The company also reported income from continuing operations for the quarter ended December 31, 2008 of $273 million, or $0.98 per diluted common share, compared to income of $100 million, or $0.34 per diluted common share, for the fourth quarter of 2007. Driving the increase in fourth quarter 2008 income was an after tax benefit of $200 million in unrealized mark-to-market (MtM) gains as a result of falling commodity prices, while fourth quarter 2007 results included an after tax charge of $22 million in unrealized MtM losses.
For the year ended December 31, 2008, the company reported record income from continuing operations of $1,016 million, or $3.66 per diluted common share, compared to 2007 income from continuing operations of $569 million, or $1.95 per share. The increase was due primarily to a $361 million increase in net after tax MtM gains as such gains were $315 million in 2008 versus MtM losses of $46 million in 2007.
Financial results for 2008 were favorably impacted by both strong plant operating performance and a proactive commercial operations strategy implemented during the second quarter of the year. Further benefitting 2008 results was a $33 million after tax reduction in development expenses resulting from the capitalization of STP units 3&4 costs starting on January 1, 2008, following the docketing of the company’s Combined Construction and Operating License Application.
The full year 2008 results included $172 million in income, or $0.63 per diluted common share from discontinued operations including a $164 million after tax gain from the sale of Itiquira Energetica S.A. (ITISA), which was sold in April 2008.
Cash flow from operations for the 12 months ended December 31, 2008 was $1,434 million compared to $1,517 million for the previous year. After adjusting for cash collateral outflows of $417 million in 2008 and $125 million of out flows in 2007, cash from operations actually rose 13%, or $209 million, to $1,851 million in 2008, compared to $1,642 million in 2007.
MtM Impacts of Hedging and Trading 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 risk management activities. Although these transactions are predominantly economic hedges of company’s portfolio, a portion of these forward sales are not afforded hedge accounting treatment and the MtM change in value of these transactions is recorded to current period earnings. NRG also hedges power prices using natural gas contracts and, to the extent gas and power prices do not fully meet correlation tests, this ineffectiveness is also reflected in MtM results. For the fourth quarter 2008, NRG incurred $365 million of forward domestic net MtM gains accompanied by a $1 million gain on hedge ineffectiveness compared to the fourth quarter 2007 when the company recorded a $2 million forward net MtM loss accompanied by an $18 million loss on hedge ineffectiveness. For the full year 2008, NRG recognized $536 million of net forward MtM gains and a $25 million hedge ineffectiveness loss compared to the full year 2007 when the company recorded $20 million of MtM gains along with a $13 million hedge ineffectiveness gain. MtM gains in 2008 were driven primarily by the downward trend in natural gas prices during the second half of the year.
Texas: Adjusted EBITDA for the fourth quarter of 2008 for the region was $270 million, a $77 million reduction compared to the same period in 2007. Net energy margins declined by $33 million as a 31-day refueling outage at STP, together with lower power prices year-over-year, negatively impacted results.
Operating expenses increased by $14 million as higher employment in the region increased labor and benefit costs by $6 million and asset retirement and disposal costs increased $8 million. Development expenses increased $23 million in the fourth quarter 2008 versus 2007 as the prior year’s quarter included a $39 million reimbursement of development expenses by the company’s partner for the STP 3&4 repowering project.
Annual adjusted EBITDA for 2008 was $1,543 million, a $159 million increase over 2007. Net energy margins increased $144 million as higher power prices, particularly during the second quarter of the year, more than offset a 2% reduction in fleetwide generation. Coal generation increased 1% compared to 2007 as the Limestone facility set a plant record of just under 13.9 million MWhrs produced and net capacity factor of 94%. These results, however, were offset by a 3% reduction in nuclear generation due to a second refueling outage at STP and a 14% decrease in gas plant generation resulting from lower market heat rates during the fourth quarter. Operating costs rose by $32 million during 2008 as higher headcount increased labor and benefit costs by $14 million, and the retirement and disposal of assets added an additional $16 million in expenses. Higher operating costs were more than offset by a $59 million reduction in development expenses, primarily due to the capitalization of STP units 3&4 costs in 2008 versus expensing those costs in 2007.
Northeast: Fourth quarter 2008 regional adjusted EBITDA was $92 million, a decrease of $21 million as compared to the same quarter last year. Net energy margins were down $9 million mainly due to declining power prices and market heat rates partially offset by fuel-related risk management activities. Capacity revenues also declined by $13 million as New York in-city capacity prices fell year-over-year and capacity payments were lower at the company’s Norwalk Harbor plant under its reliability-must-run (RMR) agreement.
Full-year 2008 adjusted EBITDA decreased $99 million over the prior year to $475 million. Despite flat baseload generation, total generation declined by 6%, or 814,000 MWhrs, from 2007 levels as gas- and oilfueled units ran less than in 2007. Generation at Arthur Kill declined 205,000 MWhrs as congestion support provided in 2007 was not as prevalent in 2008. In addition to lower generation, energy margins were negatively impacted by $83 million due to rising fuel costs and an additional $38 million due to the expiry of certain load contracts and higher costs to serve remaining contracts. Partially offsetting these unfavorable variances was a $14 million increase in capacity revenues as a $20 million increase in PJM Reliability Pricing Model (RPM) capacity revenues and a $12 million increase in the Norwalk RMR capacity payments more than offset an $18 million reduction in New York capacity revenues resulting from new in-city capacity mitigation rules. Further offsetting these unfavorable variances were $7 million in higher emission credit sales, a $10 million reduction in operating and maintenance expenses due to reduced scope of outages during 2008, a $10 million reduction in property taxes, and $6 million in lower general and administrative costs mainly associated with lower insurance costs.
“The company completed 2008 by setting records on almost all financial metrics including net income, adjusted EBITDA and liquidity, and these were achieved during the most challenging business environment seen in a generation,” commented David Crane, NRG Energy president and chief executive officer. “The financial success in 2008 was equally matched by record operating performance at our plants including our best ever safety performance achieved across our entire fleet.”
