NRG ENERGY, INC. quarterly report, Q1 FY2011

NRG Energy, Inc. — Q1 2011 Form 10-Q

Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. NRG operates power generation and retail electricity businesses. At quarter-end, it reported approximately 24,570 MW of operating generation capacity and served approximately 1.9 million retail customers. Interim results are not necessarily indicative of full-year results.

Financial performance and position

Metric	Q1 2011	Q1 2010 / comparison
Operating revenue	$1.995 billion	$2.215 billion; down 10%
Operating income	$314 million	$258 million
Net income (loss) attributable to NRG	$(260) million	$58 million
Loss per diluted share	$(1.06)	Income per diluted share of $0.22
Cash from operating activities	$216 million	$114 million
Cash used in investing activities	$(228) million	$(194) million
Cash and cash equivalents at March 31	$2.711 billion	$2.951 billion at December 31, 2010
Liquidity, excluding collateral received	$4.013 billion	$4.252 billion at December 31, 2010

• Operating costs and expenses declined 15% to $1.681 billion. Cost of operations fell 19%, while SG&A increased 10% to $143 million.
• The reported pre-tax loss includes a $481 million impairment of NRG’s NINA investment and a $28 million loss on extinguishment of debt. These outweighed improved mark-to-market results: a $147 million net gain versus a $38 million net loss in Q1 2010.
• Retail revenue was $1.180 billion, down 5%. Reliant Energy retail gross margin declined to $254 million from $293 million; management cited lower sales volumes and margins, partly offset by higher C&I margins.
• At March 31, balance-sheet total assets were $25.043 billion and total liabilities were $17.194 billion. Long-term debt and capital leases, including current maturities, totaled $8.952 billion; the funded letter-of-credit liability was a further $1.300 billion. Senior Notes outstanding totaled $6.5 billion.
• NRG issued $1.2 billion of 7.625% Senior Notes due 2018 and redeemed its 2014 Senior Notes. It also made a $149 million Term Loan Facility repayment from excess cash flow and paid $130 million under an accelerated share repurchase agreement.
• Cash flow from operations increased year over year, primarily because less cash was paid for collateral; capital expenditures were $219 million in cash, with an additional $62 million accrued and unpaid at quarter-end.

Material changes and developments

• Following the Fukushima nuclear incident, NINA curtailed STP Units 3 and 4 development. NRG concluded it no longer controlled NINA, deconsolidated it as of March 31, and impaired its investment in full. NRG subsequently announced it would withdraw from further financial participation in development; it expected related one-time contributions not to exceed $20 million.
• NRG reversed an $80 million contingent liability to CPS Energy, along with the associated capitalized project amount, after concluding the conditional DOE loan guarantee was no longer probable. It retained $5 million of liabilities for REAP donations.
• After quarter-end, NRG acquired a 50.1% interest in the 392 MW Ivanpah solar project, with $68 million paid and further cash and letter-of-credit commitments. The project has a $1.6 billion DOE-guaranteed financing package and long-term power purchase agreements.
• NRG reported 2011 capital allocation plans that included approximately $390 million for maintenance and environmental spending and approximately $2.3 billion for solar and other repowering projects. Large solar investments are conditional on project financing, DOE loan guarantees, third-party participation, permits, and financial close. These are plans, not assured expenditures or returns.

Outlook, risks, and contingencies

• Management stated that liquidity and operating cash flows were expected to be adequate for operations, maintenance capital expenditures, preferred dividends, and other liquidity commitments. The filing provides no specific earnings guidance.
• NRG estimated environmental capital expenditures of approximately $721 million from 2011 through 2015. The estimate depends on proposed or evolving regulations; final requirements could change costs and timing.
• Management planned to refinance approximately $7.0 billion of credit facilities and senior notes, including restructuring first-lien facilities and refinancing 2016 and 2017 notes, subject to market conditions.
• Key exposures include wholesale power, fuel and energy-price volatility; collateral and liquidity demands; counterparty performance; substantial indebtedness; competition and retail customer attrition; regulatory and environmental changes; and execution and financing risks for development projects. A $1/MMBtu change in natural-gas prices across derivative contract terms was estimated to change net derivative value by approximately $95 million; related margin collateral sensitivity was approximately $148 million.
• Material proceedings include the California Department of Water Resources contract-refund dispute, Clean Air Act litigation involving Big Cajun II, and regulatory matters concerning California station-power charges and Midwest ISO SECA charges. Outcomes and potential liabilities are uncertain; the filing does not provide a clear estimate for several matters.
• NRG estimated $1.2 billion of net counterparty credit exposure after collateral for a significant portion of counterparties, plus approximately $700 million of exposure under certain long-term agreements over the next five years. It also reported $583 million of non-current liabilities for uncertain tax benefits.
• Disclosure controls were concluded effective at quarter-end; the company reported no material first-quarter changes in internal control over financial reporting.

Important facts for investors to verify

• Whether the NINA impairment, deconsolidation, and withdrawal from STP 3 and 4 create any further cash obligations or contingent liabilities.
• Availability, conditions, and timing of DOE guarantees, project financing, permits, and partner funding for Ivanpah and other planned solar investments.
• Progress and terms of the planned debt refinancing, alongside debt maturities, interest costs, and covenant restrictions.
• Actual environmental compliance spending and the effect of final EPA and state requirements on NRG’s facilities and project economics.
• Developments in significant legal and regulatory proceedings, especially potential refunds, penalties, remediation, or market-rule changes.
• Whether retail margins, customer counts, operating cash flow, and collateral requirements improve or deteriorate; Q1 liquidity included collateral-related balances and restricted cash.