Vistra and NRG Energy: Record-Breaking Texas Summer a Hot Topic for Third-Quarter Earnings

We are reaffirming our fair value estimates of $37 per share for NRG Energy and $26 per share for Vistra VST after a month of tight supply/demand conditions on the Texas power grid. We are also reaffirming our no-moat and High Uncertainty Ratings for both companies.

Relentless heat and electricity demand growth in Texas have led to at least 10 emergency alerts this summer and nearly a partial blackout on Sept. 6.

Core electricity use continues growing rapidly relative to other states, in line with our forecast. The Texas grid operator, ERCOT, has reported a 7% increase in peak demand this summer and a record 85.5-gigawatt peak on Aug. 10. ERCOT had forecast 83 GW peak demand entering the summer.

The shares of NRG and Vistra trade at premiums to our fair value estimates after surging this summer. Vistra is up 56% and NRG is up 25% since May.

Tight grid conditions are a blessing and a curse for NRG and Vistra, the largest retail energy suppliers and power generators in the state. NRG’s retail-focused strategy should benefit from high demand but could suffer if tight supply leads to price volatility. Apart from a few price spikes in recent weeks, Texas power prices have remained relatively stable, a positive for NRG.

We also expect good results from Vistra’s integrated strategy. We don’t expect the power generation business to benefit as much as past years, given the lower and less volatile prices this summer, but the retail business should outperform.

The surge in solar generation in the state has shifted net peak demand later in the afternoon and created more intraday volatility. This should be a positive for Vistra’s gas generation fleet, which provides power quickly for short periods. More renewable energy overall devalues baseload generation like coal and nuclear. We think NRG’s recent decision to sell its interest in the South Texas Project nuclear plant fits well with its retail-focused strategy.