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Morningstar | Stream Acquisition Could Vault NRG's Retail Earnings Above Generation Earnings

NRG Energy is returning to its roots as a mostly Texas-based wholesale and retail power company, making it more of an energy company than a utility.A restructuring in 2017 cut the company in half. Subsidiary GenOn Energy declared bankruptcy in spring 2017. Then management announced in February 2018 that it will sell NRG's renewable energy portfolio, its 47% stake in NRG Yield, and its South Central generation. This brought in nearly $3 billion of cash and eliminated $10 billion of debt. Following the divestitures, NRG's generation fleet is half the size it was at year-end 2016, including its share of NRG Yield.NRG's earnings mix has shifted as well. It now has a near-even earnings split between its retail and wholesale generation businesses. We think this is a good competitive position as the industry shifts from centralized, fossil-fuel generation to more distributed and renewable energy. Recent acquisitions of smaller retail energy businesses and weak power market prices could result in retail earnings surpassing generation earnings as soon as 2020.The new NRG is counting on growing electricity use and volatile power prices. NRG's biggest upside is by selling more electricity into markets that have tightening supply/demand dynamics. NRG is well positioned in Texas and the Northeast, but in general we expect modest demand growth and a surge in renewable energy to damp prices, especially in Texas. 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 mid-Atlantic and 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. In 2018, a hotter-than-normal July in Texas showed the potential upside as tight supply/demand conditions led to price spikes. However, moderate weather and increasing wind generation could suppress power prices.