NRG Yield (NYLD): IPO Report

Francis Gaskins |

NRG Yield ($NYLD) is a shell vehicle to pass dividends to investors generated from renewable and conventional generation and thermal infrastructure assets, ultimately owned by NRG, which has a market cap of $8.9 billion.

Based in Princeton, NJ, NRG Yield ($NYLD) scheduled a $392 million IPO with a market capitalization of $1.3 billion at a price range mid-point of $20, for Wednesday, July 18, 2013.

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S-1 filed July 8, 2013

Manager, Joint Managers:  BofA Merrill; Goldman; Citi
Co Managers:  Barclays; KeyBanc; Mitsubishi UFJ; RBC; Credit Suisse; Deutsche

Summary

NYLD’s annualized dividend is expected to be 6%, with 20% growth in dividends by the end of 2014.  See ‘dividend growth’ below. 

A new Califorina Vally Solar Ranch (CVSR) facility is expected to be online in October, 2013, and is expected to make substantial contributions to cash flow.

NRG Energy completes 250 MW California Valley Solar Ranch, June 27, 2013
http://www.seia.org/news/nrg-energy-completes-250-mw-california-valley-solar-ranch

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

annualizing Q1 '13

Cap (mm)

Sls

Erngs

BkVlue

TanBV

in IPO

NRG Yield (NYLD)

$1,306

6.2

46.6

1.7

2.1

30%


Compare with parent

 

IPO Mrkt

Price /

Price /

Price /

Price /

Dividend

annualizing Q1 '13

Cap (mm)

Sls

Erngs

BkVlue

TanBV

Yield

NRG Yield (NYLD)

$1,306

6.2

46.6

1.7

2.1

6.0%

NRG

$8,980

1.1

-6.8

0.9

1.4

1.7%

 
Glossary

Conclusion

The average dividend yield of the S&P 500 is 4.44%, so NYLD’s 6% payout is higher, with an expected 20% growth within 18 months.

As long as interest rates don’t rise (they will at some point in time, of course) NYLD looks fairly priced and may edge up over time.

Organizational structure

NRG Energy (NRG) is a shell company carve-out (with no operations) which was formed to serve as the primary vehicle through which NRG Energy, Inc. (NYSE: NRG) will own, operate and acquire contracted renewable and conventional generation and thermal infrastructure assets.   NRG has a market cap of $8.9 billion.

NYLD expects to receive dividends from the operating entities that are controlled NRG Yield, LLC and NRG Yield Operating Company, LLC, both of which are controlled by NRG, in terms of voting power.

The public company NYLD will receive dividends from Yield LLC, which is a carve-out from NRG.

The organizational structure is here

Current operations

Yield LLC owns a diversified portfolio of contracted renewable and conventional generation and thermal infrastructure assets in the United States.

The contracted generation portfolio includes three natural gas or dual-fired facilities, eight utility-scale solar and wind generation facilities and two portfolios of distributed solar facilities that collectively represent 1,324 net MW.

Each of these assets sells substantially all of its output pursuant to long-term, fixed price offtake agreements to credit-worthy counterparties. The average remaining contract life, weighted by MWs, of these offtake agreements was approximately 16 years as of March 31, 2013.

The CVSR facility is in the final stage of construction with is expected to be online by October 2013, and is expected to substantially contribute to future cash flow forecasts.

Yield LLC  also owns thermal infrastructure assets with an aggregate steam and chilled water capacity of 1,098 net MWt and electric generation capacity of 123 net MW. These thermal infrastructure assets provide steam, hot water and/or chilled water, and in some instances electricity, to commercial businesses, universities, hospitals and governmental units in ten locations, principally through long-term contracts or pursuant to rates regulated by state utility commissions.

NYLD believes it will have a lower cost of capital than competitors

NYLD/Yield LLC believes that Yield's cash flow profile, coupled with its scale, diversity and low cost business model, will offer NYLD a lower cost of capital than that of a traditional independent power producer and provide NYLD with a significant competitive.

Customers

A significant portion of the electric power Yield generates is sold under long-term offtake agreements with public utilities or industrial or commercial end-users, with a weighted average remaining duration of approximately 16 years (based on net capacity under contract).

As of March 31, 2013, the largest customers of the power generation assets, including assets in which Yield LLC has less than a 100% membership interest, were CL&P, PG&E and American Electric Power, which represented 35%, 28% and 19% respectively, of the net electric generation capacity of the facilities.

Upon completion of the CVSR facility, when all of assets are online, the largest customers of the power generation facilities will be PG&E, CL&P and American Electric Power, representing 70%, 14% and 8%, respectively, of the net electric generation capacity of Yield’s facilities.

Competition

Competitors include regulated utilities, other independent power producers and power marketers or trading companies, including those owned by financial institutions, municipalities and cooperatives.

Divdend policy

NYLD intends to pay a regular quarterly dividend to holders of Class A common stock. The quarterly dividend will initially be set at $0.30 per share of Class A common stock, or $1.20 per share on an annualized basis, which is 6% on an annualized basis.

Dividend growth

NYLD/Yield LLC expects to generate cash available for distribution that would enable an increase quarterly dividends from the initial amount by 20% by the end of 2014.

NYLD  forecasts that cash available for distribution during the twelve months ending June 30, 2014 and 2015 will be approximately $87 million and $105 million, respectively. NLYD forecasts $23 million will be distributed to Yield Inc. for the twelve months ending June 30, 2014 and $28 million for twelve months ending June 30, 2015.

NYLD/Yield further believes that, given an expected ability to acquire assets with characteristics similar to those in the current portfolio, including the NRG ROFO Assets, NYLD/Yield LLC will have the opportunity to grow cash available for distribution in a manner that would allow a further increase cash dividends over time.

Use of proceeds

NYLD expects to net $370 million from its IPO

 NYLD intends to use $66.2 million of the IPO proceeds to acquire newly issued Yield LLC Class A units, representing 5.4% of Yield LLC's outstanding membership units after this offering, from Yield LLC.   Yield LLC will use such net proceeds for general corporate purposes, including to fund approximately $16 million of our required capital contributions to pay for our portion of CVSR's construction costs.

The parent NRG receives over $304 million

NYLD intends to use $303.8 million of the IPO proceeds to put to acquire Yield LLC Class A units from NRG (the ‘parent’)

(which will be reclassified from Yield LLC Class B units in connection with such acquisition), representing 24.6% of Yield LLC's outstanding membership units after this offering, from NRG.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
SETO Seto Holdings Inc 0.01 0.00 0.00 0
NYLD NRG Yield Inc. Class C 15.60 0.40 2.63 485,235

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