Clearway Energy Inc (CWEN) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the NRG Yield third-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, this conference call may be recorded. I would now like to turn the conference over to Chad Plotkin, Vice President, Investor Relations. You may begin.

Thank you, Nicole. Good morning and welcome to NRG Yield's third-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 please ask that you limit yourself to only one question.

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 directly comparable GAAP measures, please refer to today's press release and this presentation. And with that, I will now turn the call over to David Crane, NRG Yield's Chairman and Chief Executive Officer.

Thank you, Chad. Good morning, everyone and thank you for joining us on this, the third-quarter 2015 NRG Yield earnings call. Today, I am joined by Kirk Andrews, Yield's Chief Financial Officer, who will be delivering a portion of the presentation and also available for Q&A is Mauricio Gutierrez, who is the Chief Operating Officer of NRG Yield. We appreciate everyone joining us today and I'm sure many of you just participated in the NRG Energy earnings call, so in the spirit of keeping this call brief, let's get to it by turning to slide 3 and the business overview.

First, let me begin with a quick summary of our financial performance, all of which delivered to our expectations, both in terms of being predictable and on target. In the third quarter, we delivered $198 million in adjusted EBITDA and $132 million in cash available for distribution.

With the closing of the most recent NRG drop-down, we are now also updating our 2015 guidance to $705 million in adjusted EBITDA and $165 million in cash available for distribution. As we move into 2016, the full-year impact of our acquisitions and the commencement of the Alta X and XI PPAs underpins our guidance of $805 million and $265 million in adjusted EBITDA and cash available for distribution respectively.

Looking at the bigger picture, when we first took NRG Yield public in 2013, our goal for NRG Yield was to establish a leader in a new investment class by highlighting the value of key long-term contracted assets within the NRG portfolio that were not from our perspective being appropriately priced within NRG Energy's stock price. And also by highlighting the growth opportunity arising for long-term contracted assets as the power sector entered its post-merchant phase. And over the course of nearly 2.5 years since NRG Yield went public, we have grown our dividend by 67% and are on target to grow by over 15% by the end of next year.

Our generation portfolio is now at an equivalent of 6 gigawatts versus 2.5 gigawatts at the beginning. EBITDA and CAFD expectations in 2016 are now nearly 3 times where they were at the end of 2013, all of which has been accomplished through prudent financial management that has permitted a low payout ratio while also continuing to have visibility into significant growth through our sponsor, NRG Energy.

Obviously, this positive self-evaluation does not comport with the market's assessment as reflected in our recent share price performance. We can list a myriad of reasons why the stock is down, none of which go to the fundamentals described above, but I can tell you that the NRG Yield investment proposition is unchanged. The fundamental economics of the NRG business are solid.

What the disconnect with the market means for us at NRG Yield, however, is that given the prudency with which we have managed our business, we don't need to rush to judgment or make rash decisions. Rather we can continue doing what we have been, which is deliver on both results and growth commitments with the means we have available without sacrificing shareholder value.

In other words, for the time being at least, we are going to stay the course. However, we do appreciate a persistent underperformance in our share price is not acceptable and in that regard, what we will commit to you is that the management team and Board of NRG Yield have no intention of waiting forever. We will continue to monitor over the months to come the overall yieldco environment and make strategic decisions as necessary to optimize the long-term value of NRG Yield. With that, I will turn it over to Kirk to go over the financials in greater detail.

Thank you, David. Turning to the financial summary on slide 5, NRG Yield is reporting third-quarter 2015 adjusted EBITDA of $198 million and cash available for distribution of $132 million, both exceeding our quarterly guidance. Adjusted EBITDA performance for the third quarter was slightly above expectations due to improved performance at our wind assets during the quarter.

While CAFD outperformed primarily due to the recent project debt repricing at El Segundo, which resulted rather in a beneficial revision to that debt's amortization schedule and also due to lower-than-expected maintenance capital expenditures during the quarter, simply reflecting a timing shift of some of those into the fourth quarter.

On November 3, the Company completed the acquisition of the latest set of right of first offer assets from NRG Energy. Specifically, a 75% interest in a portfolio of 12 wind assets totaling 814 net megawatts of wind capacity for a total cash consideration of $210 million subject to standard working capital adjustments. NRG Yield funded this purchase with a mix of cash on hand and borrowings from its revolving credit facility.

In accordance with GAAP, the Company is updating 2015 adjusted EBITDA guidance from $660 million to $705 million to reflect the acquisition of the wind portfolio from NRG as if the 75% stake had been held for the full-year 2015. The Company is also updating 2015 CAFD cadence from $160 million now to $165 million, which reflects the CAFD impact of the acquisition over the balance of 2015.

Moving to slide 6, NRG Yield is also initiating 2016 financial guidance of $805 million in adjusted EBITDA and $265 million of CAFD, in both cases reflecting the full-year impact of the recent wind portfolio acquisition. We continue to target a $1 annualized dividend per share by the fourth quarter of 2016, a 15% year-over-year increase. This targeted dividend implies a payout ratio under 70% based on 2016 CAFD guidance, providing increasing liquidity in 2016 and significant headroom for dividend growth in 2017 and 2018 without the need for additional drop-downs or new third-party capital.

When combined with a robust pipeline of remaining ROFO assets, these factors underscore our confidence in our ability to maintain annual dividend growth consistent with long-term targets. Beginning this quarter, we are providing CAFD sensitivity on our aggregate renewable portfolio in an effort to provide our investors clearer visibility into the potential impacts on CAFD, resulting from possible fluctuations in wind velocity and solar insulation.

Our 2016 CAFD guidance reflects our revised expected production cases for our wind and solar assets, including the reductions to the expected win production discussed on our second-quarter call. The sensitivity charts illustrate the CAFD impact versus guidance of a 5% change in wind and solar production in each hour over the full-year 2016. However, it is important to note that due to the seasonality of PPA pricing, which is typically highest from May to September as depicted in the lower left chart, it is possible that an aggregate 5% change may have a different effect on actual results if a disproportionate amount of that change is concentrated in certain periods.

As the chart illustrates, a 5% change in hourly production across the wind portfolio for the full year could increase or decrease CAFD by approximately $20 million while a 5% change in hourly production across the solar portfolio for the full year could increase or decrease CAFD by approximately $6 million.

Finally on slide 7, NRG Yield remains well-positioned to achieve long-term sustainable and efficient total shareholder return through superior execution of its business model and long-term strategic plan. With one of the most diverse mixes of conventional and renewable assets in its sector consisting of natural gas plants, thermal combined heat and power and district energy assets and an array of renewable assets, the Company is well-positioned to deliver stable, growing and tax-efficient dividend growth to its shareholders.

We continue to target a 15% annual dividend per share growth and as we've indicated in the prior quarter, this can be achieved through 2018 without the need for additional drop-downs or new third-party capital as our low payout ratio provides us with the ability to deliver organic dividend growth.

Through our right of first offer arrangement with NRG, NRG Yield has access to an estimated $135 million of additional CAFD runway, which excludes additional CAFD, which will be derived from $250 million of additional equity in ROFO drop-downs of distributed generation and home solar leases.

At NRG Yield's current position, this represents approximately a 50% increase in CAFD from these ROFO assets alone and that excludes any additional growth from NRG's efforts in the fast-growing residential and distributed solar markets.

Lastly, you can see in the lower right of this slide, NRG Yield ended the quarter with $572 million of liquidity versus $515 million at the end of the prior quarter. Pro forma for the recently closed wind acquisition, we have over $350 million in the remaining liquidity, more than sufficient to fund the remaining drop-downs from our home solar and DG partnerships with NRG. We continue to expect this liquidity surplus to grow as our low payout ratio will provide near-term excess capital for incremental growth. And, Nicole, with that, I think we would like to move directly to Q&A.

Thank you. (Operator Instructions). Matt Tucker, KeyBanc Capital Markets.

Good morning. Congrats on a nice quarter. David, I just wanted to follow up on the comment you made about not wanting to wait forever and taking steps to optimize NRG Yield's value. Could you elaborate at all on what type of options may be considered there?

Matt, what I would tell you is the basic message there, which is -- it seems like right now like we have been forever in this extreme downturn, but if you sort of chronicle it back, it's four or five months that it is really. My main message is we think that the fundamental business model of Yield is sound and that's our dominant paradigm. But if this persists, and I can't tell you exactly how much longer, six months, whatever, we have to consider all our options. And the only thing I'm really trying to convey to you and to the market, Matt, is that, and I know that the independent directors of NRG Yield feel the same way about this, is everything is on the table.

NRG Yield is a public company with its own shareholders and while it's got a strategic connection with NRG, we have to do what's right by the shareholders. So you hear all sorts of things, should Yields be combined, should they be bought in, should it go private and to be frank, we haven't actually evaluated any of those in any great detail.

I'm just sort of telling you that we will not ignore the existing share price performance forever or believe that, even if we keep executing against the plan and it doesn't recover and what's the problem is not our performance, but that the yield sector for whatever reason is just not going to attract public company investors in the way that it did in the past, then we will take whatever steps makes most sense for the existing NRG Yield shareholders at the time.

Thanks, David. And just as a follow-up to that, thinking just longer term and big picture, how would you address any concerns that the new NRG reset strategy could limit the development of additional assets that might be suitable for addition to NRG Yield's ROFO portfolio just down the road in the future?

Well, I think the -- certainly my sense speaking as the CEO of NRG Yield is, first of all, there's a pretty big pipeline -- I guess what I would say is the concern you are expressing is not our primary concern at this point because there's already a pipeline of growth assets that I think would be our first priority. From NRG Yield's perspective, it is just our ability to bring in what NRG already has in the ROFO pipeline.

I think that our understanding on behalf of NRG Yield is that NRG is not going to stop redeveloping its conventional plans with contracted assets nor on the distributed side are the two companies that have long-term contracted assets, leases in all home solar and the business-to-business solar that the greenco is being built around them and we would expect would continue to have a relationship with us. So we don't really see what NRG's announced with respect to reset having that much of an impact and I think the bigger issue is the restoration of the value proposition around NRG Yield itself.

I think that makes sense. Thanks a lot.

Julien Dumoulin-Smith, UBS.

Good morning. I will make this super quick. Can you comment a little bit around a contemplated yield and also timing of drop-downs here, CVSR specifically? Obviously, markets evolve. How are you thinking about what a palatable acquisition yield or multiple might be, if you could give us your latest estimate?

From the perspective of NRG Yield, the Company has not yet been officially offered CVSR for drop-down; although NRG has indicated it continues to intend to do so. All I can tell you is in much the same context as was the case with the most recent drop-down that yield and the total return associated with that drop-down will take into account the current market circumstances, including the cost of capital and CAFD yield for NRG Yield.

It's, obviously, important that on both of those metrics we have a total return that is value-accretive relative to the cost of capital of NRG Yield, as well as CAFD accretive. And so both of those two I would expect to be taken into account when we get into the negotiations between the two companies once NRG has actually made that offer.

Right. And CVSR as indicated previously was anticipated for the back half of the year?

That is correct. That is what NRG has indicated it continues to intend, which is in the latter part of the year to offer that asset for drop-down.

But that's the offer, not necessarily completion.

That's right, that's right. But, as I have said, that offer has not yet been made. I am simply acknowledging that NRG has repeated it in its intentions to make that offer available sometime later this year.

Thank you.

Daniel Eggers, Credit Suisse.

Just remind me on the ROFO pipeline, is there a timeline where if NRG offers assets to NYLD and NYLD doesn't like the price or the availability to capital that that commitment will go away?

What I would say, Dan, is that there is a right of first offer and the way you've described the first iteration of that is what the commitment that underlies that agreement is. And that is that NRG has an obligation to first offer those assets to NRG Yield and thus far, each time that has taken place, including the very latest one, which obviously takes into account the current conditions in the market as cost of capital, as I alluded to in my response to Julien's question, the two companies then being able to arrive at that agreement. I don't want to speculate other than, empirically speaking, we've been on a good path to progress with a favorable outcome in the negotiations. As to whether or not you can absolutely count on that, that is obviously up to both of these two parties, NRG on the one hand, NRG Yield as governed by the independent directors in this particular context on the other.

So I certainly won't predict on a go-forward basis what that outcome will be, but we've had a constructive process thus far and in the event that that was not the case, NRG having met that obligation to make that first offer has the option or the opportunity to monetize that asset elsewhere. That doesn't necessarily mean that NRG might do so. I can't speculate on that from NRG Yield's perspective, but that is the obligation that exists is that offer is first made to NRG Yield.

But there is no specifically prescribed by contract or anything else that says that the offer has to be outstanding for 120 days or 150 days if that's not specified, I don't believe.

Yes, NRG Yield under the ROFO arrangement has 30 days to respond to the offer when it gets made and that's the process that we pursue each time.

Okay. And I guess just when you think about evaluating strategic alternatives, because NRG is the majority voter in NYLD, I guess all those decisions will be approved or determined by NRG ultimately?

Obviously, NRG's say in what NRG Yield does is significant, but I think there's fiduciary responsibilities to all the shareholders of the Company. So I think it would probably be difficult for NRG Yield to do something that NRG didn't want it to do, but I don't think it can be done exclusively for the benefit of NRG.

I would just add probably the best example of how we have addressed very important circumstances like that is obviously how we approach the recapitalization. Again, not to say that that's prescriptive about how things work going forward in strategic alternatives or the like, but we have, from NRG Yield's perspective, certainly seen that NRG has been very mindful of the voice of the public shareholders as it did voluntarily in raising the threshold for the vote and the recapitalization to include a majority of the minority, which was not necessary, but something that NRG voluntarily did. And so I think that's probably a good indication about the seriousness with which NRG as the majority shareholder takes major decisions strategically and otherwise where NRT Yield comprehensively is concerned.

Okay. I guess one last question. When you think about the drop-down potential, is there a price or a cost of equity capital, do you think, for NYLD where you would want to return back into issuing equity to execute more on the pipeline or how do you guys think about when you would be ready to raise outside capital given the fact that you don't actually need any drop-downs for the next couple years to hit your dividend objectives?

Yes, from my perspective, a couple of things come to mind. Obviously, we are certainly very mindful at the prices at which capital has been raised and certainly that creates one consideration for future equity prices at which we'd begin to consider raising equity. Certainly, we are not at that level today as we have acknowledged. One barometer of that is, as you know, just by way of example, the CAFD yield, I think, under both the distributed generation and residential solar plant on an average basis over the course of the contracts is about 7.5%. That's, obviously, probably the lowest among the yields at which drop-downs have occurred and obviously, that's reflective of the fact that that's really a preferred return to NRG Yield with no residual exposure kind of terminal value beyond the contracted period. But judging by that, that CAFD yield would imply a price certainly at or north of $20 a share, which also comports directionally with the lowest price at which we've raise capital to date.

So that's a long-winded way of saying, academically speaking, I think certainly a price north of $20 is one that is probably a decent barometer to look for, not to say prescriptively at whatever level above that we do it, but that's a good threshold to think about.

Very good. Thank you, guys.

Steve Fleischman, Wolfe Research.

Just on the Alta Wind, could you just talk about how that performed in the quarter and just how you feel about your -- you still feel the expectations going forward are, if anything, conservative, fair?

I would not say, Steve, that they are conservative. I think, as we've said, we revised our expected case with respect to wind production taking into account what we've seen, most recently the averaging of the more recent periods. As to the quarter, we did say, as I alluded to in my prepared remarks, we did see some outperformance and most of that outperformance on the EBITDA side, in fact, practically all of it, was outperformance of Alta Wind relative to our expectations in the guidance.

But I think we feel comfortable having gone back through and reevaluated our expectations, which were reflected in our 2016 guidance and obviously, we've supplemented that with the sensitivities around that revised expected case that we provided today as well.

Okay. Great. And just one question on strategic thoughts for NRG Yield. I recall during the voting change that there are issues in NRG Yield at some of the projects and contracts with change of ownership. Would that impact or limit some of the things at NRG Yield that you can do with NRG Yield from a strategic standpoint?

I wouldn't say necessarily with absolute certainty that it would prohibit, but as we had said before, once there is a change of control, that's the way to think about both of those two circumstances, both in certain instances on the project financing side, as well as in certain instances on the PPA side, think about those as change of control. So certainly if those strategic alternatives constituted a change of control in terms of the voting shares that NRG has, then obviously it would entail having to take into consideration the impact of that change of control and potentially the reopening around certain of those project financings.

Okay. All right. Thank you.

[Ava Zar], Deutsche Bank.

During the NRG presentation, you highlighted the EBITDA and the debt associated with the ROFO assets. With increased focused on debt at yieldcos, how do you view the debt associated with those ROFO assets?

I think it's very important. I think specifically on the NRG side, I don't think there was a whole lot of discussion specifically about the ROFO assets other than the fact that that was one of the nonrecourse subsidiaries. But the important distinction I think that was made is that all of that debt is fully amortizing and the duration of that amortization matches exactly the remaining duration of the respective contracts behind it, so that you have a naturally delevering portfolio of assets. The original leverage levels of which were set and determined by the project finance and the cash flow coverages there.

So certainly we feel comfortable with the original debt levels underscored by the due diligence and all of the engineering that goes into determining what those levels are, but important to remind everyone that that part of the debt capital structure, both that resides at NRG Yield today, as well as in the ROFO assets, is fully amortizing. The only debt that is not is the corporate level, which is a very small piece of the overall debt.

And with some of those assets not performing up to initial specs, are you still confident that that debt will amortize over the contract period?

This is a question about the assets that are still in ROFO, still (multiple speakers)? I think we are confident in amortization of all the assets that are within NRG Yield. If you are asking us about the amortization of assets that are still at NRG, we probably should take that call in the context -- take that question in the context of an NRG call, not this because NRG Yield doesn't really have visibility into that.

Great. I will follow up.

Andrew Hughes, Bank of America Merrill Lynch.

Question on future drop-downs. As you look towards the timing of those, including CVSR and then what is behind it, are you or can you consider a cadence or timing there that enables you to avoid equity markets altogether just given -- to finance those drop-downs -- just given where the payout is and your access to your revolver?

Sure. I would say with respect to the aggregate $135 million of remaining CAFD from the ROFO portfolio, I certainly would not expect all of that is possible or even a significant portion of it would be possible without third-party equity. But as we have said, as I said in my prepared remarks, take into account that both there is the remainder of the existing agreements for residential solar and distributed generation, as well as taking into account NRG's stated intentions to offer CVSR, we feel comfortable with the liquidity as being sufficient and that liquidity obviously building giving the low payout ratio into 2016 that that would certainly be sufficient to fund those.

Beyond that, I think it's safe to assume that that would require -- anything beyond that would require, at this point, third-party capital and that would be more likely to be equity in the next iteration of that.

And then when you do consider those incremental drop-downs, are you thinking about it now more as extending the 15% growth target into the 2020s, or more along the lines of growing faster in the short term?

I think for the time being, the answer to that question is yes, extending the 15%. The ability to accelerate those things would certainly be most notably a function of the equity markets at the end of the day and also taking into account the ongoing expansion of the ROFO pipeline, both with NRG as it exists today and taking into account the potential for future drop-downs depending upon the nature of the business plan comprehensively at greenco, as we talked about before.

And just one last one, if I may. In talking about when you might trigger some of these strategic decisions about what to do with Yield if you are not happy with the valuation, is there a metric that you can point to where you might start contemplating those plans more seriously? Is it the $20 share price? Is it a specific yield number? Is it timing related? Any incremental color would be great. Thanks, guys.

No, I, actually, don't think there is any incremental color. If you go through all of our answers, some of what I would call more indicators in terms of the time that I talked about plus or minus 6 months, the $20 a share plus or minus, what Kirk is talking about and the third factor, and this goes to the question of -- the question of whether we want to extend the 15% growth rate into 2020 and beyond, the whole yieldco space, as well as NRG Yield for its long-term vitality depends on regular access to the capital markets. And if that doesn't come back then we have to look at all the other alternatives.

And so I sort of think those are the three factors -- the value of yield, what it looks like in terms of access to equity capital and roughly when I say we are not lasting forever, you can certainly narrow that. You should think in terms of multiple months rather than multiple years.

So, Nicole, I think we have time for one more question. I'm sorry we've gone over the hour, but we appreciate your interest. So could you -- and again, if anyone is left in the queue after this last question, please give us a call. We want to follow up and answer your questions.

Michael Lapides, Goldman Sachs.

This will be a very, very quick housekeeping question. Your guidance for 2016 includes or excludes CVSR?

Excludes CVSR. It is the existing portfolio, including the drop-down we most recently closed, but excludes CVSR.

Got it. Thanks, Kirk. Much appreciate it.

Thank you, Michael and Nicole, thank you and we appreciate your interest and we look forward to talking to you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.