NRG Energy

NRG Energy reported $1.2 billion of adjusted EBITDA during the second quarter, up from $909 million in the second quarter of 2025. Separately, Texas Gov. Greg Abbott announced an audit of planned new data centers in the state, possibly stalling growth.

Why it matters: Earnings from the LS Power assets acquired earlier this year were the primary year-over-year uplift. Mild weather and low power prices have contributed to a 26% drop in EBITDA during the first six months in Texas, NRG's largest segment. Management reaffirmed its $5.325 billion-$5.825 billion EBITDA guidance range for 2026, including 11 months of contribution from the $12 billion LS Power acquisition, which closed in January. This is in line with our outlook. Smart home segment earnings are up 10% year to date due to continued customer growth and margin expansion.

The bottom line: We are reaffirming our $104 fair value estimate per share and no-moat rating for NRG. NRG's stock is down nearly 30% this year, including a 17% drop on Aug. 4. We think investors are moderating their growth outlook as NRG deals with weak energy markets and political opposition to data center growth in its core markets. NRG announced a 15-year 1.2-gigawatt supply agreement with a large data center developer that includes at least one new gas plant. Management expects $500 million run-rate EBITDA from the project by 2030.

Big picture: Management reaffirmed its long-term capital allocation plan, which aims to return 80% of cash to shareholders annually, including $1 billion of share repurchases in 2026. Management said it might offer less than half of its possible 2 GW of power uprates into the mid-Atlantic grid operators' Reliability Backstop Procurement auction in September. During the second quarter, NRG completed one of its three planned new generation projects selected to receive subsidies from the Texas Energy Fund. The other projects are scheduled to be completed by mid-2028.

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Our fair value estimate is $104 per share.

We forecast $5.5 billion EBITDA in 2026, including 11 months of earnings from the LS Power assets. We expect EBITDA to climb slightly through 2029 on higher retail sales, full integration of LS Power benefits, and higher capacity revenue in the Eastern US.

With few organic capital investment growth opportunities and our forecast for shrinking margins at the retail business, we assume midcycle EBITDA near $5.8 billion.

At NRG's generation business, we expect moderating capacity revenue in the Eastern US beyond 2030 to offset growth in Texas.

At NRG's retail business, we assume 1% annual weather-normalized electricity and gas usage growth on average across all of its markets. We also assume retail margins shrink slightly as more competition enters the market.

In Texas, we expect management to continue optimizing its generation fleet to support retail margins. This includes completing $1.5 billion of planned investment in three expansion projects that will receive $1.15 billion of state-subsidized loans. Following the LS Power and Rockland additions, we expect few changes in NRG's Eastern fleet other than the planned Powerton coal plant closure in 2029.

At Vivint, we assume slow core growth but high cash flow conversion, given the limited investment needs.

We use a 10.8% cost of equity and 9.1% cost of capital in our discounted cash flow valuation. This assumes credit spreads consistent with low-investment-grade credit ratings.

NRG's retail energy, power generation, and home-services businesses do not have economic moats.

Shareholder returns for NRG's generation assets and retail businesses remain subject to volatile power and fuel commodity prices, as well as electricity demand trends.

Energy retailers like NRG sell commodity products such as electricity and natural gas. Customers enjoy virtually no switching costs, resulting in intensely competitive markets with tight and volatile margins. Economies of scale can boost returns as the retail business grows, but we think this is a fleeting source of competitive advantage.

Few of NRG's power plants maintain a low-cost advantage that would be the foundation for establishing an economic moat. Many of NRG's plants are subject to intense local competition that can quickly erode any excess shareholder returns.

NRG has proved that there are some benefits to owning generation where it has a large retail supply business, particularly in Texas, where the bulk of its legacy generation fleet is located. This combination has helped reduce earnings volatility and improve returns on capital.

The Direct Energy and Vivint acquisitions introduced NRG to new customer services and retail markets outside Texas. NRG serves more retail load than its generation fleet can cover on an economic basis, reducing the benefit of the retail-wholesale hedge.

The LS Power assets restore some of that retail-wholesale balance outside of Texas.

We expect few revenue or cost benefits that would improve shareholder returns from pairing the retail energy and home-services businesses.

NRG generates enough free cash flow to stabilize the balance sheet while returning cash to shareholders after the LS Power and Rockland asset deals.

NRG's generation fleet provides a partial hedge for its retail supply business, resulting in more stable consolidated earnings.

Half of NRG's earnings come from Texas, which we think will have among the fastest electricity demand growth of any state during the next decade.

Environmental regulations and renewable energy growth could erode profitability at NRG's fossil fuel power plants.

The retail energy supply business is highly competitive, with low margins, few barriers to entry, and minimal customer switching costs.

Between large acquisitions, divestitures, and management turnover, it has been difficult for investors to assess management's ability to create long-term value for shareholders.