Tag Archives: energy

NRG Energy: Kicking Its Residential Solar Segment Into High Gear

Summary Over the past few days, NRG Energy has further outlined its goals of residential solar domination. The company plans to be the second largest residential solar company by the end of 2015, which is a huge task considering its current 5th place position. NRG Energy’s management is surprisingly forward-thinking in its embrace of distributed residential solar, an industry inherently at odds with centralized fossil fuel generation. Residential solar has been growing at an astounding 40%-50% CAGR over the past few years, outpacing the growth of the broader solar industry. As the inherent advantages of distributed solar have become more clear, the switch from centralized energy to distributed generation has been a no brainer for many individuals. UBS AG (NYSE: OUBS ) has even stated , “By 2025, everybody will be able to produce and store power. And it will be green and cost competitive, i.e., not more expensive or even cheaper than buying power from utilities. It is also the most efficient way to produce power where it is consumed, because transmission losses will be minimized. Power will no longer be something that is consumed in a ‘dumb’ way. Homes and grids will be smart, aligning the demand profile with supply from (volatile) renewables.” While the vast majority of utilities have been bitterly opposing residential solar companies, NRG Energy (NYSE: NRG ) is looking to join them. NRG Energy, which is one of the largest fossil fuel utilities in the U.S., is surprisingly optimistic about home solar. While this viewpoint may seem contradictory given the opposing natures of centralized fossil fuel generation and distributed residential solar, NRG Energy certainly does not view it this way. NRG Energy has made its residential solar intentions much clearer in recent days. The company has announced that is planning to become the 2nd largest residential solar company, right after SolarCity (NASDAQ: SCTY ), by the end of 2015. This goal is indicative of NRG Energy’s incredibly ambitious distributed energy plans, as it has to increase its residential solar business by a number of magnitudes to accomplish this goal. While NRG Energy is currently ranked at a respectable 5th place in residential installs as of quarter 3, the gap between itself and 2nd place Vivint Solar (NYSE: VSLR ) is huge. NRG Energy still has a market share in the low single digit percentages as opposed to Vivint Solar’s approximately 15% market share. In fact, SolarCity and Vivint Solar make up for more than half of the residential solar industry’s market share. As a result, NRG Energy has started putting in enormous efforts to build and scale up its residential solar business in order to compete with the industry standouts. NRG Energy’s Unique Competitive Edge NRG Energy’s current position as one of the nations largest utilities gives it a financial clout and leverage never seen before in the emerging residential solar market. While all the top residential solar companies could have easily been classified as startups just a few years back, with SolarCity as no exception, NRG Energy is entering the industry as a proven and established business with countless billions on its balance sheet. The company’s huge finances and reputation as a proven business will give it an undeniable advantage over its competitors in the form of lower capital costs. Financiers could very well give NRG Energy cheaper access to capital due to the company’s already established brand. Of course, while most of NRG Energy’s cash will be tied its main business of centralized fossil fuel generation, having its huge fossil fuel business backing up its burgeoning residential venture will be invaluable for the company. NRG Energy could easily leverage its financial clout and well-established brand name to help achieve its grand solar ambitions. Forward-Thinking Management While it is extremely surprising to see a fossil fuels based utility focus so much attention on the distributed generation, this hints at NRG Energy’s extremely forward-thinking nature. Despite the fact that residential solar poses an existential threat to the company’s predominantly centralized generation model, NRG Energy’s management hold no bias against residential solar, and is in fact embracing this growing trend. The company’s enthusiasm about distributed residential solar starts at its CEO David Crane. He is so optimistic about residential solar that he has been qouted as saying, “We expect to convincingly persuade our investors that NRG has an embedded SolarCity within it,” and that “everyone is beginning to believe that residential solar is this trillion-dollar market that currently has about 1 percent market penetration.” David Crane is clearly all-aboard residential solar. Having a utility state that residential solar has the potential to be a trillion-dollar market is shocking to say the least, and would have been utterly unbelievable just a few years ago. His optimism is also a clear sign of residential solar’s promise. In fact, Crane sees so much potential in the company’s distributed residential solar segment that he is even considering creating a separate residential solar spin-off. Although a negligible percentage of NRG Energy’s revenue comes from residential solar, the company has been heavily emphasizing this aspect of their business in recent weeks. Just a few days ago, for instance, the company issued a press release and presentation touting residential solar’s immense potential, and the company’s plans for heavy future involvement in this industry. While residential solar currently makes up for less an 1% of the United States total energy generation, the company clearly believes in its exponential growth capabilities. NRG Energy’s recently released presentation constantly reminds investors of the emerging distributed generation. This specific graphical illustration from the presentation depicts the continually diminishing role of centralized generation as opposed to the growing role of distributed generation. (click to enlarge) Source: NRG Energy Risks Despite the immense promise of distributed residential solar, there is a considerable risk that the industry may not grow or mature as fast of NRG Energy has planned. In this case, the company’s would be in danger of losing sizable amounts of money on its massive residential solar infrastructure investments. The company is still, after all, making a huge bet on a relatively young industry with an abundant amount of uncertainty. Many factors pushing residential solar’s growth, such as subsidies or net metering policies, are largely out of the company’s control. Regardless of the risks, NRG Energy is likely making a wise decision by focusing on the residential sector, as most indicators point to distributed generation as the energy model of the future. The only obstacle truly holding distributed residential solar back from mass adoption is the lack of cost-effective storage devices. Even this though, will likely change in the future as battery innovations have sped up dramatically with the recent electric vehicle boon. Conclusion NRG Energy is changing with the times and embracing the shifting energy landscape. With solar power experiencing an exponential growth curve, the company is well-aware of residential solar’s future potential. NRG Energy’s valuation of $9B does not factor in the growth potential of distributed generation, and the company’s involvement in this highly promising arena. If distributed solar generation ends up replacing centralized generation as much of the evidence has suggested , NRG Energy will have a huge amount of upside given its early investment in the arena. While Vivint Solar is rapidly gaining on SolarCity in terms of marketshare, NRG Energy will likely be SolarCity’s true competition moving forward.

Time To Consider Tortoise Energy Infrastructure Corporation?

Summary Energy stocks have fallen in the past several months due to volatility in the price of oil. Midstream MLPs involved with the transportation or storage of fuels offer lower, but more stable distributions. This article presents a number of reasons why investors should consider TYG for exposure to the midstream MLP space. Introduction What will the price of oil be in three months time? If you think I know the answer to that question, I have a prime real estate in the Bahamas to sell you. What is known is that energy MLPs have done rather poorly recently. As a readers of my ” Buy-the-Dip High-Yield ” portfolio would know, buying on the dips allows you to lock in higher yields and grasp the potential for capital appreciation. Upstream (also known as E&P) MLPs have fallen the hardest in recent months, with bellwethers such as Line Energy (NASDAQ: LINE ) plunging by about two-thirds. While their yields are the highest, upstream MLPs also carry more risk due to their acute sensitivity to the price of oil. I considered buying upstream-containing MLP funds (see my previous articles on YMLP , MLPJ and MLPY ) to mitigate this risk, but ultimately decided that the entire sector was too volatile at this time. In comparison, midstream MLPs, which are involved with the transportation (via pipeline, rail, barge, oil tanker or truck) and storage of crude or refined petroleum products, tend to offer lower but more stable distributions. Tortoise Energy Infrastructure Corporation Upon consideration of the various midstream MLP ETFs, ETNs and CEFs on the market, I ultimately decided on purchasing Tortoise Energy Infrastructure Corporation (NYSE: TYG ). My reasons for buying TYG can be broken down into three reasons: 1. Long track record of (out)performance As described in my recent article , TYG has over 10 years of track record performance. Among MLP CEFs, only Kayne Anderson MLP Investment Company (NYSE: KYN ) has a similarly long history. Over the last three years, when the benchmark Alerian MLP ETF (NYSEARCA: AMLP ) became available, TYG has returned 17.83% annualized (by NAV), compared to 14.51% for KYN and 8.87% for AMLP. After accounting for its 25.29% leverage, TYG returned 14.23%, which is still higher than AMLP. The following graph shows the total return percentages of TYG, KYN and AMLP over the past few years. Note that the graph shows price return rather than NAV return. TYG Total Return Price data by YCharts As mentioned in the previous article, KYN actually had a better price return compared to TYG over the last few years, whereas TYG had a better NAV return. I believe that NAV return is a better reflection of performance compared to price return, since the value of a CEF is ultimately based on its NAV. Unfortunately YCharts does not have a ability to chart NAV total return. 2. Historically large discount As mentioned many times in my previous articles, mean reversion of premium/discount values is an effective strategy to add an extra bit of performance to your CEF holdings. Basically, the strategy entails buying CEFs when their discount exceeds their historical average, allowing you to profit from mean reversion as the discount narrows. TYG currently trades at a discount of -5.80%. The following chart shows the premium/discount for TYG (graph constructed from data supplied by Tortoise Capital Advisors ). (click to enlarge) We can see that for most of its 10-year history, apart from a brief spurt in 2008 and during the last year, TYG has traded at a persistent premium. The following table shows the average premium/discount values for TYG over various time periods (premium/discount data are from CEFConnect except for the 10-year time period which was manually calculated). Time Premium/discount Current -5.80% 1-year -4.97% 3-year 5.99% 5-year 9.02% 10-year 8.48% Therefore, we can see that TYG has a very large discount relative to its 3-year, 5-year and 10-year averages, indicating that now would be a good time to consider buying this fund for midstream MLP exposure. We also note that TYG had recently fallen to as low as -10% discount in September of last year, which would have been an even better time to buy the fund. 3. Reasonable expense ratio TYG charges a management fee of 1.62%* (according to CEFConnect). This seems high, but once you factor in the benchmark AMLP’s 0.85% expense ratio and the 25.29% leverage of the fund, you are really only paying 0.44% more for the active management of TYG. This compares favorably to KYN, which charges 1.12% for “active expense” (see my previous article for how this was calculated). *Excludes interest expenses and deferred tax liabilities. Given the significant outperformance of TYG vis-a-vis the benchmark over the last few years, I consider the management fee well worth it. 4. Possible downside protection Note: I’m not a tax expert so please take the following with a grain of salt. MLP CEFs (or ETFs) structured as corporations accrue deferred tax liabilities over the years, which will act as a drag on NAV (compared to an ETN) when the underlying constituents are advancing. Conversely, in a falling market an MLP CEF/ETF should fall less than an MLP ETN because the CEF/ETF will be able to accrue a deferred tax asset, or to decrease its deferred tax liability. George Spritzer’s [CFA] excellent article explains the benefit of a deferred tax liability: Another interesting feature of deferred tax liabilities is that they provide some cushion on the downside if there were a major correction in the MLP sector. This would cause a decrease in the deferred tax liabilities, which translates into less of a penalty when the regular unadjusted NAV is computed. Moreover, Mr. Spritzer estimates that the true discount for TYG is even higher (around 36%) once the deferred tax liabilities are accounted for. Indeed, if the CEF managers are using tax minimization strategies to boost the NAV return of the CEF over the benchmark AMLP, which is subject to the same tax drag as the CEFs but is passively managed, then that is even more the reason to pay for active management. To see the deferred tax liability in action, consider the price action of AMLP (an ETF) relative to JP Morgan Alerian MLP (NYSEARCA: AMJ ) (an ETN) over the last five days, a period where oil-related stocks took another punch to the stomach. AMLP and AMJ are both passive benchmarks that track similar indices but the outperformance of AMLP on the downside is probably due to its accrued deferred tax liabilities. TYG did even better, though part of this could have been due to fluctuations in premium/discount values. TYG Price data by YCharts Therefore, my investing in an MLP CEF (or ETF) over ETN that has accrued deferred tax liabilities, you gain some downside protection. Summary This article presents several reasons why investors looking to gain exposure to the midstream MLP space should consider TYG. Due to overall volatility in the energy sector, I would recommend that investors slowly dollar-cost average their way into this fund instead of buying the whole amount in one go.