Morningstar | NRG Energy Plan on Track but Needs Power Markets to Rally
We are reaffirming our $32 per share NRG Energy fair value estimate after the company reported $94 million of operating net income and $333 million adjusted EBITDA during the first quarter.Net income was down due to divestments since early last year. EBITDA was nearly flat from the first quarter of 2018 but up 15% when considering lost EBITDA from discontinued operations. We are reaffirming our no-moat and stable moat trend ratings.
Results thus far put NRG on track to meet our 2019 estimates. Management reaffirmed its $1.85 billion-$2.05 billion adjusted EBITDA guidance for 2019, in line with our estimates. NRG continues to have nearly all of its expected generation hedged for the rest of the year, reducing the chance that earnings would fall much outside of management's range.
Retail margins appeared a bit weak in the quarter with EBITDA down 19% while customer count grew 16% during the last year. We expect NRG can recover that margin during the rest of the year and are not making any immediate changes to our outlook. We continue to believe retail earnings will surpass generation earnings, as they did in 2018.
In the short term, we think NRG might try to grow its retail position through acquisition, offsetting some of the weakness at its generation unit. Longer term, we think retail margins will shrink, a key part of our bearish outlook.
Forward power prices in Texas and the eastern U.S. have hardly budged this year yet management remains bullish with less than half of its expected generation in 2020 hedged. A spike in prices this summer--like what happened last spring--could lead to attractive hedging opportunities. At current market prices, NRG likely would face a drop in earnings next year.
Management remains on track to repurchase $1.25 billion of stock and pay down as much as $600 million of debt this year. Despite NRG's stock still trading above our fair value estimate, we don't see many alternative uses for that capital.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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