Clearway Energy, Inc. (CWEN) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the NRG Yield Full Year and Fourth Quarter 2016 Financial Results Conference call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Mr. Kevin Cole, Head of Investor Relations. Sir, please go ahead.

Thank you, Liz. Good morning and welcome to NRG Yield's full year and fourth quarter 2016 earnings call. This morning's call is being broadcast live over the phone and via webcast which can be located on our Web site at www.nrgyield.com under presentations and webcasts. As this is an earnings call for NRG Yield, any statements made on this call that 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 press release and presentation. Now with that, I'll turn the call over to Chris Sotos, NRG's President and CEO.

Thank you, Kevin and good morning, everyone. Joining me and also providing remarks this morning are Chad Plotkin, NRG Yield's Chief Financial Officer. Thank you for joining NRG Yield's fourth quarter 2016 earnings call. 2016 was a great year for NRG Yield and on page 3 you can see why. We exceeded our 2016 financial guidance with full year adjusted EBITDA of $899 million and CAFD of $311 million, with strong performance across the portfolio. We also maintained our dividend growth trajectory with an increase in our dividend per share in 2016 by 16% year-over-year. Additionally, in the first quarter of 2017, we announced a dividend increase of 4% to $0.26 per share. Other key accomplishments were the closing of the CVSR transaction and the UPMC agreement, both of which have long dated cash flows who further underpin NYLD's platform for years to come. Today we are also reaffirming 2017 guidance which Chad will review in detail in his section of the presentation. We intend to update guidance on the drop down flows and we are further along in 2017 results. Continuing along these lines, today we are announcing two additional drop downs from NRG. A 50% interest in Utah solar assets, which NRG previously acquired from SunEdison, and a 16% interest in the Agua Caliente solar project. Combined, NYLD is purchasing 311 net megawatts for a total cash consideration of $130 million plus the assumption of $464 million in non-recourse debt. The acquisition of these assets extend our tax run rate to 11 years and lengthen NRG Yield's overall average PPA duration. [indiscernible] with cash on hand, these acquisitions will add on average over five years or approximately $13.3 million to CAFD, resulting in 5.3% CAFD per share accretion for shareholders and a 10.2% asset level cash yield for these long-dated contracted assets. In addition, NRG has agreed to add the Buckthorn Solar and Hawaiian utility scale solar at the ROFO pipeline, adding 234 net megawatt of high quality solar assets with elongated PPAs, anticipated to come online in 2018 and 2019 respectively. Pro forma for these acquisitions, NYLD still has more than $140 million in excess cash anticipated in 2017 under our current guidance as well as $435 million in availability under our revolver and unutilized ATM to fund future acquisition opportunity. Turning to page 4, I would like to highlight the key characteristics of the 311 net solar megawatts in the drop-down announced today, namely 16% of Agua Caliente and a 50% interest in the Utah assets. These assets benefit from long-dated PPAs with strong counterparties and are relatively young assets with Agua Caliente online since 2014 and the Utah assets reaching commercial operations in the fall 2016. Furthermore, these assets are capitalized with non-recourse debt amortizes through the contract period in line with our financial strategy. In summary, these assets provides high quality, long-dated cash flow for NRG Yield. Turning to page 5 to review the economics of this process. NYLD will acquire the projects for a full cash consideration of $130 million, assume non-recourse debt of $464 million, and is expected to generate $13.3 million in an average CAFD on a five year basis for a 10.2% asset level CAFD. As this acquisition was funded with cash on hand and as discussed last quarter because current year guidance includes all financing costs associated with the source of this cash, the transaction is highly accretive with an improvement of 5.3% to CAFD on a per share basis. In addition, as part of the negotiation, NRG Yield expands the ROFO pipeline by 234 megawatts with the addition of the Buckthorn Solar and Hawaiian asset. NRG also offered 120 megawatts of assets located in Minnesota. However, we elected not to pursue the acquisition of the Minnesota assets at this time. These wind assets remain within our ROFO pipeline and NYLD maintains the right to participate in any sales process that NRG might pursue regarding these assets. Overall, this transaction has the additional benefits of increase in the weighted average PPA contract life of the portfolio by a partial year, expanding the NOL runway by one full year to approximately 11 years, and increasing the amount of CAFD in NYLD's portfolio that comes from solar. As I have discussed previously, our emphasis is in conducting acquisitions in the most capital efficient manner possible and these acquisitions did not require any issuance of equity. Now let's turn to page six for a key update to the ROFO pipeline. The transaction announced today included two additions to the ROFO agreement, the Buckthorn Solar and Hawaiian Utility Scale projects. These assets throw in 234 net megawatts have long date PPAs and are expected to have commercial operations dates of 2018 and 2019. This increase provides NYLD greater transparency around growth between 2017 through 2020 and further diversification of the overall portfolio with additional solar and the ROFO. With that, I will turn it over to Chad to review the financial summary.

Thank you, Chris, and good morning everyone. Turning to Slide 8. Today NRG Yield announced fourth quarter adjusted EBITDA of $207 million and cash available for distribution or CAFD of $62 million. For the full year, adjusted EBITDA was $899 million, and CAFD was $311 million, both exceeding the update financial guidance provided on the third quarter earnings call this past November. As discussed on the November call, NRG Yield benefitted from strong business outperformance through the third quarter, primarily from wind and this continued through the fourth quarter as well. Additionally, fourth quarter results were positively impacted by lower maintenance CapEx and an insurance payment from a 2014 event at the Wildorado wind facility. NRG Yield also delivered on its dividend growth commitment by increasing its dividend per share by over 16% since the fourth quarter of 2015. Due to the strong CAFD earned in 2016 NRG Yield maintained dividend growth at a low payout ratio of 56% providing additional organic cash flow to invest in the platform. To support NRG Yield's growth, in 2016 we raised over $570 million of new capital through the issuance of corporate and project level debt which after deployment resulted in $215 million of investable cash and a fully undrawn revolver. Importantly, we achieved this enhanced financial flexibility without having to access the equity markets and while maintaining a stable ratings outlook at our targeted levels. Regarding growth, I would like to highlight two investments made in 2016. First, I have discussed on the second quarter earnings call we were able to finance the acquisition of the 51.05% interest in CVSR accretively without having to deploy any corporate level capital. Second, NRG Yield invested an additional $80 million in the distributed solar partnership with NRG Energy, bringing total capital invested in the partnership to $170 million. Now let me spend a moment on the $183 million non-cash impairment loss that relates to the Elbow Creek, Goat Wind and Forward wind projects. These projects are in the tax equity wind portfolio that NRG Yield acquired a 75% interest from NRG Energy in November 2015. I want to first highlight that the financial performance from the portfolio of wind projects remain within our expectations and the impairments relating to these assets are primarily driven by accounting treatment. As a reminder, under U.S. GAAP, drop down assets are considered under common control by NRG Energy. Unlike traditional purchase accounting and third party acquisitions where assets are recorded at fair value based on the purchase price, when NRG Yield acquires projects from NRG, the assets are recorded at NRG'S historical cost. For the tax equity wind portfolio acquisition, the historical net asset cost recorded by NRG Yield was $369 million while in comparison the final consideration paid was $207 million. Under the common control accounting rules, NRG Yield retained the higher asset value and recorded the difference of $162 million to minority interest versus a direct adjustment to the basis in the actual property, plant and equipment. As further described in NRG Yield's financial statement and in accordance with GAAP, impairment testing occurs when there is a triggering event, which includes timing of acquisitions and annual budget processes. At the acquisition date in November 2015, we evaluated whether an impairment occurred per GAAP and concluded no impairment was required. However, based on testing completed during 2016, NRG Yield determined that the projects were impaired relative to the [PP&E] [ph] turning value on the balance sheet, which again was based on NRG's historical cost and not the consideration that NRG Yield paid at acquisition. And this is the key point I want to highlight. If GAAP had permitted NRG Yield to record the assets at fair value at the drop down in November 2015, the impairment announced today would not have occurred. Turning to Slide 9, 2017 financial update. As you can see on the left side of the Slide, in addition to reaffirming NRG Yield's dividend per share growth target of 15% through 2018, today we are reaffirming our full year 2017 financial guidance of $865 million of adjusted EBITDA and $255 million of CAFD which continues to be based on our achieving our median expectations of business performance through the year. Consistent with past practice, we will provide an update on full year guidance after the closing of today's announced drop down. At that time, we will also factor in actual results including the impact of the outage at El Segundo, which I will discuss momentarily. On the right side of the Slide, we present our normalized quarterly explanation of financial performance based on the current portfolio at median expectations and unaffected by today's announced dropdowns. Below that we provide an adjustment to the first quarter range accounting for the outage at El Segundo. In early January, El Segundo went into forced outage on both unit 5 and 6 due to increasing vibrations on successive operations at unit 5. In consultation with NRG Energy, which is NRG Yield's operations and maintenance provider, at the conclusion of the onsite inspection and in order to ensure safe and reliable operations, especially during the key summer months, the decision was made to replace the rotor. I am pleased to say that on February 24, El Segundo was brought back to full operation. We would like to express our gratitude to both the operations and engineering teams who worked tirelessly over the past month to bring the outage to a conclusion. As previously disclosed, the financial impact of the outage is anticipated to be approximately $12 million in CAFD. This excludes any potential warranty or insurance recovery and is reflected in the sensitivity as a decrease of 5% in the range of first quarter CAFD. To put this in context, if NRG Yield did not deploy any growth capital in 2017, and the portfolio performed exactly at median expectations, CAFD for the year would be below guidance as a result of the outage. Lastly and consistent with the sensitivities we provide to show variability in renewable energy production, NRG Yield's renewable portfolio has been impacted by the extreme weather in the western part of the United States. As a result of a strong and consistent van of Pacific storms, California and Arizona experienced their seventh and sixth wettest Januaries respectively over the past 123 years and these conditions have persisted through February. This has resulted in poor insulation and wind conditions with production in January at our solar in California based wind portfolios down 22% and 13% respectively relative to our median expectations. However, as presented in the table, the first quarter is NRG Yield's lowest range for expected CAFD, so weather conditions through the remainder of the year can offset current weakness. That said, when coupled with the El Segundo outage, we do anticipate financial performance in the first quarter to be below our median expectations. Moving to Slide 10. NRG Yield's successful capital formation activities in 2016 resulted in significant excess cash to deploy towards growth investment. As addressed on the third quarter call, we highlighted $280 million of investible cash through 2017, including $215 million of immediately deployable cash as well as $65 million expected to be generated during 2017. You will also see on this Slide that despite the outage at El Segundo, the strength in 2016 performance affords NRG Yield the same level of expected investible cash. And, importantly, we have commenced the accretive deployment of that capital with now $144 million committed since the third quarter call. This includes today's announced $130 million drop down and $14 million of fourth quarter investments in the distributed generation partnerships with NRG, leaving more than $140 million in cash available for deployment. When combined with our undrawn revolver and the ATM which is yet to be utilized, NRG Yield has approximately $730 million in capital sources currently available to drive accretive growth. And with that, I will turn the call back to Chris for closing remarks.

Thank you, Chad. Turning to page 12, I would like to take a moment to address NYLD from a macro perspective given today's uncertain political and regulatory climate and with considerable speculation around economic and tax policy. In thinking about the risk of fed policy leading to rising interest rates, NYLD is well protected, given that all that's corporate debt and 93% of its project debt is fixed, providing limited CAFD exposure to rising rates. Furthermore, we have no foreign exchange exposure, further insulating our very stable portfolio of cash flow in a potentially increasing interest rate environment. Second, the potential repeal between power plants while modestly affecting medium-term growth prospects for renewables beyond 2020, this off limits the primary drivers of contracted growth in the U.S. state level policy and commercial and industrial company's demand for renewable power as well as federal tax incentives. It is our belief that states with a strong view of renewable portfolio standard will pick up demand or increase renewables in the event the federal government decides to be less supportive of the renewables overall. Finally, in terms of tax policy. While there is a great deal of speculation around the potential elimination of interest deductions, lowering of the overall tax rates, the addition of bonus depreciation, we believe that NRG Yield is well insulated from those risks. Our 11 year NOL run way also primarily by [indiscernible] depreciation, non-reliance on tax perks, provides a shield against potentially turbulent tax policy changes. Additionally from our view, a change in tax deductions regarding renewables such as the PTC or ITC, would primarily impact developers with project PPAs based upon certain assumptions around tax value and tax equity financing. NYLD with no development activity is not subject to the same level of risk embedded in those PPAs and cost to construct. As NYLD merely values the cash flows inclusive of tax implications, determines purchase price. Overall, we think that NYLD is in a strong position to deliver on the growth goals in a fluctuating interest rate environment and under a variety of tax policy outcomes. Turning to Slide 13. In terms of 2017, our key financial goals are to deliver on growing our dividend by 15% per share and achieving our financial guidance. We also expect to continue demonstrating our ability to conduct efficient capital to drop downs from our sponsor, third party acquisitions, or additional growth through non-ROFO opportunities like UPMC and Utah. While it was taking longer than anticipated, we continue to pursue strategic partners on both the development and capital side and think that these efforts will bear fruit in 2017 once the regulatory and tax policy volatility abates. Finally, we will maintain our strong balance sheet and financial flexibility as we move through the year, as it provides us with the opportunity to move quickly when opportunities arise. Thank you. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Michael Lapides with Goldman Sachs.

Congrats on a good 2016 and today's drop down announcement. Just curious, how you are thinking about -- when I think about the rest of the ROFO that’s sitting up at NRG, whether NRG Yield is the logical owner of an asset like [indiscernible] where there has been a lot of variability in the output levels. And how you are thinking about longer-term, whether you want your tilt to be more wind versus solar or vice versa?

Sure. Thanks, Michael. I think from our perspective, [indiscernible], the nature of the asset is better held of NYLD. I think as I have indicated before, we want the project to season a little bit and that’s why as we think about it as a drop down candidate, it's probably not a 2017 drop down. For us to really look at it and I think for NRG frankly to also get decent economics, the generation under the machine. Kind to get a little bit more of its lights underneath is in terms of timed. And so for us we tend to think about it as much more kind of a 2019 drop down candidate or in that time frame not the near term. So to answer your question, we I think are looking for [indiscernible] to get a better generation history to be able to determine value and we will kind of see at that time if it makes sense. Is that make sense, for that question?

Yes. And then on the question about preference for wind versus solar?

Sure. We don’t really have a preference per say. I think that the lower volatility characteristics of solar are definitely a positive but it's not as though that we necessarily looked for specific percentage around a solar part of our book or wind. Sometimes we just ask for higher return parameters on wind and solar to account for that variability. So more solar in general we think is kind of a good thing because it tends to have less volatility. But it's not as though we have specific percentage targets that we go after.

Got it. And one, just, 2017 guidance question. Can you remind us why '17 guidance is below the '16 actuals?

Sure. I will kind of give an overview and let Chad go through the details. But a large part of that is kind of, one, the outperformance that we had in our renewable portfolio, especially we kind of bring back to the P50 case for 2017. And, two, there were some specific debt service timings that hit in '17 and not in '16, but, Chad, I will let you go through for it.

Yes. I mean, Michael, without the detailed part, I think the best thing to do is to go back to the third quarter presentation because we provided a pretty decent reconciliation at that time. But to Chris' point, all the financing or most of the financing that we executed last year that underpinned the $570 million that I referenced, both the unsecured notes as well as the financing up a thermal entity and even CVSR. A lot of the way the timing of that debt service worked is it didn’t really hit in 2016, it was really in 2017 and as you know, CAFD is after debt service. So we pointed that out last quarter just to acknowledge that. So I think it's Slide 11 of the third quarter deck. So if you look through that, that should get you the reconciliation. If you have any follow up, I am sure Kevin or Lindsay can you walk you through.

Your next question comes from Greg Gordon with Evercore ISI.

So if I start with Slide, I am looking at both your decks here as per your -- now, if I look at the current guidance on Slide 9, in the upper left. Adjusted EBITDA, CAFD. To get to more or less to a sense of where you actually think you are for the year, I would just add -- I add the drop and then I subtract the El Segundo outage cost, and then I have to have some perspective on what the weather impact is going to be in Q1, and that would get me to a sort of where I would need to be in terms of an actual pro forma EBITDA and CAFD for the year. Any other factors that have changed since the Q3 guidance update that we need to be cognizant of?

In general, Greg, I think that does gets you there. The only caveat I would have is that the 13.3 is, if you look at the footnote kind of the 2018 to 2022 because it depends on exactly when we close. In 2017, but other than, but, Chad, that basically are the main factors.

Yes. So I offer two things up. I think with respect to the comments I made. If you look at that range with the impact of El Segundo, given where we stand, you are definitely at the lower end on that first quarter range. Because of the impact on what we are seeing on the renewable side. With respect to the acquisitions drop down today or announced today, we do anticipate those will be equity method. So those will be unconsolidated entities. So bear in mind, and to Chris' point, what that generally means is that timing of when we close, does inform the CAFD we had realized during the year because that will tie more directly to the actual timing of these distributions. So said another way, if you had distributions three times a year and the first distribution happens before we close, you would only pick up two of those, if you will, in the current year. So unfortunately, it is going to be tough to offer exactly what that would look like on a pro forma basis so we will have to, again, we will make that update once we close the transaction.

Great. And one final question, and I apologize if you commented on this in your opening remarks because I was distracted by a bunch of other earnings this morning. You do have remaining investible cash through 2017 of $145 million, which is on Slide 10. Should it be our assumption that some of that will get consumed through further potential negotiations with NRG or are there some sort of natural unexpected drop downs associated with your continuing, sort of consuming of DG megawatts as they get realized or how should we think about further potential drops this year.

I think the answer frankly is yes to both. One could be drop down, namely Minnesota that we talked about, the 25% of the EME book that we kind of don’t have and it was referred to as EME wind or other DG dropdowns. And then also we constantly try to look at third part acquisitions as well. So all those sources could use up the 145.

Yes. Great. Just for what's it worth, the DG portfolio is roughly $66 million, to be precise, $66 million remaining under the original commitment. So subject to the timing of when those are actually deployed. There is obviously sufficient cash there to fund the DG business.

Your next question comes from Keith Stanley with Wolfe Research.

On top of the use of cash, how comfortable would you be in tapping the revolver further for acquisitions before you utilize the ATM?

I mean it really depends. I think the revolver you look at it, it's more of a temporary facility in terms of capital, frankly it is. So I think from our perspective, it's not necessarily that we would use the revolver before the ATM. It kind of depends on market conditions. So we could use it before the ATM or if the market is right, we could issue under the ATM first and under the revolver. I think just because the amounts are so small, it's really a cash timing between the two.

Okay. And then on the strategic partners discussion. Did I hear you right, Chris, that potentially pending tax reform and I guess maybe the absence of FERC quorum. Is that playing a role in delaying potentially finding partners?

Yes. Much to my disappointment and I wish the earnings call targeted March, it happened after the election versus before, unfortunately. One of the key things I talked about with all of you over the months is that the benefit of giving price certainty to a developer. And when tax policy which obviously underpins a lot of the economics of renewable projects is a little bit up in the air as it is today. It is kind of difficult to really give that price certainty to a developer and think about what that means in terms of a [paygo] [ph] structure on PTC as those type developments. So to your point, those are kind of creating issues more we were in the third quarter of 2016.

Okay. And last one. Do you need FERC approval on these drop downs that you are announcing today?

No, we do not.

[Operator Instructions] Your next question comes from the line of Paul Ridzon with KeyBanc Capital.

Do you have a sense of when these latest drops will probably actually occur?

Late first or early second quarter, I would say.

And then just, Chad, your comments around the distributions. Whatever distribution is the first distribution made, would that kind of be prorated for the proportion that you own the assets?

No. Sorry Paul. So because of the equity method, basically CAFD would be based on our actual amount of CAFD.

For the full year?

Yes, exactly. Yes. Full year subject to what is remaining when we close. So, again, I will give you the example, again saying this is the day but let's say you actually close at the end of March. Any distributions from April through December would be factored into the CAFD results or the expected performance.

So it's prorated?

Well, if the question is over the course of the year, yes. So maybe to just answer the question a little bit differently. 13.3 is a full year number so any distributions that would typically happen between January 1 and March 31, if we were to use that as a closing date, would not be included in our 2017 update.

Got it. And what would the seasonality of these assets be? Kind of consistent with the rest of your portfolio?

That won't be -- I can't say that off the top of my head. I know that summer is obviously much more important for insulation for solar but because our portfolio is pretty diversified, I don’t think it's that different than our other solar assets. But in general, with precision, I don’t have that off the top of my head.

And that concludes today's question-and-answer session. I would like to turn the call back to Mr. Sotos for any closing remarks.

Well, thank you, and once again thanks everyone for attending and look forward to seeing all of you as we meet investors on road show. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.