NRG Energy: Under-Appreciated Turnaround

06/03/2015 8:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Our latest featured aggressive income spotlight is a utility that offers more growth than meets the eye, asserts Roger Conrad, editor of Conrad's Utility Investor.

NRG Energy (NRG) owns 51 gigawatts of unregulated generation capacity, more than any other US power company. Unfortunately, the huge drop in natural-gas prices has pushed wholesale electricity prices to half last year’s levels, a major headwind for the company.

But NRG Energy still generates a solid cash flow in this challenging business environment.

Although the cash flow generated by NRG Energy’s wholesale operations shrank 10.1% year over year, the company’s overall cash flow ticked up by 2.8%.

We also like the company’s move to market rooftop solar power to its existing customer base via a partnership with NRG Yield (NYLD), a yieldco that the company created a few years ago to monetize its generation assets that operate under long-term contracts.

Since NRG Yield went public in July 2013, the stock has surged by more than 130%. Shares of NRG Energy, in contrast, have given up 8% of their value over this period.

But NRG Energy benefits immensely from NRG Yield’s success; the yieldco gives the parent a source of low-cost capital to fund its growth projects.

NRG Energy also captures $0.65 from every dollar that NRG Yield earns, a relationship that accounted for almost 15% of the parent’s overall cash flow in the first quarter.

NRG Energy and NRG Yield’s push into renewable energy includes more than 2,200 operating leases and about 17 megawatts of generation capacity.

Management estimates that about 13,000 tax equity-funded leases are in development, another 90 megawatts of capacity. Lease terms range from 17 to 20 years.

NRG Energy will receive cash flow from this venture via its ownership interest in NRG Yield. Meanwhile, the yieldco’s higher valuation will make it easier to finance the $100 million that the firm plans to invest in distributed solar power over the next 18 months.

Trading at 93% of book value, NRG Energy’s stock has a low bar of expectations. More importantly, the company continues to demonstrate its ability to weather challenging conditions in the market for wholesale electricity.

NRG Energy rates a buy up to $35 per share for patient investors looking for an under-appreciated turnaround story.

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