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Morningstar | NRG's Earnings Jump on Favorable Market Conditions; Transformation Plan On Track

We are reaffirming our $25 per share fair value estimate for NRG Energy after the company reported $1.4 billion of adjusted EBITDA in the first half of 2018, up from $1.1 billion in the first half of 2017. We also reaffirm our no-moat and stable moat trend ratings. NRG earned $900 million EBITDA excluding NRG Yield, which it plans to divest later this year.

First-half results and summer power market conditions early in the third quarter put NRG on track to achieve our $1.8 billion full-year EBITDA estimate, excluding businesses it plans to divest in the second half. We recently raised our 2018-19 outlook, given favorable weather and higher power prices than we assumed at the beginning of the year.

We are reaffirming our long-term outlook. Surging power prices in Texas during the past few months gave NRG an opportunity to boost its hedge position in 2019, as we expected. NRG's coal and nuclear fleet now are nearly fully hedged for 2019 in Texas at an average price that increased to $51 per megawatt-hour from $43/MWh during the second quarter.

However, Texas forward power price curves remain backwardated and NRG has about half of its 2020 expected coal and nuclear generation unhedged. This supports our view that NRG's core EBITDA will peak in 2019. We remain bearish on Texas power prices beyond 2020 because of new wind and gas generation that we think will outpace demand growth.

NRG continues to execute on its cost savings plan, realizing about half of its target $500 million cost savings, debt reduction, and share buybacks to date. If management hits all of its targets, we would likely raise our fair value estimate by $1-$2 per share, all else equal.