10-Q/A 1 h95325e10-qa.txt RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A NO. 1 (Mark One) [X] AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 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 number _____________ RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC (Exact name of registrant as specified in its charter) Delaware 52-2154847 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1111 Louisiana Houston, Texas 77002 (Address of principal executive offices) (Zip Code) (713) 207-3200 (Registrant's telephone number, including area code) RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q/A WITH THE REDUCED DISCLOSURE FORMAT. 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 As of August 10, 2001, all 1,000 shares of Reliant Energy Mid-Atlantic Power Holdings, LLC common stock were held by Reliant Energy Northeast Generation, Inc. RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC (FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES Reliant Energy Mid-Atlantic Power Holdings, LLC (REMA) hereby amends Items 1 and 2 of Part 1 of its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 as originally filed on August 10, 2001. RESTATEMENT On February 5, 2002, REMA announced that is was restating its earnings for the second and third quarters of 2001. As more fully described in Note 1, the restatement relates to a correction in accounting treatment for a series of four structured transactions entered into on behalf of REMA that were inappropriately accounted for as cash flow hedges for the period of May through September 2001. Although these transactions were undertaken and accounted for as cash flow hedges, having further reviewed the transactions, REMA now believes that they did not meet the requirements of a cash flow hedge under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133). Instead, they should have been accounted for as a capital contribution of non-trading derivatives that had positive fair value at inception. As a result, REMA's unaudited consolidated condensed financial statements (Original Interim Financial Statements) and related disclosures as of June 30, 2001 and for the three and six months ended June 30, 2001 have been restated from amounts previously reported. The principal effects of the restatement on the accompanying financial statements are set forth in Note 1 of the Notes to Interim Financial Statements. For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, each item of the June 30, 2001 Form 10-Q as originally filed on August 10, 2001 that was affected by the restatement has been amended and restated in its entirety. No attempt has been made in this Form 10-Q/A to modify or update other disclosures as presented in the original Form 10-Q except as required to reflect the effects of the restatement. TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements .................................... 1 Statements of Combined and Consolidated Operations For the periods from April 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000 and the Three Months Ended June 30, 2001 (unaudited) ............ 1 For the periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000 and the Six Months Ended June 30, 2001 (unaudited) .............. 2 Consolidated Balance Sheets December 31, 2000 and June 30, 2001 (unaudited) ............ 3 Statements of Combined and Consolidated Cash Flows For the periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000 and the Six Months Ended June 30, 2001 (unaudited) .............. 4 Notes to Unaudited Combined and Consolidated Financial Statements .............................................. 5 Item 2. Management's Narrative Analysis of the Results of Operations of Reliant Energy Mid-Atlantic Power Holdings, LLC 10

RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC (FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES STATEMENTS OF COMBINED AND CONSOLIDATED OPERATIONS (THOUSANDS OF DOLLARS) (UNAUDITED)

See Notes to the Interim Financial Statements. 1 RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC (FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES STATEMENTS OF COMBINED AND CONSOLIDATED OPERATIONS (THOUSANDS OF DOLLARS) (UNAUDITED)

See Notes to the Interim Financial Statements. 2 RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC (FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS) (UNAUDITED)

See Notes to the Interim Financial Statements. 3 RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC (FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES STATEMENTS OF COMBINED AND CONSOLIDATED CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED)

See Notes to the Interim Financial Statements. 4 RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC (FORMERLY SITHE PENNSYLVANIA HOLDINGS, LLC) AND RELATED COMPANIES NOTES TO UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS 1. BACKGROUND AND BASIS OF PRESENTATION These Interim Financial Statements include the accounts of Reliant Energy Mid-Atlantic Power Holdings, LLC (formerly Sithe Pennsylvania Holdings, LLC) and the affiliates and subsidiaries (collectively, REMA) described in Note 1(a) to REMA's Annual Report on Form 10-K for the year ended December 31, 2000 (REMA Form 10-K). These Interim Financial Statements are unaudited, omit certain information included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and should be read in combination with the REMA Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (REMA First Quarter 10-Q). RESTATEMENT On February 5, 2002, Reliant Resources, Inc. (Reliant Resources) announced that it was restating its earnings for the second and third quarters of 2001. The restatement relates to a correction in accounting treatment for a series of four structured transactions that were inappropriately accounted for as cash flow hedges for the period May 2001 through September 2001. The derivative transactions discussed below were part of the four structured transactions that gave rise to the Reliant Resources restatement. As a result, REMA reevaluated its accounting for the derivative transactions entered into on its behalf by the subsidiary of Reliant Resources. A subsidiary of Reliant Resources entered into derivative transactions on behalf of REMA which, on an aggregated basis at inception, had positive fair value. For the 2001 period, the contracts resulted in net cash outflows which will be more than offset through contractually increased net cash inflows in 2002. REMA accounted for these contracts as cash flow hedges of forecasted transactions pursuant to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133). REMA initially accounted for these contracts by recognizing the fair value of the derivative as an asset or liability and recognizing the corresponding amount in accumulated other comprehensive income. As cash flow hedges, the amount recognized in accumulated other comprehensive income would have been recognized in earnings when the forecasted transactions occur. REMA now believes these derivative transactions should have been recorded as a capital contribution of a non-trading derivative asset that had positive fair value at inception. Therefore, REMA has now recorded these transactions as a capital contribution resulting in the elimination of previously recorded accumulated other comprehensive income and the reversal of previously recognized losses related to these derivative transactions. In addition, in contemplation of one of the structured transactions referred to above, in August 2001, a subsidiary of Reliant Resources, on behalf of REMA, entered into forward contracts to buy and sell natural gas, a portion of which was inappropriately recorded in the fourth quarter of 2001. REMA has also eliminated previously recorded accumulated other comprehensive income recognized in connection with these transactions as of September 30, 2001. As a result, REMA's unaudited consolidated condensed financial statements and related disclosures as of June 30, 2001 and for the three and six months ended June 30, 2001 have been restated from amounts previously reported to appropriately account for the transactions as described above. A summary of the principal effects of the restatement is as follows: (Note - Those line items for which no change in amounts are shown were not affected by the restatement.) 5

6 BASIS OF PRESENTATION The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REMA's Interim Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the respective periods. Amounts reported in REMA's statements of combined and consolidated operations are not necessarily indicative of amounts expected for a full year period due to the effects of, among other things, (a) seasonal variations in energy consumption, (b) changes in energy commodity prices, (c) timing of maintenance and other expenditures and (d) acquisitions and dispositions of assets and other interests. In addition, certain amounts from the prior year have been reclassified to conform to REMA's presentation of financial statements in the current year. These reclassifications do not affect earnings of REMA. Note 5 of the Notes to Combined and Consolidated Financial Statements of REMA included in REMA's Form 10-K (REMA 10-K Notes) relates to material contingencies. This note, updated by the notes contained in these Interim Financial Statements, is incorporated herein by reference. In May 2000, Sithe Energies, Inc. (Sithe), through an indirect wholly owned subsidiary, sold all of its equity interests in REMA to an indirect wholly owned subsidiary of Reliant Energy Power Generation, Inc. (REPG). REPG is a wholly owned subsidiary of Reliant Resources, Inc., which is in turn, a majority-owned subsidiary of Reliant Energy, Incorporated (Reliant Energy). See Note 2 to REMA 10-K Notes. 2. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 "Business Combinations" (SFAS No. 141) and SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being transferred to goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. Under SFAS No. 142, a nonamortization approach, goodwill and certain intangibles with indefinite lives will not be amortized into results of operations, but instead would be reviewed periodically for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles with indefinite lives is more than its fair value. The provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 will be adopted by REMA on January 1, 2002. REMA is in the process of determining the effect of adoption of SFAS No. 141 and SFAS No. 142 on its consolidated financial statements. 3. DERIVATIVE FINANCIAL INSTRUMENTS Adoption of SFAS No. 133 on January 1, 2001 resulted in no cumulative after-tax change in net income and a cumulative after-tax increase in accumulated other comprehensive loss of $73.7 million. The adoption also increased current assets, noncurrent assets, current liabilities and noncurrent liabilities by $85.1 million, $9.0 million, $155.2 million and $12.6 million, respectively, in REMA's Consolidated Balance Sheet. During the three and six months ended June 30, 2001, $10.2 million and $27.5 million, respectively, of the initial after-tax transition loss adjustment recognized in other comprehensive income was reclassified to net loss. For additional information regarding the adoption of SFAS No. 133 and REMA's accounting policies for derivative financial instruments, see Note 2 of REMA First Quarter 10-Q. The application of SFAS No. 133 is still evolving as the FASB clears issues submitted to the Derivatives Implementation Group for consideration. The FASB approved a number of issues regarding the normal purchases and normal sales exception in the second quarter. One issue concluded forward contracts with volumetric optionality do not qualify for the normal purchases and normal sales exception, while another issue applies 7 exclusively to the electric industry and allows the normal purchases and normal sales exception for option-type contracts if certain criteria are met. The effective date for implementation of these decisions is July 1, 2001. REMA is currently assessing the impact of the recently cleared issues and does not believe they will have a material impact on the REMA's Consolidated Financial Statements. Cash Flow Hedges. During the six months ended June 30, 2001, the amount of hedge ineffectiveness recognized in earnings from derivatives that are designated and qualify as cash flow hedges was immaterial. No component of the derivative instruments' gain or loss was excluded from the assessment of effectiveness. During the six months ended June 30, 2001, there were no deferred gains or losses recognized in earnings as a result of the discontinuance of cash flow hedges because it was no longer probable that the forecasted transaction would occur. As of June 30, 2001, current non-trading derivative assets and liabilities and corresponding amounts in accumulated other comprehensive income are expected to be reclassified into net income (loss) during the next twelve months. The maximum length of time REMA is hedging its exposure to the variability in future cash flows for forecasted transactions is five years. Other Derivatives. During the second quarter of 2001, Reliant Resources contributed $234 million of non-trading derivative assets and $92 million of non-trading derivative liabilities to REMA as a result of two structured transactions. For further discussion of these transactions, see Note 1. The change in fair value of these derivative assets and liabilities must be recorded in the statement of income each reporting period. During the second quarter of 2001, $28 million of non-trading derivative liabilities were settled related to these transactions. Accordingly, as of June 30, 2001, REMA has recognized $234 million of non-trading derivative assets and $64 million of non-trading derivative liabilities related to these transactions. 4. COMPREHENSIVE INCOME The following table summarizes the components of total comprehensive income for the three and six months ended June 30, 2001. There was no comprehensive income for the periods from January 1, 2000 to May 11, 2000 or May 12, 2000 to June 30, 2000.

5. ACQUISITION BY REPG In May 2000, REPG purchased the equity in REMA from Sithe for an aggregate purchase price of $2.1 billion, subject to post-closing adjustments which management does not believe will be material. Included within this purchase transaction were transition power purchase agreements, including the capacity transition contract with GPU, Inc. (GPU) described in Note 1(e) to REMA 10-K Notes. The transaction was completed in May 2000. REPG accounted for the acquisition as a purchase with assets and liabilities of REMA reflected at their estimated fair values. The fair value adjustments related to the acquisition, which have been pushed down to REMA, primarily included adjustments in property, plant and equipment, air emissions regulatory allowances, materials and supplies inventories, specific intangibles related to generating plant, environmental reserves and related deferred taxes. REMA finalized these fair value adjustments in May 2001. During May 2001, in connection with finalizing the purchase allocation, REMA recognized $43 million of specific intangibles related to generating plant and reduced generating plant by the same amount, which was included in the purchase adjustments. There were no additional material modifications to the preliminary adjustments from December 31, 2000. For additional information regarding the acquisition of REMA, see Note 2(a) to REMA 10-K Notes. 8 Current REMA's results of operations include the results of REMA only for the period beginning May 12, 2000. The following table presents Former REMA's selected actual financial information and unaudited pro forma information for the three and six months ended June 30, 2000, as if the acquisition had occurred on January 1, 2000. Pro forma amounts also give effect to the sale and leaseback of interests in three of the REMA generating plants, consummated in August 2000. For additional information regarding sale and leaseback transactions, see Note 5(a) to REMA 10-K Notes.

These pro forma results, based on assumptions deemed appropriate by REMA's management, have been prepared for informational purposes only and are not necessarily indicative of the amounts that would have resulted if the acquisition of the REMA entities had occurred on January 1, 2000. Purchase-related adjustments to the results of operations include the effects of depreciation and amortization, interest expense and income taxes. 6. COMMITMENTS AND CONTINGENCIES (a) REMA Ash Disposal Site Closures and Site Contaminations. Under the agreement to acquire REMA's generating assets from GPU (see Note 2(a) to REMA 10-K Notes), liabilities associated with ash disposal site closures and site contamination at the acquired facilities in Pennsylvania and New Jersey prior to a plant closing were assumed, except for the first $6 million of remediation costs at the Seward Generating Station. GPU retained liabilities associated with the disposal of hazardous substances to off-site locations prior to November 24, 1999. As of June 30, 2001, REMA has liabilities associated with six ash disposal site closures and six site investigations and environmental remediations. REMA has recorded its estimate of these environmental liabilities in the amount of $36 million as of June 30, 2001. REMA expects approximately $13 million will be paid over the next five years. (b) Other Legal Matters. REMA is party to various legal proceedings that arise from time to time in the ordinary course of business. While REMA cannot predict the outcome of these proceedings, REMA does not expect these matters to have a material adverse effect on REMA's financial position, results of operations or cash flows. 7. DEPRECIATION AND AMORTIZATION REMA's depreciation expense for the periods from January 1, 2000 to May 11, 2000, May 12, 2000 to June 30, 2000, and April 1, 2000 to May 11, 2000 was $15.4 million, $8.8 million and $4.9 million, respectively. Depreciation expense was $7.4 million and $16.8 million for the three months and six months ended June 30, 2001, respectively. Amortization expense, primarily related to goodwill and air emissions regulatory allowances, was $4.1 million, $1.3 million and $1.7 million for the periods from January 1, 2000 to May 11, 2000, May 12, 2000 to June 30, 2000, and April 1, 2000 to May 11, 2000, respectively. Amortization expense was $3.7 million and $5.3 million for the three months and six months ended June 30, 2001, respectively. 8. PREPAID LEASE EXPENSE During the first quarter of 2001, REMA paid $150.9 million to lessors related to the sale and leaseback transactions (see Note 5(a) to REMA 10-K Notes). As of June 30, 2001, REMA had recorded prepaid lease expense of $101.5 million in other current and other noncurrent assets of $58.8 million and $42.7 million, respectively. 9 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS OF RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC The following narrative analysis should be read in combination with REMA's Interim Financial Statements and REMA Form 10-K. REMA meets the conditions specified in General Instruction H(1)(a) and (b) to Form 10-Q and is therefore permitted to use the reduced disclosure format for wholly owned subsidiaries of reporting companies. Accordingly, REMA has omitted from this report the information called for by Item 3 (Quantitative and Qualitative Disclosure About Market Risk) of Part I and the following Part II items of Form 10-Q: Item 2 (Changes in Securities and Use of Proceeds), Item 3 (Defaults Upon Senior Securities) and Item 4 (Submission of Matters to a Vote of Security Holders). The following discussion explains material changes in the amount of revenue and expense items of REMA between the second quarter and first six months of 2000 and 2001. RESTATEMENT OF THE INTERIM FINANCIAL STATEMENTS On February 5, 2002, REMA announced that is was restating its earnings for the second and third quarters of 2001. As more fully described in Note 1, the restatement relates to a correction in accounting treatment for a series of four structured transactions entered into on behalf of REMA that were inappropriately accounted for as cash flow hedges for the period of May through September 2001. Although these transactions were undertaken and accounted for as cash flow hedges, having further reviewed the transactions, REMA now believes that they did not meet the requirements of a cash flow hedge under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133). Instead, they should have been accounted for as a capital contribution of non-trading derivatives that had positive fair value at inception. As a result, the Original Interim Financial Statements and related disclosures as of June 30, 2001 and for the three and six months ended June 30, 2001 have been restated from amounts previously reported. The principal effects of the restatement on the accompanying financial statements are set forth in Note 1 of the Notes to Interim Financial Statements. OVERVIEW REMA is a Delaware limited liability company that owns or leases 21 electric generation facilities in Pennsylvania, New Jersey and Maryland. REMA is an indirect wholly owned subsidiary of REPG. Until the end of May 2002, we expect to sell a portion of our capacity under transition power sales contracts entered into with affiliates of GPU at the time of Sithe's acquisition of REMA in November 1999 from GPU. During the term of the transition power sales contracts, we will derive revenues from sales of capacity under the contracts, as well as sales into the Pennsylvania-New Jersey-Maryland market (PJM market) of capacity and energy not required to meet the terms of the contracts, sales of ancillary services and sales through bilateral contracts with power marketers and load serving entities within the PJM market and the surrounding markets. In May 2000, REPG purchased the equity in REMA from Sithe for an aggregate purchase price of $2.1 billion. REPG accounted for the acquisition as a purchase with assets and liabilities of REMA reflected at their estimated fair values. The fair value adjustments related to the acquisition, which have been pushed down to REMA, primarily included adjustments in property, plant and equipment, air emissions regulatory allowances, materials and supplies inventories, specific intangibles related to generating plants, environmental reserves and related deferred taxes. For additional information regarding the acquisition of REMA, see Note 2(a) to REMA 10-K Notes. In August 2000, REMA sold to and leased back from each of three owner-lessors in separate lease transactions REMA's respective 16.45%, 16.67% and 100% interests in the Conemaugh, Keystone and Shawville generating stations, respectively. As lessee, REMA leases an interest in each facility from each owner-lessor under a facility lease agreement. As consideration for the sale of REMA's interest in the facilities, REMA received $1.0 billion in cash. REMA used the $1.0 billion of sale proceeds to return capital of $183 million, with the remainder used to 10 reduce affiliate debt. For additional information regarding sale and leaseback transactions, see Note 5(a) to REMA 10-K Notes. COMBINED AND CONSOLIDATED RESULTS OF OPERATIONS

Periods from April 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000 compared to three months ended June 30, 2001 For the three months ended June 30, 2001, REMA's net loss was $5.2 million compared to net income of $1.9 million and $22.6 million for the periods from April 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000, respectively. Net income decreased in the second quarter of 2001 compared to the same period in 2000 primarily due to decreased operating margins (revenues less fuel) and increased operating expenses, partially offset by decreased interest expense to affiliates and decreased depreciation expense. REMA's revenues and operating margins declined in the second quarter of 2001 from the same period in 2000 primarily due to lower prices for power sales combined with higher fuel costs in 2001. Total operating expenses increased in the second quarter of 2001 compared to same period in 2000 primarily due to increased maintenance at the plants, facilities lease expense and increased administrative and support costs. Depreciation expense declined in the second quarter of 2001 compared to the same period in 2000 primarily as a result of the sale of interests in three of its generating plants. During August 2000, REMA sold and leased back interests in three of its generating plants. For additional information regarding the sale and leaseback transactions, see Note 5(a) to REMA 10-K Notes. For the three months ended June 30, 2001, REMA's interest expense, net primarily related to notes payable to an affiliate, aggregated $21.2 million compared to $14.7 million and $20.9 million for the periods from April 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000, respectively. The weighted average principal amount of the notes was approximately $838 million during the three months ended June 30, 2001 and $1.6 billion during the period from April 1, 2000 to June 30, 2000. For additional information regarding notes payable to affiliates, see Note 4 to REMA 10-K Notes. In connection with the acquisition, REMA entered into a tax sharing agreement with Reliant Energy, whereby REMA calculates its income tax provision on a separate return basis. REMA uses the liability method of accounting for deferred income taxes and measures deferred income taxes of all significant income tax temporary differences. REMA's current federal and state income taxes are payable to and receivable from Reliant Energy. 11 Prior to May 11, 2000, REMA and some of its affiliates that were limited liability companies were not taxable for federal income tax purposes. Any taxable earnings or losses and certain other tax attributes were reported by the member on its income tax return. Other affiliates that were taxable corporate entities have incurred tax and book losses but were not subject to any tax-sharing agreements with Sithe. As such, no tax benefits have been recorded for these entities since the tax benefits were not considered realized. These tax benefits and the offsetting valuation allowance were less than $1 million. Periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000 compared to six months ended June 30, 2001 For the six months ended June 30, 2001, REMA's net loss was $2.0 million compared to a net loss of $6.7 million and net income $22.6 million for the periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000, respectively. Net income decreased in the first six months of 2001 compared to the same period in 2000 primarily due to decreased operating margins (revenues less fuel) and increased operating expenses, partially offset by decreased interest expense to affiliates and decreased depreciation expense. REMA's revenues and operating margins declined in the first six months of 2001 compared to the same period in 2000 primarily due to lower prices for power sales combined with higher fuel costs in 2001. Total operating expenses increased in the first six months of 2001 compared to same period in 2000 primarily due to increased maintenance at the plants, facilities lease expense and increased administrative and support costs. Depreciation expense declined from the first six months of 2001 compared to the same period in 2000 primarily as a result of the sale of interests in three of its generating plants. For the six months ended June 30, 2001, REMA's interest expense, net primarily related to notes payable to an affiliate, aggregated $41.6 million compared to $46.5 million and $20.9 million for the periods from January 1, 2000 to May 11, 2000 and May 12, 2000 to June 30, 2000, respectively. The weighted average principal amount of the notes was approximately $838 million during the six months ended June 30, 2001 and $1.6 billion during the six months ended June 30, 2000. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued SFAS No. 141 and SFAS No. 142. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being transferred to goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. Under SFAS No. 142, a nonamortization approach, goodwill and certain intangibles with indefinite lives will not be amortized into results of operations, but instead would be reviewed periodically for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles with indefinite lives is more than its fair value. The provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 will be adopted by us on January 1, 2002. We are in the process of determining the effect of adoption of SFAS No. 141 and SFAS No. 142 on our consolidated financial statements. SEASONALITY OF OUR BUSINESS Our revenues are seasonal and are affected by unusual weather conditions. Short-term prices for capacity, energy and ancillary services in the PJM market are particularly impacted by weather conditions. Peak demand for electricity typically occurs during the summer months, caused by increased use of air-conditioning. Cooler than normal summer temperatures may lead to reduced use of air-conditioners. This reduces short-term demand for capacity, energy and ancillary services and may lead to a reduction in wholesale electric prices. 12 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized. RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC (Registrant) By: /s/ Curtis A. Morgan ------------------------------ Curtis A. Morgan President Date: March 25, 2002 13

RELIANT ENERGY MID ATLANTIC POWER HOLDINGS LLC 10-Q/A