NRG Energy, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone quarterly filing; it also includes unaudited quarterly results. Amounts below are U.S. dollars unless stated otherwise. Comparisons are affected by businesses reclassified as discontinued operations and major portfolio sales.
Business context
NRG sells electricity, natural gas and related services to retail customers and operates a generation fleet. At year-end, it reported approximately 23,112 MW of continuing-operation generation capacity and about 3.1 million retail customers. Its strategy emphasizes integrating retail load with generation, cost reduction, asset sales and disciplined capital allocation.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Operating revenue | $9.478 billion | $9.074 billion |
| Operating income (loss) | $982 million | $(741) million |
| Income (loss) from continuing operations | $460 million | $(1.345) billion |
| Net income (loss) attributable to NRG | $268 million | $(2.153) billion |
| Diluted earnings (loss) per share | $0.87 | $(6.79) |
| Cash flow from operations | $1.377 billion | $1.610 billion |
| Economic gross margin (non-GAAP) | $3.730 billion | $3.391 billion |
| Liquidity, excluding counterparty collateral | $1.977 billion | $2.760 billion |
Retail economic gross margin rose to $1.802 billion from $1.602 billion, supported by margin-enhancement initiatives, higher customer volumes and capacity revenue. Generation economic gross margin was $1.935 billion versus $1.797 billion. Economic gross margin is a company-defined, non-GAAP measure and excludes certain mark-to-market and other items.
Net cash used in investing activities was $205 million, including asset-sale proceeds; net cash used in financing activities was $1.526 billion. Cash and cash equivalents were $563 million at year-end. Total assets were $10.628 billion and total stockholders’ equity was negative $1.234 billion. The balance sheet reported $6.521 billion of debt and capital leases net of current maturities, discounts and issuance costs; scheduled principal obligations including capital leases totaled $6.692 billion.
NRG repurchased $1.25 billion of shares in 2018 and completed the full $1.5 billion program by February 28, 2019, at an average $36.24 per share. The 2018 common dividend was $0.12 per share.
Fourth-quarter detail: Unaudited Q4 2018 revenue was $1.992 billion, operating income was $49 million, continuing-operations loss was $93 million and net loss was $13 million. Q4 2017 net loss was $1.655 billion, including substantial impairment and discontinued-operation effects.
Material changes versus prior year
- NRG returned to operating and net income in 2018. Impairment losses fell to $99 million from $1.534 billion in 2017; 2017 included a $1.248 billion impairment tied to its South Texas Project interest.
- Operating revenue increased about $404 million. Retail revenue rose by $727 million, while energy revenue declined by $88 million and net mark-to-market revenue moved from a $252 million gain to a $130 million loss.
- Cash from operations decreased $233 million to $1.377 billion; reported liquidity fell $783 million to $1.977 billion.
- NRG sold its interest in NRG Yield and its Renewables Platform for approximately $1.348 billion in August 2018 and deconsolidated the Agua Caliente and Ivanpah projects. It acquired XOOM Energy for approximately $213 million, adding about 300,000 customers.
- GenOn emerged from bankruptcy as a standalone company in December 2018. NRG paid approximately $125 million under its settlement and retained certain pension and post-retirement obligations.
- NRG reported negative year-end stockholders’ equity, while reducing shares outstanding through repurchases and materially reducing consolidated assets and debt through dispositions and deconsolidation.
Outlook, management commentary, risks and unusual items
- Transformation Plan: NRG expects completion by the end of 2020. It reported $532 million of annual cost savings and $32 million of margin enhancements in 2018, and said it was on track for $590 million of cost savings and $135 million of margin enhancements in 2019. It expects about $95 million of additional one-time implementation costs in 2019.
- Portfolio and capital allocation: NRG reported $3.0 billion of targeted asset-sale proceeds received through February 28, 2019. It completed the $1.5 billion repurchase program and authorized another $1.0 billion program for 2019. Management identified up to $600 million of 2019 capital for possible debt reduction. Estimated 2019 capital expenditures were $223 million.
- Post-year-end divestitures: NRG sold the South Central Portfolio for $1.0 billion on February 4, 2019, Guam for approximately $8 million on February 20, and Carlsbad for $387 million on February 27. NRG said it achieved a 3.0x net-debt-to-adjusted-EBITDA target on a pro forma basis including South Central sale proceeds.
- PG&E exposure: PG&E filed for bankruptcy in January 2019. Agua Caliente and Ivanpah have PPAs with PG&E; the projects issued notices of events of default under their financing agreements. NRG reported approximately $321 million of potential five-year contract exposure through these affiliates and stated the effect on the contracts is uncertain. Its disclosed maximum loss was limited to its equity investments of $200 million in Agua Caliente and $37 million in Ivanpah.
- Regulatory and legal uncertainty: FERC was investigating aspects of South Central market conduct, with a preliminary finding expected in 2019; NRG retained potential liability after the portfolio sale. FERC also advised NRG of a preliminary finding concerning ISO-NE auction communications in 2016; NRG said it would discuss the matter with FERC. Outcomes and potential costs were not clear from the filing.
- Market, liquidity and operating risks: Earnings and collateral needs are exposed to wholesale power and fuel prices, weather, outages, hedging and counterparty performance, retail competition, and changing capacity-market rules. The company reported $287 million of cash collateral posted and $793 million of letters of credit supporting commercial operations. Environmental requirements, nuclear operations and the cost or availability of fuel and transmission also pose risks.
- Other notable items: 2018 included $90 million of reorganization costs and $99 million of impairment losses. A $46 million Dunkirk impairment followed cancellation of the gas-conversion project. NRG recorded a $153 million obligation related to a property-tax indemnity in the NRG Yield sale. The company reported a $3.8 billion tax valuation allowance and generated an $8.0 billion tax NOL for 2018; management expected up to $20 million in 2019 income-tax payments.
- Audit and controls: KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. XOOM was excluded from management’s and the auditor’s internal-control assessment while integration work continued.
Important facts for investors to verify
- Reconcile 2018 earnings and cash generation with discontinued operations, asset-sale accounting, mark-to-market volatility and the large reduction in impairments from 2017.
- Track liquidity, collateral requirements, debt repayment plans and the effect of further asset-sale proceeds on leverage; distinguish gross principal obligations from balance-sheet carrying debt.
- Assess the status and financial consequences of PG&E’s bankruptcy for the Agua Caliente and Ivanpah PPAs, project financing and NRG’s equity investments.
- Monitor FERC proceedings, PJM and ISO-NE capacity-market reforms, ERCOT scarcity-pricing changes and unresolved environmental compliance costs.
- Test whether Transformation Plan savings, margin improvements, planned share repurchases and debt-reduction objectives are achieved without weakening operating performance or liquidity.