NRG: Long-Term Promise, Short-Term Uncertainty

On Monday, July 2, 2015, NRG Energy (NRG) released a presentation to its investors. In this presentation, NRG discussed its current position in the industry and where it is headed, which might be important to investors given the fact that the company is currently restructuring itself in order to strengthen its balance sheet. It could also serve as a useful primer to new investors to the company.

NRG Energy is a wholesale producer of electricity, it is not an FERC-regulated utility like some of its larger and more well-known peers. This has given the company a significant amount of freedom to grow its operations over the years but it has also exposed it to risks. One of the most significant risks that it faces is competition. NRG Energy is a fairly diverse supplier in terms of the fuel that it uses to produce its electricity, as shown here:

Source: NRG Energy

Each of these different fuels imposes a different cost of production onto the company. Back in 2014, natural gas prices plummeted, which made natural gas-sourced electricity much cheaper to produce than other types of power and some other wholesale electrical producers were able to use this to slash their prices to levels where NRG was not able to compete. Ultimately, this forced the company to start selling off its assets in order to improve its efficiency and reduce its debt. I discussed this in greater detail here. As a result, the company that we see today is a much smaller and leaner entity than it was just a few years ago.

Source: NRG Energy

However, as we can see above, NRG Energy is still a major electricity producer in the United States despite its downsizing. The company currently serves more than three million retail customers with approximately 23 gigawatts of electricity under a variety of brand names.

Source: NRG Energy

It was admittedly one of the company’s retail brands, Green Mountain Energy, that originally drew my attention to NRG as I thought that it could be a way to play the renewable energy industry in the United States. This is still very much an opportunity for the company even though, as shown above, only 15% of the company’s production currently comes from renewable sources. This is very much a good business for the company to be in due to the likely forward trajectory of renewable power in the United States.

Green Mountain Energy itself was a major player in the wholesale renewable energy market until it was acquired by NRG Energy in 2010. Even following the acquisition though, the company operated as a standalone subsidiary for quite some time before it was ultimately merged into the parent company. Green Mountain Energy’s customer demand over its lifetime has helped spur the development of more than fifty wind and solar plants across the United States and while not all of these are owned by NRG, it remains a major player in the industry and we can see here that there is a clear demand for renewable energy on the consumer side.

The U.S. Energy Information Administration appears to agree with this assumption. As we see here, the agency expects natural gas and renewables to grow their prevalence in the American energy mix between now and 2050 while all other fuel sources remain static or decline over the period.

Source: Annual Energy Outlook 2018, U.S. Energy Administration

Of the renewables growth shown in the EIA’s projections, wind and solar power are expected to account for the bulk of it, approximately 64%. In the near-term though, the agency expects the current tax regime to favor wind over solar until 2024 when the dynamic reverses. This positions Green Mountain Energy and, by extension, NRG Energy quite well due to the company’s particular expertise in constructing wind farms.

NRG itself appears to recognize this. In the company’s presentation, NRG specifically stated that the company is actively working to reduce its carbon dioxide emissions. In 2014, the company’s electrical generations activities produced a total of 74,000 metric tons of CO2. That figure was reduced to 48,000 metric tons of CO2 in 2017, representing a 35% reduction over just three years. The company aims to reduce that further this year as it works towards its 2050 goals.

Source: NRG Energy

Undoubtedly some of the reason for this decline was that the company sold off or otherwise disposed of a number of its coal power plants over the past few years. Over the long-term however, achieving its carbon reduction goals will likely require the company to shift an increasing portion of its electrical generation into natural gas and especially renewables, which plays quite well with the previous item discussed.

Over the next few years however, the company is likely to be focused on its restructuring efforts. As I discussed in my previous article (linked above), certain events earlier this decade left the company over-leveraged in the rate environment so it has been forced to take some steps to correct that problem.

Source: NRG Energy

Fortunately, the company does appear to be on-track to meet its 2018-2020 goals shown here. For example, the company sold NRG Yield to Global Infrastructure Partners earlier this year for $1.315 billion. This alone puts it almost halfway to achieving its $3.2 billion asset sale goal. The company also managed to achieve $80 million in savings during the first quarter alone, showing some progress towards its goal of achieving $590 million in savings by 2020.

One reason that many investors purchase shares of electrical utilities is for the dividend. Despite the fact that many electrical utilities have been bid up as such investors try desperately to generate income, many utilities such as Southern Company (SO) and Dominion Energy (D) still carry a somewhat respectable dividend yield. NRG Energy is not one of these. The company pays a very small $0.12 per share dividend annually, which gives the stock a 0.39% dividend at today’s stock price. The reason for the tiny dividend is the company’s financial struggles over the past few years that it is in the process of correcting, as discussed above. It does seem likely that NRG Energy will increase its dividend as its financial strength improves going forward but for now the meager dividend should help it conserve cash instead of paying out a dividend that it cannot afford, which should be considered a good thing.

Overall, the company appears to be positioning itself quite well for the future although uncertainty regarding the outcome of its restructuring efforts may weigh on the company for the next few years. With that said though, the company does appear to be on-track to meet its right-sizing goals and could prove to be a decent holding over the longer-term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This post was originally published here via Google News