Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-16455
RRI Energy, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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76-0655566 |
(State or Other Jurisdiction of Incorporation or
Organization)
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(I.R.S. Employer Identification No.) |
1000 Main Street
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
(713) 497-3000
(Registrants Telephone Number, Including Area Code)
Reliant Energy, Inc.
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of April 24, 2009, the latest practicable date for determination, RRI Energy, Inc. had
350,426,995 shares of common stock outstanding and no shares of treasury stock.
FORWARD-LOOKING
INFORMATION
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are statements that contain projections, assumptions or
estimates about the outcome of pending legal actions, our revenues, income, capital structure and
other financial items, our plans and objectives for future operations or about our future economic
performance, transactions and dispositions, financings or offerings and approvals related thereto.
In many cases, you can identify forward-looking statements by terminology such as anticipate,
estimate, believe, continue, could, intend, may, plan, potential, predict,
should, will, expect, objective, projection, forecast, goal, guidance, outlook,
effort, target and other similar words. However, the absence of these words does not mean that
the statements are not forward-looking.
Actual results may differ materially from those expressed or implied by the forward-looking
statements as a result of many factors or events, including, but not limited to, the following:
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Demand and market prices for electricity, purchased power and fuel and emission
allowances; |
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Limitations on our ability to set rates at market prices; |
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Legislative, regulatory and/or market developments; |
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Our ability to obtain adequate fuel supply and/or transmission and distribution
services; |
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Interruption or breakdown of our generating equipment and processes; |
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Failure of third parties to perform contractual obligations; |
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Changes in environmental regulations that constrain our operations or increase our
compliance costs; |
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Failure by transmission system operators to communicate operating and system
information properly and timely; |
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Failure to meet our debt service, restrictive covenants or collateral postings; |
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Ineffective hedging and other risk management activities; |
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Changes in the wholesale energy market or in our evaluation of our generation
assets; |
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The outcome of pending or threatened lawsuits, regulatory proceedings, tax
proceedings and investigations; |
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Weather-related events or other events beyond our control; |
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The timing and extent of changes in commodity prices or interest rates; and |
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Financial market conditions and our access to capital. |
Other factors that could cause our actual results to differ from our projected results are
discussed or referred to in the Risk Factors section of our most recent Annual Report on Form
10-K filed with the Securities and Exchange Commission.
Each forward-looking statement speaks only as of the date of the particular statement and we
undertake no obligation to update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise. Our filings and other important information are also
available on our website at www.rrienergy.com.
ii
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RRI ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended March 31, |
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2009 |
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2008 |
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(thousands of dollars, |
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except per share amounts) |
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Revenues: |
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Revenues (including $4,288 and $12,202 unrealized losses
(including $0 and $107,409 from affiliates) |
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$ |
466,184 |
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$ |
879,798 |
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Expenses: |
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Cost of sales (including $(39,455) and $43,002 unrealized gains
(losses)) (including $0 and $35,713 from affiliates) |
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324,674 |
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508,839 |
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Operation and maintenance |
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157,146 |
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155,445 |
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General and administrative |
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29,014 |
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29,214 |
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Western states litigation and similar settlements |
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34,000 |
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Gains on sales of assets and emission and exchange allowances, net |
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(18,930 |
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(611 |
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Depreciation and amortization |
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67,858 |
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82,797 |
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Total operating expense |
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559,762 |
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809,684 |
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Operating Income (Loss) |
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(93,578 |
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70,114 |
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Other Income (Expense): |
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Income of equity investment, net |
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541 |
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207 |
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Debt extinguishments |
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(423 |
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Other, net |
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51 |
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(64 |
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Interest expense |
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(46,919 |
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(52,346 |
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Interest income |
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248 |
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6,425 |
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Total other expense |
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(46,079 |
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(46,201 |
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Income (Loss) from Continuing Operations Before Income Taxes |
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(139,657 |
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23,913 |
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Income tax expense (benefit) |
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(33,876 |
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10,977 |
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Income (Loss) from Continuing Operations |
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(105,781 |
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12,936 |
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Income (loss) from discontinued operations |
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(45,632 |
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364,276 |
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Net Income (Loss) |
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$ |
(151,413 |
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$ |
377,212 |
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Basic Earnings (Loss) per Share: |
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Income (loss) from continuing operations |
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$ |
(0.30 |
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$ |
0.04 |
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Income (loss) from discontinued operations |
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(0.13 |
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1.05 |
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Net income (loss) |
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$ |
(0.43 |
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$ |
1.09 |
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Diluted Earnings (Loss) per Share: |
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Income (loss) from continuing operations |
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$ |
(0.30 |
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$ |
0.04 |
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Income (loss) from discontinued operations |
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(0.13 |
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1.03 |
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Net income (loss) |
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$ |
(0.43 |
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$ |
1.07 |
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See Notes to our Unaudited Consolidated Interim Financial Statements
1
RRI ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31, 2009 |
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December 31, 2008 |
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(thousands of dollars, except per share amounts) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,410,315 |
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$ |
1,004,367 |
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Restricted cash |
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6,522 |
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2,721 |
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Accounts and notes receivable, principally customer |
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171,906 |
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279,540 |
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Inventory |
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295,375 |
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314,999 |
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Derivative assets |
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178,746 |
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161,340 |
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Margin deposits |
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125,893 |
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231,676 |
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Investment in and receivables from Channelview, net |
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58,636 |
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58,703 |
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Prepayments and other current assets |
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119,525 |
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124,449 |
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Current assets of discontinued operations |
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2,426,117 |
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2,184,671 |
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Total current assets |
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4,793,035 |
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4,362,466 |
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Property, plant and equipment, gross |
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6,468,178 |
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6,417,268 |
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Accumulated depreciation |
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(1,656,356 |
) |
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(1,597,479 |
) |
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Property, Plant and Equipment, net |
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4,811,822 |
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4,819,789 |
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Other Assets: |
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Other intangibles, net |
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377,121 |
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380,554 |
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Prepaid lease |
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279,651 |
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273,374 |
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Other ($28,188 and $29,012 accounted for at fair value) |
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303,339 |
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298,431 |
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Long-term assets of discontinued operations |
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658,892 |
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494,781 |
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Total other assets |
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1,619,003 |
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1,447,140 |
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Total Assets |
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$ |
11,223,860 |
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$ |
10,629,395 |
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LIABILITIES AND EQUITY |
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Current Liabilities: |
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Current portion of long-term debt and short-term borrowings |
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$ |
12,869 |
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$ |
12,517 |
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Accounts payable, principally trade |
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154,513 |
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156,604 |
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Derivative liabilities |
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254,087 |
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202,206 |
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Other |
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227,804 |
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200,559 |
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Current liabilities of discontinued operations |
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3,088,758 |
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2,374,362 |
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Total current liabilities |
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3,738,031 |
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2,946,248 |
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Other Liabilities: |
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Derivative liabilities |
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127,871 |
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140,493 |
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Other |
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320,755 |
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272,079 |
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Long-term liabilities of discontinued operations |
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759,357 |
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850,483 |
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Total other liabilities |
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1,207,983 |
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1,263,055 |
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Long-term Debt |
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2,630,031 |
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2,633,444 |
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Commitments and Contingencies |
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Temporary Equity Stock-based Compensation |
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9,769 |
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9,004 |
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Stockholders Equity: |
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Preferred stock; par value $0.001 per share (125,000,000 shares authorized;
none outstanding) |
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Common stock; par value $0.001 per share (2,000,000,000 shares authorized;
350,359,291 and 349,812,537 issued) |
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111 |
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111 |
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Additional paid-in capital |
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6,243,969 |
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6,238,639 |
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Accumulated deficit |
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(2,526,614 |
) |
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(2,375,201 |
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Accumulated other comprehensive loss |
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(79,420 |
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(85,905 |
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Total stockholders equity |
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3,638,046 |
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3,777,644 |
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Total Liabilities and Equity |
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$ |
11,223,860 |
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$ |
10,629,395 |
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See Notes to our Unaudited Consolidated Interim Financial Statements
2
RRI ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31, |
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2009 |
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2008 |
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(thousands of dollars) |
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Cash Flows from Operating Activities: |
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Net income (loss) |
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$ |
(151,413 |
) |
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$ |
377,212 |
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(Income) loss from discontinued operations |
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45,632 |
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(364,276 |
) |
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Net income (loss) from continuing operations |
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(105,781 |
) |
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12,936 |
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Adjustments to reconcile net income (loss) to net cash provided by operating
activities: |
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Depreciation and amortization |
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67,858 |
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82,797 |
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Deferred income taxes |
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(33,771 |
) |
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9,319 |
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Net changes in energy derivatives |
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43,743 |
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(30,800 |
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Amortization of deferred financing costs |
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1,737 |
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2,554 |
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Gains on sales of assets and emission and exchange allowances, net |
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(18,930 |
) |
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(611 |
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Western states litigation and similar settlements |
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34,000 |
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Other, net |
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3,063 |
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|
533 |
|
Changes in other assets and liabilities: |
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Accounts and notes receivable, net |
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86,831 |
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(6,925 |
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Changes in notes, receivables and payables with affiliate, net |
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67 |
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(6,152 |
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Inventory |
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21,219 |
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27,262 |
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Margin deposits, net |
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105,783 |
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9,141 |
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Net derivative assets and liabilities |
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(10,298 |
) |
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(7,045 |
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Accounts payable |
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2,287 |
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30,410 |
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Other current assets |
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(5,102 |
) |
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(2,036 |
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Other assets |
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(4,221 |
) |
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(2,812 |
) |
Taxes payable/receivable |
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(2,689 |
) |
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24,001 |
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Other current liabilities |
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|
40,076 |
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27,893 |
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Other liabilities |
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7,204 |
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2,037 |
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Net cash provided by continuing operations from operating activities |
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199,076 |
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|
206,502 |
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Net cash provided by discontinued operations from operating activities |
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289,161 |
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97,552 |
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Net cash provided by operating activities |
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488,237 |
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304,054 |
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Cash Flows from Investing Activities: |
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Capital expenditures |
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(55,472 |
) |
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(44,689 |
) |
Proceeds from sales of emission and exchange allowances |
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12,798 |
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1,717 |
|
Purchases of emission allowances |
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(5,358 |
) |
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(4,073 |
) |
Restricted cash |
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(3,801 |
) |
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(1,687 |
) |
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Net cash used in continuing operations from investing activities |
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(51,833 |
) |
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(48,732 |
) |
Net cash used in discontinued operations from investing activities |
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(15,728 |
) |
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(4,955 |
) |
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Net cash used in investing activities |
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(67,561 |
) |
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(53,687 |
) |
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Cash Flows from Financing Activities: |
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Payments of long-term debt |
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(45,193 |
) |
Payments of debt extinguishments expenses |
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(423 |
) |
Proceeds from issuances of stock |
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2,163 |
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5,067 |
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Net cash provided by (used in) financing activities |
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2,163 |
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(40,549 |
) |
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Net
Change in Cash and Cash Equivalents, Total Operations |
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422,839 |
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|
209,818 |
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Net
Change in Cash and Cash Equivalents, Discontinued Operations |
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(16,891 |
) |
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4,621 |
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Cash and
Cash Equivalents at Beginning of Period, Continuing Operations |
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|
1,004,367 |
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|
524,070 |
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Cash and
Cash Equivalents at End of Period, Continuing Operations |
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$ |
1,410,315 |
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$ |
738,509 |
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Supplemental Disclosure of Cash Flow Information: |
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Cash Payments: |
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Interest paid (net of amounts capitalized) for continuing operations |
|
$ |
(4,745 |
) |
|
$ |
309 |
|
Income taxes paid (net of income tax refunds) for continuing operations |
|
|
3,762 |
|
|
|
(22,343 |
) |
See Notes to our Unaudited Consolidated Interim Financial Statements
3
RRI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(1) Background and Basis of Presentation
(a) Background.
RRI Energy refers to RRI Energy, Inc. and we, us and our refer to RRI Energy, Inc. and
its consolidated subsidiaries. Our business consists primarily of one business segment, wholesale
energy. See note 13. Our consolidated interim financial statements and notes (interim financial
statements) are unaudited, omit certain disclosures and should be read in conjunction with our
audited consolidated financial statements and notes in our Form 10-K.
On May 1, 2009, we sold our interests in the affiliates that operate our Texas retail
residential and small business (mass) and commercial, industrial and governmental/institutional
(C&I) business. In connection with this sale, we changed our name to RRI Energy, Inc. from Reliant
Energy, Inc. effective May 2, 2009. See note 15. Our Board of Directors has concluded its review
of strategic alternatives.
(b) Basis of Presentation.
Estimates. Management makes estimates and assumptions to prepare financial statements in
conformity with accounting principles generally accepted in the United States of America (GAAP)
that affect:
|
|
|
the reported amounts of assets, liabilities and equity; |
|
|
|
|
the reported amounts of revenues and expenses; and |
|
|
|
|
our disclosure of contingent assets and liabilities at the date of the financial statements. |
We evaluate our estimates and assumptions on an ongoing basis using historical experience and
other factors, including the current economic environment, which we believe to be reasonable under
the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate.
Adjustments and Reclassifications. The interim financial statements reflect all normal
recurring adjustments necessary, in managements opinion, to present fairly our financial position
and results of operations for the reported periods. Amounts reported for interim periods, however,
may not be indicative of a full year period due to seasonal fluctuations in demand for electricity
and energy services, changes in commodity prices, and changes in regulations, timing of maintenance
and other expenditures, dispositions, changes in interest expense and other factors.
Deconsolidation of Channelview. On August 20, 2007, four of our wholly-owned subsidiaries,
RRI Energy Channelview LP (Channelview LP), RRI Energy Channelview (Texas) LLC, RRI Energy
Channelview (Delaware) LLC and RRI Energy Services Channelview LLC (collectively, Channelview),
filed for reorganization under Chapter 11 of the Bankruptcy Code. As Channelview is currently
subject to the supervision of the bankruptcy court, we deconsolidated Channelviews financial
results beginning August 20, 2007 and began reporting our investment in Channelview using the cost
method. The Channelview plant was sold on July 1, 2008. See note 14 for further discussion of
Channelview.
Inventory. We value fuel inventories at the lower of average cost or market. We reduce these
inventories as they are used in the production of electricity or sold. During the three months
ended March 31, 2009 and 2008, we recorded $24 million and $0, respectively, for lower of average
cost or market adjustments in cost of sales.
New Accounting Pronouncement Not Yet Adopted Interim Disclosures about Fair Value of
Financial Instruments. The Financial Accounting Standards Board (FASB) issued FSP FAS 107-1 and
APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which is effective for
interim periods ending after June 15, 2009. The FSP amends Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair
Value of Financial Instruments and will require us to provide information about the fair value of
our financial instruments, including methods and significant assumptions used to estimate the fair
value, in interim financial statements.
4
New Accounting Pronouncement Not Yet Adopted Fair Value Measurements. The FASB issued FSP
FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which is effective
for interim periods ending after June 15, 2009. The FSP provides guidance on how to determine the
fair value of assets and liabilities under SFAS No. 157, Fair Value Measurements in the current economic environment. We do not expect this FSP
to have a significant impact on our consolidated financial statements.
New Accounting Pronouncement Not Yet Adopted Disclosures about Plan Assets. The FASB issued
FSP FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets, which is
effective for 2009. In addition to enhanced disclosures regarding investment policies and
strategies, this FSP will require us to disclose information about fair value measurements of plan
assets that would be similar to the disclosures about fair value measurements required by
SFAS No. 157, Fair Value Measurements in our 2009 Annual Report on Form 10-K.
(2) Stock-based Compensation
Our compensation expense for our stock-based incentive plans was:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in millions) |
|
|
Stock-based incentive plans compensation expense (pre-tax) |
|
$ |
3 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
No significant stock-based compensation awards were granted during the three months ended
March 31, 2009. Stock-based compensation expense represents recognition of grant date fair value
of previously granted awards over the vesting period. No tax benefits related to stock-based
compensation were realized during the three months ended March 31, 2009 and 2008 due to our net
operating loss carryforwards.
(3) Derivative Instruments and Hedging Activities
We account for our derivative instruments and hedging activities in accordance with
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended
(SFAS No. 133). Effective January 1, 2009, we adopted SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (SFAS No. 161).
Changes in commodity prices prior to the energy delivery period are inherent in our wholesale
energy business. However, we believe the benefits of generally hedging our generation assets do
not justify the costs, including collateral postings. Accordingly, we may enter selective hedges,
including originated transactions, based on our assessment of (a) operational and market
limitations requiring us to enter into power, fuel, capacity and emissions transactions to manage
our generation assets, (b) the near term economic environment and volatile commodity markets and
the benefits of hedging some of the downside risk to our earnings and cash flows and (c) market
fundamentals and the opportunity to increase the return from our generation assets. For our risk
management activities, we use derivative and non-derivative contracts that provide for settlement
in cash or by delivery of a commodity. We use derivative instruments such as futures, forwards,
swaps and options to execute our wholesale hedge strategy. We may also enter into derivatives to
manage our exposure to changes in prices of emission and exchange allowances.
We account for our derivatives under one of three accounting methods (mark-to-market, accrual
(under the normal purchase/normal sale exception to fair value accounting) or cash flow hedge
accounting) based on facts and circumstances. The fair values of our derivative activities are
determined by (a) prices actively quoted, (b) prices provided by other external sources or
(c) prices based on models and other valuation methods. See note 5 for discussion on fair value
measurements.
A derivative is recognized at fair value in the balance sheet whether or not it is designated
as a hedge, except for derivative contracts designated as normal purchase/normal sale exceptions,
which are not in our consolidated balance sheet or results of operations prior to settlement
resulting in accrual accounting treatment.
Realized gains and losses on derivative contracts used for risk management purposes and not
held for trading purposes are reported either on a net or gross basis based on the relevant facts
and circumstances. Hedging transactions that do not physically flow are included in the same
caption as the items being hedged.
5
A summary of our derivative activities and classification in our results of operations is:
|
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Primary |
|
|
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|
|
|
|
|
Risk |
|
Purpose for Holding or |
|
Transactions that |
|
Transactions that |
Instrument |
|
Exposure |
|
Issuing Instrument(1) |
|
Physically Flow/Settle |
|
Financially Settle(2) |
|
|
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|
|
|
|
|
|
Power futures, forward,
swap and option
contracts
|
|
Price risk
|
|
Power sales to wholesale customers
|
|
Revenues
|
|
Revenues |
|
|
|
|
Power purchases related to wholesale operations
|
|
Cost of sales
|
|
Revenues |
|
|
|
|
Power purchases/sales related to legacy trading and
non-core asset management positions(3)
|
|
Revenues
|
|
Revenues |
|
Natural gas and fuel
futures, forward, swap
and option contracts
|
|
Price risk
|
|
Natural gas and fuel sales related to wholesale operations
|
|
Revenues/Cost of sales
|
|
Cost of sales |
|
|
|
|
Natural gas and fuel purchases related to wholesale
operations
|
|
Cost of sales
|
|
Cost of sales |
|
|
|
|
Natural gas and fuel purchases/sales related to legacy
trading and non-core asset management
positions(3)
|
|
Cost of sales
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
Emission and exchange
allowances
futures(4)
|
|
Price risk
|
|
Purchases/sales of emission and exchange allowances
|
|
N/A(5)
|
|
Revenues/Cost of sales |
|
|
|
(1) |
|
The purpose for holding or issuing does not impact the accounting method elected for each
instrument. |
|
(2) |
|
Includes classification for mark-to-market derivatives and amounts reclassified from
accumulated other comprehensive income (loss) related to cash flow hedges. |
|
(3) |
|
See discussion below regarding trading activities. |
|
(4) |
|
Includes emission and exchange allowances futures for sulfur dioxide (SO2),
nitrogen oxide (NOX) and carbon dioxide (CO2). |
|
(5) |
|
N/A is not applicable. |
In addition to market risk, we are exposed to credit and operational risk. We have a risk
control framework to manage these risks, which include: (a) measuring and monitoring these risks,
(b) review and approval of new transactions relative to these risks, (c) transaction validation and
(d) portfolio valuation and reporting. We use mark-to-market valuation, value-at-risk and other
metrics in monitoring and measuring risk. Our risk control framework includes a variety of
separate but complementary processes, which involve commercial and senior management and our Board
of Directors. See note 4 for further discussion of our credit policy.
Earnings Volatility from Derivative Instruments. We procure natural gas, coal, oil, natural
gas transportation and storage capacity and other energy-related commodities to support our
wholesale energy business. Some types of transactions may cause us to experience volatility in our
earnings due to natural gas inventory related to transportation and storage generally receiving
accrual treatment while the related derivative instruments are marked to market through earnings.
Unrealized gains and losses on energy derivatives consist of both gains and losses on energy
derivatives during the current reporting period for derivative assets or liabilities that have not
settled as of the balance sheet date and the reversal of unrealized gains and losses from prior
periods for derivative assets or liabilities that settled prior to the balance sheet date but
during the current reporting period.
Cash Flow Hedges. If certain conditions are met, a derivative instrument may be designated as
a cash flow hedge. Derivatives designated as cash flow hedges must have a high correlation between
price movements in the derivative and the hedged item. The changes in fair value of cash flow
hedges are deferred in accumulated other comprehensive income (loss), net of tax, to the extent the
contracts are, or have been, effective as hedges, until the forecasted transactions affect
earnings. At the time the forecasted transactions affect earnings, we reclassify the amounts in
accumulated other comprehensive income (loss) into earnings. We record the ineffective portion of
changes in fair value of cash flow hedges immediately into earnings. For all other derivatives,
changes in fair value are recorded as unrealized gains or losses in our results of operations.
6
If and when an acceptable level of correlation no longer exists, hedge accounting ceases and
changes in fair value are recognized in our results of operations. If it becomes probable that a
forecasted transaction will not occur, we immediately recognize the related deferred gains or
losses in our results of operations. The associated hedging instrument is then marked to market
through our results of operations for the remainder of the contract term unless a new hedging
relationship is redesignated.
Over the past several years, we have substantially decreased derivatives accounted for as cash
flow hedges, in favor of utilizing the mark-to-market method of accounting or the normal
purchase/normal sale exception for these derivatives. During the first quarter of 2007, we
de-designated our remaining cash flow hedges; therefore, as of March 31, 2009 and December 31,
2008, we do not have any designated cash flow hedges.
Presentation of Derivative Assets and Liabilities. We present our derivative assets and
liabilities on a gross basis (regardless of master netting arrangements with the same
counterparty). Cash collateral amounts are also presented on a gross basis.
As of March 31, 2009, our commodity derivative assets and liabilities include amounts for
non-trading and trading activities as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets |
|
|
Derivative Liabilities |
|
|
Net Derivative |
|
|
|
Current |
|
|
Long-Term |
|
|
Current |
|
|
Long-Term |
|
|
Assets (Liabilities) |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-trading |
|
$ |
126 |
|
|
$ |
48 |
|
|
$ |
(222 |
) |
|
$ |
(110 |
) |
|
$ |
(158 |
) |
Trading |
|
|
53 |
|
|
|
27 |
|
|
|
(32 |
) |
|
|
(18 |
) |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives(1) |
|
$ |
179 |
|
|
$ |
75 |
|
|
$ |
(254 |
) |
|
$ |
(128 |
) |
|
$ |
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
There were no derivatives designated as hedging instruments under SFAS No. 133 for the
reporting periods presented. |
We have the following derivative commodity contracts outstanding as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Volumes |
|
Commodity |
|
Unit |
|
|
Current |
|
|
Long-term |
|
|
|
|
|
|
(in millions) |
|
|
Power |
|
MWh(1) |
|
|
(1 |
)(2) |
|
|
(2 |
)(2) |
Natural gas |
|
MMBTU(3) |
|
|
30 |
|
|
|
2 |
|
Natural gas basis |
|
MMBTU(3) |
|
|
3 |
|
|
|
2 |
|
Coal |
|
MMBTU(3) |
|
|
109 |
|
|
|
266 |
|
|
|
|
(1) |
|
MWh is megawatt hours. |
|
(2) |
|
Negative amounts indicate net forward sales. |
|
(3) |
|
MMBTU is million British thermal units. |
7
The income (loss) associated with our energy derivatives for the three months ended March 31,
2009 is:
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as |
|
|
|
|
|
|
Hedging Instruments Under SFAS No. 133(1) |
|
Revenues |
|
|
Cost of Sales |
|
|
|
(in millions) |
|
Non-Trading Commodity Contracts: |
|
|
|
|
|
|
|
|
Unrealized(2) |
|
$ |
(4 |
) |
|
$ |
(40 |
) |
Realized(3)(4)(5) |
|
|
106 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
Total non-trading |
|
$ |
102 |
|
|
$ |
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Commodity Contracts: |
|
|
|
|
|
|
|
|
Unrealized |
|
$ |
|
|
|
$ |
|
|
Realized(3) |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
Total trading |
|
$ |
|
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest rate swap instruments were liquidated in 2002 and the related deferred losses in
accumulated other comprehensive loss are being amortized into interest expense through 2012.
An immaterial amount was amortized during the three months ended March 31, 2009 and 2008,
which was included in interest expense under other operations. |
|
(2) |
|
During 2007, we de-designated our remaining cash flow hedges. During the three months ended
March 31, 2009, previously measured ineffectiveness gains (losses) reversing due to settlement
of the derivative contracts was insignificant. |
|
(3) |
|
Does not include realized gains or losses associated with cash month transactions,
non-derivative transactions or derivative transactions that qualify for the normal
purchase/normal sale exception. |
|
(4) |
|
Excludes settlement value of fuel contracts classified as inventory upon settlement. |
|
(5) |
|
Includes gains or losses from de-designated cash flow hedges reclassified from accumulated
other comprehensive loss due to settlement of the derivative contracts. See note 6. |
As of March 31, 2009 and December 31, 2008, we do not have any designated cash flow hedges.
Amounts included in accumulated other comprehensive loss are:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Expected to be |
|
|
|
|
|
|
|
Reclassified into |
|
|
|
|
|
|
|
Results of |
|
|
|
At the End of the |
|
|
Operations |
|
|
|
Period |
|
|
in Next 12 Months |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
De-designated cash flow hedges(1)(2)(3)
|
|
$ |
44 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
No component of the derivatives gain or loss was excluded from the assessment of
effectiveness. |
|
(2) |
|
During the three months ended March 31, 2008, previously measured ineffectiveness gains
(losses) of $(1) million and $0 in revenues and cost of sales, respectively, reversed due to
settlement of the derivative contracts. |
|
(3) |
|
During the three months ended March 31, 2009 and 2008, $0 was recognized in our results of
operations as a result of the discontinuance of cash flow hedges because it was probable that
the forecasted transaction would not occur. |
Trading Activities. Prior to March 2003, we engaged in proprietary trading activities.
Trading positions entered into prior to our decision to exit this business are being closed on
economical terms or are being retained and settled over the contract terms. In addition, we have
current transactions relating to non-core asset management, such as gas storage and transportation
contracts not tied to generation assets, which are classified as trading activities. The income
(loss) associated with these transactions is:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in millions) |
|
|
Revenues |
|
$ |
|
|
|
$ |
|
|
Cost of sales |
|
|
11 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
Total(1) |
|
$ |
11 |
|
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes realized and unrealized gains and losses on both derivative instruments and
non-derivative instruments. |
8
(4) Credit Risk
We have a credit policy that governs the management of credit risk, including the
establishment of counterparty credit limits and specific transaction approvals. Credit risk is
monitored daily and the financial condition of our counterparties is reviewed periodically. We try
to mitigate credit risk by entering into contracts that permit netting and allow us to terminate
upon the occurrence of certain events of default. We measure credit risk as the replacement cost
for our derivative positions plus amounts owed for settled transactions.
Our credit exposure is based on our derivative assets and accounts receivable from our
wholesale energy counterparties, after taking into consideration netting within each contract and
any master netting contracts with counterparties. We believe this represents the maximum potential
loss we would incur if our counterparties failed to perform according to their contract terms. In
determining the fair value of our derivative assets, we include assumptions for counterparty
non-performance risk. See note 5 below and note 2(e) to our consolidated financial statements in
our Form 10-K for additional information about fair value measurements. Additionally, we provide
an allowance for doubtful accounts for outstanding receivable balances. As of March 31, 2009, and
December 31, 2008, two investment grade counterparties (a financial institution and a power grid
operator) represented 76% ($172 million) and 61% ($189 million), respectively, of our credit
exposure. These amounts exclude activity related to contracts classified as normal
purchase/normal sale and non-derivative contractual commitments that are not recorded in our
consolidated balance sheets, except for any related accounts receivable. As of March 31, 2009 and
December 31, 2008, we held no collateral from these counterparties. There were no other
counterparties representing greater than 10% of our credit exposure.
Based on our current credit ratings, any additional collateral postings that would be required
from us due to a credit downgrade would be immaterial. As of March 31, 2009 and December 31, 2008,
we have posted cash margin deposits of $126 million and $232 million, respectively, as collateral
for our derivative liabilities.
(5) Fair Value Measurements
We apply recurring fair value measurements to our financial assets and liabilities. Fair
value measurements of our financial assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
$ |
81 |
|
|
$ |
171 |
|
|
$ |
2 |
|
|
$ |
254 |
|
Total derivative liabilities |
|
|
34 |
|
|
|
193 |
|
|
|
155 |
|
|
|
382 |
|
Other assets(1) |
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
(1) |
|
Includes available-for-sale and trading securities, which are actively traded and are valued
based upon unadjusted quoted prices. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Reclassifications |
|
|
Fair Value |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
$ |
59 |
|
|
$ |
177 |
|
|
$ |
7 |
|
|
$ |
(3 |
)(1) |
|
$ |
240 |
|
Total derivative liabilities |
|
|
17 |
|
|
|
208 |
|
|
|
121 |
|
|
|
(3 |
)(1) |
|
|
343 |
|
Other assets(2) |
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
|
(1) |
|
Reclassifications are required to reconcile to our consolidated balance sheet presentation. |
|
(2) |
|
Includes available-for-sale and trading securities, which are actively traded and are valued
based upon unadjusted quoted prices. |
9
The following is a reconciliation of changes in fair value of net derivative assets and
liabilities classified as Level 3:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Net Derivatives (Level 3) |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
(114 |
) |
|
$ |
21 |
|
Total gains (losses) realized/unrealized: |
|
|
|
|
|
|
|
|
Included in earnings |
|
|
(74 |
)(1) |
|
|
72 |
(1) |
Purchases, issuances and settlements (net) |
|
|
35 |
|
|
|
(8 |
) |
Transfers in and/or out of Level 3 (net) |
|
|
|
(2) |
|
|
|
(2) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
(153 |
) |
|
$ |
85 |
|
|
|
|
|
|
|
|
|
Changes in unrealized gains/losses relating
to derivative assets and liabilities still
held at March 31, 2009 and 2008 |
|
|
(68 |
)(3) |
|
|
62 |
(4) |
|
|
|
(1) |
|
Recorded in revenues and cost of sales. |
|
(2) |
|
Represents fair value as of December 31, 2008 and 2007, respectively. |
|
(3) |
|
Includes $0 recorded in revenues and $68 million recorded in cost of sales. |
|
(4) |
|
Includes $2 million recorded in revenues and $60 million recorded in cost of sales. |
See note 2(e) to our consolidated financial statements in our Form 10-K for additional
information about fair value measurements.
(6) Comprehensive Income (Loss)
The components of total comprehensive income (loss) are:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(151 |
) |
|
$ |
377 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
Reclassification of net deferred loss from cash
flow hedges realized in net income/loss |
|
|
5 |
|
|
|
10 |
|
Unrealized gain on available-for-sale securities |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(145 |
) |
|
$ |
387 |
|
|
|
|
|
|
|
|
10
(7) Debt
Outstanding debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Stated |
|
|
|
|
|
|
|
|
|
|
Stated |
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
Rate(1) |
|
|
Long-term |
|
|
Current |
|
|
Rate(1) |
|
|
Long-term |
|
|
Current |
|
|
|
(in millions, except interest rates) |
|
Facilities, Bonds and Notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RRI Energy: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured revolver due 2012 |
|
|
2.94 |
% |
|
$ |
|
|
|
$ |
|
|
|
|
3.18 |
% |
|
$ |
|
|
|
$ |
|
|
Senior secured notes due 2014(2)(3) |
|
|
6.75 |
|
|
|
531 |
|
|
|
|
|
|
|
6.75 |
|
|
|
531 |
|
|
|
|
|
Senior unsecured notes due 2014 |
|
|
7.625 |
|
|
|
575 |
|
|
|
|
|
|
|
7.625 |
|
|
|
575 |
|
|
|
|
|
Senior unsecured notes due 2017 |
|
|
7.875 |
|
|
|
725 |
|
|
|
|
|
|
|
7.875 |
|
|
|
725 |
|
|
|
|
|
Subsidiary Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orion Power Holdings, Inc. senior notes due 2010
(unsecured) |
|
|
12.00 |
|
|
|
400 |
|
|
|
|
|
|
|
12.00 |
|
|
|
400 |
|
|
|
|
|
PEDFA(4) fixed-rate bonds due 2036(5) |
|
|
6.75 |
|
|
|
398 |
|
|
|
|
|
|
|
6.75 |
|
|
|
398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total facilities, bonds and notes |
|
|
|
|
|
|
2,629 |
|
|
|
|
|
|
|
|
|
|
|
2,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to fair value of debt(6) |
|
|
|
|
|
|
1 |
|
|
|
13 |
|
|
|
|
|
|
|
4 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other debt |
|
|
|
|
|
|
1 |
|
|
|
13 |
|
|
|
|
|
|
|
4 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt(7) |
|
|
|
|
|
$ |
2,630 |
|
|
$ |
13 |
|
|
|
|
|
|
$ |
2,633 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted average stated interest rates are as of March 31, 2009 or December 31, 2008. |
|
(2) |
|
We repurchased $45 million during the three months ended March 31, 2008 and incurred an
insignificant amount of debt extinguishment expenses. |
|
(3) |
|
Excludes $136 million classified as discontinued operations as of March 31, 2009 and
December 31, 2008. See note 15. |
|
(4) |
|
PEDFA is the Pennsylvania Economic Development Financing Authority. These bonds were issued
for our Seward plant. |
|
(5) |
|
Excludes $102 million classified as discontinued operations as of March 31, 2009 and
December 31, 2008. See note 15. |
|
(6) |
|
Debt acquired in the Orion Power acquisition was adjusted to fair value as of the acquisition
date. Included in interest expense is amortization of $3 million for valuation adjustments
for debt during the three months ended March 31, 2009 and 2008. |
|
(7) |
|
Excludes $238 million classified as discontinued operations as of March 31, 2009 and
December 31, 2008. See note 15. |
Amounts borrowed and available for borrowing under our revolving credit agreements as of
March 31, 2009 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Committed |
|
|
Drawn |
|
|
Letters |
|
|
Unused |
|
|
|
Credit |
|
|
Amount |
|
|
of Credit |
|
|
Amount |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RRI Energy senior secured revolver due 2012 |
|
$ |
500 |
|
|
$ |
|
|
|
$ |
37 |
|
|
$ |
463 |
|
RRI Energy letter of credit facility due 2014 |
|
|
250 |
|
|
|
|
|
|
|
249 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
750 |
|
|
$ |
|
|
|
$ |
286 |
|
|
$ |
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
(8) Earnings (Loss) Per Share
Reconciliations of the amounts used in the basic and diluted earnings (loss) per common share
computations are:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations (basic) |
|
$ |
(106 |
) |
|
$ |
13 |
|
Plus: Interest expense on 5.00% convertible
senior subordinated notes, net of tax |
|
|
|
(1) |
|
|
|
(2) |
|
|
|
|
|
|
|
Income (loss) from continuing operations (diluted) |
|
$ |
(106 |
) |
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As we incurred a loss from continuing operations for this period, diluted loss per share is
calculated the same as basic loss per share. |
|
(2) |
|
In December 2006, we converted 99.2% of our convertible senior subordinated notes to common
stock. In April 2008, nearly all of the outstanding notes were converted to common stock. |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(shares in thousands) |
|
|
|
|
|
|
|
|
|
|
Diluted Weighted Average Shares Calculation: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding (basic) |
|
|
350,487 |
|
|
|
345,419 |
|
Plus: Incremental shares from assumed conversions: |
|
|
|
|
|
|
|
|
Stock options |
|
|
|
(1) |
|
|
4,252 |
|
Restricted stock |
|
|
|
(1) |
|
|
543 |
|
Employee stock purchase plan |
|
|
|
(1) |
|
|
|
|
5.00% convertible senior subordinated notes |
|
|
|
(1) |
|
|
212 |
|
Warrants |
|
|
|
(1) |
|
|
3,677 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming conversion (diluted) |
|
|
350,487 |
|
|
|
354,103 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See note 1 above regarding diluted loss per share. |
We excluded the following items from diluted earnings (loss) per common share due to the
anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(shares in thousands, dollars in millions) |
|
|
|
|
|
|
|
|
|
|
Shares excluded from the calculation of diluted earnings (loss) per share |
|
|
446 |
(1) |
|
|
N/A |
(2) |
|
Shares excluded from the calculation of diluted earnings (loss) per
share because the exercise price exceeded the average market price |
|
|
7,851 |
(3) |
|
|
2,380 |
(3) |
|
Interest expense that would be added to income if 5.00% convertible
senior subordinated notes were dilutive |
|
|
N/A |
(4) |
|
|
N/A |
(2) |
|
|
|
(1) |
|
Potential shares excluded consist of stock options and restricted stock. |
|
(2) |
|
Not applicable as we included the item in the calculation of diluted earnings/loss per share. |
|
(3) |
|
Includes stock options. |
|
(4) |
|
Not applicable. See note (2) in the table above. |
12
(9) Income Taxes
(a) Tax Rate Reconciliation.
A reconciliation of the federal statutory income tax rate to the effective income tax rate for
our continuing operations is:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Federal statutory rate |
|
|
(35 |
)% |
|
|
35 |
% |
Additions (reductions) resulting from: |
|
|
|
|
|
|
|
|
Federal valuation allowance |
|
|
11 |
(1) |
|
|
|
|
State income taxes, net of federal income taxes |
|
|
(1 |
)(2) |
|
|
11 |
(3) |
Other |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate |
|
|
(24 |
)% |
|
|
46 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of this percentage, $16 million relates to additional valuation allowance. |
|
(2) |
|
Of this percentage, $6 million relates to additional valuation allowance. |
|
(3) |
|
Of this percentage, $1 million relates to additional valuation allowance. |
(b) Tax Attributes Carryovers.
Our tax attributes carryovers are primarily not affected by the Texas retail sale to the
subsidiary of NRG Energy, Inc. See note 15.
(c) Valuation Allowances.
We assess our future ability to use federal, state and foreign net operating loss
carryforwards, capital loss carryforwards and other deferred tax assets using the
more-likely-than-not criteria. These assessments include an evaluation of our recent history of
earnings and losses, future reversals of temporary differences and identification of other sources
of future taxable income, including the identification of tax planning strategies in certain
situations.
Our valuation allowances for deferred tax assets are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital, Foreign |
|
|
|
Federal |
|
|
State |
|
|
and Other, Net |
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
$ |
49 |
|
|
$ |
103 |
|
|
$ |
14 |
|
Changes in valuation allowance |
|
|
16 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
$ |
65 |
|
|
$ |
109 |
|
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
(d) FIN 48 and Income Tax Uncertainties.
We may only recognize the tax benefit for financial reporting purposes from an uncertain tax
position when it is more-likely-than-not that, based on the technical merits, the position will be
sustained by taxing authorities or the courts. The recognized tax benefits are measured as the
largest benefit having a greater than fifty percent likelihood of being realized upon settlement
with a taxing authority. We classify accrued interest and penalties related to uncertain income
tax positions in income tax expense/benefit.
13
Our unrecognized federal and state tax benefits did not change significantly during the three
months ended March 31, 2009 and 2008.
We expect to continue discussions with taxing authorities regarding tax positions related to
the following, and believe it is reasonably possible some of these matters could be resolved in the
next 12 months; however, we cannot estimate the range of changes that might occur:
|
|
|
$177 million payment to CenterPoint during 2004 related to our residential customers; |
|
|
|
$351 million charge during 2005 to settle certain civil litigation and claims
relating to the Western states energy crisis; and |
|
|
|
the timing of tax deductions as a result of negotiations with respect to
California-related revenue, depreciation, emission allowances and certain employee
benefits. |
We are in ongoing discussions with the Internal Revenue Service (IRS) regarding the timing of
revenue recognition and tax deductions with respect to certain California-related items in our 2002
short taxable period return (subsequent to our separation from CenterPoint Energy, Inc.). The IRS
has informed us it expects to issue a notice of denial of our administrative claim for refund
involving these California-related items and we expect to institute refund litigation with respect
to this claim in the U.S. District Court or U.S. Court of Federal Claims. In order to set a
jurisdictional prerequisite to institute such a refund suit, we expect to make a payment of
approximately $60 million to $65 million (which includes an asserted tax liability of $38 million
plus interest) some time during 2009. If the IRS were to ultimately prevail in this matter, there
would be no impact on the effective tax rate except for interest. The payment is refundable with
interest if we are successful in the litigation.
(10) Guarantees and Indemnifications
We have guaranteed some non-qualified benefits of CenterPoints existing retirees at
September 20, 2002. The estimated maximum potential amount of future payments under the guarantee
is approximately $53 million as of March 31, 2009 and no liability is recorded in our consolidated
balance sheet for this item.
We also guarantee the $500 million PEDFA bonds, which are included in our consolidated balance
sheet as outstanding debt or liabilities of discontinued operations. Our guarantees are secured by
the same collateral as our 6.75% senior secured notes. The guarantees require us to comply with
covenants similar to those in the 6.75% senior secured notes indenture. The PEDFA bonds will
become secured by certain assets of our Seward power plant if the collateral supporting both the
6.75% senior secured notes and our guarantees are released. Our maximum potential obligation under
the guarantees is for payment of the principal of $500 million and related interest charges at a
fixed rate of 6.75%. See note 15.
We have guaranteed payments to a third party relating to energy sales from El Dorado Energy,
LLC, a former investment. The estimated maximum potential amount of future payments under this
guarantee is approximately $21 million as of March 31, 2009 and no liability is recorded in our
consolidated balance sheet for this item.
We enter into contracts that include indemnification and guarantee provisions. In general, we
enter into contracts with indemnities for matters such as breaches of representations and
warranties and covenants contained in the contract and/or against certain specified liabilities.
Examples of these contracts include asset purchase and sales agreements, service agreements and
procurement agreements.
In our debt agreements, we typically indemnify against liabilities that arise from the
preparation, entry into, administration or enforcement of the agreement.
Except as otherwise noted, we are unable to estimate our maximum potential exposure under
these agreements until an event triggering payment occurs. We do not expect to make any material
payments under these agreements.
14
(11) Contingencies
We are party to many legal proceedings, some of which may involve substantial amounts. Unless
otherwise noted, we cannot predict the outcome of the matters described below.
(a) Pending Natural Gas Litigation.
The following proceedings relate to alleged conduct in the natural gas markets. We have
settled a number of proceedings that were pending in California and other Western states; however,
some other proceedings remain pending.
We are party to 13 lawsuits, several of which are class action lawsuits, in state and federal
courts in California, Kansas, Missouri, Nevada, Tennessee and Wisconsin. These lawsuits relate to
alleged conduct to increase natural gas prices in violation of antitrust and similar laws. The
lawsuits seek treble or punitive damages, restitution and/or expenses. The lawsuits also name a
number of unaffiliated energy companies as parties.
Recent developments in these cases include:
|
|
|
In January 2009, we reached an agreement to settle the five California-related
cases pending in federal court in Nevada. The settlement is subject to approval of the
court. The charges anticipated to be incurred in connection with the settlement were
expensed in the third quarter of 2008. This settlement will resolve all of the
remaining California gas cases. |
|
|
|
In January 2009, the Circuit Court of Jackson County, Missouri dismissed the
case filed by the Missouri Public Service Commission for lack of standing to bring the
action. An appeal was filed in February 2009. |
(b) Merrill Lynch Action.
In December 2008, we terminated our $300 million retail working capital facility agreement
with Merrill Lynch in order to address any issue that might be asserted regarding the minimum
adjusted retail EBITDA covenant in that facility. On December 24, 2008, Merrill Lynch filed an
action in the Supreme Court of the State of New York seeking a judgment declaring that under our
credit sleeve and reimbursement agreement (the agreement), we did not have the right to terminate
the working capital facility without their consent and that such termination is an event of default
under the agreement. On May 1, 2009, we and Merrill Lynch filed to dismiss this lawsuit and the
agreement was transferred in connection with the closing of the sale of our Texas retail business.
The Court granted an order dismissing the action with prejudice on May 4, 2009. See note 15.
(c) Environmental Matters.
New Source Review Matters. The United States Environmental Protection Agency (EPA) and
various states are investigating compliance of coal-fueled electric generating stations with the
pre-construction permitting requirements of the Clean Air Act known as New Source Review. In
2000 and 2001, we responded to the EPAs information requests related to five of our stations, and
in December 2007, we received supplemental requests for two of those stations. In September 2008,
we received an EPA request for information related to two additional stations. The EPA agreed to
share information relating to its investigations with state environmental agencies. In
January 2009, we received a Notice of Violation (NOV) from the EPA alleging that past work at our
Shawville, Portland and Keystone generation facilities violated the agencys regulations regarding
New Source Review. While we are continuing to review the allegations, we believe that the projects
listed by the EPA were conducted in compliance with applicable regulations.
In December 2007, the New Jersey Department of Environmental Protection (NJDEP) filed suit
against us in the United States District Court in Pennsylvania, alleging that New Source Review
violations occurred at one of our power plants located in Pennsylvania. The suit seeks
installation of best available control technologies for each pollutant, to enjoin us from
operating the plant if it is not in compliance with the Clean Air Act and civil penalties. The
suit also names three past owners of the plant as defendants. In March 2009, the Connecticut
Department of Environmental Protection became an intervening party to the suit.
We are unable to predict the ultimate outcome of the EPAs NOV or the NJDEPs suit, but a
final finding that we violated the New Source Review requirements could result in significant
capital expenditures associated with the implementation of emissions reductions on an accelerated
basis and possible penalties. Most of these work projects were undertaken before our ownership of
those facilities. We believe we are indemnified by or have the right to seek indemnification from
the prior owners for certain losses and expenses that we may incur from activities occurring prior
to our ownership.
Ash Disposal Landfill Closures. We are responsible for environmental costs related to the
future closures of seven ash disposal landfills. We recorded the estimated discounted costs
($15 million as of March 31, 2009 and
December 31, 2008) associated with these environmental liabilities as part of our asset
retirement obligations. See note 2(q) to our consolidated financial statements in our Form 10-K.
15
Remediation Obligations. We are responsible for environmental costs related to site
contamination investigations and remediation requirements at four power plants in New Jersey. We
recorded the estimated long-term liability for the remediation costs of $8 million as of March 31,
2009 and December 31, 2008.
Conemaugh Action. In April 2007, PennEnvironment and the Sierra Club filed a citizens suit
against us in the United States District Court, Western District of Pennsylvania to enforce
provisions of the water discharge permit for the Conemaugh plant, of which we are the operator and
have a 16.45% interest. PennEnvironment and the Sierra Club seek civil penalties, remediation and
an injunction against further violations. We are confident that the Conemaugh plant has operated
and will continue to operate in material compliance with its water discharge permit, its consent
order agreement with the Pennsylvania Department of Environmental Protection, and related state and
federal laws. However, if PennEnvironment and the Sierra Club are successful, we could incur
additional capital expenditures associated with the implementation of discharge reductions and
penalties, which we do not believe would be material.
Mandalay Notice of Violation. In November 2008, the California State Water Resources Control
Board Los Angeles Region proposed a settlement payment in the amount of $192,000 relating to
alleged violations of our wastewater discharge permit for our Mandalay plant. We are reviewing the
Boards proposal and we believe that there are reasonable grounds for reduction of the amount of
the settlement proposed by the Board.
Global Warming. In February 2008, the Native Village of Kivalina and the City of Kivalina
filed a suit in the United States District Court for the Northern District of California against us
and 23 other electric generating and oil and gas companies. The lawsuit seeks damages of up to
$400 million for the cost of relocating the village allegedly because of global warming caused by
the greenhouse gas emissions of the defendants. We believe this claim lacks legal merit.
(d) Other.
Excess Mitigation Credits. From January 2002 to April 2005, CenterPoint applied excess
mitigation credits (EMCs) to its monthly charges to retail energy providers. The PUCT imposed
these credits to facilitate the transition to competition in Texas, which had the effect of
lowering the retail energy providers monthly charges payable to CenterPoint. CenterPoint
represents that the portion of those EMCs credited to us totaled $385 million. In its stranded
cost case, CenterPoint sought recovery of all EMCs credited to all retail electric providers,
including us, and the PUCT ordered that relief. On appeal, the Texas Third Court of Appeals ruled
that CenterPoints stranded cost recovery should exclude EMCs credited to us for price-to-beat
customers. The case is now before the Texas Supreme Court. In November 2008, CenterPoint asked us
to agree to suspend any limitations periods that might exist for possible claims against us if it
is ultimately not allowed to include in its stranded cost calculation EMCs credited to us. We
agreed to suspend only unexpired deadlines, if any, that may apply to a CenterPoint claim relating
to EMCs credited to us. Regardless of the outcome of the Texas Supreme Court proceeding, we
believe that any claim by CenterPoint that we are liable to it for any EMCs credited to us lacks
legal merit and is unsupported by our Master Separation Agreement with CenterPoint. In addition,
CenterPoint has publicly stated that it has no legal recourse against us for any reduction in the
amount of its recoverable stranded costs should EMCs credited to us be excluded.
CenterPoint Indemnity. We have agreed to indemnify CenterPoint against certain losses
relating to the lawsuits described in note 11(a) under Pending Natural Gas Litigation.
Texas Franchise Audit. The state of Texas has issued assessment orders indicating an
estimated tax liability of approximately $57 million (including interest and penalties of
$19 million) relating primarily to the sourcing of receipts for 2000 through 2005. We are
contesting the audit assessments related to this issue.
Sales Tax Contingencies. Some of our sales tax computations are subject to challenge under
audit. As of March 31, 2009 and December 31, 2008, we have $13 million accrued in current and
long-term liabilities relating to these contingencies.
16
Refund Contingency Related to Transportation Rates. In September 2008, Kern River Gas
Transmission Company (Kern), a natural gas pipeline company, and certain of its shippers entered into a
settlement agreement to which we were a party. The agreement set Kerns transportation rates as of
November 2004 at 12.5% return on equity, which resulted in a refund to us of $30 million during the
fourth quarter of 2008 (recorded as a current liability). In
January 2009, FERC rejected the settlement and directed Kern to recalculate the refunds based
on a rate of 11.55% return on equity. Accordingly, we expect to receive an additional
approximately $4 million in 2009. If the settlement is appealed, that amount may be subject to
adjustment on resolution of the appeal.
(12) Supplemental Guarantor Information
Our wholly-owned subsidiaries are either (a) full and unconditional guarantors, jointly and
severally, or (b) non-guarantors of the senior secured notes.
17
Condensed Consolidating Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
RRI Energy |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Adjustments (1) |
|
|
Consolidated |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
452 |
|
|
$ |
257 |
|
|
$ |
(243 |
) |
|
$ |
466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
342 |
|
|
|
223 |
|
|
|
(241 |
) |
|
|
324 |
|
Operation and maintenance |
|
|
|
|
|
|
62 |
|
|
|
96 |
|
|
|
(1 |
) |
|
|
157 |
|
General and administrative |
|
|
|
|
|
|
4 |
|
|
|
26 |
|
|
|
(1 |
) |
|
|
29 |
|
Gains on sales of assets and emission and
exchange allowances, net |
|
|
|
|
|
|
(15 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(18 |
) |
Depreciation and amortization |
|
|
|
|
|
|
32 |
|
|
|
36 |
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
425 |
|
|
|
378 |
|
|
|
(243 |
) |
|
|
560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
27 |
|
|
|
(121 |
) |
|
|
|
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income of equity investment, net |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Loss of equity investments of
consolidated subsidiaries |
|
|
(107 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
127 |
|
|
|
|
|
Interest expense |
|
|
(37 |
) |
|
|
(8 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(47 |
) |
Interest income (expense) affiliated
companies, net |
|
|
17 |
|
|
|
(3 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(127 |
) |
|
|
(30 |
) |
|
|
(16 |
) |
|
|
127 |
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes |
|
|
(127 |
) |
|
|
(3 |
) |
|
|
(137 |
) |
|
|
127 |
|
|
|
(140 |
) |
Income tax expense (benefit) |
|
|
8 |
|
|
|
9 |
|
|
|
(51 |
) |
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(135 |
) |
|
|
(12 |
) |
|
|
(86 |
) |
|
|
127 |
|
|
|
(106 |
) |
Income (loss) from discontinued operations |
|
|
(16 |
) |
|
|
9 |
|
|
|
(38 |
) |
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(151 |
) |
|
$ |
(3 |
) |
|
$ |
(124 |
) |
|
$ |
127 |
|
|
$ |
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
RRI Energy |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Adjustments (1) |
|
|
Consolidated |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
862 |
|
|
$ |
417 |
|
|
$ |
(399 |
) |
|
$ |
880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
773 |
|
|
|
133 |
|
|
|
(397 |
) |
|
|
509 |
|
Operation and maintenance |
|
|
|
|
|
|
61 |
|
|
|
96 |
|
|
|
(1 |
) |
|
|
156 |
|
General and administrative |
|
|
|
|
|
|
7 |
|
|
|
23 |
|
|
|
(1 |
) |
|
|
29 |
|
Western states litigation and similar
settlements |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
Gains on sales of assets and emission and
exchange allowances, net |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Depreciation and amortization |
|
|
|
|
|
|
35 |
|
|
|
48 |
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
34 |
|
|
|
875 |
|
|
|
300 |
|
|
|
(399 |
) |
|
|
810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(34 |
) |
|
|
(13 |
) |
|
|
117 |
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income of equity investments of
consolidated subsidiaries |
|
|
387 |
|
|
|
43 |
|
|
|
|
|
|
|
(430 |
) |
|
|
|
|
Interest expense |
|
|
(39 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(52 |
) |
Interest income |
|
|
5 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Interest income (expense) affiliated
companies, net |
|
|
54 |
|
|
|
(37 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
407 |
|
|
|
|
|
|
|
(23 |
) |
|
|
(430 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income taxes |
|
|
373 |
|
|
|
(13 |
) |
|
|
94 |
|
|
|
(430 |
) |
|
|
24 |
|
Income tax expense (benefit) |
|
|
(5 |
) |
|
|
(19 |
) |
|
|
39 |
|
|
|
(4 |
) |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
378 |
|
|
|
6 |
|
|
|
55 |
|
|
|
(426 |
) |
|
|
13 |
|
Income (loss) from discontinued operations |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
372 |
|
|
|
(4 |
) |
|
|
364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
377 |
|
|
$ |
3 |
|
|
$ |
427 |
|
|
$ |
(430 |
) |
|
$ |
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These amounts relate to either (a) eliminations and adjustments recorded in the normal
consolidation process or (b) reclassifications recorded due to differences in classifications
at the subsidiary levels compared to the consolidated level. |
18
Condensed Consolidating Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
RRI Energy |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Adjustments (1) |
|
|
Consolidated |
|
|
|
(in millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,380 |
|
|
$ |
|
|
|
$ |
30 |
|
|
$ |
|
|
|
$ |
1,410 |
|
Restricted cash |
|
|
|
|
|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
7 |
|
Accounts and notes receivable, principally
customer, net |
|
|
5 |
|
|
|
156 |
|
|
|
18 |
|
|
|
(7 |
) |
|
|
172 |
|
Accounts and notes receivable affiliated
companies |
|
|
1,140 |
|
|
|
263 |
|
|
|
140 |
|
|
|
(1,543 |
) |
|
|
|
|
Inventory |
|
|
|
|
|
|
127 |
|
|
|
168 |
|
|
|
|
|
|
|
295 |
|
Derivative assets |
|
|
|
|
|
|
146 |
|
|
|
33 |
|
|
|
|
|
|
|
179 |
|
Investment in and receivables from
Channelview, net |
|
|
1 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
59 |
|
Other current assets |
|
|
34 |
|
|
|
122 |
|
|
|
111 |
|
|
|
(22 |
) |
|
|
245 |
|
Current assets of discontinued operations |
|
|
108 |
|
|
|
63 |
|
|
|
2,783 |
|
|
|
(528 |
) |
|
|
2,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,668 |
|
|
|
938 |
|
|
|
3,287 |
|
|
|
(2,100 |
) |
|
|
4,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net |
|
|
|
|
|
|
2,346 |
|
|
|
2,466 |
|
|
|
|
|
|
|
4,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangibles, net |
|
|
|
|
|
|
115 |
|
|
|
262 |
|
|
|
|
|
|
|
377 |
|
Notes receivable affiliated companies |
|
|
2,137 |
|
|
|
591 |
|
|
|
43 |
|
|
|
(2,771 |
) |
|
|
|
|
Equity investments of consolidated
subsidiaries |
|
|
1,409 |
|
|
|
312 |
|
|
|
|
|
|
|
(1,721 |
) |
|
|
|
|
Other long-term assets |
|
|
46 |
|
|
|
822 |
|
|
|
384 |
|
|
|
(669 |
) |
|
|
583 |
|
Long-term assets of discontinued operations |
|
|
2 |
|
|
|
17 |
|
|
|
817 |
|
|
|
(177 |
) |
|
|
659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
3,594 |
|
|
|
1,857 |
|
|
|
1,506 |
|
|
|
(5,338 |
) |
|
|
1,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
6,262 |
|
|
$ |
5,141 |
|
|
$ |
7,259 |
|
|
$ |
(7,438 |
) |
|
$ |
11,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and
short-term borrowings |
|
$ |
|
|
|
$ |
|
|
|
$ |
13 |
|
|
$ |
|
|
|
$ |
13 |
|
Accounts payable, principally trade |
|
|
2 |
|
|
|
22 |
|
|
|
131 |
|
|
|
|
|
|
|
155 |
|
Accounts and notes payable affiliated
companies |
|
|
|
|
|
|
1,231 |
|
|
|
312 |
|
|
|
(1,543 |
) |
|
|
|
|
Derivative liabilities |
|
|
|
|
|
|
48 |
|
|
|
206 |
|
|
|
|
|
|
|
254 |
|
Other current liabilities |
|
|
43 |
|
|
|
212 |
|
|
|
27 |
|
|
|
(54 |
) |
|
|
228 |
|
Current liabilities of discontinued operations |
|
|
193 |
|
|
|
263 |
|
|
|
3,160 |
|
|
|
(527 |
) |
|
|
3,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
238 |
|
|
|
1,776 |
|
|
|
3,849 |
|
|
|
(2,124 |
) |
|
|
3,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable affiliated companies |
|
|
|
|
|
|
2,059 |
|
|
|
712 |
|
|
|
(2,771 |
) |
|
|
|
|
Derivative liabilities |
|
|
|
|
|
|
14 |
|
|
|
114 |
|
|
|
|
|
|
|
128 |
|
Other long-term liabilities |
|
|
531 |
|
|
|
149 |
|
|
|
283 |
|
|
|
(643 |
) |
|
|
320 |
|
Long-term liabilities of discontinued
operations |
|
|
14 |
|
|
|
15 |
|
|
|
908 |
|
|
|
(178 |
) |
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities |
|
|
545 |
|
|
|
2,237 |
|
|
|
2,017 |
|
|
|
(3,592 |
) |
|
|
1,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
1,831 |
|
|
|
398 |
|
|
|
401 |
|
|
|
|
|
|
|
2,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary Equity Stock-based Compensation |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
3,638 |
|
|
|
730 |
|
|
|
992 |
|
|
|
(1,722 |
) |
|
|
3,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
|
$ |
6,262 |
|
|
$ |
5,141 |
|
|
$ |
7,259 |
|
|
$ |
(7,438 |
) |
|
$ |
11,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
RRI Energy |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Adjustments (1) |
|
|
Consolidated |
|
|
|
(in millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
970 |
|
|
$ |
|
|
|
$ |
34 |
|
|
$ |
|
|
|
$ |
1,004 |
|
Restricted cash |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
3 |
|
Accounts and notes receivable, principally
customer, net |
|
|
15 |
|
|
|
216 |
|
|
|
62 |
|
|
|
(14 |
) |
|
|
279 |
|
Accounts and notes receivable affiliated
companies |
|
|
1,100 |
|
|
|
268 |
|
|
|
183 |
|
|
|
(1,551 |
) |
|
|
|
|
Inventory |
|
|
|
|
|
|
153 |
|
|
|
162 |
|
|
|
|
|
|
|
315 |
|
Derivative assets |
|
|
|
|
|
|
127 |
|
|
|
34 |
|
|
|
|
|
|
|
161 |
|
Investment in and receivables from
Channelview, net |
|
|
1 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
59 |
|
Other current assets |
|
|
155 |
|
|
|
105 |
|
|
|
126 |
|
|
|
(30 |
) |
|
|
356 |
|
Current assets of discontinued operations |
|
|
122 |
|
|
|
69 |
|
|
|
2,632 |
|
|
|
(638 |
) |
|
|
2,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,363 |
|
|
|
997 |
|
|
|
3,235 |
|
|
|
(2,233 |
) |
|
|
4,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net |
|
|
|
|
|
|
2,369 |
|
|
|
2,451 |
|
|
|
|
|
|
|
4,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles, net |
|
|
|
|
|
|
150 |
|
|
|
264 |
|
|
|
(34 |
) |
|
|
380 |
|
Notes receivable affiliated companies |
|
|
2,260 |
|
|
|
578 |
|
|
|
54 |
|
|
|
(2,892 |
) |
|
|
|
|
Equity investments of consolidated
subsidiaries |
|
|
1,731 |
|
|
|
332 |
|
|
|
|
|
|
|
(2,063 |
) |
|
|
|
|
Other long-term assets |
|
|
45 |
|
|
|
786 |
|
|
|
386 |
|
|
|
(645 |
) |
|
|
572 |
|
Long-term assets of discontinued operations |
|
|
2 |
|
|
|
12 |
|
|
|
686 |
|
|
|
(205 |
) |
|
|
495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
4,038 |
|
|
|
1,858 |
|
|
|
1,390 |
|
|
|
(5,839 |
) |
|
|
1,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
6,401 |
|
|
$ |
5,224 |
|
|
$ |
7,076 |
|
|
$ |
(8,072 |
) |
|
$ |
10,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and
short-term borrowings |
|
$ |
|
|
|
$ |
|
|
|
$ |
13 |
|
|
$ |
|
|
|
$ |
13 |
|
Accounts payable, principally trade |
|
|
|
|
|
|
31 |
|
|
|
132 |
|
|
|
(6 |
) |
|
|
157 |
|
Accounts and notes payable affiliated
companies |
|
|
|
|
|
|
1,307 |
|
|
|
244 |
|
|
|
(1,551 |
) |
|
|
|
|
Derivative liabilities |
|
|
|
|
|
|
29 |
|
|
|
173 |
|
|
|
|
|
|
|
202 |
|
Other current liabilities |
|
|
10 |
|
|
|
213 |
|
|
|
49 |
|
|
|
(72 |
) |
|
|
200 |
|
Current liabilities of discontinued operations |
|
|
61 |
|
|
|
147 |
|
|
|
2,803 |
|
|
|
(637 |
) |
|
|
2,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
71 |
|
|
|
1,727 |
|
|
|
3,414 |
|
|
|
(2,266 |
) |
|
|
2,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable affiliated companies |
|
|
|
|
|
|
2,132 |
|
|
|
760 |
|
|
|
(2,892 |
) |
|
|
|
|
Derivative liabilities |
|
|
|
|
|
|
4 |
|
|
|
137 |
|
|
|
|
|
|
|
141 |
|
Other long-term liabilities |
|
|
547 |
|
|
|
119 |
|
|
|
251 |
|
|
|
(645 |
) |
|
|
272 |
|
Long-term liabilities of discontinued
operations |
|
|
165 |
|
|
|
113 |
|
|
|
778 |
|
|
|
(206 |
) |
|
|
850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities |
|
|
712 |
|
|
|
2,368 |
|
|
|
1,926 |
|
|
|
(3,743 |
) |
|
|
1,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
1,831 |
|
|
|
398 |
|
|
|
404 |
|
|
|
|
|
|
|
2,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary Equity Stock-based
Compensation |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
3,778 |
|
|
|
731 |
|
|
|
1,332 |
|
|
|
(2,063 |
) |
|
|
3,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
|
$ |
6,401 |
|
|
$ |
5,224 |
|
|
$ |
7,076 |
|
|
$ |
(8,072 |
) |
|
$ |
10,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These amounts relate to either (a) eliminations and adjustments recorded in the normal
consolidation process or (b) reclassifications recorded due to differences in classifications
at the subsidiary levels compared to the consolidated level. |
20
Condensed Consolidating Statements of Cash Flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
RRI Energy |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Adjustments(1) |
|
|
Consolidated |
|
|
|
(in millions) |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
from operating activities |
|
$ |
100 |
|
|
$ |
74 |
|
|
$ |
25 |
|
|
$ |
|
|
|
$ |
199 |
|
Net cash provided by discontinued
operations from operating activities |
|
|
2 |
|
|
|
18 |
|
|
|
269 |
|
|
|
|
|
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
102 |
|
|
|
92 |
|
|
|
294 |
|
|
|
|
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
(5 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
(55 |
) |
Investments in, advances to and from and
distributions from subsidiaries,
net(2) |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
(94 |
) |
|
|
|
|
Proceeds from sales (purchases) of
emission allowances |
|
|
|
|
|
|
39 |
|
|
|
(32 |
) |
|
|
|
|
|
|
7 |
|
Restricted cash |
|
|
|
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
continuing operations from investing
activities |
|
|
94 |
|
|
|
31 |
|
|
|
(83 |
) |
|
|
(94 |
) |
|
|
(52 |
) |
Net cash provided by (used in)
discontinued operations from
investing activities |
|
|
212 |
|
|
|
(8 |
) |
|
|
(226 |
) |
|
|
7 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities |
|
|
306 |
|
|
|
23 |
|
|
|
(309 |
) |
|
|
(87 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in notes with affiliated companies,
net(3) |
|
|
|
|
|
|
(127 |
) |
|
|
33 |
|
|
|
94 |
|
|
|
|
|
Proceeds from issuances of stock |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
continuing operations from financing
activities |
|
|
2 |
|
|
|
(127 |
) |
|
|
33 |
|
|
|
94 |
|
|
|
2 |
|
Net cash provided by (used in)
discontinued operations from
financing activities |
|
|
|
|
|
|
12 |
|
|
|
(5 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
2 |
|
|
|
(115 |
) |
|
|
28 |
|
|
|
87 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash Equivalents, Total Operations |
|
|
410 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
423 |
|
Net
Change in Cash and Cash Equivalents, Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
(17 |
) |
Cash and Cash Equivalents at Beginning of
Period, Continuing Operations |
|
|
970 |
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
Cash Equivalents at End of Period, Continuing Operations |
|
$ |
1,380 |
|
|
$ |
|
|
|
$ |
30 |
|
|
$ |
|
|
|
$ |
1,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
RRI Energy |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Adjustments(1) |
|
|
Consolidated |
|
|
|
(in millions) |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing
operations from operating activities |
|
$ |
64 |
|
|
$ |
(7 |
) |
|
$ |
150 |
|
|
$ |
|
|
|
$ |
207 |
|
Net cash provided by discontinued
operations from operating activities |
|
|
1 |
|
|
|
22 |
|
|
|
74 |
|
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
65 |
|
|
|
15 |
|
|
|
224 |
|
|
|
|
|
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
(5 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
(45 |
) |
Investments in, advances to and from and
distributions from subsidiaries,
net(2) |
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
(103 |
) |
|
|
|
|
Proceeds from sales (purchases) of
emission allowances |
|
|
|
|
|
|
42 |
|
|
|
(44 |
) |
|
|
|
|
|
|
(2 |
) |
Restricted cash |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
continuing operations from investing
activities |
|
|
103 |
|
|
|
36 |
|
|
|
(85 |
) |
|
|
(103 |
) |
|
|
(49 |
) |
Net cash provided by (used in)
discontinued operations from
investing activities |
|
|
73 |
|
|
|
|
|
|
|
(80 |
) |
|
|
2 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities |
|
|
176 |
|
|
|
36 |
|
|
|
(165 |
) |
|
|
(101 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of long-term debt |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
Changes in notes with affiliated companies,
net(3) |
|
|
|
|
|
|
(51 |
) |
|
|
(52 |
) |
|
|
103 |
|
|
|
|
|
Proceeds from issuances of stock |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing
operations from financing activities |
|
|
(40 |
) |
|
|
(51 |
) |
|
|
(52 |
) |
|
|
103 |
|
|
|
(40 |
) |
Net cash provided by (used in)
discontinued operations from
financing activities |
|
|
|
|
|
|
(1 |
) |
|
|
3 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(40 |
) |
|
|
(52 |
) |
|
|
(49 |
) |
|
|
101 |
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash Equivalents, Total Operations |
|
|
201 |
|
|
|
(1 |
) |
|
|
10 |
|
|
|
|
|
|
|
210 |
|
Net
Change in Cash and Cash Equivalents, Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
Cash and Cash Equivalents at Beginning of
Period, Continuing Operations |
|
|
490 |
|
|
|
1 |
|
|
|
33 |
|
|
|
|
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period, Continuing Operations |
|
$ |
691 |
|
|
$ |
|
|
|
$ |
48 |
|
|
$ |
|
|
|
$ |
739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These amounts relate to either (a) eliminations and adjustments recorded in the normal
consolidation process or (b) reclassifications recorded due to differences in classifications
at the subsidiary levels compared to the consolidated level. |
|
(2) |
|
Net investments in, advances to and from and distributions from subsidiaries are classified
as investing activities. |
|
(3) |
|
Net changes in notes with affiliated companies are classified as financing activities for
subsidiaries of RRI Energy and as investing activities for RRI Energy. |
22
(13) Reportable Segment
Financial data for our wholesale energy segment, other operations, discontinued operations and
consolidated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
|
Other |
|
|
Discontinued |
|
|
|
|
|
|
|
|
|
Energy |
|
|
Operations |
|
|
Operations |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2009 (except as
denoted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
465 |
(1) |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
466 |
|
Intersegment revenues |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
Contribution margin, including
wholesale hedges and unrealized
gains/losses on energy
derivatives(2) |
|
|
(15 |
)(3)(4) |
|
|
2 |
|
|
|
|
|
|
|
(1 |
) |
|
|
(14 |
)(3) |
Total assets as of March 31, 2009 |
|
$ |
7,365 |
|
|
$ |
830 |
|
|
$ |
3,085 |
|
|
$ |
(56 |
) |
|
$ |
11,224 |
|
|
Three months ended
March 31, 2008 (except as
denoted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
879 |
(5) |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
880 |
|
Intersegment revenues |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
Contribution margin, including
wholesale hedges and unrealized
gains/losses on energy
derivatives(2) |
|
|
217 |
(6)(7) |
|
|
1 |
|
|
|
|
|
|
|
(1 |
) |
|
|
217 |
(6) |
Total assets as of December 31,
2008 |
|
$ |
7,536 |
|
|
$ |
547 |
|
|
$ |
2,680 |
|
|
$ |
(134 |
) |
|
$ |
10,629 |
|
|
|
|
(1) |
|
Includes $54 million in revenues from a single counterparty, which represented 12% of our
consolidated and wholesale energy segments revenues. As of March 31, 2009, $9 million was
outstanding from this counterparty. |
|
(2) |
|
Revenues less (a) cost of sales, (b) operation and maintenance and
(c) bad debt expense. |
|
(3) |
|
Includes $(44) million in wholesale energy and consolidated results relating to unrealized
losses on energy derivatives, which is a non-cash item. |
|
(4) |
|
Includes $(4) million relating to wholesale hedges.
|
|
(5) |
|
Includes $107 million from affiliates. |
|
(6) |
|
Includes $30 million in wholesale energy and consolidated results relating to unrealized
gains on energy derivatives, which is a non-cash item. |
|
(7) |
|
Includes $36 million relating to wholesale hedges. |
23
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in millions) |
|
|
Contribution margin, including wholesale hedges and
unrealized gains/losses on energy derivatives |
|
$ |
(14 |
) |
|
$ |
217 |
|
Operation and maintenance |
|
|
1 |
|
|
|
3 |
|
General and administrative |
|
|
29 |
|
|
|
28 |
|
Western states litigation and similar settlements |
|
|
|
|
|
|
34 |
|
Gains on sales of assets and emission allowances, net |
|
|
(18 |
) |
|
|
(1 |
) |
Depreciation |
|
|
59 |
|
|
|
62 |
|
Amortization |
|
|
9 |
|
|
|
21 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(94 |
) |
|
|
70 |
|
Income of equity investment, net |
|
|
1 |
|
|
|
|
|
Interest expense |
|
|
(47 |
) |
|
|
(52 |
) |
Interest income |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
|
|
(140 |
) |
|
|
24 |
|
Income tax expense (benefit) |
|
|
(34 |
) |
|
|
11 |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(106 |
) |
|
|
13 |
|
Income (loss) from discontinued operations |
|
|
(45 |
) |
|
|
364 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(151 |
) |
|
$ |
377 |
|
|
|
|
|
|
|
|
(14) Sale of Channelviews Plant and the Bankruptcy Filings
On August 20, 2007, Channelview filed voluntary petitions in the United States Bankruptcy
Court for the District of Delaware for reorganization under Chapter 11 of the Bankruptcy Code.
Channelview LP filed for bankruptcy protection to prevent the lenders from exercising their
remedies, including foreclosing on the project. The bankruptcy cases have been jointly
administered, with Channelview managing its business in the ordinary course as
debtors-in-possession subject to the supervision of the bankruptcy court.
In June 2008, the bankruptcy court approved the sale of Channelviews plant and assignment of
related contracts for $500 million. During, 2008, we recognized a $6 million gain relating to our
net investment in and receivables from Channelview and incurrence of sale-related costs (classified
in gains (losses) on sales of assets and emission and exchange allowances, net). As of March 31,
2009 and December 31, 2008, our net investment in and receivables from Channelview was $59 million
classified as a current asset.
The sale was completed on July 1, 2008, at which time Channelview LP paid off its secured
lenders. Channelview expects to distribute funds to us relating primarily to net proceeds from the
sale, pre-petition sales of fuel to Channelview, funds from operations and funds escrowed for
potential indemnification claims of approximately $50 million to $70 million in the aggregate
through the third or fourth quarters of 2009. Of this amount, $25 million was distributed to us
during 2008 and $0 was distributed to us during the three months ended March 31, 2009.
As a result of the bankruptcies, we deconsolidated Channelviews financial results beginning
August 20, 2007, and began reporting our investment in Channelview using the cost method. We will
continue to account for Channelview as a cost method investment until it emerges from bankruptcy,
which is expected during the third or fourth quarters of 2009. The following table contains
certain combined financial information of Channelview:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in millions) |
|
|
Cash |
|
$ |
21 |
|
|
$ |
22 |
|
Funds escrowed for potential indemnification claims |
|
|
40 |
|
|
|
40 |
|
Payables to RRI Energy and its subsidiaries, net |
|
|
66 |
|
|
|
66 |
|
24
(15) Discontinued Operations
(a) Retail Energy Segment.
General. On February 28, 2009, we entered into several agreements related to the sale of our
Texas retail business to a subsidiary (the buyer) of NRG Energy, Inc. (NRG) for $287.5 million in
cash plus the value of the net working capital. We currently estimate the net working capital to
be $65 million, and we expect to receive the majority of these proceeds by June 15, 2009. The sale
closed on May 1, 2009. We estimate our net proceeds will be approximately $300 million after
certain expenses. We are required to offer a portion of the net proceeds to holders of our secured
notes and PEDFA bonds. See below for further discussion. This sale also includes the rights to
the Reliant Energy name. Accordingly, we changed our name to RRI Energy, Inc. on May 2, 2009. In connection with the sale, the lawsuit against our former retail affiliates
related to the termination of the retail working capital facility has
been dismissed. See note 11(b).
In connection with the sale transaction, we entered into a two-year sublease on our corporate
office building with the buyer, with sublease rental income totaling $17 million for those two
years. We also entered a one-year transition services agreement with the buyer, which includes
terms and conditions for information technology services, accounting services and human resources.
Estimated Gain on Sale. We currently estimate a pre-tax gain on this sale of approximately
$1.1 billion, which is primarily due to the net derivative liability balance of $1.1 billion (as of
March 31, 2009) included in the transaction. This amount is subject to change due to various
factors, such as the fair value of the net derivatives.
Use of Proceeds and Assumptions Related to Debt, Deferred Financing Costs and Interest Expense
on Discontinued Operations. As required by our debt agreements, one or more offers to purchase
secured notes and PEDFA bonds at par will be made with a portion of the net proceeds. We currently
estimate this amount to approximate $238 million and have classified this in discontinued
operations (in long-term liabilities as of December 31, 2008 and in current liabilities as of
March 31, 2009). We have assumed that of this amount, $136 million relates to the secured notes
and $102 million relates to the PEDFA bonds. See note 7. We have also classified as discontinued
operations the related deferred financing costs and interest expense on this debt. We allocated
$4 million of related interest expense during the three months ended March 31, 2009 and 2008 to
discontinued operations.
Other Retail Energy Segment Discontinued Operations. We sold our C&I contracts in the PJM
(excluding Illinois) and New York areas (collectively, Northeast) in December 2008. As this was a
part of our retail energy segment, we have included this activity in our discontinued operations.
We have also included our Illinois C&I activity in discontinued operations as it is a part of our
retail energy segment and is held-for-sale.
(b) Other Discontinued Operations.
Subsequent to the sale of our New York plants in February 2006, we continue to have
(a) insignificant settlements with the independent system operator and (b) property tax and sales
and use tax settlements. In addition, we periodically record amounts for contingent consideration
for the 2003 sale of our European energy operations. These amounts are classified as discontinued
operations in our results of operations and balance sheets, as applicable.
25
(c) All Discontinued Operations.
The following summarizes certain financial information of the businesses reported as
discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Energy |
|
|
New York |
|
|
European |
|
|
|
|
|
|
Segment |
|
|
Plants |
|
|
Energy |
|
|
Total |
|
|
Three Months Ended March 31,
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,515 |
(1) |
|
$ |
2 |
|
|
$ |
|
|
|
$ |
1,517 |
|
Income (loss) before income tax
expense/benefit(2) |
|
|
(57 |
) |
|
|
3 |
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,936 |
(3) |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,936 |
|
Income before income tax
expense(4) |
|
|
576 |
|
|
|
|
|
|
|
6 |
|
|
|
582 |
|
|
|
|
(1) |
|
Includes $25 million related to our Illinois C&I activity. |
|
(2) |
|
Includes $224 million of unrealized losses on energy derivatives. |
|
(3) |
|
Includes $6 million related to our Illinois C&I activity. |
|
(4) |
|
Includes $528 million of unrealized gains on energy derivatives. |
The following summarizes the assets and liabilities related to our discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in millions) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
122 |
|
|
$ |
105 |
|
Accounts receivable, net |
|
|
592 |
|
|
|
841 |
|
Derivative assets |
|
|
1,408 |
|
|
|
1,010 |
|
Accumulated deferred income taxes |
|
|
273 |
|
|
|
217 |
|
Other current assets |
|
|
31 |
|
|
|
12 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,426 |
|
|
|
2,185 |
|
Property, Plant and Equipment, net |
|
|
56 |
|
|
|
57 |
|
Other Assets: |
|
|
|
|
|
|
|
|
Goodwill and other intangibles, net |
|
|
59 |
|
|
|
59 |
|
Derivative assets |
|
|
459 |
|
|
|
324 |
|
Accumulated deferred income taxes |
|
|
78 |
|
|
|
48 |
|
Other |
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
659 |
|
|
|
495 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
3,085 |
|
|
$ |
2,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
238 |
|
|
$ |
|
|
Accounts payable, principally trade |
|
|
345 |
|
|
|
480 |
|
Derivative liabilities |
|
|
2,270 |
|
|
|
1,637 |
|
Other current liabilities |
|
|
236 |
|
|
|
257 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,089 |
|
|
|
2,374 |
|
Other Liabilities: |
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
744 |
|
|
|
612 |
|
Other liabilities |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities |
|
|
759 |
|
|
|
612 |
|
Long-term Debt |
|
|
|
|
|
|
238 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
759 |
|
|
|
850 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
$ |
3,848 |
|
|
$ |
3,224 |
|
|
|
|
|
|
|
|
26
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with our Form 10-K. This includes
non-GAAP financial measures, which are not standardized; therefore it may not be possible to
compare these financial measures with other companies non-GAAP financial measures having the same
or similar names. These non-GAAP financial measures, which are discussed further in
Consolidated Results of Operations, reflect an additional way of viewing aspects of our
operations that, when viewed with our GAAP results, may provide a more complete understanding of
factors and trends affecting our business. Investors should review our consolidated financial
statements and publicly filed reports in their entirety and not rely on any single financial
measure.
Business Overview
We provide electricity and energy services to wholesale customers in the competitive wholesale
energy markets in the United States through our ownership and operation of and contracting for
power generation capacity. We have over 14,000 MW of power generation capacity.
Our business is capital-intensive and cyclical. Earnings are significantly impacted by spark
and dark spreads and capacity prices. Our margins are driven by a number of factors, including the
prices of power, natural gas, coal and fuel oil, the cost of emissions, transmission, weather and
global macro-economic factors, many of which are volatile. Our ability to control these factors is
limited, and in some instances, the factors are beyond our control. The factor that we have the
most control over is the percentage of time that our generating assets are available to run when it
is economical for them to do so (commercial capacity factor). Our key earnings drivers and various
factors that affect these earnings drivers include:
Economic generation (amount of time our plants are economical to operate)
|
|
|
Supply and demand fundamentals |
|
|
|
Spark spreads (difference between power prices and natural gas fuel costs) |
|
|
|
Dark spreads (difference between power prices and coal fuel costs) |
|
|
|
Generation asset fuel type and efficiency |
Commercial capacity factor (generation as a percentage of economic generation)
|
|
|
Forced and unforced outages
|
Unit margin
|
|
|
Supply and demand fundamentals |
|
|
|
Generation asset fuel type and efficiency |
Other margin
|
|
|
Capacity prices and payments |
|
|
|
Power purchase agreements sold to others |
Operating costs
|
|
|
Generation asset fuel type |
|
|
|
Forced and unforced outages |
27
We are committed to delivering superior returns from competitive wholesale markets through
insights into the fundamentals of our core markets and a commitment to risk-weighted investments
whose return on invested capital exceeds our weighted-average cost of capital.
We are focused on the following value-creation levers:
|
|
|
Establishing and maintaining a flexible capital structure to achieve a competitive
cost of capital and assure financial viability in stress scenarios; |
|
|
|
Achieving operating and commercial excellence through |
|
|
|
investing, maintaining and operating our facilities to maximize reliability and economic value over the life of the assets; and |
|
|
|
proactively monitoring environmental regulations and market conditions, and responding with a disciplined investment process that
focuses on return of invested capital; and |
|
|
|
Maintaining a largely open position to maximize profitability from a cyclical recovery. |
Nearly half of our fleet produces positive earnings across most market scenarios and has sufficient environmental
controls for most regulatory scenarios. We expect that very little environmental investments will be needed for this
part of the fleet. We have a mid-tier of generation assets that are profitable in todays market environment, but
would require improved market conditions and more stable environmental regulations before significant environmental
capital expenditures would be made. We do not expect material environmental spending in 2010 or 2011 for this mid-tier
group. For the period 2012 through 2020:
|
|
|
if current market conditions persist, we would expect to spend less than $100 million; |
|
|
|
if we see a long-term market with returns similar to 2007/2008 levels, we might invest $450 million to
$700 million, including for the recent regulation of NOx in New Jersey discussed in Recent Events; and |
|
|
|
if long-term market conditions at levels supporting new entrants were to occur, we might invest $1 billion
to $1.5 billion on this mid-tier group of generation assets. |
A small portion of the fleet representing less than ten percent of our MWs and producing less than five percent of our
operating cash flows, faces lower levels of long-term profitability. We expect to make minimal future investments in
this part of the fleet.
Given the ongoing turmoil in the financial markets, the uncertainty
in the overall economic outlook and continuing compressed spark and dark spreads, and declining power demand, our focus has been and continues to be on liquidity, free cash
flow and financial flexibility. We are regularly assessing the impact on our business of a wide
variety of economic and commodity price scenarios. We believe we have the ability to operate
through a significant downturn. See Liquidity and Capital Resources.
Recent Events
In this section, we present recent and potential events that have impacted or could in the
future impact our results of operations, financial condition or liquidity. In addition to the
events described below, a number of other factors could affect our future results of operations,
financial condition or liquidity, including changes in natural gas prices, plant availability,
weather and other factors (see Risk Factors in Item 1A of our Form 10-K).
Review of Strategic Alternatives Lead to Exit of Retail Business. In October 2008, our Board
of Directors initiated a process to review strategic alternatives and formed a special committee to
oversee this process. In late 2008, we announced our plan to wind down the C&I portion of our
retail business and sold our Northeast C&I contracts. On May 1, 2009, we sold our Texas mass and
C&I retail business. The sale of the retail business achieved a number of important strategic
objectives for us:
|
|
|
eliminated the need for approximately $2.0 billion of credit support and removed
capital requirements associated with contingent collateral requirements, which lowered our
overall risk profile; and |
|
|
|
enhanced our consolidated balance sheet and improved our liquidity position. |
In connection with the sale, the lawsuit related to the
termination of the retail working capital facility has been dismissed. Our Board of Directors has concluded its
review of strategic alternatives. See
Liquidity and Capital Resources and notes ll(b) and 15 to our interim financial statements.
Environmental
Matters. On April 20, 2009, the New Jersey Department of Environmental Protection finalized regulation
requiring a two-phase reduction in NOx emissions from combustion turbines in New Jersey.
Phase I requires reductions during high electricity demand days and commences on May 19, 2009,
when we must file our compliance plan. We are evaluating Phase I compliance plan alternatives,
including administrative processes and/or controls for reduction of NOx emissions. If
emission controls are part of the Phase I plan, the compliance date could be extended up to May 19,
2010. Phase II requires the installation of emission controls on nearly all of our New Jersey
combustion turbines by May 1, 2015. If we elect to install controls, Phase II capital expenditures
could increase by up to approximately $155 million primarily during 2013 to 2015.
For a discussion of our plans for investment to comply with other existing environmental
regulations, see Business Regulation Environmental Matters in Item 1 of our Form 10-K and
Liquidity and Capital Resources. For a discussion of pending and contingent matters related
to environmental regulations, see note 11(c) to our interim financial statements.
28
Consolidated Results of Operations
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
We reported $151 million consolidated net loss, or $0.43 loss per share, for the three months
ended March 31, 2009 compared to $377 million consolidated net income, or $1.07 income per diluted
share, for the same period in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
Wholesale energy contribution margin, including
wholesale hedges and unrealized gains/losses on
energy derivatives |
|
$ |
(15 |
) |
|
$ |
217 |
|
|
$ |
(232 |
) |
Other contribution margin |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Operation and maintenance(1) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
2 |
|
General and administrative |
|
|
(29 |
) |
|
|
(28 |
) |
|
|
(1 |
) |
Western states litigation and similar settlements |
|
|
|
|
|
|
(34 |
) |
|
|
34 |
|
Gains on sales of assets and emission allowances, net |
|
|
18 |
|
|
|
1 |
|
|
|
17 |
|
Depreciation and amortization |
|
|
(68 |
) |
|
|
(83 |
) |
|
|
15 |
|
Income of equity investment, net |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Interest expense |
|
|
(47 |
) |
|
|
(52 |
) |
|
|
5 |
|
Interest income |
|
|
|
|
|
|
6 |
|
|
|
(6 |
) |
Income tax (expense) benefit |
|
|
34 |
|
|
|
(11 |
) |
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(106 |
) |
|
|
13 |
|
|
|
(119 |
) |
Income (loss) from discontinued operations |
|
|
(45 |
) |
|
|
364 |
|
|
|
(409 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(151 |
) |
|
$ |
377 |
|
|
$ |
(528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relates primarily to general costs, which historically were allocated to our discontinued
retail energy segment. |
Wholesale Energy Segment.
In analyzing the results of our wholesale energy segment and in communications with investors,
analysts, rating agencies, banks and other parties, we use the non-GAAP financial measures open
energy gross margin, open wholesale gross margin and open wholesale contribution margin, which
exclude the items described below, as well as our wholesale energy segment profit and loss measure,
contribution margin, including wholesale hedges and unrealized gains/losses on energy
derivatives. Open energy gross margin, open wholesale gross margin and open wholesale
contribution margin should not be relied upon without considering the GAAP financial measures.
Wholesale Hedges. We exclude the recurring effect of certain wholesale hedges that were
entered into primarily to mitigate (a) certain operational and market risks at our generation
assets and (b) some of the downside risk to our earnings and cash flow. These amounts primarily
relate to settlements of power and fuel hedges, long-term natural gas transportation contracts and
storage contracts. The wholesale hedges described above are derived based on methodology
consistent with the calculation of open energy gross margin. We also exclude the recurring effect
of certain historical wholesale hedges that were entered into in order to hedge the economics of a
portion of our wholesale operations. These amounts primarily relate to settlements of forward
power hedges, long-term tolling purchases, long-term natural gas transportation contracts not
serving our generation assets and our legacy energy trading. We believe that it is useful to us,
investors, analysts and others to show our results in the absence of hedges. The impact of these
hedges on our financial results is not a function of the operating performance of our generation
assets, and excluding the impact better reflects the potential operating performance of our
generation assets based on prevailing market conditions.
29
Unrealized Gains/Losses on Energy Derivatives. We use derivative instruments to manage
operational or market constraints and to increase the return on our generation assets. We are
required to record in our consolidated statement of operations non-cash gains/losses related to
future periods based on current changes in forward commodity prices for derivative instruments
receiving mark-to-market accounting treatment. We refer to these gains and losses prior to
settlement, as well as ineffectiveness on cash flow hedges, as unrealized gains/losses on energy
derivatives. In some cases, the underlying transactions being hedged receive accrual accounting
treatment, resulting in a mismatch of accounting treatments. Since the application of
mark-to-market accounting has the effect
of pulling forward into current periods non-cash gains/losses relating to and reversing in
future delivery periods, analysis of results of operations from one period to another can be
difficult. We believe that excluding these unrealized gains/losses on energy derivatives provides
a more meaningful representation of our economic performance in the reporting period and is
therefore useful to us, investors, analysts and others in facilitating the analysis of our results
of operations from one period to another. These gains/losses are also not a function of the
operating performance of our generation assets, and excluding their impact helps isolate the
operating performance of our generation assets under prevailing market conditions.
Our wholesale energy segments contribution margin, including wholesale hedges and unrealized
gains/losses on energy derivatives was $(15) million during the three months ended March 31, 2009
compared to $217 million in the same period of 2008. The $232 million decrease was primarily due
to (a) $115 million decrease in open wholesale gross margin due to lower spark and dark spreads as
a result of lower power prices, (b) $74 million net change in unrealized gains/losses on energy
derivatives and (c) $40 million decrease in wholesale hedges primarily due to $24 million loss from
market valuation adjustments on inventory and $15 million loss related to payments to reduce fixed
price coal commitments for future periods. See Wholesale Energy Margins below for
further explanations.
30
Wholesale Energy Operational and Financial Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
GWh |
|
|
% Economic(1) |
|
|
GWh |
|
|
% Economic(1) |
|
|
Economic Generation(2)(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PJM Coal |
|
|
5,060.0 |
|
|
|
71 |
% |
|
|
5,963.9 |
|
|
|
82 |
% |
MISO Coal |
|
|
1,175.8 |
|
|
|
43 |
% |
|
|
2,048.4 |
|
|
|
74 |
% |
PJM/MISO Gas |
|
|
164.0 |
|
|
|
2 |
% |
|
|
60.8 |
|
|
|
1 |
% |
West |
|
|
148.8 |
|
|
|
3 |
% |
|
|
238.4 |
|
|
|
3 |
% |
Other |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,548.6 |
|
|
|
26 |
% |
|
|
8,311.5 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Capacity Factor(4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PJM Coal |
|
|
81.5 |
% |
|
|
|
|
|
|
84.9 |
% |
|
|
|
|
MISO Coal |
|
|
81.9 |
% |
|
|
|
|
|
|
75.3 |
% |
|
|
|
|
PJM/MISO Gas |
|
|
95.4 |
% |
|
|
|
|
|
|
93.9 |
% |
|
|
|
|
West |
|
|
86.2 |
% |
|
|
|
|
|
|
76.3 |
% |
|
|
|
|
Other |
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
82.0 |
% |
|
|
|
|
|
|
82.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generation (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PJM Coal |
|
|
4,123.1 |
|
|
|
|
|
|
|
5,062.9 |
|
|
|
|
|
MISO Coal |
|
|
962.7 |
|
|
|
|
|
|
|
1,542.3 |
|
|
|
|
|
PJM/MISO Gas |
|
|
156.4 |
|
|
|
|
|
|
|
57.1 |
|
|
|
|
|
West |
|
|
128.2 |
|
|
|
|
|
|
|
181.8 |
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,370.4 |
|
|
|
|
|
|
|
6,844.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open Energy Unit Margin
($/MWh)(5): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PJM Coal |
|
$ |
19.65 |
|
|
|
|
|
|
$ |
35.55 |
|
|
|
|
|
MISO Coal |
|
|
11.43 |
|
|
|
|
|
|
|
29.83 |
|
|
|
|
|
PJM/MISO Gas |
|
|
6.39 |
|
|
|
|
|
|
|
87.57 |
|
|
|
|
|
West |
|
|
7.80 |
|
|
|
|
|
|
|
NM |
(6) |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average |
|
$ |
17.50 |
|
|
|
|
|
|
$ |
33.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents economic generation (hours) divided by maximum generation hours (maximum plant
capacity multiplied by 8,760 hours). |
|
(2) |
|
Estimated generation at 100% plant availability based on an hourly analysis of when it is
economical to generate based on the price of power, fuel, emission allowances and variable
operating costs. |
|
(3) |
|
Excludes generation related to power purchase agreements, including tolling agreements. |
|
(4) |
|
Generation divided by economic generation. |
|
(5) |
|
Represents open energy gross margin divided by generation. |
|
(6) |
|
NM is not meaningful. |
Wholesale Energy Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale energy third-party revenues |
|
$ |
469 |
|
|
$ |
785 |
|
|
$ |
(316 |
)(1) |
Revenues affiliates |
|
|
|
|
|
|
107 |
(2) |
|
|
(107 |
) |
Unrealized losses on energy derivatives |
|
|
(4 |
) |
|
|
(13 |
) |
|
|
9 |
(3) |
|
|
|
|
|
|
|
|
|
|
Total wholesale energy revenues |
|
$ |
465 |
|
|
$ |
879 |
|
|
$ |
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Decrease primarily due to (a) lower power sales volumes and (b) lower power and natural gas
sales prices. |
|
(2) |
|
We deconsolidated Channelview on August 20, 2007. These revenues represent sales of fuel to
Channelview prior to the assets being sold. |
|
(3) |
|
See footnote 7 under Wholesale Energy Margins. |
31
Wholesale Energy Cost of Sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale energy third-party costs |
|
$ |
284 |
|
|
$ |
516 |
|
|
$ |
(232 |
)(1) |
Cost of sales affiliates |
|
|
|
|
|
|
36 |
(2) |
|
|
(36 |
) |
Unrealized (gains) losses on energy derivatives |
|
|
40 |
|
|
|
(43 |
) |
|
|
83 |
(3) |
|
|
|
|
|
|
|
|
|
|
Total wholesale energy cost of sales |
|
$ |
324 |
|
|
$ |
509 |
|
|
$ |
(185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Decrease primarily due to (a) lower prices paid for natural gas and (b) lower natural gas
volumes purchased. |
|
(2) |
|
We deconsolidated Channelview on August 20, 2007. These cost of sales represent purchases of
power from Channelview prior to the assets being sold. |
|
(3) |
|
See footnote 7 under Wholesale Energy Margins. |
Wholesale Energy Margins.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open energy gross margin(1): |
|
|
|
|
|
|
|
|
|
|
|
|
PJM Coal |
|
$ |
81 |
|
|
$ |
180 |
|
|
$ |
(99 |
)(2) |
MISO Coal |
|
|
11 |
|
|
|
46 |
|
|
|
(35 |
)(2) |
PJM/MISO Gas |
|
|
1 |
|
|
|
5 |
|
|
|
(4 |
) |
West |
|
|
1 |
|
|
|
(5 |
) |
|
|
6 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
94 |
|
|
|
226 |
|
|
|
(132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other margin(3): |
|
|
|
|
|
|
|
|
|
|
|
|
PJM Coal |
|
|
34 |
|
|
|
18 |
|
|
|
16 |
(4) |
MISO Coal |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
PJM/MISO Gas |
|
|
38 |
|
|
|
27 |
|
|
|
11 |
(4) |
West |
|
|
7 |
|
|
|
22 |
|
|
|
(15 |
)(5) |
Other |
|
|
14 |
|
|
|
9 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
95 |
|
|
|
78 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open wholesale gross margin |
|
|
189 |
|
|
|
304 |
|
|
|
(115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and maintenance |
|
|
(156 |
) |
|
|
(152 |
) |
|
|
(4 |
) |
Other |
|
|
|
|
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Open wholesale contribution margin |
|
|
33 |
|
|
|
151 |
|
|
|
(118 |
) |
Wholesale hedges |
|
|
(4 |
) |
|
|
36 |
|
|
|
(40 |
)(6) |
Unrealized gains (losses) on energy derivatives |
|
|
(44 |
) |
|
|
30 |
|
|
|
(74 |
)(7) |
|
|
|
|
|
|
|
|
|
|
Total wholesale energy contribution
margin, including wholesale hedges and
unrealized gains/losses on energy
derivatives(8) |
|
$ |
(15 |
) |
|
$ |
217 |
|
|
$ |
(232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Open energy gross margin is calculated using the power sales prices received by the plants
less delivered spot fuel prices. This figure excludes the effects of other margin, our
wholesale hedges and unrealized gains/losses on energy derivatives. |
|
(2) |
|
Decrease primarily due to lower unit margins (lower power prices). |
|
(3) |
|
Other margin represents power purchase agreements, capacity payments, ancillary services
revenues and selective commercial hedge strategies. |
|
(4) |
|
Increase primarily due to higher RPM capacity payments. |
|
(5) |
|
Decrease primarily due to (a) reduced selective commercial hedge activities and (b) lower
capacity payments. |
|
(6) |
|
Decrease primarily due to (a) $49 million decline on fuel hedges, (b) $24 million loss on
market adjustments to inventory and (c) $15 million loss primarily related to payments to
reduce fixed price coal commitments for future periods. These decreases were partially offset
by (a) $23 million gain on a hedge of generation and (b) $15 million increase on hedges of
natural gas transportation. |
|
(7) |
|
Decrease primarily due to (a) $63 million in losses from changes in prices on our energy
derivatives marked to market and (b) $11 million loss due to reversal of previously recognized
unrealized gains on energy derivatives which settled during the period. |
|
(8) |
|
Wholesale energy segment profit and loss measure. |
32
General and Administrative.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
$ |
17 |
|
|
$ |
14 |
|
|
$ |
3 |
|
Professional fees, contract services
and information systems maintenance |
|
|
6 |
|
|
|
7 |
|
|
|
(1 |
) |
Rent and utilities |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
Legal costs |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
Other, net |
|
|
1 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
29 |
|
|
$ |
28 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
Western States Litigation and Similar Settlements. See note 11(a) to our consolidated
financial statements in our Form 10-K.
Gains on Sales of Assets and Emission and Exchange Allowances, Net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CO2 exchange allowances |
|
$ |
10 |
|
|
$ |
|
|
|
$ |
10 |
|
SO2 and NOx emission allowances |
|
|
7 |
|
|
|
|
|
|
|
7 |
|
Bighorn plant |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Other, net |
|
|
(1 |
) |
|
|
1 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Gains on sales of assets and emission and
exchange allowances, net |
|
$ |
18 |
|
|
$ |
1 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation on plants |
|
$ |
55 |
|
|
$ |
58 |
|
|
$ |
(3 |
) |
Other, net depreciation |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
59 |
|
|
|
62 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Amortization of emission allowances |
|
|
8 |
|
|
|
20 |
|
|
|
(12 |
)(1) |
Other, net amortization |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
9 |
|
|
|
21 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
68 |
|
|
$ |
83 |
|
|
$ |
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Decrease primarily due to (a) lower weighted average cost of SO2 allowances and
(b) decrease in SO2 allowances used. |
Income of Equity Investment, Net. This represents income, which did not change significantly,
from our equity method investment in Sabine Cogen, LP.
Other, Net. Other, net did not change significantly.
33
Interest Expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt |
|
$ |
53 |
|
|
$ |
53 |
|
|
$ |
|
|
Deferred financing costs |
|
|
2 |
|
|
|
3 |
|
|
|
(1 |
) |
Financing fees expensed |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
Amortization of fair value
adjustment of acquired debt |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
Capitalized interest(1) |
|
|
(7 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
47 |
(2) |
|
$ |
52 |
(2) |
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relates primarily to scrubber projects at our Cheswick and Keystone plants. |
|
(2) |
|
See notes 7 and 15 to our interim financial statements regarding certain debt and related
interest expense classified in discontinued operations. |
Interest Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on temporary cash investments |
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
(4 |
) |
Net margin deposits |
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
Other, net |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
|
|
|
$ |
6 |
|
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
|
Income Tax Expense (Benefit). See note 9 to our interim financial statements.
Income (Loss) from Discontinued Operations. See note 15 to our interim financial statements.
Liquidity and Capital Resources
On May 1, 2009, we sold our Texas retail business for $287.5 million in cash plus the value of
the net working capital. We currently estimate the net working capital to be $65 million. We
estimate our net proceeds will be approximately $300 million after certain expenses. We are
required to offer a portion of the net proceeds to holders of our secured notes and PEDFA bonds.
The offer is currently estimated at $238 million. See Recent Events and notes 11(b) and 15 to our interim
financial statements.
As
of May 1, 2009, we had total available liquidity of $2.2 billion, comprised of unused
borrowing capacity, letters of credit capacity and cash and cash equivalents. During the three
months ended March 31, 2009, we generated $199 million in operating cash flows from continuing
operations, including the changes in margin deposits of $106 million (cash inflow).
See Historical Cash Flows for further detail of our cash flows from operating activities
and explanation of our $52 million use of cash from investing activities from continuing operations
for the three months ended March 31, 2009.
Based on our assessment of the near term economic environment and volatility in commodity
markets, we have hedged approximately 25% of our estimated 2010 power
generation (based on MWh). We expect these
hedges will reduce the effect of commodity volatility on our 2010 cash flows. We continue to
monitor our business and hedging to provide adequate cash flows in the event of a sustained
depressed environment.
See note 9 to our interim financial statements regarding an expected income tax cash payment
of approximately $60 million to $65 million relating to California-related matters.
See Risk Factors in Item 1A and Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources in Item 7 of our Form 10-K and note 6
to our consolidated financial statements in our Form 10-K.
34
Credit Risk
By extending credit to our counterparties, we are exposed to credit risk. For discussion of
our credit risk policy, see note 4 to our interim financial statements.
As of March 31, 2009, our derivative assets and accounts receivable from our wholesale energy
counterparties, after taking into consideration netting within each contract and any master netting
contracts with counterparties, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure |
|
|
Credit |
|
|
|
|
|
|
Number of |
|
|
Net Exposure of |
|
|
|
Before |
|
|
Collateral |
|
|
Exposure |
|
|
Counterparties |
|
|
Counterparties |
|
Credit Rating Equivalent |
|
Collateral(1) |
|
|
Held |
|
|
Net of Collateral |
|
|
>10%(2) |
|
|
>10%(2) |
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
110 |
|
|
$ |
2 |
|
|
$ |
108 |
|
|
|
1 |
(3) |
|
$ |
70 |
|
Non-investment grade |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
No external ratings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internally rated Investment grade |
|
|
107 |
|
|
|
|
|
|
|
107 |
|
|
|
1 |
(4) |
|
|
102 |
|
Internally rated Non-investment
grade |
|
|
7 |
|
|
|
5 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
227 |
|
|
$ |
7 |
|
|
$ |
220 |
|
|
|
2 |
|
|
$ |
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The table excludes amounts related to contracts classified as normal purchase/normal sale and
non-derivative contractual commitments that are not recorded in our consolidated balance
sheets, except for any related accounts receivable. Such contractual commitments contain
credit and economic risk if a counterparty does not perform. Nonperformance could have a
material adverse impact on our future results of operations, financial condition and cash
flows. |
|
(2) |
|
See note 4 to our interim financial statements. |
|
(3) |
|
This counterparty is a financial institution. |
|
(4) |
|
This counterparty is a power grid operator. |
Off-Balance Sheet Arrangements
As of March 31, 2009, we have no off-balance sheet arrangements.
Historical Cash Flows
Cash
Flows Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
Operating income (loss) |
|
$ |
(94 |
) |
|
$ |
70 |
|
|
$ |
(164 |
) |
Depreciation and amortization |
|
|
68 |
|
|
|
83 |
|
|
|
(15 |
) |
Gains on sales of assets and emission allowances, net |
|
|
(18 |
) |
|
|
(1 |
) |
|
|
(17 |
) |
Net changes in energy derivatives |
|
|
44 |
(1) |
|
|
(30 |
) (2) |
|
|
74 |
|
Western states litigation and similar settlements |
|
|
|
|
|
|
34 |
|
|
|
(34 |
) |
Margin deposits, net |
|
|
106 |
|
|
|
9 |
|
|
|
97 |
|
Change in accounts and notes receivable and accounts
payable, net |
|
|
89 |
|
|
|
23 |
|
|
|
66 |
|
Change in inventory |
|
|
21 |
|
|
|
27 |
|
|
|
(6 |
) |
Settlements of exchange transactions prior to
contractual period(3) |
|
|
(10 |
) |
|
|
(4 |
) |
|
|
(6 |
) |
Interest payments, net of capitalized interest |
|
|
5 |
|
|
|
|
|
|
|
5 |
|
Income tax payments, net of refunds |
|
|
(4 |
) |
|
|
22 |
|
|
|
(26 |
) |
Prepaid lease obligation |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
1 |
|
Other, net |
|
|
(2 |
) |
|
|
(19 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations from
operating activities |
|
|
199 |
|
|
|
207 |
|
|
|
(8 |
) |
Net cash provided by discontinued operations from
operating activities |
|
|
289 |
|
|
|
97 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
488 |
|
|
$ |
304 |
|
|
$ |
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes unrealized losses on energy derivatives of $44 million. |
|
(2) |
|
Includes unrealized gains on energy derivatives of $30 million. |
|
(3) |
|
Represents exchange transactions financially settled within three business days prior to the
contractual delivery month. |
35
Cash Flows Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
(55 |
) |
|
$ |
(45 |
) |
|
$ |
(10 |
) |
Proceeds from sales of emission allowances |
|
|
12 |
|
|
|
2 |
|
|
|
10 |
|
Purchases of emission allowances |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
Restricted cash |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
from investing activities |
|
|
(52 |
) |
|
|
(49 |
) |
|
|
(3 |
) |
Net cash used in discontinued
operations from investing activities |
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
$ |
(67 |
) |
|
$ |
(54 |
) |
|
$ |
(13 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of senior secured notes |
|
$ |
|
|
|
$ |
(45 |
) |
|
$ |
45 |
|
Proceeds from issuance of stock |
|
|
2 |
|
|
|
5 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
$ |
2 |
|
|
$ |
(40 |
) |
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
New Accounting Pronouncements, Significant Accounting Policies and Critical Accounting Estimates
New Accounting Pronouncements
See notes 1 and 3 to our interim financial statements.
Significant Accounting Policies
See note 2 to our consolidated financial statements in our Form 10-K.
Critical Accounting Estimates
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Accounting Estimates New Accounting Pronouncements, Significant Accounting Policies and Critical
Accounting Estimates Critical Accounting Estimates in Item 7 in our Form 10-K and note 2 to our
consolidated financial statements in our Form 10-K.
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks and Risk Management
Our primary market risk exposure relates to fluctuations in commodity prices. See
Quantitative and Qualitative Disclosures About Market Risk in Item 7A of our Form 10-K and note 3
to our interim financial statements.
Non-Trading Market Risks
Commodity Price Risk
As of March 31, 2009, the fair values of the contracts related to our net non-trading
derivative assets and liabilities are:
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Months |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
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|
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Ending |
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|
March 31, |
|
|
Remainder |
|
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|
|
|
|
|
|
|
|
|
|
|
|
2014 and |
|
|
Total fair |
|
Source of Fair Value |
|
2010 |
|
|
of 2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
thereafter |
|
|
value |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices actively
quoted (Level 1) |
|
$ |
8 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10 |
|
Prices provided by
other external
sources (Level 2) |
|
|
42 |
|
|
|
(16 |
) |
|
|
(35 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
(22 |
) |
Prices based on
models and other
valuation methods
(Level 3) |
|
|
(146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(146 |
) |
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
non-trading
derivatives |
|
$ |
(96 |
) |
|
$ |
(14 |
) |
|
$ |
(35 |
) |
|
$ |
(13 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(158 |
) |
|
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|
The fair values shown in the table above are subject to significant changes due to fluctuating
commodity forward market prices, volatility and credit risk. Market prices assume a functioning
market with an adequate number of buyers and sellers to provide liquidity. Insufficient market
liquidity could significantly affect the values that could be obtained for these contracts, as well
as the costs at which these contracts could be hedged. In addition, we have committed volumes
under some coal contracts through 2010 and 2011 for which the contract prices are subject to
negotiation prior to the beginning of each year. For further discussion of how we arrive at these
fair values, see note 2(d) to our consolidated financial statements in our Form 10-K, note 5 to our
interim financial statements and Managements Discussion and Analysis of Financial Condition and
Results of OperationsNew Accounting Pronouncements, Significant Accounting Policies and Critical
Accounting EstimatesCritical Accounting Estimates in Item 7 of our Form 10-K.
A hypothetical 10% movement in the underlying energy prices would have the following potential
loss impacts on our non-trading derivatives:
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As of |
|
Market Prices |
|
|
Earnings Impact |
|
|
Fair Value Impact |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
10% decrease |
|
$ |
(11 |
) |
|
$ |
(11 |
) |
December 31, 2008 |
|
10% decrease |
|
|
(5 |
) |
|
|
(5 |
) |
Interest Rate Risk
As of March 31, 2009 and December 31, 2008, we have no variable rate debt outstanding. We
earn interest income, for which the interest rates vary, on our cash and cash equivalents and net
margin deposits. During the three months ended March 31, 2009 and twelve months ended December 31,
2008, we had no variable rate interest expense and our interest income was $1 million and
$20 million, respectively.
If interest rates decreased by one percentage point from their March 31, 2009 and December 31,
2008 levels, the fair values of our fixed rate debt from continuing operations would have increased
by $121 million and $111 million, respectively.
37
Trading Market Risks
As of March 31, 2009, the fair values of the contracts related to our legacy trading and
non-core asset management positions and recorded as net derivative assets and liabilities are:
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|
|
|
|
|
|
Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
Months |
|
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|
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|
|
|
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|
|
|
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|
|
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Ending |
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|
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|
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|
|
|
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|
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|
|
|
March 31, |
|
|
Remainder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 and |
|
|
Total fair |
|
Source of Fair Value |
|
2010 |
|
|
of 2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
thereafter |
|
|
value |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Prices actively
quoted (Level 1) |
|
$ |
25 |
|
|
$ |
12 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
37 |
|
Prices provided by
other external
sources (Level 2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices based on
models and other
valuation methods
(Level 3) |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(7 |
) |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21 |
|
|
$ |
9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
30 |
|
|
|
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|
|
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|
The fair values in the above table are subject to significant changes based on fluctuating
market prices and conditions. See the discussion above related to non-trading derivative assets
and liabilities for further information on items that impact our portfolio of trading contracts.
Our consolidated realized and unrealized margins relating to these positions are (income
(loss)):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in millions) |
|
|
Realized |
|
$ |
11 |
|
|
$ |
7 |
|
Unrealized |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
11 |
|
|
$ |
(4 |
) |
|
|
|
|
|
|
|
An analysis of these net derivative assets and liabilities is:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in millions) |
|
|
Fair value of contracts outstanding, beginning of period |
|
$ |
30 |
|
|
$ |
19 |
|
Contracts realized or settled |
|
|
(12 |
)(1) |
|
|
(10 |
)(2) |
Changes in fair values attributable to market price and other market
changes |
|
|
12 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Fair value of contracts outstanding, end of period |
|
$ |
30 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount includes realized gain of $12 million. |
|
(2) |
|
Amount includes realized gain of $7 million and deferred settlements of $3 million. |
The daily value-at-risk for our legacy trading and non-core asset management positions is:
|
|
|
|
|
|
|
|
|
|
|
2009(1) |
|
|
2008 |
|
|
|
(in millions) |
|
|
As of March 31 |
|
$ |
3 |
|
|
$ |
1 |
|
Three months ended March 31: |
|
|
|
|
|
|
|
|
Average |
|
|
3 |
|
|
|
1 |
|
High |
|
|
4 |
|
|
|
1 |
|
Low |
|
|
2 |
|
|
|
|
|
|
|
|
(1) |
|
The major parameters for calculating daily value-at-risk remain the same during 2009 as
disclosed in Quantitative and Qualitative Disclosures About Market Risk in Item 7A of our
Form 10-K. |
38
Fair Value Measurements
We apply recurring fair value measurements to our derivatives assets and liabilities. See
note 5 to our interim financial statements. Derivative instruments classified as Level 2 primarily
include over-the-counter (OTC) derivative instruments such as generic swaps and forwards. The fair
value measurements of these derivative assets and liabilities are based largely on unadjusted
indicative quoted prices from independent brokers in active markets. An active market is
considered to have transactions with sufficient frequency and volume to provide pricing information
on an ongoing basis. Derivative instruments for which fair value is calculated using quoted prices
that are deemed not active or that have been extrapolated from quoted prices in active markets are
classified as Level 3. For certain natural gas and power contracts, we adjust seasonal or calendar
year quoted prices based on historical observations to represent fair value for each month in the
season or calendar year, such that the average of all months is equal to the quoted price. A
derivative instrument that has a tenor that does not span the quoted period is considered an
unobservable Level 3 measurement.
We evaluate and validate the inputs we use to estimate fair value by a number of methods,
including validating against market published prices and daily broker quotes obtainable from
multiple pricing services. For OTC derivative instruments classified as Level 2, indicative quotes
obtained from brokers in liquid markets generally represent fair value of these instruments.
Adjustments to the quotes are adjustments to the bid or ask price depending on the nature of the
position to appropriately reflect exit pricing and are considered a Level 3 input to the fair value
measurement. In less liquid markets such as coal, in which a single brokers view of the market is
used to estimate fair value, we consider such inputs to be unobservable Level 3 inputs.
Fair value for energy derivatives is further derived from credit adjustments. Derivative
assets are discounted using a yield curve representative of the counterpartys probability of
default. The counterpartys default probability is based on a modified version of published
default rates, taking 20-year historical default rates from Standard & Poors and Moodys and
adjusting them to reflect a rolling five-year average. For derivative liabilities, fair value
measurement reflects the nonperformance risk related to that liability, which is our own credit
risk. We derive our nonperformance risk by applying our credit default swap spread against the
respective derivative liability.
To determine the fair value for Level 3 energy derivatives where there are no market quotes or
external valuation services, we rely on various modeling techniques. We use a variety of valuation
models, which vary in complexity depending on the contractual terms of, and inherent risks in, the
instrument being valued. We use both industry-standard models as well as internally developed
proprietary valuation models that consider various assumptions such as market prices for power and
fuel, price shapes, volatilities and correlations as well as other relevant factors as may be
deemed appropriate. There is inherent risk in valuation modeling given the complexity and
volatility of energy markets. Therefore, it is possible that results in future periods may be
materially different as contracts are ultimately settled.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial
officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (1934 Act)) as of March 31,
2009, the end of the period covered by this Form 10-Q. Based on this evaluation, our chief
executive officer and chief financial officer concluded that, as of March 31, 2009, our disclosure
controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the 1934 Act) during the period ended March 31, 2009, that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
39
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See note 11 to our interim financial statements in this Form 10-Q.
ITEM 6. EXHIBITS
Exhibits.
See Index of Exhibits.
40
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
RRI ENERGY, INC.
(Registrant)
|
|
May 11, 2009 |
By: |
/s/ Thomas C. Livengood
|
|
|
|
Thomas C. Livengood |
|
|
|
Senior Vice President and Controller
(Duly Authorized Officer and Chief Accounting Officer) |
|
|
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.
The exhibits with the asterisk symbol (*) are compensatory arrangements filed pursuant to Item
601(b)(10)(iii) of Regulation S-K.
|
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|
|
|
|
|
|
|
|
SEC File or |
|
|
Exhibit |
|
|
|
Report or Registration |
|
Registration |
|
Exhibit |
Number |
|
Document Description |
|
Statement |
|
Number |
|
Reference |
|
+2.1
|
|
Letter Agreement dated March 24,
2009 re: Section 7.11 of the Membership Interest Purchase Agreement, dated as of February 28,
2009 by and between Reliant Energy, Inc. and NRG Retail LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+2.2
|
|
Letter Agreement dated April 9, 2009 re: Section 7.9(iv) of the Membership Interest Purchase Agreement, dated as of February 28,
2009 by and between Reliant Energy, Inc. and NRG Retail LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+2.3
|
|
Letter Agreement dated April 28, 2009 re: Sections 3.2(i), 7.12, 7.13(b) and 7.20 of the Membership Interest Purchase Agreement,
dated as of February 28, 2009 by and between Reliant Energy, Inc. and NRG Retail LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+2.4
|
|
Letter Agreement dated April 30, 2009 re: Effectiveness of the Closing of the Membership Interest Purchase Agreement, dated
as of February 28, 2009 by and between Reliant Energy, Inc. and NRG Retail LLC
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
3.1
|
|
Third Restated Certificate of Incorporation
|
|
RRI Energy, Inc.s
Quarterly Report on
Form 10-Q for the
period ended June 30,
2007
|
|
1-16455
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
+3.2
|
|
Fifth Amended and Restated Bylaws |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+3.3
|
|
Certificate of Ownership and Merger
merging a wholly-owned subsidiary into
registrant pursuant to Section 253 of the
General Corporation Law of the State of
Delaware, effective as of May 2, 2009 |
|
|
|
|
|
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|
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|
|
|
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|
|
4.1
|
|
Registrant has omitted instruments with
respect to long-term debt in an amount
that does not exceed 10% of the
registrants total assets and its
subsidiaries on a consolidated basis and
hereby undertakes to furnish a copy of any
such agreement to the Securities and
Exchange Commission upon request |
|
|
|
|
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|
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|
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|
|
+31.1
|
|
Certification of the Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+31.2
|
|
Certification of the Chief Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+32.1
|
|
Certification of Chief Executive Officer
and Chief Financial Officer pursuant to
Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
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|