We are downgrading our recommendation on NRG Energy, Inc. (NRG) to Underperform based on lower results from Reliant and NRG's Texas gas-fired assets. Furthermore, the company remains exposed to the risk of increased operational costs from future environmental legislations as the company's domestic revenues come in large part from its coal-fired baseload power plants.
There also is a risk of potential earnings downside based on unfavorable movements in natural gas prices. Though we like the company for its diverse generation assets, competitive business, robust hedging strategy and ability to generate substantial free cash flow, the above mentioned negatives affect our positive view for the time being.
Recent losses due to the Texas heat wave and natural gas-fired plant outages have led us to downgrade our Neutral recommendation on the stock to Underperform. Our $19 target price is based on 5.2x 2011 EPS.
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