Not all utility stocks are created equal, as investors in NRG Energy (NYSE:NRG) know all too well. The company operates in highly competitive markets, which differs from the usual description of utilities as regulated monopolies. Here's a quick look at what NRG Energy is and where it makes money.
Who is NRG Energy?
NRG Energy is a utility company, but within that, it has four main business lines.
- Business: NRG Energy's biggest business is electricity generation. The company owns coal, nuclear, natural gas, and renewable energy assets. Many of these assets sell electricity into the competitive electricity markets, like PJM.
- Home retail: NRG's customer arm is called Home Retail, which serves 2.77 million customers, many in competitive electricity markets.
- NRG Yield: Renewable energy has been a difficult business for renewable energy. But one positive launch has been NRG Yield (NYSE:NYLD). The company owns renewable energy power plants that have long-term contracts to sell electricity to utilities. Most of the cash flow is used to pay a dividend, which now stands at 7.1%.
- GreenCo: The GreenCo business unit was announced late last year as part of a reorganization of the business. It's meant to own everything from residential solar installations to an EV charging network to consumer solar products.
How does NRG Energy make money?
NRG Energy makes money in three ways: wholesale electricity sales, providing electricity to home or commercial retail customers, and by owning renewable energy assets with long-term contracts to sell energy to utilities.
The wholesale business -- where NRG Energy owns power plants and sells power into the competitive energy markets -- is comprised of its coal and nuclear plants, which have been put under pressure by falling natural gas prices and renewable energy taking peak load demand in some markets. Another place where NRG Energy makes money selling energy to utilities is by owning large-scale renewable plants. Typically, these plants come with long-term contracts, so they're lower risk for project owners. For 2016, management is expecting adjusted EBITDA from the wholesale and utility scale renewables business to be $1.55 billion to $1.67 billion.
Home retail is the side of the business customers would typically think of as their utility. The business' job is to get customers, primarily in non-regulated markets, and sell energy to them. For 2016, management expected adjusted EBITDA of $650 million to $725 million.
NRG Yield is actually a separate business, owning renewable energy power plants as I discussed above. But the goal of the business is to pay out dividends to shareholders. Still, it's an important part of NRG Energy's asset base and is expected to contribute around $805 million in adjusted EBITDA this year.
What risks should investors watch out for?
There are three main risks NRG Energy faces in its business. The first are falling wholesale prices, something the company has experienced lately due to an oversupplied wholesale market.
Another are rising interest rates, which could lead to lower effective returns on renewable energy projects.
Finally, NRG Energy needs to execute on its GreenCo plans in 2016. The business hasn't been the growth engine management had hoped it would be, and it needs to show progress before a potential IPO. Investors need to see traction in sales for all of the GreenCo's products and a lower cash burn or this could be a further burden on the company.
More than just a utility
NRG Energy is more than just a typical utility and operates primarily in competitive markets. That can be an advantage in good times, but when wholesale rates are low and investors lose faith in the growth of clean energy, the strategy can hurt the stock. That's something investors have experienced in the past year.
Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of NRG Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.