NRG Yield's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: NRG Yield, (NYLD)

NRG Yield, Inc. (NYSE:NYLD)

Q4 2013 Results Earnings Conference Call

February 28, 2014 10:30 AM ET


Chad Plotkin - Vice President, Investor Relations

David Crane - Chairman, President and CEO

Mauricio Gutierrez - Chief Operating Officer

Kirk Andrews - Chief Financial Officer


Paul Ridzon - KeyBanc

Neil Mehta - Goldman Sachs

Paul Zimbardo - UBS


Good day, ladies and gentlemen. And welcome to the NRG Yield Full Year and Fourth Quarter 2013 Earnings Call. My name is Denise, and I’ll be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Chad Plotkin, Vice President of Investor Relations, please proceed.

Chad Plotkin

Thank you, Denise, and good morning, everyone. I'd like to welcome you to NRG Yield's full year and fourth quarter 2013 earnings call. This morning's call is being broadcast live over the phone and via webcast, which can be located on our website at

You can access the call, associated presentation material, as well as a replay of the call on the Presentation and Webcast section of our website, because this call including the presentation and Q&A session will be limited to 45 minutes. We ask that you limit yourself to only one question with just one follow-up.

In addition as this is the earnings call for NRG Yield, any statements made on this call that may pertain to NRG Energy will be provided from NRG Yield's perspective.

Before we begin, I urge everyone to review the Safe Harbor statement provided in today's presentation which explains the risks and uncertainties associated with future events and the forward-looking statements made in today's press release and presentation material.

We caution you to consider the important risk factors contained in our press release and other filings with the SEC that could cause actual results to differ materially from those in the forward-looking statements, in the press release and this conference call.

In addition please note that the date of this conference call is Friday, February 28, 2014, and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this day. We undertake no obligation to update these statements as a result of future events except as required by law.

During this morning call, we will refer to both GAAP and non-GAAP financial measures of the company’s operating and financial results. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's press release and this presentation.

With that, I'll turn the call over to David Crane, NRG Yield's Chairman, President and Chief Executive Officer.

David Crane

Thank you, Chad. Good morning, everyone. Joining me today are Mauricio Gutierrez, which is -- who is NRG Yield’s Chief Operating Officer; and Kirk Andrews, NRG Yield’s Chief Financial Officer.

I am pleased to say, we are going to [mercy fully] brief today because we recognize that many of you may have just listened to NRG Energy’s year end earnings call and so we will get as quickly to the question-and-answer section to see if there is other things we can point out to you.

I have just a couple of slides, beginning with slide three, this maybe a statement OF the obvious, but we based on the tremendous start that we had in 2013, I am pleased to say that as we embark on our first full year as a publicly traded company, we are every well-positioned for 2014 and beyond.

Financially, we exceeded our target in 2013 for both adjusted EBITDA and cash available for distribution by delivering $244 million and $91 million, respectively. Strategically, we -- I’d like to take exceeded expectations by executing our first-ever third-party acquisition with purchase of Energy Systems company which allows us to expand our thermal business with a leading system in Omaha, Nebraska. We are very happy to have Energy Systems Company as part of the family.

This acquisition has offered us the opportunity to increase our financial guidance in 2014 as well as provide support for our first dividend increase, just before any impact of pending dropdowns from NRG.

Lastly on Slide 3 and speaking of drop downs by closing our convertible debt offering, we have increased our available liquidity which will augment our ability to drive accreted dividend growth as we begin the process of executing on these transactions with our parent company NRG Energy.

My second and last slide, Slide 4, they say that imitation is the serious form of flattery. The old cliché when we went out on the public offering for NRG Yield last summer, there weren’t too many comparables but as I guess, was expected based on successive NRG Yield, there have been other yield like vehicles being brought to market and were absolutely sure that there will be more in 2014.

So we will be in greater competition for your investment dollar but this is our first attempt. There are many to come to demonstrate to you that we feel that we offer superior yield vehicle. And we had advantages that we expect to move aggressively to keep because we think NRG Yield is the best company of its kind available for your investment dollar.

One other thing I want to say before I turn the call over to Mauricio is that we want to set expectations for you on future earnings calls. We know since many of you listened to both NRG and NRG Yield Earnings call, we know that we’re hosting two calls in one day may not be entirely productive use of your time or ours. We want to be respectful of your time.

So I just want to let you know that hosting future calls will be quite dependent on whether we’re in a position to provide you with incrementally material information. They may not have already gleamed from our press release or interim announcements when they occur throughout the given quarter.

Of course, even if we sort of skip the call in quarters to come, Chad Plotkin and the investor relations’ team will be available all the time 24 hours a day, seven days a week, 365 days a year to answer any questions you have.

With that, I want to turn the call over to Mauricio.

Mauricio Gutierrez

Thank you, David and good morning. Our portfolio performed well during 2013. Starting with safety on Slide 6, we achieved top-decile performance improving over our 2012 top-quartile results and we ended the year with 13 of 15 facilities without a single recordable injury.

In our conventional segment, our gas portfolio ended the year with 97% availability and reliability metric, a significant improvement over 2012, primarily attributed to increased availability of the GenConn Middletown facility.

In our renewable segment, the fleet ended the year with improved reliability over last year and met our contractual obligations. Our solar facilities have experienced higher than planned installation levels, resulting in production levels consistent with contractual level obligations and our wind generation was slightly lower relative to budget due to lower wind streams.

Our thermal business performed 13% better than prior year. Colder weather across our northern businesses increased steam production by 17% compared to last year. Power generation increased by 58% year-over-year mainly due to a conversion of the Dover facility from coal to gas and the full year operations of CHP at Princeton Hospital.

Finally, and as David mentioned on December 31st, we completed the acquisition of the district energy business in Omaha Nebraska. We are well underway on integrating this asset into our district energy business. It is our first such acquisition and a good example of our ability to rapidly execute on a value-adding wheel.

With that, I will turn it over to Kirk for a financial review.

Kirk Andrews

Thank you, Mauricio and good morning everyone. Turning to financial summary on Slide 8, NRG Yield is reporting fourth quarter adjusted EBITDA of $66 million and $8 million in cash available for distribution.

For the year, NRG Yield exceeded its previous guidance range with $244 million adjusted EBITDA and $91 million in cash flow for distribution or as we call it CAFD. The increase in CAFD was driven by a reduction in 2013 maintenance capital expenditures within our thermal segment.

Turning to our expectations for 2014, we are increasing our full year guidance for both adjusted EBITDA and cash available for distribution with $292 million and $115 million, an increase from $285 million and $103 million previously.

The increase in guidance was largely driven by the acquisition of Energy Systems Company, which was completed on December 31st, representing Energy Yield’s first third-party transaction and further enhancing cash flow for distribution beyond the significant growth potential represented by the right of first offer asset from NRG.

As I will explain in greater detail shortly, NRG Yield is also initiating current quarter guidance, beginning at the first quarter of 2014, where we expect adjusted EBITDA and CAFD to be $61 million and meanwhile through the successful closing of our convertible debt offering and a subsequent exercise of the greenshoe provision.

We enhanced our year end liquidity position by raising a net $337 million, and now stand at $487 million in available capital on a pro forma basis. This increase in liquidity will further position the company to execute on its growth opportunities on an accretive basis through the acquisition of the NRG ROFO Assets or other transactions, as they become available.

Finally, as we indicated on our last call, NRG notified us of its intent to offer us four of the NRG ROFO Assets in 2014, and we have now commenced discussions with NRG on three of these assets, specifically TA High Desert, RE Kansas South, and EL Segundo, which combined represent approximately $30 million in cash available for distribution, a potential 10% annualized increase over our current CAFD guidance.

Turning to slide nine, NRG Yield benefits from our unique strong sponsor relationship with our parent company, NRG Energy. Through this relationship, NRG Yield has opportunities through the NRG ROFO Assets to acquire projects with an annual run rate of EBITDA of approximately $250 million and cash available for distribution of $100 million in the aggregate.

Overall, and moreover, NRG’s proven ability to successfully develop and acquire long-term contracted assets consistent with the NRG Yield investment profile and as demonstrated most recently in its announced acquisition of Edison Mission, which includes a substantial portfolio of what NRG has termed NRG Yield eligible assets, further underscores the long-term growth potential of its unique strategic relationship.

And finally, as I discussed with many of you since the IPO, and you can see on this illustrative chart on slide 10, we expect NRG Yield’s portfolio of contracted assets to experience some degree of seasonality in our annual results, wherein we expect quarterly cash available for distribution to be greater or less than 25% of our annualized expectations. All of this, of course, is expected and well within the surplus represented by our annual payout ratio.

However, as I discussed briefly in my opening remarks, in order to provide you greater visibility, we’ve elected to begin providing next quarter guidance, and to ensure there is no concern or confusion during quarters, such as this quarter where we would expect to see lower CAFD relative to our quarterly dividend, which as the year progresses will ultimately align with our annual payout ratio.

With that, I will turn it back to David for some closing remarks.

David Crane

Well, thank you, Kirk. I think I have been full of closing remarks today. So we will just open the lines to see if there are any questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Paul Ridzon with KeyBanc. Please proceed.

Paul Ridzon - KeyBanc

Just looking for an update, when you think the Edison Mission deal might close?

David Crane

Well, I mean, our best, we’re shooting to have it close by the end of the first quarter. And I think it’s going to be very close to the end of the first quarter. But, I mean, we don’t -- there is not a lot of swing in that right now. So I think that it’s never say 100% but that’s when you should count on.

Paul Ridzon - KeyBanc

Okay. Thank you very much.


Our next question comes from Neil Mehta with Goldman Sachs. Please proceed.

Neil Mehta - Goldman Sachs

Good morning. Long time no speak.

David Crane

Yeah. Neil, how are you Neil?

Kirk Andrews

Hi, Neil.

Neil Mehta - Goldman Sachs

Lot of change in last 30 minutes. And I guess, my first question is around distributed generation, you alluded to this on the last call, but what do you think the opportunity set could be for NRG Yield and how should we think about the timeline for the ramp?

David Crane

So, I mean, I think the opportunities set for NRG Yield, I mean, is enormous, I mean, its only limited by the size of the market. But for us, I wouldn’t say that we’re in the lead, the immediate, I think the next and the first thing in distributed that, well, NRG Yield would see if we have success in bundling together to see a nice sized projects, power purchase agreements and/or leases into sizes that sort of approximate the utility scale deals we are doing, that, I mean, I think that could overtime become the dominant sort of paradigm going into NRG Yield from the renewal side of the business. But I really think that as probably at least two years away from NRG Yield’s perspective. I don’t know, Kirk, do you have any different view on how quickly that might happen?

Kirk Andrews

Well, I mean, certainly, we’re seeing robust growth in the distributed generation space and I would agree conservatively within that two-year timeframe. But I think the central focus on our part especially NRG Yield is ensuring that as much as reasonably possible, we can have some degree of uniformity in terms of the terms around those contracts from a DG perspective.

So that, obviously, we wouldn’t dropdown individual projects of that size, but rather, I think, David has alluded to in a bulk. And in doing so we’ll be able to give our shareholders the assurance that aggregate portfolio of DG is consistent with the overall investment profile than NRG Yield.

And again, as I said at the outset, given the growth that we’re seeing in distributed generation is certainly within the realm of possibility. We may see opportunities to realize that a little sooner than two years. But, certainly, by the end of two years after NRG Yield, I fully expect that those opportunities would be available yes.

Neil Mehta - Goldman Sachs

And on the dividend, the 10% to 15% long-term guidance contemplate the upside that associated with data submission and if not, how do you think about when you reevaluate that target?

David Crane

I would say that, as we talk to a lot of our perspective investors in the IPO process. Clearly, the ROFO assets themselves gave us a long way to go in terms of delivering on that growth objectives. I certainly think that the EME assets which to be clear have not been offered to us by NRG, but just the magnitude of those assets on top of the ROFO themselves as a very least gives us the opportunity to achieve something towards the upper-end of that range.

And I think, given, certainly the opportunities that we see on third-party acquisitions that’s exemplified by what we successfully concluding closing on the transaction at the end of last year combined with the growing pipeline of opportunities NRG as on the development side. We feel very comfortable in our ability to deliver on that long-term objective of 10% to 15% growth beyond the five-year horizon

Neil Mehta - Goldman Sachs

Correct. Thanks, guys.

David Crane

Thanks, Neil. I hope to talk to you again next hour.


Our next question comes from Bob Zimbardo with UBS. Please proceed.

Paul Zimbardo - UBS

Hi, this is Paul. Just a quick question. With the Energy Systems still behind you, how do you characterize kind of your desire and pace for additional third party deals going forward?

David Crane

Well, I mean, I would say that I’ve been very pleasantly surprised by the way that the Energy Systems deal went down. And to be frank, I was a little bit concerned that since it was being acquired by NRG Yield, while NRG itself had a bunch of its own M&A activity going on there that might get serve that there was a chance it would drop through the cracks and all that. And the integration of the Omaha business has been extraordinarily smooth. So I was very encouraged by it. And to the extent that there are acquisition opportunities where it sort of makes no sense to come through NRG or the acquisition currency that would be expected by the seller would be a yield like vehicle, I think we're interested in that as long as it’s accretive to NRG Yield shareholders.

Paul Zimbardo - UBS

Okay, great. And just a clarification question. On the last call, did you say we should have a decision on the ROFO Assets in the next 60 days?

Mauricio Gutierrez

Yes. And to be clear on the ROFO Assets specifically, the three that I had indicated those are being El Segundo asset and the two smaller solar assets that we’re in discussions with NRG on. My anticipation, I think my comment was I expected that as you said within the next 60 days and that was in reference to those specific three assets of the six ROFO.

Paul Zimbardo - UBS

Okay, great. Got it. Thanks. Have a good weekend.

David Crane

Yeah, thanks.


(Operator Instructions) We have no further questions. I would now like to turn the call -- my apologies we actually have a follow-up question from Neil. Please proceed.

Neil Mehta - Goldman Sachs

Hi, guys. Sorry, I couldn’t resist the urge to ask one more question. As you think about financing here and this might be too early to comment, but you've done the convert here for the first stage of the drop downs, is there any incremental equity that you -- or convert that you think would be required?

David Crane

I think on a probability basis, if I look at the overall liquidity, that's currently there, as I mentioned pro forma, I would say that my confidence is that's probably sufficient. Certainly, it would be a high class challenge if it wasn't sufficient for the first three drown downs. So I would say any future financing would be drop downs beyond those first three assets.

Neil Mehta - Goldman Sachs

Perfect. Thanks, guys.


We have no further questions. I would now like to turn the call over to David Crane for closing remarks. Please proceed.

David Crane

Thank you, Operator. And thank you all for participating in the call and we look forward to talk to you in the future. And have a good -- as Neil said, have a good weekend.


This concludes today's conference. You may now disconnect. Have a great day.

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