Clearway Energy, Inc. (CWEN) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the NRG Yield Fourth Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Chad Plotkin, Vice President, Investor Relations. Please go ahead.

Thank you, Kate, and good morning and welcome to NRG Yield’s full year and fourth quarter 2014 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 only 30 minutes, we do 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 in 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 and good morning everyone. Joining me on today’s call and providing the majority of our prepared remarks is our Chief Financial Officer, Kirk Andrews. Additionally, Mauricio Gutierrez and Gaetan Frotte are available to answer your questions. Since I know many of you know listened to the NRG Energy’s call that concluded a short time ago, our comments will be very brief. But since 2014 marked the first full year that NRG Yield operated as a public company, we did wanted to take this opportunity to reflect on what in my opinion at least was a tremendously successful year. Additionally, in case you did not listen to the NRG Energy’s call, I did want to note that NRG Yield is also experiencing a change in its Investor Relations capability as Matt Orendorff is assuming the role of Managing Director of Investor Relations replacing Chad Plotkin who is assuming new responsibilities within the NRG group of companies. So, let’s turn to Slide 4. Our financial results for the year at NRG Yield highlight one of the attributes investors should value most, predictability in our financial performance. A predictability, which stems from the highly contracted nature of our portfolio and in this regard, we delivered on both adjusted EBITDA and cash available for distribution. But more importantly than just achieving these results is our dividend growth. Last year, we increased our original target compound annual growth rate for dividend per share from 10% to 15% to 15% to 18% over the next 5 years. This growth trajectory was substantiated by our announcement just 10 days ago of an increase in our annualized dividend payment of $1.56 per share, which represents a 30% increase since our IPO and also by the strengthened and increased ROFO pipeline. While the predictability of NRG Yield’s cash flows is as strong as a result of the long-term off take agreements on our assets NRG Yield is by no means risk-free, Yield’s assets are contracted, but the assets are not operated efficiently and effectively then we don’t get paid. The operational performance of NRG Yield’s assets in 2014 was simply outstanding. I would like to thank the highly professional men and women of NRG who achieved this exemplary level of annual performance. Beyond the operational performance of the existing assets the value NRG Yield has been validated throughout the year through the successful acquisition and integration of the first set of NRG ROFO assets as well as by the direct acquisition of the Alta Wind portfolio. Further and to fund this growth, we demonstrated our credibility and accessing the capital markets through nearly $2 billion of new corporate level financings at NRG Yield. As we move forward and evaluate NRG Yield’s growth prospects, we continue to see no shortage of opportunities. Of course this begins with our strategic relationship with NRG Energy who by the way of executing on new awards for long-term contracted conventional assets in California and by taking a leader position – a leadership position in the fast growth residential solar business offers us lines of sight into a vast array of new growth prospects. Additionally and as you saw in our press release announcing our execution on two new smaller acquisitions, we have continued to see opportunities in the third party acquisition market. But to support this anticipated growth and as further described in our recently filed proxy statements, we are announcing today a proposed recapitalization of the company. While Kirk will provide more details in his remarks, what I would ask is that you carefully consider our proposals because your support will allow us to more efficiently and economically achieve our long-term growth prospects. Investor Relations will be following up with you over the coming weeks on this topic. And without further comment, I will hand the floor to Kirk.

Thank you, David and good morning everyone. Turning to Slide 6, in the financial summary, NRG Yield is reporting fourth quarter 2014 adjusted EBITDA of $114 million and $10 million in cash available for distribution. For the full year NRG Yield delivered on its financial commitments with adjusted EBITDA of $455 million and CAFD of $147 million. As previously announced, NRG Yield completed the drop-down transaction from NRG on January 2, 2015 for a total cash consideration of $489 million. NRG Yield’s pro forma liquidity following the January 2 drop-down was $336 million, which provides us with sufficient liquidity for opportunistic near-term smaller acquisitions such as those just announced Spring Canyon and the Fuel Cell investments. The issuance of the proposed Class C and D shares, which I will cover in more detail shortly, will further increase our flexibility to fund potential larger transactions to drive future growth. Pro forma for the latest drop-down in January of 2015, our corporate debt to corporate EBITDA ratio is 3.29 times, in line with our targeted ratio of 3.25. We continue to target this ratio to strike what we believe that the appropriate balance amongst optimized returns, managing financial risk and ensuring consistent access to the capital markets. Turning to guidance for 2015 on Slide 7, we are initiating first quarter 2015 adjusted EBITDA of $125 million and CAFD of negative $10 million. The negative CAFD for the quarter results from seasonal impact of conventional capacity payments and the timing of interest payments for the corporate level debt financing executed in 2014. As depicted on the graphs to the right the first and fourth quarters of the year are the shoulders for CAFD mainly due to the timing of capacity payments on our conventional assets in California during the summer months, solar resource seasonality as well as the timing of interest and principal payments. Our payout ratio, strong liquidity and diverse portfolio provides more than ample surplus cash for this predictable seasonality over the course of the year ensuring adequate cash to fund our growing dividends. For 2015, we are reaffirming our previously announced adjusted EBITDA of $705 million and CAFD of $195 million. As noted our CAFD guidance excludes the impact of interest on the revolver as we temporarily used it to fund the recent drop-down transactions, but intend to repay it with the proceeds of a permanent capital raise during 2015. Turning to Slide 8, I would like to provide some additional details on the proposed new classes of shares of NRG Yield. Since our initial public offering less than 2 years ago, NRG Yield has experienced robust and diverse growth in CAFD fueled by both drop-downs from NRG and significant third-party acquisitions. This growth has been enabled by our strategic relationship with NRG as well as our success in efficiently funding these transactions across the spectrum in the capital markets resulting in nearly $2 billion in new capital in just the last 12 months. Given the importance of maintaining the strong strategic partnership and support of NRG, while continuing to access capital to fund growth, we have identified a plan which will allow us to more efficiently raise third-party equity without the need for additional investment by NRG. This plan which requires the support of you, our shareholders, involves the creation of two new classes of low-vote NRG Yield stock which will be issued through a recapitalization of NRG Yield’s equity. Last night, we filed a preliminary proxy statement seeking the approval of the majority of our Class A stock in order to affect this recapitalization. Specifically, the recapitalization that will take the form of a 2-for-1 stock split of both our Class A stock, which is held by the public as well as the Class B stock, which is held by NRG hereby doubling the total number of NRG Yield shares outstanding. The new low-vote shares will be issued in two distinct classes due to the two classes of stock currently held by NRG and the public shareholders. Each Class A share held by the public will receive one share of Class C stock with the same economic rights as the Class A stock and a 1/100th voting right. NRG which holds approximately 42.7 million Class B shares will receive an equal number of Class B shares, each with a 1/100th voting right. As NRG’s economic interest is held exclusively through its direct interest in NRG Yield LLC, the new low-vote Class B shares to be issued to NRG will contain no economic rights. Immediately following the stock split, each shareholder will from their combined ownership to classes of stock have the same economic voting rights and voting rights as they do today. Our existing Class A shares will continue to trade on the NYSE as they do now, we intend to file a listing application following the stock split, so shareholders will be able to trade their Class B shares as they do with the Class A shares today. While NRG’s economic ownership will be diluted through future issuances of Class B shares, the proposed plan would allow for approximately $21 billion of equity to be issued based on today’s share price before NRG’s voting interest would fall below 50%. Our independent directors carefully considered this proposal to create these new classes of stock in consultation with the committee’s independent, legal and financial advisors before reaching a decision in ultimately recommending the proposal to the NRG Yield Board for stockholder approval. In terms of next steps, we expect to file and distribute a definitive proxy statement on or about March 26. We have conditioned the proposal, so it requires the approval of a majority of the Class A shareholders at our annual meeting on May 5 of this year. If approved, the Board will set a record date for the stock split shortly thereafter. For more detail on this proposal, you can find additional information in our preliminary proxy statement as filed with the SEC. Importantly, given the enabling effects of the recapitalization on our future capital raising activities to fuel growth through future acquisitions, NRG has agreed to add additional assets to the right of first offer agreement resulting in significant incremental adjusted EBITDA and cash available for distributions if such assets are offered, purchased by NRG Yield. This expanded ROFO pipeline, which I will review in greater detail shortly, provides additional visibility into NRG Yield’s long-term growth potential, which is so critical to ensure our continued success in delivering compelling total shareholder returns. NRG supports the proposal as approved by the independent directors and we ask for your support as well in this important step as we look to build on the tremendous success we have achieved since our IPO. Turning to an update on NRG Yield’s growth pipeline as a result of the proposed issuance of Class C and B shares, NRG and NRG Yield have agreed to expand the list of NRG ROFO assets to include the remaining contracted wind assets acquired from EME, the Carlsbad and Mandalay Gas PICO repowering projects and up to $250 million of equity investment in portfolios of residential solar and our distributed generation assets. With the addition of these assets, we expect to extend the duration of our targeted dividend growth rate of 15% to 18%, which we will seek to further augment through additional potential drop-downs in third-party acquisitions. Finally, turning to the residential solar partnership opportunity with NRG on Slide 10, NRG Yield has been offered and our independent directors are currently reviewing the first portfolio of approximately 2,300 existing residential solar leases with an average tenure of 17 years. NRG Yield would invest cash in exchange for an ownership stake in the partnership with the cash proceeds distributed to NRG. In return, NRG Yield will receive approximately 95% of the tax and cash distributions until its minimum return is achieved, while retaining 5% of the economics after the lease period. This flexible structure which provides NRG Yield a targeted return delivered by the majority of cash flows during the lease period, with limited reliance on the post lease period. It is replicable with future home solar leases as well as with future distributed generation portfolio. And with that, we’d like to turn to Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Matt Tucker with KeyBanc. Your line is open.

Thanks. Hi, good morning. On the home solar opportunity, could you just discuss the expected timing there and when you might be able to provide expectations for CAFD or adjusted EBITDA?

Sure, Matt. Good morning. As I indicated both at NRG’s Investor Day in January as well as in my remarks this morning, the independent directors are currently evaluating that first portfolio of potential drop-downs. And we would expect likely later in this quarter to make an announcement along that end. Once we have arrived at an agreement for that drop-down, we would provide specifics around obviously the magnitude of purchase price as well as the CAFD associated with that solar lease portfolio.

Okay. So, we should expect to hear about that later this quarter?

I would say towards the end of this quarter, that’s probably a good timeframe, yes.

Okay, thanks a lot.

Our next question comes from Julien Dumoulin-Smith with UBS. Your line is open.

Hey, Julien.

Hey, good morning.

Good morning.

Good morning, Julien.

So, a quick follow-up to Matt’s question, can you elaborate a little bit on the leverage employed ultimately sort of the capital structure on the NRG home stuff at NRG Yield? Specifically, out of tax equity and conventional leverage, what the mix you are seeing is? And also just if you can elaborate how you think about that in the context of the 18-year life of these assets?

Sure. The first thing I would say Julien is the portfolio that I alluded to that’s being evaluated right now is a portfolio without tax equity largely due to the fact that the leases in that portfolio were all cash grant rather than ITC. Obviously, the former of which requires or it’s less necessary to monetize the ITCs, because you basically got cash grants upfront. For that portfolio in terms of leverage given the fact that there is no tax equity for this first step, we would expect the cash available for distribution, which again as I indicated earlier, you provide greater details once we have greater clarity around that as the evaluation process is completed with the independent directors. That CAFD basically is un-levered CAFD and we look at that in much the same way as we do with the CAFD for any other un-levered asset. It has – it adds to the corporate EBITDA, those distributions. And obviously over time as that CAFD grows, it builds leverage capacity. And so for that first step, one way to think about it is we would inherit the opportunity to take advantage of that debt capacity as we moved south of our 3.25 leverage ratio and we could, if you will, back lever the portfolio at the corporate level. Moving forward, as we continue to evaluate potential drop-downs or offers of leases through this similar partnership structure, I think the one additional element that you would expect given the fact that going forward, most of the leases in the portfolio, given the fact, they will have ITCs, we would expect to use tax equity as the component of that partnership to monetize at least the tax attributes around that. And then the residual cash flows would basically work the same way for themselves, the ability to back lever etcetera. And while we may consider the possibility of project finance type structures at the portfolio level, that would be something we go towards on more of a securitization front as we build capacity on portfolio, but I think for now and near-term, in terms of thinking about leverage, it’s more likely to come in the form of additional corporate leverage capacity as we move forward. And last thing I would say is in terms of duration on two fronts, both in terms of your question on the duration of the contracts, but most importantly, we are very mindful of managing that very important tax runway to ensure that we can preserve the efficiency win in the structure, while we will intend to use tax equity where appropriate to monetize the ITCs, I think of that as a lever to manage the duration of that tax runway. Currently, we have got a 10-year tax holiday. We are very focused on managing that. So, our investors have confidence in the ability to work efficiently from a tax perspective and the degree to which we needed to augment that pipeline certainly have the option of dropping down leases without tax equity, but we would use tax equity to offset and manage that if you will as we move forward.

Great, thanks for the detail.

You bet.

Our next question comes from the line Angie Storozynski with Macquarie Capital. Your line is open.

Thank you. I am not going to ask about M&A, I promise.

Angie, I was waiting for it.

No, not this time I believe. So, I have a bigger picture question. So clearly, looking at your stocks, I mean the investors are concerned and some of the questions that we are hearing are about a future drop-down from NRG, now that your economic interest will be falling. Can you assure us that this entire strategy, the adding of additional classes of shares will eventually lead us to actually an improved growth in distributions per share for NRG Yield, meaning that I am going to be benefiting from third-party acquisitions, but I am also going to be getting drop-downs from NRG at multiples that are similar to the ones that I have seen recently, simply because as your stake drops, your incentive to drop these assets at attractive prices is somewhat reduced. So, can you tell us that the distribution per share growth for NRG Yield will be improved on the back of this new share structure?

Yes.

Okay, that was simple.

Yes, Angie, I absolutely will give you our insurance that, that is our intention. And Kirk will go into more detail about it, but yes. And I tried to say that I guess inelegantly on the previous call in terms of our commitment to keep NRG Yield at the top of the yield asset class, which to me is one of the biggest indicator that is the growth pipeline and that in our case as we have thoroughly demonstrated in the year that we have been out there that’s a growth pipeline that’s fed from two base of sources from NRG and third-party. And there is nothing about what we are playing here that’s designed to do anything other than to enhance both of those streams of growth prospects. So, I agree with you entirely, Angie and thank you for asking us to clarify it and Kirk is going to pile on.

And the way I address that question, Angie, first of all, I absolutely agree with what David has characterized things, but specifically I address that in two parts. First, in terms of the ROFO drop-downs that being assets that are made available to NRG Yield by NRG, whether you consider the prior structure before this proposal or after the same truth holds, NRG Yield would acquire those assets at a value obviously negotiated as we have done in the past between NRG and NRG Yield. The only difference is prior to this increased flexibility in the structure, on the one hand prior to that NRG Yield would have paid for those assets in two parts. One, it would be a proportion of cash and then two the extent to which it was necessary to maintain the ownership and governance structure, NRG would have received B units at the end of the day as part of the consideration. So, at the end of the day, it would be at the same purchase price for a given drop-down, you have the same amount of incremental shares overall issued in connection with that drop-down. Moving forward, we simply expect that same negotiating dynamic to hold on the ROFO assets, it’s just that NRG Yield issuance of equity would come in at different form likely to be the same number of shares, it would simply be – those shares would be issued exclusive with the public and the proceeds of that would be paid to NRG as cash consideration. I think the more important distinction is as an NRG Yield shareholder is on the third-party acquisition, because the distinction with third-party acquisitions as we reached the inflection point of a 50% ownership on the part of NRG, the equity issuance required to fund the cash purchase of those third-party acquisitions would have otherwise required an investment by NRG in cash at NRG Yield. So, thinking about it that way that’s governed by NRG’s A appetite to allocate capital in that direction and B to the degree to which NRG has the capital to allocate in that magnitude. So, if the growth is that great, they are no longer constrained by considering how much capital NRG has to fund that, it is simply reliant on the liquidity in the capital markets to do so. And that I think is the main distinction in terms of to drive growth on the third-party acquisition unfettered by considerations about NRG’s capital allocation.

Perfect. Look, I mean, it’s – I think, I mean, these are fair concerns, I mean from our perspective of these, because the economic interest of the parent over time will be dropping below 50% and then yet, your voting interest will stay at a majority level. So, I mean, the concern which will arise is that what ties to all those future drop-downs happen, but if you can assure us that the growth will exceed the current expectations, then I think we are all set? Thank you.

Thanks Angie.

Thanks, Angie.

Our next question comes from the line of Brian Chin with Bank of America Merrill Lynch. Your line is open.

Hi, good morning.

Hi, Brian.

Just a broader step back question on the industry, we have seen a lot of your peers on the YieldCo side talk up the international story a little bit more. And some of the international utilities out there have been exploring ideas around doing an international YieldCo. David, obviously you have had a history of working in the international arena prior to NRG, I have always had the impression that at least with regards to NRG Yield, you are more focused on the North American market. But just any thoughts around whether what’s happening in the industry might prompt you to look internationally on the margin or whether you would want to remain focused in the domestic market?

Brian, I would say we see so much opportunity in the domestic market right now. I mean, we are aware that the international markets out there, but I mean it’s so far away from anything that it serves currently on the horizon for NRG Yield. I mean, I don’t think that I can recall in the couple of years that we have been existing as NRG Yield with independent directors. I don’t think we have even raised the question of international expansion because of the breadth and depth of our domestic opportunity. So, I learned a long time ago, Brian, never say never, but it’s not – it’s certainly not. I guess what I can tell you is it’s certainly not on the immediate horizon. And if we ever did go down that international path whether or not the stuff that we did went into NRG Yield or was into some sort of yield vehicle that sort of listed on the Botswana Stock Exchange or something, it’s just way premature.

That’s great color. Thank you very much.

Okay, thank you.

So, well with that, I think we are done. We appreciate your interest in NRG Yield and we look forward to talking to you next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a good day.