UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark one)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2002
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______to ______
COMMISSION FILE NO. 333-66032
PG&E National Energy Group, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 7600 Wisconsin Avenue | 94-3316236 | ||
| (State or Other Jurisdiction of Incorporation or Organization) |
(Mailing address: 7500 Old Georgetown Road) |
(I.R.S. Employer Identification Number) | ||
| Bethesda, Maryland 20814 | ||||
| (301) 280-6800 |
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)
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 twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
1
PG&E NATIONAL ENERGY GROUP, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
| Page | ||||
| PART I. FINANCIAL INFORMATION | ||||
| ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS | 3 | |||
| Consolidated Statements of Operations | 3 | |||
| Consolidated Balance Sheets | 4 | |||
| Consolidated Statements of Cash Flows | 6 | |||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | 7 | |||
| Note 1: General | 7 | |||
| Note 2: Relationship with PG&E Corporation and the California Electric Industry | 14 | |||
| Note 3: Liquidity and Financial Resources | 15 | |||
| Note 4: Price Risk Management | 21 | |||
| Note 5: Commitments and Contingencies | 25 | |||
| Note 6: Impairment and Write offs | 30 | |||
| Note 7: Costs Incurred in an Organizational Restructuring | 31 | |||
| Note 8: Segment Information | 31 | |||
| Note 9: Subsequent Events | 32 | |||
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 33 | |||
| Overview | 33 | |||
| Market Conditions and Business Environment | 37 | |||
| Liquidity and Financial Resources | 38 | |||
| Risk Management Activities | 49 | |||
| Results of Operations | 53 | |||
| Critical Accounting Policies | 56 | |||
| Accounting Pronouncements Issued but Not Yet Adopted | 57 | |||
| Taxation Matters | 58 | |||
| Environmental and Legal Matters | 58 | |||
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS | 59 | |||
| ITEM 4. CONTROLS AND PROCEDURES | 59 | |||
| PART II. OTHER INFORMATION | ||||
| ITEM 1. LEGAL PROCEEDINGS | 60 | |||
| ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K | 62 | |||
| SIGNATURES AND CERTIFICATIONS | 63 | |||
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PG&E NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
| Three months ended | Nine months ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
Operating Revenues |
||||||||||||||||||
Generation, transportation, and trading |
$ | 1,079 | $ | 764 | $ | 2,407 | $ | 2,157 | ||||||||||
Equity in earnings of affiliates |
8 | 18 | 31 | 67 | ||||||||||||||
Total operating revenues |
1,087 | 782 | 2,438 | 2,224 | ||||||||||||||
Operating Expenses |
||||||||||||||||||
Cost of commodity sales and fuel |
763 | 462 | 1,638 | 1,266 | ||||||||||||||
Operations, maintenance, and management |
151 | 126 | 454 | 394 | ||||||||||||||
Administrative and general |
27 | 15 | 51 | 51 | ||||||||||||||
Impairment and write-offs |
125 | — | 390 | — | ||||||||||||||
Depreciation and amortization |
51 | 45 | 140 | 120 | ||||||||||||||
Other operating expenses |
20 | (2 | ) | 34 | 47 | |||||||||||||
Total operating expenses |
1,137 | 646 | 2,707 | 1,878 | ||||||||||||||
Operating Income (Loss) |
(50 | ) | 136 | (269 | ) | 346 | ||||||||||||
Interest income |
14 | 23 | 46 | 72 | ||||||||||||||
Interest expense |
(54 | ) | (48 | ) | (143 | ) | (106 | ) | ||||||||||
Other income (expense), net |
4 | (4 | ) | 1 | 2 | |||||||||||||
Income (Loss) Before Income Taxes |
(86 | ) | 107 | (365 | ) | 314 | ||||||||||||
Income taxes provision (benefit) |
(68 | ) | 30 | (204 | ) | 112 | ||||||||||||
Net Income (Loss) Before Cumulative
Effect Of A Change In Accounting
Principle |
(18 | ) | 77 | (161 | ) | 202 | ||||||||||||
Cumulative Effect Of A Change In
Accounting Principle, net of applicable income
tax benefit of $42 million |
— | — | (61 | ) | — | |||||||||||||
Net Income (Loss) |
$ | (18 | ) | $ | 77 | $ | (222 | ) | $ | 202 | ||||||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
3
PG&E NATIONAL ENERGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
| Balance at | |||||||||||
| September 30, | December 31, | ||||||||||
| 2002 | 2001 | ||||||||||
ASSETS |
|||||||||||
Current Assets |
|||||||||||
Cash and cash equivalents |
$ | 371 | $ | 725 | |||||||
Restricted cash |
210 | 141 | |||||||||
Accounts receivable: |
|||||||||||
Trade, net of allowance for uncollectibles of $44 million
and $43 million, respectively |
1,385 | 1,031 | |||||||||
Related parties |
33 | 40 | |||||||||
Other receivables |
32 | 54 | |||||||||
Inventory |
183 | 125 | |||||||||
Price risk management |
615 | 427 | |||||||||
Prepaid expenses and other |
347 | 67 | |||||||||
Total current assets |
3,176 | 2,610 | |||||||||
Property, Plant and Equipment |
|||||||||||
Electric generating facilities |
2,878 | 2,735 | |||||||||
Gas transmission assets |
1,611 | 1,512 | |||||||||
Land |
133 | 131 | |||||||||
Other |
185 | 163 | |||||||||
Construction work in progress |
2,712 | 2,076 | |||||||||
Total property, plant and equipment (at original cost) |
7,519 | 6,617 | |||||||||
Accumulated depreciation |
(997 | ) | (887 | ) | |||||||
Net property, plant and equipment |
6,522 | 5,730 | |||||||||
Other Noncurrent Assets |
|||||||||||
Long-term receivables |
469 | 455 | |||||||||
Long-term receivables from PG&E Corporation |
— | 174 | |||||||||
Investments in unconsolidated affiliates |
383 | 414 | |||||||||
Goodwill, net of accumulated amortization at December 31 of $30 million |
— | 95 | |||||||||
Intangible assets, net of accumulated amortization of $59 million
and $47 million, respectively |
74 | 85 | |||||||||
Deferred financing costs, net of accumulated amortization of $59 million
and $30 million, respectively |
95 | 103 | |||||||||
Price risk management |
550 | 299 | |||||||||
Other |
165 | 333 | |||||||||
Total other noncurrent assets |
1,736 | 1,958 | |||||||||
TOTAL ASSETS |
$ | 11,434 | $ | 10,298 | |||||||
4
PG&E NATIONAL ENERGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
| Balance at | |||||||||||
| September 30, | December 31, | ||||||||||
| 2002 | 2001 | ||||||||||
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY |
|||||||||||
Current Liabilities |
|||||||||||
Short-term borrowings |
$ | 431 | $ | 330 | |||||||
Long-term debt, classified as current |
773 | 48 | |||||||||
Obligations
due PG&E Corporation |
— | 309 | |||||||||
Accounts payable: |
|||||||||||
Trade |
1,252 | 957 | |||||||||
Related parties |
32 | 41 | |||||||||
Accrued expenses |
362 | 336 | |||||||||
Price risk management |
741 | 293 | |||||||||
Out-of-market contractual obligations |
91 | 116 | |||||||||
Other |
78 | 48 | |||||||||
Total current liabilities |
3,760 | 2,478 | |||||||||
Noncurrent Liabilities |
|||||||||||
Long-term debt |
3,292 | 3,374 | |||||||||
Deferred income taxes |
473 | 681 | |||||||||
Price risk management |
836 | 312 | |||||||||
Out-of-market contractual obligations |
521 | 683 | |||||||||
Long-term advances from PG&E Corporation |
327 | 118 | |||||||||
Other noncurrent liabilities and deferred credits |
95 | 65 | |||||||||
Total noncurrent
liabilities |
5,544 | 5,233 | |||||||||
Minority Interest |
18 | 20 | |||||||||
Commitments
and Contingencies |
|||||||||||
(Note
1,3,5) |
— | — | |||||||||
Preferred Stock of Subsidiary |
58 | 58 | |||||||||
Common Stockholders’ Equity |
|||||||||||
Common stock, $1.00 par value—1,000 shares issued and
outstanding |
— | — | |||||||||
Paid-in capital |
3,086 | 3,086 | |||||||||
Accumulated deficit |
(832 | ) | (610 | ) | |||||||
Accumulated other comprehensive income (loss) |
(200 | ) | 33 | ||||||||
Total common
stockholders’ equity |
2,054 | 2,509 | |||||||||
TOTAL LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY |
$ | 11,434 | $ | 10,298 | |||||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
5
PG&E NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Nine months ended | |||||||||||
| September 30, | |||||||||||
| 2002 | 2001 | ||||||||||
Cash Flows From Operating Activities |
|||||||||||
Net income (loss) |
$ | (222 | ) | $ | 202 | ||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|||||||||||
Depreciation and amortization |
140 | 120 | |||||||||
Deferred income taxes |
(226 | ) | (77 | ) | |||||||
Price risk management assets and liabilities, net |
158 | 34 | |||||||||
Amortization of out-of-market contractual obligation |
(59 | ) | (107 | ) | |||||||
Other deferred credits and noncurrent liabilities |
16 | (6 | ) | ||||||||
Impairment and write offs |
390 | — | |||||||||
Equity in earnings of affiliates |
(31 | ) | (67 | ) | |||||||
Distributions from affiliates |
30 | 49 | |||||||||
Cumulative effect of a change in accounting principle |
61 | — | |||||||||
Net effect of changes in operating assets and liabilities: |
|||||||||||
Restricted cash |
(69 | ) | (73 | ) | |||||||
Accounts receivable |
(233 | ) | 1,256 | ||||||||
Inventories, prepaids and deposits |
(281 | ) | 200 | ||||||||
Accounts payable and accrued liabilities |
263 | (1,212 | ) | ||||||||
Accounts payable—related parties, net |
(2 | ) | 5 | ||||||||
Other, net |
42 | (8 | ) | ||||||||
Net
cash (used in) provided by operating activities |
(23 | ) | 316 | ||||||||
Cash Flows From Investing Activities |
|||||||||||
Capital expenditures |
(1,328 | ) | (1,059 | ) | |||||||
Proceeds from sale leaseback |
340 | — | |||||||||
Long-term prepayment on turbines |
— | (144 | ) | ||||||||
Investment in Southaven project |
(74 | ) | — | ||||||||
Repayment
of note receivable from PG&E Corporation |
75 | — | |||||||||
Other, net |
30 | 57 | |||||||||