BofA Note — IPPs

How will this impact the key IPPs heading into 2022?

We had previously perceived this shift in the prior year, with a bifurcation in strategies: NRG turning focus to its retail services platform and cross-selling efforts post-Direct Energy, and VST looking to ramp its renewable development efforts, with both attempting to redefine themselves as ‘cleaner’ versions of their past selves. While the Feb ’21 Storm Uri event somewhat de-railed these initiatives given material losses induced by fuel supply issues and energy price spikes, the ongoing ERCOT (Electric Reliability Council of Texas) regulatory reforms. In particular, the recently passed ERCOT securitization bill should help mitigate both future concerns about grid reliability/volatility and the one-time cash impacts of the storm (with securitization proceeds to be received by respective parties likely in 1Q22). With many of these issues at least partially addressed (ERCOT reforms remain ongoing), we now see greater breathing room for VST and NRG to shift toward carrying out their respective strategies.

VST looks to address the growing solar/storage opportunity

Vistra Energy has outlined its five-year build-out plan for its Vistra Zero renewables business, driven by solar & storage opportunity in California (given RA or resource adequacy concerns), Illinois (with Coal-to-Solar-and-Storage), and Texas (outsized uncontracted returns driven by a volatile energy-only market). Earlier in 2022, we added VST to our BofA US1 List; we remain confident on the company’s long-term renewable/storage development prospects, with the advantage of limited equity contribution now needed following the upsized $1bn green preferred equity offering. We highlight the company’s existing transmission interconnections in CA and ability to repower legacy fossil sites with renewables plus storage in IL as a way for management to generate robust organic growth, offsetting structural market concerns in market such as PJM. We particularly view California as a robust growth market given RA initiatives in the state with opportunity for solar addition/expansion at legacy assets. Finally, we continue to see upside from a Build Back Better storage ITC as well as renewable direct pay option. With the capital allocation plan now largely laid out, we turn to 2022 as the year for execution to start. Maintain Buy, with potential for this substantive pivot to drive as much as 50%+ of the market cap in future years.

NRG’s ‘new transformation’ plan: Pivot to retail services for growth

We look to 2022 for continuation of initial efforts on NRG’s evolving direct-to-consumer retail strategy. While initial capital allocation towards these initiatives is anticipated to be relatively low in the first year, we expect management to more fully flesh out the retail transformation strategy. We could very well start to see new lines of business rolled out in an effort to prove that growth goes well beyond ‘just’ cross-selling of power & gas in existing competitive markets. We also look for the company to prove out its ability to leverage its brand to enter into new markets with home service products and partnerships. The extent of the growth opportunity is likely to surprise investors, in our view. Management h as expressed a high degree of confidence in the 15-20% FCF growth/yr plan presented at the June Analyst Day. Further, we see clear potential to outperform on synergy targets over the long term (NRG targeting $300Mn 2023 run-rate synergies with $135mn 2021 and $225Mn interim targets).