NRG ENERGY, INC. quarterly report, Q3 FY2017

Business context and reporting period

NRG Energy, Inc. filed this Form 10-Q for the quarter and nine months ended September 30, 2017. NRG is an integrated power company with generation, wholesale trading and retail electricity businesses; it reported approximately 30,000 MW of net generation capacity at period-end.

Beginning June 14, 2017, NRG deconsolidated GenOn after GenOn entities filed for Chapter 11 bankruptcy. NRG presented GenOn as discontinued operations and recast prior-period results accordingly, limiting comparability with 2016.

Financial performance and position

• Q3 gross margin was $1.312 billion versus $1.414 billion; management-defined economic gross margin, a non-GAAP measure, was $1.356 billion versus $1.524 billion.
• Nine-month gross margin was $3.578 billion versus $4.069 billion; economic gross margin was $3.626 billion versus $4.203 billion.
• Nine-month investing cash outflow was $765 million versus $255 million. Financing cash provided was $59 million, compared with $587 million used in the prior period.
• At September 30, cash and cash equivalents were $1.223 billion; total liquidity excluding collateral received was approximately $3.364 billion, including $1.604 billion of credit-facility availability. NRG reported no cash borrowings on its revolving credit facility.
• Debt and capital leases totaled approximately $17.138 billion including current maturities; $1.247 billion was classified as current and $15.658 billion as long-term debt and leases after financing costs and discounts. The balance-sheet current ratio was approximately 1.3x ($4.760 billion current assets/$3.705 billion current liabilities).
• Common dividends were $0.03 per share in each 2017 quarter through Q3. NRG declared another $0.03 quarterly dividend in October.

Material changes versus the prior comparable period

• Q3 revenue declined $372 million and operating income declined $52 million year over year. Nine-month revenue fell $196 million and operating income fell $167 million.
• For the first nine months, operating cash flow declined $935 million. NRG cited higher cash collateral requirements, lower operating income adjusted for noncash items, working-capital movements, discontinued-operation cash use, and timing of payments and inventory purchases.
• Q3 earnings from continuing operations improved, but total net income fell versus 2016, which included $265 million of income from discontinued operations. Nine-month results include an $802 million discontinued-operations loss, including a $208 million loss on GenOn deconsolidation and settlement- and pension-related charges.
• SG&A decreased $64 million in Q3 and $104 million for nine months, primarily from reduced personnel costs and selling and marketing activity. Interest expense decreased $16 million in Q3 and $26 million for nine months.
• Q3 economic gross margin decreased $168 million overall. Nine-month economic gross margin declined $577 million; management cited weaker generation margins, lower realized prices, milder weather and lower East/West generation, partly offset by other segment factors.

Outlook, commentary, risks and unusual items

• Transformation Plan: Announced in July, the three-year plan targets $1.065 billion of recurring cost savings and margin enhancement, up to $4.0 billion in net asset-sale proceeds, and reduction of consolidated debt from about $19.5 billion to about $6.5 billion. NRG targets $4.8–$6.3 billion of excess cash for allocation through 2020 after reaching a 3.0x net-debt/Adjusted EBITDA target. Full implementation is expected by end-2020, with significant completion by end-2018. Targets include $370 million of working-capital improvements and approximately $290 million of one-time implementation costs; outcomes are uncertain.
• GenOn restructuring: The restructuring support agreement contemplated $261.3 million of settlement cash, net of amounts GenOn owes NRG, NRG retention of approximately $106 million of pension obligations and a $28 million services credit. Approval and implementation were not assured. NRG and GenOn were still negotiating certain definitive terms after quarter-end.
• Post-quarter debt action: On October 16, NRG redeemed $604 million principal of notes for $630 million including accrued interest. It expected a $12 million extinguishment loss and approximately $47 million in annualized interest savings.
• Operational events: Hurricane Harvey affected Retail by approximately $20 million and Gulf Coast Generation, including Cottonwood damage, by approximately $20 million. Cottonwood returned to service in Q4; NRG was pursuing potential property-insurance recovery. Will County Unit 4 was expected to return from an extended outage in early 2018.
• Project and impairment matters: NRG recorded $77 million of nine-month impairment losses, including $41 million on the terminated Bacliff project and $36 million associated with Renewables. NRG asserted a claim for approximately $48 million against BTEC; BTEC disputed termination and sought damages. Management said lower long-term merchant power-price assumptions made significant Q4 impairment of certain goodwill or long-lived assets reasonably possible.
• Other risks: Key exposures include commodity prices and hedging, collateral and liquidity demands, debt and refinancing requirements, GenOn bankruptcy outcomes, environmental and regulatory changes, weather and outages, and litigation. The Puente project faced a potential permit denial; NRG also cited challenges to nuclear zero-emission credit programs and uncertainty around retail-market rules.
• Management stated liquidity and operating cash flows were expected to fund operating needs, maintenance capital expenditures and dividends under then-current circumstances. No earnings guidance was provided in the supplied filing text.

Important facts for investors to verify

1. Progress, timing and realized proceeds from asset sales, cost reductions and debt reduction under the Transformation Plan.
2. Final GenOn restructuring terms, bankruptcy-court approval, net settlement cash paid, and the ultimate pension and benefit liabilities retained by NRG.
3. Whether operating cash flow and available liquidity remain adequate as collateral requirements, capital spending and debt maturities evolve.
4. Q4 impairment testing assumptions and any resulting goodwill or long-lived-asset charges.
5. Resolution and collectability of NRG’s Bacliff claim, and the outcome of material legal and regulatory proceedings.