Morningstar | NRG Energy Continues Strong Performance but No Change to Our Bearish Outlook
We are reaffirming our $27 per share NRG Energy fair value estimate after the company reported $460 million of net income and $1.8 billion adjusted EBITDA during full-year 2018. EBITDA was up from $1.4 billion in 2017 and in line with our 2018 estimate, excluding NRG Yield. We are reaffirming our no-moat and stable moat trend ratings.The company continues to slim down. Management announced plans to repurchase $1 billion of stock and reserve $600 million for potential debt reduction in 2019. This comes after completing $1.5 billion of share repurchases and nearly $3 billion of debt reduction since the beginning of 2018. Although we think the buybacks are suboptimal given that the stock trades well above our fair value estimate, we think management has few alternatives for growth investment.
Management reaffirmed its $1.85 billion-$2.05 billion adjusted EBITDA guidance for 2019, and we remain at the high end of that range. However, we believe the generation segment EBITDA could fall off substantially in 2020 and beyond based on current forward power prices. The retail segment, which continues to top generation earnings with $952 million of EBITDA in 2018, remains a bright spot and source of potential growth through acquisition.
We continue to have a bearish outlook for power prices in NRG's core Texas and mid-Atlantic regions, in line with current energy forward curves. In Texas, we expect a surge of new wind capacity and higher capacity factors will depress prices for conventional generation owners like NRG. More-consistent wind generation would ease market fears of shortage conditions in Texas. The mid-Atlantic market also faces potential generation oversupply, especially if nuclear subsidies expand.
For a more detailed analysis of our bearish view on Texas power markets and NRG, see our report, "When Texas Hype Cools, NRG Energy Will Power Down," published June 12.
NRG Energy is an energy company. The company produces and sells electricity and related products and services in primary power markets in the United States and Canada. The company sells energy, services, and sustainable products and services directly to retail customers under the names NRG, Reliant, Green Mountain Energy, Stream and XOOM Energy, as well as other brand names owned by the company The company's segments are: Retail, which includes retail energy, portable solar and battery products home services, and a variety of bundled products; and Generation, which includes plant operations, commercial operations, development, engineering and construction, asset management, energy services and other related functions.
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