What happened

Shares of integrated power company NRG Energy (NYSE:NRG) rose an astonishing 43% last month, after management pulled back the curtain on its new strategic vision. The dollar amounts included in the transformation plan are matched in ambition by the deadline: Management expects most of it to be accomplished by the end of 2018.

The unveiling marked a new beginning for the company, which saw its stock descend to crushing lows in late 2015. Now, close to two years and a new CEO later, Mr. Market appears to be enthusiastically supporting the new direction. Was it worth a one-month stock gain of 43%?

A business man holding a very large magnet that is attracting a lot of money through the air.

Image source: Getty Images.

So what

NRG Energy isn't approaching its transformation with any hint of tepidness. The three highlights include: 

  • $1.065 billion in recurring cost and margin improvements, including $855 million in annual free cash flow before growth accretive improvements and $210 million in permanent selling, general, and administrative expenses to be realized from operating a smaller business.
  • $2.5 billion to $4 billion in asset sale net cash proceeds.
  • $13 billion in total debt reduction.

On paper, selling off non-core assets (more on that in a moment) will raise money to pay for some amount of debt reduction and reduce operating expenses. Management expects to achieve up to 70% of its cost and margin improvement goal by the end of 2018. The remainder will be achieved through 2020.

Meanwhile, NRG Energy will begin selling off up to 6 gigawatts of generation capacity and between 50% and 100% of its interest in NRG Yield. Most of these deals will be completed by the end of 2017.

NRG Chart

NRG data by YCharts

And the single largest part of the transformation includes whacking down debt levels from $18 billion today to just $6 billion. The goal is to reduce the net debt-to-EBITDA ratio from 6.4 to 3.0 by the end of 2018. Asset sales will get the process started, while margin improvements will provide billions more in cash flow per year that can be thrown at debt reduction between now and the end of the decade.

While the transformation plan looks good when viewed from these highlights, there is a lot of well-deserved criticism to go around.

For instance, the shareholders that may be the happiest are hedge funds looking for short-term gains at the expense of NRG Energy's long-term health. Pretty much all of the asset divestitures are renewable-energy generation, while the new "core focus" is anything but new, instead leaning mostly on coal and natural gas. In other words, the latest strategic direction may very well get the company to 2020 in a better position than it is today. But beyond then, the company's long-term prospects are a little murkier.

Now what

While the unveiling in July truly was a turning point for NRG Energy shareholders, now comes the hard part: executing. Can the ambitious plan be carried out? Investors won't know the answer to that question for several more years, although they'll have a pretty good idea of where things stand by the end of 2018. Just don't overlook the fact that the company is, essentially, giving up on America's fastest-growing generation sources: wind and solar.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.