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For NRG's yieldco, signs point to new owners

The potential sale of NRG Energy Inc.'s stake in NRG Yield Inc. is one increasingly likely outcome of the generator's strategic review amid growing investor appetite for renewable portfolios, analysts said.

Recent renewable transactions could add momentum to the business review committee's decision to bring NRG's 46.7% economic interest in NRG Yield to market.

Those transactions include Brookfield Asset Management Inc.'s purchase of TerraForm Power Inc and TerraForm Global, Inc., AES Corp.'s joint deal for sPower with Alberta Investment Management Corp., and John Hancock Life Insurance Co. (USA)'s deal for a stake in Exelon Generation Co. LLC's private yieldco earlier this week.

Such a sale, analysts say, would likely be highly subscribed by an array of infrastructure, insurance, pension and sovereign wealth funds that maintain a cost of capital better aligned with the contracted cash flows offered by NRG Yield's assets. That interest could deliver a premium for NRG Yield shares to NRG Energy, which in turn could give NRG management more cushion to deleverage, buy back shares or pay dividends.

"There is an argument out there that we have not seen the value to NRG coming from NRG Yield," Guggenheim Securities analyst Shahriar Pourreza said in an April 4 interview with S&P Global Market Intelligence. "A sell down or monetization would make a lot of sense because there is an arbitrage between selling a partial stake in the NRG yieldco and buying back stock or paying a dividend."

NRG declined to comment on whether its business review committee has retained advisors to evaluate options such as a sale of NRG Yield shares, but Bloomberg News, citing industry publication SparkSpread, reported that Citigroup Inc., which served alongside Goldman Sachs Group Inc. and Bank of America Merrill Lynch in the July 2013 NRG Yield initial public offering, has been retained to advise the review committee on strategic alternatives.

Available options

The sale of NRG's sponsor stake in its yieldco is but one of several outcomes industry observers expect could materialize as the review committee, led by former TXU Corp. CEO C. John Wilder and NRG CEO Mauricio Gutierrez, move toward a resolution by August 15.

As Goldman Sachs equity analysts noted in a March 28 upgrade of NRG Energy, the generator is "rich with catalysts," including those tied to the bulk cost cutting that inspired the arrival of Wilder and activist hedge fund Elliott Management Corp. in January. Goldman noted the eventual restructuring of GenOn Energy Inc.'s debt, only two months out from the mid-June maturity for its 7.875% senior unsecured notes and the potential sale of noncore assets outside of NRG's primary markets, would be consistent with the so-called "shrink to grow" strategy previously employed by Wilder during his tenure at TXU.

Goldman raised its NRG Energy share price target to $26 from $13, acknowledging that it "clearly missed the first leg of outperformance by NRG," but importantly ascribing only a $5 equity value to the NRG Yield holdings in its overall NRG Energy equity valuation.

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Goldman's investment banking advisory team, along with Morgan Stanley, were reportedly hired by NRG prior to Citi, in line with a report by industry news outlet SparkSpread disseminated by Bloomberg News on March 16.

Since gaining more independence from its parent in May 2016, NRG Yield management has indicated it is actively seeking financial co-sponsors for project development outside of NRG Energy, but has been stalled by federal regulatory uncertainty. That pause, however, could also help the yieldco simultaneously evaluate its sponsor relationships beyond just the project level.

Capitalizing on renewables fervor

The minimal value derived by NRG from its NRG Yield holdings could provide more reason to monetize the shares, especially if a perceived premium could be extracted from private investors.

"We emphasize its interest in NRG Yield amounts to the second largest business at NRG, behind only retail, and ahead of the ERCOT," UBS Securities LLC analysts said in an April 3 note to clients. "It is hard to imagine NRG's board review would impede value here. Rather the incentive is clearly aligned to maximize value."

As the review committee looks to trim costs, NRG's solar and wind development business and renewable pipeline may also fall within the bounds of what is considered noncore, as well as complementary to NRG Yield. In its recent nondeal roadshow, NRG Yield characterized NRG Energy as "a strong and strategic sponsor" it depends on for operations and a source for growth to the tune of some 1,639 MW of operational renewable right-of-first-offer capacity. NRG additionally highlighted a development pipeline of 3,300 MW of utility-scale and distributed generation capacity, according to its Feb. 28 earnings presentation.

Prospective buyers with operational expertise of their own or a desire to acquire development capabilities could be better natural owners of NRG's renewables platform, though risks from change of control for NRG Yield could present administrative barriers, including the possibility of repricing existing power purchase agreements and changes to property tax abatement terms, UBS noted in its report.

Capitalizing on the current private investor fervor in a sale scenario would not preclude NRG from dabbling in renewables projects in the future. But for now, a hard pivot back to NRG's core business of wholesale generation and retail, coupled with debt reduction, could be the focus of the business review committee's work, and one with an eye toward optimizing its generation fleet in major markets.