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WIKI ANALYSIS
NRG Energy (NRG) is an electric utility with a fleet of 47 power generating facilities[1] concentrated in several regions of the United States and sprinkled throughout Europe and South America. NRG's fleet consists of coal, oil, natural gas and nuclear plants that provide electricity along peaking (daily periods of high usage), intermediate, and baseload (continuously running) capacity time schedules. NRG emerged in 2003[2] from bankruptcy caused in part by an overcrowding surge of investment in electric utilities at the beginning of the decade and has since developed into a geographically and fuel-source diverse electric utility with a solid presence in several high population density regions of the United States.[3]
Company Overview
NRG is an electric utility company that generates revenue by producing and selling electricity to several regions of high population density across the United States regions and sprinkled around the globe. Its highest concentration of power stations is in Texas (about 2/5 of its total MW ownership), followed by the Northeast, South Central, and Western regions of the United States and scattered global stations in Europe, Australia and South America. Its fleet of power stations spans the spectrum of geography, fuel type and dispatch level, an industry term that categorizes what type of demand for electricity a plant meets.[4] NRG has made recent headlines as billionaire Warren Buffet's Berkshire Hathaway disclosed a stake in the company in August 2008.
Plans for Higher Revenue
Acquiring other electric utility companies
Evidenced by the NRG board's unsolicited[6] May 14, 2008 bid to purchase Calpine (CPN), another electric utility with a majority of its plants in Western U.S. and Texas, management believes firmly in the economy of scale and seeks to increase its revenue by purchasing and managing more plants: more bang for each additional buck.[7] And though the Calpine rejected NRG's offer, the proposal indicates the health of NRG's operations, strong enough to acquire and efficiently manage additional power stations, and the companies sturdy financial footing, poised for investment in its industry.
Constructing more power stations
Evidenced by NRG's March 2008 arrangement with Japanese nuclear power plant construction contractor Toshiba (TOSBF),[8] NRG affirms its faith in the economy of scale with plans to add another nuclear power station in South Texas and several others in North America to its fleet. This would also further diversify the company's plant fuel-type portfolio.
2005 - 2007 Cash Flow
($ thousands)[9]
| 2007 | 2006 | 2005 | |
| Total Revenue | 5,989,000 | 5,623,000 | 2,708,000 |
| Operating Income | 1,560,000 | 1,438,000 | 238,000 |
2007 Revenue Breakdown by Geography and Division
($ millions)[10]
| Region | Energy | Capacity | Risk Management | Contract Amortization | Thermal | Other | Total |
| Texas | 2,698 | 363 | (33) | 219 | __ | 40 | 3,287 |
| Northeast | 1,104 | 402 | 27 | __ | __ | 72 | 1,605 |
| South Central | 404 | 221 | 10 | 23 | __ | __ | 658 |
| West | 4 | 122 | __ | __ | __ | 1 | 127 |
| International | 42 | 83 | __ | __ | __ | 15 | 140 |
| Thernal | 13 | 5 | __ | __ | 125 | 16 | 159 |
| Corporate/Eliminations | __ | __ | __ | __ | __ | 13 | 13 |
| Total | 4,265 | 1,196 | 4 | 242 | 125 | 157 | 5,989 |
Key Trends/Forces
Operating Costs Are Tied Directly to Fuel Prices
NRG Energy's operations benefit from low, stable fuel prices (coal, oil, natural gas, nuclear fuel).[11] Because NRG's power station portfolio possess a fleet of diverse fuel sources,[12] price fluctuations in one of any of the above fuels affects NRG operating costs. Some specific trends to track include rising coal prices,[13] and rising oil prices.
A proudly touted facet of NRG operations is its natural gas hedging. The company speculates on the natural gas commodities market to create a buffer between price fluctuations in natural gas and NRG's operating costs.[14]
Governmental Regulation Incurs Costs and Affects Revenue
Base rates on long-term electricity sales contracts directly impact NRG Energy's revenue. 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. 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.
Also, environmental restrictions affect several aspects of NRG's (and the rest of the industry's) operations. Regulation on coal, oil, and natural gas production and sales raises fuel prices. Carbon emission regulation raises NRG's operating costs by forcing expenditures to clean up fossil fuel emissions from coal and oil-based power stations (oil ~16% and coal ~33% of NRG's 2007 fleet[15]).
Energy Usage Dependent on New England Weather Patterns
Extreme temperatures necessitate higher energy consumption to maintain comfortable equilibrium in homes across areas of high population density. Temperate weather in the Northeast decreases area demand for energy and, in turn, NRG's revenue. New England's propensity for weather inconsistency (especially when compared to the consistent weather of Texas and the Western U.S.) affects NRG's ability to guarantee high energy revenue from the Northeast, the second largest presence in its portfolio after Texas.
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. Utilities are an exception to monopoly laws because they require enormous capital expenditures, such as power lines and power plants, and it would be extremely inefficient if many companies existed in the same area and duplicated all of the same facilities.
That being said, spot market and long-term contractual competition for local government purchases among electric utilities with infrastructure overlap in the same region do occur and necessitate access to consistent fuel prices, efficient operations, and competitive sales prices on the part of NRG.[16]
Income comes from the utility company's contractual sales agreements with local and state governments. For example, 59% of NRG's baseload (coal-derived) electricity production is hedged or sold through 2013.[17] Much of the company's future success is contingent upon consistently securing these type of contracts.
Comparison to Competitors
| NRG Energy | Calpine | AES Corp. | |
| Generation Capacity (MW) | ~25,000 | ~24,000 | ~43,000 |
| Revenue ($ billions) | 5.99 | 8.26 | 14.60 |
| Quarterly Revenue Growth | 0.2% | 17.4% | 32.8% |
References
- ↑ Company Overview, NRG Energy Website
- ↑ NRG Announces Emergence from Bankruptcy, EnergyOnline.com
- ↑ Gridlocked, findarticles.com
- ↑ Company Overview, NRG Energy Website
- ↑ 2007 10K, NRG Energy, Part 1 Item 1
- ↑ 7 Reasons Why NRG's Offer for Calpine is Laughable, SeekingAlpha.com
- ↑ NRG Energy, Inc. Confirms Proposal to Calpine, PR-Inside.com
- ↑ NRG Energy Sets Up an Entity to Build Nuclear Plants, NY Times March 26, 2008
- ↑ Annual Income Statement, NRG Energy, Yahoo Finance
- ↑ NRG Energy (NRG), Annual Report, Page 35
- ↑ 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
- ↑ NRG Energy, Inc. Reports 2007 Fourth Quarter and Full-Year Results, findarticles.com
- ↑ 2007 10K, NRG Energy, Part 1, Item 1
- ↑ Electric Power Generation Industry, Hoovers
- ↑ 2007 10K, NRG Energy, Part 1 Item 1
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