NRG Energy, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are in millions of dollars unless otherwise noted. NRG is an integrated wholesale power generation and retail electricity company; it reported approximately 2.1 million retail customers and 25,105 MW of operating generation capacity.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $2,674 | $2,685 | $6,947 | $7,033 |
| Operating income | $43 | $454 | $626 | $1,156 |
| Net income (loss) | $(55) | $223 | $306 | $491 |
| Net income (loss) available to common shareholders | $(57) | $221 | $299 | $485 |
| Diluted EPS | $(0.24) | $0.87 | $1.22 | $1.90 |
| Operating cash flow | Not separately presented | Not separately presented | $668 | $1,141 |
Operating margin was approximately 1.6% in Q3 2011 versus 16.9% a year earlier, and 9.0% for the first nine months versus 16.4%. The filing does not provide a single consolidated gross-margin figure; management reported wholesale generation gross margin of $1,814 for the nine-month period, down $569 year over year, including intercompany activity.
- Cash and liquidity: Cash and equivalents were $1,127 at September 30, down from $2,951 at year-end 2010. Total liquidity excluding collateral received was $1,919, versus $4,252 at year-end; this includes $351 of revolving-credit availability. Management identified $280 of restricted cash supporting solar-project equity obligations; liquidity excluding those amounts was $1.6 billion.
- Debt: Long-term debt and capital leases were $9,208, plus $81 current, compared with $8,748 and $463 current at year-end. The July refinancing replaced the prior credit facilities with a $2.3 billion revolver due 2016 and a $1.6 billion term loan due 2018. At quarter-end, $1.949 billion of letters of credit had been issued under the revolver, leaving $351 million available.
- Cash flows and investment: Nine-month investing cash outflow was $2,161, including $1,355 of capital expenditures and $352 for acquisitions. Financing cash outflow was $333. Cash declined by $1,824 over the period. Capital expenditures accrued but unpaid at quarter-end were $217.
Material changes versus comparable periods
- Q3 revenue was nearly flat, but operating income fell $411 and the company swung to a $55 net loss. Management cited a $322 decrease in gross margin, the $160 emissions-allowance impairment, and a $32 debt-extinguishment loss.
- For the first nine months, revenue decreased 1%, operating income fell 46%, and net income declined 38%. Pre-tax results moved from $762 of income to a $509 loss, despite an $815 income-tax benefit.
- Texas generation gross margin declined $383 for the nine months; Northeast declined $244. Lower realized power prices and capacity revenues, lower hedge prices, and operating and outage impacts weighed on results. A severe August Texas heat wave and unplanned gas-plant outages contributed to approximately $146 of adverse gross-margin impact, according to management.
- Reliant Energy retail gross margin fell $154 to $801 for the nine months, reflecting lower margins on renewals and acquisitions, the heat-wave-driven increase in supply costs, and a prior-year benefit from contract terminations. Green Mountain contributed $123 of nine-month retail gross margin, but was acquired in November 2010, limiting comparability.
- Operating cash flow decreased $473 year over year, while investing outflow increased $1,591, primarily due to higher solar and other project spending, restricted cash for U.S. Department of Energy-backed projects, and acquisitions.
Outlook, management commentary, risks and unusual items
- Guidance and capital plans: The filing provides no specific earnings or revenue guidance. Management said liquidity and operating cash flows should be adequate for operations, maintenance capital expenditures, preferred dividends and other liquidity commitments. NRG estimated net 2011 capital expenditures of $845, including $576 for Repowering NRG, after project financing and partner funding. It estimated environmental capital expenditures of approximately $721 through 2015. The 2011 share-repurchase target was $430; $190 was completed under an accelerated repurchase agreement on October 6, after quarter-end, with $52 remaining to be completed subject to market conditions, debt restrictions and securities laws.
- Growth projects: NRG acquired Energy Plus, with 180,000 customers, and stakes or ownership in three major solar projects: Ivanpah, Agua Caliente and CVSR. Project debt supported by U.S. DOE guarantees is generally non-recourse to NRG. The company expects to continue solar development and is constructing a 550 MW El Segundo gas facility, with commercial operation expected in August 2013.
- Unusual charges and tax item: NRG recorded a $495 impairment of its NINA investment after withdrawing from further financial participation in the proposed STP 3 & 4 nuclear expansion; it expected up to $6 of additional one-time contributions. It also recorded a $160 impairment of Acid Rain SO2 allowances following the CSAPR rule. The $815 nine-month income-tax benefit included $633 from resolution of the federal tax audit; the company received the related refund in August.
- Key risks: Wholesale power and fuel-price volatility, weather, outages, hedging performance, collateral requirements and counterparty credit exposure could affect earnings and liquidity. Q3 collateral needs were elevated after ERCOT price spikes and outages; NRG expected related collateral to be returned by year-end as prices normalized. A $1/MMBtu gas-price movement could change posted margin collateral by approximately $219, based on the filing’s sensitivity analysis.
- Environmental compliance could require substantial spending; rules and implementation remain subject to change. NRG identified approximately $721 of environmental capital spending through 2015. The LaGen Clean Air Act litigation and potential California Department of Water Resources contract refunds could have material effects, but outcomes and potential liabilities were not estimable in the filing. Energy Plus was named in a purported New York consumer class action filed October 18, 2011; the plaintiff claimed damages exceeding $5.
- Other regulatory uncertainties include New York capacity-market proceedings, California station-power charges and the PJM capacity-market changes affecting NRG’s New Jersey project. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether liquidity remains sufficient after restricted project cash, collateral demands and planned repurchases are considered.
- How much of the quarter’s margin deterioration reflects recurring market conditions versus the unusual heat wave, outages and hedge outcomes.
- Whether solar projects meet construction, financing, cost and commercial-operation milestones, and whether project obligations remain non-recourse to NRG.
- The final effect of environmental rules and unresolved litigation or regulatory proceedings, including potential costs not currently estimable.
- Whether the tax-audit benefit and refund are nonrecurring and how remaining uncertain tax positions affect future cash taxes.