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| NRG > SEC Filings for NRG > Form 10-Q on 30-Jul-2009 | All Recent SEC Filings |
30-Jul-2009
Quarterly Report
In this discussion and analysis, NRG discusses and explains its financial
condition and results of operations, including:
• Factors which affect the Company's business;
• 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 and six months ended June 30, 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 Energy acquisition and the disposition of the MIBRAG investment.
Executive Summary
Introduction and Overview
NRG Energy, Inc., or NRG or the Company, is primarily a wholesale power
generation company with a significant presence in major competitive power
markets in the United States, as well as a major retail electricity franchise in
the ERCOT (Texas) market. NRG is engaged in the ownership, development,
construction and operation of power generation facilities, the transacting in
and trading of fuel and transportation services, the trading of energy, capacity
and related products in the United States and select international markets, and
supply of electricity and energy services to retail electricity customers in the
Texas market.
As of June 30, 2009, NRG had a total global generation portfolio of 187
active operating fossil fuel and nuclear generation units, at 47 power
generation plants, with an aggregate generation capacity of approximately 24,085
MW, and approximately 350 MW under construction which includes partners'
interests of 100 MW. In addition to its fossil fuel plant 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 U.S.,
NRG has one of the largest and most diversified power generation portfolios in
terms of geography, fuel-type and dispatch levels, with approximately 23,080 MW
of fossil fuel and nuclear generation capacity in 179 active generating units at
43 plants. In addition, NRG has ownership interests in two wind farms
representing 195 MW of wind generation capacity. The Company's power generation
facilities are most heavily concentrated in Texas (approximately 11,175 MW,
including the 195 MW from the two wind farms), the Northeast (approximately
7,015 MW), South Central (approximately 2,840 MW), and West (approximately 2,130
MW) regions of the U.S., 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 46%,
32%, 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.
On May 1, 2009, NRG acquired Reliant Energy, which is the second largest mass
market electricity provider to residential and commercial customers in Texas.
Based on metered locations, as of June 30, 2009, Reliant Energy had
approximately 1.6 million mass customers and 0.1 million C&I customers. Reliant
Energy arranges for the transmission and delivery of electricity to customers,
bills customers, collects payments for electricity sold and maintains call
centers to provide customer service.
NRG's Business Strategy
NRG's business strategy is intended to maximize shareholder value over time
through the production and the sale of safe, reliable and affordable power to
its customers and in the markets served by the Company. The key to successful
implementation of this strategy is the Company's sizable fleet of wholesale
power generation assets in the U.S., its leading retail franchise in Texas and,
increasingly, its position as an industry leader in the development of various
types of low and no carbon generation technology. NRG utilizes 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. More
specifically, 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; (iii) empowering retail customers with distinctive products
and services that transform how they use, manage, and value energy; (iv)
investment in energy-related new businesses and new technologies being developed
and deployed in response to the twin societal dynamics to foster sustainability
and combat climate change, and (v) engaging in a proactive capital allocation
plan focused on achieving the regular return of capital to stockholders within
the dictates of prudent balance sheet management. 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 enable the Company to convert the
challenges faced by the power industry in the coming years into opportunities
for financial growth. This strategy is being implemented by focusing on the
following principles, which are more fully described in the 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, efficiency between the retail and wholesale business, 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 some or
all of the following benefits: improved heat rates; lower delivered costs;
expanded electricity production capability; improved ability to dispatch
economically across the regional general portfolio; increased 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 are expected to 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 Energy has 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 address
workforce planning and community involvement and support, 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.
Business Environment - Financial Credit Market Availability
Power generation companies are capital intensive and, as such, rely on the
credit markets for liquidity and for the financing of power generation
investments. At the end of the second quarter 2009, there were some indications
that the nation's credit markets began to recover although credit continued to
be tight relative to previous years. As evidence of the markets' improvement, in
April 2009, GenConn Energy, a joint venture of NRG and the United Illuminating
Company, closed on a $534 million project financing and NRG was able to issue
$700 million of bonds in June 2009 with a 10 year maturity at a yield to
maturity of 8.75%. NRG has a diversified liquidity program, with $4.0 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. 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.
The addition of Reliant Energy to NRG's existing generation portfolio may
provide opportunities to match generation to load directly which should reduce
hedging and credit costs that both businesses would incur if hedged separately.
Reliant Energy, which expects to lock in supply and thereby its margin as load
is contracted, should also benefit from having better access to nonstandard
products necessary to meet load. NRG expects to continue hedging the generation
consistent with its prior practice, but now will benefit from having an
additional outlet for its range of generation products.
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. 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 recommended that NRG stockholders not tender
their shares. In addition, on June 17, 2009 Exelon filed a Definitive Proxy
Statement with the SEC with respect to their proposals for the Company's 2009,
Annual Meeting of Stockholders, which consisted of: (i) consideration of
Exelon's four nominees as Class III directors; (ii) consideration of the
expansion of NRG's Board of Directors to 19 directors; (iii) if the Exelon board
expansion is approved, consideration of five additional Exelon nominees; and
(iv) consideration of repealing any amendments to the NRG Bylaws after
February 26, 2008. NRG's Board of Directors recommended a vote against each of
the proposals. On July 2, 2009, Exelon revised their unsolicited proposal and
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 recommended that NRG stockholders not tender their shares. On July 21, 2009,
based on the preliminary vote count at NRG's 2009 Annual Meeting of
Stockholders, stockholders voted to re-elect all of the Company's director
nominees to the NRG Board of Directors. In addition, NRG's stockholders rejected
Exelon's proposal to expand NRG's Board with its own slate of five Director
nominees. On July 21, 2009, Exelon Corporation announced that in light of the
vote results, effective immediately, it terminated its offer to acquire all of
the outstanding shares of NRG. On July 29, 2009, IVS Associates, Inc., the
independent inspector of elections, certified the final results. The total
defense costs associated with Exelon's unsolicited proposal was approximately
$17 million as of June 30, 2009 of which $9 million was for the six months ended
June 30, 2009. In the third quarter 2009, the Company expects to incur an
additional $19 million of expenditures related to the Exelon defense.
Environmental Matters
Climate Change
On June 26, 2009, the House of Representatives passed The American Clean
Energy and Security Act of 2009. This comprehensive bill 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. The bill provides for a
declining cap in U.S. GHG emissions and provides for allocation of allowances to
merchant coal generators and local distribution companies, the use of both
international and domestic offsets, and a transition from already existing state
programs, all of which are important to the electric generation industry. The
bill further exempts CO2 from regulation under New Source Review, or NSR, as a
criteria pollutant, or a hazardous air pollutant under the CAA. It proposes
requirements for new coal-fueled power plants to implement, based on commercial
availability, carbon capture and sequestration to reduce CO2 emissions. The
debate will now move to the Senate. NRG will continue to provide input as a
leading energy company and member of the U.S. Climate Action Partnership, or
USCAP, in support of federal legislation.
In 2008, NRG emitted in the U.S. 60 million metric tonnes of CO2. If the
Waxman-Markey legislation or some other federal comprehensive climate change
bill were to pass both Houses 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 24, 2009, the U.S. EPA published 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. U.S. EPA, which requires the U.S. EPA 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 U.S. EPA 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 U.S. EPA 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 U.S. Supreme Court released its decision in the Phase II 316(b) Rule case
on April 1, 2009, that the U.S. EPA 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 U.S. EPA's
ability to include alternatives to closed-loop cooling in its redraft of the
Phase II 316(b) Rules.
On April 24, 2009, the U.S. EPA granted petitions to reconsider three NSR
rules; Fugitive Emissions, PM2.5 Implementation, and Reasonable Possibility. A
Notice for reconsideration of the PM2.5 implementation Rule was published in
Federal Register on May 1, 2009. While none of these actions directly impact NRG
at this point, it is unknown if final rules will impact future projects.
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 U.S. ton of CO2 emitted with true up for
2009-2011 occurring in 2012. NRG's emissions under RGGI were approximately
12 million tonnes in 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. NRG is also subject to
regulatory requirements as a competitive retail electric service provider in
Texas. The 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.
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. The transmission expansion plan is composed of
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 the PUCT's CREZ plan in state
district court, seeking reversal of the final order. On March 30, 2009, the 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. In July of 2009, the PUCT approved
schedules for utilities to file applications to license several of the CREZ
transmission projects (to obtain certificates of convenience and necessity, or
CCNs). If the CREZ projects are completed as currently anticipated, 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 in the ERCOT Region.
Changes in Accounting Standards
See Note 1 to the condensed consolidated financial statements of this Form
10-Q as found in Item 1 for a discussion of recent accounting developments.
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