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NRG Energy's (NRG) mediocre first quarter was made to look much worse by the writedown of the large STP 3&4 nuclear project. The first quarter's earnings per share of -$1.06 will make it difficult for NRG to produce good full-year 2011 results, even though operations have improved. The pipeline looks good going forward, and management has reaffirmed guidance.

Earnings per share were down from $0.22 in 2010 to -$1.06 last quarter. This was despite a 22% rise in operating income, and an 89% rise in cash from operating activities. Revenue was down 10% YOY due primarily to lower costumer counts and hedged prices, but this was offset by a 19% decline in costs. The real news came from NINA, the NRG subsidiary in charge of NRG's big nuclear project STP 3&4.

I outlined NINA's role here. Long story short, NRG made a sizable bet on nuclear energy in the form of expanding an existing Texas nuclear plant. This project had a total investment of $481 million from NRG, and was far along in the government loan guarantee process: The outlook was bright. In light of the Fukushima Daiichi disaster, NRG has chosen to

  1. writedown the entire investment, and

  2. wind down the project to a bare minimum.

Both of these decisions make sense given the current environment. The $481 million writedown took place in the first quarter, knocking $1.95 off of EPS. This decision was based on management's assessment that success looks "not particularly likely" and the hurdles to success are "daunting." This writedown is a one-off event, and while it does crush EPS, it has no effect on future cash flows.

Second, NRG has cut 2011 spending on STP from $300 million to $20 million. This reflects management's sober view of the hurdles facing nuclear energy right now. Also, it makes STP a forgettable chunk of 2011 capex, similar to the eVgo project discussed here. The irony of this is that NRG's interactions with the DOE and the NRC haven't changed course as a result of the disaster. While both agencies may be more cautious going forward, NRG has yet to detect cold feet from the government. This is good, beceause the government plays a crucial role in the success of the project: NRG needs a loan guarantee from the DOE. Government is not the only other party involved, however. NRG needs someone to fill the whole of its partner TEPCO, and rising energy prices wouldn't hurt the case for nuclear.

The STP 3&4 project was a good bet on the part of NRG, but it will now be difficult for NRG to produce good 2011 full-year earnings. Management doubled free cash flow guidance on lower investments, and maintained EBITDA guidance. Given current expecations for cash flow per share, the stock is currently trading at 5.5x cash flows. NRG's improving results based on lower costs and continued growth were hidden in the first quarter by the write-down of the STP 3&4 investment.

Disclosure: I am long NRG.

Source: NRG Energy's Improving Prospects Hidden by Another Troubled Quarter