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New sponsor could provide NRG Yield with 'massive' runway for growth

NRG Energy Inc. is steps away from the finish line of its strategic transformation plan, and NRG Yield Inc. is primed to accelerate its earnings and portfolio growth through a deal reached with Global Infrastructure Partners.

NRG on Feb. 7 announced the sale of its interests in NRG Yield and the NRG renewable energy development and operations platforms, consisting of a pipeline of more than 6,000 MW of backlog and development projects, to Global Infrastructure Partners, or GIP, for expected cash proceeds of about $1.38 billion. The deal includes NRG's sale of its class B and class D shares of NRG Yield, NRG's renewable energy nonright-of-first-offer backlog pipeline and its right-of-first-offer, or ROFO, updated pipeline.

NRG is separately selling its interests in the 527-MW Carlsbad Energy Center and 154-MW Buckthorn solar plant to NRG Yield for additional cash proceeds of $407 million, subject to certain adjustments.

NRG also announced the sale of its 3,555-MW NRG South Central Generating LLC coal-fired and natural gas portfolio to Cleco Corporate Holdings LLC for $1 billion. NRG expects to close these transactions in the second half of this year.

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All the transactions, including previously announced asset sales in the second half of 2017, bring NRG's cumulative transformation plan to $2.9 billion in anticipated cash proceeds. The company has revised its total asset sales cash proceeds target to approximately $3.2 billion from $4 billion and expects to announce additional asset sales by the end of 2018.

"Our objective was to maximize the value of these high-quality businesses, and I am very pleased to have achieved this outcome," NRG President and CEO Mauricio Gutierrez said Feb. 7 on a call with investors and analysts. "In addition, we were able to attract highly knowledgeable, well-capitalized and experienced buyers, which makes me confident in our ability to bring these transactions to a swift close."

"With these transactions, we have now announced over 90% of our revised target cash proceeds and have identified over 90% of our target debt to be removed," Gutierrez added.

NRG expects nearly $7 billion of debt to be removed as part of the sale of its renewables platform and stake in NRG Yield, as well as the accelerated dropdowns of Carlsbad and Buckthorn to NRG Yield. The company is targeting the removal of approximately $8 billion in consolidated debt.

Company management said they will target an additional $275 million in cash proceeds through the sale of "a combination of conventional and renewables assets."

Gutierrez said this sale process will focus on smaller renewable assets and additional monetization of the Agua Caliente solar plant. NRG and NRG Yield agreed to maintain a ROFO agreement for NRG's remaining 102-MW net ownership in the Agua Caliente solar plant and amended the agreement to remove the Ivanpah solar plant as a ROFO asset.

"On the conventional side, we haven't provided specifically the assets [to target]. We have some processes that are ongoing, so for competitive reasons, we choose not to disclose the specifics," Gutierrez said in response to an analyst's question on additional asset sales.

The CEO said the plan is to have all of these asset sales announced in 2018.

"We are now in the process of marketing the other renewable projects. We are evaluating all options for Ivanpah," Gutierrez added.

NRG is expected to provide a comprehensive update on its transformation plan and full strategic plan during an analyst day set for March 27.

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Fuel for growth

CreditSights analysts said the combination of NRG Yield and GIP will be similar to a Brookfield Asset Management Inc. and TerraForm Power Inc. structure.

GIP, in its news release, pointed out that it has invested or committed approximately $9 billion of equity across more than 8,000 MW of operating renewable assets and more than 14,000 MW of renewable assets under construction or development.

"This massive war chest of renewables will likely become the new ROFO and/or dropdown backlog pipeline for [NRG Yield]," CreditSights analyst Andy DeVries wrote in a Feb. 7 report. "This translates to a massive dropdown/earnings growth runway."

Following the lead of fellow yieldcos, CreditSights noted that NRG Yield will now fuel this growth with "long-term focused private equity capital."

As part of the deal, GIP has agreed to arrange a $1.5 billion backstop credit facility for NRG Yield to manage any change-of-control costs associated with the yieldco's corporate debt and committed to provide up to $400 million to support the acquisition of the Carlsbad gas-fired plant.

NRG Yield will also enter into a new ROFO agreement with GIP that adds the 150-MW Langford Wind and the 400-MW Mesquite Star Wind project to the current pipeline.

"We are pleased to say that the change in sponsorship does not mean a change in strategic approach," NRG Yield President and CEO Christopher Sotos said on a Feb. 7 call with investors. "Our long-term business approach remains intact with diversification around different fuel types, technologies and locations leading to more stable [cash available for distribution] generation and investment opportunities."

Sotos added that NRG Yield's financial discipline and strong governance, including its independent board structure, remain unchanged.

"I cannot think of a better sponsor to help NRG Yield achieve its next phase of growth," Sotos said, later acknowledging that NRG Yield will be in a better position to grow with GIP than under NRG.

The CEO said the yieldco will update its growth outlook after the transaction closes.

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