10-Q 1 a11-8686_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended: March 31, 2011

 

o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number: 001-15891

 

NRG Energy, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

41-1724239

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

211 Carnegie Center, Princeton, New Jersey

 

08540

(Address of principal executive offices)

 

(Zip Code)

 

(609) 524-4500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer £

Non-accelerated filer £

Smaller reporting company £

 

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No x

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes x    No £

 

As of May 2, 2011, there were 241,089,416 shares of common stock outstanding, par value $0.01 per share.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

Index

 

Cautionary Statement Regarding Forward Looking Information

 

3

GLOSSARY OF TERMS

 

4

PART I — FINANCIAL INFORMATION

 

7

ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

 

7

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

41

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

67

ITEM 4 — CONTROLS AND PROCEDURES

 

69

PART II — OTHER INFORMATION

 

70

ITEM 1 — LEGAL PROCEEDINGS

 

70

ITEM 1A — RISK FACTORS

 

70

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

70

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

 

70

ITEM 4 — (REMOVED AND RESERVED)

 

70

ITEM 5 — OTHER INFORMATION

 

70

ITEM 6 — EXHIBITS

 

71

SIGNATURES

 

72

 

2



Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q of NRG Energy, Inc., or NRG or the Company, includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Exchange Act.  The words “believes”, “projects”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and similar expressions are intended to identify forward-looking statements.  These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause NRG Energy, Inc.’s actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These factors, risks and uncertainties include the factors described under Risk Factors Related to NRG Energy, Inc., in Part I, Item 1A of the Company’s Annual Report on Form 10-K, for the year ended December 31, 2010, including the following:

 

·                  General economic conditions, changes in the wholesale power markets and fluctuations in the cost of fuel;

·                  Volatile power supply costs and demand for power;

·                  Hazards customary to the power production industry and power generation operations such as fuel and electricity price volatility, unusual weather conditions, catastrophic weather-related or other damage to facilities, unscheduled generation outages, maintenance or repairs, unanticipated changes to fuel supply costs or availability due to higher demand, shortages, transportation problems or other developments, environmental incidents, or electric transmission or gas pipeline system constraints and the possibility that NRG may not have adequate insurance to cover losses as a result of such hazards;

·                  The effectiveness of NRG’s risk management policies and procedures, and the ability of NRG’s counterparties to satisfy their financial commitments;

·                  Counterparties’ collateral demands and other factors affecting NRG’s liquidity position and financial condition;

·                  NRG’s ability to operate its businesses efficiently, manage capital expenditures and costs tightly, and generate earnings and cash flows from its asset-based businesses in relation to its debt and other obligations;

·                  NRG’s ability to enter into contracts to sell power and procure fuel on acceptable terms and prices;

·                  The liquidity and competitiveness of wholesale markets for energy commodities;

·                  Government regulation, including compliance with regulatory requirements and changes in market rules, rates, tariffs and environmental laws and increased regulation of carbon dioxide and other greenhouse gas emissions;

·                  Price mitigation strategies and other market structures employed by ISOs or RTOs that result in a failure to adequately compensate NRG’s generation units for all of its costs;

·                  NRG’s ability to borrow additional funds and access capital markets, as well as NRG’s substantial indebtedness and the possibility that NRG may incur additional indebtedness going forward;

·                  NRG’s ability to receive Federal loan guarantees or cash grants to support development projects;

·                  Operating and financial restrictions placed on NRG and its subsidiaries that are contained in the indentures governing NRG’s outstanding notes, in NRG’s Senior Credit Facility, and in debt and other agreements of certain of NRG subsidiaries and project affiliates generally;

·                  NRG’s ability to implement its RepoweringNRG strategy of developing and building new power generation facilities, including new wind and solar projects;

·                  NRG’s ability to implement its econrg strategy of finding ways to meet the challenges of climate change, clean air and protecting natural resources while taking advantage of business opportunities;

·                  NRG’s ability to implement its FORNRG strategy of increasing the return on invested capital through operational performance improvements and a range of initiatives at plants and corporate offices to reduce costs or generate revenues;

·                  NRG’s ability to achieve its strategy of regularly returning capital to shareholders;

·                  NRG’s ability to maintain retail market share;

·                  NRG’s ability to successfully evaluate investments in new business and growth initiatives;

·                  NRG’s ability to successfully integrate and manage any acquired businesses; and

·                  NRG’s ability to develop and maintain successful partnering relationships.

 

Forward-looking statements speak only as of the date they were made, and NRG Energy, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  The foregoing review of factors that could cause NRG’s actual results to differ materially from those contemplated in any forward-looking statements included in this Quarterly Report on Form 10-Q should not be construed as exhaustive.

 

3



Table of Contents

 

GLOSSARY OF TERMS

 

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:

 

2010 Form 10-K

 

NRG’s Annual Report on Form 10-K for the year ended December 31, 2010

 

 

 

316(b) Rule

 

A section of the Clean Water Act regulating cooling water intake structures

 

 

 

ASR Agreement

 

Accelerated Share Repurchase Agreement

 

 

 

Baseload capacity

 

Electric power generation capacity normally expected to serve loads on an around-the-clock basis throughout the calendar year

 

 

 

CAA

 

Clean Air Act

 

 

 

CAIR

 

Clean Air Interstate Rule

 

 

 

CAISO

 

California Independent System Operator

 

 

 

CATR

 

Clean Air Transport Rule

 

 

 

Capital Allocation Plan

 

Share repurchase program

 

 

 

Capital Allocation Program

 

NRG’s plan of allocating capital between debt reduction, reinvestment in the business, and share repurchases through the Capital Allocation Plan

 

 

 

C&I

 

Commercial, industrial and governmental/institutional

 

 

 

CFTC

 

U.S. Commodity Futures Trading Commission

 

 

 

CPS

 

CPS Energy

 

 

 

CSRA

 

Credit Sleeve Reimbursement Agreement with Merrill Lynch in connection with acquisition of Reliant Energy, as hereinafter defined

 

 

 

DNREC

 

Delaware Department of Natural Resources and Environmental Control

 

 

 

ERCOT

 

Electric Reliability Council of Texas, the Independent System Operator and the regional reliability coordinator of the various electricity systems within Texas

 

 

 

Exchange Act

 

The Securities Exchange Act of 1934, as amended

 

 

 

FERC

 

Federal Energy Regulatory Commission

 

 

 

Funded Letter of Credit Facility

 

NRG’s $1.3 billion term loan-backed fully funded senior secured letter of credit facility, of which $500 million matures on February 1, 2013, and $800 million matures on August 31, 2015, and is a component of NRG’s Senior Credit Facility

 

 

 

GHG

 

Greenhouse Gases

 

 

 

Green Mountain Energy

 

Green Mountain Energy Company

 

 

 

GWh

 

Gigawatt hour

 

 

 

IGCC

 

Integrated Gasification Combined Cycle

 

 

 

ISO

 

Independent System Operator, also referred to as Regional Transmission Organizations, or RTO

 

4



Table of Contents

 

ISO-NE

 

ISO New England Inc.

 

 

 

LFRM

 

Locational Forward Reserve Market

 

 

 

LIBOR

 

London Inter-Bank Offer Rate

 

 

 

LTIP

 

Long-Term Incentive Plan

 

 

 

MACT

 

Maximum Achievable Control Technology

 

 

 

Mass

 

Residential and small business

 

 

 

MMBtu

 

Million British Thermal Units

 

 

 

MW

 

Megawatts

 

 

 

MWh

 

Saleable megawatt hours net of internal/parasitic load megawatt-hours

 

 

 

NAAQS

 

National Ambient Air Quality Standards

 

 

 

NINA

 

Nuclear Innovation North America LLC

 

 

 

NOx

 

Nitrogen oxide

 

 

 

NPNS

 

Normal Purchase Normal Sale

 

 

 

NRC

 

U.S. Nuclear Regulatory Commission

 

 

 

NYISO

 

New York Independent System Operator

 

 

 

OCI

 

Other comprehensive income

 

 

 

PJM

 

PJM Interconnection, LLC

 

 

 

PJM market

 

The wholesale and retail electric market operated by PJM primarily in all or parts of Delaware, the District of Columbia, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and West Virginia

 

 

 

PPA

 

Power Purchase Agreement

 

 

 

PUCT

 

Public Utility Commission of Texas

 

 

 

Repowering

 

Technologies utilized to replace, rebuild, or redevelop major portions of an existing electrical generating facility, not only to achieve a substantial emissions reduction, but also to increase facility capacity, and improve system efficiency

 

 

 

RepoweringNRG

 

NRG’s program designed to develop, finance, construct and operate new, highly efficient, environmentally responsible capacity

 

5



Table of Contents

 

Revolving Credit Facility

 

NRG’s $875 million senior secured revolving credit facility, which matures on August 31, 2015, and is a component of NRG’s Senior Credit Facility

 

 

 

SEC

 

United States Securities and Exchange Commission

 

 

 

Securities Act

 

The Securities Act of 1933, as amended

 

 

 

Senior Credit Facility

 

NRG’s senior secured facility, which is comprised of a Term Loan Facility, an $875 million Revolving Credit Facility and a $1.3 billion Funded Letter of Credit Facility

 

 

 

Senior Notes

 

The Company’s $6.5 billion outstanding unsecured senior notes consisting of $2.4 billion of 7.375% senior notes due 2016, $1.1 billion of 7.375% senior notes due 2017, $1.2 billion of 7.625% senior notes due 2018, $700 million of 8.5% senior notes due 2019 and $1.1 billion of 8.25% senior notes due 2020

 

 

 

SO2

 

Sulfur dioxide

 

 

 

STP

 

South Texas Project — nuclear generating facility located near Bay City, Texas in which NRG owns a 44% Interest

 

 

 

STPNOC

 

South Texas Project Nuclear Operating Company

 

 

 

TANE

 

Toshiba America Nuclear Energy Corporation

 

 

 

TANE Facility

 

NINA’s $500 million credit facility with TANE which matures on February 24, 2012

 

 

 

TEPCO

 

The Tokyo Electric Power Company of Japan, Inc.

 

 

 

Term Loan Facility

 

A senior first priority secured term loan, of which approximately $612 million matures on February 1, 2013, and $1.0 billion matures on August 31, 2015, and is a component of NRG’s Senior Credit Facility

 

 

 

U.S.

 

United States of America

 

 

 

U.S. DOE

 

United States Department of Energy

 

 

 

U.S. EPA

 

United States Environmental Protection Agency

 

 

 

U.S. GAAP

 

Accounting principles generally accepted in the United States

 

 

 

VaR

 

Value at Risk

 

6


 


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

 

NRG ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

 

 

Three months ended March 31,

 

(In millions, except for per share amounts)

 

2011

 

2010

 

Operating Revenues

 

 

 

 

 

Total operating revenues

 

$

1,995

 

$

2,215

 

Operating Costs and Expenses

 

 

 

 

 

Cost of operations

 

1,324

 

1,639

 

Depreciation and amortization

 

205

 

202

 

Selling, general and administrative

 

143

 

130

 

Development costs

 

9

 

9

 

Total operating costs and expenses

 

1,681

 

1,980

 

Gain on sale of assets

 

 

23

 

Operating Income

 

314

 

258

 

Other Income/(Expense)

 

 

 

 

 

Equity in (losses)/earnings of unconsolidated affiliates

 

(2

)

14

 

Impairment charge on investment

 

(481

)

 

Other income, net

 

5

 

4

 

Loss on debt extinguishment

 

(28

)

 

Interest expense

 

(173

)

(153

)

Total other expense

 

(679

)

(135

)

(Loss)/Income Before Income Taxes

 

(365

)

123

 

Income tax (benefit)/expense

 

(105

)

65

 

Net (Loss)/Income attributable to NRG Energy, Inc.

 

(260

)

58

 

Dividends for preferred shares

 

2

 

2

 

(Loss)/Income Available for Common Stockholders

 

$

(262

)

$

56

 

(Loss)/earnings per share attributable to NRG Energy, Inc. Common Stockholders

 

 

 

 

 

Weighted average number of common shares outstanding — basic

 

247

 

254

 

Net (loss)/income per weighted average common share — basic

 

$

(1.06

)

$

0.22

 

Weighted average number of common shares outstanding — diluted

 

247

 

257

 

Net (loss)/income per weighted average common share — diluted

 

$

(1.06

)

$

0.22

 

 

See notes to condensed consolidated financial statements.

 

7



Table of Contents

 

NRG ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2011

 

December 31, 2010

 

(In millions, except shares)

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

2,711

 

$

2,951

 

Funds deposited by counterparties

 

317

 

408

 

Restricted cash

 

13

 

8

 

Accounts receivable — trade, less allowance for doubtful accounts of $17 and $25

 

687

 

734

 

Inventory

 

418

 

453

 

Derivative instruments valuation

 

1,774

 

1,964

 

Cash collateral paid in support of energy risk management activities

 

147

 

323

 

Prepayments and other current assets

 

311

 

296

 

Total current assets

 

6,378

 

7,137

 

Property, plant and equipment, net of accumulated depreciation of $3,987 and $3,796

 

11,579

 

12,517

 

Other Assets

 

 

 

 

 

Equity investments in affiliates

 

521

 

536

 

Note receivable — affiliate and capital leases, less current portion

 

415

 

384

 

Goodwill

 

1,863

 

1,868

 

Intangible assets, net of accumulated amortization of $1,154 and $1,064

 

1,686

 

1,776

 

Nuclear decommissioning trust fund

 

428

 

412

 

Derivative instruments valuation

 

674

 

758

 

Restricted cash supporting funded letter of credit facility

 

1,301

 

1,300

 

Other non-current assets

 

198

 

208

 

Total other assets

 

7,086

 

7,242

 

Total Assets

 

$

25,043

 

$

26,896

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt and capital leases

 

$

150

 

$

463

 

Accounts payable

 

568

 

783

 

Derivative instruments valuation

 

1,411

 

1,685

 

Deferred income taxes

 

137

 

108

 

Cash collateral received in support of energy risk management activities

 

317

 

408

 

Accrued expenses and other current liabilities

 

415

 

773

 

Total current liabilities

 

2,998

 

4,220

 

Other Liabilities

 

 

 

 

 

Long-term debt and capital leases

 

8,802

 

8,748

 

Funded letter of credit

 

1,300

 

1,300

 

Nuclear decommissioning reserve

 

322

 

317

 

Nuclear decommissioning trust liability

 

281

 

272

 

Deferred income taxes

 

1,812

 

1,989

 

Derivative instruments valuation

 

335

 

365

 

Out-of-market contracts

 

211

 

223

 

Other non-current liabilities

 

1,133

 

1,142

 

Total non-current liabilities

 

14,196

 

14,356

 

Total Liabilities

 

17,194

 

18,576

 

3.625% convertible perpetual preferred stock (at liquidation value, net of issuance costs)

 

248

 

248

 

Commitments and Contingencies

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common stock

 

3

 

3

 

Additional paid-in capital

 

5,330

 

5,323

 

Retained earnings

 

3,538

 

3,800

 

Less treasury stock, at cost — 56,742,955 and 56,808,672 shares, respectively

 

(1,633

)

(1,503

)

Accumulated other comprehensive income

 

363

 

432

 

Noncontrolling interest

 

 

17

 

Total Stockholders’ Equity

 

7,601

 

8,072

 

Total Liabilities and Stockholders’ Equity

 

$

25,043

 

$

26,896

 

 

See notes to condensed consolidated financial statements.

 

8



Table of Contents

 

NRG ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(In millions)
Three months ended March 31,

 

2011

 

2010

 

Cash Flows from Operating Activities

 

 

 

 

 

Net (loss)/income

 

$

(260

)

$

58

 

Adjustments to reconcile net (loss)/income to net cash provided by operating activities:

 

 

 

 

 

Distributions and equity in losses/(earnings) of unconsolidated affiliates

 

9

 

(5

)

Depreciation and amortization

 

205

 

202

 

Provision for bad debts

 

8

 

9

 

Amortization of nuclear fuel

 

11

 

10

 

Amortization of financing costs and debt discount/premiums

 

8

 

8

 

Amortization of intangibles and out-of-market contracts

 

48

 

 

Changes in deferred income taxes and liability for uncertain tax benefits

 

(109

)

74

 

Changes in nuclear decommissioning trust liability

 

10

 

11

 

Changes in derivatives

 

(130

)

24

 

Changes in collateral deposits supporting energy risk management activities

 

176

 

(172

)

Impairment charge on investment

 

481

 

 

Cash used by changes in other working capital

 

(241

)

(105

)

Net Cash Provided by Operating Activities

 

216

 

114

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures

 

(219

)

(185

)

Increase in restricted cash, net

 

(5

)

(5

)

Decrease in notes receivable

 

12

 

7

 

Purchases of emission allowances

 

(7

)

(34

)

Proceeds from sale of emission allowances

 

3

 

9

 

Investments in nuclear decommissioning trust fund securities

 

(105

)

(78

)

Proceeds from sales of nuclear decommissioning trust fund securities

 

95

 

67

 

Proceeds from sale of assets

 

13

 

30

 

Other

 

(15

)

(5

)

Net Cash Used by Investing Activities

 

(228

)

(194

)

Cash Flows from Financing Activities

 

 

 

 

 

Payment of dividends to preferred stockholders

 

(2

)

(2

)

Payment for treasury stock

 

(130

)

 

Net (payments to)/receipts from acquired derivatives that include financing elements

 

(17

)

13

 

Proceeds from issuance of long-term debt

 

1,286

 

10

 

Increase in restricted cash supporting funded letter of credit

 

(1

)

 

Proceeds from issuance of common stock

 

1

 

2

 

Payment of deferred debt issuance costs

 

(8

)

(2

)

Payments for short and long-term debt

 

(1,361

)

(429

)

Net Cash Used by Financing Activities

 

(232

)

(408

)

Effect of exchange rate changes on cash and cash equivalents

 

4

 

(3

)

Net Decrease in Cash and Cash Equivalents

 

(240

)

(491

)

Cash and Cash Equivalents at Beginning of Period

 

2,951

 

2,304

 

Cash and Cash Equivalents at End of Period

 

$

2,711

 

$

1,813

 

 

See notes to condensed consolidated financial statements.

 

9



Table of Contents

 

NRG ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Basis of Presentation

 

NRG Energy, Inc., or NRG or the Company, is a wholesale power generation and integrated retail electricity company with a significant presence in major competitive power markets in the United States. 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 the supply of electricity, energy services, and cleaner energy and carbon offset products to retail electricity customers in deregulated markets through its retail subsidiaries Reliant Energy and Green Mountain Energy Company, or Green Mountain Energy.

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the SEC’s regulations for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.  The following notes should be read in conjunction with the accounting policies and other disclosures as set forth in the notes to the Company’s financial statements in its Annual Report on Form 10-K for the year ended December 31, 2010, or 2010 Form 10-K.  Interim results are not necessarily indicative of results for a full year.

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present fairly the Company’s consolidated financial position as of March 31, 2011, and the results of operations and cash flows for the three months ended March 31, 2011, and 2010.

 

Use of Estimates

 

The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions.  These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements.  They also impact the reported amount of net earnings during the reporting period.  Actual results could be different from these estimates.

 

Note 2 — Other Cash Flow Information

 

NRG’s investing activities do not include capital expenditures of $62 million which were accrued and unpaid at March 31, 2011.

 

10


 


Table of Contents

 

Note 3 — Comprehensive (Loss)/Income

 

The following table summarizes the components of the Company’s comprehensive (loss)/income, net of tax:

 

(In millions)
Three months ended March 31,

 

2011

 

2010

 

Net (Loss)/Income attributable to NRG Energy, Inc.

 

$

(260

)

$

58

 

Changes in derivative activity

 

(82

)

257

 

Foreign currency translation adjustment

 

12

 

(6

)

Unrealized gain on available-for-sale securities

 

1

 

 

Other comprehensive (loss)/income

 

$

(69

)

251

 

Comprehensive (loss)/income attributable to NRG Energy, Inc.

 

$

(329

)

$

309

 

 

The following table summarizes the changes in the Company’s accumulated other comprehensive income, or OCI, net of tax:

 

(In millions)

 

 

 

Accumulated other comprehensive income as of December 31, 2010

 

$

432

 

Changes in derivative activity

 

(82

)

Foreign currency translation adjustment

 

12

 

Unrealized gain on available-for-sale securities

 

1

 

Accumulated other comprehensive income as of March 31, 2011

 

$

363

 

 

Note 4 — Business Acquisitions and Disposition

 

2011 Acquisition

 

On April 5, 2011, NRG acquired a 50.1% stake in the 392 MW Ivanpah Solar Electric Generating System, or the Ivanpah Project, from BrightSource Energy, Inc., or BSE.  NRG paid $68 million in cash and committed an additional $70 million of cash and $122 million of availability under its Funded Letter of Credit Facility in connection with the total commitment of up to $300 million.  The Ivanpah Project is composed of three separate facilities — Ivanpah 1 (126 MW), Ivanpah 2 (133 MW), and Ivanpah 3 (133 MW), and all three facilities are expected to be fully operational by the end of 2013.  The Ivanpah Project has received project financing of $1.6 billion, which is guaranteed by the U.S. Department of Energy, or U.S. DOE.  Power generated from the Ivanpah Project will be sold to Southern California Edison and Pacific Gas & Electric, under multiple 20-25 year power purchase agreements, or PPAs.  The acquisition will be recorded in the second quarter of 2011 as a business combination under ASC-805, Business Combinations, or ASC 805, and the purchase price will be preliminarily allocated to the assets acquired and liabilities assumed, based on their acquisition-date fair values.

 

2010 Acquisitions

 

The Company made several acquisitions in 2010, which were recorded as business combinations under ASC 805.  Those acquisitions for which purchase accounting was not finalized as of December 31, 2010 are briefly summarized below.  See Note 3, Business Acquisitions and Note 12, Debt and Capital Leases, in the Company’s 2010 Form 10-K for additional information related to these acquisitions.

 

Green Mountain Energy On November 5, 2010, NRG acquired Green Mountain Energy for $357 million in cash, net of $75 million cash acquired, funded from cash on hand.  The identifiable assets acquired and liabilities assumed were provisionally recorded at their estimated fair values on the acquisition date, and are subject to revision until the evaluations are completed and to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date.  Any changes to the fair value assessments will affect the acquisition-date fair value of goodwill.

 

Cottonwood — On November 15, 2010, NRG acquired the Cottonwood Generating Station, or Cottonwood, a 1,265 MW combined cycle natural gas plant in the Entergy zone of east Texas, for $507 million in cash, funded from cash on hand.  The purchase price was primarily allocated to fixed assets acquired, which were recorded at provisional fair value on the acquisition date.  The accounting for Cottonwood was considered complete as of March 31, 2011, at which point the provisional fair values became final.

 

11



Table of Contents

 

2010 Disposition

 

Padoma — On January 11, 2010, NRG sold its terrestrial wind development company, Padoma Wind Power LLC, or Padoma, to Enel North America, Inc.  NRG recognized a gain on the sale of Padoma of $23 million, which was recorded as a component of operating income in the statement of operations during the three months ended March 31, 2010.

 

Note 5 — Nuclear Innovation North America LLC Developments, Including Impairment Charge

 

Nuclear Innovation North America LLC, or NINA, which is majority-owned by NRG, was established in May 2008 to focus on marketing, siting, developing, financing and investing in new advanced design nuclear projects in select markets across North America, including the planned South Texas Project Units 3 and 4, or STP 3 & 4, Project.  Toshiba America Nuclear Energy Corporation, or TANE, a wholly-owned subsidiary of Toshiba Corporation, is the minority owner of NINA.   NINA is a bankruptcy remote entity under NRG’s corporate structure and designated as an Excluded Project Subsidiary under NRG’s Senior Credit Facility and senior unsecured notes, which require that NRG not be obligated to contribute any capital to service NINA’s debt or fund the repayment of any NINA debt in the event of a default.  Furthermore, NRG is not required to continue the funding of NINA and any capital provided to NINA by any other equity partner could result in the dilution of NRG’s equity interest.

 

On March 11, 2011, Japan was hit by a devastating earthquake and tsunami which, in turn, triggered a nuclear incident at the Fukushima Daiichi Nuclear Power Station owned by The Tokyo Electric Power Company of Japan, Inc., or TEPCO.  The nuclear incident in Japan introduced multiple and substantial uncertainties around new nuclear development in the United States and the availability of debt and equity financing to NINA, including TEPCO’s contingent investment in a wholly-owned subsidiary of NINA through an Investment and Option Agreement signed on May 10, 2010.  Consequently, NINA announced, on March 21, 2011, that it was reducing the scope of development at the STP 3 & 4 expansion to allow time for the U.S. Nuclear Regulatory Commission, or NRC, and other nuclear stakeholders to assess the impacts from the events in Japan.  NINA suspended indefinitely all detailed engineering work and other pre-construction activities and, as a result, dramatically reduced the project workforce.  The decision to reduce the scope of activities was made jointly by NINA, NRG and TANE.  Further, on April 19, 2011, NRG announced that, while it will cooperate with and support its current partners and any prospective future partners in attempting to develop STP 3 & 4 successfully, NRG was withdrawing from further financial participation in NINA’s development of STP 3 & 4.  NINA, going forward, will be focused solely on securing a combined operating license from the NRC and on obtaining the loan guarantee from the U.S. DOE, two items that are essential to the success of any future project development.  TANE agreed, for the time being, to assume responsibility for NINA’s ongoing costs associated with continuation of the licensing process.  In concurrence with the substantial reduction in NINA’s project workforce, and to support NINA’s reduced scope of work, NRG expects to incur one-time costs, related to contributions to NINA, which are not expected to exceed $20 million.  These costs will be expensed as incurred.

 

Due to the events described above, NRG evaluated its investment in NINA for impairment.  As part of this process, NRG evaluated the contractual rights and economic interests held by the various stakeholders in NINA, and concluded that while it continues to hold majority legal ownership, NRG ceased to have a controlling financial interest in NINA at the end of the first quarter of 2011.  Consequently, NRG deconsolidated NINA as of March 31, 2011, in accordance with ASC-810, Consolidation, or ASC 810.  This resulted in the removal of the following amounts from NRG’s consolidated balance sheet: $930 million of construction in progress; $154 million of accounts payable and accrued expenses; $297 million of long-term debt; $17 million of non-controlling interest; and $19 million of other assets and liabilities.  Furthermore, NRG assessed the impact of the diminished prospects for the STP 3 & 4 project on the fair value of NINA’s assets relative to NINA’s existing liabilities as well as NINA’s potential contingent liabilities.  Based on this assessment, the Company concluded it was remote that NRG would recover any portion of the carrying amount of its equity investment in NINA and, consequently, recorded an impairment charge of $481 million as of March 31, 2011 for the full amount of its investment.  This impairment charge includes net assets contributed from all of NINA’s equity investors, both NRG and TANE, which the Company previously consolidated.

 

12



Table of Contents

 

As part of a March 1, 2010, settlement of litigation with CPS Energy, or CPS, NRG had agreed to pay $80 million to CPS, subject to the U.S. DOE’s approval of a fully executed term sheet for a conditional U.S. DOE loan guarantee for STP 3 & 4.  NRG also had agreed to donate an additional $10 million, unconditionally, over four years in annual payments of $2.5 million to the Residential Energy Assistance Partnership, or REAP, in San Antonio.  Payments of $5 million were made to REAP through March 31, 2011.  As a result of the events stemming from the nuclear incident in Japan, the Company no longer believes it probable that the conditional U.S. DOE loan guarantee will be received or accepted.  Therefore, as of March 31, 2011, the Company has reversed the $80 million contingent liability to CPS previously recorded within other current liabilities, along with the $80 million of associated amounts capitalized to construction in progress within property, plant and equipment.  At March 31, 2011, $5 million in liabilities remains on the condensed consolidated balance sheet for the obligations to REAP.

 

Note 6 — Fair Value of Financial Instruments

 

The estimated carrying values and fair values of NRG’s recorded financial instruments are as follows:

 

 

 

Carrying Amount

 

Fair Value

 

 

 

March 31,
2011

 

December 31,
2010

 

March 31,
2011

 

December 31,
2010

 

Assets:

 

(In millions)

 

Cash and cash equivalents

 

$

2,711

 

$

2,951

 

$

2,711

 

$

2,951

 

Funds deposited by counterparties

 

317

 

408

 

317

 

408

 

Restricted cash

 

13

 

8

 

13

 

8

 

Cash collateral paid in support of energy risk management activities

 

147

 

323

 

147

 

323

 

Investment in available-for-sale securities (classified within other non-current assets):

 

 

 

 

 

 

 

 

 

Debt securities

 

9

 

8

 

9

 

8

 

Marketable equity securities

 

3

 

3

 

3

 

3

 

Trust fund investments

 

430

 

414

 

430

 

414

 

Notes receivable

 

200

 

177

 

194

 

190

 

Derivative assets

 

2,448

 

2,722

 

2,448

 

2,722

 

Restricted cash supporting funded letter of credit facility

 

1,301

 

1,300

 

1,301

 

1,300

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt, including current portion

 

8,841

 

9,104

 

9,071

 

9,236

 

Funded letter of credit

 

1,300

 

1,300

 

1,292

 

1,295

 

Cash collateral received in support of energy risk management activities

 

317

 

408

 

317

 

408

 

Derivative liabilities

 

$

1,746

 

$

2,050

 

$

1,746

 

$

2,050

 

 

13



Table of Contents

 

Recurring Fair Value Measurements

 

The following table presents assets and liabilities measured and recorded at fair value on the Company’s condensed consolidated balance sheet on a recurring basis and their level within the fair value hierarchy:

 

(In millions)

 

Fair Value

 

As of March 31, 2011

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash and cash equivalents

 

$

2,711

 

$

 

$

 

$

2,711

 

Funds deposited by counterparties

 

317

 

 

 

317

 

Restricted cash

 

13

 

 

 

13

 

Cash collateral paid in support of energy risk management activities

 

147

 

 

 

147

 

Investment in available-for-sale securities (classified within other non-current assets):

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

9

 

9

 

Marketable equity securities

 

3

 

 

 

3

 

Trust fund investments

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

4

 

 

 

4

 

U.S. government and federal agency obligations

 

31

 

5

 

 

36

 

Federal agency mortgage-backed securities

 

 

56

 

 

56

 

Commercial mortgage-backed securities

 

 

12

 

 

12

 

Corporate debt securities

 

 

54

 

 

54

 

Marketable equity securities

 

227

 

 

40

 

267

 

Foreign government fixed income securities

 

 

1

 

 

1

 

Derivative assets

 

 

 

 

 

 

 

 

 

Commodity contracts

 

701

 

1,692

 

55

 

2,448

 

Restricted cash supporting funded letter of credit facility

 

1,301

 

 

 

1,301

 

Total assets

 

$

5,455

 

$

1,820

 

$

104

 

$

7,379

 

Cash collateral received in support of energy risk management activities

 

$

317

 

$

 

$

 

$

317

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

Commodity contracts

 

666

 

947

 

66

 

1,679

 

Interest rate contracts

 

 

67

 

 

67

 

Total liabilities

 

$

983

 

$

1,014

 

$

66

 

$

2,063

 

 

14



Table of Contents

 

(In millions)

 

Fair Value

 

As of December 31, 2010

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash and cash equivalents

 

$

2,951

 

$

 

$

 

$

2,951

 

Funds deposited by counterparties

 

408

 

 

 

408

 

Restricted cash

 

8

 

 

 

8

 

Cash collateral paid in support of energy risk management activities

 

323

 

 

 

323

 

Investment in available-for-sale securities (classified within other non-current assets):

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

8

 

8

 

Marketable equity securities

 

3

 

 

 

3

 

Trust fund investments

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

9

 

 

 

9

 

U.S. government and federal agency obligations

 

27

 

 

 

27

 

Federal agency mortgage-backed securities

 

 

57

 

 

57

 

Commercial mortgage-backed securities

 

 

11

 

 

11

 

Corporate debt securities

 

 

56

 

 

56

 

Marketable equity securities

 

213

 

 

39

 

252

 

Foreign government fixed income securities

 

 

2

 

 

2

 

Derivative assets

 

 

 

 

 

 

 

 

 

Commodity contracts

 

652

 

2,046

 

24

 

2,722

 

Restricted cash supporting funded letter of credit facility

 

1,300

 

 

 

1,300

 

Total assets

 

$

5,894

 

$

2,172

 

$

71

 

$

8,137

 

Cash collateral received in support of energy risk management activities

 

$

408

 

$

 

$

 

$

408

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

Commodity contracts

 

660

 

1,251

 

51

 

1,962

 

Interest rate contracts

 

 

88

 

 

88

 

Total liabilities

 

$

1,068

 

$

1,339

 

$

51

 

$

2,458

 

 

There have been no transfers during the three months ended March 31, 2011, and 2010, between Levels 1 and 2.  The following tables reconcile, for the three months ended March 31, 2011, and 2010, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements at least annually using significant unobservable inputs:

 

 

 

Fair Value Measurement Using Significant Unobservable Inputs
(Level 3)

 

(In millions)
Three months ended March 31, 2011

 

Debt Securities

 

Trust Fund
Investments

 

Derivatives (a)

 

Total

 

Beginning balance as of January 1, 2011

 

$

8

 

$

39

 

$

(27

)

$

20

 

Total gains and losses (realized/unrealized)

 

 

 

 

 

 

 

 

 

Included in earnings

 

 

 

9

 

9

 

Included in OCI

 

1

 

 

 

1

 

Included in nuclear decommissioning obligations

 

 

1

 

 

1

 

Purchases

 

 

 

3

 

3

 

Transfers into Level 3 (b)

 

 

 

(18

)

(18

)

Transfers out of Level 3 (b)

 

 

 

22

 

22

 

Ending balance as of March 31, 2011

 

$

9

 

$

40

 

$

(11

)

$

38

 

The amount of the total gains for the period included in earnings attributable to the change in unrealized gains relating to assets still held as of March 31, 2011

 

$

 

$

 

$

2

 

$

2

 

 

15



Table of Contents

 

 

 

Fair Value Measurement Using Significant Unobservable Inputs
(Level 3)

 

(In millions)
Three months ended March 31, 2010

 

Debt Securities

 

Trust Fund
Investments

 

Derivatives (a)

 

Total

 

Beginning balance as of January 1, 2010

 

$

9

 

$

37

 

$

(13

)

$

33

 

Total gains and losses (realized/unrealized)

 

 

 

 

 

 

 

 

 

Included in earnings

 

 

 

32

 

32

 

Purchases

 

 

 

1

 

1

 

Transfers into Level 3 (b)

 

 

 

(62

)

(62

)

Transfers out of Level 3 (b)

 

 

 

17

 

17

 

Ending balance as of March 31, 2010

 

$

9

 

$

37

 

$

(25

)

$

21

 

The amount of the total gains for the period included in earnings attributable to the change in unrealized gains relating to assets still held as of March 31, 2010

 

$

 

$

 

$

25

 

$

25

 

 

(a)      Consists of derivative assets and liabilities, net.

(b)      Transfers into/out of Level 3 are related to the availability of external broker quotes, and are valued as of the end of the reporting period.  All transfer into/out are with Level 2.

 

Realized and unrealized gains and losses included in earnings that are related to the energy derivatives are recorded in operating revenues and cost of operations.

 

In determining the fair value of NRG’s Level 2 and 3 derivative contracts, NRG applies a credit reserve to reflect credit risk which is calculated based on credit default swaps.  As of March 31, 2011, the credit reserve resulted in a $1 million decrease in fair value which is composed of a $1 million gain in OCI and a $2 million loss in operating revenue and cost of operations.

 

Concentration of Credit Risk

 

In addition to the credit risk discussion as disclosed in Note 2, Summary of Significant Accounting Policies, to the Company’s 2010 Form 10-K, the following item is a discussion of the concentration of credit risk for the Company’s financial instruments.  Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations.  NRG is exposed to counterparty credit risk through various activities including wholesale sales, fuel purchases and retail supply and retail customer credit risk through its retail load activities.

 

Counterparty Credit Risk

 

The Company monitors and manages credit risk through credit policies that include: (i) an established credit approval process; (ii)  daily monitoring of counterparties’ credit limits; (iii) the use of credit mitigation measures such as margin, collateral, prepayment arrangements, or volumetric limits; (iv) the use of payment netting arrangements; and (v) the use of master netting agreements that allow for the netting of positive and negative exposures of various contracts associated with a single counterparty.  Risk surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows.  The Company seeks to mitigate counterparty credit risk with a diversified portfolio of counterparties.  The Company also has credit protection within various agreements to call on additional collateral support if and when necessary.  Cash margin is collected and held at NRG to cover the credit risk of the counterparty until positions settle.

 

16


 


Table of Contents

 

As of March 31, 2011, counterparty credit exposure to a significant portion of the Company’s counterparties was $1.2 billion and NRG held collateral (cash and letters of credit) against those positions of $322 million, resulting in a net exposure of $920 million.  Counterparty credit exposure is discounted at the risk free rate.  The following tables highlight the counterparty credit quality and the net counterparty credit exposure by industry sector.  Net counterparty credit exposure is defined as the aggregate net asset position for NRG with counterparties where netting is permitted under the enabling agreement and includes all cash flow, mark-to-market and Normal Purchase Normal Sale, or NPNS, and non-derivative transactions.  The exposure is shown net of collateral held, and includes amounts net of receivables or payables.

 

 

 

Net Exposure (a)

 

Category

 

(% of Total)

 

Financial institutions

 

54

%

Utilities, energy, merchants, marketers and other

 

40

 

Coal and emissions

 

3

 

ISOs

 

3

 

Total as of March 31, 2011

 

100

%

 

 

 

Net Exposure (a)

 

Category

 

(% of Total)

 

Investment grade

 

72

%

Non-Investment grade

 

3

 

Non-rated (b)

 

25

 

Total as of March 31, 2011

 

100

%

 

(a)      Counterparty credit exposure excludes uranium and coal transportation contracts because of the unavailability of market prices.

(b)      For non-rated counterparties, the majority are related to ISO and municipal public power entities, which are considered investment grade equivalent ratings based on NRG’s internal credit ratings.

 

NRG has counterparty credit risk exposure to certain counterparties representing more than 10% of total net exposure discussed above and the aggregate of such counterparties was $248 million.  Approximately 77% of NRG’s positions relating to this credit risk roll-off by the end of 2012.  Changes in hedge positions and market prices will affect credit exposure and counterparty concentration.  Given the credit quality, diversification and term of the exposure in the portfolio, NRG does not anticipate a material impact on the Company’s financial position or results of operations from nonperformance by any of NRG’s counterparties.

 

Counterparty credit exposure described above excludes credit risk exposure under certain long term agreements, including California tolling agreements, South Central load obligations and a coal supply agreement.  As external sources or observable market quotes are not available to estimate such exposure, the Company valued these contracts based on various techniques including but not limited to internal models based on a fundamental analysis of the market and extrapolation of observable market data with similar characteristics.  Based on these valuation techniques, as of March 31, 2011, credit risk exposure to these counterparties is approximately $700 million for the next five years.  This amount excludes potential credit exposure for projects with long term PPAs that have not reached commercial operations.  Many of these power contracts are with utilities or public power entities that have strong credit quality and specific public utility commission or other regulatory support.  In the case of the coal supply agreement, NRG holds a lien against the underlying asset.  These factors significantly reduce the risk of loss.

 

Retail Customer Credit Risk

 

NRG is exposed to credit risk through the Company’s competitive electricity supply business, which serves retail customers.  Retail credit risk results when a customer fails to pay for services rendered.  The losses may result from both nonpayment of customer accounts receivable and the loss of in-the-money forward value.  NRG manages retail credit risk through the use of established credit policies that include monitoring of the portfolio, and the use of credit mitigation measures such as deposits or prepayment arrangements.

 

As of March 31, 2011, the Company’s retail customer credit exposure to C&I customers was diversified across many customers and various industries, with a significant portion of the exposure with government entities.

 

17



Table of Contents

 

NRG is also exposed to retail customer credit risk relating to its Mass customers, which may result in a write-off of bad debt.  During 2011, the Company continued to experience improved customer payment behavior, but current economic conditions may affect the ability of the Company’s customers to pay bills in a timely manner, which could increase customer delinquencies and may lead to an increase in bad debt expense.

 

This footnote should be read in conjunction with the complete description under Note 5, Fair Value of Financial Instruments, to the Company’s 2010 Form 10-K.

 

Note 7 — Nuclear Decommissioning Trust Fund

 

NRG’s nuclear decommissioning trust fund assets, which are for the decommissioning of STP 1 & 2, are comprised of securities classified as available-for-sale and recorded at fair value based on actively quoted market prices.  NRG accounts for the nuclear decommissioning trust fund in accordance with ASC-980, Regulated Operations, or ASC 980.  Since the Company is in compliance with PUCT rules and regulations regarding decommissioning trusts and the cost of decommissioning is the responsibility of the Texas ratepayers, not NRG, all realized and unrealized gains or losses (including other-than-temporary impairments) related to the Nuclear Decommissioning Trust Fund are recorded to the Nuclear Decommissioning Trust Liability to the ratepayers and are not included in net income or accumulated other comprehensive income, consistent with regulatory treatment.

 

The following table summarizes the aggregate fair values and unrealized gains and losses (including other-than-temporary impairments) for the securities held in the trust funds, as well as information about the contractual maturities of those securities. The cost of securities sold is determined on the specific identification method.

 

 

 

As of March 31, 2011

 

As of December 31, 2010

(In millions, except otherwise noted)

 

Fair
Value

 

Unrealized
gains

 

Unrealized
losses

 

Weighted-
average
maturities
(in years)

 

Fair
Value

 

Unrealized
gains

 

Unrealized
losses

 

Weighted-
average
maturities
(in years)

 

Cash and cash equivalents

 

$

4

 

$

 

$

 

 

$

9

 

$

 

$

 

 

U.S. government and federal agency obligations

 

29

 

1

 

 

9

 

25

 

1

 

 

9

 

Federal agency mortgage-backed securities

 

61

 

2

 

 

23

 

57

 

2

 

 

24

 

Commercial mortgage-backed securities

 

12

 

 

 

29

 

11

 

 

 

29

 

Corporate debt securities

 

54

 

2

 

1

 

11

 

56

 

3

 

1

 

10

 

Marketable equity securities

 

267

 

130

 

1

 

 

252

 

117

 

1

 

 

Foreign government fixed income securities

 

1

 

 

 

15

 

2

 

 

 

8

 

Total

 

$

428

 

$

135

 

$

2

 

 

 

$

412

 

$

123

 

$

2

 

 

 

 

The following tables summarize proceeds from sales of available-for-sale securities and the related realized gains and losses from these sales. The cost of securities sold is determined on the specific identification method.

 

 

 

Three months ended March 31,

 

(In millions)

 

2011

 

2010

 

Realized gains

 

$

2

 

$

1

 

Realized losses

 

2

 

1

 

Proceeds from sale of securities

 

95

 

67

 

 

18



Table of Contents

 

Note 8 — Accounting for Derivative Instruments and Hedging Activities

 

This footnote should be read in conjunction with the complete description under Note 6, Accounting for Derivative Instruments and Hedging Activities, to the Company’s 2010 Form 10-K.

 

Energy-Related Commodities

 

As of March 31, 2011, NRG had energy-related derivative financial instruments extending through April 2013, which are designated as cash flow hedges.

 

Interest Rate Swaps

 

NRG is exposed to changes in interest rates through the Company’s issuance of variable and fixed rate debt. In order to manage the Company’s interest rate risk, NRG enters into interest rate swap agreements.  As of March 31, 2011, NRG had interest rate derivative instruments on recourse debt extending through 2013 and on non-recourse debt extending through 2028, the majority of which are designated as cash flow hedges.

 

Volumetric Underlying Derivative Transactions

 

The following table summarizes the net notional volume buy/(sell) of NRG’s open derivative transactions broken out by commodity, excluding those derivatives that qualified for the NPNS exception as of March 31, 2011, and December 31, 2010. Option contracts are reflected using delta volume. Delta volume equals the notional volume of an option adjusted for the probability that the option will be in-the-money at its expiration date.

 

 

 

 

 

 

 

Total Volume

 

 

 

 

 

 

 

March 31,
2011

 

December 31,
2010

 

Commodity

 

Units

 

 

 

(In millions)

 

Coal

 

Short Ton

 

 

 

29

 

34

 

Natural Gas

 

MMBtu

 

 

 

(117

)

(175

)

Oil

 

Barrel

 

 

 

1

 

1

 

Power

 

MWh

 

 

 

10

 

5

 

Capacity

 

MW/Day

 

 

 

 

(1

)

Interest

 

Dollars

 

 

 

$

1,232

 

$

2,782

 

 

19



Table of Contents

 

Fair Value of Derivative Instruments

 

The following table summarizes the fair value within the derivative instrument valuation on the balance sheet:

 

 

 

Fair Value

 

 

 

Derivative Assets

 

Derivative Liabilities

 

(In millions)

 

March 31,
2011

 

December 31,
2010

 

March 31,
2011

 

December 31,
2010

 

Derivatives Designated as Cash Flow or Fair Value Hedges:

 

 

 

 

 

 

 

 

 

Interest rate contracts current

 

$

 

$

 

$

 

$

17

 

Interest rate contracts long-term

 

 

 

67

 

71

 

Commodity contracts current

 

347

 

392

 

10

 

2

 

Commodity contracts long-term

 

164

 

217

 

2

 

 

Total Derivatives Designated as Cash Flow or Fair Value Hedges

 

511

 

609

 

79

 

90

 

Derivatives Not Designated as Cash Flow or Fair Value Hedges:

 

 

 

 

 

 

 

 

 

Commodity contracts current

 

1,427

 

1,572

 

1,401

 

1,666

 

Commodity contracts long-term

 

510

 

541

 

266

 

294

 

Total Derivatives Not Designated as Cash Flow or Fair Value Hedges

 

1,937

 

2,113

 

1,667

 

1,960

 

Total Derivatives

 

$

2,448

 

$

2,722

 

$

1,746

 

$

2,050

 

 

Accumulated Other Comprehensive Income

 

The following table summarizes the effects of ASC 815 on NRG’s accumulated OCI balance attributable to cash flow hedge derivatives, net of tax:

 

 

 

Three months ended March 31,

 

 

 

2011

 

2010

 

(In millions)

 

Energy
Commodities

 

Interest
Rate

 

Total

 

Energy
Commodities

 

Interest
Rate

 

Total

 

Accumulated OCI beginning balance

 

$

488

 

$

(47

)

$

441

 

$

461

 

$

(55

)

$

406

 

Reclassified from accumulated OCI to income:

 

 

 

 

 

 

 

 

 

 

 

 

 

- Due to realization of previously deferred amounts

 

(98

)

11

 

(87

)

(106

)

2

 

(104

)

Mark-to-market of cash flow hedge accounting contracts

 

2

 

3

 

5

 

364

 

(3

)

361

 

Accumulated OCI ending balance, net of $220 and $398 tax, respectively

 

$

392

 

$

(33

)

$

359

 

$

719

 

$

(56

)

$

663

 

Gains/(losses) expected to be realized from OCI during the next 12 months, net of $154 and $228 tax, respectively

 

$

265

 

$

(2

)

$

263

 

$

432

 

$

(43

)

$

389

 

Gains/(losses) recognized in income from the ineffective portion of cash flow hedges

 

$

3

 

$

(1

)

$

2

 

$

(2

)

$

 

$

(2

)

 

Amounts reclassified from accumulated OCI into income and amounts recognized in income from the ineffective portion of cash flow hedges are recorded to operating revenue for commodity contracts and interest expense for interest rate contracts.

 

The following table summarizes the amount of gain/(loss) resulting from fair value hedges reflected in interest income/(expense) for interest rate contracts:

 

 

 

Three months ended March 31,

 

(In millions)

 

2011

 

2010

 

Derivative

 

$

 

$

3

 

Senior Notes (hedged item)

 

 

(3

)

 

20



Table of Contents

 

Impact of Derivative Instruments on the Statement of Operations

 

In accordance with ASC 815, unrealized gains and losses associated with changes in the fair value of derivative instruments not accounted for as cash flow hedge derivatives and ineffectiveness of hedge derivatives are reflected in current period earnings.

 

The following table summarizes the pre-tax effects of economic hedges that did not qualify for cash flow hedge accounting, ineffectiveness on cash flow hedges, and trading activity on NRG’s statement of operations. These gains/(losses) are included within operating revenues and cost of operations.

 

 

 

Three months ended March 31,

 

(In millions)

 

2011

 

2010

 

Unrealized mark-to-market results

 

 

 

 

 

Reversal of previously recognized unrealized gains on settled positions related to economic hedges

 

$

(2

)

$

(40

)

Reversal of loss positions acquired as part of the Reliant Energy acquisition as of May 1, 2009

 

28

 

90

 

Reversal of loss positions acquired as part of the Green Mountain Energy acquisition as of November 5, 2010

 

13

 

 

Reversal of previously recognized unrealized losses on settled positions related to trading activity

 

14

 

18

 

Net unrealized gains/(losses) on open positions related to economic hedges

 

91

 

(118

)

Gains/(losses) on ineffectiveness associated with open positions treated as cash flow hedges

 

3

 

(2

)

Net unrealized gains on open positions related to trading activity

 

 

14

 

Total unrealized gains/(losses)

 

$

147

 

$

(38

)

 

 

 

Three months ended March 31,

 

(In millions)

 

2011

 

2010

 

Revenue from operations - energy commodities

 

$

13

 

$

69

 

Cost of operations

 

134

 

(107

)

Total impact to statement of operations

 

$

147

 

$

(38

)

 

Reliant Energy’s loss positions were acquired as of May 1, 2009, and valued using forward prices on that date.  Green Mountain Energy’s loss positions were acquired as of November 5, 2010, and valued using forward prices on that date.  The roll-off amounts were offset by realized losses at the settled prices and are reflected in the cost of operations during the same period.

 

For the three months ended March 31, 2011, the unrealized gain from open economic hedge positions is the result of an increase in value of forward purchases and sales of natural gas, electricity and fuel due to an increase in forward power and gas prices.

 

For the three months ended March 31, 2010, the unrealized loss from open economic hedge positions is the result of a decrease in value of forward purchases and sales of natural gas, electricity and fuel due to a decrease in forward power and gas prices.

 

Credit Risk Related Contingent Features

 

Certain of the Company’s hedging agreements contain provisions that require the Company to post additional collateral if the counterparty determines that there has been deterioration in credit quality, generally termed “adequate assurance” under the agreements, or require the Company to post additional collateral if there were a one notch downgrade in the Company’s credit rating.  The collateral required for contracts that have adequate assurance clauses that are in a net liability position as of March 31, 2011, was $59 million.  The collateral required for contracts with credit rating contingent features was $18 million.  The Company is also a party to certain marginable agreements where NRG has a net liability position, but the counterparty has not called for the collateral due, which was approximately $5 million as of March 31, 2011.

 

See Note 6, Fair Value of Financial Instruments, to this Form 10-Q for discussion regarding concentration of credit risk.

 

21



Table of Contents

 

Note 9 — Long-Term Debt

 

Prepayment on Senior Credit Facility

 

In March 2011, NRG made a repayment of approximately $149 million to its first lien lenders under the Term Loan Facility.  This payment resulted from the mandatory annual offer of a portion of NRG’s excess cash flow (as defined in the Senior Credit Facility) for 2010.

 

Redemption of 2014 Senior Notes

 

On January 11, 2011, the Company announced a tender offer on the 2014 Senior Notes and on January 26, 2011, the Company redeemed $945 million of the 2014 Senior Notes at an early redemption percentage of 102.063%.  An additional $2 million was tendered at a redemption percentage of 100.063% and the remaining $253 million of 2014 Senior Notes was called on February 25, 2011 at a redemption percentage of 101.813%.  A $28 million loss on the extinguishment of the 2014 Senior Notes was recorded during the three months ended March 31, 2011, which primarily consisted of the premiums paid on the redemption and the write-off of previously deferred financing costs.

 

Issuance of 2018 Senior Notes

 

On January 26, 2011, NRG issued $1.2 billion aggregate principal amount at par of 7.625% Senior Notes due 2018, or 2018 Senior Notes.  The 2018 Senior Notes were issued under an Indenture, dated February 2, 2006, between NRG and Law Debenture Trust Company of New York, as trustee, as amended through a Supplemental Indenture, which is discussed in Note 12 — Debt and Capital Leases, in the Company’s 2010 Form 10-K.  The Indenture and the form of the note provide, among other things, that the 2018 Senior Notes will be senior unsecured obligations of NRG.

 

The net proceeds were used primarily to complete the tender offer of the 2014 Senior Notes.  Interest is payable semi-annually beginning on July 15, 2011, until their maturity date of January 15, 2018.  As of March 31, 2011, $1.2 billion in principal was outstanding under the 2018 Senior Notes.

 

Prior to maturity, NRG may redeem all or a portion of the 2018 Senior Notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus a premium and accrued and unpaid interest.  The premium is the greater of (i) 1% of the principal amount of the note or (ii) the excess of the present value of the principal amount at maturity plus all required interest payments due on the note through the maturity date discounted at a Treasury rate plus 0.50%.

 

Indian River Power LLC Tax-Exempt Bonds

 

During the first quarter 2011, the Company received $29 million in additional proceeds from the Delaware Economic Development Authority tax-exempt bond financing, and $37 million in additional proceeds related to the Sussex County, Delaware tax-exempt bond financing, bringing the total proceeds received on these bonds to $133 million as of March 31, 2011.

 

22


 


Table of Contents

 

Note 10 — Variable Interest Entities, or VIEs

 

NRG has interests in entities that are considered Variable Interest Entities, or VIEs, under ASC 810, but NRG is not considered the primary beneficiary.  NRG accounts for its interests in these entities under the equity method of accounting.

 

Sherbino I Wind Farm LLC — NRG owns a 50% interest in Sherbino, a joint venture with BP Wind Energy North America Inc.  NRG’s maximum exposure to loss is limited to its equity investment, which was $92 million as of March 31, 2011.

 

GenConn Energy LLC — Through its subsidiary, NRG Connecticut Peaking, NRG owns a 50% interest in GenConn, a limited liability company formed to construct, own and operate two, 200 MW peaking generation facilities in Connecticut at NRG’s Devon and Middletown sites.  The GenConn Devon facility reached commercial operation in 2010.  The Middletown project is in the advanced stages of construction, with a target commercial operation date of June 2011.

 

NRG Connecticut Peaking had a note receivable due from GenConn for $63 million as of March 31, 2011 as discussed in Note 9, Capital Leases and Notes Receivable to the Company’s 2010 Form 10-K.  As of March 31, 2011, NRG had a $65 million equity investment in GenConn.  NRG’s maximum exposure to loss is limited to its equity investment and note receivable.

 

Note 11 — Changes in Capital Structure

 

As of March 31, 2011, and December 31, 2010, the Company had 500,000,000 shares of common stock authorized.  The following table reflects the changes in NRG’s common shares issued and outstanding:

 

 

 

Issued

 

Treasury

 

Outstanding

 

Balance as of December 31, 2010

 

304,006,027

 

(56,808,672

)

247,197,355

 

Shares issued under LTIP

 

55,496

 

 

55,496

 

Shares issued under ESPP

 

 

65,717

 

65,717

 

Balance as of March 31, 2011

 

304,061,523

 

(56,742,955

)

247,318,568

 

 

2011 Capital Allocation Plan

 

As part of the Company’s 2011 Capital Allocation Plan, the Company entered into an accelerated share repurchase agreement, or ASR Agreement, with a financial institution to repurchase a total of $130 million of NRG common stock, based on a volume weighted average price less a specified discount.  On February 25, 2011, the Company remitted $130 million to the financial institution.  The ASR Agreement was accounted for as a forward contract indexed to the Company’s own stock and recorded as treasury stock on February 25, 2011.  The share repurchases under the ASR Agreement were completed on April 29, 2011, and the Company received 6,229,574 shares of NRG common stock.

 

23



Table of Contents

 

Note 12 — (Loss)/Earnings Per Share

 

Basic (loss)/earnings per common share is computed by dividing net (loss)/income less accumulated preferred stock dividends by the weighted average number of common shares outstanding.  Shares issued and treasury shares repurchased during the year are weighted for the portion of the year that they were outstanding.  Diluted (loss)/earnings per share is computed in a manner consistent with that of basic (loss)/earnings per share while giving effect to all potentially dilutive common shares that were outstanding during the period.  Shares borrowed under the Share Lending Agreement (see Note 15, Capital Structure — Share Lending Agreements in the Company’s Form 2010 10-K) were not treated as outstanding for earnings per share purposes.

 

The reconciliation of NRG’s basic (loss)/earnings per share to diluted (loss)/earnings per share is shown in the following table:

 

 

 

Three months ended March 31,

 

(In millions, except per share data)

 

2011

 

2010

 

Basic (loss)/earnings per share attributable to NRG common stockholders

 

 

 

 

 

Numerator:

 

 

 

 

 

Net (loss)/income attributable to NRG Energy, Inc.

 

$

(260

)

$

58

 

Preferred stock dividends

 

(2

)

(2

)

Net (loss)/income attributable to NRG Energy, Inc. available to common stockholders

 

$

(262

)

$

56

 

Denominator:

 

 

 

 

 

Weighted average number of common shares outstanding

 

247

 

254

 

Basic (loss)/earnings per share:

 

 

 

 

 

Net (loss)/income attributable to NRG Energy, Inc.

 

$

(1.06

)

$

0.22

 

Diluted (loss)/earnings per share attributable to NRG common stockholders

 

 

 

 

 

Numerator:

 

 

 

 

 

Net (loss)/income attributable to NRG Energy, Inc. available to common stockholders

 

$

(262

)

$

56

 

Denominator:

 

 

 

 

 

Weighted average number of common shares outstanding

 

247

 

254

 

Incremental shares attributable to the issuance of equity compensation (treasury stock method)

 

 

1

 

Incremental shares attributable to assumed conversion features of outstanding preferred stock
(if-converted method)

 

 

2

 

Total dilutive shares

 

247

 

257

 

Diluted (loss)/earnings per share:

 

 

 

 

 

Net (loss)/income attributable to NRG Energy, Inc.

 

$

(1.06

)

$

0.22

 

 

The following table summarizes NRG’s outstanding equity instruments that are anti-dilutive and were not included in the computation of the Company’s diluted (loss)/earnings per share:

 

 

 

Three months ended March 31,

 

(In millions of shares)

 

2011

 

2010

 

Equity compensation — NQSOs and PUs

 

7

 

6

 

Embedded derivative of 3.625% redeemable perpetual preferred stock

 

16

 

16

 

Total

 

23

 

22

 

 

24



Table of Contents

 

Note 13 — Segment Reporting

 

NRG’s segment structure reflects core areas of operation which are primarily segregated based on the Company’s wholesale power generation, retail, thermal and chilled water business, and corporate activities. Within NRG’s wholesale power generation operations, there are distinct components with separate operating results and management structures for the following geographical regions: Texas, Northeast, South Central, West and International. The Company’s corporate activities include solar, wind and nuclear development, as well as Green Mountain Energy. Intersegment supply sales between Texas, Reliant Energy and Green Mountain Energy are accounted for at market.

 

(In millions)

 

 

 

Wholesale Power Generation

 

 

 

 

 

 

 

 

 

Three months ended
March 31, 2011

 

Reliant
Energy

 

Texas (a)

 

Northeast

 

South
Central

 

West

 

International

 

Thermal

 

Corporate (b) (c)

 

Elimination

 

Total

 

Operating revenues

 

$

1,005

 

$

531

 

$

226

 

$

189

 

$

42

 

$

35

 

$

40

 

$

122

 

$

(195

)

$

1,995

 

Depreciation and amortization

 

24

 

122

 

29

 

20

 

3

 

 

3

 

4

 

 

205

 

Equity in (losses)/earnings of unconsolidated affiliates

 

 

(8

)

2

 

 

 

4

 

 

 

 

(2

)

Income/(loss) before income taxes

 

272

 

7

 

(32

)

14

 

13

 

10

 

5

 

(654

)

 

(365

)

Net income/(loss) attributable
to
NRG Energy, Inc.

 

$

272

 

$

7

 

$

(32

)

$

14

 

$

13

 

$

8

 

$

5

 

$

(547

)

$

 

$

(260

)

Total assets

 

$

1,484

 

$

12,942

 

$

1,904

 

$

1,309

 

$

530

 

$

779

 

$

333

 

$

19,340

 

$

(13,578

)

$

25,043

 

 

(a) Includes inter-segment sales of $168 million to Reliant Energy and $25 million to Green Mountain Energy.

(b) Includes Green Mountain Energy results.

(c) Includes an impairment charge on investment of $481 million.

 

(In millions)

 

 

 

Wholesale Power Generation

 

 

 

 

 

 

 

 

 

Three months ended
March 31, 2010

 

Reliant
Energy

 

Texas (d)

 

Northeast

 

South
Central

 

West

 

International

 

Thermal

 

Corporate

 

Elimination

 

Total

 

Operating revenues

 

$

1,176

 

$

870

 

$

279

 

$

143

 

$

35

 

$

35

 

$

36

 

$

2

 

$

(361

)

$

2,215

 

Depreciation and amortization

 

30

 

117

 

32

 

16

 

3

 

 

2

 

2

 

 

202

 

Equity in earnings of unconsolidated affiliates

 

 

10

 

 

 

 

4