NRG ENERGY, INC. - Quarter Report: 2016 September (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: September 30, 2016 | ||
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 001-15891
NRG Energy, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 41-1724239 (I.R.S. Employer Identification No.) | |
804 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 x | Accelerated filer o | Non-accelerated filer o | 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 October 31, 2016, there were 315,442,997 shares of common stock outstanding, par value $0.01 per share.
TABLE OF CONTENTS
Index
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q of NRG Energy, Inc., or NRG or the Company, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or 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 NRG'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 Related to NRG Energy, Inc., in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2015, and the following:
• | General economic conditions, changes in the wholesale power markets and fluctuations in the cost of fuel; |
• | Volatile power supply costs and demand for power; |
• | 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 NRG may not have adequate insurance to cover losses as a result of such hazards; |
• | The effectiveness of NRG's risk management policies and procedures, and the ability of NRG's counterparties to satisfy their financial commitments; |
• | Counterparties' collateral demands and other factors affecting NRG's liquidity position and financial condition; |
• | NRG's ability to operate its businesses efficiently, manage capital expenditures and costs tightly, and generate earnings and cash flows from its asset-based businesses in relation to its debt and other obligations; |
• | NRG's ability to enter into contracts to sell power and procure fuel on acceptable terms and prices; |
• | The liquidity and competitiveness of wholesale markets for energy commodities; |
• | Government regulation, including compliance with regulatory requirements and changes in market rules, rates, tariffs and environmental laws and increased regulation of carbon dioxide and other GHG emissions; |
• | Price mitigation strategies and other market structures employed by ISOs or RTOs that result in a failure to adequately and fairly compensate NRG's generation units; |
• | NRG's ability to mitigate forced outage risk for units subject to capacity performance requirements in PJM, performance incentives in ISO-NE, and scarcity pricing in ERCOT; |
• | NRG's ability to borrow funds and access capital markets, as well as NRG's substantial indebtedness and the possibility that NRG may incur additional indebtedness going forward; |
• | NRG's ability to receive loan guarantees or cash grants to support development projects; |
• | Operating and financial restrictions placed on NRG and its subsidiaries that are contained in the indentures governing NRG's outstanding notes, in NRG's 2016 Senior Credit Facility, and in debt and other agreements of certain of NRG subsidiaries and project affiliates generally; |
• | GenOn's ability to continue as a going concern; |
• | Cyber terrorism and inadequate cybersecurity, or the occurrence of a catastrophic loss and the possibility that NRG may not have adequate insurance to cover losses resulting from such hazards or the inability of NRG's insurers to provide agreed upon coverage; |
• | NRG's ability to develop and build new power generation facilities, including new renewable projects; |
• | NRG's ability to develop and innovate new products as retail and wholesale markets continue to change and evolve; |
• | NRG's ability to implement its strategy of finding ways to meet the challenges of climate change, clean air and protecting natural resources while taking advantage of business opportunities; |
• | NRG's ability to sell assets to NRG Yield, Inc. and to close drop-down transactions; |
• | NRG's ability to achieve its strategy of regularly returning capital to stockholders; |
• | NRG's ability to obtain and maintain retail market share; |
• | NRG's ability to successfully evaluate investments and achieve intended financial results in new business and growth initiatives; |
• | NRG's ability to engage in successful mergers and acquisitions activity; |
• | NRG's ability to successfully integrate, realize cost savings and manage any acquired businesses; and |
• | NRG's ability to develop and maintain successful partnering relationships. |
3
Forward-looking statements speak only as of the date they were made, and NRG 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 NRG'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.
4
GLOSSARY OF TERMS
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:
2015 Form 10-K | NRG’s Annual Report on Form 10-K for the year ended December 31, 2015 | |
2016 Revolving Credit Facility | The Company’s $2.5 billion revolving credit facility, a component of the 2016 Senior Credit Facility. The revolving credit facility consists of $289 million of Tranche A Revolving Credit Facility, due 2018, and $2.2 billion of Tranche B Revolving Credit Facility, due 2021. | |
2016 Senior Credit Facility | NRG’s senior secured credit facility, comprised of a $1.9 billion term loan facility and a $2.5 billion revolving credit facility, which replaces the Senior Credit Facility. | |
2016 Term Loan Facility | The Company's $1.9 billion term loan facility due 2023, a component of the 2016 Senior Credit Facility. | |
AEP | American Electric Power Company Inc. | |
ARO | Asset Retirement Obligation | |
ASC | The FASB Accounting Standards Codification, which the FASB established as the source of authoritative GAAP | |
ASU | Accounting Standards Updates, which reflect updates to the ASC | |
Average realized prices | Volume-weighted average power prices, net of average fuel costs and reflecting the impact of settled hedges | |
BACT | Best Available Control Technology | |
BETM | Boston Energy Trading and Marketing LLC | |
BTU | British Thermal Unit | |
Buffalo Bear | Buffalo Bear, LLC, the operating subsidiary of Tapestry Wind LLC, which owns the Buffalo Bear project | |
CAA | Clean Air Act | |
CAIR | Clean Air Interstate Rule | |
CAISO | California Independent System Operator | |
CDD | Cooling Degree Day | |
CDFW | California Department of Fish and Wildlife | |
CDWR | California Department of Water and Resources | |
CenterPoint | CenterPoint Energy, Inc. and its subsidiaries, on and after August 31, 2002, and Reliant Energy, Incorporated and its subsidiaries prior to August 31, 2002 | |
CERT | Combustion Emissions Reduction Technologies, LLC | |
CFTC | U.S. Commodity Futures Trading Commission | |
COD | Commercial Operation Date | |
ComEd | Commonwealth Edison | |
Company | NRG Energy, Inc. | |
CPP | Clean Power Plan | |
CPS | Combined Pollutant Standard | |
CPUC | California Public Utilities Commission | |
CSAPR | Cross-State Air Pollution Rule | |
CVSR | California Valley Solar Ranch | |
CWA | Clean Water Act | |
D.C. Circuit | U.S. Court of Appeals for the District of Columbia Circuit | |
DGPV Holdco 1 | NRG DGPV Holdco 1 LLC | |
DGPV Holdco 2 | NRG DGPV Holdco 2 LLC | |
Discrete Customers | Customers measured by unit sales of one-time products or services, such as one-time in-home product installation/maintenance, portable solar products and portable battery solutions | |
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 |
5
DSI | Dry Sorbent Injection with Trona | |
Economic gross margin | Sum of energy revenue, capacity revenue and other revenue, less cost of fuels and other cost of sales | |
EGU | Electric Generating Unit | |
El Segundo Energy Center | NRG West Holdings LLC, the subsidiary of Natural Gas Repowering LLC, which owns the El Segundo Energy Center project | |
EMAAC | Eastern Mid-Atlantic Area Council | |
EME | Edison Mission Energy | |
Energy Plus Holdings | Energy Plus Holdings LLC and Energy Plus Natural Gas LLC | |
EPA | U.S. Environmental Protection Agency | |
EPC | Engineering, Procurement and Construction | |
ERCOT | Electric Reliability Council of Texas, the Independent System Operator and the regional reliability coordinator of the various electricity systems within Texas | |
ESCO | Energy Service Company | |
ESP | Electrostatic Precipitator | |
ESPP | NRG Energy, Inc. Amended and Restated Employee Stock Purchase Plan | |
ESPS | Existing Source Performance Standards | |
Exchange Act | The Securities Exchange Act of 1934, as amended | |
FASB | Financial Accounting Standards Board | |
FERC | Federal Energy Regulatory Commission | |
FirstEnergy | FirstEnergy Corp. | |
FPA | Federal Power Act | |
FTRs | Financial Transmission Rights | |
GAAP | Accounting principles generally accepted in the U.S. | |
GenConn | GenConn Energy LLC | |
GenOn | GenOn Energy, Inc. | |
GenOn Americas Generation | GenOn Americas Generation, LLC | |
GenOn Americas Generation Senior Notes | GenOn Americas Generation's $695 million outstanding unsecured senior notes consisting of $366 million of 8.5% senior notes due 2021 and $329 million of 9.125% senior notes due 2031 | |
GenOn Mid-Atlantic | GenOn Mid-Atlantic, LLC and, except where the context indicates otherwise, its subsidiaries, which include the coal generation units at two generating facilities under operating leases | |
GenOn Senior Notes | GenOn's $1.8 billion outstanding unsecured senior notes consisting of $691 million of 7.875% senior notes due 2017, $650 million of 9.5% senior notes due 2018, and $489 million of 9.875% senior notes due 2020 | |
GHG | Greenhouse Gases | |
GWh | Gigawatt Hour | |
HAPs | Hazardous Air Pollutants | |
HDD | Heating Degree Day | |
Heat Rate | A measure of thermal efficiency computed by dividing the total BTU content of the fuel burned by the resulting kWhs generated. Heat rates can be expressed as either gross or net heat rates, depending whether the electricity output measured is gross or net generation and is generally expressed as BTU per net kWh | |
HLBV | Hypothetical Liquidation at Book Value | |
HLM | High Lonesome Mesa, LLC | |
IASB | Independent Accounting Standards Board | |
IFRS | International Financial Reporting Standards | |
IL CPS | Illinois Combined Pollutant Standard | |
ILU | Illinois Union Insurance Company | |
ISO | Independent System Operator |
6
ISO-NE | ISO New England Inc. | |
January 2015 Drop Down Assets | The Laredo Ridge, Tapestry and Walnut Creek projects, which were sold to NRG Yield, Inc. on January 2, 2015 | |
KPPH | 1,000 Pounds Per Hour | |
kWh | Kilowatt-hours | |
Laredo Ridge | Laredo Ridge Wind, LLC, the operating subsidiary of Mission Wind Laredo, LLC, which owns the Laredo Ridge project | |
LIBOR | London Inter-Bank Offered Rate | |
LSE | Load Serving Entity | |
LTIPs | Collectively, the NRG Long-Term Incentive Plan and the NRG GenOn Long-Term Incentive Plan | |
MAAC | Mid-Atlantic Area Council | |
Marsh Landing | NRG Marsh Landing, LLC (formerly known as GenOn Marsh Landing, LLC) | |
Mass Market | Residential and small commercial customers | |
MATS | Mercury and Air Toxics Standards promulgated by the EPA | |
MDE | Maryland Department of the Environment | |
Midwest Generation | Midwest Generation, LLC | |
MISO | Midcontinent Independent System Operator, Inc. | |
MMBtu | Million British Thermal Units | |
MW | Megawatts | |
MWG | Midwest Generation, LLC | |
MWh | Saleable megawatt hours, net of internal/parasitic load megawatt-hours | |
MWt | Megawatts Thermal Equivalent | |
NAAQS | National Ambient Air Quality Standards | |
NEPOOL | New England Power Pool | |
NERC | North American Electric Reliability Corporation | |
Net Exposure | Counterparty credit exposure to NRG, net of collateral | |
Net Generation | The net amount of electricity produced, expressed in kWhs or MWhs, that is the total amount of electricity generated (gross) minus the amount of electricity used during generation | |
NOL | Net Operating Loss | |
NOx | Nitrogen Oxides | |
NPDES | National Pollutant Discharge Elimination System | |
NPNS | Normal Purchase Normal Sale | |
NRC | U.S. Nuclear Regulatory Commission | |
NRG | NRG Energy, Inc. | |
NRG Wind TE Holdco | NRG Wind TE Holdco LLC | |
NRG Yield | Reporting segment that includes the projects held by NRG Yield, Inc. | |
NRG Yield 2019 Convertible Notes | $345 million aggregate principal amount of 3.50% Convertible Senior Notes due 2019 issued by NRG Yield, Inc. | |
NRG Yield 2020 Convertible Notes | $287.5 million aggregate principal amount of 3.25% Convertible Notes due 2020 issued by NRG Yield, Inc. | |
NRG Yield, Inc. | NRG Yield, Inc., the owner of 53.3% of the economic interests of NRG Yield LLC with a controlling interest, and issuer of publicly held shares of Class A and Class C common stock | |
NRG Yield Operating 2024 Senior Notes | NRG Yield Operating LLC's $500 million of 5.375% unsecured senior notes due 2024 | |
NRG Yield Operating 2026 Senior Notes | NRG Yield Operating LLC's $350 million of 5.00% unsecured senior notes due 2026 | |
NSR | New Source Review | |
NSPS | New Source Performance Standards | |
Nuclear Decommissioning Trust Fund | NRG's nuclear decommissioning trust fund assets, which are for the Company's portion of the decommissioning of the STP, units 1 & 2 |
7
NYAG | State of New York Office of Attorney General | |
NYISO | New York Independent System Operator | |
NYSERDA | New York State Energy Research and Development Authority | |
NYSPSC | New York State Public Service Commission | |
OCI | Other Comprehensive Income/(Loss) | |
Peaking | Units expected to satisfy demand requirements during the periods of greatest or peak load on the system | |
PG&E | Pacific Gas and Electric Company | |
Pinnacle | Pinnacle Wind, LLC, the operating subsidiary of Tapestry Wind LLC, which owns the Pinnacle project | |
PJM | PJM Interconnection, LLC | |
PM | Particulate Matter | |
PPA | Power Purchase Agreement | |
PSD | Prevention of Significant Deterioration | |
PUCO | Public Utility Commission of Ohio | |
PUCT | Public Utility Commission of Texas | |
RAPA | Resource Adequacy Purchase Agreement | |
RCRA | Resource Conservation and Recovery Act of 1976 | |
REMA | NRG REMA LLC, which leases a 100% interest in the Shawville generating facility and 16.7% and 16.5% interests in the Keystone and Conemaugh generating facilities, respectively | |
Reliant Energy | Reliant Energy Retail Services, LLC | |
Repowering | Technologies utilized to replace, rebuild, or redevelop major portions of an existing electrical generating facility, generally to achieve a substantial emissions reduction, increase facility capacity, and improve system efficiency | |
RESA | Retail Electric Supply Association | |
Retail Mass | Reporting segment that includes NRG's residential and small commercial businesses which go to market as Reliant, NRG and other brands owned by NRG | |
Retail Mass Recurring Customers | Customers that subscribe to one or more recurring services, such as electricity, natural gas and protection products, the majority of which are retail electricity customers in Texas and the Northeast | |
Revolving Credit Facility | Prior to June 30, 2016, the Company's $2.5 billion revolving credit facility due 2018, a component of the Senior Credit Facility. On June 30, 2016, the Company replaced the Senior Credit Facility, including the Revolving Credit Facility, with the 2016 Senior Credit Facility. | |
RGGI | Regional Greenhouse Gas Initiative | |
RMR | Reliability Must-Run | |
RPV Holdco | NRG RPV Holdco 1 LLC | |
RTO | Regional Transmission Organization | |
SCE | Southern California Edison | |
SDG&E | San Diego Gas & Electric Company | |
SEC | U.S. Securities and Exchange Commission | |
Securities Act | The Securities Act of 1933, as amended | |
Senior Credit Facility | Prior to June 30, 2016, the Company's senior secured facility, comprised of the Term Loan Facility and the Revolving Credit Facility. On June 30, 2016, the Company replaced the Senior Credit Facility with the 2016 Senior Credit Facility. | |
Senior Notes | As of September 30, 2016, the Company’s $5.8 billion outstanding unsecured senior notes, consisting of $584 million of 7.625% senior notes due 2018, $399 million of 7.875% senior notes due 2021, $992 million of 6.25% senior notes due 2022, $869 million of 6.625% senior notes due 2023, $734 million of 6.25% senior notes due 2024, $1.0 billion of 7.25% senior notes due 2026 and $1.25 billion of 6.625% senior notes due 2027. | |
Seward | The Seward Power Generating Station, a 525 MW coal-fired facility in Pennsylvania | |
Shelby | The Shelby County Generating Station, a 352 MW natural gas-fired facility in Illinois |
8
SO2 | Sulfur Dioxide | |
STP | South Texas Project — nuclear generating facility located near Bay City, Texas in which NRG owns a 44% interest | |
S&P | Standard & Poor's | |
Taloga | Taloga Wind, LLC, the operating subsidiary of Tapestry Wind LLC, which owns the Taloga project | |
TCPA | Telephone Consumer Protection Act | |
Term Loan Facility | Prior to June 30, 2016, the Company's $2.0 billion term loan facility due 2018, a component of the Senior Credit Facility. On June 30, 2016, the Company replaced its Senior Credit Facility, including the Term Loan Facility, with the 2016 Senior Credit Facility. | |
TSA | Transportation Services Agreement | |
TWCC | Texas Westmoreland Coal Co. | |
UPMC | University of Pittsburgh Medical Center | |
U.S. | United States of America | |
U.S. DOE | U.S. Department of Energy | |
Utility Scale Solar | Solar power projects, typically 20 MW or greater in size (on an alternating current 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 | |
Walnut Creek | NRG Walnut Creek, LLC, the operating subsidiary of WCEP Holdings, LLC, which owns the Walnut Creek project |
9
PART I — FINANCIAL INFORMATION
ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
(In millions, except for per share amounts) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Operating Revenues | |||||||||||||||
Total operating revenues | $ | 3,952 | $ | 4,434 | $ | 9,819 | $ | 11,663 | |||||||
Operating Costs and Expenses | |||||||||||||||
Cost of operations | 2,793 | 3,042 | 6,738 | 8,551 | |||||||||||
Depreciation and amortization | 357 | 382 | 979 | 1,173 | |||||||||||
Impairment losses | 8 | 263 | 123 | 263 | |||||||||||
Selling, general and administrative | 282 | 327 | 802 | 878 | |||||||||||
Acquisition-related transaction and integration costs | — | 3 | 7 | 16 | |||||||||||
Development activity expenses | 23 | 38 | 67 | 109 | |||||||||||
Total operating costs and expenses | 3,463 | 4,055 | 8,716 | 10,990 | |||||||||||
Gain on sale of assets and postretirement benefits curtailment, net | 266 | — | 215 | 14 | |||||||||||
Operating Income | 755 | 379 | 1,318 | 687 | |||||||||||
Other Income/(Expense) | |||||||||||||||
Equity in earnings of unconsolidated affiliates | 16 | 24 | 13 | 29 | |||||||||||
Impairment loss on investment | (8 | ) | — | (147 | ) | — | |||||||||
Other income, net | 9 | 4 | 35 | 27 | |||||||||||
Loss on debt extinguishment, net | (50 | ) | (2 | ) | (119 | ) | (9 | ) | |||||||
Interest expense | (280 | ) | (291 | ) | (841 | ) | (855 | ) | |||||||
Total other expense | (313 | ) | (265 | ) | (1,059 | ) | (808 | ) | |||||||
Income/(Loss) Before Income Taxes | 442 | 114 | 259 | (121 | ) | ||||||||||
Income tax expense/(benefit) | 49 | 47 | 95 | (43 | ) | ||||||||||
Net Income/(Loss) | 393 | 67 | 164 | (78 | ) | ||||||||||
Less: Net (loss)/income attributable to noncontrolling interest and redeemable noncontrolling interests | (9 | ) | 1 | (49 | ) | (10 | ) | ||||||||
Net Income/(Loss) Attributable to NRG Energy, Inc. | 402 | 66 | 213 | (68 | ) | ||||||||||
Gain on redemption, net of dividends for preferred shares | — | 5 | (73 | ) | 15 | ||||||||||
Income/(Loss) Available for Common Stockholders | $ | 402 | $ | 61 | $ | 286 | $ | (83 | ) | ||||||
Earnings/(Loss) per Share Attributable to NRG Energy, Inc. Common Stockholders | |||||||||||||||
Weighted average number of common shares outstanding — basic | 316 | 331 | 315 | 334 | |||||||||||
Earnings/(Loss) per Weighted Average Common Share — Basic | $ | 1.27 | $ | 0.18 | $ | 0.91 | $ | (0.25 | ) | ||||||
Weighted average number of common shares outstanding — diluted | 317 | 332 | 316 | 334 | |||||||||||
Earnings/(Loss) per Weighted Average Common Share — Diluted | $ | 1.27 | $ | 0.18 | $ | 0.91 | $ | (0.25 | ) | ||||||
Dividends Per Common Share | $ | 0.03 | $ | 0.15 | $ | 0.21 | $ | 0.44 |
See accompanying notes to condensed consolidated financial statements.
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NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(In millions) | |||||||||||||||
Net Income/(Loss) | $ | 393 | $ | 67 | $ | 164 | $ | (78 | ) | ||||||
Other Comprehensive Income/(Loss), net of tax | |||||||||||||||
Unrealized gains/(losses) on derivatives, net of income tax (benefit)/expense of $(1), $(12), $1 and $(6) | 27 | (6 | ) | (8 | ) | (2 | ) | ||||||||
Foreign currency translation adjustments, net of income tax benefit of $0 , $5, $0 and $6 | 3 | (8 | ) | 6 | (10 | ) | |||||||||
Available-for-sale securities, net of income tax expense of $0, $6, $0 and $1 | — | (7 | ) | 1 | (11 | ) | |||||||||
Defined benefit plans, net of tax expense of $0, $2, $0 and $6 | 31 | 3 | 32 | 9 | |||||||||||
Other comprehensive income/(loss) | 61 | (18 | ) | 31 | (14 | ) | |||||||||
Comprehensive Income/(Loss) | 454 | 49 | 195 | (92 | ) | ||||||||||
Less: Comprehensive loss attributable to noncontrolling interest and redeemable noncontrolling interests | (2 | ) | (17 | ) | (70 | ) | (34 | ) | |||||||
Comprehensive Income/(Loss) Attributable to NRG Energy, Inc. | 456 | 66 | 265 | (58 | ) | ||||||||||
Gain on redemption, net of dividends for preferred shares | — | 5 | (73 | ) | 15 | ||||||||||
Comprehensive Income/(Loss) Available for Common Stockholders | $ | 456 | $ | 61 | $ | 338 | $ | (73 | ) |
See accompanying notes to condensed consolidated financial statements.
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NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2016 | December 31, 2015 | ||||||
(In millions, except shares) | (unaudited) | ||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 2,435 | $ | 1,518 | |||
Funds deposited by counterparties | 16 | 106 | |||||
Restricted cash | 480 | 414 | |||||
Accounts receivable, net | 1,362 | 1,157 | |||||
Inventory | 1,017 | 1,252 | |||||
Derivative instruments | 964 | 1,915 | |||||
Cash collateral paid in support of energy risk management activities | 337 | 568 | |||||
Renewable energy grant receivable, net | 34 | 13 | |||||
Current assets held-for-sale | — | 6 | |||||
Prepayments and other current assets | 369 | 442 | |||||
Total current assets | 7,014 | 7,391 | |||||
Property, plant and equipment, net | 18,203 | 18,732 | |||||
Other Assets | |||||||
Equity investments in affiliates | 900 | 1,045 | |||||
Notes receivable, less current portion | 21 | 53 | |||||
Goodwill | 999 | 999 | |||||
Intangible assets, net | 2,106 | 2,310 | |||||
Nuclear decommissioning trust fund | 605 | 561 | |||||
Derivative instruments | 256 | 305 | |||||
Deferred income taxes | 189 | 167 | |||||
Non-current assets held-for-sale | — | 105 | |||||
Other non-current assets | 1,198 | 1,214 | |||||
Total other assets | 6,274 | 6,759 | |||||
Total Assets | $ | 31,491 | $ | 32,882 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current Liabilities | |||||||
Current portion of long-term debt and capital leases | $ | 1,221 | $ | 481 | |||
Accounts payable | 945 | 869 | |||||
Derivative instruments | 969 | 1,721 | |||||
Cash collateral received in support of energy risk management activities | 16 | 106 | |||||
Current liabilities held-for-sale | — | 2 | |||||
Accrued expenses and other current liabilities | 1,150 | 1,196 | |||||
Total current liabilities | 4,301 | 4,375 | |||||
Other Liabilities | |||||||
Long-term debt and capital leases | 18,018 | 18,983 | |||||
Nuclear decommissioning reserve | 284 | 326 | |||||
Nuclear decommissioning trust liability | 309 | 283 | |||||
Deferred income taxes | 47 | 19 | |||||
Derivative instruments | 475 | 493 | |||||
Out-of-market contracts, net | 1,065 | 1,146 | |||||
Non-current liabilities held-for-sale | — | 4 | |||||
Other non-current liabilities | 1,480 | 1,488 | |||||
Total non-current liabilities | 21,678 | 22,742 | |||||
Total Liabilities | 25,979 | 27,117 | |||||
2.822% convertible perpetual preferred stock | — | 302 | |||||
Redeemable noncontrolling interest in subsidiaries | 19 | 29 | |||||
Commitments and Contingencies | |||||||
Stockholders’ Equity | |||||||
Common stock | 4 | 4 | |||||
Additional paid-in capital | 8,370 | 8,296 | |||||
Retained deficit | (2,791 | ) | (3,007 | ) | |||
Less treasury stock, at cost — 102,140,814 and 102,749,908 shares, respectively | (2,399 | ) | (2,413 | ) | |||
Accumulated other comprehensive loss | (142 | ) | (173 | ) | |||
Noncontrolling interest | 2,451 | 2,727 | |||||
Total Stockholders’ Equity | 5,493 | 5,434 | |||||
Total Liabilities and Stockholders’ Equity | $ | 31,491 | $ | 32,882 |
See accompanying notes to condensed consolidated financial statements.
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NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, | |||||||
2016 | 2015 | ||||||
(In millions) | |||||||
Cash Flows from Operating Activities | |||||||
Net Income/(Loss) | $ | 164 | $ | (78 | ) | ||
Adjustments to reconcile net income/(loss) to net cash provided by operating activities: | |||||||
Distributions and equity in earnings of unconsolidated affiliates | 44 | 28 | |||||
Depreciation and amortization | 979 | 1,173 | |||||
Provision for bad debts | 36 | 49 | |||||
Amortization of nuclear fuel | 39 | 36 | |||||
Amortization of financing costs and debt discount/premiums | 3 | (9 | ) | ||||
Adjustment to loss on debt extinguishment | 21 | 9 | |||||
Amortization of intangibles and out-of-market contracts | 73 | 68 | |||||
Amortization of unearned equity compensation | 23 | 37 | |||||
Impairment losses | 270 | 263 | |||||
Changes in deferred income taxes and liability for uncertain tax benefits | 29 | (72 | ) | ||||
Changes in nuclear decommissioning trust liability | 24 | 1 | |||||
Changes in derivative instruments | 82 | 180 | |||||
Changes in collateral deposits supporting energy risk management activities | 231 | (180 | ) | ||||
Proceeds from sale of emission allowances | 47 | (6 | ) | ||||
Gain on sale of assets and equity method investments, net and postretirement benefits curtailment | (224 | ) | (14 | ) | |||
Cash used by changes in other working capital | (108 | ) | (93 | ) | |||
Net Cash Provided by Operating Activities | 1,733 | 1,392 | |||||
Cash Flows from Investing Activities | |||||||
Acquisitions of businesses, net of cash acquired | (18 | ) | (31 | ) | |||
Capital expenditures | (898 | ) | (889 | ) | |||
Increase in restricted cash, net | (30 | ) | (41 | ) | |||
(Increase)/decrease in restricted cash to support equity requirements for U.S. DOE funded projects | (36 | ) | 1 | ||||
Decrease in notes receivable | 2 | 10 | |||||
Purchases of emission allowances | (32 | ) | (40 | ) | |||
Proceeds from sale of emission allowances | 47 | 45 | |||||
Investments in nuclear decommissioning trust fund securities | (378 | ) | (500 | ) | |||
Proceeds from the sale of nuclear decommissioning trust fund securities | 354 | 499 | |||||
Proceeds from renewable energy grants and state rebates | 11 | 62 | |||||
Proceeds from sale of assets, net of cash disposed of | 636 | 1 | |||||
Investments in unconsolidated affiliates | (23 | ) | (357 | ) | |||
Other | 44 | 8 | |||||
Net Cash Used by Investing Activities | (321 | ) | (1,232 | ) | |||
Cash Flows from Financing Activities | |||||||
Payment of dividends to common and preferred stockholders | (66 | ) | (152 | ) | |||
Payment for treasury stock | — | (353 | ) | ||||
Payment for preferred shares | (226 | ) | — | ||||
Net receipts from settlement of acquired derivatives that include financing elements | 129 | 138 | |||||
Proceeds from issuance of long-term debt | 5,237 | 679 | |||||
Payments for short and long-term debt | (5,357 | ) | (954 | ) | |||
Distributions from, net of contributions to, noncontrolling interest in subsidiaries | (127 | ) | 651 | ||||
Proceeds from issuance of common stock | 1 | 1 | |||||
Payment of debt issuance costs | (70 | ) | (14 | ) | |||
Other - contingent consideration | (10 | ) | (22 | ) | |||
Net Cash Used by Financing Activities | (489 | ) | (26 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (6 | ) | 15 | ||||
Net Increase in Cash and Cash Equivalents | 917 | 149 | |||||
Cash and Cash Equivalents at Beginning of Period | 1,518 | 2,116 | |||||
Cash and Cash Equivalents at End of Period | $ | 2,435 | $ | 2,265 |
See accompanying notes to condensed consolidated financial statements.
13
NRG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation
NRG Energy, Inc., or NRG or the Company, is an integrated competitive power company that aims to create a sustainable energy future by producing, selling and delivering energy and energy products and services in major competitive power markets in the U.S. in a manner that delivers value to all of NRG's stakeholders. NRG has one of the nation's largest and most diverse competitive generation portfolios balanced with a leading retail electricity platform. The Company owns and operates approximately 46,000 MW of generation; engages in the trading of wholesale energy, capacity and related products; transacts in and trades fuel and transportation services; and directly sells energy, services, and innovative, sustainable products and services to retail customers under the names “NRG,” "Reliant" and other retail brand names owned by NRG.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the SEC's regulations for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles 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 consolidated financial statements in the Company's 2015 Form 10-K. Interim results are not necessarily indicative of results for a full year.
In the opinion of management, the accompanying unaudited interim condensed 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 September 30, 2016, and the results of operations, comprehensive income/(loss) and cash flows for the three and nine months ended September 30, 2016 and 2015.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified for comparative purposes. The reclassifications did not affect results from operations, net assets or cash flows.
The Company decreased accumulated depreciation and facilities and equipment within total property, plant and equipment by approximately $1 billion respectively, to adjust amounts previously presented as of December 31, 2015. This adjustment had no impact on net assets at December 31, 2015. Accordingly, the Company does not consider the adjustment to be material to the consolidated balance sheet. Consolidated operating income and net income for the three months and nine months ended September 30, 2016 were not impacted by the adjustment.
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Note 2 — Summary of Significant Accounting Policies
Other Balance Sheet Information
The following table presents the allowance for doubtful accounts included in accounts receivable, net; accumulated depreciation included in property plant and equipment, net; accumulated amortization included in intangible assets, net and accumulated amortization included in out-of-market contracts, net.
September 30, 2016 | December 31, 2015 | |||||
(In millions) | ||||||
Accounts receivable allowance for doubtful accounts | $ | 28 | $ | 26 | ||
Property plant and equipment accumulated depreciation | 6,424 | 5,761 | ||||
Intangible assets accumulated amortization | 1,729 | 1,590 | ||||
Out-of-market contracts accumulated amortization | 740 | 639 |
Other Cash Flow Information
NRG’s investing activities exclude capital expenditures of $112 million which were accrued and unpaid at September 30, 2016.
Noncontrolling Interest
The following table reflects the changes in NRG's noncontrolling interest balance:
(In millions) | |||
Balance as of December 31, 2015 | $ | 2,727 | |
Distributions to noncontrolling interest | (135 | ) | |
Dividends paid to NRG Yield, Inc. public shareholders | (68 | ) | |
Comprehensive loss attributable to noncontrolling interest | (45 | ) | |
Sale of assets to NRG Yield, Inc. | (37 | ) | |
Redemption of noncontrolling interest | (7 | ) | |
Contributions from noncontrolling interest | 16 | ||
Balance as of September 30, 2016 | $ | 2,451 |
Redeemable Noncontrolling Interest
The following table reflects the changes in the Company's redeemable noncontrolling interest balance:
(In millions) | |||
Balance as of December 31, 2015 | $ | 29 | |
Distributions to redeemable noncontrolling interest | (46 | ) | |
Contributions from redeemable noncontrolling interest | 61 | ||
Comprehensive loss attributable to redeemable noncontrolling interest | (25 | ) | |
Balance as of September 30, 2016 | $ | 19 |
Recent Accounting Developments
ASU 2016-16 — In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory, or ASU No. 2016-16. The amendments of ASU No. 2016-16 were issued to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party which has resulted in diversity in practice and increased complexity within financial reporting. The amendments of ASU No. 2016-16 would require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and do not require new disclosure requirements. The amendments of ASU No. 2016-16 are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted and the adoption of ASU No. 2016-16 should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of the standard on the Company’s results of operations, cash flows and financial position.
15
ASU 2016-15 — In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, or ASU No. 2016-15. The amendments of ASU No. 2016-15 were issued to address eight specific cash flow issues for which stakeholders have indicated to the FASB that a diversity in practice existed in how entities were presenting and classifying these items in the statement of cash flows. The issues addressed by ASU No. 2016-15 include but are not limited to the classification of debt prepayment and debt extinguishment costs, payments made for contingent consideration for a business combination, proceeds from the settlement of insurance proceeds, distributions received from equity method investees and separately identifiable cash flows and the application of the predominance principle. The amendments of ASU No. 2016-15 are effective for public entities for fiscal years beginning after December 15, 2017 and interim periods in those fiscal years. Early adoption is permitted, including adoption in an interim fiscal period with all amendments adopted in the same period. The adoption of ASU No. 2016-15 is required to be applied retrospectively. The Company is currently evaluating the impact of the standard on the Company's statement of cash flows.
ASU 2016-09 — In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), or ASU No. 2016-09. The amendments of ASU No. 2016-09 were issued as part of the FASB's Simplification Initiative focused on improving areas of GAAP for which cost and complexity may be reduced while maintaining or improving the usefulness of information disclosed within the financial statements. The amendments focused on simplification specifically with regard to share-based payment transactions, including income tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows. The guidance in ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company does not expect the standard to have a material impact on its results of operations, cash flows and financial position.
ASU 2016-07 — In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323), or ASU No. 2016-07. The amendments of ASU No. 2016-07 eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting with no retroactive adjustment to the investment. In addition, ASU No. 2016-07 requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The guidance in ASU No. 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU No. 2016-07 is required to be applied prospectively and early adoption is permitted. The Company does not expect the standard to have a material impact on its results of operations, cash flows and financial position.
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ASU 2016-02 — In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU No. 2016-02. The amendments of ASU No. 2016-02 complete the joint effort between the FASB and the International Accounting Standards Board, or IASB, to develop a common leasing standard for GAAP and International Financial Reporting Standards, or IFRS, with the objective to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and to improve financial reporting. The guidance in ASU No. 2016-02 provides that a lessee that may have previously accounted for a lease as an operating lease under current GAAP should recognize the assets and liabilities that arise from a lease on the balance sheet. In addition, ASU No. 2016-02 expands the required quantitative and qualitative disclosures with regards to lease arrangements. The guidance in ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The adoption of ASU No. 2016-02 is required to be applied using a modified retrospective approach for the earliest period presented and early adoption is permitted. The Company is currently working through an adoption plan which includes the evaluation of lease contracts compared to the new standard and evaluating the impact of ASU No. 2016-02 on the Company's results of operations, cash flows and financial position.
ASU 2016-01 — In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU No. 2016-01. The amendments of ASU No. 2016-01 eliminate available-for-sale classification of equity investments and require that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be generally measured at fair value with changes in fair value recognized in net income. Further, the amendments require that financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category and form of financial asset. The guidance in ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those annual periods. The Company is currently evaluating the impact of the standard on the Company's results of operations, cash flows and financial position.
ASU 2015-16 — In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, or ASU No. 2015-16. The amendments of ASU No. 2015-16 require that an acquirer recognize measurement period adjustments to the provisional amounts recognized in a business combination in the reporting period during which the adjustments are determined. Additionally, the amendments of ASU No. 2015-16 require the acquirer to record in the same period's financial statements the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the measurement period adjustment, calculated as if the accounting had been completed at the acquisition date as well as disclosing either on the face of the income statement or in the notes the portion of the amount recorded in current period earnings that would have been recorded in previous reporting periods. The guidance in ASU No. 2015-16 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendments should be applied prospectively. The Company adopted ASU No. 2015-16 for the year ended December 31, 2016, and the adoption did not have a material impact on the Company's results of operations, cash flows and financial position.
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 IASB, to develop a common revenue standard for GAAP and IFRS, and to improve financial reporting. In addition to ASU No. 2014-09, the FASB has issued additional guidance which provides further clarification on Topic 606 including ASU No. 2016-08, ASU No. 2016-10 and ASU No. 2016-12. The guidance under Topic 606 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 a four step process to be applied by an entity in evaluating its contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, which formally deferred the effective date by one year to make the guidance of ASU No. 2014-09 effective for annual reporting periods beginning after December 15, 2017, including interim periods therein. Early adoption is permitted, but not prior to the original effective date, which was for annual reporting periods beginning after December 15, 2016. The Company is working through an adoption plan which includes the evaluation of revenue contracts compared to the new standard and evaluating the impact of Topic 606 on the Company's results of operations, cash flows and financial position.
17
Note 3 — Business Acquisitions and Dispositions
The Company has completed the following business acquisitions and dispositions that are material to the Company's financial statements:
Acquisitions
2015 Acquisition of Desert Sunlight
On June 29, 2015, NRG Yield, Inc., through its subsidiary NRG Yield Operating LLC, acquired 25% of the membership interest in Desert Sunlight Investment Holdings, LLC, which owns two solar photovoltaic facilities that total 550 MW located in Desert Center, California from EFS Desert Sun, LLC, an affiliate of GE Energy Financial Services, for a purchase price of $285 million. The Company accounts for its 25% investment as an equity method investment.
SunEdison Utility-Scale Solar and Wind Acquisition
On September 15, 2016, the Company entered into an agreement with SunEdison to acquire (i) an equity interest in a tax-equity portfolio of 530 MW mechanically-complete solar assets of which NRG’s net interest based on cash to be distributed will be 265 MW, and an additional 937 MW of solar and wind assets in development, (ii) a 154 MW construction-ready solar facility in Texas and (iii) a 182 MW portfolio of construction-ready and development solar assets in Hawaii. The acquisition of the portfolio of solar assets in Hawaii was completed on October 7, 2016 for upfront cash consideration of $2 million and the acquisition of the 530 MW tax equity portfolio and 937 MW development assets was completed on November 2, 2016 for upfront cash consideration of $111 million. The Company expects to pay total upfront cash consideration for the three acquisitions of $129 million, with an estimated $59 million in additional payments contingent upon future development milestones.
SunEdison Solar Distributed Generation Acquisition
On October 3, 2016, the Company acquired a 29 MW portfolio of mechanically-complete and construction-ready distributed generation solar assets from SunEdison for cash consideration of approximately $68 million, subject to post closing adjustments. The Company expects to sell these assets into a tax-equity financed portfolio within the DGPV Holdco partnership between NRG and NRG Yield, Inc.
Dispositions
Potrero Disposition
On September 26, 2016, NRG Potrero LLC, or Potrero, an indirect wholly owned subsidiary of GenOn Americas Generation, completed the sale of real property at the Potrero generating station located in San Francisco, CA to California Barrel Company, LLC for total consideration of $86 million, consisting of $74 million of cash received, which is net of $8 million of closing costs and $4 million to be held in escrow in order to cover post closing obligations. This transaction resulted in a gain on sale of $74 million.
Disposition of Majority Interest in EVgo
On June 17, 2016, the Company completed the sale of a majority interest in its EVgo business to Vision Ridge Partners for total consideration of approximately $39 million, including $17 million in cash received, which is net of $2.5 million in working capital adjustments, $15 million contributed as capital to the EVgo business and $7 million of future contributions by Vision Ridge Partners, all of which were determined based on forecasted cash requirements to operate the business in future periods. In addition, the Company has future earnout potential of up to $70 million based on future profitability targets. NRG retained its original financial obligation of $102.5 million under its agreement with the CPUC whereby EVgo will build at least 200 public fast charging Freedom Station sites and perform the associated work to prepare 10,000 commercial and multi-family parking spaces for electric vehicle charging in California. NRG has contracted with EVgo to continue to build the remaining required Freedom Stations and commercial and multi-family parking spaces for electric vehicle charging required under this obligation and EVgo will be directly reimbursed by NRG for the costs. As a result of the sale, the Company recorded a loss on sale of $78 million during the second quarter of 2016, which reflects the loss on the sale of the equity interest of $27 million and the accrual of NRG's remaining obligation under its agreement with the CPUC of $56 million, of which $50 million remains as of September 30, 2016. At September 30, 2016, the Company's remaining 35% interest in EVgo of $10 million was accounted for as an equity-method investment.
18
Rockford Disposition
On May 12, 2016, the Company entered into an agreement with RA Generation, LLC to sell 100% of its interests in the Rockford I and Rockford II generating stations, or Rockford, for cash consideration of $55 million, subject to adjustments for working capital and the results of the PJM 2019/2020 base residual auction. Rockford is a 450 MW natural gas facility located in Rockford, Illinois. The transaction triggered an indicator of impairment as the sales price was less than the carrying amount of the assets and as a result, the assets were considered to be impaired. The Company measured the impairment loss as the difference between the carrying amount of the assets and the agreed-upon sales price. The Company recorded an impairment loss of $17 million during the quarter ended June 30, 2016 to reduce the carrying amount of the assets held for sale to the fair market value. On July 12, 2016, the Company completed the sale of Rockford for cash proceeds of $56 million, including $1 million in adjustments for the PJM base residual auction results. For further discussion on this impairment, refer to Note 7, Impairments.
Aurora Disposition
On May 12, 2016, GenOn entered into an agreement with RA Generation, LLC to sell the Aurora Generating Station, or Aurora, for cash consideration of $365 million, subject to adjustments for working capital and the results of the PJM 2019/2020 base residual auction. Aurora is a 878 MW natural gas facility located in Aurora, Illinois. On July 12, 2016, GenOn completed the sale of Aurora for cash proceeds of $369 million, including $4 million in adjustments for the PJM base residual auction results and estimated working capital, which is subject to further adjustment. The Company recorded a gain of approximately $188 million recognized within the Company's consolidated results of operations during the quarter ended September 30, 2016.
Seward Disposition
On November 24, 2015, GenOn entered into an agreement with Seward Generation, LLC and an affiliate of Robindale Energy Services, Inc. to sell the Seward Generating Station, a 525 MW coal-fired facility in Pennsylvania, for cash consideration of $75 million. At December 31, 2015, GenOn had classified on its balance sheet the assets and liabilities of Seward as held for sale. On February 2, 2016, GenOn completed the sale of Seward and received gross cash proceeds of $75 million, excluding $3 million cash on hand transferred to the buyer. GenOn will also receive $5 million in deferred cash consideration in five $1 million annual installments and up to $2.5 million in payments contingent upon certain environmental requirements being imposed by August 2017. In addition, Robindale committed to future inventory purchases from GenOn of $13 million through 2019.
Shelby Disposition
On November 9, 2015, GenOn entered into an agreement with an affiliate of Rockland Power Partners II, LP to sell the Shelby Generating Station, a 352 MW natural gas-fired facility located in Illinois for cash consideration of $46 million. At December 31, 2015, GenOn had classified on its balance sheet the assets and liabilities of Shelby as held for sale. On March 1, 2016, GenOn completed the sale of Shelby for cash proceeds of $46 million, which resulted in a gain of $29 million recognized during the first quarter of 2016. In addition, GenOn retained $10 million related to future revenue rights retained as part of the agreement of which $7 million had been received as of September 30, 2016.
Transfer of Assets under Common Control
On September 1, 2016, the Company completed the sale of its remaining 51.05% interest in the CVSR project to NRG Yield, Inc. for total cash consideration of $78.5 million, plus an immaterial working capital adjustment. In addition, NRG Yield, Inc. assumed non-recourse project level debt of $496 million.
On November 3, 2015, the Company sold 75% of the Class B interests of NRG Wind TE Holdco, which owns a portfolio of 12 wind facilities totaling 814 net MW, to NRG Yield, Inc. NRG Yield, Inc. paid total cash consideration of $209 million, subject to working capital adjustments. NRG Yield, Inc. is responsible for its pro-rata share of non-recourse project debt of $193 million and noncontrolling interest associated with a tax equity structure of $159 million (as of the acquisition date). In February 2016, the Company made a final working capital payment of $2 million to NRG Yield, Inc. reducing total cash consideration to $207 million.
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Note 4 — Fair Value of Financial Instruments
This footnote should be read in conjunction with the complete description under Note 4, Fair Value of Financial Instruments, to the Company's 2015 Form 10-K.
For cash and cash equivalents, funds deposited by counterparties, accounts and other receivables, accounts payable, restricted cash, and cash collateral paid and received in support of energy risk management activities, 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 NRG's recorded financial instruments not carried at fair market value are as follows:
As of September 30, 2016 | As of December 31, 2015 | ||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
(In millions) | |||||||||||||||
Assets: | |||||||||||||||
Notes receivable (a) | $ | 50 | $ | 50 | $ | 73 | $ | 73 | |||||||
Liabilities: | |||||||||||||||
Long-term debt, including current portion (b) | 19,411 | 18,888 | 19,620 | 18,263 |
(a) Includes the current portion of notes receivable which is recorded in prepayments and other current assets on the Company's consolidated balance sheets.
(b) Excludes deferred financing costs, which are recorded as a reduction to long-term debt on the Company's consolidated balance sheets.
The fair value of the Company's publicly-traded long-term debt is based on quoted market prices and is classified as Level 2 within the fair value hierarchy. The fair value of debt securities, non-publicly traded long-term debt and certain notes receivable of the Company are based on expected future cash flows discounted at market interest rates, or current interest rates for similar instruments with equivalent credit quality and are classified as Level 3 within the fair value hierarchy. The following table presents the level within the fair value hierarchy for long-term debt, including current portion as of September 30, 2016 and December 31, 2015:
As of September 30, 2016 | As of December 31, 2015 | ||||||||||||||
Level 2 | Level 3 | Level 2 | Level 3 | ||||||||||||
(In millions) | |||||||||||||||
Long-term debt, including current portion | $ | 11,767 | $ | 7,121 | $ | 11,028 | $ | 7,235 |
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Recurring Fair Value Measurements
Debt securities, equity securities, and trust fund investments, which are comprised of various U.S. debt and equity securities, and derivative assets and liabilities, are carried at fair market value.
The following tables present assets and liabilities measured and recorded at fair value on the Company's condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy:
As of September 30, 2016 | |||||||||||||||
Fair Value | |||||||||||||||
(In millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Investment in available-for-sale securities (classified within other non-current assets): | |||||||||||||||
Debt securities | $ | — | $ | — | $ | 17 | $ | 17 | |||||||
Available-for-sale securities | 10 | — | — | 10 | |||||||||||
Other (a) | 10 | — | — | 10 | |||||||||||
Nuclear trust fund investments: | |||||||||||||||
Cash and cash equivalents | 24 | — | — | 24 | |||||||||||
U.S. government and federal agency obligations | 51 | 1 | — | 52 | |||||||||||
Federal agency mortgage-backed securities | — | 68 | — | 68 | |||||||||||
Commercial mortgage-backed securities | — | 17 | — | 17 | |||||||||||
Corporate debt securities | — | 87 | — | 87 | |||||||||||
Equity securities | 301 | — | 54 | 355 | |||||||||||
Foreign government fixed income securities | — | 2 | — | 2 | |||||||||||
Other trust fund investments: | |||||||||||||||
U.S. government and federal agency obligations | 1 | — | — | 1 | |||||||||||
Derivative assets: | |||||||||||||||
Commodity contracts | 308 | 798 | 107 | 1,213 | |||||||||||
Interest rate contracts | — | 7 | — | 7 | |||||||||||
Total assets | $ | 705 | $ | 980 | $ | 178 | $ | 1,863 | |||||||
Derivative liabilities: | |||||||||||||||
Commodity contracts | 375 | 773 | 133 | 1,281 | |||||||||||
Interest rate contracts | — | 163 | — | 163 | |||||||||||
Total liabilities | $ | 375 | $ | 936 | $ | 133 | $ | 1,444 |
(a) Consists primarily of mutual funds held in a Rabbi Trust for non-qualified deferred compensation plans for certain former employees.
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As of December 31, 2015 | |||||||||||||||
Fair Value | |||||||||||||||
(In millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Investment in available-for-sale securities (classified within other non-current assets): | |||||||||||||||
Debt securities | $ | — | $ | — | $ | 17 | $ | 17 | |||||||
Available-for-sale securities | 9 | — | — | 9 | |||||||||||
Other (a) | 14 | — | — | 14 | |||||||||||
Nuclear trust fund investments: | |||||||||||||||
Cash and cash equivalents | 6 | — | — | 6 | |||||||||||
U.S. government and federal agency obligations | 54 | 1 | — | 55 | |||||||||||
Federal agency mortgage-backed securities | — | 59 | — | 59 | |||||||||||
Commercial mortgage-backed securities | — | 25 | — | 25 | |||||||||||
Corporate debt securities | — | 81 | — | 81 | |||||||||||
Equity securities | 280 | — | 54 | 334 | |||||||||||
Foreign government fixed income securities | — | 1 | — | 1 | |||||||||||
Other trust fund investments: | |||||||||||||||
U.S. government and federal agency obligations | 1 | — | — | 1 | |||||||||||
Derivative assets: | |||||||||||||||
Commodity contracts | 622 | 1,449 | 149 | 2,220 | |||||||||||
Total assets | $ | 986 | $ | 1,616 | $ | 220 | $ | 2,822 | |||||||
Derivative liabilities: | |||||||||||||||
Commodity contracts | 868 | 1,036 | 182 | 2,086 | |||||||||||
Interest rate contracts | — | 128 | — | 128 | |||||||||||
Total liabilities | $ | 868 | $ | 1,164 | $ | 182 | $ | 2,214 |
(a) Primarily consists of mutual funds held in rabbi trusts for non-qualified deferred compensation plans for certain former employees and a total return swap that does not meet the definition of a derivative.
There were no transfers during the three and nine months ended September 30, 2016, and 2015 between Levels 1 and 2. The following tables reconcile, for the three and nine months ended September 30, 2016, and 2015, the beginning and ending balances for financial instruments that are recognized at fair value in the condensed consolidated financial statements, at least annually, using significant unobservable inputs:
Fair Value Measurement Using Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||||||||
Three months ended September 30, 2016 | Nine months ended September 30, 2016 | ||||||||||||||||||||||||||||||
(In millions) | Debt Securities | Trust Fund Investments | Derivatives(a) | Total | Debt Securities | Trust Fund Investments | Derivatives(a) | Total | |||||||||||||||||||||||
Beginning balance | $ | 16 | $ | 51 | $ | 7 | $ | 74 | $ | 17 | $ | 54 | $ | (33 | ) | $ | 38 | ||||||||||||||
Total gains/(losses) — realized/unrealized: | |||||||||||||||||||||||||||||||
Included in earnings | — | — | 2 | 2 | — | — | 9 | 9 | |||||||||||||||||||||||
Included in OCI | 1 | — | — | 1 | — | — | — | — | |||||||||||||||||||||||
Included in nuclear decommissioning obligation | — | 3 | — | 3 | — | (1 | ) | — | (1 | ) | |||||||||||||||||||||
Purchases | — | — | (26 | ) | (26 | ) | — | 1 | 3 | 4 | |||||||||||||||||||||
Transfers into Level 3 (b) | — | — | (12 | ) | (12 | ) | — | — | (5 | ) | (5 | ) | |||||||||||||||||||
Transfers out of Level 3 (b) | — | — | 3 | 3 | — | — | — | — | |||||||||||||||||||||||
Ending balance as of September 30, 2016 | $ | 17 | $ | 54 | $ | (26 | ) | $ | 45 | $ | 17 | $ | 54 | $ | (26 | ) | $ | 45 | |||||||||||||
Gains/(losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of September 30, 2016 | $ | — | $ | — | $ | 1 | $ | 1 | $ | — | $ | — | $ | (14 | ) | $ | (14 | ) |
(a) | Consists of derivative assets and liabilities, net. |
(b) | Transfers into/out of Level 3 are related to the availability of external broker quotes and are valued as of the end of the reporting period. All transfers in/out are with Level 2. |
22
Fair Value Measurement Using Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||||||||||||||||
Three months ended September 30, 2015 | Nine months ended September 30, 2015 | ||||||||||||||||||||||||||||||||||||||
(In millions) | Debt Securities | Other | Trust Fund Investments | Derivatives(a) | Total | Debt Securities | Other | Trust Fund Investments | Derivatives(a) | Total | |||||||||||||||||||||||||||||
Beginning balance | $ | 18 | $ | — | $ | 55 | $ | 49 | $ | 122 | $ | 18 | $ | 11 | $ | 52 | $ | 80 | $ | 161 | |||||||||||||||||||
Total losses — realized/unrealized: | |||||||||||||||||||||||||||||||||||||||
Included in earnings | — | — | — | (17 | ) | (17 | ) | — | (11 | ) | — | (95 | ) | (106 | ) | ||||||||||||||||||||||||
Included in nuclear decommissioning obligations | — | — | (6 | ) | — | (6 | ) | — | — | (4 | ) | — | (4 | ) | |||||||||||||||||||||||||
Purchases | — | — | — | 9 | 9 | — | — | 1 | 44 | 45 | |||||||||||||||||||||||||||||
Transfers into Level 3 (b) | — | — | — | (10 | ) | (10 | ) | — | — | — | 1 | 1 | |||||||||||||||||||||||||||
Transfers out of Level 3 (b) | — | — | — | 2 | 2 | — | — | — | 3 | 3 | |||||||||||||||||||||||||||||
Ending balance as of September 30, 2015 | $ | 18 | $ | — | $ | 49 | $ | 33 | $ | 100 | $ | 18 | $ | — | $ | 49 | $ | 33 | $ | 100 | |||||||||||||||||||
Losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of September 30, 2015 | $ | — | $ | — | $ | — | $ | (9 | ) | $ | (9 | ) | $ | — | $ | — | $ | — | $ | (37 | ) | $ | (37 | ) |
(a) | Consists of derivative assets and liabilities, net. |
(b) | Transfers into/out of Level 3 are related to the availability of external broker quotes and are valued as of the end of the reporting period. All transfers in/out are with Level 2. |
Derivative Fair Value Measurements
A portion of NRG's contracts are exchange-traded contracts with readily available quoted market prices. A majority of NRG's contracts are non-exchange-traded contracts valued using prices provided by external sources, primarily price quotations available through brokers or over-the-counter and on-line exchanges. The remainder of the assets and liabilities represent contracts for which external sources or observable market quotes are not available for the whole term or for certain delivery months or the contracts are retail and load following power contracts. 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 September 30, 2016, contracts valued with prices provided by models and other valuation techniques make up 9% of the total derivative assets and 9% of the total derivative liabilities.
NRG's significant positions classified as Level 3 include physical and financial power and physical coal executed in illiquid markets as well as financial transmission rights, or FTRs. The significant unobservable inputs used in developing fair value include illiquid power and coal location pricing which is derived as a basis to liquid locations. The basis spread is based on observable market data when available or derived from historic prices and forward market prices from similar observable markets when not available. For FTRs, NRG uses the most recent auction prices to derive the fair value.
23
The following tables quantify the significant unobservable inputs used in developing the fair value of the Company's Level 3 positions as of September 30, 2016 and December 31, 2015:
Significant Unobservable Inputs | |||||||||||||||||||||||
September 30, 2016 | |||||||||||||||||||||||
Fair Value | Input/Range | ||||||||||||||||||||||
Assets | Liabilities | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average | |||||||||||||||||
(In millions) | |||||||||||||||||||||||
Power Contracts | $ | 53 | $ | 78 | Discounted Cash Flow | Forward Market Price (per MWh) | $ | 11 | $ | 81 | $ | 27 | |||||||||||
Coal Contracts | — | 5 | Discounted Cash Flow | Forward Market Price (per ton) | 44 | 44 | 44 | ||||||||||||||||
FTRs | 54 | 50 | Discounted Cash Flow | Auction Prices (per MWh) | (63 | ) | 55 | — | |||||||||||||||
$ | 107 | $ | 133 |
Significant Unobservable Inputs | |||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||
Fair Value | Input/Range | ||||||||||||||||||||||
Assets | Liabilities | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average | |||||||||||||||||
(In millions) | |||||||||||||||||||||||
Power Contracts | $ | 86 | $ | 100 | Discounted Cash Flow | Forward Market Price (per MWh) | $ | 10 | $ | 92 | $ | 27 | |||||||||||
Coal Contracts | — | 12 | Discounted Cash Flow | Forward Market Price (per ton) | 28 | 45 | 35 | ||||||||||||||||
FTRs | 63 | 70 | Discounted Cash Flow | Auction Prices (per MWh) | (98 | ) | 87 | — | |||||||||||||||
$ | 149 | $ | 182 |
The following table provides sensitivity of fair value measurements to increases/(decreases) in significant unobservable inputs as of September 30, 2016 and December 31, 2015:
Significant Unobservable Input | Position | Change In Input | Impact on Fair Value Measurement | |||
Forward Market Price Power/Coal | Buy | Increase/(Decrease) | Higher/(Lower) | |||
Forward Market Price Power/Coal | Sell | Increase/(Decrease) | Lower/(Higher) | |||
FTR Prices | Buy | Increase/(Decrease) | Higher/(Lower) | |||
FTR Prices | Sell | Increase/(Decrease) | Lower/(Higher) |
The fair value of each contract is discounted using a risk-free interest rate. In addition, the Company applies a credit reserve to reflect credit risk, which is calculated based on published default probabilities. As of September 30, 2016, the credit reserve resulted in a $2 million decrease in fair value, which is composed of a $3 million gain in OCI and a $5 million loss in operating revenue and cost of operations. As of September 30, 2015, the credit reserve resulted in a $7 million increase in fair value, which was composed of a $4 million gain in OCI and a $3 million gain in operating revenues and cost of operations.
Concentration of Credit Risk
In addition to the credit risk discussion as disclosed in Note 2, Summary of Significant Accounting Policies, to the Company's 2015 Form 10-K, the following is a discussion of the concentration of credit risk for the Company's contractual obligations. 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. NRG is exposed to counterparty credit risk through various activities including wholesale sales, fuel purchases and retail supply arrangements, and retail customer credit risk through its retail load activities.
24
Counterparty Credit Risk
The Company's counterparty credit risk policies are disclosed in its 2015 Form 10-K. As of September 30, 2016, the Company's counterparty credit exposure, excluding credit risk exposure under certain long term agreements, was $635 million with net exposure of $607 million. NRG held collateral (cash and letters of credit) against those positions of $45 million. Approximately 79% of the Company's exposure before collateral is expected to roll off by the end of 2017. Counterparty credit exposure is valued through observable market quotes and discounted at a risk free interest rate. The following tables highlight net counterparty credit exposure by industry sector and by counterparty credit quality. Net counterparty credit exposure is defined as the aggregate net asset position for NRG with counterparties where netting is permitted under the enabling agreement and includes all cash flow, mark-to-market and NPNS, and non-derivative transactions. The exposure is shown net of collateral held, and includes amounts net of receivables or payables.
Net Exposure (a) | ||
Category by Industry Sector | (% of Total) | |
Financial institutions | 33 | % |
Utilities, energy merchants, marketers and other | 42 | |
ISOs | 25 | |
Total as of September 30, 2016 | 100 | % |
Net Exposure (a) | ||
Category by Counterparty Credit Quality | (% of Total) | |
Investment grade | 90 | % |
Non-rated (b) | 3 | |
Non-investment grade | 7 | |
Total as of September 30, 2016 | 100 | % |
(a) | Counterparty credit exposure excludes uranium and coal transportation contracts because of the unavailability of market prices. |
(b) | For non-rated counterparties, a significant portion are related to ISO and municipal public power entities, which are considered investment grade equivalent ratings based on NRG's internal credit ratings. |
NRG has counterparty credit risk exposure to certain counterparties, each of which represent more than 10% of total net exposure discussed above. The aggregate of such counterparties' exposure was $295 million as of September 30, 2016. Changes in hedge positions and market prices will affect credit exposure and counterparty concentration. Given the credit quality, diversification and term of the exposure in the portfolio, NRG does not anticipate a material impact on the Company's financial position or results of operations from nonperformance by any of NRG's counterparties.
Counterparty credit exposure described above excludes credit risk exposure under certain long term agreements, including California tolling agreements, Gulf Coast load obligations, wind and solar PPAs, and a coal supply agreement. As external sources or observable market quotes are not available to estimate such exposure, the Company estimates its credit exposure for 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 September 30, 2016, aggregate credit risk exposure managed by NRG to these counterparties was approximately $4.1 billion, including $2.6 billion related to assets of NRG Yield, Inc., for the next five years. This amount excludes potential credit exposures for projects with long-term PPAs that have not reached commercial operations. The majority of these power contracts are with utilities or public power entities 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 and other technology and market factors, which NRG is unable to predict. In the case of the coal supply agreement, NRG holds a lien against the underlying asset, which significantly reduces the risk of loss.
Retail Customer Credit Risk
NRG is exposed to retail credit risk through the Company's retail electricity providers, which serve commercial, industrial and governmental/institutional customers and the Mass market. Retail credit risk results when a customer fails to pay for products or services rendered. The losses may result from both nonpayment of customer accounts receivable and the loss of in-the-money forward value. NRG manages retail credit risk through the use of established credit policies that include monitoring of the portfolio, and the use of credit mitigation measures such as deposits or prepayment arrangements.
As of September 30, 2016, the Company believes its retail customer credit exposure was diversified across many customers and various industries, as well as government entities.
25
Note 5 — Nuclear Decommissioning Trust Fund
This footnote should be read in conjunction with the complete description under Note 6, Nuclear Decommissioning Trust Fund, to the Company's 2015 Form 10-K.
NRG's Nuclear Decommissioning Trust Fund assets are comprised of securities classified as available-for-sale and recorded at fair value based on actively quoted market prices. NRG accounts for the Nuclear Decommissioning Trust Fund in accordance with ASC 980, Regulated Operations, because the Company's nuclear decommissioning activities are subject to approval by the PUCT with regulated rates that are designed to recover all decommissioning costs and that can be charged to and collected from the ratepayers per PUCT mandate. Since the Company is in compliance with PUCT rules and regulations regarding decommissioning trusts and the cost of decommissioning is the responsibility of the Texas ratepayers, not NRG, all realized and unrealized gains or losses (including other-than-temporary impairments) related to the Nuclear Decommissioning Trust Fund are recorded to nuclear decommissioning trust liability and are not included in net income or accumulated OCI, consistent with regulatory treatment.
The following table summarizes the aggregate fair values and unrealized gains and losses (including other-than-temporary impairments) for the securities held in the trust funds, as well as information about the contractual maturities of those securities.
As of September 30, 2016 | As of December 31, 2015 | ||||||||||||||||||||||||||||
(In millions, except otherwise noted) | Fair Value | Unrealized Gains | Unrealized Losses | Weighted-average Maturities (In years) | Fair Value | Unrealized Gains | Unrealized Losses | Weighted-average Maturities (In years) | |||||||||||||||||||||
Cash and cash equivalents | $ | 24 | $ | — | $ | — | — | $ | 6 | $ | — | $ | — | — | |||||||||||||||
U.S. government and federal agency obligations | 52 | 4 | — | 11 | 55 | 1 | — | 11 | |||||||||||||||||||||
Federal agency mortgage-backed securities | 68 | 2 | — | 25 | 59 | 1 | — | 25 | |||||||||||||||||||||
Commercial mortgage-backed securities | 17 | — | 1 | 26 | 25 | — | 2 | 28 | |||||||||||||||||||||
Corporate debt securities | 87 | 3 | 1 | 11 | 81 | 1 | 1 | 10 | |||||||||||||||||||||
Equity securities | 355 | 213 | — | — | 334 | 199 | — | — | |||||||||||||||||||||
Foreign government fixed income securities | 2 | — | — | 9 | 1 | — | — | 9 | |||||||||||||||||||||
Total | $ | 605 | $ | 222 | $ | 2 | $ | 561 | $ | 202 | $ | 3 |
The following table summarizes proceeds from sales of available-for-sale securities and the related realized gains and losses from these sales. The cost of securities sold is determined on the specific identification method.
Nine months ended September 30, | |||||||
2016 | 2015 | ||||||
(In millions) | |||||||
Realized gains | $ | 7 | $ | 14 | |||
Realized losses | 3 | 10 | |||||
Proceeds from sale of securities | 354 | 499 |
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Note 6 — Accounting for Derivative Instruments and Hedging Activities
This footnote should be read in conjunction with the complete description under Note 5, Accounting for Derivative Instruments and Hedging Activities, to the Company's 2015 Form 10-K.
Energy-Related Commodities
As of September 30, 2016, NRG had energy-related derivative instruments extending through 2027. The Company marks these derivatives to market through the statement of operations.
Interest Rate Swaps
NRG is exposed to changes in interest rates through the Company's issuance of variable rate debt. In order to manage the Company's interest rate risk, NRG enters into interest rate swap agreements. As of September 30, 2016, the Company had interest rate derivative instruments on recourse debt extending through 2021, which are not designated as cash flow hedges. The Company had interest rate swaps on non-recourse debt extending through 2032, most of which are designated as cash flow hedges.
Volumetric Underlying Derivative Transactions
The following table summarizes the net notional volume buy/(sell) of NRG's open derivative transactions broken out by category, excluding those derivatives that qualified for the NPNS exception, as of September 30, 2016 and December 31, 2015. Option contracts are reflected using delta volume. Delta volume equals the notional volume of an option adjusted for the probability that the option will be in-the-money at its expiration date.
Total Volume | ||||||||
September 30, 2016 | December 31, 2015 | |||||||
Category | Units | (In millions) | ||||||
Emissions | Short Ton | 1 | 1 | |||||
Coal | Short Ton | 29 | 35 | |||||
Natural Gas | MMBtu | 73 | 293 | |||||
Oil | Barrel | — | 1 | |||||
Power | MWh | (35 | ) | (74 | ) | |||
Capacity | MW/Day | (1 | ) | (1 | ) | |||
Interest | Dollars | $ | 3,219 | $ | 2,326 | |||
Equity | Shares | 1 | 1 |
The decrease in the natural gas position was primarily the result of settlement of generation and retail hedge positions. The increase in the interest rate position was primarily the result of entering into new interest rate swaps to hedge the Term Loan Facility, as described in Note 8, Debt and Capital Leases.
Fair Value of Derivative Instruments
The following table summarizes the fair value within the derivative instrument valuation on the balance sheets:
Fair Value | |||||||||||||||
Derivative Assets | Derivative Liabilities | ||||||||||||||
September 30, 2016 | December 31, 2015 | September 30, 2016 | December 31, 2015 | ||||||||||||
(In millions) | |||||||||||||||
Derivatives designated as cash flow hedges: | |||||||||||||||
Interest rate contracts current | $ | — | $ | — | $ | 31 | $ | 42 | |||||||
Interest rate contracts long-term | 1 | — | 99 | 68 | |||||||||||
Total derivatives designated as cash flow hedges | 1 | — | 130 | 110 | |||||||||||
Derivatives not designated as cash flow hedges: | |||||||||||||||
Interest rate contracts current | — | — | 8 | 5 | |||||||||||
Interest rate contracts long-term | 6 | — | 25 | 13 | |||||||||||
Commodity contracts current | 964 | 1,915 | 930 | 1,674 | |||||||||||
Commodity contracts long-term | 249 | 305 | 351 | 412 | |||||||||||
Total derivatives not designated as cash flow hedges | 1,219 | 2,220 | 1,314 | 2,104 | |||||||||||
Total derivatives | $ | 1,220 | $ | 2,220 | $ | 1,444 | $ | 2,214 |
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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. In addition, collateral received or paid on the Company's derivative assets or liabilities are recorded on a separate line item on the balance sheet. The following table summarizes the offsetting of derivatives by counterparty master agreement level and collateral received or paid:
Gross Amounts Not Offset in the Statement of Financial Position | ||||||||||||||||
Gross Amounts of Recognized Assets / Liabilities | Derivative Instruments | Cash Collateral (Held) / Posted | Net Amount | |||||||||||||
As of September 30, 2016 | (In millions) | |||||||||||||||
Commodity contracts: | ||||||||||||||||
Derivative assets | $ | 1,213 | $ | (1,027 | ) | $ | (23 | ) | $ | 163 | ||||||
Derivative liabilities | (1,281 | ) | 1,027 | 121 | (133 | ) | ||||||||||
Total commodity contracts | (68 | ) | — | 98 | 30 | |||||||||||
Interest rate contracts: | ||||||||||||||||
Derivative assets | 7 | (4 | ) | — | 3 | |||||||||||
Derivative liabilities | (163 | ) | 4 | — | (159 | ) | ||||||||||
Total interest rate contracts | (156 | ) | — | — | (156 | ) | ||||||||||
Total derivative instruments | $ | (224 | ) | $ | — | $ | 98 | $ | (126 | ) |
Gross Amounts Not Offset in the Statement of Financial Position | ||||||||||||||||
Gross Amounts of Recognized Assets / Liabilities | Derivative Instruments | Cash Collateral (Held) / Posted | Net Amount | |||||||||||||
As of December 31, 2015 | (In millions) | |||||||||||||||
Commodity contracts: | ||||||||||||||||
Derivative assets | $ | 2,220 | $ | (1,616 | ) | $ | (113 | ) | $ | 491 | ||||||
Derivative liabilities | (2,086 | ) | 1,616 | 271 | (199 | ) | ||||||||||
Total commodity contracts | 134 | — | 158 | 292 | ||||||||||||
Interest rate contracts: | ||||||||||||||||
Derivative liabilities | (128 | ) | — | — | (128 | ) | ||||||||||
Total derivative instruments | $ | 6 | $ | — | $ | 158 | $ | 164 |
Accumulated Other Comprehensive Loss
The following table summarizes the effects of ASC 815 on the Company's accumulated OCI balance attributable to cash flow hedge derivatives, net of tax:
Three months ended September 30, 2016 | Nine months ended September 30, 2016 | ||||||||||||||||||||||
Energy Commodities | Interest Rate | Total | Energy Commodities | Interest Rate | Total | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Accumulated OCI beginning balance | $ | — | $ | (165 | ) | $ | (165 | ) | $ | — | $ | (101 | ) | $ | (101 | ) | |||||||
Reclassified from accumulated OCI to income: | |||||||||||||||||||||||
Due to realization of previously deferred amounts | — | 2 | 2 | — | 12 | 12 | |||||||||||||||||
Mark-to-market of cash flow hedge accounting contracts | — | 32 | 32 | — | (42 | ) | (42 | ) | |||||||||||||||
Accumulated OCI ending balance, net of $28 tax | $ | — | $ | (131 | ) | $ | (131 | ) | $ | — | $ | (131 | ) | $ | (131 | ) | |||||||
Losses expected to be realized from OCI during the next 12 months, net of $4 tax | $ | — | $ | 17 | $ | 17 | $ | — | $ | 17 | $ | 17 |
28
Three months ended September 30, 2015 | Nine months ended September 30, 2015 | ||||||||||||||||||||||
Energy Commodities | Interest Rate | Total | Energy Commodities | Interest Rate | Total | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Accumulated OCI beginning balance | $ | (1 | ) | $ | (62 | ) | $ | (63 | ) | $ | (1 | ) | $ | (67 | ) | $ | (68 | ) | |||||
Reclassified from accumulated OCI to income: | |||||||||||||||||||||||
Due to realization of previously deferred amounts | 1 | 3 | 4 | 1 | 7 | 8 | |||||||||||||||||
Mark-to-market of cash flow hedge accounting contracts | — | (33 | ) | (33 | ) | — | (32 | ) | (32 | ) | |||||||||||||
Accumulated OCI ending balance, net of $54 tax | $ | — | $ | (92 | ) | $ | (92 | ) | $ | — | $ | (92 | ) | $ | (92 | ) |
Amounts reclassified from accumulated OCI into income and amounts recognized in income from the ineffective portion of cash flow hedges are recorded to operating revenue for commodity contracts and interest expense for interest rate contracts. There was no ineffectiveness for the three and nine months ended September 30, 2016, and 2015.
Impact of Derivative Instruments on the Statements of Operations
Unrealized gains and losses associated with changes in the fair value of derivative instruments not accounted for as cash flow hedges and ineffectiveness of hedge derivatives are reflected in current period consolidated results of operations.
The following table summarizes the pre-tax effects of economic hedges that have not been designated as cash flow hedges, ineffectiveness on cash flow hedges and trading activity on the Company's statement of operations. The effect of energy commodity contracts is included within operating revenues and cost of operations and the effect of interest rate contracts is included in interest expense.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Unrealized mark-to-market results | (In millions) | ||||||||||||||
Reversal of previously recognized unrealized gains on settled positions related to economic hedges | $ | (44 | ) | $ | (29 | ) | $ | (182 | ) | $ | (179 | ) | |||
Reversal of acquired gain positions related to economic hedges | (19 | ) | (33 | ) | (47 | ) | (83 | ) | |||||||
Net unrealized (losses)/gains on open positions related to economic hedges | (121 | ) | 55 | (19 | ) | (26 | ) | ||||||||
Total unrealized mark-to-market losses for economic hedging activities | (184 | ) | (7 | ) | (248 | ) | (288 | ) | |||||||
Reversal of previously recognized unrealized losses/(gains) on settled positions related to trading activity | 3 | 2 | 13 | (34 | ) | ||||||||||
Reversal of acquired gain positions related to trading activity | — | (1 | ) | — | (13 | ) | |||||||||
Net unrealized (losses)/gains on open positions related to trading activity | (8 | ) | (2 | ) | 14 | — | |||||||||
Total unrealized mark-to-market (losses)/gains for trading activity | (5 | ) | (1 | ) | 27 | (47 | ) | ||||||||
Total unrealized losses | $ | (189 | ) | $ | (8 | ) | $ | (221 | ) | $ | (335 | ) |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(In millions) | |||||||||||||||
Unrealized (losses)/gains included in operating revenues | $ | (84 | ) | $ | 34 | $ | (565 | ) | $ | (212 | ) | ||||
Unrealized (losses)/gains included in cost of operations | (105 | ) | (42 | ) | 344 | (123 | ) | ||||||||
Total impact to statement of operations — energy commodities | $ | (189 | ) | $ | (8 | ) | $ | (221 | ) | $ | (335 | ) | |||
Total impact to statement of operations — interest rate contracts | $ | 9 | $ | (9 | ) | $ | (9 | ) | $ | 12 |
The reversals of acquired gain or loss positions were valued based upon the forward prices on the acquisition date. The roll-off amounts were offset by realized gains or losses at the settled prices and are reflected in operating revenue or cost of operations during the same period.
29
For the nine months ended September 30, 2016, the $19 million unrealized loss from open economic hedge positions was primarily the result of a decrease in value of forward purchases of ERCOT heat rate due to ERCOT heat rate contraction, partially offset by an increase in value of forward sales of PJM electricity due to decreases in PJM power prices.
For the nine months ended September 30, 2015, the $26 million unrealized loss from open economic hedge positions was primarily the result of a decrease in value of forward purchases of ERCOT electricity and coal due to decreases in ERCOT power and coal prices partially offset by an increase in value of forward sales of PJM electricity due to decreases in PJM power prices.
During 2016, the Company has been undergoing the process of closing out and financially settling certain open positions with counterparties. The closure and financial settlements with these counterparties were necessary to manage the increase in collateral posting requirements following rating agency downgrades for GenOn and to reduce expected collateral costs associated with exchange cleared hedge transactions. GenOn realized approximately $38 million due to the closure and financial settlement of all open positions with one of GenOn's counterparties during the second quarter of 2016, for which $18 million, $19 million and $1 million would have been realized during the remainder of 2016, 2017 and 2018, respectively. During the third quarter of 2016, GenOn realized $98 million due to the closure and financial settlement of certain positions with an additional counterparty for which $82 million, $13 million and $3 million would have otherwise been realized in 2017, 2018, and 2019, respectively. GenOn has entered into additional transactions with NRG Power Marketing LLC and an external counterparty in order to re-hedge the positions settled with certain counterparties.
Credit Risk Related Contingent Features
Certain of the Company's hedging agreements contain provisions that require the Company to post additional collateral if the counterparty determines that there has been deterioration in credit quality, generally termed “adequate assurance” under the agreements, or requires the Company to post additional collateral if there were a one notch downgrade in the Company's credit rating. The collateral required for contracts with adequate assurance clauses that are in a net liability position as of September 30, 2016, was $73 million. The collateral required for contracts with credit rating contingent features as of September 30, 2016, was $42 million. The Company is also a party to certain marginable agreements where NRG has a net liability position, but the counterparty has not called for the collateral due, which was approximately $10 million as of September 30, 2016.
See Note 4, Fair Value of Financial Instruments, to this Form 10-Q for discussion regarding concentration of credit risk.
Note 7 — Impairments
Rockford — As described in Note 3, Business Acquisitions and Dispositions, on May 12, 2016, the Company entered into an agreement with RA Generation, LLC to sell 100% of its interests in the Rockford generating stations for cash consideration of $55 million. The transaction triggered an indicator of impairment as the sale price was less than the carrying amount of the assets, and, as a result, the assets were considered to be impaired. The Company measured the impairment loss as the difference between the carrying amount of the assets and the agreed-upon sale price. The Company recorded an impairment loss of $17 million during the quarter ended June 30, 2016, to reduce the carrying amount of the assets held for sale to the fair market value.
Mandalay and Ormond Beach — On May 26, 2016, the CPUC rejected a multi-year resource adequacy contract between Mandalay and SCE. Also during the second quarter of 2016, the Statewide Advisory Committee on Cooling Water Intake Structures, or SACCWIS, issued a draft April 2016 Report noting that CAISO plans to continue to assume in its transmission studies that Ormond Beach will not operate after December 31, 2020, the deadline for Ormond Beach compliance with California regulations to mitigate once-through cooling (OTC) impacts. The Company does not anticipate that contracts of sufficient value can be secured to support the significant investment required to design, permit, construct and operate measures required for OTC compliance. As a result, on May 6, 2016, the Company notified SACCWIS that it does not expect to continue to operate Ormond Beach beyond 2020. Additionally, during the second quarter of 2016, CAISO issued its Local Capacity Requirements report for 2017 indicating unfavorable changes within the local reliability areas in which both Mandalay and Ormond Beach are located. The culmination of these events were considered to be indicators of impairment and as a result, the Company performed impairment tests for the Mandalay and Ormond Beach assets under ASC 360, Property, Plant and Equipment. Based on the results of the impairment tests, the Company determined that the carrying amount of these assets was higher than the estimated future net cash flows expected to be generated by the respective assets and that the Mandalay and Ormond Beach assets were impaired. The fair value of the Mandalay and Ormond Beach operating units was determined using the income approach which utilizes estimates of discounted future cash flows, which were Level 3 fair value measurements and include key inputs such as forecasted contract prices, forecasted operating expenses and discount rates. The Company measured the impairment losses as the difference between the carrying amount of the Mandalay and Ormond Beach operating units and the present value of the estimated future net cash flows for each respective operating unit. The Company recorded an impairment loss of $16 million and $43 million for Mandalay and Ormond Beach, respectively, during the quarter ended June 30, 2016.
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Other Impairments — During the second quarter of 2016, the Company recorded impairment losses for intangible assets of $8 million in connection with the Company's strategic change in its residential solar business as well as $10 million of deferred marketing expenses. In addition, the Company also recorded an impairment loss of $17 million to record certain previously purchased solar panels at fair market value. During the third quarter of 2016, the Company recorded an additional $8 million in impairments losses related to investments and $8 million in other impairments.
Petra Nova Parish Holdings — During the first quarter of 2016, management changed its plans with respect to its future capital commitments driven in part by the continued decline in oil prices. As a result, the Company reviewed its 50% interest in Petra Nova Parish Holdings for impairment utilizing the other-than-temporary impairment model. In determining fair value, the Company utilized an income approach and considered project specific assumptions for the future project cash flows. The carrying amount of the Company's equity method investment exceeded the fair value of the investment and the Company concluded that the decline is considered to be other than temporary. As a result, the Company measured the impairment loss as the difference between the carrying amount and the fair value of the investment and recorded an impairment loss of $140 million.
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Note 8 — Debt and Capital Leases
This footnote should be read in conjunction with the complete description under Note 12, Debt and Capital Leases, to the Company's 2015 Form 10-K. Long-term debt and capital leases consisted of the following:
(In millions, except rates) | September 30, 2016 | December 31, 2015 | September 30, 2016 interest rate % (a) | |||||||
Recourse debt: | ||||||||||
Senior notes, due 2018 | $ | 584 | $ | 1,039 | 7.625 | |||||
Senior notes, due 2020 | — | 1,058 | 8.250 | |||||||
Senior notes, due 2021 | 399 | 1,128 | 7.875 | |||||||
Senior notes, due 2022 | 992 | 1,100 | 6.250 | |||||||
Senior notes, due 2023 | 869 | 936 | 6.625 | |||||||
Senior notes, due 2024 | 733 | 904 | 6.250 | |||||||
Senior notes, due 2026 | 1,000 | — | 7.250 | |||||||
Senior notes, due 2027 | 1,250 | — | 6.625 | |||||||
Term loan facility, due 2018 | — | 1,964 | L+2.00 | |||||||
Term loan facility, due 2023 | 1,886 | — | L+2.75 | |||||||
Tax-exempt bonds | 455 | 455 | 4.125 - 6.00 | |||||||
Subtotal NRG recourse debt | 8,168 | 8,584 | ||||||||
Non-recourse debt: | ||||||||||
GenOn senior notes | 1,922 | 1,956 | 7.875 - 9.875 | |||||||
GenOn Americas Generation senior notes | 747 | 752 | 8.500 - 9.125 | |||||||
GenOn other | 52 | 56 | ||||||||
Subtotal GenOn debt (non-recourse to NRG) | 2,721 | 2,764 | ||||||||
NRG Yield Operating LLC Senior Notes, due 2024 | 500 | 500 | 5.375 | |||||||
NRG Yield Operating LLC Senior Notes, due 2026 | 350 | — | 5.000 | |||||||
NRG Yield LLC and Yield Operating LLC Revolving Credit Facility, due 2019 | — | 306 | L+2.75 | |||||||
NRG Yield Inc. Convertible Senior Notes, due 2019 | 334 | 330 | 3.500 | |||||||
NRG Yield Inc. Convertible Senior Notes, due 2020 | 270 | 266 | 3.250 | |||||||
El Segundo Energy Center, due 2023 | 443 | 485 | L+1.625 - L+2.25 | |||||||
Marsh Landing, due 2017 and 2023 | 385 | 418 | L+1.175 - L+1.875 | |||||||
Alta Wind I - V lease financing arrangements, due 2034 and 2035 | 978 | 1,002 | 5.696 - 7.015 | |||||||
Walnut Creek, term loans due 2023 | 322 | 351 | L+1.625 | |||||||
Tapestry, due 2021 | 175 | 181 | L+1.625 | |||||||
CVSR, due 2037 | 771 | 793 | 2.339 - 3.775 | |||||||
CVSR HoldCo, due 2037 | 199 | — | 4.680 | |||||||
Alpine, due 2022 | 147 | 154 | L+1.750 | |||||||
Energy Center Minneapolis, due 2017 and 2025 | 98 | 108 | 5.95 - 7.25 | |||||||
Viento, due 2023 | 183 | 189 | L+2.75 | |||||||
NRG Yield - other | 549 | 573 | various | |||||||
Subtotal NRG Yield debt (non-recourse to NRG) | 5,704 | 5,656 | ||||||||
Ivanpah, due 2033 and 2038 | 1,135 | 1,149 | 2.285 - 4.256 | |||||||
Agua Caliente, due 2037 | 864 | 879 | 2.395 - 3.633 | |||||||
Dandan, due 2033 | 100 | 98 | L+2.25 | |||||||
Peaker bonds, due 2019 | — | 72 | L+1.07 | |||||||
Cedro Hill, due 2025 | 165 | 103 | L+1.75 | |||||||
Midwest Generation, due 2019 | 234 | — | 4.390 | |||||||
NRG Other | 320 | 315 | various | |||||||
Subtotal other NRG non-recourse debt | 2,818 | 2,616 | ||||||||
Subtotal all non-recourse debt | 11,243 | 11,036 | ||||||||
Subtotal long-term debt (including current maturities) | 19,411 | 19,620 | ||||||||
Capital leases | 11 | 16 | various | |||||||
Subtotal long-term debt and capital leases (including current maturities) | 19,422 | 19,636 | ||||||||
Less current maturities | 1,221 | 481 | ||||||||
Less debt issuance costs | 183 | 172 | ||||||||
Total long-term debt and capital leases | $ | 18,018 | $ | 18,983 |
(a) As of September 30, 2016, L+ equals 3 month LIBOR plus x%, with the exception of the Viento Funding II term loan, which is 6 month LIBOR plus x%, and the Alpine Term Loan, the NRG Marsh Landing term loan, the Walnut Creek term loan, and 2016 Term Loan Facility, which are 1 month LIBOR plus x%.
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NRG Recourse Debt
Senior Notes
Issuance of 2026 Senior Notes
On May 23, 2016, NRG issued $1.0 billion in aggregate principal amount at par of 7.25% senior notes due 2026, or the 2026 Senior Notes. The 2026 Senior Notes are senior unsecured obligations of NRG and are guaranteed by certain of its subsidiaries. Interest is paid semi-annually beginning on November 15, 2016, until the maturity date of May 15, 2026. The proceeds from the issuance of the 2026 Senior Notes were utilized to redeem a portion of the Senior Notes discussed below.
Issuance of 2027 Senior Notes
On August 2, 2016, NRG issued $1.25 billion in aggregate principal amount at par of 6.625% senior notes due 2027, or the 2027 Senior Notes. The 2027 Senior Notes are senior unsecured obligations of NRG and are guaranteed by certain of its subsidiaries. Interest is paid semi-annually beginning on January 15, 2017, until the maturity date of January 15, 2027. The proceeds from the issuance of the 2027 Senior Notes were utilized to retire the Company's 8.250% senior notes due 2020 and reduce the balance of the Company's 7.875% senior notes due 2021.
Senior Notes Repurchases
During the nine months ended September 30, 2016, the Company repurchased $2.6 billion in aggregate principal of its Senior Notes in the open market for $2.7 billion, which included accrued interest of $67 million. In connection with the repurchases, a $94 million loss on debt extinguishment was recorded, which included the write-off of previously deferred financing costs of $15 million.
Principal Repurchased | Cash Paid (a) | Average Early Redemption Percentage | ||||||||
Amount in millions, except rates | ||||||||||
7.625% senior notes due 2018 | $ | 455 | $ | 502 | 107.95 | % | ||||
8.250% senior notes due 2020 | 1,058 | 1,129 | 103.12 | % | ||||||
7.875% senior notes due 2021 | 729 | 771 | 104.02 | % | ||||||
6.250% senior notes due 2022 | 108 | 105 | 94.73 | % | ||||||
6.625% senior notes due 2023 | 67 | 64 | 94.13 | % | ||||||
6.250% senior notes due 2024 | 171 | 163 | 94.52 | % | ||||||
Total at September 30, 2016 | $ | 2,588 | $ | 2,734 | ||||||
7.625% senior notes due 2018 (b) | 186 | 204 | 107.75 | % | ||||||
7.875% senior notes due 2021 (b) | 193 | 207 | 103.94 | % | ||||||
Total at November 4, 2016 | $ | 2,967 | $ | 3,145 |
(a) Includes payment for accrued interest
(b) Redemptions financed by cash on hand
Senior Credit Facility
On June 30, 2016, NRG replaced its Senior Credit Facility, consisting of its Term Loan Facility and Revolving Credit Facility with a new senior secured facility, or the 2016 Senior Credit Facility, which includes the following:
• | A $1.9 billion term loan facility, or the 2016 Term Loan Facility, with a maturity date of June 30, 2023, which will pay interest at a rate of LIBOR plus 2.75%, with a LIBOR floor of 0.75%. The debt was issued at 99.50% of face value; the discount will be amortized to interest expense over the life of the loan. Repayments under the 2016 Term Loan Facility will consist of 0.25% of principal per quarter, with the remainder due at maturity. The proceeds of the new term loan facility as well as cash on hand were used to repay the existing 2018 Term Loan Facility balance outstanding. A $21 million loss on extinguishment of the Term Loan Facility was recorded during the second quarter of 2016, which consisted of the write-off of previously deferred financing costs. |
• | The 2016 Revolving Credit Facility, which includes a $289 million revolving senior credit facility, or the Tranche A Revolving Facility, with a maturity date of July 1, 2018 and a $2.2 billion revolving senior credit facility, or the Tranche B Revolving Facility, with a maturity date of June 30, 2021 will pay interest at a rate of LIBOR plus 2.25%. |
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The 2016 Senior Credit Facility is guaranteed by substantially all of NRG's existing and future direct and indirect subsidiaries, with certain customary or agreed-upon exceptions for unrestricted foreign subsidiaries, and certain other subsidiaries, including GenOn, NRG Yield, Inc. and their respective subsidiaries. The capital stock of these guarantor subsidiaries has been pledged for the benefit of the 2016 Senior Credit Facility's lenders.
The 2016 Senior Credit Facility is also secured by first-priority perfected security interests in substantially all of the property and assets owned or acquired by NRG and its subsidiaries, other than certain limited exceptions. These exceptions include assets of certain unrestricted subsidiaries, equity interests in certain of NRG's affiliates that have non-recourse debt financing, including GenOn, NRG Yield, Inc. and their respective subsidiaries, and voting equity interests in excess of 66% of the total outstanding voting equity interest of certain of NRG's foreign subsidiaries.
Non-recourse Debt
GenOn Senior Notes
As of September 30, 2016, $703 million of GenOn's Senior Notes outstanding are classified as current within the consolidated balance sheet as they mature on June 15, 2017. Based on current projections, GenOn is not expected to have sufficient liquidity, exclusive of cash subject to the restrictions under the GenOn Mid-Atlantic and REMA operating leases, to make this principal payment as it becomes due. As a result of these factors, there is no assurance GenOn will continue as a going concern.
GenOn is currently considering all options available to it, including negotiations with creditors and lessors, refinancing the Senior Notes, potential sales of certain generating assets as well as the possibility of a need to file for protection under Chapter 11 of the U.S. Bankruptcy Code. During the second quarter of 2016, GenOn appointed two independent directors as part of this process. Any resolution may have a material impact on the Company's statement of operations, cash flows and financial position.
NRG Yield LLC and NRG Yield Operating LLC Revolving Credit Facility
NRG Yield LLC and its direct wholly owned subsidiary, NRG Yield Operating LLC, entered into a senior secured revolving credit facility, which can be used for cash and for the issuance of letters of credit. At September 30, 2016, there was $64 million of letters of credit issued under the revolving credit facility and no borrowing outstanding on the revolver.
Thermal Financing
On October 31, 2016, NRG Energy Center Minneapolis LLC, a subsidiary of NRG Yield, Inc. received proceeds of $125 million from the issuance of 3.55% Series D notes due October 31, 2031, or the Series D Notes, and entered into a shelf facility for an additional $70 million of notes. The Series D Notes are, and the additional notes, if issued, will be secured by substantially all of the assets of NRG Energy Center Minneapolis LLC. NRG Thermal LLC has guaranteed the indebtedness and its guarantee is secured by a pledge of the equity interests in all of NRG Thermal LLC’s subsidiaries. NRG Energy Center Minneapolis LLC distributed the proceeds of the Series D Notes to NRG Thermal LLC, who in turn distributed the proceeds to NRG Yield Operating LLC to be utilized for general corporate purposes, including potential acquisitions.
Project Financings
Peakers
In June 2002, NRG Peaker Finance Company LLC, or Peakers, an indirect wholly-owned subsidiary of NRG, issued bonds due June 2019. These notes were also secured by, among other things, substantially all of the assets of and membership interests in Big Cajun I Peaking Power LLC, NRG Sterlington Power LLC, NRG Rockford LLC, NRG Rockford II LLC, and NRG Rockford Equipment LLC.
On June 30, 2016, in contemplation of the sale of Rockford as further discussed in Note 3, Business Acquisitions and Dispositions, NRG Peaker Finance Company LLC elected to redeem all of the outstanding bonds at a redemption price equal to the principal amount plus a redemption premium, accrued and unpaid interest, swap breakage, and other fees, totaling approximately $85 million in connection with the removal of NRG Rockford LLC, and NRG Rockford II, LLC from the peaker financing collateral package. The Company recognized a $3 million loss on extinguishment of the debt related to the write-off of unamortized discount during the second quarter of 2016. On July 12, 2016, NRG completed the sale of the Rockford generating stations.
High Lonesome Mesa Facility
Prior to the Company's acquisition of EME, an intercompany tax credit agreement related to the High Lonesome Mesa facility was terminated. The termination resulted in an event of default under the project financing arrangement. The Company received additional default notices for various items. The facility is secured by the assets of High Lonesome Mesa and is non-recourse to NRG.
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On November 3, 2015, the lender sent a notice of acceleration and indicated that it would accept the Company's interest in the assets in lieu of repayment. On January 27, 2016, High Lonesome Mesa, LLC, or HLM, filed at FERC for approval to transfer 100% of the ownership interests in HLM to subsidiaries of the lien holders, Macquarie Bank Limited and Hannon Armstrong Capital, LLC. On March 2, 2016 HLM received FERC approval and on March 31, 2016 the Company transferred 100% of its interest in HLM to the lien holders and deconsolidated HLM.
Dandan Financing
In December 2013, NRG, through its wholly-owned subsidiary, NRG Solar Dandan LLC, or Dandan, entered into a credit agreement with a bank, or the Dandan Financing Agreement, for an $81 million construction loan and a $23 million cash grant loan. On January 29, 2016, the construction loan converted to a $79 million term loan with $23 million outstanding under the cash grant loan. In addition, a $4 million debt service letter of credit was issued replacing the $5 million construction letter of credit that was outstanding at year end. As of September 30, 2016, $77 million was outstanding under the term loan, $23 million was outstanding under the cash grant loan and $4 million in letters of credit in support of the project were issued.
Midwest Generation
On April 7, 2016, Midwest Generation, LLC, or MWG, entered into an agreement to sell certain quantities of unforced capacity that has cleared various PJM Reliability Pricing Model auctions to a trading counterparty for net proceeds of $253 million. MWG will continue to operate the applicable generation facilities and remains responsible for performance penalties and eligible for performance bonus payments, if any. Accordingly, MWG will continue to account for all revenues and costs as before; however, the proceeds will be recorded as a financing obligation while capacity payments by PJM to the counterparty will be reflected as debt amortization and interest expense through the end of the 2018/19 delivery year. MWG will amortize the upfront discount to interest expense, at an effective interest rate of 4.39%, over the term of the arrangement, through June 2019. As of September 30, 2016, $234 million was outstanding.
CVSR
On July 15, 2016, CVSR Holdco LLC, the indirect owner of the CVSR project, issued $200 million of senior secured notes. The $199 million of net proceeds from the notes were distributed to a subsidiary of NRG and NRG Yield Operating LLC, the owners of CVSR Holdco LLC, based on their pro-rata ownership. The notes were issued at par and bear an interest rate at 4.68%. Interest is payable semi-annually beginning on September 30, 2016, until the maturity date of March 31, 2037.
Capistrano Refinancing
On July 13 2016, Cedro Hill, Broken Bow and Crofton Bluffs, subsidiaries of Capistrano Wind Partners, each amended their respective credit facilities to increase borrowings to a total of $312 million and to lower their respective interest rates. The net proceeds of $87 million, were distributed to Capistrano Wind Partners and subsequently distributed to the holders of the Class B preferred equity interests of tax Capistrano Wind Partners.
NRG Yield Operating 2026 Senior Notes
On August 18, 2016, NRG Yield Operating LLC issued $350 million of senior unsecured notes, or the NRG Yield Operating 2026 Senior Notes. The NRG Yield Operating 2026 Senior Notes bear interest of 5.00% and mature on September 15, 2026. Interest on the notes is payable semi-annually on March 15 and September 15 of each year, and will commence on March 15, 2017. The Yield Operating 2026 Senior Notes are senior unsecured obligations of NRG Yield Operating LLC and are guaranteed by NRG Yield LLC, and by certain of NRG Yield Operating LLC’s wholly owned current and future subsidiaries. A portion of the proceeds from the 2026 Senior Notes was used to repay NRG Yield Operating LLC's revolving credit facility.
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Note 9 — Variable Interest Entities, or VIEs
Entities that are not Consolidated
NRG has interests in entities that are considered VIEs under ASC 810, Consolidation, but NRG is not considered the primary beneficiary. NRG accounts for its interests in these entities under the equity method of accounting.
GenConn Energy LLC — Through its consolidated subsidiary, NRG Yield Operating LLC, the Company owns a 50% interest in GCE Holding LLC, the owner of GenConn, which owns and operates two 190 MW peaking generation facilities in Connecticut at NRG's Devon and Middletown sites. NRG's maximum exposure to loss is limited to its equity investment, which was $106 million as of September 30, 2016.
Sherbino I Wind Farm LLC — NRG owns a 50% interest in Sherbino, a joint venture with BP Wind Energy North America Inc. NRG's maximum exposure to loss is limited to its equity investment, which was $72 million as of September 30, 2016.
Entities that are Consolidated
The Company has a controlling financial interest in certain entities which have been identified as VIEs under ASC 810. These arrangements are primarily related to tax equity arrangements entered into with third-parties in order to finance the cost of solar energy systems under operating leases and wind facilities eligible for certain tax credits as further described in Note 2, Summary of Significant Accounting Policies to the Company's 2015 Form 10-K. For one of the tax equity arrangements, the Company has a deficit restoration obligation equal to $44 million as of September 30, 2016, which would be required to be funded if the arrangement were to be dissolved.
The summarized financial information for the Company's consolidated VIEs consisted of the following:
(In millions) | September 30, 2016 | December 31, 2015 | |||||
Current assets | $ | 76 | $ | 84 | |||
Net property, plant and equipment | 1,742 | 1,807 | |||||
Other long-term assets | 945 | 863 | |||||
Total assets | 2,763 | 2,754 | |||||
Current liabilities | 59 | 56 | |||||
Long-term debt | 450 | 366 | |||||
Other long-term liabilities | 194 | 179 | |||||
Total liabilities | 703 | 601 | |||||
Noncontrolling interests | 562 | 493 | |||||
Net assets less noncontrolling interests | $ | 1,498 | $ | 1,660 |
Note 10 — Changes in Capital Structure
As of September 30, 2016, and December 31, 2015, the Company had 500,000,000 shares of common stock authorized. The following table reflects the changes in NRG's common stock issued and outstanding:
Issued | Treasury | Outstanding | ||||||
Balance as of December 31, 2015 | 416,939,950 | (102,749,908 | ) | 314,190,042 | ||||
Shares issued under LTIPs | 643,642 | — | 643,642 | |||||
Shares issued under ESPP | — | 609,094 | 609,094 | |||||
Balance as of September 30, 2016 | 417,583,592 | (102,140,814 | ) | 315,442,778 |
Preferred Stock
On May 24, 2016, NRG entered an agreement with Credit Suisse Group to repurchase 100% of the outstanding shares of its $344.5 million 2.822% preferred stock. On June 13, 2016, the Company completed the repurchase from Credit Suisse of 100% of the outstanding shares at a price of $226 million. The transaction resulted in a gain on redemption of $78 million, measured as the difference between the fair value of the cash consideration paid upon redemption of $226 million and the carrying value of the preferred stock at the time of the redemption of $304 million. This amount is reflected in net income/(loss) available to NRG common stockholders in the calculation of earnings per share.
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Employee Stock Purchase Plan
As of September 30, 2016, there were 667,819 shares of treasury stock available for issuance under the ESPP.
NRG Common Stock Dividends
The following table lists the dividends paid during the nine months ended September 30, 2016:
Third Quarter 2016 | Second Quarter 2016 | First Quarter 2016 | |||||||||
Dividends per Common Share | $ | 0.030 | $ | 0.030 | $ | 0.145 |
On October 19, 2016, NRG declared a quarterly dividend on the Company's common stock of $0.03 per share, payable November 15, 2016, to stockholders of record as of November 1, 2016, representing $0.12 per share on an annualized basis.
The Company's common stock dividends are subject to available capital, market conditions, and compliance with associated laws, regulations and other contractual obligations.
Note 11 — Earnings/(Loss) Per Share
Basic earnings/(loss) per common share is computed by dividing net income/(loss) less accumulated preferred stock dividends by the weighted average number of common shares outstanding. Shares issued and treasury shares repurchased during the year are weighted for the portion of the year that they were outstanding. Diluted earnings/(loss) per share is computed in a manner consistent with that of basic income/(loss) per share while giving effect to all potentially dilutive common shares that were outstanding during the period. The reconciliation of NRG's basic and diluted earnings/(loss) per share is shown in the following table:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
(In millions, except per share data) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Basic earnings/(loss) per share attributable to NRG Energy, Inc. common stockholders | |||||||||||||||
Net income/(loss) attributable to NRG Energy, Inc. | $ | 402 | $ | 66 | $ | 213 | $ | (68 | ) | ||||||
Dividends for preferred shares | — | 5 | 5 | 15 | |||||||||||
Gain on redemption of 2.822% redeemable perpetual preferred stock | — | — | (78 | ) | — | ||||||||||
Income/(loss) available for common stockholders | $ | 402 | $ | 61 | $ | 286 | $ | (83 | ) | ||||||
Weighted average number of common shares outstanding - basic | 316 | 331 | 315 | 334 | |||||||||||
Earnings/(Loss) per weighted average common share — basic | $ | 1.27 | $ | 0.18 | $ | 0.91 | $ | (0.25 | ) | ||||||
Diluted earnings/(loss) per share attributable to NRG Energy, Inc. common stockholders | |||||||||||||||
Weighted average number of common shares outstanding | 316 | 331 | 315 | 334 | |||||||||||
Incremental shares attributable to the issuance of equity compensation (treasury stock method) | 1 | 1 | 1 | — | |||||||||||
Total dilutive shares | 317 | 332 | 316 | 334 | |||||||||||
Earnings/(loss) per weighted average common share — diluted | $ | 1.27 | $ | 0.18 | $ | 0.91 | $ | (0.25 | ) |
The following table summarizes NRG’s outstanding equity instruments that are anti-dilutive and were not included in the computation of the Company’s diluted loss per share: