NRG Energy’s Margins Struggle as Wholesale Operations Weaken



NRG Energy’s profit margins

NRG Energy (NRG) mainly generates revenue from its wholesale operations and renewable energy sales. In the last five years, NRG revenues nearly doubled, but at the same time, its earnings dwindled. Operating margins of NRG Energy in 2015 took a beating due to weak power prices in wholesale markets. The graph below shows the profitability ratios of NRG Energy since 2010.

NRG Energy’s Margins Struggle as Wholesale Operations Weaken

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Load-matching partially mitigates risk

NRG Energy’s Home Retail segment partially offsets the weakness in its merchant power business due to low power prices. NRG’s retail business customers are concentrated in Texas, so their load is matched with NRG’s merchant power in the state. Therefore, lower power prices in the state can keep up the margins of retail energy providers. We’ll see NRG Energy’s segment-wise performance in the next part of this series.

Gas-dominated fuel mix

NRG Energy’s gross margins improved slightly in 2015 compared to the prior year due to lower fuel costs. A natural gas price correction motivated NRG to shift from coal for power generation last year. However, nearly 30% of the total power NRG generates comes from coal. Its fuel mix is dominated by natural gas (UNG), accounting for nearly 50% in the fuel mix.

Calpine (CPN), on the other hand, is a pure natural gas power generator. Dynegy (DYN) and Talen Energy (TLN) have exposure to coal for power generation. Implementation of the Clean Power Plan may force these merchant generators to switch from coal (KOL) to cleaner energy sources.

Let’s look next at why NRG couldn’t keep up its earnings growth despite a diverse business.


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