NRG Energy, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the same period in 2016. NRG operates a competitive U.S. power generation and retail energy business, with approximately 45,909 MW of net generation capacity at quarter-end.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Operating revenue | $2.759 billion | $3.229 billion |
| Operating income | $47 million | $476 million |
| Net income/(loss) attributable to NRG | $(163) million | $82 million |
| Basic and diluted EPS | $(0.52) | $0.24 |
| Gross margin | $1.223 billion | $1.727 billion |
| Economic gross margin | $1.242 billion | $1.713 billion |
| Net cash used by operating activities | $(68) million | Cash provided: $554 million |
| Capital expenditures | $268 million | $279 million |
| Cash and cash equivalents | $1.513 billion | $1.973 billion at Dec. 31, 2016 |
| Total liquidity, excluding collateral received | $3.274 billion | $3.636 billion at Dec. 31, 2016 |
| Debt and capital leases, balance-sheet carrying amounts | $19.360 billion | $19.226 billion at Dec. 31, 2016 |
Operating margin was approximately 1.7% of revenue, versus 14.7% a year earlier. The quarter-end balance sheet showed $5.440 billion of current assets and $4.197 billion of current liabilities. Total debt and capital leases included $1.688 billion classified as current. NRG reported $1.364 billion of credit-facility availability.
Material changes versus the prior comparable period
- Revenue declined $470 million and operating income fell $429 million. Economic gross margin was broadly stable overall, but results were affected by weaker Generation and Retail performance in several areas and by lower NRG Yield output.
- Generation economic gross margin decreased $429 million: $216 million in the East, $112 million in the Gulf Coast, $66 million in the West, and $35 million in Other. Drivers included lower capacity revenues, facility sales and deactivations, lower generation, and BETM trading losses. Higher unrealized hedge gains partly offset the Gulf Coast decline in reported gross margin.
- Retail economic gross margin decreased $9 million to $337 million; gross margin fell $177 million, primarily reflecting a $170 million unfavorable mark-to-market change. Average retail mass-customer count increased to 2.826 million from 2.760 million.
- NRG Yield economic gross margin decreased $16 million, mainly because of lower wind and solar generation. Operations and maintenance expense fell $103 million, while SG&A rose $20 million, including costs for the strategic review and GenOn going-concern advisors.
- Operating cash flow swung from $554 million provided to $68 million used. Management attributed the $622 million decline chiefly to collateral movements, lower operating income adjusted for non-cash items, generation and inventory timing, and receivables.
Outlook, risks, contingencies, and unusual items
- GenOn going-concern risk: GenOn had $885 million of cash, but substantial amounts were held at subsidiaries restricted from making distributions. Its $691 million of senior notes were due June 15, 2017, and NRG disclosed substantial doubt about GenOn’s ability to continue as a going concern. GenOn was considering creditor and lessor negotiations, refinancing, asset sales, or Chapter 11. NRG stated it had no general obligation to support GenOn beyond its secured intercompany revolving agreement; $214 million remained available to GenOn under that $500 million facility. A resolution could materially affect NRG.
- GenOn Mid-Atlantic disputed lessor allegations of lease defaults. In February, trustees drew $125 million under NRG’s revolving facility; NRG Mid-Atlantic had filed suit seeking declaratory and other relief. GenOn-related noteholder litigation also expanded in an amended complaint filed April 30, 2017.
- NRG said its overall liquidity and operating cash flows should be adequate for ordinary needs, including operating and maintenance spending and dividends, except for GenOn-related commitments. The company expected comparable cash dividends to continue in the foreseeable future, subject to capital, market, legal, and contractual constraints; the declared quarterly dividend was $0.03 per share.
- For the remainder of 2017, estimated capital expenditures were $871 million before third-party funding and financing, and $286 million net of those sources. Environmental capital spending estimates may decline following EPA reconsideration and an administrative stay of the Effluent Limitations Guidelines.
- NRG repriced its 2023 term loan in January, reducing the margin by 50 basis points to LIBOR plus 2.25%; management expected approximately $9 million of interest savings in 2017 and $60 million over the loan’s life. In March, NRG Yield acquired solar interests for $130 million cash plus working-capital adjustments and assumed approximately $328 million of project debt.
- Q1 2016 included a $146 million investment impairment, primarily related to Petra Nova, and a $32 million asset-sale gain; Q1 2017 had no impairment and a $2 million sale gain. In 2017, adoption of intra-entity transfer tax guidance reduced non-current assets by $267 million with a corresponding reduction to cumulative retained deficit.
- Key exposures include power and fuel price volatility, hedging and collateral requirements, counterparty credit, substantial indebtedness, environmental regulation, and litigation. NRG estimated that a $0.50/MMBtu gas-price move could change collateral posted by approximately $220 million under marginable contracts. Significant proceedings include challenges to Illinois and New York nuclear zero-emission credit programs and environmental, consumer, and GenOn-related litigation.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing provides no specific consolidated earnings guidance.
Most important facts for investors to verify
- Whether GenOn refinanced, settled, or otherwise repaid the $691 million of notes due June 15, 2017, and the resulting effects on NRG.
- How much of reported cash and liquidity is accessible to NRG versus restricted at subsidiaries, especially GenOn entities.
- Whether operating cash flow and collateral needs improve, and how much capital spending is ultimately funded by partners or project financing.
- Whether Q1 earnings changes reflect recurring operating economics or volatile hedge marks, asset sales, and other unusual items.
- Developments in GenOn lease and noteholder disputes, environmental requirements, and regulatory proceedings affecting power-market revenues.