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NRG Energy Is Ready For A Turnaround

Summary Despite NRG Energy’s current troubles in the fossil fuels arena, the company’s decentralized generation segment is booming. NRG Energy’s heavy footprint in the distributed generation market ensures that it a place in the future energy landscape. NRG Energy’s enormous fossil fuels business will help pave the way for the company’s future. Although NRG Energy has a bright long-term future, near-term volatility in the fossil fuels arena represents a significant risk to the company. NRG Energy (NYSE: NRG ) has been on a steady decline over the past year, with its stock price dropping from a high of $37 to its current levels of around $25. Much of this drop has been associated with the company’s increasingly volatile fossil fuels business, in which recent fluctuations and margin compressions have taken a toll on the company’s financials. With the majority of NRG Energy’s business being based in fossil fuels, the company’s recent underperformance is not so surprising. Given the heavy oil price volatility, plummeting natural gas prices, and unfavorable coal rulings, it is no wonder that NRG Energy has been experiencing pressure on the margins front. While the company’s total revenues is on an upward trend, its net income is facing much more uncertainty. Given that nearly one-third of the company’s energy generation comes from coal, which is facing an unprecedented amount of industry headwinds, NRG Energy may face some difficulties in the near-term. Regardless of NRG Energy’s underperformance in its fossil fuels business, the company’s heavy presence in residential solar should provide it with a massive long-term boost. Whereas the benefits of the company’s early residential solar involvement are not yet apparent, they should be soon enough as NRG Energy ramps up its involvement. Given the comparatively small size of residential solar, it is only natural that investors are overlooking this crucial energy market. NRG Energy Is Hedging Its Bets As one of the first major power companies to enter the residential solar market, NRG Energy still has upside even in spite of the obstacles facing its fossil fuels business. If predictions of the global rooftop solar market being worth $2.7 trillion by 2040 are anywhere near accurate, NRG Energy is on the cusp of explosive growth. Given the growth trend of solar PV and the theoretical advantages of decentralized generation, this prediction may even underestimate rooftop solar’s impact in the long-run. As NRG Energy is one of the few large companies fully on board with rooftop solar, it is well-positioned to reap the benefits of such growth. Despite the fact that NRG Energy’s residential solar segment still only accounts for a tiny fraction the company business, with just over 16K customers as of Q1, NRG Energy is paying particularly close attention on the segment. Such enthusiasm about an extremely small but promising aspect of its business shows how dedicated NRG Energy is to distributed solar. Such a forward thinking mindset is exactly what will push NRG Energy to the forefront of the energy industry. Given residential solar’s potential, NRG Energy is definitely on the right path. In fact, NRG Energy CEO David Crane is so convinced of the distributed energy paradigm that he is even starting to throw jabs at the electric utility industry. David Crane has recently implied in an interview that utilities are too near-sighted to full embrace new energy concepts(e.g. distributed solar), stating that “There are no thirty-year-old C.E.O.s of electric utilities, no Zuckerbergs,” and that “You have to pay your dues, come up through the ranks. You become C.E.O. when you have five years, max, left. Some of them are just not worrying about ten, fifteen years in the future.” Clearly, NRG Energy is fully committed to the distributed generation paradigm in a way that most other energy companies are not. The company’s residential solar wing NRG Home Solar is growing in prominence, and is set to even compete with residential solar powerhouses SolarCity (NASDAQ: SCTY ) and Vivint Solar (NYSE: VSLR ) in the coming quarters. It would not be surprising to see its residential solar segment double or even triple in customer count over the next few quarters, which would place it squarely among the leading residential solar companies. Despite the uncertainty of NRG Energy’s fossil fuels business, the company’s residential solar business remains a bright spot. (click to enlarge) Source: NRG Catalyzing Residential Solar Growth Using Fossil Fuels With tens of billions in revenue from its fossil fuels business, NRG Energy is one of the largest power companies in the world. The company’s enormous fossil fuels business will allow the company to more easily dominate the distributed solar business. Rather than reinvesting its future profits into its fossil fuels business, the company will likely funnel more and more of its money into its solar operations. Given the hundreds of millions of dollars in annual net income that NRG Energy will likely see moving forward, the company is in a better position than most of its distributed generation competition from a financial standpoint. Rather than having to borrow enormous amounts of cash at relatively high rates, NRG Energy should have a wealth of capital from its fossil fuels business. While hundreds of millions of dollars is a negligible amount in the fossil fuel industry, such a quantity of money will undoubtedly make a huge impact in the comparatively miniscule solar industry. NRG Energy’s cheaper access to capital is likely a big reason why the company has been able to make such a large impact on the decentralized generation scene so quickly. While NRG Energy will have an extremely hard time outcompeting SolarCity in the long-run due to various other factors, the company definitely has the potential to eventually beat out second place residential solar company Vivint Solar. With $15.35B in revenues for 2014, NRG Energy should be able to produce net incomes of around the half-billion dollar range moving forward. Access to such large finances should allow NRG Energy to accelerate it distributed solar business. Obstacles NRG Energy still faces many obstacles in its transition to solar. Given that the vast majority of its business is still based on fossil fuels, the company’s near-term prospects are more uncertain due to the fossil fuel industry’s current volatility. Even if NRG Energy can stabilize its fossil fuels business, there are still many questions regarding the long-term viability of its residential solar business. Despite the enormous promise associated with the solar leasing model, this business model is still relatively young and untested. There is almost a complete absence of data regarding long-term default rates, module performance, etc. As such, the present value of the long-term solar lease contracts are still heavily debated. Conclusion Despite the uncertainty facing NRG Energy in the near-term, the company’s amazing progress in the residential solar sector is undeniable. The potential rewards associated with the residential solar business model far outweigh the risks, which puts NRG Energy in a great position moving forward. After dropping nearly one-third of its value over the course of a year, NRG Energy should experience significant upside moving forward. NRG Energy is at the forefront of the distributed generation movement, and has the financial resources to truly make a long-term impact. At a valuation of $8.12B , NRG Energy still has much more room to grow. Disclosure: I am/we are long SCTY. (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.

Adoption Of VXUP As A Hedging Instrument Could Transform Investment Management

VXUP is revolutionary. VXUP could become a key hedge for non-correlated portfolios. VXUP deserves to become a billion-dollar ETF. Spot CBOE VIX Up Class Shares (NASDAQ: VXUP ) could transform investment management. While I am very empathetic to the notion put forth in yesterday’s article that the daily movement of the ETF currently lags the responsiveness of the raw VIX index, the recognition, appreciation, and acceptance of VXUP’s benefits should dramatically increase its trading volume. In turn, the increase in VXUP’s trading volume should make it much more responsive to changes in the raw VIX index. And this increased responsiveness to the raw VIX index will further increase the ETF’s value as a hedging tool, in a virtuous cycle. The general acceptance and adoption of VXUP as a hedging instrument should transform investment management in a variety of ways which I will specifically illustrate. Indeed, I believe that the investment community will quickly realize the immense profitability of promoting a very healthy level of liquidity and AUM in VXUP. Yesterday’s article did an excellent job of explaining VXUP’s mechanics, along with that of its inverse ETF VXDN (NASDAQ: VXDN ). I will not recreate the wheel here. However, I will point out numerous examples of strategies which could be vastly improved by the use of VXUP as a hedging component. Indeed, as a hedging instrument, it is totally irrelevant whether VXUP is perfect. What matters to the investor is whether or not VXUP is a drastic improvement over every other ETP hedging alternative currently available. I will argue forcefully that VXUP is vastly superior. The ZOMMA Index Master Sheet is an exhaustive list of ETP strategy indices and their variations that we have published on seekingalpha and sometimes in books. I forcefully argue that for any of the strategies which use iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA: VXZ ), iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ), or ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) as a hedging component, that the performance of those strategies could be vastly improved over multi-year periods by replacing the use of VXZ, VXX, and UVXY with VXUP. Theoretically, there are very short, discrete time periods where backwardation could benefit the use of VXZ, VXX, or UVXY. However, it has been definitively illustrated by dozens of studies that over longer times frames, persistent contango tends to cause an uncomfortable amount of performance drag when using these instruments as hedges. On one hand, I have argued that all of the strategies illustrated in the master sheet should no longer be used due to their correlation to long bonds. On the other hand, reducing the size of TMF, and making VXZ, VXX, or UVXY larger percentage allocations in an effort to reduce the strategies’ long bond correlation and diversify hedging sources kills upside performance due to contango lag–equally unacceptable. VXUP would solve this problem elegantly, allowing larger volatility-related hedges, which could reduce the correlation of the strategy indices to both stocks and to bonds, while eliminating contango lag. I have argued forcefully that the nightmare scenario for the financial markets is for both stocks and bonds to crash simultaneously. On 3/11/2015 , I wrote: The sad joke of financial markets is that they are driven by long term interest rates, which set the discount rate for all other asset classes. And indeed, dropping interest rates have made speculators of every stripe look brilliant. Imagine a high jumper who is constantly buoyed by a dropping force of gravity. His athletic prowess appears to be improving, but instead, the force of gravity is becoming weaker. And conversely, rising gravity, or interest rates, cause moving objects to drop to earth more quickly. Moving objects like stock prices, bonds, real estate, and even gold. Every asset class will be affected by rising rates. Since then, the TLT ETF has dropped from $127 to a touch below $117. Imagine a nightmare scenario is which both stocks and long bonds dropped by 50%, due to a spike in interest rates. In such a scenario, it is almost facile and axiomatic to point out that volatility would skyrocket. A hedge like VXUP would be absolutely essential to reduce a portfolio’s correlation to both stocks and to bonds during such a nightmare. Moreover, if stocks and bonds do not simultaneously collapse, a lower correlation to both asset classes will not hurt the investor seeking an authentically non-correlated return stream during more normal regimes. So returning to the issue at hand, the use of VXUP as a hedging tool potentially allows the serious investor to reduce a portfolio’s correlation to both stocks and to bonds without the continuous contango that a VXZ, VXX, or UVXY position would entail. And without contango, the new VXUP volatility hedge could be comparatively larger without the associated drag of pre-existing alternatives. So it is largely irrelevant to the serious investor whether or not VXUP perfectly mirrors the raw VIX index. No hedge is perfect. There are merely hedges which are far better than any available ETP alternative! And VXUP is that far better hedge. As the investment community realizes it and volume in the VXUP increases, ironically, the VXUP should better mirror the raw VIX and even further outpace the competition as the most serious tool in the hedger’s toolbox. The portfolio manager’s dream has always been a continuously traded put option of sorts, which can serve as a shock absorber to a portfolio, without the drawbacks of a put option’s time decay or a volatility future-based instrument’s contango (which some would call synthetic time decay). The VXUP should become that continuously traded put option. Nothing else which has been introduced in the ETF world comes close to the VXUP in achieving that goal. I am not an expert in ETF design, but the goal that VXUP seeks to achieve is exceedingly shrewd. I would argue that increased volume, AUM, and acceptance will make the instrument more robust, useful, and demanded. Disclosure: I am/we are long VXUP. (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.

PPL Remains On Track Despite Spin-Off

When a company spins off part of its business, it may look like shareholders lost money, but in most cases, it’s just a technical adjustment. PPL’s stock hasn’t “fallen,” per se, but instead PPL shareholders now own a portion of newly-created Talen Energy, a stake of which they can do with what they want. After the spinoff, PPL management reaffirmed its 2015 ongoing EPS guidance of $2.05-$2.25, as well as its expected earnings CAGR of 4%-6% through at least 2017. Certainly there’s been a lot of share-price noise at PPL as of late, but the firm continues to execute, and we still like the utility. By Kris Rosemann PPL Corp’s (NYSE: PPL ) shares have been adjusted lower recently, as the firm officially completed the spinoff of its energy supply business June 1. The move finalizes PPL’s transition to a focus on regulated utilities in the US and UK. PPL’s spinoff, now trading under the name Talen Energy Corporation (Pending: TLN ), also includes the addition of RJS Power of Riverstone Holdings. As previously announced , all of the common stock of Talen Energy will be distributed pro rata to PPL shareholders. PPL shareholders received ~.1249 shares of Talen Energy common stock for each share of PPL owned as of May 20. Fractional shares were not issued; instead they were aggregated and sold in the open market, with the cash proceeds distributed pro rata to PPL shareholders. The affiliates of Riverstone Holdings will receive common shares of Talen Energy in compensation for RJS Power, resulting in their owning 35% of Talen Energy. PPL shareholders will own 65%. After the spinoff, PPL management reaffirmed its 2015 EPS from ongoing operations guidance of $2.05-$2.25, as well as its expected compound annual earnings growth rate of 4%-6% through at least 2017. The firm expects substantial rate base growth in the coming years, projecting a CAGR of 7% through 2019, though we note currency headwinds from its UK operations will continue to negatively impact earnings in the near term. Management also stated as recently as February of this year that it expects dividend growth potential to become realizable following the spinoff. The dividend potential of Talen Energy remains to be seen, but the assets that make up the company generated $4.3 billion in revenue in 2014. The newly-created firm will boast a competitive cost structure and the financial agility to pursue additional growth options. At its inception, Talen’s generation capacity of about 15,000 megawatts will be primarily located in the Mid-Atlantic and Texas, two of the largest and most competitive energy markets in the US. Its generation mix is approximately 43% natural gas or oil, 40% coal, 15% nuclear, and 2% hydroelectric. The energy-generating plants will continue to be operated and maintained by the same employees before the spin off, and the firm’s leadership team is partially comprised of former PPL leadership. The drop in PPL’s share price should not come as a surprise, and intuitively, it makes sense. Though at face value it appears that PPL shareholders suffered a decline in the value of their position, the spinoff is a net-neutral one in the sense that the value lost by PPL shareholders in the market will be realized by the receipt of new Talen stock and cash distributions. Our opinion of PPL is relatively unchanged following the spinoff, and we maintain the company is still one of the best-performing utility companies available. We see no need to adjust our holding of PPL in the Dividend Growth Portfolio, though we may view the new shares of Talen Energy as a source of cash. Our fair value estimate already reflects the anticipated spinoff. We value shares of PPL at $30 each at the time of this writing. 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. Additional disclosure: PPL is included in the Dividend Growth Newsletter portfolio.