NRG Energy, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing was signed March 1, 2018. NRG is an integrated U.S. power company with approximately 30,000 MW of net generation capacity and retail electricity operations. Figures are in U.S. dollars; financial amounts are in millions unless noted.
Financial performance and position
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Operating revenue | $10,629 | $10,512 | Up $117; mix included retail revenue of $6,388 and energy revenue of $2,461 |
| Operating income (loss) | $(587) | $266 | 2017 operating margin approximately (5.5%), versus 2.5% in 2016 |
| Net loss attributable to NRG | $(2,153) | $(774) | 2017 diluted loss per share was $(6.79), versus $(2.22) |
| Economic gross margin | $4,748 | $5,383 | Down $635, or approximately 12%; non-GAAP measure |
| Cash from operating activities | $1,387 | $2,088 | Down $701 |
| Cash used in investing / financing | $(1,066) / $(485) | $(792) / $(915) | Investing outflow increased; financing outflow decreased |
| Liquidity | $3,210 | $2,373 | Includes cash and credit facility availability; excludes collateral funds held for counterparties |
| Debt and capital leases | $16,638 | $16,710 | Includes $7,182 recourse debt and $9,451 non-recourse debt at year-end |
| Stockholders’ equity | $1,968 | $4,446 | Down $2,478 |
NRG reported $1,709 of operating impairment losses in 2017, compared with $702 in 2016. Interest expense was $890, and income tax expense was $8 despite a pretax loss of $1,540. Cash capital expenditures were $1,111; stated 2018 capital expenditure estimates were $724 gross and $419 net of expected financing and other investment offsets.
Material changes versus 2016
- GenOn filed for Chapter 11 on June 14, 2017. NRG deconsolidated GenOn from that date, recorded its investment at an estimated fair value of zero, and presented GenOn as discontinued operations in comparative periods. The 2017 discontinued-operations loss was $789, versus income of $92 in 2016; it included a $208 deconsolidation loss and restructuring-related charges.
- The $1,709 impairment charge was principally driven by revised long-term power price assumptions following a lower long-term natural-gas price outlook. It included a $1,248 impairment on NRG’s 44% interest in the South Texas Project (STP), plus impairments at other generation and renewable assets. The company also recorded a $90 goodwill impairment related to BETM being held for sale.
- Operating cash flow declined, including from changes in collateral and working capital. The filing attributes a $478 adverse year-over-year change to cash collateral movements supporting risk-management activities.
- Lower wholesale realized prices and reduced economic gross margin in Generation were partly offset by higher coal generation in Texas and improved renewable margin. Retail economic gross margin declined by $32, to $1,617, while customer count increased.
- NRG reduced its quarterly common dividend to $0.03 per share in 2016; it paid that amount each quarter in 2017. The January 2018 declaration maintained an annualized rate of $0.12 per share.
Outlook, strategy, risks and unusual items
- Transformation Plan: NRG targets $1,065 of recurring annual savings and margin enhancement, up to $3.2 billion of asset-sale proceeds, and a reduction in consolidated debt from approximately $19.5 billion to $6.5 billion. It reported $150 of annual cost savings and $221 of working-capital improvements in 2017, with $44 of one-time costs to achieve. The plan is expected to be substantially completed by the end of 2018 and fully implemented by the end of 2020. These are management targets, not guaranteed outcomes.
- Announced transactions after year-end: Agreements announced in February 2018 include sales of NRG’s NRG Yield ownership and renewables platform for $1.375 billion, South Central for $1.0 billion, Carlsbad for $365 million, Buckthorn Solar for $42 million, and BETM for $70 million. Closings are subject to conditions and generally expected in 2018. NRG also indicated $7.1 billion of non-recourse debt was associated with the NRG Yield/renewables, Carlsbad and Buckthorn assets identified for sale.
- Capital allocation: Management expects approximately $5.3 billion of excess cash to be available for allocation through 2020 after targeted deleveraging and a 3.0x net debt/Adjusted EBITDA corporate credit ratio. The board authorized up to $1 billion in share repurchases, with the first $500 million program expected to begin in the first quarter of 2018; execution remains subject to circumstances and transaction progress.
- Tax and impairment items: The Tax Cuts and Jobs Act reduced the U.S. federal corporate rate to 21%. NRG recorded a $733 reduction in deferred tax assets, offset by a $660 valuation-allowance change, and established a $64 refundable AMT credit receivable; the stated net income impact was a $9 decrease. NRG also disclosed an estimated $9.5 billion worthless-stock deduction for tax purposes upon GenOn’s emergence from bankruptcy.
- Operating and market risks: Earnings and liquidity remain exposed to wholesale power and fuel prices, weather, generation outages, retail customer usage and procurement costs, hedge valuation and collateral calls, and capacity-market rules. Environmental requirements, changing renewable incentives, competition and transmission constraints may affect margins and capital needs. NRG’s commodity portfolio VaR was $46 at year-end; a $0.50/MMBtu gas-price move was estimated to change required margin collateral by approximately $120.
- Contingencies: GenOn’s confirmed reorganization plan remained subject to effectiveness conditions and regulatory approvals, with deadlines extended to June 30, 2018, or September 30, 2018 if approvals were pending. NRG agreed to $261.3 of settlement cash consideration, subject to offsets, and retained specified pension and retiree-benefit liabilities. Other disclosed matters include a Bacliff project contract dispute in which NRG counterclaimed for more than $48, and assorted environmental, customer and regulatory proceedings. The filing says outcomes of many proceedings cannot be predicted.
- Unusual quarter: Fourth-quarter 2017 revenue was $2,497 and NRG-attributable net loss was $1,535, including major impairment charges. The filing’s quarterly table reports fourth-quarter continuing-operations loss of $1,667.
KPMG issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting. Management also concluded disclosure controls were effective at year-end.
Most important facts for investors to verify
- Whether the announced asset sales close on expected terms and dates, including final proceeds, adjustments, approvals, debt transferred or retired, and the planned use of proceeds.
- How GenOn’s reorganization becomes effective, the final settlement and retained liabilities, and whether the projected tax deduction is realized as expected.
- Whether operating cash flow and economic gross margin stabilize, particularly given wholesale price exposure, hedges, retail load economics and collateral requirements.
- Progress against Transformation Plan targets, including recurring savings, asset-sale proceeds, debt reduction, the 3.0x leverage target and proposed share repurchases.
- The assumptions underlying the STP and other impairment valuations, and the potential for further impairments if power-price forecasts or asset cash flows change.
- Developments in material litigation and regulatory matters, including the Bacliff dispute, capacity-market proceedings and environmental requirements.