NRG Energy, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 3, 2018. NRG is an integrated power company with retail energy businesses and a generation portfolio of approximately 30,000 net MW. Comparisons reflect GenOn as a discontinued operation after its 2017 Chapter 11 filing; interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $2.421 billion | $2.382 billion |
| Operating income | $406 million | $36 million |
| Net income (loss) | $233 million | $(203) million |
| Net income (loss) attributable to NRG | $279 million | $(163) million |
| Diluted EPS | $0.87 | $(0.52) |
| Operating cash flow | $357 million | $(67) million |
| Capital expenditures | $358 million | $236 million |
- Revenue increased about 2%. Reported gross margin rose to $1.326 billion from $979 million, while management’s non-GAAP economic gross margin rose to $1.150 billion from $1.020 billion. Economic gross margin excludes specified mark-to-market and amortization items.
- Reported earnings included substantial derivative mark-to-market gains: $204 million from energy commodity contracts, including $196 million on economic hedges and $8 million from trading. Management attributed key hedge movements largely to ERCOT price and heat-rate changes.
- Interest expense fell $58 million to $167 million, principally due to lower fair-value expense on interest-rate swaps and prior senior-note repurchases. The effective tax rate was negative 0.4%; NRG recorded a $1 million tax benefit on $232 million pretax income.
- Operating cash flow improved by $424 million year over year, including favorable movements in collateral and working capital. Investing cash outflow was $432 million and financing cash outflow $49 million. Cash, counterparty funds and restricted cash totaled $1.412 billion at quarter-end, down $124 million from year-end.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $764 million; current assets were $4.557 billion and current liabilities $3.708 billion.
- Long-term debt and capital leases were $15.406 billion, with $956 million classified as current. Total debt and capital leases before debt issuance costs and discounts were $16.588 billion.
- Management reported liquidity, excluding collateral received, of $2.785 billion, comprising $1.171 billion of cash and restricted cash and $1.614 billion of credit facility availability, down from $3.210 billion at December 31, 2017.
- NRG repriced its 2023 term loan in March, lowering the spread to LIBOR plus 1.75% and eliminating the LIBOR floor; it expects approximately $47 million of interest savings over the loan’s remaining life.
Changes, outlook and key risks
- Profitability improved sharply year over year amid lower operating expenses, reduced SG&A and interest expense, higher economic gross margin, and favorable mark-to-market movements. SG&A decreased $69 million; Q1 also included $20 million of reorganization costs, primarily employee costs related to the Transformation Plan.
- The Transformation Plan targets $1.065 billion of recurring cost savings and margin enhancement, up to $3.2 billion of asset-sale proceeds, and a 3.0x net debt/Adjusted EBITDA corporate credit ratio. NRG said significant implementation was expected by year-end 2018 and full implementation by the end of 2020. Since inception, it reported $242 million of non-recurring working-capital improvements and $83 million of one-time costs to achieve.
- Announced transactions include sales of NRG’s NRG Yield ownership and renewables platform for $1.375 billion, South Central for $1.0 billion, BETM for $70 million, and Carlsbad for $365 million; most were expected to close in the second half of 2018, subject to conditions. NRG completed the Buckthorn sale for about $42 million in March. It also agreed to acquire XOOM Energy for about $204 million plus estimated transaction costs of $6 million, with closing expected in the second half of 2018.
- The board authorized up to $1 billion of share repurchases; NRG bought 3.1 million shares for approximately $93 million in March. The quarterly dividend was $0.03 per share, and the company declared the same amount for payment in May.
- Management noted elevated ERCOT forward prices for July and August 2018, which could make deviations in demand or generation availability materially affect results. Other risks include commodity-price and collateral volatility, generation outages and weather, counterparty performance, market-rule and environmental changes, and execution and closing risks for the transformation-related sales and acquisition.
- GenOn’s Chapter 11 restructuring remained a material contingency. NRG’s agreed settlement provides for $261.3 million of cash consideration, reduced by amounts GenOn owes NRG; the filing reported approximately $125 million owed under the intercompany facility. A related GenMA settlement became effective April 27, 2018 and included $37.5 million of letters of credit and approximately $6 million of professional-fee reimbursement. The filing also describes unresolved legal and regulatory matters; outcomes and potential liabilities are not always estimable.
- NRG adopted ASC 606 on January 1, 2018, recording a $16 million credit to opening accumulated deficit. It expects the 2019 lease-accounting standard to materially affect the financial statements, but the amount was still under evaluation.
Important facts for investors to verify
- How much of the earnings improvement reflects recurring operating performance versus unrealized derivative marks and other nonrecurring effects.
- Progress, final terms, proceeds, debt reduction and closing conditions for the announced asset sales and XOOM acquisition.
- Liquidity and collateral needs under changing power, fuel and heat-rate prices, as well as the timing and availability of credit facilities.
- Final costs and exposure associated with GenOn’s restructuring, related settlements, and other material legal or regulatory proceedings.
- Transformation Plan delivery against its cost, asset-sale and leverage targets, and the financial impact of the pending lease-accounting adoption.