Energy generation company NRG Energy Inc. (NRG) announced operating earnings of 87 cents per share for third-quarter 2010, which fell short of the Zacks Consensus Estimate of 96 cents and the year-ago figure of $1.02.
The year-over-year decline was due to an increase in fuel costs, which resulted in lower margins and a decrease in wholesale business results.
Total Revenue
Total revenue of the company decreased 7.9% year over year to $2,685 million from $2,916 million in the year-ago quarter.
Operational Update
Total operating expenses of NRG Energy decreased by 3.2% over the prior-year quarter, but increased as a percentage of total revenue. The year-over-year increase in operating expenses, as a percentage of revenue, resulted in a lower operating income compared with the year-ago quarter.
NRG Energy's interest expenses, at $169 million, dropped 5% from $178 million a year ago.
Financial Update
The company continues to have a strong cash balance, with total cash and cash equivalents as of September 30, 2010, of $3.44 billion versus $2.25 billion as of September 30, 2009.
NRG Energy spent approximately $490 million on capital expenditure in the quarter, down from $560 million in the prior-year quarter.
During the reported quarter the company issued $1.1 billion of 8.25% senior notes due in August 2020, the proceeds of which would be used for repaying debts and for general corporate purposes.
Guidance for 2010
The company updated its guidance for the year taking into consideration the third quarter results of the company.
EBITDA for 2010 is expected to be in the range of $2,500 million to $2,550 million, up from the previous expectation of $2,450 million to $2,550 million.
Free cash flow before growth investment is expected to be in the range of $1,198 million to $1,248 million, up from the previous expectation of $1,098 million to $1,198 million. Taking into consideration the new growth investments, free cash flow of the company is expected to be $699 million to $749 million, down from the earlier expectation of $824 million to $924 million.
Looking Forward to 2011
NRG Energy expects 2011 EBITDA to be in the range of $1,900 million to $2,100 million.
Free cash flow before growth investment is expected to be in the range of $950 million to $1,150 million and free cash flow after growth investment is expected in the range of $550 million to $750 million.
Our View
It is encouraging to see that the company has consistently maintained a healthy cash balance and is using the same to increase shareholder value through share repurchase. The company has repurchased 8.5 million shares at an average price of $21.26 amounting to $180 million so far in 2010.
During the quarter NRG Energy entered into a few agreements to acquire certain power generation assets and companies, aiming to enhance its power generation portfolio. As the acquisition process is still ongoing and the financial benefits to NRG Energy unclear, we prefer to wait on the sidelines.
We also appreciate the move of NRG Energy to enhance its renewable resource portfolio through the development of its solar pipeline, cumulatively over 1,000 megawatts (MW).
NRG Energy currently retains a Zacks #3 Rank (short-term Hold rating).
Based in Princeton, New Jersey, NRG Energy Inc. operates as a wholesale power generation company. The company is also involved in trade of fuel and transportation services, and trade of energy, capacity, and related products in the United States and internationally.
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