NRG Energy: Earnings Preview

Diverse power generator NRG Energy Inc. (NYSE:NRG) is slated to release its second-quarter 2012 earnings results before market open on August 8, 2012.

First Quarter Performance

NRG Energy, Inc. reported a loss of 92 cents per share in first quarter 2012 compared with a loss of $1.06 in the prior-year quarter. This was due to mild weather, switching from coal to gas and outage at the STP unit 2. The quarterly loss was wider than the Zacks Consensus Estimate of a loss of 11 cents per share.

NRG Energy's total operating revenue of $1.86 billion in first quarter 2012 decreased 6.67% from $2 billion in the year-ago quarter. The year-over-year decline was due to lower commodity prices and mild weather. The quarterly revenue fell short of the Zacks Consensus Estimate of $2.46 billion.

The operating expenses of the company increased 20.88% year over year to $2.03 billion due to higher cost of operations, and selling, general and administrative expenses; partially offset by a decline in development expenses.

Guidance 2012

NRG Energy maintained its 2012 adjusted EBITDA expectation in the range of $1,825 million to $2,000 million, including wholesale and retail contribution in the range of $1,200-$1,300 million and $625-$700 million, respectively.

The 2012 guidance for free cash flow was also reaffirmed in the range of $800 million to $1,000 million.

The guidance takes into account normalized summer weather condition in the company's service territories.

Zacks Consensus

The Zacks Consensus Estimate for the second quarter 2012 is 16 cents per share, an estimated decline of 65% from 46 cents reported in the year-ago quarter. The current Zacks Consensus Estimate ranges between a loss of 32 cents per share and earnings of 47 cents per share.

The full year 2012 Zacks Consensus Estimate is 94 cents, up a projected 28.6% from 73 cents reported in the prior year. The current Zacks Consensus Estimate ranges between 52 cents per share and $1.20 per share.

Estimate Revisions Trend

Agreement

The past 30 days have seen two of the five estimates declining for the second quarter, while two moved in the opposite direction. There were no changes in the quarterly estimates in the last 7 days.

For full year 2012, of the 8 available estimates, four estimates moved up while two estimates went down, in the last 30 days. There were no changes in the estimates in the prior 7 days.

Magnitude

The Zacks Consensus Estimate for the second quarter inched down by 5 cents in the last 30 days. However, for full-year 2012, the consensus estimate increased by 7 cents in the past 30 days. For the past 7 days, the consensus earnings estimates remained static both for the second quarter and full year 2012.

Surprise History

With respect to earnings surprise, the company surpassed our expectation in three of the last four quarters, but widely missed the consensus in the last reported quarter.

The earnings surprise in the last four quarters ranged from (736.4%) to 22.9%. The average surprise over the last four quarters is a negative 167.8%.

Our Recommendation

NRG Energy has a diverse portfolio of electric generation facilities in terms of geography, fuel type and dispatch levels, which helps mitigate risks associated with fuel price volatility and market demand cycles. Besides, the company is working on its long-term strategy of divesting its non-core assets in order to focus on its retail electric business in core domestic markets.

The company has been investing to develop its green generation portfolio and working to increase savings for its customers while maintaining a steady supply of power. The Board of Directors of the company announced its first ever quarterly dividend of 9 cents per share. We appreciate these initiatives taken by the company to boost its overall performance.

NRG Energy follows a practice of selling forward a substantial portion of its baseload power. Any failure to meet its supply obligations under these long-term contracts may result in huge payments to the contracted party, increasing the company's financial burden. Like other regulated utility operators, this company too suffers from fluctuating weather conditions in its service territories.

We have maintained our Neutral recommendation on the company. The company has a Zacks #3 Rank implying a short-term Hold rating on the stock. NRG Energy Inc. competes with Xcel Energy Inc. (NYSE:XEL), DTE Energy Co. (NYSE:DTE) and CenterPoint Energy Inc. (NYSE:CNP).

Based in Princeton, New Jersey, NRG Energy is a wholesale power generation company engaged in the ownership, development, construction, and operation of power generation facilities.

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