NRG Energy Finishes Disappointing 2022; Reset Coming With Vivint Addition in 2023

We are reaffirming our $37 fair value estimate for NRG Energy NRG after the company announced $1.75 billion of adjusted EBITDA in 2022, down from $2.4 billion in 2021. We had anticipated lower earnings in 2022 due to operational challenges during the summer. Results were consistent with management’s earlier guidance toward the lower end of its initial $1.95 billion-$2.25 billion EBITDA target range. We are reaffirming our no-moat rating, stable moat trend rating, and High Morningstar Uncertainty Rating.

We expect 2023 to be a reset year for NRG in part due to the pending $5.2 billion acquisition of Vivint. Management reaffirmed its $2.27 billion-$2.47 billion EBITDA guidance for 2023 on a stand-alone basis, consistent with our outlook.

However, adding Vivint should bring both new net earnings and the potential for significant revenue and cost synergies at NRG’s retail business. On a full-year run-rate basis, we expect retail business earnings will represent at least three fourths of earnings. This could be even higher if management hits its long-term expectations for $300 million of incremental EBITDA from cross-selling and margin expansion among existing customers, $100 million of net cost savings, and up to $400 million of new business opportunities.

We expect NRG to slow share repurchases in 2023-24 after buying back $655 million of its $1 billion authorization in 2022. NRG is adding about $2 billion of debt to fund the Vivint acquisition and will need to allocate free cash flow toward reducing leverage.

In total, management said it plans to retire about $1 billion of debt and allocate about $350 million to the dividend in 2023, representing an 8% dividend per share increase. Completing the $1 billion share buyback plan will depend on remaining available cash later in the year. Management suggested it might net $500 million of cash from more generation divestitures. We think this capital allocation strategy is in shareholders’ long-term best interest.