Clearway Energy Inc (CWEN) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NRG Yield first-quarter 2015 earnings call. (Operator Instructions). As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Matt Orendorff, Managing Director of Investor Relations. Please go ahead.

Thank you, Jonathan. Good morning and welcome to NRG Yield's first-quarter 2015 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 and webcasts. Because this call will be limited to 30 minutes, we ask that you limit yourself to only one question.

As this is the earnings call for NRG Yield, any statements made on the 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 encourage everyone to read our 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 directly comparable GAAP measures, please refer to today's press release and this presentation.

With that I will turn the call over to David Crane, NRG Yield's Chairman and Chief Executive Officer.

Thank you, Matt, and good morning to everyone and good morning again to the folks that joined us on the previous call. And again today I am joined by our Chief Financial Officer, Kirk Andrews who will be giving part of the presentation, and Mauricio Gutierrez, the Chief Operating Officer of the NRG Yield is available for questions.

Since we know that many of you did listen to the NRG Energy call a little while ago, we will be brief in our comments.

If you turn to slide three, during the first quarter, weather caused wind resources in the Western United States to perform at levels well below expectations but NRG Yield, thanks to our portfolio of diverse generation technologies, provided a result that is generally in line with our guidance. While Kirk will spend more time delving into the specific impacts here, we believe that this is an occasion where the choice of owning a portfolio comprised of renewable and conventional assets is proving to be the correct and differentiating strategy relative to other YieldCo vehicles.

As we look toward the balance of the year during the current quarter, the second quarter, we anticipate some lingering impacts from the lack of wind production in the West so we are recalibrating our full-year EBITDA guidance from $705 million down to $690 million. Having said that and importantly, we do not expect the unusually low wind production to impact our near- or long-term dividends and are maintaining our guidance with respect to cash available for distribution to $195 million.

We are also pleased to share an update with you regarding an expanded solar relationship with NRG. Following on the recent announcement of our partnership, $150 million of residential solar leases that NRG Yield is investing in. The companies have broadened this relationship and have received approval for an additional $100 million investment in distributed generation solar assets combined with the previously announced $250 million of solar assets that are now part of the ROFO pipeline and we have earmarked $500 million of new commercial and residential assets for the portfolio that will have attractive economics and supported by long dated contracts that will enhance significantly NRG Yield's cash dividends going forward.

Before turning the call over to Kirk, I want to take a minute and discuss the recently approved recapitalization. We can't thank our investors enough for the support they showed us through the process and we are incredibly excited at the prospects for what lies ahead for NRG Yield. With our highly strategic relationship with NRG now cemented and any potential inhibitors of growth now cast aside, we are focused on delivering to our investors more of what we have delivered since our IPO.

And with that I will turn it over to Kirk.

Thank you, David. I want to turn to the financial guidance or excuse me, the financial overview rather on slide five. And for the quarter, as David mentioned, our first-quarter adjusted EBITDA results are $122 million and we had $6 million in cash build for distribution. And our adjusted EBITDA was just slightly below our first-quarter guidance due to the impact of the continued unusually low wind speeds in California and also in Texas. We exceeded our CAFD guidance primarily due to a one-time distribution from the Avenal solar project and that resulted from a favorable repricing and extension of the nonrecourse project debt that we executed during the quarter.

We are initiating our guidance on the second quarter 2015 with adjusted EBITDA of $195 million and CAFD of $35 million which also takes into account lower than expected wind production during this quarter especially in the early part of this quarter but for the full-year 2015, we are assuming a return to normalized wind speed over the balance of the year and we are slightly revising the adjusted EBITDA guidance as David said to $690 million to reflect the impact of that lower wind production especially this quarter. But that is partially offset by the impact of third-party acquisitions and the investments which have taken place to date in residential and DG partnerships.

On the cash available for distribution side, we are maintaining that 2015 guidance of $195 million largely due to that Avenal distribution that I spoke about earlier.

I want to turn to slide six and talk a little bit about the new share class approval and I too would like to thank our public shareholders for their support in approving the creation of these two important Yield share classes. And this important step is going to allow us to maintain a strong strategic partnership and the support of NRG while enabling the Company to a more efficiently raise third-party equity to fund continued growth without the need for additional investment by NRG.

With the new C Class shares now available as our primary source of new equity, Yield has a firm foundation to build on our success in executing on our long-term growth strategy by providing us with incremental financial flexibility to finance future growth opportunities which includes future acquisitions as well as drop downs from NRG which of course are now enhanced by the increased ROFO pipeline and the expansion into high growth asset classes such as residential solar.

While NRG's economic ownership will be dilutive through future issuances of those Class C shares which I said is we intend to be our primary source of new equity, the proposed plan allows for over $20 billion of equity you raised based on today's share price before NRG's voting interest would fall below 50% and this really helps us to preserve that important strategic partnership between our two companies that is responsible for the success that we have enjoyed to date.

We expect to effectuate that recapitalization on May 14 and that will take the form of a 2-for-1 stock split of both of our Class A stock, which is held by the public, as well as the Class B stock, which is held by NRG. Each Class A share is going to be split into one Class A and one Class B share and then each Class B share, which is the ones that are owned by NRG, those will be split into one Class B and one Class D share.

Importantly immediately following the stock split, each shareholder will through their combined ownership of those classes of stock have the same economic and voting rights as they do today.

Of equal importance and as a result of that vote, the amended and restated right of first offer agreement became effective and that further expands the Company's visible growth pipeline by adding 900 MW of wind assets which NRG has actually indicated its intention to offer us later this quarter and up to $250 million of equity investments in residential, solar and distributed generation portfolios.

Finally, 800 MW of new long-term contracted natural gas assets in California. With the substantial growth potential available from the diverse set of asset opportunities coupled with our improved access to that equity funding, we now have the necessary components in place to continue our growth momentum toward the next decade.

Finally on slide six, I would like to provide some more details around our recently announced $150 million commitment to a residential solar partnership with NRG Home Solar. Our initial investment which has already occurred, that consisted of $26 million and that was into an existing unencumbered portfolio and by the unencumbered, no tax equity or debt of 2200 residential leases. And since then we have actually invested an additional $7 million of the $150 million additional commitment to the partnership with Home Solar and we are expecting to invest the balance of that during 2015 with an additional 13,000 leases.

As we near completion of this initial commitment later this year, NRG has indicated its intention to offer us additional opportunities for continued investment in what we see as a really exciting high growth asset class for Yield.

As shown on the top portion of this slide, the current portfolio, that portfolio that represented that initial $26 million unencumbered portfolio, that consists of high-quality leases and those are located around the country and those have an average FICO score of 770. And over the long run, we expect to continue diversifying that portfolio from a geographic standpoint while we are maintaining a strong credit profile with a weighted average FICO score of no less than 700 and that is required by our partnership agreement with NRG.

From an economic standpoint, we expect that portfolio to generate an average CAFD yield of 7.5% with the majority of those cash flows given the profile of the [current] portfolio especially oriented more toward the Northeast right now generated in the early years thanks to some incremental revenues from renewable energy credits and state incentives.

In addition, the partnership structure created with NRG will provide significant flexibility to both parties to achieve their mutual strategic objectives. On the one hand, NRG while access a new source of long-term diversified contracted cash flows and capture 95% of the portfolio, NRG Yield that is, and those economics they will realize those economics of that 95% until NRG Yield achieves its targeted return during that contracted period.

On the NRG side, NRG will be able to periodically monetize those residential leases and redeploy that capital towards future drop downs while retaining a residual economic interest in that portfolio post the contract period. We think this flexible structure which will also be [reciprocal] with other asset classes, most notably commercial and industrial solar distributed generation or as we call it DG for which as David mentioned, we have also established a similarly structured $100 million partnership with NRG.

That is the end of my remarks and I will turn it back over to David and I think we will move to Q&A.

Thank you, Kirk. Let's go straight to Q&A.

(Operator Instructions). Daniel Eggers, Credit Suisse.

Good morning again, guys. Just on the solar arrangement between NRG and NYLD, the 7.5% CAFD, is that the agreement for this first $250 million of drop downs and what sort of framework are you guys going to use for sustaining that relationship from a Yield perspective?

Dan, it is Kirk. As I said, we established that partnership at the outset and there is the initial $150 million but the intention is as that 150 million is fulfilled, NRGY expects to offer -- as indicated to Yield that it expects to offer continued lease investment opportunities as we move forward. So we would expect that same partnership arrangement and the economics therein that govern that 7.5% average yield over the lease life to be the model that we'd use going forward including the $150 million. But beyond that as we offer additional leases moving forward so it would be the same model.

Now should we use that 7.5% as the assumption for when you guys look at other acquisition projects? Is that what you guys are kind of using as your hurdle rate effectively for transactions?

No, and the reason for that is tied to really total returns. That 7.5% average CAFD yield is based on a targeted total return and that is really the way we think about all acquisitions, not limited to the residential solar. It is very important to maintain the discipline as we often say internally here, and CAFD accretion is really one part of the equation but ensuring that the total return proposition is consistent with NRG's cost of capital is really what governs. And that can vary in terms of the impact that has on CAFD depending on the profile of an opportunity that we look at.

So what sort of IRRs are you embedding --underlying these projects and anything about things for sale in the market today? Are they above or below the IRRs you guys are targeting?

When we talk about the 7.5% CAFD yield, that is really not an IRR, I would say the total return for us is depending upon the asset class because to some extent -- let's say they take some of the drop downs that we have done in the early part of NRG Yield. We look at it is a little bit of a hybrid and what I mean by that is the low cost of capital or the low IRR on an unlevered basis which is in kind of in that 6% to 7% type range, that is really how we think about the contracted portion of the cash flows.

So if you think about a shorter duration asset when we look beyond the contracted period, we use a hurdle rate if you will above that to account for the risk on the merchant part on the recontracting part. And so depending upon the duration of the contract in question, it is really a hybrid of the components of the discount rate we (technical difficulty) to the post-contract, and the pre-contract period. And obviously the longer the contract, the more it tends to drift toward the lower hurdle rate; the shorter the contract, the more we ascribe a little bit of a higher hurdle rate to account for the risk of the re-contract.

Got it. Thank you.

Steven Fleishman, Wolfe Research.

Hi, good morning. So first question just on the dividend increase this quarter was a little lighter than you have done. Any reason for that and do you expect that you will continue to grow the dividend pretty much higher every quarter?

Yes, we do and what I would say is it is in line with our expectations in maintaining adherence to that annual compounded annual growth rate guidance. Our philosophy is it is important to deliver consistent growth year-by-year that is consistent with that long-term 15% to 18% growth rate. And we would expect that for 2015 and as we move into 2016 and beyond so we are calibrating that quarterly increase on the basis of the annual target.

The one thing I would say and I think this is something that we went into on the last call that we had, because of the nature of both the contracts and also to some extent the timing of the debt service, the CAFD doesn't perfectly mirror the EBITDA as an example. And so for that reason especially in early quarters, in the early part of the year where the seasonality is exemplified by the amount of CAFD we had in the first quarter relative to our guidance is a little lower. We tend to have a little lower dividend increase in that early quarter and then we catch it up toward the latter part of the year and that kind of reflects that shape if you will of the cash flow over the course of the year.

But without question on an annualized basis, we are very consistent in adherence to that 15% to 18% compounded annual growth, Steve.

Okay. One other question, I'm sorry. Just the acquisition environment, could you give us some perspective on just how the environment looks right now and were you inhibited from doing things you would have done over the last few months because of needing to get this structural change done?

Steve, let me answer that question. I think this would be -- I am sure this would probably be maybe one of a great blinding glimpse of the obvious out there. But the acquisition environment is obviously a lot more competitive with 30 YieldCos or whatever there are now compared to when we first started. And we have particularly seen in the realm of contracted wind portfolios people bidding prices that we can't even begin to contemplate even with the cost of capital advantage of NRG Yield.

So to me it highlights the virtue of the fact that we have a more diverse portfolio and we see other areas certainly smaller than contracted wind right now where we understand the technology, we understand the contracts and we see opportunity for NRG Yield. But I would say in the center of the fairway in the rich two-year tradition of Yield land of contracted wind assets, it is very much a seller's market, the prices are insane.

Greg Gordon, Evercore ISI.

Thanks. This is my 27th question. I held it over from the last call.

What would the impact be to the sequencing and timing of drop downs and the growth rate if the Carlsbad drop doesn't happen in 2017 because of a lack of a regulatory approval? How do you think about an alternative drop-down path that sustains the growth rate?

Well, I mean, yes. It seems to me it is a little early to --. Greg, we should get back to you on this 27th question after the CPC later this month. But Kirk, if you want to take it, go ahead.

The only thing is I think that certainly covers the situation with the Carlsbad but I would say the thing that we feel most optimistic about is now that we have the capacity to issue equity without reliance on NRG's investment and as David said, seeing opportunities in the broader set for our diversified portfolio on the third-party asset acquisition coupled with the fact that although we have announced these two partnerships which have initial amount of $250 million, we are counting the first $250 million of the ROFO in addition to that first $250 million.

And we haven't fully factored in into our growth guidance the ongoing impact of that because as you know especially where Home Solar is concerned, that is a very robust growing asset class. And I feel confident through the combination of diversified asset opportunities, the growth that is represented in those new asset classes that is really enabled by the new source of capital we have in the C shares, we feel comfortable we have a lot of means to sort of manage and maintain that growth over the long-term.

Thank you. Great answer. Have a good afternoon.

Matt Tucker, KeyBanc Capital Markets.

Good morning. Can you give us a sense of the time period you expect it to take to fulfill the first $250 million in the residential and DG investments and how much is included in the $600 million of drop-down proceeds NRG expects in 2015 that you all talked about earlier this morning?

I will pivot to the first part of that. On the Home Solar side, we would expect that the first $150 million would be completed within the balance of this year and that is just due to the growth that NRG has made us aware of in terms of their expectations on the residential solar portfolio.

As far as DG is concerned, we would expect a good portion of that to take place during 2015 with some portion of it carrying over into 2016. But the majority of both components of that $250 million I think you would expect to see fulfilled during the balance of this year.

Thank you. And then just you guys certainly weren't the only ones to comment on the weak wind conditions in the quarter. Just to confirm, is there any concern about the assumptions relative to wind or perhaps any operational issues there or how confident are you that it was solely a function of the weak wind in the quarter?

I think Mauricio may have something to add on the operational front but I mean you don't use this word often but I mean the absence of wind compared to historical data was virtually unprecedented. So I don't think there was anything about the operation of the units that was of particular concern. I think we have been very much focused on looking at the forward forecast and all and at this point after one quarter, you are not going to sort of assume that it was anything other than an aberration. But certainly we are spending a lot of time looking at the forecast.

But Mauricio, is there anything on the operational side of particular concern?

No, we don't have any concerns on the operational side. As David said, I think it was a pretty extreme period of very low wind speeds that really affected the production at the facility. In the future we just don't have any concerns on the operational side.

Great. Makes sense. Thanks, guys.

(inaudible), Deutsche Bank.

Good morning and congratulations, guys. Two questions today, the 2015 guidance just to confirm, it does contain EBITDA from Home Solar and DG but does not contain it from EME and CVSR? Is that the right way to think about it?

That is correct. Yes, that is correct. It includes the impact of those first two elements but does not include any of the CAFD contribution from the remainder of the assets that NRG has indicated its intention to offer in what I think was two tranches, both EME and CVSR. Neither of those are in our guidance right now. We would expect to update the guidance as we have done in past practice once we have completed those acquisitions.

My other question is does concentrated solar power generally and Ivanpah specifically possess the right risk reward for NYLD?

I think -- we have made under Mauricio's team's leadership dramatic improvements month to month in the operating performance. We always knew that Ivanpah represented a more complex set of operational challenges than the run of the mill solar PV plant. So we very much like the trajectory of operational performance that Ivanpah is on. There is still room to go but I think it is fair to say since we are speaking on behalf of NRG Yield, that the scrutiny of Ivanpah and its ability to perform going forward if at such time as it is considered for drop-down to NRG Yield will be heavily scrutinized by the NRG Yield Board and particularly by the independent directors of NRG Yield.

So I think it is just too early to say but I can assure you that it will be scrutinized with a microscope.

Great. Can I ask one more or am I out of time? The guidance cut, Q1 was only light by about $3 million and you were adding EBITDA from the solar assets. What else is going on there, is that just the April wind performance?

Yes, April and also what we have done is because in reality, it is unlikely to see an immediate step change in the wind production given what we have seen in April and May we have seen a little bit of improvement in the wind here recently. We have made adjustments and as I mentioned earlier, that are embedded in our second-quarter guidance to reflect what we have seen already quarter to date as well as acknowledging that as that wind is improving, it tends to improve over time and not on an immediate basis. So we've factored that into the second-quarter guidance and that is really in addition to what you saw in the first quarter in total what represents that guidance adjustment.

Thank you.

This does conclude the question-and-answer session of today's program. I would like to hand the program back to David Crane.

I just want to thank all the folks who participated in the call and tell them I look forward to talking to them again next quarter. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.