NRG Energy, Inc. — Q3 2010 Form 10-Q
Business context and period: NRG is a wholesale power generator and Texas retail electricity provider. This unaudited filing covers the quarter and nine months ended September 30, 2010; balance-sheet comparisons are with December 31, 2009. NRG reported about 24,010 MW of operating fossil-fuel and nuclear capacity and 465 MW of operating renewable capacity.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $2.685 billion | $2.916 billion | $7.033 billion | $6.811 billion |
| Operating income | $454 million | $611 million | $1.156 billion | $1.845 billion |
| Net income | $223 million | $278 million | $491 million | $908 million |
| Net income attributable to NRG | $223 million | $278 million | $492 million | $909 million |
| Basic / diluted EPS | $0.88 / $0.87 | $1.09 / $1.02 | $1.91 / $1.90 | $3.58 / $3.29 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.141 billion | $1.280 billion |
Margins: Q3 operating margin was approximately 16.9%, versus 20.9% a year earlier; net margin was approximately 8.3%, versus 9.5%. For the nine months, operating margin was approximately 16.4%, versus 27.1%, and net margin approximately 7.0%, versus 13.3%.
- For Q3, revenue fell 8%, operating income fell 26%, and net income fell 20% year over year. Retail revenue declined 15%; energy revenue declined 18% and capacity revenue 21%.
- For nine months, revenue rose 3%, while operating income fell 37% and net income fell 46%. Retail revenue rose 34%, reflecting the inclusion of Reliant Energy for nine months in 2010 versus only from May 1 in 2009; wholesale energy and capacity revenue declined.
- Q3 retail gross margin fell to $354 million from $443 million. Management cited lower Mass-market unit margins and volumes, customer attrition and C&I volume declines. Competition and lower pricing on renewals may pressure future margins.
- Nine-month operating cash flow was $1.141 billion, down $139 million. Investing used $570 million and financing provided $575 million. Cash and cash equivalents ended at $3.447 billion, up from $2.304 billion at year-end 2009. Capital expenditures paid were $490 million; an additional $215 million was accrued and unpaid.
Financial position, liquidity and debt
- At September 30, total assets were $27.419 billion, total liabilities $18.950 billion, and stockholders’ equity $8.221 billion.
- Long-term debt and capital leases totaled $9.220 billion including current maturities ($157 million current and $9.063 billion non-current); funded letter-of-credit debt added $1.300 billion. Cash was $3.447 billion, but $1.301 billion backing the funded letter-of-credit facility was restricted and unavailable to NRG’s general creditors.
- Reported liquidity excluding collateral received was $4.755 billion, comprising cash, restricted cash, and available facilities. The revolving facility had $839 million available and the funded letter-of-credit facility $450 million available. Counterparty collateral included in reported cash is subject to refund and is not intended for general corporate obligations.
- NRG issued $1.1 billion of 8.25% senior notes due 2020 in August. It amended and extended its senior credit facility in June, extending portions of term debt and facilities to 2015 at higher spreads. The company repaid about $229 million of term debt in March and contemplated an additional excess-cash-flow prepayment in Q4.
- NRG repurchased $180 million of common stock under its 2010 capital allocation plan. The accelerated repurchase settled in October with delivery of additional shares.
Material changes, outlook and risks
- Q3 mark-to-market results were a net $35 million loss, compared with a $15 million loss in Q3 2009. For nine months, mark-to-market results were a $10 million loss versus a $376 million gain, contributing to the year-over-year decline. Results include non-cash and timing-related derivative effects.
- Management said 2011 pretax income is expected to be lower than 2010 because of lower energy hedge prices. No specific earnings guidance was provided. The FOR NRG program had delivered a 55-basis-point ROIC improvement through Q3 versus its 65-basis-point 2010 goal and 100-basis-point goal by 2012.
- NRG agreed to acquire Green Mountain for $350 million, Cottonwood for $525 million and 3,884 MW of Dynegy assets for $1.36 billion. These pending transactions were expected to require about $2.2 billion of cash; the Dynegy transaction depended on Blackstone’s separate acquisition and regulatory approvals. NRG also completed acquisitions of South Trent Wind and Northwind Phoenix.
- The STP Units 3 and 4 nuclear project depends materially on a U.S. DOE loan guarantee and further financing. NRG reduced ongoing equity contributions while the guarantee remained uncertain; withdrawal of partner support could lead to impairment of capitalized project costs. NRG had contributed $315 million to NINA through September 30.
- Estimated environmental capital expenditures for 2010–2014 were approximately $0.9 billion, with the amount and timing subject to evolving regulations. Proposed air and water rules, greenhouse-gas requirements and market-rule changes could increase costs or affect generation economics.
- Material exposure includes a $557 million non-current liability for uncertain tax benefits, with IRS review for 2004–2006 expected to conclude by March 31, 2011; a potential future goodwill impairment of up to $1.7 billion if long-term gas prices remain depressed; and legal/regulatory proceedings whose outcomes are uncertain. A proposed CATR rule could cause up to a $50 million impairment of sulfur-dioxide allowances.
- Counterparty credit exposure was $1.7 billion gross, with $461 million collateral held and $1.2 billion net exposure; separate long-term contract exposure was estimated at $550 million. Commodity portfolio VaR was $50 million at quarter-end. A $1/MMBtu gas-price change could alter derivative net value by about $226 million and margin collateral by about $159 million.
Important facts for investors to verify
- Whether reported liquidity remains available after planned acquisitions, collateral movements and restricted-cash requirements.
- Final terms, funding and closing status of the Green Mountain, Cottonwood and Dynegy acquisitions, and their impact on debt and returns.
- Reliant customer counts, retention, retail gross margin and renewal pricing, given reported customer attrition and lower margins.
- Energy hedge-price assumptions behind the lower 2011 pretax outlook, and the cash-versus-mark-to-market components of earnings.
- Progress and funding certainty for STP Units 3 and 4, including the DOE guarantee and potential project impairment exposure.
- Resolution of uncertain tax positions, significant litigation and environmental requirements, including associated cash costs and reserves.