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Morningstar | Renewable energy buildout could hurt NRG's generation profitability.

NRG Energy is returning to its roots as a mostly Texas-based wholesale and retail power company, but that doesn't change the fact that NRG is more of an energy company than a utility.The emergence of activist investors and a board shakeup in early 2017 preceded a restructuring that has cut the company in half. Subsidiary GenOn Energy declared bankruptcy in spring 2017. Then in February 2018, management announced a multipronged deal to sell its 47% stake in NRG Yield, its own renewable energy portfolio, and its South Central generation. Altogether, NRG raised nearly $3 billion of cash and eliminated $10 billion of debt. NRG now has a near-even earnings split between its retail and wholesale generation businesses.The GenOn bankruptcy wasn't a huge loss, given that the power plants were operating near break-even profitability. The NRG Yield sale had been widely anticipated since the 2017 leadership changes but suffered from poor timing. We estimate that the implied deal price was half of its 2013 IPO price. We consider the South Central asset sales mostly value-neutral. By the end of 2018, we expect NRG's generation fleet will be half the size it was at year-end 2016, including its share of NRG Yield.The new NRG is counting on growing electricity use and volatile power prices. The company has little exposure to outright power prices because its retail business serves as an effective price hedge. NRG's biggest upside is by selling more electricity into markets that have tightening supply-demand dynamics. NRG is well-positioned in Texas, California, and the Northeast, but in general we expect modest demand growth and a surge in renewable energy that could dampen prices, especially in Texas and California. In the Northeast, capacity revenue creates a stable source of cash to offset energy market volatility.Investors must keep a close eye on regional energy policy. In the Northeast, subsidies for coal, nuclear, and renewable energy present challenges for NRG's gas plants. In Texas, NRG could suffer if demand growth falls short of expectations or grid operators find ways to reduce market volatility.