NRG Energy, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. NRG owns and operates power generation, trades energy and fuel, and supplies retail customers. The period reflects GenOn, acquired in December 2012, while the comparable 2012 periods do not include GenOn’s results.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $3,490 | $2,331 | $8,500 | $6,359 |
| Operating income | $535 | $86 | $571 | $313 |
| Net income (loss) | $143 | $8 | $(47) | $61 |
| Net income (loss) attributable to NRG | $124 | $(1) | $(74) | $43 |
| Common EPS, diluted | $0.37 | $(0.01) | $(0.25) | $0.16 |
| Operating cash flow | Not presented by quarter in the supplied text | $823 | $1,058 |
- Q3 operating margin was approximately 15.3%, versus 3.7% a year earlier; net margin was approximately 4.1%, versus 0.3%. Nine-month operating margin was approximately 6.7%, versus 4.9%; NRG-attributable net margin was approximately -0.9%, versus 0.7%.
- Q3 revenue increased 50% and operating income rose to $535 million. Management cited higher conventional generation gross margin, including the contribution from GenOn, improved NRG Yield and alternative energy results, and a $206 million improvement in net mark-to-market results. Q3 retail gross margin declined $13 million.
- For the first nine months, revenue rose 34%, but NRG reported a $74 million attributable loss. Management cited higher generation, Yield and alternative-energy gross margins, offset by lower retail gross margin, higher operating costs and higher interest expense. The comparison is significantly affected by GenOn’s acquisition.
- Q3 income-tax expense was $163 million, compared with a $113 million benefit in Q3 2012. Nine-month tax benefit was $47 million, versus $246 million in 2012.
Cash, debt and liquidity
- At September 30, 2013, cash and cash equivalents were $2.129 billion; restricted cash was $307 million. Reported liquidity, excluding collateral received, was $3.671 billion, including $1.235 billion of credit-facility availability.
- Total long-term debt and capital leases were $16.713 billion, including $911 million current; debt and leases totaled $15.883 billion at December 31, 2012, with $147 million current. Debt fair value was $17.1 billion versus a $16.7 billion carrying amount.
- Nine-month operating cash flow was $823 million, down from $1.058 billion. Investing cash use was $2.031 billion, including $1.581 billion of capital expenditures; financing provided $1.251 billion. Cash increased $42 million to $2.129 billion. Operating cash flow less reported capital expenditures was negative $758 million, a simple derived measure, not company-defined free cash flow.
- Cash flow was pressured by working-capital uses and increased cash collateral paid for risk management. The company reported $288 million of cash collateral posted and $943 million of letters of credit outstanding to third parties, primarily for commercial activities.
- In June, NRG added $450 million to its term loan, repriced it to LIBOR plus 2.00%, and amended its revolving facility to $2.5 billion, at LIBOR plus 2.25%, with maturity extended to July 2018. It also redeemed $575 million of GenOn 2014 notes and repurchased other senior notes; nine-month debt-extinguishment loss was $50 million.
Material changes, outlook and risks
- NRG Yield completed its July IPO, raising approximately $468 million net. NRG retained control and continued consolidating Yield. NRG recorded a $221 million increase to additional paid-in capital related to the noncontrolling interest transaction; it was not reported as operating income.
- NRG acquired the 388 MW Gregory cogeneration plant in August for approximately $245 million net of cash acquired. It also expanded solar and contracted generation operations; Ivanpah construction delays pushed expected completion of all three units into Q4 2013.
- On October 18, 2013, NRG agreed to acquire substantially all Edison Mission Energy assets for $2.6 billion, subject to adjustment, including 12.7 million NRG shares and cash. The proposed funding included cash on hand, approximately $700 million of new corporate debt, and assumption of about $1.5 billion of non-recourse debt. The deal remained subject to court and regulatory approvals and was expected to close by Q1 2014; completion was not assured. NRG also committed up to $350 million for Powerton and Joliet plant modifications.
- Management estimated environmental capital expenditures of approximately $530 million for 2013–2017, including $223 million for GenOn. Environmental regulation, emissions-control requirements, pending litigation and remediation obligations may raise costs; the ultimate remediation obligation for Maryland ash sites could not be reasonably estimated.
- NRG increased its annual common dividend by 33% to $0.48 per share. It paid $0.12 per share in Q3 and declared another $0.12 dividend for November 2013. The proposed EME acquisition led NRG to suspend the remaining $175 million of planned 2013 share repurchases.
- Retail gross margin was under pressure from competition, lower unit margins, supply costs and weather. Management warned that competition and higher supply costs could further reduce unit margins. Results are also exposed to wholesale power and fuel prices, weather, outages, collateral requirements, counterparty performance, interest rates and regulatory changes.
- Environmental and market-rule developments could affect operations and prices, including proposed tighter regional emissions limits, pending power-market proceedings and changes to capacity-market rules. Management stated that results may differ materially from forward-looking statements; the filing provides no specific consolidated earnings guidance.
- Management said liquidity and operating cash flows were expected to cover operating needs, maintenance capital expenditures, dividends and other commitments. This outlook is subject to market conditions and financing access. Disclosure controls were assessed as effective; integration of GenOn systems and controls remained ongoing.
Most important facts for investors to verify
- How much of the reported year-over-year revenue and operating-profit growth reflects GenOn consolidation versus comparable operating performance and market movements.
- Whether NRG can sustain operating cash generation while funding capital expenditures, debt service, collateral needs and the proposed EME acquisition.
- The final EME purchase price, financing, approvals, assumed liabilities and environmental spending, and whether the transaction closes on expected terms and timing.
- Cash-grant timing and repayment of approximately $860 million of cash-grant bridge loans, including $405 million due in Q1 2014.
- Exposure to environmental compliance and remediation costs, retail margin compression, power and fuel price volatility, and potential collateral calls.