1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities - ----- Exchange Act of 1934 Transition report pursuant to Section 13 or 15(d) of the - ----- Securities Exchange Act of 1934 For Quarter Ended June 30, 1999 Commission File Number 333-33397 ------------------------ --------- NRG Energy, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 41-1724239 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1221 Nicollet Mall, Minneapolis, Minnesota 55403 - ------------------------------------------------------------------------------- (Address of principal executive officers) (Zip Code) Registrant's telephone number, including area code (612) 373-5300 ----------------------------- None - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 16, 1999 -------------------------------- ------------------------------ Common Stock, $1.00 par value 1,000 Shares All outstanding common stock of NRG Energy, Inc., is owned beneficially and of record by Northern States Power Company, a Minnesota corporation. The Registrant meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
2 <TABLE> <CAPTION> INDEX PAGE NO. ------- <S> <C> PART I Item 1 Consolidated Financial Statements and Notes Consolidated Statements of Income 1 Consolidated Balance Sheets 2-3 Consolidated Statements of Stockholder's Equity 4 Consolidated Statements of Cash Flows 5 Notes to Financial Statements 6-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II Item 1 Legal Proceedings 13 Item 6 Exhibits, Financial Statement Schedules, and Reports 14-15 on Form 8-K SIGNATURES 16 </TABLE>
3 CONSOLIDATED STATEMENTS OF INCOME NRG ENERGY, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, (Thousands of Dollars) 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> OPERATING REVENUES Revenues from wholly-owned operations $ 60,034 $ 25,260 $ 97,881 $ 49,782 Equity in earnings of unconsolidated affiliates 6,625 13,102 15,292 29,183 - ----------------------------------------------------------------------------------------------------------------------------------- Total operating revenues 66,659 38,362 113,173 78,965 =================================================================================================================================== OPERATING COSTS AND EXPENSES Cost of wholly-owned operations 41,124 12,659 69,064 26,305 Depreciation and amortization 6,291 4,373 11,025 8,049 General, administrative, and development 16,288 11,210 32,273 24,380 - ----------------------------------------------------------------------------------------------------------------------------------- Total operating costs and expenses 63,703 28,242 112,362 58,734 =================================================================================================================================== OPERATING INCOME 2,956 10,120 811 20,231 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Minority interest in earnings of consolidated subsidiaries (691) (128) (1,155) (1,160) Other income, net 2,574 1,842 3,308 1,899 Interest expense (15,788) (12,798) (26,847) (24,251) - ----------------------------------------------------------------------------------------------------------------------------------- Total other expense (13,905) (11,084) (24,694) (23,512) =================================================================================================================================== LOSS BEFORE INCOME TAXES (10,949) (964) (23,883) (3,281) INCOME TAXES - BENEFIT (13,290) (7,933) (25,284) (16,339) - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 2,341 $ 6,969 $ 1,401 $ 13,058 =================================================================================================================================== </TABLE> See notes to consolidated financial statements. 1
4 CONSOLIDATED BALANCE SHEETS NRG ENERGY, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, (Thousands of Dollars) 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 65,962 $ 6,381 Restricted cash 2,452 4,021 Accounts receivable-trade, less allowance for doubtful accounts of $118 and $100 39,314 15,223 Accounts receivable-affiliates 16,751 7,324 Current portion of notes receivable - affiliates 11,895 4,460 Current portion of notes receivable -- 26,200 Income taxes receivable 6,623 21,169 Inventory 48,028 2,647 Prepayments and other current assets 18,504 4,533 - -------------------------------------------------------------------------------------------------------------------------- Total current assets 209,529 91,958 ========================================================================================================================== PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST In service 1,198,607 291,558 Under construction 33,309 5,352 - -------------------------------------------------------------------------------------------------------------------------- 1,231,916 296,910 Less accumulated depreciation (104,713) (92,181) - -------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 1,127,203 204,729 - -------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Investments in projects 811,491 800,924 Capitalized project costs 31,622 13,685 Notes receivable, less current portion - affiliates 108,332 101,887 Notes receivable, less current portion 3,791 3,744 Intangible assets, net of accumulated amortization of $3,896 and $2,984 45,190 22,507 Debt issuance costs, net of accumulated amortization of $2,502 and $1,675 16,492 7,276 Other assets, net of accumulated amortization of $7,835 and $7,350 48,112 46,716 - -------------------------------------------------------------------------------------------------------------------------- Total other asset 1,065,030 996,739 ========================================================================================================================== TOTAL ASSETS $ 2,401,762 $ 1,293,426 ========================================================================================================================== </TABLE> See notes to consolidated financial statements. 2
5 CONSOLIDATED BALANCE SHEETS NRG ENERGY, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 7,747 $ 8,258 Revolving line of credit 221,267 -- Consolidated project-level, non-recourse debt 539,965 -- Accounts payable-trade 36,936 7,371 Accrued property and sales taxes 4,538 3,251 Accrued salaries, benefits and related costs 6,646 7,551 Accrued interest 11,117 7,648 Other current liabilities 25,078 8,289 - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 853,294 42,368 =========================================================================================================================== MINORITY INTEREST 12,941 13,516 CONSOLIDATED PROJECT-LEVEL, LONG TERM, NONRECOURSE DEBT 126,914 113,437 CORPORATE LEVEL LONG-TERM DEBT, LESS CURRENT PORTION 675,000 504,781 DEFERRED INCOME TAXES 10,998 19,841 DEFERRED INVESTMENT TAX CREDITS 1,215 1,343 POSTRETIREMENT AND OTHER BENEFIT OBLIGATIONS 11,113 11,060 DEFERRED INCOME AND OTHER LONG-TERM OBLIGATIONS 11,761 7,748 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,703,236 714,094 =========================================================================================================================== STOCKHOLDER'S EQUITY Common stock; $1 par value; 1,000 shares authorized; 1,000 shares issued and outstanding 1 1 Additional paid-in capital 631,913 531,913 Retained earnings 131,416 130,015 Accumulated other comprehensive income (64,804) (82,597) - --------------------------------------------------------------------------------------------------------------------------- Total Stockholder's Equity 698,526 579,332 =========================================================================================================================== TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 2,401,762 $1,293,426 =========================================================================================================================== </TABLE> See notes to consolidated financial statements. 3
6 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY NRG ENERGY, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> Accumulated Additional Other Total Common Stock Paid-in Retained Comprehensive Stockholder's (Thousands of Dollars) Capital Earnings Income Equity - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> BALANCES AT JANUARY 1, 1998 $ 1 $ 431,913 $ 88,283 $ (69,499) $ 450,698 Net Income 13,058 13,058 Foreign currency translation adjustments (16,459) (16,459) --------- Comprehensive income (3,401) --------------------------------------------------------------------------- BALANCES AT JUNE 30, 1998 $ 1 $ 431,913 $101,341 $ (85,958) $ 447,297 ============================================================================== BALANCES AT JANUARY 1, 1999 $ 1 $ 531,913 $130,015 $ (82,597) $ 579,332 Net Income 1,401 1,401 Foreign currency translation adjustments 17,793 17,793 --------- Comprehensive income 19,194 Capital Contribution from parent 100,000 100,000 - -------------------------------------------------------------------------------------------------------------------------------- BALANCES AT JUNE 30, 1999 $ 1 $ 631,913 $ 131,416 $ (64,804) $ 698,526 ============================================================================== </TABLE> See notes to consolidated financial statements. 4
7 CONSOLIDATED STATEMENTS OF CASH FLOWS NRG ENERGY, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, (Thousands of Dollars) 1999 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,401 $ 13,058 Adjustments to reconcile net income to net cash provided (used) by operating activities Undistributed equity earnings of unconsolidated affiliates 26,141 (16,210) Depreciation and amortization 11,025 8,049 Deferred income taxes and investment tax credits (8,971) (5,120) Minority interest (575) (5,722) Cash provided (used) by changes in certain working capital items, net of acquisition effects Accounts receivable (22,551) (2,045) Accounts receivable-affiliates (9,427) 9,903 Accrued income taxes 14,546 (995) Inventory (5,438) -- Prepayments and other current assets (13,971) 1,162 Accounts payable-trade 29,565 (9,266) Accrued property and sales tax 1,287 (924) Accrued salaries, benefits and related costs (1,047) (57) Accrued interest 3,469 1,585 Other current liabilities 4,676 462 Cash used by changes in other assets and liabilities (11,313) (62) - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 18,817 (6,182) - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions, net of liabilities assumed (930,185) -- Investments in projects (37,167) (94,194) Divestiture of projects 1,000 9,219 Changes in notes receivable (net) 12,273 32,255 Purchase of plant, property and equipment (47,760) (14,320) Decrease (increase) in restricted cash 1,569 (2,970) - -------------------------------------------------------------------------------------------------------------------- NET CASH USED BY INVESTING ACTIVITIES (1,000,270) (70,010) - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions from parent 100,000 -- Revolving line of credit 97,267 53,000 Proceeds from issuance of note 539,965 -- Proceeds from issuance of long-term debt 310,294 22,658 Principal payments on long-term debt (6,492) (6,069) - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,041,034 69,589 - -------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59,581 (6,603) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,381 11,986 - -------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 65,962 $ 5,383 ==================================================================================================================== </TABLE> See notes to consolidated financial statements. 5
8 NRG ENERGY, INC. NOTES TO FINANCIAL STATEMENTS The Company is a wholly-owned subsidiary of Northern States Power Company (NSP), a Minnesota corporation. Additional information regarding the Company can be found in NSP's Form 10-Q for the six months ended June 30, 1999. The accompanying unaudited consolidated financial statements have been prepared in accordance with SEC regulations for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accounting policies followed by the Company are set forth in Note 1 to the Company's financial statements in its Annual Report on Form 10-K for the year ended December 31, 1998 (Form 10-K). The following notes should be read in conjunction with such policies and other disclosures in the Form 10-K. Interim results are not necessarily indicative of results for a full year. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all material adjustments necessary to present fairly the consolidated financial position of the Company as of June 30, 1999 and December 31, 1998, the results of its operations for the three months and six months ended June 30, 1999 and 1998, and its cash flows and stockholders' equity for the six months ended June 30, 1999 and 1998. 1. BUSINESS DEVELOPMENTS In February 1999, NRG purchased from certain affiliates of Thermal Ventures, Inc. (TVI) the remaining 50.1% limited partnership interests held by the TVI affiliates in San Francisco Thermal Limited Partnership and Pittsburgh Thermal Limited Partnership for $12.3 million. In April 1999, NRG acquired TVI's 50% member interest in North American Thermal Systems LLC (the entity holding the general partnership interest in the San Francisco and Pittsburgh partnerships) for $500,000. In April 1999, the Company completed the acquisition of the Somerset power station for approximately $55 million from the Eastern Utilities Association (EUA). The Somerset station, located in Somerset, Massachusetts, includes two coal-fired generating facilities and two aeroderivative combustion turbine peaking units supplying 229 MW in aggregate, of which 69 MW is on deactivated reserve. In April 1999, NRG reached agreement to purchase the 1,700 MW oil and gas-fired Oswego generating station for $91 million from Niagara Mohawk Power Corporation and Rochester Gas and Electric Corporation. The facility is located in Oswego, New York. The acquisition is expected to close in the fourth quarter of 1999, pending regulatory approvals and resolution of certain litigation. In May 1999, NRG and Dynegy completed the acquisition of the Encina generating station and 17 combustion turbines for $356 million from San Diego Gas & Electric Company. The facilities, which have a combined capacity of 1,218 MW, are located near Carlsbad and San Diego California. NRG and Dynegy will each own a 50% interest in these facilities. In June 1999, NRG completed its acquisition of the Huntley and Dunkirk generating stations from Niagara Mohawk Power Corporation for $355 million. The two coal-fired power generation facilities are located near Buffalo, New York, and have a combined summer capacity rating of 1,360 MW. In June 1999, NRG completed its acquisition of the Arthur Kill generating station and the Astoria gas turbine site for $505 million from the Consolidated Edison Company of New York, Inc. These facilities, which are located in Staten Island and Queens, New York, have a combined summer capacity rating of 1,456 MW. In July 1999, NRG executed a binding agreement to purchase four fossil fuel electric generating stations and numerous remote gas turbines totaling 2,235 MW from Connecticut Light & Power Company for $460 million. 6
9 These facilities are located throughout Connecticut. The acquisition is expected to close in the fourth quarter of 1999, pending regulatory approvals. In June 1999, NRG sold its interest in the Sunnyside project for book value. The underlying assets were previously written down in accordance with Financial Accounting Standards No. 121. NRG, together with its partner, filed a plan with the United States Bankruptcy Court for the Middle District of Louisiana to acquire 1,708 MW of fossil generating assets from Cajun Electric Power Cooperative of Baton Rouge, La., for approximately $1.0 billion. A second plan was submitted by Southwestern Electric Power Co. In June 1999, the bankruptcy court completed confirmation hearings on the two competing plans. NRG and its partner are awaiting a final confirmation decision by the court, which is expected in the third quarter. 2. CONTINGENT REVENUES NRG and its partner Dynegy each own a 50% interest in the Long Beach and El Segundo generating stations ("California Projects"). During 1998, the first year of deregulation of the state of California power industry, the California Projects accrued certain receivables related to contingent revenues. These revenues have been deferred pending resolution of the contingency. Such amounts relate to items that are subject to contract interpretations, compliance with processes and filed market disputes. The California Projects are actively pursuing resolution and/or collection of these amounts, which totaled approximately $53 million (NRG's share approximates $26.5 million) as of June 30, 1999. Upon any final resolution and/or collection of these amounts, such deferred revenues will be recognized in NRG's equity income. 3. SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATES The Company has 20-50% investments in four companies that are considered significant subsidiaries, as defined by applicable SEC regulations, and accounts for those investments using the equity method. The following summarizes the income statements of these unconsolidated entities: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, (Thousands of Dollars) 1999 1998 1999 1998 ----------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 166,076 $ 261,471 $ 320,421 $ 399,302 Other income (expense) 12,876 (9,455) 13,000 (509) Costs and expenses: Cost of sales 110,287 112,129 237,403 229,953 General and administrative 41,895 7,582 49,572 12,320 ----------------------------------------------------------------------- 152,182 119,711 286,975 242,273 ======================================================================= Income before income taxes 26,770 132,305 46,446 156,520 Income taxes 6,131 1,766 11,836 5,612 ----------------------------------------------------------------------- Net income $ 20,639 $ 130,539 $ 34,610 $ 150,908 ======================================================================= Company's share of net income $ 9,084 $ 5,829 $ 14,595 $ 13,395 ======================================================================= </TABLE> 4. SHORT TERM BORROWINGS At June 30, 1999, the Company had $539.9 million in short-term project level borrowings at an average interest rate of 6.35% (LIBOR + 125 basis points) used for project acquisitions. The Company has $686.6 million of available borrowing under this credit facility. The Company plans to refinance its short-term project-level borrowings with long-term project-level debt later this year. As of June 30, 1999, the Company had $350 million in revolving credit facilities under a commitment fee arrangement. These facilities provide short-term financing in the form of bank loans and letters of credit. At June 30,1999, the Company had $221 million outstanding under its revolving credit agreements. 7
10 5. LONG TERM DEBT In March 1999, NRG filed a shelf registration with the SEC for up to $500 million in debt securities. The net proceeds will be used to finance NRG's equity investment in connection with pending acquisitions and for general corporate purposes, which may include financing the development and construction of new facilities, working capital, debt reduction, capital expenditures and potential acquisitions. In May, 1999, NRG issued $300 million of 7.5% senior notes due in 2009 under this registration. In anticipation of this transaction, NRG executed $175 million in 10-year treasury locks with an effective yield of 5.26%. 6. SEGMENT REPORTING NRG conducts its business within three segments: Independent Power Generation, Alternative Energy (Resource Recovery and Landfill Gas) and Thermal projects. These segments are distinct components of NRG 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 that have not been allocated to the operating segments. Segment information for the second quarter and six months ended periods of 1999 and 1998 are as follows: <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 1999 INDEPENDENT (Thousands of Dollars) POWER ALTERNATIVE GENERATION ENERGY THERMAL OTHER TOTAL ------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> OPERATING REVENUES Revenues from wholly-owned operations $ 28,068 $ 8,862 $ 21,410 $ 1,270 $ 59,610 Intersegment revenues -- 424 -- -- 424 Equity in earnings of unconsolidated affiliates 12,297 1,087 (79) (6,680) 6,625 ------------------------------------------------------------------ Total operating revenues 40,365 10,373 21,331 (5,410) 66,659 ================================================================== NET INCOME (LOSS) $ 6,578 $ 2,651 $ 1,022 $ (7,910) $ 2,341 <CAPTION> THREE MONTHS ENDED JUNE 30, 1998 INDEPENDENT (Thousands of Dollars) POWER ALTERNATIVE GENERATION ENERGY THERMAL OTHER TOTAL ------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> OPERATING REVENUES Revenues from wholly-owned operations $ 458 $ 8,544 $ 12,235 $ 3,694 $ 24,931 Intersegment revenues -- 329 -- -- 329 Equity in earnings of unconsolidated affiliates 13,292 (12) 82 (260) 13,102 ------------------------------------------------------------------ Total operating revenues 13,750 8,861 12,317 3,434 38,362 ================================================================== NET INCOME (LOSS) $ 8,784 $ 5,123 $ 1,221 $ (8,159) $ 6,969 <CAPTION> SIX MONTHS ENDED JUNE 30, 1999 INDEPENDENT (Thousands of Dollars) POWER ALTERNATIVE GENERATION ENERGY THERMAL OTHER TOTAL ------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> OPERATING REVENUES Revenues from wholly-owned operations $ 41,132 $ 15,142 $ 36,555 $ 4,304 $ 97,133 Intersegment revenues -- 748 -- -- 748 Equity in earnings of unconsolidated affiliates 20,126 1,336 1,083 (7,253) 15,292 ------------------------------------------------------------------ Total operating revenues 61,258 17,226 37,638 (2,949) 113,173 ================================================================== NET INCOME (LOSS) $ 7,527 $ 6,164 $ 3,184 $(15,474) $ 1,401 </TABLE> 8
11 <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1998 INDEPENDENT (Thousands of Dollars) POWER ALTERNATIVE GENERATION ENERGY THERMAL OTHER TOTAL ------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> OPERATING REVENUES Revenues from wholly-owned operations $ 858 $ 15,352 $ 26,653 $ 6,238 $ 49,101 Intersegment revenues -- 681 -- -- 681 Equity in earnings of unconsolidated affiliates 28,952 375 236 (380) 29,183 ------------------------------------------------------------------ Total operating revenues 29,810 16,408 26,889 5,858 78,965 ================================================================== NET INCOME (LOSS) $ 21,246 $ 8,848 $ 2,937 $(19,973) $ 13,058 </TABLE> 7. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivatives be recognized at fair value in the Balance Sheet, and that changes in fair value be recognized either currently in earnings or deferred as a component of Other Comprehensive Income, depending on the intended use of derivative, its resulting designation and its effectiveness. The Company plans to adopt this standard in 2001, as required. The potential impact of implementing this statement has not yet been determined. 9
12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition is omitted per conditions as set forth in General Instructions H(1) (a) and (b) of Form 10-Q for wholly owned subsidiaries. It is replaced with management's narrative analysis of the results of operations set forth in General Instructions H(2) (a) of Form 10-Q for wholly owned subsidiaries (reduced disclosure format). This analysis will primarily compare the Company's revenue and expense items for the six months ended June 30, 1999 with the six months ended June 30, 1998. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Net income for the six months ended June 30, 1999, was $1.4 million compared to $13.1 million for the same period in 1998. The decrease in net income of $11.7 million was due to the factors described below. OPERATING REVENUES For the six months ended June 30, 1999, revenues were $113.2 million, an increase of $34.2 million, or 43% over the same period in 1998. The operating revenues from wholly owned operations for the six months ended June 30, 1999 were $97.9 million, an increase of $48.1 million, or 97%, over the same period in 1998. Approximately $26.0 million of the increase relates to energy sales to Eastern Utilities Association (EUA) under an agreement that went into effect on January 1, 1999. Under the terms of the agreement, NRG will provide various entities within EUA with a fixed percentage of their energy needs for a period of 6.2 to 11 years. In addition, NRG purchased the remaining 50% interest in the Pittsburgh and San Francisco thermal operations resulting in $10 million of additional revenues in 1999. The remaining increase relates to the Dunkirk, Huntley, Astoria and Arthur Kill facilities that were acquired in June 1999. For the six months ended June 30, 1999, revenues from wholly owned operations consisted primarily of revenue from electrical generation (57%) heating, cooling and thermal activities (39%) and technical services (4%). Equity in earnings of unconsolidated affiliates was $15.3 million for the six months ended June 30, 1999, compared to $29.2 million for the six months ended June 30, 1998, a decrease of $13.9 million, or 48%. The decrease was due to several factors, including a $6.5 million reduction in earnings from the Mt. Poso project primarily due to curtailment revenues that were recorded in 1998, a $2.5 million decrease in earnings due to cooler weather conditions at the El Segundo, Long Beach and Encina facilities and a $1.5 million decrease in earnings from NEO affiliates. In addition, there was a $3.7 million decrease in equity earnings due to the transaction adjustment related to the Kladno Project. A portion of the Kladno project's debt is denominated in U.S. dollars and German deutsche marks, which strengthened against the Czech koruna in the first six months of 1999. Under SFAS No. 52, the Kladno project records foreign currency gains and losses through the income statement. OPERATING COSTS AND EXPENSES Cost of wholly owned operations was $69.1 million for the six months ended June 30, 1999. This is an increase of $42.8 million or 163% over the same period in 1998. The increase is due primarily to energy purchases made to satisfy the EUA power sales agreement and increased operating costs from new acquisitions. 10
13 Depreciation and amortization costs were $11.0 million for the six months ended June 30, 1999, compared to $8.0 million for the six months ended June 30, 1998. The depreciation and amortization increase was due primarily to new projects, including the Somerset, Dunkirk, Huntley, Astoria and Arthur Kill facilities and depreciation from the Pittsburgh and San Francisco thermal facilities that were previously recorded on the equity method of accounting. General, administrative and development costs were $32.3 million for the six months ended June 30, 1999, compared to $24.4 million for the six months ended June 30, 1998. The $7.9 million increase is due primarily to increased business development activities, associated legal, technical, and accounting expenses, employees and equipment resulting from expanded operations and pending acquisitions. The Company's asset base increased from $1.2 billion to $2.4 billion during the first six months of 1999. OTHER INCOME (EXPENSE) Other expense for the six months ended June 30, 1999, is $24.7 million, an increase of $1.2 million, compared to $23.5 million for the same period in 1998. The increase in expenses is due primarily to interest costs related to a new $300 Senior Note issuance and approximately $540 million of new short-term debt which is partially offset by increased interest income from loans to affiliates. INCOME TAX The Company recognized an income tax benefit due to a pre-tax loss from domestic operations and due to the recognition of certain tax credits. The net income tax benefit for the six months ended June 30, 1999, increased by $9.0 million to $25.3 million as compared to $16.3 million for the same period one year earlier. The increase in tax benefits for the six months period was due primarily to an increase in Section 29 credits from NEO operations and higher domestic pre-tax losses. YEAR 2000 (Y2K) READINESS To the extent allowed, the information in the following section is designated as a "Year 2000 Readiness Disclosure." NRG is incurring costs to modify or replace existing technology, including computer software, for uninterrupted operation in the year 2000 and beyond. A committee made up of senior management is leading NRG's initiatives to identify Y2K related issues and remediate business processes as necessary. NRG is also partnering with its parent, NSP, to ensure a consistent overall company process in addressing the Y2K issue, as discussed in NRG's 1998 Form 10-K. NRG's is on schedule for completion of its Y2K project based on the following revised timetable. - - Assessment/discovery/analysis - Completed - - Final testing - October 31, 1999 - - Y2K Ready - November 15, 1999 NRG is currently updating contingency plans for all material Y2K risk and is on track to meet the contingency planning schedule that has been established. In addition to Y2K readiness, NRG's contingency planning addresses the failure of key third party contracts to be Y2K compliant. A Y2K readiness plan is obtained as part of all new acquisitions. FORWARD-LOOKING STATEMENTS In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: - Economic conditions including inflation rates and monetary fluctuations; - Trade, monetary, fiscal, taxation, and environmental policies of governments, agencies and similar organizations in geographic areas where we have a financial interest; 11
14 - 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; - 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 security 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; - Increased competition in the power generation industry; - Cost and other effects of legal and administrative proceedings, settlements, investigations and claims; - Technological developments that result in competitive disadvantages and create the potential for impairment of existing assets; - Factors associated with various investments including conditions of final legal closing, foreign government actions, foreign economic and currency risks, political instability in foreign countries, partnership actions, competition, operating risks, dependence on certain suppliers and customers, domestic and foreign environmental and energy regulations; - Limitations on our ability to control the development or operation of projects in which the Company has less than 100% interest; - Other business or investment considerations that may be disclosed from time to time in the Company's Securities and Exchange Commission filings or in other publicly disseminated written documents, including the Company's Registration Statement No. 333-33397, as amended. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors pursuant to the Act should not be construed as exhaustive. 12
15 PART II ITEM 1. LEGAL PROCEEDINGS On or about July 12, 1999, Fortistar Capital, Inc. ("Fortistar") commenced an action against NRG Energy, Inc. ("NRG") in Hennepin County (Minnesota) District Court, seeking damages in excess of $100 million and an order restraining NRG from consummating the acquisition of Niagara Mohawk's Power Corporation's Oswego generating station. Fortistar's motion for a temporary restraining order was denied and a temporary injunction hearing has been scheduled for September 27, 1999. NRG intends to vigorously defend the suit and believes Fortistar's claims to be without merit. NRG has asserted numerous counterclaims against Fortistar. NRG expects to close the Oswego acquisition in the fourth quarter of 1999, pending regulatory approvals and resolution of this lawsuit. 13
16 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 4.3 Loan Agreement, dated June 4, 1999 between NRG Northeast Generating LLC, Chase Manhattan Bank and Citibank, N.A. 4.4 Indenture between the Company and Norwest Bank Minnesota, National Association, as Trustee dated as of May 25, 1999 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated May 25, 1999 and filed on May 27, 1999). 10.18 Wholesale Standard Offer Service Agreement between Blackstone Valley Electric Company, Eastern Edison Company, Newport Electric Corporation and NRG Power Marketing, Inc., dated October 13, 1998. 10.19 Asset Sales Agreement by and between Niagara Mohawk Power Corporation and NRG Energy, Inc., dated December 23, 1998. 10.20 First Amendment to Wholesale Standard Offer Service Agreement between Blackstone Valley Electric Company, Eastern Edison Company, Newport Electric Corporation and NRG Power Marketing, Inc., dated January 15, 1999. 10.21 Generating Plant and Gas Turbine Asset Purchase and Sale Agreement for the Arthur Kill generating plants and Astoria gas turbines by and between Consolidated Edison Company of New York, Inc., and NRG Energy, Inc., dated January 27, 1999. 10.22 Transition Energy Sales Agreement between Arthur Kill Power LLC and Consolidated Edison Company of New York, Inc., dated June 1, 1999. 10.23 Transition Energy Sales Agreement between Astoria Gas Turbine Power LLC and Consolidated Edison Company of New York, Inc., dated June 1, 1999. 10.24 Transition Power Purchase Agreement between Niagara Mohawk Power Corporation and Huntley Power LLC, dated June 11, 1999. 10.25 Transition Power Purchase Agreement between Niagara Mohawk Power Corporation and Dunkirk Power LLC, dated June 11, 1999. 10.26 Power Purchase Agreement between Niagara Mohawk Power Corporation and Dunkirk Power LLC, dated June 11, 1999. 10.27 Power Purchase Agreement between Niagara Mohawk Power Corporation and Huntley Power LLC, dated June 11, 1999. 10.28 Amendment to the Asset Sales Agreement by and between Niagara Mohawk Power Corporation and NRG Energy, Inc., dated June 11, 1999. 10.29 Transition Capacity Agreement between Astoria Gas Turbine Power LLC and Consolidated Edison Company of New York, Inc., dated June 25, 1999. 10.30 Transition Capacity Agreement between Arthur Kill Power LLC and Consolidated Edison Company of New York, Inc., dated June 25, 1999. 27 Financial Data Schedule for the period ended June 30, 1999. (b) REPORTS ON FORM 8-K: On May 24, 1999, NRG filed a Form 8-K reporting under Item 5 - Other Events. NRG filed certain exhibits relating to the offering of $300,000,000 principal amount of the Company's 7.5% Senior Notes due 2009. On May 27, 1999, NRG filed a Form 8-K reporting under Item 5 - Other Events. NRG announced that the $300,000,000 Senior Note offering was completed. On June 28, 1999, NRG filed a Form 8-K reporting under Item 5 - Other Events. NRG announced its acquisition of the Dunkirk and Huntley stations from Niagara Mohawk Power Corporation. 14
17 On July 8, 1999, NRG filed a Form 8-K reporting under Item 5 - Other Events. NRG announced its acquisition of the Arthur Kill and Astoria generating assets from the Consolidated Edison Company of New York, Inc. On July 16, 1999, NRG filed a Form 8-K reporting under Item 5 - Other Events. NRG announced that earnings for the six months ended June 30, 1999 would be below expectation. 15
18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NRG ENERGY, INC. ----------------------------------- (Registrant) /s/ --------------------------------- Leonard A. Bluhm Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ --------------------------------- David E. Ripka Vice President and Controller (Principal Accounting Officer) Date: August 16, 1999 -------------------- 16