NRG Energy, Inc. — 2009 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2009. The filing was signed February 23, 2010. NRG is a wholesale power generator with a major Texas retail electricity business acquired during the year.
Business context
NRG reported approximately 24,115 MW of operating fossil-fuel and nuclear capacity worldwide, plus 365 MW of operating renewable capacity, across 44 plants. Its portfolio is concentrated in Texas and the Northeast. On May 1, 2009, NRG acquired Reliant Energy’s Texas retail business, serving approximately 1.5 million residential and small-business customers and 0.1 million commercial and industrial customers at year-end. Reliant’s results are included for eight months, so year-over-year consolidated comparisons are not fully like-for-like.
Financial and operating performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | 2009 | 2008 | Change / context |
|---|---|---|---|
| Operating revenue | $8,952 | $6,885 | Up 30%, including $4,440 of Reliant retail revenue for eight months |
| Operating income | $2,159 | $2,273 | Down 5%; operating margin was approximately 24% versus 33% |
| Income from continuing operations | $941 | $1,053 | Down 9% |
| Net income attributable to NRG | $942 | $1,225 | Down 23%; 2008 included discontinued-operation income |
| Basic / diluted EPS | $3.70 / $3.44 | $4.98 / $4.43 | Prior year included discontinued operations |
| Cash provided by operations | $2,106 | $1,479 | Up $627, including approximately $855 from Reliant |
| Cash used in investing | $954 | $672 | Included $427 for business acquisitions and $734 of capital expenditures |
| Cash used in financing | $343 | $487 | Included $500 of share repurchases and $644 of debt payments |
Henry Hub natural gas averaged $3.92/MMBtu, down 56% from 2008. Average on-peak power prices fell across NRG’s reported regions: Texas $35.43/MWh (down 59%), Northeast $46.14 (down 50%), South Central $33.58 (down 53%) and West $40.10 (down 51%). Lower wholesale prices and weaker demand reduced energy revenue; wholesale generation excluding Reliant produced $1,001 of operating income versus $1,158 in 2008. Texas operating income fell to $840 from $1,685, and South Central to $6 from $100. Reliant reported $909 of retail gross margin and $1,001 of operating income, including substantial derivative-related gains; management cautioned that competitive pricing and lower supply costs could pressure future unit margins.
At year-end, cash and cash equivalents were $2,304; total liquidity was $3,794 excluding collateral received ($3,971 including $177 of counterparty collateral). Total debt and capital leases were $8,418, including current maturities; total stockholders’ equity was $7,697. The filing reports a 43.49% debt-to-total-capitalization ratio. Current assets were $6,208 and current liabilities $3,762. Interest expense was $634, up from $583. NRG’s ratings were BB−/Ba3/B from S&P/Moody’s/Fitch; the $1 billion revolving facility matured February 2011.
Material changes versus 2008
- The Reliant acquisition added a large retail operation and changed reported segment structure; its eight-month contribution makes consolidated revenue and cash-flow comparisons non-comparable without adjustment.
- Wholesale energy revenue fell $1.5 billion and capacity revenue fell $329 million, primarily because of lower prices, reduced generation and fewer Texas baseload contracts with capacity components.
- Reliant added $4.4 billion of retail revenue and $3.5 billion of cost of sales. Acquisition and integration costs were $54 million; Reliant also incurred $61 million of bad-debt expense.
- Operating costs and expenses rose 47% to $6,793, reflecting the acquisition, higher depreciation and amortization, and higher selling, general and administrative expense.
- Operating cash flow improved, but liquidity excluding counterparty collateral increased by $430 million to $3.794 billion. NRG issued $700 million of 8.5% notes due 2019, repaid $429 million of term debt, and completed $500 million of share repurchases.
- NRG sold its 50% MIBRAG interest for $284 million net proceeds and recorded a $128 million gain. It completed Cedar Bayou 4, Langford Wind and Blythe Solar, and acquired Bluewater Wind.
Outlook, management commentary and key risks
- 2010 spending and capital allocation: NRG forecast $1.181 billion of capital expenditures, including $474 million for maintenance and environmental work and $707 million for repowering projects under construction or otherwise committed. It announced a $180 million 2010 share-repurchase plan, subject to debt restrictions and market conditions, and expected to offer first-lien lenders $430 million of 2009 excess cash flow; $200 million had already been prepaid in December 2009.
- Environmental obligations: Estimated environmental capital expenditures for 2010–2014 were approximately $902 million. Scope and timing could change with pending rules governing greenhouse gases, air emissions, coal ash and cooling-water intake.
- STP Units 3 and 4: NRG’s development subsidiary estimated overnight EPC cost at $11.5 billion, while management maintained a $9.8 billion target; estimated owners’ and financing costs were an additional $2.1 billion and $1.5 billion. DOE loan-guarantee support and final arrangements with project partner CPS were not secured in final documentation at filing. An agreement in principle dated February 17, 2010 would increase NRG’s project ownership to 92.375%, give it management control, and settle litigation, subject to final terms and a conditional DOE guarantee. Failure to finalize arrangements, obtain support or sell down ownership could lead to reassessing the project and a write-down of at least $299 million of capitalized construction costs through year-end 2009.
- Market and operating exposure: Merchant generation remains exposed to power and fuel-price volatility, weather, transmission constraints, outages and fuel delivery disruptions. Forward-sale commitments can require costly replacement power if plants or fuel supplies fail; collateral calls can also pressure liquidity. Retail results depend on customer retention, procurement costs, weather and collections.
- Contingencies: The U.S. and Louisiana environmental authorities alleged Clean Air Act violations at Big Cajun II; remedies sought include operating restrictions, pollution controls and civil penalties, with exposure not clearly quantified in the filing. A separate WCP/California power-contract proceeding involved alleged overcharges of approximately $940 million; NRG could not estimate any potential refund. CenterPoint claimed up to $385 million in Excess Mitigation Credits related to Reliant, but the filing says the actual amount is unclear and NRG disputes the claim. The Dunkirk contractor dispute included a $30 million counterclaim against NRG. These matters are unresolved and outcomes are uncertain.
- Management initiatives: NRG reported that its FOR NRG program achieved a 50.37-basis-point 2009 ROIC improvement, exceeding its 20-basis-point goal, and targeted a 100-basis-point improvement by 2012. The company’s longer-term strategy emphasizes operating efficiency, repowering, renewable and nuclear development, retail services and disciplined capital allocation.
Most important facts for investors to verify
- Separate Reliant’s eight-month contribution and derivative accounting effects from underlying, comparable wholesale and retail performance; assess customer attrition and retail margins.
- Reconcile reported liquidity to unrestricted cash and available facilities, and review the 2011 revolving-credit maturity, debt covenants, collateral needs and scheduled debt repayments.
- Track final CPS settlement terms, DOE loan-guarantee status, project ownership and funding plan, and any STP Units 3 and 4 cost revisions or impairment indicators.
- Review outcomes and potential financial exposure from the Big Cajun II environmental case, California contract-refund proceeding, Excess Mitigation Credits dispute and Dunkirk litigation.
- Test the $902 million environmental-capex estimate and project schedule against final regulations, permitting requirements and recoveries under customer contracts.
- Assess how much of reported earnings and cash flow depended on derivative gains, acquisition accounting, asset-sale gains and other nonrecurring items.
KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2009.