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NYLD > SEC Filings for NYLD > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for NRG YIELD, INC.

Form 10-Q for NRG YIELD, INC.


14-Aug-2013

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion analyzes the historical financial condition and results of operations of the Company's accounting predecessor, or NRG Yield, which were prepared on a ''carve-out'' basis from NRG and are intended to represent the financial results of the contracted renewable energy and conventional generation and thermal infrastructure assets in the United States that were acquired by NRG Yield LLC on July 22, 2013. As you read this discussion and analysis, refer to NRG Yield's Combined Statements of Operations to this Form 10-Q, which present the results of operations for the six months ended June 30, 2013 and 2012. Also refer to the Company's Prospectus, which includes detailed discussions of various items impacting the Company's business, results of operations and financial condition.
The discussion and analysis below has been organized as follows:
Executive Summary, including a description of the business and significant events that are important to understanding the results of operations and financial condition;

            Results of operations, including an explanation of significant
             differences between the periods in the specific line items of the
             combined statement of operations;


            Financial condition addressing liquidity position, sources and uses
             of cash, capital resources and requirements, commitments, and
             off-balance sheet arrangements; and


            Known trends that may affect NRG Yield's results of operations and
             financial condition in the future.

Executive Summary
Introduction and Overview
NRG Yield, Inc. is a dividend growth-oriented company formed to serve as the primary vehicle through which NRG will own, operate and acquire contracted renewable and conventional generation and thermal infrastructure assets. The Company owns a diversified portfolio of contracted renewable and conventional generation and thermal infrastructure assets in the United States. The contracted generation portfolio includes three natural gas or dual-fired facilities, eight utility-scale solar and wind generation facilities and two portfolios of distributed solar facilities that collectively represent 1,324 net MW. Each of these assets sells substantially all of its output pursuant to long-term, fixed price offtake agreements to credit-worthy counterparties. The average remaining contract life, weighted by MWs, of these offtake agreements was approximately 16 years as of June 30, 2013. One of these facilities, CVSR, is in the final stages of construction and is expected to reach commercial operations in October 2013. The Company also owns thermal infrastructure assets with an aggregate steam and chilled water capacity of 1,098 net MWt and electric generation capacity of 123 net MW. These thermal infrastructure assets provide steam, hot water and/or chilled water, and in some instances electricity, to commercial businesses, universities, hospitals and governmental units in ten locations, principally through long-term contracts or pursuant to rates regulated by state utility commissions.
Government Incentives
Government incentives enhance the economic viability of the Company's operating assets by providing additional sources of funding for the construction of these assets. NRG has applied for and received cash grants in-lieu of ITCs, pursuant to section 1603 of the American Recovery and Reinvestment Tax Act of 2009, for assets that are currently operating including Blythe, South Trent, Roadrunner, Avra Valley and certain Distributed Generation assets. In addition, NRG has submitted applications for cash grants in lieu of ITCs for Alpine and Borrego of $72 million and $39 million, respectively. These amounts were subsequently reduced to $65 million and $36 million, respectively, as a result of automatic federal spending cuts in 2013 that have taken place pursuant to the Balanced Budget and Emergency Deficit Control Act of 1985 as amended, commonly known as sequestration. Cash grants are treated as a reduction to the book basis of the property, plant and equipment and reduce the related depreciation over the useful life of the asset. One of the Company's equity method investments, CVSR, has obtained a loan guarantee from the U.S. DOE in support of its borrowings from the Federal Financing Bank, or FFB, to fund the construction of the facility and has applied for a cash grant in lieu of ITC of $206 million, which was subsequently reduced to $188 million as a result of sequestration. In connection with the CVSR financing, as of June 30, 2013, there was $374 million outstanding on the related cash grant bridge loan, of which $34 million became due on August 5, 2013, $167 million becomes due on February 5, 2014 and the remaining amount becomes due on August 5, 2014. The Company did not receive grant proceeds under the 1603 Cash Grant Program, or the 1603 Cash Grant Proceeds, by the first maturity date. However, pursuant to the guarantee provided by NRG to the DOE, when the 1603 Cash Grant Proceeds were not received, NRG paid the related portion of the cash grant bridge loan on the Company's behalf. Any future 1603 Cash Grant Proceeds relating to CVSR, if received and available for distribution to the Company, would be used first by the Company to reimburse NRG without interest for the amount of the cash grant bridge loan repaid to the DOE on the Company's behalf.


In addition, when the final phase of CVSR reaches commercial operations, NRG will submit an application for an additional cash grant of $215 million. If the full amount of the cash grants for Alpine and CVSR are not received, as a result of review of the application or as a result of sequestration, net income will be reduced by the amount of the additional depreciation, or in the case of CVSR the Company's share of the additional depreciation, over the useful life of the assets, which is approximately 28 years, partially offset by less deferred tax expense.
Regulatory Matters
As operators of power plants and participants in wholesale energy markets, certain NRG Yield entities are subject to regulation by various federal and state government agencies. These include the CFTC, FERC, and the PUCT, as well as other public utility commissions in certain states where NRG's generating, thermal, or distributed generation assets are located. In addition, NRG Yield is subject to the market rules, procedures and protocols of the various ISO markets in which it participates. NRG Yield must also comply with the mandatory reliability requirements imposed by NERC and the regional reliability entities in the regions where NRG Yield operates.
NRG Yield's operations within the ERCOT footprint are not subject to rate regulation by the FERC, as they are deemed to operate solely within the ERCOT market and not in interstate commerce. These operations are subject to regulation by PUCT.
Thermal
NRG Energy Center Harrisburg LLC Rate Case - On April 12, 2013, NRG Energy Center Harrisburg LLC, or NRG Harrisburg, a regulated steam utility in Harrisburg, Pennsylvania, filed a base rate case with the Pennsylvania Public Utility Commission, or PA PUC, for an increase in annual revenues of $875,000. On August 2, 2013, the parties to the proceeding filed a petition for approval of a unanimous settlement of all issues under which NRG Harrisburg would receive its requested increase in full. The settlement is subject to final PA PUC review and approval. A PA PUC vote on the settlement is anticipated to occur at the end of the third quarter of 2013. Conventional Generation
New England Power Generators Association, or NEPGA, Complaint - On May 17, 2013, NEPGA filed a complaint against ISO New England, Inc., or ISO-NE, asking FERC to clarify that under ISO-NE's existing tariff, a capacity resource's inability to procure or schedule fuel when called upon is not a tariff violation or an attempt to manipulate the ISO-NE energy markets. As operators of gas and oil dual fuel generation facilities in New England, GenConn Devon LLC and GenConn Middletown LLC could be subject to sanction when gas is not available, unless FERC grants the NEPGA complaint. NRG and the Company support the NEPGA complaint. ISO-NE answered the NEPGA complaint and the matter is pending. Significant Events During the Six Months Ended June 30, 2013 During the first six months of 2013, Alpine, Borrego and Marsh Landing achieved COD. In addition, Borrego completed a financing arrangement with a group of lenders.
Significant Events During the Six Months Ended June 30, 2012 During the first six months of 2012, Alpine completed a financing arrangement with a group of lenders.


Combined Results of Operations
The following table provides selected financial information for NRG Yield:
                                           Three months ended June 30,              Six months ended June 30,
(In millions except otherwise noted)     2013          2012       Change %       2013           2012       Change %
Operating Revenues
Total operating revenues              $    79       $    42            88     $    132       $    86           53
Operating Costs and Expenses
Cost of operations                         30            26            15           59            53           11
Depreciation and amortization               9             6            50           19            12           58
General and administrative                  2             2             -            4             4            -
Total operating costs and expenses         41            34            21           82            69           19
Operating Income                           38             8           375           50            17          194
Other Income/(Expense)
Equity in earnings of unconsolidated
affiliates                                  2             6           (67 )          6             9          (33 )
Interest expense                           (6 )         (16 )         (63 )        (11 )         (20 )        (45 )
Total other expense                        (4 )         (10 )         (60 )         (5 )         (11 )        (55 )
Income/(Loss) Before Income Taxes          34            (2 )         N/M           45             6          N/M
Income tax expense/(benefit)                1            (1 )         100            5             2          150
Net Income/(Loss)                     $    33       $    (1 )         N/M     $     40       $     4          N/M

N/M - Not meaningful.
Management's discussion of the results of operations for the three months ended June 30, 2013, and 2012
Operating Revenues
Operating revenues increased by $37 million, during the three months ended June 30, 2013, compared to the same period in 2012, due to:

                                             Conventional       Renewables       Thermal         Total
                                                                    (In millions)
Three Months Ended June 30, 2013            $          19     $         24     $       36            79
Three Months Ended June 30, 2012                        -                9             33     $      42

Volumes sold - three months ended June 30,
2013 (a)                                               31              241            367
Volumes sold - three months ended June 30,
2012 (a)                                                -              124            343

(a) Volumes sold reflect MWh for Renewables and MWt for Thermal The increase in operating revenues is due primarily to:

Increase in Conventional Generation revenues as assets reached
commercial operations in 2013                                            $    19
Increase in Renewables revenue as Alpine, Avra Valley and Borrego
reached commercial operations in late 2012 and early 2013                     15
Increase in Thermal revenues                                                   3
                                                                         $    37


Operating Costs
Operating expense increased by $4 million, during the three months ended

June 30, 2013, compared to the same period in 2012, primarily due to an increase in operations and maintenance expense related to Alpine, Borrego and Avra Valley reaching commercial operations in late 2012 and 2013. Depreciation and Amortization
Depreciation and amortization increased by $3 million during the three months ended June 30, 2013 compared to the same period in 2012, due primarily to additional depreciation for the projects that reached commercial operations in late 2012 and 2013.


Interest Expense
Interest expense decreased by $10 million during the three months ended June 30, 2013 compared to the same period in 2012, due primarily to the recognition of the ineffective portion of the unrealized loss on the Alpine interest rate swap of $10 million in the prior year.
Income Tax Expense
Income tax expense increased by $2 million during the three months ended June 30, 2013 compared to the same period in 2012, due primarily to the increase in pre-tax income. NRG Yield, Inc. obtained its financial interest on July 22, 2013. For the three months ended June 30, 2013, income tax expense was calculated reflecting the July ownership percentage. NRG Yield LLC is treated as a partnership for income tax purposes. As such, NRG Yield, Inc. records income tax on its 34.5% of the NRG Yield LLC taxable income. The remaining 65.5% of taxable income is taxed at NRG Energy, Inc. Management's discussion of the results of operations for the six months ended June 30, 2013, and 2012
Operating Revenues
Operating revenues increased by $46 million, during the six months ended June 30, 2013, compared to the same period in 2012, due to:

                                             Conventional       Renewables       Thermal         Total
                                                                    (In millions)
Six Months Ended June 30, 2013              $          19     $         40     $       73     $     132
Six Months Ended June 30, 2012                          -               17             69            86

Volumes sold - six months ended June 30,
2013 (a)                                               31              423            871
Volumes sold - six months ended June 30,
2012 (a)                                                -              250            760

(a) Volumes sold reflect MWh for Renewables and MWt for Thermal The increase in operating revenues is due primarily to:
Increase in Conventional Generation revenues as assets reached commercial operations in 2013 $ 19 Increase in Renewables revenue as Alpine, Avra Valley and Borrego reached commercial operations in late 2012 and early 2013 23 Increase in Thermal revenues 4 $ 46

Operating Costs
Operating expense increased by $6 million, during the six months ended June 30, 2013, compared to the same period in 2012, primarily due to an increase in operations and maintenance expense related to Alpine, Borrego and Avra Valley reaching commercial operations in late 2012 and 2013. Depreciation and Amortization
Depreciation and amortization increased by $7 million during the six months ended June 30, 2013 compared to the same period in 2012, due primarily to additional depreciation for the projects that reached commercial operations in late 2012 and 2013.
Interest Expense
Interest expense decreased by $9 million during the six months ended June 30, 2013 compared to the same period in 2012, due primarily to the recognition of the ineffective portion of the unrealized loss on the Alpine interest rate swap of $10 million in the prior year.
Income Tax Expense
Income tax expense increased by $3 million during the six months ended June 30, 2013 compared to the same period in 2012, due primarily to the increase in pre-tax income. NRG Yield, Inc. obtained its financial interest on July 22, 2013. For the six months ended June 30, 2013, the tax expense was calculated reflecting the July ownership percentage. NRG Yield LLC is treated as a partnership for income tax purposes. As such, NRG Yield, Inc. records income tax on its 34.5% of the NRG Yield LLC taxable income. The remaining 65.5% of taxable income is taxed at NRG Energy, Inc.


Liquidity and Capital Resources
The Company's principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, and to service debt. Historically, the Company's predecessor operations were financed as part of NRG's integrated operations and largely relied on internally generated cash flows as well as corporate and/or project-level borrowings to satisfy its capital expenditure requirements. Liquidity Position
As of June 30, 2013 and December 31, 2012, the Company's liquidity was approximately $84 million and $42 million, respectively, comprised of cash and restricted cash.
Management believes that the Company's liquidity position and cash flows from operations will be adequate to finance growth, operating and maintenance capital expenditures, to fund dividends to holders of the Company's Class A common stock and other liquidity commitments. Management continues to regularly monitor the Company's ability to finance the needs of its operating, financing and investing activity within the dictates of prudent balance sheet management. Sources of Liquidity
The Company's principal sources of liquidity to include cash on hand, cash generated from operations, borrowings under new and existing financing arrangements and the issuance of additional equity securities as appropriate given market conditions. As described in Note 7, Long-term Debt, the Company's financing arrangements consist mainly of the project-level financings for its various assets.
On July 22, 2013, the Company issued 22,511,250 shares of Class A common stock in an initial public offering at a price of $22 per share, which resulted in net proceeds of $468 million, net of underwriting discounts. The Company used $395 million to acquire Class A units of NRG Yield LLC from NRG. The remaining $73 million was used to acquire Class A units of NRG Yield LLC directly from NRG Yield LLC. The $73 million will be retained at NRG Yield LLC for general corporate purposes.
In connection with the initial public offering of Class A common stock of NRG Yield, Inc., as further described in Note 1, Nature of Business, NRG Yield LLC and its direct wholly-owned subsidiary, NRG Yield Operating LLC entered into a senior secured revolving credit facility, which provides a revolving line of credit of $60 million. The NRG Yield revolving credit facility can be used for cash or for the issuance of letters of credit. Uses of Liquidity
The Company's requirements for liquidity and capital resources, other than for operating its facilities, are categorized as: (i) debt service obligations, as described more fully in Note 7, Long-term Debt; (ii) capital expenditures; and
(iii) cash dividends to investors. Capital Expenditures
The Company's capital spending program is focused on completing the construction of assets where construction is in process and maintaining the assets currently operating. The Company develops annual capital spending plans based on projected requirements for maintenance capital and completion of facilities under construction. For the six months ended June 30, 2013, the Company used approximately $182 million to fund capital expenditures, primarily related to the construction of its solar generating assets and Marsh Landing. Cash Dividends to Investors
NRG Yield, Inc. intends to use the amount of cash that it receives from its distributions from NRG Yield LLC to pay quarterly dividends to the holders of its Class A common stock. NRG Yield LLC intends to distribute to its unit holders in the form of a quarterly distribution all of the cash available for distribution that is generated each quarter less reserves for the prudent conduct of the business, including among others, maintenance capital expenditures to maintain the operating capacity of the assets. Cash available for distribution is defined as earnings before income taxes, depreciation and amortization, excluding contract amortization, cash interest paid, income taxes paid, maintenance capital expenditures, investments in unconsolidated affiliates, growth capital expenditures, net of capital and debt funding, and principal amortization of indebtedness, and including cash distributions from unconsolidated affiliates.
NRG Yield, Inc. expects to declare and pay a dividend of $0.23 per Class A common share during the fourth quarter of 2013.


Cash Flow Discussion
The following table reflects the changes in cash flows for the comparative six
month periods:
Six months ended June 30,                         2013      2012      Change
                                                        (In millions)
Net cash (used)/provided by operating activities $ (11 )   $  58     $  (69 )
Net cash used by investing activities             (221 )    (144 )      (77 )
Net cash provided by financing activities          227        89        138

Net Cash (Used)/Provided By Operating Activities Changes to net cash used by operating activities were driven by the timing of cash payments for working capital obligations.

Net Cash Used By Investing Activities
Changes to net cash used by investing activities were driven by:
                                                                         (In millions)
Increase in capital expenditures, primarily for construction activities
at Marsh Landing, Alpine, Avra Valley and Borrego                       $        (26 )
Increase in restricted cash, primarily for Marsh Landing                         (48 )
Increase in investments in unconsolidated affiliates                             (17 )
Change in notes receivable                                                        15
Other                                                                             (1 )
                                                                        $        (77 )


Net Cash Provided By Financing Activities
Changes in net cash provided by financing activities were driven by:
                                                                         (In millions)
Net increase in cash received from proceeds for issuance of long-term
debt, net of payments                                                   $        415
Decrease in capital contributions net of dividends and returns of
capital from NRG                                                                (281 )
Decrease in cash paid for deferred financing costs                                 4
                                                                        $        138

NOLs, Deferred Tax Assets and Uncertain Tax Position Implications, under ASC 740 The Company has no tax effected uncertain tax benefits. As a result of the Company's tax position, and based on current forecasts, the Company does not anticipate significant income tax payments for federal, state and local jurisdictions in 2013.
Off-Balance Sheet Arrangements
Obligations under Certain Guarantee Contracts The Company may enter into guarantee arrangements in the normal course of business to facilitate commercial transactions with third parties. Retained or Contingent Interests
The Company does not have any material retained or contingent interests in assets transferred to an unconsolidated entity.
Obligations Arising Out of a Variable Interest in an Unconsolidated Entity Variable interest in equity investments - As of June 30, 2013, NRG Yield has several investments with an ownership interest percentage of 50% or less in energy and energy-related entities that are accounted for under the equity method. One of these investments is a variable interest entity for which the Company is not the primary beneficiary.
NRG Yield's pro-rata share of non-recourse debt held by unconsolidated affiliates was approximately $699 million as of June 30, 2013. This indebtedness may restrict the ability of these subsidiaries to issue dividends or distributions to the Company. See also Note 4, Variable Interest Entities.


Contractual Obligations and Commercial Commitments NRG Yield has a variety of contractual obligations and other commercial commitments that represent prospective cash requirements in addition to our capital expenditure programs, as disclosed in the Company's Prospectus. See also Note 7, Long-term Debt, for additional discussion of contractual obligations incurred during the six months ended June 30, 2013. Fair Value of Derivative Instruments
The Company may enter into long-term fuel purchase contracts and other energy-related financial instruments to mitigate variability in earnings due to fluctuations in spot market prices and to hedge fuel requirements at certain generation facilities. In addition, in order to mitigate interest rate risk associated with the issuance of variable rate and fixed rate debt, NRG Yield enters into interest rate swap agreements.
The tables below disclose the activities that include non-exchange traded contracts accounted for at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures, or ASC 820. Specifically, these tables disaggregate realized and unrealized changes in fair value; disaggregate estimated fair values at June 30, 2013, based on their level within the fair value hierarchy defined in ASC 820; and indicate the maturities of contracts at June 30, 2013. For a full discussion of the Company's valuation methodology of its contracts, see Derivative Fair Value Measurements in Note 5, Fair Value of Financial Instruments.

Derivative Activity Gains/(Losses)                         (In millions)
Fair value of contracts as of December 31, 2012           $        (80 )
Contracts realized or otherwise settled during the period            5
Changes in fair value                                               32
Fair value of contracts as of June 30, 2013               $        (43 )


                                                         Fair Value of Contracts as of June 30, 2013
                                                                                              Maturity in
                                     Maturity Less Than 1      Maturity        Maturity         Excess 5      Total Fair
Fair value hierarchy Gains/(Losses)          Year             1-3 Years        3-5 Years         Years          Value
                                                                        (In millions)
Level 1                              $           -           $       -       $        -       $        -     $       -
Level 2                                        (23 )               (30 )             (4 )             14           (43 )
Level 3                                          -                   -                -                -             -
Total                                $         (23 )         $     (30 )     $       (4 )     $       14     $     (43 )

The Company has elected to disclose derivative assets and liabilities on a trade-by-trade basis and does not offset amounts at the counterparty master agreement level. As discussed below in Qualitative and Quantitative Disclosures . . .

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