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NRG Yield, Inc. (NYSE: NYLD ) Q1 2016 Earnings Conference Call May 5, 2016 10:30 AM ET Executives Kevin Cole – Senior Vice President-Investor Relations Mauricio Gutierrez – Interim President and Chief Executive Officer Christopher Sotos – Head of Strategy and Mergers & Acquisitions, Director of NRG Yield Kirkland Andrews – Executive Vice President, Chief Financial Officer and Director Analysts Grier Buchanan – KeyBanc Capital Markets Inc. Angie Storozynski – Macquarie Group Shahriar Pourreza – Guggenheim Partners Michael Morosi – Avondale Partners Steve Fleishman – Wolfe Research Operator Good day, ladies and gentlemen. And welcome to the First Quarter 2016 NRG Yield Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to hand the meeting over to Kevin Cole, Head of Investor Relations. Please go ahead. Kevin Cole Thank you, Karen. Good morning and welcome to NRG Yield’s first quarter 2016 earnings call. This morning’s call is being broadcasted live over the phone and via the webcast, which can be located on our website at www.nrgyield.com, under Presentations & Webcasts. As this is the earnings call for NRG Yield, any statements made on this call that may pertain to NRG Energy will be from the perspective of NRG Yield. 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 vary differently. We urge everyone to review the Safe Harbor in today’s presentation as well as 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’ll refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and the reconciliation to the most directly comparable GAAP measures, please refer to today’s presentation and press release. Now, with that, I’ll turn the call over to Mauricio Gutierrez, NRG Yield’s Interim President and Chief Executive Officer. Mauricio Gutierrez Thank you, Kevin, and good morning, everyone. Joining me and also providing remarks this morning are Chris Sotos, the incoming CEO; and Kirk Andrews, NRG Yield’s Chief Financial Officer. I am very excited about today’s call. We are reporting strong result for the first quarter announcing the transition of the CEO position and moving forward with our growth objectives. I’m sure many of you have participated in NRG’s first quarter earnings call, given the relationship between NRG and NRG Yield. But let me just repeat what I said on that call. NRG Yield remains a critical part of the overall NRG Energy strategic platform and NRG is committed to certainty and visibility in both conventional and renewable development to reinvigorate the virtuous cycle between the two companies. In my last quarterly call, I discussed my goal for 2016, deliver on our financial commitment to grow our dividend by over 15% in 2016, enhance our growth pipeline through access to NRG’s development efforts, ensure confidence in governance and management structure of NRG Yield, and to evaluate alternative financial solutions to facilitate growth during this period of equity market dislocation. I’m glad to report that we have or are on track to achieve many of these goals. Turning to Slide 3 for the business updates, NRG Yield continues to validate its value-proposition through offering a steady high-performing source of dividend growth to our shareholders. During the first quarter of 2016 the company achieved $188 million of adjusted EBITDA and $43 million of cash available for distribution. Additionally, I am pleased to say we are also increasing our quarterly dividend for the 10th consecutive time, and are reaffirming our full year guidance including our target dividend growth of 15% annualized. Next, I am pleased to say that we continue to push forward on our growth plans in concert with NRG. In addition to executing across our distributed generation, which now stands at $141 million invested through the first quarter, NRG has announced its intention to offer its remaining 51% interest in the 250 megawatt California Valley Solar Ranch project. You should expect an update on this transaction during the second quarter earnings call. As interim CEO, I evaluated with the NRG Yield Board of Directors what we believe is the optimal management structure, and today announced that Chris Sotos, NRG Energy’s current Head of Strategy and Mergers & Acquisitions and current Director of NYLD, will be the dedicated CEO for NRG Yield, employed solely by NRG Yield. While over the next several weeks we will be conducting an outreach with investors to introduce Chris. He has had a long and successful career in the power sector with over 20 years of experience, 12 of which at NRG Energy. Chris has managed the team that created NRG Yield, been part of the board since its IPO, and was responsible for identifying, evaluating and executing on many of the acquisitions that make up Yield today and its ROFO portfolio. Chris will assume the CEO role effective from May 6 and be able to focus entirely on the company strategy, capital structure and path forward by the end of the second quarter. Representative of the strong strategic alignment between two companies, I will assume the role of Chairman of the NRG Yield board. John Chlebowski will return to his role as the Lead Independent Director. And the board appointed John Chillemi, NRG’s Head of Business Development to fill the existing vacancy on the board. Of course, I and the board will ensure a seamless transition of the CEO position. Chris is the first fulltime employee of NRG Yield, and he will continue to evaluate the optimal management structure and perhaps field out additional few dedicated roles. I appreciate our investors have been through a lot in the past year. And as you all know well, the top priority of mine and the NRG family is to offer investors a simpler and more visible story with consistent and regular interactions with the investment community. As so, in this vein, Chris, I ask that he will be able share a few words to share our visibility and strategy to shareholders, of this intention to lead Yield with the same dividend growth-oriented principals set forth at our IPO. Chris? Christopher Sotos Thank you, Mauricio, and good morning. It gives me great pleasure to address you as not only the incoming CEO, but as the dedicated CEO to NRG Yield. Mauricio has given you a good look at my background and fit for the role, so I won’t repeat his comments. Instead, I’ll keep my remarks brief, but I did want to reassure the investor community that you should expect the continuation of the core fundamental drivers and objectives behind the value proposition of NRG Yield that have made it successful. As Mauricio highlighted earlier, I played a key role in the creation and execution of NRG Yield’s goals and objectives. And we should expect this strategy to remain consistent, although I will explore the possibility of expanding its dedicated team to ensure that NRG Yield is always focused on consistent value creation for our shareholders, to take advantage of opportunities throughout all parts of the cycle. Now, let me turn the call back over to Mauricio. But again, I want to thank you for the time today. I look forward to meeting and interacting with you over the weeks and months ahead. Mauricio Gutierrez Thank you, Chris. And with that, let me turn it over to Kirk, for a more detailed discussion on our financial result. Kirkland Andrews Thank you, Mauricio. Beginning with the left slide on Slide 5 of the presentation, during the first quarter NRG Yield delivered favorable financial results with adjusted EBITDA of $188 million and CAFD of $43 million. Our performance in the first quarter was positive across all of our settlement. And NRG Yield continues to benefit from the diversification of this platform, where approximately 45% of our adjusted EBITDA comes from the conventional and thermal segment, and 55% from renewable. Specifically, in the renewable segment, first quarter results benefitted from strong production across both our solar and wind fleet. This especially indicates that also wind during the quarter, where production about 17% above our median expectation. The wind resources also continues to exhibit significant volatility however, and while the first quarter was quite strong, production during the month of April was peak relative to our expectation. Today, NRG Yield is also reaffirming full-year guidance, including adjusted EBITDA of $805 million and CAFD of $265 million. Finally, consistent with our commitments to investors to reach $1 of annualized dividend per share by the fourth quarter of 2016, NRG Yield paid dividends of $0.225 per share in the first quarter. We are pleased to announce the 10th consecutive quarterly increase to $0.23 per share in the second quarter of 2015, placing us on a trajectory to meet that goal by the fourth quarter. Moving to the right on Slide 5, NRG Yield also continued to execute on commitments to its business renewable and residential solar partnerships with NRG Energy. In the first quarter, NRG Yield invested in incremental $40 million and $11 million into those two partnerships respectively. As you can see, we have now cumulatively deployed approximately $115 million of capital into those partnerships. Resulting in joint ownership of nearly 1,000 megawatt of long-tenure, fully contracted, strong credit quality, geographically diversified, and most importantly, strong cash flow producing disturbed solar assets. NRG Yield maintains an additional $135 million of capital commitment to these partnerships, including $53 million for residential solar. However, given NRG’s pivot with respect to the residential solar business, as was discussed on the NRG earnings call earlier. NRG Yield now expects to invest only around $20 million more in the residential partnership. Importantly, this change does not affect NRG Yield’s perspective on residential solar as an investable asset class nor does it affects our 2016 financial guidance or impacts our ability to meet our objectives of 15% annualized dividend growth through 2018. As a result of our reduced expectation for capital deployment for the residential solar partnership near-term liquidity will be enhanced providing flexibility to invest across other areas of the business. Now turning to Slide 6, I want to take a moment to emphasize an aspect of NRG Yield’s capital structure that is often underappreciated, which is the natural deleveraging effect which results from the fact that a majority of our balance sheet debt was with amortizing non-recourse project financing. As many of you know this project debt is sized relative to the tenure and cash flows of the long-term contracts of our projects, which are with investment-grade counterparties, all while committing project distributions that underlie the dividends we then pay to our shareholders. This benefit is not reflected in our cash available for distribution metric, which represents cash available after debt service and that is both principle and interest. As shown on the chart over the next five years alone, based on the current portfolio NRG Yield will repay approximately $1.5 billion out of this project debt across its existing portfolio, an amount that is over 50% of today’s equity market capitalization, to put this in perspective. Second, this natural deleveraging also increases NRG Yield’s long-term flexibility on growing the platform, as it provides increase in capacity, finance, future accretive growth, especially at times when the equity markets may not be as accommodating. With that, I’ll turn it back to Mauricio for closing remarks or Q&A. Mauricio Gutierrez Thank you, Kirk. And before we turn to Q&A, let me provide some closing thoughts. I hope my excitement for Chris becoming the new dedicated CEO is coming through on today’s call. I have known and worked closely with Chris over my entire career at NRG. And I know he’s the right person at the right time for NRG Yield. As I move to Chairman of the Board I am in a unique position of being able to say that from the perspective of both companies that fundamental drivers behind the value proposition of NRG Yield have not changed, nor would I expect them to change with the naming of Chris Sotos as a CEO. Chris will not be available during Q&A, but I can assure you he is eager to engage with you in the days and weeks to come. So with that, operator, we’re ready to open the line for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] our first question comes from the line of Matt Tucker from KeyBanc. Grier Buchanan Hey, guys. This is Grier Buchanan on for Matt. Nice quarter and thanks for the question. Just a couple of follow-ups on home solar restructuring, one, on the monetization of those assets, could you just share your thoughts from the NRG perspective on why third-parties and Sunrun and Spruce rather than NRG Yield. And then, two, any chance you could quantify the expected unit economics on those residential system sales? Thanks. Kirkland Andrews Sure. It’s Kirk. I will address the first part of that question. Certainly, we are mindful of the opportunity around residential solar energy NRG Yield is concerned. But with respect to the partnerships, I think they achieved two objectives. One of which I’ll make reference to in the remarks that were made by NRG on the earnings call earlier today. And that is that it comports a lot more closely with the financial metrics that NRG’s investors are familiar with and value, and that is EBITDA. As you probably know, in the dropdown context, NRG is still consolidating to all of that. And so the long-term lease revenues and expenses associated with that will continue over the course of the remaining life of the lease, rather than in the monetizing open area. The other important thing is from a financial complexity standpoint, it is simpler. And that is certainly a benefit for NRG Yield. The partnerships that was announced this morning does not include any ongoing relationship or importantly taxed equity. It is simply a monetize and hold. And because we see a more robust opportunity going forward, especially through the distributed generation of what NRG calls business renewable, as I said in my remarks this is an opportunity to free up capital as we expand and diversify the portfolio, not only to take advantage of the growing portfolio that we see from NRG on the renewable side, business renewables and utility scale, but also expanding the opportunities across the asset class. So I think this arrangement and certainly in the near-term works for both parts of the production. Grier Buchanan That makes sense, and certainly consistent with the announcement back in February. Along those lines, could you just clarify – I’m looking at Slide 5, the remaining capital of $135 million in that partnership. There is $53 million earmarked for residential solar, but you disclosed that only expect to invest another $20 million. So will that $33 million, I think you mentioned that could be – that’s liquidity that could be used for other purposes, will that be allocated to business renewables or should we just think about that as TBD. Kirkland Andrews Yes. When I talked about that – when I referred to enhancing liquidity, obviously, liquidity is both the function of where it currently stands and prospectively from a financial planning standpoint. On the previous trajectory, as we would, given the magnitude of the capital remaining under that program that $135 million, our financial forecast in the use of about liquidity as we roll forward reflects the anticipation of utilizing that. We revised that anticipation that all but about $30 million, if you just do the math there, it’d be more than $35 million we’re now going to use, that gives us incremental financial flexibility as move forward because we are not deploying that $30 million. And so it’s certainly the use of proceeds, but it’s less likely we see the complete, the remainder, under the business renewables, because that’s already part of our financial. And that’s $82 million that’s referred to in the [page that you referred] [ph]. It’s more likely to be used for other opportunities. As NRG has announced its intention and has made that intention known to NRG Yield in the second quarter. CVSR certainly can be used to fund that, but importantly relative to the path we were on board that does turn out to be the case. That’s $30 million of incremental capital for existing, example, CVSR. That would not further tapped into, if you will, the liquidity reserve relative to the path we are on there. So on that first $30 million, it’s neutral to the plan and yet expands the portfolio. Grier Buchanan Got it. Thanks for the time. Mauricio Gutierrez Thank you. Kirkland Andrews You bet. Operator Thank you. And our next question comes from the line of Angie Storozynski from Macquarie. Angie Storozynski Thank you. So I have two questions, one is you mentioned a potential alternative finance inclusion, so I wanted to know, what they are? And, secondly, would you consider teaming up with some developer or, I don’t know, an infrastructure investor to provide NYLD with more of a visibility into long-term growth? Thank you. Mauricio Gutierrez Hi… Kirkland Andrews Sure, Angie. Go ahead. Mauricio Gutierrez Hi, Angie. So I will say that to your latter part of that question, the answer is, yes. We are exploring opportunities to potentially partner with infrastructure funds or additional developers that can enhance the growth and the – for the pipeline that we have. But, clearly, going forward, that will be Chris’ priority. For the first part of the question, Kirk? Kirkland Andrews What I’ll say in the near-term and I’m going to talk about this in the context of CVSR. And I think, I mentioned this on the last call, in our fourth quarter earning call. CVSR is among the assets currently, although I referenced in my prepared remarks the fact that we have a natural deleveraging portfolio. Where CVSR currently stands today, the level of debt there, which I believe a little less than $800 million, and that’s across the entirety of CVSR. Relative to the overall cash flow there is incremental debt capacity there as it is today. And that is probably the best example in terms of alternative uses of capital to help finance dropdowns or free up capital as we move forward. But we are certainly leaving no stone unturned, but I think in terms of near-term execution opportunities, it’s reasonable to expect that that is probably most likely among them and that is taking advantage of that excess debt capacity of CVSR. Angie Storozynski So there’s no project-level debt, but doesn’t it eat into cash flows, because that set amortizes? Kirkland Andrews Yes, it certainly would be lower than the existing cash flows today. But we’d only do so if it was ultimately accretive, so the way to think about it is, there is an existing level of CAFD at CVSR today. Some portion of that would be used for debt service. The remainder, you can think about as equity in cash flow on the dropdown. And, of course, what that means is, the remaining portion of the purchase price not funded by debt is also lower. So we’re obviously very focused on making sure that we can see a path clear on CVSR as well as future dropdowns or acquisitions that we can enhance the CAFD. So that the CAFD along the equity cash flow on the excess capital above and beyond that project financing is accretive relative to the current CAFD. That’s deal is probably the highest level of importance for us. Angie Storozynski Okay. Thank you. Operator Thank you. And our next question comes from the line of Shahriar Pourreza from Guggenheim. Kirkland Andrews Good morning, Shahriar. Shahriar Pourreza Hi, everyone. How are you? Just real quick, just one question, on the delevering slide that you have on slide 6, so when you think about sort of the residential reduction and then solar spend plus the natural delevering you’re seeing at the business through amortization of the debt, you’re kind of making comments around CVSR and being able to have some additional capacity at the project level. Is it fair to say that given sort of where this amortization is heading and the delevering is heading, can you fund the growth beyond 2018, without hitting the equity markets, for tapping the equity markets? Kirkland Andrews I would say, we could certainly use that as supplement. But I would not over the long run in terms of really funding substantial amount of growth using loans [ph] for example on the 15%. I think that is certainly necessary and helpful, but is not sufficient to really continue that as meaningfully beyond anything. Shahriar Pourreza Any room to back-lever? Kirkland Andrews Yes, it’s something – I mean, that’s something, so that’s the best way I’m trying to think about that, that’s a variation of it I think can get also true. But if you think about back-levering at our corporate level, very importantly, that is not something that we would do today, because we are very focused on maintaining adherence to our balance sheet principles and the metrics that we laid out there. But that’s certainly an opportunity, but we’d have to do so without tapping into corporate debt at the current CAFD level. Shahriar Pourreza And then just, Kirk, one last thing on the equity market, is it still sort of remaining closed? Kirkland Andrews Well, I think closed is a function of two things. One, in terms of the efficiency, I mean, obviously we haven’t seen a whole lot of Yield paper coming out in the last year. And it’s certainly – our concern is sort of the file to offer spread in terms of the discount. We want to have confidence if that’s manageable, because we’re very focused on raising equity we can deploy creatively. And the other component is just the overall cost in capital that’s implied by the current share pricing. I said in the past, and I continue to feel that based on where we’re trailing are today we’re not in a hurry to issue at these prices. But our equity issuance is both the function of an absolute and a relative. Absolute, I just spoke to. Relative means that the equity we issue at whatever price, the use of proceeds have to represent clear accretion both from a CAFD standpoint and on total return standpoint. Shahriar Pourreza Excellent. Thanks guys. Operator Thank you. And our next question comes from the line of Michael Morosi from Avondale Partners. Michael Morosi Hi, guys. Thank you for taking the question. Should I interpret the commitment to growth or the renewed commitment to dividend growth as saying that, NRG Yield is kind of stepping away from the notion of the Yield co. as asset manager or that NRG yield is willing to kind of trade around its portfolio and basically view its existing asset base as a potential source of funds? Kirkland Andrews Sorry, Mike, I am not completely clear on your question, with respect to NRG Yield. Can you clarify? Michael Morosi Yes, I mean, basically doing your – basically being a buyer and seller of assets, as a way to manage shareholder return? Kirkland Andrews Yes. So with real state overall, although we have no current intentions to monetize an asset if that’s what you’re thinking about. But the best way to think about it is the principle or the philosophy behind that is, we are not wed to assets. We are wed to growing CAFD per share. And so, if there is an opportunity to monetize an asset at value, we are certainly agnostic in terms of the portfolio. But we are not indifferent as to be effect of that transaction or any. It has to be accretive to grow that CAFD per share. Michael Morosi That’s fair. Thanks. And then, as it relates to other potential equity offerings. We’re hearing more and more about companies looking at ATM-type offerings. Is that something that you consider? Kirkland Andrews We have, yes. I certainly think that’s a tool in the tool-chest. But, obviously, in terms of order of magnitude it’s helpful. But I don’t think at this juncture it’s something that that we’re in a massive hurry to put in place. I think as we can – hopefully, we need to see their trajectory in terms of the appreciation in the share price. And that is certainly a lever that we would pull, but it doesn’t substantially move the needle in the near-term in terms of building dry powder for a significant acquisition, but it is certainly helpful. Michael Morosi Very good. Thanks a lot, guys. Operator Thank you. And we are approaching the end of the call. We have time for one more question. Our final question for today comes from the line of Steve Fleishman from Wolfe Research. Steve Fleishman Hi, good morning. Mauricio Gutierrez Hi, Steve. Steve Fleishman Kirk, just on the slide with the debt pay-down, and the like, project debt pay-down, I don’t know if there is a way to give a sense. But obviously you – because the PTAs don’t last forever, you really need the debt on the projects to be paid down over the life. So it’s hard to kind of judge, how much, if any, extra debt capacity is really created by that versus the debt reduction that you actually need. Is there a way to kind of think of a sense of that? Kirkland Andrews Yes, I think that’s a fair question, Steve. So I’ll answer it in two ways. One, certainly I gave the example of CVSR today. And that is something that I continue expect to see us if we’re able to quantify by action. But let me think back on a way that we can give you some sense of what that capacity is. That said the other part of that equation, which I’ve been very mindful of and was at the time that we came out the IPO and continue to be, in addition to that debt capacity piece, the natural delevering nature of those particular assets means that we remove the debt service. Basically, it’s the same point as the contract rolls off, which gives us a tremendous amount of flexibility on a re-contracting basis as we move forward. Obviously, they continue, that’s CAFD. And if it has to be on a non-levered basis, they will be it, but there is a lot of cushion with the removal of that debt burden on an asset-by-asset basis. And the other thing I’d say is that, I think you’ll find in that – although we didn’t go through in the specific part of the – the first part of your question, behind that Page 6, which we included, I think the pro-rata share of the equity method part of the portfolio, CVSR currently among them, but I think we gave you an asset-by-asset table in the appendix, back on I think Page 13. So that at least gives you more granularity behind that. But let me think on a way that we can give you a little bit better sense of that debt capacity on what I’ve alluded to on CVSR. Steve Fleishman That’s helpful. Maybe I’d ask the question in a more simplistic way, which is that, based on your view of the portfolio, you would say that there is room for excess – for additional project debt overall. Kirkland Andrews Yes. Steve Fleishman And that’s part of it, so what the exact number is, fine. But you believe there is room to kind of add project add. Kirkland Andrews Yes. Steve Fleishman Okay. Kirkland Andrews And I would be willing to add to that that I think that CVSR is probably the most substantial example of that right now. Steve Fleishman Okay. Okay. Thank you. Kirkland Andrews You bet. Mauricio Gutierrez Thank you. Operator Thank you and that concludes our question-and-answer session for today. I would like to turn the conference back over to management for any closing comments. Mauricio Gutierrez No, I think that’s it. Thank you for your time. Christopher Sotos Thank you. Operator Thank you, ladies and gentlemen. Thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone have a good day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. 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