Citi: Sell NRG On Lower Coal Fleet Valuation

• Shares of NRG Energy Inc NRG have been treading a southward path in 2015 and are down 54 percent year-to-date.
• Citi’s Praful Mehta initiated coverage of the company with a Sell rating and a price target of $11.
• The company faces several challenges but its ability to implement the Reset strategy holds the key, Mehta mentioned.

Analyst Praful Mehta mentioned that the valuation of NRG Energy’s coal fleet is expected to be low, given the bearish stance on the average life of coal power plants in the US at around 15yrs. This indicates that the company should take up deleveraging in the near term.

The company’s gas assets should be valued at a 7.5x multiple, given their longer asset life and higher conversion levels, Mehta added.

The analyst expects NRG Energy’s 2017 EBITDA to decline versus 2016 as the company’s current hedges are $5-$10 MWh above forward curves.

The company’s retail business is performing well and continues to generate robust cash flow even as competition intensifies.

“With generation's EBITDA declining, NRG's recourse debt is now partially supported by the retail business. Retail's ability to manage increasing volatility now takes on heightened importance,” the Citi report noted.

Mehta believes that NRG Energy should reassess its leverage targets in-line with their asset life views and target leverage for retail. Although the company has identified the challenges facing it, its ability to face them is important.