01—Abstract
Summary
Summary of the 10-K filed March 7, 2006. Cited figures are marked; the original filing is the authoritative source.
NRG Energy, Inc. reported 2005 results in its 10-K filed March 7, 2006, a year in which revenues from majority-owned operations rose to $2,708 milliona from $2,348 million, while net income fell to $84 million from $186 million.
Operating income was $238 millionb versus $393 million in 2004, and the filing attributes the decline largely to $119 million of net mark-to-market losses in the Northeast region tied to forward electricity sales, partly offset by higher power prices and stronger generation from New York City gas and Connecticut oil assets. Income from continuing operations was $77 million, or $0.66 per diluted share, compared with $161 million and $1.60 a year earlier. Cash flow from operations fell to $68 million from $645 million, mainly because of $405 million of collateral deposits supporting hedging activities.
The filing's most important subject is the February 2, 2006 acquisition of Texas Genco LLC, for a purchase price of approximately $6.1 billionc (about $4.4 billion in cash plus roughly 35.4 million NRG shares valued at $1.7 billion), with approximately $2.7 billion of Texas Genco debt assumed. Texas Genco becomes the NRG Texas segment and owns approximately 11,000 MW of ERCOT generation. To finance the deal, NRG entered into a $5.575 billion New Senior Credit Facility, issued $3.6 billion of 7.25% and 7.375% senior notes, sold 2 million shares of 5.75% mandatory convertible preferred stock, and issued 20,855,057 common shares at $48.75 per share.
The filing notes that the company expects the net effect in 2006 to be positive for results and earnings per share, though it also acknowledges that the larger share count will dilute future earnings per share. Investors should also weigh the company's stated risks: a large merchant exposure, a South Central cooperative contract structure that leaves NRG purchasing power at times of peak demand, significant pending environmental capital spending (including about $540 milliond for CAMR and CAIR compliance between 2009 and 2012), and ongoing California and other litigation. The company reported no dividends on common stock, with dividend capacity limited by its credit agreement and note indentures.
02—Key points
Key Highlights
- Revenues from majority-owned operations of $2,708 million in 2005, up from $2,348 million in 2004; net income of $84 million versus $186 million.
- Net income available to common stockholders of $64 million, or $0.75 diluted EPS, versus $1.85 diluted EPS in 2004 (after $20 million of preference stock dividends).
- Northeast operating income of $218 million, down from $318 million, reflecting $119 million of net mark-to-market losses on forward electricity sales.
- Texas Genco acquisition closed February 2, 2006 for approximately $6.1 billion, adding about 11,000 MW of ERCOT generation as the NRG Texas segment.
- Financing for the acquisition included a $5.575 billion New Senior Credit Facility, $3.6 billion of senior notes, $485 million of 5.75% mandatory convertible preferred stock and $985 million of common stock.
- Cash provided by operating activities fell to $68 million from $645 million, largely due to $405 million of collateral deposits supporting hedging activities.
- No dividends declared or paid on common stock; dividend capacity is limited by senior secured credit agreements and high yield note indentures.
03—Questions
Frequently Asked Questions
Why did net income decline in 2005 despite higher revenues?
Revenues rose to $2,708 million from $2,348 million, but operating income fell to $238 million from $393 million. The filing attributes the decline mainly to derivative losses on forward electricity sales in the Northeast, which produced $143 million of mark-to-market losses. Cost of majority-owned operations rose to $2,067 million from $1,489 million, with the increase largely driven by higher energy costs.
What did NRG acquire in 2006 and how was it paid for?
On February 2, 2006, NRG acquired Texas Genco LLC for a purchase price of approximately $6.1 billion, consisting of about $4.4 billion in cash and roughly 35.4 million NRG common shares valued at $1.7 billion. NRG also assumed about $2.7 billion of Texas Genco debt. The cash portion was funded through new debt, equity offerings, and cash on hand.
How much debt and equity financing did NRG arrange to fund the Texas Genco deal?
The financing included a $3.575 billion term loan, a $1.0 billion revolving credit facility and a $1.0 billion synthetic letter of credit facility under a $5.575 billion New Senior Credit Facility. NRG also sold $1.2 billion of 7.25% senior notes due 2014 and $2.4 billion of 7.375% senior notes due 2016, issued 2 million shares of 5.75% mandatory convertible preferred stock, and sold 20,855,057 common shares at $48.75 per share.
What does management expect the acquisition to mean for 2006 results?
The filing states that NRG anticipates the net effect in 2006 will be positive to future results of operations and earnings per share. It also notes that the issuance of about 35 million shares to the sellers and about 21 million shares to the public will dilute future earnings per share, and that increased interest expense from the higher debt level will partially offset the added profit from the new NRG Texas segment.
What are the main risks highlighted in the filing?
Key risks include a large share of merchant generation without long-term power sales agreements, exposure to volatile wholesale power and fuel prices, and collateral demands from counterparties. The filing also highlights obligations to serve rural cooperatives in South Central at prices that may not cover purchased power costs, environmental capital needs including about $540 million for CAMR and CAIR compliance during 2009-2012, and pending or ongoing litigation, including California electricity-related lawsuits.
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