Clearway Energy Inc (CWEN) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by, and welcome to the NRG Yield second quarter 2014 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would like to turn the conference to our host, Mr. Chad Plotkin, Vice President of Investor Relations. You may begin.

Thank you Eric. Good morning, and welcome to NRG Yield's second quarter 2014 earnings call. This morning's call is being broadcast live over the phone and via webcast, which can be located on our website at www.NRGYield.com under Presentations & Webcasts. Additionally this call will only last for 30 minutes. As this is the earnings call for NRG Yield, any statements made on this call that may pertain to NRG Energy will be provided from NRG Yield's perspective. Please note that today's discussion may contain forward-looking statements which are based on assumptions that we believe to be reasonable as of this date. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. We urge everyone to review the Safe Harbor statement provided in today's presentation, as well as the Risk Factors contained in our SEC filings.

We undertake no obligation to update these statements as a result of future events except as required by law. During this morning's call, we will refer to both GAAP and non-GAAP financial measures of the Company's operating and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most comparable GAAP measures, please refer to today's press release and this presentation. With that, I turn the call over to David Crane.

Thank you Chad. Good morning everyone. Good morning again in many cases. I am joined by Kirk Andrews, NRG Yield's Chief Financial Officer, who will be giving the bulk of the very short presentation. Mauricio Gutierrez is also with us, Yield's Chief Operating Officer, and he will not be part of the presentation, but will be available to answer any operational questions that you have about the performance of Yield assets.

I have one slide to go through, slide three. And we are going to be brief about this, because obviously we just had the NRG Energy earnings call, and I also expect that many of you on the phone would have been subjected to listening to us during the recent, particularly listening to Kirk during one of the recent equity or debt offerings, so we will try to get to Q&A as quickly as possible. Looking at this slide, I just want to sum up, we are just past the first year birthday of NRG Yield as a public company, and all I can tell you is from the point of view of being the Chief Executive Officer of NRG Yield, I couldn't be more pleased with what we have accomplished in this 12 month time frame.

Directly or through our sponsorship with NRG, we have acquired over 2.5 gigawatts of new assets which are perfectly suited for NRG Yield, we have successfully accessed the capital markets by raising nearly $1.5 billion, which obviously provides the liquidity that we need to grow yield on an accretive basis. We have grown our target annualized dividend by 25% from $1.20 per share at the time of the IPO, to $1.50 a share by year end 2015. And lastly and most importantly, all of these actions that we have done have allowed us to establish the industry-leading dividend growth rate of 15% to 18% over the next five years. I believe that we have delivered on our commitments to you the shareholders of NRG Yield, and I commit to continue to try and meet our undertaking to you going forward. So with that, I will turn it over to Kirk.

Thank you David. Good morning everyone. Turning to financial summary on slide five. NRG Yield is reporting second quarter 2014 adjusted EBITDA of $109 million, and $38 million in cash available for distribution. Those results reflect a full quarters impact from the three ROFO assets that we acquired from NRG on June 30. That is in accordion with GAAP accounting treatment for the sale of assets under common control. As detailed on slide 13 of the Appendix, the portfolio net of the ROFO assets delivered $78 million, and $25 million of EBITDA and CAFD respectively ahead of our prior guidance for the second quarter.

Through the first half of the year NRG Yield delivered adjusted EBITDA of $201 million, and CAFD of $43 million again including the ROFO impact over the same period. As previously disclosed following the ROFO closings, we are reaffirming our 2014 guidance of $410 million of EBITDA and $140 million of CAFD. Our current guidance also reflects a full year impact from the ROFO asset acquisition, but is prior to the impact of the Alta Wind transaction, which we expect to close shortly. At closing we will provide a further update to guidance via press release to reflect the EBITDA and CAFD contribution over the remainder of the year from Alta. Finally, consistent with past practice, we are also providing guidance on expected third quarter 2014 results with $120 million in adjusted EBITDA, and $74 million in CAFD expected for the quarter, which currently excludes any impact from the Alta Wind portfolio. Turning to highlights of what has been the busiest year yet in executing our plans to deliver robust dividend growth at Yield, and having now completed our first acquisition of ROFO assets, NRG has notified us of its intention to offer a second set of its NRG Yield eligible contracted assets later in the quarter, which I will review in greater detail shortly. Having completed our equity in green bond offerings over the last two weeks, we have now more than fully funded the cash needed to close the Alta Wind transaction. Pro forma for that transaction which we estimate will require approximately $930 million in cash, we expect NRG Yield to net approximately $188 million in excess cash from the equity and debt offerings, further increasing liquidity and available capital to fund growth.

Finally, we are pleased to announce a 4% increase in our quarterly dividend to $0.365 per share on a quarterly basis, or $1.46 per share on an annualized basis, representing a 22% cumulative increase in our annualized dividend since our IPO just one year ago. As previously announced, we plan to reach $1.50 per share on an annualized basis by the fourth quarter, or a 25% increase as we remain on track to deliver our 15% to 18% annualized dividend growth over the next five years.

Turning to a more detailed view of pro forma liquidity following the Alta Wind transaction on slide six including an estimated $54 million working capital adjustment as well as transaction and integration costs, the anticipated cash required for Alta is approximately $934 million which will be funded by the full amount of net proceeds from our green bond offering which closed this week, with the balance of cash required to be funded by a portion of the net proceeds from our 12 million share equity offering. The balance of the net proceeds from the equity offering approximately $188 million will supplement our current cash balance, and including $420 million in revolver availability, which reflects an anticipated $30 million LC posting for Alta, puts NRG Yield in a very strong liquidity position, with over $700 million in total pro forma liquidity. This enhanced strength provides us significant flexibility to fund future growth, including the assets NRG intends to offer us later this quarter. Now having completed our upsized inaugural unsecured notes offering, I would like to take a moment to review on slide seven our target corporate at NRG Yield, which will discipline our decision-making as sources of future capital for growth. We will target a ratio of corporate debt to corporate EBITDA at NRG Yield of 3.25 times. The numerator of this ratio will consist of debt at the corporate level, specifically Yield operating LLC, which currently includes our new $500 million green bond, as well as the $345 million of convertible debt. Any draws on our secured credit facility which is currently undrawn would also be included this that numerator. The denominator of this ratio, what we call corporate EBITDA, is simply cash available for distribution prior to debt service at the corporate level, or the aggregate distribution to Yield's LLC from all of the projects. As of June 30 and prior to the green bond issuance this ratio stood at 2.27 times. Pro forma for Alta Wind as well as the second installment of drop-downs from NRG, which we target to close by year end, and fund with sources other than permanent debt at the corporate level, this ratio is expected to be 3.29 times. The discipline behind this ratio is simple. It will serve as the barometer of our corporate debt capacity for acquisitions, in fact the degree to which we are below the ratio will determine any incremental corporate leverage, which will be sized to ensure that we maintain compliance with the target. We target this ratio to strike what we believe is an appropriate balance among optimized returns, managing financial risk, and ensuring consistent access to the capital markets.

This ratio also supports or credit ratings of BA1 BB+ from Moody's and S&P respectively. The quality of this ratio is further ensured by our ongoing discipline in targeting assets for acquisition which are consistent with the NRG Yield overall investment thesis, and is reflected in our current portfolio and growth pipeline. Operating assets with proven technology under long-term contract with high quality offtakers. The stability of the denominator of this ratio, project distribution, is also a function of the underlying project capital structures that are consistent across the portfolio and pipeline. Specifically, long-term fully amortizing project debt with minimal floating rate exposure achieved via fix rate swaps. And finally, turning to a brief update on progress and intended timing of future drop-downs to NRG Yield on slide eight. NRG notified of its intention to offer a second set of assets from the portfolio of NRG Yield eligible assets it acquired as a part of the Edison Mission transaction. These assets include Walnut Creek, a 500-megawatt natural gas fired asset under a 10-year capacity contract with Southern California Edison, Tapestry, a 200-megawatt portfolio of wind assets under 20-year contracts with various offtakers, and Laredo Ridge, and 81-megawatt wind asset also under a 20-year PPA. These assets comprising approximately 800 megawatts in total are expected to generate around $120 million in annual EBITDA, and approximately $35 million in annual cash billed for distribution, bringing the total CAFD made available to NRG Yield by NRG from drop-downs to $65 million in 2014, which together with approximately $43 million in annual run rate CAFD from Alta, which is net of annual green bond interest expense of approximately $27 million, would be additive to the current CAFD run rate providing a solid base to continue our dividend growth trajectory.

NRG has indicated that it expects to offer the remaining ROFO assets and other NRG Yield eligible assets to us beyond 2014, providing us the pipeline to deliver on our revised five year annualized dividend growth target of 15% to 18%. Importantly, this allows us to be disciplined and opportunistic in pursuing third-party acquisitions, as these would be additive to this long-term dividend growth target, rather than necessary to achieve it. Although we will evaluate the dividend growth impact of these opportunities on a case-by-case basis, we would currently expect that the impact of additional acquisitions or drop-downs from NRG beyond the current pipeline, would more likely increase the duration of this long-term target, rather than serve to further increase the annualized growth. With that, Eric, I think we would like to open the call to Q&A.

Certainly. (Operator Instructions). Our first question comes from Paul Zimbardo of UBS. Please go ahead.

Good morning again, guys.

Good morning.

Good morning.

On the slide eight with the ROFO pipeline, could you give some insight into which of the post-2014 assets is more front of the line versus longer dated, or you can't really answer that? Do you have a preference for drops versus solar or wind?

The only thing I see is within that portfolio from a sequencing perspective a portion of Agua Caliente, that isn't to say we would plan on delaying over the long-term, but rather I would anticipate we drop down the lion's share of Aqua Caliente earlier in that 5-year window, and then a small portion of Aqua Caliente would be dropped down in the back end, call that in the 2018 time frame, and that is really a function of the ITC's and some of the requirements around avoiding recapture. Ivanpah is probably earmarked beyond 2015, and other than that, we would size the drop-downs between solar and wind on a mix designed to increase or continue the trajectory, in terms of diversification and really size to levelize the growth in CAFD, so that we can deliver towards this growth target.

Okay. Great. And then as a follow-up, the first drop-down was around 10 times EV/EBITDA for the El Segundo bucket. Would you say that this is a good proxy for the future, or not as much a mix of technologies?

Not as much of a proxy or a function of the mix of technology as it is more the duration. I would anticipate that the longer term duration contracts would probably reflect a modestly more robust multiple on an individual asset basis, but the low digit multiple overall is a good proxy moving forward.

Great. Thank you very much.

(Operator Instructions). And our next question comes from Paul Ridzon of KeyBanc. Please go ahead.

Good morning.

Good morning, Paul.

Just real quick question. Any more clarity around the timing of closing Alta? Any more granularity there?

The only thing I would say Paul, is thatwe have more or less gone through all of the conditions precedent and approvals, third-party approvals that are required save FERC, which we are anticipating shortly. Certainly we are highly confident in the third quarter anticipation, and it would be relatively soon, is what I would tell you.

Thank you very much for the color.

Our next question comes from Andrew Hughes of Bank of America. Please go ahead.

Hi guys. This is Andrew on for Brian Chin. A few on the EME assets that are designated to come onboard particularly on the wind side. Want to get your thoughts around two assets in particular, Tapestry and Laredo Ridge, why those were chosen over some of the other wind assets that have a little less time left on their contract life?

I would say, first of all, as to the other assets with the shorter contract life both of those are contained within broader portfolios of wind that are all project financed on a portfolio basis, so when those get dropped down, they would we dropped down as a part of the portfolio this coincides with the project debt. And I would say that all things being equal those would probably be at the nearer term as we move forward. Tapestry and Laredo Ridge we saw the diversification both geographically in terms of offtakers, as well as I think I had indicated before, they are right-sized along with Walnut Creek to deliver the right magnitude of CAFD to keep us on the levelized pace of growth to support the dividend.

Thanks for that. Is there any consideration also in terms of right-sizing related to sort of the tax efficiency here of the vehicle needing to right-size the size of the wind drop-down to offset any of the additional tax liability that might come from Walnut Creek?

Overall, the totality of the drop-down portfolio, if you will, between the ROFO assets and what NRG is deemed to be beyond that NRG Yield eligible, in totality the self-shielding aspect of those, very much mirrors what we started out with kind of that 10-year window, or 10-year runway of tax, so they would represent the same thing. On a case-by-case basis for example when we drop-down El Segundo in the first quarter, that was disproportionately more of a tax paying portfolio. So it tends to temporarily pull that runway if you will in. Also wind obviously is going to extend that to a large degree and get us back to that 10 years. And we kind of fluctuate around. Ultimately as we drop down assets over time, we would expect to maintain much consistency with that 10-year sort of tax window, if you will, over the remaining five years with the pipeline for drop-down.

Okay. Thanks, guys.

Thanks, Andrew.

The next question from Keith Stanley of Wolfe Research.

Good morning, for the drop-downs of Walnut Creek and the wind assets that you plan to do before the end of the year, it sounds like you intend to finance just with existing cash on hand. Will cash be enough or do you think you would need to issue Class B shares up to NRG to fund part of this? Or how should we think about that?

I will put that in the context of the $280 million in anticipated total cash at NRG Yield by year end. Obviously if you just use the $30 million of CAFD we drop down, or $100 million of EBITDA we drop down in the first quarter, this represents a slight increase on the second drop down. Relative to the $350 million that was the purchase price there, clearly that exceeds the $280 million. And that is before taking into account that there is a little bit more robust CAFD here. So I would certainly expect without front running the process this has to take place with the independent directors, that we would anticipate the purchase price would certainly exceed the $280 million, and depending on market conditions at the time, we certainly have the flexibility to take advantage of the capacity under the revolver temporarily to, if you will, bridge equity. Ultimately, I think equity will represent the remaining capital necessary to supplement the cash on the balance sheet in the near term.

And could this take the form of Class B or Class A units?

I have as I believe NRG indicated on the call the anticipation is that they would take cash so that would mean that would be Class A shares being issued in that sense.

Okay. And one other question. Can you just go over I know this was discussed a little bit on the NRG call, just what types of assets would have to backfill the drop-down pipeline, and I think you mentioned even Petronova as a type of asset for the Yield fill. Go over the contract structure there, and what would be required to drop an asset like that into NRG Yield?

Let me clarify that, because you picked on something, a tidbit I dropped out there maybe as a little bit too far over my skis. But first of all, I mean clearly the assets that are probably going to be refilling the pipeline in the near term are going to be more of the same. And Angie asked a question on the NRG call about the contracted, the contract that we have for a 600 megawatt project that we hope to build at Carlsbad. We have a few projects like that, that we hope to get from the development stage into the construction stage and be part of organic growth as well as a third-party acquisition.

But beyond that, as the reorganization that we announced on the NRG call, I mean certainly ultimately, and this hasn't been discussed yet with the NRG Yield independent directors in any great detail, but certainly in the residential solar, the idea of securitizations of residential solar lease packages or distributed solar business, 20-year leases or in the case of some business they are done as 20-year PPAs with a business offtaker. We very much could see a situation where a couple of years from now, we are bundling those and they are becoming part of the backlog for Energy Yield.

The comment that you alluded to when I mentioned Petronova, that was more aspirational. Right now Petronova does not have the key element which would allow it to be drop-down able, which is a 10-plus year offtake agreement. As carbon capture goes forward, I put it out there because we may develop a world where we can present a carbon capture to enhance oil recovery project with a 10-year oil offtake, or something that looks drop-down able. But that is not the project that started construction this summer. So NRG Yield will adhere to the principles of certainty of cash, and avoiding commodity risk. The Petronova for now is a long putt.

Okay. Thanks for that. And one quick one just on the dividend. Should we think of the growth rate as what you are basically going to target for the dividend, because it seems like the cash flow could be even much greater than that 15% to 18% near term. Should we think of the payout ratio as declining into 2015 potentially meaningfully, and you just manage that growth rate, or how should we think about that?

Clearly over the course of the first year as I alluded to in my remarks, we are on track to deliver a 25% year-over-year growth rate in this first year, and yes, the knock-on effect of that is at least temporarily we would anticipate being below that long term 80% to 90% payout ratio. But in the interim that build of cash in much the same way it has contributed to the $280 million at end of the year, serves to be a capital base for NRG Yield that can fund that growth, because the growth pipeline is so visible and tangible, we have a high degree of reliability that despite having in the short-term building some cash, we have very immediate needs for that on a pretty near term basis as we move forward, and so over the long-term we would sort of evolve into that 80% to 90% long-term payout ratio, within the interim you can expect it would move around, and as you have alluded to, maybe slightly below that in the near term.

Thank you.

And there are no further questions at this time.

Thank you Operator. And thank you all for participating on the call. We look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone have a great day.