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| NRG > SEC Filings for NRG > Form 10-Q on 2-Nov-2009 | All Recent SEC Filings |
2-Nov-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 and nine months ended September 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 September 30, 2009, NRG had a total global generation portfolio of 187
active operating fossil fuel and nuclear generation units, at 46 power
generation plants, with an aggregate generation capacity of approximately 24,100
MW, and approximately 550 MW under construction which includes partners'
interests of 200 MW. In addition to its fossil fuel plant ownership, NRG has
ownership interests in two operating 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 23,095 MW of fossil fuel and nuclear generation capacity in 179
active generating units at 42 plants. The Company's power generation facilities
are most heavily concentrated in Texas (approximately 11,190 MW, including 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 September 30, 2009, Reliant Energy had
approximately 1.6 million Mass customers and approximately 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, while aggressively
pursuing sustainable energy solutions for the future. 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 technologies and integrated solutions
aimed at satisfying the Company's customers' increasing demand for sustainable
energy lifestyles. In addition, 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 2.0 initiative,
commercial operations strategy, achieving synergies between the Company's retail
and wholesale business in Texas, and maintaining of appropriate levels of
liquidity, debt and equity in order to ensure continued access to capital
through all economic and financial cycles.
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 reduced environmental impacts, including facilities that
either have near zero GHG emissions or can be equipped to capture and sequester
GHG emissions. In addition, 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 and NRG has several applications
pending or contemplated.
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 sustainable energy lifestyles, such as smart meters, electric vehicle
ecosystems, 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. During the first nine months of 2009, the nation's credit markets
have recovered to some extent although credit continued to be tight relative to
years prior to 2008. 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 $3.9 billion in
total liquidity as of September 30, 2009, 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 transacts with a diversified pool of counterparties
and actively manages the Company's exposure to any single counterparty. See
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
$39 million for the period October 1, 2008, through September 30, 2009, of which
$31 million was for the nine months ended September 30, 2009.
Environmental Matters
Climate Change
Senators Kerry and Boxer introduced climate legislation based on The American
Clean Energy and Security Act of 2009 which passed the House of Representatives
in June 2009. The Senate bill proposes a multi-sector, market based greenhouse
gas cap-and-trade system starting in 2012. It provides for a declining cap in
U.S. GHG emissions and provides for the allocation of allowances to merchant
coal generators, the use of both international and domestic offsets to local
distribution companies , and a transition from already existing state programs,
all of which are important to the electric generation industry. It proposes
requirements for new coal-fueled power plants to implement, based on commercial
availability, carbon capture and sequestration to reduce CO2 emissions. 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 60 million metric tonnes of CO2 from its domestic
operations. If climate change 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 stated that the mix of six key GHGs, including CO2, threaten the public
health and welfare. On September 28, 2009, U.S.EPA and Department of
Transportation, or DOT published "Proposed GHG Emissions Standards for Motor
Vehicles". These actions are 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. Under the CAA, these regulations when final,
would render GHGs regulated pollutants and subject them to other existing
requirements that affect stationary sources, including power plants. The primary
impact on NRG would be a statutory requirement to install BACT determined on a
case-by-case basis, for major modifications or improvements at power plants if
they cause GHG emissions to increase by the statutory Prevention of Significant
Deterioration, or PSD limits of 100 tons per year. The U.S. EPA also released,
on September 30, 2009, a draft PSD tailoring rule for GHGs that would increase
the major stationary source threshold of 25,000 tons per year of carbon dioxide
equivalents. This threshold level would be used to determine (i) if an existing
source would be required to obtain a Title V operating permit and (ii) if a new
facility or a major modification at an existing facility would trigger PSD
permitting requirements. Existing major sources making modifications that result
in an increase of emissions above the significance level would be required to
obtain a PSD permit and install BACT. The timing of the final motor vehicle
rule, acceptance of the PSD tailoring rule and EPA's approach to BACT for GHGs
could affect the level of impact to NRG's plants and future repowering projects.
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, nitrogen dioxide,
SO2, 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's planned
environmental capital expenditures include installation of particulate, SO2,
NOx, and mercury controls to comply with federal and state air quality rules and
consent orders, as well as installation of "Best Technology Available" under
Phase II 316(b) Rule. NRG continues to explore cost-effective alternatives that
can achieve desired results. This planned investment reflects anticipated
schedules and controls related to CAIR, MACT for mercury, and the Phase II
316(B) Rule which are under remand to the U.S. EPA and, as such, the full impact
on the scope and timing of environmental retrofits from any new or revised
regulations cannot be determined at this time.
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 the
Federal Register on May 1, 2009. While none of these actions directly impact NRG
at this point, it is unknown if any such final rules will impact future
projects.
The U.S. Supreme Court released its decision in the Phase II 316(b) Rule case
on April 1, 2009, in which it concluded 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. In the absence of federal
regulations, some states in which NRG operates, such as California, Connecticut,
Delaware and New York, are moving ahead with guidance for more stringent
requirements for once through cooled units which may have an impact on future
operations.
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 CO2 cap-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 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 2, Summary of Significant Accounting Policies, 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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