NRG ENERGY, INC. quarterly report, Q1 FY2010

NRG Energy, Inc. — Q1 2010 Form 10-Q

Reporting period: Three months ended March 31, 2010; filed May 10, 2010. NRG is a wholesale power generator and Texas retail electricity provider through Reliant Energy. The quarter includes Reliant, acquired May 1, 2009, so year-over-year consolidated comparisons are not like-for-like.

Financial results and liquidity

Metric	Q1 2010	Q1 2009	Change
Operating revenue	$2.215 billion	$1.658 billion	+34%
Operating income	$258 million	$615 million	-58%
Income before tax	$123 million	$496 million	-75%
Net income attributable to NRG	$58 million	$198 million	-71%
Income available to common shareholders	$56 million	$184 million
Diluted EPS	$0.22	$0.70
Operating cash flow	$114 million	$139 million	-$25 million

• Operating margin was approximately 11.6%, versus 37.1% in Q1 2009; net margin was approximately 2.6%, versus 11.9%. These percentages are calculated from reported figures.
• Revenue growth included $1.245 billion of retail revenue from Reliant. Excluding Reliant, reported revenue was $1.039 billion, 37% below the prior-year consolidated amount; risk-management revenue and gains also differed substantially.
• Cash used in investing was $194 million, including $185 million of cash capital expenditures. Financing used $408 million, including $429 million of short- and long-term debt payments. Cash fell $491 million to $1.813 billion.
• At March 31, cash and cash equivalents were $1.813 billion; total debt and capital leases were approximately $7.998 billion, including current maturities. Long-term debt was $7.846 billion. Total liabilities were $16.310 billion.
• Reported liquidity excluding collateral received was $3.210 billion, down from $3.794 billion at December 31, 2009. It included $1.813 billion cash, $964 million of revolving-credit availability and $426 million of synthetic letter-of-credit availability. Counterparty collateral received is not generally available for corporate obligations.

Material changes and operating drivers

• Operating costs and expenses rose 90% to $1.980 billion, driven substantially by Reliant retail supply costs and the changed business mix. Cost of operations rose 114% to $1.639 billion.
• NRG recorded a $23 million gain on the January sale of Padoma Wind Power. The sale generated approximately $29 million net proceeds; NRG retained interests in three Texas wind farms.
• Risk-management activity swung from a $369 million gain in Q1 2009 to a $44 million loss in Q1 2010, as reported across revenue and cost of operations. The filing attributes the deterioration largely to mark-to-market movements; Reliant recorded $288 million of unrealized losses on energy-supply derivatives.
• Texas operating income was $351 million versus $402 million; Northeast operating income was $64 million versus $224 million. Reliant reported a $187 million operating loss, including the unrealized derivative losses. Segment comparisons are affected by the acquisition and market conditions.
• Interest expense increased to $153 million from $138 million, principally reflecting the 2019 notes and lower capitalized interest, partly offset by debt repayment and lower rates. The effective tax rate was 52.7%, versus 60.0%.

Outlook, management commentary, risks and contingencies

• The filing provides no consolidated earnings or revenue guidance. Management said liquidity and operating cash flows were expected to fund operating needs, maintenance capital expenditures and commitments, and stated a target net-debt-to-capital range of 45%–60%.
• The 2010 capital allocation plan includes $180 million for common-stock repurchases, approximately $349 million for maintenance and environmental spending, and $508 million for Repowering NRG projects under construction or with existing obligations. Estimated remaining-2010 capital expenditures in the filing’s schedule were $857 million. Environmental capital expenditures for 2010–2014 were estimated at approximately $0.9 billion.
• NRG paid approximately $229 million to first-lien term-loan lenders under the mandatory excess-cash-flow offer and paid $242 million to unwind CSF I Debt early, completing its CSF I and II and share-lending obligations.
• The South Texas Project Units 3 and 4 nuclear project is dependent on a U.S. Department of Energy loan guarantee and additional financing/partners. NRG expected approximately $328 million of net 2010 project expenditures funded from its operating activities. If the guarantee is not obtained, NRG said it intends to reduce spending significantly; failure could prompt impairment of $389 million of construction-in-progress recorded through March 31, plus subsequent capitalized costs. NRG also agreed to pay CPS $80 million, contingent on the guarantee, and make $10 million in REAP donations over four years.
• On May 10, 2010, after quarter-end, TEPCO’s U.S. affiliate agreed conditionally to invest $155 million for a 10% interest in the nuclear-project holding company and received an option to acquire another 10% for $125 million. Closing depends on the DOE loan-guarantee commitment.
• El Segundo repowering is delayed by permitting; the company was considering PPA changes, with commercial operation then expected in summer 2013. Proposed and changing environmental rules may alter compliance costs and schedules.
• Material legal and regulatory exposures include the California CDWR contract-refund proceeding, for which NRG could not estimate a possible refund; the federal and Louisiana environmental cases concerning Big Cajun II, with remedies and potential penalties unresolved; and market/regulatory proceedings that could affect capacity revenues or create resettlement/refund exposure. The CPS litigation was settled and dismissed with prejudice.
• Other stated risks include power, fuel and weather volatility; generation outages and fuel availability; collateral and liquidity calls; counterparty performance; customer delinquencies; regulation of greenhouse gases and other emissions; and access to capital. NRG estimated a $222 million change in margin collateral for a $1/MMBtu natural-gas price move under marginable contracts. A $1/MMBtu move could change net derivative value by approximately $324 million.
• NRG reported disclosure controls effective at period-end and no material first-quarter change in internal control over financial reporting.

Important facts for investors to verify

• How much of the year-over-year earnings decline reflects underlying generation/retail economics versus acquisition accounting and volatile derivative marks; specifically, reconcile derivative gains and losses between revenue, cost of operations and cash flows.
• Reliant’s sustainable retail gross margin, customer retention, bad-debt trends and exposure to variable-rate supply contracts, given its reported operating loss and the competitive pressures management described.
• Progress, financing, DOE-guarantee conditions and partner commitments for STP Units 3 and 4, including the potential impairment and contingent CPS payment.
• Near-term refinancing and liquidity plans for the $1 billion revolving facility maturing February 2011, alongside collateral requirements and the availability of credit facilities.
• Actual environmental-capex requirements and outcomes of the CDWR, Big Cajun II and other legal or regulatory matters, for which ultimate costs or exposure may differ materially from current estimates.