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NRG Energy Inc. (NRG - Analyst Report) reported net loss of 1 cent per share in the third quarter of 2012, way below the Zacks Consensus Estimate of earnings of 53 cents per share. However, the results were narrower than the year-ago loss of 24 cents per share.

Operational Highlights

NRG Energy's total operating revenue of $2.33 billion in third-quarter 2012 decreased 12.8% from $2.67 billion in the year-ago quarter. Also, the quarterly revenue fell short of the Zacks Consensus Estimate of $2.89 billion.

Adjusted EBITDA during the quarter was $657 million, significantly up 43.4% year over year.

NRG Energy's third quarter 2012 total operating expenses decreased 14.7% year over year to $2.25 billion. Decline in revenue was offset by a decline in operating expenses that resulted in a 100% year-over-year increase in operating income to $86 million. Interest expenses were $163 million versus $164 million in the prior-year quarter.

Segment Details:

Conventional Power Generation: Segment includes the erstwhile Texas, Northeast, South Central, West segments and Other (comprising international businesses, thermal and chilled water business and maintenance operations). This segment reported third-quarter 2012 adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $460 million compared with $322 million in the year-ago quarter.

Retail Businesses: This segment reported EBITDA of $173 million in the third quarter of 2012 compared with $145 million in the prior-year period.

Alternative Energy: This segment’s adjusted EBITDA in the third quarter of 2012 was $24 million compared with a loss of $5 million in the year-ago quarter.

Corporate activities: This segment reported a breakeven EBITDA versus a loss of ($4) million in the prior-year quarter.

Financial Update

Cash and cash equivalents as of September 30, 2012 were $1.61 billion compared with $1.11 billion as of December 31, 2011.

As of September 30, 2012, long-term debt and capital leases were approximately $11 billion versus $9.75 billion as of December 31, 2011.

During the quarter, the company issued 6.625% Senior Notes due 2023 worth $990 million. It will utilize the net proceeds for the redemption of 2017 notes.  This refinancing will reduce corporate debt and also decrease annual interest expenses, which will in turn, allow the company to invest more opportunistically in growth initiatives while improving its ability to efficiently return capital to its investors.

Guidance

The company has narrowed its adjusted EBITDA guidance in the range of $1,875 to $1,925 million versus its prior expectation of $1,825 to $2,000 million. The guidance reflects unfavorable weather condition. For 2013 and 2014, the company maintained its guidance and expects it to be in the range of $1.7–$1.9 billion.

For full-year 2012, the company expects free cash flow before growth investments to be in the range of $900 to $950 million versus its prior expectation of $800 to $1,000 million. In 2013, the company expects free cash flow in the range of $650 million to $850 million. It expects free cash flow to be in the range of $500 million to $700 million in 2014.

Peer Comparison

One of the NRG Energy’s peers DTE Energy Company (DTE - Analyst Report) reported third-quarter 2012 earnings per share of $1.31, easily beating the Zacks Consensus Estimate by 19 cents. Results improved 22.4% year over year. Total revenue of DTE Energy in the third quarter of 2012 was $2.21 billion, declining 2.6% year over year. The reported quarter’s revenue also missed the Zacks Consensus Estimate of $2.36 million.

Our Take

NRG Energy has a diverse portfolio of electric generation facilities in terms of geography, fuel type and dispatch levels, which helps to mitigate risks associated with fuel price volatility and market demand cycles. The company has a solid growth strategy which emphasizes on innovation and maintenance of a rich resource portfolio. NRG Energy consistently generates significant free cash flow, driven by its robust hedging profile.

However, we remain concerned about the potential downside risks, which include pressure of regulation compliance, failure to acquire high quality contracts, and unexpected outages. Moreover, New Jersey was one of the major areas of focus of Sandy Hurricane. Therefore, the company could be affected by its negative impacts going forward. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Based in Princeton, New Jersey, NRG Energy Inc. 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; the sale of energy, capacity, and related products in the United States and internationally; and the supply of electricity and energy services to retail electricity customers in the Texas market.

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