Clearway Energy, Inc. (CWEN) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the NRG Yield Second Quarter 2016 Earnings call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Kevin Cole, Head of Investor Relations. Sir, you may begin.

Thank you, and good morning and welcome to NRG Yield's second quarter 2016 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 the earnings call for NRG Yield, any statement made on this call that may pertain to NRG Energy will be provided from the NRG Yield perspective. Please note that today's discussion may contain forward-looking statements which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. We urge everyone to review the Safe Harbor in today's presentation as well as the risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events except as required by law. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures, please refer to today's presentation and press release. Now, with that, I'll now turn the call over to Chris Sotos, NRG Yield's President and Chief Executive Officer.

Thank you, Kevin; and good morning, everyone. Joining me and also providing remarks this morning is Kirk Andrews, NRG Yield's Chief Financial Officer. I am very excited about today's call, my first as CEO of NYLD. During these three months, I have appreciated the dialogue I've had with many of you, not only about NRG Yield, but the industry as a whole. And I look forward to advancing that dialogue as we continue to grow NRG Yield's cash flow and dividends for shareholders. Starting on slide 3 with the business update: NRG Yield continues to demonstrate its consistency through offering a steady, high performing source of dividend growth to our shareholders. Today we are reaffirming full year adjusted EBITDA and cash available for distribution or CAFD guidance. During the second quarter of 2016, the Company achieved 240 million of adjusted EBITDA and 63 million of CAFD. Additionally, I am pleased to say we are also increasing our quarterly dividend for the 11th consecutive quarter to $0.24 a share and remain on track to achieve our target year-over-year dividend growth of 15% annualized. Next, as the capital markets continue to show signs of improvement, we are making progress on enhancing our sources of capital. First, and something about which I will speak in more detail on a few slides as it relates to the funding of our most recent acquisition -- we, in conjunction with our partner NRG Energy, closed a new nonrecourse financing on the 250 megawatt California Valley Solar Ranch or CVSR project. This financing raised $199 million in net proceeds, of which NYLD received $97.5 million based upon its current ownership in CVSR of 48.95%, and NRG received approximately $101.5 million. From a capital flexibility standpoint, today we are also announcing a $150 million at-the-market or ATM equity program to allow NYLD the ability to access the equity markets in an opportunistic manner. I want to emphasize that this ATM program is meant to be an option for us to issue over time, not all at once, and not a mechanism to issue equity without being disciplined on price. I will be methodical about issuing equity, with a focus on driving CAFD per-share accretion over the long-term. Lastly, I am pleased to say that we continue to push forward on our growth plans in alignment with NRG. In addition to executing across our distributed generation platform, which now stands at $149 million invested through the second quarter, we have signed a binding agreement with NRG for the purchase of its at 51.05% interest in the CVSR project for $78.5 million in cash after taking into account NRG's $101.5 million portion of the CVSR financing discussed earlier, providing for a 15% CAFD yield. I will discuss this accretive transaction in more detail later in the presentation. Given this is my first call as CEO, I wanted to provide you with a quick perspective of how I see the underlying strength in demand for projects in which NYLD can participate. As we all know, there are a number of factors driving strong growth in the renewable sector. Turning to Page 4, you can see that six states have recently increased their RPS standards to between 50% and 100%. This is important, because it's estimated that 60% of all non-hydro renewable generation since 2000 has been associated with RPS standards. So an expansion in those standards will directly create new opportunities for investment. That said, RPS is only one vehicle for securing renewables growth. States without formal RPS programs have also pushed utilities to pursue renewables. In addition, there's a tremendous amount of growth from the corporate sector of the market, with significant expansion and demand for these products by Fortune 100 companies and others who are seeking to improve their environmental footprint with new renewable megawatts. Wind PPAs signed by corporations seeking renewable energy increased fourfold in the past year, according to the business renewables center, creating additional sources of growth for NYLD. Finally, and a key part of NYLD's diversification strategy, is that as these renewable trends continue, the need for fast-start gas plants to back these new resources increases. This can be seen in the data that suggests that California's previously projected 2020 daily minimum load is actually occurring much sooner than anticipated. This solidly positions NYLD's approximately 2 gigawatts of existing California natural gas fleet, as well as the 789 megawatts of gas assets currently under development by NRG in the ROFO pipeline -- namely, Puente and Carlsbad. Turning to Page 5, with the opportunities just described, I wanted to provide you with an overview on how I think about financing this growth. First, in looking at long-term or permanent capital sources, NYLD looks to optimize nonrecourse project financing on its assets, allowing it to garner the lowest interest costs -- and, as we discussed last quarter, to also amortize debt commensurate with the PPA tenor of the asset, reducing refinancing risk. Next, when assessing corporate leverage, NYLD views the term loan and unsecured markets in the context of maintaining a rating with a BB/Ba profile, not a specific leverage target. NYLD currently focused on the unsecured bond market, which continues to demonstrate exceptionally strong demand for high-quality issuers, in order to preserve its flexibility of the corporate level by not accessing the secured term loan market. Finally, we focus on the equity markets with a critical eye toward increasing CAFD per share. Equity issuance was a critical component in the overall capital structure of NYLD. And by expanding our equity base, we can grow more significantly in the future on a consistent, long-term basis. In terms of the non-permanent pieces of our capital structure, we utilize the revolver to bridge the short term capital needs of the business and then term it out using a lot of sources of capital described previously. Turning to page 6, I want to describe an important transaction for NYLD, namely, the acquisition of the 51.05% of CVSR owned by NRG Energy. As a reminder, CVSR is a 250 megawatt utility scale solar project located in California, of which we have owned roughly 49% since our IPO in 2013. The additional interest in CVSR is a strong addition to the NYLD fleet, with 22 years of remaining PPA tenor and the benefit of the DOE loan guarantee program. In addition, CVSR has maintained a strong operational profile since its commercial operation date in 2013 and has the ability to renew its land lease through 2061, providing opportunities beyond the PPA tenor. Consistent with our overall approach to financing growth investment, we financed this acquisition by closing on a 21 year amortizing nonrecourse financing at a very attractive interest rate of 4.68%, achieving an investment-grade rating for the project, further validating the project's strong cash coverage and operating history. NYLD's total share of the 199 million in financing proceeds was 97.5 million, commensurate with its ownership in CVSR. Turning to page 7, let me walk you through how we think of the overall economics of the acquisition. First, as you can see on the left side of the slide, NRG received 180 million in total proceeds through the combination of the approximately 102 million that received as a portion of the financing, 138.5 million paid in cash by NYLD. For this consideration, NYLD purchased NRG's ownership at an EV to EBITDA multiple of approximately 14 times while obtaining a strong, levered CAFD yield on its cash investment of 15%. The purchase of the asset, taking into account the reduction in CAFD from the financing on the portion of CVSR that NYLD already owned, leads to net CAFD per share accretion of approximately $5 million or roughly 2% per share. In addition, after evaluating the financing and acquisition as a whole, NYLD also has 19 million in net proceeds after the purchase which is available for further investment. In summary, this acquisition again proves the synergistic benefits of the NRG and NYLD relationship, with an efficiently priced capital raise leading to CAFD accretion for NYLD shareholders without issuing equity or increasing corporate leverage. Now I'll turn it over to Kirk to provide the financial summary.

Thank you, Chris. For the second quarter, as Chris mentioned we are pleased to report adjusted EBITDA of 240 million and 63 million of cash available for distribution or CAFD. During the quarter, although wind conditions were weaker relative to expectations, improvements in both operating expenses and planned maintenance CapEx at both the conventional and thermal segments, as well as higher distributions from unconsolidated affiliates, served to offset the impact of lower wind speeds. With these results, we remain on track with our full-year expectations and are reaffirming our financial guidance for both 2016 adjusted EBITDA and CAFD. Our guidance does not yet reflect the impact of the CVSR acquisition as, consistent with our practice, we will update guidance to reflect the impact of the acquisition following closing, which we expect this quarter. As Chris also mentioned earlier, we are increasing our dividend to $0.24 per share or $0.96 per share annualized, representing a 14% year-over-year increase from the second quarter of 2015, and continuing the trajectory we have previously targeted of 15% annual dividend per share growth for a $1.00 per share annualized dividend by the end of this year. Based on our 2016 CAFD guidance of $265 million, the $1.00 per share annualized dividend target for the fourth quarter would imply a payout ratio of just under 70%, providing us the ability to continue to grow the dividend at that 15% rate through 2018 without the need for drop-downs or additional capital. Turning to the right side of the slide, NRG Yield continues to make progress under the existing distributed solar partnerships with NRG. Through additional investments during the quarter, total capital invested in the distributed solar partnerships with NRG now stands at $149 million as of June 30, with $88 million in remaining capital to be invested under the current partnerships, $78 million of which will be toward business renewables. Due to the nature of the sales and construction cycle times for business renewables, we would expect investment to continue to fluctuate quarter to quarter, as evidenced by the $8 million invested in the second quarter versus the $51 million invested in the first quarter. Additionally on this chart, I want to highlight the performance of what we’ve invested thus far. Through the second quarter and included in our financial results, we have received approximately $12 million in cumulative distributions against the $149 million invested in the partnerships, well within our expectations and further reinforcing the benefits of this investment vehicle in partnership with NRG. With that, I’ll turn it back to Chris for closing remarks.

Thank you, Kirk. Before I turn to Q&A, let me provide some closing thoughts. As I’ve discussed with many of you, there are several key factors of focus for NYLD in the near term. We’ve enhanced the governance of NYLD during 2016, continued to further evaluate changes to management structure and to deliver on our guidance for dividends, CAFD, and EBITDA. The accretive acquisition of CVSR allows NYLD to reduce the payout ratio required to achieve its goal of growing its dividend 15% per share through 2018 on an annualized basis while marginally reducing corporate leverage, both of which serve to allow NYLD more flexibility in growing dividends after 2018. In addition, due to our low current payout ratio and the ability to finance the CVSR acquisition while simultaneously reducing corporate leverage, we will continue to improve our liquidity in a way that allows us to grow, as evidenced by initiation of our ATM program and execution of ongoing investments into our distributed solar partnerships. Finally, we continue to work to advance prospects to add additional partners from either the development or the capital side. All of these factors provide me with confidence that NYLD will be able to deliver on its dividend growth commitments in position the Company for growth beyond 2018. Kaylee, we are ready to open the line for questions.

[Operator Instructions]. Our first question comes from the line of Greg Gordon with Evercore. Your line is open.

So I’m just not sure I understand and/or agree with your CAFD calculation on CVSR. The nonrecourse debt you’re issuing an order to buy that, I should presume that amortizes over the life of the contract?

Correct.

Okay. So aren’t you paying $80 million to get $5 million in CAFD? So shouldn’t we be thinking about that being more like a 6% to 7% actual CAFD yield, not a 15% CAFD yield? And if so, doesn’t that look less attractive than you’ve portrayed it?

Sure. To me, I’ll walk through at least how I think about it. And I think there’s a differential between the value of the acquisition and the source and use of funds, basically, to create accretion for shareholders. The most important metric, I think, for a NYLD shareholder is CAFD per share accretion, because that really shows how much dividend can increase over time. So in looking at CVSR for the portion that we basically didn't own, the 51%, we paid $78.5 million, and it has $12 million of CAFD that's available. That's where the 15% comes from. And that's really the value of the acquisition. As you say, what was the yield on what we paid? The differentiator is, how did we source the capital to pay for it? And while money is fungible, I have -- chose to look at it in terms of looking at the overall CVSR transaction as a whole. So that has to include the $97.5 million that we based on our half of CVSR. Taking the two components together, A) the $12 million inflow from basically the acquisition -- that's $12 million of CAFD at $78.5 million and, B) how we paid for it, which is different than the value of the acquisition, the net of those two leads to the $5 million.

Just to follow along with that, Greg just setting aside the source of funding for the $78.5 million. I think that's what Chris was appropriately focusing on. The acquisition price for 51% of an asset -- let's just forget for the moment that we own 49% of it today. At the increment, we are acquiring a 51% stake in an asset, a levered stake. The purchase price for that acquisition, as Chris said, was $78.5 million. The CAFD associated with that purchase price, which is net of the debt service on the additional debt on that 51% stake, is $12 million. The quotient of that, as Chris has pointed out -- that is where we get that CAFD yield. That is the right way to think about that incremental acquisition. And then the separate consideration is how is the $78.5 million funded?

Okay, I think I got you. Maybe I'll circle back with you after the call. And the second is, can you comment on -- in general on trends in terms of wind resource improvement? I think you have a slide here on Page 14, and take us back maybe a little bit to what the base case assumptions had been for the Alta Wind acquisition; and how they were reset; and whether or not, now that they've been reset, these wind resource outcomes are reflective of the sort of adjusted base case?

As part of this year's guidance, basically from last year's results, which we consider 2015 to be a little bit of an aberration in terms of wind resources, we reset what we think of as the P50 case, and that was incorporated into our 2016 guidance. As part of that, basically, as we reported in the first quarter, where we overproduced, the second quarter was one of underproduction to that. So I think over the first six months, we are a little bit under. July has been a strong month from at least early preliminary results, but we have to see how the whole year turns out. So I think to answer your question, 2016, we reduced what the P50 case was. We're a little bit under that through the second quarter. First-quarter was overproduction; second quarter, underproduction. But we think, we feel they'll turn out over the course of the year.

Our next question comes from the line of Michael Lapides with Goldman Sachs. Your line is open.

Trying to think a little bit longer term, you put in today's release, I think, that you were going to pay for the drop-down with the revolver and then immediately come out with the at-the-market program. Just curious in terms of how you're thinking about the capital structure and the credit metrics you'd like to meet longer-term at NYLD.

I think from our perspective, one, in terms of the equity issuance being linked to CVSR, that's not how I think about it. As indicated in our materials, we basically raised $97.5 million and paid $78.5 million. So the end -- once again, I choose to look at the transaction as a whole. Looking at both parts, there's actually an inflow of capital to NYLD to invest further. So that's kind of one part. The ATM for me is more of a long term source of capital to be dribbled out, not done all at once, as equity markets are constructive. I think your question about ratings and how we think about leverage, you know, I'm less concerned about one particular metric. What I want to take is a more robust approach as we look at TPA tenors, NOL runway, what's our different credit metrics, to then really target a BB/Ba overall rating. I think when you drop to the single-B range, there's a pretty significant increase in cost of capital. So I'd want to basically capitalize and run NYLD to stay away from that. So long term, we'd want to stay around that BB/Ba rating. We'll oscillate within it, but definitely want to stay away from the single Bs.

Got it. Can you talk a little bit about your expectations not just for the rest of 2016, but even thinking about 2017, about the pace of drop downs? And what are the assets that, within the ROFO portfolio that might be more attractive as near term drop downs versus ones that you'd probably rather drop, you know, much further out in the future?

Sure. I think out of what's in the ROFO pipeline, just to be mindful, we almost drop kind of distributed generation almost on a monthly basis as they are constructed. So we do it as kind of an ongoing program from that perspective, and that happens every quarter. But in terms of the larger assets, really the ones that are of nearer term our Aqua Caliente and the remainder of the Edison Mission wind portfolio, the 25% that hasn't been dropped. Those are the ones in the nearer term. Whether that's, you know, where in 2017 exactly, that's obviously partially dependent on when NRG Energy wants to offer it. Ivanpah, I think, is going to take a little bit longer, given some of its operational issues it's working through. So I think that's much more back end of this decade. In terms of Puente and Carlsbad, as indicated, those commercial operation dates are 2019/2020. So that's a little bit further down the road.

Got it. Last thing: if I look at the top of slide 13, so of what that basically is implying is that you spent $149 million; the total commitment is $210 million. Roughly $61 million left to go. Do you assume the bulk of that plays out over 2016? Or is it longer-term?

No, that won't be just in 2016. I would say that would be completed by the first half of 2017? So that will take some time to work through.

But by mid-2017 or late 2017, you'll be done with the investment in the distributed solar partnerships with the parent?

Yes, at least as far as the existing partnerships are concerned. And the reason I draw that distinction, Michael, it's Kirk, is because, as you can see, just referencing slide 13 again, there is an additional $250 million of equity associated with business renewable investments still in the ROFO pipeline. So that's why I draw the distinction. To your question, I think Chris's response was: with respect to the existing partnerships, that's the case, yes.

Got it. Thanks, guys, much appreciated.

You bet.

Our next question comes from the line of Jonathan Arnold, with Deutsche Bank. Your line is open.

Can I just ask on, so the ATM program, can you give us some sense of how you have thought about sizing that? And is it reasonable to assume it's kind of a through 2017 type of time frame or something else?

Sure. I'll answer your second question first. Yes, it is kind of through a 2017 time frame. We sized it in many ways, if you look at our average trading volume, a little bit small. I didn't want to come out with a really a big program that concerned equity investors. At least that was the intent. So I think the $150 million is due to something that's meaningful, but it will take us, to your point, some time to execute, once again, kind of through 2017.

Okay. And then I think you mentioned just towards the end that you're still focusing on potential strategic partnerships with other entities. And could you give us a bit more color on sort of where those kinds of discussions stand? There’s obviously a lot going on in the space, generally. Is that something that has kind of moved a bit off the front burner? It was kind of mentioned just at the end. Or is that something that where you think we might actually see something in the relatively near term?

It has not moved off the front burner. That’s something, what I’m keenly focused on. I think as you can well imagine, these things take some time to develop; to also, frankly, find what’s the correct transaction for NYLD. So I do think that’s a 2016 or early 2017 event. But that has not moved to the back burner, to answer your question.

And are we talking financial partners or more kind of development partners? What’s the most sort of likely way this plays out?

It would, frankly, we are targeting kind of both sides of that. I think the development makes a little bit more sense early on. But I think for us, focusing on what’s the right transaction for yield, we are focused on both.

Okay. Thank you.

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

So perhaps just to follow a little bit up on that, in terms of expanding the ROFO bucket, can you elaborate a little bit on how you think about the right size of a ROFO, right number of partners? And then ultimately with that, what do you think the right mix should be at NRG Yield? I appreciate the elaboration earlier on, but kind of continue going with that sense of what should we expect in terms of the mix of NRG versus partners, especially in the future as you look to expand these buckets? How big could it be?

Sure. I think it’s a little early to speculate, but what I can tell you is it’s not only the number of partners, but also what they do. We don’t necessarily need five partners who all do distributed generation solar of 2 megawatt sizes. So I think the one thing is to diversify a little bit between what NRG has demonstrated to date and then other aspects that NRG hasn’t developed a lot to date. So I think part one is, it’s not necessarily the number, but what they do. I think having five that do all the same thing is not necessarily the best answer. So to put some precision around it, I think more than three partners at the end kind of makes sense. That’s a little bit of false mathematical position, but yes, more than three I think would work. In terms of the overall mix going forward, frankly, I think having something as large as NextEra’s I think that’s too aspirational a goal. I think something that is a multiple of where we stand today makes sense. Is that 2 times or 3 times? It’s way too early to speculate on that. But it’s not as, you know, adding three partners to add 200 megawatts, that’s not a good use of time. However, doing something as large as NextEra, difficult as well.

Got it. All right. Great. And then, perhaps just keeping going with the same theme, can you elaborate a little bit more on your equity ATM in the sense of when exactly do you think you’ll make your way through that? And how do we think about the drops for 2017 right now in terms of the specific targets and the use of that ATM through the course of the year? I mean, how much raising do you expect next year maybe is part of that question. The second part is: when do you expect to use that ATM, at what point in time?

Sure. I would say we would anticipate, I anticipate we are going to use the ATM kind of through 2017. And that’s not the first quarter, so kind of the back half of 2017, to give you a little bit of timing. And I think in terms of what it will fund, a lot of it is frankly dependent upon what types of transactions are out there. Could it be used to fund something like a drop of Agua Caliente or EME, potentially? Could it be used for third-party acquisitions? Yes, as well, to fund that. So I think in terms of the exact linkage of what proceeds is this going to be used for, I think, frankly, that's a little bit to be determined. What I can tell you is we're not going to utilize it unless we can do things on a CAFD per-share accretive basis. Once again, I think -- and looking at the transaction, the CVSR transaction, to me the most important part, as I indicated earlier in my remarks, is: what accretion is there for the Yield shareholder? Because if there's not CAFD per share accretion for the Yield shareholder; it's very difficult to get dividend per share for the NYLD shareholder. So as we look at utilizing that $150 million, that's the key metric they're going to be looking at in determining how to utilize it.

And I think just add to that -- and I think that this was Chris's point there -- we're certainly very focused on the organic growth potential we have as the foundation. This was my reference to the existing CAFD, the existing payout ratio, and the ability to grow into that just off of the, if you'll call it, loosely speaking, organic growth. Nothing should jeopardize that. So the utilization of the at-the-market program should be additive to that foundation in both duration and magnitude. Obviously, accretion goes along with that. It would go without saying, but it's worth saying again.

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

I'm sorry, my questions were all answered. Thank you.

Thank you. Our next question comes from the line of Matt Tucker with KeyBanc. Your line is open.

I apologize if I missed this, my line dropped for a few minutes there. I had to dial back in. Can you comment on how much corporate debt capacity you feel you have right now in the context of your target credit ratings?

Sure, and maybe it was part of my prepared remarks. We are not really targeting a specific leverage metric; we are targeting basically a BB/Ba type of metric, because we think that basically the cost of capital increase from going into the single Bs is significant, so we want to kind of stay out of that ratings area. So there's not a specific number that we are targeting; it's more staying within that general rating area.

And then with respect to potential additions to the ROFO pipeline, I mean, I think you touched on this a bit and kind of focused on partnership opportunities. But maybe -- could you talk a little bit more about NRG's development pipeline, and whether there's anything there that could be a good candidate for a ROFO addition in the near term?

I think, frankly, not much more than what's been disclosed, just to answer your question fully. I think what's indicated in the ROFO pipeline is kind of what's available, at least as it stands today. As Kirk mentioned a little bit some of his comments, the DG team on an annual basis kind of organically comes up with new prospects for investment. So I'd say, yes, as you sit right now, development is really what you see kind of in our disclosed ROFO pipeline, but also what's available from DG on an organic basis. Kirk, I don't know if you have anything to add?

The only thing to add to that is, you know, we recognize the importance of the visibility of the pipeline. And that's part of the reason why, to Chris's earlier remarks, focusing on diversifying and expanding that, including but not limited to NRG. But where NRG is concerned, I think as a partner, speaking from the NRG Yield perspective, it's certainly incumbent upon NRG -- and I think it's reasonable to assume that they will move forward in their disclosure around that pipeline as we move further towards the end of this year and into 2017. That's the most important first step for us as NRG Yield, as the ultimate acquirer of those assets, to give greater visibility to that pipeline in terms of magnitude beyond the existing ROFOs that have been disclosed.

And then, unfortunately I missed the NRG call, so I don't know if this came up. But Carlsbad -- I believe the construction start has been delayed several months. Any sense of timing of when these environmental challenges could be resolved and construction could start? And has the COD moved out at all yet?

Candidly, I think that's probably a better question on the NRG side; obviously, I wear both hats where that is concerned. The product I know has received its citing permit from the California Energy Commission and its air permit. And they are moving forward in obtaining a final, non-appealable, the PPA basically. And I think the approval by the CPUC that is working its way through the appeals process. And I think it's right now in the California Court of Appeals. So obviously, that's NRG information, but that's basically where it is. So we have no reason to believe that that process won't run its course and ultimately NRG will be successful in obtaining that approval. But that's basically the extent of information I can give you this point.

Our next question comes from the line of Praful Mehta with Citigroup. Your line is open.

So quickly, on strategic partnerships, as you look at slide 5, where you very helpfully laid out all the kind of key sources of permanent capital. Strategic partnerships will basically fit into the common equity bucket, or you're also looking at them from a credit perspective? And secondly are you looking at them as permanent long term relationships, or how are you approaching these at this point?

Sure. The DG partnerships would be financed with a combination of kind of -- you know, project at basically corporate and then equity as well. The relationship and if you already are familiar, basically it's an 18 year, basically NRG Yield has a preferred return ahead of NRG Energy with no terminal value at the end. So in terms of it kind of being a long term relationship from a Yield perspective. Obviously we hope to grow and have more opportunities to invest with those customers. But really the relationship kind of fits with NRG. We're really kind of a preferred provider of capital to those. So I think, Praful if I'm understanding your question correctly, the customer relationship in the long term kind of resides with NRG. We have the 18 year preferred return, but we would use a combination of the debts and tax equity that's available at the project level as well as debt and equity at the corporate level.

Praful, it's Kirk. Does that answer your question? I wasn't clear to me either whether you are referring to the DG partnership, which is what Chris just addressed, or the potential strategic partner, as to whether that might be a permanent source of either equity or debt capital. I wasn't clear, either exactly what the focus of your question was there.

Yes, no, I apologize for the confusion. The DG was helpful, but I was actually more asking about a strategic long-term partnership.

Got it. So that could be either equity at a project level or equity at the corporate level, so one of those two. Either we basically work with a strategic partner to create an SBE that we both jointly invest instead of the project or as a corp.

Okay. And you're looking at the partners who have an existing pipeline? Or are you looking at just capital, or are you open to both types of relationships?

Open to both.

And just one question on the corporate debt. In the debt financing map that you laid out on the permanent capital, slide 5. Clearly if you're looking at corporate debt, you're assigning some form of terminal value after the project level debt is amortized or after the PPA tenor. How should we think about values of these assets post their PPA life. Is there a particular way you think about that value, and how should we think about that?

Sure. I answer your question in a couple of ways. First, because a lot of the debt is only a 10-year maturity, given our 17 year CAFD weighted average tenor schedule, it still is within, there’s not a terminal value in the entire portfolio there, obviously. So I think part one is mostly the debt maturity basis occurs well within that. So that’s just one answer. The second part, if we look at kind of terminal values further out, there’s a couple of different methodologies that one could think through. One would be what you simply think is the redevelopment value of those assets. You know, depending who you ask, that might be $100 to $200 a kW in today’s dollars. Second, I’m not going to say that I know 2035 power prices well, but you do have a zero marginal cost asset in a lot of these cases that’s completely unlevered, with the example of the solar or wind asset. And I think third is really around is there any type of re-contracting or even, you know, not a preferred mode of operating, but merchant value there as well? I think it’s important to note that basically, in project financing, most of these assets are raised at a 1.3 to 1.4 debt service coverage ratio. And truthfully that means only 0.3 or 0.4 of their EBITDA basically translates into dividends for shareholders. So I think from that same perspective, then if once they are completely delevered, once the project debt has been amortized and paid off, you only need 0.3 or 0.4 of the EBITDA to maintain the same CAFD. So that’s kind of the three ways I'd think of answering your question.

And just to follow along with that, one unrelated point, but I think it’s important to note: one of the benefits which we alluded to before with respect to CVSR is just the debt capacity that was available there, which obviously we’ve taken advantage of in this particular acquisition. Chris correctly identifies that the 1.3 to 1.4 debt service coverage ratio is probably the right benchmark to use to think about leverage capacity at the project level. Before the acquisition debt we were talking about here on CVSR, that coverage ratio was close to 1.8 times. And pro forma for the additional $199 million we have put there, that basically puts CVSR in line and consistent with about a 1.35 times coverage ratio. So one way to reinforce what Chris just said about the project level debt is the new leverage on CVSR takes it to a level that’s basically in line with the other project-level debt in the portfolio. The other thing I would say, specifically to your question on terminal value: duration matters a great deal in terms of how we think about that. And we’ve articulated that before. Obviously, the shorter the duration of the asset, especially relative to its useful life, and here the best example, which is the conventional assets, the more important the consideration and facts and circumstances matter around that terminal value. So if you take the conventional assets, which have a little less than 10 years left in their tenor, but because those assets are fully amortizing, and the principle is being repaid and counted before the CAFD contribution, what you wind up with on the conventional assets is basically an unlevered portfolio of conventional assets, all located in load pockets, all with fast-start technology. And the marginal amount of additional either recontracting or merchant, if you will, revenues that are required is a fraction of the current contract today in order to continue that particular then unlevered asset's contribution to CAFD. So we very much look at the terminal value on a case-by-case basis. And it is far more acute in terms of focus, fact, and circumstance when we look at the shorter-duration assets within the portfolio.

Got you. Chris, Kirk, that is extremely helpful, thank you.

You bet.

[Operator Instructions] Our next question comes from the line of Michael Morosi with Avondale Partners. Your line is open.

Hi guys. Thanks for taking my questions. I guess first of all, as you look around the Yield Co group, some of your peers are looking to improve returns by going further up the development cycle and acquiring earlier-stage projects or development-stage projects. Where do you guys stand with respect to that strategy? And how likely is it that you'll look to do that in the future?

Frankly, that is not a strategy that we would intend to pursue. I think that the risk/return payoff sits better with the development shop to take that profile than with a company like NRG Yield.

And then as it relates to the CVSR deal, it seems like the returns are more attractive than maybe was originally conceived. It is my understanding that the IRR is basically infinite. You are receiving $19 million for $5 million of CAFD. Some of your other peers have started disclosing IRRs in their investments and intend to going forward. Is that something that you would also consider doing in the future?

I think we would be reticent to do that. I think there's obviously a key competition for certain assets in this space. And I think saying, listen, here's kind of how we think about IRRs, especially over asset lives which have a variety of assumptions to make it translatable to you as an investor, I think gives away a lot of how we think about investments. So I would tend to think that we wouldn't tend to go to that in the future.

And then finally, just as your valuations come back in line, and you are in a position to accretively raise equity for growth, how do you think about the pace or cadence of equity raises? Obviously, the ATM is going to help a lot with that. But just in terms of frequency or kind of orders of magnitude of equity capital markets activity?

I think exclusive of some large acquisition or a one-off that's outside scope of the ATM, I think as some of the questions before I alluded to, we would think of basically working through the ATM through 2017. And I think that will be kind of done at a measured pace. It's not as though there is there some goal to complete it by December or something of that nature. So I'd say a lot of it is, to what I've stated before, is really focused on what CAFD accretion and CAFD per share is going to be for shareholders. So I think that's the main way by which we'll roll this out. There is not a defined timeline. I think it will take through 2017 to do it. And that's, once again, outside of any particular special transaction or something like that as well.

Thank you. And we have a follow-up from the line of Michael Lapides with Goldman Sachs. Your line is open.

Just curious -- in terms of thinking about the value of the equity, and when it's accretive, not accretive. Do you just look at it on a CAFD per-share basis, where you say, hey, look, if I can issue equity at whatever, today's stock price, a potential issuance to fund growth is accretive as long as I'm increasing CAFD per share? Or are there other metrics you focus on?

We look at a wide variety of metrics. I think one -- basically, what happens to the overall PPA tenor of NYLD as a whole. Oftentimes you can kind of make things very accretive by doing very short-tenored contracts. That's not the intent here. Also, regarding what happens to our tax runway; but we don't want to roll that in quickly, either, to kind of do it as something that's simply accretive. We also look at IRR overall in looking at acquisitions. But I think to your question, Michael, all of that, if it does not translate into the ability to pay more dividends to shareholders over time, it kind of really doesn't work well. And so from our perspective, we never really focus on only one metric. We look at that kind of combinations by -- as well as some others in terms of thinking about acquisitions. So it's not, is it accretive per share? We should go do it. A lot of it is multifaceted in terms of what merchant risk are we taking in a terminal. And I think, to highlight the CVSR transaction, this is almost from one perspective a perfect acquisition as we kind of look at it. It tends to -- you know, it doesn't tend to, it adds, it has a longer PPA tenor than the book as a whole. It adds tax attributes. It's able to be financed on a 21-year basis, which obviously we cannot do in the high-yield market. It requires no equity on the part of NRG Yield shareholders. It does not require any corporate leverage on the part of NRG Yield shareholders. And it still is accretive. So I think to kind of your question, not looking at one metric solely, it's the combination of all of them. But I think that combination is kind of exemplified in the CVSR transaction.

And just to follow along with that, Michael, it's Kirk, and this is something that was touched on in the previous question. In addition to Chris' point, which basically, certainly CAFD is a necessary metric to tick, but it is not sufficient to constitute what we would believe is a compelling acquisition opportunity, some of the other things Chris alluded to. Total return is a part of that. But part of the reason why we also look at total return or IRR on an asset-by-asset basis is we think about that return or the risk-adjusted return as kind of the sum of two parts. You've got a contracted period for the asset, and then you've got a post-contracted period for the asset. So pursuant to my prior observations, when the post-contract period, which is a function of the useful life of the asset relative to the contract, so let's take a conventional asset, for example. If I'm buying a conventional asset with a 30 year life with a 15 year contract, I'm going to very much focus on that post 15 year contract value. But I'm going to apply a different return threshold to that than I will to the contracted threshold. NRG Yield, and I'd argue yieldcos as a whole, their competitive advantage is focusing on the cost of capital advantage specifically to the contracted period. Our discipline has been and continues to be: when I look beyond the contracted period, you're looking at a potentially merchant asset, or the analog to that is the risk around recontracting that asset, which I'd say is not all that dissimilar to think about in a merchant capacity. So the return thresholds that we would apply would be not dissimilar to a typical IPP or a merchant acquisition. And I think that informs that blend, if you will, that is duration based informs on a case-by-case basis how we evaluate the appropriate total return. And of course, always focusing on ensuring we can also deliver CAFD accretion as well.

Thank you. And I'm showing no further questions at this time. I'd like to turn the back to Mr. Sotos for closing remarks.

Thank you, everyone, for your time, and look forward to talking to you in the future. Thank you.

Thanks, everyone.

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