NRG Energy outlines transformation plan; aims to cut net debt by 67%, drop leverage ratio to 3 times

By Paul Deckelman

New York, July 12 – NRG Energy, Inc. outlined a sweeping business transformation plan on Wednesday that aims to reduce the overall size of the Princeton, N.J.-based merchant power generation company, streamline and simplify its corporate structure and balance sheet, and wipe some $12 billion of consolidated net debt off that balance sheet, cutting its leverage ratio of net debt as a multiple of trailing adjusted EBITDA by more than half.

“Today marks an important step in NRG’s transformation,” the company’s president and chief executive officer, Mauricio Gutierrez, told analysts on a conference call during which he and NRG executive vice president and chief financial officer Kirkland B. Andrews unveiled the ambitious plan.

“Following the completion of a comprehensive business review process, we are announcing a plan that will significantly simplify our business and strengthen our position as the leading competitive power company.”

Gutierrez said that a special Business Review Committee had thoroughly examined every aspect of NRG’s far-flung business, looking for ways to cut expenses and achieve more efficient performance and optimize its asset portfolio, seeking to shed non-core operations.

It came up with a three-year, three part plan that includes cutting the company’s net debt from current levels at just under $18 billion, as reported at the end of this year’s first quarter, to slightly under $6 billion, or a two-thirds reduction. That would bring the leverage ratio down to 3 times on a pro forma basis by the end of 2018, versus a first –quarter leverage measure of 6.4 times.

Gutierrez and Andrews said that once the 3.0 times leverage measure was reached, the company would be generating up to $6.3 billion of cumulative excess cash for allocation through 2020, with as much as $4 billion of that available by the end of 2018.

They said that the cash could be used to fund additional incremental deleveraging or could be returned to NRG’s shareholders, once the company’s capital structure objectives had been met and expected high-capital return investments funded.

Gutierrez said that “if we do not have compelling investment opportunities,” the cash would go back to the shareholders.

However, he stressed that “first and foremost” before starting to return cash to the shareholders, the company would have to hit its 3 times leverage target.

One key to NRG being able to successfully reach its goals will be the expected completion of subsidiary GenOn Energy, Inc.’s Chapter 11 restructuring, which will see GenOn, – which NRG acquired in 2012 for $1.5 billion, but which filed for bankruptcy protection in mid-June – emerge as a standalone company independent of NRG. That is expected to occur before the end of this year, and should remove some $2.62 billion of gross debt from the NRG balance sheet.

NRG also expects to shed a further $8.7 billion of balance sheet debt via asset sales, including its holdings in another subsidiary, NRG Yield, Inc., which acquires, owns, and operates contracted renewable and conventional generation and thermal infrastructure assets, among other holdings.

NRG could sell all or some of its NRG Yield stake. Guiterrez and Andrews did not identify other possible asset sales in the pipeline – but the company estimated that such asset sales would bring in as much as $4 billion that would go to help bring down the net debt level.

NRG did say that it expects to announce signed agreements on asset sales during the fourth quarter of 2017. It has engaged Citigroup, Goldman Sachs and Morgan Stanley for certain asset sale processes that the company says “are well underway.”

Pro forma for shedding the GenOn debt and debt associated with NRG Yield and other assets that might be sold, NRG expects to have some $6.49 billion of total consolidated debt on its balance sheet, plus about $500 million of cash, bringing net debt down to about $5.99 billion.

The company’s presentation materials prepared for investor use during the conference call also indicated that it expects some $701 million of corporate debt reduction this year separate from anything envisioned by the transformation plan, including $398 million to retire its remaining outstanding 7 5/8% notes due in January 2018, out of the $1.2 billion originally sold in 2012, and another $200 million reserved for additional debt reductions.

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