Tag Archives: nysenrg

NRG Energy Increases Its Solar Ambitions

Summary NRG Energy is jumping into community solar, making it one of the first companies to enter into this promising market. NRG Energy holds many unique advantages in the community solar segment, making it highly competitive against even the likes of SolarCity. The company’s growing distributed solar operations comes with many risks, most notable in the form of long-term unknowns. The community solar concept is rapidly gaining steam, with some leading solar companies jumping into this space over the past few months. Given that community solar covers the renters’ market, which consists of 108 million individuals in the U.S. alone, its sudden emergence is not so surprising. Financing in the solar industry has finally reached a stage where community solar is not only feasible, but attractive for solar companies. While there are many more complexities involved in this solar market compared to the residential or utility-scale solar markets, it should still see explosive growth in the near term. NRG Energy (NYSE: NRG ) has been the latest company to enter into the community solar market, which is not surprising given its ambitions in distributed solar. The company recently launched a 1 MW project (connected to 200 homes), which will serve as a pilot to more community solar projects in the future. With 100 MW of shared community solar projects already in its pipeline, NRG Energy clearly has big community solar ambitions. This marks the first time that NRG Energy has been able to penetrate a major solar market so early on, which should add more upside to the company’s already undervalued stock. First Mover’s Advantage The community solar market has just recently opened up, which means that NRG Energy has a huge opportunity to cement itself early on as a dominant presence. Given the immense size of the U.S. renters’ market alone, the company should be able to experience some serious growth in this arena. While the current community solar market is nearly nonexistent, this market is expected to grow at ~60% per annum until 2020. This would mean that the community solar segment should grow approximately twice as fast as the general industry during this time period. While dominating the community solar segment will certainly not be easy for NRG Energy, the company has all the tools to do so. With the operational capabilities and expertise of its NRG Home and NRG Renew business segments, the company could even compete with the likes of SolarCity (NASDAQ: SCTY ) on this front. In fact, NRG Energy’s 100 MW community solar pipeline is equivalent to that of SolarCity’s . Given that SolarCity was the first company to make a truly impactful entrance into community solar, this shows how ambitious and forward-looking NRG Energy is. GTM Research predicts that community solar will be a half-GW market (annual) by 2020. (click to enlarge) Source: GTM Research Unique Advantages NRG Energy has some major advantages over its competitors on the community solar, and more generally, distributed solar front. First, the company already has a huge customer base off of which to leverage for its distributed/community solar business. The company also has stronger relationships with electricity companies compared to its solar pure play peers, which should allow it to expand its community solar segment more rapidly. Given that cooperation with utilities will likely prove key to dominating the community solar segment, NRG Energy definitely has an edge on this front. With NRG Energy’s enormous distributed solar ambitions, it is easy to forget that the company is one of the largest fossil fuel power companies in the world. In fact, the company has a whopping ~47 GW of operational assets, which would also give the company a financing edge over its pure play solar competitors. As such, NRG Energy will almost certainly be one of the front-runners in the highly promising community solar segment. While NRG Energy’s pure play solar competitors may be more well versed in the solar arena, NRG Energy’s own unique advantages more than make up for this. Obstacles The community solar segment is still basically unexplored, which means that first movers like NRG Energy are taking on more risk. Despite the sudden surge of competitors in this arena, the community solar business model is still new. As NRG Energy is planning to make the community solar segment a sizable portion of its business down the road, the company will likely funnel a lot of its resources into this arena. Given the unknowns associated with community solar, entering into this segment is relatively risky. More generally, there are also many long-term questions about the solar leasing model used by NRG Energy. How the long-term plays out for solar leases is incredibly important for the company as it is making a huge transition to renewables, and is planning to make distributed solar one of its focal points. Regardless of such unknowns, the potential rewards of involving itself in this solar segment far outweigh the risks. NRG Energy’s transition from a fossil fuel-centric power company to one more focused around renewables should prove to be extremely smart on balance. Conclusion NRG Energy has faced a yearlong downturn, which can largely be attributed to the instability experienced by the fossil fuels industry during this time. Although many investors still view NRG Energy as part of the fossil fuels sector, the majority of the company’s long-term prospects lie in its growing renewables sector, namely solar. Given the sheer potential of its distributed solar business alone, NRG Energy is undervalued at a market valuation of $7.2B . NRG Energy is slated to be one of SolarCity’s largest competitors, which speaks to the potential that NRG Energy’s solar segment holds. The company’s entrance into community solar just reinforces its place within the future energy landscape. 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.

NRG Could Be The Green Victim Of Green Energy

NRG stock is down by one-third in the last year despite its green energy gloss. The company’s problem is that it produces and sells solar and wind but does not own utilities. Next Era Energy has a better economic model. NRG (NYSE: NRG ) CEO David Crane has the reputation of being one of the smartest guys in the energy industry, certainly the smartest in the utility business. He talks big about ruling and overthrowing the utility industry, with a big boost from renewable energy. But over the last year he, and his shareholders, have been getting their comeuppance. NRG shares are down by one-third over that time. Profits have been down for three consecutive quarters, and the March quarter saw the company make a $120 million, 37 cent per share loss. The company raised the dividend a penny in defiance of this, to 15 cents, but the company’s yield of 2.33% is still not awesome compared with its peers, and it looks a lot more threatened. What went wrong? Some might argue the problem lies in its business model. NRG makes most of its money as a “standby” energy producer. It doesn’t control customer accounts. It builds and holds energy production, and makes money on the production cost. When investors look at it, however, they see things like Green Mountain Energy , which works to get consumers using “green” energy and lower their costs at the same time. But NRG is not a utility. It does not control the delivery of the energy it sells. Green Mountain is often confused with Green Mountain Power , a Vermont utility that does do business with NRG but is actually owned by Gaz Metro , a company which, through a web of holding companies and partnerships , is connected to Quebec’s public pension funds and Enbridge (NYSE: ENB ), a pipeline company whose Alberta Clipper pipeline serves the region’s oil sands. Contrast it with NextEra Energy (NYSE: NEE ), the parent of Florida Power & Light, which recently announced a deal to buy Hawaii’s Hawaiian Electric (NYSE: HE ). Th at deal has some in a bad odor but the idea is to run Hawaiian Electric, where renewable energy is abundant, more like Green Mountain Power. That is, the company can make money by financing energy savings for consumers and sharing in the proceeds, as described this week at The New Yorker . When the company delivering energy savings to a consumer is also the consumer’s electric utility, it can be creating multiple routes to profit. It’s selling and financing something other than power generation. It’s actually creating a financial benefit for itself out of lower power use. It’s also gaining control of an account that can help it deal with the costs of solar and wind energy, including its intermittent nature. Utilities don’t have to be opponents of green energy, the story goes, they can make money from being its advocates. If what Green Mountain Power did in Vermont works in Hawaii, it’s a huge win for NextEra Energy. Trouble is, that lower power demand also becomes a huge loss for companies like NRG, whose business depends on selling power, and whose profits depend on maintaining a high price for that power. Perhaps that is the reason that NEE stock has been stable over the last year, and it has nearly double the net income, $1.45/share, it needs to pay the dividend of 77 cents per share, up a nickel from last year’s 72 cents. The dividend means a yield of 3.04% that is quite sustainable, and it has profit opportunities that NRG can only dream of. 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.

NRG Energy – A Business Pivot At Just The Right Time

Summary There are major trends impacting the Utility sector: Fuel fluctuations, renewable energy targets, increasingly connected customers and innovations in distributed generation. The interest rate environment is favorable for highly leveraged Utility companies to refinance at attractive rates. NRG is using this drawdown period to shift their business to benefit from these trends in the future. The utility sector is going through a period of margin compression and market disruption which is challenging for a group of companies which are expected to pay stable dividends. The sector is being impacted by changing trends in renewable energy, increasingly connected retail customers, fluctuations in fuel costs and the increasing economic validity of distributed generation. NRG (NYSE: NRG ) is using this challenging business environment and the current low interest rates to pivot all of the Company’s businesses to benefit from these trends going forward. Make no mistake, NRG is undergoing major restructuring of their business model. The Company taken a hard look at all facets of the company and is making broad changes. One major change is that NRG has reorganized their company organizational structure, which is summarized in the Business Overview section below, to fit their view on trends in the Utility sector. Another major change is how NRG is approaching regulatory risks regarding the environment. 31% of NRG’s generation fleet is “dirty” coal-fueled power plants, the Company is currently burning cash upgrading these plants to bring them on pair with cleaner Combined Cycle Gas Turbine plants which are fueled by Natural Gas. The bottom-line benefits of the coal plant upgrades have yet to be seen. By analyzing the NRG’s current business environment, future trends in the sector, growth plan, risk management strategy and expert opinions we can tentatively postulate that the Company will produce sub-par results in the near-term, but has positioned itself as a Utility sector leader in the long-term. (click to enlarge) *from Yahoo Finance Business Overview: NRG Energy, Inc. is a competitive power company that produces, sells and delivers energy and energy products and services in major competitive power markets in the United States. Further the Company is a leader in the Utility sector and is 48th in the Fortune 100 Largest Companies in the United States. NRG owns and operates around 52,000 MWs of generation and engages in trading of wholesale energy, capacity, fuel and transportation services. Further the Company directly sells energy and sustainable services to retail customers. There are three major grouping within NRG: NRG Business: Was traditionally known as the Wholesale Power Generation Business, but now also includes business-to-business solutions. These solutions include, demand response, commodity sales, energy management and energy efficiency. Further this branch includes the distributed generation team for NRG. NRG Home: Is the consumer facing retail power operations, including solar. The branch serves 2.8 million recurring customers and is the largest retail energy provider in Texas and one of the largest in the United States. NRG Renew: The branch of NRG which develops mirco grid solutions as well as renewable products and services for large clients. In 2014, NRG Renew became one of the largest domestic wind-operators after an acquisition from EME . NRG Yield: A publicly traded dividend growth-oriented company formed to serve as the primary vehicle through which NRG owns operates and acquires contracted renewable and conventional generation. NRG Carbon 360: Consists of the Company’s carbon capture business. The branch plans to develop carbon capture technologies for NRG with an aim to prolong the life of NRG’s coal fleet and convert the carbon emissions to a marketable asset. (click to enlarge) * from 10-k Trends: The NRG has stated that the U.S. energy industry is going to be increasingly impacted by a long-term societal trend towards sustainability. Further the company stated that the information technology revolution, which has enabled greater personal choice, will increase churn in the U.S. retail energy sector. The sector specific trends above need to be considered in context with two current trends in the Natural Gas Market and Credit Markets which directly impact NRG’s business results. The Natural Gas Market has been in a downward price trend since its peak in 2007. While it might seem counter intuitive, downward Natural Gas prices actually reduce margins for NRG’s power generation portfolio, this relationship is explained further in the Risk Management section below. If Natural Gas reverse trend and begin rising, NRG will see an expansion of margins from their generation fleet. (click to enlarge) * Henry Hub Natural Gas Prices, Monthly from WSJ The Credit Markets have been in a decreasing interest rate environment since 2007. Like many Utilities, NRG is heavily leveraged, which means the company has significant exposure to interest rate risk, these risks are explained further in the Risk Management section below. If the Credit Markets reverse their trend and NRG cannot hedge adequately, the Company will be forced to devote much of their operating capital to debt repayments. (click to enlarge) *from the US Treasury Database Growth Plan: from the 10-k Enhance Generation: Continue to invest in upgrading the Company’s coal-fueled generation fleet. Expand Retail : NRG has increased its exposure to the Texas retail energy market in order to gain access to the competitive pricing structure of the ERCOT market. Further the company is diversifying its retail brand names to capture more segments of the market. Go Green: The company recently acquired the largest wind farm in north America. See it here . Smart Capital Allocation: NRG has hedged a portion of its coal and nuclear capacity with decreasing hedge levels through 2019. As a result of the GenOn aquisition , the majority of the Company’s generation is in forward capacity markets that extend three years into the future. As of December 31, 2014 the Company had purchased fuel forward under fixed price contracts, for approximately 50% of its expected coal requirement from 2015 – 2019. Risk Management: from the 10-k Many of NRG’s Power Generation Facilities Operate Without Long-term Power Sale Agreements: The Company’s “merchant” generation fleet operates without long-term power sales agreement, and therefore are exposed to market fluctuations. Without long-term agreements NRG cannot be sure that these facilities will operate profitability in future energy price environments. Exposure to Fluctuation in The Natural Gas Markets: In many of the markets NRG operates in the price of power is typically set by natural gas-fired power plants which have traditionally had higher variable costs than NRG’s coal-fired plants. Decreases in natural gas prices have resulted in a corresponding decrease in the market price of power which significantly reduces the operating margins of the Company’s baseload generation assets. At extremely low natural gas prices, gas plants become more economical than coal generation, in such environments NRG coal-fired units cycle more often or even shut down. 31% of NRG’s generation fleet is coal-fueled. Disruptions of Fuel Supplies: NRG relies upon coal, oil and natural gas to fuel a majority of its generation facilities. Delivery of these fuels depends upon continuing viability of counterparties as well as upon the infrastructure available to serve each facility. There are many risks which can disrupt the distribution of fuel such as, weather conditions, demand levels, changes in market liquidity, etc. For an example of these risks please read this article on well freeze-offs. Competition in the Wholesale Power Markets: Many of the Company’s facilities are old, newer plants owned by the competition are often more efficient than NRG’s aging plants. In order to compete effectively NRG seeks to use its scale and aggregate fuel supplies, efficiently utilize transportation services and transmission services from other Utilities and third-parties. Power Outages: Old facilities require periodic maintenance, and unexpected outages are extremely costly for NRG. Government Regulation: NRG’s business is subject to extensive U.S. federal, state and local laws and foreign laws. Except for ERCOT (Texas), most of NRG’s generation companies are considered ‘public utilities’, which subjects these generation companies to FERC oversight, ratemaking and environmental oversight. There are many ongoing regulatory issues, here are a few examples that the Company is currently dealing with: Cross-State Air Pollution Rule , MATS , CO2 Emissions , and Byproducts, Wastes, Hazardous Materials and Contamination. Interest Rate Risk: NRG’s substantial debt could have negative consequences including: Increasing NRG’s vulnerability to general economic and industry conditions Requiring large portions of NRG’s cash flow from operations to be dedicated to the payment of interest, reducing the Company’s ability to pay dividends Limits NRG’s ability to enter into long-term power agreements Limits NRG’s ability to obtain additional financing for working capital Limiting NRG’s ability to adjust to changing market conditions and placing it at a competitive disadvantage compared to its competitors who have less debt. Expert Opinion: (click to enlarge) * from Yahoo Finance The experts are currently bearish on the prospects of NRG’s near-term stock price. Most experts are providing a “Neutral” or “Hold” rating to NRG. However with NRG’s current price of $25 per share, there is still an upside of 22% to the median price estimate of $30.50. (click to enlarge) * from Yahoo Finance The experts expect NRG to have a difficult year during 2016. EPS is expected to decay from $0.83 for 2015 to $0.17 during 2016. Further the revenues are expected to stagnate between 2015 to 2016 with estimated revenues of $15.33B and $15.31B respectively. Recent News: The California Public Utilities Commission approved the SDG&E Power Purchase and Tolling Agreement for the NRG Energy, Inc Carlsbad Energy Center. The Center is a 500 MW, five unit natural gas peaking plant in southern California. Reliant launches integrated home security, automation solutions. CEO David Crane wins 2015 C.K. Prahalad Award for Global Business Sustainability Leadership. NRG moves to spot 48 on the Fortune 500 List. The Company acquired Goal Zero , a leading provider of portable solar power and battery packs. Through the acquisition NRG hopes to increase cross selling between mass market system power, residential solar and personal power. Conclusion: In conclusion NRG is going through a difficult business pivot. Low Natural Gas prices have hurt NRG’s margins for the electricity generation fleet. However, the low interest rates in the Credit Markets have given NRG financial flexibility to restructure the Company into position which benefits from the major trends in LNG technology adoption, renewable energy, distributed generation and increased energy connectivity of retail customers. NRG is a massive company, so these changes are going to be slow and relatively painful for the company’s bottom line in the near-term. However, if NRG and David Crane can weather this challenging business environment then the Company will be able to apply its scale to capture increasing margins as the Natural Gas Markets bounce back. I recommend NRG as a near-term Short, but a long-term Buy, because the Company’s margins are tied to the fluctuations in the Natural Gas Markets. The Company will refinance at currently attractive interest rates and the global Natural Gas Markets are slowly moving towards parity with one another as the adaptation of LNG technology allows for easier transportation of Natural Gas. These two factors should allow NRG to boost their cash flows from operations and reward long-term investors. 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.