Summary
- NRG Energy has seen quite a turbulent history with M&A on both the buy and sell-side.
- After ''recent'' divestments and current uncertainty, the company announced a massive acquisition which comes as quite a surprise.
- I like the deal on its strategic and financial merits, yet want to see some proof given the corporate past.
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NRG Energy (NRG) is a utility company which to date I never have covered, yet as the company announced what appears to be a very sizable and transformative transaction, it is time to review the investment case. To judge the deal on sits merits, lets first see what NRG itself is about before spending nearly $4 billion on Centrica's operations in North America.
The Company
NRG became independent in its current form in 2000 and following a string of acquisitions the company has grown over time. The company has dozens of plants and other electricity generating capacities which combined add up to 23,000 MW, including a big renewable part. The company serves 3.7 million retail and business customers, but moreover it is a generator instead of a distributor.
The stock has seen quite a few volatile moments over the past two decades and traded in a wide range between $10 and $40 per share as periods of acquisitions and rapid built up in debt have been followed by divestments. With the company under the pressure of too much leverage in 2015 and 2016, causing shares to fall to just $10, activist investors Paul Singer got involved. Mr. Singer demanded and got his divestment plan in the summer of 2017.
The company generated total revenues of $9.82 billion in 2019, a 3.6% increase compared to the year before. The company managed to improve operating earnings from $982 million towards $1.29 billion, driven by a combination of lower depreciation charges, impairment costs and restructuring charges.
The company reported a spectacular profit of $4.44 billion yet that was only due to a major tax benefit. Based on the reported operating profits and assuming a 25% tax rate, earnigns otherwise would have come in around $590 million. Based on the reported share count that resulted in earnings per share close to $2.25 per share.
The company reported adjusted EBITDA of $1.98 billion for the year as rising EBITDA metrics are much desired given net debt load. The company ended the year with $353 million in cash. While bank debt totals just $5.89 billion, this number rises to $8.4 billion if we include financial leases, operating leases and derivative liabilities. Based on the definition of net debt, this comes in around $5.5 billion to $8 billion, for leverage ratios of 2.7-4.0 times.
Based on the realistic earnigns power calculated above, and shares trading at levels in the high thirties as the start of the year, marking the highest levels since the recession of 2008, shares traded at a market earnings multiple in part driven by a dividend yield just in excess of 3% despite the leverage incurred.
