Clearway Energy, Inc. (CWEN) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the NRG Yield Second Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer, and instructions will follow at that time. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to Matt Orendorff, Managing Director, Investor Relations. Sir, you may begin.

Thank you, Shannon. Good morning. And welcome to NRG Yield’s second quarter 2015 earnings call. This morning’s call is being broadcast live over the phone and via webcast, which can be located at 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 made 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 and this presentation. With that, I will now turn the call over to David Crane, NRG Yield’s Chairman and Chief Executive Officer.

Thank you, Matt, and good morning, everyone. Joining me today and participating in the presentation is our Chief Financial Officer; Kirk Andrews; and additionally, Mauricio Gutierrez, who is NRG Yield’s Chief Operating Office, is here and he is available to answer any questions you might have. Since the NRG Energy call just wrapped up short time ago, we will try and keep our comments here brief and use as little bit as more of your time as necessary. That being said, it's been an interesting past several weeks both in the Yield cost base generally and the quarter and the year-to-date has been a bit more eventful for NRG Yield than as usual. So we are going to cover a little bit more ground than we usually do. So let's start by turning to slide three of the presentation. For the second quarter of 2015 NRG Yield achieved $187 million of adjusted EBITDA and $26 million of cash available for distribution. While Kirk will provide more detail on the drivers of our performance of the quarter, I want to address one element upfront. We along with the majority of other large-scale wind operators experienced another quarter of challenging operating conditions for our wind fleet as the majority of the wind resources West Mississippi were less than 80% of what would be deemed normal conditions. This unfortunately has caused us to adjust our expectation for wind performance over the remainder of the year and revise our guidance accordingly. With that said, we continue to be very comfortable with the current and long-term prospects of the company's dividend program and that's why we continue to increase the annualized dividend payment, which is now set at $0.84 per share, which represents an increase of 40% in the dividend since our IPO and a 15% increase year-on-year. As you might note from the company's press release, we have initiated a target for fourth quarter 2016 dividend run rate of a $1 per share on an annualized basis. This implies growth in excess of 19% from current annualized levels. I want to be very clear here that while our financial performance is not been what we would have like so far this year, we continued to believe very strongly in our ability to deliver the long-term dividend growth our investors look to us for. Now looking at the execution for the quarter, NRG Yield made significant progress in expanding commercial prospects of the business, the strategic relationship with NRG again bore fruit. In addition to formalizing the joint venture with NRG Renew to invest up to $100 million in completed distributed solar project, we received the formal offer from NRG of the third ROFO transaction. This portfolio consists primarily of wind assets NRG acquired in the Edison Mission Energy Transaction and we anticipate closing during the third quarter. These transactions combined with the previously disclosed acquisition of the 25% interest in the Desert Sunlight solar facility and the recapitalization of the Alta X and XI facilities should enhance the run rate CAFD for NRG Yield by approximately $70 million to $75 million once they are closed. As we turn to slide four, I want to point out that recently we’ve said there has been a turbulent time for the Yield sector and NRG Yield has been negatively affected along with other companies in this sector. Given the importance of having continuous access to a competitive cost of capital to NRG, we have sought to put NRG Yield on a path to sustain value creation by focusing on three critical attributes, which are more important today than ever. Starting with portfolio diversification, we never anticipated drop-off of the wind resource as we have witness over the past six months, but we aim for diversification precisely so that we could withstand the unexpected. While we are obviously not immune to the financial impacts of reduced wind, the fact that year-to-date we could both continue to grow our dividend on a quarterly basis and also reaffirm the trajectory of future dividend growth is a testament to the success of our portfolio diversification strategy. The second attribute is M&A, when we initiated NRG Yield two summers ago we knew there would be multiple followers into the market and we guess that at some point irrational exuberant will grip the acquisition market a with some bidders paying exorbitant prices to grow their portfolios. Since we expect to be around for the long-term, we settle on a more prudent robust measured M&A strategy that would strike the right balance between high-growth merely and extending the visible duration of future growth. Striking that proper balance has been and continues to be the focus of this management team, which brings me to a final very important point, which actually Kirk will elaborate on in significantly greater detail. Not only do we wish to avoid deals that we view is creating little long-term value in and of themselves, we do so knowing that unlike many of our peers we do not layer a punitive idea on top of it. We see IDRs has an impediment to the sustainability of the low cost of capital which we view is the key enabler of dividend growth overtime. Said blindly, given the choice we believe the yieldco investor who will be funding the growth of the vehicle over the long-term should be adversely sharing dividends on an increasingly unequitable basis enjoys preferred a company without an IDR. So I will end my comments there and turn it over to Kirk. Kirk?

Thank you, David. Turning to financial overview on slide six, NRG Yield is reporting second quarter 2015 adjusted EBITDA of $187 million and cash available for distribution $26 million. Adjusted EBITDA and CAFD for the second quarter were below our second quarter guidance due to historical low wind speeds, which continued through the quarter end, primarily impacting our Alta Wind assets in California are also impacting the other wind assets in the fleet. The chart in the top right corner shows an illustrative view of the Alta average wind speeds for the first half of 2015 as compared to long-term historic average ranges of wind speeds for that region. As you can see the average wind speed for the first of 2015 were significantly below the historic range. Due to the ongoing low wind production impact in the fleet, we have adjusted our expectation on wind production over the balance of 2015. For the full year 2015, the company is updating adjusted EBITDA guidance from $690 million to $660 million and CAFD guidance from $195 million to $160 million, reflecting the impact of lower expected wind production. Our revised guidance also reflects the impact of reduced pace of residential solar drop downs by NRG Home Solar over the balance of 2015, which is offset by the half year impact of the Desert Sunlight acquisition. We are also providing guidance on third quarter 2015 with expected adjusted EBITDA of $195 million and CAFD of $110 million, which also reflect the impact of reductions in expected wind production. We do not expect the reduction in 2015 adjusted EBITDA or CAFD guidance to have any impact on either our current dividend or expected long-term dividend growth. The company remained confident in its long-term prospects and its targeting annual dividend rate of $1 per share by the fourth quarter of 2016, which will represent a 19% increase over the current dividend rate and a 67% increase since our first IPO dividend in the fourth quarter of 2013. During the second quarter the company raised net proceeds of 600 million from the issuance of approximately 28 million Class C shares and net proceeds of 281 million from the issuance of Senior Convertible Notes due in 2020, both of which were used to fund the Desert Sunlight acquisition and the tax equity refinancing of Alta X and XI. The tax equity refinancing enabled the monetization of production tax credits and other tax attributes to be generated from the Alta X and XI wind projects and resulted in $119 million of upfront cash proceeds to yield. The company used the proceeds from this transaction and a portion of the proceeds from the equity and debt offerings to fully repay the $491 million of project level debt associated with the Alta X/XI assets. This transaction is expected to result in incremental CAFD of $28 million on an annualized run rate basis beginning in 2016. Our revised guidance does not reflect any impact from the tax equity refinancing in 2015 given a substantial portion of the CAFD benefits result from the elimination of principal amortization, which was not scheduled to begin until 2016, coincident with the start of the PPAs for those two assets. During the quarter, we also expanded NRG Yield's revolving credit facility capacity by an additional $45 million, bringing total capacity to $495 million, providing additional liquidity to temporarily fund acquisitions. NRG Yield completed the formation of the previously announced $100 million DG solar partnership with NRG Energy during the quarter. Under the terms of this partnership, the company will receive 95% of the economics until it achieves its targeted return. In July, the company was offered the opportunity to purchase a third set of Right of First Offer assets from NRG Energy. Specifically 75% interest in a portfolio of 12 wind assets totaling 814 net megawatts of wind capacity and consisting primarily of assets acquired by NRG Energy in the EME transaction. The company's independent directors and advisors are evaluating this offer from NRG and assuming agreement with NRG on price. We would expect to fund the closing of the transaction with cash on hand by the end of the quarter. Turning to slide seven, relative to our 2015 guidance which only reflects the partial impact of the recently completed Desert Sunlight and tax equity transactions. We expect our current portfolio to deliver an annual run rate of adjusted EBITDA of $760 million and CAFD of 245 million. These run rate estimates reflect the full year impact of our two recently completed transaction, which combined are expected to contribute approximately $45 million in incremental run rate EBITDA exclusively from Desert Sunlight, and approximately $50 million of annual CAFD through the combination of Desert Sunlight and the tax equity refinancing as well as the impact of Alta X/XI PPAs which began in 2016 and adjustments to reflect lower wind production on a run rate basis. Our target annualized dividend rate of $1 per share by the fourth quarter of 2016 implies approximately 75% payout ratio on our current portfolio’s annual run rate CAFD, which when combined with a robust pipeline of remaining ROFO assets underscores our confidence in our ability to maintain annual dividend growth consistent with long-term target. Turning to slide eight. NRG Yield remains well-positioned to achieve long-term sustainable and efficient total shareholder returns through its superior business model. With one of the most adverse mixes of conventional and renewable assets in the growing yield sector, consisting a fast-start natural gas conventional generation, thermal combined heat and power in district energy assets and array of renewable assets, the company is well structured to deliver more stable and tax efficient CAFD. NRG Yield continues to target 15% to 18% dividend growth into the next decade, highlighting our top-tier long-term target in the yieldco space, which is not dependent on incremental M&A transactions, providing our investors with clear visibility as to our ability to deliver on our growth target. Through its strategic partnership with NRG, NRG Yield is able to access NRG’s proven track record in conventional generation development as highlighted by addition of the Carlsbad and Mandalay projects project to ROFO pipeline. NRG also provides yield’s unique platforms of residential solar and distributed generation solar, which provides further diversification and incremental CAFD. Importantly, NRG Yield does not have incentive distribution rights or IDRs, which over time allocate a greater and greater portion of the incremental CAFD from acquisitions and dropdowns back to the sponsor. NRG is already highly incentive to ensure efficient and ongoing growth with NRG Yield as contracted opportunities and NRG Yield’s cost of capital advantage are significant component of NRG’s overall strategy. We believe that the absence of IDRs not only helps preserve NRG Yield’s low cost of capital advantage. It also permits the company to appropriately allocate every dollar of incremental CAFD where it rightfully belongs, in support of dividend growth and return to our shareholders. They will underscore this advantage we provided in the last to do example on slide nine. It illustrates the long-term drag on CAFD from IDRs and the advantage according to NRG yield and its shareholders, without them, we’ve compared the CAFD impact of the generic 100 million acquisition to both NRG Yield, and a competitor with an IDR which is at the split IDR level which provides approximately 50% of incremental CAFD back to the sponsor as an incentive payment. Although the acquired assets within asset level CAFD yield of 8% delivers 8 million of CAFD, NRG Yield without an IDR realizes 100% of the incremental financial benefit of the acquisitions. While the competitor with a 50% split IDR mostly half of that CAFD back to the sponsor as an incentive. Importantly, while the asset level CAFD for the competitor is 8% on a yield basis, the realized CAFD to that yieldco and the corresponding yield is half of that realized by NRG Yield. Since as a result of the IDR, each acquisition will be incrementally less accretive. The competitive yieldco in this illustrative example must pursue twice the volume of acquisitions to achieve the same level of accretion, leading to larger and more dilutive capital raises overtime in order for dividend growth. The IDR may also create an incentive responses to be more aggressive in pursuing acquisition in search of higher incentive payments while the absence of IDRs we believe ensures that NRG Yield approach the acquisition is better aligned with shareholder interest. As robust acquisition activity continues across the sector, we believe this differentiation will become more apparent as an increasing number of competitors with IDRs move closer to the higher incentive tiers prescribed by the IDR arrangements with their sponsors making NRG Yield advantage more and more apparent to our shareholders. With that, I’ll turn it back to David to move to Q&A.

Thank you, Kirk. And Operator, Jane, I think we should open the lines for question.

Thank you. [Operator Instructions] Our first question comes from Greg Gordon with Evercore ISI. You may begin.

Thanks. So just to regurgitate back to you, so I make sure it’s clear, the dollar run rate in fourth quarter next year represent a 7% payout on the existing portfolio assuming a lower wind resource?

That’s correct. And that’s on a full run rate basis. So that’s annualizing -- as in annualized dollar, that’s targeted by the fourth quarter relative to the run rate of the existing portfolio without giving any impact to future drop downs between now and then.

Okay. And what’s the financing plan again just to be clear for the assets that have been offered and the relationship to the rooftop solar business? Do you need -- what is the next time you need to access the equity market at the NYLD level?

Well, as I indicated, Greg, given the current liquidity position at company, particularly cash on hand, the near-term offer that was made by NRG in July, we would expect to be able to fund that through the existing liquidity that we have. NRG has indicated its intention to offer an additional drop down later in this year. Our expectation is that that drop down would give rise to the need for additional financing. We are currently roughly on target with our long-term credit ratio. And for that reason, although the incremental drop down would obviously expand some debt capacity there, so there is some capacity for debt. My expectation is the next time for external financing would be early in 2016 and that would consist at least of some component of equity.

Okay. Great. So bottomline is you can get to at least a $1 run rate on the existing portfolio and next drop doesn’t need equity, the drop after that would need some?

I think that’s a fair summary, yes.

Thank you.

Thanks, Greg.

Thank you. Our next question is from Daniel Eggers with Credit Suisse. You may begin.

Hey, good morning, guys. Just looking at the 25% run rate or the dollar run rate at the end of '16, should we be using as kind of about a penny a quarter if you look at history and kind of where that $0.25 get to. Is that how we look at the progression of dividends and then I will see for ROFO?

On a quarter by quarter basis you’re asking, Dan?

Yes.

Yes. I mean, I think you should assume that the ramp up in our dividend relative to our current $0.21 going to $0.25, it would be relatively levelized. And while we don’t dismiss the possibility of that dividend being increased beyond that level, we are confident at least with the target that we’ve given with respect to that $0.25 on a quarterly basis or $1 on an annual basis by the fourth quarter of next year.

And I guess just on the future ROFO dropdowns given how much the stock has come back and the rising cost of capital. What conversations do you guys end up having as NYLD backed NRG on pricing have dropped down value of assets given the fact your cost of capital has gone up?

We look at this on a long, certainly on a long-term basis. Certainly we’ve seen a tremendous amount of headwinds across the yield sector in terms of where the shares are traded or the stock prices are. I can’t really comment that there has been any change on part of the independent directors. They are currently evaluating that drop down. And I think they do so on the basis of kind of a long-term view from a cost of capital perspective, but no indication at this point that there is any anticipation of a change in appetite where cost of capital is concerned with respect to future drop down valuation at this point.

So the ROFO drop down that you have coming surely the wind assets, that’s been price subject to change?

That has been offered at a price and that price is under negotiation at this point.

Okay. Thank you.

Thank you. Our next question comes from Stephen Byrd with Morgan Stanley. You may begin.

Good morning.

Good morning, Stephen.

I wanted to just talk about the 2016 dividend outlook. So you’ve laid out that -- under the conditions you laid out the payout ratio would be about 75% on the '15 run rate level as per Greg’s question. As you think about incremental drop downs and growth, would those in your mind be more likely to cause an increase in the dividend or reduction in the payout ratio even further to give you further visibility? What is your sort of mindset in terms of what that incremental drop down from '16 might do to the dividend?

Well, as I have indicated before, we feel comfortable with our 15% to 18% launch on growth target. We think that provides a good balance of both duration and magnitude in terms of dividend growth. And as we said in the past, especially episodic M&A transactions, we looked to augment the duration of that pipeline. Certainly, we don’t dismiss the possibility of augmenting that, given the fact that that 75% payout ratio as I indicated before, I mean relatively easy math since we have a 182 million rough shares outstanding, $1 a share is a $182 million of dividend. That’s how we get to that 75% payout ratio. That provides us some cushion or ability to consider the possibility of augmenting that target. But at this point, I would say we continue to be a little bit more duration bias towards incremental CAFD and how it impacts our ability to continue deliver on long-term growth.

I think Stephen’s question was slightly different than that. I mean more simple between maintaining the dividend at 15% to 18% growth or payout ratio of 75%, which takes priority, the simple answer is 15% to 18% dividend growth takes priority. I mean, obviously, the dividend has to within reasons Stephen right, obviously you can’t payout more than you got over time and all that. But between those two, maintaining the dividend, then growth which we have today, then that’s first priority for us.

Understood. And then shifting over just to the M&A environment at a high level without talking about any particular opportunities, could you comment on the magnitude of opportunities, how competitive they are, are there other opportunities for situations that are perhaps say less cookie cutter, like some of the deals that you have done before that have been fairly attractive? Or if you could just at a high level discuss that? There is a lot of sort of investor speculation on what that market is really like these days in terms of both magnitude and how attractive or unattractive it is these days?

Stephen, why, I will tell you is that sort of the recent -- there is obviously a log or I guess that you would say it’s new territory in terms of the recent sell-off across the yield space, which from where we sit sort of indicates that the market is sort of saturated with yield paper and the markets in the greatest traditions of supply and demand has repriced that paper marks more expensively. How that impacts the M&A environment hasn’t been seen yet. I mean, clearly, as I think we said on the last call, while we saw that there were opportunities for us because of the greater diversification of the assets that we could look at, we felt that we were priced out of the sort of plain vanilla contracted wind asset because the prices that we were being seeing paid in that space were far beyond anything that we could make work in terms of our own financial analysis. Part of you sort of hopes that as the sector gets less overheated there, some of those [exchange] [ph] will come back into a range for us. But let met put this way, I am not holding my breadth. So I think there are opportunities around the three pillars of our business. But I mean, for the most part I would say, right now we are really focused on the organic opportunities that are arising out of NRG, not only with the Home Solar but with distributed solar. And we like those, not only because the relationship with NRG, but because they also provide work diversification in terms of off-takers and geographies and all that. So, we are comfortable, that’s the growth part, the trajectory that we’ve laid out is sustainable for us. And we are always looking at the M&A space. It’s not predicated on doing some major transactions.

Great. Thank you very much.

Thanks, Steve.

Thank you. Our next question is from Steven Fleishman with Wolfe Research. You may begin.

Yes. Hi. In one of the slides or slide 8, when you talk about the 15% to 18% in terms of dividend growth you say through the next decade. When you are saying that, is that your view based on kind of current portfolio plus what’s at NRG as we stand today?

The shortest possible answer to that is yes. As we have said before, we are adhering to the discipline that our ability to deliver on that growth ought to be as close as the relationship that we have with NRG.

Okay. Great. And then just if you can, can you maybe more specific on kind of a walk between the guidance change for ’15 and the pieces that you gave like how much is due to the wind conditions, a judgment on that and the other pieces?

Sure. The simplest way to talk about it is that the change which amounts to $30 million on EBITDA side, that is due to the reduction in the expectations for wind production over the balance of the year. And there are really two other pieces within that, that really just offset each other. One, the lower pace of drop downs, which also means a lower pace of capital deployment is equal in offset to the impact, which is roughly half of the full year run rate from the Desert Sunlight Acquisition. So, on the Desert Sunlight acquisition, I think we were talking about roughly $45 million of EBITDA and about $22 million of CAFD. So, on the CAFD side, you are talking about roughly $11 million of incremental CAFD from Desert Sunlight, that‘s really almost equal in offset to the change, due to the reduced volume of installations on drop downs offered on residential solar. So those two components obviously offset. So, net-net, the $30 million is really attributable to the change in expectations on wind of the balance of the year.

And you’ve now reset your wind expectations going forward just to be conservative?

Yes.

Okay.

The 2016 or the full run rate, also takes into account an adjustment to expected wind production on the back of those run rate numbers as well. That’s great.

Okay. Thank you.

Thank you. Our next question is from Andrew Hughes with Bank of America Merrill Lynch. You may begin.

Good morning, guys. Thanks for taking the question. The first one -- and maybe too early to say but given some of the discussion on the NRG call about a sort of Brownco wind cost split, can you discuss or tell us how you would think about managing the NRG Yield entity with either two sort of parent entities or more aligned with one of the other?

Andrew, we really can’t because we would be thinking about it over the phone. It’s not -- The only thing I can tell you is that, having ask this NRG Energy Yield cost of capital, it’s important to all the capital intensive parts of the business. So, we would if that -- if we ever got to that, we would try and make it so that NRG Yield’s -- offices were available to both sides of the split that is part of your hypothetical. But no, there is no detailed planning on that at this point.

Fair enough. And then the wind portfolio, following or the portfolio following the drop down will be more wind oriented. Curious if you guys have a target portfolio mix in mind longer-term? And related if the decision to cap the run -- the fourth quarter dividend in 2016 had a 75% payout ratio, whether or not that has anything to do with sensitivity to a lot of wind in the portfolio or desire to keep more cash on the balance sheet for acquisitions or the puts and takes there? Thanks.

Let me answer the first part. At this point, the Board of NRG Yield, the Board nor the directors have a sort of technology target. The directors obviously are looking at portfolio theory and diversification all the time. Right now that focus has been more on the concentration of California utility off-takers. And the question whether there could be a point where, whether we have too much wind, I’m sort of getting ahead of the Board on this. I don't know if we will get there because while there is deficiency of wind resource has occurred in the Western United States, it's hard to imagine a deficiency of wind resource occurring in every geography at the same time. So certainly, the Board will look at that over time but right now there's no Board policy that a, we won't let wind be more than x percent of the overall portfolio. And as for the second part of your question, Kirk was going to answer that.

So to answer the second part of your question is whether the payout ratio is reflective of any considerations around wind production. The answer to that question is no. It’s a function of managing that long-term growth. We don't look to hold cash on the balance sheet. The one thing as we’ve talked before -- in fact that we have less than a 100% payout ratio. One is a function of our target, the degree to which is below our target because we still have a significant amount of ROFO assets left to be offered. That building of cash is relatively temporary short in nature because the excess cash that’s generated by the lower payout ratio starts to offset that otherwise be third-party capital required or financing rates. So, it’s really more a function of those two things and not a function at all of concerns about wind. As we’ve said, we’ve adjusted the wind production even in the context of our run rate, CAFD. In terms of the drop down diversification, the only thing I would add to what Dave had said is the next drop down in the wind portfolio is a more geographically diverse portfolio in terms of wind resource. And as I believe, if you follow the NRG’s guidance in terms of their expectations for drop downs that would be followed by what they’ve indicated at NRG and intended drop down of CVSR as the second portion of the offers left to come in the back half of 2015. So that continues to add a diversification to the portfolio as well.

All right. Thank you, gentlemen.

Thank you, Andrew.

Thank you. Our next question is from Julien Dumoulin-Smith with UBS. You may begin.

Hi. Good morning.

Good morning, Julien.

So, I just wondered if that space real quickly here on technology. Obviously, we’ve seen some IPP peers talking about seeing a little bit more thermal of the mix. I heard you just now talked about the mix on your side. Just a little bit curious, open to more thermal as it goes I mean? And ultimately, do you have an ideal mix of assets just more broadly?

I mean, we're certainly more open. We’re open to more thermal. The opportunities in that sector don't rise that often and it can be pretty competitive, actually sometimes with the different set of players. But we’ve had good experience with expanding in that area and so certainly, we’re looking all the time. I mean there is -- in this sort of duplicate plans in terms of, do we have an ideal, have we figured out the ideal mix in our portfolio of this or various buckets we have not. We look across each of the buckets for the opportunities that give us the individual opportunity to have the best sort of contracted and risk adjusted returns. So, there is no precise target in terms of the size of various buckets and so.

Got it. And perhaps just to follow with that. Is there any ideal within the residential, I mean, just in terms of thinking about how much of that bucket should be filled by residential? What kind of a spread you should see for residential in terms of the yield when you acquire assets?

Kirk?

Okay. Well, first of all, on second part of that question, as far as spread is concerned, that goes partially to why we've structured the arrangement with NRG for dropdowns that we did and that is that its almost for NRG Yield a preferred return. So that NRG Yield’s return and cash flow is really tied, almost exclusively to the contracted period. That’s why the transactions or the arrangement within our deal for residential solar structure is leased. So the NRG Yield’s ability to achieve its return is almost exclusively predicated on the contracted period and then any residual value doesn’t have to be taken into account by NRG Yield, that’s retained by NRG at the end of day. The degree to which NRG have the opportunity to re-contract those, that’s up to its option, way down in the future to offer those recontracting leases. But it’s really more of an acute focus on the contracted cash flows in particular on residential and distributed solar. And the other thing in terms of portfolio diversification and drop down as far as targets is because the drop down portfolio really kind of comports nicely with the overall profile with existing portfolio in terms of diversification because we have a nice mix or balance of both conventional generation, which has been augmented by the Mandalay and Carlsbad dropdowns to go inside and complement the solar research. Even including residential solar, we feel confident that that mix in terms of that drop down portfolio allows us to maintain what is a pretty balance mix of contribution to CAFD in the existing portfolio today.

Great. Thank you.

Thank you. Operator, I think we’ll take two more questions and then call it a day.

Our next question is from Jonathan Arnold with Deutsche Bank. You may begin.

Hi. Just following-up on the drivers on the quarter. Chad, would -- was the slower pace of drops in residential solar function of the fact that you had doesn't sunlight instead or a function of the business moving slower than you hoped?

No, I would say it was more the latter in terms of the residential solar during the quarter. And obviously, the knock-on of which is the adjustment to our expectations I spoke about further. So I would not say it was really bad on the residential solar side as far as the quarterly performance is concerned.

Okay. That was it. Thank you.

Thanks, Jonathan.

Thank you. Our next question is from Michael Lapides with Goldman Sachs. You may begin.

Hey, guys. One minor one, is there a change in terms of the amount of megawatts in the EME wind portfolio that you're dropping down, meaning the 75% this year and the 25% next year? Or had that always been the plan and if it’s a change, can you just -- is the driver cost of capital or is there something else driving that?

No, not a cost of capital driver. In late 2014, NRG made the decision to monetize the production tax credits out of that portfolio. And as a function of that, and importantly as a function of -- excuse me of the partnership or the structure that was created at that time that is really what necessitated the offer of only 75%. And as many times the case when you have structural complexity, it’s for tax purposes. As I think, NRG indicated, its intention is to offer the remaining 25% of that drop down in 2016. So it has nothing to do with the financing capacity or anything, has everything to do with structure, and in particular structure on the tax side. But again, based on NRG’s announced intentions you should expect that the full balance of 100% of that EME portfolio would be completed in 2016 as if we indicated their intention to offer the remaining 25%. Once we’re beyond that window that ensures the efficiency from a tax perspective as far as that drop down is concerned.

Got it. And is the EBITDA in CAFD on per megawatt or megawatt hour basis for the remaining 25% similar to what’s being drop this year?

Yeah. I would say, it’s exactly ratable, so as the footnote, I believe indicates in the press release, the numbers that we indicated in terms of expectations about EBITDA and CAFD represents that 75% kind of sort of divide that 5.75 and you basically get the full run rate of the aggregate portfolio that would give you an indication of what's left to come on that 25% that NRG had indicated its intension to drop down in ’16.

Got it. Thank you, Kirk. Much appreciated.

Thank you, Michael. And Shannon, I think, that's it for today. We appreciate you all staying through and participating. And particularly if you sat through both calls NRG Energy, NRG Yield and we’ll look forward to talking you next quarter. Thank you.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.