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GenOn Energy Misses Overall

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GenOn Energy, Inc. posted second-quarter 2012 pro forma loss of 14 cents per share compared with a loss of 11 cents per share in the prior-year quarter. The company reported wider loss primarily due to a decline in contracted and capacity revenues in Eastern PJM and Western PJM/MISO; partially offset by higher realized value of hedges and lower adjusted operating costs.

Quarterly loss was wider than the Zacks Consensus Estimate of a loss of 10 cents.

In the reported quarter, GenOn’s GAAP loss was 30 cents versus a loss of 18 cents in the year-ago quarter. The variance between GAAP and pro forma loss was due to costs of 20 cents related to unrealized charges, Mirant/RRI merger-related expenses, charges for deactivation of generating facilities, litigation charges, market inventory adjustments and other several charges; partially offset by gains of 4 cents which includes reversal of Potomac River settlement obligations and large scale remediation and settlement gain.

Total Revenue

GenOn Energy’s total revenue for second-quarter 2012 was $521 million, down 35.8% from $812 million reported in the year-ago period. The decline was due to a drop in revenues in each of the company’s segments. Reported quarter revenue fell short of the Zacks Consensus Estimate of $707 million.

Segment Results

Eastern PJM: In the reported quarter, the segment revenue decreased 26.3% year over year to $221 million from $300 million in the year-ago quarter. This year-over-year decline was due to lower power generation volumes in coal-fired facilities and mild weather.

Western PJM/MISO: The segment revenue was $180 million versus $293 million in the year-ago quarter. The drop in quarterly revenue was primarily due to an outage at one of the generating facilities, mild weather as well as lower capacity prices.

California: Revenue decreased 13.8% year over year to $31 million in second-quarter 2012 from $36 million in the year-ago quarter. This was primarily due to the shutdown of the Potrero generating plant.

Energy Marketing: Total revenue for second-quarter 2012 was $45 million versus $119 million in second-quarter 2011, reflecting a drop of 62.1%. The year-over-year decline was due to a fall in income from proprietary trading.

Other Operations: Total revenue for second-quarter 2012 was $44 million, down 31.3% year over year. This was due to a decrease in intermediate generation volumes for a outage at the company’s Northeast facility.

Operational Update

In second-quarter 2012, GenOn’s adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) was $72 million compared with $104 million in the prior-year quarter.

In the quarter under review, total operating expenses decreased 24% year over year to $354 million primarily due to lower operation and maintenance expenses.

Operating loss during the reported quarter was $139 million versus $42 million in the year-ago period.

Interest expenses during the quarter decreased to $85 million from $96 million a year ago. This was due to the repayment of GenOn Americas Generation senior unsecured notes and PEDFA bonds.

Financial Update

Cash and cash equivalents as of June 30, 2012 were $1,677 million versus $1,668 million as of December 31, 2011.

Net cash used in operating activities in second-quarter 2012 was $39 million, down from $203 million in the comparable period last year. This decline was primarily due to changes in energy prices and fluctuations in working capital needs.

In the first six months, capital expenditure was $342 million, up from $183 million in the prior-year period. This growth in capital expenditure was due to construction of Marsh Landing generation facility and payment of the scrubber contract litigation settlement in 2012. 

Total debt as of June 30, 2012 was $4.3 billion versus $4.1 billion as of December 31, 2011.

Merger Update

In July 2012, GenOn Energy Inc. has entered into an agreement, worth $18 billion, with NRG Energy Inc. (NRG - Analyst Report) to merge in a stock for stock tax free transaction. The transaction is subject to the approval of both the companies’ shareholders, the Federal Energy Regulatory Commission, the New York Public Service Commission and the Public Utility Commission of Texas. Both the companies are expected to close the merger by first-quarter 2013. The merged entity will retain the name of “NRG Energy”.

The merger will enable fuel innovation, increase operational efficiency and generate approximately 47,000 megawatts from its Eastern, Gulf Coast and Western assets.

Zacks Rank

GenOn Energy, Inc. currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.

Houston, Texas-based GenOn Energy, Inc. is a competitive wholesale electricity provider in 12 states of the U.S. The company has total generating capacity of 22,700 megawatts. GenOn has several types of power generation facilities, which include baseload, intermediate and peaking units by utilizing coal, natural gas and oil.

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