Category: Financial Markets

Business Strategy and Outlook

NRG Energy has completed its latest strategic shift following the $3.625 billion acquisition of Direct Energy in January 2021, the sale of most of its Northeast power generation fleet, and the planned closure of four Midwest power plants. A higher share of retail energy earnings helps offset the long-term threat to NRG’s legacy fossil fuel generation fleet as renewable energy grows. NRG will benefit the most if electricity demand grows in its key markets, particularly Texas and the Northeast. In Texas, brief summer heat spells in 2018 and 2019 along with Winter Storm Uri in February 2021 show that growing demand can also create more energy price volatility and risk. Uri resulted in $1 billion of gross losses for NRG in just two weeks. 

Despite offsetting much of those one-time losses, it’s uncertain how energy market reforms in Texas will impact NRG in the long run. NRG’s transformation has taken twists and turns during the last five years, ultimately shrinking its wholesale generation business and increasing its retail energy business. Between 2016 and 2020, NRG divested half of its generation fleet, brought in nearly $3 billion of cash, and eliminated $10 billion of debt. In spring 2017, NRG sent subsidiary GenOn Energy into bankruptcy and in 2018, NRG sold its renewable energy business, its 47% stake in NRG Yield, and its South Central generation.

Financial Strength

NRG’s transformation, which started in mid-2017, simplified its balance sheet and improved its credit metrics. Before the Direct Energy acquisition, NRG had cut its recourse debt below $6 billion and was on track to reach investment-grade credit metrics by the end of 2020. The all-cash Direct Energy acquisition and losses from the Texas winter storm in February 2021 push that back slightly. Management is targeting 2.5-2.75 times net debt/EBITDA, a level it reached in 2019 but might not reach again until 2023 or later. The winter storm losses led management to scale back its 2021 debt reduction target to less than $300 million from the pre-storm $1.05 billion target. The board’s decision to initiate a $1 billion stock repurchase plan in late 2021 suggests NRG’s capital allocation focus has shifted away from balance sheet repair. Lower capital expenditures should boost cash flow as NRG adjusts to maintenance levels at its core business. The retail business requires little capital investment.  

The $3 billion of cash proceeds from the renewable energy, NRG Yield, and South Central business sales helped NRG finance the Direct Energy acquisition with no new equity. Management reset the dividend at $1.20 per share annualized in 2020, up from $0.12 in 2019. NRG plans to pay a $1.40 per share annualized dividend in 2022. Robust free cash flow and share buybacks should allow management to meet its 7%-9% dividend growth target easily. Before the 2017-18 restructuring, NRG carried $19.5 billion of consolidated debt at year-end 2015, but only $7.9 billion was recourse parent debt. The rest was nonrecourse debt at GenOn Energy, NRG Yield, or project financing. The GenOn bankruptcy eliminated $2.7 billion of debt, and the 2018 divestitures eliminated another $7 billion of debt. NRG used $2 billion of cash proceeds from its 2018 asset sales to pay down parent debt and repurchase $1.25 billion of stock. NRG bought back $1.6 billion of stock in 2019-20 before the Direct Energy acquisition.

Bulls Say’s

• NRG’s transformation in 2017-20 cut the business in half, improved its credit metrics, and generated substantial cash to use for the dividend, stock buybacks, and acquisitions like Direct Energy. 
• NRG’s match between its wholesale generation earnings and its retail supply earnings provides a hedge that stabilizes consolidated earnings. 
• NRG’s primary operations are in Texas, which we think will have among the fastest electricity demand growth of any state during the next decade.

Company Profile 

NRG Energy is one of the largest retail energy providers in the U.S., with 7 million customers, including its 2021 acquisition of Direct Energy. It also is one of the largest U.S. independent power producers, with 16 gigawatts of nuclear, coal, gas, and oil power generation capacity primarily in Texas. Since 2018, NRG has divested its 47% stake in NRG Yield, among other renewable energy and conventional generation investments. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.