Clearway Energy Inc (CWEN) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NRG Yield Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Kevin Cole, Head of Investor Relations. Please go ahead, sir.

Thank you, Christie. Good morning, and welcome to NRG Yield's fourth quarter and full year 2017 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.

As this is an 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.

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 this presentation.

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

Thank you, Kevin. Also presenting today and available for questions is Chad Plotkin, NRG Yield's Chief Financial Officer.

Let's begin by turning to Page 3. I'm pleased to report that despite some weak wind conditions in 2017, we were able to achieve our EBITDA and CAFD target, and generated $933 million of EBITDA and $267 million of CAFD during the year. Chad will go over our results in more detail in his portion of the presentation.

Given our cash flow, NYLD achieved 15.2% in annualized dividend per share growth during 2017, while deploying $319 million of growth capital at approximately 11% average CAFD yield.

We are also reaffirming 2018 guidance of $950 million of EBITDA and $280 million of CAFD, which continue to target 15% year-on-year growth on our annualized dividend per share, starting with an increase in the first quarter of 2018, $0.298 per share.

Importantly, we continue to work on our strategic and growth objectives for 2018. Our effort to bring the NRG Energy transaction with GIP as our new sponsor to our close in the second half of 2018 is a clear priority, and that work continues to move forward according to schedule. Today, we are also providing an update to the over $450 million of capital commitments NYLD has already made this year, including the binding agreements of Buckthorn Solar and the Carlsbad Energy Center announced on the strategic update call on February 7.

In total, we expect these investments as well as the investments in the University of Pittsburgh Medical Center and in NYLD's distributed generation partnerships to generate over $50 million in annual average CAFD when closed.

In addition to the capital commitments for our core and new assets, we continue to add value to our existing fleet where possible. As an example of this, in December of 2017, the California ISO selected Marsh Landing to provide black start capability, which is implemented to provide the project a meaningful enhancement to its overall long-term value. We are currently working on analyzing the potential investment at which current estimates is between $10 million and $12 million.

Our current expectation is that we will make an investment decision regarding this project by the third quarter of 2018. And if we move forward, NYLD expects that we'd earn it and return all and on 100% of its capital through the remaining PPA term of 2023 under an approved regulatory return regime.

Now turning to Page 4. Consistent with market feedback, I want to provide new further detail no our near-term growth with NYLD platform by highlighting, on an indicative basis, what the investment commitments we have already made to potentially mean for CAFD per share growth. I want to emphasize that this is not guidance, nor does it include any assumptions around the value of any additional ROFO drop-downs from NRG Energy, namely Agua Caliente; our new ROFO with GIP, which will contain the Hawaii solar projects and our TE partnerships as well as the Langford and Mesquite Star Wind assets. This example also excludes any third-party acquisitions.

In essence, it is a view of our existing platform today, inclusive of the assets for which we have already committed capital this year with no other changes.

As you can see, based upon both current CAFD guidance and shares outstanding, NYLD expects to generate $1.52 of CAFD per share in 2018.

Summarized on the page, you can also see that NYLD has $453 million in committed growth investments for which we have binding agreements: the Carlsbad and Buckthorn Solar drop-down transactions; University of Pittsburgh Medical Center, which is expected to reach COD in the first half of 2018; and the ongoing investment in the existing distributed generation partnerships.

These commitments represent an opportunity of $53 million in annual CAFD. From an illustrative perspective, we model financing these investments through a combination of cash on hand, corporate debt issuance and common equity issuance. As always, we first look to the $48 million of estimated cash we'll keep on our balance sheet as a result of our prudent payout ratio at our current guidance.

Next, we seek to raise corporate debt consistent with our BB/Ba2 target metrics or approximately $210 million in order to stay within a leverage target at illustrative 5.5% interest rate, demonstrated by a negative $12 million of interest cost in the yellow box in the graph. Last, we issued equity for the remaining $195 million of capital required to complete these acquisitions, resulting in additional shares of approximately $11 million using NYLD's current 30-day VWAP of $17.18.

Using these assumptions, CAFD per share would increase to $1.64 on a pro forma basis, which again includes no growth from a wider variety of sources available to us other than what is currently committed. Our outlook for growth is strong. And with GIP's experience, capital availability and the diversified investing experience, we anticipate further growth potential going forward.

As we continue to work to bring this transaction to a close and to provide you with greater transparency in our growth runway of GIP, it was important to provide you with a better visibility into the growth already available to the company in the near term. As a result of our actions, I highlight our already strong foundation for growth beyond 2018.

With that, I'll turn it over to Chad.

Thank you, Chris, and turning to Slide 6. Today, NRG Yield is reporting fourth quarter adjusted EBITDA of $204 million and cash available for distribution, or CAFD, of $59 million.

For full year 2017, NRG Yield is reporting adjusted EBITDA of $933 million and CAFD of $267 million, both in line with the company's full year financial guidance.

While full year results were in line with expectations, fourth quarter wind resource across the portfolio was especially weak despite starting the quarter favorably in October. As noted in the appendix of today's presentation, California, or the Alta project, experienced a lack of wind resource, which led to production of less than 50% of median expectations during the month of December. Despite this impact, NRG Yield's diversified platform continues to insulate the company's financial performance from these weather-related variances. An example of this was in December with production of the solar portfolio 13% above median expectations.

Additionally, fourth quarter results were favorably impacted by a timing shift in maintenance CapEx of approximately $5 million at the Thermal segment, which we anticipate now impacting cash available for distribution in the first half of 2018.

During 2017, NRG Yield also delivered on its dividend growth commitments by increasing the dividend by 15.2% since the fourth quarter of 2016. This increase in dividend was accomplished by maintaining an implied payout ratio of less than 76%, providing additional cash resources that when combined with the capital formation executed during 2016, afforded NRG Yield the ability to deploy $319 million in growth capital on an accretive basis during 2017.

With the passing of the Tax Cuts and Jobs Act of 2017, NRG yield stands to benefit over the long run as the NOL tax runway continues to be approximately 10 years. And importantly, the intrinsic value of the company's project portfolio has improved due to the lower corporate tax rate. However, because of the lower corporate tax rate, in the fourth quarter, NRG Yield recorded a $68 million noncash charge relating to a reduction in the value of the net deferred tax asset.

Additional noncash charges included asset impairments of $31 million at the Elbow Creek and Forward Wind projects in the TE holdco portfolio, resulting primarily from lower projected power prices during future merchant periods and the $13 million charge taken by NRG Energy on the November 2017 drop-down asset that, because of common control accounting rules, is reflected on NRG Yield's financial statements.

Despite these noncash impairment charges, the projects continue to operate in accordance with our expectations. And we are pleased to announce that, in December, the Forward Wind project executed a 5-year contract extension through the end of 2022.

Now turning to Slide 7 to discuss 2017 financial guidance.

Today, NRG Yield is reaffirming its full year 2018 financial guidance with adjusted EBITDA of $950 million and CAFD of $280 million. Consistent with our normal practice, guidance continues to reflect median P50 renewable energy conditions for the full year. Additionally, while the company has line of sight on the future capital deployment of new growth opportunities, guidance also excludes the potential impact of this growth since the capital is yet to be deployed.

That said, and as noted on the next slide, an additional $24 million of growth capital was deployed in the distributed generation partnerships in the fourth quarter of 2017. The CAFD from that additional investment will help offset the impact of the timing shift in maintenance CapEx at the Thermal segment discussed on the prior slide.

With the first quarter of 2018 dividend already increased by 3.47% to $0.298 per share, or $1.19 per share annualized, NRG Yield is also reaffirming its full year dividend growth target of 15% year-over-year on an annualized basis.

Because guidance is set at expected P50 median renewable energy expectations, on the right side of the slide, we present the normal full year annual sensitivity to cash available for distribution on the renewable portfolio. This chart illustrates the potential CAFD impact versus median expectations, with a 5% change in wind and solar production in each hour over the full year.

As a reminder, due to the seasonality of PPA pricing, it is possible that an aggregate 5% change over the year may have a different effect on actual results if a disproportionate amount of the change is concentrated in certain periods.

Consistent with its sensitivity, weak wind resource has persisted into the first quarter of 2018 with production down 3.6% across the wind portfolio year-to-date. However, because the first quarter is a seasonably low quarter of the year, if similar conditions continue through March, the anticipated impact of full year results would be limited.

Moving to Slide 8 to summarize the company's capital deployment and allocation activities. Starting with the left side of the slide, with an additional $24 million invested in the distributed generation partnerships in the fourth quarter, we are pleased to say that NRG Yield successfully deployed 100% of its available growth capital in 2017, and did so accretively by acquiring $36 million in new annual average CAFD at an implied yield of over 11%.

As Chris addressed in his remarks, NRG Yield now moves into 2018 with line of sight on additional growth with $453 million of new capital commitments already in place for the year. To fund this growth, NRG Yield will look to both existing and new sources of capital.

As noted on the right side of the slide, NRG Yield has $529 million of existing financing sources comprised of $48 million in expected excess cash, up to $366 million in temporary bridge financing through the revolving credit facility, and the remaining $115 million in the currently registering ATM program.

For new capital sources, we will evaluate options over the course of the year. And as previously disclosed, the company will also benefit from this future sponsorship with GIP. In the event capital markets are not conducive to raising new permanent financing, GIP has already agreed to backstop the Carlsbad transaction by acquiring the project directly from NRG until capital markets are more constructive to allow for a drop-down in the future.

Finally, as we evaluate the various options to permanently finance these transactions, we will continue to be prudent with respect to the company's overall capital structure, including a strict adherence to maintaining a strong balance sheet and the company's leverage targets.

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

Thanks, Chad. In closing, our 2018 scorecard reflects a continuation of our growth plans, which includes increasing our dividend by at least $0.15 per share on an annualized basis watching our financial guidance. We're also focused on closing a transaction with GIP, and have already begun the consent processes through discussions with project lenders, PPA offtakers and regulatory agencies.

Closing continues to be targeted in the second half of 2018, and we'll provide more visibility into our long-term growth plans with GIP, inclusive of the growth potential of our ROFO pipeline at that time. Finally, while maintaining a strong balance sheet and leverage profile, we expect to continue to demonstrate CAFD per share accretion by closing on the Buckthorn and Carlsbad acquisitions, continued execution with the DG partnerships in 2018 and beginning operations of our UPMC thermal facility. We look forward to a strong 2018 and the growth beyond.

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

(Operator Instructions) Our first question comes from the line of Michael Lapides of Goldman Sachs.

Chris, there's been a lot of change in both the yieldco market and the renewable market, including what's happening with you over the last 12 to 15 months. Just curious how you guys are thinking about, maybe not in the next 3 to 6 months, but over the next couple of years, the landscape for both development, but also asset acquisition, especially given some of the larger CAFD utilities are still involved in buying projects from developers, given the very shift in the yieldco landscape, and even given a little bit of the change in the yield curve.

Sure. So a multiple -- first, nice talking to you, Mike. Well, there's a number of questions in there I'll try to unpack, but I think looking longer term, if you were to ask within the yieldcos, I think what we're seeing in the industry as a whole is really an evolution of the yieldcos to enterprise with much stronger sponsors. It's kind of the yieldcos all are very successful in the early part of their life cycle. You see whether it's kind of CAFD moving to private capital NextEra Partners getting deconsolidated from NextEra or ourselves looking for long-term basically tied infrastructure money. But, however, that public/private partnership between the 2, except for the CAFD example, really is remaining intact. So I think longer term, as kind of the yieldcos and the growth that's available to them within the renewable space in the U.S. kind of has outstripped some of the ability of sponsors to cover that, I think you're seeing a shift in the sponsor demographics over time and may continue to do so as those needs arise. I think to your second question around renewable development and acquisition landscape, I think, actually, the tax reform legislation that reduced overall corporate taxes means that everything else held confident, utilities are actually less interested in the renewable projects than they were before in terms of ownership because, obviously, the benefit of that tax shield is significantly less than it was under the previous tax rate. And so from our perspective, we see actually a pretty -- a deep overall target market to look at in terms of what's going on in the renewable development, and then also acquisition targets.

Got it, Chris. Much appreciated. Finally, financing. Right, yield curves started to move. Just curious if that's kind of shaken anything a little bit in terms of the cost of finance and in terms of what it does to some of those smaller developers in the market.

Yes. I think I'd break it down into 2 parts. I think the high-yield market, despite the move in treasuries, has remained fairly stable. As of yesterday, our 2026s were around 5.29% yielders. I think you see much more movement in the LIBOR market if you were to look back in terms of 3-month LIBOR. So there's your point for new development. LIBOR market is obviously an underpinning of the project finance market as a generalization. So I think that difference of interest cost, to your point, Michael, might make somebody economic developers a little bit more difficult than it was a couple of years ago. But from a perspective of our cost of financing or purchasing, not as much.

Our next question is from Jonathan Arnold of Deutsche Bank.

Can you give us -- just give us a reminder, given some of the ongoing concerns about credit quality and the California IOUs, just what your exposure there is, and how you can manage it? And any concerns in the portfolio from that aspect?

Sure. Except on the CAFD, Chad might have that number. But in terms of we're obviously actively monitoring it, I think, yes, Jonathan, you've been part of the industry. You remember, I'm sure, the California energy crisis in the early 2000s. Basically, all of these type of contracts made it through bankruptcy. I think, yes, I'm not going to speculate on the bankruptcy of the entities involved, which is out in the press. But I think from our perspective, even if that were to occur, it's not as though that these contracts are out of the money from their perspective. They're passed through to ratepayers. And so I think while we're monitoring the situation, I think the history kind of shows that these contracts have tended to hang in there. And I think also importantly, right, California is a key market and obviously focused on maintaining a strong and robust RPS standard. Obviously, if all of those contracts were repriced, that would create a fair amount of instability from both developers' perspective, but also the banks that finance all those instruments -- or projects, excuse me, as well.

Okay. Was Chad going to provide a number there or...

Yes. I have to cross-check it. I think our biggest offtaker is Edison. PG&E, I think, was about 23 -- probably it's like in the 20% to 25%. Edison's probably a little more than 40% all in.

As a percent of CAFD.

As a percent of CAFD, yes.

Perfect. All right. And then can I just ask? I'm looking at your data, the 46% number for wind in California in December, just, obviously, it seems -- it doesn't seem to gel with kind of what we know about the fire situation that month and the strong winds that kept things burning. So that may just be my perspective being offset. Was this purely wind resource? Or was there some challenges operationally or something else?

Yes. Thanks, Jonathan. No. I mean, it was wind resource. I think I'm not going to try to act as a meteorologist, but I think it had something to do with the directions of the winds that were actually causing the fire. So I think the winds that were causing the fire during that period of time were north to south, and given where Alta is, and I think that was the primary driver. So yes, I mean, it's funny. Your intuition is what we would have expected until we saw some of the data. But yes, look, there's anomalous months, I think, over the course of the 12-month period. It tends to even out, but it certainly was a bit of a surprise. But the flip side to that is when you've got this certain type of weather with rain as well as more sunlight, which also comes in, that actually improves solar performance by desoiling the panels. And obviously, more sunlight is helpful.

But your question wasn't availability issue. That the answer is no.

Perfect. Okay. And then you mentioned, obviously, this continuing into January and February. Are we talking about sort of similar numbers? Or was December really a very real anomalous thing?

No, December was the extreme. I think in my numbers, I said quarter-to-date, through February, we're down about 3.6% in generation in the first quarter versus our expectations. And for the quarter, we -- the first quarter is negligible from a total CAFD generation in the business. So it's definitely the quarter to have. But it is -- it has persisted. But again, if you also look at the chart in the slide, you go back to 2016, and we were above our expectations for the full year. 2017 was a little bit weaker in the spirit of a P50 expectation. That's probably not a bad way to think about it.

Our next question is from Julien Dumoulin-Smith of Bank of America.

This is Antoine calling for Julien. A quick question. So on the committed growth, you have CAFD per share increasing by 8%, and then you have this 15% EPS growth target in '18. Should we expect additional drop-downs this year? And if so, can you give us a bit more detail on the sources of growth beyond what's in the ROFO currently?

Sure. I think that's a little of an apple and orange -- just to make certain we're on those same page, the 15% growth in 2018 doesn't require any of these to close. It obviously will close throughout the year. This is more beyond that time frame. So just to make sure we kind of square that out as though -- but the 15% DPS growth in '18 is conditioned upon these, just our kind of step one. Step 2 in terms of growth beyond we have listed on the page, from that perspective, I think as I've talked about, kind of when we rolled this out February 7, really at the closing of the transaction of the NRG transaction with GIP, it would kind of really go through the ROFO pipeline and what ROFO pipeline we have in more granular detail. However, just what's been publicly disclosed, basically, the NRG pipeline would remain as kind of the Agua Caliente project. The GIP ROFO pipeline would contain the Hawaiian assets, distribution generation partnerships, Langford and Mesquite Star.

Got it. And then in terms of how you think about sort of the DPS growth and payout target beyond 2018?

Remember when we've gotten into DPS growth? I think, again, that would be something that makes sense once we can kind of show more transparency around the ROFO pipeline. And we do that at closings. But I think in terms of payout ratio, as kind of indicated, 80% to 85% is where we're comfortable long term.

Our next question is from Colin Rusch of Oppenheimer.

I want to follow up a little bit on Michael's question just in terms of incremental opportunities with some outsized return potential. Are you taking a look at any sort of portfolios of newer technologies, not just on battery, energy storage, but also things like fuel cells? Any of those smart geothermal projects that could layer into this portfolio?

We always look at newer technologies. So the ones that you mentioned, several of them, we do look at. So I think that's definitely a viable portion of our CAFD profile. Would those type of sources ever make up 20% of our CAFD in the near term? No. Could they make up 5% at some point in time? Potentially.

(Operator Instructions) Our next question is from Cindy Motz of Williams Capital Group.

I just wanted to follow up on the $280 million. So Chad, that's even with the cap that you guys had, like the $10 million potential for renegotiated costs, you're still good with that? And then just on the -- is the $321 million, that's kind of we should look at that almost like a run rate kind of like what like NextEra Energy Partners does. Like they sort of do it like going out like in the fourth quarter, I'm just guessing. And obviously, for the dividend growth, you're not going to give more guidance right now, but this -- it looks like it would still probably be pretty good. Maybe you'll have some kind of an analyst meeting at the end of the year when it closes to give us some more details on that. But just if you could answer that. And then just one other follow-up.

Sure. I guess, on the $280 million, that's our current year guidance. So I think any impact on change and costs related to the transaction is underway. That is not factored into that number. I think that is something that we would reflect on a holistic basis later when we know where we land, if anywhere at all. On the $321 million, I think that is more -- you should look at that more pro forma on the $280 million based on the capital that has been committed versus saying that is a run rate number.

Okay. I know it's not the one, but like sort of that's what we should look at with everything being committed sort of the way. Some companies do it exactly what -- like you are doing at sort of how you forecasted for the year. Others look at it sort of on like what I would call an exit basis. And that's what that looks like pro forma to me. But I don't want to put words in your mouth, but -- and then also just how the year lays out. I know first quarter, you're saying -- should we expect generally to lay out like last year in terms of CAFD, similar to 2017 just as it lays out?

Yes. I think maybe one way to look at it is in the appendix on page -- just give me a second, Page 18. We provide sort of -- the idea here is to just give investors a view of the seasonality of the portfolio. So if we achieve median expectations, you sort of land with that kind of shape of cash flow or CAFD realization during the quarter -- or excuse me, for the full year.

Okay. I see. Yes, that's right. So that's pretty much -- that's very similar just from recollections. Okay. Great.

And our last question comes from the line of Shar Pourreza of Guggenheim Partners.

This is Eugene actually on for Shar. Just I'm curious if there's anything kind of mechanically to consider with PPAs in light of the tax reform, the new tax code, kind of how that adjustment would flow through to the revenues that you're collecting.

Sure. On PPAs, the simple answer is no. They're not -- if you're kind of going for a regulated return model, which would include tax as a part of the calculation of the capital structure, that's not how the vast majority of our PPAs work with kind of the exception of GenCom.

Okay. So you're not collecting some of that assumed 35% rate? That would have like a windfall of cash just as it floored for what you're paying?

No.

And that does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Chris Sotos for any further remarks.

No, that's it. Thanks, everyone, for attending. And once again, as we continue to push to closing, I look forward to updating everyone then. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program.