On Jan 21, 2013, we downgraded our recommendation on wholesale
power generation company,
NRG Energy Inc.
) to Underperform from Neutral. The company currently has a
short-term Zacks Rank #3 (Hold).
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Why the Downgrade?
The combined negative impact from fuel price volatility,
stringent regulatory compliances and over-reliance on weather
conditions drive us to downgrade our recommendation on the stock.
The effects of these negative factors have also been reflected on
the Zacks Consensus Estimates. The Zacks Consensus Estimates of a
loss of 13 cents per share for first-quarter 2013 and earnings of
57 cents per share for fiscal 2013 reflects a decline of 139%
sequentially and 43 % year over year, respectively.
Causes for Concern
Performance of the utility providers, to a great extent, depends
on weather patterns of the region and NRG Energy is no exception.
Demand for power is sensitive to unpredictable variations in
weather conditions. Periods of volatile weather conditions not
only affect the demand, but severe weather conditions can cause
interruptions in coal production and transportation, thereby
increasing the company's cost of operations.
NRG Energy's functions primarily depend on its coal-fired
base-load power plants to obtain a major portion of its revenues.
As a result, the company's performance lies with several risks
related to the environmental issues due to its higher coal
A number of NRG Energy's "merchant" facilities function without
long-term power sales agreements. Therefore, these facilities are
influenced by market price fluctuations. As there is no guarantee
that power generated from these units will be sold at
commercially attractive rates, the company's profitability might
Other Stocks to Consider
Apart from NRG Energy, other utility companies
Integrys Energy Group Inc.
Wisconsin Energy Corporation
), are currently performing well and carries a short-term Zacks
Rank #1 (Strong Buy).