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On Jan 21, 2013, we downgraded our recommendation on wholesale power generation company, NRG Energy Inc. (NRG - Analyst Report) to Underperform from Neutral. The company currently has a short-term Zacks Rank #3 (Hold).

Why the Downgrade?

The combined negative impact from fuel price volatility, stringent regulatory compliances and over-reliance on weather conditions drive us to downgrade our recommendation on the stock.

The effects of these negative factors have also been reflected on the Zacks Consensus Estimates. The Zacks Consensus Estimates of a loss of 13 cents per share for first-quarter 2013 and earnings of 57 cents per share for fiscal 2013 reflects a decline of 139% sequentially and 43 % year over year, respectively.

Causes for Concern

Performance of the utility providers, to a great extent, depends on weather patterns of the region and NRG Energy is no exception. Demand for power is sensitive to unpredictable variations in weather conditions. Periods of volatile weather conditions not only affect the demand, but severe weather conditions can cause interruptions in coal production and transportation, thereby increasing the company’s cost of operations.

NRG Energy’s functions primarily depend on its coal-fired base-load power plants to obtain a major portion of its revenues. As a result, the company’s performance lies with several risks related to the environmental issues due to its higher coal exposure.

A number of NRG Energy's “merchant” facilities function without long-term power sales agreements. Therefore, these facilities are influenced by market price fluctuations. As there is no guarantee that power generated from these units will be sold at commercially attractive rates, the company's profitability might get impacted.

Other Stocks to Consider     

Apart from NRG Energy, other utility companies Ameren Corporation (AEE - Analyst Report), Integrys Energy Group Inc. (TEG - Analyst Report) and Wisconsin Energy Corporation (WEC - Analyst Report), are currently performing well and carries a short-term Zacks Rank #1 (Strong Buy).

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