Volatile power supply costs and demand for power could adversely affect the financial performance of NRG's retail businesses.
Although NRG is the primary provider of its retail businesses' wholesale electricity supply requirements, the retail businesses purchase a significant portion of their supply requirements from third parties. As a result, financial performance depends on the ability to obtain adequate supplies of electric generation from third parties at prices below the prices it charges its customers. Consequently, the Company's earnings and cash flows could be adversely affected in any period in which the retail businesses' wholesale electricity supply costs rise at a greater rate than the rates it charges to customers. The price of wholesale electricity supply purchases associated with the retail businesses' energy commitments can be different than that reflected in the rates charged to customers due to, among other factors:
varying supply procurement contracts used and the timing of entering into related contracts;
subsequent changes in the overall price of natural gas;
daily, monthly or seasonal fluctuations in the price of natural gas relative to the 12-month forward prices;
transmission constraints and the Company's ability to move power to its customers; and
changes in market heat rate (i.e., the relationship between power and natural gas prices).
The retail businesses' earnings and cash flows could also be adversely affected in any period in which its customers' actual usage of electricity significantly varies from the forecasted usage, which could occur due to, among other factors, weather events, competition and economic conditions.
There may be periods when NRG will not be able to meet its commitments under forward sale obligations at a reasonable cost or at all.
A substantial portion of the output from NRG's coal and nuclear facilities has been sold forward under fixed price power sales contracts through 2016 and the Company also sells forward the output from its intermediate and peaking facilities when it deems it commercially advantageous to do so. The Company also sells fixed price gas as a proxy for power. Because the obligations under most of these agreements are not contingent on a unit being available to generate power, NRG is generally required to deliver power to the buyer, even in the event of a plant outage, fuel supply disruption or a reduction in the available capacity of the unit. To the extent that the Company does not have sufficient lower cost capacity to meet its commitments under its forward sale obligations, the Company would be required to supply replacement power either by running its other, higher cost power plants or by obtaining power from third-party sources at market prices that could substantially exceed the contract price. If NRG fails to deliver the contracted power, it would be required to pay the difference between the market price at the delivery point and the contract price, and the amount of such payments could be substantial.
In the Gulf Coast region, NRG has long-term contracts with rural cooperatives that require it to serve all of the cooperatives' requirements at prices for energy that generally reflect the cost of coal-fired generation. On December 19, 2013, the Entergy region joined the MISO RTO, which employs a two settlement market in which NRG submits bids for energy to cover its load obligations and submits offers to sell energy from its resources. Given the “full requirements” obligation contained in the cooperative contracts, and the possibility of unplanned forced outages of its generation, NRG may be exposed to locational market prices as a net buyer of energy for certain periods, which could have a negative impact on NRG's financial returns from its Gulf Coast region.
NRG's trading operations and use of hedging agreements could result in financial losses that negatively impact its results of operations.
The Company typically enters into hedging agreements, including contracts to purchase or sell commodities at future dates and at fixed prices, in order to manage the commodity price risks inherent in its power generation operations. These activities, although intended to mitigate price volatility, expose the Company to other risks. When the Company sells power forward, it gives up the opportunity to sell power at higher prices in the future, which not only may result in lost opportunity costs but also may require the Company to post significant amounts of cash collateral or other credit support to its counterparties. The Company also relies on counterparty performance under its hedging agreements and is exposed to the credit quality of its counterparties under those agreements. Further, if the values of the financial contracts change in a manner that the Company does not anticipate, or if a counterparty fails to perform under a contract, it could harm the Company's business, operating results or financial position.
NRG does not typically hedge the entire exposure of its operations against commodity price volatility. To the extent it does not hedge against commodity price volatility, the Company's results of operations and financial position may be improved or diminished based upon movement in commodity prices.