Fueled by a broad portfolio of quality power generation
operations, NRG Yield, a recent IPO, is fully stoked for growth
NRG Yield (
) was formed by major U.S. independent power producerNRG Energy (
) 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
As an independent power producer, NRG Yield sells power to
utilities at market-based rates. Its contracted generation
portfolio consists of 21 assets, including three natural gas or
multifuel facilities, eight utility-scale solar and wind
generation facilities and two portfolios of distributed solar
facilities. It also owns thermal infrastructure assets.
NRG took its offspring public on July 17 at $22, above the
initial offering range of $19 to $21.
NRG retains a 65.5% economic and voting interest in NRG Yield.
Its rationale behind taking it public as a separate entity had to
do with creating a pure-play company with operating, financial
and tax characteristics that would appeal to dividend
growth-oriented investors looking for exposure to the contracted
power sector, says a company filing with the SEC.
Long-Term Power Player
NRG has one of the largest power generation portfolios in the
U.S., with approximately 45,105 megawatts of fossil fuel and
nuclear generation capacity in 345 active generating units at 88
plants as of Dec. 31.
But most of these assets are under shorter-term duration
contracts of one year or less, with a small portion in long-term
contracts of 25 years and beyond, says Citi Research analyst
Shahriar Pourreza. That's where NRG Yield comes in. NRG "sold
down" its long-term contracted assets to create NRG Yield,
composed of long-term project assets with an average life of 17
years, Pourreza says.
"They created this entity that would take these long-term
contracted assets, show them to the market saying 'Here's some
assets we don't think the market is valuing correctly,'" he
NRG Yield owns more "stable assets" with more concrete
contracts in place than NRG, adds Renaissance Capital analyst
"NRG felt these assets could get a higher valuation if they
were in a distinct company," Einhorn said. "A lot of oil
companies have sold off some of their pipelines or infrastructure
type of assets as limited partnerships.
"It's taking some very stable assets and making them their own
company," he said. "It attracts a different investor base looking
for a different strategy."
NRG Yield stock has climbed as high as 29.45 since its IPO,
and shares are now trading around 28.
Name Says It
The attraction? NRG Yield is yielding between 5% and 6% on a
forward basis, almost 1% to 2% higher than what an average
utility is yielding, Pourreza says.
He adds that NRG Yield also offers "cash flow certainty"
because it's fully contracted for a long time. So it knows with
certainty what it will pay out in distributions.
Pourreza says NRG Yield is growing its cash flow between 10%
and 15% annually with the current asset mix as well as future
Its initial dividend is 30 cents per share per quarter.
NRG Yield holds a right of first offer for six additional
contracted assets currently owned by NRG. These assets, combined
with a number of repowering opportunities in earlier stages of
development within NRG, provide NRG Yield a significant platform
for future growth, NRG said in the SEC filing.
More assets coming into the entity create more cash flow,
Pourreza says, which means dividends will continue to grow beyond
typical utilities' growth rate.
"Driven by a pipeline of six drop-down candidates, many
potential third-party deals, and over five repowering
opportunities, we expect NRG Yield's visible growth profile to
lead to a 12% dividend growth rate for the future," Pourreza
wrote in an initiation report -- with a buy rating.
NRG Yield gave investors good news in its first financial
report as a public company Aug. 14. Second-quarter revenue grew
88% to $79 million. It earned 51 cents a share.
Adjusted EBITDA grew 144% vs. a year earlier to $61 million,
primarily driven by assets that came online during the fourth
quarter of 2012 through the first half of 2013.
It delivered a pro-rated initial dividend of 23 cents per
share based on an initial quarterly dividend of 30 cents,
expected to be declared and paid during the fourth quarter.
EBITDA represents net income before interest including loss on
debt extinguishment, taxes, depreciation and amortization.
Adjusted EBITDA represents EBITDA adjusted for mark-to-market
gains or losses, asset write-offs and impairments, and factors
the company doesn't consider indicative of future operating
NRG Yield should benefit from the growth prospects in the
renewable space. According to U.S. Energy Information
Administration estimates, between 2011 and 2035, 29% of all new
electric generation will be solar, wind and thermal, notes
Pourreza in a report.
In solar, NRG Yield's largest project is the California Valley
Solar Ranch, with a forecasted EBITDA contribution of $45 million
a year. The company has a 48.95% stake in the solar farm, which
is located in San Luis Obispo County, and NRG owns the
), a large U.S.-based solar company, is developing the project,
called CVSR for short. Until 2011, it was the owner.
Projects Of All Kinds
CVSR construction is ahead of schedule with the final phase
expected to come online in the fourth quarter, NRG said in a
press release. Power from this project is being sold toPG&E
Corp. 's (PGE) Pacific Gas and Electric Co. under two separate
25-year power purchase agreements.
Its conventional operations consist of natural gas and
dual-fired generation assets, Marsh Landing and GenConn. In May,
it completed the construction of the Marsh Landing natural
gas-fired peaking generation facility on a site near Antioch,
Calif. Marsh Landing sells all the energy and capacity it
generates and ancillary products and services to Pacific Gas and
Electric under a 10-year tolling agreement.
But NRG Yield faces some risks, writes Pourreza: It is exposed
to interest rate, environmental, legislative, management
execution, re-contracting, construction, capital markets, and
"In our view, the largest risk to valuation is a rising
interest-rate environment or government policy changes," Pourreza
Analysts polled by Thomson Reuters expect the company to
report full-year earnings of 91 cents a share. They see 2014
earnings growing 12%. They forecast a 5% rise in 2015 and a 32%
increase in 2016.