distribution companies pursuant to which COBEE supplies electricity.
All payments under these contracts are made in United States dollars.
COBEE operates its electric generation business under a 40-year concession
granted by the Bolivian government in 1990. Under this concession, COBEE is
entitled to earn a return of 9.0% on assets within its rate base. The Bolivian
Electricity Code also provides for the adjustment of rates to compensate COBEE
for any shortfall or to recapture any excess in COBEE's actual rate of return
during the previous year. COBEE periodically applies to the Superintendent of
Electricity for rate increases sufficient to provide its 9.0% rate of return
based on COBEE's current operating results and its projection of future revenues
and expenses. Under COBEE's concession, COBEE's assets are required to be
removed from the rate base in 2008.
CSEPEL
The Csepel facility is a 389 MW gas-fired power plant and a 116 MW thermal
power plant, both of which are located on Csepel Island in Budapest, Hungary. In
June 2001, NRG Energy acquired a 100% interest in the Csepel project for $111.4
million. The Csepel facility was the first new independent power station in
Hungary. Csepel commenced operations in November 2000.
The Csepel facility has a signed 20-year purchase power agreement with MVM,
the Hungarian state owned utility. At commercial operation the purchase power
agreement was replaced with an annual administrative price set by the Hungarian
Energy office and approved by the Economic Ministry. Since commercial operation,
the administrative price followed in line with the purchase power agreement
pricing. In addition, the fuel is supplied to Csepel through a 20-year "back to
back" gas supply agreement.
MIDATLANTIC
In June 2001 NRG Energy acquired 1,081 MW of baseload electric generating
plants from Delmarva Power and Light, a subsidiary of Wilmington, Delaware-based
Conectiv. As part of the agreement, NRG entered into both short- and long-term
purchase power contracts with Delmarva Power to provide energy and capacity for
the Delmarva Peninsula. Under the long-term agreement, Conectiv is obligated to
purchase 500 MW through 2005 at contracted prices.
The 784 MW coal-fired Indian River Generating Station is located on the
Delmarva Peninsula near Millsboro, Delaware. The Vienna Generating Station is a
170 MW oil-fired generating station located along the Nanticoke River in the
town of Vienna, Maryland. Of the 1,711 MW coal-fired Conemaugh Generating
Station, NRG acquired 64 MW. The plant is located on the Conemaugh River,
approximately 60 miles east of Pittsburgh, Pennsylvania. NRG Energy also
acquired 63 MW of the 1,711 MW coal-fired Keystone Generating Station, located
approximately 50 miles east of Pittsburgh, Pennsylvania.
INDECK
In August 2001, NRG Energy acquired a 2,255 MW project portfolio from
Indeck Energy Services, Inc. The portfolio primarily serves the Chicago,
Illinois energy market.
NRG Energy acquired full ownership in five projects in operation,
construction and advanced development. The portfolio includes combined-cycle and
peaking power plants that employ natural gas-fueled combustion technology.
Operational facilities include the Rockford I and Ilion Energy Centers. Projects
under construction and development include the Rockford II Energy Center,
Bourbonnais I and II Energy Centers.
Rockford I is a 342 MW simple cycle power generation plant designed to
produce peaking electricity located in Rockford, Illinois. Power is contracted
to ComEd under a long-term power sales agreement. Under
18
the agreement, ComEd delivers natural gas and the facility generates electricity
to ComEd that amounts to a tolling arrangement. Ilion, located in central
upstate New York, is a 60 MW combined cycle cogeneration plan. Ilion operates as
a merchant power plant while selling its steam to Remington Arms Company. The
Rockford II project is scheduled for commercial operation in 2002 while the
Bourbonnais projects are planned for 2004 and 2005.
HSIN YU ENERGY DEVELOPMENT CO. LIMITED
During 2001, NRG Energy acquired approximately 60% ownership in Hsin Yu
Energy Development Co. LTD for NT $1.6 billion (approximately $46.7 million at
the date of acquisition). Hsin Yu is a Taiwan company that owns a 170 MW
cogeneration facility located near Taipei. Hsin Yu is developing a 245 MW
expansion of the facility and has rights to develop a 490 MW Greenfield project
near Tainan. Hsin Yu sells power to industrial customer under short-term power
purchase agreements and sells residual power to Tai Power. Hsin Yu secures gas
supply through a 12-year contract with China Petroleum Corp. the state owned gas
supplier.
SIGNIFICANT PENDING ACQUISITIONS AND PROJECTS UNDER DEVELOPMENT
Due to the many complexities inherent in the acquisition, development and
financing of projects, there can be no assurance that any of NRG Energy's
pending acquisitions and projects under development, including those described
below, will be consummated.
FIRSTENERGY
In November 2001, NRG Energy signed purchase agreements to acquire or lease
four coal-fired generating facilities totaling approximately 2,535 MW and two
ash disposal sites from subsidiaries of FirstEnergy Corporation. The four
generating facilities are located in Ohio, along the shore of Lake Erie, and the
approximately 376 MW Ashtabula facility in Ashtabula, Ohio, the approximately
249 MW Lake Shore facility in downtown Cleveland, the approximately 1,262 MW
Eastlake facility near Cleveland and the approximately 648 MW Bay Shore facility
near Toledo. NRG Energy is also acquiring all of the equity interests in Bay
Shore Power Company, which is a subsidiary of FirstEnergy and the owner of a 136
MW petroleum coke-fired steam generating project on the Bay Shore facility site.
The acquisition is expected to close in the second quarter of 2002. In
connection with the acquisition of these facilities, NRG Energy also entered
into a Transition Power Purchase Agreement with FirstEnergy, pursuant to which
NRG Energy will supply to FirstEnergy approximately 95% of the output from the
facilities through 2005.
CONECTIV ASSETS
In June and October 2001, NRG Energy extended purchase agreements that NRG
Energy entered into with a subsidiary of Conectiv in January 2000 to acquire 794
MW of coal and oil-fired electric generating capacity and other assets in New
Jersey and Pennsylvania, including an additional 66 MW of Conemaugh Generating
Station and an additional 42 MW of the Keystone Generating Station. By their
terms these purchase agreements became terminable by either party after February
28, 2002, and on April 1, 2002 NRG Energy exercised its right to terminate the
agreements.
REGULATION
NRG Energy is subject to a broad range of federal, state and local energy
and environmental laws and regulations applicable to the development, ownership
and operation of its United States and international projects. These laws and
regulations generally require that permits and approvals be obtained before
siting a power plant, during the plants construction, and after it becomes fully
operational. Throughout each phase of the project's implementation, all
operations must be conducted in compliance with the terms specified in such
permits and approvals.
19
NRG Energy strives to comply with the terms of all applicable laws,
regulations, permits and licenses and believes that all of its ongoing
operations are in material compliance with all such requirements. Even so, due
to the promulgation of increasingly stringent regulatory requirements and/or
local opposition to its projects, NRG Energy cannot presently assure its ability
to obtain all future permits and approvals nor guarantee 100% regulatory
compliance. In order to approach such levels of regulatory certainty,
prohibitive expenditures could force projects to be abandoned, create the risk
of expensive delays or materially impair project values.
In particular, the competitive power markets in the United States, United
Kingdom, Australia and other countries are dependent on the existing regulatory
structure, and while NRG Energy strives to take advantage of the opportunities
created by regulatory changes, it is impossible to predict the impact of
regulatory changes on its operations. The level of environmental awareness and
enforcement is growing in most countries, including most of the countries in
which NRG Energy intends to develop and operate new projects. Accompanying such
awareness is the requirement to achieve stringent emission limitations. NRG
Energy believes that the nature and level of environmental regulation to which
it is subject will become more stringent. Therefore, NRG Energy's policy is to
integrate the consideration of potential environmental impacts into every
decision it makes, and by doing so strive to improve its competitive advantage
by meeting or exceeding environmental requirements pertaining to the management
and operation of its assets.
COMPETITION
The independent power industry is characterized by numerous strong and
capable competitors, some of which may have more extensive operating experience,
more extensive experience in the acquisition and development of power generation
facilities, larger staffs or greater financial resources than NRG Energy does.
In recent years, the independent power industry has been characterized by
increased competition for asset purchases and development opportunities. In
recent months there have been announcements from several of NRG Energy's
competitors that they will be scaling back their growth plans and delaying
construction expenditures.
In addition, regulatory changes have also been proposed to increase access
to transmission grids by utility and non-utility purchasers and sellers of
electricity. Industry deregulation may encourage the disaggregation of
vertically integrated utilities into separate generation, transmission and
distribution businesses.
The United States electric utility industry is currently experiencing
increasing competitive pressures, primarily in wholesale markets, as a result of
consumer demands, technological advances, greater availability of natural
gas-fired generation that is more efficient than NRG Energy's generation
facilities and other factors. The Federal Energy Regulatory Commission (FERC)
has implemented and continues to propose regulatory changes to increase access
to the nationwide transmission grid by utility and non-utility purchasers and
sellers of electricity.
Proposals have been introduced in Congress to repeal PURPA and PUHCA, and
FERC has publicly indicated support for the PUHCA repeal effort. If the repeal
of PURPA or PUHCA occurs, either separately or as part of legislation designed
to encourage the broader introduction of wholesale and retail competition, the
significant competitive advantages that independent power producers currently
enjoy over certain regulated utility companies would be eliminated or sharply
curtailed, and the ability of regulated utility companies to compete more
directly with independent power companies would be increased. To the extent
competitive pressures increase and the pricing and sale of electricity assumes
more characteristics of a commodity business, the economics of domestic
independent power generation projects may come under increasing pressure.
Deregulation may not only continue to fuel the current trend toward
consolidation among domestic utilities, but may also encourage the
disaggregation of vertically-integrated utilities into separate generation,
transmission and distribution businesses.
In addition, the independent system operators who oversee most of the
wholesale power markets have in the past imposed, and may in the future continue
to impose, price limitations and other mechanisms to address some of the
volatility in these markets. For example, the independent system operator for
the New York power Pool and the California independent system operator have
recently imposed price limitations. These types of price limitations and other
mechanisms in New York, California, the New England Power Pool and elsewhere may
adversely impact the profitability of NRG Energy's generation facilities that
sell energy into the
20
wholesale power markets. Finally, the regulatory and legislative changes that
have recently been enacted in a number of states in an effort to promote
competition are novel and untested in many respects. These new approaches to the
sale of electric power have very short operating histories, and it is not yet
clear how they will operate in times of market stress or pressure, given the
extreme volatility and lack of meaningful long-term price history in many of
these markets and the imposition of price limitations by independent system
operators.
EMPLOYEES
At December 31, 2001, NRG Energy had 3,888 employees, approximately 496 of
whom are employed directly by NRG Energy and approximately 3,392 of whom are
employed by its wholly owned subsidiaries and affiliates. Approximately 1,825
employees are covered by bargaining agreements. NRG Energy has experienced no
significant labor stoppages or labor disputes at its facilities.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
The information presented in this annual report includes forward-looking
statements in addition to historical information. These Statements involve known
and unknown risks and relate to future events, or projected business results. In
some cases forward-looking statements may be identified by their use of such
words as "may," "expects," "plans," "anticipates," "believes," and similar
terms. Forward-looking statements are only predictions, and actual results may
differ materially from the expectations expressed in any forward-looking
statement. While NRG Energy believes that the expectations expressed in such
forward-looking statements are reasonable, we can give no assurances that these
expectations will prove to have been correct. In addition to any assumptions and
other factors referred to specifically in connection with such forward-looking
statements, factors that could cause actual results to differ materially from
those contemplated in any forward-looking statements include, among others, the
following:
- General economic conditions including inflation rates and monetary or
currency exchange rate fluctuations; the risk of a significant slowdown
in growth in the U.S. economy or risk of delay in growth recovery in the
U.S. as a consequence of the September 11, 2001 terrorist attacks and
other factors;
- Trade, monetary, fiscal, taxation, and environmental policies of
governments, agencies and similar organizations in geographic areas where
NRG Energy has a financial interest;
- Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their
products and services;
- Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board, the Securities and Exchange
Commission, the Federal Energy Regulatory Commission and similar entities
with regulatory oversight;
- Factors affecting the availability or cost of capital such as changes in
interest rates; market perceptions of the power generation industry, the
Company or any of its subsidiaries; or credit ratings;
- Factors affecting power generation operations such as unusual weather
conditions; catastrophic weather-related damage; unscheduled generation
outages, maintenance or repairs; unanticipated changes to fossil fuel, or
gas supply costs or availability due to higher demand, shortages,
transportation problems or other developments; environmental incidents;
or electric transmission or gas pipeline system constraints;
- Employee workforce factors including loss or retirement of key
executives, collective bargaining agreements with union employees, or
work stoppages;
- Volatility of energy prices in a deregulated market environment;
- Increased competition in the power generation industry;
- Cost and other effects of legal and administrative proceedings,
settlements, investigations and claims;
21
- Technological developments that result in competitive disadvantages and
create the potential for impairment of existing assets;
- The completion of the Xcel Energy exchange offer transaction and the
business plan Xcel Energy puts in place following such completion;
- Factors associated with various investments including conditions of final
legal closing, partnership actions, competition, operating risks,
dependence on certain suppliers and customers, domestic and foreign
environmental and energy regulations;
- Limitations on NRG Energy's ability to control the development or
operation of projects in which the Company has less than 100% interest;
- The lack of operating history at development projects, the lack of NRG
Energy's operating history at the projects not yet owned and the limited
operating history at the remaining projects provide only a limited basis
for management to project the results of future operations;
- Risks associated with timely completion of projects under construction,
including obtaining competitive contracts, obtaining regulatory and
permitting approvals, local opposition, construction delays and other
factors beyond NRG Energy's control;
- The failure to timely satisfy the closing conditions contained in the
definitive agreements for the acquisitions of projects subject to
definitive agreements but not yet closed, many of which are beyond NRG
Energy's control;
- Factors challenging the successful integration of projects not previously
owned or operated by NRG Energy, including the ability to obtain
operating synergies;
- Factors associated with operating in foreign countries including: delays
in permitting and licensing, construction delays and interruption of
business, political instability, risk of war, expropriation,
nationalization, renegotiation, or nullification of existing contracts,
changes in law, and the ability to convert foreign currency into United
States dollars;
- Changes in government regulation or the implementation of government
regulations, including pending changes within or outside of California as
a result of the California energy crisis, which could result in NRG
Energy's failure to obtain regulatory approvals required to close project
acquisitions, and which could adversely affect the continued deregulation
of the electric industry;
- Other business or investment considerations that may be disclosed from
time to time in NRG Energy's Securities and Exchange Commission filings
or in other publicly disseminated written documents, including NRG
Energy's Registration Statement No. 333-62958, as amended, and all
supplements therein.
NRG Energy undertakes no obligation or publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors that could cause our actual
results to differ materially from those contemplated in any forward-looking
statements included in this annual report should not be construed as exhaustive.
ITEM 2 -- PROPERTIES
Listed below are descriptions of NRG Energy's interests in facilities,
operations and/or projects under construction as of December 31, 2001.
22
INDEPENDENT POWER PRODUCTION AND COGENERATION FACILITIES
NET NRG'S
OWNED PERCENTAGE
CAPACITY OWNERSHIP
NAME AND LOCATION OF FACILITY PURCHASER/POWER MARKET (MW) INTEREST FUEL TYPE
----------------------------- ---------------------- -------- ---------- ---------
NORTHEAST REGION:
Oswego, New York....................... Niagara Mohawk/NYISO 1,700 100% Oil/Gas
Huntley, New York...................... Niagara Mohawk/NYISO 760 100% Coal
Dunkirk, New York...................... Niagara Mohawk/NYISO 600 100% Coal
Arthur Kill, New York.................. NYISO 842 100% Gas/Oil
Astoria Gas Turbines, New York......... NYISO 614 100% Gas/Oil
Ilion, New York........................ NYISO 60 100% Gas/Oil
Somerset, Massachusetts................ Eastern Utilities 229 100% Coal/Oil/Jet
Associates
Middletown, Connecticut................ Connecticut Light & Power 856 100% Oil/Gas/Jet
Meriden Power, Connecticut............. ISO-NE 540 100% Gas/Oil
Montville, Connecticut................. Connecticut Light & Power 498 100% Oil/Gas
Devon, Connecticut..................... Connecticut Light & Power 401 100% Gas/Oil/Jet
Norwalk Harbor, Connecticut............ Connecticut Light & Power 353 100% Oil
Connecticut Jet Power, Connecticut..... Connecticut Light & Power 127 100% Jet
Other -- 7 projects.................... Various 96 Various Various
SOUTH CENTRAL REGION:
Big Cajun II, Louisiana................ Cooperatives/SERC-Entergy 1,489 86.04% Coal
Big Cajun I, Louisiana................. Cooperatives/SERC-Entergy 458 100% Gas
Bayou Cove, Louisiana.................. SERC-Entergy 320 100% Gas
Sterlington, Louisiana................. Louisiana Generating 202 100% Gas
Batesville, Mississippi................ SERC-TVA 837 100% Gas
McClain, Oklahoma...................... SPP-Southern 400 77% Gas
Brazos Valley, Texas................... ERCOT 633 100% Gas
Sabine River Works, Texas.............. Dupont/SERC-Entergy 210 50% Gas
Mustang, Texas......................... Golden Spread Electric Coop 122 25% Gas
Other -- 3 projects.................... Various 45 Various Various
WEST COAST REGION:
El Segundo Power, California........... California DWR 510 50% Gas
Encina, California..................... California DWR 483 50% Gas/Oil
Long Beach Generating, California...... California DWR 265 50% Gas
San Diego Combustion Turbines, 50%
California........................... Cal ISO 127 Gas/Oil
Crockett Cogeneration, California...... PG&E 138 57.67% Gas
Mt. Poso Cogeneration, California...... PG&E 20 39.50% Coal
Saguaro Power Co., Nevada.............. Nevada Power 53 50.00% Gas/Oil
NORTH CENTRAL REGION:
Kendall, Illinois...................... MAIN 1,168 100% Gas
Nelson, Illinois....................... MAIN 1,168 100% Gas
Rockford I, Illinois................... ComEd 342 100% Gas
Rockford II, Illinois.................. MAIN 171 100% Gas
Rocky Road Power, Illinois............. MAIN 175 50% Gas
Audrain, Missouri...................... MAIN/SERC-Entergy 640 100% Gas
Other -- 2 projects.................... Various 42 Various Various
MID-ATLANTIC REGION:
Indian River, Delaware................. Delmarva/PJM 784 100% Coal/Oil
Dover, Delaware........................ PJM 106 100% Gas/Coal
Vienna, Maryland....................... Delmarva/PJM 170 100% Oil
Conemaugh, Pennsylvania................ PJM 64 3.72% Coal/Oil
Keystone, Pennsylvania................. PJM 63 3.70% Coal/Oil
Paxton Creek Cogeneration, 100%
Pennsylvania......................... Virginia Electric & Power 12 Gas
OTHER NORTH AMERICA:
NEO Corporation, Various............... Various 197 71.57% Various
Energy Investors Funds, Various........ Various 11 0.73% Various
23
NET NRG'S
OWNED PERCENTAGE
CAPACITY OWNERSHIP
NAME AND LOCATION OF FACILITY PURCHASER/POWER MARKET (MW) INTEREST FUEL TYPE
----------------------------- ---------------------- -------- ---------- ---------
INTERNATIONAL PROJECTS:
Asia-Pacific:
Lanco Kondapalli Power, India.......... APTRANSCO 107 30% Gas/Oil
Hsinchu, Taiwan........................ Industrials 102 60% Gas
Australia:
Flinders, South Australia.............. South Australian Pool 760 100% Coal
Gladstone Power Station, Queensland.... Enertrade/Boyne Smelters 630 37.50% Coal
Loy Yang Power A, Victoria............. Victorian Pool 507 25.37% Coal
Collinsville Power Station, 50%
Queensland........................... Enertrade 96 Coal
Energy Developments Limited, Various... Various 95 25.10% Various
Europe:
Killingholme Power A, UK............... UK Electricity Grid 680 100% Gas
Enfield Energy Centre, UK.............. UK Electricity Grid 99 25% Gas/Oil
Schkopau Power Station, Germany........ VEAG/Industrials 400 41.67% Coal
MIBRAG mbH, Germany.................... ENVIA/MIBRAG Mines 119 50% Coal
Csepel II, Hungary..................... MVM 389 100% Gas/Oil
ECK Generating, Czech Republic......... STE/Industrials 166 44.50% Coal/Gas/Oil
CEEP Fund, Poland...................... Industrials 1 9.33% Gas/Coal
Other Americas:
TermoRio, Brazil....................... Petrobras 520 50% Gas/Oil
Itiquira Energetica, Brazil............ COPEL/Tradener 154 98.73% Hydro
COBEE, Bolivia......................... Electropaz/ELF 217 98.90% Hydro/Gas
Bulo Bulo, Bolivia..................... Bolivian Grid 53 60% Gas
Energia Pacasmayo, Peru................ Electroperu/Peruvian Grid 66 100% Hydro/Oil
Cahua, Peru............................ Quimpac/Industrials 45 100% Hydro
Latin Power, Various................... Various 52 6.75% Various
THERMAL ENERGY PRODUCTION AND TRANSMISSION FACILITIES
AND RESOURCE RECOVERY FACILITIES
NRG'S
PERCENTAGE THERMAL ENERGY
DATE OF OWNERSHIP PURCHASER/MSW
NAME AND LOCATION OF FACILITY ACQUISITION NET OWNED CAPACITY(1) INTEREST SUPPLIER
----------------------------- ----------- --------------------- ---------- --------------
NRG Energy Center Minneapolis,
Minnesota..................... 1993 Steam: 1,403 mmBtu/hr. 100% Approximately 100 steam
(411 MWt) customers and 40 chilled
Chilled water: 42,450 water customers
tons (149 MWt)
NRG Energy Center San Francisco,
California.................... 1999 Steam: 490 mmBtu/hr. 100% Approximately 185 steam
(144 MWt) customers
NRG Energy Center Harrisburg,
Pennsylvania.................. 2000 Steam: 490 mmBtu/hr. 100% Approximately 295 steam
(144 MWt) customers and 2 chilled
Chilled water: 1,800 water customers
tons (6 MWt)
NRG Energy Center Pittsburgh,
Pennsylvania.................. 1999 Steam: 260 mmBtu/hr. 100% Approximately 30 steam
(76 MWt) and 30 chilled water
Chilled water: 12,580 customers
tons (44 MWt)
NRG Energy Center San Diego,
California.................... 1997 Chilled water: 8,000 100% Approximately 20 chilled
tons (28 MWt) water customers
Hennepin Co. Energy Center,
Minnesota..................... N/A Steam: 140 mmBtu/hr. -- NRG Energy Center
(41 MWt) Minneapolis Customers
24
NRG'S
PERCENTAGE THERMAL ENERGY
DATE OF OWNERSHIP PURCHASER/MSW
NAME AND LOCATION OF FACILITY ACQUISITION NET OWNED CAPACITY(1) INTEREST SUPPLIER
----------------------------- ----------- --------------------- ---------- --------------
NRG Energy Center Rock-Tenn,
Minnesota..................... 1992 Steam: 430 mmBtu/hr. 100% Rock-Tenn Company
(126 MWt)
Camas Power Boiler,
Washington.................... 1997 Steam: 200 mmBtu/hr. 100% Georgia-Pacific Corp.
(59 MWt)
NRG Energy Center Dover,
Delaware...................... 2000 Steam: 190 mmBtu/hr. 100% Kraft Foods Inc.
(56 MWt)
NRG Energy Center Washco,
Minnesota..................... 1992 Steam: 160 mmBtu/hr. 100% Andersen Corporation,
(47 MWt) Minnesota Correctional
Facility
Energy Center Kladno, Czech
Republic (2).................. 1994 227 mmBtu/hr. (67 MWt) 44.40% City of Kladno
Csepel I, Budapest, Hungary..... 2001 396 mmBtu/hr. (116 100% Industrial customers
MWt)
RESOURCE RECOVERY FACILITIES
Newport, Minnesota.............. 1993 MSW: 1,500 tons/day 100% Ramsey and Washington
Counties
Elk River, Minnesota............ 2001 MSW: 1,275 tons/day 85% Anoka, Hennepin, and
Sherburne Counties;
Tri-County Solid Waste
Management Commission
Penobscot Energy Recovery,
Maine......................... 1997 MSW: 590 tons/day 59% Bangor Hydroelectric
Company
---------------
(1) Thermal production and transmission capacity is based on 1,000 Btus per
pound of steam production or transmission capacity. The unit mmBtu is equal
to one million Btus.
(2) Kladno also is included in the Independent Power Production and Cogeneration
Facilities table on the preceding page, under the name ECK Generating.
OTHER PROPERTIES
In addition to the above, NRG Energy leases its corporate offices at 901
Marquette, Suite 2300, Minneapolis, Minnesota 55402 and various other office
spaces.
25
ITEM 3 -- LEGAL PROCEEDINGS
FORTISTAR CAPITAL V. NRG ENERGY
In July 1999, Fortistar Capital Inc., a Delaware corporation, filed a
complaint in District Court (Fourth Judicial District, Hennepin County) in
Minnesota against NRG Energy asserting claims for injunctive relief and for
damages as a result of NRG Energy's alleged breach of a confidentiality letter
agreement with Fortistar relating to the Oswego facility in New York. NRG Energy
disputed Fortistar's allegations and asserted numerous counterclaims, and in
October 1999, NRG Energy, through a wholly-owned subsidiary, closed on the
acquisition of the Oswego facility. In April and December 2000, NRG Energy filed
summary judgment motions to dispose of the litigation. A hearing on these
motions was held in February 2001 and certain of Fortistar's claims were
dismissed. NRG Energy intends to continue to vigorously defend the suit and
believes Fortistar's claims to be without merit. A trial date of May 13, 2002
has been set in respect of the remaining claims.
NEW YORK ENVIRONMENTAL LITIGATION
In January 2002 the New York Attorney General and the New York Department
of Environmental Control (NYDEC) filed suit in the western district of New York
against NRG Energy and Niagara Mohawk Power Corporation (Niagara Mohawk), the
prior owner of the Huntley and Dunkirk facilities in New York. The lawsuit
relates to physical changes made at those facilities prior to NRG Energy's
assumption of ownership. The complaint alleges that these changes represent
major modifications undertaken without the required permits having been
obtained. Although NRG Energy has a right to indemnification by the previous
owner for fines, penalties, assessments and related losses resulting from the
previous owner's failure to comply with environmental laws and regulations, NRG
Energy could be enjoined from operating the facilities if the facilities are
found not to comply with applicable permit requirements.
In July 2001, Niagara Mohawk Power Corporation filed a declaratory judgment
action in the Supreme Court for the State of New York, County of Onondaga,
against NRG Energy and its wholly-owned subsidiaries, Huntley Power LLC and
Dunkirk Power LLC. Niagara Mohawk requests a declaration by the Court that,
pursuant to the terms of the Assets Sales Agreement under which NRG Energy
purchased the Huntley and Dunkirk generating facilities from Niagara Mohawk (the
ASA), defendants have assumed liability for any costs for the installation of
emissions controls or other modifications to or related to the Huntley or
Dunkirk plants imposed as a result of violations or alleged violations of
environmental law. Niagara Mohawk also requests a declaration by the Court that,
pursuant to the ASA, defendants have assumed all liabilities, including
liabilities for natural resource damages, arising from emissions or releases of
pollutants from the Huntley and Dunkirk plants, without regard to whether such
emissions or releases occurred before, on or after the closing date for the
purchase of the Huntley and Dunkirk plants. NRG Energy has counterclaimed
against Niagara Mohawk, and the parties have exchanged discovery requests.
NYDEC OPACITY NOTICE OF VIOLATION
NRG Energy became part of an opacity consent order as a result of acquiring
its Huntley, Dunkirk and Oswego plants from Niagara Mohawk. At the time of
financial close on these assets, a consent order was being negotiated between
Niagara Mohawk and the NYDEC; it required Niagara Mohawk to pay a stipulated
penalty for each opacity event at these facilities. On January 14, 2002, the
NYDEC issued NRG Energy Notices of Violations (NOV) for opacity events which had
occurred since the time NRG Energy assumed ownership of the Huntley, Dunkirk and
Oswego generating stations. The NOVs allege that a total of 7,231 events had
occurred where the average opacity during a six minute block of time had
exceeded 20%. The NYDEC set the penalty associated with the NOVs at $900,000.
CALIFORNIA LITIGATION
NRG Energy and other power generators and power traders have been named as
defendants in certain private plaintiff class actions filed in the Superior
Court of the State of California for the County of San Diego in San Diego,
California in November 2000 (Pamela R. Gordon v. Reliant Energy, Inc., et al.
and Ruth Hendricks
26
v. Dynegy Power Marketing Inc., et al). NRG Energy has also been named in
another suit filed in January 2001 in San Diego County and brought by three
California water districts, as consumers of electricity (Sweetwater Authority v.
Dynegy, Inc., et al.), and in two suits filed in San Francisco County, one
brought by the San Francisco City Attorney on behalf of the people of the State
of California (The People of the State of California v. Dynegy Power Marketing,
Inc., et al.) and one brought by Pier 23 Restaurant as a class action (Pier 23
Restaurant v. PG&E Energy Trading, et al.). Certain NRG Energy affiliates in NRG
Energy's West Coast power partnership with Dynegy (Cabrillo I and II, Long Beach
Generation and El Segundo Power) have been named as defendants in a state court
action in Los Angeles County (Bustamonte v. Dynegy, Inc., et al.).
Although the complaints contain a number of allegations, the basic claim is
that, by underbidding forward contracts and exporting electricity to surrounding
markets, the defendants, acting in collusion, were able to drive up wholesale
prices on the Real Time and Replacement Reserve markets, through the Western
Coordinating Council and otherwise. The complaints allege that the conduct
violated California antitrust and unfair competition laws. NRG Energy does not
believe that it has engaged in any illegal activities, and intends to vigorously
defend these lawsuits. These six civil actions brought against NRG Energy and
other power generators and power traders in California have been consolidated
and assigned to the presiding judge of the San Diego County Superior Court, and
a pre-trial conference has been scheduled for March 2002. The plaintiffs in
these six consolidated civil actions have filed a master amended complaint with
the Superior Court of the State of California, County of San Diego. The
plaintiffs reiterate the allegations contained in their complaints and allege
that defendants' anti-competitive conduct damaged the general public and class
members in an amount in excess of $1.0 billion.
On March 20, 2002 the Attorney General of California filed at the Federal
Energy Regulatory Commission a complaint against specific named generators and
marketers (including Dynegy Power Marketing, Inc., which serves as the
scheduling coordinator for certain NRG affiliates) and against "all other public
utility sellers of energy and ancillary services into markets operated by the
California Power Exchange and California Independent System Operator." The
complaint alleges that defendants have violated FERC's grant of market-based
rate authority by failing to file their rates, as required by Section 205(c) of
the Federal Power Act and numerous FERC orders requiring the filing of
transaction-specific information about defendants' sales and purchases at
market-based rates. The plaintiff seeks injunctive relief to compel defendants'
prospective compliance with Section 205 of the Federal Power Act, as well as
refunds on behalf of California purchasers to the extent prior transactions are
found to exceed just and reasonable price levels.
On March 27, 2002, the Attorney General of California requested that Xcel,
Inc., NRG Energy, Inc., Dynegy, Inc., Dynegy Power Marketing, Inc., and certain
NRG affiliates agree to toll the statute of limitations for a threatened action
under the Clayton Antitrust Act. The Attorney General has neither provided a
draft complaint nor served an actual complaint, but the Company expects to see a
draft complaint within the next several weeks.
SHAREHOLDER LITIGATION
On February 15, 2002, Xcel Energy announced its intention to commence an
exchange offer to acquire all of the outstanding publicly held shares of NRG
Energy. Following this announcement, nine separate but similar civil actions
were filed in the Court of Chancery of the State of Delaware in and for New
Castle County by owners of NRG Energy common stock, against Xcel Energy, NRG
Energy and NRG Energy's directors. The complaints contain a number of
allegations, but the basic claim is that Xcel proposes to acquire the remaining
ownership of NRG Energy for inadequate consideration and without full and
complete disclosure of all material information, in breach of defendants'
fiduciary duties. The complaints request the court to enjoin the proposed
transaction and, in the event the exchange offer is consummated, to award
damages to plaintiffs. An NRG Energy stockholder has also filed a class action
complaint challenging the transaction in a Minnesota state court against Xcel
Energy, NRG Energy, and seven of the nine NRG Energy directors, alleging
essentially the same charges.
27
ANCILLARY SERVICES
On March 11, 2002, the Attorney General of California filed a civil
complaint against NRG Energy, certain NRG Energy affiliates, Xcel Energy,
Dynegy, Inc. and Dynegy Power Marketing, Inc., alleging antitrust violations in
the ancillary services market. The complaint alleges that defendants repeatedly
sold electricity generating capacity to the California ISO for use as a reserve
and subsequently, and impermissibly, sold the same capacity into the "spot"
market for wholesale power, unlawfully collecting millions of dollars. Similar
complaints were filed against other power generators. The plaintiff seeks an
injunction against further similar acts by the defendants, and also seeks
restitution, disgorgement of all proceeds, including profits, gained from these
sales, and certain civil penalties.
There are no other material legal proceedings pending to which NRG Energy
is a party. There are no material legal proceedings to which an officer or
director is a party or has a material interest adverse to NRG Energy or its
subsidiaries. There are no other material administrative or judicial proceedings
arising under environmental quality or civil rights statutes pending or known to
be contemplated by governmental agencies to which NRG Energy is or would be a
party.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were considered during the fourth quarter of 2001.
PART II
ITEM 5 -- MARKET PRICE FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
QUARTERLY STOCK DATA
NRG Energy's common stock is traded principally on the New York Stock
Exchange (the Exchange). The common stock was first traded on the Exchange on
May 31, 2000, concurrent with the underwritten initial public offering of shares
of NRG Energy's common stock at an initial price to the public of $15.00 per
share. The following table reflects the range of high and low selling prices of
NRG Energy's common stock by quarter from May 31, 2000 through December 31,
2001. This information is based on selling prices as reported by the New York
Stock Exchange.
2001 2000
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter....................................... $36.40 $22.19 N.A. N.A.
Second Quarter...................................... $35.75 $21.38 $18.15 $16.25
Third Quarter....................................... $25.30 $13.72 $36.50 $18.15
Fourth Quarter...................................... $20.47 $12.24 $36.50 $22.50
N.A. -- Not available -- stock not publicly traded
HOLDERS
At March 6, 2002, there were approximately 278 holders of record of common
stock and 1 holder of Class A common stock.
28
DIVIDENDS ON COMMON STOCK
NRG Energy has not paid and does not currently intend to distribute any
earnings as dividends.
ITEM 6 -- SELECTED FINANCIAL DATA
The following table presents selected financial data of NRG Energy. This
historical data should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto in Item 8 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
(In thousands, except per share data.) ----------- ---------- ---------- ---------- ----------
Total operating revenues and equity
earnings.......................... $ 3,008,640 $2,157,986 $ 500,018 $ 182,130 $ 118,252
Total operating costs and expenses... 2,293,818 1,584,913 390,498 125,118 100,143
Net Income.......................... 265,204 182,935 57,195 41,732 21,982
Weighted Average Number of Common
Shares Outstanding -- Basic....... 194,929 165,861 147,605 147,605 147,605
Weighted Average Number of Common
Shares Outstanding -- Diluted..... 196,439 166,989 147,605 147,605 147,605
Earnings per Weighted Average Common
Share -- Basic.................... $ 1.36 $ 1.10 $ .39 $ .28 $ .15
Earnings per Weighted Average Common
Share -- Diluted.................. 1.35 1.10 .39 .28 .15
Total Assets........................ 12,894,545 5,978,992 3,431,684 1,293,426 1,168,102
Long-term debt, including current
Maturities........................ 8,343,986 3,797,318 1,971,860 626,476 620,855
---------------
* Earnings Per Share amounts for the years 1999 and earlier have been restated
to reflect the issuance of Class A common stock.
29
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31,
2000
EARNINGS PER SHARE
Earnings per share on a fully diluted basis for 2001 were $1.35, compared
to $1.10 for 2000, an increase of $0.25 or approximately 22.7%. During the year
2001, earnings per share were adversely affected through additional dilution
resulting from the issuance of 18.4 million shares of common stock in March 2001
and through the issuance and exercise of stock options throughout the year, as
compared to 2000.
NET INCOME
Net income for 2001 was $265.2 million, compared to $182.9 million for
2000, an increase of $82.3 million or approximately 45.0%. Net income for 2001
increased by $82.3 million due to the factors described below.
REVENUES AND EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
For the year ended December 31, 2001, NRG Energy had total revenues and
equity earnings of $3.0 billion, compared to $2.2 billion for 2000, an increase
of $850.7 million or approximately 39.4%.
REVENUES FROM MAJORITY-OWNED OPERATIONS
NRG Energy's operating revenues from majority-owned operations were $2.8
billion compared to $2.0 billion, an increase of $780 million or approximately
38.6%. Revenues from majority-owned operations for the year ended December 31,
2001, consisted primarily of power generation revenues from domestic operations
of approximately $1.8 billion, operations in Europe of $490.9 million,
Asia-Pacific $239.1 million and Other Americas $34.7 million, resulting in
increases of $256.5 million, $293.2 million, $144.4 million and $34.4 million
compared to 2000, respectively. In addition, NRG Energy recognized revenues from
majority-owned operations from its alternative energy, thermal and other
operations of approximately $79.5 million, $108.3 million and $10.9 million
respectively, resulting in increases of $37.9 million, $20.5 million and a
decrease of $6.9 million compared to 2000, respectively.
The increase of $256.5 million related to NRG Energy's domestic power
generation operations is due primarily to additional sales at NRG Energy's Mid
Atlantic region facilities which were acquired in June 2001 from Conectiv and
increased sales at NRG Energy's South Central region facilities which were
primarily acquired in March 2000 from Cajun Electric and expanded with the
acquisition of the Batesville facility from LS Power in January 2001 and
completion of the Sterlington and Big Cajun 1 peaking facilities in 2001.
The increase of $293.2 million related to NRG Energy's Europe power
generation operations is due primarily to operations at Entrade, the Csepel
facility in Hungary and Saale Energia in Germany (SEG). Entrade was acquired in
November 2000, Csepel was acquired in June 2001 and SEG through an increase in
ownership became consolidated in March 2001.
The increase of $144.4 million related to NRG Energy's Asia-Pacific's power
generation operations is due primarily to a full year of operations at the
Flinders Power facilities which was acquired in August 2000 and to a lesser
degree the addition of the Hsin Yu Development Company facilities in July 2001.
The increase of $34.4 million related to NRG Energy's Other America's power
generation operations is due primarily to the consolidation in 2001 of the COBEE
and Bulo Bulo facilities which were previously accounted for under the equity
method.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
For the year ended December 31, 2001, NRG Energy had equity in earnings of
unconsolidated affiliates of $210.0 million, compared to $139.4 million for
2000, an increase of $70.6 million or approximately 50.7%. The increase of $70.6
million is primarily comprised of favorable results from NRG Energy's domestic
and
30
international power generation equity investments. During 2001, NRG Energy's
domestic power generation investment in West Coast Power contributed $41.0
million of this increase. NRG Energy's international power generation
investments in MIBRAG, Loy Yang and Kladno (ECKG) also favorably contributed to
equity in earnings for 2001 in comparison to 2000. MIBRAG favorably contributed
$13.3 million, Loy Yang favorably contributed $11.7 million due to improved
market prices in Australia, Kladno contributed $6.6 million, Enfield contributed
$7.4 million and Kondapalli contributed $3.8 million. These increases were
partially offset by unfavorable results at NRG Energy's other investments
accounted for under the equity method and continued reductions in the equity
earnings attributable to NEO Corporation. NEO Corporation derives a significant
portion of its net income from Section 29 tax credits.
OPERATING COSTS AND EXPENSES
For the year ended December 31, 2001, cost of majority-owned operations was
$1.9 billion compared to $1.3 billion for 2000, an increase of $566.2 million or
approximately 43.9%. For the years ended December 31, 2001 and 2000, cost of
majority-owned operations represented approximately 66.3% and 63.9% of revenues
from majority-owned operations, respectively. Cost of majority-owned operations
consists primarily of cost of energy (primarily fuel costs), labor, operating
and maintenance costs and non-income based taxes related to NRG Energy's
majority-owned operations.
Approximately 89% of the increase in operating costs and expenses for 2001
compared to 2000 of $566.2 million is primarily due to increased cost of energy
incurred at NRG Energy's generating facilities.
The majority of the growth in cost of majority owned operations was due to
NRG Energy's recent international acquisitions. In the third and fourth quarters
of 2000, NRG Energy completed the Flinders and Entrade acquisitions, during the
second quarter of 2001, NRG Energy increased its ownership in the Schkopau,
Cobee and Bulo Bulo projects as well as acquired the Csepel facility in Hungary.
During the third quarter NRG Energy acquired a 60% interest in the Hsin Yu
Energy Development Company. These recent acquisitions accounted for
approximately $370.7 million of the increase in the cost of majority-owned
operations the remaining increase is due primarily to increased operating costs
at the South Central region generating facilities, the recently acquired
Mid-Atlantic generating facilities and costs incurred by NRG Energy's power
marketing operations.
DEPRECIATION AND AMORTIZATION
For the year ended December 31, 2001, depreciation and amortization was
$212.5 million, compared to $122.9 million for the year ended December 31, 2000,
an increase of $89.5 million or approximately 72.8%. This increase is primarily
due to the addition of property, plant and equipment related to NRG Energy's
recently completed acquisitions of electric generating facilities. Approximately
$57.2 million of this increase is related to increased depreciable balances
resulting from recently completed domestic acquisitions and the remainder is
related to recently completed international acquisitions. Through primarily
acquisitions NRG Energy's net property, plant and equipment balance has grown to
$9.4 billion, at the end of 2001 from $4.0 billion, at the end of 2000, an
increase of $5.4 billion, or approximately 133.4%.
GENERAL, ADMINISTRATIVE AND DEVELOPMENT
For the year ended December 31, 2001, general, administrative and
development costs were $225.7 million, compared to $172.5 million, an increase
of $53.2 million or approximately 30.8%. This increase is primarily due to
increased business development activities, associated legal, technical and
accounting expenses, employees and equipment resulting from expanded operations
and pending acquisitions. This also includes a $10.3 million expense related to
Enron's bankruptcy. This amount includes a pre-tax charge of $22.4 million to
establish bad debt reserves, which was partially offset by a pre-tax gain of
$12.1 million on a credit swap agreement entered into as part of the NRG
Energy's credit risk management program.
31
OTHER INCOME (EXPENSE)
For the year ended December 31, 2001, total other expense was $416.2
million, compared to $297.4 million for the year ended December 31, 2000, an
increase of $118.8 million or approximately 40.0%. The increase in total other
expense of $118.8 million, from 2000, consisted primarily of an increase in
interest expense that was partially offset by an increase in other income and a
reduction in minority interest in earnings of consolidated subsidiaries.
For the year ended December 31, 2001, interest expense (which includes both
corporate and project level interest expense) was $443.7 million, compared to
$293.9 million in 2000, an increase of $149.8 million or approximately 51.0%.
This increase is due to increased corporate and project level debt issued during
2001. During 2001, NRG Energy issued substantial amounts of long-term debt at
both the corporate level (recourse debt) and project level (non-recourse debt)
to either directly finance the acquisition of electric generating facilities or
refinance short-term bridge loans incurred to finance such acquisitions. NRG
Energy also completed its issuance of a $2 billion construction revolver during
2001 of which approximately $697.5 million is outstanding as of December 31,
2001. NRG Energy's outstanding debt balances has grown to $9.2 billion at the
end of 2001 from $3.8 billion at the end of 2000. The growth in the outstanding
debt balance has contributed directly to the growth in interest expense during
2001, as compared to 2000.
For the year ended December 31, 2001, minority interest in earnings of
consolidated subsidiaries was $6.6 million, compared to $11.3 million, a
decrease of $4.7 million or approximately 42.1%, as compared to 2000. The
decrease is primarily due to lower earnings from the Crockett Cogeneration
project which resulted from bad debt reserves established in 2001.
For the year ended December 31, 2001, other income, net, was $34.1 million,
as compared to $7.9 million, for the year ended December 31, 2000, an increase
of $26.2 million, or approximately 333.8%. Other income, net consists primarily
of interest income on cash balances and loans to affiliates, and miscellaneous
other items, including the income statement impact of certain foreign currency
translation adjustments and the impact of gains and losses on the dispositions
of investments. Approximately $18.0 million of the increase relates to interest
on cash balances and loans to affiliates, primarily West Coast Power. The
increase also includes gains on foreign currency translation adjustments and
miscellaneous asset sales that were partially offset by a $3.8 million charge to
write-off capitalized costs associated with the Estonia project.
INCOME TAX
For the year ended December 31, 2001, income tax expense was $33.4 million,
compared to an income tax expense of $92.7 million for the year ended December
31, 2000, a decrease of $59.3 million, or approximately 64.0%. Approximately
$14.7 million of the decrease is attributed to additional IRC Section 29 energy
credits that were recorded in 2001, as compared to the same period in 2000. NRG
Energy reported a worldwide effective tax rate of approximately 27.5% (before
tax credits) for the year ended December 31, 2001, compared to approximately
46.0% for the year ended December 31, 2000. The overall reduction in tax rates
was primarily due to the implementation of state tax planning strategies and a
higher percentage of NRG's overall earnings derived from foreign projects in
lower tax jurisdictions.
FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31,
1999
For the year ended December 31, 2000, net income was $182.9 million
compared to $57.2 million for 1999, an increase of $125.7 million or 219.8%.
This increase was due to the factors described below.
REVENUES AND EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
For the year ended December 31, 2000, NRG Energy had total revenues and
equity earnings of $2.2 billion, compared to $500.0 million for the year ended
December 31, 1999, an increase of $1.7 billion or approximately 331.6%. NRG
Energy's operating revenues from majority-owned operations were $2.0 billion
compared to $432.5 million, an increase of $1.6 billion or approximately 366.7%.
The increase in revenues from majority-owned operations is primarily due to
increased sales resulting from recently completed acquisitions of electric
generating facilities, primarily during the later portion of 1999 and the first
and third
32
quarters of 2000. During the later portion of 1999, NRG Energy acquired certain
electric generating facilities in the northeastern region of the United States.
In addition, NRG Energy acquired certain electric generating facilities located
in Louisiana and the United Kingdom at the end of the first quarter of 2000.
During the third quarter of 2000, NRG Energy acquired Flinders Power and certain
thermal operations. In addition, NRG Energy's increased ownership in Crockett
Cogeneration has contributed significantly to its revenue growth during 2000, as
compared to 1999.
For the year ended December 31, 2000, NRG Energy had equity in earnings of
unconsolidated affiliates of $139.4 million, compared to $67.5 million for the
year ended December 31, 1999, an increase of $71.9 million or 106.5%. The
increase in equity earnings of unconsolidated affiliates is due primarily to NRG
Energy's investment in West Coast Power LLC, which benefited from favorable
market conditions in California. In addition, NRG Energy's investment in Rocky
Road LLC, in the fourth quarter of 1999, also contributed favorably to the
increase in equity earnings, compared to the prior year. These increases were
partially offset by reductions in the earnings attributable to NRG Energy's
international equity investments and its investment in NEO Corporation. NEO
Corporation derives a significant portion of its net income from Section 29 tax
credits.
OPERATING COSTS AND EXPENSES
For the year ended December 31, 2000, cost of majority-owned operations,
was $1.3 billion, compared to $269.9 million, an increase of $1.0 billion or
approximately 377.8%. For the year ended December 31, 2000 and 1999, cost of
majority-owned operations represented approximately 59.8% and 54.0% of total
operating revenues and equity earnings, respectively.
For the year ended December 31, 2000, the increase of $1.0 billion is
primarily due to NRG Energy's recent acquisitions of electric generating
facilities during the later portion of 1999 and primarily the first and third
quarters of 2000. During the later portion of 1999, NRG Energy acquired certain
electric generating facilities in the northeastern region of the United States.
In addition, NRG Energy acquired certain electric generating facilities located
in Louisiana and the United Kingdom at the end of the first quarter of 2000.
During the third quarter of 2000, NRG Energy acquired Flinders Power and certain
thermal operations. In addition, NRG Energy's ownership in Crockett Cogeneration
has contributed significantly to the growth the cost of majority-owned
operations during 2000, as compared to 1999.
DEPRECIATION AND AMORTIZATION
For the year ended December 31, 2000, depreciation and amortization was
$122.9 million, compared to $37.0 million for the year ended December 31, 1999,
an increase of $85.9 million or 232.1%. This increase is primarily due to the
addition of property, plant and equipment related to NRG Energy's recently
completed acquisitions of electric generating facilities during the later
portion of 1999 and primarily the first and third quarters of 2000. In addition
the consolidation of NRG Energy's investment in Crockett Cogeneration at the end
of 1999 also contributed to the increase in depreciation and amortization during
2000. Through these acquisitions NRG Energy's net property, plant and equipment
balance has grown to $4.0 billion at the end of 2000 from $2.0 billion at the
end of 1999, an increase of $2.0 billion or approximately 104.6%.
GENERAL, ADMINISTRATIVE AND DEVELOPMENT
For the year ended December 31, 2000, general, administrative and
development costs were $172.5 million, compared to $83.6 million, an increase of
$88.9 million or approximately 106.4%. This increase is primarily due to
increased business development activities, associated legal, technical and
accounting expenses, employees and equipment resulting from expanded operations
and pending acquisitions. NRG Energy's asset base has grown to $6.0 billion at
the end of 2000, compared to $3.4 billion at the end of 1999, an increase of
$2.5 billion or approximately 74.2%. NRG Energy expects this trend to continue
as it continues to be successful in expanding its operations through closure of
its pending acquisitions and business development activities.
33
OTHER INCOME (EXPENSE)
For the year ended December 31, 2000, total other expense was $297.4
million, compared to $78.4 million for the year ended December 31, 1999, an
increase of $219.0 million or approximately 279.3%.
The increase in total other expense of $219.0 million, as compared to 1999,
consisted primarily of an increase in Interest expense and Minority interest in
earnings of consolidated subsidiary. These increases were partially offset by
decreases in other income, net and gain on sale of interest in projects, in
comparison to 1999.
For the year ended December 31, 2000, interest expense (which includes both
corporate and project level interest expense) was $293.9 million, as compared to
$93.4 million in 1999, an increase of $200.5 million or approximately 214.8%.
This increase is due to increased corporate and project level debt issued during
2000 as compared to 1999. During 2000, NRG Energy issued substantial amounts of
long term debt at both the corporate level (recourse debt) and project level
(non-recourse debt) to either directly finance the acquisition of electric
generating facilities or refinance short term bridge loans incurred to finance
such acquisitions. NRG Energy's outstanding long-term debt balances have grown
to $3.8 billion at the end of 2000 from $2.0 billion at the end of 1999. The
growth of such outstanding debt balances has contributed directly to the growth
in interest expense during 2000 as compared to 1999.
For the year ended December 31, 2000, minority interest in earnings of
consolidated subsidiaries was $11.3 million, compared to $2.5 million, an
increase of $8.8 million or approximately 361.5% as compared to 1999. The
increase is due to the consolidation of NRG Energy's 58% interest in Crockett
Cogeneration at the end of 1999 and the recognition of the minority interest in
the project.
For the year ended December 31, 2000, NRG Energy did not recognize any
gains on the sale of any project interests. During 1999 NRG Energy recognized a
gain of $11.0 million related to the reduction in its ownership of Cogeneration
Corporation of America (CogenAmerica). For the year ended December 31, 2000,
other income, net, was $7.9 million, as compared to $6.4 million, for the year
ended December 31, 1999, an increase of $1.5 million, or approximately 22.2%.
Other income, net consists primarily of interest income on loans to affiliates,
and miscellaneous other items, including the income statement impact of certain
foreign currency translation adjustments and the impact of project write-downs
and gains and losses on the dispositions of investments. The increase of $1.5
million is primarily due to an increase in interest income in 2000.
INCOME TAX
For the year ended December 31, 2000, income tax expense was $92.7 million,
compared to an income tax benefit of $26.1 million, an increase of $118.8
million or approximately 455.6%, compared to 1999. The increase in tax expense
in 2000 compared to 1999 is due primarily to higher domestic taxable income.
This increase was partially offset by additional IRC Section 29 energy credits.
For the year ended December 31, 2000, NRG Energy's overall effective income tax
rate was approximately 34%. NRG Energy's effective income tax rate before
recognition of tax credits is 46%. This rate is higher than a combined federal
and Minnesota statutory rate because a significant portion of NRG Energy's
income is generated in New York City, an area with high state and local tax
rates. In addition, NRG Energy has recorded a valuation allowance on certain
state and foreign tax losses, also increasing the effective tax rate.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
NRG Energy's discussion and analysis of its financial condition and results
of operations are based upon NRG Energy's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements and
related disclosures in compliance with generally accepted accounting principles
(GAAP) requires the application of appropriate technical accounting rules and
guidance as well as the use of estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. The application of these policies
necessarily involves judgments regarding future events, including the likelihood
of success of particular projects, legal and regulatory challenges. These
judgments, in and of themselves, could materially impact the financial
statements and disclosures based on varying
34
assumptions, which may be appropriate to use. In addition, the financial and
operating environment also may have a significant effect, not only on the
operation of the business, but on the results reported through the application
of accounting measures used in preparing the financial statements and related
disclosures, even if the nature of the accounting policies have not changed.
On an ongoing basis, NRG Energy, evaluates its estimates, utilizing
historic experience, consultation with experts and other methods NRG Energy
considers reasonable in particular circumstances. In any case, actual results
may differ significantly from NRG Energy's estimates. Any effects on NRG
Energy's business, financial position or results of operations resulting from
revisions to these estimates are recorded in the period in which the facts that
give rise to the revision become known.
NRG Energy's significant accounting policies are summarized in Item
8 -- Note 2 of the Consolidated Financial Statements. The following table
identifies certain of the significant accounting policies listed in Item
8 -- Note 2 of the Consolidated Financial Statements. The table also identifies
the judgments required and uncertainties involved in the application of each.
These policies, along with the underlying assumptions and judgments made by NRG
Energy's management in their application, have a significant impact on NRG
Energy's consolidated financial statements. NRG Energy identifies its most
critical accounting policies as those that are the most pervasive and important
to the portrayal of NRG Energy's financial position and results of operations,
and that require the most difficult, subjective and/or complex judgments by
management regarding estimates about matters that are inherently uncertain.
ACCOUNTING POLICY JUDGMENTS/UNCERTAINTIES AFFECTING APPLICATION
----------------- ---------------------------------------------
Consolidation Policy - Determination of control of investments with less than or
equal to 50% interest
- Consistent application of accounting policies of
partnerships and joint ventures
Capitalization Practices - Determination of beginning and ending of capitalization
periods
Asset Valuation/Purchase - Recoverability of investment through future operations
Accounting - Regulatory and political environments and requirements
- Estimated useful lives of assets
- Allocation of purchase prices to identified assets
Revenue Recognition - Customer/counter-party dispute resolution practices
- Market maturity and economic conditions
- Contract interpretation
Uncollectible Receivables - Economic conditions affecting customers, counter parties,
suppliers and market prices
- Regulatory environment and impact on customer financial
condition
- Outcome of litigation and bankruptcy proceedings
Derivative Financial Instruments - Market conditions in the energy industry, especially the
effects of price volatility on contractual commitments
- Assumptions used in valuation models
- Counter party credit risk
- Market conditions in foreign countries
- Regulatory and political environments and requirements
Environmental Issues - Government regulations and standards
- Results of ongoing research and development regarding
environmental impacts
- Cost of remediation
Benefit Plan Accounting - Future rate of return on pension and other plan assets
- Interest rates used in valuing benefit obligation
35
ACCOUNTING POLICY JUDGMENTS/UNCERTAINTIES AFFECTING APPLICATION
----------------- ---------------------------------------------
Income Tax Reserves - Application of tax statues and regulations to transactions
- Anticipated future decisions of tax authorities
- Ability of tax authority decisions/positions to withstand
legal challenges and appeals
- Ability to utilize tax benefits through future earnings
Of all of the accounting policies identified in the above table, NRG Energy
believes that the following policies and the application thereof to be those
having the most direct impact on NRG Energy's financial position and results of
operations.
CONSOLIDATION POLICY
NRG Energy's consolidated financial statements include NRG Energy's
accounts and those of its subsidiaries. The accounting policies for all of NRG
Energy's operations are in accordance with accounting principles generally
accepted in the United States. NRG Energy has investments in partnerships, joint
ventures and projects, investments such as these in which NRG Energy does not
have control, but has the ability to exercise significant influence over the
operating and financial policies, are accounted for under the equity method.
CAPITALIZATION PRACTICES, ASSET VALUATION AND PURCHASE ACCOUNTING
As of December 31, 2001, NRG Energy has a carrying value of approximately
$9.4 billion of net property, plant and equipment, $2.9 billion of which is
under construction, representing approximately 73.1% and 22.8% of total assets,
respectively. The majority of the carrying value of property, plant and
equipment is the result of NRG Energy's recent asset acquisitions. These amounts
represent the estimated fair values at the date of acquisition. These estimates
may be adjusted based upon completion of certain procedures including third
party valuations. For those assets that were or are being constructed by NRG
Energy the carrying value reflects the application of NRG Energy's property,
plant and equipment policies which incorporate estimates, assumptions and
judgments by management relative to the capitalized costs and useful lives of
NRG Energy's generating facilities. NRG Energy periodically evaluates the
recoverability of the carrying value of its property, plant and equipment when
events or changes in circumstances indicate that the carrying value of such
assets may be impaired. Asset impairment evaluations are, by nature highly
subjective.
REVENUE RECOGNITION AND UNCOLLECTIBLE RECEIVABLES
NRG Energy is primarily an electric generation company, operating a
portfolio of majority-owned electric generating plants and certain plants in
which its ownership is 50% or less which are accounted for under the equity
method of accounting. NRG Energy also produces thermal energy for sale to
customers and collects methane gas from landfill sites, which is then used for
the generation of electricity. Both physical and financial transactions are
entered into to optimize the financial performance of NRG Energy's generating
facilities. Electric energy is recognized upon transmission to the customer.
Capacity and ancillary revenue is recognized when contractually earned. Revenues
from operations and maintenance services, is recognized when the services are
performed. NRG Energy uses the equity method of accounting to recognize it's pro
rata share of the net income or loss of its unconsolidated investments. NRG
Energy continually assesses the collectibility of its receivables and in the
event it believes a receivable to be uncollectible an allowance for doubtful
accounts is recorded or in the event of a contractual dispute the receivable and
corresponding revenue may be considered unlikely of recovery and not recorded in
the financial statements until management is satisfied that it will be
collected.
DERIVATIVE FINANCIAL INSTRUMENTS
In January 2001, NRG Energy adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138.
SFAS No. 133 requires NRG Energy to record all derivatives on the balance sheet
at fair value. Changes in the fair value of non-hedge derivatives
36
are immediately recognized in earnings. Changes in the fair value of derivatives
accounted for as hedges are either recognized in earnings as offset to the
charges in the fair value of the related hedged assets, liabilities and firm
commitments or for forecasted transactions, deferred and recorded as a component
of accumulated other comprehensive income (OCI) until the hedged transactions
occur and are recognized in earnings. NRG Energy primarily applies SFAS No. 133
to long-term power sales contracts, long-term gas purchase contracts and other
energy related commodities financial instruments used to mitigate variability in
earnings due to fluctuations in spot market prices, hedge fuel requirements at
generation facilities and protect investments in fuel inventories. SFAS No. 133
also applies to interest rate swaps and foreign currency exchange rate
contracts. The application of SFAS No. 133 results in increased volatility in
earnings due to the impact market prices have on the market positions and
financial instruments that NRG Energy has entered into. In determining the fair
value of these derivative/financial instruments NRG Energy uses estimates,
various assumptions, judgement of management and when considered appropriate
third party experts in determining the fair value of these derivatives.
LIQUIDITY AND CAPITAL RESOURCES
Historically, NRG Energy and its subsidiaries have obtained cash from
operations, issuance of debt and equity securities, borrowings under credit
facilities, capital contributions from Xcel Energy, reimbursement by Xcel Energy
of tax benefits pursuant to a tax sharing agreement and proceeds from
non-recourse project financings. NRG Energy has used these funds to finance
operations, service debt obligations, fund the acquisition, development and
construction of generation facilities, finance capital expenditures and meet
other cash and liquidity needs.
NRG Energy targets a financial strategy that sustains investment grade
ratings and diversifies investment risk. Specifically, NRG Energy seeks to fund
an average of 50% of its project investments with non-recourse project level
debt, 20% with senior unsecured recourse debt, and 30% with equity and internal
cash generation. The proportion of project financing varies depending on the
dispatch and the quantity of revenues under contract so that base load or highly
contracted plants will typically support greater than 50% non-recourse debt;
whereas merchant or peaking assets will support less than 50% financing. When
taken in total NRG Energy has and will continue to arrange 50% of its financing
with non-recourse project level debt.
Substantially all of NRG Energy's operations are conducted by project
subsidiaries and project affiliates. NRG Energy's cash flow and ability to
service corporate-level indebtedness when due is dependent upon receipt of cash
dividends and distributions or other transfers from NRG Energy's projects and
other subsidiaries. The debt agreements of NRG Energy's subsidiaries and project
affiliates generally restrict their ability to pay dividends, make distributions
or otherwise transfer funds to NRG Energy. As of December 31, 2001, six of NRG
Energy's subsidiaries and project affiliates are restricted from making cash
payments to NRG Energy. Loy Yang, Killingholme, Energy Center Kladno and
Louisiana Generating do not currently meet the minimum debt service coverage
ratios required for these projects to make payments to NRG Energy; Batesville is
resolving equipment problems that will cause its debt service coverage ratio to
fall below the minimum required for distribution, though, irrespective of the
debt service coverage ratio, no distributions to NRG Energy were anticipated
from Batesville in 2002; and Crockett Cogeneration is limited in its ability to
make distributions to NRG Energy and the other partners.
NRG Energy believes that the situations at Louisiana Generating, Energy
Center Kladno, Batesville and Killingholme do not create an event of default and
will not allow the lenders to accelerate the project financings. The forced
outage of one 500 MW unit at Loy Yang combined with current market prices may
lead to an event of default and the possible acceleration of the Loy Yang
project debt in the fourth quarter of 2002, but if insurance claims are paid and
budgeted revenues and costs are achieved, along with replacement of the damaged
unit as scheduled, default will be avoided. Loy Yang then has an AUD $500
million repayment due in May 2003 that will need to be refinanced prior to
maturity.
The bankruptcy of PG&E creates the potential for a covenant default that
would result in the acceleration of the debt at Crockett if not resolved with
the lenders. Management has engaged in active discussions with the lenders to
Crockett since PG&E filed for bankruptcy in April 2001, and Crockett is being
paid each month
37
by PG&E since the bankruptcy filing. Thus NRG Energy believes that an
acceleration of the Crockett debt is unlikely. The U.S. Federal Bankruptcy Court
recently approved the power purchase agreement thereby increasing the likelihood
that Crockett soon will be permitted by the lenders to distribute any excess
cash flows to the partners.
In all of these cases NRG Energy's corporate-level financial obligations to
project lenders is limited to no more than six-months debt service.
CASH FLOWS
2001 2000 1999
---- ---- ----
Net cash provided by (used in) operating activities (in
thousands)............................................... $276,014 $361,678 ($11,380)
Net cash provided by operating activities decreased during 2001 compared
with 2000, primarily due to adverse changes to working capital and increased
undistributed equity earnings from unconsolidated affiliates. These decreases to
net cash were partially offset by increases in net income after non-cash
adjustments for depreciation and amortization in 2001 as compared to 2000. The
adverse changes to working capital are primarily due to increases in inventory
balances, accrued income taxes receivables and changes in other long term assets
and liabilities, partially offset by a favorable change in other current
liabilities.
Net cash provided by operating activities increased during 2000 compared
with 1999, primarily due to increased earnings during the year, increased
depreciation and amortization and deferred income tax and investment tax
credits, non-cash reductions in earnings and improved working capital.
2001 2000 1999
---- ---- ----
Net cash used in investing activities (in
thousands)........................................ ($4,335,641) ($2,204,148) ($1,668,613)
Net cash used in investing activities increased in 2001, compared with
2000, primarily due to additional acquisitions of electric generating facilities
and increased capital expenditures and project investments. Net cash used in
investing activities increased in 2000, compared with 1999, primarily due to
acquisitions of electric generating facilities and increased capital
expenditures and project investments.
2001 2000 1999
---- ---- ----
Net cash provided by financing activities (in
thousands)........................................... $4,153,546 $1,905,870 $1,705,095
Net cash provided by financing activities during 2001 increased, compared
to 2000 due to the issuance of debt and equity securities to finance asset
acquisitions. Net cash provided by financing activities during 2000 increased,
compared to 1999, primarily due to the issuance of debt and equity securities to
finance asset acquisitions.
PROSPECTIVE CAPITAL REQUIREMENTS
In 2002, NRG Energy expects to complete the acquisition from FirstEnergy,
for approximately $1.6 billion in cash and assumed debt, of a portfolio of
assets. The FirstEnergy acquisition is expected to be financed with an $875
million lease with limited recourse to NRG Energy, the assumption of $145
million of municipal debt secured by the Bay Shore facility, and $575 million of
capital raised directly by NRG Energy through internal cash flow and the sale of
existing assets.
CONSTRUCTION PROGRAM REQUIREMENTS
As of December 31, 2001, NRG Energy estimates its capital expenditure
program to be approximately $7.5 billion for the period 2002 - 2006. NRG Energy
expects to spend approximately $1.9 billion in 2002, $1.8 billion in 2003 and
$1.6 billion in 2004. These estimated expenditures are primarily for NRG
Energy's project development program. For 2002, NRG Energy's capital
requirements reflect the expected construction costs for those projects
currently under construction and those expected to begin construction in the
near future. In January 2002, NRG Energy announced that it planned to scale back
its previously announced acquisition and construction plans in order to enhance
its financial position and improve liquidity in 2002. The
38
above amounts reflect this previously announced scaled back construction
schedule. In March 2002, Xcel Energy commenced an exchange offer by which Xcel
Energy would acquire all of the outstanding publicly held shares of NRG Energy.
If successful, Xcel Energy has stated that it intends to delay or cancel $1.6
billion of planned projects, among other actions. The proposed delays or
cancellations have not been factored into the above expected capital
expenditures.
NRG Energy's capital expenditure program is subject to continuing review
and modification. Actual expenditures may differ significantly depending upon
such factors as the success, timing of and the level of involvement in projects
under consideration.
ACQUISITION AND CONSTRUCTION PROGRAM CAPITAL SOURCES
NRG Energy has generally financed the acquisition and development of its
projects under financing arrangements to be repaid solely from each of its
project's cash flows, which are typically secured by the plant's physical assets
and equity interests in the project company.
Financing needs are subject to continuing review and can change depending
on market and business conditions and changes, if any, in the capital
requirements of NRG Energy and its subsidiaries. During the year ended December
31, 2001, NRG Energy financed its acquisition program and construction
activities through a combination of the following corporate level and project
level financings and operating cash flows. The specifics of such financing
arrangements are detailed below:
As of December 31, 2001, NRG Energy had a $500 million recourse revolving
credit facility under a commitment fee arrangement that matures in March of
2002. This facility provided short-term financing in the form of bank loans. At
December 31, 2001, NRG Energy had $170 million outstanding under this facility.
In March 2002, the revolving credit facility terminated and was replaced with a
$1.0 billion 364-day corporate level unsecured revolving line of credit with ABN
AMRO Bank, N.V. as Administrative Agent.
NRG Energy's $1.0 billion 364-day revolving line of credit terminates on
March 7, 2003. The facility is unsecured and provides for borrowings of "Base
Rate Loans" and "Eurocurrency Loans". The Base Rate Loans bear interest at the
greater of the Administrative Agent's prime rate or the sum of the prevailing
per annum rates for overnight funds plus 0.5% per annum, plus an additional
margin which varies based upon NRG Energy's utilization of the facility and its
then-current senior debt credit rating. The Eurocurrency loans bear interest at
an adjusted rate based on LIBOR plus an adjustment percentage which varies
depending on NRG Energy's senior debt credit rating and the amount outstanding
under the facility. The facility contains covenants that, among other things,
restrict the incurrence of liens and require NRG Energy to maintain a net worth
of at least $500 million plus 25% of NRG Energy's consolidated net income from
January 1, 2002 through the determination date. In addition, NRG Energy must
maintain a debt to capitalization ratio of not more than 0.68 to 1.00, and must
maintain an interest coverage ratio of not less than 2.00 to 1.00, as determined
at the end of each fiscal quarter. The failure to comply with any of these
covenants would be an Event of Default under the terms of the credit agreement.
In May 2001, NRG Energy's wholly-owned subsidiary, NRG Finance Company I
LLC, entered into a $2 billion revolving credit facility. The facility has been
and will be used to finance the acquisition, development and construction of
power generating plants located in the United States and to finance the
acquisition of turbines for such facilities. The facility provides for
borrowings of base rate loans and Eurocurrency loans and is secured by mortgages
and security agreements in respect of the assets of the projects financed under
the facility, pledges of the equity interests in the subsidiaries or affiliates
of the borrower that own such projects, and by guaranties from each such
subsidiary or affiliate. Provided that certain conditions are met that assure
the lenders that sufficient security remains for the remaining outstanding
loans, the borrower may repay loans relating to one project and have the liens
relating to that project released. Loans that have been repaid may be
re-borrowed, as permitted by the terms of the facility. The facility terminates
on May 8, 2006. The facility is non-recourse to NRG Energy other than its
obligation to contribute equity at certain times in respect of projects and
turbines financed under the facility. As of December 31, 2001, the aggregate
amount outstanding under this facility was $697.5 million.
39
In January 2001, NRG Energy entered into a bridge credit agreement, with a
final maturity date of December 31, 2001. Approximately $600 million was
borrowed under this facility to partially finance NRG Energy's acquisition of
the LS Power generation assets.
During March of 2001, NRG Energy raised net proceeds of approximately
$473.4 million through a second common stock offering of 18.4 million shares of
common stock. In addition, approximately $278.4 million of net proceeds were
raised through the issuance of 11.5 million equity units. Each equity unit
initially comprises a $25 principal amount of NRG Energy's senior debentures and
an obligation to acquire shares of NRG Energy's common stock no later then May
18, 2004. A portion of the combined net proceeds were used to repay a $600
million bridge credit agreement entered into in January 2001 to acquire certain
generating facilities and projects from LS Power; the remaining net proceeds
were used for general corporate purposes.
In April 2001, NRG Energy issued $690 million of senior notes in two
tranches. The first tranche of $350 million matures in April 2011 and bears an
interest rate of 7.75%. The second tranche of $340 million matures in April 2031
and bears an interest rate of 8.625%. The net proceeds of the issuance were used
for repayment of short-term indebtedness incurred to fund acquisitions, for
investments, general corporate purposes and to provide capital for future
planned acquisitions.
In June 2001, NRG Energy entered into a $600 million term loan facility.
The facility was unsecured and provided for borrowings of base rate loans and
Eurocurrency loans. The facility had a termination date of June 21, 2002. As of
December 31, 2001, the aggregate amount outstanding under this facility was $600
million. NRG Energy repaid this facility in March 2002 in conjunction with the
closing of its new $1.0 billion unsecured corporate level revolving line of
credit and the receipt of $300 million of cash from Xcel Energy.
On June 22, 2001, NRG Mid Atlantic Generating LLC (Mid Atlantic), a wholly
owned subsidiary of NRG Energy, borrowed approximately $420.9 million under a
five year term loan agreement (Agreement) to finance, in part, the acquisition
of certain generating facilities from Conectiv. The Agreement terminates in
November 2005 and provides for a total credit facility of $580 million.
In June 2001, NRG Energy through its wholly owned subsidiaries, Brazos
Valley Energy LP and Brazos Valley Technology LP, entered into a $180 million
non-recourse construction credit facility to fund the construction of the 600 MW
Brazos Valley gas-fired combined cycle merchant generation facility located in
Fort Bend County, Texas. As of December 31, 2001, there exists an outstanding
balance of $159.8 million under this credit agreement.
In connection with NRG Energy's acquisition of the Audrain facilities, NRG
Energy has recognized a capital lease on its balance sheet in the amount of
$239.9 million, as of December 31, 2001. The capital lease obligation is
recorded at the net present value of the minimum lease obligation payable. The
lease terminates in May 2023. In addition, approximately $326 million was drawn
down on NRG Energy's construction revolver to refinance NRG Energy's investment
in the Audrain County Municipal bonds originally issued to finance the
construction of the Audrain generating facility.
In July 2001, NRG Energy completed the sale of $500 million of unsecured
senior notes. The senior notes were issued in two tranches, the first tranche of
$340 million of 6.75% Senior Notes is due July 2006 and the second tranche of
$160 million of 8.625% Senior Notes is due April 2031. NRG Energy received net
proceeds from the sale of both series of notes of approximately $505.2 million,
including interest on the senior notes due 2031, accrued from April 5, 2001. The
net proceeds were used to repay all amounts outstanding under NRG Energy's
revolving credit agreement and for investments, other general corporate purposes
and to provide capital for planned acquisitions.
In August 2001, NRG Energy entered into a 364-day term loan of up to $296
million. The credit facility was structured as a senior unsecured loan and was
partially non-recourse to NRG Energy. The proceeds were used to finance the
McClain generating facility acquisition. In November 2001 the credit facility
was repaid from the proceeds of a $181.0 million term loan and $8.0 million
working capital facility entered into by NRG McClain LLC, with Westdeutsche
Landesbank Girozentrale, New York branch, as agent (Non-recourse to
40
NRG Energy). The final maturity date of the facility is November 30, 2006. As of
December 31, 2001, the aggregate amount outstanding under this facility was
$159.9 million.
REGISTRATION STATEMENTS
In December 2000, NRG Energy filed a universal shelf registration statement
with the SEC. Based on this registration, NRG Energy could issue up to $1.65
billion of debt securities, preferred stock, common stock, depositary shares,
warrants and convertible securities. This registration statement included $150
million of securities that were carried forward from a previous shelf
registration. During March 2001, NRG Energy issued 18.4 million shares of common
stock and 11.5 million corporate units under this shelf registration. There are
no remaining amounts available under this shelf registration as of December 31,
2001.
In June 2001, NRG Energy filed a shelf registration with the SEC to sell up
to $2 billion in debt securities, common and preferred stock, warrants and other
securities. NRG Energy expects to use the net proceeds for general corporate
purposes, which may include the financing and development of new facilities,
working capital and debt reduction. In July 2001, NRG Energy completed the sale
of $500 million of unsecured senior notes under this shelf registration,
approximately $1.5 billion remains available under this facility at December 31,
2001.
PREVIOUSLY EXISTING DEBT AND DEBT ASSUMED UPON ACQUISITION
For additional information on NRG Energy's short term and long term
borrowing arrangements, see Item 8 -- Note 9 to the Consolidated Financial
Statements.
PROJECTED FINANCING NEEDS
NRG Energy expects to meet its future financing requirements through a
combination of internally generated cash, corporate and project level long term
and short term debt, equity securities and equity like securities. As outlined
above, NRG Energy is expected to need approximately $7.5 billion during the
period 2002 - 2006 in order to meet its planned construction schedule. NRG
Energy plans to issue equity in the total amount of $1.1 billion during the
period 2002 - 2006, and project level long term debt financing in the amount of
$6.3 billion during this same period of time. If Xcel Energy successfully
completes its tender offer, NRG Energy's equity capital requirements would come
from cash infusions from Xcel Energy. NRG Energy believes it will be able to
raise the necessary funding in the capital markets in the near term because most
of the project level construction financing has already been committed either
through the $2.0 billion construction revolver or project specific construction
financings.
IMPACT OF A DOWNGRADE OF CREDIT RATING
NRG Energy's unsecured credit rating is BBB- from Standard & Poors's and
Baa3 from Moody's Investors Service. In December 2001, Moody's placed NRG
Energy's credit rating on review for potential downgrade. NRG Energy's credit
rating remains under review by Moody's for potential downgrade.
As of December 31, 2001, NRG Energy's off-balance sheet obligations
pursuant to its guarantees of performance, equity and indebtedness obligations
of its subsidiaries totaled approximately $721.7 million. NRG Energy is directly
liable for the obligations of certain of its project affiliates and other
subsidiaries pursuant to guarantees relating to certain of their indebtedness,
equity and operating obligations. In addition, in connection with the purchase
and sale of fuel emission credits and power generation products to and from
third parties with respect to the operation of some of NRG Energy's generation
facilities in the United States, NRG Energy may be required to guarantee a
portion of the obligations of certain of its subsidiaries.
If Moody's or Standard & Poor's were to downgrade NRG Energy, many of the
corporate guarantees and commitments currently in place would need to be
supported with letters of credit or cash collateral within 5 to 30 days. As of
December 31, 2001, the amount of collateral required, if NRG Energy were
downgraded, was approximately $960 million, to satisfy certain of the above
mentioned guarantees and obligations associated with the $2 billion
construction/acquisition revolver. Of the $960 million in collateral that could
be required,
41
approximately $200 million relates to NRG Energy's guarantees of debt service
reserve accounts required by some of its project-level financings; approximately
$400 million relates to NRG Energy's power marketing activities; and $360
million would be required to support its Contingent Equity Guarantee associated
with the $2 billion construction/acquisition revolver.
Because NRG Energy limits the amount of the guarantees it issues to support
NRG Power Marketing's activities, and because of the relatively small number of
margin accounts in place, even very large changes in market conditions would not
have a material impact on the $400 million of collateral that would be required
for NRG Power Marketing in the event of a downgrade.
In the event of a downgrade, NRG Energy would expect to meet its collateral
obligations with cash on hand, available credit lines provided under its
revolving line of credit potentially from, liquidity support from Xcel Energy
and the issuance of debt into capital markets. Xcel Energy has stated its plan
to infuse approximately $600 million of equity into NRG Energy in 2002 in
connection with its exchange offer and merger. Of this amount, $300 million has
already been provided in the form of a convertible subordinated note that Xcel
Energy has said it will cancel if its exchange offer and merger are completed.
If the offer and merger are not completed, Xcel Energy has said it will continue
to evaluate the terms and timing of any additional investment in NRG Energy. In
March 2002, NRG Energy successfully replaced its corporate level $500 million
unsecured revolving line of credit facility with a new 364-day $1.0 billion
corporate level unsecured revolving line of credit. In addition, NRG Energy will
maintain its $125 million letter of credit facility and plans to secure an
additional $125 million credit facility for total credit facilities of $1.25
billion to be available in 2002.
The Contingent Equity Guarantee associated with NRG Energy's
construction/acquisition revolver could increase to a maximum of $850 million by
the end of 2002 as NRG Energy utilizes the capacity of the
construction/acquisition revolver. Therefore, the amount of collateral required
by the end of 2002 could increase to $1.45 billion.
ASSET SALES
In January 2002, NRG Energy also announced that it has reviewed its
portfolio of operating assets and has identified approximately 650 MW of less
strategic facilities that it plans to put up for sale in the near term and
expects to raise an additional $350-$400 million cash after paying off any
project level debt.
OFF BALANCE-SHEET ITEMS
As of December 31, 2001, NRG Energy does not have any significant
relationships with structured finance or special purpose entities that provide
liquidity, financing or incremental market risk or credit risk. However, as
noted in Item 8 -- Note 9 to the Consolidated Financial Statements, NRG Energy
issued $250 million of 8.70% ROARS due March 2020 through an unconsolidated
guarantor trust. The sole assets of the trust consist of L160 million of Reset
senior notes due March 2020. NRG Energy has numerous investments of generally
less then 50% interests in numerous energy and energy related entities that are
accounted for under the equity method of accounting as disclosed in Item
8 -- Note 6 to the Consolidated Financial Statements. NRG Energy's pro-rata
share of non-recourse debt held by unconsolidated affiliates was approximately
$940 million as of December 31, 2001. In the normal course of business NRG
Energy may be asked to loan funds to these entities on both a long and
short-term basis. Such transactions are generally accounted for as accounts
payables and receivables to/from affiliates and notes receivables from
affiliates and if appropriate, bear market based interest rates. For additional
information regarding amounts accounted for as notes receivables to affiliates
see Item 8 -- Note 8 to the Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
NRG Energy has a variety of contractual obligations and other commercial
commitments that represent prospective cash requirements in addition to its
capital expenditure programs. The following is a summarized
42
table of contractual obligations. See additional discussion in Item 8 -- Notes 9
and 17 to the Consolidated Financial Statements.
PAYMENTS DUE BY PERIOD AS OF DECEMBER 31, 2001 (IN THOUSANDS)
-------------------------------------------------------------
1-3 4-5 AFTER
CONTRACTUAL CASH OBLIGATIONS TOTAL SHORT TERM YEARS YEARS 5 YEARS
---------------------------- ----------- ---------- -------- ---------- ----------
Long term debt................... $ 7,791,660 $ 477,638 $274,914 $2,052,963 $4,986,145
Capital lease obligations........ 552,326 22,516 45,010 45,010 439,790
Operating leases................. 87,779 10,742 19,111 16,311 41,615
Unconditional purchase
obligations.................... 1,900,000 1,900,000 -- -- --
Short term debt.................. 832,156 832,156 -- -- --
----------- ---------- -------- ---------- ----------
Total contractual cash
obligations.................... $11,163,921 $3,243,052 $339,035 $2,114,284 $5,467,550
=========== ========== ======== ========== ==========
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
AS OF DECEMBER 31, 2001 (IN THOUSANDS)
--------------------------------------------------------
TOTAL
AMOUNTS 1-3 4-5 AFTER
OTHER COMMERCIAL COMMITMENTS COMMITTED SHORT TERM YEARS YEARS 5 YEARS
---------------------------- ---------- ---------- ------- ------- ----------
Lines of credit........................ $2,540,000 $540,000 $ -- $ -- $2,000,000
Stand by letters of credit............. 170,287 170,287 -- -- --
Guarantees............................. 721,730 149,450 37,300 19,000 515,980
Standby repurchase obligations......... -- -- -- -- --
Other commercial commitments........... -- -- -- -- --
---------- -------- ------- ------- ----------
Total commercial commitments........... $3,432,017 $859,737 $37,300 $19,000 $2,515,980
========== ======== ======= ======= ==========
INTERDEPENDENT RELATIONSHIPS
NRG Energy does not have any significant interdependent relationships.
Since it is a majority owned subsidiary of Xcel Energy there are certain related
party transactions that take place in the normal course of business. For
additional information regarding NRG Energy's related party transactions see
Item 8 -- Note 7 to the Consolidated Financial Statements and Item 13 -- Certain
Relationships and Related Transactions.
DOMESTIC ENVIRONMENTAL MATTERS
The construction and operation of power projects are subject to stringent
environmental protection and land use regulation in the United States. These
laws and regulations generally require lengthy and complex processes to obtain
licenses, permits and approvals from federal, state and local agencies. If such
laws and regulations are tightened and NRG Energy's facilities are not exempted
from coverage, extensive modifications to further reduce environmental impacts
could be required.
NRG Energy and its subsidiaries continue to strive to exceed compliance
with all environmental regulations currently applicable to their operations.
However, it is not possible at this time to determine when or to what extent
additional facilities or modifications of existing or planned facilities will be
required as a result of changes to environmental regulations, interpretations or
enforcement policies or, generally, what effect future laws or regulations may
have upon NRG Energy's operations. For more information on Environmental Matters
see Item 8 -- Note 17 to the Consolidated Financial Statements.
FEDERAL INITIATIVES
Numerous Federal and legislative initiatives are being undertaken to
control pollutant emissions from fossil-fuel-fired combustion units. All of NRG
Energy's power plants will be affected in some manner by
43
changes that are expected to occur. In Congress, legislation is being proposed
that would impose annual caps on U.S. power plant emissions of nitrogen oxide
(NO(X)), sulfur dioxide (SO(2)), mercury, and, in some instances, carbon dioxide
(CO(2)). NRG Energy is currently participating in the debates around such
legislative proposals as a member of the Electric Power Supply Association. The
U.S. Environmental Protection Agency (USEPA) is set to propose in December 2003
rules governing mercury emissions from power plants; these rules are set to be
finalized on December 2004. In support of maintaining this schedule, a thorough
review of existing power plant mercury emissions data is underway by USEPA and
critical stakeholders.
Federal rules governing ozone season NO(X) emissions across the eastern
United States have been finalized and will now occur in two phases. The first
phase of restrictions will occur in the Ozone Transport Commission region during
the 2003 and subsequent ozone seasons; all of NRG Energy's existing, wholly
owned generating units in the Northeast and Mid-Atlantic regions are included in
this part of the program. The second phase of NO(X) reductions will extend to
states within the ozone transport assessment region and restrict 2004 and
subsequent ozone season NO(X) emissions in most states east of the Mississippi
River.
New rules governing cooling water intake structures at existing facilities
are to be proposed during the first quarter of 2002 and finalized in August of
2003. These rules will specify rules governing the location, design,
construction, and capacity of cooling water intake structures and reflect the
best technology available for minimizing adverse environmental impact therewith.
Other Federal initiatives that would govern regional haze and fine
particulate matter are underway, but under extended compliance timeframes.
REGIONAL INITIATIVES
WEST COAST REGION
The California Air Resources Board (CARB) is required under Senate Bill 28
(SB 28) to develop a schedule for retrofitting, by December 31, 2004, emission
controls on existing power generation facilities. SB 28 requires that the
emission control retrofit schedule be completed by CARB on or before July 1,
2002. CARB's current schedule for implementing the requirements of SB 28 show
final rulemaking by spring of 2003. Because the SB 28 emission control retrofit
requirements are not intended to change local or regional air quality control
requirements, it is difficult to predict what, if any, additional emission
controls would be required on NRG Energy's California assets.
The El Segundo and Long Beach Generating Stations are both regulated by the
South Coast Air Quality Management District's (SCAQMD) Regional Clean Air
Incentives Market (RECLAIM) program. This program, which regulates NO(X)
emissions in the Los Angeles area, was amended on May 11, 2001 and included
major changes with respect to power generation facilities. New RECLAIM Rule 2009
requires all existing power generation facilities to meet Best Available
Retrofit Control Technology (BARCT) for NO(X) emissions from all utility boilers
by January 1, 2003, and for all gas turbine units by January 1, 2004. Under the
new rule, existing power generation facilities were required to submit
compliance plans by September 1, 2001, listing how each unit at the stations
would meet BARCT by the deadlines. El Segundo's compliance plan did not plan for
any additional NO(X) controls to meet BARCT since Units 3 & 4 are already
equipped with SCR technology (first installed on Unit 4 in 1995 and on Unit 3 in
2001) and Units 1 & 2 are expected to be decommissioned in order to build a new
621 MW combined cycle plant. The SCAQMD denied the El Segundo Compliance Plan in
late 2001, citing that the SCRs on Units 3 & 4 could be cost effectively
modified to meet a lower NO(X) emission rate. El Segundo Power, LLC has appealed
this denial because the SCAQMD criteria for cost effectiveness assumes the units
operate at 100% capacity factor, which is not how they truly operate and is
contradictory to SCAQMD rules. The appeal case is still pending. The Long Beach
Generating Station's compliance plan demonstrated that SCR technology is neither
technically feasible nor cost effective and called for approximately $1 million
in modifications to the existing steam injection system to meet BARCT. This
compliance plan is still pending a decision by SCAQMD.
44
NORTHEAST REGION
Final rules implementing changes in air regulations in the states of
Massachusetts and Connecticut were promulgated in 2000. The Connecticut rules
required that existing facilities reduce their emissions of SO(2) in two steps,
the first of which took place on January 1, 2002. The second milestone change is
set to occur on January 1, 2003. NRG Energy is operating in full compliance with
the first phase now and expects to comply with step phase changes in accordance
with the established schedule. Connecticut's rules governing emissions of NO(X)
were modified to restrict the average, non-ozone season NO(X) emission rate to
0.15 pound per million Btu heat input. NRG Energy will comply with the new NO(X)
rules, in part, through selective firing of natural gas.
The new Massachusetts rules set forth schedules under which six existing
coal-fired power plants were required to meet stringent emission limits for
NO(X), SO(2), mercury, and CO(2). Control of carbon monoxide and particulate
matter emissions were reserved for future consideration. NRG Energy has
submitted an Emission Control Plan (ECP) to the Massachusetts Department of
Environmental Protection (MADEP) which identified natural gas reburn technology
as an option for meeting the NO(X) and SO(2) limits specified in the new rule.
NRG Energy is conducting ongoing discussions with MADEP with respect to
finalizing its ECP. By December 1, 2002, MADEP is to complete an evaluation of
the technological and economic feasibility of controlling and eliminating
emissions of mercury from the combustion of solid fossil fuel in Massachusetts.
Within six months of completing the feasibility evaluation, MADEP must propose
emission standards for mercury, with a proposed compliance date of October 1,
2006. NRG Energy is still considering its options with respect to how it will
address MADEP's CO(2) emission standards. Such options include filing a legal
challenge with respect to MADEP's legal authority to regulate CO(2) emissions.
New rules reducing allowable SO(2) and NO(X) emissions from large,
fossil-fuel-fired combustion units in New York State were expected to be
proposed in January 2002. No word has been released with regard to the reason
the proposal of these rules has been delayed. NRG Energy has provided comments
as part of New York State coalition of electricity producers on major conceptual
flaws contained in pre-publication releases of the proposed rule.
SOUTH-CENTRAL REGION
The Louisiana Department of Environmental Quality has promulgated State
Implementation Plan revisions to bring the Baton Rouge ozone non-attainment area
into compliance with National Ambient Air Quality Standards. NRG Energy
participated in development of the revisions which require NO(X) emissions to be
reduced at the Big Cajun II Power Station to 0.21 pounds per million Btu heat
input. This revision of the Louisiana air rules would appear to constitute a
change-in-law covered by agreement between Louisiana Generating LLC and the
electric cooperatives allowing the costs of added controls to be passed through
to the cooperatives.
MID-ATLANTIC AND NORTH-CENTRAL REGION
No material impending rule changes affecting NRG Energy's existing
facilities have been proposed in either of these regions.
INTERNATIONAL ENVIRONMENTAL MATTERS
Most of the foreign countries in which NRG Energy owns or may acquire or
develop independent power projects have laws or regulations relating to the
ownership or operation of electric power generation facilities. These laws and
regulations are typically significant for independent power producers because
they are still changing and evolving.
NRG Energy retains appropriate advisors in foreign countries and seeks to
design its international development and acquisition strategy to comply with and
take advantage of opportunities presented by each
45
country's energy laws and regulations. There can be no assurance that changes in
such laws or regulations could not adversely affect NRG Energy's international
operations.
RECENT ACCOUNTING DEVELOPMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized but instead be tested for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-lived assets and for Long-lived Assets to Be Disposed Of." Goodwill will no
longer be amortized to comply with the provisions of SFAS No. 142. Instead,
goodwill and intangible assets that will not be amortized should be tested for
impairment annually and on an interim basis if an event occurs or a circumstance
changes between annual tests that may reduce the fair value of a reporting unit
below its carrying value. An impairment test is required to be performed within
six months of the date of adoption, and the first annual impairment test must be
performed in the year the statement is initially adopted.
NRG Energy and its subsidiaries, as required, adopted SFAS No. 142 on
January 1, 2002. At December 31, 2001, NRG Energy had intangible assets of $97.1
million, including $56.6 million of goodwill. These amounts and all intangible
assets and goodwill acquired in the future will be accounted for under the new
accounting standard. The new accounting standard is expected to initially
increase earnings by an immaterial amount due to the elimination of regular
amortization expense, but occasionally cause reductions in earnings when
impairment write-downs of goodwill and/or intangible assets are required.
Expense recognized for amortization of goodwill in 2001 was $3.8 million. NRG
Energy does not expect to recognize any asset impairments as a result of
adopting SFAS No. 142 in the first quarter of 2002.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires an entity to recognize
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred. Upon initial recognition of a liability for an asset
retirement obligation, an entity shall capitalize an asset retirement cost by
increasing the carrying amount of the related long-lived asset by the same
amount as the liability. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. NRG Energy has not
completed its analysis of SFAS No. 143.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 retains and expands upon the fundamental provisions of existing
guidance related to the recognition and measurement of the impairment of
long-lived assets to be held and used and the measurement of long-lived assets
to be disposed of by sale. Generally, the provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001.
CALIFORNIA LIQUIDITY CRISIS
NRG Energy's California generation assets include a 57.67% interest in
Crockett Cogeneration, a 39.5% interest in the Mt. Poso facility and a 50%
interest in the West Coast Power partnership with Dynegy.
In March 2001, the California PX filed for bankruptcy under Chapter 11 of
the Bankruptcy Code, and in April 2001, Pacific Gas & Electric Company (PG&E)
also filed for bankruptcy under Chapter 11. PG&E's filing delayed collection of
receivables owed to the Crockett facility. In September 2001, PG&E filed a
proposed plan of reorganization. Under the terms of the proposed plan, which is
subject to challenge by interested parties, unsecured creditors such as NRG
Energy's California affiliates would receive 60% of the amounts owed upon
approval of the plan. The remaining 40% would be paid in negotiable debt with
terms from 10 to 30 years. The California Power Exchange's (PX) ability to repay
its debt is dependent on the extent to which it receives payments from PG&E and
SCE. On December 21, 2001, the California bankruptcy court affirmed the Mt. Poso
and Crockett Power Purchase Agreement (it had previously affirmed Mt. Poso's
agreement) with PG&E and, in respect of the Crockett Power Purchase Agreement,
approved a twelve-month
46
repayment schedule of all past due amounts totaling $49.6 million, plus
interest. The first payment of $6.2 million, including accrued interest, was
received on December 31, 2001.
NRG Energy's share of the net amounts owed to West Coast Power by the
California ISO and PX totaled approximately $85.1 million as of December 31,
2001, compared to $101.8 million at December 31, 2000. These amounts reflect NRG
Energy's share of (a) total amounts owed to West Coast Power less (b) amounts
that are currently treated as disputed revenues and are not recorded as accounts
receivable in the financial statements of West Coast Power LLC, and reserves
taken against accounts receivable that have been recorded in the financial
statements. The decrease is primarily attributed to cash collections from the
California ISO during the fourth quarter of 2001.
ENRON EXPOSURE
During the fourth quarter of 2001, NRG Energy recorded a net after-tax
expense of approximately $6.7 million related to Enron Corp.'s bankruptcy. This
amount includes a $14.2 million after-tax charge to establish bad debt reserves,
which was partially offset by a $7.5 million after-tax gain on a credit swap
agreement entered into as part of NRG Energy's credit risk management program.
NRG Energy has fully provided for its exposure to Enron; however, as with any
receivable, NRG Energy will pursue collection of all amounts outstanding through
the ordinary course of business.
In addition, an Enron subsidiary, NEPCO, is serving as the construction
contractor for two greenfield development projects, the Kendall and Nelson
projects (2,336 MW combined) currently under construction in Illinois. Enron
guaranteed NEPCO's obligations under the construction contracts. To date, the
actual construction and engineering work on both projects has continued without
disruption and NRG Energy expects the projects to achieve commercial operations
on schedule. NRG Energy believes its overall construction costs for these two
projects will increase by approximately $22 per kilowatt, as a result of the
need to restructure the underlying construction contracts following the Enron
bankruptcy.
CERTAIN TRADING ACTIVITIES
The tables below disclose the trading activities that include non-exchange
traded contracts accounted for at fair value. Specifically, these tables
disaggregate realized and unrealized changes in fair value; identifies changes
in fair value attributable to changes in valuation techniques; disaggregates
estimated fair values at December 31, 2001 based on whether fair values are
determined by quoted market prices or more subjective means; and indicates the
maturities of contracts at December 31, 2001.
TRADING ACTIVITY (Gains/(Losses), in thousands)
Fair Value of contracts outstanding at the beginning of the
period.................................................... $(75,188)
Contracts realized or otherwise settled during the period... (38,097)
Fair value of new contract when entered into during the
period.................................................... --
Changes in fair values attributable to changes in valuation
techniques................................................ --
Other changes in fair values................................ 185,521
--------
Fair value of contracts outstanding at the end of the
period.................................................... $ 72,236
========
47
SOURCES OF FAIR VALUE (Gains/(Losses), in thousands)
FAIR VALUE OF CONTRACTS AT PERIOD-END
-------------------------------------------------------
MATURITY MATURITY MATURITY MATURITY TOTAL
LESS THAN 1-3 4-5 IN EXCESS FAIR
1 YEAR YEARS YEARS OF 5 YEARS VALUE
--------- -------- -------- ---------- --------
Prices actively quoted................. $(18,826) $(18,553) $ 8,200 $ 2,823 $(26,356)
Prices provided by other external
sources.............................. -- -- -- -- --
Prices based on models & other
valuation methods.................... 58,890 156,326 (10,087) (106,537) 98,592
-------- -------- -------- --------- --------
$ 40,064 $137,773 $ (1,887) $(103,714) $ 72,236
======== ======== ======== ========= ========
48
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NRG Energy uses a variety of financial instruments to manage its exposure
to fluctuations in foreign currency exchange rates on its international project
cash flows, interest rates on its cost of borrowing and energy and energy
related commodities prices.
CURRENCY EXCHANGE RISK
NRG Energy has an investment in the Kladno project in the Czech Republic.
Statement of Financial Accounting Standard (SFAS) No. 52, "Foreign Currency
Translation," requires foreign currency gains and losses to flow through the
income statement if settlement of an obligation is in a currency other than the
local currency of the entity. A portion of the Kladno project debt is in a
non-local currency (U.S. dollars and German deutsche marks). As of December 31,
2001, if the value of the Czech koruna decreases by 10% in relation to the U.S.
dollar and the German deutsche mark, NRG Energy would record a $4.2 million loss
(after tax) on the currency transaction adjustment. If the value of the Czech
koruna increased by 10%, NRG Energy would record a $4.2 million gain (after tax)
on the currency transaction adjustment. Additionally, NRG Energy has in
investment in Hsin Yu in Taiwan which holds a payable denominated in U.S.
Dollars. If the New Taiwan Dollar increased by 10%, NRG Energy would record a
$0.8 million gain (after tax) on the currency adjustment. These currency
fluctuations are inherent to the debt structure of the projects and not
indicative of the long-term earnings potential of the investments.
NRG Energy is also subject to currency risks associated with foreign
denominated distributions from international investments. In the normal course
of business NRG Energy receives distributions denominated in Australian Dollar,
British Pound, Euro, Hungarian Forint and Czech Koruna. Upon completion of the
Itiquira plant in Brazil, NRG Energy will also be subject to currency risk with
the Brazilian Real. NRG Energy engages in a Board approved strategy of hedging
foreign denominated cash flows through a program of matching currency inflows
and outflows, and to the extent required, fixing the U.S. Dollar equivalent of
net foreign denominated distributions with currency forward and swap agreements
with highly credit worthy financial institutions.
As of December 31, 2001, NRG Energy had two foreign currency exchange
contracts with notional amounts of $46.3 million. If the contracts had been
discontinued on December 31, 2001, NRG Energy would have owed the
counter-parties approximately $2.4 million.
INTEREST RATE RISK
In order to minimize NRG Energy's exposure to changes in interest rates,
NRG Energy attempts to maintain 60-70% of its debt as fixed rate, which has
proven historically to provide the lowest volatility and price, when calculated
on an annual basis. When necessary, NRG Energy will employ the use of interest
rate swaps with highly credit worthy counter-parties to maintain this mix of
fixed and floating rates.
As of December 31, 2001, NRG energy had various interest rate swap
agreements with notional amounts totaling approximately $2.4 billion. If the
swaps had been discontinued on December 31, 2001, NRG Energy would have owed the
counter parties approximately $81.5 million. Based on the investment grade
rating of the counter parties, NRG Energy believes that its exposure to credit
risk due to nonperformance by the counter-parties to its hedging contracts is
insignificant.
NRG Energy and its subsidiaries have both long and short-term debt
instruments that subject it to the risk of loss associated with movements in
market interest rates. As of December 31, 2001, a 100 basis point change in the
benchmark rate on NRG Energy's variable rate debt would impact net income by
approximately $16.6 million. As of December 31, 2000, NRG Energy did not have a
material interest rate exposure as a result of interest rate swaps, which
convert floating rate debt into fixed rate debt.
COMMODITY PRICE
NRG Energy is exposed to commodity price variability in electricity,
emission allowances and natural gas, oil and coal used to meet fuel
requirements. To manage earnings volatility associated with these
49
commodity price risks, NRG Energy enters into financial instruments, which may
take the form of fixed price, floating price or indexed sales or purchases, and
options, such as puts, calls, basis transactions and swaps.
NRG Energy utilizes a "Value-at-Risk" (VAR) model to estimate a maximum
potential loss in the fair value of its commodity portfolio including generation
assets, load obligations and bilateral physical and financial transactions. The
key assumptions for the NRG Energy VaR model include (1) a lognormal
distribution of price returns (2) three day holding period and (3) a 95%
confidence interval. The volatility estimate is based on the implied volatility
for at the money call options. This model encompasses the following generating
regions: Entergy, NEPOOL, NYPP, PJM, WSCC, SPP and Main.
The estimated maximum potential three-day loss in fair value of its
commodity portfolio, calculated using the VAR model is as follows:
(IN MILLIONS)
-------------
Year end December 31, 2001.................................. $ 71.7
Average..................................................... 78.8
High........................................................ 126.6
Low......................................................... 58.6
Year end December 31, 2000.................................. $116.0
Average..................................................... 80.0
High........................................................ 125.0
Low......................................................... 50.0
CREDIT RISK
NRG Energy is exposed to credit risk in its risk management activities.
Credit risk relates to the risk of loss resulting from the nonperformance by a
counter party of its contractual obligations. NRG Energy actively manages its
counter-party credit risk. NRG Energy has an established credit policy in place
to minimize overall credit risk. Important elements of this policy include
ongoing financial reviews of all counter-parties, established credit limits, as
well as monitoring, managing, and mitigating credit exposure.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of NRG Energy, Inc. as of December
31, 2001 and 2000, and for the years then ended together with the Report of
Independent Accountants are included in this Form 10-K on the pages indicated
below.
PAGE NO.
--------
Report of Independent Accountants........................... 51
Consolidated Statement of Income............................ 52
Consolidated Statement of Cash Flows........................ 53
Consolidated Balance Sheet.................................. 54
Consolidated Statement of Stockholders' Equity.............. 56
Notes to Consolidated Financial Statements.................. 57
Schedule II. Valuation and Qualifying Accounts.............. 93
50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of NRG Energy, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of NRG Energy, Inc. and its subsidiaries at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 21 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" on January 1, 2001.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 21, 2002
51
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations................... $2,798,608 $2,018,622 $432,518
Equity in earnings of unconsolidated affiliates........... 210,032 139,364 67,500
---------- ---------- --------
Total operating revenues and equity earnings......... 3,008,640 2,157,986 500,018
---------- ---------- --------
OPERATING COSTS AND EXPENSES
Cost of majority-owned operations......................... 1,855,631 1,289,471 269,900
Depreciation and amortization............................. 212,493 122,953 37,026
General, administrative and development................... 225,694 172,489 83,572
---------- ---------- --------
Total operating costs and expenses................... 2,293,818 1,584,913 390,498
---------- ---------- --------
OPERATING INCOME............................................ 714,822 573,073 109,520
---------- ---------- --------
OTHER INCOME (EXPENSE)
Minority interest in earnings of consolidated
subsidiaries........................................... (6,564) (11,335) (2,456)
Gain on sale of interest in projects...................... -- -- 10,994
Other income, net......................................... 34,084 7,857 6,432
Interest expense.......................................... (443,734) (293,922) (93,376)
---------- ---------- --------
Total other expense.................................. (416,214) (297,400) (78,406)
---------- ---------- --------
INCOME BEFORE INCOME TAXES.................................. 298,608 275,673 31,114
INCOME TAX EXPENSE (BENEFIT)................................ 33,404 92,738 (26,081)
---------- ---------- --------
NET INCOME.................................................. $ 265,204 $ 182,935 $ 57,195
========== ========== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC....................................... 194,929 165,861 147,605
EARNINGS PER WEIGHTED AVERAGE COMMON SHARE - BASIC.......... $ 1.36 $ 1.10 $ 0.39
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - DILUTED..................................... 196,439 166,989 147,605
EARNINGS PER WEIGHTED AVERAGE COMMON SHARES - DILUTED....... $ 1.35 $ 1.10 $ 0.39
See notes to consolidated financial statements.
52
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 265,204 $ 182,935 $ 57,195
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Undistributed equity in earnings of unconsolidated
affiliates............................................ (119,002) (43,258) (27,181)
Depreciation and amortization........................... 212,493 122,953 37,026
Deferred income taxes and investment tax credits........ 45,556 38,458 (3,401)
Unrealized (gains)/losses on energy contracts........... (13,257) -- --
Minority interest....................................... 6,564 4,993 857
Gain on sale of investments............................. -- -- (10,994)
Cash provided by (used in) changes in certain working
capital items, net of effects from acquisitions and
dispositions..........................................
Accounts receivable................................... 89,523 (198,091) (99,608)
Accounts receivable-affiliates........................ -- 10,703 9,964
Inventory............................................. (111,131) (12,316) (17,287)
Prepayments and other current assets.................. (36,530) (608) (13,433)
Accounts payable...................................... (4,512) 143,045 40,616
Accounts payable-affiliates........................... 4,989 -- --
Accrued income taxes.................................. (75,132) 39,137 25,834
Accrued property and sales taxes...................... 4,054 3,743 1,740
Accrued salaries, benefits, and related costs......... 15,785 (8,153) 1,955
Accrued interest...................................... 35,637 38,479 5,192
Other current liabilities............................. 37,675 (5,136) (3,533)
Cash provided by (used by) changes in other assets and
liabilities........................................... (81,902) 44,794 (16,322)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 276,014 361,678 (11,380)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of liabilities assumed.................. (2,813,117) (1,912,957) (1,519,365)
Consolidation of equity subsidiaries...................... -- -- 20,181
Proceeds from sale of investments......................... 4,063 8,917 43,500
Decrease/(increase) in restricted cash.................... (99,707) 5,306 (13,067)
Decrease/(increase) in notes receivable................... 45,091 (5,444) 58,331
Capital expenditures...................................... (1,322,130) (223,560) (94,853)
Proceeds from sale of property............................ -- 9,785 --
Investments in projects................................... (149,841) (86,195) (163,340)
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES....................... (4,335,641) (2,204,148) (1,668,613)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments)/borrowings under line of credit
agreement............................................... 202,000 (367,766) 216,000
Proceeds from issuance of stock........................... 475,464 453,719 --
Proceeds from issuance of corporate units (warrants)...... 4,080 -- --
Proceeds from issuance of short term debt................. 622,156 -- 682,096
Capital contributions from parent......................... -- -- 250,000
Proceeds from issuance of long-term debt.................. 3,268,017 3,034,909 575,633
Principal payments on long-term debt...................... (418,171) (1,214,992) (18,634)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 4,153,546 1,905,870 1,705,095
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (3,055) 360 --
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 90,864 63,760 25,102
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 95,243 31,483 6,381
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 186,107 $ 95,243 $ 31,483
=========== =========== ===========
See notes to consolidated financial statements.
53
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-------------------------
2001 2000
----------- ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 186,107 $ 95,243
Restricted cash........................................... 161,842 12,135
Accounts receivable-trade, less allowance for doubtful
accounts of $33,962 and $21,199........................ 346,154 360,075
Income tax receivable..................................... 28,118 --
Inventory................................................. 331,323 174,864
Current portion of notes receivable....................... 737 267
Derivative instruments valuation -- at market............. 54,934 --
Prepayments and other current assets...................... 78,142 30,074
----------- ----------
Total current assets........................................ 1,187,357 672,658
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
In service................................................ 7,005,680 4,106,653
Under construction........................................ 2,942,993 206,992
----------- ----------
Total property, plant and equipment......................... 9,948,673 4,313,645
Less accumulated depreciation............................. (516,454) (271,977)
----------- ----------
Net property, plant and equipment........................... 9,432,219 4,041,668
----------- ----------
OTHER ASSETS
Equity investments in affiliates.......................... 1,050,510 973,261
Capitalized project costs................................. 2,581 10,262
Notes receivable, less current portion.................... 775,865 76,745
Decommissioning fund investments.......................... 4,336 3,863
Intangible assets, net of accumulated amortization of
$15,311 and $8,951..................................... 97,133 101,570
Debt issuance costs, net of accumulated amortization of
$17,250 and $6,443..................................... 110,708 48,773
Derivative instruments valuation -- at market............. 179,605 --
Other assets, net of accumulated amortization of $13,323
and $10,628............................................ 54,231 50,192
----------- ----------
Total other assets.......................................... 2,274,969 1,264,666
----------- ----------
TOTAL ASSETS................................................ $12,894,545 $5,978,992
=========== ==========
See notes to consolidated financial statements.
54
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-------------------------
2001 2000
----------- ----------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of project level long-term debt........... $ 500,154 $ 146,469
Revolving line of credit.................................. 170,000 8,000
Revolving line of credit, non-recourse debt............... 40,000 --
Project-level, non-recourse debt.......................... 22,156 --
Corporate level, recourse debt............................ 600,000 --
Accounts payable-trade.................................... 330,471 255,917
Accounts payable-affiliate................................ 16,867 7,191
Accrued income taxes...................................... -- 43,870
Accrued property, sales and other taxes................... 14,585 10,531
Accrued salaries, benefits and related costs.............. 40,043 24,830
Accrued interest.......................................... 96,479 51,962
Derivative instruments valuation -- at market............. 21,910 --
Other current liabilities................................. 97,939 14,220
----------- ----------
Total current liabilities................................... 1,950,604 562,990
OTHER LIABILITIES
Project-level, long-term, non-recourse debt............... 4,871,432 2,146,953
Corporate level long-term, recourse debt.................. 2,972,400 1,503,896
Deferred Income Taxes..................................... 445,736 55,642
Postretirement and other benefit obligations.............. 75,455 83,098
Derivative instruments valuation -- at market............. 51,520 --
Other long-term obligations and deferred income........... 222,468 149,640
Minority interest......................................... 67,801 14,685
----------- ----------
Total liabilities........................................... 10,657,416 4,516,904
----------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A - Common stock; $.01 par value; 250,000,000 shares
authorized; 147,604,500 shares issued and
outstanding............................................ 1,476 1,476
Common stock; $.01 par value; 550,000,000 shares
authorized; 50,939,875 shares and 32,395,500 shares
issued and outstanding at December 31, 2001 and 2000... 509 324
Additional paid-in capital................................ 1,713,984 1,233,833
Retained earnings......................................... 635,349 370,145
Accumulated other comprehensive income.................... (114,189) (143,690)
----------- ----------
Total Stockholders' Equity.................................. 2,237,129 1,462,088
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $12,894,545 $5,978,992
=========== ==========
See notes to consolidated financial statements.
55
NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CLASS A ACCUMULATED
COMMON COMMON ADDITIONAL OTHER TOTAL
---------------- -------------- PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SHARES STOCK SHARES CAPITAL EARNINGS INCOME EQUITY
----- ------ ----- ------ ---------- -------- ------------- -------------
(IN THOUSANDS)
BALANCES AT DECEMBER 31, 1998........ $1,476 147,605 $ -- -- $ 530,438 $130,015 $ (82,597) $ 579,332
------ ------- ---- ------ ---------- -------- --------- ----------
Net Income......................... 57,195 57,195
Foreign currency translation
adjustments.................... 7,127 7,127
----------
Comprehensive income for 1999.... 64,322
Capital contribution from
parent......................... 250,000 250,000
------ ------- ---- ------ ---------- -------- --------- ----------
BALANCES AT DECEMBER 31, 1999........ $1,476 147,605 $ -- -- $ 780,438 $187,210 $ (75,470) $ 893,654
====== ======= ==== ====== ========== ======== ========= ==========
Net Income......................... 182,935 182,935
Foreign currency translation
adjustments.................... (68,220) (68,220)
----------
Comprehensive income for 2000.... 114,715
Issuance of common stock, net of
issuance costs of $32.2
million........................ 324 32,396 453,395 453,719
------ ------- ---- ------ ---------- -------- --------- ----------
BALANCES AT DECEMBER 31, 2000........ $1,476 147,605 $324 32,396 $1,233,833 $370,145 $(143,690) $1,462,088
====== ======= ==== ====== ========== ======== ========= ==========
Net Income......................... 265,204 265,204
Foreign currency translation
adjustments and other.......... (41,600) (41,600)
Deferred unrealized gains, net on
derivatives.................... 71,101 71,101
----------
Comprehensive income for 2001.... 294,705
Capital stock activity:
-Issuance of corporate units/
warrant........................ 4,080 4,080
-Tax benefits of stock option
issuance....................... 792 792
-Issuance of common stock, net of
issuance costs of $23.5
million........................ 185 18,543 475,279 475,464
------ ------- ---- ------ ---------- -------- --------- ----------
BALANCES AT DECEMBER 31, 2001........ $1,476 147,605 $509 50,939 $1,713,984 $635,349 $(114,189) $2,237,129
====== ======= ==== ====== ========== ======== ========= ==========
See notes to consolidated financial statements.
56
NOTE 1 -- ORGANIZATION
NRG Energy, Inc., (NRG Energy), was incorporated as a Delaware corporation
on May 29, 1992. Beginning in 1989, NRG Energy conducted business through its
predecessor companies, NRG Energy, Inc. and NRG Group, Inc., Minnesota
corporations, which were merged into NRG Energy subsequent to its incorporation.
NRG Energy, together with its majority owned subsidiaries and affiliates, is a
leading global energy company primarily engaged in the acquisition, development,
ownership and operation of power generation facilities and the sale of energy,
capacity and related products.
On June 5, 2000, NRG Energy completed its initial public offering. Prior to
completing its initial public offering, NRG Energy was a wholly owned subsidiary
of Northern States Power Company (NSP). During August 2000, NSP and New Century
Energies, Inc. completed their merger. The surviving company operates under the
new name Xcel Energy, Inc. (Xcel Energy). The shares of NRG Energy's class A
common stock previously held by NSP are now owned by Xcel Energy. As of December
31, 2001, Xcel Energy owned a 74% interest in NRG Energy's outstanding common
and class A common stock, representing 97% of the total voting power of NRG
Energy's common stock and class A common stock.
In February 2002, Xcel Energy announced its intention to commence an
exchange offer to acquire all of NRG Energy's outstanding common stock, and
stated its intention to close this transaction in April 2002 (See Note 23).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include NRG Energy's accounts and
those of its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Accounting policies for all of
NRG Energy's operations are in accordance with accounting principles generally
accepted in the United States of America. As discussed in Note 6, NRG Energy has
investments in partnerships, joint ventures and projects. Investments in such
businesses in which NRG Energy does not have control, but has the ability to
exercise significant influence over the operating and financial policies, are
accounted for under the equity method. Earnings from equity in international
investments are recorded net of foreign income taxes.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments (primarily commercial
paper) with an original maturity of three months or less at the time of
purchase.
RESTRICTED CASH
Restricted cash consists primarily of cash collateral for letters of credit
issued in relation to project development activities and funds held in trust
accounts to satisfy the requirements of certain debt agreements.
INVENTORY
Inventory is valued at the lower of weighted average cost or market and
consists principally of fuel oil, spare parts, coal, kerosene, emission
allowance credits and raw materials used to generate steam.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at original cost or the present
value of minimum lease payments for assets under capital leases. Significant
additions or improvements extending asset lives are capitalized,
57
while repairs and maintenance are charged to expense as incurred. Depreciation
is computed using the straight-line method over the following estimated useful
lives:
Facilities and improvements................................. 10-45 years
Machinery and equipment..................................... 7-30 years
Office furnishings and equipment............................ 3-5 years
The assets and related accumulated depreciation amounts are adjusted for
asset retirements and disposals with the resulting gain or loss included in
operations. NRG Energy analyzes property, plant and equipment quarterly for
potential impairment, assessing the appropriateness of lives and recoverability
of net balances in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
IMPAIRMENT OF LONG LIVED ASSETS
Long-lived assets and intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to the future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the cost to sell.
CAPITALIZED INTEREST
Interest incurred on funds borrowed to finance projects expected to require
more than three months to complete is capitalized. Capitalization of interest is
discontinued when the asset under construction is ready for its intended use.
Capitalized interest was approximately $27,175,000, $2,667,000, and $287,000 in
2001, 2000 and 1999, respectively.
CAPITALIZED PROJECT COSTS
Development costs and capitalized project costs include third party
professional services, permits, and other costs which are incurred incidental to
a particular project. Such costs are expensed as incurred until an acquisition
agreement or letter of intent is signed, and the project has been approved by
NRG Energy's Board of Directors. Additional costs incurred after this point are
capitalized. When a project begins operation, previously capitalized project
costs are reclassified to equity investments in affiliates or property plant and
equipment and amortized on a straight-line basis over the lesser of the life of
the project's related assets or revenue contract period.
DEBT ISSUANCE COSTS
Debt issuance costs are capitalized and amortized over the terms of the
related debt.
INTANGIBLE ASSETS
Goodwill results when NRG Energy purchases a business at a price higher
than the underlying fair value of the net assets. Effective January 1, 2002, NRG
Energy implemented SFAS No. 142, "Goodwill and Other Intangible Assets." (SFAS
No. 142). At December 31, 2001, NRG Energy had intangible assets of $97.1
million including $56.6 million of goodwill. These amounts and all intangible
assets and goodwill acquired in the future will be accounted for under the new
accounting standard. The new accounting can be expected to initially increase
earnings due to the elimination of regular amortization expense, but
periodically cause reductions in earnings when impairment write-downs of
goodwill and/or intangible assets are required.
58
INCOME TAXES
In March 2001, NRG Energy was deconsolidated from Xcel Energy for Federal
income tax purposes. Prior to March 13, 2001, NRG Energy was included in the
consolidated tax returns of Xcel Energy. NRG Energy calculated its income tax
provision on a separate return basis under a tax sharing agreement with Xcel
Energy as discussed in Note 10. Current Federal and certain state income taxes
were payable to or receivable from Xcel Energy.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
REVENUE RECOGNITION
NRG Energy is primarily an electric generation company, operating a
portfolio of majority-owned electric generating plants and certain plants in
which its ownership interest is 50% or less and which are accounted for under
the equity method. In connection with its electric generation business, NRG
Energy also produces thermal energy for sale to customers, principally through
steam and chilled water facilities. NRG Energy also collects methane gas from
landfill sites, which is then used for the generation of electricity. In
addition, NRG Energy sells small amounts of natural gas and oil to third
parties. NRG Energy's wholly owned subsidiary, NRG Power Marketing, Inc. enters
into both physical and financial transactions on behalf of the entities which
own the electric generating plants in order to optimize the financial
performance of the plants.
Electrical energy revenue is recognized upon transmission to the customer.
Capacity and ancillary revenue is recognized when contractually earned. Disputed
revenues are not recorded on the financial statements and will not be recognized
as income until disputes are resolved and collection is assured.
NRG Energy also performs operations and maintenance services for some of
the projects in which it has an interest. Revenue is recognized as service
contract revenue on these contracts when the services are performed.
NRG Energy uses the equity method of accounting to recognize as revenue its
pro rata share of the net income or loss of the unconsolidated investment until
such time as the company's investment is reduced to zero, at which time equity
income is generally recognized only upon receipt of cash distributions from the
investee.
NRG Energy recognizes other income for interest income on loans to
affiliates as the interest is earned and realizable.
FOREIGN CURRENCY TRANSLATION
The local currencies are generally the functional currency of NRG Energy's
foreign operations. Foreign currency denominated assets and liabilities are
translated at end-of-period rates of exchange. Revenues, expenses and cash flows
are translated at weighted-average rates of exchange for the period. The
resulting currency adjustments are accumulated and reported as a separate
component of stockholders' equity and are not included in the determination of
the results of operations.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject NRG Energy to
concentrations of credit risk consist primarily of cash, accounts receivable,
and notes receivable. Cash accounts are generally held in Federally insured
banks. Accounts receivable, notes receivable and derivative instruments are
concentrated within entities engaged in the energy industry. These industry
concentrations may impact NRG Energy's overall exposure to credit risk, either
positively or negatively, in that the customers may be similarly affected by
changes in economic, industry or other conditions. Receivables are generally not
collateralized; however, NRG
59
Energy believes the credit risk posed by industry concentration is offset by the
diversification and creditworthiness of its customer base. See Note 17.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, receivables, accounts
payables, and accrued liabilities approximate fair value because of the short
maturity of these instruments. The carrying amounts of long-term receivables
approximate fair value as the effective rates for these instruments are
comparable to market rates at year end, including current portions. The carrying
amount of long term debt was approximately $8.3 billion and $3.8 billion at
December 31, 2001 and 2000, respectively. The estimated fair value of long-term
debt is based on borrowing rates currently available with similar terms and
average maturities.
STOCK BASED COMPENSATION
In 1995, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock Based
Compensation." NRG Energy has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting Principle
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
NRG Energy records expense in an amount equal to the excess of the quoted market
price on the grant date over the option price. Such expense is recognized at the
grant date for options fully vested. For options with a vesting period, the
expense is recognized over the vesting period. NRG Energy has recognized
approximately $1.9 million and $7.3 million of stock based compensation expense
for the periods ended December 31, 2001 and 2000, respectively.
NET INCOME PER SHARE
Basic net income per share is calculated based on the weighted average of
common shares outstanding during the period. Net income per share, assuming
dilution is computed by dividing net income by the weighted average number of
common and common equivalent shares outstanding. NRG Energy's only common
equivalent shares are those that result from dilutive common stock options and
NRG Energy's Corporate Units (see Note 15).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, 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 these estimates.
In recording transactions and balances resulting from business operations,
NRG Energy uses estimates based on the best information available. Estimates are
used for such items as plant depreciable lives, tax provisions, un-collectible
accounts and actuarially determined benefit costs and the valuation of long-term
energy commodities contracts, among others. As better information becomes
available (or actual amounts are determinable), the recorded estimates are
revised. Consequently, operating results can be affected by revisions to prior
accounting estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized but instead be tested for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-lived assets and for Long-lived Assets to Be Disposed Of." Goodwill will no
longer be amortized to comply with the provisions of SFAS No. 142. Instead,
goodwill and intangible assets that will not be amortized should be tested for
impairment annually and on an interim basis if an event occurs or a circumstance
changes between annual tests that may reduce the fair value of a reporting unit
below its carrying value. An impairment test is
60
required to be performed within six months of the date of adoption, and the
first annual impairment test must be performed in the year the statement is
initially adopted.
NRG Energy and its subsidiaries, as required, adopted SFAS No. 142 on
January 1, 2002. At December 31, 2001, NRG Energy had intangible assets of $97.1
million, including $56.6 million of goodwill. These amounts and all intangible
assets and goodwill acquired in the future will be accounted for under the new
accounting standard. The new accounting standard is expected to initially
increase earnings by an immaterial amount due to the elimination of regular
amortization expense, but occasionally cause reductions in earnings when
impairment write-downs of goodwill and/or intangible assets are required.
Expense recognized for amortization of goodwill in 2001 was $3.8 million
(pre-tax). NRG Energy does not expect to recognize any asset impairments as a
result of adopting SFAS No. 142 in the first quarter of 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 requires an
entity to recognize the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. Upon initial recognition of a
liability for an asset retirement obligation, an entity shall capitalize an
asset retirement cost by increasing the carrying amount of the related
long-lived asset by the same amount as the liability. SFAS No. 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
NRG Energy has not completed its analysis of SFAS No. 143.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 retains and expands upon the fundamental provisions of existing
guidance related to the recognition and measurement of the impairment of
long-lived assets to be held and used and the measurement of long-lived assets
to be disposed of by sale. Generally, the provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified for comparative purposes.
These reclassifications had no effect on net income or total stockholders'
equity as previously reported.
NOTE 3 -- ASSET ACQUISITIONS
During the year ended December 31, 2001, NRG Energy completed numerous
acquisitions. These acquisitions have been recorded using the purchase method of
accounting. Accordingly, these purchase prices have been preliminarily allocated
to assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition. These estimates may be adjusted based upon
completion of certain procedures including third party valuations. Operations of
the acquired companies have been included in the operations of NRG Energy since
the date of the respective acquisitions.
In January 2001, NRG Energy purchased from LS Power, LLC a 5,339 MW
portfolio of operating projects and projects in construction and advanced
development that are located primarily in the north central and south central
United States. Each facility employs natural gas-fired, combined-cycle
technology. Through December 31, 2005, NRG Energy also has the opportunity to
acquire ownership interests in an additional 3,000 MW of generation projects
developed and offered for sale by LS Power and its partners.
In March 2001, NRG Energy purchased from Cogentrix the remaining 430 MW, or
51.37% interest, in an 837 MW natural gas-fired combined-cycle plant in
Batesville, Mississippi. NRG Energy acquired a 48.63% interest in the plant in
January 2001 from LS Power.
In June 2001, NRG Energy purchased a 640 MW natural gas-fired power plant
in Audrain County, Missouri from Duke Energy North America LLC.
In June 2001, NRG Energy closed on the construction financing for the
Brazos Valley generating facility, a 633 MW gas-fired power plant in Fort Bend
County, Texas that NRG Energy will build, operate and
61
manage. At the time of the closing, NRG Energy also became the 100% owner of the
project by purchasing STEAG Power LLC's 50% interest in the project. NRG Energy
expects the project to begin commercial operation in February 2003.
In June 2001, NRG Energy purchased 1,081 MW of interests in power
generation plants from a subsidiary of Conectiv. NRG Energy acquired a 100%
interest in the 784 MW coal-fired Indian River Generating Station located near
Millsboro, Delaware and in the 170 MW oil-fired Vienna Generating Station
located in Vienna, Maryland. In addition, NRG Energy acquired 64 MW of the 1,711
MW coal-fired Conemaugh Generating Station located approximately 60 miles east
of Pittsburgh, Pennsylvania and 63 MW of the 1,711 MW coal-fired Keystone
Generating Station located approximately 50 miles east of Pittsburgh,
Pennsylvania.
In June 2001, NRG Energy purchased a 389 MW gas-fired power plant and a 116
MW thermal power plant, both of which are located on Csepel Island in Budapest,
Hungary, from PowerGen. In April 2001, NRG Energy also purchased from PowerGen
its interest in Saale Energie GmbH and its 33.3% interest in MIBRAG BV. By
acquiring PowerGen's interest in Saale Energie, NRG Energy increased its
ownership interest in the 960 MW coal-fired Schkopau power station located near
Halle, Germany from 200 MW to 400 MW.
By acquiring PowerGen's interest in MIBRAG, an integrated energy business
in eastern Germany consisting primarily of two lignite mines and three power
stations, and following MIBRAG's buy back of the shares NRG Energy acquired from
PowerGen, NRG Energy increased its ownership of MIBRAG from 33.3% to 50%. The
Washington Group International, Inc., owns the remaining 50% of MIBRAG.
In August 2001, NRG Energy acquired an approximately 2,255 MW portfolio of
operating projects and projects in advanced development, including projects that
NRG Energy intends to develop, that are located in Illinois and upstate New York
from Indeck Energy Services, Inc.
In August 2001, NRG Energy acquired Duke Energy's 77% interest in the
approximately 520 MW natural-gas fired McClain Energy Generating Facility
located near Oklahoma City, Oklahoma. The Oklahoma Municipal Power Authority
owns the remaining 23% interest. The McClain facility commenced operations in
June 2001.
In September 2001, NRG Energy acquired a 50% interest in TermoRio SA, a
1,040 MW gas-fired cogeneration facility currently under construction in Rio de
Janeiro State, Brazil, from Petroleos Brasileiros SA (Petrobras). Commercial
operation of the facility is expected to begin in March 2004. NRG Energy has the
option to put its interest in the project back to Petrobras after March 2002 if
by that time certain milestones have not been met, including final agreement on
the terms of all project documents.
During fiscal year 2001, NRG Energy also acquired other minor interests in
projects in Taiwan, India, Peru and the State of Nevada.
62
The respective purchase prices have been allocated to the net assets of the
acquired entities as follows:
DECEMBER 31, 2001
-----------------
(IN THOUSANDS)
Current assets.............................................. $ 307,654
Property plant and equipment................................ 4,173,509
Non-current portion of notes receivable..................... 736,041
Current portion of long term debt assumed................... (61,268)
Other current liabilities................................... (99,666)
Long term debt assumed...................................... (1,586,501)
Deferred income taxes....................................... (149,988)
Other long term liabilities................................. (202,411)
Other non-current assets and liabilities.................... (181,473)
-----------
Total purchase price................................... 2,935,897
Less -- Cash balances acquired (excluding restricted
cash)..................................................... (122,780)
-----------
Net purchase price..................................... $ 2,813,117
===========
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment at December 31, were as
follows:
2001 2000
---------- ----------
(IN THOUSANDS)
Facilities and equipment.................................... $6,863,930 $4,009,244
Land and improvements....................................... 111,368 79,190
Office furnishings and equipment............................ 30,382 18,219
Construction in Progress.................................... 2,942,993 206,992
---------- ----------
Total property, plant and equipment.................. 9,948,673 4,313,645
Accumulated depreciation............................. (516,454) (271,977)
---------- ----------
Net property, plant and equipment.................... $9,432,219 $4,041,668
========== ==========
NOTE 5 -- INVENTORY
Inventory, which is stated at the lower of weighted average cost or market,
at December 31, consists of:
2001 2000
-------- --------
(IN THOUSANDS)
Fuel oil.................................................... $ 89,318 $ 48,541
Coal........................................................ 96,193 17,439
Kerosene.................................................... 1,267 1,524
Spare parts................................................. 121,622 85,136
Emission credits............................................ 16,995 871
Natural gas................................................. 1,395 --
Other....................................................... 4,533 21,353
-------- --------
Total Inventory...................................... $331,323 $174,864
======== ========
NOTE 6 -- INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD
NRG Energy has investments in various international and domestic energy
projects. The equity method of accounting is applied to such investments in
affiliates, which include joint ventures and partnerships, because the ownership
structure prevents NRG Energy from exercising a controlling influence over
operating and financial policies of the projects. Under this method, equity in
pretax income or losses of domestic
63
partnerships and, generally, in the net income or losses of international
projects, are reflected as equity in earnings of unconsolidated affiliates.
A summary of NRG Energy's equity-method investments of 200 MW or more which
were in operation at December 31, 2001 is as follows:
NAME GEOGRAPHIC AREA ECONOMIC INTEREST
---- --------------- -----------------
Gladstone Power Station..................................... Australia 37.50%
Loy Yang Power A............................................ Australia 25.37%
Lanco Kondapalli Power...................................... India 30.00%
MIBRAG GmbH................................................. Europe 50.00%
ECK Generating (ECKG)....................................... Czech Republic 44.50%
Scudder Latin American Power................................ Latin America 25.00%
El Segundo Power............................................ USA 50.00%
Long Beach Generating....................................... USA 50.00%
Encina...................................................... USA 50.00%
San Diego Combustion Turbines............................... USA 50.00%
Rocky Road Power............................................ USA 50.00%
Mustang..................................................... USA 25.00%
Sabine River Works Cogeneration............................. USA 50.00%
Cogeneration Corp. of America............................... USA 20.00%
Summarized financial information for investments in unconsolidated
affiliates accounted for under the equity method as of and for the year ended
December 31, is as follows:
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
Operating revenues....................................... $3,070,078 $2,349,108 $1,732,521
Costs and expenses....................................... 2,658,168 1,991,086 1,531,958
---------- ---------- ----------
Net income.......................................... $ 411,910 $ 358,022 $ 200,563
---------- ---------- ----------
Current assets........................................... $1,425,175 $1,000,670 $ 742,674
Noncurrent assets........................................ 7,009,862 7,470,766 7,322,219
---------- ---------- ----------
Total assets........................................ $8,435,037 $8,471,436 $8,064,893
---------- ---------- ----------
Current liabilities...................................... $1,192,630 $1,094,304 $ 708,114
Noncurrent liabilities................................... 4,533,168 4,306,142 5,168,893
Equity................................................... 2,709,239 3,070,990 2,187,886
---------- ---------- ----------
Total liabilities and equity........................ $8,435,037 $8,471,436 $8,064,893
NRG's share of equity.................................... $1,050,510 $ 973,261 $ 932,591
NRG's share of net income................................ $ 210,032 $ 139,364 $ 67,500
NOTE 7 -- RELATED PARTY TRANSACTIONS
NRG Energy and Xcel Energy have entered into material transactions and
agreements with one another and are expected to enter into material transactions
and agreements from time to time in the future. Certain material agreements and
transactions currently existing between NRG Energy and Xcel Energy are described
below.
OPERATING AGREEMENTS
NRG Energy has two agreements with Xcel Energy for the purchase of thermal
energy. Under the terms of the agreements, Xcel Energy charges NRG Energy for
certain costs (fuel, labor, plant maintenance, and auxiliary power) incurred by
Xcel Energy to produce the thermal energy. NRG Energy paid Xcel Energy $7.1
million, $5.5 million and $4.4 million in 2001, 2000 and 1999, respectively,
under these agreements. One of these agreements expires on December 31, 2002 and
the other expires on December 31, 2006.
64
NRG Energy has a renewable 10-year agreement with Xcel Energy, expiring on
December 31, 2006, whereby Xcel Energy agreed to purchase refuse-derived fuel
for use in certain of its boilers and NRG Energy agrees to pay Xcel Energy a
burn incentive. Under this agreement, NRG Energy received $1.6 million, $1.5
million and $1.4 million from Xcel Energy, and paid $2.8 million, $2.8 million
and $2.7 million to Xcel Energy in 2001, 2000 and 1999, respectively.
ADMINISTRATIVE SERVICES AND OTHER COSTS
NRG Energy has an administrative services agreement in place with Xcel
Energy. Under this agreement NRG Energy reimburses Xcel Energy for certain
overhead and administrative costs, including benefits administration,
engineering support, accounting, and other shared services as requested by NRG
Energy. In addition, NRG Energy employees participate in certain employee
benefit plans of Xcel Energy as discussed in Note 11. NRG Energy reimbursed Xcel
Energy in the amounts of $12.2 million, $5.9 million and $6.4 million, during
2001, 2000 and 1999, respectively, under this agreement.
NOTE 8 -- NOTES RECEIVABLE
Notes receivable consists primarily of fixed and variable rate notes
secured by equity interests in partnerships and joint ventures. The notes
receivable as of December 31, are as follows:
2001 2000
-------- -------
(THOUSANDS OF DOLLARS)
Central Texas Commercial Air Conditioning & Heating, Inc.,
due July 10, 2001, 10%.................................... $ -- $ 60
O'Brien Cogen II note, due 2008, non-interest bearing....... 553 513
Southern Minnesota-Praireland Solid Waste, note due 2003,
7%........................................................ 24 34
Omega Energy, LLC, due 2004, 12.5%.......................... 4,095 3,745
Omega Energy, LLC, due 2009, 11%............................ 1,533 1,533
Audrain County, due December 2023, 10%...................... 239,930 --
Elk River -- GRE, due December 31, 2008, non-interest
bearing................................................... 2,098 --
Bangor Hydro Electric, due October 1, 2002, 5.45%........... 737 --
SET PERC Investment, LLC, due December 31, 2005, 7%......... 2,497
SET Telogia Investment, LLC, due December 31, 2008, 7%...... 3,775 --
-------- -------
Notes receivable - non-affiliates......................... 255,242 5,885
NEO notes to various affiliates due primarily 2012, prime
+2%....................................................... 21,087 23,277
TOSLI, various notes due 2000, LIBOR plus 4.0%, 6.56%
December 31, 2000......................................... -- 207
Pacific Generation, various notes, prime +2% to 12%......... -- 3,368
Kladno Power (No. 2) B.V. notes to various affiliates,
non-interest bearing...................................... 46,635 44,275
Termo Rio (via NRGenerating Luxembourg (No. 2) S.a.r.L, due
20 years after plant becomes operational, 19.5%........... 46,890 --
Saale Energie Gmbh, indefinite maturity date, 4.75%-7.79%... 79,476 --
Northbrook Texas LLC, due February 2024, 9.25%.............. 8,323 --
-------- -------
Notes receivable - affiliates............................. 202,411 71,127
Saale Energia GmbH, due August 31, 2021, 13.88% (direct
financing lease).......................................... 318,949 --
-------- -------
Total................................................. $776,602 $77,012
======== =======
Saale Energie GmbH (SEG) has a long-term electricity supply contract with
its sole customer, VEAG. SEG supplies its total available electricity capacity
to VEAG. The contract has a term of 25 years. VEAG is obligated to pay on a
monthly basis a price that covers 1) the availability of power supply capacity
and 2) the operating costs incurred to produce electricity. During the nine
months subsequent to NRG Energy's consolidation of SEG in March 2001,
approximately $56.3 million was recognized as revenue under this agreement.
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NOTE 9 -- DEBT AND CAPITAL LEASES
Long-term debt and capital leases consist of the following:
2001 2000
---------- ----------
(THOUSANDS OF DOLLARS)
NRG DEBT:
NRG Energy ROARS, due March 15, 2020, 7.97%................. $ 232,960 $ 239,386
NRG Finance Company I LLC -- Construction revolver, due May
2006, various interest rates.............................. 697,500 --
NRG Energy senior debentures (corporate units), due May 16,
2006, 6.5%................................................ 284,440 --
NRG Energy senior notes:
February 1, 2006, 7.625%.................................. 125,000 125,000
July 15, 2006, 6.75%...................................... 340,000 --
June 15, 2007, 7.50%...................................... 250,000 250,000
June 1, 2009, 7.50%....................................... 300,000 300,000
September 15, 2010, 8.25%................................. 350,000 350,000
April 1, 2011, 7.75%...................................... 350,000 --
Nov. 1, 2013, 8.00%....................................... 240,000 240,000
April 1, 2031, 8.625%..................................... 500,000 --
NRG DEBT SECURED SOLELY BY PROJECT ASSETS:
COBEE, due upon demand, non-interest bearing................ -- 69
San Francisco Capital lease, due September, 2002, 20.8%..... 11 --
Timber Energy Resources, Inc., due December 2002, 7%........ 4,620 --
Entrade revolving line of credit, various interest rates.... 8,485 --
Hsin Yu Energy -- Capital lease, due April, 2003, 10.25%.... 518 --
NRG San Diego, Inc. promissory note, due June 25, 2003,
8.0%...................................................... 801 1,283
Pittsburgh Thermal LP, due 2002-2004, 10.61%-10.73%......... 4,400 5,525
San Francisco Thermal LP, October 5, 2004, 10.61%........... 3,761 4,984
Cahua SA, due various dates through November 2004, various
interest rates............................................ 29,106 --
Various NEO debt due 2005-2008, 9.35%....................... 23,956 27,186
LSP Kendall Energy LLC, due September 2005, 3.15%........... 499,500 --
MidAtlantic Generating LLC, due October 2005, 3.56%......... 420,892 --
NRG McClain due December 31, 2005, 3.43%.................... 159,885 --
Camas Power Boiler LP, unsecured term loan, due June 30,
2007, 7.65%............................................... 11,779 14,526
COBEE, due July 2007, various interest rates................ 51,600 --
Camas Power Boiler LP, revenue bonds, due August 1, 2007,
4.65%..................................................... 9,130 9,130
NRG Brazos Valley LLC, due June 30, 2008, 3.44%............. 159,750 --
Cementos Energia SA, due various dates through January 2011,
various interest rates.................................... 26,014 --
Hsin Yu Energy Development, due various dates through 2012,
various interest rates.................................... 89,964 --
Flinders Power Finance Pty, due September 2012, 8.56%....... 74,886 83,820
NRG Energy Center, Inc. senior secured notes due June 15,
2013, 7.31%............................................... 62,408 65,762
LSP Energy LLC (Batesville), due 2014 and 2025,
7.16%-8.16%............................................... 321,875 --
Crockett Cogeneration LLP, due December 31, 2014, 8.13%..... 234,497 245,229
PERC, due 2017 and 2018, 5.2%............................... 33,220 --
Csepeli Aramtermelo, due October 2017, 3.79%-4.85%.......... 169,712 --
Sterling Luxembourg (No. 3) S.a.r.L., due June 30, 2019,
7.86%, LIBOR+1.31%........................................ 329,842 346,668
Saale Energie GmbH, Schkopau Capital lease, due 2021,
various interest rates.................................... 311,867 --
Audrain County, MO -- Capital lease, due December 2023,
10%....................................................... 239,930 --
66
2001 2000
---------- ----------
(THOUSANDS OF DOLLARS)
NRG South Central Generating LLC senior bonds, due various
dates through September 15, 2024, various interest
rates..................................................... 763,500 788,750
NRG Northeast Generating LLC senior bonds, due various dates
through December 15, 2024, various interest rates......... 610,000 700,000
Bulo Bulo, indefinite lived, non-interest bearing........... 18,177 --
---------- ----------
8,343,986 3,797,318
Less current maturities..................................... 500,154 146,469
---------- ----------
Total................................................... $7,843,832 $3,650,849
========== ==========
SHORT TERM DEBT
As of December 31, 2001, NRG Energy had a $500 million recourse revolving
credit facility under a commitment fee arrangement that matures in March of
2002. This facility provides short-term financing in the form of bank loans and
replaced an earlier facility with substantially similar terms and conditions,
that matured in March 2001. At December 31, 2001, NRG Energy had $170 million
outstanding under this facility. In March 2002, the revolving credit facility
was terminated and was replaced with a $1.0 billion 364-day corporate-level
unsecured revolving line of credit with ABN AMRO Bank N.V. as Administrative
Agent. During the period ended December 31, 2001 the facility bore interest at a
floating rate based on LIBOR and Prime rates throughout the period and had a
weighted average interest rate of 5.89%.
As of December 31, 2001, NRG Energy, through its wholly owned subsidiary,
NRG South Central Generating LLC, had outstanding approximately $40 million
under a project level, non-recourse revolving credit agreement which matures in
March 2002. During the period ended December 31, 2001, the weighted average
interest rate of such outstanding advances was 4.46%. The maximum available
under this facility is $40 million. NRG Energy intends to renew this facility
with a facility having substantially similar terms and conditions.
In January 2001, NRG Energy entered into a bridge credit agreement with a
final maturity date of December 31, 2001. Approximately $600 million was
borrowed under this facility to partially finance NRG Energy's acquisition of
the LS Power generation assets. In March 2001, the bridge credit facility was
repaid with proceeds from NRG Energy's offering of common stock and equity
units.
In June 2001, NRG Energy entered into a $600 million term loan facility.
The facility is unsecured and provides for borrowings of base rate loans and
Eurocurrency loans. The facility terminates on June 21, 2002. As of December 31,
2001, the aggregate amount outstanding under this facility was $600 million.
During the period ended December 31, 2001 the weighted average interest rate of
such outstanding advances was 3.94%. NRG Energy repaid this facility in March
2002, in connection with the closing of its new $1.0 billion unsecured
corporate-level revolving line of credit and the receipt of $300 million of cash
from Xcel Energy.
NRG Energy had $170 million and $63 million in outstanding letters of
credit as of December 31, 2001 and 2000, respectively.
LONG-TERM DEBT AND CAPITAL LEASES
In May 2001, NRG Energy's wholly-owned subsidiary, NRG Finance Company I
LLC, entered into a $2 billion revolving credit facility. The facility will be
used to finance the acquisition, development and construction of power
generating plants located in the United States and to finance the acquisition of
turbines for such facilities. The facility provides for borrowings of base rate
loans and Eurocurrency loans and is secured by mortgages and security agreements
in respect of the assets of the projects financed under the facility, pledges of
the equity interests in the subsidiaries or affiliates of the borrower that own
such projects, and by guaranties from each such subsidiary or affiliate.
Provided that certain conditions are met that assure the lenders that sufficient
security remains for the remaining outstanding loans, the borrower may repay
loans
67
relating to one project and have the liens relating to that project released.
Loans that have been repaid may be re-borrowed, as permitted by the terms of the
facility. The facility terminates on May 8, 2006. The facility is non-recourse
to NRG Energy other than its obligation to contribute equity at certain times in
respect of projects and turbines financed under the facility. As of December 31,
2001, the aggregate amount outstanding under this facility was $697.5 million.
During the period ended December 31, 2001, the weighted average interest rate of
such outstanding advances was 4.83%.
As part of NRG Energy's acquisition of the LS Power assets in January 2001,
NRG Energy, through its wholly owned subsidiary, LSP Kendall Energy LLC, has
acquired a $554.2 million credit facility. The facility is non-recourse to NRG
Energy and consists of a construction and term loan, working capital and letter
of credit facilities. As of December 31, 2001, there were borrowings totaling
approximately $499.5 million outstanding under the facility at a weighted
average annual interest rate of 5.12%.
Upon the acquisition of the LS Power assets, NRG Energy assumed
approximately $326 million of bonds outstanding originally issued to finance the
construction of the Batesville generation plant. In May 1999, LSP Energy Limited
Partnership (Partnership) and LSP Batesville Funding Corporation (Funding)
issued two series of Senior Secured Bonds (Bonds) in the following total
principle amounts: $150 million 7.16% Series A Senior Secured Bonds due 2014 and
$176 million 8.160% Series B Senior Secured Bonds due 2025. Interest is payable
semiannually on each January 15 and July 15. In March 2000, a registration
statement was filed by Partnership and Funding and became effective. The
registration statement was filed to allow the exchange of the Bonds for two
series of debt securities (Exchange Bonds), which are in all material respects
substantially identical to the Bonds. The Exchange Bonds are secured by
substantially all of the personal property and contract rights of the
Partnership and Funding. The Exchange Bonds are redeemable, at the option of
Partnership and Funding, at any time in whole or from time to time in part, on
not less than 30 nor more than 60 days prior notice to the holders of that
series of Exchange Bonds, on any date prior to their maturity at a redemption
price equal to 100% of the outstanding principal amount of the Exchange Bonds
being redeemed and a make whole premium. In no event will the redemption price
ever be less than 100% of the principal amount of the Exchange Bonds being
redeemed plus accrued and unpaid interest thereon. Principal payments are
payable on each January 15 and July 15 beginning July 15, 2001.
On March 13, 2001, NRG Energy completed the sale of 11.5 million equity
units for an initial price of $25 per unit. The 11.5 million equity units sold
included 1.5 million units sold pursuant to the underwriters' over-allotment
option. NRG Energy received gross proceeds from the issuance of $287.5 million.
Net proceeds from this issuance were $278.4 million after deducting underwriting
discounts, commissions and estimated offering expenses. Each equity unit
initially consists of a corporate unit comprising a $25 principal amount of NRG
Energy's senior debentures and an obligation to acquire shares of NRG Energy
common stock no later than May 18, 2004 at a price ranging from between $27.00
and $32.94. Approximately $4.1 million of the gross proceeds have been recorded
as additional paid in capital to reflect the value of the obligation to purchase
NRG Energy's common stock. Interest payments will be payable on the debentures
quarterly in arrears on each February 16, May 16, August 16 and November 16,
commencing May 16, 2001. Interest will be payable initially at an annual rate of
6.50% of the principal amount of $25 per debenture to, but excluding, February
17, 2004, or May 18, 2004 if the interest rate is not reset three business days
prior to February 17, 2004 or three business days prior to May 18, 2004, the
debentures will bear interest from February 17, 2004, or May 18, 2004, as
applicable, at the reset rate to, but excluding, May 16, 2006. In addition,
original issued discount will accrue on the debentures. The net proceeds were
used in part to reduce amounts outstanding under NRG Energy's $600 million
short-term bridge credit agreement, which was used to finance in part NRG
Energy's acquisition of LS Power generation assets.
In March 2001, NRG Energy increased its ownership interest in PERC, which
resulted in the consolidation of its equity investment in PERC. As a result, the
assets and liabilities of PERC became part of the assets and liabilities of NRG
Energy. Upon completion of the transaction, NRG Energy recorded approximately
$37.9 million of outstanding Finance Authority of Maine (FAME) Electric Rate
Stabilization Revenue Refunding Bonds Series 1998 (FAME bonds) which were issued
on PERC's behalf by FAME in June 1998. The face amount of the bonds that were
initially issued was approximately $44.9 million and was used to repay the
Floating Rate Demand Resource Revenue Bonds issued by the Town of Orrington,
Maine
68
on behalf of PERC. The FAME bonds are fixed rate bonds with yields ranging from
3.75% to 5.2%. The weighted average yield on the FAME bonds is approximately
5.1%. The FAME bonds are subject to mandatory redemption in annual installments
of varying amounts through July 1, 2018. Beginning July 1, 2008 the FAME bonds
are subject to redemption at the option of PERC at a redemption price equal to
102% through June 30, 2009, 101% for the period July 1, 2009 to June 30, 2010
and 100% thereafter, of the principal amount outstanding, plus accrued interest.
The loan agreement with FAME contains certain restrictive covenants relating to
the FAME bonds, which restrict PERC's ability to incur additional indebtedness,
and restricts the ability of the general partners to sell, assign or transfer
their general partner interests. The bonds are collateralized by liens on
substantially all of PERC's assets.
In April 2001, NRG Energy issued $690 million of senior notes in two
tranches. The first tranche of $350 million matures in April 2011 and bears an
interest rate of 7.75%. The second tranche of $340 million matures in April 2031
and bears an interest rate of 8.625%. Interest on the notes is due semi-annually
each April and October. The net proceeds of the issuance were used for repayment
of short-term indebtedness incurred to fund acquisitions, for investments,
general corporate purposes and to provide capital for future planned
acquisitions.
On June 22, 2001, NRG MidAtlantic Generating LLC (MidAtlantic), a wholly
owned subsidiary of NRG Energy, borrowed approximately $420.9 million under a
five year term loan agreement (Agreement) to finance, in part, the acquisition
of certain generating facilities from Conectiv. The Agreement terminates in
November 2005 and provides for a total credit facility of $580 million. Interest
is payable quarterly. The debt is guaranteed by MidAtlantic and its wholly owned
subsidiaries. The Agreement provides for a variable interest rate at either the
higher of the Prime rate or the Federal Funds rate plus 0.50%, or the London
Interbank Offered Rate (LIBOR) of interest. During the period ended December 31,
2001, the weighted average interest rate for amounts outstanding under the
Agreement was 4.56%. MidAtlantic is obligated to pay a commitment fee of 0.375%
of the unused portion of the credit facility. The Agreement requires MidAtlantic
to comply with certain covenants concerning limitations on additional
borrowings, sales of assets, capital expenditures, and payment of dividends or
other distributions to shareholders.
In June 2001, in connection with NRG Energy's acquisition of the Csepel
facilities, NRG Energy assumed a non-recourse credit facility agreement that
provides for borrowings of approximately $78.5 million and DEM 203.6 million. As
of December 31, 2001, there exists an outstanding balance of approximately
$169.7 million under this credit facility. The facility terminates in 2017 with
principle payments due quarterly in varying amounts throughout the term of the
agreement. Interest is payable quarterly at a variable rate.
In June 2001, NRG Energy through its wholly owned subsidiaries, Brazos
Valley Energy LP and Brazos Valley Technology LP, entered into a $180 million
non-recourse construction credit facility to fund the construction of the 600 MW
Brazos Valley gas-fired combined cycle merchant generation facility located in
Fort Bend County, Texas. As of December 31, 2001, there exists an outstanding
balance of $159.8 million under this credit agreement. The weighted average
interest rate as of December 31, 2001 was 4.61%, interest is payable quarterly.
In connection with NRG Energy's acquisition of the COBEE facilities, NRG
Energy recorded on its balance sheet approximately $56.3 million of non-recourse
long-term debt that is due in 18 semi-annual installments of varying amounts
beginning January 31, 1999 and ending July 31, 2007. The loan agreement provides
an A Loan of up to $30 million and a B Loan of up to $45 million. Interest is
payable semi-annual in arrears at a rate equal to 6-month LIBOR plus a margin of
4.5% on the A Loan and 6-month LIBOR plus a margin of 4.0% on the B Loan. The A
Loan and the B Loan are collateralized by a mortgage on substantially all of
COBEE's assets.
In August 2001, NRG Energy entered into a 364-day term loan of up to $296
million. The credit facility was structured as a senior unsecured loan and was
partially non-recourse to NRG Energy. The proceeds were used to finance the
McClain generating facility acquisition. In November 2001, the credit facility
was repaid from the proceeds of a $181.0 million term loan and $8.0 million
working capital facility entered into by NRG McClain LLC, with Westdeutsche
Landesbank Girozentrale, New York branch, as agent (non-recourse to NRG Energy).
The final maturity date of the facility is November 30, 2006. As of December 31,
2001, the
69
aggregate amount outstanding under this facility was $159.9 million. During the
period ended December 31, 2001, the weighted average interest rate of such
outstanding borrowings was 5.07%.
In connection with NRG Energy's acquisition of the Audrain facilities, NRG
Energy has recognized a capital lease on its balance sheet within long-term debt
in the amount of $239.9 million, as of December 31, 2001. The capital lease
obligation is recorded at the net present value of the minimum lease obligation
payable. The lease terminates in May 2023. NRG Energy will make interest
payments only over the term of the lease and no principal payments until the end
of the lease term. In addition, NRG Energy has recorded in notes receivable, an
amount of approximately $239.9 million, which represents its investment in the
bonds that the county of Audrain issued to finance the project.
In connection with NRG Energy's purchase of PowerGen's interest in Saale
Energie GmbH, NRG Energy has recognized a non-recourse capital lease on its
balance sheet within long-term debt in the amount of $311.9 million, as of
December 31, 2001. The capital lease obligation is recorded at the net present
value of the minimum lease obligation payable over the lease's remaining period
of 20 years. In addition, a direct financing lease was recorded in notes
receivable in the amount of approximately $318.9 million.
The NRG Energy Center, Inc. notes are secured principally by long-term
assets of the Minneapolis Energy Center (MEC). In accordance with the terms of
the note agreement, MEC is required to maintain compliance with certain
financial covenants primarily related to incurring debt, disposing of MEC
assets, and affiliate transactions. MEC was in compliance with these covenants
at December 31, 2001.
The NRG Energy senior notes are unsecured and are used to support equity
requirements for projects acquired and in development. Interest is paid
semi-annually.
The $240 million NRG Energy Senior notes due November 1, 2013 are
remarketable or redeemable Security (ROARS). November 1, 2003 is the first
remarketing date for these notes. Interest is payable semi-annually on May 1,
and November 1, of each year through 2003, and then at intervals and interest
rates as discussed in the indenture. On the remarketing date, the notes will
either be mandatorily tendered to and purchased by Credit Suisse Financial
Products or mandatorily redeemed by NRG Energy at prices discussed in the
indenture. The notes are unsecured debt that rank senior to all of NRG Energy's
existing and future subordinated indebtedness.
The various NEO notes are term loans. The loans are secured principally by
long-term assets of NEO Landfill Gas collection system. NEO Landfill Gas is
required to maintain compliance with certain covenants primarily related to
incurring debt, disposing of the NEO Landfill Gas assets, and affiliate
transactions. NEO was in compliance with these covenants at December 31, 2001.
The Camas Power Boiler LP notes are secured principally by its long-term
assets. In accordance with the terms of the note agreements, Camas Power Boiler
LP is required to maintain compliance with certain financial covenants primarily
related to incurring debt, disposing of assets, and affiliate transactions.
Camas Power Boiler was in compliance with these covenants at December 31, 2001.
The Crockett Corporation term loan is secured primarily by the long-term
assets of the Crockett Cogeneration project. Crockett is required to maintain
compliance with certain financial covenants primarily related to incurring debt,
disposing of assets and complying with the terms of the contract to sell energy,
capacity and steam to Pacific Gas & Electric and its other customer. Crockett
was in compliance with these covenants at December 31, 2001, but the bankruptcy
of Pacific Gas & Electric, the counterparty on a material contract that provides
security to the lenders, gives rise to a situation that could result in the
acceleration of the loan. The Crockett partnership has been working with the
lenders to resolve this issue, and it is the view of NRG Energy management that
the lenders will not exercise their right to accelerate this loan.
On February 22, 2000, NRG Northeast Generating LLC, an indirect,
wholly-owned subsidiary of NRG Energy, issued $750 million of project level
senior secured bonds, to refinance short-term project borrowings and for certain
other purposes. The bond offering included three tranches: $320 million with an
interest rate of 8.065% due in 2004, $130 million with an interest rate of
8.842% due in 2015 and $300 million with an interest rate of 9.292% due in 2024.
Interest and principal payments are due quarterly. The bonds are jointly and
70
severally guaranteed by each of NRG Northeast's existing and future
subsidiaries. The bonds are secured by a security interest in NRG Northeast's
membership or other ownership interests in the guarantors and its rights under
all inter-company notes between NRG Northeast and the guarantors. In December
2000, NRG Northeast Generating LLC exchanged all of its outstanding bonds for
bonds registered under the Securities Act of 1933. As of December 31, 2001,
there remains $610 million of outstanding bonds.
In March 2000, NRG Energy issued $250 million of 8.70% ROARS due March 15,
2005. Each security represents a fractional interest in the assets of an
unconsolidated grantor trust that pays interest semi-annually on March 15, and
September 15, of each year through 2005. The sole assets of the Trust consists
of (pounds)160 million of Reset senior notes due March 15, 2020 issued by NRG
Energy pursuant to the Indenture and certain other defined rights. The Reset
senior notes were used principally to finance NRG Energy's acquisition of the
Killingholme facility. On March 15, 2005, these senior notes may be remarketed
by Bank of America, N.A. at a fixed rate of interest through the maturity date
or, at a floating rate of interest for up to one year and then at a fixed rate
of interest through 2020, or redeemed by NRG Energy. Interest is payable
semi-annually on these securities beginning September 15, 2000 through March 15,
2005, and then at intervals and interest rates established in the remarketing
process.
Additionally, three of NRG Energy's foreign subsidiaries entered into a
(pounds)325 million (US $517 million at March 31, 2000) secured borrowing
facility agreement with Bank of America International Limited. Under this
facility, the financial institutions have made available to our subsidiaries
various term loans totaling (pounds)235 million (US $374 million at March 31,
2000) for purposes of financing the acquisition of the Killingholme facility and
(pounds)90 million (US $143 million at March 31, 2000) of revolving credit and
letter of credit facilities to provide working capital for operating the
Killingholme facility. The final maturity date of the facility is the earlier of
June 30, 2019, or the date on which all borrowings and commitments under the
largest tranche of the term facility have been repaid or cancelled.
In March 2000, NRG South Central Generating LLC, an indirect wholly owned
subsidiary of NRG Energy, issued $800 million of senior secured bonds in a
two-part offering, to finance its acquisition of the Cajun generating
facilities. The first tranche was for $500 million with a coupon of 8.962% and a
maturity of 2016. The second tranche was for $300 million with a coupon of
9.479% and a maturity of 2024. Interest and principal payments are due
quarterly. The bonds are secured by a security interest in NRG Central U.S.
LLC's and South Central Generating Holding LLC's membership interests in NRG
South Central and NRG South Central's membership interests in Louisiana
Generating and all of the assets related to the Cajun facilities including its
rights under a guarantor loan agreement and all inter-company notes between it
and Louisiana Generating, and a revenue account and a debt service reserve
account. In January 2001, NRG South Central Generating LLC exchanged all of its
outstanding bonds for bonds registered under the Securities Act of 1933. As of
December 31, 2001, there remains $763.5 million of outstanding bonds.
In September 2000, Flinders Power Finance Pty, an Australian wholly owned
subsidiary, entered into a twelve year AUD $150 million promissory note (US
$81.4 million at September 2000). The interest has a fixed and variable
component. At December 31, 2001, the effective interest rate was 5.89% and is
paid semi annually.
In December 2000, NRG Energy filed a shelf registration with the SEC to
issue up to $1,650.0 million of an indeterminate amount of debt securities,
preferred stock, common stock, depository shares, debt warrants, stock purchase
contracts, stock purchase units and hybrid securities. This shelf registration
includes $150 million of securities that were carried forward from NRG Energy's
previous shelf registration filed in December 1999.
In June 2001, NRG filed a shelf registration with the SEC to sell up to $2
billion in debt securities, common and preferred stock, warrants and other
securities. NRG expects to use the net proceeds of offering under the shelf for
general corporate purposes, which may include the financing and development of
new facilities, working capital and debt reduction. In July 2001, NRG Energy
completed the sale of $500 million of unsecured senior notes under this shelf
registration. The senior notes were issued in two tranches, the first tranche of
$340 million of 6.75% Senior Notes is due July 2006 and the second tranche of
$160 million of 8.625% Senior Notes is due April 2031. Interest payments are due
semi-annually on January 15 and July 15
71
until maturity for the Senior Notes due 2006 and April 1 and October 1 until
maturity for the Senior Notes due 2031. NRG received net proceeds from the sale
of both series of notes of approximately $505.2 million, including interest on
the senior notes due 2031, accrued from April 5, 2001. The net proceeds were
used to repay all amounts outstanding under NRG's revolving credit agreement and
for investments and other general corporate purposes and to provide capital for
planned acquisitions.
Annual maturities of long-term debt and capital leases for the years ending
after December 31, 2001 are as follows:
(THOUSANDS OF DOLLARS) TOTAL
---------------------- ----------
2002........................................................ $ 500,154
2003........................................................ 159,095
2004........................................................ 160,829
2005........................................................ 908,435
2006........................................................ 1,189,538
Thereafter.................................................. 5,425,935
----------
Total.................................................. $8,343,986
Future minimum lease payments for capital leases included above at December
31, 2001 are as follows:
(THOUSANDS OF DOLLARS)
----------------------
2002........................................................ $ 69,576
2003........................................................ 67,775
2004........................................................ 65,985
2005........................................................ 64,195
2006........................................................ 62,405
Thereafter.................................................. 988,420
----------
Total minimum obligations.............................. $1,318,356
==========
Interest.................................................... $ (766,030)
----------
Present value of minimum obligations........................ 552,326
----------
Current Portion............................................. (22,516)
----------
Long-term obligations....................................... $ 529,810
==========
Total accumulated amortization related to the assets recorded with respect
to NRG Energy's capital leases at December 31, 2001 was $0.
NRG ENERGY CREDIT RATING
NRG Energy's unsecured credit rating is BBB- from Standard & Poor's and
Baa3 from Moody's Investors Service. In December 2001, Moody's placed NRG
Energy's credit rating on review for potential downgrade. NRG Energy's credit
rating remains under review by Moody's for potential downgrade.
As of December 31, 2001, and 2000, NRG Energy's off-balance sheet
obligations pursuant to its guarantees of performance, equity and indebtedness
obligations of its subsidiaries totaled approximately $721.7 million and $493
million, respectively. NRG Energy is directly liable for the obligations of
certain of its project affiliates and other subsidiaries pursuant to guarantees
relating to certain of their indebtedness, equity and operating obligations. In
addition, in connection with the purchase and sale of fuel emission credits and
power generation products to and from third parties with respect to the
operation of some of NRG Energy's generation facilities in the United States,
NRG Energy may be required to guarantee a portion of the obligations of certain
of its subsidiaries.
If Moody's or Standard & Poor's were to downgrade NRG Energy, many of the
corporate guarantees and commitments currently in place would need to be
supported with letters of credit or cash collateral within 5 to 30 days.
72
As of December 31, 2001, the amount of collateral required, if NRG Energy
were downgraded, was approximately $960 million to satisfy certain of the above
mentioned guarantees and certain obligations associated with the $2 billion
construction/acquisition revolver. Of the $960 million in collateral that could
be required, approximately $200 million relates to NRG Energy's guarantees of
debt service reserve accounts required by some of its project-level financings,
approximately $400 million relates to NRG Energy's power marketing activities;
and $360 million would be required to support its Contingent Equity Guarantee
associated with the $2 billion Construction/Acquisition Revolver.
Because NRG Energy places a maximum amount on its guarantees in place to
support power marketing activities, and because of the relatively small number
of margin accounts in place, even very large changes in market conditions would
not have a material impact on the approximately $400 million of collateral that
would be required for NRG Power Marketing in the event of a downgrade.
In the event of a downgrade, NRG Energy would expect to meet its collateral
obligations with cash on hand, available credit lines provided under its
revolving line of credit, liquidity support from Xcel Energy and potentially
from the issuance of debt into capital markets. Xcel Energy has stated its plan
to infuse $600 million of equity into NRG Energy in 2002 in connection with its
exchange offer and merger. Of this amount, $300 million has already been
provided (March 2002) in the form of a convertible subordinated note that Xcel
Energy has said it will cancel if its exchange offer and merger are completed.
If the offer and merger are not completed, Xcel Energy has said it will continue
to evaluate the terms and timing of any additional investment in NRG Energy. NRG
Energy's revolving line of credit is expected to be increased from $500 million
to $1 billion in March 2002. In addition, NRG Energy will maintain its $125
million letter of credit facility and plans to secure an additional $125 million
credit facility for total credit facilities of $1.25 billion to be available in
2002.
The Contingent Equity Guarantee associated with NRG Energy's construction
revolver could increase to a maximum of $850 million by the end of 2002 as NRG
Energy utilizes the capacity of the Construction/ Acquisition Revolver.
Therefore, the amount of collateral required by the end of 2002 could increase
to $1.45 billion.
NOTE 10 -- INCOME TAXES
Through March 12, 2001, NRG Energy had a tax sharing agreement with its
parent, Xcel Energy, that included the following significant provisions: (1) if
NRG Energy, along with its subsidiaries, is in a taxable income position, NRG
Energy will be currently charged with an amount equivalent to its federal income
tax computed as if the group had actually filed a separate return, and (2) if
NRG Energy, along with its subsidiaries, is in a tax loss position, NRG Energy
will be currently reimbursed to the extent its combined losses are utilized in a
consolidated return, and (3) NRG Energy will be currently reimbursed for the tax
credits it generates to the extent its tax credits are utilized in a
consolidated return.
Due to the 2001 public equity offering, NRG Energy and its subsidiaries
will file a federal income tax return separate from Xcel Energy for the period
March 13, 2001 through December 31, 2001. This
73
deconsolidation for tax purposes has had no material impact on current or
deferred taxes recorded for NRG Energy. The provision (benefit) for income taxes
for the years ended December 31, consists of the following:
2001 2000 1999
-------- -------- --------
(THOUSANDS OF DOLLARS)
Current
U.S.................................................... $ 29,301 $ 89,020 $ 4,661
Foreign................................................ 7,149 (614) 4,040
-------- -------- --------
36,450 88,406 8,701
-------- -------- --------
Deferred
U.S.................................................... 31,773 31,311 (6,693)
Foreign................................................ 13,969 7,104 (7,668)
-------- -------- --------
45,742 38,415 (14,361)
Tax credits recognized................................... (48,788) (34,083) (20,421)
-------- -------- --------
Total income tax (benefit).......................... 33,404 92,738 (26,081)
-------- -------- --------
Effective tax rate....................................... 11.2% 33.6% (84.0)%
The components of the net deferred income tax liability at December 31
were:
2001 2000
--------- ---------
(THOUSANDS OF DOLLARS)
Deferred tax liabilities
Differences between book and tax basis of property........ $491,633 $ 82,392
Investments in projects................................... 30,036 29,475
Goodwill.................................................. 2,116 2,015
Net unrealized gains on mark to market transactions....... 53,944 --
Other..................................................... 8,845 10,546
-------- --------
Total deferred tax liabilities............................ $586,574 $124,428
-------- --------
Deferred tax assets
Deferred compensation, accrued vacation and other
reserves............................................... 23,555 23,703
Development costs......................................... 5,741 13,891
Foreign tax loss carryforwards............................ 23,630 25,063
Differences between book and tax basis of contracts....... 82,972 --
Other..................................................... 4,940 6,129
-------- --------
Total deferred tax assets................................. 140,838 68,786
======== ========
Net deferred tax liability................................ $445,736 $ 55,642
======== ========
The effective income tax rates for the years ended December 31, 2001 and
2000 differ from the statutory federal income tax rate of 35% as follows:
2001 2000
-------------------- ---------------------
Income before income taxes........................ $298,608 $ 275,673
======== =========
Tax at 35%........................................ 104,512 35.0% 96,486 35%
State taxes (net of federal benefit).............. 7,576 2.5% 29,541 10.72%
Foreign operations................................ (29,386) (9.8)% (10,692) (3.88)%
Tax credits....................................... (48,788) (16.3)% (34,083) (12.36)%
Permanent differences, reserves, other............ (510) (0.2)% 11,486 4.16%
-------- -------- --------- --------
Income Tax Expense................................ $ 33,404 11.2% $ 92,738 33.64%
======== ======== ========= ========
For the year ended December 31, 2001, income tax expense was $33.4 million,
compared to an income tax expense of $92.7 million for the year ended December
31, 2000, a decrease of $59.3 million. The decrease in tax expense compared to
2000 was primarily due to increased IRC Section 29 energy credits, a reduction
in
74
the state effective tax rate, and a higher percentage of NRG's overall earnings
derived from foreign projects in lower tax jurisdictions. For the year ended
December 31, 2001, NRG Energy's overall effective tax rate was 11.2%, compared
to 33.6% for the same period in 2000. For the year ended December 31, 2001, NRG
Energy's overall effective income tax rate before recognition of tax credits was
27.5% compared to 46.0%, for the same period in 2000.
The effective income tax rate for the year ended December 31, 2000 differs
from the statutory federal income tax rate of 35% primarily due to state tax,
foreign tax and tax credits as shown above.
NRG Energy intends to reinvest the earnings of foreign operations except to
the extent the earnings are subject to current U.S. income taxes. Accordingly,
U.S. income taxes and foreign withholding taxes have not been provided on a
cumulative amount of un-remitted earnings of foreign subsidiaries of
approximately $346 million and $238 million at December 31, 2001 and 2000,
respectively. The additional U.S. income tax and foreign withholding tax on the
un-remitted foreign earnings, if repatriated, would be offset in whole or in
part by foreign tax credits. Thus, it is not practicable to estimate the amount
of tax that might be payable.
NOTE 11 -- BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS PENSION BENEFITS
Substantially all of NRG Energy's employees participate in defined benefit
pension plans. The majority of the employees participate in Xcel Energy's
noncontributory, defined benefit pension plan which was formerly sponsored by
NSP. Other employees participate in noncontributory, defined benefit pension
plans that are sponsored by NRG Energy or NRG Energy affiliates. Benefits are
generally based on a combination of an employee's years of service and earnings.
Some formulas also take into account Social Security benefits. Plan assets
principally consist of the common stock of public companies, corporate bonds and
U.S. government securities. In addition, NRG Energy provides postretirement
health and welfare benefits (health care and death benefits) for certain groups
of its employees. Generally, these are groups that were acquired in recent years
and for whom prior benefits are being continued (at least for a certain period
of time or as required by union contracts). Cost sharing provisions vary by
acquisition group and terms of any applicable collective bargaining agreements.
Certain former NRG retirees are covered under the legacy Xcel plan, which was
terminated for non-bargaining employees retiring after 1998 and for bargaining
employees retiring after 1999.
Xcel's pension and other postretirement health and welfare benefit
obligations and assets/(liability) at December 31, 2001 and 2000 were as
follows:
PENSION BENEFITS OTHER BENEFITS
------------------------ --------------------------
2001 2000 2001 2000
---------- ---------- -------- --------------
(THOUSANDS OF DOLLARS)
Benefit obligation at Dec. 31............. $1,366,912 $1,275,815 $191,114 $170,932
Fair value of plan assets at Dec. 31...... 2,090,846 2,411,238 30,767 32,127
Accrued asset (liability) at Dec. 31...... 224,907 113,551 (90,566) (91,165)
NRG Energy's net annual periodic pension cost includes the following
components:
COMPONENTS OF NET PERIODIC BENEFIT COST
PENSION BENEFITS OTHER BENEFITS
-------------------- ------------------------
2001 2000 2001 2000
-------- -------- ------ --------------
(THOUSANDS OF DOLLARS)
Service cost benefits earned................... $ 6,931 $ 5,769 $ 910 $ 833
Interest cost on benefit obligation............ 9,802 6,728 1,439 1,270
Amortization of prior service cost............. 427 394 (129) (104)
Expected return on plan assets................. (15,748) (11,227) -- --
Recognized actuarial (gain)/loss............... (6,549) (5,355) (51) (28)
-------- -------- ------ ------
Net periodic benefit cost (credit)........ $ (5,137) $ (3,691) $2,169 $1,971
======== ======== ====== ======
75
A comparison of the pension benefit obligation and pension assets at
December 31, 2001 and 2000 for all of NRG's plans on a combined basis is as
follows:
RECONCILIATION OF FUNDED STATUS
PENSION BENEFITS OTHER BENEFITS
--------------------- --------------------
2001 2000 2001 2000
--------- -------- -------- --------
(THOUSANDS OF DOLLARS)
Benefit obligation at Jan. 1....................... $ 90,572 $ 24,289 $ 18,194 $ 421
Service cost....................................... 6,931 5,769 910 833
Interest cost...................................... 9,802 6,728 1,439 1,270
Employee contributions............................. 570 -- 7 6
Plan amendments.................................... 1,446 -- (278) --
Actuarial (gain)/loss.............................. 8,407 5,357 1,806 (755)
Acquisitions....................................... 31,404 52,800 3,212 16,445
Benefit payments................................... (6,402) (4,371) (107) (26)
--------- -------- -------- --------
Benefit obligation at Dec. 31...................... $ 142,730 $ 90,572 $ 25,183 $ 18,194
========= ======== ======== ========
Fair value of plan assets at Jan. 1................ $ 171,177 $ 47,078 $ -- $ --
Actual return on plan assets....................... (4,424) 90,058 -- --
Employee contributions............................. -- -- 7 6
Employer contributions............................. 14 -- 100 20
Benefit payments................................... (6,402) (4,371) (107) (26)
Acquisitions....................................... 17,334 38,412 -- --
--------- -------- -------- --------
Fair value of plan assets at Dec. 31............. $ 177,699 $171,177 $ -- $ --
========= ======== ======== ========
Funded status at Dec. 31 - excess of assets over
obligation....................................... $ 35,376 $ 80,605 ($25,183) ($18,194)
Unrecognized prior service cost.................... 5,400 4,381 (1,497) (1,348)
Unrecognized net gain.............................. (65,031) (98,874) 1,419 (2,106)
--------- -------- -------- --------
Accrued asset (liability) at Dec. 31............... $ (24,255) $(13,888) ($25,261) ($21,648)
========= ======== ======== ========
AMOUNT RECOGNIZED IN THE BALANCE SHEET
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
(THOUSANDS OF DOLLARS)
Accrued benefit liability..................... $(24,255) $(13,888) $(25,261) $(18,199)
Intangible asset.............................. (1,121) -- -- --
-------- -------- -------- --------
Net amount recognized -- asset (liability).... $(25,376) $(13,888) $(25,261) $(18,199)
======== ======== ======== ========
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
2001 2000 2001 2000
------ ------ ----- -----
Weighted-average assumption as of December 31,
Discount Rate............................................. 7.25 7.75 7.25 7.75
Expected return on plan assets............................ 9.50 8.50 9.00 8.00
Rate of compensation increase............................. 4.50 4.50 -- --
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effect:
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components..... $ 304 $ (217)
Effect on postretirement benefit obligation................. 2,620 (2,086)
76
NRG Energy participates in Xcel Energy's defined contribution 401(K) plan
that covers substantially all employees. Total contributions to the plan were
approximately $1.7 million, $1.1 million and $0.5 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
NRG EQUITY PLAN
During 1998 and 1999, NRG Energy's employees were eligible to participate
in its Equity Plan (the Plan). The Plan granted, to employees, phantom equity
units that were intended to simulate Stock options. Grant size was based on the
participant's position in NRG Energy and base salary. Equity unit valuations
were performed annually by an outside valuation firm. The value of an equity
unit was the approximate value per share of NRG Energy's stockholder equity as
of the valuation date, less the value of Xcel Energy's (formerly NSP) equity
investments. The units were awarded to employees annually at the respective
year's calculated share price (grant price). The Plan provided employees with a
cash pay out for the unit's appreciation in value over the vesting period. The
Plan had a seven year vesting schedule with actual payments beginning after the
end of the third year and continuing at 20% each year for the subsequent five
years. During 2001, 2000 and 1999, NRG Energy recorded compensation expense of
approximately $0, $6.0 million and $13.0 million, respectively, for the Plan.
The Plan included a change of control provision, which allowed all shares
to vest if NRG Energy's ownership were to change. Subsequent to the completion
of NRG Energy's initial public offering in June 2000, the Plan was converted to
a new stock option plan (see Note 14).
401(K) PLANS
NRG Energy also assumed several contributory, defined contribution employee
savings plans as a result of its 2000 and 1999 acquisition activity. These plans
comply with Section 401(k) of the Internal Revenue Code and cover substantially
all of our employees who are not covered by Xcel Energy's 401(k) Plan. NRG
Energy matches specified amounts of employee contributions to the plan. Employer
contributions made to these plans were approximately $1.5 million, $1.1 million
and $0.3 million in 2001, 2000 and 1999, respectively.
PENSION AND OTHER BENEFITS -- 2001 ACQUISITIONS
During 2001, NRG Energy acquired several generating assets and assumed
benefit obligations for a number of employees associated with those
acquisitions. The plans assumption included noncontributory defined benefit
pension plans, matched 401(k) savings plans, and contributory post-retirement
welfare plans. Of the 2001 acquisitions where these obligations were assumed,
approximately 79% percent of such employees are represented by one local union
under collective bargaining agreements, which expire on July 1, 2004. Plan
liability and expense amounts for these acquisitions are included in the pension
and postretirement health care amounts shown above.
PENSION AND OTHER BENEFITS
NRG Energy assumed the Hsin Yu Energy Development Co., LTD. defined pension
obligation upon NRG Energy's approximate 60% acquisition of Hsin Yu Development
Co. LTD during fiscal year 2001. The approximate net periodic benefit cost for
the year related to this plan was $0.07 million.
NRG Energy also assumed the pension obligation related to Killingholme due
to NRG Energy's acquisition of the gas-fired combined cycle, baseload facility
in March of 2000. Pension costs relating to this plan for FY 2001 were
approximately $0.5 million.
NOTE 12 -- SALES TO SIGNIFICANT CUSTOMERS
During 2001, sales to two customers accounted for 26.7% and 13.8% of total
revenues from majority owned operations in 2001. During 2000, sales to two
customers accounted for 22.2% and 12.2% of total
77
revenues from majority owned operations in 2000. Sales to three customers
accounted for 21.0%, 19.7% and 10.5% of total revenues from majority owned
operations in 1999.
NOTE 13 -- FINANCIAL INSTRUMENTS
The estimated December 31 fair values of NRG Energy's recorded financial
instruments are as follows:
2001 2000
------------------------ -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ---------
(IN THOUSANDS)
Cash and Cash equivalents...................... $ 186,107 $ 186,107 $ 95,243 $ 95,243
Restricted cash................................ 161,842 161,842 12,135 12,135
Notes receivable, including current portion.... 777,602 777,602 77,012 77,012
Long-term debt, including current portion...... 8,343,986 8,217,452 3,797,318 3,838,627
For cash and cash equivalents and restricted cash, the carrying amount
approximates fair value because of the short-term maturity of those instruments.
The fair value of notes receivable is based on expected future cash flows
discounted at market interest rates. The fair value of long-term debt is
estimated based on the quoted market prices for the same or similar issues.
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign currency exchange rates
At December 31, 2001 and 2000, NRG Energy had various foreign currency
exchange instruments with combined notional amounts of $46.3 million and $8.8
million, respectively. These foreign currency exchange instruments were hedges
of expected future cash flows. If the hedges had been terminated at December 31,
2001 and 2000, NRG Energy would have owed the counterparties $2.4 million and
$0.7 million, respectively.
Interest rates
At December 31, 2001 and 2000, NRG Energy had various interest-rate swap
agreements with combined notional amounts of $2.4 billion and $530 million,
respectively. These contracts are used to manage NRG Energy's exposure to
changes in interest rates. If these swaps had been terminated at December 31,
2001 and 2000, NRG Energy would have owed the counterparties $81.5 million and
$28.9 million, respectively.
Energy related commodities
At December 31, 2001 and 2000 NRG Energy had various energy related
commodities financial instruments with combined notional amounts of $1.0 billion
and $309.0 million, respectively. These financial instruments take the form of
fixed price, floating price or indexed sales or purchases, and options, such as
puts, calls, basis transactions and swaps. These contracts are used to manage
NRG Energy's exposure to commodity price variability in electricity, emission
allowances and natural gas, oil and coal used to meet fuel requirements. If
these contracts were terminated at December 31, 2001 and 2000, NRG Energy would
have received $224.1 million and $52.8 million from counterparties,
respectively.
Credit Risk
Management believes that NRG Energy's exposure to credit risk due to
nonperformance by the counter-parties to its hedging contracts is insignificant,
based on the investment grade rating of the counterparties. Counter-parties
consist principally of financial institutions and major energy companies. NRG
Energy actively manages its exposure to counter-party risk. NRG Energy has an
established credit policy in place to minimize overall credit risk. Important
elements of this policy include ongoing financial reviews of all counterparties,
established credit limits, as well as monitoring, managing and mitigating credit
exposure.
78
Enron Bankruptcy
During the fourth quarter of 2001, NRG Energy recorded a net after-tax
expense of approximately $6.7 million related to Enron Corp.'s bankruptcy. This
amount includes a $14.2 million after-tax charge to establish bad debt reserves,
which was partially offset by a $7.5 million after-tax gain on a credit swap
agreement entered into as part of NRG Energy's credit risk management program.
NRG Energy has fully provided for its exposure to Enron; however, as with any
receivable, NRG Energy will pursue collection of all amounts outstanding through
the ordinary course of business.
In addition, an Enron subsidiary, NEPCO, is serving as the construction
contractor for two greenfield development projects, the Kendall and Nelson
projects (2,336 MW combined) currently under construction in Illinois. Enron
guaranteed NEPCO's obligations under the construction contracts. To date, the
actual construction and engineering work on both projects has continued without
disruption and NRG Energy expects the projects to achieve commercial operations
on schedule. NRG Energy believes its overall construction costs for these two
projects will increase by approximately $22 per kilowatt, as a result of the
need to restructure the underlying construction contracts following the Enron
bankruptcy.
NOTE 14 -- CAPITAL STOCK
SALE OF STOCK
In March 2001, NRG Energy completed the sale of 18.4 million shares of
common stock for an initial price of $27 per share. The offering was completed
with all 18.4 million shares of common stock being sold including the
over-allotment shares of 2.4 million. NRG Energy received gross proceeds from
the issuance of $496.6 million. Net proceeds from the issuance were $473.4
million after deducting underwriting discounts, commissions and estimated
offering expenses. The net proceeds were used in part to reduce amounts
outstanding under NRG Energy's short-term bridge credit agreement, which was
used to finance in part NRG Energy's acquisition of the LS Power assets. At
December 31, 2001, there were approximately 50,939,875 shares of common stock,
and 147,605,000 shares of Class A common stock issued and outstanding.
In June 2000, NRG Energy sold 32.4 million shares of common stock at $15
per share. Net proceeds from the offering were $453.7 million. NRG Energy has
authorized capital stock consisting of 550,000,000 shares of common stock, and
250,000,000 shares of Class A common stock. At December 31, 2000, there were
approximately 32,396,000 shares of common stock, and 147,605,000 shares of Class
A common stock issued and outstanding.
INCENTIVE COMPENSATION PLAN
In June 2000, NRG Energy adopted a new incentive compensation plan (the New
Stock Plan), which was approved by shareholders in June 2001 and which will be
administered by a committee appointed by the Board of Directors. The New Stock
Plan provides for awards in the form of stock options, stock appreciation
rights, restricted stock, performance units, performance shares, or cash based
awards as determined by the Board of Directors. All officers, certain other
employees, and non-employee directors are eligible to participate in the plan.
Nine million shares of common stock are authorized for issuance under the Stock
Plan. Initially, only stock option grants will be made to certain officers,
independent directors and employees under the plan.
Each new option granted is valued at the fair market value per share at
date of grant. The difference between the option price and the market value of
the stock at the date of grant, if any, of each option on the date of grant is
recorded as compensation expense over a vesting period. Options granted prior to
June 2001 vest over a period of five years, with 25% vesting in each of the
years two through five and generally expire ten years from the date of grant.
Options granted in June 2001 and subsequently, vest over a four year period,
with 25% vesting each year and generally expire ten years from the date of
grant. The board's independent directors' options vested immediately upon being
granted. The average exercise price of vested options at December 31, 2001 and
2000 was $14.39 and $9.51, respectively, all of which were granted in
replacement of units previously outstanding under the equity plan. Compensation
expense related to options granted totaled $1.9 million and $7.3 million, for
the year ended December 31, 2001 and 2000, respectively.
79
At December 31, 2000, no employee stock options were exercisable. Other
options currently granted under the equity plan will fully vest periodically and
become exercisable through the year 2005 at prices ranging from $5.75 to $17.25.
Stock option transactions were (shares in thousands):
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------ ---------
Outstanding at January 1, 2000.............................. -- $ --
Granted..................................................... 4,304 9.51
Exercised................................................... -- --
Canceled or expired......................................... -- --
Other, contingent share issuance............................ -- --
----- ------
Outstanding at December 31, 2000............................ 4,304 9.51
----- ------
Exercisable December 31, 2000............................... -- $ --
----- ------
Outstanding at January 1, 2001.............................. 4,304 $ 9.51
Granted..................................................... 3,437 20.19
Exercised................................................... (145) 6.97
Canceled or expired......................................... (169) 14.66
Other, contingent share issuance............................ -- --
----- ------
Outstanding at December 31, 2001............................ 7,427 14.39
----- ------
Exercisable at December 31, 2001............................ 1,368 7.45
----- ------
The following table summarizes information about stock options outstanding
at December 31, 2001 (in thousands of shares):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
TOTAL LIFE EXERCISE TOTAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
------------------------ ----------- ---------- --------- ----------- ---------
$ 3.18 - $ 6.36........................... 635 1.7 $ 5.75 329 $ 5.75
$ 6.36 - $ 9.54........................... 2,371 5.0 8.14 1,024 7.77
$ 9.54 - $15.90........................... 2,211 9.1 14.43 -- --
$15.90 - $19.08........................... 62 9.4 17.77 -- --
$19.08 - $22.26........................... 36 9.5 21.45 -- --
$22.26 - $25.44........................... 2,050 9.3 23.49 15 22.95
$25.44 - $28.62........................... 2 8.6 25.62 -- --
$28.62 - $31.80........................... 60 9.2 31.80 -- --
----- --- ------ ----- ------
Total................................... 7,427 7.2 $14.39 1,368 $ 7.45
===== === ====== ===== ======
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model, with the following
weighted-average assumptions used for grants in 2001 and 2000.
2001 2000
----- -----
Dividends per year.......................................... -- --
Expected volatility......................................... 60.54 50.26
Risk-free interest rate..................................... 5.47 5.01
Expected life (years)....................................... 7 7
Using the Black-Scholes option-pricing model, the weighted-average fair
value of NRG Energy's stock options granted for 2001 and 2000 is $13.26 and
$14.38 per share, respectively.
80
NRG Energy accounts for its stock option plan in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
under which, no compensation cost has been recognized. Had compensation cost
been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), NRG Energy's net income and per share amounts
would have approximated the following pro forma amounts for the years ended
December 31:
2001 2000
-------- --------
Net income.................................................. As reported $265,204 $182,935
Pro Forma $260,404 182,279
Earnings per share data:
Basic earnings per share.................................... As reported $ 1.36 $ 1.10
Pro Forma 1.34 1.10
Diluted earnings per share.................................. As reported 1.35 1.10
Pro Forma 1.33 1.09
The effects of applying SFAS No. 123 on pro forma disclosures of net income
and earnings per share for the years ended December 31, 2001 and 2000 are not
likely to be representative of the pro forma effects on net income and earnings
per share in future years for the following reasons: 1) the number of future
shares to be issued under this plan is not known, 2) the effect of an additional
year of vesting no options granted in prior years is not considered in the
assumptions as of December 31, 2001 and 3) the assumptions used to determine the
fair value can vary significantly.
NOTE 15 -- EARNINGS PER SHARE
Basic earnings per common share were computed by dividing net income by the
weighted average number of Class A common stock and common stock shares
outstanding during each year. Shares issued during the year are weighted for the
portion of the year that they were outstanding. Diluted earnings per share is
computed in a manner consistent with that of basic earnings per share while
giving effect to all potentially dilutive common shares that were outstanding
during the period. The dilutive effect of the potential exercise of outstanding
options to purchase shares of common stock is calculated using the treasury
stock method. The dilutive effect of the issuance of common stock in the future
due to the outstanding warrants (11.5 million shares) to buy NRG Energy common
stock issued in connection with NRG Energy's Corporate Units issuance in March
2001 is calculated using the treasury stock method. The reconciliation of basic
earnings per common share to diluted earnings per share is shown in the
following table (in thousands, except per share data):
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------ -----------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ --------- ------ ------ ---------
Basic earnings per share
Income before
extraordinary items... $265,204 194,929 $ 1.36 $182,935 165,861 $1.10 $57,195 147,605 $.39
Effect of dilutive
securities:
Warrants (corporate
units).................. -- -- -- -- -- -- -- -- --
Stock options......... -- 1,510 $(0.01) -- 1,128 -- -- -- --
-------- ------- ------ -------- ------- ----- ------- ------- ----
Diluted earnings per
share................... $265,204 196,439 $ 1.35 $182,935 166,989 $1.10 $57,195 147,605 $.39
======== ======= ====== ======== ======= ===== ======= ======= ====
As of December 31, 2001, 2000 and 1999, 2,077,180, 2,700 and 0 options,
respectively, have been excluded from the dilutive calculation above as their
exercise price exceeded the average fair market value of NRG Energy's common
stock.
81
NOTE 16 -- CASH FLOW INFORMATION
Detail of supplemental disclosures of cash flow and non-cash investing and
financing information was:
2001 2000 1999
----------- ---------- ----------
(THOUSANDS OF DOLLARS)
Interest paid (net of amount capitalized)............... $ 385,885 $ 248,325 $ 82,891
Taxes paid/(refunds).................................... $ 57,055 $ 20,923 $ (54,384)
----------- ---------- ----------
Detail of businesses and assets acquired:
Current assets (including restricted cash)............ $ 184,874 $ 97,970 $ 110,821
Fair value of non-current assets...................... 4,779,530 1,896,113 1,433,370
Liabilities assumed, including deferred taxes......... (2,151,287) (81,126) (24,826)
----------- ---------- ----------
Cash paid net of cash acquired........................ $ 2,813,117 $1,912,957 $1,519,365
=========== ========== ==========
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
NRG Energy leases certain of its facilities and equipment under operating
leases, some of which include escalation clauses, expiring on various dates
through 2010. Rental expense under these operating leases was $9.7 million, $2.3
million and $2.2 million in 2001, 2000 and 1999, respectively. Future minimum
lease commitments under these leases for the years ending after December 31,
2001 are as follows:
(THOUSANDS OF
DOLLARS)
-------------
2002........................................................ $10,742
2003........................................................ 9,844
2004........................................................ 9,267
2005........................................................ 8,355
2006........................................................ 7,956
Thereafter.................................................. 41,615
-------
Total..................................................... $87,779
=======
CAPITAL COMMITMENTS
NRG Energy's management expects future capital expenditures related to
projects listed below, as well as construction and the purchase of turbines, to
total approximately $7.5 billion in the years 2002 through 2006. NRG Energy
anticipates funding its ongoing capital requirements through the issuance of
debt, equity and equity like instruments, preferred stock and operating cash
flows.
NRG Energy has contractually agreed to the monetization of certain tax
credits generated from landfill gas sales through the year 2007.
FirstEnergy. In November 2001, NRG Energy signed purchase agreements to
acquire or lease four coal-fired generating facilities totaling approximately
2,535 MW and two ash disposal sites from subsidiaries of FirstEnergy
Corporation. The four generating facilities are located in Ohio, along the shore
of Lake Erie, and are the approximately 376 MW Ashtabula facility in Ashtabula,
Ohio, the approximately 249 MW Lake Shore facility in downtown Cleveland, the
approximately 1,262 MW Eastlake facility near Cleveland and the approximately
648 MW Bay Shore facility near Toledo. NRG Energy is also acquiring all of the
equity interests in Bay Shore Power Company, which is a subsidiary of
FirstEnergy and the owner of a 136 MW petroleum coke-fired steam generating
project currently undergoing testing and commissioning on the Bay Shore facility
site. NRG Energy is working to close these acquisitions in the second quarter of
2002. In connection with the acquisition of these facilities, NRG Energy is
entering into a Transition Power Purchase Agreement with FirstEnergy, pursuant
to which NRG Energy will supply to FirstEnergy approximately 95% of the output
from the facilities through 2005.
82
Conectiv. In June 2001, NRG Energy extended purchase agreements that were
entered into with a subsidiary of Conectiv to acquire 794 MW of coal and
oil-fired electric generating capacity and other assets in New Jersey and
Pennsylvania, including an additional 66 MW of the Conemaugh Generating Station
and an additional 42 MW of the Keystone Generating Station. By their terms these
purchase agreements became terminable by either party after February 28, 2002,
and on April 1, 2002 NRG Energy exercised its right to terminate the agreements.
CALIFORNIA LIQUIDITY CRISIS
NRG Energy's California generation assets include a 57.67% interest in
Crockett Cogeneration, a 39.5% interest in the Mt. Poso facility and a 50%
interest in the West Coast Power partnership with Dynegy.
In March 2001, the California PX filed for bankruptcy under Chapter Eleven
of the Bankruptcy Code, and in April 2001, Pacific Gas & Electric Company (PG&E)
also filed for bankruptcy under Chapter Eleven. PG&E's filing delayed collection
of receivables owed to the Crockett facility. In September 2001, PG&E filed a
proposed plan of reorganization. Under the terms of the proposed plan, which is
subject to challenge by interested parties, unsecured creditors such as NRG
Energy's California affiliates would receive 60% of the amounts owed upon
approval of the plan. The remaining 40% would be paid in negotiable debt with
terms from 10 to 30 years. The California Power Exchange's (PX) ability to repay
its debt is dependent on the extent to which it receives payments from PG&E and
SCE. On December 21, 2001, the California bankruptcy court affirmed the Crockett
Power Purchase Agreement (it had previously affirmed Mt. Poso's agreement) with
PG&E and, in respect of the Crockett Power Purchase Agreement, approved a
twelve-month repayment schedule of all past due amounts totaling $49.6 million,
plus interest. The first payment of $6.2 million, including accrued interest,
was received on December 31, 2001.
NRG Energy's share of the net amounts owed to West Coast Power by the
California ISO and PX totaled approximately $85.1 million as of December 31,
2001 compared to $101.8 million at December 31, 2000. These amounts reflect NRG
Energy's share of (a) total amounts owed to West Coast Power less (b) amounts
that are currently treated as disputed revenues and are not recorded as accounts
receivable in the financial statements of West Coast Power LLC, and reserves
taken against accounts receivable that have been recorded in the financial
statements. The decrease is primarily attributed to cash collections from the
California ISO during the fourth quarter of 2001.
CONTRACTUAL COMMITMENTS
In connection with the acquisition of certain generating facilities NRG
Energy entered into various long-term transition agreements and standard offer
agreements that obligated NRG Energy to provide its customers, primarily the
previous owners of the acquired facilities, with a certain portion of the energy
and capacity output of the acquired facilities.
During 1999, NRG Energy acquired the Huntley and Dunkirk generating
facilities from Niagara Mohawk Power Corporation (NiMo). In connection with this
acquisition, NRG Energy entered into a 4-year agreement with NiMo that requires
NRG Energy to provide to NiMo pursuant to a predetermined schedule fixed
quantities of energy and capacity at a fixed price.
During 1999, NRG Energy acquired certain generating facilities from
Connecticut Light and Power Company (CL&P). NRG also entered into a 4-year
standard offer agreement that requires NRG Energy to provide to CL&P a portion
of its load requirements through the year 2003 at a substantially fixed rate.
During 2000, NRG Energy acquired the non-nuclear generating assets of Cajun
Electric. Upon acquisition of the facilities, NRG Energy entered into various
long-term power purchase agreements with the former customers of Cajun Electric,
primarily distribution cooperatives and municipalities. These agreements specify
that NRG Energy provide these customers with all requirements necessary to
satisfy the energy and capacity needs of their retail load.
Also during 2000, NRG Energy acquired the Killingholme generating
facilities from National Power plc. In connection with this acquisition, NRG
Energy entered into certain agreements to provide the natural gas to
83
operate the facility which generally sells its power into the spot market. NRG
Energy has entered into two gas purchase agreements, the first being a 5-year
agreement that provides approximately 30% of the generating facilities natural
gas requirements and the second agreement being a 10-year agreement that
provides approximately 70% of the generating facilities natural gas
requirements. NRG Energy has also entered into a 5-year fixed price agreement to
resell up to 15% of the gas it has contracted for at a slightly higher price.
Also during 2000, NRG Energy acquired the Flinders Power operations in
South Australia. Upon the closing of the acquisition, NRG Energy assumed a gas
purchase and sales agreement relating to the Osborne generating plant with a
remaining life of 18-years. These agreements require NRG Energy to purchase a
specified quantity of natural gas from a third party supplier at a fixed price
for 18-years and resell the natural gas to Osborne at a fixed price for
13-years. The sales price is substantially lower than the purchase price. NRG
Energy has recorded the liability associated with this out of the market
contract in the amount of approximately $66 million in other long-term
obligations and deferred income on its balance sheet. In addition, NRG Energy
has entered into a contract for differences agreement which provides for the
sale of energy into the South Australian power pool through the year 2002. The
agreement provides for a swap of the variable market price to a fixed price.
During 2001, NRG Energy acquired a portfolio of projects located in
Delaware, Maryland and Pennsylvania from Conectiv. Upon closing of the
acquisition, NRG Energy assumed a power purchase agreement. This agreement,
which is not project specific, requires NRG Energy to deliver and Conectiv to
purchase 500 MW of electric energy around the clock at a specified price through
2005. The sales price of the contracted electricity was substantially lower than
the fair value that the electricity on the merchant market at the date of
acquisition. NRG Energy has recorded the liability associated with the out of
market contract on the balance sheet in the amount of approximately $89.4
million as of December 31, 2001. Approximately $45.1 million is recorded in
other current liabilities and approximately $44.3 million in other long-term
obligations and deferred income. The difference will be amortized into income
over the life of the agreement.
ENVIRONMENTAL REGULATIONS
As part of acquiring existing generating assets, NRG Energy has inherited
environmental liabilities. Generally, potential liabilities are identified and
researched during due diligence processes and funds are reserved in the
financial pro forma to address them as circumstances dictate. Often, potential
implementation plans are changed, delayed or abandoned due to one or more of the
following conditions: (a) extended negotiations with regulatory agencies, (b) a
delay in promulgating rules critical to dictating the design of expensive
control systems, (c) changes in governmental/regulatory personnel, (d) changes
in governmental priorities (i.e., events of September 11th, 2001), or (e)
selection of a less expensive compliance option than originally envisioned. The
following paragraphs present an update on capital investments associated with
existing environmental liabilities.
WEST COAST REGION
Environmental expenditures at the Encina Generating Station include the
installation of Selective Catalytic Reduction (SCR) emission control technology
on all five units. These SCRs are mandated by the San Diego County Air Pollution
Control District Rule 69 and by the December 13, 2001 Rule 69 Regular Variance
Order 3732. Units 4 & 5 were retrofit with SCRs beginning in late 2001 and
scheduled to end in spring 2002. SCR emission control installations on Units 1,
2 & 3 are scheduled to be phased in beginning in fall 2002 and ending in spring
2003. The cost for all five SCR retrofits is estimated at approximately $39
million.
NORTHEAST REGION
The total budgeted capital expenditures during the first 5 years of the
Con-Ed, NIMO, Somerset and CLP assets acquired by NRG Energy were in the range
of $60 million dollars. During the years 1999-2001, NRG Energy recorded
approximately $4 million of expenditures on environmental matters related to
inherited
84
liabilities associated with these assets. These expenditures were incurred as a
result of moving forward with efforts to address NRG Energy's inherited remedial
obligations, studies related to establishing strategies for complying with the
NO(X) budget program, and other matters required as part of consent orders
transferred to NRG Energy as part of acquisition packages. As the company
progresses in its negotiations to close out consent order issues, an increased
rate of expenditure is anticipated. NRG Energy estimates approximately $7.5
million to close out the remaining issues associated with remedial
investigations/clean-ups at Somerset, Arthur Kill, Astoria, Middletown, Norwalk
Harbor, Devon, and Montville. In response to liabilities associated with these
activities, accruals have been established when reasonable estimates are
possible. As of December 31, 2001 and 2000, NRG Energy has established such
accruals in the amount of approximately $5.0 million and $6.0 million,
respectively. NRG Energy has not used discounting in determining its accrued
liabilities for environmental remediation and no claims for possible recovery
from third party issuers or other parties related to environmental costs have
been recognized in NRG Energy's consolidated financial statements. NRG Energy
adjusts the accruals when new remediation responsibilities are discovered and
probable costs become estimable, or when current remediation estimates are
adjusted to reflect new information. During the years 2001, 2000 and 1999, NRG
Energy recorded expenses of approximately $15.3 million, $3.4 million and $0.3
million of expenditures related to environmental matters, respectively.
The balance of the estimated $60 million in capital expenditures over the
next five years is most notably for landfill construction, installation of NO(X)
controls, installation of best available technology for minimizing environmental
impacts associated with impingement and entrainment of fish and larvae,
particulate matter control improvements, and spill prevention controls.
MID-ATLANTIC REGION
Capital expenditures over the next five years related to resolving
environmental concerns at the Indian River Generating Station are centered
around possible closure of the existing landfill and construction of a new
cell(s) to replace it, possible addition of a cooling tower, and the addition of
controls to reduce NO(X) emissions. Currently, cost estimates for addressing the
first two items vary widely with NRG Energy's success in selling ash and in NRG
Energy's negotiations with the Delaware Natural Resources and Environment
Commission (DNREC). If ash sales are poor, it is estimated that NRG Energy could
spend up to $11 million over the five-year timeframe to close/construct sections
of the landfill; if sales are robust, expenditures related to
closure/construction are expected to be minimal. In the unlikely event NRG
Energy is unable reach agreement with DNREC on extension of a variance, NRG
Energy estimates a $40 million cooling tower could be required; if negotiations
are successful, a cooling tower can be avoided.
NRG Energy has also budgeted funds for installation of NO(X) controls at
both the Indian River and Vienna Generating Stations.
SOUTH CENTRAL REGION
Approximately $35 million over the next five years has been budgeted for
the addition of NO(X) controls to Units 1-3 at Big Cajun II; $5-10 million over
the same time period is for NO(X) controls on the steam boilers at Big Cajun I.
Approximately $4-5 million will be spent over the next two years to reduce
particulate matter emissions during start-up of the Big Cajun II boilers and
$3-5 million for expanding the existing bottom ash pond at the Big Cajun II
plant site.
NORTH CENTRAL REGION
No capital expenditures related to environmental liabilities have been
budgeted at this time.
LEGAL ISSUES
New York Environmental Litigation
In January 2002 the New York Attorney General and the New York Department
of Environmental Control filed suit in the western district of New York against
NRG Energy and Niagara Mohawk Power Corporation, the prior owner of the Huntley
and Dunkirk facilities in New York. The lawsuit relates to
85
physical changes made at those facilities prior to NRG Energy's assumption of
ownership. The complaint alleges that these changes represent major
modifications undertaken without the required permits having been obtained.
Although NRG Energy has a right to indemnification by the previous owner for
fines, penalties, assessments and related losses resulting from the previous
owner's failure to comply with environmental laws and regulations, NRG Energy
could be enjoined from operating the facilities if the facilities are found not
to comply with applicable permit requirements.
In July 2001, Niagara Mohawk Power Corporation filed a declaratory judgment
action in the Supreme Court for the State of New York, County of Onondaga,
against NRG Energy and its wholly-owned subsidiaries, Huntley Power LLC and
Dunkirk Power LLC. Niagara Mohawk Power Corporation requests a declaration by
the Court that, pursuant to the terms of the Assets Sales Agreement under which
NRG Energy purchased the Huntley and Dunkirk generating facilities from Niagara
Mohawk (the ASA), defendants have assumed liability for any costs for the
installation of emissions controls or other modifications to or related to the
Huntley or Dunkirk plants imposed as a result of violations or alleged
violations of environmental law. Niagara Mohawk Power Corporation also requests
a declaration by the Court that, pursuant to the ASA, defendants have assumed
all liabilities, including liabilities for natural resource damages, arising
from emissions or releases of pollutants from the Huntley and Dunkirk plants,
without regard to whether such emissions or releases occurred before, on or
after the closing date for the purchase of the Huntley and Dunkirk plants. NRG
Energy has counterclaimed against Niagara Mohawk Power Corporation, and the
parties have exchanged discovery requests.
California Litigation
NRG Energy and other power generators and power traders have been named as
defendants in certain private plaintiff class actions filed in the Superior
Court of the State of California for the County of San Diego in San Diego,
California in November 2000 (Pamela R. Gordon v. Reliant Energy, Inc., et al.
and Ruth Hendricks v. Dynegy Power Marketing Inc., et al). NRG Energy has also
been named in another suit filed in January 2001 in San Diego County and brought
by three California water districts, as consumers of electricity (Sweetwater
Authority v. Dynegy, Inc., et al.), and in two suits filed in San Francisco
County, one brought by the San Francisco City Attorney on behalf of the people
of the State of California (The People of the State of California v. Dynegy
Power Marketing, Inc., et al.) and one brought by Pier 23 Restaurant as a class
action (Pier 23 Restaurant v. PG&E Energy Trading, et al.). Certain NRG Energy
affiliates in NRG Energy's West Coast power partnership with Dynegy (Cabrillo I
and II, Long Beach Generation and El Segundo Power) have been named as
defendants in a state court action in Los Angeles County (Bustamonte v. Dynegy,
Inc., et al.).
Although the complaints contain a number of allegations, the basic claim is
that, by underbidding forward contracts and exporting electricity to surrounding
markets, the defendants, acting in collusion, were able to drive up wholesale
prices on the Real Time and Replacement Reserve markets, through the Western
Coordinating Council and otherwise. The complaints allege that the conduct
violated California antitrust and unfair competition laws. NRG Energy does not
believe that it has engaged in any illegal activities, and intends to vigorously
defend these lawsuits. These six civil actions brought against NRG Energy and
other power generators and power traders in California have been consolidated
and assigned to the presiding judge of the San Diego County Superior Court, and
a pretrial conference has been scheduled for March 2002. While these cases are
in too preliminary a stage to speculate on their outcome, if they were
ultimately resolved adversely to the defendants it could have a material adverse
effect on NRG Energy's results of operations and financial condition.
Shareholder Litigation
On February 15, 2002, Xcel Energy announced its intention to commence an
exchange offer to acquire all of the outstanding publicly held shares of NRG
Energy. On the same day, eight separate civil actions were filed in the Court of
Chancery of the State of Delaware in and for New Castle County by owners of NRG
common stock, against Xcel Energy, NRG Energy, and NRG Energy's directors. The
complaints contain a number of allegations, but the basic claim is that Xcel
proposes to acquire the remaining ownership of NRG
86
for inadequate consideration and without full and complete disclosure of all
material information, in breach of defendants' fiduciary duties. The complaints
request the court to enjoin the proposed transaction and, in the event the
exchange offer is consummated, to award damages to plaintiffs.
NOTE 18 -- SEGMENT REPORTING
NRG Energy conducts its business within six segments: Independent Power
Generation in North America, Independent Power Generation outside North America
(Europe, Asia Pacific and Other Americas regions), Alternative Energy and
Thermal projects. NRG Energy's Revenues from majority owned operations
attributable to Europe and Asia Pacific primarily relate to operations in the
United Kingdom and Australia, respectively. These segments are distinct
components with separate operating results and management structures in place.
The "Other" category includes operations that do not meet the threshold for
separate disclosure and corporate charges (primarily interest expense) that have
not been allocated to the operating segments.
POWER GENERATION
----------------------------------------------------
OTHER
NORTH AMERICA EUROPE ASIA PACIFIC AMERICAS
------------- ------ ------------ --------
(THOUSANDS OF DOLLARS)
2001
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............. $1,835,221 $490,885 $239,085 $ 34,690
Inter-segment revenues.............................. -- -- -- --
Equity in earnings of unconsolidated affiliates..... 187,579 31,977 13,228 3,886
---------- -------- -------- ----------
Total operating revenues and equity earnings........ 2,022,800 522,862 252,313 38,576
---------- -------- -------- ----------
Operating Income.................................... 563,584 113,038 22,252 12,608
---------- -------- -------- ----------
Net Income.......................................... $ 261,317 $64,345 $ 12,427 $ 1,381
========== ======== ======== ==========
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
----------- ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............. $ 77,629 $ 108,319 $ 10,920 $2,796,749
Inter-segment revenues.............................. 1,859 -- -- 1,859
Equity in earnings of unconsolidated affiliates..... (26,638) -- -- 210,032
---------- ---------- ---------- ----------
Total operating revenues and equity earnings........ 52,850 108,319 10,920 3,008,640
---------- ---------- ---------- ----------
Operating Income.................................... (25,688) 18,666 10,362 714,822
---------- ---------- ---------- ----------
Net Income (Loss)................................... $ 35,013 $ 10,219 $ (119,498) $ 265,204
========== ========== ========== ==========
Total assets as of December 31, 2001, for North America, Europe, Asia
Pacific and Other Americas total $9.6 billion, $1.9 billion, $882 million and
$508 million, respectively.
POWER GENERATION
------------------------------------------------------
OTHER
NORTH AMERICA EUROPE ASIA PACIFIC AMERICAS
------------- ------ ------------ --------
(THOUSANDS OF DOLLARS)
2000
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............ $1,578,706 $ 197,718 $ 94,681 $ 291
Inter-segment revenues............................. -- -- -- --
Equity in earnings of unconsolidated affiliates.... 138,655 9,098 3,456 5,704
---------- ---------- ---------- ----------
Total operating revenues and equity earnings....... 1,717,361 206,816 98,137 5,995
---------- ---------- ---------- ----------
Operating Income................................... 596,919 32,573 6,297 2,268
---------- ---------- ---------- ----------
Net Income......................................... $ 241,846 $ 9,706 $ 9,343 $ 3,607
========== ========== ========== ==========
87
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
----------- ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............ $ 39,379 $ 87,802 $ 17,789 $2,016,366
Inter-segment revenues............................. 2,256 -- -- 2,256
Equity in earnings of unconsolidated affiliates.... (17,300) (249) -- 139,364
---------- ---------- ---------- ----------
Total operating revenues and equity earnings....... 24,335 87,553 17,789 2,157,986
---------- ---------- ---------- ----------
Operating Income (Loss)............................ (28,898) 20,303 (56,389) 573,073
---------- ---------- ---------- ----------
Net Income (Loss).................................. $ 14,637 $ 7,590 $ (103,794) $ 182,935
========== ========== ========== ==========
Total assets as of December 31, 2000, for North America, Europe, Asia
Pacific and Other Americas total $4.4 billion, $828 million, $599 million and
$141 million, respectively.
POWER GENERATION
-------------------------------------------------
OTHER
NORTH AMERICA EUROPE ASIA PACIFIC AMERICAS
------------- ------ ------------ --------
(THOUSANDS OF DOLLARS)
1999
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............. $319,598 $ -- $ 3,155 $ 189
Inter-segment revenues.............................. -- -- -- --
Equity in earnings of unconsolidated affiliates..... 31,052 22,840 9,915 5,879
-------- ------- -------- --------
Total operating revenues and equity earnings........ 350,650 22,840 13,070 6,068
-------- ------- -------- --------
Operating Income.................................... 114,628 9,168 7,901 2,916
-------- ------- -------- --------
Net Income (Loss)................................... $ 71,850 $9,509 $ 15,028 $ 3,502
======== ======= ======== ========
ALTERNATIVE
ENERGY THERMAL OTHER TOTAL
----------- ------- ----- -----
OPERATING REVENUES AND EQUITY EARNINGS
Revenues from majority-owned operations............. $ 26,934 $76,277 $ 5,402 $431,555
Inter-segment revenues.............................. 963 -- -- 963
Equity in earnings of unconsolidated affiliates..... (2,205) 19 -- 67,500
-------- ------- -------- --------
Total operating revenues and equity earnings........ 25,692 76,296 5,402 500,018
-------- ------- -------- --------
Operating Income (Loss)............................. (13,288) 18,746 (30,551) 109,520
-------- ------- -------- --------
Net Income (Loss)................................... $ 10,243 $6,506 $(59,443) $ 57,195
======== ======= ======== ========
All operating revenues are from external customers located in the United
States except $764.7 million and $292 million of revenues in 2001 and 2000,
respectively, which came from external customers outside of the United States.
NRG Energy's equity in earnings of unconsolidated affiliates, primarily
independent power projects, includes $54.1 million in 2001, $19.2 million in
2000 and $38.6 million in 1999 from non-regulated projects located outside of
the United States. NRG Energy's investments in affiliates outside of the United
States were $519 million in 2001, $566 million in 2000 and $606 million in 1999.
In addition, NRG Energy's majority owned foreign assets of $2.8 billion in 2001
and $796 million in 2000, contributed earnings of $49.2 million in 2001, $30.1
million in 2000 and $0 in 1999.
Total assets as of December 31, 1999, for North America, Europe, Asia
Pacific and Other Americas total $2.8 billion, $179 million, $346 million and
$117 million, respectively.
NOTE 19 -- JOINTLY OWNED PLANTS
On March 31, 2000, NRG Energy acquired a 58% interest in the Big Cajun II,
Unit 3 generation plant. Entergy Gulf States owns the remaining 42%. Big Cajun
II, Unit 3 is operated and maintained by Louisiana Generating pursuant to a
joint ownership participation and operating agreement. Under this agreement,
88
Louisiana Generating and Entergy Gulf States are each entitled to their
ownership percentage of the hourly net electrical output of Big Cajun II, Unit
3. All fixed costs are shared in proportion to the ownership interests. Fixed
costs include the cost of operating common facilities. All variable costs are
incurred in proportion to the energy delivered to the owners. NRG Energy's
income statement includes its share of all fixed and variable costs of operating
the unit. NRG Energy's 58% share of the original cost included in Property,
Plant and Equipment and construction in progress at December 31, 2001 and 2000,
was $179.6 million and $179.1 million, respectively. The corresponding
accumulated depreciation and amortization at December 31, 2001 and 2000, was
$7.8 million and $3.4 million, respectively.
In August 2001, NRG Energy completed the acquisition of a 77% interest in
the 520 MW gas fired electric generating facility located in McClain County,
Oklahoma from Duke energy North America LLC (McClain generating facility). The
remaining 23% of the McClain generating facility is owned and operated by the
Oklahoma Municipal Power Authority (OMPA) pursuant to a joint ownership and
operating agreement. Under this agreement, NRG McClain LLC operates the facility
and NRG Energy and OMPA are entitled to their ownership ratio of the net
available output of the McClain facility. All fixed costs are shared in
proportion to the ownership interests. All variable costs are incurred in
proportion to the energy delivered to the owners. NRG Energy's income statement
includes its share of all fixed and variable costs of operating the facilities.
NRG Energy's 77% share of the original cost included in Property, Plant and
Equipment and construction in progress at December 31, 2001 was $276.6 million.
The corresponding accumulated depreciation and amortization at December 31,
2001, was $3.1 million.
In June 2001, NRG Energy completed the acquisition of an approximately 3.7%
interest in both the Keystone and Conemaugh coal-fired generating facilities.
The Keystone and Conemaugh facilities are located near Pittsburgh, Pennsylvania
and are jointly owned by a consortium of energy companies. NRG Energy purchase
its interests from Conectiv, Inc. Keystone and Conemaugh are operated by GPU
Generation, Inc. which sold its assets and operating responsibilities to Sithe
Energies. Keystone and Conemaugh both consist of two operational coal-fired
steam power units with a combined net output of 1,700 MW, four diesel units with
a combined net output of 11 MW and an on-site landfill. The units are operated
pursuant to a joint ownership participation and operating agreement. Under this
agreement each joint owner is entitled to its ownership ratio of the net
available output of the facility. All fixed costs are shared in proportion to
the ownership interests. All variable costs are incurred in proportion to the
energy delivered to the owners. NRG Energy's income statement includes its share
of all fixed and variable costs of operating the facilities. NRG Energy's 3.70%
and 3.72% share of the Keystone and Conemaugh facilities original cost included
in Property, Plant and Equipment and construction in progress at December 31,
2001 was $52.9 million and $60.9 million, respectively. The corresponding
accumulated depreciation and amortization at December 31, 2001, for Keystone and
Conemaugh was $1.3 million and $1.5 million, respectively.
NOTE 20 -- DECOMMISSIONING FUNDS
NRG Energy is required by the State of Louisiana Department of
Environmental Quality ("DEQ") to rehabilitate NRG Energy's Big Cajun II ash and
wastewater impoundment areas, subsequent to the Big Cajun II facilities' removal
from service. On July 1, 1989, a guarantor trust fund (the "Solid Waste Disposal
Trust Fund") was established to accumulate the estimated funds necessary for
such purpose. Approximately $1.1 million was initially deposited in the Solid
Waste Disposal Trust Fund in 1989, and $116,000 has been funded annually
thereafter, based upon an estimated future rehabilitation cost (in 1989 dollars)
of approximately $3.5 million and the remaining estimated useful life of the Big
Cajun II facilities. Cumulative contributions to the Solid Waste Disposal Trust
Fund and earnings on the investments therein are accrued as a decommissioning
liability. At December 31, 2001 and 2000, the carrying value of the trust fund
investments and the related accrued decommissioning liability was approximately
$4.3 million and $3.9 million, respectively. The trust fund investments are
comprised of various debt securities of the United States and are carried at
amortized cost, which approximates their fair value.
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NOTE 21 -- ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
On January 1, 2001, NRG Energy adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), as amended by SFAS No. 137 and SFAS No. 138. SFAS
No. 133 requires NRG Energy to record all derivatives on the balance sheet at
fair value. Changes in the fair value of non-hedge derivatives will be
immediately recognized in earnings. Changes in fair values of derivatives
accounted for as hedges will either be recognized in earnings as offsets to the
changes in fair value of related hedged assets, liabilities and firm commitments
or, for forecasted transactions, deferred and recorded as a component of other
accumulated comprehensive income (OCI) until the hedged transactions occur and
are recognized in earnings. The ineffective portion of a hedging derivative
instrument's change in fair value will be immediately recognized in earnings.
NRG Energy also formally assesses both at inception and at least quarterly
thereafter, whether the derivatives that are used in hedging transactions are
highly effective in offsetting the changes in either the fair value or cash
flows of the hedged item. This assessment includes all components of each
derivative's gain or loss unless otherwise noted. When it is determined that a
derivative ceases to be a highly effective hedge, hedge accounting is
discontinued.
SFAS No. 133 applies to NRG Energy's long-term power sales contracts,
long-term gas purchase contracts and other energy related commodities financial
instruments used to mitigate variability in earnings due to fluctuations in spot
market prices, hedge fuel requirements at generation facilities and protect
investments in fuel inventories. SFAS No. 133 also applies to various interest
rate swaps used to mitigate the risks associated with movements in interest
rates and foreign exchange contracts to reduce the effect of fluctuating foreign
currencies on foreign denominated investments and other transactions. At
December 31, 2001, NRG Energy had various commodity contracts extending through
December 2003, and several fixed-price gas and electricity purchase contracts
extending through 2018.
ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the effects of SFAS No. 133 on NRG Energy's
Other Comprehensive Income balance as of December 31, 2001:
ENERGY INTEREST FOREIGN
COMMODITIES RATE CURRENCY TOTAL
----------- -------- -------- --------
(GAINS/(LOSSES) IN $ THOUSANDS)
OCI balance at December 31, 2000............. $ -- $ -- $ -- $ --
Initial adoption of SFAS No. 133........... (6,567) (16,064) -- (22,631)
Unwound from OCI during period:
- due to unwinding of previously deferred
amounts.................................. (25,789) 662 (167) (25,294)
Mark to market of hedge contracts.......... 167,224 (46,002) (2,196) 119,026
-------- -------- ------- --------
OCI balance at December 31, 2001............. 134,868 (61,404) (2,363) 71,101
======== ======== ======= ========
Gains/(Losses) expected to unwind from OCI
during next 12 months...................... 24,157 (7,636) (2,196) 14,325
The adoption of SFAS No. 133 on January 1, 2001, resulted in an after-tax
unrealized loss of $22.6 million recorded to OCI related to previously deferred
net losses on derivatives designated as cash flow hedges. During the year ended
December 31, 2001, NRG Energy reclassified gains of $25.3 million from OCI to
current-period earnings. This amount is recorded on the same line in the
statement of operations in which the hedged item is recorded. Also during the
year ended December 31, 2001, NRG Energy recorded an after-tax gain in OCI of
approximately $119.0 million related to changes in the fair values of
derivatives accounted for as hedges. The net balance in OCI relating to SFAS No.
133 as of December 31, 2001 was an unrecognized gain of approximately $71.1
million. NRG Energy expects $14.3 million of the deferred net gains on
derivative instruments accumulated in OCI to be recognized as earnings during
the next twelve months.
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STATEMENT OF OPERATIONS
The following tables summarize the effects of SFAS No. 133 on NRG Energy's
statement of operations for the period ended December 31, 2001:
ENERGY FOREIGN
COMMODITIES CURRENCY TOTAL
----------- -------- -------
(GAINS/(LOSSES) IN $ THOUSANDS)
Revenue from majority owned subsidiaries................ $(8,138) $ -- $(8,138)
Equity in earnings of unconsolidated subsidiaries....... 4,662 -- 4,662
Cost of operations...................................... 17,556 -- 17,556
Other income............................................ -- 252 252
------- ---- -------
Total Statement of Operations impact before tax.... $14,080 $252 $14,332
======= ==== =======
ENERGY RELATED COMMODITIES
NRG Energy is exposed to commodity price variability in electricity,
emission allowances and natural gas, oil and coal used to meet fuel
requirements. In order to manage these commodity price risks, NRG Energy enters
into financial instruments, which may take the form of fixed price, floating
price or indexed sales or purchases, and options, such as puts, calls, basis
transactions and swaps. Certain of these transactions have been designated as
cash flow hedges. NRG Energy has accounted for these derivatives by recording
the effective portion of the cumulative gain or loss on the derivative
instrument as a component of OCI in shareholders' equity. NRG Energy recognizes
deferred gains and losses into earnings in the same period or periods during
which the hedged transaction affects earnings. Such reclassifications are
included on the same line of the statement of operations in which the hedged
item is recorded.
No ineffectiveness was recognized on commodity cash flow hedges during the
period ended December 31, 2001.
NRG Energy's pre-tax earnings for the year ended December 31, 2001 were
increased by an unrealized gain of $14.1 million associated with changes in the
fair value of energy related derivative instruments not accounted for as hedges
in accordance with SFAS No. 133.
During the year ended December 31, 2001, NRG Energy reclassified gains of
$25.8 million from OCI to current-period earnings and expects to reclassify an
additional $24.2 million of deferred gains to earnings during the next twelve
months on energy related derivative instruments accounted for as hedges.
INTEREST RATES
To manage interest rate risk, NRG Energy has entered into interest-rate
swaps that effectively fix the interest payments of certain floating rate debt
instruments. Interest-rate swap agreements are accounted for as cash flow
hedges. The effective portion of the cumulative gain or loss on the derivative
instrument is reported as a component of OCI in shareholders' equity and
recognized into earnings as the underlying interest expense is incurred. Such
reclassifications are included on the same line of the statement of operations
in which the hedged item is recorded.
No ineffectiveness was recognized on interest rate cash flow hedges during
the period ended December 31, 2001.
During the year ended December 31, 2001, NRG Energy reclassified losses of
$0.7 million from OCI to current-period earnings and expects to reclassify $7.6
million of deferred losses to earnings during the next twelve months on interest
rate swaps accounted for as hedges.
FOREIGN CURRENCY EXCHANGE RATES
To preserve the U.S. dollar value of projected foreign currency cash flows,
NRG Energy may hedge, or protect those cash flows if appropriate foreign hedging
instruments are available.
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No ineffectiveness was recognized on foreign currency cash flow hedges
during the period ended December 31, 2001.
NRG Energy's pre-tax earnings for the year ended December 31, 2001 were
increased by an unrealized gain of $0.3 million associated with foreign currency
hedging instruments not accounted for as hedges in accordance with SFAS No. 133.
During the year ended December 31, 2001, NRG Energy reclassified gains of
$0.2 million from OCI to current period earnings and expects to reclassify $2.2
million of deferred losses to earnings during the next twelve months on foreign
currency swaps accounted for as hedges.
NOTE 22 -- UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly unaudited financial data is as follows:
QUARTER ENDED 2001
-------------------------------------------------------------
MAR 31 JUNE 30 SEPT 30 DEC 31 TOTAL YEAR(1)
-------- -------- -------- -------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenues and equity earnings............ $643,166 $722,900 $963,302 $679,272 $3,008,640
Operating Income........................ 127,024 153,363 309,370 125,065 714,822
Net income.............................. 35,178 49,114 141,580 39,332 265,204
Earnings per share:
Basic................................. $ .19 $ .25 $ .71 $ .20 $ 1.36
Diluted............................... .19 .25 .71 .20 1.35
QUARTER ENDED 2000
-------------------------------------------------------------
MAR 31 JUNE 30 SEPT 30 DEC 31 TOTAL YEAR(1)
-------- -------- -------- -------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenues and equity earnings............ $323,027 $522,009 $624,798 $688,152 $2,157,986
Operating income........................ 62,937 154,128 227,209 128,799 573,073
Net income.............................. 8,746 43,581 88,604 42,004 182,935
Earnings per share:
Basic................................. $ .06 $ .28 $ .49 $ .23 $ 1.10
Diluted............................... .06 .28 .49 .23 1.10
---------------
(1) The sum of earnings per share for the four quarters may not equal earnings
per share for the total year due to changes in the average number of common
shares outstanding.
During the fourth quarter of the year ended December 31, 2001, NRG Energy
recorded a $24.5 million income tax benefit as a result of state income tax
planning strategies and a higher percentage of NRG Energy's overall earnings
derived from foreign projects in lower tax jurisdictions, than expected
throughout the year. Also during the fourth quarter of 2001, NRG Energy recorded
a net after-tax expense of $6.7 million related to Enron's bankruptcy. This
amount includes a $14.2 million after-tax charge to establish bad debt reserves,
which was partially offset by a $7.5 million after-tax gain on a credit swap
agreement entered into as part of NRG's credit risk management program.
NOTE 23 -- SUBSEQUENT EVENT
In February 2002, Xcel Energy announced its intention to commence an
exchange offer by which Xcel Energy would acquire all of the outstanding
publicly held shares of NRG Energy. In the announcement Xcel Energy stated its
intention to close this transaction in April 2002 and stated that in the offer,
NRG Energy shareholders would receive 0.4846 shares of Xcel Energy common stock
in a tax-free exchange for each outstanding share of NRG Energy common stock.
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NRG ENERGY, INC.
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------- ------------ ------------------------ ------------- ----------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
Allowance for doubtful accounts,
deducted from accounts receivable in
the balance sheet:
2001................................ $21,199 $12,808 -- $ (45) $33,962
2000................................ 186 25,885 -- (4,872) 21,199
1999................................ 100 116 -- (30) 186
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ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age and title of each of the executive officers and directors of
NRG Energy as of March 6, 2002 are as set forth below:
NAME AGE TITLE
---- --- -----
David H. Peterson 60 Chairman of the Board, President, Chief Executive Officer
and Director
James J. Bender 45 Senior Vice President and General Counsel
Brian B. Bird 39 Vice President and Treasurer
Leonard A. Bluhm 56 Executive Vice President and Chief Financial Officer
Jay M. Carpenter 40 Senior Vice President, NRG Energy, Inc. Managing Director
and Chief Executive Officer, Asia Pacific
W. Mark Hart 51 Senior Vice President, NRG Energy, Inc. and President NRG
Europe and Latin America
Roy R. Hewitt 56 Vice President, Administrative Services
Craig A. Mataczynski 41 Senior Vice President, NRG Energy, Inc. President and Chief
Executive Officer, NRG North America
John A. Noer 55 Senior Vice President, NRG Energy Inc. and President, NRG
Worldwide Operations
William T. Pieper 36 Vice President and Controller
Renee Sass 36 Vice President, Strategic Planning and Portfolio Assessment
Wayne H. Brunetti 59 Director, President and CEO Xcel Energy Inc.
Luella G. Goldberg 65 Director, Former Acting President and Chair of the Board of
Trustees Wellesley College
Pierson M. Grieve 73 Director, Retired Chairman and CEO Ecolab, Inc.
William A. Hodder 70 Director, Retired Chairman and CEO Donaldson Company Inc.
James J. Howard 66 Director, Retired Chairman of the Board Xcel Energy, Inc.
Gary R. Johnson 55 Director, Vice President and General Counsel Xcel Energy
Inc.
Richard C. Kelly 55 Director, President-Enterprises Xcel Energy Inc.
Edward J. McIntyre 51 Director, Vice President and CFO Xcel Energy Inc.
David H. Peterson has been Chairman of the Board of NRG Energy since
January 1994, Chief Executive Officer since November 1993, President since 1989
and a Director since 1989. Mr. Peterson was also Chief Operating Officer of NRG
Energy from June 1992 to November 1993. Prior to joining NRG Energy, Mr.
Peterson was Vice President, Non-Regulated Generation for Northern States Power,
and he has served in various other management positions with Northern States
Power during the last 20 years.
James J. Bender has been Senior Vice President and General Counsel of NRG
Energy since June 2000, prior to which he had been Vice President, General
Counsel and Secretary of NRG Energy since June 1997. He served as the General
Counsel of the Polymers Division of Allied Signal Inc. from May 1996 until June
1997. From June 1994 to May 1996, Mr. Bender was employed at NRG Energy, acting
as Senior Counsel until December 1994 and as Assistant General Counsel and
Corporate Secretary from December 1994 to May 1996.
Brian B. Bird has been Vice President and Treasurer of NRG Energy since
June 1999 and Treasurer since June 1997, prior to which he was Director of
Corporate Finance and Treasury for Deluxe Corporation in Shoreview, Minnesota
from September 1994 to May 1997. Mr. Bird was Manager of Finance for the
Minnesota Vikings professional football team from March 1993 to September 1994.
Mr. Bird held several financial management positions with Northwest Airlines in
Minneapolis, Minnesota from 1988 to March 1993.
94
Leonard A. Bluhm has been Executive Vice President and Chief Financial
Officer of NRG Energy since January 1997. Immediately prior to that, he served
as the first President and Chief Executive Officer of Cogeneration Corporation
of America. Mr. Bluhm was Vice President, Finance of NRG Energy from January
1993 through April 1996. Mr. Bluhm was Chief Financial Officer of Cypress Energy
Partners, a wholly-owned project subsidiary of NRG Energy, from April 1992 to
January 1993, prior to which he was Director, International Operations and
Manager, Acquisitions and Special Projects of NRG Energy from 1991. Mr. Bluhm
previously served for 20 years in various financial positions with Northern
States Power.
Jay M. Carpenter was appointed Senior Vice President, Asia Pacific of NRG
Energy and Managing Director and CEO of NRG Asia Pacific on January 1, 2002,
following the retirement of Keith G. Hilless. Prior to that he was Executive
Director, Business Development of NRG Asia Pacific since February 1999. Before
joining NRG Energy Mr. Carpenter was Director of Special Projects for Epic
Energy Pty Ltd, a natural gas transmission company located in Australia. Mr.
Carpenter has over 15 years of experience in the energy industry.
W. Mark Hart is Senior Vice President, Europe and Latin America of NRG
Energy. Prior to joining NRG Energy, in March 2001, Mr. Hart was vice president
of Canadian Operations at Newmont Mining Company and vice president of Business
Processes and Operations for Europe, South America and Asia. Before that he
managed mining operations, engineering and machinery with Cyprus Amax Minerals
Company where he served as Senior Vice President of U.S. Operations and
President and Chief Executive Officer of Australia. He has also worked for
American Electric Power Fuel Supply, Standard Oil Company's minerals division
and Consolidated Coal Company.
Roy R. Hewitt has been Vice President, Administrative Services at NRG
Energy since February 1999. He has over 30 years experience in the power
industry including 24 years with Northern States Power and eight years with NRG
Energy. Mr. Hewitt joined NRG Energy in 1994 as a member of the senior
management team with NRG's Gladstone Power Station project in Queensland,
Australia. In 1996, he returned to NRG Energy's corporate headquarters as
Executive Director, Human Resources. In 1997, Mr. Hewitt returned to Australia
as Managing Director of the Gladstone Project and later served as Executive
Director, Operations and Engineering for NRG Energy's Asia-Pacific region
headquartered in Brisbane, Australia.
Craig A. Mataczynski has been Senior Vice President, North America of NRG
Energy and President and Chief Executive Officer of NRG North America, since
July 1998. From December 1994 until July 1998, Mr. Mataczynski served as Vice
President, U.S. Business Development of NRG Energy. From May 1993 to January
1995, Mr. Mataczynski served as President of NEO Corporation, NRG Energy's
wholly owned subsidiary that develops small electric generation projects within
the United States. Prior to joining NRG Energy, Mr. Mataczynski worked for
Northern States Power from 1982 to 1994 in various positions, including
Director, Strategy and Business Development and Director, Power Supply Finance.
John A. Noer has been Senior Vice President of NRG Energy and President of
NRG Worldwide Operations since January 1, 2000. Immediately prior to that he
served as President-NSP Combustion and Hydro Generation for Northern States
Power Company and as a director of NRG Energy since June 1997. Mr. Noer was
President and CEO of Northern States Power Wisconsin, a wholly owned subsidiary
of Northern States Power, since January 1993. Prior to joining Northern States
Power Wisconsin, Mr. Noer was President of Cypress Energy Partners, a project
subsidiary of NRG Energy, from March 1992 to January 1993. Prior to joining
Cypress Energy Partners, Mr. Noer held various management positions with
Northern States Power since joining the company in September 1968.
William T. Pieper has been Vice President and Controller of NRG Energy
since June 2001. He has also held the positions of Controller, Assistant
Controller and Manager of International Accounting since joining NRG Energy in
March 1995. Prior to joining NRG Energy, Mr. Pieper practiced as a Certified
Public Accountant for six years with the firm of KPMG.
Renee J. Sass has been Vice President, Strategic Planning and Portfolio
Assessment since June 2001, prior to which she was Executive Director, Finance
and Assistant Treasurer. Mrs. Sass has been with NRG
95
Energy since 1991 holding a number of finance and business development
positions. From 1988 to 1991, Ms. Sass was with Ernst & Young's Utility
Consulting Group in Washington D.C.
Wayne H. Brunetti has been President and CEO of Xcel Energy Inc. since
August 2000. Prior to assuming his current position in August 2000, Mr. Brunetti
was Vice Chairman, President and Chief Executive Officer of NCE. Mr. Brunetti
was Vice Chairman, President and Chief Operating Officer of Public Service
Company of Colorado before it merged with Southwestern Public Service Company to
form NCE. Mr. Brunetti joined Public Service Company of Colorado as president
and chief operating officer in 1994. Mr. Brunetti has been a Director of NRG
Energy since August 2000.
Luella G. Goldberg is a member of the boards of directors of TCF Financial,
Hormel Foods Corporation, the ING Group, Communications Systems, Inc., and the
University of Minnesota Carlson School of Management (Board of Overseers). From
1985 to 1993, Ms. Goldberg served as chair of the Wellesley College Board of
Trustees. She served as acting president of the college from July 1993 to
October 1993 and is now a Trustee Emerita. Ms. Goldberg is also a Trustee of the
University of Minnesota Foundation, and served as a chair for the Foundation's
Board of Trustees from 1996 to 1998. Ms. Goldberg has been a Director of NRG
Energy since June 2000.
Pierson M. (Sandy) Grieve is a member of the boards of directors of The St.
Paul Companies, Inc., Mesaba Aviation and Bank of Naples. Mr. Grieve is a
partner at Palladium Equity Partners, New York, New York. Mr. Grieve served as
chairman and CEO of Ecolab, Inc. from 1983 to 1995 after moving to Minnesota
from his position as President and CEO of Questor Corp., Toledo, Ohio. Mr.
Grieve has been a Director of NRG Energy since June 2000.
William A. Hodder is a member of the boards of directors of SUPERVALU, Inc.
and the University of Minnesota Carlson School of Management (Board of
Overseers). Mr. Hodder served as chairman and CEO of Donaldson Company, Inc.
from 1994 to 1996 and Chairman, President and CEO from 1982 to 1994. Mr. Hodder
joined Donaldson as President in 1973. Mr. Hodder has been a Director of NRG
Energy since June 2000.
James J. Howard was Chairman of Xcel Energy from August 2000 until his
retirement in August 2001. Mr. Howard served as Chairman, President and CEO of
Northern States Power from 1994 until August 2000. Mr. Howard joined NSP as
President and CEO in 1987. Before joining NSP, Mr. Howard was President and
Chief Operating Officer of Ameritech. Mr. Howard is also Chairman of the Federal
Reserve Bank of Minneapolis, a Director of Ecolab Inc., Honeywell International
Inc. and Walgreen Co. Mr. Howard has been a Director of NRG Energy since June
2000.
Gary R. Johnson has been a Director of NRG Energy since 1993 and has been
Vice President and General Counsel of Xcel Energy since August 2000. Mr. Johnson
served as Vice President and General Counsel of Northern States Power from
November 1991 to August 2000. Prior to November 1991, Mr. Johnson was Vice
President-Law of Northern States Power from January 1989, acting Vice President
from September 1988 and Director of Law from February 1987, and he has served in
various management positions with Northern States Power during the last 20
years.
Richard C. Kelly has been a Director of NRG Energy since August 2000. Mr.
Kelly is President -- Enterprises of Xcel Energy, and was formerly Executive
Vice President, financial and support services, and Chief Financial Officer for
NCE from 1997 to August 2000. Before that, Mr. Kelly was Senior Vice President
of Finance, Treasurer and Chief Financial Officer for Public Service Company of
Colorado, which he joined in 1968.
Edward J. McIntyre has been a Director of NRG Energy since 1993. Mr.
McIntyre has been Vice President and Chief Financial Officer of Xcel Energy
since August 2000, and prior to that was Vice President and Chief Financial
Officer of Northern States Power from January 1993. Mr. McIntyre served as
President and Chief Executive Officer of Northern States Power-Wisconsin, a
wholly-owned subsidiary of Northern States Power, from July 1990 to December
1992, as Vice President Gas Utility from November 1985 to June 1990, and he has
served in various other management positions since joining Northern States Power
in 1973.
96
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under federal securities laws, NRG Energy's directors and executive
officers are required to report, within specified monthly and annual due dates,
their initial ownership in NRG Energy's securities and subsequent acquisitions,
dispositions or other transfers of interest in such securities. NRG Energy is
required to disclose whether it has knowledge that any person required to file
such a report may have failed to do so in a timely manner. To the knowledge of
NRG Energy, all of its directors and officers subject to such reporting
obligations have satisfied their reporting obligations in full for 2001.
ITEM 11 -- EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY
The Compensation Committee of the Board of Directors (the "Committee")
consists of four members, two of which are independent.
The purpose of the Committee is to, on a regular basis, review, approve,
and where applicable, make recommendations to the Board of Directors concerning
executive officer compensation. The Committee's philosophy regarding executive
compensation is that such compensation should be directly aligned with
improvements in corporate performance and increased shareholder value. The
Committee's guidelines, which are intended to reflect such philosophy, include:
- Providing a competitive total compensation package that enables the
Company to attract and retain key executive talent.
- Aligning compensation with the Company's annual and long-term
business strategies and objectives.
- Providing variable compensation opportunities that are directly
linked to the Company's performance and shareholder return.
For the fiscal year 2001, the Compensation Committee evaluated the
competitiveness of its executive compensation based on information obtained by
assessing data contained in the proxy statements of similar competitive power
production companies. The competitive comparisons were made against a peer group
of ten power generation companies. In determining the peer group, emphasis was
placed on companies with non-regulated power generation operations that are
reasonably similar in size to that of NRG. The Committee utilized such
information to assess the Company's position in each individual aspect of
executive compensation, including base salary, annual incentive compensation and
long-term incentive compensation.
ELEMENTS OF COMPENSATION
Compensation for the Company's executive officers for the fiscal year 2001
consisted of the following elements: base salary, annual incentive compensation,
and long-term incentive compensation.
Base Salary. Annual base salary is designed to compensate executive
officers for their sustained performance. For the fiscal year 2001, annual base
salaries for executive officers were established by reviewing base pay levels
for each executive's position in the peer group proxy analysis. The base salary
recommendations also incorporate the executive officer's individual performance,
the general contributions of the executive officer to overall corporate
performance, and the level of achievement by the executive officer in respect to
specific annual goals. In general, the 2001 base salary levels for executive
officers, including the Chief Executive Officer, Mr. Peterson, were increased in
accordance with comparable market data. The base salary amounts paid to the
executive officers for the fiscal year 2001 are reflected in the salary column
of the Summary Compensation Table.
Annual Incentive Compensation. Annual incentive compensation is designed to
compensate executive officers for satisfying certain Company goals and is
determined as a percentage of each such executive officer's
97
annual base salary. Annual incentive compensation for the executive officers for
the fiscal year 2001 was determined in accordance with median levels of annual
incentive awards for comparable positions, as set forth in the peer group proxy
analysis. For the fiscal year 2001, the target incentive for annual incentive
compensation for executive officers ranged from 55% to 75% of base salary, with
Mr. Peterson's target incentive being 75% of base salary. Annual incentive
payout opportunities range from 0% to 200% of the target incentive. Target
incentives for the executive officers for the fiscal year 2001, were based on
some or all of the following factors: net income, business development and
safety goals. Mr. Peterson's target incentive was based on 95% net income and 5%
of safety goal. Overall the Company achieved the maximum net income and safety
goal for 2001 with a net income growth of 45% from the fiscal year ending
December 31, 2000. As such, Mr. Peterson received the maximum payout available
for his annual incentive compensation. The annual incentive compensation paid to
the executive officers for the fiscal year 2001, is reflected in the bonus
column of the Summary Compensation Table.
Long-Term Incentive Compensation. Prior to the completion of the Company's
initial public offering and the adoption of the NRG 2000 Long-Term Incentive
Compensation Plan (the "2000 Plan"), each of which occurred in May 2000, the
Company offered the NRG Equity Plan (the "Equity Plan") to its executive
officers and other selected employees. The Equity Plan was established in 1993
to promote the achievement of long-term financial objectives by linking the
long-term incentive compensation of the employees to the achievement of value
creation, as well as to attract and retain employees of outstanding competence,
encourage teamwork among employees and provide employees with an opportunity for
long-term capital accumulation. Under the Equity Plan, the Company made grants
of "equity units", which were intended to simulate stock options. Grants of
equity units were made annually at the discretion of the Board of Directors with
a grant price consistent with the most recent valuation of equity units.
In connection with the Company's initial public offering, the Company
established the 2000 Plan, the principal components of which are non-qualified
stock options. As such, the Company discontinued the Equity Plan. All
outstanding, non-vested equity units for active employee participants were
terminated and replaced with a comparable stock option grant.
Under the 2000 Plan the Incentive Plan Subcommittee will approve a target
number of option shares for each executive officer, with such targets to be
based in part on proxy information and a base salary multiple to determine the
long-term incentive compensation. It is intended that NRG's CEO will make a
recommendation to the Incentive Plan Subcommittee as to the number of options to
be granted and the Incentive Plan Subcommittee will be responsible for reviewing
and approving all such recommendations and stock option grants to executive
officers. Options granted will have an exercise price equal to the fair market
value of the common stock of the Company on the date of grant, and typically,
will be exercisable over a four-year period in increments of 25% per year.
Initial grants may include a one-year waiting period prior to the vesting of
such options.
DISCUSSION OF COMPENSATION IN EXCESS OF $1 MILLION PER YEAR
The Company has considered the implications of Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), enacted under the
Revenue Reconciliation Act of 1993, which precludes a public corporation from
taking tax deduction for individual compensation in excess of $1 million for its
Chief Executive Officer or any of its four other highest-paid officers.
Additionally, the Company has considered the exemptions to such limitation,
specifically for compensation that is performance based within the meaning of
such Section, which are also provided in Section 162(m).
In order to qualify compensation derived by executive officers from stock
options as performance-based compensation, as contemplated by the Internal
Revenue Service, the NRG Energy, Inc. 2000 Long-Term Incentive Compensation Plan
was approved by the Board of Directors and the shareholders of the Company.
Additionally, in order to qualify bonus payments to executives under Section
162(m) and preserve the deductibility of such payments, the Annual Incentive
Plan for Designated Officers has been approved by the Committee, the Board, and
the shareholders of the Company.
98
Regardless, in the future, the Company may award compensation to its
executive officers that may not qualify under Section 162(m) as deductible
compensation. The Company will continue to consider all elements of expense in
providing such compensation, including the impact of Section 162(m).
Chair Member Member Member
Pierson M. Grieve James J. Howard William A. Hodder Richard C. Kelly
DIRECTOR COMPENSATION
NRG Energy does not award directors who are also employees of NRG Energy or
employees of Xcel Energy any separate compensation or other consideration,
direct or indirect, for service as a director. During 2001, directors not
employed by NRG Energy or Xcel Energy ("Non-Employee Directors") received annual
fees of $35,000 plus $1,000 for each Board of Directors meeting attended in
person, $800 for each committee meeting attended in person and reasonable travel
expenses. Committee chairs received an additional $200 per meeting attended in
person. Non-Employee Directors participating in meetings of the Board of
Directors or a committee by telephone received 50% of such meeting fees.
In connection with NRG Energy's initial public offering, each of the
Non-Employee Directors received a grant of stock options to purchase 5,000
shares of Common Stock pursuant to the 2000 Plan at an exercise price equal to
$15, the initial public offering price of a share of Common Stock. Such options
vest in four equal annual installments, beginning on the second anniversary of
the date of each such grant. NRG Energy also granted stock options to each of
the Non-Employee Directors in June 2001 for the purchase of 5,000 shares of
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date of such grant, pursuant to the 2000 Plan.
Each of the Non-Employee Directors participates in NRG Energy's Independent
Director Deferral Plan (the "Deferral Plan"). The Deferral Plan allows
Non-Employee Directors to defer all or a portion of his or her annual fees,
meeting fees and other fees paid in connection with service on the Board of
Directors to a cash deferral account, a stock unit account or a combination of
such accounts. The Deferral Plan provides for a 20% premium on fees deferred
into a stock unit account. Fees deferred under the Deferral Plan are paid out in
cash upon the retirement of the Non-Employee Director from service on the
Company's Board of Directors or upon two payout commencement dates other than
retirement, as determined by the Non-Employee Director. Payout of fees deferred
under the Deferral Plan are made in installments, with a minimum of two and
maximum of ten such installments, or in a lump sum.
Each of NRG Energy's directors has an indemnification agreement that
entitles him or her to indemnification for claims asserted against them in their
capacity as directors to the fullest extent NRG Energy's permitted by Delaware
law.
99
TOTAL STOCKHOLDER RETURN COMPARISON
The graph below compares the NRG Energy's cumulative total stockholder
return on Common Stock with the cumulative total return of the Standard & Poor's
500 Composite Stock Price Index and an index of comparable peer issuers (the
"Peer Group Index") from May 31, 2000, the first date on which the Common Stock
began trading on the New York Stock Exchange, to December 31, 2001, NRG Energy's
fiscal year end (assuming a $100 investment in each vehicle on May 31, 2000 and
the reinvestment of all dividends).
The Peer Group Index consists of the following publicly traded companies in
the global power generation industry: AES Corp., Calpine Corp., Dynegy, Inc. and
Mirant Corp. The former Peer Group consisted of the following publicly traded
companies in the global power generation industry: AES Corp., Calpine Corp.,
Dynegy, Inc., Orion Power Holdings, Inc. and Mirant Corp. The former Peer Group
differs from the current Peer Group because Orion Power Holdings, Inc. is no
longer publically traded. In accordance with the rules of the SEC, the returns
are indexed to a value of $100 at May 31, 2000, and the returns of each company
in the Peer Group Index have been weighted according to their market
capitalization at December 31, 2000.
[PERFORMANCE GRAPH]
TIME PERIOD
-----------------------------------------------------------------------------------------
5/31/00 6/30/00 8/31/00 10/31/00 12/31/00 2/28/01 4/30/01 6/29/01 8/31/01
------- ------- ------- -------- -------- ------- ------- ------- -------
NRG.................. $100.00 $109.16 $157.89 $156.39 $167.29 $166.62 $215.04 $132.81 $110.68
Peer Group Index..... 100.00 105.02 148.03 141.65 152.56 140.88 169.08 135.58 114.53
S&P 500.............. 100.00 102.47 107.13 101.04 93.53 87.28 87.95 86.19 79.80
TIME PERIOD
-------------------
10/31/01 12/31/01
-------- --------
NRG.................. $106.29 $93.23
Peer Group Index..... 83.99 62.33
S&P 500.............. 74.60 80.82
100
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth cash and non-cash compensation for each of
the last three fiscal years ended December 31, for the individual who served as
the Company's Chief Executive Officer during 2001 and each of the four next most
highly compensated executive officers (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------- -------------------------------------
AWARDS PAYOUTS
----------------------- -----------
(A) (B) (C) (D) (F) (G) (H) (I)
(E) NUMBER OF
OTHER SECURITIES
ANNUAL UNDERLYING
COMPEN- RESTRICTED OPTIONS ALL OTHER
NAME AND SATION STOCK AND SARS LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) AWARDS ($) (#) PAYOUTS ($) SATION ($)
------------------ ---- ---------- --------- ------- ---------- ---------- ----------- ----------
David H. Peterson....... 2001 $491,670 $750,000 $13,689 -- 265,500 -- $ 9,902(8)
Chairman, President & 2000 397,340 474,000 28,678 -- 120,000 1,212,067 22,923(3)
Chief Executive Officer 1999 367,992 192,970 6,131 -- -- 155,995 33,201
Craig A. Mataczynski.... 2001 316,680 321,038 7,752 -- 105,000 -- 8,125(9)
Senior Vice President- 2000 278,340 276,500 6,303 -- 60,000 186,250 3,059(4)
North America 1999 246,250 150,000 4,706 -- -- 15,533 15,251
John Noer(2)............ 2001 270,009 297,000 12,663 -- 78,000 -- 4,649(10)
Senior Vice President- 2000 259,992 256,750 6,554 -- 60,000 -- 2,464(5)
Worldwide Operations 1999 -- -- -- -- -- -- --
James J. Bender......... 2001 287,510 319,000 13,110 -- 84,000 -- 6,815(11)
Senior Vice President & 2000 256,242 256,750 7,131 -- 60,000 186,636 2,609(6)
General Counsel 1999 213,746 100,000 6,528 -- -- 19,729 6,172
Leonard A. Bluhm........ 2001 218,761 242,000 7,350 -- 85,000 -- 4,760(12)
Executive Vice 2000 204,175 202,438 8,508 -- 60,000 391,887 2,467(7)
President & Chief 1999 194,590 72,150 5,265 -- -- 50,489 12,814
Financial Officer
---------------
(1) Represents amounts reimbursed during the fiscal year for the payment of
taxes on fringe benefits.
(2) Mr. Noer was hired on January 1, 2000. Prior to such date, Mr. Noer was
employed by NSP.
(3) Includes $7,000 of universal life insurance premiums; $13,478 of imputed
income on life insurance; $1,279 of contributions to the Northern States
Power Company Employee Stock Ownership Plan; $900 of matching contributions
to the NSP Retirement Savings Plan; and $266 of deferred compensation
excess. Does not include $5,789 of incentive pension make-up earned in 1999
and paid in 2000.
(4) Includes $384 of term life insurance premiums; $1,226 of contributions to
the Northern States Power Company Employee Stock Ownership Plan; $900 of
matching contributions to the NSP Retirement Savings Plan; and $549 of
deferred compensation excess. Does not include $4,500 for incentive pension
make-up earned in 1999 and paid in 2000.
(5) Includes $1,279 of contributions to the Northern States Power Company
Employee Stock Ownership Plan; $900 of matching contributions to the NSP
Retirement Savings Plan; and $2,464 of deferred compensation excess. Does
not include $1,320 for incentive pension make-up earned in 1999 and paid in
2000.
(6) Includes $318 of term life insurance premiums; $1,279 of contributions to
the Northern States Power Company Employee Stock Ownership Plan; $900 of
matching contributions to the NSP Retirement Savings Plan; and $112 of
deferred compensation excess. Does not include $3,000 for incentive pension
make-up earned in 1999 and paid in 2000.
(7) Includes $288 of term life insurance premiums; $1,279 of contributions to
the Northern States Power Company Employee Stock Ownership Plan; and $900
of matching contributions to the NSP Retirement Savings Plan. Does not
include $2,165 for incentive pension make-up earned in 1999 and paid in
2000.
(8) Includes $7,000 of universal life insurance premiums; $1,502 of Employee
Stock Ownership Plan contributions; $1,400 of 401(k) Plan matching
contributions.
101
(9) Includes $1,502 of Employee Stock Ownership Plan contributions; $327 of
term life insurance premiums; $5,297 of 401(k) Plan matching contributions
and $999 of Deferred Compensation excess.
(10) Includes $1,502 of Employee Stock Ownership Plan contributions; $1,400 of
401(k) Plan matching contributions, and $1,747 of Deferred Compensation
excess.
(11) Includes $1,502 of Employee Stock Ownership Plan contributions; $16 of term
life insurance premiums; and $5,297 of 401(k) Plan matching contributions.
(12) Includes $1,502 of Employee Stock Ownership Plan contributions; $1,858 of
term life insurance premiums and $1,400 of 401(k) Plan matching
contributions.
OPTIONS AND STOCK APPRECIATION RIGHTS (SARS)
The following table indicates for each of the Named Executive Officers the
extent to which the Company used stock options and SARs for executive
compensation purposes in 2001 and the potential value of such stock options and
SARs as determined pursuant to the SEC rules.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
----------------------------------------------------------------------------------------------- -------------------------
(A) (B) (C) (D) (E) (F) (G)
NUMBER OF % OF TOTAL
SECURITIES UNDERLYING OPTIONS/SARS EXERCISE OR
OPTIONS/SARS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED(#)(1) IN FISCAL YEAR ($/SHARE) DATE 5%($)(2) 10%($)(2)
---- --------------------- -------------------- ----------- ---------- ----------- -----------
David H. Peterson..... 177,000 5.15% $23.50 06/19/11 $2,644,719 $6,675,081
88,500 2.58% $13.96 12/21/11 $ 775,533 $1,966,710
Craig A.
Mataczynski......... 70,000 2.04% $23.50 06/19/11 $1,045,934 $2,639,863
35,000 1.02% $13.96 12/21/11 $ 306,708 $ 777,795
John A. Noer.......... 52,000 1.51% $23.50 06/19/11 $ 776,979 $1,961,041
26,000 0.76% $13.96 12/21/11 $ 227,840 $ 577,790
James J. Bender....... 56,000 1.63% $23.50 06/19/11 $ 836,747 $2,111,890
28,000 0.81% $13.96 12/21/11 $ 245,366 $ 622,236
Leonard A. Bluhm...... 55,000 1.60% $23.50 06/19/11 $ 821,805 $2,074,178
30,000 0.87% $13.96 12/21/11 $ 262,892 $ 666,681
---------------
(1) Amounts shown represent stock options granted to the Named Executive
Officers for compensation purposes in 2001 under the NRG Energy, Inc. 2000
Long-Term Incentive Compensation Plan and do not include options held by the
Named Executive Officers to purchase shares of stock of Xcel Energy or stock
options granted to the Named Executive Officers to replace equity units held
under the NRG Equity Plan, which is described below in the Compensation
Committee Report on Executive Compensation. The options set forth in the
table above were granted with an exercise price equal to the Fair Market
Value Closing Price of a share of NRG Energy common stock on the day of the
grant and will vest and become fully exercisable on the fourth anniversary
of the date of the grant. All options expire 10 years from the date of the
grant.
(2) The hypothetical potential appreciation shown in columns (f) and (g) for the
Named Executive Officers is required by the SEC rules. The amounts in these
columns do not represent either the historical or anticipated future
performance of the Company's Common Stock level of appreciation.
102
The following table indicates for each of the Named Executive Officers the
number and value of all exercisable and unexercisable options and SARs held by
the Named Executive Officers as of December 31, 2001.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(A) (B) (C) (D) (E)
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS/SARS
ACQUIRED ON VALUE AT FY-END(#) AT FY-END($)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
---- ----------- ------------ ---------------------------- ----------------------------
David H. Peterson....... -- -- 308,415 $2,542,754
697,780 $2,613,092
Craig A. Mataczynski.... 13,074 $302,875 44,294 $ 353,079
246,961 $ 126,666
John A. Noer............ -- -- -- $ --
60,000 $ 30,000
James J. Bender......... -- -- 54,025 $ 436,933
177,769 $ 492,348
Leonard A. Bluhm........ -- -- 43,690 $ 372,754
193,601 $1,111,298
---------------
(1) Includes stock options granted to the Named Executive Officers to replace
equity units held under the NRG Equity Plan but does not include Xcel Energy
options.
(2) Option values were calculated based on a $15.50 closing price of Common
Stock, as reported on the New York Stock Exchange on December 31, 2001.
(3) Does not include 8,672 shares and 1,524 shares of NSP Nonqualified Stock
Options having values of $15,192 and $3,146, respectively, sold by David H.
Peterson in calendar year 2001.
103
PENSION PLAN TABLES
NRG Energy participates in Xcel Energy's noncontributory, defined benefit
pension plan. Such plan covers substantially all of NRG Energy's employees. As
of January 1, 1999, the pension benefit formula that applies to the Named
Executive Officers was changed and each Named Executive Officer, together with
all other affected nonbargaining employees, was given an opportunity to choose
between two retirement programs, the traditional program and the pension equity
program. Messrs. Peterson, Bluhm and Noer have selected the traditional program
and Messrs. Mataczynski and Bender have selected the pension equity program.
Under the traditional program applicable to certain of the Named Executive
Officers, the pension benefit is computed by taking the highest average
compensation below the integration level times 1.1333% plus the highest average
compensation above the integration level times 1.6333%. The result is multiplied
by credited service. The integration level is one-third of the social security
wage base. The annual compensation used to calculate average compensation is
base salary for the year. After an employee has reached 30 years of service, no
additional years of service are used in determining the pension benefit under
the traditional program. The benefit amounts under the traditional program are
computed in the form of a straight-life annuity.
Under the pension equity program applicable to certain of the Named
Executive Officers, the formula for determining the pension benefit is average
compensation times credited years of service times 10%. The annual compensation
used to calculate average compensation is base salary for the year plus bonus
compensation paid in that same year. There is no maximum on the number of years
of service used to determine the pension benefit. The benefit amounts under the
pension equity program are computed in the form of a lump sum.
Both programs feature a retirement spending account, which credits $1,400
plus interest annually. The opening balance as of January 1, 1999 was $1,400,
multiplied by years of service.
The employment agreement between Mr. Peterson and NRG Energy provides that
Mr. Peterson will receive the accumulated value of his pension payments had he
begun payments at his earliest retirement eligibility. Additionally, the
employment agreement provides that, in the event that Mr. Peterson elects a lump
sum payment, the value of his benefits will be calculated based on both his and
his spouse's mortality, subject to certain financial performance measures. Such
calculation of benefits is different from the single mortality basis used for
other employees.
104
The following table illustrates the approximate retirement benefits payable
to employees retiring at the normal retirement age of 65 years under the
traditional program applicable to certain of the Named Executive Officers:
ESTIMATED ANNUAL BENEFITS FOR YEARS OF SERVICE INDICATED
YEARS OF SERVICE
AVERAGE COMPENSATION -----------------------------------------------------------------------------
(LAST 4 YEARS) 5 10 15 20 25 30
-------------------- ------- -------- -------- -------- -------- --------
$ 50,000................... $ 4,500 $ 9,000 $ 13,500 $ 19,000 $ 25,000 $ 31,500
100,000................... 8,500 17,000 25,500 35,000 45,500 56,000
150,000................... 12,500 25,000 38,000 51,500 66,000 80,500
200,000................... 16,500 33,500 50,000 68,000 86,500 105,000
250,000................... 21,000 41,500 62,500 84,000 107,000 129,500
300,000................... 25,000 49,500 74,500 100,500 127,500 154,000
350,000................... 29,000 58,000 87,000 117,000 147,500 178,500
400,000................... 33,000 66,000 99,000 133,000 168,000 203,000
450,000................... 37,000 74,000 111,500 149,500 188,500 227,500
500,000................... 41,000 82,500 123,500 166,000 209,000 252,000
550,000................... 45,500 90,500 136,000 182,000 229,500 276,500
600,000................... 49,500 98,500 148,000 198,500 250,000 301,000
650,000................... 53,500 107,000 160,500 215,000 270,000 325,500
700,000................... 57,500 115,000 172,500 231,000 290,500 350,000
750,000................... 61,500 123,000 185,000 247,500 311,000 374,500
800,000................... 65,500 131,500 197,000 264,000 331,500 399,000
850,000................... 70,000 139,500 209,500 280,000 352,000 423,500
900,000................... 74,000 147,500 221,500 296,500 372,500 448,000
950,000................... 78,000 156,000 234,000 313,000 392,500 472,500
1,000,000................... 82,000 164,000 246,000 329,000 413,000 497,000
1,050,000................... 86,000 172,000 258,500 345,500 433,500 521,500
1,100,000................... 90,000 180,500 270,500 362,000 454,000 546,000
1,150,000................... 94,500 188,500 283,000 378,000 474,500 570,500
1,200,000................... 98,500 196,500 295,000 394,500 495,000 595,000
105
The following table illustrates the approximate retirement benefits payable
to employees retiring at the normal retirement age of 65 years under the pension
equity program applicable to certain of the Named Executive Officers if paid in
the form of a straight-line annuity:
ESTIMATED ANNUAL BENEFITS FOR YEARS OF SERVICE INDICATED
YEARS OF SERVICE
AVERAGE COMPENSATION -----------------------------------------------------------------------------
(LAST 4 YEARS) 5 10 15 20 25 30
-------------------- ------- -------- -------- -------- -------- --------
$ 50,000................... $ 3,500 $ 7,000 $ 11,000 $ 15,500 $ 20,500 $ 26,500
100,000................... 6,000 12,000 18,500 25,500 33,000 41,500
150,000................... 8,500 17,000 26,000 35,500 46,000 57,000
200,000................... 11,000 22,000 33,500 45,500 58,500 72,000
250,000................... 13,500 27,000 41,500 56,000 71,000 87,000
300,000................... 16,000 32,500 49,000 66,000 83,500 102,500
350,000................... 18,500 37,500 56,500 76,000 96,500 117,500
400,000................... 21,000 42,500 64,000 86,000 109,000 133,000
450,000................... 23,500 47,500 71,500 96,500 121,500 148,000
500,000................... 26,000 52,500 79,500 106,500 134,500 163,000
550,000................... 28,500 57,500 87,000 116,500 147,000 178,500
600,000................... 31,000 62,500 94,500 127,000 159,500 193,500
650,000................... 33,500 67,500 102,000 137,000 172,500 208,500
700,000................... 36,000 73,000 109,500 147,000 185,000 224,000
750,000................... 39,000 78,000 117,000 157,000 197,500 239,000
800,000................... 41,500 83,000 125,000 167,500 210,500 254,500
850,000................... 44,000 88,000 132,500 177,500 223,000 269,500
900,000................... 46,500 93,000 140,000 187,500 235,500 284,500
950,000................... 49,000 98,000 147,500 197,500 248,500 300,000
1,000,000................... 51,500 103,000 155,000 208,000 261,000 315,000
1,050,000................... 54,000 108,000 163,000 218,000 273,500 330,500
1,100,000................... 56,500 113,500 170,500 228,000 286,500 345,500
1,150,000................... 59,000 118,500 178,000 238,000 299,000 360,500
1,200,000................... 61,500 123,500 185,500 248,500 311,500 376,000
The approximate credited years of service as of December 31, 2001, for the
Named Executive Officers were as follows:
Mr. Peterson................................................ 37.83
Mr. Mataczynski............................................. 19.42
Mr. Noer.................................................... 32.67
Mr. Bender.................................................. 6.33
Mr. Bluhm................................................... 30.42
EMPLOYMENT AGREEMENTS
DAVID H. PETERSON EMPLOYMENT AGREEMENT
NRG Energy has entered into an employment agreement with Mr. Peterson which
provides that Mr. Peterson will be employed as NRG Energy's highest level
executive officer. The term of the agreement expires June 27, 2004. During the
term of the agreement, Mr. Peterson's base salary will be reviewed at least
annually by the Compensation Committee of the Board of Directors for possible
increase. The agreement provides that Mr. Peterson will receive retirement and
welfare benefits no less favorable than those provided to any other officer of
NRG Energy. In addition, the agreement provides for participation in a
supplemental executive retirement plan such that the aggregate value of the
retirement benefits that Mr. Peterson and his spouse will receive at the end of
the term of the agreement under all of NRG Energy's defined benefit pension
plans and those of NRG Energy's affiliates will not be less than the aggregate
value of the benefits he would
106
have received had he continued, through the end of the term of the agreement, to
participate in the NSP Deferred Compensation Plan, the NSP Excess Benefit Plan
and the NSP Pension Plan. Such retirement benefits include amounts to compensate
Mr. Peterson for the monthly defined benefit payments he would have received
during the term of the agreement and prior to the date of his termination of
employment if monthly benefit payments had commenced following the month in
which he first became eligible for early retirement under the Xcel Energy
Pension Plan.
The agreement also provides for certain additional benefits to be paid upon
Mr. Peterson's death. If Mr. Peterson's employment is terminated by NRG Energy
without cause, or by Mr. Peterson with good reason, in each case as defined in
the agreement, Mr. Peterson will continue to receive his salary, bonus at the
greater of target bonus or actual bonus for the last plan year prior to
termination, incentive compensation with cash replacing equity based awards and
benefits under the agreement as if he had remained employed until the end of the
term of the agreement and then retired, at which time he will be treated as
eligible for retiree welfare benefits and other benefits provided to the retired
senior executives. However, if the termination of employment is a result of a
change of control, as defined in the Equity Plan, the compensation and benefits
will be continued for the longer of 30 months or through the end of the
employment period.
In accordance with the terms of the agreement, Mr. Peterson has agreed not
to compete with the business of NRG Energy during the period of his employment
and for one year after his termination or resignation. Mr. Peterson has also
agreed not to solicit any of NRG Energy's customers for any business purpose
that competes with NRG Energy's business during the period of his employment or
two years after his termination or resignation. Finally, during the period of
his employment and for two years after his termination or resignation, Mr.
Peterson has agreed not to disclose any of NRG Energy's confidential information
to any person not authorized by NRG Energy to receive such confidential
information.
JAMES J. BENDER, LEONARD A. BLUHM, CRAIG A. MATACZYNSKI AND JOHN A. NOER
SEVERANCE AGREEMENTS
Messrs. Bender, Bluhm, Mataczynski and Noer are participants in the
Company's Executive officer and Key Personnel Severance Plan (the "Plan"). In
June and July 2001, the Company executed severance plan agreements with Messrs.
Bender, Bluhm, Mataczynski and Noer pursuant to the Plan. Each such agreement
remains in effect until the third anniversary of its effective date. Each
agreement has an effective date of May 31, 2001, except for the Company's
agreement with Mr. Noer, which has an effective date of January 15, 2001. The
severance agreements provide that if the employment of Messrs. Bender, Bluhm,
Mataczynski, or Noer is terminated due to his death or disability, he will
receive his base salary and accrued vacation through the date of termination or
resignation. Each such agreement further provides that if any of Messrs. Bender,
Bluhm, Mataczynski or Noer is terminated for cause, or if any of them
voluntarily resigns without good cause, he will receive his base salary and
accrued vacation through the date of termination or resignation, plus all other
amounts to which he is entitled under any compensation plans of the Company, at
the time such payments are due.
Each such agreement further provides for the payment of severance benefits
in the event that any of Messrs. Bender, Bluhm, Mataczynski or Noer is
terminated by the Company without cause, or if any of them terminates his
employment within three months of a material change or reduction in his job
responsibilities with the Company or as a result of a material breach by the
Company of the compensation or benefit terms of the severance agreement. The
severance benefits payable include the payment of two times the participant's
base salary, plus two times the participant's average annual bonus earned over
the two full years prior to the date of termination, or two times the
participant's target annual bonus established for the bonus plan year in which
the participant's termination occurs, whichever is greater.
Severance benefits are also payable to each of Messrs. Bender, Bluhm,
Mataczynski and Noer if, within six months prior to, or twelve months after, the
effective date of a Change in Control (as defined in the Company's Severance
Plan) of the Company, his employment with the Company ends as a result of either
an involuntary termination of his employment by the Company for reasons other
than cause, or by voluntary termination by him for cause. Whether or not a
particular transaction constitutes a change of control is to be determined by
the Board of Directors of the Company. In the event of a Change in Control of
the Company,
107
the severance benefits payable include the payment of three times the
participant's base salary, plus three times the participant's average annual
bonus earned over the two full years prior to the date of termination, or three
times the participant's target annual bonus established for the bonus plan year
in which the participant's termination occurs, whichever is greater.
Under the terms of each such agreement, each of Messrs. Bender, Bluhm,
Mataczynski and Noer has agreed not to compete with the Company's business
during the course of his employment and for one year after his resignation or
termination, unless there has been a Change of Control of the Company.
Additionally, Messrs. Bender, Bluhm, Mataczynski and Noer have agreed not to
disclose any of the Company's confidential and proprietary information. This
description of the Plan is qualified in its entirety by reference to the form of
the Plan, which is filed as Exhibit 10.41.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF SHARES OF COMMON STOCK
AND CLASS A COMMON STOCK
The following table lists the beneficial ownership of Common Stock and
Class A Common Stock owned as of March 6, 2002, by (i) the directors and
nominees of the Company, (ii) the executive officers named in the Summary
Compensation Table that follows and (iii) all the directors and executive
officers of the Company as a group. The following table also lists the
beneficial ownership of Common Stock and Class A Common Stock owned as of March
6, 2002 by each person known by the Company to beneficially own more than five
percent (5%) of the outstanding shares of Common Stock and Class A Common Stock.
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER CLASS OF STOCK BENEFICIALLY OWNED(1) PERCENT OF CLASS
------------------------ -------------------- --------------------- ----------------
David H. Peterson.................... Common Stock 314,415(2) *
Pierson M. Grieve.................... Common Stock 55,000 *
Luella G. Goldberg................... Common Stock 10,000 *
William A. Hodder.................... Common Stock 25,000 *
Wayne H. Brunetti.................... Common Stock 5,500 *
James J. Howard...................... Common Stock 3,000 *
Gary R. Johnson...................... Common Stock 1,000 *
Richard C. Kelly..................... Common Stock 4,000 *
Edward J. McIntyre................... Common Stock 1,000(12) *
Craig A. Mataczynski................. Common Stock 46,294(3) *
John A. Noer......................... Common Stock 600 *
James J. Bender...................... Common Stock 55,028(4) *
Leonard A. Bluhm..................... Common Stock 93,365(5) *
Xcel Energy Inc.(6).................. Common Stock --(7) --
Class A Common Stock 147,604,500 100%(8)
Massachusetts Financial Services
Company(9)......................... Common Stock 2,885,772(10) 5.6%
Capital Group International, Inc.(14)
and Capital Guardian Trust......... Common Stock 8,139,810(13) 16.0%
Directors and executive officers as a
group.............................. Common Stock 671,598(11) *
---------------
(1) The number of shares beneficially owned by each person or entity is
determined under the rules of the Securities and Exchange Commission (the
"SEC"), and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, each person or entity is
considered the beneficial owner of any shares: (a) to which such person or
entity has sole or shared voting power or investment power and (b) that
such person or entity has the right to acquire within 60 days through the
exercise of stock options or other similar rights. Unless otherwise
indicated, each person or entity has sole investment and voting power (or
such person shares such powers with his or her spouse) with respect to the
shares set forth in the table above.
108
(2) Includes 308,415 shares subject to options that are exercisable within 60
days.
(3) Includes 44,294 shares subject to options that are exercisable within 60
days.
(4) Includes 54,028 shares subject to options that are exercisable within 60
days, does not include 100 shares owned by Mr. Bender's wife. Mr. Bender
disclaims beneficial ownership of the shares owned by his wife.
(5) Includes 91,665 shares subject to options that are exercisable within 60
days.
(6) The address for Xcel Energy Inc. is 800 Nicollet Mall, Suite 3000,
Minneapolis, Minnesota, 55402-2023.
(7) Pursuant to an option agreement, which is more fully described below under
the heading "Relationships and Related Transactions," Xcel Energy and its
affiliates have a continuing option to purchase shares of Common Stock to
the extent necessary to maintain or restore an ownership percentage of 80%
of the outstanding shares of Common Stock and Class A Common Stock on a
combined basis.
(8) Xcel Energy currently owns an approximate 74% interest in the Common Stock
and Class A Common Stock of the Company on a combined basis, which
represents 96.7% of the total voting power of the Common Stock and Class A
Common Stock on a combined basis.
(9) The address for Massachusetts Financial Services Company is 500 Boylston
Street, Boston, Massachusetts, 02116.
(10) Based on the Schedule 13G filed with the SEC on February 12, 2002.
(11) Includes 568,005 shares subject to options that are exercisable within 60
days.
(12) Does not include 1,500 shares owned by Mr. McIntyre's wife.
(13) Based on Schedule 13G/A filed with the SEC on February 11, 2002.
(14) The address of Capital Group International is 11100 Santa Monica Blvd., Los
Angeles, CA 90025.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIPS AND RELATED TRANSACTIONS
NRG Energy was initially incorporated in Minnesota in 1989, and was
reincorporated in Delaware in 1992, as a wholly owned subsidiary of NSP. The
Company became publicly traded on May 31, 2000. In August 2000, NSP merged with
NCE to form Xcel Energy. Following the completion in March 2001 of a public
offering by NRG Energy of 18.4 million shares of Common Stock (the "March 2001
Offering"), Xcel Energy owns an approximate 74% interest in the Common Stock and
Class A Common Stock of NRG Energy on a combined basis, representing 96.7% of
the total voting power of the Common Stock and Class A Common Stock on a
combined basis. In addition, 4 directors of NRG Energy are executive officers of
Xcel Energy.
NRG Energy and Xcel Energy have entered into material transactions and
agreements with one another and are expected to enter into material transactions
and agreements from time to time in the future. Material agreements and
transactions currently existing or currently proposed between NRG Energy and
Xcel Energy are described below.
OPERATING AGREEMENTS
NRG Energy has two agreements with Xcel Energy for the purchase of thermal
energy. Under the terms of the agreements, Xcel Energy charges NRG Energy for
certain costs (fuel, labor, plant maintenance and auxiliary power) incurred by
Xcel Energy to produce thermal energy. NRG Energy paid $7.1 million in 2001
under these agreements. One of the agreements expires on December 31, 2002, and
the other expires on December 31, 2006. NRG Energy and Xcel Energy have executed
a new agreement, expiring on December 31, 2010, to replace the agreement that
would have expired on December 31, 2002; this new agreement will not become
effective until it is approved by the Minnesota Public Utilities Commission.
NRG Energy has a renewable 10-year agreement with Xcel Energy, expiring on
December 31, 2006, under which Xcel Energy agrees to purchase refuse-derived
fuel for use in certain of its boilers, and NRG Energy agrees to pay Xcel Energy
a burn incentive. Under this agreement, NRG Energy received from Xcel Energy
$1.6 million in 2001, and NRG Energy paid to Xcel Energy $2.8 million in 2001.
NRG Energy has entered into an operation and maintenance agreement with
Xcel Energy with respect to its Elk River and Becker Facilities, under which NRG
Energy receives a base management fee and is
109
reimbursed for costs it incurs. The operation and maintenance agreement also
provides for a management incentive fee payable to NRG, based upon the financial
performance of the facilities. NRG Energy earned a total management fee, in
addition to reimbursed expenses, of $1.9 million in 2001. This agreement expires
on December 31, 2003.
NRG Energy and Xcel Energy have entered into an asset purchase agreement
for the sale of Xcel Energy's Elk River and Becker Facilities to NRG Energy. The
boards of directors of Xcel Energy and NRG have approved the transaction. The
Minnesota Public Utilities Commission has approved Xcel Energy's request for the
transfer of assets. Xcel Energy expects that the transaction will be completed
by the second quarter of 2002.
REIMBURSEMENT FOR ADMINISTRATIVE SERVICES
NRG Energy reimburses Xcel Energy for certain overhead and administrative
costs, including benefits administration, engineering support, accounting, and
other shared services. Employees of NRG Energy participate in certain employee
benefit plans of Xcel Energy. NRG Energy paid Xcel Energy $12.2 million in 2001
as reimbursement for certain overhead costs and the cost of services provided.
TREECYCLE AGREEMENT
In February 2001, a wholly-owned subsidiary of NRG Energy, NRG Processing
Solutions LLC (NRG PS), entered into agreements with Xcel Energy to provide for
the assignment by Xcel Energy to NRG PS of various leases and contracts with
respect to Xcel Energy's Treecycle business unit. The Treecycle operation
manages wood waste from Xcel Energy's line-clearance operations in the
Minneapolis and St. Paul metropolitan area. In conjunction with this transfer,
NRG Energy and Xcel Energy have also entered into a one-year processing
agreement whereby NRG PS agreed to process Xcel Energy's wood waste until
December 31, 2001, for a minimum fee of $500,000. Such agreements were approved
by the Minnesota Public Utilities Commission in April 2001. The agreements were
not renewed. During the year ended December 31, 2001, NRG Energy received the
minimum fee of $500,000 from Xcel Energy.
CONSULTING SERVICES AGREEMENT
NRG Energy has an agreement with Utility Engineering Corporation, a wholly
owned subsidiary of Xcel Energy, under which Utility Engineering provides
consulting services to NRG Energy. Consulting services are provided from time to
time at NRG Energy's request. NRG Energy paid $1.4 million to Utility
Engineering for consulting services in 2001.
TAX ALLOCATION AGREEMENT
NRG Energy was formerly a member of Xcel Energy's consolidated tax group
for United States federal income tax purposes. Following the completion of the
March 2001 Offering, Xcel Energy owns equity securities representing less than
80% of NRG Energy's value and, accordingly, NRG Energy is no longer a member of
Xcel Energy's consolidated tax group. The responsibility for payment of taxes
and the allocation between Xcel Energy and NRG Energy of tax benefits and
liabilities was previously governed by a tax sharing agreement between NRG
Energy and Xcel Energy. Such tax sharing agreement was replaced by a tax
allocation agreement, which became effective as of December 2000, that
formalizes the various practices which arose under the previous tax sharing
agreement and reflects the change in NRG Energy's status from a wholly-owned
subsidiary of Xcel Energy to a majority-owned subsidiary.
OPTION AGREEMENT
NRG Energy has entered into an option agreement with Xcel Energy under
which NRG Energy has granted to Xcel Energy and its affiliates a continuing
option to purchase additional shares of Common Stock. In the event that NRG
Energy issues equity securities, Xcel Energy and its affiliates may exercise
options to purchase shares of Common Stock to the extent necessary to maintain
or restore an ownership percentage of 80% of the outstanding shares of Common
Stock and Class A Common Stock on a combined basis. Such
110
option agreement expires if and when Xcel Energy and its affiliates beneficially
own less than 30% of the outstanding Common Stock and Class A Common Stock on a
combined basis.
Following the March 2001 Offering, Xcel Energy's ownership in NRG Energy
was reduced to approximately 74% of the outstanding shares of Common Stock and
Class A Common Stock on a combined basis. Xcel Energy waived its rights under
such option agreement in connection with the March 2001 offering. This option
agreement would terminate upon completion of Xcel Energy's exchange offer for
NRG Energy common stock.
REGISTRATION RIGHTS AGREEMENT
NRG Energy has entered into a registration rights agreement with Xcel
Energy, under which NRG Energy has agreed to register the shares of Common Stock
issuable upon conversion of shares of Class A Common Stock held by Xcel Energy
and its affiliates under the following circumstances:
- Demand Rights. Upon the written request of Xcel Energy, NRG Energy will
register shares of Common Stock held by Xcel Energy and its affiliates
specified in its request for resale under an appropriate registration
statement filed and declared effective by the SEC. Xcel Energy may make a
demand so long as:
- it requests registration of shares with an anticipated aggregate
offering price of at least $20 million;
- it has made no more than four previous requests for the registration of
common stock; and
- NRG Energy has not completed a registered offering of Common Stock
within the 180 day period before Xcel Energy's request.
- Piggyback Rights. If at any time NRG Energy registers newly issued
shares of Common Stock or registers outstanding shares of Common Stock
for resale on behalf of any holder of Common Stock, Xcel Energy and its
affiliates may elect to include in such registration any shares of Common
Stock it holds. If the offering is an underwritten offering, the managing
underwriter may exclude up to 75% of the shares of Xcel Energy and its
affiliates if market factors dictate, but only if Xcel Energy and its
affiliates is not exercising a demand right, described above, and only if
all other shares being sold by other stockholders are excluded first.
- Termination. The registration rights agreement will terminate upon the
earlier of seven years from the date of the agreement or the date on
which all remaining shares of Common Stock held by Xcel Energy and its
affiliates, or issuable to Xcel Energy and its affiliates upon conversion
of Class A Common Stock, may be sold in any 90-day period in compliance
with Rule 144 under the Securities Act. This registration rights
agreement will terminate upon the completion of Xcel Energy's tender
offer for the exchange of NRG Energy's common stock.
111
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
Included in Part II.
(a)(2) Supplemental Financial Statement Schedules
Exhibit 99.1 contains the financial statements of West Coast Power
LLC.
All other financial statement schedules have been omitted because
either they are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements
or in the Notes thereto.
(a)(3) Exhibits
3.1 Amended and Restated Certificate of Incorporation.(9)
3.2 By-Laws.(9)
4.1 Indenture, dated as of January 31, 1996, between the Company
and Norwest Bank Minnesota, National Association, As
Trustee.(1)
4.2 Indenture, dated as of June 1, 1997, between the Company and
Norwest Bank Minnesota, National Association.(1)
4.3 Form of Exchange Notes.(1)
4.4 Indenture between the Company and Norwest Bank Minnesota,
National Association, as Trustee dated as of May 25,
1999.(4)
4.5 Indenture, dated as of November 8, 1999, between the Company
and Norwest Bank Minnesota, National Association as
Trustee.(7)
4.6 Indenture, dated as of February 22, 2000, between the
Company, NRG Northeast Generating LLC and Chase Manhattan
Bank, as Trustee.(8)
4.7 NRG Energy Pass-Through Trust 2000-1, $250,000,000 8.70%
Remarketable or Redeemable Securities ("ROARS") due March
15, 2005.(8)
4.8 Trust Agreement, dated March 20, 2000, between the Company
and The Bank of New York, as Trustee.(8)
4.9 Indenture, dated March 20, 2000, between the Company and The
Bank of New York, as Trustee, 160,000,000 pounds sterling
Reset Senior Notes due March 15, 2020.(8)
4.10 Form of Common Stock Certificate.(9)
4.11 Indenture, dated September 11, 2000, between the Company and
Wells Fargo Bank Minnesota, National Association, as
Trustee.(10)
4.12 Form of Supplemental Indenture to be used in connection with
the issuance of Debentures.(11)
4.13 Form of Indenture.(11)
4.14 Form of Purchase Contract Agreement between the Company and
the Purchase Contract Agent to be named therein.(11)
4.15 Form of Corporate Unit Certificate.(11)
4.16 Form of Pledge Agreement among the Company, the Collateral
Agent and the Unit Agent, each to be named therein.(11)
4.17 Form of Remarketing Agreement among the Company, the
Purchase Contract Agent and the Remarketing Agent, each to
be named therein.(11)
4.18 Indenture, dated March 13, 2001, between the Company and The
Bank of New York, a New York banking corporation, as
Trustee.(12)
112
4.19 First Supplement Indenture, dated March 13, 2001, between
the Company and The Bank of New York, a New York banking
corporation, as Trustee.(12)
4.20 364-Day Revolving Credit Agreement dated as of March 8,
2002, among NRG Energy, Inc., The Financial Institutions
Party hereto and ABN AMRO Bank N.V., as agent.
4.21 $2.0 billion credit agreement dated May 8, 2001 among NRG
Finance Company LLC and certain financial institutions named
therein.(14)
4.22 $600 million credit agreement among NRG Energy and certain
financial institutions named therein.(14)
10.1 Employment Contract, dated as of June 28, 1995, between the
Company and David H. Peterson.(1)
10.2 Note Agreement, dated August 20, 1993, between the Company,
Energy Center, Inc. and each of the purchasers named
therein.(1)
10.3 Master Shelf and Revolving Credit Agreement, dated August
20, 1993, between the Company, Energy Center, Inc., The
Prudential Insurance Registrants of America and each
Prudential Affiliate, which becomes party thereto.(1)
10.4 Energy Agreement, dated February 12, 1988, between the
Company (formerly known as Norenco Corporation) and Waldorf
Corporation (the "Energy Agreement").(1)
10.5 First Amendment to the Energy Agreement, dated August 27,
1993.(1)
10.6 Second Amendment to the Energy Agreement, dated January 31,
1996.(1)
10.7 Third Amendment to the Energy Agreement, dated August 25,
1997.(1)
10.8 Construction, Acquisition and Term Loan Agreement, dated
September 2, 1997, between NEO Landfill Gas, Inc, as
Borrower, the lenders named on the signature pages, Credit
Lyonnais New York Branch, as Construction/Acquisition Agent
and Lyon Credit Corporation, as Term Agent.(1)
10.9 Guaranty, dated September 12, 1997, by the Company in favor
of Credit Lyonnais New York Branch, as agent for the
Construction/Acquisition Lenders.(1)
10.10 Construction, Acquisition and Term Loan Agreement, dated
September 2, 1997, between Minnesota Methane LLC, as
Borrower, the lenders named on the signature pages, Credit
Lyonnais New York Branch, as Construction/Acquisition Agent
and Lyon Credit Corporation, as Term Agent.(1)
10.11 Guaranty, dated September 12, 1997, by the Company in favor
of Credit Lyonnais New York Branch, as agent for the
Construction/Acquisition Lenders.(1)
10.12 Non Operating Interest Acquisition Agreement dated as of
September 12, 1997, between the Company and NEO
Corporation.(1)
10.13 Employment Agreements, dated April 15, 1998, between the
Company and certain officers.(3)
10.14 Wholesale Standard Offer Service Agreement, dated October
13, 1998, between Blackstone Valley Electric Company,
Eastern Edison Company, Newport Electric Corporation and NRG
Power Marketing, Inc.(5)
10.15 Asset Sales Agreement, dated December 23, 1998, between the
Company and Niagara Mohawk Power Corporation.(5)
10.16 First Amendment to Wholesale Standard Offer Service
Agreement, dated January 15, 1999, between Blackstone Valley
Electric Company, Eastern Edison Company, Newport Electric
Corporation and NRG Power Marketing, Inc.(5)
10.17 Generating Plant and Gas Turbine Asset Purchase and Sale
Agreement for the Arthur Kill generating plants and Astoria
gas turbines, dated January 27, 1999, between the Company
and Consolidated Edison Company of New York, Inc.(5)
113
10.18 Transition Energy Sales Agreement, dated June 1, 1999,
between Arthur Kill Power LLC and Consolidated Edison
Company of New York, Inc.(5)
10.19 Transition Power Purchase Agreement, dated June 1, 1999,
between Astoria Gas Turbine Power LLC and Consolidated
Edison Company of New York, Inc.(5)
10.20 Transition Power Purchase Agreement, dated June 11, 1999,
between Niagara Mohawk Power Corporation and Huntley Power
LLC.(5)
10.21 Transition Power Purchase Agreement, dated June 11, 1999,
between Niagara Mohawk Power Corporation and Dunkirk Power
LLC.(5)
10.22 Power Purchase Agreement, dated June 11, 1999, between
Niagara Mohawk Power Corporation and Dunkirk Power LLC.(5)
10.23 Power Purchase Agreement, dated June 11, 1999, between
Niagara Mohawk Power Corporation and Huntley Power LLC.(5)
10.24 Amendment to the Asset Sales Agreement, dated June 11, 1999,
between the Company and Niagara Mohawk Power Corporation.(5)
10.25 Transition Capacity Agreement, dated June 25, 1999, between
Astoria Gas Turbine Power LLC and Consolidated Edison
Company of New York, Inc.(5)
10.26 Transition Capacity Agreement, dated June 25, 1999, between
Arthur Kill Power LLC and Consolidated Edison Company of New
York, Inc.(5)
10.27 First Amendment to the Employment Agreement of David H.
Peterson, dated June 27, 1999.(6)
10.28 Second Amendment to the Employment Agreement of David H.
Peterson, dated August 26, 1999.(6)
10.29 Third Amendment to the Employment Agreement of David H.
Peterson, dated October 20, 1999.(6)
10.30 [Swap] Master Agreement, dated June 11, 1999, between
Niagara Mohawk Power Corporation and NRG Power Marketing,
Inc.(6)
10.31 Standard Offer Service Wholesale Sales Agreement, dated
October 29, 1999, between the Connecticut Light And Power
Company and NRG Power Marketing, Inc.(6)
10.32 Amended Agreement for the Sale of Thermal Energy, dated
January 1, 1983, between the Company (formerly known as
Norenco Corporation) and Northern States Power and Norenco
Corporation.(9)
10.33 Operations and Maintenance Agreement, dated November 1,
1996, between the Company and Northern States Power.(9)
10.34 Agreement for the Sale of Thermal Energy and Wood Byproduct,
dated December 1, 1986, between Northern States Power and
Norenco Corporation.(9)
10.35 Federal and State Income Tax Sharing Agreement, dated April
4, 1991, between Northern States Power Company and NRG
Group, Inc.(9)
10.36 Support Agreement, dated March 27, 2000, between Northern
States Power Company and CitiCorp USA Inc.(9)
10.37 Administrative Services Agreement, dated January 1, 1992,
between Northern States Power Company and NRG Thermal
Corporation.(9)
10.38 Form of Option Agreement with Northern States Power
Company.(9)
10.39 Form of Registration Rights Agreement with Northern States
Power Company.(9)
10.40 Form of Indemnification Agreement.(9)
10.41 Form of Severance Agreement entered into between NRG Energy
and each of the following executive officers; James Bender,
Leonard Bluhm, Craig Mataczynski, and John Noer.(14)
114
21 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Financial Statements of "West Coast Power"
---------------
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-1, as amended, Registration No. 333-33397.
(2) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1997.
(3) Incorporated herein by reference to the Company's quarterly report on Form
10-Q for the quarter ended March 31, 1998.
(4) Incorporated herein by reference to the Company's current report on Form
8-K filed on May 27, 1999.
(5) Incorporated herein by reference to the Company's quarterly report on Form
10-Q for the quarter ended June 30, 1999.
(6) Incorporated herein by reference to the Company's quarterly report on Form
10-Q for the quarter ended September 31, 1999.
(7) Incorporated herein by reference to the Company's current report on Form
8-K filed on November 16, 1999.
(8) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1999.
(9) Incorporated herein by reference to the Company's Registration Statement on
Form S-1, as amended, Registration No. 333-35096.
(10) Incorporated herein by reference to the Company's current report on Form
8-K filed on September 13, 2000.
(11) Incorporated herein by reference to the Company's Registration Statement on
Form S-3, as amended, Registration No. 333-52508.
(12) Incorporated herein by reference to the Company's current report on Form
8-K filed on March 15, 2001.
(13) Incorporated herein by reference to the Company's quarterly report on Form
10-Q for the quarter ended March 31, 2001.
(14) Incorporated herein by reference to the Company's quarterly report on Form
10-Q for the quarter ended June 30, 2001.
(b) Reports on Form 8-K
On February 1, 2001, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events.
NRG Energy reported its financial results for the year ended
December 31, 2000.
On February 9, 2001, NRG Energy filed a Form 8-K reporting under Item
2 -- Acquisition or Disposition of Assets.
NRG Energy announced the closing of its acquisition of a 5,633
megawatt portfolio of operating projects and projects in
construction and advanced development from LS Power, LLC and its
partners.
On March 5, 2001, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events.
NRG Energy filed as exhibit 99.1 the audited financial statements
of NRG Energy, Inc. for the year ended December 31, 2000.
On March 9, 2001, NRG Energy filed a Form 8-K reporting under Item
7 -- Exhibits.
NRG Energy filed an opinion of Gibson, Dunn & Gutcher LLP
regarding certain tax matters in connection with its Form S-3
Registration Statement No. 333-52508.
On March 15, 2001, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events
115
NRG Energy filed certain exhibits under Item 7 -- Exhibits in
connection with its Registration Statement No. 333-52508.
On April 3, 2001, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events
NRG Energy announced that on March 23, 2001, NRG Energy Inc.
announced its appointment of W. Mark Hart to the position of
Senior Vice President, NRG Energy and NRG Europe and Latin
America.
On April 10, 2001, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events
On April 5, 2001, NRG Energy completed the offering of
$350,000,000 of its 7.75% senior notes due 2011 and $340,000,000
of its 8.625% Senior Notes due 2031. In connection with NRG
Energy's December 2000 Registration Statement on Form S-3 (file
No. 333-52508), NRG Energy filed certain exhibits under Item
7 -- Exhibits
On April 30, 2001, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events
On April 25, 2001, NRG Energy reported its financial results for
the three months ended March 31, 2001
On June 18, 2001, NRG Energy filed a Form 8-K under Item 5 -- Other
Events
On June 15, 2001, NRG Energy reported that it is on track to
achieve its stated goal of increasing earnings and megawatt
ownership
On July 2, 2001, NRG Energy filed a Form 8-K under Item
2 -- Acquisition or Disposition of assets
On June 22, 2001, NRG Energy reported that it acquired 1,081
megawatts of baseload electric generating plants from Delmarva
Power and Light a subsidiary of Wilmington, Delaware-based
Conectiv
On July 18, 2001, NRG Energy filed a Form 8-K under Item 5 -- Other
Events
On July 16, 2001, NRG Energy completed the offering of
$340,000,000 of its 6.75% senior notes due 2006 and $160,000,000
of its 8.625% Senior Notes due 2031
On July 30, 2001, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events
On July 25, 2001, NRG Energy reported its financial results for
the second quarter of 2001
On July 30, 2001, NRG Energy filed a form 8-K reporting under Item
5 -- Other Events
On July 26, 2001, NRG Energy reported that the Federal Energy
Regulatory Commission has instructed its staff to convene a
technical conference to "further explore issues related to the
competitive effects" resulting from NRG Energy's proposed
acquisition of the and New Haven Harbor stations in Connecticut.
The action will result in the acquisition being delayed beyond its
previously expected close in the third quarter of 2001
On September 21, 2001, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events
On September 20, 2001, NRG Energy reported that it is on target to
reach its forecasted EPS of $1.35 and announced that it acquired a
50% interest in the Saguaro Station from Edison Mission Energy and
further announced that it has decided to stop pursuing the
acquisition of two Connecticut plants from Wisvest Connecticut LLC
On October 15, 2001, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events
On October 11, 2001, NRG Energy reported its financial results for
the third quarter of 2001
On December 3, 2001, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events
On November 29, 2001, NRG Energy announced that it signed asset
purchase and sale agreements with subsidiaries of First Energy
Corporation to acquire a 2,535 MW portfolio of generating assets
On January 31, 2002, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events
On January 29, 2002 NRG Energy reported its financial results for
the year ended December 31, 2001
116
On February 26, 2002, NRG Energy filed a Form 8-K reporting under Item
5 -- Other Events
On February 26, 2002 NRG Energy filed its audited financial
statements for the year ended December 31, 2001
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 28, 2002.
NRG ENERGY, INC.
By: /s/ LEONARD A. BLUHM
------------------------------------
Leonard A. Bluhm
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY:
Each person whose signature appears below constitutes and appoints David H.
Peterson and Leonard A. Bluhm, each or any of them, such person's true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for such person and in such person's name, place and stead, in
any and all capacities, to sign any and all amendments to this report on Form
10-K, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as such person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them or his or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities indicated on
March 28, 2002.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID H. PETERSON Chairman of the Board, President and March 28, 2002
--------------------------------------------- Chief Executive Officer
David H. Peterson (Principal Executive Officer)
/s/ LEONARD A. BLUHM Executive Vice President and Chief March 28, 2002
--------------------------------------------- Financial Officer
Leonard A. Bluhm (Principal Financial Officer)
/s/ WILLIAM T. PIEPER Vice President and Controller March 28, 2002
--------------------------------------------- (Principal Accounting Officer)
William T. Pieper
/s/ WAYNE H. BRUNETTI Director March 28, 2002
---------------------------------------------
Wayne H. Brunetti
/s/ LUELLA G. GOLDBERG Director March 28, 2002
---------------------------------------------
Luella G. Goldberg
/s/ PIERSON M. GRIEVE Director March 28, 2002
---------------------------------------------
Pierson M. Grieve
/s/ WILLIAM A. HODDER Director March 28, 2002
---------------------------------------------
William A. Hodder
118
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES J. HOWARD Director March 28, 2002
---------------------------------------------
James J. Howard
/s/ GARY R. JOHNSON Director March 28, 2002
---------------------------------------------
Gary R. Johnson
/s/ RICHARD C. KELLY Director March 28, 2002
---------------------------------------------
Richard C. Kelly
/s/ EDWARD J. MCINTYRE Director March 28, 2002
---------------------------------------------
Edward J. McIntyre
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
An annual report will be sent to security holders and will be
supplementally filed with the Commission. Such annual report to security holders
will not be deemed "filed" with the Commission or otherwise subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934.
119