Clearway Energy, Inc. - Quarter Report: 2014 June (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the Quarterly Period Ended: June 30, 2014 | ||
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 001-36002
NRG Yield, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 46-1777204 (I.R.S. Employer Identification No.) | |
211 Carnegie Center, Princeton, New Jersey (Address of principal executive offices) | 08540 (Zip Code) |
(609) 524-4500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of July 31, 2014, there were 34,586,250 shares of Class A common stock outstanding, par value $0.01 per share, and 42,738,750 shares of Class B common stock outstanding, par value $0.01 per share.
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TABLE OF CONTENTS
Index
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION | |
GLOSSARY OF TERMS | |
PART I — FINANCIAL INFORMATION | |
ITEM 1 — FINANCIAL STATEMENTS AND NOTES | |
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
ITEM 4 — CONTROLS AND PROCEDURES | |
PART II — OTHER INFORMATION | |
ITEM 1 — LEGAL PROCEEDINGS | |
ITEM 1A — RISK FACTORS | |
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
ITEM 3 — DEFAULTS UPON SENIOR SECURITIES | |
ITEM 4 — MINE SAFETY DISCLOSURES | |
ITEM 5 — OTHER INFORMATION | |
ITEM 6 — EXHIBITS | |
SIGNATURES |
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q of NRG Yield, Inc., or the Company, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The words "believes," "projects," "anticipates," "plans," "expects," "intends," "estimates" and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors, risks and uncertainties include the factors described under Item 1A — Risk Factors in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2013, including, but not limited to, the following:
• | The Company's ability to maintain and grow its quarterly dividend; |
• | The Company's ability to successfully identify, evaluate and consummate acquisitions; |
• | The Company's ability to raise additional capital due to its indebtedness; |
• | Hazards customary to the power production industry and power generation operations such as fuel and electricity price volatility, unusual weather conditions, catastrophic weather-related or other damage to facilities, unscheduled generation outages, maintenance or repairs, unanticipated changes to fuel supply costs or availability due to higher demand, shortages, transportation problems or other developments, environmental incidents, or electric transmission or gas pipeline system constraints and the possibility that the Company may not have adequate insurance to cover losses as a result of such hazards; |
• | The Company's ability to operate its businesses efficiently, manage maintenance capital expenditures and costs effectively, and generate earnings and cash flows from its asset-based businesses in relation to its debt and other obligations; |
• | The willingness and ability of the counterparties to the Company's offtake agreements to fulfill their obligations under such agreements; |
• | The Company's ability to enter into contracts to sell power and procure fuel on acceptable terms and prices as current offtake agreements expire; |
• | Government regulation, including compliance with regulatory requirements and changes in market rules, rates, tariffs and environmental laws; |
• | Operating and financial restrictions placed on the Company and its subsidiaries that are contained in the project-level debt facilities and other agreements of certain subsidiaries and project-level subsidiaries generally and in the NRG Yield Operating LLC revolving credit facility or the Company's convertible notes; and |
• | The Company's ability to borrow additional funds and access capital markets, as well as the Company's substantial indebtedness and the possibility that the Company may incur additional indebtedness going forward. |
Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause the Company's actual results to differ materially from those contemplated in any forward-looking statements included in this Quarterly Report on Form 10-Q should not be construed as exhaustive.
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GLOSSARY OF TERMS
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:
2013 Form 10-K | NRG Yield, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 | |
Alta Sellers | Terra-Gen Finance Company, LLC and certain of its affiliates | |
Acquired ROFO Assets | The TA-High Desert, RE Kansas South and El Segundo projects, which were acquired from NRG on June 30, 2014 | |
ASC | The FASB Accounting Standards Codification, which the FASB established as the source of authoritative U.S. GAAP | |
ASU | Accounting Standards Updates - updates to the ASC | |
CFTC | U.S. Commodity Future Trading Commission | |
Distributed Solar | Solar power projects that primarily sell power produced to customers for usage on site, or are interconnected to sell power into the local distribution grid | |
El Segundo | NRG West Holdings LLC, the subsidiary of Natural Gas Repowering LLC, which owns the El Segundo Energy Center project | |
ERCOT | Electric Reliability Council of Texas, the Independent System Operator and the regional reliability coordinator of the various electricity systems within Texas | |
EWG | Exempt Wholesale Generator | |
Exchange Act | The Securities Exchange Act of 1934, as amended | |
FERC | Federal Energy Regulatory Commission | |
FPA | Federal Power Act | |
ISO | Independent System Operator | |
ISO-NE | ISO New England Inc. | |
LIBOR | London Inter-Bank Offered Rate | |
Marsh Landing | NRG Marsh Landing LLC, formerly GenOn Marsh Landing LLC | |
MMBtu | Million British Thermal Units | |
MW | Megawatt | |
MWh | Saleable megawatt hours, net of internal/parasitic load megawatt-hours | |
MWt | Megawatts Thermal Equivalent | |
Net Exposure | Counterparty credit exposure to NRG Yield, Inc. net of collateral | |
NOLs | Net operating losses | |
NRG | NRG Energy, Inc. | |
NRG Yield | Accounting predecessor, representing the combination of the projects that were acquired by NRG Yield LLC in July 2013 | |
NRG Yield, Inc. | NRG Yield, Inc., or the Company | |
NRG Yield LLC | The holding company, owned by NRG, the holder of Class B common units, and NRG Yield, Inc., the holder of the Class A common units | |
NRG Yield Operating LLC | The holding company that owns the project companies and is a wholly owned subsidiary of NRG Yield LLC | |
OCI / OCL | Other comprehensive income / loss | |
PPA | Power Purchase Agreement | |
PUCT | Public Utility Commission of Texas | |
PUHCA | Public Utility Holding Company Act of 2005 | |
PURPA | Public Utility Regulatory Policies Act of 1978 | |
RE Kansas South | NRG Solar Kansas South LLC, the operating subsidiary of NRG Solar Kansas South Holdings LLC, which owns the RE Kansas South project | |
Remaining ROFO Assets | Three remaining power generating assets that NRG has given NRG Yield, Inc. a right of first offer to acquire, and to the extent NRG elects to sell those assets, prior to July 16, 2018 | |
TA High Desert | TA-High Desert LLC, the operating subsidiary of NRG Solar Mayfair LLC, which owns the TA High Desert project | |
Terra-Gen | Terra-Gen Operating Company, LLC | |
U.S. | United States of America | |
U.S. DOE | U.S. Department of Energy |
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U.S. GAAP | Accounting principles generally accepted in the United States | |
Utility-Scale Solar | Solar power projects, typically 20 MW or greater in size (on an alternating current, or AC, basis), that are interconnected into the transmission or distribution grid to sell power at a wholesale level | |
VaR | Value at Risk | |
VIE | Variable Interest Entity |
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PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
NRG YIELD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
(In millions, except per share amounts) | 2014 | 2013 (a) | 2014 | 2013 (a) | |||||||||||
Operating Revenues | |||||||||||||||
Total operating revenues | $ | 134 | $ | 82 | $ | 274 | $ | 135 | |||||||
Operating Costs and Expenses | |||||||||||||||
Cost of operations | 45 | 32 | 105 | 61 | |||||||||||
Depreciation and amortization | 36 | 10 | 60 | 20 | |||||||||||
General and administrative — affiliate | 2 | 2 | 4 | 4 | |||||||||||
Total operating costs and expenses | 83 | 44 | 169 | 85 | |||||||||||
Operating Income | 51 | 38 | 105 | 50 | |||||||||||
Other Income/(Expense) | |||||||||||||||
Equity in earnings of unconsolidated affiliates | 14 | 2 | 15 | 6 | |||||||||||
Other income, net | — | 1 | 1 | 1 | |||||||||||
Interest expense | (29 | ) | (6 | ) | (56 | ) | (11 | ) | |||||||
Total other expense | (15 | ) | (3 | ) | (40 | ) | (4 | ) | |||||||
Income Before Income Taxes | 36 | 35 | 65 | 46 | |||||||||||
Income tax expense | 2 | — | 5 | — | |||||||||||
Net Income | 34 | 35 | 60 | 46 | |||||||||||
Pre-acquisition net income of Acquired ROFO Assets | 9 | 1 | 17 | 1 | |||||||||||
Net Income Excluding Pre-acquisition Net Income of Acquired ROFO Assets | 25 | 34 | 43 | 45 | |||||||||||
Income attributable to NRG (b) | 19 | 33 | |||||||||||||
Net Income Attributable to NRG Yield, Inc. | $ | 6 | $ | 10 | |||||||||||
Basic and Diluted Earnings per Share Attributable to Class A Common Stockholders | |||||||||||||||
Weighted average number of Class A common shares outstanding | 23 | 23 | |||||||||||||
Basic and Diluted Earnings per Class A Common Share | $ | 0.26 | $ | 0.42 | |||||||||||
Dividends per Class A Common Share | $ | 0.35 | $ | 0.68 | |||||||||||
(a) Retrospectively adjusted as discussed in Note 1, Nature of Business.
(b) The calculation of income attributable to NRG excludes pre-acquisition net income of the Acquired ROFO Assets.
See accompanying notes to consolidated financial statements.
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NRG YIELD, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2014 | 2013 (a) | 2014 | 2013 (a) | ||||||||||||
(In millions) | |||||||||||||||
Net Income | $ | 34 | $ | 35 | $ | 60 | $ | 46 | |||||||
Other Comprehensive (Loss) Income, net of tax | |||||||||||||||
Unrealized (loss) gain on derivatives | (12 | ) | 25 | (24 | ) | 29 | |||||||||
Other comprehensive (loss) income | (12 | ) | 25 | (24 | ) | 29 | |||||||||
Comprehensive Income | 22 | 60 | 36 | 75 | |||||||||||
Less: Pre-acquisition net income of Acquired ROFO Assets | 9 | 1 | 17 | 1 | |||||||||||
Less: Comprehensive income attributable to NRG | 11 | 59 | 18 | 74 | |||||||||||
Comprehensive Income Attributable to NRG Yield, Inc. | $ | 2 | $ | — | $ | 1 | $ | — | |||||||
(a) Retrospectively adjusted as discussed in Note 1, Nature of Business.
See accompanying notes to consolidated financial statements.
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NRG YIELD, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2014 | December 31, 2013 (a) | ||||||
(In millions) | (unaudited) | ||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 87 | $ | 59 | |||
Restricted cash | 23 | 67 | |||||
Accounts receivable — trade | 56 | 51 | |||||
Accounts receivable — affiliate | 1 | 5 | |||||
Inventory | 14 | 15 | |||||
Derivative instruments | 1 | 1 | |||||
Notes receivable | 6 | 6 | |||||
Renewable energy grant receivable | — | 147 | |||||
Deferred income taxes | 1 | — | |||||
Prepayments and other current assets | 7 | 27 | |||||
Total current assets | 196 | 378 | |||||
Property, plant and equipment | |||||||
In service | 2,477 | 2,459 | |||||
Under construction | 11 | 6 | |||||
Total property, plant and equipment | 2,488 | 2,465 | |||||
Less accumulated depreciation | (233 | ) | (174 | ) | |||
Net property, plant and equipment | 2,255 | 2,291 | |||||
Other Assets | |||||||
Equity investments in affiliates | 253 | 227 | |||||
Notes receivable | 17 | 21 | |||||
Notes receivable — affiliate | — | 2 | |||||
Intangible assets, net of accumulated amortization of $8 and $6 | 105 | 103 | |||||
Derivative instruments | 5 | 20 | |||||
Deferred income taxes | 312 | 146 | |||||
Other non-current assets | 93 | 50 | |||||
Total other assets | 785 | 569 | |||||
Total Assets | $ | 3,236 | $ | 3,238 |
(a) Retrospectively adjusted as discussed in Note 1, Nature of Business.
See accompanying notes to consolidated financial statements.
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NRG YIELD, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, 2014 | December 31, 2013 (a) | ||||||
(In millions, except share information) | (unaudited) | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current Liabilities | |||||||
Current portion of long-term debt | $ | 119 | $ | 214 | |||
Accounts payable | 15 | 42 | |||||
Accounts payable — affiliate | 50 | 52 | |||||
Derivative instruments | 30 | 31 | |||||
Accrued expenses and other current liabilities | 19 | 30 | |||||
Total current liabilities | 233 | 369 | |||||
Other Liabilities | |||||||
Long-term debt | 1,880 | 1,569 | |||||
Out-of-market contracts | 5 | 5 | |||||
Derivative instruments | 24 | 16 | |||||
Other non-current liabilities | 21 | 27 | |||||
Total non-current liabilities | 1,930 | 1,617 | |||||
Total Liabilities | 2,163 | 1,986 | |||||
Commitments and Contingencies | |||||||
Stockholders' Equity | |||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued | — | — | |||||
Class A common stock, $0.01 par value; 500,000,000 shares authorized; 22,511,250 shares issued | — | — | |||||
Class B common stock, $0.01 par value; 500,000,000 shares authorized; 42,738,750 shares issued | — | — | |||||
Additional paid-in capital | 815 | 621 | |||||
Retained earnings | 3 | 8 | |||||
Accumulated other comprehensive loss | (9 | ) | — | ||||
Noncontrolling interest | 264 | 623 | |||||
Total Stockholders' Equity | 1,073 | 1,252 | |||||
Total Liabilities and Stockholders’ Equity | $ | 3,236 | $ | 3,238 |
(a) Retrospectively adjusted as discussed in Note 1, Nature of Business.
See accompanying notes to consolidated financial statements.
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NRG YIELD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30, | |||||||
2014 | 2013 (a) | ||||||
(In millions) | |||||||
Cash Flows from Operating Activities | |||||||
Net income | $ | 60 | $ | 46 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Distributions and equity in earnings of unconsolidated affiliates | (8 | ) | 3 | ||||
Depreciation and amortization | 60 | 20 | |||||
Amortization of financing costs and debt discount/premium | 5 | 1 | |||||
Amortization of intangibles and out-of-market contracts | 1 | 1 | |||||
Changes in deferred income taxes | 5 | — | |||||
Changes in derivative instruments | — | (10 | ) | ||||
Changes in other working capital | (50 | ) | (80 | ) | |||
Net Cash Provided by (Used in) Operating Activities | 73 | (19 | ) | ||||
Cash Flows from Investing Activities | |||||||
Payment to NRG for Acquired ROFO Assets | (357 | ) | — | ||||
Capital expenditures | (29 | ) | (267 | ) | |||
Decrease (increase) in restricted cash | 44 | (52 | ) | ||||
Decrease in notes receivable, including affiliates | 5 | 3 | |||||
Proceeds from renewable energy grants | 137 | 24 | |||||
Investments in unconsolidated affiliates | (15 | ) | (19 | ) | |||
Other | 11 | — | |||||
Net Cash Used in Investing Activities | (204 | ) | (311 | ) | |||
Cash Flows from Financing Activities | |||||||
Capital contributions from NRG | 2 | 150 | |||||
Dividends and returns of capital to NRG | (24 | ) | (312 | ) | |||
Payment of dividends and distributions | (44 | ) | — | ||||
Proceeds from issuance of long-term debt — external | 386 | 519 | |||||
Payment of debt issuance costs | (13 | ) | (4 | ) | |||
Payment of borrowings from affiliate | — | (2 | ) | ||||
Payments for long-term debt — external | (148 | ) | (25 | ) | |||
Net Cash Provided by Financing Activities | 159 | 326 | |||||
Net Increase in Cash and Cash Equivalents | 28 | (4 | ) | ||||
Cash and Cash Equivalents at Beginning of Period | 59 | 22 | |||||
Cash and Cash Equivalents at End of Period | $ | 87 | $ | 18 |
(a) Retrospectively adjusted as discussed in Note 1, Nature of Business.
See accompanying notes to consolidated financial statements.
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NRG YIELD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Nature of Business
NRG Yield, Inc., or the Company, was formed by NRG as a Delaware corporation on December 20, 2012. On July 22, 2013, the Company issued 22,511,250 shares of Class A common stock in an initial public offering. The Company utilized the net proceeds of the initial public offering to acquire 19,011,250 Class A units of NRG Yield LLC from NRG, in return for $395 million and 3,500,000 Class A units of NRG Yield LLC directly from NRG Yield LLC in return for $73 million. In connection with the acquisition of the Class A units, the Company also became the sole managing member of NRG Yield LLC thereby acquiring a controlling interest in NRG Yield LLC.
Immediately prior to the acquisition, NRG Yield LLC acquired a portfolio of contracted renewable and conventional generation and thermal infrastructure assets, primarily located in the Northeast, Southwest and California regions of the United States, from NRG in return for Class B units in NRG Yield LLC. These assets were simultaneously contributed by NRG Yield LLC to its direct wholly owned subsidiary NRG Yield Operating LLC at their historical cost. As of June 30, 2014, the Company owned 34.5% of NRG Yield LLC and consolidates the results of NRG Yield LLC through its controlling interest, with NRG's 65.5% interest shown as noncontrolling interest in the financial statements. As described in Note 3, Business Acquisitions, on June 30, 2014, NRG Yield Operating LLC acquired the TA High Desert, RE Kansas South, and El Segundo projects from NRG for total cash consideration of $357 million plus assumed project level debt.
The following table represents the structure of the Company as of June 30, 2014:
![](https://www.sec.gov/Archives/edgar/data/0001567683/000156768314000015/yieldorgpica02a01.jpg)
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On July 29, 2014, the Company issued 12,075,000 shares of Class A common stock for net proceeds, after underwriting discount and expenses, of $630 million. The Company utilized the proceeds of the offering to acquire 12,075,000 additional Class A units of NRG Yield LLC and, as a result, it currently owns 44.7% of NRG Yield LLC, with NRG retaining 55.3% of NRG Yield LLC.
For the period prior to the initial public offering, the accompanying unaudited combined financial statements represent the combination of the assets that NRG Yield LLC acquired and were prepared using NRG's historical basis in the assets and liabilities. For the purposes of the unaudited combined financial statements, the term "NRG Yield" represents the accounting predecessor, or the combination of the acquired businesses. For all periods subsequent to the initial public offering, the accompanying unaudited consolidated financial statements represent the consolidated results of the Company, which consolidates NRG Yield LLC through its controlling interest.
As of June 30, 2014, the Company's operating assets are comprised of the following projects:
Projects | Percentage Ownership | Net Capacity (MW) (a) | Offtake Counterparty | Expiration | ||||||
Conventional | ||||||||||
GenConn Middletown | 49.95 | % | 95 | Connecticut Light & Power | 2041 | |||||
GenConn Devon | 49.95 | % | 95 | Connecticut Light & Power | 2040 | |||||
Marsh Landing | 100 | % | 720 | Pacific Gas and Electric | 2023 | |||||
El Segundo | 100 | % | 550 | Southern California Edison | 2023 | |||||
1,460 | ||||||||||
Utility-Scale Solar | ||||||||||
Alpine | 100 | % | 66 | Pacific Gas and Electric | 2033 | |||||
Avenal | 49.95 | % | 23 | Pacific Gas and Electric | 2031 | |||||
Avra Valley | 100 | % | 25 | Tucson Electric Power | 2032 | |||||
Blythe | 100 | % | 21 | Southern California Edison | 2029 | |||||
Borrego | 100 | % | 26 | San Diego Gas and Electric | 2038 | |||||
CVSR | 48.95 | % | 122 | Pacific Gas and Electric | 2038 | |||||
Roadrunner | 100 | % | 20 | El Paso Electric | 2031 | |||||
RE Kansas South | 100 | % | 20 | Pacific Gas and Electric | 2033 | |||||
TA High Desert | 100 | % | 20 | Southern California Edison | 2033 | |||||
343 | ||||||||||
Distributed Solar | ||||||||||
AZ DG Solar Projects | 100 | % | 5 | Various | 2025 - 2033 | |||||
PFMG DG Solar Projects | 51 | % | 5 | Various | 2032 | |||||
10 | ||||||||||
Wind | ||||||||||
South Trent | 100 | % | 101 | AEP Energy Partners | 2029 | |||||
Thermal | ||||||||||
Thermal equivalent MWt(b) | 100 | % | 1,346 | Various | Various | |||||
Thermal generation | 100 | % | 123 | Various | Various | |||||
Total net capacity (excluding equivalent MWt) | 2,037 |
(a) Net capacity represents the maximum, or rated, generating capacity of the facility multiplied by the Company's percentage ownership in the facility as of June 30, 2014.
(b) For thermal energy, net capacity represents MWt for steam or chilled water and excludes 118 MWt which is available under the right-to-use provisions contained in agreements between two of NRG Yield Inc.'s thermal facilities and certain of their customers.
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Substantially all of the Company's generation assets are under long-term contractual arrangements for the output or capacity from these assets. The thermal assets are comprised of district energy systems and combined heat and power plants that produce steam, hot water and/or chilled water and, in some instances, electricity at a central plant. Three of the district energy systems are subject to rate regulation by state public utility commissions while the other district energy systems have rates determined by negotiated bilateral contracts.
The historical combined financial statements include allocations of certain NRG corporate expenses. Management believes the assumptions and methodology underlying the allocation of general corporate overhead expenses are reasonable. The allocated costs include legal, accounting, tax, treasury, information technology, insurance, employee benefit costs, and other corporate costs. However, such expenses may not be indicative of the actual level of expense that would have been incurred if the Company had operated as an independent, publicly-traded company during the periods prior to the initial public offering or of the costs expected to be incurred in the future. Allocation of NRG corporate expenses was $4 million for the period ending June 30, 2013. In connection with the initial public offering, the Company entered into a management services agreement with NRG for various services, including human resources, accounting, tax, legal, information systems, treasury, and risk management. Costs incurred by the Company under this agreement were $4 million for the six months ending June 30, 2014.
For all periods prior to the initial public offering, member's equity represents the combined equity of the Company's subsidiaries, including adjustments necessary to present the Company's financial statements as if the Company were in existence as of the beginning of the periods represented. Member's equity represents NRG's equity in the subsidiaries, and accordingly, in connection with the initial public offering, the historical equity balance as of that date was reclassified into noncontrolling interest. Subsequent to the initial public offering, stockholders' equity represents the equity associated with the Class A common stockholders, with the equity associated with the Class B common stockholders, or NRG, classified as noncontrolling interest.
The acquisition of the TA High Desert, RE Kansas South, and El Segundo projects from NRG on June 30, 2014 was accounted for as a transfer of entities under common control. The guidance requires retrospective combination of the entities for all periods presented as if the combination has been in effect since the inception of common control. Accordingly, the Company prepared its consolidated financial statements to reflect the transfer as if it had taken place on January 1, 2013, or from the date the entities were under common control, which was May 13, 2013 for RE Kansas South and March 28, 2013 for TA High Desert, which represent the dates these entities were acquired by NRG. Member's equity represents NRG's equity in the subsidiaries, and accordingly, in connection with the acquisition by the Company, the balance was reclassified into noncontrolling interest.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the Securities and Exchange Commission’s, or SEC’s, regulations for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The following notes should be read in conjunction with the accounting policies and other disclosures as set forth in the notes to the Company’s consolidated financial statements set forth in the 2013 Form 10-K. Interim results are not necessarily indicative of results for a full year.
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present fairly the Company's consolidated financial position as of June 30, 2014, and the results of operations, comprehensive income and cash flows for the six months ended June 30, 2014, and 2013.
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Note 2 — Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during the reporting period. Actual results could be different from these estimates.
Noncontrolling Interest
The following table reflects the changes in the Company's noncontrolling interest balance:
(In millions) | |||
Balance as of December 31, 2013 (As previously reported) | $ | 382 | |
Net Assets of Acquired ROFO Assets as of December 31, 2013 | 241 | ||
Balance as of December 31, 2013 (As currently reported) | 623 | ||
Payment to NRG for Acquired ROFO assets | (357 | ) | |
Comprehensive income, including pre-acquisition net income from Acquired ROFO Assets | 35 | ||
Non-cash contributions | 14 | ||
Cash distributions, net of cash contributions | (51 | ) | |
Balance as of June 30, 2014 | $ | 264 |
Distributions
On January 30, 2014, NRG Yield LLC declared a distribution on its units of $0.33 per unit, which was paid on March 17, 2014. The portion of the distribution paid by NRG Yield LLC to NRG was recorded as a reduction to the Company's noncontrolling interest balance.
On May 5, 2014, NRG Yield LLC declared a distribution on its Class B unit of $0.35 per share, which was paid to NRG, its Class B unitholder, on June 16, 2014. The distribution by NRG Yield LLC to NRG was recorded as a reduction to the Company's noncontrolling interest balance.
On June 30, 2014, the Company acquired the TA High Desert, RE Kansas South, and El Segundo projects, as discussed in Note 3, Business Acquisitions. The difference between the cash paid and historical value of the entities' equity of $113 million was recorded as a distribution to NRG and reduced the balance of its noncontrolling interest. In addition, as the TA High Desert, RE Kansas South and El Segundo projects were owned by NRG until June 30, 2014, the pre-acquisition earnings of such projects are recorded as attributable to NRG's noncontrolling interest. Prior to the date of acquisition, El Segundo made a distribution to NRG of $24 million.
Recent Accounting Developments
ASU 2014-09 - In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU No. 2014-09. The amendments of ASU No. 2014-09 complete the joint effort between the FASB and the International Accounting Standards Board, or IASB, to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards, or IFRS, and to improve financial reporting. The guidance in ASU No. 2014-09 provides that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services provided and establishes the following steps to be applied by an entity: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies the performance obligation. The guidance of ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods therein. Early adoption is not permitted. The Company is currently evaluating the impact of the standard on the Company's results of operations, cash flows and financial position.
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ASU 2013-11 - In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, or ASU No. 2013-11. The amendments of ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction of a deferred tax asset for an NOL, a similar tax loss or tax credit carryforwards rather than a liability when the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and the entity intends to use the deferred tax asset for that purpose. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 with early adoption permitted. The Company adopted this standard effective January 1, 2014. The adoption of this standard did not impact the Company's results of operations or cash flows as the unrecognized tax benefits relate to state issues and the Company either has no NOLs or the NOLs are limited for that particular jurisdiction.
Note 3 — Business Acquisitions
2014 Acquisitions
Alta Wind Portfolio Acquisition — On June 3, 2014, the Company and NRG Yield Operating LLC entered into a purchase and sale agreement with the Alta Sellers, whereby the Company agreed to acquire 100% of the membership interests of Alta Wind Asset Management Holdings, LLC, Alta Wind Company, LLC, Alta Wind X Holding Company, LLC and Alta Wind XI Holding Company, LLC, which collectively own 7 wind facilities that total 947 MW located in Tehachapi, California and a portfolio of associated land leases, or the Alta Wind Assets. The purchase price for the Alta Wind Assets is $870 million, as well as working capital adjustments, plus the assumption of $1.6 billion of non-recourse project-level debt. The purchase price is expected to be funded by the following components:
(in millions) | ||||
Issuance of corporate bonds | $ | 500 | ||
Issuance of Class A common stock | 370 | |||
Total | $ | 870 |
In order to fund the purchase price, the Company completed an equity offering of 12,075,000 shares of its Class A common stock at an offering price of $54.00 per share on July 29, 2014, which resulted in net proceeds of $630 million, after underwriting discount and expenses. In addition, on August 5, 2014, NRG Yield Operating LLC issued $500 million of senior unsecured notes, which bear interest at a rate of 5.375% and mature in August 2024. The acquisition of the Alta Wind Assets is subject to customary closing conditions, including the receipt of regulatory approvals. The Company expects the acquisition to close during the third quarter of 2014. The excess of the proceeds over the amount utilized for the acquisition will be available for general corporate purposes, including future acquisitions.
Acquired ROFO Assets — On June 30, 2014, NRG Yield Operating LLC acquired the El Segundo, TA High Desert, and RE Kansas South projects for a total cash consideration of $357 million, which represents a base purchase price of $349 million and $8 million of working capital adjustments. In addition, the acquisition included the assumption of $612 million in project level debt. The assets and liabilities transferred to the Company relate to interests under common control by NRG and accordingly, were recorded at historical cost in accordance with ASC 805-50, Business Combinations - Related Issues. The difference between the cash proceeds and historical value of the net assets was recorded as a distribution to NRG and reduced the balance of its noncontrolling interest. Since the transaction constituted a transfer of net assets under common control, the guidance requires retrospective combination of the entities for all periods presented as if the combination has been in effect since the inception of common control.
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The following is a summary of assets and liabilities transferred in connection with the acquisition:
RE Kansas South | TA High Desert | El Segundo | |||||||||
(In millions) | |||||||||||
Current assets | $ | 1 | $ | 3 | $ | 43 | |||||
Property, plant and equipment | 50 | 67 | 625 | ||||||||
Non-current assets | 2 | 13 | 76 | ||||||||
Total assets | 53 | 83 | 744 | ||||||||
Debt | 35 | 57 | 520 | ||||||||
Other current and non-current liabilities | 2 | — | 30 | ||||||||
Total liabilities | 37 | 57 | 550 | ||||||||
Net assets acquired | $ | 16 | $ | 26 | $ | 194 |
The following table presents historical information summary combining the financial information for the Acquired ROFO assets transferred in connection with the acquisition:
December 31, 2013 | |||||||||||||||||||
As Previously Reported | RE Kansas South | TA High Desert | El Segundo | As Currently Reported | |||||||||||||||
(In millions) | |||||||||||||||||||
Current assets | $ | 267 | $ | 25 | $ | 28 | $ | 58 | $ | 378 | |||||||||
Property, plant and equipment | 1,541 | 51 | 63 | 636 | 2,291 | ||||||||||||||
Non-current assets | 505 | 3 | 10 | 51 | 569 | ||||||||||||||
Total assets | 2,313 | 79 | 101 | 745 | 3,238 | ||||||||||||||
Debt | 1,133 | 58 | 80 | 512 | 1,783 | ||||||||||||||
Other current and non-current liabilities | 169 | 5 | 3 | 26 | 203 | ||||||||||||||
Total liabilities | $ | 1,302 | $ | 63 | $ | 83 | $ | 538 | $ | 1,986 |
Three months ended June 30, 2013 | Six months ended June 30, 2013 | ||||||||||||||||||||||||||||||||||||||
As Previously Reported | RE Kansas South | TA High Desert | El Segundo | As Currently Reported | As Previously Reported | RE Kansas South | TA High Desert | El Segundo | As Currently Reported | ||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||
Operating revenues | $ | 79 | $ | — | $ | 3 | $ | — | $ | 82 | $ | 132 | $ | — | $ | 3 | $ | — | $ | 135 | |||||||||||||||||||
Operating income | 38 | — | 1 | (1 | ) | 38 | 50 | — | 1 | (1 | ) | 50 | |||||||||||||||||||||||||||
Net income | $ | 34 | $ | 1 | $ | — | $ | — | $ | 35 | $ | 45 | $ | 1 | $ | — | $ | — | $ | 46 |
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2013 Acquisitions
Energy Systems — On December 31, 2013, NRG Energy Center Omaha Holdings, LLC, an indirect wholly owned subsidiary of NRG Yield LLC, acquired Energy Systems Company, or Energy Systems, for approximately $120 million. The acquisition was financed from cash on hand. Energy Systems is an operator of steam and chilled water thermal facilities that provides heating and cooling services to nonresidential customers in Omaha, Nebraska. The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The purchase price was primarily allocated to property, plant and equipment of $60 million, customer relationships of $59 million, and $1 million of working capital. The initial accounting for the business combination is not complete because the evaluations necessary to assess the fair values of certain net assets acquired are still in process. The provisional amounts are subject to revision until the evaluations are completed to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date.
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Note 4 — Property, Plant and Equipment
The Company’s major classes of property, plant, and equipment were as follows:
June 30, 2014 | December 31, 2013 | Depreciable Lives | |||||||
(In millions) | |||||||||
Facilities and equipment | $ | 2,429 | $ | 2,411 | 5 - 40 Years | ||||
Land and improvements | 48 | 48 | |||||||
Construction in progress | 11 | 6 | |||||||
Total property, plant and equipment | 2,488 | 2,465 | |||||||
Accumulated depreciation | (233 | ) | (174 | ) | |||||
Net property, plant and equipment | $ | 2,255 | $ | 2,291 |
Renewable Energy Grants
Borrego achieved commercial operations on February 12, 2013 and transferred the construction in progress to property, plant and equipment. On May 16, 2013, the Borrego solar project, as a qualified renewable energy project, applied for a cash grant in lieu of investment tax credit from the U.S. Treasury Department in the amount of $39 million. A receivable for the cash grant was recorded when the application was filed, which resulted in a reduction to the book basis of the property, plant and equipment. In addition, the receivable was reduced to $36 million as a result of the federal government’s sequestration, which was put into effect on March 1, 2013. The related deferred tax asset of $10 million recognizable was recorded with a corresponding reduction of the book value of Borrego’s property plant and equipment. In March 2014, the Company received payment of $30 million for the cash grant related to Borrego. The Company recorded a reserve for the shortage and is in the process of evaluating all of its options for recovering the full amount of the reserve.
TA High Desert achieved commercial operations on March 25, 2013 and transferred the construction in progress to property, plant and equipment. On May 22, 2013, the TA High Desert solar project, as a qualified renewable energy project, applied for a cash grant in lieu of investment tax credit from the U.S. Treasury Department in the amount of $25 million. A receivable for the cash grant was recorded when the application was filed, which resulted in a reduction to the book basis of the property, plant and equipment. In addition, the receivable was reduced as a result of the federal government’s sequestration, which was put into effect on March 1, 2013. The related deferred tax asset of $6 million was recorded with a corresponding reduction of the book value of TA High Desert's property plant and equipment. In April 2014, TA High Desert received a payment of $20 million for the cash grant and reduced the book value of its property plant and equipment by the amount by which the grant was reduced.
RE Kansas South achieved commercial operations on June 7, 2013 and transferred the construction in progress to property, plant and equipment. On June 27, 2013, the RE Kansas South solar project, as a qualified renewable energy project, applied for a cash grant in lieu of investment tax credit from the U.S. Treasury Department in the amount of $23 million. A receivable for the cash grant was recorded when the application was filed, which resulted in a reduction to the book basis of the property, plant and equipment. In addition, the receivable was reduced to $21 million as a result of the federal government’s sequestration, which was put into effect on March 1, 2013. The related deferred tax asset of $6 million recognizable was recorded with a corresponding reduction of the book value of RE Kansas South's property plant and equipment. In April 2014, RE Kansas South received a payment of $21 million for the cash grant.
Note 5 — Variable Interest Entities, or VIEs
GenConn Energy LLC — The Company has a 49.95% interest in GCE Holdings LLC, the owner of GenConn Energy LLC, or GenConn, a limited liability company formed to construct, own and operate two 190 MW peaking generation facilities in Connecticut at the Devon and Middletown sites. Each of these facilities was constructed pursuant to a 30-year cost of service type contract with the Connecticut Light & Power Company. All four units at the GenConn Devon facility reached commercial operation in June 2010 and were released to the ISO-NE by July 2010. In June 2011, all four units at the GenConn Middletown facility reached commercial operation and were released to the ISO-NE. GenConn is considered a VIE under ASC 810, however the Company is not the primary beneficiary, and accounts for its investment under the equity method.
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The project was funded through equity contributions from the owners and non-recourse, project level debt. As of June 30, 2014, the Company's investment in GenConn was $116 million and its maximum exposure to loss is limited to its equity investment. On September 17, 2013, GenConn refinanced its existing project financing facility. As of June 30, 2014, the refinanced facility has a $237 million note with an interest rate of 4.73% per annum and a maturity date of July 2041 and a $35 million working capital facility that matures in 2018 which can be used to issue letters of credit at an interest rate of 1.875% per annum. The refinancing is secured by all of the GenConn assets.
The following table presents summarized unaudited financial information for GCE Holdings LLC:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Income Statement Data: | (In millions) | ||||||||||||||
Operating revenues | $ | 18 | $ | 19 | $ | 44 | $ | 39 | |||||||
Operating income | 10 | 12 | 20 | 23 | |||||||||||
Net income | 7 | 7 | 14 | 15 |
June 30, 2014 | December 31, 2013 | ||||||
Balance Sheet Data: | (In millions) | ||||||
Current assets | $ | 31 | $ | 32 | |||
Non-current assets | 446 | 453 | |||||
Current liabilities | 16 | 18 | |||||
Non-current liabilities | 228 | 231 |
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Note 6 — Fair Value of Financial Instruments
For cash and cash equivalents, restricted cash, accounts receivable — trade, accounts payable, affiliate accounts payable and receivable, accrued expenses and other liabilities, the carrying amount approximates fair value because of the short-term maturity of those instruments and are classified as Level 1 within the fair value hierarchy.
The estimated carrying amounts and fair values of the Company’s recorded financial instruments not carried at fair market value are as follows:
As of June 30, 2014 | As of December 31, 2013 | ||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
(In millions) | |||||||||||||||
Assets: | |||||||||||||||
Notes receivable — affiliate | $ | — | $ | — | $ | 2 | $ | 2 | |||||||
Notes receivable, including current portion | 23 | 23 | 27 | 27 | |||||||||||
Liabilities: | |||||||||||||||
Long-term debt, including current portion | 1,999 | 2,087 | 1,783 | 1,785 |
The fair value of notes receivable and long-term debt are based on expected future cash flows discounted at market interest rates, or current interest rates for similar instruments and are classified as Level 3 within the fair value hierarchy.
Fair Value Accounting under ASC 820
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
• | Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. |
• | Level 2—inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. |
• | Level 3—unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. |
In accordance with ASC 820, the Company determines the level in the fair value hierarchy within which each fair value measurement in its entirety falls, based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The Company records its derivative assets and liabilities at fair market value on its consolidated balance sheet. The following table presents assets and liabilities measured and recorded at fair value on the Company's consolidated balance sheets on a recurring basis and their level within the fair value hierarchy:
As of June 30, 2014 | |||||||||||
Fair Value (a) | |||||||||||
(In millions) | Level 2 | Level 3 | Total | ||||||||
Derivative assets: | |||||||||||
Commodity contracts | $ | 1 | $ | — | $ | 1 | |||||
Interest rate contracts | 5 | — | 5 | ||||||||
Total assets | 6 | — | 6 | ||||||||
Derivative liabilities: | |||||||||||
Commodity contracts | 1 | 1 | 2 | ||||||||
Interest rate contracts | 52 | — | 52 | ||||||||
Total liabilities | $ | 53 | $ | 1 | $ | 54 |
(a) There were no assets or liabilities classified as Level 1 as of June 30, 2014.
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As of December 31, 2013 | |||||||||||
Fair Value (a) | |||||||||||
(In millions) | Level 2 | Level 3 | Total | ||||||||
Derivative assets: | |||||||||||
Commodity contracts | $ | 1 | $ | — | $ | 1 | |||||
Interest rate contracts | 20 | — | 20 | ||||||||
Total assets | 21 | — | 21 | ||||||||
Derivative liabilities: | |||||||||||
Commodity contracts | 1 | 1 | 2 | ||||||||
Interest rate contracts | 45 | — | 45 | ||||||||
Total liabilities | $ | 46 | $ | 1 | $ | 47 |
(a) There were no assets or liabilities classified as Level 1 as of December 31, 2013.
The following table reconciles, for the three and six months ended June 30, 2014, the beginning and ending balances for derivative instruments that are recognized at fair value in the consolidated financial statements, at least annually, using significant unobservable inputs:
Fair Value Measurement Using Significant Unobservable Inputs - Derivatives (Level 3) | ||||||||
Three months ended June 30, | Six months ended June 30, | |||||||
(In millions) | 2014 | 2014 | ||||||
Beginning balance | $ | (1 | ) | $ | (1 | ) | ||
Purchases | — | — | ||||||
Ending balance as of June 30, 2014 | $ | (1 | ) | $ | (1 | ) |
Derivative Fair Value Measurements
A majority of the Company's contracts are non-exchange-traded and valued using prices provided by external sources. For the Company’s energy markets, management receives quotes from multiple sources. To the extent that multiple quotes are received, the prices reflect the average of the bid-ask mid-point prices obtained from all sources believed to provide the most liquid market for the commodity. The remainder of the assets and liabilities represent contracts for which external sources or observable market quotes are not available. These contracts are valued using various valuation techniques including but not limited to internal models that apply fundamental analysis of the market and corroboration with similar markets. As of June 30, 2014, contracts valued with prices provided by models and other valuation techniques make up 0% of the total derivative assets and 2% of the total derivative liabilities.
The fair value of each contract is discounted using a risk free interest rate. In addition, a credit reserve is applied to reflect credit risk, which is calculated based on credit default swaps. To the extent that the net exposure is an asset, the Company uses the counterparty’s default swap rate. If the exposure is a liability, the Company uses its default swap rate. The credit reserve is added to the discounted fair value to reflect the exit price that a market participant would be willing to receive to assume the liabilities or that a market participant would be willing to pay for the assets. It is possible that future market prices could vary from those used in recording assets and liabilities and such variations could be material.
Concentration of Credit Risk
Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. The Company monitors and manages credit risk through credit policies that include: (i) an established credit approval process; (ii) a daily monitoring of counterparties' credit limits; (iii) the use of credit mitigation measures such as margin, collateral, prepayment arrangements, or volumetric limits; (iv) the use of payment netting agreements; and (v) the use of master netting agreements that allow for the netting of positive and negative exposures of various contracts associated with a single counterparty. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. The Company seeks to mitigate counterparty risk by having a diversified portfolio of counterparties. The Company also has credit protection within various agreements to call on additional collateral support if and when necessary. Cash margin is collected and held at the Company to cover the credit risk of the counterparty until positions settle.
21
Counterparty credit exposure includes credit risk exposure under certain long-term agreements, including solar and other PPAs. As external sources or observable market quotes are not available to estimate such exposure, the Company estimates the exposure related to these contracts based on various techniques including but not limited to internal models based on a fundamental analysis of the market and extrapolation of observable market data with similar characteristics. Based on these valuation techniques, as of June 30, 2014, credit risk exposure to these counterparties attributable to the Company's ownership interests was approximately $1.1 billion for the next five years. The majority of these power contracts are with utilities with strong credit quality and public utility commission or other regulatory support. However, such regulated utility counterparties can be impacted by changes in government regulations, which the Company is unable to predict.
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Note 7 — Accounting for Derivative Instruments and Hedging Activities
Energy-Related Commodities
As of June 30, 2014, the Company had forward contracts for the purchase of fuel commodities relating to the forecasted usage of the Company’s district energy centers extending through 2017. At June 30, 2014, these contracts were not designated as cash flow or fair value hedges.
Interest Rate Swaps
As of June 30, 2014, the Company had interest rate derivative instruments on project-level debt extending through 2030, the majority of which are designated as cash flow hedges.
Volumetric Underlying Derivative Transactions
The following table summarizes the net notional volume buy/(sell) of the Company's open derivative transactions broken out by commodity as of June 30, 2014 and December 31, 2013.
Total Volume | ||||||||
June 30, 2014 | December 31, 2013 | |||||||
Commodity | Units | (In millions) | ||||||
Natural Gas | MMBtu | 2 | 2 | |||||
Interest | Dollars | $ | 1,215 | $ | 1,234 |
Fair Value of Derivative Instruments
The following table summarizes the fair value within the derivative instrument valuation on the balance sheet:
Fair Value | |||||||||||||||
Derivative Assets | Derivative Liabilities | ||||||||||||||
June 30, 2014 | December 31, 2013 | June 30, 2014 | December 31, 2013 | ||||||||||||
(In millions) | |||||||||||||||
Derivatives Designated as Cash Flow Hedges: | |||||||||||||||
Interest rate contracts current | $ | — | $ | — | $ | 26 | $ | 26 | |||||||
Interest rate contracts long-term | 4 | 14 | 22 | 16 | |||||||||||
Total Derivatives Designated as Cash Flow Hedges | 4 | 14 | 48 | 42 | |||||||||||
Derivatives Not Designated as Cash Flow Hedges: | |||||||||||||||
Interest rate contracts current | — | — | 3 | 3 | |||||||||||
Interest rate contracts long-term | 1 | 6 | 1 | — | |||||||||||
Commodity contracts current | 1 | 1 | 1 | 2 | |||||||||||
Commodity contracts long-term | — | — | 1 | — | |||||||||||
Total Derivatives Not Designated as Cash Flow Hedges | 2 | 7 | 6 | 5 | |||||||||||
Total Derivatives | $ | 6 | $ | 21 | $ | 54 | $ | 47 |
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The Company has elected to present derivative assets and liabilities on the balance sheet on a trade-by-trade basis and does not offset amounts at the counterparty master agreement level. As of June 30, 2014 and December 31, 2013, there was no outstanding collateral paid or received. The following table summarizes the offsetting of derivatives by counterparty master agreement level:
Gross Amounts Not Offset in the Statement of Financial Position | |||||||||||
Gross Amounts of Recognized Assets/Liabilities | Derivative Instruments | Net Amount | |||||||||
As of June 30, 2014 | (In millions) | ||||||||||
Commodity contracts: | |||||||||||
Derivative assets | $ | 1 | $ | — | $ | 1 | |||||
Derivative liabilities | (2 | ) | — | (2 | ) | ||||||
Total commodity contracts | (1 | ) | — | (1 | ) | ||||||
Interest rate contracts: | |||||||||||
Derivative assets | 5 | (3 | ) | 2 | |||||||
Derivative liabilities | (52 | ) | 3 | (49 | ) | ||||||
Total interest rate contracts | (47 | ) | — | (47 | ) | ||||||
Total derivative instruments | $ | (48 | ) | $ | — | $ | (48 | ) |
Gross Amounts Not Offset in the Statement of Financial Position | |||||||||||
As of December 31, 2013 | Gross Amounts of Recognized Assets/Liabilities | Derivative Instruments | Net Amount | ||||||||
Commodity contracts: | (In millions) | ||||||||||
Derivative assets | $ | 1 | $ | — | $ | 1 | |||||
Derivative liabilities | (2 | ) | — | (2 | ) | ||||||
Total commodity contracts | (1 | ) | — | (1 | ) | ||||||
Interest rate contracts: | |||||||||||
Derivative assets | 20 | (12 | ) | 8 | |||||||
Derivative liabilities | (45 | ) | 12 | (33 | ) | ||||||
Total interest rate contracts | (25 | ) | — | (25 | ) | ||||||
Total derivative instruments | $ | (26 | ) | $ | — | $ | (26 | ) |
Accumulated Other Comprehensive Loss
The following table summarizes the effects on the Company’s accumulated other comprehensive loss, or OCL, balance attributable to interest rate swaps designated as cash flow hedge derivatives, net of tax:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(In millions) | (In millions) | ||||||||||||||
Accumulated OCL beginning balance, net of tax | $ | (12 | ) | $ | (34 | ) | $ | — | $ | (38 | ) | ||||
Reclassified from accumulated OCL to income due to realization of previously deferred amounts | 4 | 3 | 7 | 5 | |||||||||||
Mark-to-market of cash flow hedge accounting contracts | (16 | ) | 22 | (31 | ) | 24 | |||||||||
Accumulated OCL ending balance, net of income tax benefit of $1 and $3, respectively | (24 | ) | (9 | ) | (24 | ) | (9 | ) | |||||||
Accumulated OCL attributable to noncontrolling interest | (15 | ) | (15 | ) | |||||||||||
Accumulated OCL attributable to NRG Yield, Inc. | $ | (9 | ) | $ | (9 | ) | |||||||||
A loss of $15 million is expected to be realized from OCL during the next 12 months, net of $0 million tax.
Amounts reclassified from accumulated OCL into income and amounts recognized in income from the ineffective portion of cash flow hedges are recorded to interest expense.
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Impact of Derivative Instruments on the Statements of Operations
The Company has interest rate derivative instruments that are not designated as cash flow hedges as well as ineffectiveness on cash flow hedge derivatives. For the three months ended June 30, 2014 and 2013, the impact to the consolidated statements of operations was a loss of $3 million and a gain of $6 million, respectively. For the six months ended June 30, 2014 and 2013, the impact to the consolidated statements of operations was a loss of $6 million and a gain of $9 million, respectively.
The Company’s derivative commodity contracts relate to its Thermal business for the purchase of fuel commodities based on the forecasted usage of the Thermal district energy centers. Realized gains and losses on these contracts are reflected in the fuel costs that are permitted to be billed to customers through the related customer contracts or tariffs and accordingly, no gains or losses are reflected in the statement of operations for these contracts.
See Note 6, Fair Value of Financial Instruments, for discussion regarding concentration of credit risk.
Note 8 — Long - Term Debt
This footnote should be read in conjunction with the complete description under Note 9, Long - Term Debt, to the Company's 2013 Form 10-K. Long-term debt consisted of the following:
June 30, 2014 | December 31, 2013 | Current interest rate % (a) | ||||||||
(In millions, except rates) | ||||||||||
Convertible Senior Notes, due 2019 (b) | $ | 324 | $ | — | 3.50 | |||||
Project-level debt: | ||||||||||
NRG West Holdings LLC, due 2023 | 520 | 512 | L+2.50/L+2.875 | |||||||
NRG Marsh Landing LLC, due 2017 and 2023 | 464 | 473 | L+ 2.75/L+3.00 | |||||||
NRG Solar Alpine LLC, due 2022 | 170 | 221 | L+2.5/L+1.75 | |||||||
NRG Energy Center Minneapolis LLC, senior secured notes, due 2017 and 2025 | 124 | 127 | 5.95/7.25 | |||||||
NRG Solar Borrego LLC, due 2024 and 2038 | 77 | 78 | L+ 2.50/5.65 | |||||||
South Trent Wind LLC, due 2020 | 66 | 69 | L+ 2.625/L+2.75 | |||||||
NRG Solar Avra Valley LLC, due 2031 | 62 | 63 | L+ 2.25 | |||||||
TA High Desert LLC, due 2023 and 2033 | 57 | 80 | L+2.50/5.15 | |||||||
NRG Roadrunner LLC, due 2031 | 43 | 44 | L+ 2.01 | |||||||
NRG Solar Kansas South LLC, due 2031 | 35 | 58 | L+2.625 | |||||||
NRG Solar Blythe LLC, due 2028 | 24 | 24 | L+ 2.75 | |||||||
PFMG and related subsidiaries financing agreement, due 2030 | 31 | 32 | 6.00 | |||||||
NRG Energy Center Princeton LLC, due 2017 | 2 | 2 | 5.95 | |||||||
Subtotal project-level debt: | 1,675 | 1,783 | ||||||||
Total debt | 1,999 | 1,783 | ||||||||
Less current maturities | 119 | 214 | ||||||||
Total long-term debt | $ | 1,880 | $ | 1,569 |
(a) As of June 30, 2014, L+ equals 3 month LIBOR plus x%, except for Kansas South where L+ equals 6 month LIBOR plus x% .
(b) Net of discount of $21 million as of June 30, 2014.
The financing arrangements listed above contain certain covenants, including financial covenants, that the Company is required to be in compliance with during the term of the arrangement. As of June 30, 2014, the Company was in compliance with all of the required covenants.
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NRG Yield, Inc. Convertible Notes
During the first quarter of 2014, the Company closed on its offering of $345 million aggregate principal amount of 3.50% Convertible Notes due 2019, or the Convertible Notes. The Convertible Notes are convertible, under certain circumstances, into the Company’s Class A common stock, cash or a combination thereof at an initial conversion price of $46.55 per Class A common share, which is equivalent to an initial conversion rate of approximately 21.4822 shares of Class A common stock per $1,000 principal amount of Convertible Notes. Interest on the Convertible Notes is payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 2014. The Convertible Notes mature on February 1, 2019, unless earlier repurchased or converted in accordance with their terms. Prior to the close of business on the business day immediately preceding August 1, 2018, the Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.
The convertible notes are accounted for in accordance with ASC 470-20. Under ASC 470-20, issuers of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components. The application of ACS 470-20 resulted in the recognition of $23 million as the value for the equity component with the offset to debt discount. The debt discount will be amortized to interest expense using the effective interest method over the term of the Convertible Notes.
NRG Yield Operating LLC Senior Notes
On August 5, 2014, NRG Yield Operating LLC issued $500 million of senior unsecured notes, or the Senior Notes. The Senior Notes bear interest at 5.375% and mature in 2024.
NRG Yield LLC and NRG Yield Operating LLC Revolving Credit Facility
In connection with the Company's initial public offering of Class A common stock in July 2013, as further described in Note 1, Nature of Business, NRG Yield LLC and NRG Yield Operating LLC entered into a senior secured revolving credit facility, which provided a revolving line of credit of $60 million. On April 25, 2014, NRG Yield LLC and NRG Yield Operating LLC amended the revolving credit facility to increase the available line of credit to $450 million and extend its maturity to April 2019. The revolving credit facility can be used for cash or for the issuance of letters of credit. There was no cash drawn or letters of credit issued under the revolving credit facility as of June 30, 2014.
Project - level Debt
NRG West Holdings Credit Agreement
On August 23, 2011, NRG West Holdings LLC, or West Holdings, entered into a credit agreement with a group of lenders in respect to the El Segundo project, or the West Holdings Credit Agreement. The West Holdings Credit Agreement, is comprised of a $540 million two tranche construction loan facility with additional facilities for the issuance of letters of credit or working capital loans, and is secured by the assets of West Holdings.
The two tranche construction loan facility consists of the $480 million Tranche A Construction Facility, or the Tranche A Facility, and the $60 million Tranche B Construction Facility, or the Tranche B Facility. The Tranche A and Tranche B Facilities, which mature in August 2023, convert to a term loan and have an interest rate of 3-month LIBOR, plus an applicable margin which (i) increases by 0.125% periodically from conversion through year eight for the Tranche A Facility, and (ii) increases by (A) 0.125% upon term conversion and on the third and sixth anniversary of the term conversion and (B) by 0.025% on the eighth anniversary of the term conversion for the Tranche B Facility. The Tranche A and Tranche B Facilities amortize based upon a predetermined schedule over the term of the loan with the balance payable at maturity. The construction loan converted to a term loan on January 28, 2014.
The West Holdings Credit Agreement also provides for the issuance of letters of credit and working capital loans to support the El Segundo's collateral needs. This includes letter of credit facilities on behalf of West Holdings of up to $90 million in support of the PPA, up to $48 million in support of the collateral agent, and a working capital facility which permits loans or the issuance of letters of credit of up to $10 million.
As of June 30, 2014, under the West Holdings Credit Agreement, West Holdings has outstanding $460 million under the Tranche A Facility, $60 million under the Tranche B Facility, issued a $33 million letter of credit in support of the PPA, a $48 million letter in support of debt service and a $1 million letter of credit under the working capital facility.
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Alpine Financing
On March 16, 2012, NRG Solar Alpine LLC, or Alpine, entered into a credit agreement with a group of lenders for a $166 million construction loan that was convertible to a term loan upon completion of the project and a $68 million cash grant loan. On January 15, 2013, the credit agreement was amended, reducing the cash grant loan to $63 million. On March 26, 2013, Alpine met the conditions under the credit agreement to convert the construction loan to a term loan. Immediately prior to the conversion, the Company drew an additional $164 million under the construction loan and $62 million under the cash grant loan. The term loan amortizes on a predetermined schedule with final maturity in November 2022.
In January 2014, Alpine repaid the $62 million of outstanding cash grant loan, including accrued interest and breakage fees, with the proceeds that it had received from the U.S. Treasury Department, as further described in in Note 4, Property, Plant and Equipment. On June 24, 2014, Alpine amended the credit agreement to increase its term loan borrowings by an additional $13 million and to reduce the related interest rate to 3 month LIBOR plus 1.75% through June 30, 2019 and 3 month LIBOR plus 2.00% through November 2022. The proceeds were utilized to make a distribution of $11 million to NRG Yield Operating LLC with the remaining $2 million utilized to fund the costs of the amendment.
TA High Desert Facility
The TA High Desert Facility is comprised of $53 million of fixed rate notes due 2033 at an interest rate of 5.15%, $7 million of floating rate notes due 2023, $22 million of bridge notes due the earlier of ten days after receipt of the cash grant or May 2014, and a revolving facility of $12 million. The floating rate notes have an interest rate of 3 month LIBOR plus 2.5% with LIBOR floor of 1.5%, while the bridge notes have an interest rate of 1 month LIBOR plus 2.50%. As described in Note 4, Property, Plant and Equipment, in April 2014, TA High Desert received payment of $20 million for its cash grant and utilized the proceeds, along with an additional $2 million of cash contributed by NRG to repay the cash grant bridge loan. The revolving facility can be used for cash or for the issuance of up to $9 million in letters of credit. As of June 30, 2014, $57 million of notes were outstanding and $8 million of letters of credit were outstanding under the revolving facility. The notes amortize on predetermined schedules and are secured by all of the assets of TA High Desert.
RE Kansas South Facility
The RE Kansas South Facility includes a $38 million term loan due 2031 and a $21 million cash grant bridge loan due ten days after receipt of the cash grant. The term loan has an interest rate of 6 month LIBOR plus an applicable margin of 2.625% and increases by 0.25% every 4 years. The cash grant bridge loan had an interest rate of 1 month LIBOR plus an applicable margin of 2.00%. The term loan amortizes on a predetermined schedule and is secured by all of the assets of RE Kansas South. As described in Note 4, Property, Plant and Equipment, in April 2014, the Company received payment of $21 million for the cash grant related to RE Kansas South and utilized the proceeds to repay the cash grant bridge loan. As of June 30, 2014, $35 million was outstanding under the term loan and $4 million of letters of credit were issued under the RE Kansas South Facility.
Additional Project-level Debt Amendments
On July 9, 2014, Avra Valley amended its credit agreement to increase its borrowings by $3 million and to reduce the related interest rate from 3 month LIBOR plus an applicable margin of 2.25% to 3 month LIBOR plus 1.75%. The proceeds were primarily utilized to make a distribution to NRG Yield Operating LLC.
On July 17, 2014, Marsh Landing amended its credit agreement to increase its borrowings by $34 million and to reduce the related interest rate for the Tranche A borrowings from 3 month LIBOR plus an applicable margin of 2.75% to 3 month LIBOR plus 1.75% through December 2017 and to 3 month LIBOR plus 2.00% thereafter; and for the Tranche B to reduce the related interest rate from 3 month LIBOR plus 3.00% to 3 month LIBOR plus 1.875% through December 2017 and to 3 month LIBOR plus 2.125% thereafter. The proceeds from the borrowings were utilized to make a distribution of $29 million to NRG Yield Operating LLC and to fund the costs of the amendment.
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Note 9 — Earnings Per Share
Basic and diluted earnings per Class A common share are computed by dividing net income by the weighted average number of Class A common shares outstanding. Shares issued during the year are weighted for the portion of the year that they were outstanding.
The reconciliation of the Company's basic and diluted earnings per share is shown in the following table:
Three months ended June 30, | Six months ended June 30, | ||||||
2014 | 2014 | ||||||
(In millions, except per share data) | |||||||
Basic and diluted earnings per share attributable to Class A common stockholders | |||||||
Net Income Attributable to NRG Yield, Inc. | $ | 6 | $ | 10 | |||
Weighted average number of Class A common shares outstanding | 23 | 23 | |||||
Basic and Diluted Earnings per Class A common share: | $ | 0.26 | $ | 0.42 | |||
There was a total of 7 million shares of Class A common stock that were anti-dilutive as of June 30, 2014.
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Note 10 — Changes in Capital Structure
As of June 30, 2014 and December 31, 2013, the Company had 22,511,250 shares of Class A common stock outstanding.
The following table lists the dividends paid on the Company's Class A common stock during the six months ended June 30, 2014:
Second Quarter 2014 | First Quarter 2014 | |||||
Dividends per share | $ | 0.35 | $ | 0.33 |
The Company's Class A common stock dividends are subject to available capital, market conditions, and compliance with associated laws and regulations.
On July 29, 2014, the Company declared a quarterly dividend on Class A common stock of $0.365 per share payable on September 15, 2014 to shareholders of record as of September 2, 2014.
On July 29, 2014, the Company issued 12,075,000 Class A common shares for net proceeds, after underwriting discount and expenses, of $630 million. The proceeds are expected to be used to fund the acquisition of the Alta Wind Assets with the excess of the proceeds over the amount utilized for the acquisition available for general corporate purposes, including future acquisitions.
Note 11 — Segment Reporting
The Company’s segment structure reflects how management currently makes financial decisions and allocates resources. Its businesses are primarily segregated based on conventional power generation, renewable businesses which consist of solar and wind, and the thermal and chilled water business. The Corporate segment reflects the Company's corporate costs.
Three months ended June 30, 2014 | |||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Corporate | Total | ||||||||||||||
Operating revenues | $ | 61 | $ | 30 | $ | 43 | $ | — | $ | 134 | |||||||||
Cost of operations | 12 | 3 | 30 | — | 45 | ||||||||||||||
Depreciation and amortization | 24 | 7 | 5 | — | 36 | ||||||||||||||
General and administrative — affiliate | — | — | — | 2 | 2 | ||||||||||||||
Operating income/(loss) | 25 | 20 | 8 | (2 | ) | 51 | |||||||||||||
Equity in earnings of unconsolidated affiliates | 4 | 10 | — | — | 14 | ||||||||||||||
Interest expense | (11 | ) | (11 | ) | (2 | ) | (5 | ) | (29 | ) | |||||||||
Income/(loss) before income taxes | 18 | 19 | 6 | (7 | ) | 36 | |||||||||||||
Net income/(loss) | 18 | 19 | 6 | (9 | ) | 34 | |||||||||||||
Total assets | $ | 1,535 | $ | 905 | $ | 362 | $ | 434 | $ | 3,236 |
Three months ended June 30, 2013 | |||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Corporate | Total | ||||||||||||||
Operating revenues | $ | 20 | $ | 26 | $ | 36 | $ | — | $ | 82 | |||||||||
Cost of operations | 3 | 2 | 27 | — | 32 | ||||||||||||||
Depreciation and amortization | 2 | 5 | 3 | — | 10 | ||||||||||||||
General and administrative — affiliate | — | — | — | 2 | 2 | ||||||||||||||
Operating income/(loss) | 15 | 19 | 6 | (2 | ) | 38 | |||||||||||||
Equity in earnings of unconsolidated affiliates | 3 | (1 | ) | — | — | 2 | |||||||||||||
Interest expense | (3 | ) | (1 | ) | (2 | ) | — | (6 | ) | ||||||||||
Other income, net | 1 | — | — | — | 1 | ||||||||||||||
Income/(loss) before income taxes | 16 | 17 | 4 | (2 | ) | 35 | |||||||||||||
Net income/(loss) | $ | 16 | $ | 17 | $ | 4 | $ | (2 | ) | $ | 35 |
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Six months ended June 30, 2014 | |||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Corporate | Total | ||||||||||||||
Operating revenues | $ | 117 | $ | 49 | $ | 108 | $ | — | $ | 274 | |||||||||
Cost of operations | 22 | 7 | 76 | — | 105 | ||||||||||||||
Depreciation and amortization | 36 | 15 | 9 | — | 60 | ||||||||||||||
General and administrative — affiliate | — | — | — | 4 | 4 | ||||||||||||||
Operating income/(loss) | 59 | 27 | 23 | (4 | ) | 105 | |||||||||||||
Equity in earnings of unconsolidated affiliates | 7 | 8 | — | — | 15 | ||||||||||||||
Interest expense | (22 | ) | (22 | ) | (4 | ) | (8 | ) | (56 | ) | |||||||||
Other income | — | 1 | — | — | 1 | ||||||||||||||
Income/(loss) before income taxes | 44 | 14 | 19 | (12 | ) | 65 | |||||||||||||
Net income/(loss) | $ | 44 | $ | 14 | $ | 19 | $ | (17 | ) | $ | 60 |
Six months ended June 30, 2013 | |||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Corporate | Total | ||||||||||||||
Operating revenues | $ | 20 | $ | 42 | $ | 73 | $ | — | $ | 135 | |||||||||
Cost of operations | 3 | 5 | 53 | — | 61 | ||||||||||||||
Depreciation and amortization | 2 | 11 | 7 | — | 20 | ||||||||||||||
General and administrative — affiliate | — | — | — | 4 | 4 | ||||||||||||||
Operating income/(loss) | 15 | 26 | 13 | (4 | ) | 50 | |||||||||||||
Equity in earnings of unconsolidated affiliates | 7 | (1 | ) | — | — | 6 | |||||||||||||
Interest expense | (3 | ) | (4 | ) | (4 | ) | — | (11 | ) | ||||||||||
Other income, net | 1 | — | — | — | 1 | ||||||||||||||
Income/(loss) before income taxes | 20 | 21 | 9 | (4 | ) | 46 | |||||||||||||
Net income/(loss) | $ | 20 | $ | 21 | $ | 9 | $ | (4 | ) | $ | 46 |
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Note 12 — Income Taxes
Effective Tax Rate
The income tax provision consisted of the following:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
(In millions, except otherwise noted) | 2014 | 2013 | 2014 | 2013 | |||||||||||
Income before income taxes | $ | 36 | $ | 35 | $ | 65 | $ | 46 | |||||||
Income tax expense | 2 | — | 5 | — | |||||||||||
Effective tax rate | 5.6 | % | — | % | 7.7 | % | — | % |
For the three and six months ended June 30, 2014 and 2013, the overall effective tax rate was different than the statutory rate of 35% primarily due to taxable earnings allocated to NRG resulting from its 65.5% interest in NRG Yield LLC.
On July 22, 2013, the Company acquired a controlling interest in NRG Yield LLC and its subsidiary NRG Yield Operating LLC. As a result, the Company owns 34.5% of NRG Yield LLC and consolidates the results due to its controlling interest. The Company records NRG's 65.5% ownership as noncontrolling interest in the financial statements. NRG Yield LLC is treated as a partnership for income tax purposes. As such, the Company records income tax on its 34.5% of NRG Yield LLC's taxable income. NRG records income tax on its 65.5% share of taxable income generated by NRG Yield LLC.
The Company's deferred tax balances reflect the change in tax basis of the Company's assets as a result of the initial public offering and ROFO acquisitions, primarily due to an increase in the tax basis of the Company's property, plant and equipment. The change in tax basis resulted in a non-cash addition of $171 million as of June 30, 2014 and $153 million as of December 31, 2013 to the Company's additional paid-in capital.
Note 13 — Related Party Transactions
Management Services Agreement with NRG
Subsequent to the initial public offering, NRG provides the Company with various operation, management, and administrative services, which include human resources, accounting, tax, legal, information systems, treasury, and risk management, as set forth in the Management Services Agreement. As of June 30, 2014, the base management fee was approximately $1 million per quarter subject to an inflation based adjustment annually at an inflation factor based on the year-over-year U.S. consumer price index. The fee is also subject to adjustments following the consummation of future acquisitions and as a result of a change in the scope of services provided under the Management Services Agreement. The fee was increased by approximately $0.5 million per year in connection with the acquisition of the Acquired ROFO Assets. Costs incurred under this agreement were approximately $4 million for the six months ending June 30, 2014, which included certain direct expenses incurred by NRG on behalf of the Company in addition to the base management fee.
Accounts Payable to NRG Solar LLC
During the third quarter of 2013, NRG Solar LLC, a wholly-owned subsidiary of NRG, made 100% of the required capital contributions to CVSR, including the Company's 48.95% portion, of which $14 million was outstanding as of December 31, 2013. This balance was repaid to NRG Solar LLC during the quarter ended March 31, 2014.
Accounts Payable to NRG Repowering Holdings LLC
During 2013, NRG Repowering Holdings, LLC, a wholly-owned subsidiary of NRG, made payments to BA Leasing BSC, LLC, or BA Leasing, of $18 million, which were expected to be repaid with the proceeds of the cash grant received by BA leasing with respect to the PFMG DG Solar Projects, a wholly-owned subsidiary of the Company, in connection with a sale-leaseback arrangement between the PFMG DG Solar Projects and BA Leasing. As of December 31, 2013, PFMG DG Solar Projects had a corresponding receivable for the reimbursement of the cash grant from BA Leasing and related payable to NRG Repowering Holdings, LLC. In the first quarter of 2014, the PFMG DG Solar Projects received $11 million from BA Leasing and reduced the remaining receivable with an offset to the deferred liability recorded in connection with the sale - leaseback arrangement. The PFMG DG Solar Projects utilized the $11 million to repay NRG Repowering Holdings LLC.
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Note 14 — Environmental Matters
In 2013, NRG Energy Center San Francisco LLC, a wholly owned indirect subsidiary of the Company, received a notice of violation from the San Francisco Department of Public Health alleging improper monitoring of three underground storage tanks. The tanks have not leaked. The Company settled the matter in July 2014 for $123,000.
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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion analyzes the Company's historical financial condition and results of operations. For all periods prior to the initial public offering, the discussion reflects the Company's accounting predecessor, or NRG Yield, the financial statements of which were prepared on a ''carve-out'' basis from NRG and are intended to represent the financial results of the contracted renewable energy and conventional generation and thermal infrastructure assets in the United States that were acquired by NRG Yield LLC on July 22, 2013. For all periods subsequent to the initial public offering, the discussion reflects the Company's consolidated financial results. In addition, as discussed in Note 1, Nature of Business to this Form 10-Q, the purchase of the Acquired ROFO Assets on June 30, 2014 was accounted for in accordance with ASC 850-50, Business Combinations - Related Issues, whereas the assets and liabilities transferred to the Company relate to interests under common control by NRG and accordingly, were recorded at historical cost. The difference between the cash proceeds and historical value of the net assets was recorded as a distribution to NRG and reduced the balance of its noncontrolling interest. The guidance requires retrospective combination of the entities for all periods presented as if the combination has been in effect since the inception of common control.
As you read this discussion and analysis, refer to the Company's Consolidated Statements of Operations to this Form 10-Q, which present the results of operations for the six months ended June 30, 2014 and 2013. Also refer to the Company's 2013 Form 10-K, which includes detailed discussions of various items impacting the Company's business, results of operations and financial condition.
The discussion and analysis below has been organized as follows:
• | Executive Summary, including a description of the business and significant events that are important to understanding the results of operations and financial condition; |
• | Results of operations, including an explanation of significant differences between the periods in the specific line items of the consolidated statements of operations; |
• | Financial condition addressing liquidity position, sources and uses of cash, capital resources and requirements, commitments, and off-balance sheet arrangements; and |
• | Known trends that may affect the Company’s results of operations and financial condition in the future. |
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Executive Summary
Introduction and Overview
The Company is a dividend growth-oriented company formed to serve as the primary vehicle through which NRG owns, operates and acquires contracted renewable and conventional generation and thermal infrastructure assets. The Company believes it is well positioned to be a premier company for investors seeking stable and growing dividend income from a diversified portfolio of lower-risk high-quality assets.
The Company owns a diversified portfolio of contracted renewable and conventional generation and thermal infrastructure assets in the United States. The Company’s contracted generation portfolio consists of four natural gas or dual-fired facilities, ten utility-scale solar and wind generation facilities and two portfolios of distributed solar facilities that collectively represent 1,914 net MW, and includes the Acquired ROFO Assets (which consists of El Segundo, RE Kansas South and TA High Desert projects) that were acquired from NRG on June 30, 2014 as described in Note 1, Nature of Business, and Note 3, Business Acquisitions. Each of these assets sells substantially all of its output pursuant to long-term, fixed price offtake agreements with creditworthy counterparties. The average remaining contract duration of these offtake agreements was approximately 17 years as of June 30, 2014 based on cash available for distribution. The Company also owns thermal infrastructure assets with an aggregate steam and chilled water capacity of 1,346 net MWt and electric generation capacity of 123 net MW. These thermal infrastructure assets provide steam, hot water and/or chilled water, and in some instances electricity, to commercial businesses, universities, hospitals and governmental units in multiple locations, principally through long-term contracts or pursuant to rates regulated by state utility commissions.
Regulatory Matters
As operators of power plants and participants in wholesale energy markets, certain of the Company's entities are subject to regulation by various federal and state government agencies. These include the CFTC, FERC, and the PUCT, as well as other public utility commissions in certain states where the Company's generating, thermal, or distributed solar assets are located. In addition, the Company is subject to the market rules, procedures and protocols of the various ISO markets in which it participates. The Company must also comply with the mandatory reliability requirements imposed by the North American Electric Reliability Corporation and the regional reliability entities in the regions where the Company operates.
The Company's operations within the ERCOT footprint are not subject to rate regulation by FERC, as they are deemed to operate solely within the ERCOT market and not in interstate commerce. These operations are subject to regulation by PUCT.
The Company’s regulatory matters are described in the Company’s 2013 Form 10-K in Item 1, Business — Regulatory Matters. These matters have been updated below.
CFTC
The CFTC, among other things, has regulatory oversight authority over the trading of swaps, futures and many commodities under the Commodity Exchange Act, or CEA. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, among other things, aims to improve transparency and accountability in derivatives markets. The Dodd-Frank Act increases the CFTC’s regulatory authority on matters related to over-the-counter derivatives, market clearing, position reporting, and capital requirements.
The Company expects that in 2014, the CFTC will clarify the scope of the Dodd-Frank Act and issue final rules concerning position limits, margin requirements, and other issues that will affect the Company's over-the-counter derivatives and futures trading. Because there are many details that remain to be addressed in CFTC rulemaking proceedings, at this time the expected impact to the Company on its current operations cannot be measured.
FERC
FERC, among other things, regulates the transmission and the wholesale sale of electricity in interstate commerce under the authority of the FPA. The transmission of electric energy occurring wholly within ERCOT is not subject to the FERC’s jurisdiction under Sections 203 or 205 of the FPA. Under existing regulations, FERC determines whether an entity owning a generation facility is an EWG, as defined in the PUHCA. FERC also determines whether a generation facility meets the ownership and technical criteria of a Qualifying Facility, or QF, under the PURPA. Each of the Company’s non-ERCOT U.S. generating facilities qualifies as an EWG.
The FPA gives FERC exclusive rate-making jurisdiction over the wholesale sale of electricity and transmission of electricity in interstate commerce of public utilities (as defined by the FPA). Under the FPA, FERC, with certain exceptions, regulates the owners of facilities used for the wholesale sale of electricity or transmission in interstate commerce as public utilities, and establishes market rules that are just and reasonable.
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Public utilities are required to obtain FERC’s acceptance, pursuant to Section 205 of the FPA, of their rate schedules for the wholesale sale of electricity. All of the Company’s non-QF generating entities located outside of ERCOT make sales of electricity pursuant to market-based rates, as opposed to traditional cost-of-service regulated rates. Every three years, FERC conducts a review of the Company’s market based rates and potential market power on a regional basis.
In accordance with the Energy Policy Act of 2005, FERC has approved the NERC as the national Energy Reliability Organization, or ERO. As the ERO, NERC is responsible for the development and enforcement of mandatory reliability standards for the wholesale electric power system. In addition to complying with NERC requirements, each project entity must comply with the requirements of the regional reliability entity for the region in which it is located.
PURPA was passed in 1978 in large part to promote increased energy efficiency and development of independent power producers. PURPA created QFs to further both goals, and FERC is primarily charged with administering PURPA as it applies to QFs. Certain QFs are exempt from regulation, either in whole or in part, under the FPA as public utilities.
PUHCA provides FERC with certain authority over and access to books and records of public utility holding companies not otherwise exempt by virtue of their ownership of EWGs, QFs, and Foreign Utility Companies. The Company is exempt from many of the accounting, record retention, and reporting requirements of the PUHCA.
National
New Jersey and Maryland’s Generator Contracting Programs — The New Jersey Board of Public Utilities and the Maryland Public Service Commission awarded long-term power purchase contracts to generation developers to encourage the construction of new generation capacity in the respective States. The constitutionality of the long-term contracts was challenged and the U.S. District Court for the District of New Jersey (in an October 25, 2013 decision) and the U.S. District Court for the District of Maryland (in an October 24, 2013 decision) found that the respective contracts violated the Supremacy Clause of the U.S. Constitution and were preempted. On June 30, 2014, the U.S. Court of Appeals for the Fourth Circuit affirmed the Maryland District Court's decision. The appeal of the New Jersey decision is still pending before the U.S. Court of Appeals for the Third Circuit. These decisions may affect future contracting opportunities.
Thermal
On January 17, 2014, ISO-NE filed with FERC to fundamentally revamp its forward capacity market, or FCM, by making a resource’s forward capacity market compensation dependent on resource output during short intervals of operating reserve scarcity. The ISO-NE proposal would replace the existing shortage event penalty structure with a new performance incentive, or PI, mechanism, resulting in capacity payments to resources that would be the combination of two components: (1) a base capacity payment and (2) a performance payment or charge. The performance payment or charge would be entirely dependent upon the resource’s delivery of energy or operating reserves during scarcity conditions, and could be larger than the base payment.
NEPOOL, the ISO-NE stakeholder group, filed an alternative proposal to ISO-NE’s PI proposal with FERC, under which the market rules would be revised to maintain the FCM capacity product as a tool to ensure resource adequacy, and would place real-time performance incentive-related improvements directly into the energy and reserve markets. The Company supported the NEPOOL alternative.
On May 30, 2014, FERC rejected both proposals, instituted a proceeding for further hearings and required ISO-NE to make a compliance filing to modify its proposal and adopt the increases to the reserve constraint penalty factors in NEPOOL’s proposal. The matter is still subject to rehearing with FERC.
Significant Events During the Six Months Ended June 30, 2014
Acquisition of Drop-Down Assets from NRG
On May 5, 2014, NRG Yield Operating LLC entered into purchase and sale agreements with certain NRG entities, each of which is a wholly-owned subsidiary of NRG. Pursuant to the terms of the purchase and sale agreements, NRG Yield Operating LLC agreed to acquire: (i) El Segundo, a 550 MW fast-start, gas-fired facility located in Los Angeles County, California; (ii) TA High Desert, a 20 MW solar facility located in Los Angeles County, California; and (iii) RE Kansas South, a 20 MW solar facility located in Kings County, California.
These transactions represent the first drop-down of assets from NRG to the Company at an aggregate purchase price of $357 million, which represents a base purchase price of $349 million and $8 million of working capital adjustments. In addition, the acquisition included the assumption of $612 million in project level debt.
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Alta Acquisition
On June 3, 2014, the Company and NRG Yield Operating LLC entered into a purchase and sale agreement with the Alta Sellers, whereby the Company agreed to acquire 100% of the membership interests of Alta Wind Asset Management Holdings, LLC, Alta Wind Company, LLC, Alta Wind X Holding Company, LLC and Alta Wind XI Holding Company, LLC, which collectively own 7 wind facilities that total 947 MW located in Tehachapi, California, or the Alta Wind Assets, and a portfolio of land leases associated with the Alta Wind Assets. The purchase price for the Alta Wind Assets is $870 million, as well as working capital adjustments, plus the assumption of $1.6 billion of non-recourse project-level debt. Terra-Gen, an affiliate of the Alta Sellers, will continue to provide day-to-day operations and maintenance services under a 10-year O&M agreement, which will automatically extend for additional five-year periods unless either party provides notice of termination at least 90 days prior to the expiration of the then-current term. Pursuant to the terms of such agreement, Terra-Gen will be paid a fixed monthly payment (adjusted annually for inflation) and reimbursed for certain costs incurred.
The Alta Acquisition is subject to customary closing conditions, including the receipt of regulatory approvals. The Company expects the Alta Acquisition to close during the third quarter of 2014.
Issuance of 3.50% Convertible Notes
During the first quarter of 2014, the Company issued $345 million in aggregate principal amount of its convertible notes as described in Note 8, Long - Term Debt. The convertible notes are convertible, under certain circumstances, into shares of the Company’s Class A common stock, cash or a combination thereof at the option of the Company at an initial conversion price of $46.55 per share of Class A common stock.
Significant Events During the Six Months Ended June 30, 2013
During the first six months of 2013, Alpine, Borrego and Marsh Landing achieved commercial operations. In addition, Borrego completed financing arrangements with a group of lenders.
Basis of Presentation
For all periods prior to the initial public offering, the accompanying unaudited combined financial statements represent the combination of the assets that NRG Yield LLC acquired and were prepared using NRG's historical basis in the assets and liabilities. For the purposes of the unaudited combined financial statements, the term "NRG Yield" represents the accounting predecessor, or the combination of the acquired businesses. For all periods subsequent to the initial public offering, the accompanying unaudited consolidated financial statements represent the consolidated results of NRG Yield, Inc., which consolidates NRG Yield LLC through its controlling interest.
The acquisition of the TA High Desert, RE Kansas South, and El Segundo projects from NRG on June 30, 2014 was accounted for as a transfer of entities under common control. The guidance requires retrospective combination of the entities for all periods presented as if the combination has been in effect since the inception of common control. Accordingly, the Company prepared its consolidated financial statements to reflect the transfer as if it had taken place on January 1, 2013, or from the date the entities were under common control, which was May 13, 2013 for RE Kansas South and March 28, 2013 for TA High Desert. Member's equity represents NRG's equity in the subsidiaries, and accordingly, in connection with their acquisition by the Company, the balance was reclassified into noncontrolling interest. The Company reduces net income attributable to its Class A common shareholders by the pre-acquisition net income for the Acquired ROFO Assets as it is not available to the shareholders.
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Consolidated Results of Operations
The following table provides selected financial information:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||
(In millions except otherwise noted) | 2014 | 2013 | Change % | 2014 | 2013 | Change % | |||||||||||||||
Operating Revenues | |||||||||||||||||||||
Total operating revenues | $ | 134 | $ | 82 | 64 | $ | 274 | $ | 135 | 103 | |||||||||||
Operating Costs and Expenses | |||||||||||||||||||||
Cost of operations | 45 | 32 | 41 | 105 | 61 | 72 | |||||||||||||||
Depreciation and amortization | 36 | 10 | 260 | 60 | 20 | 200 | |||||||||||||||
General and administrative — affiliate | 2 | 2 | — | 4 | 4 | — | |||||||||||||||
Total operating costs and expenses | 83 | 44 | 89 | 169 | 85 | 99 | |||||||||||||||
Operating Income | 51 | 38 | 34 | 105 | 50 | 110 | |||||||||||||||
Other Income/(Expense) | |||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | 14 | 2 | N/M | 15 | 6 | 150 | |||||||||||||||
Other income, net | — | 1 | 100 | 1 | 1 | — | |||||||||||||||
Interest expense | (29 | ) | (6 | ) | (383 | ) | (56 | ) | (11 | ) | (409 | ) | |||||||||
Total other income/(expense) | (15 | ) | (3 | ) | 400 | (40 | ) | (4 | ) | N/M | |||||||||||
Income Before Income Taxes | 36 | 35 | 3 | 65 | 46 | 41 | |||||||||||||||
Income tax expense | 2 | — | 100 | 5 | — | 100 | |||||||||||||||
Net Income | 34 | 35 | (3 | ) | 60 | 46 | 31 | ||||||||||||||
Pre-acquisition net income of Acquired ROFO Assets | 9 | 1 | N/M | 17 | 1 | N/M | |||||||||||||||
Net Income Excluding Pre-acquisition Net Income of Acquired ROFO Assets | 25 | 34 | (26 | ) | 43 | 45 | (5 | ) | |||||||||||||
Income attributable to NRG | 19 | 33 | |||||||||||||||||||
Net Income Attributable to NRG Yield, Inc. | $ | 6 | $ | 10 |
N/M - Not meaningful.
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
Business metrics: | 2014 (a) | 2013 (a) | 2014 (a) | 2013 (a) | |||||||||||
Conventional MWh sold (in thousands) | 346 | — | 674 | — | |||||||||||
Renewable MWh sold (in thousands) | 279 | 256 | 490 | 439 | |||||||||||
Thermal MWt sold (in thousands) | 441 | 364 | 1,109 | 862 |
(a) Volumes sold do not include MWh 52 thousand, 37 thousand, 124 thousand and 45 thousand for thermal generation for the three months and six months ended June 30, 2014 and 2013, respectively.
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Management’s Discussion of the Results of Operations for the Three months ended June 30, 2014 and 2013
Operating Revenues
Operating revenues increased by $52 million during the three months ended June 30, 2014, compared to the same period in 2013 due to:
Conventional | Renewables | Thermal | Total | ||||||||||||
(In millions) | |||||||||||||||
Three Months Ended June 30, 2014 | $ | 61 | $ | 30 | $ | 43 | $ | 134 | |||||||
Three Months Ended June 30, 2013 | 20 | 26 | 36 | 82 |
The increase in operating revenues is due primarily to:
Increase in Conventional revenues as Marsh Landing and El Segundo reached commercial operations in 2013 | $ | 41 | |
Increase in Thermal revenue is primarily due to revenue generated from Energy Systems acquired in the fourth quarter of 2013 | 7 | ||
Increase in Renewables revenue primarily due to RE Kansas South and TA High Desert facilities reaching commercial operations in the first half of 2013 | 4 | ||
$ | 52 |
Operating Costs
Operating costs increased by $13 million during the three months ended June 30, 2014, compared to the same period in 2013 due to:
Conventional | Renewables | Thermal | Total | ||||||||||||
(In millions) | |||||||||||||||
Three Months Ended June 30, 2014 | $ | 12 | $ | 3 | $ | 30 | $ | 45 | |||||||
Three Months Ended June 30, 2013 | 3 | 2 | 27 | 32 |
The increase in operating costs is due primarily to:
Increase in costs associated with maintenance and operations at Marsh Landing and El Segundo which reached commercial operations in 2013 | $ | 9 | |
Higher cost of production due to repowering of Dover facilities in the second quarter of 2013; as well as increased costs in connection with the Energy Systems acquisition | 3 | ||
Increase in costs associated with maintenance and operations at RE Kansas South and TA High Desert which reached commercial operations in 2013 | 1 | ||
$ | 13 |
Depreciation and Amortization
Depreciation and amortization increased by $26 million during the three months ended June 30, 2014, compared to the same period in 2013, due primarily to additional depreciation expense associated with El Segundo and Marsh Landing facilities which reached commercial operations in 2013, as well as RE Kansas South and TA High Desert reaching commercial operations in the first half of 2013.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates increased by $12 million during the three months ended June 30, 2014, compared to the same period in 2013 due primarily to an increase in earnings for CVSR and GenConn.
Interest Expense
Interest expense increased by $23 million during the three months ended June 30, 2014, compared to the same period in 2013, due primarily to an increase in derivative interest expense of $9 million related to the Alpine interest rate swap, interest expense of $8 million on the Company's revolving credit facility and Convertible Notes issued in February 2014, as well as $6 million of interest expense for the Marsh Landing and El Segundo projects which reached commercial operations in 2013.
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Income Tax Expense
For the three months ended June 30, 2014, the Company recorded income tax expense of $2 million on pretax income of $36 million. The overall effective tax rate was different than the statutory rate of 35% primarily due to taxable earnings allocated to NRG resulting from its 65.5% interest in NRG Yield LLC.
Pre-acquisition net income of Acquired ROFO Assets
For the three months ended June 30, 2014 the Company had an increase of $8 million in pre-acquisition net income of Acquired ROFO Assets primarily due to the El Segundo project, which reached commercial operations in the third quarter of 2013.
Income Attributable to NRG
Income attributable to NRG of $19 million represents NRG's 65.5% interest in NRG Yield LLC's net income during the three months ended June 30, 2014.
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Management’s Discussion of the Results of Operations for the Six Months ended June 30, 2014 and June 30, 2013
Operating Revenues
Operating revenues increased by $139 million during the six months ended June 30, 2014, compared to the same period in 2013 due to:
Conventional | Renewables | Thermal | Total | ||||||||||||
(In millions) | |||||||||||||||
Six Months Ended June 30, 2014 | $ | 117 | $ | 49 | $ | 108 | $ | 274 | |||||||
Six Months Ended June 30, 2013 | 20 | 42 | 73 | 135 |
The increase in operating revenues is due primarily to:
Increase in Conventional revenues as Marsh Landing and El Segundo reached commercial operations in 2013 | $ | 97 | |
Increase in Thermal segment due to revenue generated from Energy Systems acquired in the fourth quarter of 2013, repowering of Dover facilities in the second quarter of 2013, as well as increased generation at other Thermal facilities due to weather conditions in the first quarter of 2014 | 35 | ||
Increase in Renewables revenue due to Alpine, Borrego, TA High Desert and RE Kansas South facilities reaching commercial operations in the first half of 2013 | 7 | ||
$ | 139 |
Operating Costs
Operating costs increased by $44 million during the six months ended June 30, 2014, compared to the same period in 2013 due to:
Conventional | Renewables | Thermal | Total | ||||||||||||
(In millions) | |||||||||||||||
Six Months Ended March 31, 2014 | $ | 22 | $ | 7 | $ | 76 | $ | 105 | |||||||
Six Months Ended March 31, 2013 | 3 | 5 | 53 | 61 |
The increase in operating costs is due primarily to:
Higher cost of production due to repowering of Dover facilities in the second quarter of 2013; increased generation at other Thermal facilities due to weather conditions in the first quarter of 2014, as well as increased costs in connection with Energy Systems acquisition | 23 | ||
Increase in costs associated with maintenance and operations at Marsh Landing and El Segundo which reached commercial operations in 2013 | 19 | ||
Increase in cost associated with maintenance and operations of the Alpine, Borrego, TA High Desert and RE Kansas South facilities which reached commercial operations in the first half of 2013 | 2 | ||
$ | 44 |
Depreciation and Amortization
Depreciation and amortization increased by $40 million during the six months ended June 30, 2014, compared to the same period in 2013, due primarily to $35 million of additional depreciation associated with Marsh Landing and El Segundo in the Conventional segment, which reached commercial operations in the second and third quarters of 2013; and $4 million of additional depreciation expense in the Renewable segment for the facilities that reached commercial operations in the first and second quarters of 2013.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates increased by $9 million during the six months ended June 30, 2014, compared to the same period in 2013, due primarily to an increase of income for CVSR and GenConn.
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Interest Expense
Interest expense increased by $45 million during the six months ended June 30, 2014, compared to the same period in 2013, due primarily to an increase of $22 million in interest expense for the Marsh Landing and El Segundo projects in the Conventional segment which reached commercial operations in the second and third quarter of 2013, an increase in derivative interest expense of $15 million related to the Alpine interest rate swap, and an increase of $8 million in interest expense on the Company's revolving credit facility and Convertible Notes issued in February 2014.
Income Tax Expense
For the six months ended June 30, 2014, the Company recorded income tax expense of $5 million on pretax income of $65 million. The overall effective tax rate was different than the statutory rate of 35% primarily due to taxable earnings allocated to NRG resulting from its 65.5% interest in NRG Yield LLC.
Pre-acquisition net income of Acquired ROFO Assets
For the six months ended June 30, 2014, the Company had an increase of $16 million in pre-acquisition net income of Acquired ROFO Assets primarily due to the El Segundo project, which reached commercial operations in the third quarter of 2013.
Income Attributable to NRG
Income attributable to NRG of $33 million represents NRG's 65.5% interest in NRG Yield LLC's net income during the six months ended June 30, 2014.
Liquidity and Capital Resources
The Company's principal liquidity requirements are to meet its financial commitments, finance current operations, fund capital expenditures, including acquisitions from time to time, and to service debt. Historically, the Company's predecessor operations were financed as part of NRG's integrated operations and largely relied on internally generated cash flows as well as corporate and/or project-level borrowings to satisfy its capital expenditure requirements. As a normal part of the Company's business, depending on market conditions, the Company will from time to time consider opportunities to repay, redeem, repurchase or refinance its indebtedness. Changes in the Company's operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may cause the Company to seek additional debt or equity financing in future periods. There can be no guarantee that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions.
Liquidity Position
As of June 30, 2014 and December 31, 2013, the Company's liquidity was approximately $560 million and $186 million, respectively, comprised of cash, restricted cash, and availability under the Company's revolving credit facility. The increase primarily relates to the available line of credit under the revolving credit facility. The Company's various financing arrangements are described in Note 8, Long-term Debt.
Management believes that the Company's liquidity position, cash flows from operations and availability under our revolving credit facility will be adequate to meet our financial commitments, operating and maintenance capital expenditures and debt service obligations. Management continues to regularly monitor the Company's ability to finance the needs of its operating, financing and investing activity within the dictates of prudent balance sheet management.
Sources of Liquidity
The Company's principal sources of liquidity include cash on hand, cash generated from operations, borrowings under new and existing financing arrangements, including its revolving credit facility, and the issuance of additional equity securities as appropriate given market conditions. As described in Note 8, Long - Term Debt, the Company's financing arrangements consist of the convertible notes and project-level financings for its various assets.
In connection with the initial public offering of Class A common stock of NRG Yield, Inc., as further described in Note 1, Nature of Business, NRG Yield LLC and its direct wholly owned subsidiary, NRG Yield Operating LLC entered into a senior secured revolving credit facility, which provided a revolving line of credit of $60 million. On April 25, 2014, the Company amended its revolving credit facility to increase the available line of credit to $450 million and extend its maturity to April 2019. The revolving credit facility can be used for cash or for the issuance of letters of credit.
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During the first quarter of 2014, the Company issued $345 million of Senior Notes, as described in Note 8, Long - Term Debt. The Convertible Notes are convertible, under certain circumstances, into the Company’s Class A common stock, cash or a combination thereof at an initial conversion price of $46.55 per Class A common share, which is equivalent to an initial conversion rate of approximately 21.4822 shares of Class A common stock per $1,000 principal amount of Senior Notes. The proceeds from the issuance were used to fund the purchase of the Acquired ROFO Assets, as well as general corporate purposes, including future acquisitions.
On July 29, 2014, the Company issued 12,075,000 Class A common shares for net proceeds, after underwriting discount and expenses, of $630 million. The proceeds are expected to be used to fund the acquisition of the Alta Wind Assets with the excess of the proceeds over the amount utilized for the acquisition available for general corporate purposes.
On August 5, 2014, NRG Yield Operating LLC issued $500 million of senior unsecured notes, or the Senior Notes, with the intention of utilizing the proceeds to fund the acquisition of the Alta Wind Assets. The Senior Notes bear interest at 5.375% and mature in 2024.
Uses of Liquidity
The Company's requirements for liquidity and capital resources, other than for operating its facilities, are categorized as: (i) debt service obligations, as described more fully in Note 8, Long - Term Debt; (ii) capital expenditures; and (iii) cash dividends to investors.
Capital Expenditures
The Company’s capital spending program is focused on growth capital expenditures, or construction of new assets and completing the construction of new assets where construction is in process, and maintenance capital expenditures, or costs to maintain the assets currently operating such as costs to replace or refurbish assets during routine maintenance. The Company develops annual capital spending plans based on projected requirements for maintenance capital and completion of facilities under construction.
For the six months ended June 30, 2014, the Company used approximately $29 million to fund capital expenditures, including maintenance capital expenditures of $5 million. Growth capital expenditures primarily relate to the construction of Marsh Landing and El Segundo.
Acquisitions
The Company intends to acquire generation assets developed and constructed by NRG in the future, as well as generation and thermal infrastructure assets from third parties where the Company believes its knowledge of the market, operating expertise and access to capital provides a competitive advantage, and to utilize such acquisitions as a means to grow its cash available for distribution.
On June 30, 2014, the Company acquired the following NRG facilities: TA High Desert, RE Kansas South, and El Segundo for total cash consideration of $357 million plus assumed project level debt.
Cash Dividends to Investors
The Company intends to use the amount of cash that it receives from its distributions from NRG Yield LLC to pay quarterly dividends to the holders of its Class A common stock. NRG Yield LLC intends to distribute to its unit holders in the form of a quarterly distribution all of the cash available for distribution that is generated each quarter less reserves for the prudent conduct of the business, including among others, maintenance capital expenditures to maintain the operating capacity of the assets. Cash available for distribution is defined as earnings before income taxes, depreciation and amortization, excluding contract amortization, cash interest paid, income taxes paid, maintenance capital expenditures, investments in unconsolidated affiliates, growth capital expenditures, net of capital and debt funding, and principal amortization of indebtedness, and including cash distributions from unconsolidated affiliates. Common stock dividends are subject to available capital, market conditions, and compliance with associated laws and regulations. The Company expects that, based on current circumstances, comparable cash dividends will continue to be paid in the foreseeable future.
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The following table lists the dividends paid on the Company's Class A common stock during the six months ended June 30, 2014:
Second Quarter 2014 | First Quarter 2014 | |||||
Dividends per share | $ | 0.35 | $ | 0.33 |
The Company's Class A common stock dividends are subject to available capital, market conditions, and compliance with associated laws and regulations.
On July 29, 2014, the Company declared a quarterly dividend on Class A common stock of $0.365 per share payable on September 15, 2014 to shareholders of record as of September 2, 2014.
Cash Flow Discussion
The following table reflects the changes in cash flows for the comparative six month periods:
2014 | 2013 | Change | |||||||||
(In millions) | |||||||||||
Net cash provided by (used in) operating activities | $ | 73 | $ | (19 | ) | $ | 92 | ||||
Net cash used in investing activities | (204 | ) | (311 | ) | 107 | ||||||
Net cash provided by financing activities | 159 | 326 | (167 | ) |
Net Cash Provided By Operating Activities
Changes to net cash provided by (used in) operating activities were driven by:
(In millions) | |||
Increase in operating income adjusted for non-cash items | $ | 62 | |
Changes in working capital | 30 | ||
$ | 92 |
Net Cash Provided By Investing Activities
Changes to net cash used in investing activities were driven by:
(In millions) | |||
Payment to NRG for Acquired ROFO Assets | $ | (357 | ) |
Decrease in capital expenditures as most of the projects were placed in service in late 2012 or 2013 | 238 | ||
Increase in proceeds from renewable grants in the first half of 2014 | 113 | ||
Decrease in restricted cash, primarily for Marsh Landing | 96 | ||
Other | 17 | ||
$ | 107 |
Net Cash Provided By Financing Activities
Changes in net cash provided by financing activities were driven by:
(In millions) | |||
Prior year dividends and returns of capital to NRG, net of cash contributions from NRG | $ | 140 | |
Decrease in cash proceeds from issuance of long term debt, as well as higher principal payments in the first half of 2014 compared to the first half of 2013 | (254 | ) | |
Dividends and distributions paid in 2014 | (44 | ) | |
Increase in cash paid for deferred financing costs | (9 | ) | |
$ | (167 | ) |
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NOLs, Deferred Tax Assets and Uncertain Tax Position Implications, under ASC 740
The Company has no uncertain tax benefits. As of June 30, 2014, the Company has a cumulative NOL carry-forward balance of $173 million for financial statement purposes and does not anticipate any federal income tax payments for 2014. As a result of the Company's tax position, and based on current forecasts, the Company does not anticipate significant income tax payments for state and local jurisdictions in 2014.
Off-Balance Sheet Arrangements
Obligations under Certain Guarantee Contracts
The Company may enter into guarantee arrangements in the normal course of business to facilitate commercial transactions with third parties.
Retained or Contingent Interests
The Company does not have any material retained or contingent interests in assets transferred to an unconsolidated entity.
Obligations Arising Out of a Variable Interest in an Unconsolidated Entity
Variable interest in equity investments — As of June 30, 2014, the Company has several investments with an ownership interest percentage of 50% or less in energy and energy-related entities that are accounted for under the equity method. One of these investments is a variable interest entity for which the Company is not the primary beneficiary.
The Company's pro-rata share of non-recourse debt held by unconsolidated affiliates was approximately $560 million as of June 30, 2014. This indebtedness may restrict the ability of these subsidiaries to issue dividends or distributions to the Company. See also Note 5, Variable Interest Entities, or VIEs.
Contractual Obligations and Commercial Commitments
The Company has a variety of contractual obligations and other commercial commitments that represent prospective cash requirements in addition to our capital expenditure programs, as disclosed in the Company's 2013 Form 10-K. See also Note 8, Long - Term Debt, for additional discussion of contractual obligations incurred during the six months ended June 30, 2014.
Fair Value of Derivative Instruments
The Company may enter into long-term fuel purchase contracts and other energy-related financial instruments to mitigate variability in earnings due to fluctuations in spot market prices and to hedge fuel requirements at certain generation facilities. In addition, in order to mitigate interest rate risk associated with the issuance of variable rate and fixed rate debt, the Company enters into interest rate swap agreements.
The tables below disclose the activities that include non-exchange traded contracts accounted for at fair value in accordance with ASC 820. Specifically, these tables disaggregate realized and unrealized changes in fair value; disaggregate estimated fair values at June 30, 2014, based on their level within the fair value hierarchy defined in ASC 820; and indicate the maturities of contracts at June 30, 2014. For a full discussion of the Company's valuation methodology of its contracts, see Note 6, Fair Value of Financial Instruments.
Derivative Activity Gains/(Losses) | (In millions) | ||
Fair value of contracts as of December 31, 2013 | $ | (26 | ) |
Contracts realized or otherwise settled during the period | 16 | ||
Changes in fair value | (38 | ) | |
Fair value of contracts as of June 30, 2014 | $ | (48 | ) |
Fair Value of Contracts as of June 30, 2014 | |||||||||||||||||||
Fair value hierarchy Gains/(Losses) | Maturity Less Than 1 Year | Maturity 1-3 Years | Maturity 3-5 Years | Maturity in Excess 5 Years | Total Fair Value | ||||||||||||||
(In millions) | |||||||||||||||||||
Level 2 | $ | (28 | ) | $ | (32 | ) | $ | (2 | ) | $ | 15 | $ | (47 | ) | |||||
Level 3 | (1 | ) | — | — | — | (1 | ) | ||||||||||||
Total | $ | (29 | ) | $ | (32 | ) | $ | (2 | ) | $ | 15 | $ | (48 | ) |
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The Company has elected to disclose derivative assets and liabilities on a trade-by-trade basis and does not offset amounts at the counterparty master agreement level. As discussed below in Quantitative and Qualitative Disclosures about Market Risk -Commodity Price Risk, the Company measures the sensitivity of the portfolio to potential changes in market prices using VaR, a statistical model which attempts to predict risk of loss based on market price and volatility. The Company's risk management policy places a limit on one-day holding period VaR, which limits the net open position.
Based on a sensitivity analysis using simplified assumptions, the impact of a $0.50 per MMBtu increase or decrease in natural gas prices across the term of the derivative contracts would cause a change of approximately $1 million in the net value of derivatives as of June 30, 2014.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements and related disclosures in compliance with U.S. GAAP requires the application of appropriate technical accounting rules and guidance as well as the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. The application of these policies necessarily involves judgments regarding future events, including the likelihood of success of particular projects, legal and regulatory challenges, and the fair value of certain assets and liabilities. These judgments, in and of themselves, could materially affect the financial statements and disclosures based on varying assumptions, which may be appropriate to use. In addition, the financial and operating environment may also have a significant effect, not only on the operation of the business, but on the results reported through the application of accounting measures used in preparing the financial statements and related disclosures, even if the nature of the accounting policies has not changed.
On an ongoing basis, the Company evaluates these estimates, utilizing historic experience, consultation with experts and other methods the Company considers reasonable. In any event, actual results may differ substantially from the Company's estimates. Any effects on the Company's business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the information that gives rise to the revision becomes known.
The Company's significant accounting policies are summarized in Note 2, Summary of Significant Accounting Policies. The Company identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Company's financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. The Company's critical accounting policies include derivative instruments, income taxes and valuation allowance for deferred tax assets, impairment of long lived assets and other intangible assets, and contingencies.
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ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to several market risks in its normal business activities. Market risk is the potential loss that may result from market changes associated with the Company's power generation or with an existing or forecasted financial or commodity transaction. The types of market risks we are exposed to are commodity price risk, interest rate risk, liquidity risk, and credit risk.
Commodity Price Risk
Commodity price risks result from exposures to changes in spot prices, forward prices, volatilities, and correlations between various commodities, such as natural gas, and emissions credits. The Company manages the commodity price risk of its merchant generation operations by entering into derivative or non-derivative instruments to hedge the variability in future cash flows from forecasted purchases of fuel. The portion of forecasted transactions hedged may vary based upon management's assessment of market, weather, operation and other factors.
Based on a sensitivity analysis using simplified assumptions, the impact of a $0.50 per MMBtu increase or decrease in natural gas prices across the term of the derivative contracts would cause a change of approximately $1 million in the net value of derivatives as of June 30, 2014.
Interest Rate Risk
The Company is exposed to fluctuations in interest rates through its issuance of variable rate debt. Exposures to interest rate fluctuations may be mitigated by entering into derivative instruments known as interest rate swaps, caps, collars and put or call options. These contracts reduce exposure to interest rate volatility and result in primarily fixed rate debt obligations when taking into account the combination of the variable rate debt and the interest rate derivative instrument. The Company's risk management policies allow it to reduce interest rate exposure from variable rate debt obligations.
Most of the Company's project subsidiaries enter into interest rate swaps, intended to hedge the risks associated with interest rates on non-recourse project level debt. See Note 9, Long-Term Debt, to the Company's audited consolidated financial statements included in the Company's 2013 Form 10-K, and Note 8, Long - Term Debt, to this Form 10-Q for more information about interest rate swaps of the Company's project subsidiaries.
If all of the above swaps had been discontinued on June 30, 2014, the Company would have owed the counterparties $48 million. Based on the investment grade rating of the counterparties, the Company believes its exposure to credit risk due to nonperformance by counterparties to its hedge contracts to be insignificant.
The Company has long-term debt instruments that subject it to the risk of loss associated with movements in market interest rates. As of June 30, 2014, a 1% change in interest rates would result in an approximately $2 million change in interest expense on a rolling twelve month basis.
As of June 30, 2014, the fair value of the Company's debt was $2,087 million and the carrying value was $1,999 million. The Company estimates that a 1% decrease in market interest rates would have increased the fair value of its long-term debt by $119 million.
Liquidity Risk
Liquidity risk arises from the general funding needs of the Company's activities and in the management of the Company's assets and liabilities.
Counterparty Credit Risk
Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. The Company monitors and manages credit risk through credit policies that include: (i) an established credit approval process, and (ii) the use of credit mitigation measures such as prepayment arrangements or volumetric limits. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. The Company seeks to mitigate counterparty risk by having a diversified portfolio of counterparties.
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ITEM 4 — CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's management, including its principal executive officer, principal financial officer and principal accounting officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act. Based on this evaluation, the Company's principal executive officer, principal financial officer and principal accounting officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report on Form 10-Q.
Changes in Internal Control over Financial Reporting
The Company is integrating certain business operations, information systems, processes and related internal control over financial reporting which will continue to the end of the fiscal year. The Company will assess the effectiveness of internal control over financial reporting as integration activities continue.
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PART II — OTHER INFORMATION
ITEM 1 — LEGAL PROCEEDINGS
None.
ITEM 1A — RISK FACTORS
Information regarding risk factors appears in Part I, Item 1A, Risk Factors in the Company's 2013 Form 10-K. There have been no material changes in the Company's risk factors since those reported in its 2013 Form 10-K.
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 — DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 — MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 — OTHER INFORMATION
None.
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ITEM 6 — EXHIBITS
Number | Description | Method of Filing | ||
2.1 | Purchase and Sale Agreement, dated as of May 5, 2014, by and between NRG Gas Development Company, LLC and NRG Yield Operating LLC. | Incorporated by reference from Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 9, 2014. | ||
2.2 | Purchase and Sale Agreement, dated as of May 5, 2014, by and between NRG Solar PV LLC and NRG Yield Operating LLC. | Incorporated by reference from Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on May 9, 2014. | ||
2.3 | Purchase and Sale Agreement, dated as of May 5, 2014, by and between NRG Solar PV LLC and NRG Yield Operating LLC. | Incorporated by reference from Exhibit 2.3 to the Company’s Current Report on Form 8-K filed on May 9, 2014. | ||
2.4 | Purchase and Sale Agreement, dated June 3, 2014, by and among NRG Yield, Inc., NRG Yield Operating LLC, Terra-Gen Finance Company, LLC, NTD AWAM Holdings, LLC, CHIPS Alta Wind X Holding Company, LLC and CHIPS Alta Wind XI Holding Company, LLC. | Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 9, 2014. | ||
10.1 | Amended and Restated Credit Agreement, dated April 25, 2014, by and among NRG Yield Operating LLC, NRG Yield LLC, Royal Bank of Canada, as Administrative Agent, the lenders party thereto, Royal Bank of Canada, Goldman Sachs Bank USA and Bank of America, N.A., as L/C Issuers and RBC Capital Markets as Sole Left Lead Arranger and Sole Left Lead Book Runner. | Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 28, 2014. | ||
10.2 | Credit Agreement, dated as of August 23, 2011, among NRG West Holdings LLC, ING Capital LLC, Union Bank, N.A., Mizuho Corporate Bank, Ltd., RBS Securities Inc., Credit Agricole Corporate and Investment Bank, and each of lenders and issuing banks thereto.* | Filed herewith | ||
10.3 | Amendment No. 1 dated October 7, 2011, by and between NRG West Holdings LLC and Credit Agricole Corporate and Investment Bank. | Filed herewith | ||
10.4 | Amendment No. 2 dated February 29, 2012, by and between NRG West Holdings LLC and Credit Agricole Corporate and Investment Bank. | Filed herewith | ||
10.5 | Amended and Restated Credit Agreement, dated July 17, 2014, by and among NRG Marsh Landing LLC, The Royal Bank of Scotland Plc, Deutsche Bank Trust Company Americas and the lenders party thereto. | Filed herewith | ||
10.6 | First Amendment to the Credit Agreement and Collateral Agency and Intercreditor Agreement, dated July 17, 2014, by and among NRG Marsh Landing LLC, The Royal Bank of Scotland Plc, Deutsche Bank Trust Company Americas and the lenders party thereto. | Filed herewith | ||
31.1 | Rule 13a-14(a)/15d-14(a) certification of David Crane | Filed herewith | ||
31.2 | Rule 13a-14(a)/15d-14(a) certification of Kirkland Andrews | Filed herewith | ||
31.3 | Rule 13a-14(a)/15d-14(a) certification of Ronald Stark | Filed herewith | ||
32 | Section 1350 Certification | Filed herewith | ||
101 INS | XBRL Instance Document | Filed herewith | ||
101 SCH | XBRL Taxonomy Extension Schema | Filed herewith | ||
101 CAL | XBRL Taxonomy Extension Calculation Linkbase | Filed herewith | ||
101 DEF | XBRL Taxonomy Extension Definition Linkbase | Filed herewith |
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101 LAB | XBRL Taxonomy Extension Label Linkbase | Filed herewith | ||
101 PRE | XBRL Taxonomy Extension Presentation Linkbase | Filed herewith |
* This filing excludes schedules pursuant to Item 601(b)(2) of Regulation S-K, which the registrant agrees to furnish supplementary to the Securities and Exchange Commission upon request by the Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NRG YIELD, INC. (Registrant) | ||||
/s/ DAVID CRANE | ||||
David Crane | ||||
Chief Executive Officer (Principal Executive Officer) | ||||
/s/ KIRKLAND B. ANDREWS | ||||
Kirkland B. Andrews | ||||
Chief Financial Officer (Principal Financial Officer) | ||||
/s/ RONALD B. STARK | ||||
Ronald B. Stark | ||||
Date: August 7, 2014 | Chief Accounting Officer (Principal Accounting Officer) | |||
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