Texas Grid Operator’s Summer Outlook Suggests Unfavorable Markets for NRG, Vistra

We are reaffirming our fair value estimates for NRG Energy ($37 per share) and Vistra Energy VST ($24) after the Texas grid operator, ERCOT, released its summer seasonal outlook. We are reaffirming our no-moat and High Uncertainty Ratings for both companies.

ERCOT’s report shows that Texas electricity demand continues growing at a rapid rate relative to other states, as we forecast. The state broke demand records 11 times last summer, and ERCOT forecasts a record-breaking 83 gigawatts of peak demand this summer. We incorporate this demand growth in our outlooks for Texas’ largest power generators and retail energy suppliers like NRG and Vistra.

However, we expect a surge of new generation will make Texas power markets less volatile than in recent years, a negative for NRG and Vistra. ERCOT expects 97 GW of available generation capacity this summer, up from 91 GW going into last summer. Half of that new supply is solar, which tends to perform well during extreme weather. The rest is from new wind and gas generation.

The increase in generation, especially solar, reduces the value of NRG’s and Vistra’s fossil-fuel fleets and their integrated wholesale-retail business models. Both companies still have upside to extreme weather, assuming their plants operate well. But both companies have had operational issues during recent extreme weather, hurting profitability.

Our full-year 2023 EBITDA forecast for NRG remains in line with management’s $3.0 billion-$3.25 billion guidance, assuming normal weather. NRG stock trades at a 15% discount to our fair value estimate as of May 8 likely due to investors’ concerns about management achieving its projected synergies from the Vivint acquisition.

Vistra stock trades near our fair value estimate after falling 12% since it announced its restructuring plan and Energy Harbor acquisition in early March. We don’t expect the restructuring to create incremental shareholder value.