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NRG Yield – Well Hedged Yield Co With Great Growth Prospects Going Into 2015
NRG Yield is well hedged between renewable and conventional assets. Coal fired plants is being phased out – conventional gas and renewables will pick up the slack. NRG Yield´s total power capacity will increase 25% in 2015. NRG Yield (NYSE: NYLD ) operates a portfolio of thermal infrastructure and both conventional and renewable generation assets in mostly Northeast, Southwest and California regions of United States. The company focuses on returning cash flow back to shareholders and has established a goal to reach a 15% dividend growth per year for the foreseeable future. Currently roughly half of the power generation is contributed by conventional, mostly gas fired, power plants while the other half is primarily wind. The company has long term agreements to sell the generated power with an average contract duration of 18 years, providing certainty, although ultimately market prices determine the profitability of the operations. The management is actively seeking to expand the company’s portfolio by looking to acquire projects from NRG Energy and other energy companies that look promising from the cash flow perspective. Currently NRG Yield and NRG have entered an agreement for the acquisition of the following NRG facilities – Walnut Creek gas fired power plant with a capacity of 500MW and three wind farms with total capacity of 285MW. The deal will be financed by cash and revolving credit facility and is to close during this quarter. It will bring the NRG Yield´s total power capacity to 3769MW which represents a more than 25% increase from the current levels. Revenue increase by the same order of magnitude is to be expected. NRG stands out from the rest of the Yield Co-s, because its portfolio is well diversified between conventional and renewable assets (around 50% conventional gas fired plants and 50% solar and wind) offering more flexibility to fit the constantly changing regulatory landscape. The company´s conventional assets comprise of gas fired power plants, which are suitable to meet the requirements of peak generation. This is especially important in the light of aggressive renewable takeover induced by both new technology and regulatory incentives, because renewables are bringing about more instability when it comes to consumption and production equilibrium. The crux of the matter here is that it pays to be diversified between relatively green gas fired assets and renewables as the older coal fired plants are quite aggressively phased out by political moves . The energy sector, especially companies in the renewable energy business, have unfairly sold off along with the oil prices, although oil has very little to do with electricity markets – generating only roughly 4% of power globally. Going forward, NRG Yield is a well hedged play in the energy sector and will gain from the coming regulatory moves to support renewables and greener technologies. After all, the old power capacity has to be replaced with something. Renewables and more economical gas fired power plants are likely to pick up the slack – both of which are in the core asset portfolio of NRG Yield. The company offers a dividend of 3.4% and great growth prospects for 2015 and beyond considering its total production capacity will increase by 25% next year. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague
TransCanada: Sandell Asset Thinks It Can Unlock Value With A Split
Summary Sandell Asset Management has moved up from activist campaigns in the restaurant space to the oil & gas pipeline space. Founder Thomas Sandell is pushing TRP to break itself up and utilize its MLP more. TRP is pushing back, given it might not benefit its Canadian shareholders. But with a below-average dividend yield and the Keystone XL overhang, something needs to be done. Sandell Asset Management is known for its heated battle with Bob Evans (NASDAQ: BOBE ), with its founder, Thomas Sandell, pushing for a split of Bob Evans’ restaurant and processed food business. “One of Sandell’s keys is to get Bob Evans to sell or spin-off the segment that produces products, such as sausages and mashed potatoes for sale in supermarkets. That’s because there are little synergies between that business and the restaurants it operates.” – Marshall Hargrave Well, he’s pushing the “split-up” thesis at another company, one that is quite the opposite. Sandell wants TransCanada (NYSE: TRP ) to spin off its power generation business, while also transferring its U.S. assets into an MLP. Known for the Keystone XL pipeline, TransCanada is much more than that; however, the stalling of the Keystone yet again puts in focus the fact that the company only offers a 3.7% dividend yield, well below its oil/gas infrastructure peers. It needs to generate more value for shareholders – with shares up 37% over the last five years, while the S&P 500 is up 80%. Sandell is just a small TransCanada shareholder. But that hasn’t stopped it from waging a proxy battle in an effort to get the company to reorganize its corporate structure. Sandell puts TransCanada’s fair value at C$75 a share, which is over 40% upside. Sandell Asset Pro Forma Portfolio (Q3’14) (click to enlarge) (Source: stockpucker.com) The Sandell Basics Sandell wants TransCanada to split off its nuclear, coal and other power generation businesses; granted, without those it would likely be afforded a higher multiple, where it would also be a more stable business and not as dependent on commodity prices. Sandell also wants more asset dropdowns to TC Pipelines (NYSE: TCP ) – a U.S. pipeline MLP that TransCanada has a stake in. It already has plans to drop down stakes in natural gas pipelines to TC, but Sandell wants more. TransCanada plans to drop down $1 billion in assets to TC over the interim; Sandell thinks that number should be north of $10 billion. Selling all its U.S. pipelines to the MLP would reduce costs, given the MLP pays no taxes. This isn’t Sandell’s first rodeo with this type of deal; last year, it pushed Spectra Energy (NYSE: SE ) to drop down its U.S. assets to Spectra Energy Partners (NYSE: SEP ). Using MLPs is a way to pass profits to shareholders without having to pay taxes. Many of the other major oil/gas infrastructure companies turned to MLPs years ago; think Williams Companies (NYSE: WMB ). Yet, the big counter-argument from some of TransCanada’s top shareholders, which are Canadian institutions, is that they would not benefit as much from the U.S. MLP tax benefits. Our Thoughts TransCanada’s dividend leaves something to be desired when stacked up against its oil/gas infrastructure peers. However, the pipeline industry is heavily regulated and has some pretty high barriers to entry, and as a result, is fairly stable. The counter-argument to Sandell is that the pipeline projects are highly capital-intensive. Canadian pipeline companies are self-funding most of their large projects, and don’t need equity funding. With that, its cash distribution payouts are subpar to American counterparts. However, by TransCanada dropping more of its assets to the MLP, it would be able to boost its distribution payout to shareholders. That means a higher yield and higher stock price for the company. So there would be initial upside in dropping the assets down, but it wouldn’t be a long-term positive. TransCanada would be forced to undergo equity issuances to fund future pipeline projects. Where We Stand Sandell sees two key catalysts: one being the spin-off, two being MLP dropdowns. The spin-off seems the least likely of the two, but it also creates the least value. If TransCanada does show signs of utilizing its MLP more, it would seem to be a buying opportunity for investors. However, we would caution the move for investors with a long-term horizon, and question the suggested benefits to dropping down more assets to its MLP.