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 September 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 November 11, 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 INDEX <TABLE> <CAPTION> PAGE NO. -------- PART I ------ <S> <C> <C> 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 Consolidated Financial Statements 6-9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 PART II ------- Item 1 Legal Proceedings 13 Item 6 Exhibits, Financial Statement Schedules, and Reports 14 on Form 8-K SIGNATURES 15 </TABLE>
3 CONSOLIDATED STATEMENTS OF INCOME NRG ENERGY, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (Thousands of Dollars) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> OPERATING REVENUES Revenues from wholly-owned operations $ 139,974 $ 25,047 $ 237,855 $ 74,829 Equity in earnings of unconsolidated affiliates 30,434 29,249 45,726 58,432 - ---------------------------------------------------------------------------------------------------------------------------- Total operating revenues 170,408 54,296 283,581 133,261 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES Cost of wholly-owned operations 79,147 13,079 148,211 39,384 Depreciation and amortization 12,663 4,511 23,688 12,560 General, administrative, and development 20,650 15,201 52,923 39,581 - ---------------------------------------------------------------------------------------------------------------------------- Total operating costs and expenses 112,460 32,791 224,822 91,525 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 57,948 21,505 58,759 41,736 - ---------------------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Minority interest in earnings of consolidated subsidiaries (382) (492) (1,537) (1,652) Write-down of investment in projects - (23,410) - (23,410) Other income, net 2,196 1,206 5,504 3,105 Interest expense (30,760) (13,598) (57,607) (37,849) - ---------------------------------------------------------------------------------------------------------------------------- Total other expense (28,946) (36,294) (53,640) (59,806) - ---------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES 29,002 (14,789) 5,119 (18,070) INCOME TAX EXPENSE (BENEFIT) 1,395 (10,014) (23,889) (26,353) - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 27,607 $ (4,775) $ 29,008 $ 8,283 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes to consolidated financial statements. 1
4 CONSOLIDATED BALANCE SHEETS NRG ENERGY, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, (Thousands of Dollars) 1999 1998 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 25,236 $ 6,381 Restricted cash 2,122 4,021 Accounts receivable-trade, less allowance for doubtful accounts of $110 and $100 84,721 15,223 Accounts receivable-affiliates 33,879 7,324 Current portion of notes receivable - affiliates 11,461 4,460 Current portion of notes receivable - 26,200 Income taxes receivable - 21,169 Inventory 59,535 2,647 Prepayments and other current assets 15,086 4,533 - ------------------------------------------------------------------------------------------------------------------ Total current assets 232,040 91,958 - ------------------------------------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST In service 1,229,082 291,558 Under construction 17,173 5,352 - ------------------------------------------------------------------------------------------------------------------ 1,246,255 296,910 Less accumulated depreciation (116,019) (92,181) - ------------------------------------------------------------------------------------------------------------------ Net property, plant and equipment 1,130,236 204,729 - ------------------------------------------------------------------------------------------------------------------ OTHER ASSETS Investments in projects 894,106 800,924 Capitalized project costs 53,475 13,685 Notes receivable, less current portion - affiliates 96,589 101,887 Notes receivable, less current portion 5,324 3,744 Intangible assets, net of accumulated amortization of $4,292 and $2,984 49,743 22,507 Debt issuance costs, net of accumulated amortization of $4,545 and $1,675 15,543 7,276 Other assets, net of accumulated amortization of $8,395 and $7,350 49,305 46,716 - ------------------------------------------------------------------------------------------------------------------ Total other assets 1,164,085 996,739 - ------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 2,526,361 $ 1,293,426 ================================================================================================================== </TABLE> See notes to consolidated financial statements. 2
5 CONSOLIDATED BALANCE SHEETS NRG ENERGY, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------------------- <S> <C> <C> LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 26,707 $ 8,258 Revolving line of credit 208,000 - Consolidated project-level, non-recourse debt 613,890 - Accounts payable-trade 46,094 7,371 Income taxes payable 11,356 - Accrued property and sales taxes 6,006 3,251 Accrued salaries, benefits and related costs 6,836 7,551 Accrued interest 18,202 7,648 Other current liabilities 22,662 8,289 - -------------------------------------------------------------------------------------------- Total current liabilities 959,753 42,368 - -------------------------------------------------------------------------------------------- MINORITY INTEREST 12,998 13,516 CONSOLIDATED PROJECT-LEVEL, LONG TERM, NONRECOURSE DEBT 122,348 113,437 CORPORATE LEVEL LONG-TERM DEBT, LESS CURRENT PORTION 675,000 504,781 DEFERRED INCOME TAXES 6,282 19,841 DEFERRED INVESTMENT TAX CREDITS 1,152 1,343 POSTRETIREMENT AND OTHER BENEFIT OBLIGATIONS 16,078 11,060 DEFERRED INCOME AND OTHER LONG-TERM OBLIGATIONS 10,507 7,748 - -------------------------------------------------------------------------------------------- Total liabilities 1,804,118 714,094 - -------------------------------------------------------------------------------------------- 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 159,023 130,015 Accumulated other comprehensive income (68,694) (82,597) - -------------------------------------------------------------------------------------------- Total Stockholder's Equity 722,243 579,332 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 2,526,361 $ 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 Paid-in Retained Comprehensive Stockholder's (Thousands of Dollars) Stock 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 8,283 8,283 Foreign currency translation adjustments (23,150) (23,150) -------------- Comprehensive income (14,867) -------------------------------------------------------------------------------------- BALANCES AT SEPTEMBER 30, 1998 $ 1 $ 431,913 $ 96,566 $ (92,649) $ 435,831 -------------------------------------------------------------------------------------- BALANCES AT JANUARY 1, 1999 $ 1 $ 531,913 $130,015 $ (82,597) $ 579,332 Net Income 29,008 29,008 Foreign currency translation adjustments 13,903 13,903 -------------- Comprehensive income 42,911 Capital Contribution from parent 100,000 100,000 -------------------------------------------------------------------------------------- BALANCES AT SEPTEMBER 30, 1999 $ 1 $ 631,913 $159,023 $ (68,694) $ 722,243 -------------------------------------------------------------------------------------- </TABLE> See notes to consolidated financial statements. 4
7 CONSOLIDATED STATEMENTS OF CASH FLOWS NRG ENERGY, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, (Thousands of Dollars) 1999 1998 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 29,008 $ 8,283 Adjustments to reconcile net income to net cash provided (used) by operating activities Undistributed equity earnings of unconsolidated affiliates (1,363) (29,873) Depreciation and amortization 23,688 12,560 Deferred income taxes and investment tax credits (13,750) (7,601) Minority interest (518) - Write-down of investment in projects - 23,410 Cash provided (used) by changes in certain working capital items, net of acquisition effects Accounts receivable (67,958) (197) Accounts receivable-affiliates (26,555) 13,934 Income tax receivable 21,169 (3,692) Inventory (16,945) - Prepayments and other current assets (10,553) (3,043) Accounts payable-trade 38,723 (8,636) Income taxes payable 11,356 - Accrued property and sales tax 2,755 (512) Accrued salaries, benefits and related costs (857) 1,274 Accrued interest 10,554 4,430 Other current liabilities 2,260 1,742 Cash used by changes in other assets and liabilities (12,451) 2,808 - ---------------------------------------------------------------------------------------------------------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (11,437) 14,887 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions, net of liabilities assumed (930,185) - Investments in projects (118,231) (124,903) Divestiture of projects 1,000 9,219 Changes in notes receivable (net) 22,917 20,918 Purchase of plant, property and equipment (62,099) (23,265) Decrease (increase) in restricted cash 1,899 (2,341) - ---------------------------------------------------------------------------------------------------------- NET CASH USED BY INVESTING ACTIVITIES (1,084,699) (120,372) - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions from parent 100,000 - Revolving line of credit 84,000 103,000 Proceeds from issuance of note 613,890 - Proceeds from issuance of long-term debt 326,713 22,658 Principal payments on long-term debt (9,612) (18,187) - ---------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,114,991 107,471 - ---------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 18,855 1,986 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,381 11,986 - ---------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,236 $ 13,972 - ---------------------------------------------------------------------------------------------------------- </TABLE> See notes to consolidated financial statements. 5
8 NRG ENERGY, INC. NOTES TO CONSOLIDATED 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 nine months ended September 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 financial statements contain all material adjustments necessary to present fairly the consolidated financial position of the Company as of September 30, 1999 and December 31, 1998, the results of its operations for the three and nine months ended September 30, 1999 and 1998, and its cash flows and stockholders' equity for the nine months ended September 30, 1999 and 1998. 1. BUSINESS DEVELOPMENTS In February 1999, the Company purchased from Thermal Ventures, Inc. (TVI) the remaining 50.1% limited partnership interests held by TVI 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 with a nominal capacity rating of 160 MW. In May 1999, the Company and Dynegy, through West Coast Power LLC, completed the acquisition of the Encina generating station and 17 combustion turbines for approximately $356 million from San Diego Gas & Electric Company. The facilities, which have a combined nominal capacity rating of 1,218 MW, are located near Carlsbad and San Diego, California. The Company and Dynegy each own a 50% interest in these facilities. In June 1999, the Company completed its acquisition of the Huntley and Dunkirk generating stations from Niagara Mohawk Power Corporation (NIMO) for approximately $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, the Company completed its acquisition of the Arthur Kill generating station and the Astoria gas turbine site from Consolidated Edison Company of New York, Inc. for approximately $505 million. These facilities, which are located in the New York City area, have a combined nominal capacity rating of 1,456 MW. 6
9 The Company, together with its partner and the Creditor's committee, 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, Louisiana (Cajun) for approximately $1.0 billion. During the third quarter, the U.S. Bankruptcy Judge confirmed the Company's Plan of Reorganization and the Company exercised an option to purchase its partner's 50-percent interest in the project. The Company expects to close the acquisition of the Cajun assets at the end of the first quarter of 2000. In August, the Company agreed to sell all but a 20 percent ownership interest in Cogeneration Corporation of America (CogenAmerica) to Calpine Corporation in connection with Calpine's acquisition of the remaining shares of CogenAmerica. The Company currently owns approximately 45 percent of CogenAmerica and upon the closing of the proposed transaction, all outstanding shares of CogenAmerica common stock (other than those to be retained by the Company) will be acquired by Calpine for a cash purchase price of $25.00 per share. The Company will retain a 20-percent ownership interest in CogenAmerica. The transaction is expected to close during the fourth quarter of 1999. In October 1999, the Company completed its acquisition of the Oswego generating station from NIMO and Rochester Gas and Electric for approximately $85 million. The oil and gas-fired power generating facility, which has a nominal capacity rating of 1,700 MW is located on a 93-acre site in Oswego, New York. In October 1999, the Company entered into a Standard Offer Service Wholesale Sales Agreement with Connecticut Light And Power Company (CL&P) pursuant to which the Company will supply CL&P with 35% of its standard offer service load during 2000, 40% during 2001 and 2002 and 45% during 2003. In July 1999, the Company executed an agreement to acquire four fossil fuel generating stations and numerous remote gas turbines from CL&P for approximately $460 million. These facilities have a combined nominal capacity rating of 2,235 MW. The Company expects the transaction to close during the fourth quarter of 1999. 2. CONTINGENT REVENUES The Company 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 $40 million (the Company's share approximates $20 million) as of September 30, 1999. No assurance can be given that any of these deferred revenues will be collected, however, if collected, such deferred revenues will be recognized in the Company'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: 7
10 <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (Thousands of Dollars) 1999 1998 1999 1998 ------------------------ ----------------------- <S> <C> <C> <C> <C> Net sales $ 186,573 $ 209,035 $ 506,994 $ 516,588 Other income (expense) (13,000) 712 - 179 Costs and expenses: Cost of sales 143,674 146,539 381,077 390,340 Depreciation and amortization 7,785 2,049 7,785 4,079 General and administrative (31,745) 5,416 17,827 17,964 ------------------------ ----------------------- 119,714 154,004 406,689 412,383 ------------------------ ----------------------- Income before income taxes 53,859 55,743 100,305 104,384 Income taxes 9,903 19,998 21,739 28,817 ------------------------ ----------------------- Net income $ 43,956 $ 35,745 $ 78,566 $ 75,567 ======================== ======================= Company's share of net income $ 16,572 $ 16,981 $ 31,167 $ 32,648 ======================== ======================= </TABLE> 4. SHORT TERM BORROWINGS At September 30, 1999, the Company had $613.9 million in short-term project level borrowings at an average interest rate of 6.62% used for project acquisitions. The Company has $686.6 million of available borrowing under this credit facility. The Company plans to refinance this short-term project-level borrowing with long-term project-level debt later this year. As of September 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 September 30, 1999, the Company has $208 million outstanding under its revolving credit agreements. 5. LONG TERM DEBT In March 1999, the Company filed a shelf registration statement with the Securities and Exchange Commission for up to $500 million in debt securities. The net proceeds will be used to finance the Company's equity investments 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 and capital expenditures. In May 1999, the Company issued $300 million of 7.5% senior notes due in 2009 under this registration statement. In September 1999, the Company entered into a $200 million swap agreement effectively converting the 7.5% fixed rate on these senior notes to a variable rate based on LIBOR. In November 1999, the Company issued $240 million of Remarketable or Redeemable Securities (ROARS) with an 8 percent coupon, a re-marketing date of November 2003 and a final maturity of November 2013. During the third quarter of 1999 NRG Northeast Generating LLC (N.E. Generating), a wholly owned subsidiary of the Company, entered into $600 million of treasury locks at various interest rates. These treasury locks, which expire in February of 2000, are an interest rate hedge of N.E. Generating's anticipated bond offering in the first quarter of 2000. The proceeds of any such bond offering will be used to pay off N.E. Generating's currently existing short-term credit facility. 6. SEGMENT REPORTING The Company 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 the Company 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 three and nine months ended September 30, 1999 and 1998 are as follows: 8
11 <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 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 $ 115,447 $ 5,356 $ 18,450 $ 506 $ 139,759 Intersegment revenues - 215 - - 215 Equity in earnings of unconsolidated affiliates 30,744 (3,365) 588 2,467 30,434 ---------------------------------------------------------------- Total operating revenues 146,191 2,206 19,038 2,973 170,408 ---------------------------------------------------------------- NET INCOME (LOSS) $ 48,272 $ 683 $ 1,498 $ (22,846) $ 27,607 <CAPTION> THREE MONTHS ENDED SEPTEMBER 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 $ 307 $ 7,642 $ 13,293 $ 3,446 $ 24,688 Intersegment revenues - 359 - - 359 Equity in earnings of unconsolidated affiliates 29,678 (361) 58 (126) 29,249 ----------------------------------------------------------------- Total operating revenues 29,985 7,640 13,351 3,320 54,296 ----------------------------------------------------------------- NET INCOME (LOSS) $ 14,077 $ 3,247 $ 1,553 $(23,653) $ (4,776) <CAPTION> NINE MONTHS ENDED SEPTEMBER 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 $156,579 $ 20,498 $ 55,005 $ 4,810 $236,892 Intersegment revenues - 963 - - 963 Equity in earnings of unconsolidated affiliates 50,871 (2,029) 1,671 (4,787) 45,726 ----------------------------------------------------------------- Total operating revenues 207,450 19,432 56,676 23 283,581 ----------------------------------------------------------------- NET INCOME (LOSS) $ 55,799 $ 6,847 $ 4,682 $(38,320) $ 29,008 <CAPTION> NINE MONTHS ENDED SEPTEMBER 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 $ 1,165 $ 22,994 $ 39,946 $ 9,683 $ 73,788 Intersegment revenues - 1,041 - - 1,041 Equity in earnings of unconsolidated affiliates 58,629 13 294 (504) 58,432 ----------------------------------------------------------------- Total operating revenues 59,794 24,048 40,240 9,179 133,261 ----------------------------------------------------------------- NET INCOME (LOSS) $ 35,324 $ 12,095 $ 4,490 $(43,626) $ 8,283 </TABLE> 7. FINANCIAL INSTRUMENTS During the first quarter of 1999, the Company entered into a forward contract to exchange approximately $10.5 million of U.S. dollars for British pounds. This foreign exchange contract, which expires in December, 1999 is a hedge of the Company's equity commitment to the Enfield project currently under construction in England. 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 the derivative, its resulting designation and its effectiveness. The Company plans to adopt this standard in 2001, as required. The Company has not determined the potential impact of implementing this statement. 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 as permitted by General Instructions H (2) (a) of Form 10-Q for wholly owned subsidiaries (reduced disclosure format). This analysis compares the Company's revenue and expense items for the nine months ended September 30, 1999 with the nine months ended September 30, 1998. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 Net income for the nine months ended September 30, 1999, was $29.0 million compared to $8.3 million for the same period in 1998. The increase in net income of $20.7 million was due to the factors described below. OPERATING REVENUES For the nine months ended September 30, 1999, revenues were $283.6 million, an increase of $150.3 million, or 113%, over the same period in 1998. The operating revenues from wholly owned operations for the nine months ended September 30, 1999 were $237.9 million, an increase of $163.0 million, or 218%, over the same period in 1998. Approximately $115.5 million of the increase relates to the Dunkirk, Huntley, Somerset, Astoria and Arthur Kill facilities that were acquired during the second quarter of 1999. Approximately $41.3 million of the increase is from energy sales to Eastern Utilities Association (EUA) under an agreement that went into effect on January 1, 1999. Under the terms of the power sales agreement, the Company will provide various affiliates of EUA with a fixed percentage of their energy needs for a period of 6.2 to 11 years. In addition, approximately $15.5 million of the increased revenues relates to the Company's increased ownership in the Pittsburgh and San Francisco Thermal operations as a result of the acquisition of the remaining 50% interest in these projects in April, 1999. For the nine months ended September 30, 1999, revenues from wholly owned operations consisted of revenue from electrical generation (77%), heating, cooling and thermal activities (20%) and technical services (3%). Equity in earnings of unconsolidated affiliates was $45.7 million for the nine months ended September 30, 1999, compared to $58.4 million for the nine months ended September 30, 1998, a decrease of $12.7 million, or 22%. The decrease was due to several factors, including a $6.8 million reduction in earnings from the Mt. Poso project primarily due to curtailment revenues that were recorded in 1998, a $3.9 million decrease in earnings from West Coast Power LLC due to cooler weather conditions partially offset by earnings from the Encina facility which was acquired during the second quarter of 1999. In addition, there was a $2.1 million net decrease in equity earnings due to a 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, Foreign Currency Translation, the Kladno project records foreign currency gains and losses through the income statement. OPERATING COSTS AND EXPENSES Cost of wholly owned operations was $148.2 million for the nine months ended September 30, 1999. This is an increase of $108.8 million, or 276%, over the same period in 1998. The increase is due to increased operating costs from new acquisitions and energy purchases made to satisfy the EUA power sales agreement. 10
13 Depreciation and amortization costs were $23.7 million for the nine months ended September 30, 1999, compared to $12.6 million for the nine months ended September 30, 1998. The depreciation and amortization increase was due primarily to the acquisition of 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 $52.9 million for the nine months ended September 30, 1999, compared to $39.6 million for the nine months ended September 30, 1998. The $13.3 million increase was due primarily to increased business development activities, associated legal, technical, and accounting expenses, labor and other costs resulting from expanded operations and pending acquisitions. The Company's total assets increased from approximately $1.3 billion to approximately $2.5 billion during the first nine months of 1999. OTHER INCOME (EXPENSE) Other expense for the nine months ended September 30, 1999, was $53.6 million, a decrease of $6.2 million from $59.8 million for the same period in 1998. The decrease was due to a $23.4 million write-down that was recorded in the third quarter of 1998 related to the West Java project in Indonesia and other projects. This amount was partially offset by $19.8 million of additional interest costs in 1999 related to the issuance of $300 million of 7.5% senior notes in May 1999 and approximately $540 million of additional short-term debt. 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 nine months ended September 30, 1999, decreased by $2.5 million to $23.9 million as compared to $26.4 million for the same period during 1998. The decrease in tax benefits for the nine month period was due primarily to increased earnings from domestic operations. YEAR 2000 (Y2K) READINESS To the extent allowed, the information in the following section is designated as a "Year 2000 Readiness Disclosure." The Company continues to incur 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 the Company's initiatives to identify Y2K related issues and remediate business processes as necessary. The Company is also partnering with its parent, Northern States Power Company, to ensure a consistent overall company process in addressing the Y2K issue, as discussed in the Company's 1998 Form 10-K. The Company is on schedule for completion of its Y2K project based on the following revised timetable. - - Assessment/discovery/analysis - Completed - - Final testing - Completed - - Y2K Ready - November 15, 1999 The Company is currently updating contingency plans for all material Y2K risks and is on track to meet the contingency planning schedule that has been established. In addition to Y2K readiness, the Company'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 This quarterly report on Form 10-Q includes forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate," "estimate," "expect," "objective," "possible," "potential" and similar expressions. Without limitation, forward-looking statements are contained under the heading "business developments". 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: the failure to timely satisfy the closing 11
14 conditions contained in definitive agreements for transactions not yet closed, including obtaining all necessary regulatory approvals, many of which are beyond the Company's control; limitations on the Company's ability to control projects or transactions in which the Company has less than 100% interest; and other business or investment considerations that may be disclosed from time to time in the Company's Securities and Exchange Commission filings and in other publicly disseminated written documents, including the Company's registration statement number 333-74519, as amended, and all supplements thereto. The Company undertakes 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 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 the Company in Hennepin County (Minnesota) District Court, seeking damages in excess of $100 million and an order restraining the Company from consummating the acquisition of NIMO's Oswego generating station. Fortistar's motion for a temporary restraining order was denied and a temporary injunction hearing was held on September 27, 1999. The acquisition of the Oswego generating station was closed on October 22, 1999 following notification to the Court of the closing date. The Company intends to continue to vigorously defend the suit and believes Fortistar's claims to be without merit. The Company has asserted numerous counterclaims against Fortistar. 13
16 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 10.31 First Amendment to the Employment Agreement of David H. Peterson, dated June 27, 1999. 10.32 Second Amendment to the Employment Agreement of David H. Peterson, dated August 26, 1999. 10.33 Third Amendment to the Employment Agreement of David H. Peterson, dated October 20, 1999. 10.34 [Swap] Master Agreement between Niagara Mohawk Power Corporation and NRG Power Marketing, Inc., dated June 11, 1999. 10.35 Standard Offer Service Wholesale Sales Agreement between the Connecticut Light And Power Company and NRG Power Marketing, Inc., dated October 29, 1999. 27 Financial data schedule for the period ended September 30, 1999. (B) REPORTS ON FORM 8-K: 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 expectations. On September 14, 1999 NRG filed a Form 8-K reporting under Item 5 - Other Events. NRG announced forecasted earnings for the twelve months ending December 31, 1999 and 2000. On October 14, 1999, NRG filed a Form 8-K reporting under Item 5 - Other Events. NRG announced earnings for the nine months ended September 30, 1999 and reduced its forecast for the twelve months ending December 31, 1999. On November 3, 1999 NRG filed a Form 8-K reporting under Item 5 - Other Events. NRG filed certain exhibits relating to the offering of $240 million principal amount of the Company's 8.0% Remarketable or Redeemable Securities (ROARS) due November 1, 2013 (Remarketing date November 1, 2003). 14
17 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 ---------------------------------- Leonard A. Bluhm Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ David E. Ripka ---------------------------------- David E. Ripka Vice President and Controller (Principal Accounting Officer) Date: November 12, 1999 ------------------------ 15