NRG Energy, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. NRG is an integrated power company with retail energy businesses and approximately 29,800 MW of net generation capacity. GenOn is reported as a discontinued operation.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $2,922 | $2,701 | $5,343 | $5,083 |
| Operating income | $334 | $339 | $740 | $374 |
| Income from continuing operations | $121 | $99 | $354 | $(70) |
| Net income/(loss) attributable to NRG | $72 | $(626) | $351 | $(790) |
| Diluted EPS | $0.23 | $(1.98) | $1.10 | $(2.50) |
| Operating cash flow | Not separately presented | Not separately presented | $524 | $74 |
Revenue increased about 8% in Q2 and 5% year to date. Operating margin, calculated as operating income divided by revenue, was approximately 11.4% in Q2 versus 12.5%; for the first half it was 13.9% versus 7.4%. Economic gross margin, a company-defined non-GAAP measure, was $1,406 in Q2 versus $1,252 and $2,554 for the first half versus $2,270.
- Operating cash flow improved by $450 year over year in the first half. Investing activities used $1,146, including $691 of capital expenditures and $284 for acquisitions. Financing activities provided $423; cash, counterparty funds and restricted cash combined declined by $199.
- At June 30, cash and cash equivalents were $980; total liquidity excluding collateral received was approximately $2.49 billion, including $1.22 billion of credit facility availability. The company reported $15.8 billion of debt and capital leases on the balance sheet (carrying amount); debt including current maturities before financing discounts and costs was $16.1 billion.
- Common stock repurchases totaled $500 in the first half. Dividends were $0.03 per share quarterly. The company reported 303.4 million shares outstanding at June 30.
Changes versus the comparable period
- First-half earnings turned positive from a loss in 2017, while Q2 operating income was slightly lower. The prior-year net loss was heavily affected by GenOn discontinued-operation and disposal charges; accordingly, the net-income comparison is not solely indicative of continuing-business performance.
- Interest expense declined by $102 in the first half, principally from lower fair-value expense on interest-rate swaps, debt repurchases and Ivanpah’s deconsolidation. SG&A fell $79, reflecting Transformation Plan savings and lower prior-year advisory costs, partly offset by higher marketing, legal and bad-debt costs.
- Economic gross margin rose, but reported gross margin and operating results were affected by volatile, unrealized hedge marks. NRG reported a net $138 unrealized mark-to-market gain for energy commodities in the first half, compared with $39 in 2017.
- NRG acquired XOOM Energy on June 1 for approximately $219, adding about 300,000 retail customers. It recorded $74 of impairments: $46 for the discontinued Dunkirk gas-conversion project and $28 for its Keystone and Conemaugh interests held for sale.
Outlook, management commentary and risks
- The Transformation Plan targets $1.065 billion of recurring cost savings and margin enhancements, up to $3.2 billion of asset-sale proceeds, and a 3.0x net-debt-to-Adjusted-EBITDA credit ratio. NRG expected significant plan completion by year-end 2018 and full implementation by the end of 2020. Management reported $298 of cumulative working-capital improvements and $113 of one-time implementation costs to date.
- Pending transactions included the $1.375 billion sale of NRG’s NRG Yield ownership and renewables platform, the $1.0 billion sale of South Central, and a $365 million sale of Carlsbad to NRG Yield. The filing expected the first two transactions to close in the second half of 2018, subject to conditions and consents, and Carlsbad in Q4. BETM was sold August 1 for $70, after quarter-end.
- NRG said elevated ERCOT forward prices for July and August could make results materially sensitive to demand and generation availability. Commodity prices, outages, weather, collateral requirements, counterparties, market-rule changes and environmental regulation remain key risks.
- GenOn’s Chapter 11 reorganization was not yet consummated as of June 30. A settlement was completed July 16, after the reporting date, involving an approximately $125 net payment by NRG. If the reorganization is not completed, NRG could remain exposed to claims and lose anticipated settlement benefits.
- Other notable matters include the $39 uncertain-tax-benefit liability, litigation and regulatory proceedings, and the expected material balance-sheet impact of adopting the new lease standard in 2019. Management stated that liquidity and operating cash flows were expected to fund operations, maintenance capital spending, dividends and other commitments.
Important facts for investors to verify
- Whether the announced asset sales closed on expected terms and how much net debt and liquidity they ultimately removed or generated.
- Progress toward the Transformation Plan’s savings, proceeds and 3.0x leverage targets, including the definition and calculation of Adjusted EBITDA and net debt.
- The sustainability and cash conversion of earnings, separating recurring operating performance from unrealized hedge marks, asset sales, impairments and other one-off items.
- GenOn plan emergence, settlement implementation, retained pension and benefit obligations, and remaining litigation or indemnification exposure.
- Debt maturities, refinancing and collateral demands, including the announced $486 million partial redemption of 2022 notes and exposure to commodity and interest-rate movements.