On Tuesday, December 3, NRG Yield (NYLD) announced that it has agreed to acquire the assets of privately held Energy Systems Co., a provider of heating and cooling thermal energy, for $120M in cash. In the wake of NRG Yield's first third-party acquisition, I not only wanted to highlight the transaction but also point out a number of reasons why I'm staying bullish on shares of this particular utilities play.
A Few Things To Consider
There are three key elements investors should consider with regard to the acquisition of Energy Systems Co. First is the fact that the transaction will be immediately accretive to 2014 cash flow available for distribution per share by approximately 8%. If NRG yield can continue to make additional third-party acquisitions over the course of the next 12-24 months, I think we could see the company's distributable cash flow available for distribution demonstrate gains of at least 15%, if not higher.
Second is the fact that the transaction is consistent with the company's strategy of acquiring long-term contracted assets that favorably complement its existing portfolio and offer long-term growth opportunities. The key here will clearly be how well any future acquisitions contribute to long-term growth. If NRG Yield can continue to acquire, through third-party transactions, similar types of companies that will contribute to long-term growth then strategy should do just fine over the next several years. If, on the chance this strategy fails to perform as well as management would have hoped, investors could see shares head down a fairly unfavorable path and as a result see their position lose significant value.
Lastly, investors should consider the idea that this transaction offers NRG Yield a unique opportunity to grow its thermal infrastructure platform. I believe that if future transactions of this particular type could contribute to the growth of the company's thermal infrastructure platform, shareholders could see some very nice long-term growth with regard to their current positions.
Managements Thoughts on the Transaction
According to David Crane, the Chairman and CEO of NRG Yield, "The acquisition of ESC demonstrates NRG Yield's ability to successfully compete for attractive contracted energy assets available from third parties…In addition to contributing to our objective of sustainable and visible dividend growth for our investors, ESC provides us another important opportunity to supply the energy needs of business and other institutional customers directly and in a manner that is not entirely grid dependent".
Recent Performance and Trend Behavior
On Monday, shares of NYLD, which currently possess a market cap of $812.84 million, a forward P/E ratio of 32.68, and a dividend yield of 1.38% ($0.50), settled at a price of $36.11/share. Based on their closing price of $36.11/share, shares of NYLD are trading 3.60% above their 20-day simple moving average, 7.81% above their 50-day simple moving average, and 16.55% above their 200-day simple moving average. These numbers indicate a short-term, mid-term and long-term uptrend for the stock which generally translates into a moderate buying mode for both short-term traders and long-term investors.
NRG Yield's Current Dividend Policy
As an income-driven investor it wouldn't be right to discuss NRG Yield without taking a look at the company's current dividend policy which is expected to demonstrate significant growth by 3Q14. Management is expecting to achieve to a $1.45/share quarterly distribution by 3Q14, and subsequently increase that distribution by a minimum of 1% in each of the following quarters beginning in 4Q14.
In my opinion, I think the company's estimates of 1% per quarter are a bit on the conservative side and as a result a subsequent increase of at least 2.5% - 3.5% may actually occur, since drop-downs, third-party acquisitions and additional financing will all positively contribute to the company's cash flow available for distribution.
Are there any risk factors investors should consider before establishing a position in NRG Yield? Yes there are, and according to its most recent 10-Q there are a number of risk factors all investors should consider. These factors include but are not limited to the fact that certain facilities are newly constructed or are under construction and may not perform as expected, and the fact that operation of electric generation facilities involves significant risks and hazards customary to the power industry that could have a material adverse effect on the business, financial condition, results of operations and cash flows.
For those of you who may be considering a position in NRG Yield, I'd keep a watchful eye on a number of things over the next 18-36 months as each could play a role in the company's long-term growth. For example, near-term investors should focus on the company's recent performance and trend behavior, while long-term investors should keep an eye on any further progress the company is able to make with regard to its growth-by-acquisition strategy as such a strategy could positively impact results for years to come.