NRG Energy Inc (NYSE:NRG) took a big step toward its vision of a more fossil fuel-powered future this week, agreeing to sell its sponsorship stake in NRG Yield Inc (NYSE:CWEN)(NYSE:CWEN.A) and its renewable energy pipeline to Global Infrastructure Partners. The deal is part of a plan to sell renewable energy assets to raise cash and reduce debt on the balance sheet.
When asset sales are complete, NRG Energy expects to see $2.8 billion of cash proceeds and the removal of $7.0 billion of debt from the consolidated balance sheet. But it'll be a company betting on a fossil fuel business that's facing pressure from all sides and no guarantee of long-term profitability.
Unloading renewable energy
The biggest announcement was the sale of NRG Energy's Class B and Class D shares of NRG Yield, along with the company's renewables platform and nearly all of its 6.4 GW of renewables development pipeline. In total, the deal will bring $1.375 billion of cash into NRG Energy and give NRG Yield a more committed long-term sponsor.
As part of the deal, NRG Yield agreed to accelerate the drop-downs of the 527 MW Carlsbad Energy Center and 154 MW Buckthorn Solar project for $407 million. 102 net MW of the Agua Caliente solar project will also remain in NRG Yield's right of first offer portfolio. The troubled Ivanpah concentrated solar project has been removed.
NRG Energy also agreed to sell its South Central business to Cleco Corporate Holdings LLC for $1.0 billion in cash. The company includes 3,555 MW of generating assets that serves cooperatives, municipalities, and regional utilities. NRG will leaseback the 1,263 MW Cottonwood plant through May 2025.
NRG is trying to focus on its core fossil fuel markets, so this deal is intended to raise cash and focus the operations of the remaining business.
What shouldn't go overlooked in NRG Energy's announcement is that it's revising the projected total asset cash proceeds to $3.2 billion. That's down from a projection of $4.0 billion as of November 2017.
The reduced cash proceeds will leave more leverage on NRG Energy's balance sheet and reduce financial flexibility in the future. You can see in the chart below that NRG Energy may be able to reduce debt, but it'll still have around $10 billion in debt and a smaller asset base from which to generate cash flow.
Until NRG Energy can prove that its fossil fuel-focused strategy can produce the cost savings and cash flow that management projects, I'll stay skeptical of this business. I don't see the trends for fossil fuels being very strong, so a company doubling down on them probably isn't well positioned in today's market.