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Wall Street Journal
29-05-2025
- Business
- Wall Street Journal
NRG's Stock Is a Top Gainer. How Does It Really Make Money?
NRG Energy NRG -0.54%decrease; red down pointing triangle, once viewed as a boring retail energy supplier, suddenly is one of America's hottest stocks. Investors see a power producer expanding rapidly to tap surging demand driven by artificial intelligence. But NRG also is a large derivatives trader. It has volatile earnings, a weak balance sheet and in some ways resembles a commodities hedge fund that also owns power plants. About $5.2 billion of NRG's assets were derivative contracts as of March 31, compared with $2.2 billion of property, plant and equipment. Much of NRG's earnings are of the noncash, mark-to-market variety, tied mainly to commodity prices, including natural gas and power. Those aren't visible on the face of NRG's income statement, but they are disclosed in the footnotes. NRG's unrealized, mark-to-market gains on derivatives last quarter were $512 million, equivalent to 52% of pretax profit. The quarter before that they were $506 million, or 71% of pretax profit. The fluctuations also swerve the other way. For the third quarter of 2024, NRG reported a $1 billion pretax loss, driven by even bigger mark-to-market losses. Now NRG has agreed to buy many power plants from closely held LS Power, using new debt and its own richly valued stock to pay for them. NRG's shares rose 26% when the deal was announced on May 12 along with first-quarter earnings. It is now the S&P 500's top performer this year, up 73%, giving it about a $31 billion stock-market value. While the acquisition has excited Wall Street, it also highlights the fragility of NRG's current asset-light business model. NRG said the deal would double its generation capacity and immediately boost its earnings when it closes in early 2026. NRG said it would pay $6.4 billion of cash, plus stock that was worth $2.9 billion at the time of the announcement. Since then, the value of the stock NRG plans to issue has risen by almost $900 million. NRG had only $1.4 billion of cash as of March 31. Hence, it will need to borrow to fund the cash portion. But it is hard to evaluate what NRG is getting. NRG said it would assume $3.2 billion of net debt, but few other details are public because LS Power's financial statements aren't disclosed. A comparison of NRG and other power companies is instructive. NRG in its proxy identified its peer group as the 21 companies in the Philadelphia Utility Sector Index, which includes NextEra Energy NEE -1.22%decrease; red down pointing triangle and Duke Energy DUK -1.66%decrease; red down pointing triangle. NRG's net derivative assets were 61% of its book value as of March 31. The average for the peer group was less than 1%, according to a Wall Street Journal analysis. Property, plant and equipment represented 9% of NRG's total assets, compared with 72% for the peer group. Put another way, NRG, which isn't in the utilities index, has a much different profile than the companies that are. It looks more like a risky energy trader. Book value was a relative sliver at $2.1 billion, or 9% of assets, while the index's average ratio was 25%. NRG's tangible equity was negative, owing to large amounts of goodwill and other intangible assets from an earlier string of acquisitions. S&P and Moody's have junk credit ratings on NRG, while every company in the utilities index is investment-grade. Moody's in a May 15 report on NRG cited its 'opaque and volatile trading operation' and 'exposure to volatile energy commodities' among its credit risks. NRG has a highly valued stock, though. It trades for about 14 times book value and 24 times trailing earnings. The average for the index is about two times book and 21 times earnings. NRG often draws comparisons with Vistra VST -0.92%decrease; red down pointing triangle, another junk-rated power company, and Constellation Energy CEG -0.33%decrease; red down pointing triangle, which is in the utility index. Both have hot stocks fueled by acquisitions. Vistra may be a closer match. It has negative tangible equity, and its shares trade for 24 times book value and 25 times trailing earnings. Like NRG, Vistra has a sizable derivatives book that is prone to volatility, but it is smaller than NRG's as a percentage of total assets and has a negative net value. Vistra also has more hard assets. Property, plant and equipment were 46% of total assets as of March 31. NRG says it uses derivatives to manage the commodity-price risk of its businesses. But it doesn't treat any of its derivatives as hedges under the accounting rules. That means the contracts are directional bets, mainly on commodity prices going one way or another. Changes in their value can have large impacts on quarterly earnings. Investors arguably shouldn't pay a multiple of earnings for mark-to-market gains such as those, which are volatile and unpredictable. The deal with LS Power is understandable, as it could add more hard assets to NRG's balance sheet. Still, there isn't much for investors to go on given the lack of details about LS Power's finances. And it isn't often that a company can announce that it is making a $9 billion acquisition and get almost an $8 billion pop in its stock-market value within a week. That leaves investors with an expensive stock in an opaque, highly levered company riding the AI wave. It could be a volatile ride. Write to Jonathan Weil at
Bloomberg
12-05-2025
- Automotive
- Bloomberg
Tesla's Trillion-Dollar Market Value Is Fueled by Amnesia
Tesla Inc. is back in the trillion-dollar club for the first time since February. Elon Musk's electric vehicle maker added about $65 billion of market value on Monday morning, as of writing this, taking it into thirteen figures again. The obvious catalyst is the partial truce in the US-China trade war, fueling a 2.5% rally in the S&P 500 Index. Tesla's gain is more than double that, presumably reflecting the specific benefits it stands to reap from all this. These include… vibes?
