NRG Energy, Inc. — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. NRG operates wholesale power generation businesses and, following its May 1 acquisition of Reliant Energy, a large Texas retail electricity business. The acquisition materially affects year-over-year comparisons; amounts are unaudited and in U.S. dollars.
Key financial results
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Operating revenue | $2.916bn | $2.612bn | $6.811bn | $5.230bn |
| Operating income | $611m | $1.371bn | $1.845bn | $1.678bn |
| Net income | $278m | $778m | $908m | $954m |
| Diluted EPS | $1.02 | $2.81 | $3.29 | $3.41 |
| Operating margin | 21.0% | 52.5% | 27.1% | 32.1% |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $1.280bn | $1.086bn |
Q3 revenue increased 12%, principally reflecting five months of Reliant results; operating income fell 55% and net income fell 64%. For the first nine months, revenue rose 30% and operating income rose 10%, while net income declined 5%. The 2008 nine-month comparison included $172m of discontinued-operations income; 2009 included a $128m gain on the MIBRAG investment sale.
For the nine months, investing cash flow was negative $727m and financing cash flow was positive $200m. Capital expenditures were $560m in the cash flow statement ($556m including accruals). Cash and equivalents were $2.250bn at September 30, versus $1.494bn at year-end 2008. Total liquidity, excluding collateral received, was approximately $3.936bn.
Debt and capital leases totaled approximately $8.766bn, including $537m current and $8.229bn long-term, compared with $8.161bn at December 31, 2008. NRG issued $700m of 8.5% senior notes due 2019. Current assets were $8.211bn and current liabilities $5.208bn. The company reported $475m of cash collateral paid for energy risk management and $293m of counterparty funds held.
Material changes and operating drivers
- Reliant added $1.876bn of Q3 retail revenue and $3.126bn for the five months since acquisition. Its Q3 segment operating income was $409m; reported retail gross margin was $443m. The acquired business served about 1.6m mass-market and 0.1m commercial and industrial customers.
- NRG’s legacy generation businesses faced lower wholesale power prices, weaker demand and reduced generation. In Texas, Q3 on-peak prices were down 67% year over year; Texas segment operating income fell to $181m from $1.009bn. Northeast Q3 operating income fell to $63m from $309m, while South Central reported a $22m operating loss versus $37m income.
- Q3 consolidated operating results were affected by a sharp comparison in risk-management marks: the prior-year quarter included $835m of unrealized gains, versus a $14m unrealized loss in Q3 2009. Reliant acquisition-date derivative loss positions also produced substantial accounting roll-offs, offset by realized losses in cost of operations.
- NRG completed the sale of its 50% MIBRAG interest in June for $284m net proceeds and recorded a $128m after-tax gain; a related currency hedge generated a $24m loss.
- NRG repurchased $250m of shares through September 30. The Board raised the 2009 authorization to $500m, and management intended to complete the program by year-end, subject to market conditions, debt restrictions and securities laws.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said liquidity and operating cash flows should fund operations, maintenance capital spending, preferred dividends and other commitments, and targeted a net debt-to-capital ratio of 45%–60%.
- Management expected $266m of capital expenditures for the remainder of 2009. Planned environmental capital expenditures for 2010–2013 were approximately $900m, subject to evolving regulations and schedules.
- Reliant retail margins could face pressure from competition and lower retail prices as supply costs decline. Customer counts fell approximately 2% during Q3 and 4% since acquisition; Q3 bad-debt expense was $28m for Reliant.
- The October 5, 2009 CSRA amendment ended Merrill Lynch’s prior credit-sleeve support and removed related first liens, but required NRG to post collateral for Reliant supply positions. NRG posted $366m cash collateral, issued $206m of letters of credit, returned $53m of collateral and received $45m; Merrill Lynch returned $250m previously posted and released liens on $322m of Reliant cash. This post-quarter change may affect liquidity and collateral sensitivity.
- Material legal and regulatory exposures include the California Department of Water Resources contract-refund proceeding, for which NRG could not estimate a potential loss; the Texas Excess Mitigation Credits dispute, with CenterPoint claiming $385m but no claim filed against NRG’s subsidiary; and the EPA Clean Air Act case concerning Big Cajun II. NRG also disclosed a $688m non-current liability for unrecognized tax benefits.
- Environmental rules, possible greenhouse-gas regulation, volatile power and fuel prices, generation outages, collateral demands, counterparty performance and access to capital are identified risks. The El Segundo repowering project was delayed by permitting issues, and the company could not confirm its revised completion date.
- NRG’s Q3 2008 revenue was revised downward by $78m for an energy-options accounting error, reducing net income by $50m and diluted EPS by $0.18. This should be considered when assessing the comparative period.
Most important facts for investors to verify
- How much of reported growth and earnings reflects Reliant acquisition accounting, including derivative settlements, contract amortization and the $31m non-cash gain on a pre-existing relationship.
- The sustainability of Reliant’s margins, customer retention and bad-debt trends as retail prices and supply costs change.
- Post-October 5 liquidity after collateral postings, letters of credit and the unwind of the Merrill Lynch credit sleeve; also verify the timing and funding of the CSF II debt unwind.
- Progress and funding needs for the $900m environmental program, STP Units 3 and 4, and other repowering projects, along with regulatory and permitting milestones.
- Developments and potential financial exposure in the California refund, EMC, Big Cajun II and tax matters; the filing does not provide clear loss estimates for several of these contingencies.