NRG Energy, Inc. — Q2 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2014. NRG is a U.S. competitive energy company with power generation, retail supply, renewables, trading and energy services businesses. Results include major acquisitions completed during the period, notably Edison Mission Energy (EME) and Dominion’s competitive retail electricity business, so comparisons also reflect a larger business.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $3.621 billion | $2.929 billion | $7.107 billion | $5.010 billion |
| Operating income | $89 million | $287 million | $269 million | $21 million |
| Net income (loss) attributable to NRG | $(97) million | $124 million | $(153) million | $(208) million |
| EPS attributable to common stockholders | $(0.30) | $0.37 | $(0.48) | $(0.66) |
| Cash flow from operations | Not presented for quarter | $370 million | $(78) million |
Q2 operating income declined despite higher revenue. Management attributed the deterioration in pretax results primarily to higher operating costs and a $217 million unfavorable change in net mark-to-market results on economic hedges. Six-month pretax loss improved to $304 million from $415 million, with higher gross margin partly offset by costs and unfavorable hedge marks. Q2 and six-month operating margins were approximately 2.5% and 3.8%, respectively.
Cash and cash equivalents were $1.481 billion at June 30, down from $2.254 billion at year-end. Reported liquidity, excluding collateral received, was $3.010 billion, including $1.243 billion of credit-facility availability. Six-month investing cash outflow was $1.753 billion, including $1.817 billion for business acquisitions; financing cash inflow was $634 million. Total debt and capital leases, including current maturities, were approximately $18.998 billion, versus $16.817 billion at December 31, 2013. Interest expense was $274 million in Q2 and $529 million for the six months.
Material changes and significant transactions
- NRG acquired substantially all EME assets on April 1 for a reported purchase price of $3.493 billion, including approximately 8,000 MW of generation assets; the acquisition was financed with stock, new debt and cash, and included assumed project debt. Purchase accounting remained provisional.
- NRG acquired Dominion’s competitive retail business on March 31 for approximately $195 million, adding about 217,000 customers by June 30. Management expected the transaction to add about 500,000 customers in total by year-end 2014.
- On June 30, NRG sold High Desert, Kansas South and El Segundo Energy Center to NRG Yield for $357 million cash plus assumed project debt of about $612 million.
- NRG issued $1.1 billion of 6.25% notes due 2022 and $1.0 billion of 6.25% notes due 2024, using proceeds in part to redeem higher-coupon 2019 notes. Debt-extinguishment losses were $40 million in Q2 and $81 million for the first half.
- After quarter-end, NRG Yield agreed to acquire the 947 MW Alta Wind assets for $870 million plus working-capital adjustments and assumption of $1.6 billion of project debt; closing was expected in Q3 2014. Funding included a post-quarter $630 million equity issuance and $500 million of Yield Operating notes.
Outlook, risks and unusual items
- The filing provides no consolidated earnings guidance. Management estimated remaining 2014 capital expenditures of $815 million before identified financing and partner funding; estimated net capital expenditures were $464 million.
- NRG estimated environmental capital expenditures of approximately $906 million for 2014–2018, including up to $350 million committed for modifications at Powerton and Joliet. Final rules and regulatory outcomes could change these requirements.
- NRG reported $614 million of renewable-energy grant receivables and approximately $408 million of Ivanpah cash-grant bridge loans due between October 2014 and February 2015. A portion of the CVSR grant remained disputed; NRG was seeking $75 million from SunPower under an indemnity claim.
- NRG cited exposure to power, fuel and weather volatility, hedge valuation changes, collateral demands, counterparty performance, substantial debt and regulatory and environmental changes. A $0.50/MMBtu natural-gas price movement was estimated to change collateral posted under marginable contracts by about $282 million; a one-unit heat-rate change was estimated to change it by about $211 million.
- Certain GenOn Mid-Atlantic and REMA subsidiaries could not make distributions at June 30 because they did not meet restricted-payment tests. Moody’s downgraded GenOn-related notes in April. Environmental and legal matters include pending claims and proceedings; outcomes and potential costs are uncertain. NRG also disclosed a project-financing default at High Lonesome Mesa, whose debt was classified as current and could be called for repayment.
- The company declared a $0.14-per-share quarterly dividend in July, equivalent to $0.56 annualized, subject to available capital and other restrictions. It stated disclosure controls were effective; integration of acquired businesses and related controls remained ongoing.
Most important facts for investors to verify
- How much of revenue and gross-margin growth reflects acquired businesses versus comparable operations, and whether EME and Dominion deliver expected benefits.
- How hedge mark-to-market swings reconcile with realized results and future cash generation.
- Whether grant receivables are collected on schedule and bridge loans are repaid without added liquidity pressure.
- Funding, closing and leverage implications of the Alta Wind acquisition, and the effect of project-level debt.
- Actual environmental spending, resolution of material legal and regulatory matters, and restrictions on subsidiary cash distributions.
- Debt maturities, collateral requirements and available liquidity under adverse commodity-price or credit conditions.