Agreement with The Tokyo Electric Power Company (TEPCO) to invest in Nuclear Innovation North America’s (NINA) STP 3&4 nuclear project
– Edited by Stephen Heiser –
NRG Energy, Inc. as reported net income of $58 million, or $0.22 per diluted common share for the first quarter of 2010, compared to $198 million, or $0.70 per diluted common share, for the first quarter of 2009. Income before taxes was $123 million in the first quarter of 2010 compared to $496 million generated in the first quarter of 2009. The $373 million decline in income before taxes is largely the result of a $456 million decrease in unrealized mark-to-market (MtM) derivative gains on economic hedges partly offset by contributions from Reliant Energy which NRG acquired on May 1, 2009.
First Quarter 2010 Financial Highlights
$601 million of adjusted EBITDA, excluding mark-to-market (MtM) impacts – up 26% from 2009
$242 million early settlement of NRG Common Stock Finance I (CSF I) facility
$237 million paydown on Term Loan B debt
$2,200 million 2010 EBITDA outlook reaffirmed
Agreement with The Tokyo Electric Power Company (TEPCO) to invest in Nuclear Innovation North America’s (NINA) STP 3&4 nuclear project
$154 million United States Department of Energy (DOE) grant for large scale post-combustion carbon capture project at WA Parish
Pending acquisition of 101 megawatt (MW) South Trent wind farm in Texas
10-year contract awarded for biomass use at Dunkirk Generating Station in New York
680 MW of solar and offshore wind development projects now under power purchase agreements and in active development
Adjusted EBITDA, excluding MtM impacts, was $601 million for the first quarter of 2010, $124 million higher than the first quarter of 2009 EBITDA of $477 million. Reliant Energy contributed $190 million of EBITDA for the quarter, offsetting a $48 million decline in the Texas wholesale business. The net $142 million gain in EBITDA in the first quarter of 2010 compared to 2009 in Texas illustrates the complementary benefits of owning both generation and retail businesses in the state. Going forward, NRG is well positioned to continue to manage commodity price risk, minimize collateral requirements and reduce commercial transaction costs. The $18 million decline in wholesale EBITDA outside of Texas was driven by lower average hedged prices in the Northeast region and lower contributions from the international assets due to the sale of MIBRAG in June 2009, which was partially offset by a $23 million gain from the sale of Padoma in January 2010.
“In a weak commodity price environment, our record financial performance reflects the strength of our hedging program and continued operational excellence across our generation and retail businesses. While retaining our focus on delivering stellar financial results for the quarter, we also made significant progress in our renewables development program and, importantly, on our industry-leading STP nuclear development project as demonstrated by today’s announcement of TEPCO’s proposed investment,” commented David Crane, NRG President and Chief Executive Officer. “In addition, we concluded our search for a Chief Financial Officer during the quarter with the appointment of Christian Schade who brings a proven track record of creating shareholder value at highly entrepreneurial and fast-growing companies.”
TEPCO Partners in STP 3&4
TEPCO, one of the world’s largest operators of nuclear plants, will invest $155 million—through its U.S.-based subsidiary—for a 10% share of NINA Investments Holdings’ interest in the STP expansion, STP units 3&4, once a conditional commitment for U.S. Department of Energy loan guarantee is secured for the project. NINA Investments Holdings is a wholly owned subsidiary of NINA. This $155 million includes a $30 million option payment to NINA Investments Holdings, enabling TEPCO to buy an additional 10% share of the company for an additional $125 million within approximately one year.
With this initial transaction, TEPCO would hold a 9.2375% interest in STP 3&4, bringing NINA’s share to 83.1375%, and leaving CPS Energy’s share at 7.625%. TEPCO would also be responsible for 10% of all STP expansion capital costs and up to 20% of these costs if the company exercises its option to increase its ownership to 20% of NINA Investments Holdings’ interest in the STP expansion. TEPCO would then own approximately 18% of the project itself, or roughly 500 megawatts of emission-free generation—enough to power about 400,000 households.
MtM Impacts of Hedging Activities
The Company, in the normal course of business, enters into contracts to lock in forward prices for a significant portion of its expected power generation and to fulfill Reliant Energy’s supply requirements. Although these transactions are predominantly economic hedges of our generation portfolio and load requirements, a portion of these forward sales and purchases are not afforded hedge accounting treatment, in accordance with ASC 815, and the MtM change in value of these transactions is recorded to current period earnings. Included in the $123 million of income before taxes in the first quarter of 2010 was a $63 million forward net MtM loss on our economic hedges resulting from falling commodity prices and the combined wholesale and retail portfolio during the quarter. Excluding this impact, income before taxes, net of MtM impacts was $186 million. In the first quarter of 2009, there were $332 million net MtM gains on our economic hedges included in the $496 million of income before taxes. The net MtM gains on our wholesale portfolio were largely caused by decreasing power and natural gas prices. Excluding this impact, income before taxes, net of MtM impacts was $164 million for the first quarter of 2009.
Reliant Energy: First quarter adjusted EBITDA, net of MtM impacts, totaled $190 million principally as a result of colder than normal weather which led to increased customer usage. Reliant’s financial performance for the quarter also benefited from a reduction in bad debt expense and improved customer retention. Total Retail revenues were $1,245 million on 11 TWh sold to both Mass and C&I customers while cost of sales, net of MtM, totaled $952 million, resulting in a Retail gross margin of $293 million. Other operating expenses incurred during the quarter totaled $103 million and included $49 million of selling, general and administrative expenses; $29 million of expenses associated with the call center and billing, credit, and collections; $16 million of gross receipts tax; and $9 million of bad debt expense.
Texas: Adjusted EBITDA, net of MtM impacts for the first quarter of 2010 for the Texas wholesale generation business decreased by $48 million to $272 million compared to the first quarter of 2009. Increased gas fleet generation of 94% was more than offset by lower margins from the baseload fleet resulting from lower hedged prices, a decline in nuclear generation, and higher fuel costs at WA Parish and Limestone, which drove an overall $37 million quarter over quarter decline in energy margins. Also, maintenance spending at South Texas Project (STP) was higher in the first quarter of 2010 versus 2009 by $9 million, largely due to the plant beginning preparations for its Unit 2 refueling and maintenance outage in April 2010.
Northeast: First quarter 2010 adjusted EBITDA, net of MtM impacts was $76 million, a decrease of $30 million from the first quarter of 2009. Net energy margins were unfavorable $38 million due to lower hedged prices. Due to the plan to retire Indian River unit 3 in 2014, the region incurred termination fees of $7 million related to the cancellation of environmental capital expenditures, as well as a $7 million write-off of construction in progress for the unit in the first quarter. This quarter’s results were positively impacted by an increase in capacity revenue of $8 million due to higher prices in New York and PJM in 2010.
South Central: Adjusted EBITDA, net of MtM impacts for the first quarter decreased by $3 million to $26 million. During the quarter the region experienced an 8% sales increase to its contract customers due to the colder than normal weather driving contract revenue higher by $11 million. However, this gain was offset by a decline in merchant margins due to the expiration of a merchant capacity agreement and a 20% decline in merchant megawatt-hours sold. The increased load requirements resulted in lower merchant sales which are generally at higher prices.
Post-Combustion Carbon Capture Project selected by DOE
On March 9, 2010, NRG’s 60 MW post-combustion carbon capture demonstration project was selected by the DOE to receive up to $154 million from the American Recovery and Reinvestment Act. Scheduled to start operation in 2013, the project will be located at the WA Parish facility.
Letter of Intent to Acquire South Trent wind farm
On March 4, 2010, NRG signed a binding letter of intent to purchase the South Trent wind farm near Sweetwater, Texas. The 101 MW operating wind farm consists of 44 turbines and has a 20-year power purchase agreement with AEP Energy Partners, Inc. The proposed acquisition must be approved by the Public Utility Commission of Texas and is expected to close in the second quarter of this year.
Biomass use at Dunkirk moves forward
In April, NRG received a 10-year contract from the New York State Energy Research and Development Authority (NYSERDA) for power generated using renewable biomass fuel at the Dunkirk Generating Station in western New York. The project will produce up to 15 MWs of the station’s output and is expected to be online by the end of 2011.
Outlook for 2010
NRG is reaffirming its 2010 adjusted EBITDA guidance of $2,200 million, and adjusting cash flow from operations guidance to $1,300 million as a result of collateral postings in the first quarter. Free cash flow improved by $112 million to $462 million reflecting the expected proceeds from the agreement with TEPCO to invest in NINA
Earnings Conference Call
To access the live webcast of the conference call and accompanying presentation materials, log on to NRG’s website at http://www.nrgenergy.com and clicking on “Investors.” The webcast will also be archived on the site.
NRG Energy, Inc., a Fortune 500 company, owns and operates one of the country’s largest and most diverse power generation portfolios. Headquartered in Princeton, NJ, the Company’s power plants provide more than 24,000 megawatts of generation capacity – enough to supply more than 20 million homes. NRG’s retail business, Reliant Energy, serves 1.6 million residential, business, and commercial and industrial customers in Texas. A past recipient of the energy industry’s highest honors – Platts Industry Leadership and Energy Company of the Year awards – NRG is a member of the U.S. Climate Action Partnership (USCAP), a group of business and environmental organizations calling for mandatory legislation to reduce greenhouse gas emissions.