NRG Energy (NRG - Free Report) has announced its ambitious transformation plan, which is aimed to save nearly $1.065 billion through recurring cost cuts and margin improvements. The plan also calls for divestment of assets in the range of $2.5–$4 billion and usage of the net proceeds to strengthen its balance sheet by repayment of a debt of $13 billion.

The company, with its cost-savings initiatives, expansion of renewable portfolio and latest transformation plan, is geared up for further growth from the present levels.

Objective of This Transformation

The primary objective of this transformative initiative is to strengthen the balance sheet of NRG Energy from the current levels and at the same time create value for the shareholders.

At present, the net debt of the company is nearly $18 billion. The total Debt/Capital ratio stands at 82.8%, much higher than the  Utility – Electric Power industry average of 54.51%. The transformation plan will bring the debt levels to near $6 billion and at the same time is likely to provide up to $6.3 billion of excess cash for allocation through 2020.

NRG Energy’s aim will be to utilize this excess cash in projects that will generate an unlevered pre-tax return in the range of 12-15%.

The majority of the transformative benefits will be generated before the end of 2018 and prepare the company to overcome any financial challenge.

Our View

NRG Energy has already lowered $1 billion in debt through its corporate debt-reduction program since the third quarter of 2015.

This transformation plan will not only help the company to lower its debt but systematically utilize the excess funds in strengthening the performance of the company, thereby generating better returns for the shareholders.

Price Movement

Year to date, shares of NRG Energy have returned 82.7% compared with the Utility Electric Power industry’s return of 4.2%.

Zacks Rank and Other Top-Ranked Stocks

NRG Energy currently holds a Zacks Rank #2 (Buy). Other top-ranked stocks in the same space are Pattern Energy Co (PEGI - Free Report) , NextEra Energy (NEE - Free Report) and NorthWestern Corp. (NWE - Free Report) . Each of these stocks carries a Zacks Rank #2. Pattern Energy delivered average positive earnings surprise of 77.28% in the last four quarters. Its 2017 earnings estimates moved up 375.0% to 38 cents over the last 90 days.

NextEra Energy delivered average positive earnings surprise of 4.28% in the last four quarters. Its 2017 earnings estimates moved up 0.6% to $6.67 over the last 90 days.

NorthWestern Corp. delivered average positive earnings surprise of 9.98% in the last four quarters. Its 2017 earnings estimates moved up 0.3% to $3.41 over the last 90 days.