Energy Firm NRG Yield Charges Up With Asset Power

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Like the utilities it serves, NRG Yield is powered up.

NRG Yield ( NYLD ) was formed by major U.S. independent power producer NRG Energy ( NRG )to own and operate a portfolio of long-term contracted renewable energy, conventional generation facilities and thermal infrastructure assets in the U.S., and pay regular dividends to shareholders.

As an independent power producer, NRG Yield sells power to utilities at market-based rates. Its contracted generation portfolio includes three natural gas or dual-fired facilities, eight utility-scale solar and wind generation facilities and two portfolios of distributed solar facilities. It also owns thermal infrastructure assets.

NRG Yield is the fourth largest company by market cap in IBD's No. 1 Energy-Alternative/Other industry group, afterCalpine ( CPN ),Vestas Wind ( VWDRY ) andBrookfield Renewable Energy ( BEP ).

NRG Energy has one of the largest power-generation portfolios in the U.S. It retains a 65.5% economic and voting interest in NRG Yield.

"NRG Yield believes its base of operations and relationship with NRG provide a platform in the power generation and thermal sectors for strategic growth through cash accretive and tax advantaged acquisitions complementary to its existing portfolio," the company said in an SEC filing.

Fueled by the potential dropdown of assets from acquisitions made by NRG Energy as well as opportunities to make its own third-party buys, NRG Yield is primed for solid growth and returns.

Analysts surveyed by Thomson Reuters expect full-year 2014 earnings to rise 82% to $1.04 a share. They see a 38% jump in 2015.

Acquisition Strategy

Investors have taken notice: Since going public last July at 22, NRG Yield's stock has rocketed 93% and is trading around 42.

"Its prospects are very strong," said Citi Research analyst Shar Pourreza.

"We said when we launched coverage one of the biggest attributes of NRG Yield is NRG Energy," Pourreza said, adding that NRG Energy has "got a history of making acquisitions -- this entire business is about making acquisitions and dropping them down into NRG Yield."

NRG Energy has granted its offspring a right of first offer to acquire six of its owned power generating assets, "if and to the extent NRG elects to sell any of these assets prior to July 2018," said the company in an SEC filing.

In addition, NRG Yield has the opportunity to gain from NRG's acquisition of the assets of Edison Mission Energy, which closed in April.

NRG Energy paid $2.635 billion, excluding transaction adjustments for cash and working capital, in the transaction. EME companies own, operate and lease a portfolio consisting of more than 40 electric generating facilities that are powered by wind, natural gas and coal, as well as an energy marketing and trading operation.

In announcing the deal last October, NRG Energy said the buy "significantly expands (the) pipeline of assets available to drive growth at NRG Yield through future drop-downs with 1,600 megawatts of long-term, fully contracted wind and natural gas assets."

NRG Energy has said its near-term plan is to offer NRG Yield certain EME assets it believes fit within its asset portfolio, says a company filing with the SEC.

"The Edison Mission acquisition could eventually be used for a dropdown into NRG Yield," said analyst Pourreza.

Meanwhile, on Dec. 31, NYLD closed on its first acquisition outside its relationship with NRG with the purchase of privately held Energy Systems Co. of Omaha, Neb., for $120 million in cash.

Energy Systems serves data center, commercial, educational, hospital, cultural and governmental space in Omaha with a weighted average remaining life of customer contracts over 11 years.

The Omaha system acquired by NRG Yield is known as one of the "premier assets in the U.S. district energy industry," the company said.

"The acquisition of ESC demonstrates NRG Yield's ability to successfully compete for attractive contracted energy assets available from third parties," said CEO David Crane in a statement announcing the deal.

"In addition to contributing to our objective of sustainable and visible dividend growth for our investors, ESC provides us another important opportunity to supply the energy needs of business and other institutional customers directly and in a manner that is not entirely grid dependent," he said.

NRG Yield said the buy would be "immediately accretive" to 2014 cash flow available for distribution per share by approximately 8%.

"It's also consistent with NRG Yield's strategy of acquiring long-term contracted assets that favorably complement its existing portfolio and offer long-term growth opportunities," the company said in a statement.

The buyout provides "geographic diversification" and helps NRG Yield boost its thermal infrastructure platform, it added. Primarily due to the buyout, NRG Yield raised its 2014 adjusted EBITDA guidance to $292 million from $285 million, and cash available for distribution, or CAFD, guidance to $115 million from $103 million.

EBITDA represents net income before interest including loss on debt extinguishment, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted for market-to-market gains or losses, asset write-offs and impairments, and factors the company doesn't consider indicative of future operating performance.

New Deals

NRG Yield also has the opportunity to gain additional assets from NRG Energy this year. In the 2013 third quarter, NRG Energy notified NRG Yield of its intention to offer four NRG Energy right of first refusal assets in 2014.

In this year's first quarter, NRG began discussions with NRG Yield on three of those assets, all of which are based in California.

They are TA High Desert, a 20 megawatt solar facility in Los Angeles County; RE Kansas South, a 20 megawatt solar facility in Kings County; and El Segundo Energy Center, a 550 megawatt fast-start natural gas-fired facility in L.A. County.

This past Jan. 30, the company declared a quarterly dividend on its Class A common stock of 33 cents per share, a 10% increase over the fourth quarter 2013 initial dividend of 30 cents per share.

Fourth-quarter revenue rose 105% to $86 million and NRG Yield earned $1.04 a share, sailing past views, according to Thomson Reuters data.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: NYLD , NRG , CPN , VWDRY , BEP

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