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Why NRG Energy Beat Earnings Estimates in Fiscal 1Q16

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NRG Energy’s fiscal 1Q16 earnings

NRG Energy (NRG) reported earnings of $0.47 per share in 1Q16 against its loss of 0.35 per share in 1Q15. As you can see in the graph below, earnings for 4Q15 were adjusted for non-cash impairment charges of $4.8 billion and non-cash income tax expenses of $1.4 billion. The impairment charges were mainly triggered by the loss in value of NRG’s stressed Texas coal plants.

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Earnings drivers

NRG’s Retail Mass segment, formerly known as NRG Home Retail, reported improved earnings due to operating cost efficiencies and lower supply costs. This was partially offset by milder weather. NRG’s Renewables segment also posted better performance for the quarter as more capacities came in service late last year. Increased wind energy production from NRG Yield also contributed positively to earnings.

NRG Energy is planning for its next drop-down to NRG Yield in 2Q16. It intends to offer the rest of the stake, 51.1%, of its California Valley Solar Ranch facility to NRG Yield (NYLD). It currently holds 50.0% stake in it. This 250-megawatt solar facility is expected to improve NRG Yields’ earnings in the coming quarters.

First-quarter adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was $812 million. That beat analysts’ EBITDA estimate of $741 million. NRG Energy reiterated its adjusted EBITDA guidance of $3.0 billion to $3.2 billion for fiscal 2016.

NRG’s management focuses on debt reduction

NRG Energy’s management recently made a tough decision to cut dividends (DVY) and expenses to repay $1 billion in debt. It’s focusing on its wholesale operations and lowering leverage.

NRG’s top peers include Dynegy (DYN) and Calpine (CPN). CPN has a competitive advantage over the other two because of its exclusive natural gas–fired (UNG) power generation fleet. DYN, NRG, and Talen Energy (TLN) have mostly coal-fired (KOL) power plants.

In the next part of the series, we’ll see if NRG Energy stock could rise with its attractive-looking valuations.

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