NRG Energy announced the conclusion of the GreenCo process on its first-quarter earnings call this week, with the majority interest sale of NRG EVgo to investment firm Vision Ridge Partners and a restructuring of NRG Home Solar that will result in layoffs involving 500 employees.
With the restructuring, the residential solar business will move back under NRG’s retail arm by the end of the year. NRG Home Solar will also shift its business model to focus on customer acquisition, installation and direct third-party sales. NRG has entered into agreements with Sunrun and Spruce Finance to purchase and support solar contracts originated by NRG, an approach management said will simplify financial reporting by providing immediate revenue recognition.
“We have turned the page on this period of uncertainty and now are focused on executing on our plan,” said CEO Mauricio Gutierrez on Thursday’s earnings call.
“While [NRG Home Solar] is not a business you can expect to hear about each quarter, our strategy for this business is important to our organization, allowing us to maintain a viable yet right-sized structure,” he added.
To streamline the business, NRG plans to refocus its residential solar business on three Northeast markets -- New Jersey, New York and Massachusetts -- where the company believes it has a competitive advantage. According to Gutierrez, this move positions NRG to offer residential solar to its existing 3 million retail customers in Texas when the economics for residential solar in ERCOT improve.
In the meantime, an NRG spokesperson confirmed that the streamlining process will result in “around 500 layoffs” across the country. Kelcy Pegler Jr. resigned as CEO of NRG Home Solar last month.
“The NRG Home Solar integration allows NRG to remain in the residential solar business in a more effective and economical way, continuing to provide the best value to investors and customers and enable the long-term success of employees,” according to the spokesperson. “As opportunities arise for serving other markets, we will evaluate them on a case-by-case basis.”
In 2015, NRG Home Solar saw an EBITDA loss of $175 million. In 2016, the home solar division is already running at a loss of $60 million. NRG expects to pay a one-time restructuring cost of $20 million, which Gutierrez said will enable the home solar business to break even on an EBITDA basis by 2017.
Home solar demoted?
The market responded positively to NRG’s first-quarter earnings report, with NRG’s stock price climbing roughly 3 percent on Friday. Julien Dumoulin-Smith, executive director of equity research at UBS Securities, said the restructuring of NRG’s home solar business is “ideal.”
“While many investors wanted to see NRG exit this market entirely, we think this is ultimately the right move,” he wrote in a note to investors. A complete sell-down of the business would have removed the opportunity for a long-term upside from marketing solar to NRG’s 3 million retail customers in Texas.
The front-end monetization for complete sales to a Spruce or Sunrun also makes sense, Dumoulin-Smith said. This structure is likely to generate around cash margins of 30 cents per watt on sales for NRG, according to a UBS analysis. Assuming a modest initial pace of 20 megawatts per year could ramp up to 50 megawatts per year, UBS calculates NRG would generate roughly $15 million in free cash flow per year.
“The solar partnership will be a small incremental contributor off the wider retail franchise, but a positive rather than a historical negative,” Dumoulin-Smith wrote in a note to investors.
The near-term focus on breaking even may erode any advantages NRG has in the residential solar space, however. Subordinating NRG Home Solar to NRG Retail could see the business waste away in the highly competitive U.S. solar marketplace.
“The restructuring of NRG Home Solar makes it apparent that residential solar is, unsurprisingly, not a strategic priority for the company,” said Nicole Litvak, senior solar analyst at GTM Research. “With home solar demoted from its own division to simply an offering through the retail business, it seems unlikely that it will be able to sustain the growth it experienced over the past year.”
“NRG says it will focus its efforts on Massachusetts, New Jersey, and New York -- all strong growth markets for residential solar -- but it faces stiff competition from installers like Trinity Solar and Amergy that are quickly scaling in those states, in additional to the national players,” she said.
In 2015, NRG was the No. 4 residential installer in the U.S., with a market share of 2 percent. It was No. 4 in New Jersey and No. 3 in Massachusetts and New York.
A vision for EV expansion
NRG also announced that Vision Ridge, a climate-action-oriented investment firm, has made a $50 million investment in NRG’s EVgo electric car charging network. Vision Ridge will pay $19.5 million in cash to NRG and invest the remainder in the EVgo business. This new capital, in conjunction with NRG’s remaining commitment of $70 million under the California settlement, is said to position EVgo with more than $100 million of infrastructure funding to expand the charging network beyond existing metro areas. Going forward, NRG has no capital commitments to EVgo save for the settlement obligation.
NRG became one of the most aggressive builders of electric-vehicle infrastructure with the launch of EVgo in 2011. EVgo currently operates 665 fast chargers in more than 50 metro markets across the country, but it’s been a money-losing business (with $17 million in losses in 2014), hurt by sluggish electric-vehicle sales.
Despite the segment’s underwhelming performance, Vision Ridge, as an investment firm with substantial experience in late-stage sustainable and clean energy projects, believes it’s a strategic time to invest in electric-vehicle charging.
“Electric vehicles are here now. American consumers are starting to see how much better these cars are, not just for the planet but as fun to drive and cheaper to maintain,” Reuben Munger, the managing partner at Vision Ridge, wrote in an email. “Battery technology and range keep improving, and a charging network is a key part of the solution for American drivers. Our investment is a sign of how excited we are about both where this technology is today and its enormous growth potential.”
“NRG is proud of the leadership that EVgo has established under our guidance,” said Arun Banskota, president of EVgo, in a statement. “As NRG looked at potential partners and investors for EVgo, it was important for us to align our business with a firm that is focused on building and investing in a sustainable energy future. We are confident that Vision Ridge will provide the added resources and specific expertise to take EVgo to the next level in sustainable transportation.”
The changes announced this week bring an end to the GreenCo, which was formed last fall as former CEO David Crane came under pressure for making an expensive push into clean energy. The restructuring eliminates the need for the $125 million GreenCo fund, and has allowed NRG to reaffirm its 2016 guidance of $3 billion to $3.2 billion, said Gutierrez.
To help strengthen the company’s balance sheet, NRG reintegrated its business renewables division into the company last quarter, which is expected to provide a growth opportunity for NRG Yield. The YieldCo showed strong performance in the first quarter of 2016 and reaffirmed its guidance for the year. NRG Yield also announced a new CEO, Christopher Sotos, who has served on the board of NRG Yield since its initial public offering in July 2013. Sotos previously served as NRG’s head of strategy and mergers and acquisitions.