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| NRG > SEC Filings for NRG > Form 10-Q on 30-Apr-2009 | All Recent SEC Filings |
30-Apr-2009
Quarterly Report
• NRG's earnings and costs in the periods presented;
• Changes in earnings and costs between periods;
• Impact of these factors on NRG's overall financial condition;
• A discussion of new and ongoing initiatives that may affect NRG's future results of operations and financial condition;
• Expected future expenditures for capital projects; and
• Expected sources of cash for future operations and capital expenditures.
As you read this discussion and analysis, refer to the Company's Condensed
Consolidated Statements of Operations, which present the results of operations
for the three months ended March 31, 2009, and 2008. NRG analyzes and explains
the differences between periods in the specific line items of NRG's Condensed
Consolidated Statements of Operations. Also refer to NRG's 2008 Annual Report on
Form 10-K, which includes detailed discussions of various items impacting the
Company's business, results of operations and financial condition, including:
• Introduction and Overview section which provides a description of NRG's
business segments;
• Strategy section;
• Business Environment section, including how regulation, weather, and other factors affect NRG's business; and
• Critical Accounting Policies and Estimates section.
The discussion and analysis below has been organized as follows:
• Executive Summary, including introduction and overview, business strategy,
and changes to the business environment during the period including
regulatory and environmental matters;
• Results of operations beginning with an overview of the Company's consolidated results, followed by a more detailed discussion of those results by operating segment;
• Financial condition addressing liquidity position, sources and uses of cash, capital resources and requirements, commitments, and off-balance sheet arrangements; and
• Known trends that may affect NRG's results of operations and financial condition in the future, including the Reliant Retail acquisition and the disposition of the MIBRAG investment.
Executive Summary
Introduction and Overview
NRG is a wholesale power generation company with a significant presence in
major competitive power markets in the US. NRG is engaged in the ownership,
development, construction and operation of power generation facilities, the
transacting in and trading of fuel and transportation services, and the trading
of energy, capacity and related products in the regional markets in the US and
select international markets where its generating assets are located.
As of March 31, 2009, NRG had a total global portfolio of 189 active
operating fossil fuel and nuclear generation units, at 48 power generation
plants, with an aggregate generation capacity of approximately 24,000 MW, and
approximately 700 MW under construction which includes partners' interests of
275 MW. In addition to the previous ownership, NRG has ownership interests in
two wind farms representing an aggregate generation capacity of 270 MW, which
includes partner interests of 75 MW. Within the US, NRG has one of the largest
and most diversified power generation portfolios in terms of geography,
fuel-type and dispatch levels, with approximately 22,920 MW of fossil fuel and
nuclear generation capacity in 177 active generating units at 43 plants. In
addition, NRG has ownership interests in two wind farms representing 195 MW of
wind generation capacity. All of these power generation facilities combined are
primarily located in Texas (approximately 11,010 MW, including the 195 MW from
the two wind farms), the Northeast (approximately 7,015 MW), South Central
(approximately 2,845 MW), and West (approximately 2,130 MW) regions of the US,
and approximately 115 MW of additional generation capacity from the Company's
thermal assets.
NRG's principal domestic power plants consist of a mix of natural gas-,
coal-, oil-fired, nuclear and wind facilities, representing approximately 45%,
33%, 16%, 5% and 1% of the Company's total domestic generation capacity,
respectively. In addition, 11% of NRG's domestic generating facilities have dual
or multiple fuel capacity, which allows plants to dispatch with the lowest cost
fuel option.
NRG's domestic generation facilities consist of intermittent, baseload,
intermediate and peaking power generation facilities, the ranking of which is
referred to as Merit Order, and include thermal energy production plants. The
sale of capacity and power from baseload generation facilities accounts for the
majority of the Company's revenues and provides a stable source of cash flow. In
addition, NRG's generation portfolio provides the Company with opportunities to
capture additional revenues by selling power during periods of peak demand,
offering capacity or similar products to retail electric providers and others,
and providing ancillary services to support system reliability.
NRG's Business Strategy
NRG's business strategy is designed to enhance the Company's position as a
leading wholesale power generation company in the US. NRG will continue to
utilize its asset base as a platform for growth and development and as a source
of cash flow generation which can be used for the return of capital to debt and
equity holders. The Company's strategy is focused on: (i) top decile operating
performance of its existing operating assets and enhanced operating performance
of the Company's commercial operations and hedging program; (ii) repowering of
power generation assets at existing sites and development of new power
generation projects; and (iii) investment in energy-related new businesses and
new technologies associated with the societal and industry imperatives to foster
sustainability and combat climate change. This strategy is supported by the
Company's five major initiatives (FORNRG, RepoweringNRG, econrg, Future NRG and
NRG Global Giving) which are designed to enhance the Company's competitive
advantages in these strategic areas and allow the Company to surmount the
challenges faced by the power industry in the coming years. This strategy is
being implemented by focusing on the following principles, which are more fully
described in Company's 2008 Annual Report on Form 10-K:
Operational Performance - The Company is focused on increasing value from its
existing assets, primarily through the Company's FORNRG initiative, commercial
operations strategy, and maintenance of appropriate levels of liquidity, debt
and equity in order to ensure continued access to capital.
Development - NRG is favorably positioned to pursue growth opportunities
through expansion of its existing generating capacity and development of new
generating capacity at its existing facilities, primarily through the Company's
RepoweringNRG initiative. NRG expects that these efforts will provide one or
more of the following benefits: improve heat rates; lower delivered costs;
expand electricity production capability; improve the ability to dispatch
economically across the regional general portfolio; increase technological and
fuel diversity; and reduce environmental impacts, including facilities that
either have near zero GHG emissions or can be equipped to capture and sequester
GHG emissions. Several of the Company's original RepoweringNRG projects or
projects commenced under that initiative since its inception may qualify for
financial support under the infrastructure financing component of the American
Recovery and Reinvestment Act.
New Businesses and New Technology - NRG is focused on the development and
investment in energy-related new businesses and new technologies where the
benefits of such investments represent significant commercial opportunities and
create a comparative advantage for the Company, including low or no GHG emitting
energy generating sources, such as nuclear, wind, solar thermal, photovoltaic,
"clean" coal and gasification, and the retrofit of post-combustion carbon
capture technologies. A primary focus of this strategy is supported by the
econrg initiative whereby NRG is pursuing investments in new generating
facilities and technologies that will be highly efficient and will employ no and
low carbon technologies to limit CO2 emissions and other air emissions. While
the Company's effort in this regard to date has focused on businesses and
technologies applicable to the centralized power station, the acquisition of
Reliant Retail will put the Company in a position to consider and pursue smart
meters and distributed "clean" solutions.
Company-Wide Initiatives - In addition, the Company's overall strategy is
also supported by Future NRG and NRG Global Giving initiatives, which primarily
contemplate workforce planning and community investments, respectively.
Finally, NRG will continue to pursue selective acquisitions, joint ventures
and divestitures to enhance its asset mix and competitive position in the
Company's core markets. NRG intends to concentrate on opportunities that present
attractive risk-adjusted returns. NRG will also opportunistically pursue other
strategic transactions, including mergers, acquisitions or divestitures. On
March 2, 2009, NRG announced that it entered into an agreement to acquire
Reliant Energy, Inc.'s Texas electric retail business operations. See New and
On-going Company Initiatives - Reliant Retail Acquisition, hereinafter, for
further discussion.
Business Environment - Financial Credit Market Availability and Domestic
Recession
In 2009, the nation's economy continues to experience recessionary factors
which include tight credit markets. Power generation companies are capital
intensive and, as such, rely on the credit markets for liquidity and for the
financing of power generation investments. In addition, economic recessions
historically result in lower power demand, power prices, and fuel prices. NRG
has a diversified liquidity program, with $3.1 billion in total liquidity,
excluding funds deposited by counterparties, and a first and second lien
structure that enables significant strategic hedging while reducing requirements
for the posting of cash or letters of credit as collateral. NRG expects to
continue to manage commodity price volatility through its strategic hedging
program, under which the Company expects to hedge revenues and fuel costs. This
program should provide the Company with the flexibility to enter into hedges
opportunistically, such as when gas prices are increasing, while at the same
time protecting NRG against longer-term volatility in the commodity markets. The
Company believes that an economic recession is unlikely to have a material
impact on the Company's cash generation in the near term due to the hedged
position of its portfolio. NRG transacts with a diversified pool of
counterparties and actively manages the Company's exposure to any single
counterparty. See Part I, Item 2 - Liquidity and Capital Resources, and Part I,
Item 3 - Quantitative and Qualitative Disclosures about Market Risk for further
discussion.
Unsolicited Exelon Proposal
On October 19, 2008, the Company received an unsolicited proposal from Exelon
Corporation to acquire all of the outstanding shares of the Company and on
November 12, 2008, Exelon announced a tender offer for all of the Company's
outstanding common stock. On February 26, 2009, Exelon again extended the tender
offer, to June 26, 2009. NRG's Board of Directors, after carefully reviewing the
proposal, unanimously concluded that the proposal was not in the best interests
of the stockholders and has recommended that NRG stockholders not tender their
shares. In addition, on March 17, 2009 Exelon filed a Preliminary Proxy
Statement with the SEC with respect to their proposals for the Company's 2009
Annual Meeting of Stockholders, which consists of: (i) consideration of Exelon's
four nominees as Class III directors, (ii) consideration of the expansion of
NRG's board to 19 directors, (iii) if the board expansion is approved,
consideration of five additional Exelon nominees; and (iv) consideration of
repealing any amendments to the NRG Bylaws after February 26, 2009. NRG's Board
of Directors has recommended a vote against each of the proposals.
Environmental Matters
Climate Change Update
On March 31, 2009, Representatives Henry Waxman and Edward Markey released
draft climate change legislation, titled The American Clean Energy and Security
Act of 2009. This comprehensive draft proposes a multi-sector, market based
greenhouse gas cap and trade system starting in 2012 as well as national
Renewable Energy Standards, expedited transmission planning and approval and
aggressive efficiency measures. While the draft has provisions for both auction
and allocation of the allowances, the level of allocation and the nature of
recipients for such allocations have not been defined. The draft further exempts
CO2 from regulation under New Source Review, or NSR, as a criteria pollutant, or
a hazardous air pollutant under the CAA. In 2008, NRG emitted 60 million metric
tonnes of CO2 in the US and will continue to provide input as a leading energy
company and member of the US Climate Action Partnership, or USCAP, to achieve
final legislation.
If the Waxman-Markey draft legislation or some other federal comprehensive
climate change bill were to pass both House of Congress and be enacted into law,
the actual impact on the Company's financial performance would depend on a
number of factors, including the overall level of GHG reductions required under
any final legislation, the degree to which offsets may be used for compliance
and their price and availability, and the extent to which NRG would be entitled
to receive CO2 emissions allowances without having to purchase them in an
auction or on the open market. Thereafter, the impact would depend on the level
of success of the Company's multifold strategy, which includes (i) shaping
public policy with the objective being constructive and effective federal GHG
regulatory policy, and (ii) pursuing its RepoweringNRG and econrg programs. The
Company's multifold strategy is discussed in greater detail in Part I, Item 1
- Business, Carbon Update in NRG's 2008 Annual Report on Form 10-K.
On April 17, 2009, the USEPA released a proposed endangerment finding that
the mix of six key GHGs, including CO2, threaten the public health and welfare.
The proposed endangerment finding does not include any proposed regulations.
This is in response to the Supreme Court's decision in Massachusetts v. USEPA,
which requires the USEPA to decide under the CAA's mobile source title whether
GHGs contribute to climate change, and if so, promulgate appropriate
regulations. Absent eventual action from Congress on climate change, this
finding could ultimately serve as a basis for rulemaking for stationary sources,
like power plants, under the existing CAA.
Federal Environmental Initiatives
A number of regulations are under review by USEPA including CAIR, MACT,
National Ambient Air Quality Standards, or NAAQS for ozone, small particle
matter, or PM2.5, and the Phase II 316(b) Rule. These rules address air
emissions and best practices for units with once-through-cooling. In addition,
the USEPA has announced that it is considering new rules regarding the handling
and disposition of coal combustion byproducts. While the Company cannot predict
the requirements in the final versions nor the ultimate effect that the changing
regulations will have on NRG's business, NRG has prepared an environmental
capital expenditure plan in anticipation of such requirements.
The Supreme Court released its decision in the Phase II 316(b) Rule case on
April 1, 2009, that the USEPA does have the authority to allow a cost-benefit
analysis in the evaluation of Best Technology Available, or BTA. This ruling is
favorable for the industry and NRG as it improves the USEPA's ability to include
alternatives to closed-loop cooling in its redraft of the Phase II 316(b) Rules.
Regional Environmental Initiatives
Northeast Region - NRG operates electric generating units located in
Connecticut, Delaware, Maryland, Massachusetts and New York which are subject to
RGGI. The RGGI CO2cap-and-trade program went into effect on January 1, 2009. An
allowance must be surrendered for every US ton of CO2 emitted with true up for
2009-2011 occurring in 2012. NRG's emissions under RGGI was on the order of
12 million tonnes in 2008, although 2009 year-to-date emissions are tracking
lower than first quarter 2008.
Regulatory Matters
As an operator of power plants and a participant in the wholesale markets,
NRG is subject to regulation by various federal and state government agencies.
In addition, NRG is subject to the market rules, procedures, and protocols of
the various ISO markets in which NRG participates. These wholesale power markets
are subject to ongoing legislative and regulatory changes. In some of NRG's
regions, interested parties have advocated for material market design changes,
including the elimination of a single clearing price mechanism, as well as
proposals to re-regulate the markets or require divestiture by generating
companies in order to reduce their market share. The Company cannot predict the
future design of the wholesale power markets or the ultimate effect that the
changing regulatory environment will have on NRG's business.
Northeast Region
PJM -On March 26, 2009, the FERC issued an order accepting in part and
rejecting in part a December 12, 2008, PJM proposal to revise the design of the
RPM capacity market, and a February 9, 2009, settlement agreement reached
between PJM and various load interests. The revisions will take effect with the
next RPM Base Residual Auction for planning year 2012/2013, which is scheduled
to take place in May 2009. Several parties have requested rehearing of the
March 26, 2009 order.
West Region
California - The CAISO Market Redesign and Technology Update, or MRTU,
commenced April 1, 2009. Significant components of the MRTU include:
(i) locational marginal pricing of energy; (ii) a more effective congestion
management system; (iii) a day-ahead market; and (iv) an increase to the
existing bid caps. NRG considers these market reforms to generally be a positive
development for its assets in the region, but additional time is needed to
assess the impact of MRTU.
Texas Region
On October 6, 2008, as part of its determination of Competitive Renewable
Energy Zones, or CREZ, the Public Utility Commission of Texas, or PUCT, issued
its final order approving a significant transmission expansion plan to provide
for the delivery of approximately 18,500 MW of energy from the western region of
Texas, primarily wind generation - approximately 2,300 miles of new 345 kV lines
and 42 miles of new 138 kV lines. In January 2009, Texas Industrial Energy
Consumers, a trade organization composed of large industrial customers, appealed
PUCT's CREZ plan in state district court, seeking reversal of the final order.
On March 30, 2009, PUCT issued a final order designating the transmission
utilities that plan to construct the various CREZ transmission component
projects. A large number of separate transmission licensing proceedings will be
required prior to construction of the CREZ facilities. If completed as currently
approved, the transmission upgrades and associated wind generation could impact
wholesale energy and ancillary service prices in ERCOT. As part of the normal
ERCOT five-year planning process, transmission utilities are also planning other
system improvements, 2,800 circuit miles of transmission and more than 17,000
MVA of autotransformer capacity, intended to support increasing power demand and
to address transmission congestion.
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