We like the Big, Bold strokes that NRG is using to repaint its canvas

We like what we heard on the call, and we’re 100% supportive of this transformative plan
We don’t believe that this is the end, but only the opening act; act two may be some 2-years away

We feel that act 2 will be contingent on the stock price performance over the next 2 years
We believe that the privatization of NRG is NOT off the table

The transformative plan calls for the sale of some 50%-100% of NRG’s interest in NYLD and its renewable assets; we expect 100% to be sold for both NYLD and NRG’s directly-owned renewables

Our expectations would be that a strategic and not a financial buyer would pay the most for these assets and, therefore, would want 100% of NRG’s interests in both
In our opinion, it is unlikely that NYLD goes to one buyer and the rest of NRG’s renewable assets goes to another buyer; we feel that the strategic buyer would want to continue to use the operated assets as a potential source for NYLD growth

Debt is expected to be reduced by some $13B to about $6.5B from some $19B at present; net-debt-to-adjusted-EBITDA is expect to be lowered to some 3.0x from some 6.3x at present
As expected, what remains is its conventional power assets and its Retail business
NRG believes that it would have additional $6.3B in cash proceeds to invest in new assets or new businesses, or available to be returned to shareholders

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Power Company Privatization will Lead to Unintended Consequences

Lately there has been talk about privatizing power companies, including both CPN and NRG, and while we believe that the most rational course for these companies may be to go private – given the lack of “enthusiasm” for these names in the public markets – we are certain that the end result will not be either what the market expects nor what the regulators, politicians and, most of all, what the consumers desire
The assumptions we are making in our analysis are as follows:
Private equity (PE) investors are not unintelligent and will act in their own self-interest
Virtually all of the market (public and private) believe in the theory of “all else being equal”
Market forces move along least resistant path absent paradigm shift, typically externally imposed
As reserve margins dip below 12% market prices become more volatile and margins begin to expand at an accelerated rate
PE investors will be betting on the reduction of debt from internally generated free cash flow and asset sales, supplemented by cost reductions, to increase the equity value of its investments with the option value of changing market dynamics to further boost its rate of return
The first thing that PE investors are likely to do is to make the assumption that the underlying market forces and conditions don’t/can’t/won’t change for the foreseeable future
Based on these underlying assumption, PE investors will be able to figure out which plants they buy will remain profitable, which won’t and which are on the margin

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