Exceet Group SCA (TG:EXC)
Historical Stock Chart

From May 2019 to May 2024

NRG Energy Inc. (NRG) is reaping rewards from broadening its focus in Texas from solely generating electricity to include retail power sales.

By linking up the wholesale and retail businesses more like old-fashioned integrated power companies, NRG and some of its Lone Star State peers could be marking a shift for deregulated markets across the U.S. Independent generators have largely steered clear of the retail business in deregulated markets, with separate retail companies or utilities by default serving as a bridge between the market and the consumer. But NRG, TXU Energy and Direct Energy rely increasingly on matching up their power output with residential and commercial customer demand, bringing stability to an often volatile business.

NRG, of Princeton, N.J., expanded beyond generation with the acquisition of Reliant Energy Inc.'s (RRI) Texas retail business nearly three months ago. The purchase boosted the company's value, helping it fend off a hostile bid by Exelon Corp. (EXC). NRG's share price is up more than 30% since the Reliant acquisition closed at the start of May, while estimating earlier this month the retail business would add $400 million to earnings before interest, taxes, depreciation and amortization for the year.

The deal has helped sway shareholders against Exelon's hostile bid as the two companies prepare to face off Tuesday at NRG's annual meeting. Exelon is offering 0.545 of an Exelon share for each NRG share, valuing NRG at $7.5 billion, as of Monday's market close.

Linking wholesale and retail businesses brings some advantages. Stand-alone retail business have considerable collateral requirements, which became particularly problematic last year amid price spikes in Texas and the breakdown of global credit markets. Several small retailers were forced out of business and Reliant decided to put its Texas business up for sale. If a retailer owns generation, the collateral requirements evaporate since a company doesn't post collateral to its generation business.

At the same time, retail customers provide a natural hedge, while removing the healthy margins banks often make by serving as middlemen between generators and retail suppliers, said Brandon Blossman, an analyst at Tudor, Pickering, Holt & Co. in Houston.

Blossman added that retail and wholesale returns tend to move in opposite directions, with high wholesale power prices curbing retail margins and low wholesale prices tending to fatten retail margins.

NRG's arrangement resembles that of two other large retailers in Texas: Energy Future Holdings Inc.'s TXU, and Direct Energy, a subsidiary of the U.K.'s Centrica PLC (CNA.LN). TXU is the largest customer of Luminant, the generation subsidiary of parent Energy Future Holdings. Direct Energy gets about 20% of its retail supply from its own generation and is looking to expand the amount of generation it owns, a company spokeswoman said.

It's too early to tell whether what's happening in Texas represents the future of the power business in other deregulated states. The president of a leading trade group warned that the Texas market has key differences compared to states in the Northeast and Midwest, where local utilities provide a default service to customers who don't shop for a supplier.

"Residential markets tend to evolve in different ways," said Jay Kooper, president of the Retail Energy Supply Association and an executive at Hess Corp. (HES). "It would be dangerous to assume a trend."

(Mark Peters covers the U.S. power and coal industries and environmental markets for Dow Jones Newswires. He can be reached at 212-416-2457; mark.peters@dowjones.com.)

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)