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WIKI ANALYSIS
NRG Energy (NYSE: NRG) is an independent power producer with generation operations in three countries. The company engages in the ownership, development, construction and operation of power generation facilities; the trading fuel and transportation services; trading of energy related products; and the supply of electricity to retail electricity customers in deregulated markets through its retail subsidiaries Reliant Energy and Green Mountain Energy. A majority of the company's revenues come from North America. As an energy producer, the company's earnings are susceptible to commodity prices and electricity demand.
Business Growth
The company earned $477 million on 2010 revenues of $8.84 billion, compared to $942 million on 2009 revenues of $8.95 billion. Contributing factors to the decline in net income are the sustained drop in natural gas prices and overall electricity demand. Also as a result of low gas prices, some of NRG's hedging positions that have hurt margins. NRG has acquired several companies in the renewable energy industry, which have the potential providing sources of future growth and of diversifying operations away from natural gas dependence.
Trends and Forces
Operations Are Tied Directly to Fuel Prices
NRG Energy's operations benefit from low, stable fuel prices (coal, oil, natural gas, nuclear fuel).[1] Because NRG's power station portfolio possess a fleet of diverse fuel sources,[2] price fluctuations in one of any of the above fuels affects NRG operating costs. Some specific trends to track include rising coal prices,[3] and rising oil prices.
To offset volatile natural gas prices and declines in electricity demand, NRG has several hedge positions on commodity prices.[4] When commodity prices fell rapidly in 2008, NRG reported record earnings partially as a result of their hedges.[5] However, these hedges have the potential of straining cash flows when commodity prices remain stable at historical lows.[6]
Additionally, NRG has acquired several renewable energy companies.[7] By diversify its operations, NRG's revenues become less dependent on commodity prices.[8]
Governmental Regulation Incurs Costs and Affects Revenue
Base rates on long-term electricity sales contracts directly impact NRG Energy's revenue.[9] The company's ability to maximize sale prices on contracts especially in California, Texas, and New England depends on local government demand and negotiation for the company's electricity.[10] NRG's competitiveness in these areas of high population density rests in its ability to sustain efficient, consistent operations relative to other area electric utilities.[11]
Additionally, environmental restrictions affect several aspects of NRG's (and the rest of the industry's) operations.[12] Regulation on coal, oil, and natural gas production and sales raises fuel prices.[13]Carbon emission regulation raises NRG's operating costs by forcing expenditures to clean up fossil fuel emissions from coal and oil-based power stations.[14]
Competition
Since NRG is a utility, the company has little competition. Utilities are typically monopolies that are regulated to ensure they are charging fair prices. Income comes from the utility company's contractual sales agreements with local and state governments. NRG competes with the following companies for contracts:
References
- ↑ 2007 10K, NRG Energy, Part 1, Item 2
- ↑ 2007 10K, NRG Energy, Part 1, Item 1A
- ↑ Coal prices seen rising 3 fold, to hit record; Reuters Business News
- ↑ Foxbusiness.com: S&P Lowers NRG Energy Outlook On Hedges, Low Prices
- ↑ Foxbusiness.com: S&P Lowers NRG Energy Outlook On Hedges, Low Prices
- ↑ Foxbusiness.com: S&P Lowers NRG Energy Outlook On Hedges, Low Prices
- ↑ renewableenergyworld.com: NRG Energy To Develop 500 MW of Solar Thermal
- ↑ renewableenergyworld.com: NRG Energy To Develop 500 MW of Solar Thermal
- ↑ NRG 10K SEC Filings 2010
- ↑ NRG 10K SEC Filings 2010
- ↑ NRG 10K SEC Filings 2010
- ↑ Seekingalpha.com:NRG Energy Testifies Before the Senate Committee on Energy and Natural Resources on Reducing Oil Consumption through Electric Vehicle Adoption
- ↑ Seekingalpha.com:NRG Energy Testifies Before the Senate Committee on Energy and Natural Resources on Reducing Oil Consumption through Electric Vehicle Adoption
- ↑ Seekingalpha.com:NRG Energy Testifies Before the Senate Committee on Energy and Natural Resources on Reducing Oil Consumption through Electric Vehicle Adoption
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