NRG Energy, Inc. (NRG - Analyst Report) reported third-quarter 2014 earnings of 48 cents per share, missing the Zacks Consensus Estimate of 60 cents by 20%. Quarterly earnings per share, however, increased 33.3% from 36 cents a year ago.

Revenue

In the third quarter, NRG Energy’s total operating revenues of $4.57 billion surpassed the Zacks Consensus Estimate by 41.7%. On a year-over-year basis, the reported top line soared 30.9%, primarily on the back of growth in both retail customer and product base, higher sales volumes at the thermal business and positive outcomes from the acquisition of most of the Edison Mission Energy (EME) assets.

Highlights of the Release

In the quarter under review, NRG Energy's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were $1,014 million, up 1.4% year over year  on  higher contribution from the Retail, Wholesale - West, NRG Yield and Renewables segments. These were partially offset by lower adjusted EBITDA from Wholesale - Gulf Coast, Wholesale - East and Corporate segments.

Total operating expenses surged 35.7% year over year to $4,020 million, primarily due to higher cost of operations, and depreciation and amortization expenses.

The company’s operating income in the third quarter was $549 million, up 4.2% from $527 million a year ago.

The company incurred $280 million as interest expenses in the reported quarter compared with $228 million in the prior-year quarter.

NRG Energy's free cash flow (before growth investments) in the third quarter was $526 million compared with $773 million in the prior-year period.

Business Update

On Nov 4, 2014, NRG Energy inked an agreement with NRG Yield, Inc. (NYLD - Snapshot Report) to sell its facilities – Walnut Creek, Tapestry and Laredo Ridge – to the latter. Upon customary adjustments, the cost of the transaction is pegged at a cash consideration of $480 million in addition to the assumed project debt worth $746 million.

Financial Condition

As of Sep 30, 2014, NRG Energy had cash and cash equivalents of $1.95 billion compared with $2.25 billion as of Dec 31, 2013.

The company’s long-term debt and capital leases were $19.9 billion as of Sep 30, 2014 versus $15.8 billion as of Dec 31, 2013.

In the first nine months of 2014, NRG Energy’s net cash from operating activities was $1.11 billion compared with $0.82 billion in the year-ago period.

The company invested $0.68 billion as capital expenditure during the first nine months of 2014 versus $1.58 billion in the prior-year period.

Guidance

NRG Energy reduced its guidance for 2014 adjusted EBITDA and free cash flow (before growth investments), considering several factors – the lower-than-expected market opportunity because of subdued summer pricing and volume, and fuel inventory build prior to winter, payment of interest of the Alta Wind project debt, timing of working capital and environmental capital expenditures, and an anticipated negative contribution of $50 million from NRG Home Solar business.

Currently, the adjusted EBITDA stands in the range of $3,100–$3,200 million versus the previous projection in the band of $3,200–$3,400 million, and free cash flow (before growth investments) stands in the range of $950–$1,050 million compared with the earlier estimate in the range of $1,200–$1,400 million.

In addition, the company provided its guidance for 2015 adjusted EBITDA in the range of $3,200–$3,400 million and free cash flow (before growth investments) in the range of $1,100–$1,300 million.

Other Earnings Releases

Exelon Corp. (EXC - Analyst Report) announced third-quarter 2014 operating earnings of 78 cents per share, beating the Zacks Consensus Estimate of 71 cents by 9.8%.

PPL Corp. (PPL - Analyst Report) reported third-quarter 2014 adjusted earnings of 54 cents per share, surpassing the Zacks Consensus Estimate of 52 cents by 3.9%.

Our View

Despite missing the estimate, third-quarter 2014 earnings saw a significant year-over-year improvement primarily on the back of strong revenue growth and positive outcomes from the company’s strategic acquisitions.

NRG Energy’s continuous efforts toward the expansion of its operations through organic growth projects and acquisitions will allow it to strengthen both its product and service offering, which will subsequently boost its cash inflow going forward.

However, the steady increase in expenses remains a cause of concern.

NRG Energy currently has a Zacks Rank #3 (Hold).