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NRG recommits to integrated business model amid recent share price slide

NRG Energy Inc. management touted the transformation of its business model and addressed its flagging stock price Aug. 7 and also announced share repurchases and new solar contracts.

"Over the past three-and-a-half years, we have made significant progress in transforming our company from a traditional IPP to an integrated power company focused on our customers," NRG President and CEO Mauricio Gutierrez said on the Aug. 7 earnings call. "The recent stock price performance does not reflect our confidence in the resiliency of our integrated model to deliver predictable and robust results."

The Princeton, N.J.-based company's stock declined 2.8% in July, though it fared better than Vistra Energy Corp.'s, which declined 5.2%. These dips come amid efforts by both IPPs to balance their retail energy operations with their wholesale power businesses.

"Our confidence in the business remains absolutely unchanged," said Gutierrez, who said that the new model has been a success so far and noted that second-quarter results were "driven primarily by higher wholesale power prices, offset by higher retail supply costs and mild weather, demonstrating the complementary nature of our generation and retail business."

"I no longer refer to us as an IPP, but an IPC," said Gutierrez. "We're truly now an integrated power company."

Gutierrez also announced an incremental $250 million share repurchase program, which will bring its total 2019 share repurchases to $1.5 billion. NRG sold $1.83 billion of senior debt in the second quarter of 2019, aiming to reduce its outstanding debt under its senior first priority secured term loan.

The sale of $1.1 billion of senior secured first-lien notes and $733 million of 5.25% senior unsecured notes put NRG second to Dominion Energy Inc. in issuance among electric utilities and IPPs, according to a recent ranking by S&P Global Market Intelligence.

Through transactions in May and June, the company completed the redemption of all of its outstanding $140.1 million of 6.25% senior notes due 2024.

NRG also executed power purchase agreements for 1,300 MW of solar projects in the Electric Reliability Council Of Texas market and sealed its acquisition of Stream Energy's retail energy business. The Federal Energy Regulatory Commission approved the acquisition on July 17. Under the terms of the deal, NRG Retail LLC will directly acquire the retail business for $300 million. Retail acquisitions have been a strategy by IPPs to ensure stable cash flows.

As for the Texas market, NRG management believes that a May capacity demand and research report by ERCOT overestimated the amount of new gas capacity coming online by approximately 1.7 GW and underestimated the number of thermal generation retirements by approximately 1.4 GW, which together account for 4% of the reserve margin. NRG estimates that more than 17 GW of new renewable capacity will be necessary in Texas to maintain reserve margins of 10% to 12% in the next three years, according to Gutierrez.

"Let me be clear: The ERCOT market needs a tremendous amount of investment to just simply maintain the low reserve margin it currently has," Gutierrez added. NRG expects ERCOT to remain "tight and volatile for the foreseeable future" even in the face of a large build-out of renewable power, Gutierrez said, which should position NRG's integrated platform well compared to pure retail or pure generation companies.

Gutierrez laughed after an analyst raised the possibility of taking the company private but, like Vistra President and CEO Curt Morgan, who addressed the issue on his company's Aug. 2 earnings call, the NRG chief did not entirely rule it out.

"Right now, the focus is executing the strategy that we have," said Gutierrez. "Once we feel that we have exhausted all our efforts to demonstrate the stability of our business, then we will explore all options to maximize the value of our shareholders."

"When we feel that we have given it enough time and the market is not responding [and] I'm still hopeful that it will and I'm convinced that it will, because we have a very strong value proposition, then we will evaluate something else," Gutierrez added.