NRG Energy Story Remains All About The Cost Cuts

Clarity on the GenOn Energy Inc settlement and PJM Interconnection auction led UBS analyst Julien Dumoulin-Smith to upgrade NRG Energy Inc NRG Thursday to Buy with a $20 price target.

The GenOn Deal

In May, NRG proposed a settlement with bankrupt subsidiary GenOn that would release NRG from litigation surrounding shared services costs and transfer all GenOn equity to the company’s bondholders.

“We see the proposed GenOn settlement as positive, as the roughly $150 million net cash contribution (plus the assumption of the nearly $120 million underfunded pension plan) is lower than many investors feared given the tangible threats of substantial litigation, notably related to the Shared Services Agreement and previous asset transfers,” Dumoulin-Smith wrote in a Thursday note.

UBS expects the GenOn settlement, which appears to have widespread support, to take effect within the next half year.

Other Factors

Although PJM Interconnection, an electricity grid coordinator that serves 13 states and the District of Columbia, awarded ex-GenOn NRG decreased service capacity for the June 2020 to May 2021 season, the loss was not significant to UBS’ valuation.

“NRG ex-GenOn cleared most if not all of its assets, and the negative impact on revenue was mitigated by the exposure to higher-priced regions,” Dumoulin-Smith wrote. “Further, with the company splitting from GenOn, NRG is decreasing its exposure to lower-priced regions.”

The auction and legal settlement compounded positive sentiment on NRG’s cost-cutting efforts, which are estimated to save about $240 million. UBS sees potential for additional expense reduction, which would yield further upside.

NRG Energy closed Thursday trading up 4.36 percent on the day at $16.76.

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