NRG Energy Continues Cost Savings, Compliance Cost A Woe

NRG Energy (NYSE:NRG) will continue with its cost-savings initiative in 2017, which actually resulted in cost savings in excess of $500 million in 2016. However, to meet government regulations in its coal-fired generation units, the company will have to incur additional expenditures.

The cost-saving initiatives, serving a wide variety of customers, expansion of renewable portfolio and strategic asset drop-down program are going to drive performance.

The company is expected to enjoy the same benefit from cost savings in the current year as in the previous year. NRG Energy provides electricity to a wide variety of customers, none of whom accounted for more than 10% of its revenues in 2016. Since the company does not depend on a single customer to generate revenues, migration of consumers to other operators is not going to have a significant impact on its earnings.

During the first quarter of 2017, the company dropped down a few assets to NRG Yield, which generated cash of $130 million. The company decided to drop down its remaining 25% interest in a large portfolio of wind assets from the ROFO pipeline to NRG Yield as well. NRG Energy is gaining from its asset drop-down program that is in sync with its long-term growth strategy.

Despite implementing several pollution-control measures at its power generating facilities, the company has to invest nearly $134 million during the 2017–2021 time period to meet government regulations in its coal-fired generation units.

Intense competition in the wholesale power markets may hurt NRG Energy’s margins. In addition, a number of its “merchant” facilities function without long-term power sales agreements and are influenced by market price fluctuations. Since there is no guarantee that the power generated from these units will be sold at commercially attractive rates, profitability from the merchant business is uncertain.

Price Movement

Shares of NRG Energy gained 43.1% in the last six months compared with the Utility-Electric Power industry’s gain of 12.5%.

We believe that the company’s cost-saving initiatives, providing service to a wide variety of customers, expansion of renewable portfolio and strategic asset drop-down program will boost its performance.

Zacks Rank and Stocks to Consider

NRG Energy currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the utility space are Brookfield Infrastructure Partners LP (NYSE:BIP) , Unitil Corporation (NYSE:UTL) and Avangrid, Inc. (NYSE:AGR) . All of them currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Brookfield Infrastructure Partners reported in-line earnings in the first quarter of 2017. Its 2017 earnings estimates moved up 2.5% to $3.22 in the last 60 days.

Unitil Corporation reported a positive earnings surprise of 2.33% in the first quarter of 2017. Its 2017 earnings estimates moved up 0.9% to $2.09 in the last 60 days.

Avangrid reported a positive earnings surprise of 7.35% in the first quarter of 2017. Its 2017 earnings estimates moved up a penny to $2.21 in the last 60 days.

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