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Clues surface in NRG's asset sale campaign

The sweeping sale of NRG Energy Inc.'s yieldco stake, renewables platform and bundles of regional assets appears an increasingly likely outcome of the $4 billion divestiture campaign launched as part of the generator's business transformation plan.

NRG's second-quarter adjusted earnings topped analyst expectations at $685 million, helping reaffirm its 2017 guidance of $2.57 billion to $2.77 billion. The second-quarter results reflect the omission of earnings contributions from GenOn Energy Inc., which is expected to emerge from bankruptcy by year-end, NRG executives said Aug. 3.

Helping to offset GenOn's absence and weaker power prices, however, was the earnings performance of yieldco affiliate NRG Yield Inc. and NRG's renewables business over the quarter. NRG Yield and the renewables business have contributed significantly to NRG's earnings in recent years, but the company intends to bring the holdings to market, consistent with steps outlined in its business transformation plan unveiled July 12.

On the Aug. 3 earnings call, NRG CEO and President Mauricio Gutierrez said the sale effort is underway, with announcements set for as soon as late September. The company previously announced it retained advisers from Goldman Sachs, Morgan Stanley and Citigroup to run separate sale segments, with Citi responsible for the broader renewables sale, sources indicated.

"We try to stagger some of these sales initiatives to make sure that we exit the market in an efficient way," Gutierrez said. "My expectation is that the first announcement will come out late third quarter, early fourth quarter."

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Market drop down

Though NRG raked in $41 million in proceeds from the drop down of its remaining 25% interest in NRG Wind TE Holdco LLC to NRG Yield, the company appears to be leaning toward dropping down 100% of its economic interest into the broader market for new equity sponsors. NRG, which owns a 46.7% economic interest in NRG Yield, initially suggested it would sell between 50% to 100% of its stake, though to hit its debt-to-EBITDA target of 3.0x by 2018, an aggregate sale appears most plausible.

"Additional deleveraging in 2018 will be necessary solely as a result of the reduction in EBITDA associated with assets targeted for sale," NRG CFO Kirk Andrews said. "We intend to fund this additional debt reduction with the proceeds from asset sales and based on 100% sale of NRG Yield and Renewables."

On a separate call, NRG Yield's management team indicated they welcome new partnerships, having previously expressed interest in finding new equity partners beyond the NRG parent. But NRG's sustained sponsor status in NRG Yield appears unlikely, particularly given NRG Yield management's effort to address change of control triggers within the business in the event of new owners.

"I do want to assure our investors that NRG Yield's management team and independent directors are engaged to facilitate a strong partner for NRG Yield and to balance any change of control friction cost that may materialize," NRG Yield CEO Chris Sotos said.

Thermal bundles

Getting to $4 billion in sale proceeds will also require sales of thermal assets the company views as noncore. Analysts have speculated such sales could take the form of select Southern gas-fired assets outside of ERCOT, such as Cottonwood Energy and Big Cajun 1, for example. The sales may not be constrained to noncore markets, but rather markets where it may look to eventually re-expand its generation footprint, specifically in the Northeast.

"In the Northeast, given the resolution of GenOn and some of the conventional asset sales that we're going to have post-transformation ... we will have an opportunity to re-balance that portfolio," Gutierrez said. "While we're going to be a little longer generation, keep in mind that, that generation is within the load pocket of the Chicago area, New York City or Southwest Connecticut."

While that may indicate assets like the Astoria Gas Turbines, Arthur Kill and Bowline Point are off the table, combined-cycle assets in neighboring Pennsylvania and Maryland could prove attractive.

NRG may be looking to shed bundles of its Eastern fleet, including combined-cycle units or even peaker assets, both favored targets of private equity investors.

"We are seeing a lot of assets in the market, but I think what we have been able to put together here is a type of asset or business that is differentiated from a single, combined cycle somewhere in the country," Gutierrez added. "We've received very good response from the market so far."

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