Business context and reporting period
NRG Energy, Inc. is an integrated U.S. competitive power company with generation, wholesale trading, retail electricity, renewables and energy services businesses. It owned approximately 47.8 GW of net generation capacity at June 30, 2016. This unaudited Form 10-Q covers the three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Dollar amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $2,638 | $3,400 | $5,867 | $7,229 |
| Operating income | $87 | $232 | $563 | $308 |
| Net loss | $(276) | $(9) | $(229) | $(145) |
| Loss available to common stockholders | $(193) | $(19) | $(116) | $(144) |
| Loss per share, basic and diluted | $(0.61) | $(0.06) | $(0.37) | $(0.43) |
| Gross margin | $1,565 | $1,719 | $3,292 | $3,222 |
| Economic gross margin (non-GAAP) | $1,674 | $1,734 | $3,387 | $3,527 |
| Operating cash flow | — | $873 | $458 | |
| Capital expenditures | — | $622 | $583 |
Q2 operating margin was approximately 3.3% of revenue, versus 6.8% a year earlier. First-half operating cash flow less capital expenditures was approximately $251 million, compared with approximately negative $125 million in 2015. This simple cash-flow measure is not company-reported free cash flow.
At June 30, cash and cash equivalents were $1.389 billion, total current assets $6.364 billion and current liabilities $4.514 billion. Debt and capital leases were $19.268 billion including current maturities, before debt issuance costs; $1.215 billion was classified as current. Total liquidity, excluding collateral received, was approximately $3.131 billion, including $1.329 billion of credit facility availability. Consolidated liabilities were $26.278 billion.
Material changes versus prior periods
- Revenue declined 22% in Q2 and 19% in the first half. Lower energy prices, generation and volumes contributed; reported revenue and margins were also affected by volatile mark-to-market hedge accounting.
- Q2 gross margin fell $154 million, while economic gross margin declined $60 million. First-half gross margin rose $70 million, but economic gross margin fell $140 million. Generation economic gross margin weakened, partly offset by retail and NRG Yield contributions.
- First-half net loss widened by $84 million. Q2 included $115 million of impairment losses, an $83 million EVgo sale loss and $80 million of debt-extinguishment loss. First-half results also included a $139 million impairment of the Petra Nova investment.
- First-half cash flow from operations increased by $415 million year over year, substantially reflecting a $462 million favorable change in cash collateral associated with risk management activities.
- NRG repurchased $1.276 billion principal amount of senior notes in the first half and issued $1.0 billion of 7.25% notes due 2026. It replaced its prior credit facility with a $1.9 billion term loan due 2023 and a $2.5 billion revolving facility. The company also repurchased its $344.5 million preferred stock for $226 million, recording a $78 million gain.
Outlook, commentary, risks and unusual items
- GenOn liquidity and going concern: GenOn had $707 million of senior notes due June 2017 and NRG said GenOn was not expected to have sufficient liquidity to repay them. Cash held by GenOn Mid-Atlantic and REMA was subject to distribution restrictions, and GenOn did not meet its restricted-payment test. GenOn was considering creditor negotiations, refinancing, asset sales and possible Chapter 11. NRG stated it had no general obligation to provide financial support beyond a secured intercompany credit agreement. A resolution could materially affect NRG.
- Capital allocation: NRG said it expected to devote most available capital to debt reduction, alongside selected fuel conversions and renewable investments. It reduced its annualized common dividend to $0.12 per share and stated comparable dividends were expected to continue under current circumstances, subject to capital availability, market conditions and contractual constraints.
- Operating and investment plans: Estimated remaining-2016 capital expenditures were $1.272 billion gross, or $635 million net of identified financing and other funding. Environmental capital expenditures for 2016–2020 were estimated at approximately $322 million. PJM auction results indicated approximately $569 million of expected capacity revenue for the 2019/2020 delivery year; this is not overall earnings guidance. The filing provides no clear consolidated earnings or revenue guidance.
- Asset changes and impairments: NRG completed the sale of a majority interest in EVgo, recognizing an $83 million loss that included a $56 million accrual for its continuing California charging-network obligation. Rockford and Aurora were sold after quarter-end for $56 million and $369 million, respectively; the Aurora sale was expected to produce an approximately $189 million gain in Q3. Mandalay and Ormond Beach were impaired following adverse contract, reliability and regulatory developments. NRG also identified residential solar, solar-panel and deferred-marketing impairments.
- Market, hedge and collateral exposure: Lower natural gas and wholesale power prices, weather, generation outages, fuel and transmission constraints, and regulatory market changes may affect results. NRG’s commodity portfolio VaR was $63 million at June 30, compared with $36 million a year earlier. A $0.50/MMBtu natural-gas price movement was estimated to change margin collateral posted by approximately $211 million under the specified simplified assumptions. Certain hedge agreements also permit additional collateral calls following credit deterioration.
- Other notable exposures: NRG disclosed environmental compliance requirements and litigation, including pending regulatory and capacity-market matters. The Cottonwood station was damaged by flooding; NRG expected return to service in Q3 2016 and had collected $27.5 million of insurance proceeds through June, while continuing to pursue recovery. Sherwin Alumina’s bankruptcy and announced planned shutdown could affect the Gregory cogeneration plant. The filing also describes a $75 million disputed SunPower indemnity claim.
- Management concluded disclosure controls were effective at quarter-end and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- GenOn’s plan and ability to address the $707 million June 2017 maturity, restricted subsidiary cash and potential bankruptcy-related consequences for NRG.
- How much of the reported cash-flow improvement is recurring operating performance versus collateral timing, and whether liquidity remains adequate under adverse commodity-price or collateral-call scenarios.
- The effect of hedge mark-to-market volatility on reported earnings, and the underlying segment economics—particularly Generation and Retail Mass economic gross margins.
- Actual costs, timing and funding of planned capital expenditures, environmental compliance projects, fuel conversions and renewable investments.
- Completion, final proceeds and earnings effects of asset transactions, and NRG’s continuing EVgo obligations and contingent earnout.
- Outcomes of material regulatory and legal matters, including PJM capacity rules, environmental proceedings and the SunPower indemnity dispute.