Is Gas Price Revival the Key to NRG Energy's Sustained Recovery?
Leverage: Reacting to the risk alert
Debt reduction is one of the primary agendas of NRG Energy’s (NRG) newly appointed CEO (chief executive officer) Mauricio Gutierrez. NRG is fighting on various fronts to bring down its leverage. It has announced a huge 79% dividend cut and is cutting operational expenditures as well. Planned asset sales to NRG Yield are also expected to fetch cash. Both of these are expected to provide capital to pay down its ~$1 billion debt.
At the end of the fourth quarter of 2015, NRG Energy has total debt of $19.5 billion.
Debt profile
The above graph shows that NRG Energy’s debt increased steadily over the last three years. However, the company’s debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio declined noticeably after 3Q14. NRG has a total debt-to-EBITDA ratio of 7x. NRG’s peer Calpine (CPN) has a ratio of 7.5x. Talen Energy (TLN) also has a debt-to-EBITDA ratio of 7.5x. The debt-to-EBITDA ratio shows how many years it will take a company to repay its debt using EBITDA if debt and EBITDA remain constant.
The debt-to-asset ratio represents the proportion of a company’s assets that are financed by debt. It assesses the financial risk of a company. NRG Energy has a debt-to-asset ratio of 0.6x. Peer Dynegy (DYN) and Calpine (CPN) also have debt-to-asset ratios at the same levels. Talen’s debt-to-asset ratio stands at 0.4x.
Credit rating
The riskiness of merchant power players is reflected from their credit ratings. Standard & Poor’s has given Dynegy a “B+” rating with a stable outlook. NRG has a “BB-“rating and a stable outlook. By comparison, utilities (XLU) have a “BBB+” rating at the end of 4Q15.
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