NRG Energy, Inc. recently reported full year 2016 net loss of $891 million, or $2.22 per diluted common share. The loss and resulting loss per share were driven by a $1.2 billion impairment of goodwill and fixed assets as forecasted gas and power prices continue to decline. Adjusted EBITDA for the full year 2016 was $3.3 billion, cash from operations was $2.1 billion and FCFbG was $1.2 billion. Additionally, NRG realized its second best safety year in company history with a full year top decile recordable rate of 0.624.
“Our business delivered a year of strong results, both EBITDA and Free Cash Flow, driven by Retail, which had a record 2016 adjusted EBITDA and its third consecutive year of EBITDA growth,” said Mauricio Gutierrez, NRG President and Chief Executive Officer. “Our focus on strategic priorities and strong execution in 2016 sets the foundation for 2017, allowing us to seize market opportunities while continuing to streamline the business, strengthen the balance sheet and deliver value to shareholders.”
Consolidated Financial Results
|Three Months Ended||Twelve Months Ended|
|($ in millions)||12/31/16||12/31/15||12/31/16||12/31/15|
|Cash From Operations||$||339||$||(83||)||$||2,072||$||1,309|
|Free Cash Flow Before Growth (FCFbG)||$||78||$||(8||)||$||1,209||$||1,127|
|a.||For comparability, 2015 results have been restated to include the negative contribution from Residential Solar of $43 million and $173 million for the three and twelve months ended December 31, 2015.|
As part of its streamlining strategy, NRG has realigned its reporting segments to more clearly report Generation and Retail activities. Accordingly, customer-facing businesses will now reside in the Retail segment. The Company’s Retail segment will now include Business Solutions which includes Commercial & Industrial (C&I) previously in Generation, and the Generation segment now includes BETM. The results of the Company have been recast to reflect these changes.
Table 1: Net (Loss)/Income
|($ in millions)||Three Months Ended||Twelve Months Ended|
|NRG Yield a||(126||)||12||(15||)||65|
|Net Loss c||$||(1,055||)||$||(6,358||)||$||(891||)||$||(6,436||)|
|a.||In accordance with GAAP, 2015 results have been restated to include full impact of the assets in the NRG Yield Drop Down transactions which closed on November 3, 2015, and September 1, 2016.|
|b.||Includes Residential Solar.|
|c.||Includes mark-to-market gains and losses of economic hedges.|
The net loss for the twelve months of 2016 was driven by a $1.2 billion impairment of goodwill and fixed assets as forecasted gas and power prices continue to decline. The net loss for the twelve months of 2015 includes non-cash charges of $3.3 billion5 and $3.0 billion for asset impairments net of taxes and income tax valuation allowance expense, respectively.
Table 2: Adjusted EBITDA
|($ in millions)||Three Months Ended||Twelve Months Ended|
|NRG Yield b||207||189||899||758|
|Adjusted EBITDA d||$||492||$||582||$||3,257||$||3,166|
|a.||See Appendices A-6 through A-9 for Generation regional Reg G results.|
|b.||In accordance with GAAP, 2015 results have been restated to include full impact of the assets in the NRG Yield Drop Down transactions which closed on November 3, 2015, and September 1, 2016.|
|c.||2016 includes Residential Solar. 2015 results have been restated to include negative contribution of $43 million and $173 million for the three and twelve months ended December 31, 2015, respectively.|
|d.||See Appendices A-1 through A-4 for Operating Segment Reg G results.|
Generation: Full year 2016 Adjusted EBITDA was $1.5 billion, $254 million lower than 2015 primarily driven by:
- Gulf Coast Region: $93 million decrease due to lower average realized energy margins in Texas from the decline in power prices, offset by lower operating costs.
- East Region: $365 million decrease from lower dispatch and capacity prices, partially offset by the monetization of forward hedges and lower operating costs on decreased run times, deactivations and plant sales.
- West Region: $122 million increase due to gains from sale of real property at Potrero site, emission credit sales and lower operating costs, partially offset by lower capacity revenues.
- Other Generation: $82 million increase driven by favorable trading results at BETM.
Fourth quarter Adjusted EBITDA was $160 million, $140 million lower than the fourth quarter 2015 primarily driven by:
- Gulf Coast Region: $22 million decrease due to lower realized energy margins in Texas.
- East Region: $128 million lower due to lower realized energy margins and lower capacity prices.
- West Region: $11 million increase due to higher capacity revenues and lower operating costs.
Retail: Full year 2016 Adjusted EBITDA was $811 million, $18 million higher than 2015 driven by lower costs, increased retail margins and favorable settlement of a Texas sales tax audit, partially offset by unfavorable impacts from selling back excess supply due to milder weather conditions in 2016 as compared to 2015 and lower volumes driven by lower average customer usage.
Fourth quarter Adjusted EBITDA was $134 million, $15 million lower than the fourth quarter 2015 due primarily to an increase in spend associated with customer growth initiatives.
Renewables: Full year 2016 Adjusted EBITDA was $187 million, $29 million higher than 2015 due mainly to increased generation at Ivanpah and Mountain Wind and lower operating expenses while fourth quarter Adjusted EBITDA was $1 million higher than the prior year due primarily to increased generation at Ivanpah.
NRG Yield: Full year 2016 Adjusted EBITDA was $899 million, $141 million higher than 2015 due primarily to increased wind production from Renewables, full year contributions from the acquisitions of Desert Sunlight and Spring Canyon which closed in 2015, and a receipt of insurance proceeds from a 2014 wind outage claim.
Fourth quarter Adjusted EBITDA was $207 million, $18 million higher than the fourth quarter 2015 due primarily to increased production in the Renewables segment and a receipt of insurance proceeds from a 2014 wind outage claim.
Corporate: Full year 2016 Adjusted EBITDA was $(145) million, $157 million better than 2015 due to reduced operating expenses at Residential Solar and other expense reductions, also driving the fourth quarter Adjusted EBITDA which was $48 million favorable to 2015.
Liquidity and Capital Resources
Table 3: Corporate Liquidity
|($ in millions)||12/31/16||12/31/15|
|Cash at NRG-Level a||$||570||$||693|
|Cash at Non-Guarantor Subsidiaries||1,403||825|
|a.||December 31, 2016, balance includes $247 million of unrestricted cash held at Midwest Generation (a non-guarantor subsidiary) which can be distributed to NRG without limitation.|
NRG-Level cash as of December 31, 2016, was $570 million, a decrease of $123 million from the end of 2015, and $1.2 billion was available under the Company’s credit facilities at the end of 2016. Total liquidity was $3.6 billion, including restricted cash and cash at non-guarantor subsidiaries (primarily GenOn and NRG Yield).
NRG Strategic Developments
Drop Down Assets and Expanded ROFO Pipeline
In December 2016, NRG offered NRG Yield the opportunity to purchase the following assets: (i) the Minnesota Portfolio, a 40 MW portfolio of wind projects; (ii) the 30 MW Community wind projects; (iii) the 50 MW Jeffers wind projects; and (iv) a 16% interest in the 290 MW Agua Caliente solar facility, pursuant to the ROFO Agreement. In addition to these ROFO Assets, NRG also offered NRG Yield the opportunity to purchase NRG’s 50% interests in seven utility-scale solar projects located in Utah, representing 265 net MW of capacity6.
On February 24, 2017, NRG entered into a definitive agreement with NRG Yield to drop down the Agua Caliente and Utah utility-scale solar projects (311 net MW) for cash consideration of $130 million, plus assumed non-recourse project debt of approximately $464 million7, excluding working capital and other adjustments. Details of the projects, which are expected to close in the second quarter of 2017, include:
- A 16% interest (approximately 31% of NRG’s 51% interest) in the Agua Caliente solar project, one of the ROFO Assets, representing ownership of approximately 46 net MW of capacity. Prior to the agreement, on February 17, 2017, NRG decreased its equity investment through an incremental $128 million non-recourse project-level note, after fees, all of which was distributed to NRG.
- NRG’s 50% interest in seven utility-scale solar projects located in Utah representing 265 net MW of capacity. NRG acquired the Utah assets in November 2016 for upfront cash consideration of $111 million and subsequent to closing reduced the effective cash consideration paid to $63 million as a result of additional non-recourse project-level financings of $48 million8 during the fourth quarter of 2016.
NRG Yield elected not to pursue the acquisition of the Minnesota, Community and Jeffers wind projects at this time, but may continue its evaluation of the projects. NRG Yield has retained the right with NRG, pursuant to the ROFO Agreement, to participate in any third party process to the extent NRG elected to pursue a third party sale of these assets.
In connection with the execution of the definitive agreement, NRG and NRG Yield entered into an amendment to the ROFO Agreement to expand the ROFO Assets pipeline with the addition of 234 net MW of utility-scale solar projects. These assets include:
- Buckthorn Solar, a 154 net MW facility located in Texas with a 25-year PPA with City of Georgetown
- The Hawaii Solar projects, which have a combined capacity of 80 net MW with an average PPA of 22 years with the Hawaiian Electric Company9
NRG achieved a significant milestone in its fleet optimization strategy, completing coal-to-gas projects at three generation facilities across its fleet. The modified units can generate approximately 2.2 GW. The three plants include the Joliet Generating Station (three units converted by fourth quarter 2016 for a total of 1,326 MW), the Shawville Generating Station (all four units are currently in final commissioning following modification for a total of 597 MW) and the New Castle Generating Station, (all three units have been modified by second quarter 2016 for a total of 325 MW).
Over 2016, NRG continued to grow renewables development opportunities with acquisitions of 1.7GW of wind and solar assets. As of December 2016, NRG held 543 MW of backlog in execution across the utility wind and solar, community solar and DG solar businesses. Over the fourth quarter 2016, NRG accelerated utility project origination across CAISO, ERCOT and ISO-NE, growing the project pipeline to approximately 3.3 GW, a 25% increase over the previous quarter. NRG successfully transitioned 2.7 GW of the combined NRG and NYLD fleet (approximately 26 wind and 7 solar projects) to self-perform operations in 2016, including Alta and CVSR.
On December 29, 2016, NRG completed, on time and on budget, construction and final acceptance of performance testing at the Petra Nova project, the world’s largest post-combustion carbon capture system. During performance testing, the facility captured more than 90% of CO2 from a 240 MW equivalent slipstream of flue gas off an existing coal-fueled electrical generating unit at the WA Parish power plant in Fort Bend County, southwest of Houston. At this level of operation, Petra Nova can capture more than 5,000 tons of CO2 per day, which is the equivalent of taking more than 350,000 cars off the road.
In 2016, NRG completed the installation of environmental control upgrades at its 638 MW Avon Lake Unit 9 facility (COD June 2016) and its 1,538 MW Powerton coal facility (COD December 2016).
NRG is reaffirming its guidance range for 2017 with respect to Adjusted EBITDA, cash from operations and FCFbG as set forth below.
Table 4: 2017 Adjusted EBITDA and FCF before Growth Guidance
|($ in millions)||Guidance|
|Adjusted EBITDAa||$2,700 – $2,900|
|Cash From Operations||$1,355 – $1,555|
|Free Cash Flow – before Growth||$800 – $1,000|
|a.||Non-GAAP financial measure; see Appendix Table A-11 for GAAP Reconciliation to Net Income that excludes fair value adjustments related to derivatives. The Company is unable to provide guidance for Net Income due to the impact of such fair value adjustments related to derivatives in a given year.|
Capital Allocation Update
On January 24, 2017, NRG repriced the 2023 Term Loan Facility, reducing the interest rate margin by 50 basis points to LIBOR plus 2.25%. In 2016, NRG reduced corporate debt by $792 million10. Combined with the debt repurchases in 2015 and the extension of debt maturities at a lower average coupon rate, NRG has realized annual interest savings of approximately $87 million, plus an additional $10 million in dividend savings from the repurchase of 100% of its outstanding $345 million, 2.822% convertible perpetual preferred stock. NRG is also announcing $200 million of additional capital reserved for debt reduction bringing total 2017 allocation to discretionary debt reduction to $600 million.
On January 18, 2017, NRG declared a quarterly dividend on the Company’s common stock of $0.03 per share, payable February 15, 2017, to stockholders of record as of February 1, 2017, representing $0.12 on an annualized basis.
The Company’s common stock dividend, corporate level debt reduction and share repurchases are subject to available capital, market conditions and compliance with associated laws and regulations.
Earnings Conference Call
On February 28, 2017, NRG will host a conference call at 8:00 a.m. Eastern to discuss these results. Investors, the news media and others may access the live webcast of the conference call and accompanying presentation materials by logging on to NRG’s website at http://www.nrg.com and clicking on “Investors.” The webcast will be archived on the site for those unable to listen in real time.