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Summary NRG held an analyst call last Friday to provide a strategic update. NRG will create a GreenCo, including its Home Solar business. The remaining exposure to GreenCo is $125M. NRG committed to an additional $1.3B in share repurchases and debt reduction through 2016. The company also announced its performance in the latest PJM capacity auction. Last Friday, NRG Energy (NYSE: NRG ) held a conference call to present an update to its strategic direction and to present a business update. The big item in this call was the plan for simplifying NRG by creating a new “GreenCo.” The GreenCo will contain three of NRG’s current business units: NRG Home Solar, NRG EVgo, and NRG Renew. The creation of the GreenCo is expected to be complete on January 1, 2016. Part of the reason for this move is that investors have been concerned that these businesses were money pits that would just suck away the cash generated by its main wholesale power business. NRG said that these businesses are showing progress and that the time had come to increase the financial rigor and make them more self-supportive. NRG has put a limit of $125M in additional support to GreenCo from the parent. It is also pursuing potential strategic partners. NRG feels that the GreenCo business will be self-sufficient by the middle of 2016. NRG provided an update on how the Home Solar business has been doing this year, and presented the following chart: Exhibit 1 Source: NRG 9/18/15 presentation NRG felt that the solar business got off to a slow start in 2015, but that it has achieved some momentum as the year has progressed. 2015 sales are up 103% year-to-date, even after the slow start, and the 2,500 bookings in August are a monthly record for NRG. That level puts it with Sunrun (NASDAQ: RUN ) in the competition for third place in domestic market share, behind SolarCity (NASDAQ: SCTY ) and Vivint (NYSE: VSLR ). Installations and deployments are still lagging, but NRG feels this lag will be addressed by year-end. Getting the installations and deployments figured out is obviously a big thing for its solar business. It is one thing to be able to take orders, but it is another to actually deliver a product, and this is what NRG needs to prove to investors. (Reminds me of this old Seinfeld episode .) Of course, one of the advantages of solar deployment being behind schedule is that it has burned less cash in the business. At January’s investor day, NRG estimated $250M in cash being spent at Home Solar in 2015, but now its estimate is only $168M. Other reasons for the decrease are a partnership with NRG Yield (NYSE: NYLD ) and better terms from tax equity providers. It really makes sense for NRG to make the move to break out the GreenCo businesses. You can see how small these GreenCo businesses really are compared to the older NRG businesses by looking at the YTD EBITDA table: Exhibit 2 (click to enlarge) Source: NRG Q2 2015 Earnings Presentation Management is spending significant time involved with these businesses, even though there is a small effect on the bottom line. Yes, there is the potential for high growth if these work, but there are lots of risks as well, and with management spending all of their time on the small businesses, they risk missing opportunities at the big businesses that could really impact the bottom line. Management does not want to quickly sell the GreenCo business at this time. They think that as the business continues to grow and as the IPO market improves, they could extract a lot of value. One example they gave is that the Texas market has been very slow to embrace solar. They feel that if Texas takes off, the GreenCo would really be a big beneficiary, and they would like to keep exposure to this upside. NRG said it thinks it could eventually realize a significant multiple above the $125M commitment it is making today. RUN, the company with a similar-sized solar business, has an enterprise value of about $1.7B, so there may be hope that NRG can extract value from this endeavor. The call reviewed a number of other topics besides the GreenCo announcement. Over the last six months, NRG has been examining ways to optimize its generating portfolio through deactivations, fuel conversions, or other means. On Friday, NRG announced that non-strategic asset sales would also be part of its portfolio optimization. The company feels that there are a number of valuable assets that could be sold, simultaneously reducing its need for CAPEX and providing capital to be used elsewhere in the company. NRG mentioned that there is a good chance a number of these sales would be in the PJM region. If transactions do take place in PJM, it could give investors some nice data on values for similar assets that would help in estimating the value of other companies with big nearby portfolios (Dynegy (NYSE: DYN ) and Talen (NYSE: TLN ) for example). NRG also plans to reduce development, marketing, and G&A spending by $150M in 2016. It estimates that it will cost $60M to put these expense reductions in place. NRG expects that over the next six to nine months, cost reductions, CAPEX reductions, non-recourse financings, and asset dispositions will free up $1B in capital. By the Q3 conference call, NRG will announce the details of where the first 50% of this $1B will come from. The final 50% will most likely take place through asset dispositions, which it expects to happen in 2016. This $1B will be used for stock repurchases and debt reduction. NRG also committed to an additional $300M of stock repurchases and debt repayments from cash flow it expects to receive this year. All of these balance sheet reductions are on top of the remaining $251M of stock buybacks that NRG has already committed to for 2015. Also, don’t forget that in 2016, NRG’s operations will produce additional cash flow that could be used for further reductions to the balance sheet and dividends to shareholders beyond this current plan. NRG also mentioned that maintenance and environmental CAPEX is expected to go from about $725M in 2016 to $400M in 2017, which will continue to help its cash flow over the long run. The call also provided updates regarding NRG Yield. The big item was that an agreement has been reached to move the Edison Mission Wind portfolio to NRG Yield. This is going to bring $210M of cash to NRG, and the entire deal was completed at an implied enterprise value of $452M. The implied EV/EBITDA of the deal was approximately 11x. It was also announced the NRG Yield would not be looking to raise any equity until the markets for Yieldcos improved. This could impact its ability to obtain more assets, but stated that NYLD can still grow its dividend at a 15% CAGR without any further asset dropdowns from NRG. Exhibit 3 (click to enlarge) Source: NRG September 18 presentation The big update about NRG’s traditional generation business was the review of last month’s PJM capacity auction. (My Seeking Alpha article discussing the auction can be found here .) Exhibit 4 (click to enlarge) Source: NRG 9/18/15 presentation The company’s 2018/19 results give about $225M of extra revenue compared to the results of the original 2017/18 auction. If you assume a 40% tax rate, and then take NRG’s 331M shares, you get an almost 41¢/share impact to earnings. NRG did not break out the specific units that cleared the auction, but it did show some data by zone. I have totaled the cleared capacity data NRG gave in Exhibit 4 above, and compared it to the available capacity in the different regions. Exhibit 5 (click to enlarge) Source: NRG and Garnet Research estimates It should be noted that NRG’s numbers include imports, which explains why the total of NRG generation that cleared in the RTO is above the amount located in that zone. If all of NRG’s assets in PJM (not including imports) had cleared at the CP price, it would have received about $1.1B in revenue, instead of the $950M level it achieved. According to page 16 of PJM’s report on the auction results, the COMED zone (the area around Chicago) had 23,320 MW of capacity clear the auction. This means that NRG had about 18% of the cleared capacity. PJM’s report also shows that 26,275 MW were offered in the auction for that zone. Exelon (NYSE: EXC ) has already stated that its 1,800 MW Quad Cities nuclear plant did not clear in COMED, and it now appears, assuming NRG offered all of its capacity, that the remaining capacity that didn’t clear was entirely owned by NRG. This should be a sign that if things continue to tighten around Chicago, NRG has a good chance of benefiting. With the new auction results, expect an update of this slide from the Q2 results presentation when NRG presents Q3 results. Exhibit 6 (click to enlarge) Source: NRG Q2 2015 Earnings Presentation NRG now has about $950M from the latest auction that will be split between 2018 and 2019 in the above chart. The recent PJM transitional capacity auctions for the 2016/17 and 2017/18 planning years will add $125M to be split between 2017 and 2018, and an additional $105M to be split between 2016 and 2017. Friday’s announcements should be pretty positive for NRG, but the initial reaction has not been that enthusiastic. Exhibit 7 (click to enlarge) Source: SNL NRG did take a big hit on Friday after the conference call. But most of this was giving back that gains from earlier in the week that came when it announced it would hold the call. The market also had a down day on Friday, so NRG was likely carried along with everyone else, further worsening performance. So far this week, the stock has continued down, even with Friday’s positive news. Most of the other independent power producers were down significantly as well, so NRG’s fall has not been isolated. Conclusion This was a positive call for NRG. It is simplifying its business and will be returning significant capital to investors. The stock market has driven NRG’s shares down further since the announcement, on top of an already tough year. If NRG can execute this plan, it should at least stop the relentless decline it has been experiencing. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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