Clearway Energy Inc (CWEN) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NRG Yield full-year and fourth-quarter 2016 financial results conference call. (Operator Instructions) As reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Mr. Kevin Cole, Head of Investor Relations. Sir, please go ahead.

Thank you, Liz. Good morning and welcome to NRG Yield's full-year and fourth-quarter 2016 earnings call. This morning's call is being broadcast live over the phone and via a webcast, which can be located on our website at www.nrgyield.com under presentations and webcasts.

As this is an earnings call for NRG Yield, any statements made on this call that pertain to NRG Energy will be provided from the NRG Yield 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.

Actual results may differ materially. We urge everyone to review the Safe Harbor in today's presentation as well as the 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 will refer to both GAAP and non-GAAP financial measures. 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 presentation.

Now with that, I'll turn the call over to Chris Sotos, NRG's President and CEO.

Thank you, Kevin, and good morning, everyone. Joining me and also providing remarks this morning is Chad Plotkin, NRG Yield's Chief Financial Officer. Thank you for joining NRG Yield's fourth-quarter 2016 earnings call.

2016 was a great year for NRG Yield, and on page 3, you can see why. We exceeded our 2016 financial guidance with full-year adjusted EBITDA of $899 million and CAFD of $311 million, with strong performance across the portfolio.

We also maintained our dividend growth trajectory, with an increase in our dividend per share in 2016 of 16% year over year. Additionally, in the first quarter of 2017, we announced a dividend increase of 4% to $0.26 per share. Other key accomplishments were the closing of the CVSR transaction and the UPMC agreement, both of which have long-dated cash flows that will further underpin NYLD's platform for years to come.

Today we are also reaffirming 2017 guidance, which Chad will review in detail in his section of the presentation. We intend to update guidance when the drop-down is closed and we are further along in 2017 actual results.

Continuing along these lines, today we're announcing two additional drop-downs from NRG: a 50% interest in Utah solar assets, which NRG previously acquired from SunEdison and a 16% interest in the Agua Caliente solar project. Combined, NYLD is purchasing 311 net megawatts for a total cash consideration of $130 million plus the assumption of $464 million in nonrecourse debt.

The acquisition of these assets expands our tax runway to 11 years and lengthens NRG Yield's overall average PPA duration. Funded with cash on hand, these exciting acquisitions will add on average over five years or approximately $13.3 million to CAFD, resulting in a 5.3% CAFD per share accretion for shareholders and a 10.2% asset-level CAFD yield for these long-dated contracted assets.

In addition, NRG has agreed to add the Buckthorn Solar and Hawaii Utility scale solar assets to the ROFO pipeline, adding 234 net megawatts of high-quality solar assets with long-dated PPAs, anticipated to come online in 2018 and 2019, respectively. Pro forma for these acquisitions, NYLD still has more than $140 million in excess cash anticipated to deploy in 2017 under our current guidance as well as $435 million in availability under its revolver and an unutilized ATM to fund future acquisition opportunity.

Turning to page 4, I'd like to highlight the key characteristics of the 311 net solar megawatts in the drop-down announced today, namely 16% of Agua Caliente and the 50% interest in the Utah asset. These assets benefit from long-dated PPAs with strong counterparties and are relatively young assets, with Agua Caliente online since 2014 and the Utah assets reaching commercial operations in the fall of 2016.

Furthermore, these assets are capitalized with nonrecourse debt amortizing through the contract period, in line with our financial strategy. In summary, these assets provide high-quality, long-dated cash flows for NRG Yield.

Turning to page 5 to review the economics of this drop-down, NYLD will acquire the projects for a total cash consideration of $130 million, assume nonrecourse debt of $464 million, and is expected to generate $13.3 million in the average CAFD on a 5-year basis or a 10.2% asset-level CAFD. As this acquisition was funded with cash on hand, and as discussed last quarter, because current-year guidance includes all financing costs associated with the source of this cash, the transaction is highly accretive, with an improvement of 5.3% to CAFD on a per-share basis.

In addition, as part of the negotiation, NRG Yield expanded the ROFO pipeline by 234 megawatts with the addition of the Buckthorn solar and Hawaiian assets. NRG also offered 120 megawatts of assets located in Minnesota. However, we elected not to pursue the acquisition of the Minnesota assets at this time. These wind assets remain within our ROFO pipeline and NYLD maintains the right to participate in any sales process that NRG may pursue regarding these assets.

Overall, this transaction has the additional benefits of increasing the weighted average PPA contract life of the portfolio by a partial year, extending the NOL runway by one full year to approximately 11 years, and increasing the amount of CAFD in NYLD's portfolio that comes from solar. As I have said previously, our emphasis is on conducting acquisitions in the most capital-efficient manner possible, and these acquisitions did not require any issuance of equity.

Now let's turn to page 6 for a key update to the ROFO pipeline. The transaction announced today included two additions to the ROFO agreement: the Buckthorn Solar and a Hawaiian utility scale projects. These assets, totaling 234 net megawatts, have long-dated PPAs and are expected to have commercial operations dates of 2018 and 2019. This increase provides NYLD greater transparency around growth between 2017 and through 2020, and further diversification of the overall portfolio with additional solar in the ROFO pipeline.

With that, I'll turn it over to Chad to review the financial summary.

Thank you, Chris, and good morning, everyone. Turning to slide 8, today NRG Yield announced fourth-quarter adjusted EBITDA of $207 million and cash available for distribution, or CAFD, of $62 million. For the full year, adjusted EBITDA was $899 million and CAFD was $311 million, both exceeding the updated financial guidance provided on the third-quarter earnings call this past November.

As discussed on the November call, NRG Yield benefited from strong business outperformance through the third quarter, primarily from wind, and this continued through the fourth quarter as well. Additionally, fourth-quarter results were positively impacted by lower maintenance CapEx and an insurance payment from a 2014 event at the Wildorado wind facility.

NRG Yield also delivered on its dividend growth commitment by increasing its dividend per share by over 16% since the fourth quarter of 2015. Due to the strong CAFD earned in 2016, NRG Yield maintained dividend growth at a low payout ratio of 56%, providing additional organic cash flow to invest in the platform.

To support NRG Yield's growth, in 2016, we raised over $570 million of new capital through the issuance of corporate and project-level debt, which after deployment resulted in $215 million of investable cash and a fully undrawn revolver. Importantly, we achieved this enhanced financial flexibility without having to access the equity markets and while maintaining a stable ratings outlook at our targeted levels.

Regarding growth, I'd like to highlight two investments made in 2016. First, as discussed on the second-quarter earnings call, we were able to finance the acquisition of the 51.05% interest in CVSR accretively without having to deploy any corporate-level capital. Second, NRG Yield invested an additional $80 million in the distributed solar partnerships with NRG Energy, bringing total capital invested in the partnerships to $170 million.

Now let me spend a moment on the $183 million non-cash impairment loss that relates to the Elbow Creek, Goat Wind, and Forward Wind projects. These projects are in the tax equity wind portfolio that NRG Yield acquired a 75% interest from NRG Energy in November 2015.

I want to first highlight that the financial performance from the portfolio of wind projects remains within our expectation, and the impairments relating to these assets are primarily driven by accounting treatment. As a reminder, under US GAAP, drop-down assets are considered under common control by NRG Energy.

Unlike traditional purchase accounting and third-party acquisitions, where assets are recorded at fair value based on the purchase price, when NRG Yield acquires projects from NRG, the assets are recorded at NRG's historical cost. For the tax equity wind portfolio acquisitions, the historical net asset costs recorded by NRG Yield was $369 million, while in comparison, the final consideration paid was $207 million.

Under the common control accounting rules, NRG Yield retained the higher asset value and recorded the difference of $162 million to minority interest versus a direct adjustment to the basis in the actual property, plant, and equipment.

As further described in NRG Yield's financial statements and in accordance with GAAP, impairment testing occurs when there is a triggering event, which includes timing of acquisitions and annual budget processes. At the acquisition date in November 2015, we evaluated whether an impairment occurred per GAAP and concluded no impairment was required.

However, based on testing completed during 2016, NRG Yield determined that the projects were impaired relative to the PP&E carrying value on the balance sheet, which again was based on NRG's historical cost and not the consideration that NRG Yield paid at acquisition.

And this is the key point I want to highlight. If GAAP had permitted NRG Yield to record the assets at fair value at the drop-down in November 2015, the impairment announced today would not have occurred.

Turning to slide 9, 2017 financial update. As you can see on the left side of the slide, in addition to affirming NRG Yield's dividend per share growth target of 15% through 2018, today we are reaffirming our full-year 2017 financial guidance of $865 million of adjusted EBITDA and $255 million of CAFD, which continued to be based on our achieving our median expectations of business performance through the year.

Consistent with past practice, we will provide an update on full-year guidance after the closing of today's announced drop-down. At that time, we will also factor in actual results, including the impact of the outage at El Segundo, which I will discuss momentarily.

On the right side of the slide, we present our normalized quarterly estimation of financial performance based on the current portfolio at median expectations and unaffected by today's announced drop-down. Below that, we provide an adjustment to the first-quarter range, accounting for the outage at El Segundo.

In early January, El Segundo went into forced outage on both on both Units 5 and 6 due to increasing vibrations on successive operations at Unit 5. In consultation with NRG Energy, which is NRG Yield's operations and maintenance provider, at the conclusion of the on-site inspection and in order to ensure safe and reliable operations, especially during the key summer months, the decision was made to replace the rotor.

I am pleased to say that on February 24, El Segundo was brought back to full operation. We would like to express our gratitude to both the operations and engineering teams, who worked tirelessly over the past month to bring the outage to a conclusion.

As previously disclosed, the financial impact of the outage is anticipated to be approximately $12 million in CAFD. This excludes any potential warranty or insurance recovery and is reflected in the sensitivity of the decrease of 5% in the range of first-quarter CAFD.

To put this in context, if NRG Yield does not deploy any growth capital in 2017 and the portfolio performs exactly at median expectations, CAFD for the year would be below guidance as a result of the outage.

Lastly, and consistent with the sensitivities we provide to show variability in renewable energy production, NRG Yield's renewal portfolio has been impacted by the extreme weather in the western part of the United States. As a result of the strong and consistent band of Pacific storms, California and Arizona experienced their seventh- and sixth-wettest Januarys, respectively, over the past 123 years, and these conditions have persisted through February. This has resulted in poor insulation and wind conditions, with production in January at our solar and California-based winds portfolios, down 22% and 13%, respectively, relative to our median expectations.

However, as presented in the table, the first quarter is NRG Yield's lowest range for expected CAFD, so weather conditions through the remainder of the year can offset current weakness. That said, when coupled with the El Segundo outage, we do anticipate financial performance in the first quarter to be below our median expectations.

Moving to slide 10, NRG Yield's successful capital formation activities in 2016 resulted in significant excess cash to deploy toward growth investments. As addressed on the third-quarter call, we highlighted $280 million of investable cash through 2017, including $215 million of immediately deployable cash as well as $65 million expected to be generated during 2017.

You will also see on the slide that despite the outage at El Segundo, the strength in 2016 performance affords NRG Yield the same level of expected investable cash. And importantly, we have commenced the accretive deployment of that capital, with now $144 million committed since the third-quarter call.

This includes today's announced $130 million drop-down and $14 million of fourth-quarter investments in the distributed generation partnerships with NRG, leaving more than $140 million in cash available for deployment. When combined with our undrawn revolver and the ATM, which is yet to be utilized, NRG Yield has approximately $730 million in capital sources currently available to drive accretive growth.

And with that, I'll turn the call back to Chris for closing remarks.

Thank you, Chad. Turning to page 12, I'd like to take a moment to address NYLD from a macro perspective, given today's uncertain political and regulatory climate and with considerable speculation around economic and tax policy.

In thinking about the risk of Fed policy leading to rising interest rates, NYLD is well protected, given that all of its corporate debt and 93% of its project debt is fixed, providing limited CAFD exposure to rising rates. Furthermore, we have no foreign exchange exposure, further insulating our very stable portfolio of cash flow in a potentially increasing interest rate environment.

Second, the potential repeal of the Clean Power Plan, while modestly affecting medium-term growth prospects for renewables beyond 2020, does not limit the primary drivers of contracted growth in the US, state-level policy, and commercial industrial companies' demand for renewable power as well as federal tax incentives. It is our belief that states with a strong view of renewable portfolio standards will pick up the mantle of increased renewables in the event the federal government decides to be less supportive of the renewables overall.

Finally, in terms of tax policy, while there is a great deal of speculation around the potential elimination of interest deductions, the lowering of the overall tax rate, the addition of bonus depreciation, we believe that NRG Yield is well insulated from those risks. Our 11-year NOL runway, bolstered primarily by makers depreciation, not a reliance on tax credits, provides a shield against potentially turbulent tax policy changes.

Additionally from our view, a change in tax deductions regarding renewables, such as the PTC or ITC, would primarily impact developers with project PPAs based upon certain assumptions around tax value and tax equity financing. NYLD, with no development activity, is not subject to the same level of risk embedded in those PPAs and cost to construct, as NYLD merely values the cash flows inclusive of tax implications to determine its purchase price.

Overall, we think that NYLD is in a strong position to deliver on its dividend growth goals in a fluctuating interest rate environment and under a variety of tax policy outcomes.

Turning to slide 13, in terms of 2017, our key financial goals are to deliver on growing our dividend by 15% per share and achieving our financial guidance. We also expect to continue demonstrating our ability to conduct efficient capital deployment with drop-downs from our sponsor, third-party acquisitions, or additional growth through non-ROFO opportunities like UPMC and Utah.

Although it is taking longer than anticipated, we continue to pursue strategic partners on both the development and capital side and think that these efforts will bear fruit in 2017 once the regulatory and tax policy volatility abate. Finally, we will maintain our strong balance sheet and financial flexibility as we move through the year, as it provides us with the opportunity to move quickly when opportunities arise.

Thank you. Operator, please open the line for questions.

(Operator Instructions) Michael Lapides, Goldman Sachs.

Congrats on a good 2016 and today's drop-down announcement. Just curious how you are thinking about, when I think about the rest of the ROFO that's sitting up at NRG, whether NRG Yield is the logical owner of an asset like Ivanpah, where there has been a lot of variability in the output levels. And how you are thinking about longer term whether you want your tilt to be more wind versus solar or vice versa.

Sure. Thanks, Michael. I think from our perspective, Ivanpah, the nature of the asset, is it better held by NYLD or not? I think, as I've indicated before, we want the project to season a little bit. And that's why, as we think about it as a drop-down candidate, it's probably not a 2017 drop-down.

For us to really look at it, and I think for NRG, frankly, to also get decent economics, the generation under the machine timing has to get a little more of its legs underneath it in terms of time. And so for us, we tend to think about it much more kind of as a 2019 drop-down candidate or in that time frame, not in near term.

So to answer your question, we I think are looking for Ivanpah to get a better generation history to be able to determine value, and we will see at that time if it makes sense. Does that make sense for that question?

Yes. And then on the question about preference for wind versus solar?

Sure. We don't really have a preference, per se. I think that the lower volatility characteristics of solar are definitely a positive, but it's not as though that we necessarily look for specific percentages around a solar part of our book or wind. Sometimes we just ask for higher return parameters on the wind and solar to account for that variability.

More solar, in general, we think it's a good thing because it tends to have less volatility. But it's not as though we have very specific percentage targets that we go after.

Got it. And one just 2017 guidance question. Can you remind us why 2017 guidance is below the 2016 actuals?

Sure. I'll give an overview and let Chad go through the details. But a large part of that is, one, the outperformance that we had in our renewable portfolio, especially we bring back to the P50 case for 2017. And, two, there were some specific debt service timings that hit in 2017 and not in 2016.

But Chad, I'll let you go through any details.

Michael, without the details [on the permit], I think the best thing to do is to go back to the third-quarter presentation because we provided a pretty decent reconciliation at that time. But to Chris's point, all the financing or most of the financing that we executed last year that underpinned the $570 million that I referenced, both the unsecured notes as well as the financing at the thermal entity and even CVSR, a lot of the way of the timing of that debt service worked is it didn't really hit in 2016, it was really in 2017.

And as you know, CAFD is after debt service. So we had pointed that out last quarter just to acknowledge that. So I think it's slide 11 of the third-quarter deck. So if you look through that, that should get you the reconciliation. If you have any follow-up, I'm sure Kevin or Lindsey can walk you through it.

Sounds good. Thanks, guys.

Greg Gordon, Evercore ISI.

So if I start with slide -- I'm looking at both your decks here, as per your guidance. No; if I look at the current guidance on slide 9, in the upper left, adjusted EBITDA CAFD, to get more or less to a sense of where you actually think you are for the year, I just add the drop and then I subtract the El Segundo outage costs.

And then I have to have some perspective on what the weather impact is going to be in Q1, and that would get me to where I would need to be in terms of an actual pro forma EBITDA and CAFD for the year? Or are there any other factors that have changed since the Q3 guidance update that we need to be cognizant of?

In general, Greg, I think that does get you there. The only caveat I would have is that the $13.3 million is, if you look in the footnotes, kind of a 2018 to 2022 because it depends on exactly when we close in 2017. But other than that, Chad, I think that basically are the main factors.

Yes. So I'd offer two things up. I think with respect to the comments I made, if you look at that range with the impact of El Segundo, given where we stand, you are definitely at the lower end on that first-quarter range, simply because of the impact on what we are seeing on the renewables side.

With respect to the acquisition's drop-down today or announced today, we do anticipate those will be equity method. So those will be unconsolidated entities. So bear in mind, and to Chris's point, what that generally means is the timing of when we close does inform the CAFD we realize during the year because that will tie more directly to the actual timing of the distribution.

So said another way, if you had distributions three times a year and the first distribution happens before we close, you would only pick up two of those, if you will, in the current year. So unfortunately, it's going to be tough to offer exactly what that would look like on a pro forma basis. So again, we will make that update once we close the transaction.

Great. And one final question, and I apologize if you commented on this in your opening remarks because I was distracted by a bunch of other earnings this morning.

You do have remaining investable cash through 2017 of $145 million, which is on slide 10. Should it be our assumption that some of that will get consumed through further potential negotiations with NRG? Or are there some natural and expected drop-downs associated with your continuing consuming of DG megawatts as they get realized? Or how should we think about further potential drops this year?

I think the answer, frankly, is yes to both. One could be drop-downs, namely the Minnesota that we talked about. The 25% of the EME book that we don't have that was referred to as EME wind or other DG drop-downs. And then also, we constantly try to look at third-party acquisitions as well. So all those 3 sources could use up the $140 million.

Okay. Thank you, guys.

Greg, just for what it's worth, the DG portfolio, there's roughly 66 -- I mean, to be precise, there's $66 million remaining under the original commitment. So subject to the timing of when those are actually deployed, there's obviously sufficient cash there to fund the DG business.

Great. Thank you.

Keith Stanley, Wolfe Research.

On top of the use of cash, how comfortable would you be in tapping the revolver further for acquisitions before you utilize the ATM?

It really depends. I think the revolver we look at as more of a temporary facility in terms of capital because, frankly, it is. So I think from our perspective, it's not necessarily that we would use the revolver before the ATM. It kind of depends on market conditions.

We could use it before the ATM, or, if the market is right, we could turn to the ATM first and not draw on the revolver. I think just because the amounts are so small, it's really a cash timing between the two.

Okay. And then on the strategic partners discussion, did I hear you right, Chris, the potentially pending tax reform and I guess maybe the absence of a full FERC quorum, is that playing a role in delaying potentially finding partners?

Yes. Much to my disappointment, and I wish the earnings call where I had targeted March had happened after the election versus before, unfortunately, is that one of the key things I talked about with all of you over the months is that the benefit of giving price certainty to a developer, and when tax policy, which obviously underpins a lot of the economics of renewable projects, is a little bit up in the air, as it is today, it's kind of difficult to really give that price synergy to a developer and think about what that means in terms of a pay-go structure on PPCs or those type of elements. So, to your point, those are creating issues from where we were in the third quarter of 2016 till today.

Okay, and last one. Do you need FERC approval on these drop-downs that you are announcing today?

No, we do not.

Great. Thank you.

(Operator Instructions) Paul Ridzon, KeyBanc Capital.

Do you have a sense of when these latest drops will probably actually occur?

Late first or early second quarter, I would think.

And then just, Chad, to your comments around the distributions, whatever distribution is the first distribution made, would that kind of be prorated for the proportion that you own the assets?

No. Sorry, Paul. So because of the equity method, we would basically -- CAFD would be based on our actual amount of CAFD.

For the full year?

Yes, exactly. Full year, subject to what is remaining when we close. So again, let's use the example, when we -- again, not saying this is the day. But let's say you actually close at the end of March. Any distributions from April through December would be factored into CAFD results or the expected performance.

So it is prorated?

If the question is over the course of the year, yes. So maybe to just answer the question a little bit differently, $13.3 million is the full-year number. So any distributions that would typically happen between January 1 and March 31, if we were to use that as the closing date, would not be included in our 2017 update.

Got it. And what would the seasonality of these assets be? Kind of consistent with the rest of your portfolio?

That wouldn't be fair. I can't say. And off the top of my head, I know that summer is obviously much more important for installation for solar. But because our overall portfolio is pretty diversified, I don't think it's that different than our other solar assets. But in general, with precision, I don't have that off the top of my head.

Great. Thank you very much for your help.

That concludes today's question-and-answer session. I'd like to turn the call back to Mr. Sotos for any closing remarks.

Well, thank you. And once again, thanks, everyone, for attending. And I'll look forward to seeing all of you as we meet with investors on road shows. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.