Business context and reporting period
NRG Energy, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. NRG is a U.S.-focused competitive power company combining wholesale generation, retail electricity and energy services, and renewable and contracted infrastructure assets. At year-end it reported 45,881 MW of net generation capacity and approximately 2.3 million retail customers. The 2013 comparison is affected by the December 2012 GenOn acquisition: 2013 includes a full year of GenOn operations, while 2012 includes results only from December 15 onward. Segment results were recast following a June 2013 reporting-structure change.
Key financial metrics
Amounts below are in U.S. dollars; financial-statement figures are in millions unless stated otherwise.
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue | $11,295 | $8,422 |
| Operating income | $343 | $350 |
| Operating margin | 3.0% (calculated) | 4.2% (calculated) |
| Net income (loss) | $(352) | $315 |
| Net income (loss) attributable to NRG | $(386) | $295 |
| Diluted earnings (loss) per share | $(1.22) | $1.22 |
| Cash from operating activities | $1,270 | $1,149 |
| Cash used in investing activities | $(2,528) | $(2,262) |
| Cash from financing activities | $1,427 | $2,099 |
Revenue rose 34%, principally reflecting GenOn and higher capacity and energy revenue. Operating income was broadly flat, while net results turned to a loss. NRG recorded $459 million of impairment losses on the Indian River facility and $99 million of investment impairment losses, primarily related to Gladstone. Interest expense rose to $848 million from $661 million. The 2012 comparison included a $296 million GenOn bargain-purchase gain. Retail gross margin declined $39 million to $1,339 million.
At December 31, 2013, cash and cash equivalents were $2,254 million, current assets $7,596 million, and current liabilities $4,204 million. Reported liquidity, excluding collateral received, was $3,695 million, including $1,173 million of available credit facilities. Long-term debt and capital leases totaled $16,817 million, including current maturities; debt to total capitalization was 57.60%, versus 56.74% in 2012. Total stockholders’ equity was $10,469 million. Operating cash flow increased $121 million year over year.
Material changes versus the prior comparable period
- GenOn significantly expanded the East generation business and contributed to higher revenue and conventional-generation gross margin; the partial-year 2012 comparison limits comparability.
- The NRG Yield, Inc. IPO closed in July 2013, raising approximately $468 million net for Yield. NRG retained control and continued to consolidate it.
- Alternative Energy and NRG Yield gross margins increased as solar and gas projects entered commercial operation. NRG also completed the Gregory plant acquisition for approximately $245 million, net of cash acquired.
- NRG’s 2013 generation and retail revenues were affected by higher average Henry Hub natural gas prices, $3.65/MMBtu versus $2.79/MMBtu in 2012. Texas generation gross margin fell, while East-region results rose substantially, primarily due to GenOn.
- Cash flow from operations improved, but investment cash use remained high. Year-end liquidity increased by $333 million, and long-term debt and capital leases increased by approximately $934 million.
Outlook, risks, contingencies and unusual items
- Outlook and capital allocation: The filing provides no clear consolidated earnings or revenue guidance. Management estimated 2014 capital expenditures of $1,277 million gross, or $919 million net of anticipated financing and third-party equity funding. Environmental compliance capital expenditures for 2014–2018 were estimated at approximately $332 million, before additional EME-related spending. NRG announced an intended 17% increase in its annual common dividend, from $0.48 to $0.56 per share, in February 2014.
- Proposed EME acquisition: NRG agreed to acquire substantially all of Edison Mission Energy’s assets for approximately $2.6 billion, subject to adjustments and approvals. The company expected to fund the cash portion with cash on hand and debt proceeds, issue approximately $350 million of NRG shares, and assume about $1.5 billion of project-level non-recourse debt. Closing was expected by the end of the first quarter of 2014; completion and final terms were not assured. The transaction also involved POJO lease obligations and up to $350 million of plant-modification commitments.
- Near-term financing and cash grants: NRG issued $1.1 billion of 6.25% notes due 2022 in January 2014, using part of the proceeds to redeem notes and expecting to use approximately $700 million toward EME. At year-end, approximately $854 million of cash-grant bridge loans were outstanding. NRG had $539 million of grant receivables; subsequent January 2014 awards included $285 million net for CVSR, less than the amount requested, and $66 million net for Alpine.
- Market and operating risks: Results are exposed to volatile wholesale power, natural gas and fuel prices; weather and plant outages; fuel and transmission constraints; collateral and counterparty demands; retail competition and customer credit; and substantial debt and variable-rate exposure. Management identified the potential for depressed long-term gas and power prices to pressure merchant generation economics and potentially impair Texas goodwill.
- Regulatory and environmental exposure: Environmental requirements, including MATS, emissions and water rules, may require material investment or plant retirement. NRG disclosed ongoing or potential regulatory proceedings affecting capacity-market prices, including PJM and ERCOT market-rule changes. It also reported environmental settlements and remediation obligations, including the Big Cajun II consent decree and Maryland ash-site work; the ultimate remediation cost for the Maryland sites was not yet reasonably estimable.
- Other unusual items: A $20 million California Department of Water Resources settlement payment was made in January 2013, with additional EV-charging and wiring commitments expected over four to six years. NRG reported contingent guarantees totaling $4,081 million, including letters of credit and surety bonds, commercial sales arrangements and other guarantees. Certain GenOn subsidiaries did not meet restricted-payment tests at year-end, limiting upstream distributions.
Important facts for investors to verify
- Whether the EME acquisition closed on expected terms, and its actual cash, share issuance, assumed debt, lease guarantees and environmental capital requirements.
- Collection and final treatment of renewable-energy grants, particularly the CVSR award shortfall, and repayment or refinancing of grant bridge loans.
- Underlying cash generation and recurring operating performance excluding acquisition effects, impairments, acquisition costs and the prior-year bargain-purchase gain.
- Debt maturities, interest costs, covenant and restricted-payment capacity, and the availability of liquidity after collateral needs and acquisition funding.
- Potential further impairments or retirement decisions for merchant and coal assets, and the effect of power prices, environmental rules and capacity-market outcomes.
KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2013; management also concluded disclosure controls were effective.