Clearway Energy Inc (CWEN) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first-quarter 2016 NRG Yield earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to hand the meeting over to Kevin Cole, Head of Investor Relations. Please go ahead.

Thank you, Karen. Good morning and welcome to NRG Yield first quarter 2016 earnings call.

This morning's call is being broadcasted live over the phone and via webcast which can be located on our website at www.NRGYield.com under presentations and webcasts. As this is the earnings call for NRG Yield any statements made on this call that may pertain to NRG Energy will be from the perspective of NRG Yield.

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. Actual results may vary differently.

We urge everyone to review the Safe Harbor in today's presentation as well as risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events except as required by law.

In addition, we refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and the reconciliation to the most directly comparable GAAP measures please refer to today's presentation and press release.

Now with that I will turn the call over to Mauricio Gutierrez, NRG Yield's Interim President and Chief Executive Officer.

Thank you, Kevin, and good morning everyone. Joining me and also providing remarks this morning are Chris Sotos, the incoming CEO, and Kirk Andrews, NRG Yield's Chief Financial Officer.

I am very excited about today's call. We are reporting strong results for the first quarter, announcing the transition of the CEO position and moving forward with our growth objectives.

I am sure many of you just participated in NRG's first-quarter earnings call given the relationship between NRG and NRG Yield. But let me just repeat what I said on that call. NRG Yield remains a critical part of the overall NRG strategic platform and NRG is committed to provide certainty and visibility in both conventional and renewable development to reinvigorate the virtuous cycle between the two companies.

In my last quarterly call I discussed my goals for 2016: deliver on our financial commitments to grow our dividend by over 15% in 2016, enhance our growth pipeline through access to NRG's development efforts, ensure confidence in governance and management structure of NRG Yield and to evaluate alternative financing solutions to facilitate growth during this period of equity market dislocation. I am glad to report that we have or are on track to achieve many of these goals.

Turning to slide 3 for the business update, NRG Yield continues to validate its value proposition through offering a steady, high-performing source of dividend growth to our shareholders. During the first quarter of 2015 the Company achieved $188 million of adjusted EBITDA and $43 million of cash available for distribution. Additionally, I am pleased to say we are also increasing our quarterly dividend for the 10th consecutive time and are reaffirming our full-year guidance including our target dividend growth of 15% annualized.

Next I am pleased to say that we continue to push forward on our growth plans in concert with NRG. In addition to executing across our distributed generation which now stands at $141 million invested through the first quarter NRG has announced its intention to offer its remaining 51% interest in the 250 megawatt California Valley Solar Ranch project. You should expect an update on this transaction during the second-quarter earnings call.

As interim CEO I evaluated with the NRG Yield's Board of Directors what we believe is the optimal management structure and today announced that Chris Sotos, NRG Energy's current Head of Strategy and Mergers & Acquisitions and current Director of NYLD will be the dedicated CEO for NRG Yield, employed solely by NRG Yield. While over the next several weeks we will be conducting an outreach with investors during Q3 he has had a long and successful career in the power sector with over 20 years of experience, 12 of which had NRG Energy.

Chris has managed the team that created NRG Yield, been part of the board since its IPO and was responsible for identifying, evaluating and executing on many of the acquisitions that make up Yield today and its ROFO portfolio. Chris will assume the CEO role effective May 6 and be able to focus entirely on the Company's strategy, capital structure and path forward by the end the second quarter.

Representative of the strong strategic alliance between the two companies I will assume the role of Chairman of the NRG Yield Board, John Chlebowski will return to his role as Lead Independent Director and the Board appointed John Chillemi, NRG's Head of Business Development, to fill the existing vacancy on the Board. Of course, I and the Board will ensure a seamless transition of the CEO position. Chris is the first full-time employee of NRG Yield and he will continue to evaluate the optimal management structure and perhaps build out additional (inaudible) [dedicated] roles.

I appreciate our investors have been through a lot in the past year. And as you well know well, a top priority of mine and the NRG family is to offer investors a simpler and more visible story with consistent and regular interactions with the investment community.

And so in this vein, Chris asked that he be able to share a few words to help add visibility and certainty to shareholders of his intention to lead deals with the same dividend growth oriented principles set forth at our IPO. Chris?

Thank you, Mauricio, and good morning. It gives me great pleasure to address you as not only the incoming CEO but as the dedicated CEO to NRG Yield.

Mauricio has given you a good look at my background and fit for the role so I won't repeat his comments. Instead I will keep my remarks brief but I did want to reassure the investment community that you should expect a continuation of the core fundamental drivers and objectives behind the value proposition of NRG Yield that have made it successful.

As Mauricio highlighted earlier, I played a key role in the creation and execution of NRG Yield's goals and objectives. And so you should expect the strategy to remain consistent, although I will explore the possibility of expanding the dedicated team to ensure that NRG Yield is always focused on consistent value creation for our shareholders to take advantage of opportunities throughout all parts of the cycle.

Now let me turn the call back to Mauricio but again I wanted to thank you for the time today. I look forward to meeting and interacting with you over the weeks and months ahead.

Thank you, Chris. And with that let me turn it over to Kirk for a more detailed discussion of our financial results.

Thank you, Mauricio. Beginning with the left slide on slide 5 of the presentation, during the first quarter NRG Yield delivered favorable financial results with adjusted EBITDA of $180 million and CAFD of $43 million. Our performance in the first quarter was positive across all of our segments and NRG Yield continues to benefit from the diversification of this platform where approximately 45% of our adjusted EBITDA comes from the conventional thermal segments and 55% from renewables.

Specifically in the renewable segment, first-quarter results benefited from strong production across both our solar and wind fleet. This was especially the case at Alta Wind during the quarter where production was about 17% above our median expectation. The wind resource at Alta continues to exhibit significant volatility, however, and while the first quarter was quite strong production during the month of April was weak relative to our expectations.

Today NRG Yield is also reaffirming full-year guidance including adjusted EBITDA of $805 million and CAFD of $265 million. Finally, consistent with our commitment to investors to reach $1 of annualized dividends per share by the fourth quarter of 2016, NRG Yield paid dividends of $0.225 per share in the first quarter and we're pleased to announce the 10th consecutive quarterly increase to $0.23 per share in the second quarter of 2016, placing us on a trajectory to meet that goal by the fourth quarter.

Moving to the right of slide 5, NRG Yield also continued to execute on commitments to its business renewables and residential solar partnerships with NRG Energy. In the first quarter NRG Yield invested an incremental $40 million and $11 million into those two partnerships respectively. As you can see we have no cumulatively deployed approximately $115 million of capital into those partnerships, resulting in joint ownership of nearly 100 megawatts of long tenor, fully contracted, strong credit quality, geographically diversified and most importantly strong cash flow producing distributed solar assets.

NRG Yield maintains an additional $135 million of capital commitments to these partnerships including $53 million for residential solar. However, given NRG's pivot with respect to the residential solar business as was discussed on the NRG earnings call earlier, NRG Yield now expects to invest only around $20 million more in the residential partnership.

Importantly, this change does not affect NRG Yield's perspective on residential solar as an investable asset class nor does it affect our 2016 financial guidance or impact our ability to meet our objective of 15% annualized dividend growth through 2018. As a result of our reduced expectations for capital deployment in the residential solar partnership, near-term liquidity will be enhanced, providing flexibility to invest across other areas of the business.

Now turning to slide 6, I want to take a moment to emphasize an aspect of NRG Yield's capital structure that is often underappreciated which is the natural deleveraging effect which results from the fact that a majority of our balance sheet debt is with amortizing, non-recourse project financing. As many of you know, this project debt is sized relative to the tenor and cash flows of the long-term contracts of our projects which are with investment grade counterparties, all while committing permitting project distributions that underlie the dividends we then pay to our shareholders.

This benefit is not reflected in our cash available for distribution metric which represents cash available after debt service. And that is both principal and interest.

As shown on the chart over the next five years alone based on the current portfolio NRG Yield will repay approximately $1.5 billion of this project debt across the existing portfolio, an amount that is over 50% of today's equity market capitalization to put this in perspective. Second, this natural deleveraging also increases NRG Yield's long-term flexibility on growing the platform as it provides increasing capacity, finance, future accretive growth, especially at times when the equity markets may not be as accommodating.

With that it will turn it back to Mauricio for closing remarks and Q&A.

Thank you, Kirk, and before we turn to Q&A let me provide some closing thoughts. I hope my excitement for Chris becoming the new dedicated CEO is coming through on today's call. I have known and worked closely with Chris over my entire career at NRG and I know he is the right person at the right time for NRG Yield.

As I move to Chairman of the Board I am in a unique position of being able to say that from the perspective of both companies the fundamental drivers behind the value proposition of NRG Yield have not changed, nor would I expect them to change with the naming of Chris Sotos as CEO. Chris will not be available during Q&A but I can assure you he's eager to engage with you in the days and weeks to come.

So with that, operator, we are ready to open the line for questions.

(Operator Instructions) Matt Tucker, KeyBanc.

Hey guys, this is Grier Buchanan on format. Nice quarter and thanks for the question.

Just a couple of follow-ups on home solar restructuring. One, on the monetization of those assets, could you just share your thoughts from the NRG perspective on why third parties in Sunrun and Spruce rather than NRG Yield? And then two, any chance you could quantify the expected unit economics on those residential systems sales? Thanks.

Sure, it's Kirk. I will address the first part of that question.

Certainly we were mindful of the opportunity around residential solar where NRG Yield is concerned. But with respect to the partnerships I think they achieved the two objectives, one of which I'll make reference to the remarks that were made by NRG on the earnings call earlier today. And that is that it comports a lot more closely with the financial metrics that NRG's investors are familiar with and value and that is EBITDA.

And as you probably know in the drop-down context NRG still consolidates all of that. And so the long-term leased revenues and expenses associated with that they'll continue over the course of the remaining life of the lease rather than in the monetize and hold scenario.

The other important thing is from a financial complexity standpoint it is simpler and that is certainly a benefit for NRG Yield. The partnership that was announced this morning does not include any ongoing relationship or importantly tax equity. It is simply a monetize and hold.

And because we see a more robust opportunity going forward, especially through the distributed generation or what NRG calls business renewables, as I said in my remarks this is an opportunity to free up capital as we expand and diversify the portfolio, not only to take advantage of the growing portfolio that we see from NRG on the renewables side, business renewables until we scale, but also expanding the opportunities across the asset. I think this arrangement certainly in the near term works for both parts of the partnership.

That makes sense. And certainly consistent with the announcement back in February.

Along those lines could you just clarify, looking at slide 5 the remaining capital of $135 million in that partnership, there's $53 million earmarked for residential solar but you disclosed that you only expect to invest another $20 million. So will that $33 million -- I think you mentioned that could be that's liquidity that could be used for other purposes. Will that be allocated to business renewables or should we just think about that as TBD?

Yes, when I referred to enhancing the liquidity, obviously liquidity is both a function of where it currently stands and prospectively from a financial planning standpoint. On the previous trajectory as we would given the magnitude of the capital remaining under that program, that $135 million, our financial forecast and the use of that liquidity as we roll forward reflects the anticipation of utilizing that.

We've revised that anticipation that all but about $30 million, if you just do the math, and a little more than $35 million is now going to be used, that gives us incremental financial flexibility as we move forward because we're not deploying that $30 million. So in terms of the use of proceeds I'd say it's less likely we'd complete the remainder under the business renewables because that's already part of our financial plan, that's that $82 million that's referred to (technical difficulty).

It's more likely to be used for other opportunities. As NRG has announced the intention and has made that intention known to NRG Yield in the second quarter as CVRS certainly can be used to fund that.

But importantly relative to the path we were on before if that does turn out to be the case that's $30 million of incremental capital towards this example, CVSR, that would not further tap into if you will the liquidity reserve relative to the path we are on there. So on that first $30 million it's neutral to the plan and yet expands the portfolio.

Got it. Thanks for the time.

Angie Storozynski, Macquarie.

Thank you. I have two questions, one is you mentioned a potential alternative financing solution so I wanted to know what they are. And secondly, would you consider teaming up with some developer or I don't know an infrastructure investor to provide NYLD with more of a visibility into long-term growth? Thank you.

Sure Angie, it's Kirk -- go ahead.

Hi, Angie. So I will say that to your latter part of the question the answer is yes. We are exploring opportunities to potentially partner with infrastructure funds or additional developers that can enhance the growth and the ROFO for the pipeline that we have.

But clearly going forward that will be Chris' priority. For the first part of the question, Kirk.

What I'm seeing in the near term, and I want to talk about this in the context of CVSR, and I think I've mentioned this on the last call, on our fourth-quarter earnings call, CVSR is among the assets currently, although I referenced in my prepared remarks the fact that we have a natural deleveraging portfolio, where's CVSR currently stands today the level of debt there, which is I believe a little less than $800 million, and that's across the entirety of CVSR relative to the overall cash flows there is incremental debt capacity there as it sits today. And that is probably the best example in terms of alternative uses of capital to help finance dropdowns or free up capital as we move forward.

But we're certainly leaving no stone unturned. But I think in terms of near-term execution opportunities it's reasonable to expect that that is probably the most likely among them. And that is taking advantage of that excess debt capacity at CVSR.

So additional project level, but doesn't it eat into cash flows because that amortizes?

Yes, it certainly would be lower than the existing cash flows today but we'd only do so if it was ultimately accretive. So the way to think about it is there is an existing level of CAFD at CVSR today. Some portion of that would be used for debt service.

The remainder you can think about it as equity cash flow on the dropdown. And of course what that means is the remaining portion of the purchase price not funded by debt is also lower.

So we're obviously very focused on making sure that we can see a path clear on CVSR as well as future dropdowns or acquisitions that we can enhance to CAFD so that they CAFD on the equity cash flow, on the excess capital above and beyond that project financing is accretive relative to the current CAFD yield. That is probably the highest level of importance for us.

Okay, thank you.

Shariar Pourreza, Guggenheim.

Hey everyone, how are you? Just real quick, just one question, on the deal levering slide that you have on slide 6 so when you think about sort of the residential reduction in solar spend plus the natural delevering you're seeing at the business through amortization of the debt, you know you kind of made some comments around CVSR and being able to tap some additional capacity at the project level. Is it fair to say that given sort of where this amortization is heading and the delevering is heading, can you fund the growth beyond 2018 without hitting the equity markets or tapping the equity markets?

I would say we could certainly use that to supplement but I would not (technical difficulty) over the long run in terms of really funding substantial amounts of growth using, for example on the 15% I think that is certainly necessary and helpful but is not sufficient to really continue that path meaningfully beyond 2018.

Any room to back lever?

Yes, to some extent that's the way I'm thinking about that. That's a variation on (technical difficulty), yes, also true. But if you think about back levering at the corporate level, very importantly that is not something that we would do today because we are very focused on maintaining adherence to our balance sheet principles and the metrics that we've laid out there. But that's certainly an opportunity but would have to do so without tapping into corporate debt at the current CAFD level.

And then, Kirk, just one last thing on the equity markets, still sort of remains closed?

Well, I think closed is a function of two things. One, in terms of the efficiency, I mean obviously we haven't seen a whole lot of yield paper coming out in the last year.

And it's certainly our concern is sort of the file to offer spread in terms of the discount we want to have confidence that that's manageable because we're very focused on raising equity we can deploy accretively. And the other component is just the overall cost of capital that's implied by the current share price.

And I've said in the past and I continue to feel that based on where we currently are today we're not in any hurry to issue equity at these prices. But our equity issuance is both a function of an absolute and a relative. Absolute I just spoke to, relative means that the equity we issue at whatever price the use of proceeds have to represent clear accretion both from a CAFD standpoint and a total return standpoint.

Excellent, thanks Kirk.

Michael Morosi, Avondale Partners.

Hi guys, thank you for taking the question. Should I interpret the commitment to grow through the renewed commitment to dividend growth as saying that NRG Yield is stepping away from the notion of yieldco as asset manager or that NRG Yield is willing to trade around its portfolio and basically view its existing asset base as a potential source of funds?

Sorry, Michael, I'm not completely clear on your question with respect to NRG Yield. Can you please clarify?

Yes, I mean basically viewing your basically being a buyer and a seller of assets (technical difficulty) as a way to manage shareholder return?

The way I'd say it overall is although we have no current intentions to monetize an asset if that's what you're thinking about but the best way to think about it in principle is the philosophy behind that is we are not wed to assets. We are wed to growing CAFD per share.

And so if there is an opportunity to monetize an asset at value we are certainly agnostic in terms of the portfolio but we are not indifferent as to the effect of that transaction or any. It has to be accretive to grow that CAFD.

That's fair. Thanks. And then as it relates to other potential equity offerings we're hearing more and more about companies looking at ATM-type offering. Is that something that you've considered?

We have, yes. I certainly think that's a tool in the tool chest but obviously in terms of order of magnitude it's helpful but I don't think at this juncture it something that we're in a massive hurry to put in place.

I think as we hopefully we continue to see the trajectory in terms of the appreciation and the share price. And that is certainly a lever that we would pull but it doesn't substantially move the needle in the near term in terms of building dry powder for a significant acquisition. But it is certainly helpful.

Very good. Thanks a lot, guys.

Steve Fleishman, Wolfe Research.

Hi, good morning. Kirk, just on the slide with the debt paydown and the like, project debt paydown, I don't know if there's a way to give a sense but obviously you because the PTAs don't last forever you really need the debt on a project to be paid down over the life, so it's hard to kind of judge how much if any extra debt capacity is really created by that versus the debt reduction that you actually need. Is there a way to kind of think of a sense of that?

Yes, I think that's a fair question. So I will answer it in two ways. One, certainly I gave the example of CVSR today and that is something that I continue to expect you to see us to be able to quantify by action.

But let me think back on a way that we can kind of give you some sense of what that capacity is. That said, the other part of that equation which I've been very mindful of and was at the time that we came out of the IPO and continue to be, in addition to that debt capacity piece the natural delevering nature of those particular assets means that we remove the debt service basically at the same point as the contract rolls off which gives us a tremendous amount of flexibility on a re-contracting basis as we move forward obviously to continue that CAFD.

If it has to be on an unlevered basis so be it. But there's a lot of cushion with the removal of that debt service on an asset-by-asset basis.

And the other thing I'd say I think you'll find, although we didn't go through in the specific part of the first part of your question, behind that page 6 which we included I think the pro rata share of the equity method part of the portfolio, CVSR currently among them, but I think we gave you an asset-by-asset table in the appendix back around page 13. So that at least gives you more granularity behind that. But let me think on a way that we can give you a little bit better (technical difficulty) debt capacity beyond what I've alluded to on CVSR.

That's helpful. Maybe to ask the question then in a more simplistic way which is that based on your view of the portfolio, you would say that there is room for access for additional project debt overall and that's part of it. So what the exact number is, fine, but you believe there is room to kind of add project debt.

And I'd be willing to add to that because I think that CVSR is probably the most substantial example of that right now.

Okay. Thank you.

Thank you and that concludes our question-and-answer session for today. I would like to turn the conference back over to management for any closing comments.

I think that's it. Thank you for your time.

Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the program and you may now disconnect. Everyone have a good day.