Nuclear Power Industry News

Adjusted EBITDA, excluding MtM impacts, was a record of $906 million for the third quarter of 2009 compared to $682 million in the third quarter of 2008

 - By April Murelio -

NRG Energy, Inc. has reported net income for the three months ended September 30, 2009, of $278 million, or $1.02 per diluted common share, compared to $778 million, or $2.81 per diluted common share, for the third quarter last year. The current quarter benefited from Reliant Energy’s results which contributed $393 million in pre-tax income, while the third quarter results in 2008 benefited from $824 million of pre-tax net mark-to-market gains on asset-backed hedges. Non-recurring operating expenses for the third quarter of 2009 included $21 million for Exelon defense costs and $6 million of transaction and integration costs associated with the Company’s acquisition of Reliant Energy. Adjusted EBITDA, excluding MtM impacts, was a record of $906 million for the third quarter of 2009 compared to $682 million in the third quarter of 2008. The $224 million quarter-over-quarter increase was driven by Reliant Energy’s adjusted EBITDA contribution of $306 million partially offset by an $82 million decrease in the wholesale portfolio results.

Net income for the first nine months of 2009 was $909 million, or $3.29 per diluted common share, compared to $954 million, or $3.41 per diluted common share, for the same period last year. Non-recurring operating expenses for the first nine months of 2009 included $31 million of Exelon defense costs and $41 million of transaction and integration costs associated with the Company’s acquisition of Reliant Energy on May 1, 2009. Adjusted EBITDA for the first nine months of 2009 was a record $2,129 million compared to $1,889 million over the same period in 2008. This $240 million increase was driven by Retail Energy’s contribution of $536 million offset by a $296 million decline in the performance of the wholesale portfolio, primarily in the Texas and South Central regions.

Cash flow from operations was $1,280 million for the nine months ended September 30, 2009, a $194 million increase from the same period in 2008. This increase was attributable to the financial performance from Reliant Energy. Cash flow also benefited from first quarter collateral returns partially offset by collateral posting obligations under the Merrill Lynch Credit Sleeve. In addition, pension contributions were $35 million lower mainly due to a prepayment in 2008 related to 2009 contributions.

Total generation declined 8% in the third quarter of 2009 compared to 2008, which included a 13% decline in baseload generation. Lower baseload generation attributable to market factors, particularly in the Northeast, had minimal financial impact on the quarter as the portfolio had been fully hedged. Maintenance and unplanned outages during the quarter, primarily in Texas, contributed to the lower generation and impacted the quarter’s results. This decrease also was partially offset by a 47% increase in gas fleet generation in Texas primarily due to the newly constructed Cedar Bayou Unit 4 plant.

“NRG’s record financial performance has been achieved in the most challenging commodity price and economic environment NRG has ever experienced. Our ability to operate and hedge our generation assets coupled with our financial strength and ability to respond quickly to market opportunities such as the Reliant acquisition sets us apart,” commented David Crane, NRG President and Chief Executive Officer. “As we look forward, while the commodity price environment remains challenging in 2010, the opportunities in our sector to enhance shareholder value for a Company in NRG’s strong position are immense through our various internal growth opportunities already underway. We are working hard to repeat the success of 2009 in 2010.”

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 and the MtM change in value of these transactions is recorded to current period earnings. For the third quarter of 2009, we recorded a $16 million forward net MtM gain on our economic hedges, as reversals of previously unrecognized gains and positions acquired as part of the Reliant acquisition offset the net unrealized losses on open positions related to economic hedges. In the third quarter of 2008, there were $824 million net MtM gains on our economic hedges caused by a period of rapidly decreasing power and natural gas prices, including $479 million of unrealized gains on open positions related to economic hedges and $352 million of gains associated with ineffectiveness of cash flow hedges.

During the first nine months of 2009, the Company recognized $502 million of net MtM gains with $448 million associated with the reversal of positions acquired as part of the Reliant acquisition. The same period during 2008 experienced $112 million in net MtM gains, of which $171 million of gains on open positions related to economic hedges.

Reliant Energy: Reliant Energy’s adjusted EBITDA for the quarter totaled $306 million due to strong margins accompanied by high customer usage from warmer than normal weather, slightly offset by a decrease in customer count. Reliant announced and enacted price reductions effective June 1 and July 1, 2009, which cumulatively lowered prices by up to 20% for certain customers. Despite higher weather-related demand, power purchase costs remained low during the quarter, thereby enabling higher customer margins. Total revenues for the quarter, excluding contract amortization and unrealized gains and losses, were $1,876 million on 16 TWh sold to both Commercial and Industrial and Mass customers. Cost of energy, excluding contract amortization and unrealized gains and losses on derivative contracts for energy supply, totaled $1,433 million, resulting in a gross margin of $443 million. Other operating expenses incurred during the quarter totaled $136 million and included $37 million of expenses associated with the call center and billing, credit, and collections; $48 million of selling, general and administrative expense; $24 million of gross receipts tax; and $28 million of bad debt expense.

Texas: Texas adjusted EBITDA for the third quarter of 2009 decreased by $61 million to $404 million compared to the third quarter of 2008. During the quarter, power prices in the Houston Zone, where the majority of our assets are located, were less than half those in the same quarter of 2008. Although NRG’s hedging program insulated the region’s baseload fleet from these significant price movements, the margins realized on our gas assets in 2008 were not repeated in 2009 despite higher generation. The combined impact of lower power prices and fuel costs resulted in $63 million of lower quarter-over-quarter energy margins. Baseload generation declined compared to 2008 due to maintenance and unplanned outages. Generation from the gas fleet increased quarter-over-quarter with Cedar Bayou Unit 4, which came on line in late June of this year, contributing 454k MWh of generation in addition to strong operating performance from the remainder of the gas fleet. Operating costs increased quarter-over-quarter by $10 million, including a $4 million increase at STP largely due to a Unit 2 outage in September 2009 and higher O&M costs at our WA Parish and Limestone plants.

Northeast: The Northeast region’s adjusted EBITDA for the third quarter of 2009 was $168 million, a $27 million increase compared to the same quarter in 2008. Energy margins were $36 million higher in 2009 as the contributions realized from our hedging program and contract revenue more than offset lower market prices and reduced generation. Generation in the third quarter of 2009 was 30% lower than 2008 resulting in a $45 million energy margin decrease. This decrease was offset by $18 million in higher contract revenues due to lower cost to serve load obligations and a $63 million increase in realized margin per MWh due to portfolio hedging.

South Central: Third quarter 2009 adjusted EBITDA was $4 million, $43 million lower than the same period in 2008. The decline in adjusted EBITDA was largely driven by unrealized gains in 2008 related to forward physical power sales that were delivered in 2009. The region’s quarterly results were also impacted by higher operating expenses as additional plant maintenance was performed, including a 28 day outage on Big Cajun Unit 1 versus a 21 day outage on Unit 2 in the prior period.

Total liquidity, excluding counterparty collateral received, decreased $90 million to $3.9 billion during the third quarter driven by a $32 million decrease in cash and cash equivalents and a $65 million reduction in synthetic and revolver credit facilities. The decrease in cash and cash equivalents during the quarter was principally driven by $186 million in capital expenditures, $232 million in cash collateral sweeps to reduce Reliant Energy’s exposure with Merrill Lynch, and $250 million of common share repurchases. These cash outflows were partially offset by $558 million in cash flow from operations. The decrease in letters of credit and revolver credit facilities were primarily in support of commercial operations trade positions.

2009 Share Repurchase Plan

During the third quarter of 2009, the Company purchased 8,919,100 of its common shares in open market transactions at a volume weighted average cost of $28.01 per share, for a total of $250 million. Currently, the Company is authorized to repurchase up to $500 million of its common shares and intends to complete the remaining $250 million of repurchases during the fourth quarter of 2009. The Company has repurchased an aggregate of $2.2 billion of its common shares at a weighted average cost of $23.91 per share since embarking on common share repurchases in December 2004.

Credit Sleeve Unwound One Year Early

On October 5, 2009, the Company amended the Credit Sleeve and Reimbursement Agreement (CSRA) with Merrill Lynch that provided credit support to Reliant Energy’s operations. As a result of this amendment, the Reliant Energy retail entities became part of the corporate collateral package and its credit support needs are now provided by the Company’s corporate level liquidity. In connection with the credit sleeve unwind, NRG had a net cash collateral outflow of $374 million to various counterparties with the funds sourced from the June 5, 2009, bond offering that raised approximately $678 million in net proceeds. Simultaneously, Merrill Lynch terminated their liens on approximately $322 million of unrestricted cash held at Reliant Energy, and returned $250 million of posted cash collateral. The CSRA was originally scheduled to mature in October 2010.

Outlook for 2009

Full year 2009 Adjusted EBITDA guidance is estimated to be $2,575 million for the year, a $75 million increase from the guidance issued on July 30, 2009. This increase in guidance is attributable to a $225 million improvement in the Reliant Energy outlook driven by higher than expected summer demand and margins, partially offset by a $150 million decline in the wholesale portfolio as a result of a weak commodity pricing environment and higher operating costs.

In addition to the above, and in connection with the early unwind of the Merrill Lynch Credit Sleeve, certain economic hedges were terminated in the fourth quarter of 2009 prior to their normal maturity. This early settlement resulted in a realized $85 million mark-to-market loss to 2009 results. These charges are expected to be recorded in the fourth quarter 2009 results.

Outlook for 2010

NRG is initiating 2010 Adjusted EBITDA and Cash Flow from Operations guidance at $2,200 million and $1,350 million, respectively. The outlook for the wholesale operations is a result of lower hedged prices on the overall portfolio in 2010 compared to 2009 and increased coal transportation costs in 2010. Reliant Energy’s outlook for 2010 will be lower than 2009 results due to lower margins as a result of the two price reductions that occurred in the summer of 2009, increased supply costs as gas prices are expected to be higher in 2010 versus 2009, and normalized weather conditions.