Business context and reporting period
NRG Energy, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. NRG sells electricity and related products to retail customers, operates generation assets, and trades wholesale energy. It reported approximately 26,000 MW of generation capacity at quarter-end. Prior-period results were recast to present NRG Yield, the Renewables Platform, Carlsbad and GenOn as discontinued operations; comparisons therefore reflect the filing’s revised presentation.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $3.061 billion | $2.740 billion | $7.795 billion | $7.246 billion |
| Operating income | $416 million | $297 million | $981 million | $528 million |
| Income from continuing operations | $306 million | $185 million | $601 million | $116 million |
| Net income (loss) attributable to NRG common stockholders | $(72) million | $171 million | $280 million | $(619) million |
| Basic earnings (loss) per share | $(0.24) | $0.54 | $0.91 | $(1.95) |
| Economic gross margin (non-GAAP) | $1.171 billion | $1.048 billion | $3.112 billion | $2.742 billion |
Q3 operating revenue rose about 12% year over year, while operating income increased by $119 million. Continuing-operations earnings improved, but Q3 common-stockholder results were more than offset by a $354 million after-tax loss from discontinued operations. That loss included disposal-related items and the California property-tax indemnity. For the nine months, the improvement in continuing earnings and lower discontinued-operation losses contributed to the swing to positive common-stockholder income.
For the nine months, operating cash flow was $1.082 billion, versus $736 million in 2017; investing cash outflow was $59 million, versus $422 million; and financing cash outflow was $666 million, versus $214 million. Cash and cash equivalents were $1.359 billion at September 30. Reported liquidity, excluding collateral received, was $2.841 billion, including $1.454 billion of credit-facility availability.
Balance-sheet long-term debt and capital leases were $7.251 billion carrying value, plus $593 million current maturities; the debt note reports $7.438 billion before debt issuance costs and discounts. Total liabilities were $12.367 billion and stockholders’ equity was negative $936 million. NRG repurchased $1 billion of common stock during the nine months and paid $0.03 per share each quarter.
Material changes versus the prior comparable period
- Retail revenue increased, partly reflecting higher customer counts and the June acquisition of XOOM Energy, which added approximately 300,000 customers. Q3 retail economic gross margin increased $25 million, although retail GAAP gross margin fell $162 million, largely reflecting mark-to-market movements.
- Nine-month economic gross margin increased $370 million. Management attributed gains to retail and Gulf Coast performance, while East/West/Other was affected by lower capacity pricing, lower load-contract volumes, and the deconsolidation of Ivanpah and Agua Caliente.
- NRG completed the $1.348 billion sale of NRG Yield and the Renewables Platform to GIP on August 31. The transaction triggered deconsolidation and disposal charges, including a $153 million property-tax indemnity provision and other commitments and fees.
- NRG deconsolidated Ivanpah in the second quarter, recording a $22 million loss, and Agua Caliente in the third quarter, recording an $8 million gain. The company also recorded $74 million of nine-month impairments, principally for Dunkirk and Keystone/Conemaugh.
- Interest expense declined $71 million for the nine months, reflecting debt repurchases and deconsolidations, among other items. The company also recorded a $22 million nine-month loss on debt extinguishment.
Outlook, management commentary, risks and unusual items
Management said the Transformation Plan was expected to be substantially completed by the end of 2018 and fully implemented by the end of 2020. Its stated targets include $1.065 billion of recurring cost savings and margin enhancement, $3.1 billion of asset-sale proceeds, and a 3.0x 2018 net-debt-to-Adjusted-EBITDA ratio. NRG reported completing its targeted $640 million debt reduction after the October 2018 redemption and term-loan prepayment, and said it was on track for the leverage target. The filing does not provide a specific full-year revenue or earnings forecast.
Planned or anticipated transactions included the $1.0 billion South Central sale, then expected in Q4 2018, and the $365 million Carlsbad sale, expected in Q1 2019. NRG also offered to sell its 35% Agua Caliente interest for approximately $120 million, with closing anticipated in Q1 2019. These transactions were subject to closing conditions.
- Key operating exposures include wholesale power and fuel prices, weather and demand, generation outages, collateral requirements, counterparty credit, and access to capital. NRG reported commodity portfolio VaR of $72 million at September 30 and noted that a $0.50/MMBtu natural-gas price movement could change posted margin collateral by approximately $82 million.
- Regulatory and market uncertainties include PJM capacity-market reforms, pending FERC action on grid resilience, state nuclear subsidies, and environmental rules. Management said the proposed federal ACE rule replacing the Clean Power Plan would, on balance, be positive for its fleet.
- Contingencies include ongoing legal and environmental proceedings and the October 2018 Chapter 11 filing by TWCC, the mine operator responsible for reclamation at Jewett. NRG supports a $99 million reclamation bond obligation and said the effect of TWCC’s bankruptcy remained uncertain.
- NRG disclosed that it expects a $17 million pension curtailment loss and a $2 million post-retirement plan remeasurement gain in Q4 2018. It also expects lease accounting adoption in 2019 to materially affect its financial statements, with the amount not yet determined.
- The filing cautions that actual results may differ from forward-looking statements. NRG reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the South Central, Carlsbad and Agua Caliente transactions closed on the expected terms and dates, and their final cash proceeds and debt effects.
- How much continuing-operations earnings and cash generation persist after asset disposals, and how discontinued-operation items affect reported comparisons.
- Whether NRG achieved its 3.0x leverage target and how subsequent debt repayments, share repurchases and dividends affected liquidity and capital allocation.
- The realized economics of XOOM and other customer acquisitions, including customer retention, supply costs and retail margins.
- Developments in GenOn/REMA restructuring, environmental obligations, significant litigation and capacity-market proceedings.