NRG - NRG Energy

[bttmline]

NRG Energy: mostly wholesale energy provide in US.  Looks interesting > 20% FCFY. Close to 52 Week low.

 

Just started my homework the other day and interested to see if anyone else has looked at it yet.  Buffett has a position of +/- 7 million shares.

 

They don't pay a dividend, so probably not interesting to many utility focused funds.

 

investor relations:

http://phx.corporate-ir.net/phoenix.zhtml?c=121544&p=irol-irhome

[turar]

I looked at it a little bit. Overall it looked interesting at higher price, but it was just a little over my head -- couldn't understand a lot of the things that were talked about in the call.

 

I think it's kind of a play on natural gas, they have it locked at higher prices until 2014. From the call it seems their nuclear project isn't going anywhere either, and they pretty much pulled out for now. Dividend would be a good catalyst probably. I need to take a better look again.

[rranjan]

FCF when adjusted for debt is not anywhere close to 20%. Back of the envelop calculation puts it even below 10%.

[twacowfca]

We had a large holding position in NRG during the financial meltdown, and I came to understand it fairly well.  There was a serious acquisition  offer that helped NRG resist the market meltdown.  We bought when it was in the teens and low 20's and rotated out for a small profit in the first Q of 09 so we could do some bottom fishing in mediocre companies that had lost 85% to 90% of their market value in early March 09.  

 

I think Lou Simpson, rather than Buffett may have bought it.

[UhuruPeak]

We had a large holding position in NRG during the financial meltdown, and I came to understand it fairly well.  There was a serious acquisition  offer that helped NRG resist the market meltdown.  We bought when it was in the teens and low 20's and rotated out for a small profit in the first Q of 09 so we could do some bottom fishing in mediocre companies that had lost 85% to 90% of their market value in early March 09.  

 

I think Lou Simpson, rather than Buffett may have bought it.

 

I too am familiar with the company. David Crane (CEO) is one of the shrewdest managers in the industry; he successfully staved off a buyout attempt from Excelon two years ago, then turned around and 'stole' the second largest electric retailer in Texas (Reliant) for a few month's worth of Reliant's profits.  A few weeks ago he purchased Green Mountain, a specialty retailer focused on renewable energy and just this past week I think he finalized the purchase of a few generation plants.

Basically, electric retailers are the perfect hedge for the generation, since a plan is long power (makes & sells it) while the retailer is short power (needs to sell).  By having both, a company is therefore benefiting from free hedging and sees its capital needs minimized - very important for pricing in the large commercial & industrial segment in particular (LCI gross margins are around $1 or $2 / MWh).

 

I think the company is cheap but still long power overall, so yes it is still basically a call option on Natural Gas - just not as leveraged as others in the market.  Ah - and the Nuclear thing seems mostly dead at the moment but there is also some optionality value here.

[Packer16]

I calc the FCF adjusted for debt closer to 17%.  I use (FCF+IE)/MVIC (Equity plus net debt).  The leveraged FCF is close to 27%.

 

Packer

[bttmline]

That brings up a good discussion that I think was started before, but how does everyone adjust for debt in their analysis. I have a hard time trying to figure how much I should take it into consideration. I.e 10% FCFY w/ zero debt or 20% FCFY w/ debt. NRG is a prime example with about < 3x net debt to ebitda.

[rranjan]

Packer - I have not double checked it but you might be right based on your calculation.  If I remember correctly the leveraged one was coming in 25% range but I usually ignore the leveraged FCF completely.

 

Bttmline - If I am acquiring the whole company then FCF is all I get as an owner but my cost is market price + debt - excess equity. I might have put close to zero value for non-current asset to get my figure.  One of the problems of using any non-standard calculations and then quickly typing one or two lines :)

 

I feel that there are many ways to skin the cat but as long as we know which component goes where, we can feel comfortable with valuation at certain level. I will be more careful in future to put one liner's after doing some calculation in my head to avoid confusion.

 

Cheers,

[Myth465]

I look at an EV yield. Then decide if its worth the time. If the EV yield is 10% and the FCF yield is 25% I spend sometime thinking will that debt pose a real problem or is it just an expense / cheap leverage. I also wonder will Mr. Market pay up with that debt overhang. The answer generally lets me know if I should buy or not.

 

I got screwed in 2 cases but it has worked well most other times. With a toll road business, debt is an expense if the entity is well managed. With a declining or cyclical industry  debt can take her down.

[twacowfca]

I calc the FCF adjusted for debt closer to 17%.  I use (FCF+IE)/MVIC (Equity plus net debt).  The leveraged FCF is close to 27%.

 

Packer

 

 

Haven't looked at NRG recently.  You may want to take a close look at their FCF and see if all of it truly is free.  In 08, some uses for their FCF didn't seem to be entirely optional, but perhaps semi required upgrades and uses to make their situation more environmentally friendly -- uses to keep them ahead of the ecco cops that didn't improve their productivity.  With unconventional accounting that looks only at the ultimate impact on their future bottom line, these uses might be thought of as expenses!

 

Nevertheless, Crane is one of the very best CEO's in the industry.  He has demonstrated nimbleness in dodging arrows that constantly fly toward producers with coal fired plants.  If WEB turns his interest back toward electricity generators, that might be a sign that prospects for the industry are improving.  :)

[sdev]

Is this still in the too complicated pile? It continues to creep lower. The CEO appears to be doing everything right at this point. Buying back shares, showing investors where the best ROIC investments for them are and why they are pursuing them, addressing and hitting goals. The bad points I see are low natural gas prices and this nuclear deal falling through. However they seem to be misunderstood with their recent multiple retail power buys providing diversification from that and the nuclear deal isn't a material sunk cost. I think it can be viewed as both a cheap company and a decent takeover target. I haven't purchased any shares yet, still have to find time to go through their complicated 10-k but just wondering if anybody else has looked at this again.

[UhuruPeak]

I haven't purchased any shares yet, still have to find time to go through their complicated 10-k but just wondering if anybody else has looked at this again.

 

I have it on my watch list; the only reason I can think of for the share price is how low natural gas is going - but then, Constellation (CEG)'s share price is holding up pretty well, over 50% above the level it was at when WEB tried to snap it.  Exelon (EXC) is low too... but Chesapeake not so much. All 4 are essentially call options on the price of natural gas, but NRG & CHK are my favorite to play the NG rebound because better managed.

[bttmline]

I've finally had some time over the past week and spent quite a good amount of time reviewing past years. Very comfortable with CEO and capital allocation decisions. As discussed, they paid +/- $250 million for Reliant Energy (Retail Business) and this yr it contributed over $600 million in EBITDA. I don't know why everyone is so focused on the Nuclear deal. They have +/- $350-400 Million already spent on the project and now they only spend about $1.5 million a month to support it. If it dies its not that big of a deal for a company that is going to have $2.5 billion EBITDA and +/- $1 Billion in FCF in  in 2011.

My only issue so far is that I'm not an energy expert and need time to study competitors. Hedging makes it more complicated to understand, but they have a good track record since new CEO (2004). My initial impression on them compared to industry is favorable. They seem more conservative than others. I.e. Baseload generation makes up a large portion of their earnings and now matching the wholesale and retail in Texas market. Currently, Solar is a great business with the US Fed incentives. Not sure how long it last, but they are locking in 20 yr agreement, so doesn't matter.

[menlo]

If I read the 9/30/10 filings correctly, Berkshire sold their entire position.

 

[ftp=ftp://http://www.nasdaq.com/asp/holdings.asp?FormType=Institutional&symbol=NRG&selected=NRG]http://www.nasdaq.com/asp/holdings.asp?FormType=Institutional&symbol=NRG&selected=NRG[/ftp]

[bttmline]

Correct, they sold out completely, but it seems it was a Lou Simpson position which they are cleaning up.

[twacowfca]

I haven't purchased any shares yet, still have to find time to go through their complicated 10-k but just wondering if anybody else has looked at this again.

 

I have it on my watch list; the only reason I can think of for the share price is how low natural gas is going - but then, Constellation (CEG)'s share price is holding up pretty well, over 50% above the level it was at when WEB tried to snap it.  Exelon (EXC) is low too... but Chesapeake not so much. All 4 are essentially call options on the price of natural gas, but NRG & CHK are my favorite to play the NG rebound because better managed.

 

One problem with NRG is that rates in Texas are set and based on the price of natural gas.  When the gas price is low for an extended period, there is only so much that hedging will help.  If the price of natural gas continues to be low, this will be a drag because most of their fuel cost is based on long term contracts for coal.  They are a low cost producer, but subject to increasing regulatory risk.  However, it's hard to exploit their low cost generation advantage as long as there is a supply imbalance in natural gas.

[finetrader]

Haven't looked at NRG recently.  You may want to take a close look at their FCF and see if all of it truly is free.  In 08, some uses for their FCF didn't seem to be entirely optional, but perhaps semi required upgrades and uses to make their situation more environmentally friendly -- uses to keep them ahead of the ecco cops that didn't improve their productivity.  With unconventional accounting that looks only at the ultimate impact on their future bottom line, these uses might be thought of as expenses!

 

 

Just looked at this company and I have a hard time with the growth investment

 

check p.51:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzQzOTMyN3xDaGlsZElEPTQwMjY1M3xUeXBlPTI=&t=1

 

a lot of these 'growth investment' don't seems to add a lot of additionnal production or revenue (i.e. additionnal MW or additionnal customer)

 

Seems to me that FCF is closer to 500M-600M$ than 1000M$

 

 

 

 

 

 

[bttmline]

finetrader: I agree you can put some question marks next to 1billion, but they are real projects that they are investing in. The $178 was towards the nuclear project, which after this quarter spent goes down to $18million annual until a decision is made. As for $170 towards solar, I'm completely comfortable with that as an investment. The structure of solar deals is very attractive. +/- 20 yr agreements with locked in rates to strong credit end users(typically power companies) with project level financing. Typically the construction time-line is very short and not very complicated. You can lock in 15% returns with potential upside if energy regulations become more stringent. 

[finetrader]

I think you're right, solar investment look attractive!

600M equity investment in 4 years to get 175 EBITDA contribution,

that compare to the actual 8000M$ in book value producing about 2000M$ EBITDA

 

p.28

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzQzOTMyN3xDaGlsZElEPTQwMjY1M3xUeXBlPTI=&t=1

 

so maybe it is cheap at this price... will dig further

 

 

[twacowfca]

I think you're right, solar investment look attractive!

600M equity investment in 4 years to get 175 EBITDA contribution,

that compare to the actual 8000M$ in book value producing about 2000M$ EBITDA

 

p.28

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzQzOTMyN3xDaGlsZElEPTQwMjY1M3xUeXBlPTI=&t=1

 

so maybe it is cheap at this price... will dig further

 

 

 

 

Solar just doesn't feel right to me as an earning asset because it's very high cost compared to output.  Also, I think an analysis of the energy required to make, install transport and maintain the expensive generation equipment would reveal that it may not be so Eco friendly after all, given the paltry output per dollar of capex.

 

Nevertheless, it could be profitable with the environmental brownie points and higher rates they may be allowed to charge for this "pure" energy.  How solid are these?  Could they lose these in the future with a change in the way the political wind blows?

[bttmline]

twacowfca: Its a terrible investment if the government didn't subsidize it so much. But the US does and substantially. Both last yr and this year the US govt gives you a check within 60 days of install for 30% of your total project cost. Also, lets your depreciation 100% of install cost in yr 1. Additionally, a majority of the states have renewable energy mandates, that all electric companies must purchase a minimum percentage of production form a renewable energy source. These mandates are typically state laws that are hard to repeal and the energy companies typically have strong lobbies. They don't care too much about the increase pricing that they have to pay for the renewables because they are allowed to pass these fees on to customers either via special assessments or just part calculation of minimum return requirements at rate hearings. 

 

Project Example- I worked on a couple of small deals similar to this

 

$10M Project- 30% cash grant $3M back in 60 days. $7 M net project cost.

$10m- (50% of $3M deprec) = $8.5 deprec basis.

$8.5 deprec charge in 2011 @ 35% tax rate=  $2.975 tax benefit

$7m-$2.975m= $4.025m Net Cost in 2011

Go USA National Debt 

 

 

[finetrader]

bttmline,

 

do you know if the profitability will be the same for the Agua Caliente solar project they acquired from First Solar?

 

 

[bttmline]

I don't know the project specific returns yet. I would assume next conference call we will get more specific project detail. This is all I know. They have a 25-year power purchase agreement with Pacific Gas and Electric. They just received $967 million financing from the government.http://www.reuters.com/article/idUS334626584320110120. +/- $1.5 billion dollar project.

 

I can tell you that all solar deals done in the united states this year qualify for 30% grant and 100% depreciation. Not positive on this specific project because of when construction starts.

[txlaw]

Some interesting NRG-related news:

 

http://www.statesman.com/news/local/offer-to-austin-swap-coal-for-nuclear-power-1226328.html

 

http://www.reuters.com/article/2011/02/03/us-ercot-blackouts-idUSTRE7127CM20110203

 

[mevsemt]

I wanted to pick this thread back up and see if there are any new thoughts on NRG...

 

After the Japanese disaster made NRG's nuclear project unfeasible it looks like management has refocused their efforts on returning cash to shareholders (buybacks and maybe even dividends).  IMO this is a positive development for shareholders - does anyone else have an opinion?