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NRG Energy’s Debt: Is It Too Late for Dividend and Cost Cuts?

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NRG Energy’s credit profile

Leverage for merchant power players has increased in the last couple of years as their earnings have tumbled. NRG Energy’s (NRG) chief executive officer Mauricio Gutierrez seems focused on reducing debt and strengthening the balance sheet.

As part of the strategy, NRG cut its annual dividend by 80%, from $0.58 per share to $.12 per share. NRG is planning to reduce its debt by $1.1 billion through dividend cuts and various cost-cutting initiatives.

At the end of the first quarter of 2016, NRG had a total debt of $19.5 billion. Its debt-to-equity ratio is 3.3x, and its debt-to-market capitalization stands at 3.5x.

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NRG Energy’s leverage

NRG Energy’s leverage has increased significantly since its debt has risen steadily. Earnings have fallen due to weaker margins. NRG’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortizaton) ratio stands at 6.5x, which is above the average of 5.5x for merchant power players.

Dynegy (DYN), one of NRG’s peers, has a net debt-to-EBITDA ratio of 11x. AES’s (AES) ratio is about 5x.

Net debt-to-EBITDA ratio is an important metric when analyzing utilities (IDU). It indicates how many years it would take for a company to repay its debt with current debt and EBITDA remaining constant.

NRG management’s focus on debt reduction and cost-cutting initiatives may improve the company’s balance sheet. But its cash flow is likely to remain stressed due to weaker demand growth, environmental policies, and, most importantly, wholesale power prices.

NRG may struggle for financing in the future since nearly $3 billion of debt will mature in 2018. It will be interesting to see if it’s already too late for NRG to cut dividends and implement cost-cutting strategies.

In the final part of our series, we’ll see why NRG Energy is looking unattractive even after rising 50% this year.

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