NRG 3Q2017: As economy rises-up from ashes, feels like NRG’s poised to take flight

Reported 3Q17 AEPS of $0.78 vs. our $0.74 and consensus of $1.01
Revised commodity price curve, which resulted in higher NIV but slightly lower estimates
Raising ST-Target/share to $35 from $30 on strength of rising economy
NRG has done a great job of realigning its strategy starting with GenOn and moving-on to its B/S management, and now its strategic overhaul. We believe these are all the right moves, and we expect that these will translate into further upside for NRG.
With new strategy, we’d also expect that NRG can reduce its hedging exposure but NRG has yet to disavow share buybacks
We’re intrigued and titillated by potential of Boston Energy Trading and Marketing (BETM like “bet ‘em”)
As expected, it appears NRG will sell 100% of NYLD with rest of its renewable portfolio and believe that NRG would be successful without both
We look for NRG to aggressively expand its Retail business, especially in the PJM where it has excess generation relative to retail load, which would also allow it to reduce hedging
We look for continued modest recovery in commodity fundamentals and macro-economic tail wind to pick-up
We like aggressive debt repay and cost cutting efforts. Successful asset sales would be ST driver.
ST we expect proceeds to be applied to debt repay, but MT it is likely to be redeployed to acquisitions and other growth projects

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NRG 2Q2017 Earnings: Decks are cleared, execution at forefront; waiting for results to rise-up

Completed major overhaul of model to eliminate GenOn, GenOn debt, incorporate Retail gas business, and flattened out our commodity price curve. Net result is that estimates flattened but our NIV/share remains at some $40/share. Also, raising our ST-Target to $30/share from $22/share. NRG has done a great job of realigning its strategy starting with GenOn and moving-on to its B/S management, and now its strategic overhaul. We believe these are all the right moves, and we expect that these will translate into further upside for NRG. With new strategy, we’d also expect that NRG can reduce its hedging exposure but NRG has yet to disavow share buybacks. We’d still like NRG to officially and separately reestablish customer-based marketing and trading business through bankruptcy-remote sub with strong, consistent and vigorously enforced risk-management policies. We believe that NRG will sell NYLD with the rest of its renewable portfolio and believe that NRG would be successful without both. We look for NRG to aggressively expand its Retail business, which would also allow it to reduce hedging. We look for continued modest recovery in commodity fundamentals and macro-economic tail wind to pick-up.

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The Logic NY Fed Court Decision to Uphold ZECs is Spurious

The US District Court of the Southern District of New York (Fed District Court) yesterday ruled through New York Southern District Judge Valerie Caproni dismissed all challenges to New York’s Zero Emissions Credit (ZEC) program
The decision by Judge Caproni, though seemingly logical, is actually spurious, in our opinion. The decision was based on the following logic and comparison:
While we do appreciate Judge Caproni’s position and interpretation of the law, we note several inconsistencies in the Judge’s arguments

By acknowledging that financial subsidies do allow otherwise uncompetitive sources of generation to be built, Judge Caproni is acknowledging that financial subsidies do distort market pricing because it increase supply into the market relative to demand, which by definition, ALWAYS NEGATIVELY affects pricing

Conclusion: Therefore, we continue to believe that as the case is appealed to higher judicial authority, we maintain that the most rational outcome is the reversal of both NY and IL subsidies for nuclear power. However,

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We like the Big, Bold strokes that NRG is using to repaint its canvas

We like what we heard on the call, and we’re 100% supportive of this transformative plan
We don’t believe that this is the end, but only the opening act; act two may be some 2-years away

We feel that act 2 will be contingent on the stock price performance over the next 2 years
We believe that the privatization of NRG is NOT off the table

The transformative plan calls for the sale of some 50%-100% of NRG’s interest in NYLD and its renewable assets; we expect 100% to be sold for both NYLD and NRG’s directly-owned renewables

Our expectations would be that a strategic and not a financial buyer would pay the most for these assets and, therefore, would want 100% of NRG’s interests in both
In our opinion, it is unlikely that NYLD goes to one buyer and the rest of NRG’s renewable assets goes to another buyer; we feel that the strategic buyer would want to continue to use the operated assets as a potential source for NYLD growth

Debt is expected to be reduced by some $13B to about $6.5B from some $19B at present; net-debt-to-adjusted-EBITDA is expect to be lowered to some 3.0x from some 6.3x at present
As expected, what remains is its conventional power assets and its Retail business
NRG believes that it would have additional $6.3B in cash proceeds to invest in new assets or new businesses, or available to be returned to shareholders

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NRG Poised to transform itself from a 500lbs pig into a 100lbs ballerina

On Tuesday, June 13, 2017, NRG (about 32.1GW, excluding GenOn) and debtholders of GenOn Energy, Inc. (GEI) and GenOn Americas Generation (GAG) (together GenOn: some 13.8GW) successfully negotiated a Restructuring Settlement Agreement (RSA), which would allow the orderly separation of NRG and GenOn. Summary of the terms and conditions are as follows:

o GEI debt holders to receive 100% of the equity of the reorganized GenOn in lieu of debt repayment upon exiting Chapter 11 reorganization

o GAG debt holders to receive $920 per $1,000 in principal amount of debt, plus accrued interest

o NRG released from or indemnified for any GenOn Mid-Atlantic (GMA) or Reliant Energy Mid-Atlantic (REMA) claims

o Dismissal of all litigation against NRG

o NRG to contribute some $261.3MM upon exit of Chapter 11 reorganization

o NRG to provide continued shared services at a rate of $7MM per month ($84MM annualized) prior to Chapter 11 emergence, and post Chapter 11 emergence, NRG would provide shared services for two additional months at no charge with 2-one month extensions at the option of GenOn for $7MM per month

· We believe the RSA is positive for NRG shareholders in NT-to-MT by eliminating some $2.75B in debt and almost $60MM in annual interest expense

· The RSA also lifts the cloud of uncertainty

· In our opinion, the RSA signals the potential future direction of the company

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Power Company Privatization will Lead to Unintended Consequences

Lately there has been talk about privatizing power companies, including both CPN and NRG, and while we believe that the most rational course for these companies may be to go private – given the lack of “enthusiasm” for these names in the public markets – we are certain that the end result will not be either what the market expects nor what the regulators, politicians and, most of all, what the consumers desire
The assumptions we are making in our analysis are as follows:
Private equity (PE) investors are not unintelligent and will act in their own self-interest
Virtually all of the market (public and private) believe in the theory of “all else being equal”
Market forces move along least resistant path absent paradigm shift, typically externally imposed
As reserve margins dip below 12% market prices become more volatile and margins begin to expand at an accelerated rate
PE investors will be betting on the reduction of debt from internally generated free cash flow and asset sales, supplemented by cost reductions, to increase the equity value of its investments with the option value of changing market dynamics to further boost its rate of return
The first thing that PE investors are likely to do is to make the assumption that the underlying market forces and conditions don’t/can’t/won’t change for the foreseeable future
Based on these underlying assumption, PE investors will be able to figure out which plants they buy will remain profitable, which won’t and which are on the margin

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NRG 1Q2017 Earnings Note

2Q17 is transition quarter until business review and GenOn resolution ||

We blew our 2Q17 estimate by country mile due to generation optimism and wishful thinking on Retail. Moving-up ST-Target to $22/share from $24/share, and NIV/share lowered to $40 from $44. But, we continue to believe upside coming for commodities and Washington policies’ effects should be more positive than face value. We are concerned about potential for headline risk around GenOn financial distress, but we look for positive outcome, and along with Business Review results, should serve as catalysts. We like NRG’s debt pay-down and refinance of some $5.8B of debt due in 2018 to later maturities. We like NRG keeping hedging levels low for 2018/2019. NRG yet to disavow share buybacks. We’d still like NRG to officially and separately reestablish customer-based marketing and trading business through bankruptcy-remote sub with strong, consistent and vigorously enforced risk-management policies. We believe NRG needs to roll-up NYLD, before NRG runs out of drop-downs.

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NRG 4Q2016 Earnings Note

With lot riding on it mgmt seems to be setting strategic review agenda ||

Moving-up ST-Target to $22/share from $19/share, but NIV/share goes down to $44 from $52. We feel that there is upside coming for commodity fundamentals and Washington policies’ effects should be more positive than face value. We are less than thrilled about the potential for headline risk surrounding the potential financial distress of GenOn, but we look for a positive outcome. We like that NRG is paying down debt and refinanced some $5.8B of debt due in 2018 to later maturities. Given strong potential for upside, we’re opposed to high level of hedging, especially in 2018 & 2019, so we like that NRG is keeping hedging levels low for 2018 and 2019. NRG has yet to disavow share buybacks, and we’d still like NRG to officially and separately reestablish a customer-based marketing and trading business through a bankruptcy-remote sub with strong, consistent and vigorously enforced risk-management policies. NRG needs to roll-up NYLD, in our minds, before NRG runs out of drop-down options. It feels like to us that management is attempting to set the agenda for the strategic review.

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NRG 4Q2016 Earnings Quick Note

Management appears to be setting the agenda for strategic review ||

Note: Please note that due to five companies (NRG, CNP, PNM, LNG, SRE) reporting on one day, we will be writing a Quick Note for all of the companies reporting today followed by a full note later in the week

It would seem to us that management is attempting to set the agenda for the strategic review

It would seem that the agenda for the strategic review would be based on objectives laid-out by management for 2016 and 2017. From our perspective, we feel that the strategy preferred by management is the following:

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NRG 3Q2016 Earnings Note

If market’s valuing NRG at such ridiculous levels, it should go private ||

Moving ST-Target to $17 and NIV goes to $52 from $19 and $58, respectively. Retail margins weren’t as robust as expected for 3Q16 causing us to re-evaluate future margins. We feel that there is upside coming for commodity fundamentals. We are less than thrilled about the potential for headline risk surrounding the potential financial distress of GenOn, but we look for a positive outcome. We like that NRG is paying down debt and refinanced some $5.8B of debt due in 2018 to later maturities. Given strong potential for upside, we’re opposed to high level of hedging, especially in 2018 & 2019, so we were pleasantly surprised at the liquidation of some GenOn hedges. And, NRG has yet to disavow share buybacks, and we’d still like NRG to officially and separately reestablish a customer-based marketing and trading business through a bankruptcy-remote sub with strong, consistent and vigorously enforced risk-management policies. NRG needs to roll-up NYLD, in our minds, before NRG runs out of drop-down options. SunEdison renewable portfolio acquisition looks reasonable. 2016E AEBITDA guidance increased, but 2017E AEBITDA guidance lower due to hedge liquidation.

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