History just keeps on repeating itself. Here we finally have a decent market for independent power generators, a market in which it seems that operators like Mirant
The culprit in this case is NRG Energy, who announced recently that they intend to spend roughly $16 billion over the next decade on projects with 10,500 MW in gross generating potential. Though the company initially characterized the plan as both an expansion of capacity and a replacement of old assets, I count only 968MW as scheduled for replacement -- meaning, then, that this is really about new capacity.
If this brings up unpleasant memories of the spate of independent energy producer bankruptcies resulting from over-expansion just a few years ago, you're not alone. What's more, NRG has already talked about how their lower credit rating forces them to accept inferior pricing terms in some cases, so I'm not sure how this big capital expenditure plan is going to help that situation.
But maybe it's different this time. First of all, about 80% of the targeted construction is for baseload plants, and the company is looking to lock up about 70% of the new production under hedges. It's also true that there are some areas where power supply is tight and where rising marginal rates suggest a decent return on capital from new capacity.
It would also seem that NRG will meaningfully change the profile of its energy-generating assets with this build-out. Assuming everything goes as planned (and that's not certain, as some of the plants are nuclear), the company will improve its emissions profile, become less dependent upon gas and oil, and add newer technologies like coal gasification and wind power.
I'll freely admit that this plan has me a bit nervous. By the same token, when you invest in a company you are often implicitly expressing your trust that management will act in your best interests. So while I would frankly like to hear more about share buybacks and less about new plants, maybe they still deserve the benefit of the doubt.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).