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NRG Energy Upgraded to Neutral

NRG AES

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NRG Energy Inc.’s (NRG - Analyst Report) flagship retail outlet Reliant is anticipated to be a major revenue churner for the company and will lead to net customer additions in the coming years. The company’s solar business also looks promising with its Agua Caliente officially becoming the largest operating solar PV plant in the US. We thus upgrade our recommendations on NRG Energy Inc. from Underperform to Neutral.

The company had nevertheless reported in the red in the first quarter of 2012. Pro forma loss of 92 cents per share in the reported quarter narrowed the $1.06 per share loss in the year-ago period. Despite lackluster earnings, the company’s solid growth strategy and its diverse portfolio of generation assets will offer a cushion against fuel price volatility and market demand cycles.

NRG’s hardened focus on keeping a strong capital source would enable smooth operation and speedy execution of its high quality projects. These projects include the Texas gas fleet, El Segundo Repowering Project and the Encina Plant. The increased capacity generation from these endeavors would lead to greater profitability.

Going forward, the company’s robust hedging profile would add to its cash flow visibility. NRG’s commitment of retaining a strong financial position and flexible liquidity would strengthen its well-balanced market profile. In addition, the company is constantly devising means to enhance security measures which will drive superior operating results and maintain its solid track record.

Conversely, NRG’s overt dependence on coal-fired baseload power plants makes it susceptible to risks on the environmental front. We believe the operational costs of coal plants are bound to rise over the long term in one way or the other.

Failure to properly modernize transmission infrastructures and restrictive transmission price regulation could also decrease the company’s availability of adequate transmission capacity. This would lead to inefficiencies in end user services.

Generic downside factors like sudden plant outage, fuel supply disruption or reduction in the available capacity of a unit could increase the company’s financial burden. Besides, weather irregularities could affect power demand limiting the company’s earnings potential.

NRG maintained its 2012 adjusted EBITDA guidance in the range of $1,825 million to $2,000 million. The 2012 guidance for free cash flow was also reaffirmed at $800 million to $1,000 million.

The company also expects to pay a quarterly dividend of 36 cents per share, with the first payment likely to be made during third quarter 2012. The Zack Consensus Estimates for the second quarter and full-year 2012 are currently pegged at 21 cents per share and 86 cents per share, respectively.
 
NRG Energy holds a Zacks #2 Rank, which translates into a short-term Buy Rating. The company’s closest competitors are The AES Corporation (AES - Analyst Report) and GenOn Energy, Inc. .

Based in Princeton, New Jersey, NRG Energy is a wholesale power generation company engaged in the ownership, development, construction, and operation of power generation facilities. The company is also involved in the trade of fuel and transportation services; and the sale of energy, capacity, supply of electricity and related products in the United States and internationally.

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