Shares of NRG Energy are down about 20 percent in the seven months since Exelon announced it intends to buy out the smaller power generation rival. But Macquarie Research believes there’s more upside to NRG than the rest of Wall Street is giving it credit for and that it’s time for a change.
In a research note Tuesday Macquarie notes that NRG has underperformed versus other power producers in the last six months or so, in part due to the looming threat of Exelon’s hostile takeover bid. But the research firm says the pending climate change legislation may bode relatively well for NRG initially, that its two new nuclear reactor projects appear to be on track for federal loan guarantees and that its recent acquisition of Reliant Energy’s retail electric business should have a positive impact.
Those factors and others “…makes us believe that it will take much more than the 0.485 stock exchange ratio for the EXC-NRG merger to get done.”
A quick reminder of why we should care in Houston: NRG owns many of the power plants around here and as the owner of Houston-based Reliant Energy employs about 2,700 people here.
Macquarie on carbon legislation and NRG:
Carbon impact should be lower than expected: The most recent version of the American Clean Energy and Security Act assumes that coal-fired power generators, such as NRG, would receive 40% of carbon emission allowances for free, with truly reduced CO2 emission caps only after 2025. Combined with new nuclear and other “clean” projects, we now believe that the impact of carbon could actually be positive during the next decade, though the impact is most likely negligible.
On the nuclear projects:
Nuclear capex may be real: With NRG’s two new nuclear units selected as finalists for DOE loan guarantees, it is likely the projects will move forward. Announcements of PPAs and equity sell-downs in those future nuclear units would quantify the value of this capex to NRG and largely reduce its risk.
On the Reliant acquisition:
Earnings uplift from competitive retail: Limited competition and vertical integration should allow NRG improve its margins for its competitive retail business in Texas. Expect an update to guidance in the 2Q earnings season.
That “limited competition” point is one that many in Texas’ retail electric business would argue against, of course.
The upshot? Macquarie is predicting higher earnings for NRG in 2009 and 2010 (Old EBITDA estimate: 2009 = $2.279 billion, 2010 = $2.504 billion. New EBITDA estimates: 2009 = $2.309 billion, 2010 = $2.563 billion.) and increasing its 12-month price prediction from $42 to $44 per share.