Clearway Energy, Inc. (CWEN) Q1 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the NRG Yield, First Quarter 2015 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer and instructions will be given at that time. [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Matt Orendorff, Managing Director of Investor Relations. Please go ahead.

Thank you, Jonathan. Good morning and welcome to NRG Yield’s first quarter 2015 earnings call. This morning’s call is being broadcast live over the phone and via webcast, which can be located on our website at www.nrgyield.com under Presentations and Webcasts. Because this call will be limited to 30 minutes, we 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 read our Safe Harbor statement provided in today’s presentation, as well as the risk factors contained in our SEC filings. We undertake no obligation to update these statements as a result of future events except as required by law. During this morning’s call we will refer to both GAAP and non-GAAP financial measures of the company’s operating and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today’s press release and this presentation. And with that, I will turn the call over to David Crane, NRG Yield’s Chairman and Chief Executive Officer.

Thank you Matt and good morning to everyone and good morning again to the folks that joined us on the previous call. Again today I’m joined by our Chief Financial Officer; Kirk Andrews who will be giving part of the presentation and Mauricio Gutierrez the Chief Operating Office of NRG Yield is available for questions. Since we know that many of you did listen to NRG Energy call a little while ago, we’ll be brief in our comments. If you turn to slide 3, during the first quarter weather caused – wind resources and the weather in Western United States have performed at levels well below expectations, but NRG Yield, thanks to our portfolio of diverse generation technologies, provided a result that is generally in line with our guidance. While Kirk will spend more time delving into the specific impacts here, we believe that this is an occasion where the choice of owning a portfolio comprised of renewable and conventional assets is proving to be the correct and differentiating strategy relative to other yield co-vehicles. As we look towards the balance of the year, during the current quarter the second quarter, we anticipate some lingering impacts from the lack of wind production in the west, so we are recalibrating our full year EBITDA guidance from $705 million down to $690 million. Having said that, and importantly we do not expect the unusually low wind product to impact our near or long term dividends and are maintaining our guidance with respect to cash available for distribution to $195 million. We are also pleased to share an update with you regarding an expanded solar relationship with NRG. Following on the recent announcement of the partnership, $150 million of residential solar releases that NRG Yield is investing in, the companies have broadened this relationship and have received approval for an additional $100 million investment in distributor generation of solar assets. Combined with the previously announced $250 million of solar assets that are now part of ROFO pipeline and we’ve earmarked $500 million of new commercial and residential assets for the portfolio that will have attractive economies and supported long dated contracts that will enhance significantly NRG Yield’s cash dividends going forward. Before turning the call over to Kirk, I want to take a minute and discuss the recently approved recapitalization. We can’t thank our investors enough for the support they showed us through the process and we are incredibly excited about the prospects for what lies ahead for NRG Yield. With our highly strategic relationship with NRG now cemented and any potential inhibitors of growth now cast aside, we are focused on delivering to our investors more of what we have delivered since our IPO. And with that I will turn it over Kirk.

Thank you, David. I want to turn to the financial overview rather on slide 5, and for the quarter as David mentioned, our first quarter adjusted EBITDA results are $122 million and we had $6 million in cash bill for distribution and our adjusted EBITDA was just slightly below our first quarter guidance, due to the impact of the continued usually low wind speeds in California and also in Texas. We exceeded our CAFD guidance primarily due a onetime distribution on the Avenal solar project and that resulted from a favorable re-pricing and extension of the non-recourse project debt we executed during the quarter. We are initiating our guidance on the second quarter 2015 with adjusted EBITDA of $195 million and CAFD is $35 million, which also takes into account lower than expected wind production during this quarter, especially in the early part of this quarter. But for the full year 2015 we are assuming a return to normalized wind speeds over the balance of the year and we are slightly revising the adjusted EBITDA guidance as David said to $690 million to reflect the impact of that lower wind production, especially this quarter. But that is partially offset by the impact of third party acquisitions and the investments which have taken place to date in residential and DG partnerships. On the cash bill for distribution side, we are maintaining that 2015 guidance of $195 million, largely due to that Avenal distribution that I spoke about earlier. I want to talk – turn to slide 6 and talk a little bit about the new share price approval. I too would like to thank our public share holders for their support in improving the creation of these two important yield share classes. And this important step is going to allow us to maintain a strong strategic partnership and the support of NRG, while enabling the company to more efficiently raised third party equity to fund continued growth without the need for additional investment by NRG. And with the new C Class shares now available as our primary source of new equity, yield has a firm foundation to build on our success and executing on our long term growth strategy by providing us with incremental financial flexibility to finance future growth opportunities, which includes future acquisitions, as well as drop downs from NRG, which of course are now enhanced by the increased ROFO pipeline and the expansion into high growth asset classes such as residential solar. While NRG’s economic ownership will be diluted through future issuances of those Class C shares, which I said is that we intend to be our primary source of new equity, the proposed plan allows for over $20 billion of equity to be raised based on today’s share price before NRG’s voting interest would fall be 50%, and this really helps us to preserve that important strategic partnership between our two companies that is responsible for the success that we’ve enjoyed to-date. We expect to effectuate that recapitalization on May 14, and that will take the form of a two-for-one stock split of both of our Class A stock which is held by the public, as well as the Class B stock which is held by NRG. Each Class A share is going to be split into one Class A and one Class C share and then each Class B share, which is the ones that are owned by NRG, those will be split into one Class B and one Class D share. Importantly, immediately following the stocks spilt, each shareholder will through their combined ownership of those classes of stock have the same economic and voting rights as they do today and of equal importance and as a result of that vote, the amended and restated right of first offer agreement became effective rather and that further expands the company’s visible growth pipeline by adding 900 megawatts of wind assets, which NRG has actually indicated detention to offer us later this quarter and up to $250 million of equity investments in Residential Solar and Distributed Generation Portfolios. Finally 800 megawatts of new long term contracted natural gas assets in California. And with the substantial growth potential available from the diverse set of asset opportunities, coupled with our improved access to that equity funding, we have the necessary components in place to continue our growth momentum towards the next decade. Finally, on slide six I’d like to provide some more details around our recently announced $150 million commitment to a residential solar partnership with NRG Home Solar. Our initial investment which has already occurred, that consisted of $26 million and that was into an existing unencumbered portfolio and by unencumbered no tax equity or debt of 2,200 residential leases. And since then we’ve actually invested in additional $7 million of the $150 million additional commitment to the partnership with Home Solar and we are expecting to invest the balance of that during 2015 with an additional 13,000 leases. As we near completion of this initial commitment later this year, NRG has indicated its intention to offer its additional opportunities for continued investment in what we see as a really exciting high growth asset class for yield. As shown on the top portion of the slide, the current portfolio, that portfolio that represented that initial $26 million unencumbered portfolio, that consists of high quality leases and those are located around the country. Those have an average FICO score of 770 and over the long run we expect to continue to diversify in that portfolio from a geographic standpoint while we are maintaining a strong credit profile with a weighted average FICO score of no less than 700 and that’s required by our partnership agreement with NRG. Form an economic standpoint, we expect our portfolio to generate an average CAFD yield of 7.5% with the majority of those cash flows given the profile of the core portfolio, especially oriented more towards to the northeast right now, generated in the early years. Thanks to some incremental revenues from the renewable energy credits and state incentives. In addition, the partnership structure created with NRG will provide significant flexibility to both parties to achieve their mutual strategic objectives. On the one hand NRG will access a new source of long term diversified contract to cash flows and capture 95% of the portfolio, NRG Yield that is, and those economics, they will realize those economics of that 95% until NRG Yield achieves its target of return during that contracted period. On the NRG side, NRGs will be able to periodically monetize those residential leases and redeploy that capital towards future dropdowns, while retaining a residually economic interest in that portfolio post the contract period. We think this flexible structure which will also be a replicable with other asset classes, most notably commercial and industrial solar distributed generation, as we call it DG, for which as David mentioned we’ve also established a similarly structured $100 million partnerships with NRG. And that’s the end of my remarks. I’ll turn it back over to David and I think we’ll move to Q&A.

Yes. Thank you, Kirk. Let’s go straight to Q&A.

[Operator Instructions] Our first question comes from the line of Daniel Eggers from Credit Suisse; your question please.

Hey, good morning again guys. Just on the solar arrangement between NRG and NYLD, the 7.5% CAFD, is that the agreement for this first $250 million of dropdowns and what sort of framework are you guys going to use for sustaining that relationship from a yield perspective?

Well Dan, its Kirk. As I said we established that partnership at the outset and there is the initial $150 million. But the intention is, as that $150 million is fulfilled, NRG expects to offer as indicated, the yield that it expects offer, continued lease investment opportunities as we move forward. So we would expect that same partnership arrangement and the economics therein that govern that 7.5% average yield over the lease life to be the model that we used going forward, including the $150 million, but beyond that as we offer additional leases moving forward. So it will be the same model.

Next, should we use that 7.5% as kind of assumption for when you guys look at other acquisition projects. Is that what you guys are kind of using as your hurdle rate effectively for transactions?

No, and the reason for that is tied to really total return. That 7.5% average CAFD yield is based on a targeted total return and that’s really the way we think about all acquisitions, not limited to the residential solar. It’s very important to maintain the discipline as we often say internally here. CAFD accretion is really one part of the equation, but ensuring that the total return proposition is consistent with NRGs cost to capital is really what governs and that can vary in terms of the impact that has on CAFD, depending on the profile of an opportunity that we look at.

So what sort of IRR are you embedding, underline these projects and you know anything about things for sale in the market today. Are they above or below the IRR that you guys are targeting?

Well, when we talk about the 7.5% CAFD yield, that’s really not an IRR. I would say the total return for us, depending upon the asset class, because to some extent let’s take for example some of the dropdowns that we’ve done in the early part of NRG Yield. We look at it as a little bit of hybrid and what I mean by that is the low cost to capital or the low IRR on an unlevered basis, which is in kind of that 6% to 7% type range, that’s really how we think about the contracted portion of the cash flows. So we think about a shorter duration asset. When we look beyond the contracted period, we use our hurdle rate if you will above that to account for the risk on the merchant part, on the re-contracting part. And so depending upon the duration of the contracting question, it’s really a hybrid of the components of the discount rate we have priced, but to the post contract period and the pre-contract period. And obviously the longer the contract, the more it tends to drift towards the lower hurdle rate, the shorter the contract the more we use to grab a little bit of a higher hurdle rate to account for the risk of the re-contract.

Got it. Thank you.

Thank you. Our next question comes from the line of Steve Fleishman from Wolfe Research. Your question please.

Hi, good morning. So first question just on the dividend increase this quarter was a little lighter than you’ve done. Any reason for that and do you expect that you will continue to growth the dividend pretty much higher every quarter?

Yes, we do, and what I would say is it is in line with our expectations, in maintaining inherence to that annual compound and annual growth rate guidance. Our philosophy is it is important to deliver consistent growth year-by-year that’s consistent with that long term 15% to 18% growth rate and we’d expect that for ’15 and as we move into ’16 and beyond. So we are calibrating that quarterly increase on the basis of the annual target. The one thing I would say and I think this is something that we went into on the last call that we had. Because of the nature of both the contracts and also to some extent the timing of the debt service, the CAFD doesn’t perfectly mirror the EBITDA as an example. And so for that reason, especially in early quarters and the early part of the year where the seasonality is exemplified by the amount of CAFD we have in the first quarter relative to our guidance that’s a little lower, we then to have a little lower dividend increase in that early quarter and then we catch it up towards the latter part of the year and that kind of that reflects that shape if you will of the cash flows over the course of the year. Without question, on an annualized basis we are very consistent and adherent to that 15% to 18% compounded annual growth.

Okay. One other question, I'm sorry. Just the acquisition environment, could you give us some perspective on just how the environment looks right now and were you inhibited from doing things you would have done over the last few months because of needing to get the structural change done?

Let me answer that question. I’m sure this would probably be maybe one of the great lining glimpse of the obvious out there, but the acquisition environments obviously a lot more competitive with 30 yield stores or whatever there are now compared to when we first started, and we have particularly seen in the realm of contracted wind portfolios, people bidding prices that we can’t even begin to contemplate, even with the cost of capital advantage with NRG Yield. So to me that like highlights the virtue of the fact that we have a more diverse portfolio and we see other areas certainly smaller than contracted wind right now, where we understand the technology, we understand the contracts and we see opportunity in our GE yield. But I’d say in sort of the center of the fairway, in the rich two year tradition of the yield land of contracted wind assets its very much a seller’s market, the prices are insane.

Thank you. Our next question comes from the line of Greg Gordon from Evercore ISI; your question please.

Thanks. This is my 27th question.

Okay, good.

I held it over from the last call. What would the impact be to the sequencing and timing of dropdowns and the growth rate if the Carlsbad drop doesn’t happen in ’17, because of a lack of a regulatory approval? How do you think about sort of an alternative drop down path that sustains the growth rate?

Do you want me to take that one? Well, I mean yes, it seems to be – it’s a little early to serve.

Greg, we should get back to you on this 27th question after the CPC later this month, but Kirk if you want to take it, go ahead.

Well, I mean the only thing I think that certainly covers the situation at Carlsbad, but I would say the thing that we feel most optimistic about is now that we have the capacity to issue equity without reliance on NRGs investment and as David said, seeing opportunities in the broader sense for our diversified portfolio in the third party asset acquisition, coupled with the fact that although we’ve announced these two partnerships, which have an initial amount of $250 million, we are counting the first $250 million of the ROFO in addition to that first $250 million and we haven’t fully factored into our growth guidance the ongoing impact of that, because as you know especially where Home Solar is concerned, that is a very robust growing asset class and I feel confident through the combination of diversified asset opportunities, the growth that’s representing those new asset classes that’s really enabled by the new source of capital we have in the C shares. We feel comfortable we have a lot of means to sort of manage and maintain that growth over the long term.

Thank you. Great answer. Have a good afternoon.

Thanks Greg.

Thank you. Our next question comes from the line of Matt Tucker from KeyBanc Capital Markets; your question please.

Hi, good morning. Can you give us a sense of the time period you expected to take to fulfill the first $250 million in the Residential and DG investments and how much is included in the $600 million of drop down proceeds NRG specs in 2015 which you all talked about earlier this morning?

Sure Matt. I’ll pivot to the first part of that on the Home Solar side. We would expect that the first $150 million would be completed within the balance of this year and that’s just due to the growth that NRG has made us aware of in terms of their expectations on the Residential Solar portfolio. As far as DG is concerned, we’d expect a good portion of that to take place during 2015 with some portion of it carrying over into 2016, but the majority of both components of that $250 million I think you’d expect to see fulfilled during the balance of this year.

Thank you. And then just you guys certainly weren’t the only ones to comment on the weakening conditions in the quarter. Just to confirm how, is there any concern about the assumptions relative to wind or perhaps any operational issues there or are you – how confident are you that it was solely a function of the weak wind in the quarter?

Well, I mean I think Mauricio may have something to add on the operational front part. I mean you don’t use this word often, but the sort of absence of wind compared to historical data was almost – was virtually unprecedented. So I mean I don’t think there was anything about the operation of the units that was of particular concern. I think we’ve been very much focused on looking at the forward forecast and all and at this point after one quarter you’re not going to sort of assume that it was anything other than an aberration. But certainly we’re spending a lot of time looking at the forecast. Mauricio, is there anything on the operational side of particular concern.

No, I mean we don’t have any concerns on the operation side and as David said, I mean I think it was a pretty extreme period of very low wind speed that really affected the production of the facility. So in the future we just don’t have any concerns on the operational side.

Great, it makes sense. Thanks guys.

Thank you. Our next question comes from the line of [Indiscernible] from Deutsche Bank; your question please.

Good morning and congratulations guys. Two questions today. The 2015 guidance, just to confirm it, it does contain EBITDA from Home Solar and DGE but does not contain it from EME and CVSR. Is that the right way to think about it?

Correct, yes, that’s correct. It includes the impact of those first two elements, but does not include any of the CAFD contribution from the remainder of the assets that NRG has indicated its intention to offer in what I think was two trenches, both the EME and CVSR. Neither of those are in our guidance right now. We would expect to update the guidance as we’ve done in past practice once we’ve completed those acquisitions.

Great. My other question is, does concentrated solar power generally and Ivanpah specifically possess the right risk reward for NYLD?

Yes, I think – I mean we’ve made under Mauricio’s teams leadership dramatic improvements month-to-month in the operating performance. I mean we always knew that Ivanpah represented a more complex set of operational challenges than the run of the no solar PV plant. So we very much like the trajectory of operational performance that Ivanpah is on. I mean there is still room to go. I mean I think it’s fair to say since we are speaking on behalf of NRG Yield that the scrutiny of Ivanpah and its ability to perform going forward, if in at such time as its considered for drop down, NRG Yield will be heavily scrutinized by the NRG Yield board and particularly by the independent directors of NRG Yield. So, I think it’s just too early, it’s just too early to say, but I can assure you that it will be scrutinized with the micro scope.

Great. Can I ask one more or are we out of time?

Sure.

The guidance cut, Q1 was only like by about $3 million and you were adding EBITDA from the solar assets. What else is going on there? Is that just the April 1 performance or…

Kirk?

Yes, April and also what we’ve done is because in reality it’s unlikely to see an immediate step change in the wind production. Given what we’ve seen in April and May, we’ve seen a little bit of improvement in the wind here. Recently we’ve made adjustments as I had mentioned earlier, that are embedded in our second quarter guidance to reflect what we’ve seen already quarter-to-date, as well as acknowledging that as that wind is improving, it tends to improve over time and not on an immediate basis. So we’ve factored that into the second quarter guidance and that’s really an addition to what you saw in the first quarter. In total what represents that guidance adjustment.

Thank you.

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to David Crane.

Well, operator I just want to thank all of the folks who have participated in the call and tell them I look forward to talking to them again next quarter. Thank you very much.

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.