Deutsche Bank Gives Color On NRG Energy Following Earnings; Raises PT

Deutsche Bank rates NRG Energy NRG a Hold on fundamental valuation and expect a continued overhang from the STP nuclear project over the next several months, with binary event risk likely in Q3 as NRG will decide if it moves forward. It likes NRG's strategy to grow in clean energy generation and services, but execution on this strategy looks fully priced given a growing balance sheet and relatively flat EBITDA profile from the roll-off of hedges. NRG provided updated disclosures on expected “equity” spending on STP and potential free cash flows from the project, although these are difficult to reconcile absent NRG entering into significant above-market PPAs. Mgmt comments that STP would earn a low teens IRR if it sold two-thirds of its output at a $4 gas price was unsettling for investors, and could be interpreted as a sign NRG is more likely to move forward at lower PPA prices. NRG announced a $180M stock buyback program, in line with its estimate and flat with the 2010 program, but perhaps disappointing to some investors. Cash on hand is expected to remain high at $2.5B at YE 2011, despite a large $3.1B gross capex budget. Deutsche Bank estimates 2011 gross solar capex of $2.4B, the clear focus of NRG's capital plan and a rising contributor to earnings. Deutsche Bank has a $20 PT on NRG NRG closed Tuesday at $19.97