NRG Energy. Lack of Texas summer pressures guidance

Transcription

1 08/10/12 09/10/12 10/10/12 11/10/12 12/10/12 01/10/13 02/10/13 03/10/13 04/10/13 05/10/13 06/10/13 07/10/13 UTILITIES & POWER Regulateds Market Weight Integrateds Market Underweight IPPs Market Overweight NRG Energy (NRG US EQUITY $26.35 OUTPERFORM) Lack of Texas summer pressures guidance Lowering guidance on mild weather NRG lowered its 2013 guidance to $2.55-$2.7B down from $2.615-$2.815B. The primary reason for the lower guidance was weak Texas power prices, due to a mild summer. However, NRG had already lowered its retail guidance for the year by $75M in late June. While we view the mild weather as largely one-time, and remain favorably inclined to the fundamental tightness in the Texas market, investors may question this more given the lack of scarcity pricing in ERCOT. Furthermore, we see upside in NRG going forward from growth at NRG Yield, the remaining $175M buyback to be completed and realizing the full GEN synergies. For more detail on NRG Yield please see our initiation note. We continue to see NRG as one of the best ways to play power recovery long-term. NRG keeps 2014 guidance, but likely under some pressure NRG maintained its 2014 guidance of $2.85-$3.05B. However, based on margin pressures at retail, and the forward curves declining in ERCOT, NRG is likely facing some headwinds in its 2014 guidance. We do note that NRG is more open (unhedged) at this point for 2014 than it was for 2013 at this point last year (74% hedged in 2014 this year compared to 84% hedged in 2013 last year) basically, NRG is choosing to stay more open on its fundamental view that prices are too low. That said, to the upside from 2013 should be a lack of extended outage at STP, no expected commercial optimization losses, more GEN synergies realized and a return to normal weather. NRG still sees $1B or so of excess cash for YE13. We believe NRG will use this for more asset purchases that should enhance value. Quarter hurt by retail, weather NRG reported 2Q13 EBITDA of $594M, a miss vs consensus of $663M. Retail was down meaningfully in the quarter, by $79M driven by mild weather and margin pressure at Mass & C&I. EBITDA in the Texas wholesale segment was down $111M driven by lower realized average prices and less gas volumes driven by less coal to gas switching than Other segments are harder to compare y-o-y as this quarter includes GEN assets. NY was strong for NRG with higher capacity revenue and better hedge pricing. $31 PT includes $4 of value for NYLD; adjusting estimates for hedging Our current $31 PT includes $4/sh valuation uplift for NYLD; our base valuation for NRG uses a 9x EV/EBITDA multiple, consistent with its peers. We had adjusted our estimates based on updated hedging disclosures, mainly impacting our estimates. Our E Wolfe Research EBITDA is now $2.64B, $2.91B, $2.75B and $2.72B. Our prior estimates were $2.64B, $2.87B, $2.75B and $2.72B. Estimates / Valuation (US$ in millions) 2013E 2014E 2015E 2016E EBITDA $2,639 $2,909 $2,757 $2,716 EBITDA (Mark to Market) $2,506 $2,806 $2,581 $2,550 Consensus $2,691 $2,887 $2,740 $2,717 EV/EBITDA 8.4x 7.3x 7.4x 7.2x EV/EBITDA (Mark to Market) 8.8x 7.6x 7.9x 7.6x Free Cash Flow Yield 10.1% 13.4% 13.8% 14.0% Trading and Fundamental Data Target Price $ 31 Current Price $ Week Range $ 17 - $ 29 Market Cap. ($MM) $ 8,498 Share Out. (MM) Dividend Yield 1.71% Dividend Payout Ratio 7.5% ROE 5.7% Debt to Cap 59.6% Avg Daily Vol (ooo) 4,289 Price Performance YTD LTM NRG US Equity 15% 26% Utility Index 10% 2% S&P % 20% $35 $30 $25 $20 $15 $10 $5 Key Changes (US$ in M) Current Previous 2013E EBITDA $2,639 $2, E EBITDA $2,909 $2, E EBITDA $2,757 $2, E EBITDA $2,716 $2,717 Steven Fleishman (646) Sfleishman@WolfeResearch.com Naaz Khumawala (646) NKhumawala@WolfeResearch.com DO NOT FORWARD DO NOT DISTRIBUTE DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications, Important Disclosures and Other Disclosures. WolfeResearch.com Page 1 of 7

2 08/10/12 09/10/12 10/10/12 11/10/12 12/10/12 01/10/13 02/10/13 03/10/13 04/10/13 05/10/13 06/10/13 07/10/13 NRG ENERGY NRG Energy Snapshot Exhibit 1: Financial Summary Financial Summary 2013E 2014E 2015E 2016E EBITDA (WR Estimates) $2,639 $2,909 $2,757 $2,716 EBITDA (MTM Estimates) $2,506 $2,806 $2,581 $2,550 Diluted Shares Outstanding Market Capitalization $8,485 $8,210 $7,661 $7,112 Dividend Yield 1.7% 1.8% 1.8% 1.8% Cash Flow From Operations $1,750 $1,872 $1,720 $1,659 Net Debt $13,586 $13,145 $12,738 $12,382 Enterprise Value (unadjusted) $22,070 $21,355 $20,399 $19,494 Valuation Metrics (un-adjusted) EV/EBITDA (with solar) 8.4x 7.3x 7.4x 7.2x EV/EBITDA (ex solar) 7.5x 6.6x 7.0x 6.8x FCF Yield 10.1% 13.4% 13.8% 14.0% Credit Metrics Net GAAP Debt/Capitalization 57.5% 57.1% 57.0% 57.1% FFO/Net Debt 12.9% 14.2% 13.5% 13.4% Segment EBITDA 2013E 2014E 2015E 2016E Wholesale $1,785 $1,920 $1,746 $1,675 Retail Solar Adj. EBITDA $2,639 $2,909 $2,757 $2,716 Exhibit 2: Modeling Assumptions Capital Spending 2013E 2014E 2015E 2016E Maintenance $463 $420 $415 $415 Environmental Growth Solar Baseload Hedges ERCOT (Houston Zone) 2013E 2014E 2015E 2016E Hedged Price ($/MWh) $43.00 $41.50 $41.00 $40.00 Wtd Avg Open Price ($/MWh) $35.50 $41.03 $43.58 $44.23 Wtd Avg Realized Price ($/MWh) $42.10 $41.38 $42.65 $43.51 PJM-West (legacy GEN) Hedged Price ($/MWh) $50.00 $50.00 $46.00 $46.00 Wtd Avg Open Price ($/MWh) $36.05 $35.98 $36.81 $38.35 Wtd Avg Realized Price ($/MWh) $43.55 $43.94 $41.42 $42.56 Generation by Region (TWhs) Total Company description Based in Princeton, New Jersey, NRG Energy is one of the largest competitive power generation companies in the US. The company has ~45 GW of installed capacity, with a big presence in Texas, PJM, Southeast, Northeast and California. NRG also has a large retail business, particularly in Texas, and serves 2.2M customers. Finally, NRG also has a large solar portfolio with over 500MW of installed generation. In December 2012, NRG acquired GenOn Energy, in a stock for stock deal. Investment Thesis We like NRG s wholesale portfolio, particularly in Texas and strong FCF profile. NRG offers investors exposure to an integrated retail/ wholesale generation strategy, attractive growth opportunities and a commitment to return capital to shareholders. We believe NRG has upside from NRG Yield, its contracted gen spin and the GEN acquisition through increased synergies and potentially growing its retail footprint in the NE. Valuation Our $31 PT is primarily based on our sum-of-the- parts valuation, which uses an 9x EBITDA multiple to our adjusted 2015 wholesale EBITDA estimate. We apply a 7x EBITDA multiple to retail given its baseload generation support. We value NYLD at $4/sh. Downside risks to our price target are NRG's exposure to volatile capacity and commodity prices, retail margin pressure, and environmental liabilities and costs. Upside risks include higher commodity prices, development of a Texas capacity market. Exhibit 3: 2015E EBITDA by Segment Retail 24% Solar 12% Wholesale 64% Exhibit 4: Performance Chart $35 $30 $25 $20 $15 $10 $5 WolfeResearch.com Page 2 of 7

3 12/27/12 1/27/13 2/27/13 3/27/13 4/27/13 5/27/13 6/27/13 7/27/13 12/27/12 1/27/13 2/27/13 3/27/13 4/27/13 5/27/13 6/27/13 7/27/13 $/MWh $/MWh NRG ENERGY Highlights from NRG s earnings call Below are highlights from NRG s 2Q earnings call: Lowering 2013 EBITDA guidance, trimming FCF: NRG lowered its 2013 guidance to $2.55-$2.7B down from $2.615-$2.815B. The reduction in guidance is due to mild Texas weather which impacted wholesale and retail volumes. The mild weather also pushed down power prices. NRG had lowered its retail guidance for both 2013 and 2014 by $75M in late June due to margin pressure, particularly in its C&I segment. NRG s 2013 FCF guidance is $1.05-$1.2B down slightly from $1.05-$1.25B given at the end of June. NRG did lower its maintenance and environmental capex by about $80M to preserve as much of its FCF range as possible. NRG maintains 2014 guidance, but we believe could be under pressure. NRG maintained its 2014 EBITDA guidance of $2.85-$3.05B and FCF range of $1.1-$1.3B. However, we believe NRG may be towards the current end of the range based on current power forwards. PJM West 7x forwards are down around 3% since the end of June and ERCOT Houston 2014 forwards are down almost 6%! That said, there are some drivers that give upside over 2013 which include a lack of extended outage at STP, no expected commercial optimization losses, more GEN synergies realized and a return to normal weather. Exhibit 5: x24 PJM West forwards $42 Exhibit 6: x24 ERCOT Houston forwards $46 $41 $40 $39 $38 $37 $36 $35 $44 $42 $40 $38 $36 $34 Source: Platts, Wolfe Utilities & Power Research, goes through 8/1/2013 Source: Platts, Wolfe Utilities & Power Research, goes through 8/1/2013 Hedging increased, but below historic levels: NRG increased its gas and heat rate hedging to 74% and 51% in 2014 and 36% and 44% in 2015, respectively. This is up from 66% and 46% in 2014 and 30% and 33% in Despite the increase, NRG is still more open than it has been in the past at this time last year, NRG was 84% hedged for We believe NRG is choosing to stay more open for now given the current weak prices. NRG has indicated its fundamental price estimates are higher. WolfeResearch.com Page 3 of 7

4 Texas power prices suffering from weather, lack of regulatory action. TX power prices are much more weather sensitive than anywhere else in the country power prices have declined on mild weather and lack of scarcity pricing. However, the entire forward curve has come down in sympathy as well, as even on hot days the grid has managed to hold up. o Last week, Texas had its third highest demand day on record, but power prices remained stubbornly low, as the grid did not experience any shortage or plant outages. NRG has seen higher wind in the system (which CPN also discussed) pressuring the system. Texas power prices are also suffering from lack of regulatory action. On the energy side is the Interim Solution B+ which will raise power prices along the curve. But, both NRG and CPN advocate for a capacity market which will give certainty to developers looking for a fixed return for a few years. We believe Texas will ultimately adopt a capacity market, but it will not be in place for a few years. Retail pressures remain: As we discussed above, NRG is seeing margin pressure at its retail segment. Higher operating costs and increased competition are squeezing margins at both Mass and C&I. NRG is embarking on a plan to reduce costs and offer more products to attract customers, but overall we do not see retail margins returning to historical levels near-term. That said, the recent phenomenon of hot weather but low power prices will benefit NRG s retail system this year. $1B of excess cash flow creates opportunity. NRG will have about $1B of excess cash by YE13. While we had expected this number to be higher given the proceeds from the NRG Yield IPO ($462M), NRG has taken steps to pay down more debt than originally indicated, and has increased its acquisitions budget. Compared to 1Q13 guidance, NRG now plans for $555M of deleveraging, compared to $310M previously. In addition, NRG has increased its acquisitions by $103M including the Gregory gas plant and the three solar projects. We believe NRG will use the excess cash for asset purchases that should enhance value, either by increasing power leverage to NRG or to drop-down into NRG Yield. In addition, NRG may also expand its share buyback program at some point. $175M share buyback to complete by YE13. NRG has $175M outstanding under its share buyback plan ($200M total, no shares repurchased in 2Q13). Management indicated it plans to complete its buyback by year-end Model updates We have updated our model for hedge disclosures and margin assumptions. Our new E EBITDA is now $2.64B, $2.91B, $2.75B and $2.72B. Our MTM estimates are $2.51B, $2.81B, $2.58B and $2.55B. Our financial summary and model assumptions are in Exhibits 7-8 below. WolfeResearch.com Page 4 of 7

5 Exhibit 7: Financial Summary Financial Summary 2013E 2014E 2015E 2016E EBITDA (WR Estimates) $2,639 $2,909 $2,757 $2,716 EBITDA (MTM Estimates) $2,506 $2,806 $2,581 $2,550 Diluted Shares Outstanding Market Capitalization $8,485 $8,210 $7,661 $7,112 Dividends Per Share $0.45 $0.48 $0.48 $0.48 Dividend Yield 1.7% 1.8% 1.8% 1.8% Cash Flow From Operations $1,750 $1,872 $1,720 $1,659 Net Debt $13,586 $13,145 $12,738 $12,382 Enterprise Value (unadjusted) $22,070 $21,355 $20,399 $19,494 Valuation Metrics (un-adjusted) EV/EBITDA (with solar) 8.4x 7.3x 7.4x 7.2x EV/EBITDA (ex solar) 7.5x 6.6x 7.0x 6.8x FCF Yield 10.1% 13.4% 13.8% 14.0% Credit Metrics Net GAAP Debt/Capitalization 57.5% 57.1% 57.0% 57.1% Net Debt/EBITDA 5.1x 4.5x 4.6x 4.6x FFO/Net Debt 12.9% 14.2% 13.5% 13.4% EBITDA/Interest Expense 2.7x 3.0x 3.0x 3.0x Segment EBITDA 2013E 2014E 2015E 2016E Wholesale $1,785 $1,920 $1,746 $1,675 Retail Solar Adj. EBITDA $2,639 $2,909 $2,757 $2,716 Segment EBITDA 2013E 2014E 2015E 2016E Northeast Region $106 $138 $138 $122 South Central Region Texas Region Western Region International Thermal Retail Solar Marketing and Trading Other & Tolls (8) (1) California PJM East PJM West Other Adj. EBITDA $2,639 $2,909 $2,757 $2,716 Exhibit 8: Model Assumptions Capital Spending 2013E 2014E 2015E 2016E Maintenance $463 $420 $415 $415 Environmental Growth Solar Total $889 $772 $664 $664 Baseload Hedges ERCOT (Houston Zone) 2013E 2014E 2015E 2016E Hedged Price ($/MWh) $43.00 $41.50 $41.00 $40.00 Wtd Avg Open Price ($/MWh) $35.50 $41.03 $43.58 $44.23 Wtd Avg Realized Price ($/MWh) $42.10 $41.38 $42.65 $43.51 ERCOT (North Zone) Hedged Price ($/MWh) $43.00 $41.50 $40.00 $39.00 Wtd Avg Open Price ($/MWh) $31.97 $39.48 $42.23 $43.11 Wtd Avg Realized Price ($/MWh) $41.68 $40.98 $41.42 $42.41 South Central % Hedged 100% 100% 80% 80% Hedged Price ($/MWh) $35.00 $33.00 $35.00 $35.00 Wtd Avg Open Price ($/MWh) $30.82 $30.74 $31.62 $32.43 Wtd Avg Realized Price ($/MWh) $35.00 $33.00 $34.32 $34.49 New York Zone A Hedged Price ($/MWh) $43.00 $41.50 $42.00 $42.00 Wtd Avg Open Price ($/MWh) $38.36 $37.09 $37.83 $38.62 Wtd Avg Realized Price ($/MWh) $42.44 $40.35 $39.33 $39.19 PJM-E (legacy GEN) Hedged Price ($/MWh) $70.00 $80.00 $72.75 $72.75 Wtd Avg Open Price ($/MWh) $41.98 $42.10 $42.91 $44.05 Wtd Avg Realized Price ($/MWh) $67.48 $59.16 $50.67 $51.51 PJM-West (legacy GEN) Hedged Price ($/MWh) $50.00 $50.00 $46.00 $46.00 Wtd Avg Open Price ($/MWh) $40.70 $41.36 $42.14 $43.17 Wtd Avg Realized Price ($/MWh) $49.16 $45.25 $43.14 $43.90 AD-Hub (legacy GEN) Hedged Price ($/MWh) $44.00 $50.00 $46.00 $46.00 Wtd Avg Open Price ($/MWh) $36.05 $35.98 $36.81 $38.35 Wtd Avg Realized Price ($/MWh) $43.55 $43.94 $41.42 $42.56 Fuel Price Drivers Nymex Natural Gas ($/MMBtu) $3.75 $4.10 $4.25 $4.50 Uranium ($/MWh) $7.25 $7.50 $7.50 $7.50 Texas Coal ($/MMBtu) $2.37 $2.40 $2.41 $2.42 Northeast Coal ($/MMBtu) $3.27 $3.10 $3.23 $3.35 PJM-W Coal ($/MMBtu) $3.31 $3.32 $3.53 $3.81 PJM-E Coal ($/MMBtu) $3.64 $3.90 $4.18 $4.45 Generation by Region (TWhs) Northeast Region South Central Region Texas Region Western Region Other & Tolls California PJM East PJM West Total WolfeResearch.com Page 5 of 7

6 DISCLOSURE SECTION Analyst Certification: The analyst of Wolfe Research, LLC primarily responsible for this research report whose name appears first on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the research analysts personal views about the subject securities or issuers and (ii) no part of the research analysts compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this report. Note: OP = Outperform; PP = Peer Perform; UP = Underperform Wolfe Research, LLC Fundamental Valuation Methodology: Company: Fundamental Valuation Methodology: NRG US Equity EV/EBITDA, sum of parts Wolfe Research, LLC Fundamental Target Price Risks: Company: Fundamental Target Price Risks: NRG US Equity commodity prices, government intervention Wolfe Research, LLC Research Disclosures: Company: Research Disclosures: NRG US Equity None Other Disclosures: Wolfe Research, LLC Fundamental Stock Ratings Key: Outperform (OP): Peer Perform (PP): Underperform (UP): The security is projected to outperform analyst's industry coverage universe over the next 12 months. The security is projected to perform approximately in line with analyst's industry coverage universe over the next 12 months. The security is projected to underperform analyst's industry coverage universe over the next 12 months. Wolfe Research, LLC uses a relative rating system using terms such as Outperform, Peer Perform and Underperform (see definitions above). Please carefully read the definitions of all ratings used in Wolfe Research, LLC research. In addition, since Wolfe Research, LLC research contains more complete information concerning the analyst s views, please carefully read Wolfe Research, LLC research in its entirety and not infer the contents from the ratings alone. In all cases, ratings (or research) should not be used or relied upon as investment advice and any investment decisions should be based upon individual circumstances and other considerations. Wolfe Research, LLC Sector Weighting System: Market Overweight (MO): Expect the industry to outperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Market Weight (MW): Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the U.S.) over the next 12 months. Market Underweight (MU): Expect the industry to underperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Wolfe Research, LLC Distribution of Fundamental Stock Ratings (As of June 30, 2013): Outperform: 42% 4% Investment Banking Clients Peer Perform: 43% 0% Investment Banking Clients WolfeResearch.com Page 6 of 7

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