NRG Energy, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial figures are in millions unless otherwise noted. NRG operates competitive-market retail energy and power generation businesses, with approximately 23,000 MW of generation capacity reported at quarter-end.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $2,465 | $2,461 | $4,630 | $4,526 |
| Operating income | $320 | $174 | $541 | $535 |
| Income from continuing operations | $189 | $27 | $283 | $265 |
| Net income attributable to NRG | $201 | $72 | $683 | $351 |
| Diluted EPS | $0.75 | $0.23 | $2.49 | $1.10 |
| Economic gross margin (non-GAAP) | $951 | $999 | $1,755 | $1,837 |
Revenue was nearly flat in Q2; operating income rose substantially. Q2 net income included $13 million from discontinued operations. Six-month net income included $401 million from discontinued operations, primarily reflecting disposal-related gains; continuing-operations income was $283 million. Economic gross margin declined 5% in Q2 and about 4% for the six-month period. Management attributed margin pressures to weather, lower customer load and changing generation market conditions; results also reflect volatile, largely unrealized hedge mark-to-market movements.
For the six months, operating cash flow was $389 million, down from $513 million. Investing activities provided $1.103 billion, mainly reflecting asset-sale proceeds; financing used $1.720 billion, including debt repayments and stock repurchases. Cash and cash equivalents were $294 million at June 30, versus $563 million at year-end 2018. Total liquidity, including available credit facilities and excluding counterparty deposits, was $2.104 billion.
Gross long-term debt and capital leases, including current maturities, totaled approximately $6.043 billion; reported long-term debt and capital leases were $5.794 billion, with $87 million current. Total stockholders’ equity was negative $1.648 billion. Current assets of $3.045 billion exceeded current liabilities of $2.294 billion. The company repurchased 26.6 million shares for approximately $1.054 billion during the first half.
Material changes and capital allocation
- NRG sold its South Central Portfolio, Carlsbad project and Guam assets during the first half, reporting approximately $1.376 billion of aggregate sale proceeds. The South Central sale closed in February; NRG leases the Cottonwood plant back through May 2025.
- In May, NRG issued $733 million of 5.25% unsecured notes due 2029 to redeem its remaining 6.25% notes due 2024. It also issued $1.1 billion of secured first-lien notes due 2024 and 2029 and repaid its $1.7 billion 2023 term loan using note proceeds and cash. The transactions generated a $47 million debt-extinguishment loss. Management estimated approximately $15 million of 2019 interest savings and $25 million annualized savings.
- The revolving credit facility was increased to $2.6 billion and extended to May 2024. Borrowing margins were reduced; collateral may be released if NRG obtains investment-grade ratings from two of three agencies, subject to reinstatement conditions.
- NRG adopted the new lease standard in 2019. At June 30, it reported $499 million of operating lease right-of-use assets and $587 million of discounted lease liabilities; adoption did not materially affect earnings or cash flows.
Outlook, commentary and risks
- NRG said it expects to complete its Transformation Plan by the end of 2020. It expected to realize $590 million of cost savings and $135 million of margin enhancements in 2019; approximately $95 million of additional one-time costs to achieve were expected in 2019. No quantified full-year earnings or EPS guidance is provided in the filing text.
- The company revised its credit-metric target to further reduce leverage. It expected comparable cash dividends to continue in the foreseeable future, subject to capital availability, market conditions and contractual limits. After quarter-end, it reported completing the $1 billion 2019 repurchase program and authorized an additional $250 million for the second half.
- NRG agreed to acquire Stream Energy’s retail business for $300 million plus estimated transaction costs and working-capital adjustments of approximately $25 million; the acquisition closed August 1, 2019, after the reporting date, adding about 450,000 customers.
- NRG’s subsidiaries had notices of default under project financing arrangements tied to PG&E’s bankruptcy. NRG said it believed the related Agua Caliente and Ivanpah power purchase agreements would not be rejected. Its stated maximum loss was limited to equity investments of $206 million in Agua Caliente and $16 million in Ivanpah; the outcome of the bankruptcy and contract disputes remained uncertain.
- NRG guaranteed up to $124 million of Petra Nova project debt if a debt-coverage covenant was not met; the covenant test and possible repayment were scheduled for Q3 2019. The company also reported an $80 million letter-of-credit facility supporting the Cottonwood lease.
- Other material risks include FERC investigations concerning South Central and ISO-NE market conduct, regulatory changes to capacity and scarcity-pricing markets, environmental compliance costs, generation outages and weather, commodity-price volatility, collateral requirements, and counterparty performance. Illinois regulators found coal-ash violations at four facilities; hearings were to determine relief. NRG stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Investor verification priorities
- Separate continuing operating performance from discontinued-operation gains, particularly the $401 million six-month contribution to net income.
- Review cash generation and liquidity against the substantial first-half uses for debt repayment and share repurchases, as well as planned repurchases and dividends.
- Assess refinancing outcomes, interest savings, debt maturities, secured claims and the conditions attached to potential collateral release.
- Monitor PG&E bankruptcy developments and related project-financing defaults, plus the Petra Nova covenant test and potential guarantee payment.
- Track FERC proceedings, coal-ash remediation or penalties, and other regulatory and environmental contingencies; their ultimate financial effects are uncertain.
- Check post-quarter developments, including the Stream acquisition, additional buyback authorization and any subsequent guidance or updated liquidity disclosures.