NRG Energy: Management Defends Consumer-Focused Strategy Amid Investor Skepticism

We are reaffirming our $37 fair value estimate for NRG Energy NRG after management reiterated its commitment to a strategy that focuses on retail energy and home services while shrinking the legacy power generation business.

Although we think investors should be relieved that NRG is not changing strategies, we don’t think retail energy, home services, or power generation have sustainable competitive advantages. We are reaffirming our no-moat rating and High Morningstar Uncertainty Rating.

Management strongly defended the $5.2 billion Vivint acquisition, which has been an overhang since the announcement in late 2022. If management can achieve its targeted $300 million cash flow upside from cost savings, cross-selling, and growth, we estimate the deal will be slightly value-accretive.

We continue to forecast little long-term EBITDA growth aside from the Vivint synergies. NRG’s plan to maintain investment-grade credit metrics and return 80% of cash flow—as much as $6.9 billion—through 2027 is value-neutral if the stock continues to trade near our fair value estimate. We also believe half of NRG’s planned growth investment, or $700 million earmarked for new power generation in Texas, will only go forward if regulators and politicians approve certain power market changes in the state.

Management reaffirmed its $3.0 billion-$3.25 billion adjusted 2023 EBITDA guidance despite losing earnings from the $1.75 billion sale of its South Texas Project nuclear plant interest. Favorable summer retail margins and initial benefits from NRG’s new three-year $150 million cost-saving initiative could offset the lost STP earnings.

Management did not directly address concerns from activist investor Elliott Management, which disclosed a 13% economic interest in NRG in May. However, NRG’s initiatives—reduce debt, cut costs, divest generation assets, and refresh the board—are similar to what the company did during Elliott’s last investment in 2016-18.