Q4 results were fine — EBITDA was up 31% from $330m to $433m and FY21 finished at $2.4bn. Here are some highlights for the year:
- NRG sold 4.85GW of fossil fuel generation for $623m (recorded $210m gain on sale).
- In process of retiring 1.6GW of coal generation by June 2022
- Winter Storm Uri in Texas caused $380m in losses vs. previously expected $500-700m impact
- Buybacks were $120m on $1bn authorization — current share count is 242m
Management gave a capital allocation rollforward (slide below) highlighting the cash that will come in during 2022 and how it should get spent. The end result is net debt of ~$7.14bn at end of 2022. With some EBITDA growth in 2023, leverage should be coming down nicely into 2022-2023.
With shares trading cheaply, management is shifting capital allocation priorities from deleveraging to buying back shares. They plan to “grow into” the desired leverage target of 2.5-2.75x instead of rapidly paying down debt to get there sooner (a strategy being taken by peer Vistra as well).
2021 was dominated by Direct Energy acquisition + debt paydown; 2022 is focused on share buybacks (~$1bn):
NRG has already made a ton of progress over the last 5-7 years on changing the mix of business, reducing the reliance on wholesale generation, and delevering the balance sheet.
At yearend 2021, I have gross debt at $7.97bn and net debt at $7.7bn. Midpoint EBITDA guide of $2.1bn implies 3.67x leverage and an 8x EBITDA multiple with the stock at $38/share.
Midpoint FCF guide is ~$1.3bn but this is “before growth investments” which total ~$60-100m per year — as an aside, I wish they’d just include ALL capex when calculating FCF. I’m going to call true FCF $1.2bn or $5/share on the current share count, a 7.6x P/FCF multiple.
There aren’t a ton of companies trading at <10x FCF that aren’t majorly cyclical, very levered, or secularly challenged. In some cases, those trading at low multiples are just coming off a massive 2020-2021 positively-impacted COVID period (think Peloton or Zoom -like earnings)... NRG generates plenty of excess cash for deployment each year and outlined a reasonable path to $12.50/share in earnings by 2025... As a reminder NRG plans to have $8bn in deployable cash from 2022-2025 — $1.3bn going to dividends, $2.7bn going to buybacks, and $4bn available for opportunistic activity
If they repurchase the remaining $960m on the buyback at prices below $40/share, that’d leave an ending share count of 220m or lower = $5.90 per share (using their definition of FCFbG).
For simplicity — call it 9x $5.90 in 2022 FCF per share for a $53 price target and 40% upside within the next 12 months.