NRG Energy, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019. Dollar amounts are in millions unless stated otherwise. NRG sells electricity and related products and services to retail customers and operates approximately 23,000 MW of generation capacity. Prior-period results were recast for discontinued operations, including the South Central Portfolio, NRG Yield and its Renewables Platform, Carlsbad, and GenOn.
Financial results and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $2,165 | $2,065 | +$100 |
| Operating income | $221 | $361 | -$140 |
| Income from continuing operations | $94 | $238 | -$144 |
| Net income attributable to NRG | $482 | $279 | +$203 |
| Basic EPS | $1.73 | $0.88 | +$0.85 |
| Economic gross margin (non-GAAP) | $804 | $839 | -$35 |
| Net cash from operating activities | -$127 | $350 | -$477 |
Operating margin was approximately 10.2%, compared with 17.5% in the prior-year quarter. Reported net income includes $388 million of income from discontinued operations, including gains on dispositions; continuing operations were substantially weaker. The $1.72 diluted EPS includes $1.38 per share from discontinued operations, versus $0.89 and a $0.02 loss per share, respectively, in Q1 2018.
- Retail revenue rose to $1,606 from $1,485. Retail economic gross margin was $372, down $4; mass-market customer count increased to 3.325 million at quarter-end from 2.878 million.
- Economic gross margin in Generation was $433, down from $466. NRG cited asset deconsolidations and sales, lower generation volumes and weaker capacity pricing in some regions, partly offset by higher capacity prices in PJM and ISO-NE.
- Lower operating income reflected higher total operating costs, including the absence of the prior-year $302 million mark-to-market gain in operating costs. Economic hedging results are volatile and can materially affect reported revenue and expenses.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $859, versus $563 at year-end 2018. Total liquidity, excluding collateral received, was $2,675, including $1,801 of credit facility availability, compared with $1,977 at year-end.
- Long-term debt and capital leases, including current maturities, totaled $6,657; the balance-sheet carrying amount was $6,490 after debt issuance costs and discounts. Debt fair value was approximately $6,971. Total stockholders’ equity was negative $1,538.
- Operating cash flow was negative $127, driven in part by collateral and working-capital outflows. Investing cash flow was positive $1,196, including $1,313 of net proceeds from asset sales. Financing cash outflow was $748, including $747 for treasury stock.
- NRG repurchased 17.6 million shares for $749 during the quarter. The board authorized a further $1.0 billion repurchase program; $500 million had been repurchased under that program through May 2, 2019. The quarterly dividend was $0.03 per share.
Material changes, outlook and management commentary
- NRG completed the South Central Portfolio sale to Cleco on February 4 for $1.0 billion before adjustments, and sold Carlsbad on February 27. Net proceeds reported for South Central, Carlsbad and Guam transactions totaled $1,368. NRG leases back the 1,153 MW Cottonwood facility through May 2025.
- Management said the Transformation Plan is expected to be fully implemented by the end of 2020. For 2019, NRG expects $590 million of cost savings and $135 million of margin enhancements, and approximately $95 million of one-time costs to achieve. The company estimated remaining-2019 capital expenditures and growth investments at $155 million.
- NRG said it may reserve up to $600 million of 2019 capital for debt reduction. It also expects comparable cash dividends to continue in the foreseeable future, subject to available capital and other constraints. The filing provides no explicit earnings or revenue guidance.
- NRG began pursuing medium- to long-term power purchase agreements to support its business needs. It entered an agreement to sell its Sherbino wind farm interest, with closing expected in May 2019.
Risks, contingencies and unusual items
- PG&E bankruptcy: Agua Caliente and Ivanpah have PPAs with PG&E and issued notices of events of default under project loan agreements. NRG’s stated maximum exposure was its equity investments of $201 million in Agua Caliente and $20 million in Ivanpah. The outcome for the PPAs and project financing remained uncertain.
- Agua Caliente financing: Lenders notified the project borrower of defaults related to PG&E’s bankruptcy. NRG said it was working with lenders on a path forward.
- Regulatory matters: FERC made a preliminary finding that NRG violated market behavior rules concerning 2016 ISO-NE capacity-auction offers; discussions with FERC were expected. FERC’s investigation into MISO/South Central market conduct remained ongoing, and NRG retained potential liability after the portfolio sale.
- Other exposures: NRG guaranteed up to $124 million of Petra Nova project debt, with a covenant test and possible repayment scheduled for Q3 2019. NRG also disclosed a $99 million surety-bond obligation related to Jewett mine reclamation and indemnification obligations connected with the sold South Central portfolio.
- Environmental rules and market-design changes could affect operating costs, capacity payments and generation economics. NRG highlighted possible changes to coal-ash, emissions and water rules, as well as PJM, ISO-NE and ERCOT market reforms. Commodity-price movements can also affect collateral needs and liquidity.
Most important facts for investors to verify
- How much of Q1 net income and EPS came from disposition gains, and what continuing earnings and cash generation indicate about underlying performance.
- Whether operating cash flow and collateral requirements improve, and whether reported liquidity remains available after working-capital needs and share repurchases.
- Progress against Transformation Plan savings, margin-enhancement and one-time-cost targets, and the extent of any debt reduction.
- Developments in PG&E’s bankruptcy, project-loan defaults, and NRG’s potential exposure at Agua Caliente and Ivanpah.
- Outcomes of the FERC proceedings and Petra Nova’s Q3 covenant test, along with any material environmental or market-rule changes.