NRG ENERGY, INC. annual report, FY2011

Business context and reporting period

NRG Energy, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011. It operates wholesale power generation and retail electricity businesses, alongside solar, wind, thermal energy and emerging-energy initiatives. At year-end, its retail businesses served approximately 2.1 million customers, and its global generation portfolio totaled 25,135 MW, with 1,410 MW under construction.

Financial results and key metrics

Retail gross margin was $1.254 billion, compared with $1.213 billion in 2010; wholesale generation gross margin fell to $2.374 billion from $3.046 billion. The filing reports no consolidated gross-margin percentage. The fourth quarter recorded revenue of $2.132 billion, operating income of $9 million and a net loss attributable to NRG of $109 million, or $0.48 per diluted share.

Material changes versus the prior comparable period

• Revenue increased approximately 3%, but operating income fell approximately 51% and net income attributable to NRG declined approximately 59%.
• Management cited weaker wholesale generation margins, lower realized prices in several regions and August 2011 Texas heat-wave costs that affected both retail and generation margins. Texas on-peak power prices averaged $57.42/MWh, up from $40.40/MWh in 2010, while prices in the Northeast, South Central and West were lower.
• Cash from operations declined $457 million. Cash and cash equivalents fell $1.846 billion, while investing cash outflow increased to $3.047 billion, principally reflecting project and development spending.
• Liquidity excluding received collateral declined $2.182 billion. The company attributed the decline mainly to lower cash balances and reduced revolving-credit availability as letters of credit supported solar and other projects.
• NRG replaced its prior senior credit facilities with a $2.3 billion revolving facility and a $1.6 billion term loan in July 2011. It also issued notes and redeemed its 2014 and 2016 notes; the transactions contributed to a $175 million debt-extinguishment loss.

Outlook, commentary, risks and unusual items

• 2011 results included a $495 million impairment of NRG’s investment in Nuclear Innovation North America following the Fukushima incident and the suspension of detailed development work on the proposed STP Units 3 and 4. NRG withdrew from further financial participation in that development.
• A $160 million impairment of SO2 emission allowances followed the planned implementation of the Cross-State Air Pollution Rule; the rule was stayed by a court in December 2011 pending review. NRG said the stay had no material impact.
• The $843 million income-tax benefit included a $633 million benefit from resolution of the federal tax audit. This nonrecurring item substantially affected reported net income; 2011 pre-tax results were a $646 million loss.
• Management forecast 2012 capital expenditures of $3.513 billion before financing and partner contributions, including $3.2 billion for repowering and renewables; estimated net expenditures after specified project financing and partner funding were $636 million. Environmental capital expenditures for 2012–2016 were estimated at $553 million, subject to regulatory outcomes.
• After year-end, NRG announced an intended annual common dividend of $0.36 per share, with the first quarterly payment expected in the third quarter of 2012. It also said it intended to refinance the remaining $1.1 billion of 2017 notes, subject to market conditions. No common dividend was paid in 2011.
• Key risks include merchant power and fuel-price volatility, plant outages and replacement-power costs, collateral and liquidity demands, substantial debt and covenants, retail competition, environmental compliance costs, and dependence of renewable projects on construction, financing and government support.
• Material proceedings include a Clean Air Act case involving Big Cajun II, where liability was not determined and a trial was scheduled for October 2012, and a proposed Energy Plus consumer class action seeking statutory damages exceeding $5 million. NRG said it could not predict the outcome or reasonably estimate potential costs for certain proceedings.

Most important facts for investors to verify

• Whether operating cash flow and available liquidity can support the large renewable-development program, collateral requirements and debt service.
• Whether lower gas and power prices, hedging roll-off, outages or extreme weather further pressure generation and retail margins.
• Actual cost, timing, financing and commercial-operation progress for solar projects and the El Segundo Energy Center, including federal loan-guarantee funding and partner contributions.
• Final environmental-rule requirements and resulting retrofit costs, including the stated $553 million environmental-capex estimate.
• Developments in the Big Cajun II litigation, the Energy Plus class action and other contingencies, as well as the potential effects of any adverse outcomes.
• Whether the announced dividend and contemplated note refinancing proceed as planned, and how they affect liquidity, leverage and covenant flexibility.

KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2011.