22 Feb 11

by Travis Miller
Toronto Morningstar

NRG Energy NRG reported full-year EBITDA of $2.5 billion, down 4% year over year but in line with our expectations. Stronger results at the Reliant marketing unit offset weaker year-over-year results across the firm’s power generation fleet. This was long expected, as falling natural gas and power prices compressed power generation margins but led to wider margins and customer acquisition opportunities for Reliant. Management also announced plans for a $180 million share buyback out of its $3 billion year-end cash position and emphasized its key near-term growth initiative is to expand its solar portfolio. We would rather see NRG return cash through share buybacks, but the firm remains constrained by its debt covenants and said it is cost-prohibitive to renegotiate those debt terms in a way that would allow more buybacks.

Management reaffirmed its revised 2011 EBITDA guidance at $1.75 billion-$1.95 billion, in line with our $2.0 billion projection. We think additional upside could be available at the firm’s retail businesses, given the attractive market conditions and potential for expansion outside its core Texas region. NRG has hedged all of its expected baseload generation for 2011 and most of its coal needs. Management also suggested that 2012 EBITDA will probably be about $2 billion based on its current 2012 baseload hedge position and current forward markets. This is in line with our projections. NRG remains one of the best-positioned independent power producer to benefit from a cyclical upturn in power markets in 2012 and beyond, given its nearly 50% open position on its expected 2012 baseload generation. The company has added virtually no incremental hedges in the past nine months.

NRG’s plan to build two new nuclear units remains on track but proceeding slowly while the company awaits a Department of Energy loan guarantee, a long-term power purchase agreement for a portion of the offtake, and additional financing partners. Management said it plans to make a final decision on the project by late summer and suggested that even at gas prices around $4 per million BTU in perpetuity, rates of return would be around 15%. Given the progress to date, we think the project will probably be canceled, but favorable moves forward on any of the three key milestones could extend that final decision time frame.

Travis Miller is the associated director for the utility sector. Before joining Morningstar in January 2007, he was a student at the University of Chicago’s Graduate School of Business where he pursued concentrations in accounting and finance. He previously worked as a reporter at several Chicago-area newspapers, including the Daily Herald in Arlington Heights, Ill. He earned a bachelor’s degree from Northwestern University’s Medill School of Journalism.

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