ITEM 1. BUSINESS
GENERAL
Reliant Energy Mid-Atlantic Power Holdings, LLC, a Delaware limited liability company (formerly Sithe Pennsylvania Holdings, LLC), and its affiliates and subsidiaries (collectively, REMA) owns or leases 21 electric generation facilities in Pennsylvania, New Jersey and Maryland with an aggregate net generating capacity of 4,262 megawatts (MW) as of December 31, 2001. REMA is an indirect wholly owned subsidiary of Reliant Energy Power Generation, Inc. (REPG) which is a wholly owned subsidiary of Reliant Resources, Inc. (Reliant Resources).
In May 2000, REPG purchased the equity in REMA from Sithe Energies, Inc. (Sithe) for an aggregate purchase price of $2.1 billion. Included within this purchase transaction were transition power sales contracts, including a capacity transition contract with affiliates of GPU, Inc. (GPU). These transition power sales contracts were originally entered into with the affiliates of GPU at the time of Sithe's acquisition of REMA in November 1999 from GPU. Until the end of May 2002, we expect to sell a portion of our capacity under these transition power sales contracts. During the term of the transition power sales contracts, we will derive revenues from sales of capacity under these contracts, as well as sales into the Pennsylvania-New Jersey-Maryland market, commonly referred to as the "PJM market," of capacity and energy not required to meet the terms of these contracts, sales of ancillary services and sales through bilateral contracts with power marketers and load serving entities within the PJM market and the surrounding markets. REMA also expects to sell power in a newly created extension of the PJM market in western Pennsylvania (PJM West market). For additional information regarding the acquisition of REMA, see Note 3(a) to the REMA's financial statements contained in Item 8 of this Form 10-K (REMA 10-K Notes).
In August 2000, REMA sold to and leased back from each of three owner-lessors in separate lease transactions REMA's respective 16.45%, 16.67% and 100% interests in the Conemaugh, Keystone and Shawville generating stations, respectively. As lessee, REMA leases an interest in each facility from each owner-lessor under a facility lease agreement. As consideration for the sale of REMA's interest in the facilities, REMA received $1.0 billion in cash. REMA used $1.0 billion of sale proceeds to return capital of $183 million, with the remainder used to reduce affiliate debt. For additional information regarding the sale and leaseback transactions, see Note 6(a) to the REMA 10-K Notes.
THE PJM MARKET FRAMEWORK
All of our facilities are located within the PJM market. The PJM market encompasses a region in the northeast part of the United States that includes all or a portion of the states of Pennsylvania, New Jersey, Maryland, Delaware and Virginia and the District of Columbia. As of March 31, 2002, the PJM market included 293 generating facilities with a total installed capacity of 61,414 megawatts (MW). The fuel mix of this aggregate capacity is approximately 34% coal-fired, 21% nuclear, 21% gas-fired, 19% oil-fired, 4% hydroelectric power and 1% from other sources.
The PJM market has been restructured as competitive, nondiscriminatory markets in response to the Federal Energy Regulatory Commission's (FERC) open-access rules. The PJM market and PJM West market operate as centralized power pools with open-access, non-discriminatory transmission systems administered by independent system operators approved by the FERC. Although the transmission infrastructure within this market is well developed and independently operated, transmission constraints exist between, and to a certain extent within, this market. In particular, transmission of power from eastern Pennsylvania to western Pennsylvania may be constrained from time to time. Depending on the timing and nature of transmission constraints, market prices may vary from market to market, or between sub-regions of a particular market.
In addition to managing the transmission system for each market, the respective independent system operator for the PJM market and PJM West market is responsible for maintaining competitive wholesale markets, operating the spot wholesale energy market and determining the market clearing price based on bids submitted by participating generators in each market. Each independent system operator generally matches sellers with buyers within a
particular market that meet specified minimum credit standards. We sell capacity, energy and ancillary services into the markets maintained by the applicable independent system operator for each of these types of products for both real time sales and forward sales for periods of up to one year. Our customers include the members of each market, consisting of municipalities, electric cooperatives, integrated utilities, transmission and distribution utilities, retail electric providers and power marketers. We also sell capacity, energy and ancillary services to customers under negotiated bilateral contracts. Bilateral contracts, in addition to other physical and financial transactions enable us to hedge a portion of our generation portfolio.
Markets in the Northeastern United States are subject to constant and significant regulatory oversight and control and the results of our operations in the region may be adversely affected by any changes or additions to the current regulatory structure. Our sales into markets administered by the PJM independent system operator (PJM ISO) are governed by the PJM ISO's operating agreement, tariffs and protocols (PJM Protocols). The PJM Protocols provide the structure, rules and pricing mechanisms for the PJM ISO's energy, capacity and ancillary services markets, and establish rates, terms and conditions for transmission service in PJM ISO's control area and the PJM West market, including transmission congestion pricing. Wholesale energy prices in the markets administered by the PJM ISO are currently capped at $1,000 per megawatt-hour.
OUR GENERATING FACILITIES
REMA owns a 100% ownership interest in each of its electric generating stations except for the Conemaugh, Keystone and Shawville stations, which REMA leases from owner lessors. The table below lists and describes briefly our electric power generating facilities.
- ---------- (1)We use the designations "Base," "Inter" and "Peak" to indicate whether the facilities described are base-load, intermediate or peaking facilities, respectively. (2) We lease a 100% interest in the Shawville Station, a 16.67% interest in the Keystone Station and a 16.45% interest in the Conemaugh Station under facility lease agreements with terms of 26.25 years, 33.75 years and 33.75 years, respectively.
SEASONALITY OF OUR BUSINESS
Our revenues are seasonal and are affected by unusual weather conditions. Short-term prices for capacity, energy and ancillary services in the PJM market and PJM West market are particularly impacted by weather conditions. Peak demand for electricity typically occurs during the summer months, caused by increased use of air-conditioning. Cooler than normal summer temperatures may lead to reduced use of air-conditioners. This reduces short-term demand for capacity, energy and ancillary services and may lead to a reduction in wholesale electric prices.
COMPETITION
We compete in the PJM market and PJM West market on the basis of price, operating characteristics of our generating facilities and the availability of our facilities to supply capacity, energy and ancillary services to the market when needed. We compete in the PJM market and PJM West market primarily with six other major power generators. A number of additional generation facilities are being developed in the PJM market and PJM West market, and these facilities will increase competition in that market over time. Additional facilities are also being planned for the PJM market and PJM West market and could be developed in the future.
EMPLOYEES
As of December 31, 2001, we had 1,119 employees. Of that number, 1,001 were involved in operating and maintaining our generating facilities. Substantially all of the operating employees were involved in the operation of our facilities before they were acquired by Sithe from affiliates of GPU. Furthermore, 386 employees were involved in the operation and support of the Keystone and Conemaugh stations. All of the facilities are staffed by a combination of union and nonunion employees. All union employees are covered by current labor agreements with the relevant unions, and those agreements have varying expiration dates until May 15, 2007. To date, we have not experienced any grievances that we expect to result in a material adverse effect on us.
REGULATION
ENERGY REGULATORY MATTERS
Federal Energy Regulation.
Federal Power Act. Under the Federal Power Act, the FERC has the exclusive rate-making jurisdiction over wholesale sales of electricity and the transmission of electricity in interstate commerce by "public utilities." Public utilities that are subject to the FERC's jurisdiction must file rates with the FERC applicable to their wholesale sales or transmission of electricity in interstate commerce. REMA and its subsidiaries that own generating facilities, Reliant Energy New Jersey Holdings, LLC and Reliant Energy Maryland Holdings, LLC, sell power at wholesale and are public utilities under the Federal Power Act. In July 1999 and August 1999, the FERC accepted for filing tariffs for the sale of energy and capacity at wholesale at market-based rates filed by the predecessors of REMA and those two subsidiaries. The FERC also granted the predecessor companies waivers of many of the accounting, recordkeeping and reporting requirements that are imposed on public utilities with cost-based rate schedules. In October 1999, the FERC accepted for filing rate schedules for the sale of some ancillary services at market-based rates filed by such companies. On March 1, 2000, predecessors of REMA and its two subsidiaries that own generating facilities jointly filed with the FERC a notification of the planned acquisition by REPG and the resulting affiliation with Reliant Energy, Incorporated (our current ultimate parent company) as well as revised tariffs reflecting such changes. The FERC accepted the revised tariffs for filing on April 3, 2000, effective March 2, 2000. In May 2000, REMA and its two subsidiaries that own generating facilities filed revised tariffs for the sale of energy, capacity and ancillary services at market-based rates that included regulation service as an additional ancillary service. FERC accepted the revised tariffs for filing on June 2, 2000, effective June 1, 2000.
The FERC's orders accepting the market-based rate schedules, as is customary with such orders, reserve the right to revoke or limit market-based rate authority if the FERC subsequently determines that REMA or any of its affiliates possess excessive market power. If the FERC were to revoke our market-based rate authority, we would have to file, and obtain the FERC's acceptance of, cost-based rate schedules for all or some of our sales. In addition,
the loss of market-based rate authority could subject us to the accounting, recordkeeping and reporting requirements that the FERC imposes on public utilities with cost-based rate schedules.
The FERC issued Order No. 2000 in December 1999. Order No. 2000, which applies to all FERC jurisdictional transmission providers, describes the FERC's intention to promote the establishment of large regional transmission organizations (RTOs) and sets forth the minimum characteristics and functions of RTOs. Among the basic minimum characteristics are that the RTOs must be independent of market participants and must be of sufficient scope and geographical configuration. Order No. 2000 also encourages RTOs to work with each other to minimize or eliminate "seams" issues between RTOs that operate as barriers to inter-regional transactions. The FERC's goal is to encourage the growth of a robust competitive wholesale market for electricity. Although jurisdictional transmission providers are not required to join RTOs, they are encouraged to do so. Under Order No. 2000, RTOs were to be operational by December 15, 2001. However, because RTO development was in different stages in different regions of the country, the FERC issued an order on November 7, 2001 extending the deadline until it resolves issues relating to geographic scope and governance of qualifying RTOs across the country and issues relating to business and procedural needs. For organizations to accomplish the functions of Order No. 2000, the FERC is taking steps to create business standards and protocols to facilitate RTO formation. However, there can be no assurance that the FERC's goals will be achieved. Also there is considerable resistance in some regions to the formation of RTOs. At least 14 separate organizations, covering the substantial majority of all the FERC jurisdictional transmission providers, are in various stages of organization and have made at least preliminary filings with the FERC.
Public Utility Holding Company Act. The Public Utility Holding Company Act of 1935, or PUHCA, subjects to regulation as a registered holding company any corporation, partnership or other entity or organized group that owns, controls or has power to vote 10% or more of the outstanding voting securities of a "public utility company" or a company that is a "holding company" of a public utility company, unless an exemption is established or an order is issued by the SEC declaring such company not to be a holding company. Registered holding companies under PUHCA are generally required to limit their operations to a single integrated utility system and to other operations functionally related to the operation of the utility system. In addition, under PUHCA, a public utility company that is a subsidiary of a registered holding company must comply with various financial and organizational regulations, including approval of many of its financing transactions by the SEC. Under the Energy Policy Act of 1992, a company engaged exclusively in the business of owning and/or operating facilities used for the generation of electric energy exclusively for sale at wholesale and selling electric energy at wholesale may be exempted from PUHCA regulation as an "exempt wholesale generator," or EWG. Sithe Pennsylvania Holdings, LLC, Sithe Maryland Holdings, LLC and Sithe New Jersey Holdings, LLC, the predecessors of REMA, Reliant Energy Maryland Holdings, LLC and Reliant Energy New Jersey Holdings, LLC, respectively, received from the FERC determinations of EWG status in 1999. Following both the restructuring by which Reliant Energy Maryland Holdings, LLC and Reliant Energy New Jersey Holdings, LLC became subsidiaries of REMA and the lease transaction, FERC reaffirmed the continued exempt wholesale generator (EWG) status of REMA and its subsidiaries in an order issued in October 2000.
If, after having received this determination, there is a "material change" in facts that might affect our continued eligibility for EWG status, within 60 days of this material change we must:
o file with the FERC a written explanation of why the material change does not affect our EWG status,
o file with the FERC a new application for EWG status, or
o notify the FERC that we no longer wish to maintain EWG status .
On January 22, 2001, and as amended May 10, 2001, REMA and some of the other companies that hold or lease individual interests in the Keystone station and in the Conemaugh station, and that are also EWGs, filed with FERC separate applications for a redetermination of their status as EWGs, in connection with a transaction related to a new fuel supply for the Keystone station and other lease and real property activities related to the plant sites. The interest owners in the Keystone station have agreed to lease to SynFuel Co. land and the use of some facilities and to provide SynFuel Co. coal, which SynFuel Co. will then convert to synthetic fuel for use at the Keystone station. On June 14, 2001, FERC issued an order approving the SynFuel arrangements and also finding, based in part on the commitments of REMA and the other interest owners that are EWGs to donate the proceeds of certain other
commercial lease and real property activities to charity, that REMA's participation in these leasing activities was consistent with its EWG status.
If we lost our EWG status, we would have to restructure our organization or, with Reliant Energy and its other subsidiaries, risk being subjected to regulation under PUHCA.
State Regulation. In Pennsylvania, our generation facilities are not subject to rate regulation by the Pennsylvania Public Utility Commission because, under the Pennsylvania Electricity Generation Customer Choice and Competition Act, the generation of electricity is no longer regulated as a utility function. Under this statutory scheme, affiliates of GPU transferred their generation facilities located in Pennsylvania to Sithe Energies and its affiliates through a transaction approved by the Pennsylvania Public Utility Commission in June 1999.
Similarly, our New Jersey generation facilities are not subject to rate regulation by the New Jersey Board of Public Utilities because, under the New Jersey Electric Discount and Energy Competition Act, New Jersey has determined that electric generation service in New Jersey is a competitive service that is no longer subject to regulation. As in Pennsylvania, our New Jersey generation facilities became unregulated when they were transferred by GPU affiliates to Sithe Energies and its affiliates in a transaction approved by the New Jersey Board, and the facilities continue to be unregulated. Under the New Jersey act, however, the Board may re-regulate the provision of electric generation service in the event the Board concludes that sufficient competition is no longer present.
ENVIRONMENTAL MATTERS
GENERAL
We are subject to a number of federal, state and local requirements relating to the protection of the environment and the safety and health of personnel and the public. These requirements relate to a broad range of our activities, including the discharge of pollutants into air, water, and soil, the proper handling of solid, hazardous, and toxic materials and waste, noise, and safety and health standards applicable to the workplace. In order to comply with these requirements, we will spend substantial amounts from time to time to construct, modify and retrofit equipment, acquire air emission allowances for operation of our facilities, and to clean up or decommission disposal or fuel storage areas and other locations as necessary. Anticipated environmental expenditures for the period 2002 through 2006 are $85 million.
If we do not comply with environmental requirements that apply to our operations, regulatory agencies could seek to impose on us civil, administrative and/or criminal liabilities as well as seek to curtail our operations. Under some statutes, private parties could also seek to impose upon us civil fines or liabilities for property damage, personal injury and possibly other costs.
AIR EMISSIONS
As part of the 1990 amendments to the Federal Clean Air Act (Clean Air Act), requirements and schedules for compliance were developed for attainment of health-based standards. As part of this process, standards for the emission of Nitrogen Oxides (NOx), a product of the combustion process associated with power generation, are being developed or have been finalized. We currently anticipate capital expenditures of approximately $25 million for 2002-2004 period, including the costs associated with our ownership share of Keystone and Conemaugh station. We will purchase NOX allowances, if available, in addition to those that are allocated to our facilities in order to minimize our cost of compliance.
The Environmental Protection Agency (EPA) has announced its determination to regulate hazardous air pollutants (HAPs) from coal-fired and oil-fired steam electric generating units under Section 112 of the Clean Air Act. The EPA plans to develop maximum achievable control technology (MACT) standards for these types of units. The rulemaking for coal and oil-fired steam electric generating units must be completed by December 2004. Compliance with the rules will be required within three years thereafter. The MACT standards that will be applicable to the units cannot be predicted at this time so the impact on our facilities is uncertain. In addition, a request for reconsideration of the EPA's decision to impose MACT standards has been filed with the EPA. We cannot predict the outcome of the request.
In 1998, the United States became a signatory to the United Nations Framework Convention on Climate Change (the Kyoto Protocol). The Kyoto Protocol calls for developed nations to reduce their emissions of greenhouse gases. Carbon dioxide, which is a major byproduct of the combustion of fossil fuel, is considered to be a greenhouse gas. If the United States Senate ultimately ratifies the Kyoto Protocol, any resulting limitations on power plant carbon dioxide emissions could have a material adverse impact on all fossil fuel fired facilities, including those belonging to us.
The EPA is conducting a nationwide investigation regarding the historical compliance of coal-fueled electric generating stations with various permitting requirements of the Clean Air Act. Specifically, the EPA and the United States Department of Justice have initiated formal enforcement actions and litigation against several other utility companies that operate these stations, alleging that these companies modified their facilities without proper pre-construction permit authority. Since June 1998, six of our coal-fired facilities have received requests for information related to work activities conducted at those sites. The EPA has not filed an enforcement action or initiated litigation in connection with these facilities at this time. Nevertheless, any litigation, if pursued successfully by the EPA, could accelerate the timing of emission reductions currently contemplated for the facilities and result in the imposition of penalties.
In February 2001, the United States Supreme Court upheld a previously adopted EPA ambient air quality standards for fine particulate matter and ozone. While attaining these new standard may ultimately require expenditures for air quality control system upgrades for our facilities, regulations addressing affected sources and required controls are not expected until after 2005. Consequently, it is not possible to determine the impact on our operations at this time.
Multi-pollutant air emission initiative. On February 14, 2002, the White House announced its "Clear Skies Initiative." The proposal is aimed at long-term reductions of multiple pollutants produced from fossil fuel-fired power plants. Reductions averaging 70% are targeted for Sulfur Dioxide (SO2), NOx, and mercury. In addition, a voluntary program for greenhouse gas emissions is proposed as an alternative to the Kyoto Protocol discussed above. The implementation of the initiative, if approved by the United States Congress, would be a market-based program, modeled after the Acid Rain Program, beginning in 2008 and phased full compliance by 2018. Fossil fuel-fired power plants in the United States would be affected by the adoption of this program, or other legislation currently pending in the United States Congress addressing similar issues. Such programs would require compliance to be achieved by the installation of pollution controls, the purchase of emission allowances or curtailment of operations.
WATER ISSUES
In July 2000, the EPA issued final rules for the implementation of the Total Maximum Daily Load program of the Clean Water Act (TMDL). The goal of the TMDL rules is to establish, over the next 15 years, the maximum amounts of various pollutants that can be discharged into waterways while keeping those waterways in compliance with water quality standards. The establishment of TMDL values may eventually result in more stringent discharge limits in each facility's discharge permit. Such limits may require our facilities to install additional water treatment, modify operational practices or implement other wastewater control measures. Certain members of the United States Congress have expressed concern to the EPA about the TMDL program and the EPA, in October 2001, extended the effective date of the regulation until April 2003.
In November 2001, the EPA promulgated rules that impose additional technology based requirements on new cooling water intake structures. Draft rules for existing intake structures have also been issued. It is not known at this time what requirements the final rules for existing intake structures will impose and whether our existing intake structures will require modification as a result of such requirements. The process by which the intake structure rules were written was a contentious one and litigation is expected. Court action in response to this expected litigation could result in unforeseen changes in the requirements.
A number of efforts are under way within the EPA to evaluate water quality criteria for parameters associated with the byproducts of fossil fuel combustion. These parameters include arsenic, mercury and selenium. Significant changes in these criteria could impact station discharge limits and could require our facilities to install additional water treatment equipment. The impact on us as a result of these initiatives is unknown at this time.
LIABILITY FOR PREEXISTING CONDITIONS AND REMEDIATION
Under the purchase agreements between Sithe Energies and REPG, we, with a few exceptions, assumed liability for preexisting conditions, including some ongoing remediations at the electric generating stations. Funds for carrying out any identified actions have been included in our planning for future requirements, and we are not currently aware of any environmental condition at any of our facilities that we expect to have a material adverse effect on our financial position, results of operation or cash flows.
A prior owner of one of our facilities entered into a Consent Order Agreement with the Pennsylvania Department of Environmental Protection (PaDEP) to remediate a coal refuse pile on the property of the facility. We expect the remediation will cost between $10 million and $15 million. Under the acquisition agreements between Sithe Energies and GPU, GPU has agreed to retain responsibility for up to $6 million of environmental liabilities associated with the coal refuse site at this facility. We will be responsible for any amounts in excess of that $6 million. In August 2000 we signed a modified consent order that committed us to complete the remediation work no later than November 2004.
Under the New Jersey Industrial Site Recovery Act (ISRA), owners and operators of industrial properties are responsible for performing all necessary remediation at the facility prior to closing, or undertaking actions that ensure that the property will be remediated after the closing of a facility and the termination of operations. In connection with the acquisition of our facilities from Sithe Energies, we have agreed to take responsibility for any costs under ISRA relating to the four New Jersey properties we purchased. We estimate that the costs to fulfill our obligations under ISRA will be approximately $10 million. However, these remedial activities are still in the early stages. Following further investigation the scope of the necessary remedial work could increase, and we could, as a result, incur greater costs.
REMA operates six landfills for the exclusive disposal of solid wastes generated at its coal fired generation facilities in Pennsylvania. Under the PaDEP permitting scheme, those sites have specifically calculated and bonded closure obligations. We expect approximately $16 million to be paid over the next five years.
As a result of their age, many of our facilities contain significant amounts of asbestos insulation, other asbestos containing materials, as well as lead-based paint. Existing state and federal rules require the proper management and disposal of these potentially toxic materials. We have developed a management plan that includes proper maintenance of existing non-friable asbestos installations, and removal and abatement of asbestos containing materials where necessary because of maintenance, repairs, replacement or damage to the asbestos itself. We have planned for the proper management, abatement and disposal of asbestos and lead-based paint at our facilities in our financial planning.
Under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, owners and operators of facilities from which there has been a release or threatened release of hazardous substances, together with those who have transported or arranged for the disposal of those substances, are liable for:
o the costs of responding to that release or threatened release, and
o the restoration of natural resources damaged by any such release.
We are not aware of any liabilities under CERCLA that would have a material adverse effect on us, our financial position, results of operations or cash flows.
ITEM 2.
ITEM 2. PROPERTIES
For information regarding our properties, please read "Our Generating Facilities" in Item 1 of this Form 10-K, which information is incorporated herein by reference.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
For a description of certain legal and regulatory proceedings affecting REMA, see "Regulation - Energy Regulatory Matters" and "- Environmental Matters" in Item 1 of this Form 10-K and Note 6 to REMA 10-K Notes, which description is incorporated herein by reference.
RESTATEMENT OF SECOND AND THIRD QUARTER 2001 RESULTS OF OPERATIONS
On February 5, 2002, Reliant Resources, REMA's indirect parent company, announced that it and REMA were restating earnings for the second and third quarters of 2001. As more fully described in REMA's March 15, 2002 Current Report on Form 8-K, the restatement related to a correction in accounting treatment for a series of four structured transactions that were inappropriately accounted for as cash flow hedges for the period of May 2001 through September 2001, rather than as derivatives with changes in fair value recognized through the income statement. Each structured transaction involved a series of forward contracts to buy and sell an energy commodity in 2001 and to buy and sell an energy commodity in 2002 or 2003.
At the time of the public announcement of the intention to restate REMA's reporting of the structured transactions, the Audit Committee of the Board of Directors of Reliant Resources (Audit Committee) instructed Reliant Resources to conduct an internal audit review to determine whether there were any other transactions included in Reliant Resources' asset books as cash flow hedges that failed to meet the cash flow hedge requirements under Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended. This targeted internal audit review found no other similar transactions.
The Audit Committee also directed an internal investigation by outside legal counsel of the facts and circumstances leading to the restatement, which investigation has been completed. In connection with the restatement and related investigations, the Audit Committee has met eight times to hear and assess reports from the investigative counsel regarding its investigation and contacts with the Staff of the SEC. To address the issues identified in the investigation process, the Audit Committee and management have begun analyzing and implementing remedial actions, including, among other things, changes in organizational structure and enhancement of internal controls and procedures.
On April 5, 2002, Reliant Resources was advised that the Staff of the Division of Enforcement of the SEC is conducting an informal inquiry into the facts and circumstances surrounding the restatement. Reliant Resources is cooperating with this inquiry. Before releasing Reliant Resources' 2001 earnings, Reliant Resources received concurrence from the SEC's accounting staff on the accounting treatment of the restatement, which increased REMA's earnings for the two quarters by a total of $34 million. At this time, REMA cannot predict the outcome of the SEC's inquiry.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by Item 4 is omitted pursuant to Instruction I (2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
PART II
ITEM 5.
ITEM 5. MARKET FOR REMA'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the 1,000 outstanding shares of REMA's common stock are held by by Reliant Energy Northeast Generation, Inc., an indirect subsidiary of Reliant Resources.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by Item 6 is omitted pursuant to Instruction I (2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
ITEM 7.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS OF RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
The following narrative analysis should be read in combination with REMA's financial statements and notes contained in Item 8 of the Form 10-K of REMA.
REMA is a Delaware limited liability company that owns or leases 21 electric generation facilities in Pennsylvania, New Jersey and Maryland. REMA is an indirect wholly owned subsidiary of REPG which is a wholly owned subsidiary of Reliant Resources.
In May 2000, REPG purchased the equity in REMA from Sithe for an aggregate purchase price of $2.1 billion. REPG accounted for the acquisition as a purchase with assets and liabilities of REMA reflected at their estimated fair values. The fair value adjustments related to the acquisition, which have been pushed down to REMA, primarily included adjustments in property, plant and equipment, air emissions regulatory allowances, materials and supplies inventories, specific intangibles related to generating plants, environmental reserves and related deferred taxes. For additional information regarding the acquisition of REMA, see Note 3(a) to the REMA 10-K Notes.
Until the end of May 2002, we expect to sell a portion of our capacity under transition power sales contracts entered into with affiliates of GPU at the time of Sithe's acquisition of REMA in November 1999 from GPU. During the term of the transition power sales contracts, we will derive revenues from sales of capacity under these contracts, as well as sales into the PJM market and PJM West market of capacity and energy not required to meet the terms of these contracts, sales of ancillary services and sales through bilateral contracts with power marketers and load serving entities within the PJM market and the surrounding markets.
In August 2000, REMA sold to and leased back from each of three owner-lessors in separate lease transactions REMA's respective 16.45%, 16.67% and 100% interests in the Conemaugh, Keystone and Shawville generating stations, respectively. As lessee, REMA leases an interest in each facility from each owner-lessor under a facility lease agreement. As consideration for the sale of REMA's interest in the facilities, REMA received $1.0 billion in cash. REMA used the $1.0 billion of sale proceeds to return capital of $183 million, with the remainder used to reduce affiliate debt. For additional information regarding sale and leaseback transactions, see Note 6(a) to the REMA 10-K Notes.
COMBINED AND CONSOLIDATED RESULTS OF OPERATIONS
Twelve months ended December 31, 2001 compared to periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to December 31, 2000
For the year ended December 31, 2001, REMA's net loss was $0.4 million compared to a net loss of $6.7 million and net income $81.2 million for the periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to December 31, 2000, respectively. Net income decreased in 2001 compared to 2000 primarily due to decreased operating margins (revenues less fuel) and increased operating expenses, partially offset by decreased interest expense to affiliates and decreased depreciation expense.
REMA's operating margins declined in 2001 compared to 2000 primarily due to a provision against receivables of $3.7 million and non-trading derivative balances of $64.7 million related to Enron Corp. and its affiliates (see Note 11 to REMA 10-K Notes), which filed for voluntary bankruptcy in the fourth quarter of 2001,and lower volume on power sales combined with higher fuel costs in 2001. The $64.7 million provision against non-trading derivative assets is a non-cash provision in 2001. Total operating expenses increased by $94.6 million in 2001 compared to the same period in 2000 primarily due to increased maintenance at the plants, facilities lease expense related to sale-leaseback transactions entered into in August 2000, and administrative and support costs. In 2001, REPG began charging and allocating to REMA certain administrative, accounting, legal, tax and other costs under a support services agreement. Cost allocated to REMA under the support services agreement totaled $54.9 million during 2001. In 2001, Reliant Energy Services, Inc. (Reliant Energy Services), an affiliate of REMA, began charging REMA fees for power and marketing services under a procurement and marketing agreement. Fees charges to REMA under the procurement and marketing agreement totaled $4.7 million in 2001. Such cost and fees charged under the support services agreement and procurement and marketing agreement are subordinated to certain expenses pursuant to the sale-leaseback financing documents, including lease expense (see Notes 9(a) and 9(b) to the REMA 10-K Notes). Depreciation expense declined by $10.1 million in 2001 compared to 2000, primarily as a result of the sale of interests in three of its generating plants in the sale-leaseback transaction in August 2000.
For 2001, REMA's interest expense, net, primarily related to notes payable to an affiliate, aggregated $88.3 million in 2001 compared to $46.5 million and $70.0 million for the periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to December 31, 2000, respectively. The weighted average principal amount of the notes was approximately $980 million during 2001 and $1.26 billion during 2000. Affiliated interest expense is subordinated to certain expenses pursuant to the sale-leaseback financing documents, including lease expense.
Our federal statutory tax rate is 35%. Our reconciling items from the federal statutory tax rate to the effective tax rate totaled $11.2 million and $2.7 million for 2000 and 2001, respectively. In 2000, these items primarily related to losses not benefited during the period from January 1, 2000 through May 11, 2000 (see Note 1(l) to the REMA 10-K Notes) and state income taxes. In 2001, these items primarily related to state income taxes. In addition, during 2001, the effective state income tax rate was increased due to the apportionment of income between the applicable states.
NEW ACCOUNTING PRONOUNCEMENTS
Reference is made to Note 1(n) to REMA 10-K Notes, for discussion of new accounting pronouncements that affect REMA.
SEASONALITY OF OUR BUSINESS
Our revenues are seasonal and are affected by unusual weather conditions. Short-term prices for capacity, energy and ancilliary services in the PJM market and PJM West market are particularly impacted by weather conditions. Peak demand for electricity typically occurs during the summer months, caused by increased use of air-conditioning. Cooler than normal summer temperatures may lead to reduced use of air-conditioners. This reduces short-term demand for capacity, energy and ancilliary services and may lead to a reduction in wholesale electric prices.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks. These risks arise from transactions entered into in the normal course of business and are inherent in our financial statements. We seek to manage these risk exposures through the implementation of our risk management policies and framework. We seek to manage our exposures through the use of derivative financial instruments and derivative commodity instruments (Energy Derivatives). During the normal course of business, we review our hedging strategies and determine the hedging approach we deem appropriate based upon the circumstances of each situation.
Derivative instruments are instruments, such as futures, forward contracts, swaps or options, that derive their value from underlying assets, indices, reference rates or a combination of these factors. These derivative instruments include negotiated contracts, which are referred to as over-the-counter derivatives, and instruments that are listed and traded on an exchange.
Commodity price risk is an inherent component of our electric power generation business because the profitability of our generation assets depends significantly on commodity prices sufficient to create gross margin. Prior to the energy delivery period, we attempt to partially hedge the economics of our electric power facilities by selling power and purchasing equivalent fuel. Some power capacity is held in reserve and sold in the spot market. Derivative instruments are used to mitigate exposure to variability in future cash flows from probable, anticipated future transactions attributable to a commodity risk. In this way, more certainty is provided as to the financial contribution associated with the operation of these assets.
Derivative instruments, which we use as economic hedges, create exposure to commodity prices, which we use to offset the commodity exposure inherent in our businesses. The stand-alone commodity risk created by these instruments, without regard to the offsetting effect of the underlying exposure these instruments are intended to hedge, is described below. We measure the commodity risk using a sensitivity analysis. The sensitivity analysis performed on our Energy Derivatives measures the potential loss in earnings based on a hypothetical 10% movement in energy prices. An increase of 10% in the market prices of energy commodities from their December 31, 2001 levels would have decreased the fair value of our Energy Derivatives by $78 million.
The above analysis of the Energy Derivatives utilized for hedging purposes does not include the favorable impact that the same hypothetical price movement would have on our physical purchases and sales of natural gas and electric power to which the hedges relate. Furthermore, the Energy Derivative portfolio is managed to complement the physical transaction portfolio, thereby reducing overall risks within limits. Therefore, the adverse impact to the fair value of the portfolio of Energy Derivatives held for hedging purposes associated with the hypothetical changes in commodity prices referenced above would be offset by a favorable impact on the underlying hedged physical transactions, assuming:
o the Energy Derivatives are not closed out in advance of their expected term,
o the Energy Derivatives continue to function effectively as hedges of the underlying risk, and
o as applicable, anticipated underlying transactions settle as expected.
If any of the above-mentioned assumptions cease to be true, a loss on the derivative instruments may occur, or the options might be worthless as determined by the prevailing market value on their termination or maturity date, whichever comes first. Energy Derivatives intended as hedges, and which are effective as hedges, may still have some percentage which is not effective.
For information regarding Reliant Resources risk management structure, please read "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Reliant Resources' 2001 Form 10-K, a copy of which is filed as Exhibit 99.1 and which information, to the extent it relates to REMA is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND RELATED COMPANIES
STATEMENTS OF COMBINED AND CONSOLIDATED OPERATIONS (THOUSANDS OF DOLLARS)
See Notes to the Combined and Consolidated Financial Statements.
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND RELATED COMPANIES
CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)
See Notes to the Combined and Consolidated Financial Statements.
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND RELATED COMPANIES
STATEMENTS OF COMBINED AND CONSOLIDATED CASH FLOWS (THOUSANDS OF DOLLARS)
See Notes to the Combined and Consolidated Financial Statements.
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND RELATED COMPANIES
STATEMENTS OF COMBINED AND CONSOLIDATED MEMBER'S AND SHAREHOLDER'S EQUITY (THOUSANDS OF DOLLARS)
See Notes to the Combined and Consolidated Financial Statements.
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND RELATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Reliant Energy Mid-Atlantic Power Holdings, LLC -- Reliant Energy Mid-Atlantic Power Holdings, LLC (formerly Sithe Pennsylvania Holdings, LLC) and related companies which include the affiliates and subsidiaries listed below (collectively, REMA), were indirect wholly owned subsidiaries of Sithe Energies, Inc. (Sithe) as of December 31, 1999 (see Note 3). REMA acquired its generating stations and various related assets (including the capital stock of Sithe Mid-Atlantic Power Services, Inc.) from the operating subsidiaries of GPU, Inc. (GPU), a utility holding company, on November 24, 1999. REMA was formed as follows:
In May 2000, Sithe, through an indirect wholly owned subsidiary, sold all of its equity interests in REMA to an indirect wholly owned subsidiary of Reliant Energy Power Generation, Inc. (REPG). REPG is a wholly owned subsidiary of Reliant Resources, Inc. (Reliant Resources), which is in turn an indirect subsidiary of Reliant Energy, Incorporated (Reliant Energy) (see Note 3). Following this transaction, REMA changed its name and the names of its operating and developmental entities. Sithe Pennsylvania Holdings, LLC was renamed Reliant Energy Mid-Atlantic Power Holdings, LLC. In all other cases, the names were changed such that "Sithe" was replaced with "Reliant Energy."
REMA owns or leases interests in 21 electric generation plants in Pennsylvania, New Jersey and Maryland with an annual average net generating capacity of approximately 4,262 megawatts (MW).
(b) Basis of Presentation and Principles of Combination -- These financial statements present the results of operations for the periods from November 24, 1999 (the date that REMA acquired the generation assets from GPU) to December 31, 1999, January 1, 2000 to May 11, 2000 (the date that REPG acquired REMA) and May 12, 2000 to December 31, 2000 and the year ended December 31, 2001. Within these financial statements, "Current REMA" and "Former REMA" refer to REMA after and before, respectively, the acquisition from Sithe Energies and one of its subsidiaries by REPG. As a result of the restructuring (see Note 3(b)), Current REMA financial statements are presented on a consolidated basis, whereas Former REMA financial statements are presented on a combined basis. There are no separate financial statements available with regard to the facilities of REMA prior to the acquisition because their operations were fully integrated with, and their results of operations were consolidated into, the former owners of the facilities of REMA. In addition, the electric output of the facilities was sold based on rates set by regulatory authorities. As a result and because electricity rates will now be set by the operation of market forces, the historical financial data with respect to the facilities of REMA prior to November 24, 1999 is not meaningful or
indicative of REMA's future results. REMA's results of operations in the future will depend primarily on revenues from the sale of energy, capacity and ancillary services, and the level of its operating expenses.
The financial statements include the accounts of REMA and related companies described in Note 1(a). All significant inter-affiliate and intercompany transactions and balances are eliminated in either combination or consolidation. The affiliates and subsidiaries include all of the operations and assets acquired from GPU on November 24, 1999, which have been managed together since that acquisition date.
(c) Reclassification and Use of Estimates -- Some amounts from the previous years have been reclassified to conform to the 2001 presentation of financial statements. These reclassifications do not affect earnings.
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, 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.
(d) Market Risk and Uncertainties -- REMA is subject to risks associated with price movements of energy commodities, credit risk associated with its hedging activities, supply and price of fuel and electricity, effects of competition, operation of deregulating power markets, seasonal weather patterns, technological obsolescence and the regulatory environment within the United States.
(e) Revenue Recognition -- Revenues include energy, capacity and ancillary service sales. Current REMA's power and services, excluding capacity, were sold at market-based prices through a related party and indirect subsidiary of Reliant Resources, Reliant Energy Services, Inc. (Reliant Energy Services). Reliant Energy Services acted as agent on behalf of REMA on most market-based sales. REMA's capacity was also sold pursuant to a transition power purchase agreement with GPU. The transition power purchase agreement extends through May 31, 2002. Sales not billed by month-end are accrued based upon estimated energy or services delivered.
The gains and losses related to financial instruments and contractual commitments qualifying and designated as hedges related to the sale of electric power and purchase of fuel are recognized in the same period as the settlement of the underlying physical transaction. These realized gains and losses are included in operating revenues and operating expenses in the statements of consolidated operations. For additional discussion, see Note 2.
Through May 11, 2000, Former REMA's power and services, excluding capacity, were sold at market-based prices through sales to a related party and wholly owned subsidiary of Sithe (the Sithe Affiliate) for resale.
(f) Cash and Cash Equivalents -- Cash and cash equivalents are considered to be highly liquid investments with an original maturity of three months or less, which are cash or are readily convertible to cash.
(g) Inventories -- Inventories are comprised of materials, supplies and fuel stock held for consumption and are stated at the lower of weighted-average cost or market.
(h) Fair Values of Financial Instruments -- The recorded amounts for financial instruments such as cash and cash equivalents and accounts payable approximate fair value.
(i) Property, Plant and Equipment -- Property, plant and equipment are stated at cost or valuation. Depreciation is computed using the straight-line method over the estimated useful lives commencing when assets, or major components thereof, are either placed in service or acquired, as appropriate (see Note 4). REMA expenses all repair and maintenance costs as incurred.
(j) Intangible Assets -- Historically, cost in excess of fair value of net assets acquired (goodwill) is amortized on a straight-line basis over the estimated useful life of 35 years. See Note 1(n) for additional information regarding goodwill and the related amortization periods. Through May 11, 2000 goodwill was amortized on a straight-line basis over the estimated useful life of 40 years. Goodwill amortization expense for the periods November 24, 1999
to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000 and year ended December 31, 2001, was $481,000, $1,660,000, $132,000 and $89,000, respectively.
Other intangible assets consist primarily of air emissions regulatory allowances that have already been issued to REMA and allowances that REMA is entitled to be allocated during the remaining useful lives of the plants and other specific intangibles which relate to water rights and permits. Air emissions regulatory allowances are amortized on a unit-of-production basis as utilized. The amortization of the specific intangibles related to water rights and permits will be amortized over the estimated life of the related facility of 35 years. Amortization expense recognized in the periods November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000 and year ended December 31, 2001 related to other intangible assets was $209,000, $2,473,000, $6,463,000 and $14,119,000, respectively.
(k) Impairment of Long-Lived Assets -- REMA periodically evaluates long-lived assets, including property, plant and equipment, goodwill and other intangible assets, when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The determination of whether an impairment has been incurred is based on an estimate of undiscounted cash flows attributable to the assets, as compared to the carrying value of the assets. To date, no impairment has been indicated. For discussion of goodwill impairment analysis in 2002, see Note 1(n).
(1) Income Taxes -- In connection with the acquisition, REMA entered into a tax sharing agreement with Reliant Energy, whereby REMA calculates its income tax provision on a separate return basis. REMA uses the liability method of accounting for deferred income taxes and measures deferred income taxes for all significant income tax temporary differences. REMA's current federal and some state income taxes are payable to and receivable from Reliant Energy. For additional information regarding income taxes, see Note 8.
Prior to May 11, 2000, REMA and some of its affiliates that were limited liability companies were not taxable for federal income tax purposes. Any taxable earnings or losses and certain other tax attributes were reported by the member on its income tax return. Other affiliates that were taxable corporate entities have incurred tax and book losses but were not subject to any tax-sharing agreements with Sithe. As such, no tax benefits have been recorded for these entities since the tax benefits were not considered realizable. These tax benefits and the offsetting valuation allowance were less than $1 million.
(m) Environmental Costs -- REMA expenses or capitalizes environmental expenditures, as appropriate, depending on their future economic benefit. REMA expenses amounts that relate to an existing condition caused by past operations, and that do not have future economic benefit. REMA records undiscounted liabilities related to these future costs when environmental assessments and/or remediation activities are probable and the costs can be reasonably estimated.
(n) Changes in Accounting Principles and New Accounting Pronouncements.
Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), was issued by the SEC on December 3, 1999. SAB No. 101 summarizes some of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. REMA's combined and consolidated financial statements reflect the accounting principles provided in SAB No. 101.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations" (SFAS No. 141) and SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being transferred to goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 provides for a nonamortization approach, whereby goodwill and certain intangibles with indefinite lives will not be amortized into results of operations, but instead will be reviewed periodically for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles with indefinite lives is more than its fair value. REMA adopted the provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 on January 1, 2002. The adoption of SFAS No. 141 did not have a material impact on REMA's historical results of operations or financial position. On January 1, 2002, REMA discontinued amortizing goodwill into the results of operations pursuant to SFAS No. 142. REMA recognized $89,000 of goodwill amortization expense during the year ended December 31, 2001. REMA is in the process of determining further effects of adoption of SFAS No. 142 on its Combined and Consolidated Financial Statements, including the review of goodwill and certain intangibles for impairment. REMA anticipates finalizing its review of goodwill and
certain intangibles during 2002. REMA does not believe impairments and certain intangibles of goodwill, if any, will have a material impact on REMA's results of operations or financial position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of a liability for an asset retirement legal obligation to be recognized in the period in which it is incurred. When the liability is initially recorded, associated costs are capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. SFAS No. 143 requires entities to record a cumulative effect of change in accounting principle in the income statement in the period of adoption. REMA plans to adopt SFAS No. 143 on January 1, 2003, and is in the process of determining the effect of adoption on its results of operations and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," while retaining many of the requirements of these two statements. Under SFAS No. 144, assets held for sale that are a component of an entity will be included in discontinued operations if the operations and cash flows will be or have been eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations prospectively. SFAS No. 144 is not expected to materially change the methods used by REMA to measure impairment losses on long-lived assets. REMA adopted SFAS No. 144 on January 1, 2002.
See Note 2 for REMA's adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133) on January 1, 2001 and adoption of subsequent cleared guidance.
2. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, REMA adopted SFAS No. 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. This statement requires that 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. If certain conditions are met, an entity may designate a derivative instrument as hedging (a) the exposure to changes in the fair value of an asset or liability (Fair Value Hedge), (b) the exposure to variability in expected future cash flows (Cash Flow Hedge) or (c) the foreign currency exposure of a net investment in a foreign operation. For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period it occurs.
Adoption of SFAS No. 133 on January 1, 2001, resulted in no cumulative after-tax change in net income and a cumulative after-tax increase in accumulated other comprehensive loss of $73.6 million. The adoption also increased current assets, noncurrent assets, current liabilities and noncurrent liabilities by $85.1 million, $9.0 million, $155.2 million and $12.5 million, respectively, in REMA's Consolidated Balance Sheet. During the year ended December 31, 2001, $70.4 million of the initial after-tax transition adjustment recognized in other comprehensive income was reclassified to net loss.
The application of SFAS No. 133 is still evolving as the FASB clears issues submitted to the Derivatives Implementation Group for consideration. During the second quarter of 2001, an issue that applies exclusively to the electric industry and allows the normal purchases and normal sales exception for option-type contracts if certain criteria are met was approved by the FASB with an effective date of July 1, 2001. The adoption of this cleared guidance had no impact on REMA's results of operations. Certain criteria of this previously approved guidance were revised in October and December 2001 and will become effective on April 1, 2002. REMA is currently in the process of determining the effect of adoption of the revised guidance.
During the third quarter of 2001, the FASB cleared an issue related to application of the normal purchases and normal sales exception to contracts that combine forward and purchased option contracts. The effective date of this guidance is April 1, 2002, and REMA is currently assessing the impact of this cleared issue and does not believe it will have a material impact on REMA's consolidated financial statements.
REMA is exposed to various market risks. These risks arise from transactions entered into in the normal course of business and are inherent in REMA's consolidated financial statements. REMA utilizes derivative instruments such as futures, physical forward contracts, swaps and options (Energy Derivatives) to mitigate the impact of changes in electricity and fuel prices on its operating results and cash flows.
Energy Derivatives primarily used by REMA are described below:
o Futures contracts are exchange-traded standardized commitments to purchase or sell an energy commodity or financial instrument, or to make a cash settlement, at a specific price and future date.
o Physical forward contracts are commitments to purchase or sell energy commodities in the future.
o Swap agreements require payments to or from counterparties based upon the differential between a fixed price and variable index price (fixed price swap) or two variable index prices (variable price swap) for a predetermined contractual notional amount. The respective index may be an exchange quotation or an industry pricing publication.
o Option contracts convey the right to buy or sell an energy commodity or a financial instrument at a predetermined price or settlement of the differential between a fixed price and a variable index price or two variable index prices.
Cash Flow Hedges. To reduce the risk from market fluctuations in revenues and the resulting cash flows derived from the sale of electric power, REMA may enter into Energy Derivatives in order to hedge some expected purchases of electric power, natural gas and other commodities and sales of electric power (Non-trading Energy Derivatives). The Non-trading Energy Derivative portfolios are managed to complement the physical transaction portfolio, reducing overall risks within authorized limits.
REMA applies hedge accounting for its Non-trading Energy Derivatives utilized in non-trading activities only if there is a high correlation between price movements in the derivative and the item designated as being hedged. This correlation, a measure of hedge effectiveness, is measured both at the inception of the hedge and on an ongoing basis, with an acceptable level of correlation of at least 80% to 120% for hedge designation. If and when correlation ceases to exist at an acceptable level, hedge accounting ceases and mark-to-market accounting is applied. During 2001, the amount of hedge ineffectiveness recognized in earnings from derivatives that are designated and qualify as Cash Flow Hedges was a gain of $1 million. No component of the derivative instruments' gain or loss was excluded from the assessment of effectiveness. If it becomes probable that an anticipated transaction will not occur, REMA realizes in net income the deferred gains and losses recognized in accumulated other comprehensive income. During 2001, there were no deferred gains or losses recognized in earnings as a result of the discontinuance of Cash Flow Hedges because it was no longer probable that the forecasted transaction would occur. Once the anticipated transaction occurs, the accumulated deferred gain or loss recognized in accumulated other comprehensive income is reclassified and included in REMA's Statements of Consolidated Operations under the captions (a) fuel expenses, in the case of natural gas transactions and (b) revenues, in the case of electric power sales transactions. Cash flows resulting from these transactions in Non-trading Energy Derivatives are included in the Statements of Consolidated Cash Flows in the same category as the item being hedged. As of December 31, 2001, REMA's current non-trading-derivative assets and liabilities and corresponding amounts in accumulated other comprehensive income were expected to be reclassified into net income during the next twelve months.
The maximum length of time REMA is hedging its exposure to the variability in future cash flows for forecasted transactions is eleven years.
Other Derivatives. During 2001, Reliant Resources contributed $337 million of non-trading derivative assets and $159 million of non-trading derivative liabilities to REMA as a result of four structured transactions involving a series of forward contracts to buy and sell an energy commodity in 2001 and to buy and sell an energy commodity in
2002 or 2003. During 2001, $54 million of non-trading derivative liabilities were settled related to these transactions. The change in fair value of these derivative assets and liabilities must be recorded in the statement of operations each reporting period. REMA recognized a change in fair value of $8 million for the non-trading derivative assets related to these transactions resulting in a net pre-tax tax unrealized gain of $8 million in 2001. Therefore, as of December 31, 2001, REMA has recognized $345 million of non-trading derivative assets and $105 million of non-trading derivative liabilities related to these transactions.
Credit Risk. In addition to the risk associated with price movements, credit risk is also inherent in REMA's hedging activities. Credit risk relates to the risk of loss resulting from non-performance of contractual obligations by a counterparty. REMA has off-balance sheet risk to the extent that the counterparties to these transactions may fail to perform as required by the terms of each contract.
The following table shows the composition of the non-trading derivative assets as of December 31, 2001.
- ---------- (1) "Investment Grade" is primarily determined using publicly available credit ratings along with the consideration of credit support (such as parent company guarantees) and collateral, which encompass cash and standby letters of credit. (2) For unrated counterparties, REMA performs financial statement analysis, considering contractual rights and restrictions, and collateral, to create a synthetic credit rating. (3) As of December 31, 2001, REMA had credit risk exposure to three investment-grade counterparties and one non-investment grade counterparty that represented greater than 5% of non-trading derivatives, on a net contractual basis.
GENERAL POLICY. Reliant Resources has established a Risk Oversight Committee comprised of corporate and business segment officers that oversees all commodity price and credit risk activities, including REMA's hedging activities.
3. BUSINESS ACQUISITIONS
(a) Acquisition by REPG
On May 12, 2000, REPG purchased the equity in REMA for an aggregate purchase price of $2.1 billion. Included within this purchase transaction were transition power purchase agreements, including the capacity transition contract with GPU described in Note 1(e). In 2002, REPG made an $8 million payment to the prior owner for post closing adjustments which resulted in an adjustment to purchase price. REPG accounted for the acquisition as a purchase with assets and liabilities of REMA reflected at their estimated fair values. The fair value adjustments related to the acquisition, which have been pushed down to REMA, primarily included adjustments in property, plant and equipment, air emissions regulatory allowances, specific intangibles, material and supplies inventories, environmental reserves and related deferred taxes. The air emissions regulatory allowances of $153 million are being amortized on a units-of-production basis as utilized. The specific intangibles which relate to water rights and permits of $43 million will be amortized over the estimated life of the related facility of 35 years. In addition, a valuation allowance for materials and supplies inventories of $17 million was established. The excess of the purchase price over the fair value of the net assets acquired of approximately $5 million was recorded as goodwill and was historically amortized over 35 years. See Note 1(j). REMA has liabilities associated with six ash disposal sites and six site investigations and environmental remediations. REMA has recorded its estimate of these environmental liabilities in the amount of $36 million as of December 31, 2001. REMA finalized these fair value
adjustments in May 2001. There were no additional material modifications to the preliminary adjustments from December 31, 2000.
The net purchase price of REMA was allocated and the fair value adjustments to Sithe's book value were as follows:
In August 2000, REMA sold to and leased back from each of three owner-lessors in separate lease transactions REMA's respective 16.45%, 16.67% and 100% interests in the Conemaugh, Keystone and Shawville generating stations, respectively. As lessee, REMA leases an interest in each facility from each owner-lessor under a leveraged facility lease agreement. As consideration for the sale of REMA's interest in the facilities, REMA received $1.0 billion in cash. REMA used the $1.0 billion of sale proceeds to return capital of $183 million, with the remainder used to reduce affiliate debt.
The following table presents selected actual financial information and unaudited pro forma information for the periods November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000, as if the acquisition by REPG had occurred on November 24, 1999 and January 1, 2000, as applicable. Pro forma information would not be meaningful for the periods prior to November 24, 1999 since historical financial results of the business and the revenue generating activities underlying the periods prior to November 24, 1999 are substantially different from the wholesale generation activities that REMA has been engaged in after November 24, 1999. Pro forma amounts also give effect to the sale and leaseback of interests in three of the generating plants, which were consummated in August 2000.
These unaudited pro forma results, based on assumptions deemed appropriate by REMA's management, have been prepared for informational purposes only and are not necessarily indicative of the amounts that would have resulted if the acquisition of the REMA entities by REPG had occurred on November 24, 1999 and January 1, 2000, as applicable. Purchase-related adjustments to the results of operations include the effects on depreciation and amortization, interest expense and income taxes.
(b) Restructuring
In July 2000, Reliant Energy Mid-Atlantic Power Holdings, LLC acquired the ownership interests in the following affiliates, which are included in these combined and consolidated financial statements, for all periods presented:
Reliant Energy New Jersey Holdings, LLC Reliant Energy Maryland Holdings, LLC Reliant Energy Mid-Atlantic Power Services, Inc.
These affiliates were acquired from an indirect wholly owned subsidiary of REPG for a purchase price of $192 million, which amount was borrowed from an indirect wholly owned subsidiary of REPG. In addition, the developmental entities listed in Note 1(a) were sold to Reliant Energy Mid-Atlantic Development, Inc., a wholly owned subsidiary of REPG, but not of REMA, for approximately $8 million. All these subsidiaries were included in the combined financial statements prior to such acquisition. These subsidiaries, other than the development entities, continued to be included in the consolidated financial statements after the acquisition.
As of December 31, 1999, the Conemaugh and Keystone generating stations (Conemaugh and Keystone, respectively) were each owned as a tenancy in common among their co-owners, with each owner retaining its undivided ownership interest in the generating units and the electrical output from those units. In August 2000, REMA sold to and leased back its respective 16.45% and 16.67% interest in Conemaugh and Keystone, respectively. See Notes 3(a) and 6(a). Reliant Energy Northeast Management Company, a subsidiary of REMA, operates and manages Conemaugh and Keystone under separate operating agreements that the owners of Conemaugh and Keystone have elected to terminate effective December 31, 2002. The owners of each station have not yet decided on the operating arrangements for such stations for the period beginning on January 1, 2003.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Depreciation expense for the periods November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000 and for the year ended December 31, 2001 was $4.2 million, $15.4 million, $31.0 million and $36.3 million, respectively.
5. LONG-TERM NOTES PAYABLE TO AFFILIATE AND LETTER OF CREDIT FACILITY
In connection with Sithe's acquisition of its generating assets from GPU, REMA executed and issued approximately $1.6 billion of demand notes payable to Sithe Northeast Generating Company, Inc. (an indirect wholly owned subsidiary of Sithe) due August 20, 2001. In connection with the acquisition of REMA in May 2000, Sithe Northeast Generating Company, Inc. sold these notes to an indirect wholly owned subsidiary of REPG. The original notes were subsequently cancelled and new notes issued (New Notes), which are due January 1, 2029. As of December 31, 2000 and 2001, REMA had $838 million of New Notes outstanding. The New Notes accrue interest at a fixed rate of 9.4% per annum. Payments under this indebtedness are subordinate to REMA's lease obligations.
In January 2001, REMA borrowed from Reliant Energy Northeast Holdings, Inc. (RENH) approximately $83 million. The borrowing matures on January 1, 2029, bears interest at a fixed rate of 9.4% and is unsecured. Repayment of the borrowing is subordinated to REMA's lease obligations as required by the lease documents. At December 31, 2001, $81 million of borrowings were outstanding under this note.
In July 2001, REMA borrowed an additional $106 million from RENH. The borrowing matures on July 1, 2029, bears interest at a fixed rate of 9.4% and is unsecured. Repayment of the borrowing is subordinated to REMA's lease obligations as required by the lease documents. At December 31, 2001, $106 million of borrowings were outstanding under this note.
REMA's lease obligations are currently supported by three letters of credit issued under three separate letter of credit facilities. See Note 6(a). The letter of credit facilities expire in August 2003. The amounts available to be drawn under the letters of credit fluctuate to satisfy the lease terms. At December 31, 2001, a total of $73 million was available to be drawn under the three letters of credit. Under the letter of credit facilities, REMA pays a fee equal to 1% of the total amount available to be drawn under the letters of credit. Any draws under the letters of credit become loans and bear interest at (a)(i) the higher of (A) the Federal funds rate plus .5% or (B) the Prime Rate plus (ii) a margin or (b) the London inter-bank offered rate plus a margin, at the option of REMA. As of December 31, 2002, there were no outstanding loans under the letter of credit facilities.
6. COMMITMENTS AND CONTINGENCIES
(a) Lease Financing -- In August 2000, REMA sold to and leased back from each of three owner lessors in separate lease transactions REMA's respective 16.45%, 16.67% and 100% interest in the Conemaugh, Keystone and Shawville generating stations. As lessee, REMA leases an interest in each facility from each owner lessor under a leveraged facility lease agreement. The lease documents contain restrictive covenants that restrict REMA's ability to, among other things, make dividend distributions unless REMA satisfies various conditions. The covenant restricting dividends would be suspended if the direct or indirect parent of REMA, meeting specified criteria, including having a rating on REMA's long-term unsecured senior debt of at least BBB from Standard and Poor's and Baa2 from Moody's, guarantees the lease obligations. Additionally, under the terms of the lease agreements, REMA was required to maintain $50 million in restricted deposits until January 2, 2001. As consideration for the sale of REMA's interest in each of the facilities, REMA received $1.0 billion in cash. These proceeds were utilized to return capital of $183 million, with the remainder used to reduce affiliate debt. In connection with the lease transactions, REMA entered into working capital facilities with affiliates in the aggregate amount of $150 million (see Notes 9(d) and 9(e)). REMA will make lease payments through 2029. The terms of leases for the Conemaugh, Keystone and Shawville generating stations expire in 2034, 2034 and 2026, respectively.
The following table sets forth REMA's obligation under these long-term operating leases (in millions):
There was no operating lease expense for the periods November 24, 1999 to December 31, 1999 and January 1, 2000 to May 11, 2000. Operating lease expense was $20.9 million and $58.8 million for the period May 12, 2000 to December 31, 2000 and year ended December 31, 2001, respectively.
The equity interests in all of the subsidiaries of REMA are pledged as collateral for REMA's lease obligations. In addition, these subsidiaries have also guaranteed the payments under the lease obligations. The following represents condensed consolidating financial statements of REMA and its subsidiaries. The subsidiaries included in the condensed consolidating financial statements presented below are all wholly owned and constitute all of REMA's direct and indirect subsidiaries (Guarantor Subsidiaries). The guaranties of the Guarantor Subsidiaries of the lease obligations are all full, unconditional, and joint and several. There are no significant restrictions on REMA's ability to obtain funds from the Guarantor Subsidiaries.
Reliant Energy Mid-Atlantic Power Holdings LLC and Related Companies Condensed Consolidating Statement of Income For the Year Ended December 31, 2000 (Thousands of Dollars)
Reliant Energy Mid-Atlantic Power Holdings LLC and Related Companies Condensed Consolidating Statement of Operations For the Year Ended December 31, 2001 (Thousands of Dollars)
Reliant Energy Mid-Atlantic Power Holdings LLC and Related Companies Condensed Consolidating Balance Sheet December 31, 2000 (Thousands of Dollars)
Reliant Energy Mid-Atlantic Power Holdings LLC and Related Companies Condensed Consolidating Balance Sheet December 31, 2001 (Thousands of Dollars)
(b) Other Operating Leases -- REMA leases some equipment and vehicles under noncancelable operating leases extending through 2007. Future minimum rentals under lease agreements are as follows (in thousands):
Rent expense incurred under other operating leases aggregated approximately $35,000, $187,000, $346,000 and $363,000 for the periods November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, May 12, 2000 to December 31, 2000 and year ended December 31, 2001, respectively.
(c) Environmental -- Under the agreement to acquire REMA's generating assets from GPU, liabilities associated with ash disposal site closures and site contamination at the acquired facilities in Pennsylvania and New Jersey prior to plant closing were assumed, except for the first $6 million of remediation costs at the Seward Station.
GPU retained liabilities associated with the disposal of hazardous substances to off-site locations prior to November 24, 1999. REMA has recorded its estimate of these environmental liabilities in the amount of $35.8 million and $35.6 million, as of December 31, 2000 and 2001, respectively. REMA expects approximately $16.0 million will be paid over the next five years.
(d) Fuel Supply and Transportation Agreements -- REMA is a party to several fuel supply contracts and commodity transportation contracts that have various quantity requirements and durations that are not classified as non-trading derivatives assets and liabilities in REMA's Consolidated Balance Sheet as of December 31, 2001 as these contracts meet the SFAS No. 133 exception to be classified as "normal purchases contracts" (see Note 2) or do not meet the definition of a derivative. The maximum duration under any individual fuel supply contract and transportation contract is 18 years and 20 years, respectively. Minimum payment obligations under these agreements are as follows, as of December 31, 2001 (in millions):
(e) Other -- REMA is party to various legal proceedings that arise from time to time in the ordinary course of business. While REMA cannot predict the outcome of these proceedings, REMA does not expect these matters to have a material adverse effect on REMA's financial position, results of operations or cash flows.
7. EMPLOYEE BENEFIT PLANS AND OTHER EMPLOYEE MATTERS
(a) Pension -- In connection with REPG's acquisition of REMA, REMA's non-union employees began participation in Reliant Energy's noncontributory cash balance pension plan. Effective March 1, 2001, REMA no longer accrues benefits under a noncontributory pension plan for its non-union employees. Effective March 1, 2001, each non-union participant's unvested pension account balance became fully vested. Under the cash balance formula, each participant has an account, for recordkeeping purposes only, to which credits are allocated annually based on a percentage of the participant's pay. Reliant Energy's funding policy is to review amounts annually in accordance with applicable regulations in order to achieve adequate funding of projected benefit obligations. The assets of Reliant Energy's pension plan consist principally of common stocks and high-quality, interest-bearing obligations. REMA's pension costs related to its non-union participants has been determined based on the non-union employees of REMA and their respective compensation level. Pension expense for the periods January 1, 2000 to May 11, 2000, May 12, 2000 to December 31, 2000, related to REMA's non-union employees was $252,000 and $503,000, respectively. For the period from January 1, 2000 through March 1, 2001, REMA recorded net pension income of $119,000 related to its non-union employees.
Substantially all of REMA's union employees participate in a noncontributory pension plan (the Union Pension Plan). The Union Pension Plan provides retirement benefits based on years of service and compensation. The funding policy of REMA is to contribute amounts annually in accordance with applicable regulations in order to achieve adequate funding of projected benefit obligations. All pension liabilities associated with REMA's union employees' service periods prior to November 24, 1999 were retained by GPU pursuant to the purchase agreement between Sithe and GPU. Pension expense for the periods November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, May 12, 2000 to December 31, 2000, and year ended December 31, 2001 for REMA union employees was approximately $231,000, $803,000, $1,605,000 and $2,700,000, respectively.
Net pension cost for the Union Pension Plan includes the following components for 2000 and 2001 (in thousands):
Following are reconciliations of the Union Pension Plan's beginning and ending balances of its retirement plan benefit obligation, plan assets and funded status for 2000 and 2001 (in thousands):
(b) Savings Plan -- Effective November 24, 1999 through May 11, 2000, REMA participated in Sithe's savings plan, which covered substantially all of REMA's employees. Effective May 12, 2000, REMA began to participate in a separate REMA savings plan, which covered substantially all of REMA's employees with terms somewhat similar to Sithe's savings plan. These savings plans are collectively referred to as the "Savings Plans." The Savings Plans limit non-union employees to 16% pre-tax until January 1, 2001 when after-tax contributions became available. The Savings Plans limit union employee's pre-tax contributions to 22% and after-tax contributions to 10%. These contributions are based on covered compensation, not to exceed the annual contribution limits of the Internal Revenue Code of 1986, as amended (Code). Prior to March 1, 2001, REMA matched up to 100% of the first 3% of each non-union employee's contributions (based on the employee's service). Effective March 1, 2001, Reliant Energy amended REMA's non-union employee savings plan to generally provide for (a) employer matching contributions equal to 100% of the first 6% of each employee's contributions to the plan, (b) a 2% employer contribution on a payroll basis for 2002, limited to the first $85,000 of compensation, and (c) discretionary employer contributions up to 3% at the end of the plan year based on each employee's eligible compensation. Effective March 1, 2001, all prior and future employer contributions on behalf of such employees are fully vested. REMA matches between 55% and 65% (based upon the terms of the applicable collective bargaining agreement) of the first 4% of each union employee's pre-tax and/or after-tax contributions (up to the annual Code contribution limits) to the Savings Plans. Union employees are fully vested in their employer matching contributions. Savings plan benefit expense for REMA employees for the periods November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000 and year ended December 31, 2001, was approximately $93,000, $450,000, $935,000 and $3,928,000, respectively.
(c) Postretirement Benefits -- Prior to March 1, 2001, REMA provided some postretirement benefits through a Reliant Energy plan (primarily medical care and life insurance benefits) for its non-union retired employees, substantially all of whom may become eligible for these benefits when they retire. Postretirement benefit expense related to REMA's non-union employees for the period May 12, 2000 to December 31, 2000 and year ended December 31, 2001 was $67,000 and $26,000, respectively.
REMA provides some postretirement benefits (primarily medical care and life insurance benefits) for its union retired employees, substantially all of whom may become eligible for these benefits when they retire. All retiree medical obligations for REMA's union employees eligible for retirement prior to November 24, 1999 were retained by GPU pursuant to the purchase agreement between Sithe and GPU. REMA funds its union postretirement benefits on a pay-as-you-go basis. Postretirement benefit expense for the period May 12, 2000 to December 31, 2000 and year ended December 31, 2001 related to REMA's union employees was $892,000 and $1,645,000 respectively.
The net postretirement benefit cost related to REMA's union employees includes the following components for the period May 12, 2000 to December 31, 2000 and the year 2001 (in thousands):
Following are reconciliations of REMA's beginning and ending balances of its postretirement benefit plan's benefit obligation and funded status related to its union employees for 2000 and 2001 (in thousands):
The assumed health care rates gradually decline to 5.5% for both medical categories by 2010.
If the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 2001 would increase by approximately 16.1%. The annual effect of the 1% increase on the total of the service and interest costs would be an increase of approximately 5.4%. If the health care cost trend rate assumptions were decreased by 1%, the accumulated postretirement benefit obligation as of December 31, 2001 would decrease by approximately 16.2%. The annual effect of the 1% decrease on the total of the service and interest costs would be a decrease of 5.4%.
(d) Other Employee Matters -- Approximately 66% of REMA's employees are the subject of three collective bargaining arrangements. Of these employees, 12% are subject to arrangements that expire prior to December 31, 2002.
8. INCOME TAXES.
REMA's current and deferred components of income tax expense were as follows:
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
Following were REMA's tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases:
9. RELATED PARTY TRANSACTIONS
(a) Procurement and Marketing Agreement -- REMA is a partner to a procurement and marketing agreement with Reliant Energy Services under which Reliant Energy Services is entitled to procurement and power marketing fees. Under the agreement, Reliant Energy Services
o enters into derivative transactions on behalf of REMA to hedge commodity risks;
o procures coal, fuel oil and emissions allowances on REMA's behalf at a pass through price;
o procures gas on REMA's behalf at a pass through price or for an index price plus costs of delivery, depending on when and how the gas is procured; and
o markets power and surplus gas, fuel oil and emissions allowances on REMA's behalf.
Reliant Energy Services began charging for these services in 2001. The amount charged to REMA for these services was $4.7 million for the year ended December 31, 2001.
From November 24, 1999 through May 11, 2000, REMA sold most of the electric power generated by its facilities to the Sithe Affiliate. REMA also purchased fuel for its generation plants (other than coal for Keystone and Conemaugh) from the Sithe Affiliate.
(b) Support Services Agreement -- REMA is a party to a support services agreement with REPG under which REPG will, on an as-requested basis and at cost, provide or procure from other affiliates or third parties services in support of REMA's business in areas such as human resources, accounting, finance, treasury, tax, office administration, information technology, engineering, construction management, environmental, legal and safety. REPG has agreed to provide these services only to the extent it or its affiliates provide these services for its or its subsidiaries' generating assets. REPG began charging and allocating to REMA for these services in 2001. Amounts charged and allocated to REMA for these services were $54.9 million for the year ended December 31, 2001.
Such cost and fees charged under the support services agreement and procurement and marketing agreement (see Note 9(a)) are subordinated to certain expenses pursuant to the sale-leaseback financing documents, including lease expense.
(c) Long-term Notes to Affiliated Entities -- See Note 5.
(d) Working Capital Note -- In May 2000, REMA executed a two-year revolving note with RENH under which REMA may borrow, and RENH is committed to lend, up to $30 million from time to time for working capital needs. Borrowings under the note will be unsecured and will rank equal in priority with REMA's lease obligations. REMA may replace this note with a working capital facility from an unaffiliated lender. Borrowings under the working capital note bear interest based on LIBOR. At December 31, 2001, borrowings under the working capital note totaled $11 million. At December 31, 2000, there were no borrowings outstanding under this note.
(e) Subordinated Working Capital Facility -- REMA has entered into an irrevocably committed subordinated working capital facility with RENH. RENH will fund REMA's drawings under this facility through borrowings or equity contributions irrevocably committed to RENH by Reliant Energy Resources Corp., a wholly owned subsidiary of Reliant Energy, until March 2002, and thereafter by Reliant Resources. REMA may borrow under this facility to pay operating expenditures, senior indebtedness and rent, but excluding capital expenditures and subordinated indebtedness. In addition, RENH must make advances to REMA and REMA must obtain such advance under such facility up to the maximum available commitment under such facility from time to time if REMA's pro forma coverage ratio does not equal or exceed 1.1 to 1.0, measured at the time rent under the leases is due. Subject to the maximum available commitment, drawings will be made in amounts necessary to permit REMA to achieve a pro forma coverage ratio of at least 1.1 to 1.0. The amount available under the subordinated working capital facility is $120 million through January 1, 2007. Thereafter, the available amount decreases by $24 million on January 2, 2007 and by $24 million each subsequent year through its expiration in 2011. At December 31, 2000 and 2001, there were no borrowings under this facility.
10. PREPAID LEASE EXPENSE
During the first and third quarters of 2001, REMA paid $150.9 million and $108.4 million, respectively, to lessors related to the sale and leaseback transactions (see Note 6(a)). As of December 31, 2001, REMA had recorded prepaid lease expense of $180.5 million in other current and other noncurrent assets of $58.8 million and $121.7 million, respectively.
11. BANKRUPTCY OF ENRON CORP. AND ITS AFFILIATES
During the fourth quarter of 2001, Enron Corp. and its Affiliates (Enron) filed a petition for voluntary bankruptcy. Accordingly, REMA recorded a $68.4 million provision, comprised of provisions against receivables of $3.7 million and net non-trading derivative balances of $64.7 million.
The non-trading derivatives with Enron were designated as Cash Flow Hedges (see Note 2). The net gain on these derivative instruments previously reported in other comprehensive income will remain in accumulated other comprehensive income and will be reclassified into earnings during the period in which the originally designated hedged transaction occurs.
12. UNAUDITED QUARTERLY INFORMATION
Summarized quarterly financial data for 2000 and 2001 is as follows (in thousands):
The variances in revenues from quarter to quarter were primarily due to the seasonal fluctuations in demand for energy and energy services and changes in energy commodity prices. Changes in operating income (loss) and net (loss) income from quarter to quarter were primarily due to the seasonal fluctuations in demand for energy and energy services, changes in energy commodity prices and timing of maintenance expenses on electric generation plants. In addition, during the fourth quarter of 2001, REMA recognized a $68.4 million provision related to receivables and net non-trading derivative balances which reduced revenues and operating income (see Note 11).
* * *
INDEPENDENT AUDITORS' REPORT
Reliant Energy Mid-Atlantic Power Holdings, LLC
We have audited the accompanying consolidated balance sheets of Reliant Energy Mid-Atlantic Power Holdings, LLC (formerly Sithe Pennsylvania Holdings, LLC) and related companies (REMA) as of December 31, 2000 and 2001, and the related combined and consolidated statements of operations, member's and shareholder's equity, and cash flows for the periods from November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, May 12, 2000 to December 31, 2000, and the year ended December 31, 2001. The combined and consolidated financial statements include the accounts of Reliant Energy Mid-Atlantic Power Holdings, LLC and three related companies, Reliant Energy New Jersey Holdings, LLC (formerly Sithe New Jersey Holdings, LLC), Reliant Energy Maryland Holdings, LLC (formerly Sithe Maryland Holdings, LLC) and Reliant Energy Mid-Atlantic Power Services, Inc. (formerly Sithe Mid-Atlantic Power Services, Inc.) These companies are under common ownership and common management. These financial statements are the responsibility of REMA's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined and consolidated financial statements present fairly, in all material respects, the consolidated financial position of REMA at December 31, 2000 and 2001, and the combined and consolidated results of their operations and their combined and consolidated cash flows for the periods from November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, May 12, 2000 to December 31, 2000, and the year ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, REMA changed its method of accounting for derivative instruments and hedging activities in 2001.
DELOITTE & TOUCHE LLP
Houston, Texas March 28, 2002
RELIANT ENERGY NEW JERSEY HOLDINGS, LLC AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (THOUSANDS OF DOLLARS)
See Notes to the Consolidated Financial Statements.
RELIANT ENERGY NEW JERSEY HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)
See Notes to the Consolidated Financial Statements.
RELIANT ENERGY NEW JERSEY HOLDINGS, LLC AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (THOUSANDS OF DOLLARS)
See Notes to the Consolidated Financial Statements.
RELIANT ENERGY NEW JERSEY HOLDINGS, LLC AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED MEMBER'S EQUITY (THOUSANDS OF DOLLARS)
See Notes to the Consolidated Financial Statements.
RELIANT ENERGY NEW JERSEY HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Reliant Energy New Jersey Holdings, LLC -- Reliant Energy New Jersey Holdings, LLC (formed December 28, 1998 and formerly named Sithe New Jersey Holdings, LLC), together with its subsidiaries (collectively, RENJ), were indirect wholly owned subsidiaries of Sithe Energies, Inc. (Sithe) as of December 31, 1999. RENJ acquired its generating stations and various related assets from an operating subsidiary of GPU, Inc. (GPU), a utility holding company, on November 24, 1999. Reliant Energy Mid-Atlantic Power Holdings, LLC (formerly Sithe Pennsylvania Holdings, LLC) (REMA), an affiliate of RENJ, also acquired assets from GPU in Pennsylvania as did another affiliate in Maryland. The operations of RENJ, REMA and the other affiliate in Maryland have been managed together since November 24, 1999.
In May 2000, Sithe, through an indirect wholly owned subsidiary, sold all of its equity interests in RENJ and REMA to an indirect wholly owned subsidiary of Reliant Energy Power Generation, Inc. (REPG). REPG is an indirect subsidiary of Reliant Resources, Inc. (Reliant Resources) and Reliant Energy, Incorporated (Reliant Energy) (see Note 2). Following this transaction, RENJ changed its name such that "Sithe" was replaced with "Reliant Energy."
RENJ owns and operates four electric generation plants in New Jersey with an annual average net generating capacity of approximately 1,499 megawatts (MW).
(b) Basis of Presentation and Principles of Consolidation -- These consolidated financial statements present the results of operations for the periods from November 24, 1999 (the date that RENJ acquired the generation assets from GPU) to December 31, 1999, January 1, 2000 to May 11, 2000 (the date that REPG indirectly acquired RENJ), May 12, 2000 to December 31, 2000 and for the year ended December 31, 2001. Within these financial statements, "Current RENJ" and "Former RENJ" refer to RENJ after and before, respectively, the acquisition from Sithe Energies by REPG. There are no separate financial statements available with regard to the facilities of RENJ (prior to the acquisition) because their operations were fully integrated with, and their results of operations were consolidated into, the former owners of the facilities of RENJ. In addition, the electric output of the facilities was sold based on rates set by regulatory authorities. As a result and because electricity rates will now be set by the operation of market forces, the historical financial data with respect to the facilities of RENJ prior to November 24, 1999 is not meaningful or indicative of RENJ's future results. RENJ's results of operations in the future will depend primarily on revenues from the sale of energy, capacity and ancillary services, and the level of its operating expenses.
The consolidated financial statements include the accounts of RENJ. All significant intercompany transactions and balances are eliminated in consolidation.
(c) Use of Estimates and Reclassifications -- 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, 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.
Some amounts from previous years have been reclassified to conform to the 2001 presentation of financial statements. These reclassifications do not affect earnings.
(d) Market Risk and Other Uncertainties -- RENJ is subject to risks associated with price movements of energy commodities, supply and price of fuel and electricity, effects of competition, operation of deregulating power markets, seasonal weather patterns, technological obsolescence and the regulatory environment within the United States.
(e) Revenue Recognition -- Revenues include energy, capacity and ancillary service sales. Current RENJ's power and services, excluding capacity, were sold at market-based prices through a related party and indirect subsidiary of Reliant Energy, Reliant Energy Services, Inc. (Reliant Energy Services). Reliant Energy Services acted as agent on behalf of RENJ on most market-based sales. These revenues are directly allocated to RENJ. RENJ's capacity was also sold pursuant to a transition power purchase agreement with GPU. The transition power purchase agreement extends through May 31, 2002. Sales not billed by month-end are accrued based upon estimated energy or services delivered.
In addition, Reliant Energy Services enters into derivative transactions in order to hedge some expected sales and purchases of fuel for REMA and its subsidiaries, including Current RENJ. These transactions are designated to the portfolio of generation of REMA, including RENJ power generation operations, at the time of executing the transactions. However, such transactions are not designated to individual subsidiaries of REMA. The gains and losses related to these contractual commitments are allocated by REMA to its subsidiaries based on capacity of each subsidiary. These allocated realized gains and losses are included in operating revenues and operating expenses in the statement of consolidated income.
Prior to May 11, 2000, Former RENJ's power and services, excluding capacity, were sold at market-based prices through sales to a related party and wholly owned subsidiary of Sithe (the Sithe Affiliate) for resale.
(f) Cash and Cash Equivalents -- Cash and cash equivalents are considered to be highly liquid investments with an original maturity of three months or less, which are cash or are readily convertible to cash.
(g) Inventories -- Inventories are comprised of materials, supplies and fuel stock held for consumption and are stated at the lower of weighted-average cost or market.
(h) Fair Values of Financial Instruments -- The recorded amounts for financial instruments such as affiliate receivables and payables approximate fair value.
(i) Property, Plant and Equipment -- Property, plant and equipment are stated at historical cost. Depreciation is computed using the straight-line method over the estimated useful lives commencing when assets, or major components thereof, are either placed in service or acquired, as appropriate. RENJ expenses all repair and maintenance costs as incurred.
(j) Intangible Assets -- Historically, cost in excess of fair value of net assets acquired (goodwill) is amortized on a straight line basis over the estimated useful life of 35 years. See Note 1(n). Through May 11, 2000 goodwill was amortized on a straight-line basis over the estimated useful life of 40 years. Goodwill amortization expense for the periods from November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000 and May 12, 2000 to December 31, 2000 and the year ended December 31, 2001, was $46,000, $200,000, $0 and $100,000, respectively.
Other intangible assets consist primarily of air emissions regulatory allowances that have already been issued to RENJ and allowances that RENJ is entitled to be allocated during the remaining useful lives of the plants. These intangible assets are amortized on a unit-of-production basis as utilized. Because no credits were utilized in 1999 and during the period January 1, 2000 to May 11, 2000, no amortization expense was recognized during these periods related to other intangible assets. Other intangible amortization expense during the period from May 12, 2000 to December 31, 2000 and year ended December 31, 2001 was $48,000 and $93,000, respectively.
(k) Impairment of Long-Lived Assets -- RENJ periodically evaluates long-lived assets, including property, plant and equipment and other intangibles, when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets, as compared to the carrying value of the assets. To date, no impairment has been indicated.
(m) Income Taxes -- In connection with the acquisition, RENJ entered into a tax sharing agreement with Reliant Energy, whereby RENJ calculates its income tax provision on a separate return basis. RENJ uses the liability method of accounting for deferred income taxes and measures deferred income taxes for all significant income tax temporary differences. RENJ's current federal and state income taxes are payable to and receivable from Reliant Energy. For additional information regarding income taxes, see Note 7.
(n) Changes in Accounting Principles and New Accounting Pronouncements.
Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), was issued by the SEC on December 3, 1999. SAB No. 101 summarizes some of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. RENJ's consolidated financial statements reflect the accounting principles provided in SAB No. 101.
Effective January 1, 2001, RENJ was required to adopt Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. This statement requires that derivatives be recognized at fair value in the balance sheet and 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. Adoption of SFAS No. 133 resulted in no cumulative after-tax change to net income or other comprehensive income.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 "Business Combinations" (SFAS No. 141) and SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being transferred to goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 provides for a nonamortization approach, whereby goodwill and certain intangibles with indefinite lives will not be amortized into results of operations, but instead will be reviewed periodically for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles with indefinite lives is more than its fair value. RENJ adopted the provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 on January 1, 2002. The adoption of SFAS No. 141 did not have a material impact on RENJ's historical results of operations or financial position. On January 1, 2002, RENJ discontinued amortizing goodwill into the results of operations pursuant to SFAS No. 142. RENJ recognized $100,000 of goodwill amortization expense during the year ended December 31, 2001. RENJ is in the process of determining further effects of adoption of SFAS No. 142 on its Consolidated Financial Statements, including the review of goodwill and certain intangibles for impairment. RENJ anticipates finalizing its review of goodwill and certain intangibles during 2002. RENJ does not believe impairments of goodwill and certain intangibles, if any, will have a material impact on RENJ's results of operations or financial position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of a liability for an asset retirement legal obligation to be recognized in the period in which it is incurred. When the liability is initially recorded, associated costs are capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. SFAS No. 143 requires entities to record a cumulative effect of change in accounting principle in the income statement in the period of adoption. RENJ plans to adopt SFAS No. 143 on January 1, 2003, and is in the process of determining the effect of adoption on its results of operations and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," while retaining many of the requirements of these two statements. Under SFAS No. 144, assets held for sale that are a component of an entity will be included in discontinued operations if the operations and cash flows will be or have been eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations prospectively. SFAS No. 144 is not expected to materially change the methods used by RENJ to measure impairment losses on long-lived assets. RENJ adopted SFAS No. 144 on January 1, 2002.
2. ACQUISITION BY REPG AND RESTRUCTURING
In February 2000, REPG reached a definitive agreement to purchase the equity in and the pre-existing affiliate debt of RENJ, REMA and other affiliates from Sithe for an aggregate purchase price of $2.1 billion. Included within this purchase transaction were transition power purchase agreements, including the capacity transition contract with GPU described in Note 1(e). The transaction was completed in May 2000. REPG accounted for the acquisition as a purchase with assets and liabilities of RENJ reflected at their estimated fair values. The fair value adjustments related to the acquisition which have been pushed down to RENJ, primarily included adjustments in
property, plant and equipment, air emissions regulatory allowances, materials and supplies inventories, environmental reserves and related deferred taxes. The air emissions regulatory allowances of $12 million are being amortized on a units-of-production basis as utilized. In addition, a valuation allowance for materials and supplies inventories of $8 million was established. The excess of the purchase price over the fair value of the net assets acquired of $2 million was recorded as goodwill and was historically amortized over 35 years. As of December 31, 2000, RENJ has liabilities associated with four site investigations and environmental remediations. RENJ has recorded its estimate of these environmental liabilities in the amount of $8.3 million as of December 31, 2001. RENJ finalized these fair value adjustments in May 2001. There were no material modifications to the preliminary adjustments from December 31, 2000.
The net purchase price of RENJ was allocated as follows:
The following table presents selected actual financial information and unaudited pro forma information for the periods November 24, 1999 to December 31, 1999 and January 1, 2000 to May 11, 2000, as if the acquisition by REPG had occurred on November 24, 1999 and January 1, 2000, as applicable. Pro forma information would not be meaningful for the periods prior to November 24, 1999 since historical financial results of the business and the revenue generating activities underlying the periods prior to November 24, 1999 are substantially different from the wholesale generation activities that RENJ has been engaged in after November 24, 1999.
These unaudited pro forma results, based on assumptions deemed appropriate by RENJ's management, have been prepared for informational purposes only and are not necessarily indicative of the amounts that would have resulted if the acquisition of RENJ by REPG had occurred on November 24, 1999 and January 1, 2000, as applicable. Purchase-related adjustments to the results of operations include the effects on depreciation and amortization and income taxes.
In July 2000, REMA acquired the equity ownership interests in RENJ as well as other affiliates.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Depreciation expense for the periods November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000 and year ended December 31, 2001, was $559,000, $1,868,000 and $7,949,000 and $12,460,000, respectively.
4. NOTES PAYABLE TO AFFILIATE
In connection with Sithe's acquisition of its generating assets from GPU, RENJ entered into approximately $145 million of demand notes payable to Sithe Northeast Generating Company, Inc. (an indirect wholly owned subsidiary of Sithe) due August 20, 2001. In connection with the acquisition of RENJ in May 2000, Sithe Northeast Generating Company, Inc. sold these notes to an indirect wholly owned subsidiary of REPG (see Note 2). The original notes were subsequently cancelled and new notes issued (New Notes), which are due January 1, 2029.
Prior to May 2000, the notes bore interest at a financing rate based on the London interbank offered rate (LIBOR) plus 1.9% per annum. The New Notes accrue interest at a fixed rate of 9.4% per annum. There are no amounts outstanding on these notes as of December 31, 2001.
5. COMMITMENTS AND CONTINGENCIES
(a) Environmental -- Under the agreement to acquire RENJ's generating assets from GPU, liabilities associated with ash disposal site closure and site contamination at the acquired facilities in New Jersey prior to closing were assumed. GPU retained liabilities associated with the disposal of hazardous substances to off-site locations prior to November 24, 1999. RENJ has recorded its estimate of these environmental liabilities in the amount of $8.7 million and $8.3 million as of December 31, 2000 and 2001, respectively. RENJ expects the total liability will be paid over the next five years.
(b) Operating Leases -- RENJ leases some equipment and vehicles under noncancelable operating leases extending through 2007. Future minimum rentals under lease agreements are as follows (in thousands):
Rent expense incurred under operating leases aggregated approximately $4,000, $8,000, $14,000 and $26,000 for the periods from November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000 and year ended December 31, 2001, respectively.
(c) Other -- RENJ is party to various legal proceedings that arise from time to time in the ordinary course of business. While RENJ cannot predict the outcome of these proceedings, RENJ does not expect these matters to have a material adverse effect on RENJ's financial position, results of operations or cash flows.
6. EMPLOYEE BENEFIT PLANS AND OTHER EMPLOYEE MATTERS
(a) Pension -- In connection with REPG's acquisition of REMA, RENJ's non-union employees participated in Reliant Energy's noncontributory cash balance pension plan. Effective March 1, 2001, RENJ no longer accrued benefits under a noncontributory pension plan for its non-union employees. Effective March 1, 2001, each non-union participant's pension account balance became fully vested. Under the cash balance formula, each participant has an account, for recordkeeping purposes only, to which credits are allocated annually based on a percentage of the participant's pay. Reliant Energy's funding policy is to review amounts annually in accordance with applicable regulations in order to achieve adequate funding of projected benefit obligations. The assets of Reliant Energy's pension plan consist principally of common stocks and high-quality, interest-bearing obligations.
Substantially all of RENJ's union employees participate in REMA's noncontributory pension plan (the Union Plan). The Union Plan provides retirement benefits based on years of service and compensation. The funding policy of REMA is to contribute amounts annually in accordance with applicable regulations in order to achieve adequate funding of projected benefit obligations. All pension liabilities associated with RENJ's union employees' service periods prior to November 24, 1999 were retained by GPU pursuant to the purchase agreement between Sithe and GPU.
RENJ's pension costs related to its non-union and union employees has been determined based on the employees of RENJ and their respective compensation level. RENJ's pension expense for the periods November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000 and year ended December 31, 2001, was $16,000, $65,000, $131,000 and $172,000, respectively.
(b) Savings Plan -- Effective November 24, 1999 through May 11, 2000, RENJ participated in Sithe's savings plan, which covered substantially all of RENJ's employees. Effective May 12, 2000, RENJ began to participate in a separate REMA savings plan, which covered substantially all of RENJ's employees with terms somewhat similar to Sithe's savings plan. These Savings Plans are collectively referred to as the "Savings Plans." The Savings Plans limit non-union employees to 16% pre-tax until January 1, 2001 when after-tax contributions become available. The Savings Plans limit union employees' pre-tax contribution to 22% and after-tax contributions to 10%. These contributions were based on covered compensation, not to exceed the annual contribution limits of the Internal Revenue Code of 1986, as amended (Code). Prior to March 1, 2001, RENJ matched up to 100% of the first 3% of each non-union employee's contributions (based on the employee's service). Effective March 1, 2001, Reliant Energy amended RENJ's non-union employee savings plan to generally provide for (a) employer matching contributions equal to 100% of the first 6% of each employee's contributions to the plan, (b) a 2% employer contribution on a payroll basis for 2002, limited to the first $85,000 of compensation, and (c) discretionary employer contributions up to 3% at the end of the plan year based on each employee's eligible compensation. Effective March 1, 2001, all prior and future employer contributions on behalf of such employees are fully vested. RENJ matches between 55% and 65% (based upon the terms of the applicable collective bargaining agreement) of the first 4% of each union employee's pre-tax and/or after-tax contributions (up to the annual Code contribution limits) to the Savings Plans. Union employees are fully vested in their employer matching contributions. Savings plan benefit expense for RENJ employees for the periods November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000 and year ended December 31, 2001 was approximately $12,000, $39,000, $61,000 and $240,000, respectively.
(c) Postretirement Benefits -- RENJ provides some postretirement benefits through Reliant Energy and REMA plans (primarily medical care and life insurance benefits) for its retired employees, substantially all of whom may become eligible for these benefits when they retire. All retiree medical obligations for RENJ employees eligible for retirement prior to November 24, 1999 were retained by GPU pursuant to the purchase agreement between Sithe and GPU. RENJ's postretirement benefits are funded on a pay-as-you-go basis. Postretirement benefit expense for the period May 12, 2000 to December 31, 2000 and year ended December 31, 2001 related to RENJ's employees was $58,000 and $102,000, respectively.
(d) Other Employee Matters -- As of December 31, 2001, approximately 78% of RENJ's employees are the subject of a collective bargaining arrangement. Of these employees, none are subject to arrangements that expire prior to December 31, 2002.
7. INCOME TAXES
RENJ's current and deferred components of income tax expense were as follows:
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
Following were RENJ's tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases:
8. RELATED PARTY TRANSACTIONS
(a) Procurement and Marketing Agreement -- RENJ is a partner to a procurement and marketing agreement with Reliant Energy Services under which Reliant Energy Services is entitled to procurement and power marketing fees. Under the agreement, Reliant Energy Services:
o procures fuel oil and emissions allowances on RENJ's behalf at a pass through price;
o procures gas on RENJ's behalf at a pass through price or for an index price plus costs of delivery, depending on when and how the gas is procured; and
o markets power and surplus gas, fuel oil and emissions allowances on RENJ's behalf.
Reliant Energy Services began charging for these services in 2001. The amount charged to RENJ for these services was $144,000 for the year ended December 31, 2001.
From November 24, 1999 through May 11, 2000, RENJ sold most of the electric power generated by its facilities to the Sithe Affiliate. REMA also purchased fuel for its generation plants from the Sithe Affiliate.
(b) Support Services Agreement -- RENJ is a party to a support services agreement with REPG under which REPG will, on an as-requested basis and at cost, provide or procure from third parties services in support of RENJ's business in areas such as human resources, accounting, finance, treasury, tax, office administration, information technology, engineering, construction management, environmental, legal and safety. REPG has agreed to provide these services only to the extent it or its affiliates provide these services for its or its subsidiaries' generating assets. Amounts charged and allocated to RENJ for these services for year ended December 31, 2001 was $9.9 million. No such amounts were charged and allocated to RENJ for the period from May 12, 2000 to December 31, 2000.
Such cost and fees charged under the support services agreement and procurement and marketing agreement (see Note 8(a)) are subordinated to certain expenses pursuant to the sale-leaseback financing documents (see Note 9).
9. LEASE FINANCING
In August 2000, REMA sold interests in three of its generating plants acquired in November 1999 and leased them back from owner lessors. The equity interests in RENJ are pledged as collateral for REMA's lease obligation. In addition, RENJ guarantees the lease obligations.
The following table sets forth REMA's obligation under these long-term operating leases (in millions):
* * *
INDEPENDENT AUDITORS' REPORT
Reliant Energy New Jersey Holdings, LLC
We have audited the accompanying consolidated balance sheet of Reliant Energy New Jersey Holdings, LLC (formerly Sithe New Jersey Holdings, LLC) and its subsidiaries (RENJ) as of December 31, 2000 and 2001, and the related statements of consolidated income, member's equity and cash flows for the periods from November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000 and the year ended December 31, 2001. These financial statements are the responsibility of RENJ's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of RENJ at December 31, 2000 and 2001, and the consolidated results of their operations and their consolidated cash flows for the periods from November 24, 1999 to December 31, 1999, January 1, 2000 to May 11, 2000, and May 12, 2000 to December 31, 2000 and the year ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Houston, Texas March 28, 2002
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The information called for by Item 10 is omitted pursuant to Instruction I(2)(a) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by Item 11 is omitted pursuant to Instruction I(2)(a) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by Item 12 is omitted pursuant to Instruction I(2)(a) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Item 13 is omitted pursuant to Instruction I(2)(a) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
The following schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements:
I, III, IV and V.
(a)(3) Exhibits
See Index of Exhibits (page 52), which index also include the management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K.
On February 5, 2002, we filed a Current Report on Form 8-K dated February 5, 2002 regarding a restatement of 2001 results.
On March 15, 2002, we filed a Current Report on Form 8-K dated March 15, 2002 regarding the effects of our restatement.
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, in the City of Houston, the State of Texas, on the 15th day of April, 2002.
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC (Registrant)
By: /s/ Curtis A. Morgan -------------------------------------------- Curtis A. Morgan President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 15, 2002.
SIGNATURE TITLE
/s/ Curtis A. Morgan President and Manager - --------------------------------------------- (Principal Executive Officer, (Curtis A. Morgan) Principal Financial Officer and Principal Accounting Officer)
/s/ Joe Bob Perkins Manager - --------------------------------------------- (Joe Bob Perkins)
RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC
EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2001
INDEX OF EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by a cross (+); all exhibits not so designated are incorporated herein by reference to a prior filing as indicated.