Good day, ladies and gentlemen. Welcome to the NRG Yield Special Event Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to hand the floor over to Kevin Cole, Head of Investor Relations. Please go ahead, sir.
Thank you, Karen. Good morning. Welcome to NRG Yield's Business Update 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 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. We will refer to both GAAP and non-GAAP financial measures.
For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's press release and presentation. I'll turn the call over to Chris Sotos, NRG Yield's President and CEO.
Thank you, Kevin. In the room with me this morning and available for questions is Chad Plotkin, NRG Yield's Chief Financial Officer. Before I begin, I would like to thank you for joining us on such short notice. Hopefully, as I review today's news, you'll become as excited as we are about the future of NRG Yield. Let's begin by turning to page two. Today, I'm very pleased to present to you NRG Yield's new controlling stockholder and sponsor, Global Infrastructure Partners, or GIP. GIP has agreed to purchase NRG's fully integrated renewable energy platform, including its controlling interest in NYLD, its renewable energy development and operations platform, as well as other operating NRG renewable assets. NRG's development platform represents a 6.4 gigawatt opportunity for NYLD of future potential drop-down assets, either in backlog or pipeline.
GIP is particularly excited about the opportunity with NYLD, which allows public market investors to access investments in core U.S. infrastructure. The NYLD conflicts committee has provided their consent, and the board has approved the transaction, so our focus now is to move to closing. The relationship with GIP is truly transformative for NYLD. GIP is a leading and highly experienced infrastructure fund manager with over $45 billion of assets under management, who, as you can read in their press release, also issued this morning, has a long history of successful development and investment in the sector, with currently approximately $9 billion of equity invested or committed to renewable sector, and with $20 billion in equity invested or committed to the global power and energy sector over the past decade. In addition to the transaction with NRG, GIP has already taken steps to support NYLD.
First, GIP has strengthened the ROFO pipeline through the addition of 550 MW of wind assets comprised of the 150 MW Langford and 400 MW Mesquite Solar projects. Second, GIP has agreed to provide $1.9 million in financial support via an arranged $1.5 billion in backstop credit commitment for NYLD's corporate debt, and importantly, $400 million of capital support in the event that the public debt and equity markets present obstacles to funding the purchase of Carlsbad, which I'll discuss later in the presentation. GIP, as part of the transaction, has also purchased NRG's 6.4 GW renewable development backlog and pipeline, which we expect GIP and NRG Renew to transform into additional NYLD-eligible assets in the years to come.
In conjunction with today's new sponsorship transaction, we are also announcing two additional transactions which are true to our focus of growing NYLD's CAFD on an accretive basis with the binding agreements to purchase both the 154 MW Buckthorn Solar Project and the 527 MW Carlsbad Energy Center at attractive terms. I will discuss the details of these transactions later in the presentation. Finally, we are pleased to say that the change in sponsorship does not mean a change in strategic approach. NYLD's core strategy of growing a diversified platform of long-dated contracted assets that are prudently financed and accretive to our shareholders while targeting a BB/Ba2 corporate leverage profile in order to drive long-term dividend growth remains intact.
We also continue our strong independent governance record at NYLD, aligning the interest of all shareholders with no IDRs, an independent conflicts committee to review and approve drop-downs, and a dedicated full-time management team. Turning to page three. Since NRG launched its transformation plan, I've spoken to many of you about the key characteristics of a new sponsor that would help drive NRG Yield forward. First is that the sponsor have experience in working with a public company and the requirements to be successful in such a relationship. Second, ensuring that the sponsor has a strong commitment to ongoing development, enhancing the ROFO pipeline, and maintaining an independent governance structure. Third, requiring that the sponsor add to NYLD's capabilities, either from a geographical or technological perspective or providing deep experience in operating, managing, and developing power infrastructure assets.
Finally, a sponsor with significant resources and a willingness to support NYLD's financial needs. In essence, does the new sponsor relationship have the resources and capital, the commitment, and the expertise to continue to enable NYLD to achieve long-term growth? I can say without qualification that GIP meets all of these criteria, and I could not think of a better sponsor to help NRG Yield achieve its next phase of growth. Turning to page four. This slide provides a high-level overview of GIP's long and successful track record in the energy infrastructure space. Founded in 2006, GIP is one of the largest independent infrastructure investors in the world, with $45 billion in assets under management, ownership interest in a variety of portfolio companies, and nearly $20 billion of equity invested in the global power and energy sector over the past decade.
This includes $9 billion invested or committed in renewable energy investments. As you can read in GIP's press release, GIP is committed to developing the 6.4 gigawatts of renewable energy backlog and development pipeline that they purchased from NRG. Turning to page five. I'll discuss some of the key provisions underpinning NYLD's consent to the NRG transaction with GIP. One of the key elements we've been focused on is ensuring that as NYLD becomes a more independent company and moves into the consent process, that the CAFD that NYLD produces today will not be reduced significantly. As such, NYLD's consent is predicated on absorbing no more than $10 million in reduced CAFD as a result of a more independent cost structure and potential impacts from consents. Importantly, we also have obtained full indemnification from NRG regarding any changes in property taxes for our California solar sites.
In addition, we have accelerated two drop-downs and enhanced our ROFO agreements as a result of the transaction. We have completed binding agreements for Buckthorn Solar and Carlsbad, which we'll review on the next page, and have added 550 megawatts of ROFO assets while removing Ivanpah from the ROFO pipeline. Agua Caliente and the Hawaiian solar assets remain part of our ROFO. GIP is going to invest in developing NRG Renew's portfolio of backlog and pipeline, which it has already invested in safe harbor equipment to support up to 280 megawatts of repowering opportunities and assets in the yield portfolio.
GIP has also provided NYLD with significant financial support, namely in the arrangement of a $1.5 billion backstop credit facility, which will help to manage any change in control risk associated with our corporate debt, as well as an additional $400 million commitment to purchase Carlsbad from NRG in the event that the markets are not conducive to NYLD raising the funding to purchase Carlsbad. In the event that GIP has to purchase the asset from NRG, it would form part of the new ROFO pipeline between GIP and NRG and would be offered to NRG Yield in the future at similar terms and conditions as negotiated in the agreement. Finally, we have enhanced and maintained our independence governance structure.
First, NYLD will move away from a full reliance upon outsourced management services by taking on direct responsibility for its corporate-level functional resources, such as corporate accounting and tax, for example, as well as full oversight of the thermal segment. As a reminder, the cost of thermal operations is already factored into our financial results. However, the cost associated with administering this segment, as well as other corporate-level costs, will now factor into our results after closing. Importantly, this change in approach will be prudently managed as there will be a direct offset with a new management services agreement with a significantly reduced scope, a strict adherence to cost management, and importantly, when combined with other potential costs that may accrue from change in control, be factored into the $10 million CAFD limitation discussed earlier.
Turning to page six, I want to highlight NYLD's ability to continue to add to our portfolio of projects to keep growing CAFD in the future. As such, NYLD has agreed to purchase the 527-megawatt Carlsbad Energy Center for $365 million of cash consideration and the 154-megawatt Buckthorn Solar asset for $42.3 million. Both of these assets have long-dated contracts, with a 20-year PPA in Carlsbad and a 25-year PPA in Buckthorn. On a combined basis, these assets will add approximately $44 million of CAFD on a five-year average basis or a 10.8% weighted average level CAFD yield. While Buckthorn Solar will achieve commercial operation in late February and be funded with cash on hand at the time, the Carlsbad asset is not expected to achieve commercial operation until the fourth quarter of 2018, meaning the source of capital is still to be determined.
If at that time NYLD has not been able to efficiently fund the acquisition due to the market environment not being conducive to the issuance of equity or other capital formation instruments, GIP has agreed to purchase the asset on our behalf from NRG and add it to the ROFO pipeline to be dropped later to NYLD when market conditions are more favorable, while importantly preserving our economics and accretion. This is but one early example of the capital commitment from our new sponsor to facilitate NYLD's future CAFD and dividend growth capabilities. Turning to page seven. In conclusion, our long-term business approach remains intact with diversification around different fuel types, technologies, and locations, leading to more stable CAFD generation and investment opportunities.
We also maintain our financial discipline with a target payout ratio of 80%-85%, our consistent double BB/Ba2 targeted credit rating, long contracted cash flow and NOL runway tenors, and the optimization of project debt as a source of funding. We also maintain our strong governance structure by making certain that the interests of all shareholders are aligned with the independent directors overseeing drop-downs, a dedicated management team, and no Incentive Distribution Rights. In closing, while I know this has been a long process for our investors and for us here at NYLD, I feel that the end result was well worth it.
Once closed, NYLB will benefit from a sponsor who has a long and distinguished track record of growing infrastructure companies in the energy space and beyond, with the resources to not only fund our development and add to our ROFO pipeline, but also to support NYLB from a capital perspective in funding its growth aspirations in the future. In conclusion, the future looks very bright for NYLB. Thank you. Operator, please open the line for questions.
Ladies and gentlemen, if you have a question at this time, please press star followed by the number 1 key on your telephone keypad. If your question has been answered or if you'd like to remove your line from the queue, you may press the pound key. Again, if you do have a question, please press star and then one at this time. Our first question comes from the line of Jonathan Arnold with Deutsche Bank.
Oh, good morning, guys.
Morning.
Congratulations on finding a new partner.
Thank you.
One question I had on the condition around the $10 million CAFD recurring impact. Then you have this footnote talking about excluding one-time costs. Is that reference to whatever consents may cost, and can you just remind us who you may need consents from and whether those are actually conditions, or how should we think about that?
Sure. To your earlier question, John, the $10 million is more of a run rate number, Changes to the continuing CAFD generation capabilities of Yield. Yes, there are certain To the extent there's upfront costs, there's sharing amongst the parties depending on what type of cost it is. Yes, we would have to get consents from a number of our PPA counterparties, as well as project lenders, and obviously corporate debt as well, depending on exactly what transpires in terms of ratings, et cetera.
How good a line of sight do you have on that? Is the sort of inference that whatever the cost of acquiring those will be financed under that $10 million impact on ongoing CAFD? Am I thinking about that right?
No, I would say that the $10 million is the ongoing, and those upfronts would be excluded from that calculation. Once again, NRG Yield does not bear 100% of those costs. Basically, depending on what the nature of the upfront cost is, either GIP or NRG will fund the vast majority of those, depending on the nature of those costs. I don't know if that answers your question.
That sharing is sort of laid out somewhere deep in the agreement?
Correct.
Okay. I think I got that. Just in terms of your longer term, you've talked about the general statement about the longer term, when should we anticipate some kind of articulation of what the growth strategy will be beyond 2018?
Sure. I think much more at the closing of the transaction. I think, while, a little to your question, we don't really anticipate a lot of difficulties in getting the consents, at least currently, that we need. It will take a lot of time, because there are a lot of parties. We would intend to provide an update around that growth strategy more around closing.
Okay, great. Thank you, guys.
Thank you. Our next question comes from the line of Angie Storozynski with Macquarie.
Thank you. Okay. We see the sale price for the acquisition by GIP of the majority stake in NRG Yield, and granted, it's commingled with some development-stage renewable assets. How should we think about it? Is there any link between what you think the core value of your business is versus what your new partner is paying for the controlling stake in the company?
Sure. Frankly, no. As I think we've indicated to many of you while this process has been going on, really, NRG Yield doesn't benefit from any of the proceeds, whether that's low or high. The proceeds that NRG receives are really for NRG's account. From our perspective, I've always been more concerned in terms of what type of partner we end up with, because that's what's going to drive long-term value for NYLD. In a simple word, Angie, no. That's more for NRG's account. From our perspective, it's more about what that sponsor will provide long term, and I think we're in a much better position with GIP currently.
Okay. I'll push back just one time.
Sure.
You could argue that some of the weakness of the pricing has to do with your conventional gas-fired assets that have short-term contracts, which could be a weakness of the existing business. Why wouldn't we then imply a much lower valuation for these assets versus where the renewable assets and long-term contracts are trading at? I'm talking about valuation of your business as is, as opposed to any controlling stake or any other transactions.
Sure. I would say that's not a new fact. Obviously, that's been out in the market since, frankly, the assets were part of the drop-down. I wouldn't say that's a new fact that need to be assessed. Obviously, NRG, and ourselves for that matter, went through a very thorough process in trying to find basically different partners, and I think we ended up in the right place.
Okay. Thank you.
Thank you. Our next question comes from the line of Michael Lapides with Goldman Sachs.
Hey, guys. I remember when you created the dual share class a couple of years ago, that one of the reasons for doing that were just some of the issues around PPA counterparties and what would happen. Can you just walk me through how you've managed that with the announcement of today's transactions?
Sure. I think the difference is that controlling stake is moving to a new party, and that's right before, basically, the high vote shares, so to speak, were maintained by NRG. In this case, obviously, GIP is purchasing those shares, which is what creates a change of control. Michael, I think that's the answer to your question.
Got it. Thanks, guys.
Sure.
Thank you. Our next question comes from the line of Steve Fleishman with Wolfe Research.
Yeah. Hi, good morning.
Morning.
This may be tough to answer at this point, but just did GIP or is there any way to give color on kind of how they plan to use the vehicle relative to other options they have at financing things? Just some better color on, is this the core vehicle they're going to use for financing renewables?
Sure. I would say definitely in kind of the U.S., and I think for evidence of that, you can look to their investment of $1.4 billion. I think from that perspective, obviously, you're probably familiar with private equity's view of returns. If NRG Yield doesn't grow, it's very tough for them to make money on that $1.4. I definitely think they're a core investment vehicle, at least in North America today for this space.
Okay. Is there going to be any change in the way the kind of things like dealing with conflicts or other things like that structurally going forward?
Simply stated, no. The conflicts committee is still there. The same independent directors are staffing it. None of those changes or charter or anything like that has been modified as a result of the transaction.
Okay. Lastly, I'll just ask it, obviously you have your 15% dividend growth to 2018 that you're going to do. Any sense on how to think about distribution growth beyond 2018?
Frankly, I think as per the earlier question, we'd anticipate updating that once we actually close and kind of, frankly, all the numbers are in. I think we'd have to wait till then to update that.
Okay. Is it fair to say that the outlook is better than it would have been if you were still under NRG?
Yes.
Okay. Thanks.
Sure.
Thank you. Our final question comes from the line of Colin Rusch with Oppenheimer.
Thanks for taking our questions. This is Kristen on for Colin. Just two for us. First on, as you go through sort of the change of control and looking at the debt stack, is there any opportunity to refi the portfolio to lower the cash needs?
Sure. Not necessarily. I think, especially at the corporate level, most of our bonds are at pretty attractive prices. I don't think we would look to reprice those. At the project level, also, once again, most of those have been done and we've kind of optimized. There may be a little bit left, the vast majority of the non-recourse debt, frankly, we've kind of optimized over the past several years. If there are opportunities, they're relatively small.
Okay. On the assets themselves, any opportunity to upgrade the existing portfolio, improve generation capacity, that sort of thing, savings for our OpEx?
Sure. I will be really undergoing kind of a comprehensive review with GIP once they kind of have the renewable platform and kind of go through all of that. There may be some opportunities there, I think, as we all look to streamline the relationship between the GIP entity and NYLD. In terms of assets themselves, looking at upgrades or things like that, I wouldn't necessarily see a dramatic difference. There is potentially 280 megawatts of repowering opportunities that GIP has paid for some of the safe harbor materials on. That'll be seen in time.
Great. Thanks so much.
Thank you.
Thank you.
You said-
That concludes our question and answer session. I'd like to turn the conference back over to NRG Yield for any concluding remarks.
Thank you, Karen. From our perspective, just want to thank everyone for getting on the call on short notice, and I'm sure we'll follow up. If you have any questions, please reach out to us. 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 great day.