Clearway Energy, Inc. (CWEN) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Clearway Energy, Inc. First Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your host today, Chris Sotos, President and CEO. Please go ahead.

Good morning. We first thank you for taking the time to join Clearway Energy, Inc.'s First Quarter call. Joining me this morning are Akil Marsh, Director of Investor Relations; Sarah Rubenstein, CFO; and Craig Cornelius, President and CEO of Clearway Energy Group, our sponsor. Craig will be available for the Q&A portion of our presentation. Before we begin, I'd like to quickly note that today's discussion will contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. Please review the safe harbor in today's presentation as well as the risk factors in our SEC filings. In addition, 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 presentation. Turning to Page 3. The company had a soft quarter driven primarily by weak renewable resource due to the heavy rainfall in California and the West Coast. CAFD was negative $4 million for the first quarter. Clearly is announcing an increase in its dividend of 2% to $0.3818 per share in the second quarter of 2023 or $1.5272 on an annualized basis, keeping us on target to achieve the upper range of our dividend growth objectives for 2023. We are also reaffirming our 2023 CAFD guidance of $410 million. Clearway continues its focus on growth at all levels of the enterprise. Our sponsor's pipeline has grown to 29.3 gigawatts, including 6.9 gigawatts of late-stage projects expected to reach COD in the next 4 years. We're excited to announce our commitment to the Cedro Hill repowering project. We will go over the project in more detail in a couple of slides, but this repowering will deploy approximately $63 million in capital while extending the PPA duration to 2045, significantly derisking the value of the asset. Focusing on the 5-year CAFD starting in the 2027 period of over 9%. Cedro will create accretion beyond the assumptions embedded in the $2.15 of CAFD per share when fully repowered. Clearway Energy, Inc. continues to work on commitments from the October 2022 drop-down offers and expect to have them completed by the end of the second quarter. In addition, Clearway Group now has visibility into nearly 600 megawatts of additional projects that will also continue growth in the future beyond the $2.15 of CAFD per share. While it is too early to update anticipate capital deployment and CAFD creation for these new asset additions, Clearway considers the projects far enough along to start adding them to our growth profile. Given the capital market volatility in recent months, I want to take a moment to remind our investors that we have enough capital to fund our line of sight drop-downs that underpin our $2.15 CAFD per share long-term target. In addition, at our 2023 guidance, we generated approximately $100 million of excess cash that can be deployed towards investments in the business as well. As an additional source of liquidity, we recently increased our revolver size from $495 million to $700 million, creating internal liquidity for drop-downs, third-party acquisitions or LC issuances to support the business, particularly as we seek to add RA capacity contracts on certain of our California natural gas assets. This significant internal liquidity is further strengthened by the fact that our long-term corporate leverage will be at the low end of our targeted range with some capacity for additional corporate debt before there'd be a need to issue any additional equity. In summary, Clearway feels we are well positioned to manage this period of capital market volatility and continue our growth trajectory without needing to access the capital markets. In summary, Clearway continues to execute its growth plan with a very strong internal liquidity profile that is well positioned to grow beyond the $2.15 of CAFD per share, combined with the DPS growth rate at the upper range through 2026. Turning to Slide 4. Here are more details on the financial results of the first quarter. Clearway is reporting adjusted EBITDA of $218 million and cash available for distribution or CAFD of negative $4 million. In the quarter, results were below expectations, primarily due to weaker results in the renewables segment. Our California solar assets were impacted by above-average rainfall, which led to lower solar irradiance and thus production coming in below expectations. Additionally, our wind portfolio experienced lower-than-expected production for the quarter, which impacted CAFD generation. Although significant driver to the quarterly results was from the conventional fleets, extended spring outages and preventive maintenance ahead of the summer merchant energy period. We continue to believe the conventional fleet is well positioned to provide critical grid reliability services as well as generate additional revenue from dispatching into the merchant power market in the second half of 2023. As discussed earlier, our liquidity and balance sheet are well positioned to execute on growth with no equity or debt issuance need to achieve our 2026 DPS growth objectives, significant undrawn revolver capacity and strong credit metrics. While the first quarter results came in below our expected seasonality for the quarter, we want to remind investors that achievement of full year results is highly weighted on both the second and third quarters, with the revenue contribution from renewable resources and the conventional fleet is typically highest. Given the seasonality of the portfolio, the conventional fleet starting merchant dispatch in the second half of the year and only 1/4 of the year complete, we are reaffirming our 2023 guidance of $410 million. Turning to Page 5. I want to highlight our Cedro Hill repowering project. Overall, this repowering is a great success for extending the asset's useful life, improving its risk profile and driving our CAFD per share growth profile. As part of the repowering, Cedro Hill will be upgraded with new GE technology, increasing its nameplate capacity by 10 megawatts and has projected annual production by approximately 14%. We are pleased to have the opportunity to work with our customer to amend and extend the existing PPA by 15 years, providing the asset with 22 years of remaining price certainty. Given the locational value of this resource, this outcome will be a win for both our customer and for Clearway. We'll also [indiscernible] deploy a turbine repowering technology that has been proven very technically efficient elsewhere in our fleet. Importantly, the Cedro repowering is projected to have a healthy average CAFD yield of approximately 9% beginning in 2027, which will create accretion beyond the assumptions and bed in the $2.15 of CAFD per share. Cedro [indiscernible] its repowering commercial operation date in the second half of 2024 and is anticipated to be funded by excess cash generation. This repowering continues our strong track record of accretively upgrading our wind fleet, having successfully repowered over 650 megawatts of assets to date. Page 6 provides an update of progress of the previously discussed drop-downs from our sponsor. The left side of the page represents our pro forma CAFD outlook inclusive of Victory Pass and Arica. We are currently not including Cedro Hill repowering as the move in CAFD is relatively small. We will modify our pro forma CAFD outlook and line of sight CAFD more comprehensively later in the year when we have more assets committed. The remaining drop-downs that we are currently working on with Clearway Group represent anticipated additional $180 million of capital deployment, which are expected to turn into binding commitments by the end of the second quarter. This would then be followed by the next drop-down offer of approximately $220 million. Importantly, these assets have a strong CAFD yield on a portfolio basis so that Clearway can continue to generate accretive returns for our shareholders. Our $440 million of potential line of sight CAFD does not include any contribution from the roughly 600 megawatts of newly identified drop-down assets. When the capital deployment and CAFD generation of these assets is more well defined, we will update our $2.15 CAFD per share number to account for this additional growth. Page 7 provides some details around additional advancement Clearway's long-term growth. And while these projects are not far enough along to provide updates to capital deployment in CAFD, development has progressed far enough that Clearway Group feels confident enough to add them to the list of assets that will eventually be offered. These assets represent nearly 600 megawatts of additional opportunities that will have funding days in the first half of 2025 and support growth in CAFD per share beyond the $2.15 target we have discussed previously. The projects highlighted are not the full extent of growth that is being developed at Clearway Group but our anchor tenants in a 1 gigawatt portfolio of diversified assets that will provide additional growth. As we work through all the opportunities of the IRA, we will continue to analyze ways to optimize our fleet through repowering and opportunities to add storage to existing facilities. As I have discussed on previous calls, a key component of achieving value for this optimization option is customer interest. We are now seeing evidence of this in multiple markets across our fleet. [indiscernible] provides some sense of scale of these opportunities with approximately 2.3 gigawatts between 2025 and 2028. As always, we'll be cognizant of exercising these options in a way that manages capital formation and value optimization for Clearway shareholders. Turning to Page 8. Our goals for 2023 have not changed to deliver on our CAFD guidance, grow our dividend at the upper range of our objectives and continue to execute on our growth plan. Clearway continues to work through commitments for the remaining drop-down offers from October of 2022 by the end of the second quarter of 2023 and received the next offer on further commitments to continue our growth path as well. Clearway is focused on demonstrating the visibility to CAFD share growth through 2027 and beyond and it's $2.15 of CAFD per share long-term objective. We are working to achieve this by investing additional growth projects beyond the drop-downs already discussed with repowering such as Cedro Hill as well as third-party M&A and also continuing to work at original and/or extending the RA contracts on our California natural gas assets. In summary, Clearway Energy Inc. continues its focus on prudent growth and has confident in its ability to meet us long-term growth objectives due in part to strong sponsor support to ensure Clearway success. Operator, please open the lines for questions.

[Operator Instructions] Our first question comes from Noah Kaye with Oppenheimer.

Maybe just to start with a health check on the operating environment. Can you comment to what you're seeing in terms of flow of panels and batteries? Are we starting to see some easing bottlenecks here and just how that plays into expectations for some of the timing of these drop-downs?

Sure. That phenomenon is kind of been taking into account with the timings of the drop-downs we have in our appendix. But Craig, you're obviously closer to that. I'll let you speak to that.

Yes. Thanks for the question, Noah. We're really pleased with our execution and in an environment, which I think you're right to note has been challenging for some. So in our case, for the projects that underpin current committed growth expectations for Clearway Energy, Inc. We're ahead of schedule on module deliveries. That's true for both Daggett and for Victory Pass and Arica. And that reflects the success we've had with those projects over really the time since we've been in execution and some of the cluttered policy issues that you're referencing have impacted module deliveries for others. So we're really quite pleased with the decisions we've made, the support we've gotten from our suppliers and have the procurement strategy we've had to underpin growth for CWEN is playing out.

Okay. Great. And then it's great to see some of the repowering opportunities start to materialize. I think, Chris, you had mentioned over a couple of gigawatts of potential opportunities, interest across the fleet. When you kind of bucket that into opportunities where it seems like the CAFD yields might pencil out similarly to this one. I mean is that broadly true for all the opportunities you've identified? Have you sharpened your pencils on that yet? Is there a subset that you have high conviction and what can you share with us?

I think it's frankly too early to say to pencil in a CAFD yield that we anticipate. Don't get wrong, I don't think they're going to be 4% or something like that. But I do think it's too early to the point I tried to raise on the 600 megawatts and the like. Obviously, these are pretty early stage. We've gone through the one that we think we're in late stage on. So I don't want to kind of like level set that all of them will be at this range. Obviously, as I've talked about on other calls, we've got 3 different types of repowering, like one like Cedro Hill, where you have an asset that's performing really well and kind of like the CAFD, the improvement in CAFD generation, while strong, may not be that high because the asset is performing well today. There's a second type where you basically have an asset that's performing well, but maybe has maintenance CapEx coming up in the future or additional volatility and degradation or O&M that's needed. In essence, you may not really see the uplift because it's kind of at a further stage. The third and the easiest one to demonstrate value on our assets that are performing poorly. Unfortunately, we don't have a lot of that third category. So I think in terms of CAFD uplift, don't want -- the reason I don't want to kind of get out of head is it's really dependent on the individual circumstances of the asset we're dealing with.

Yes. Maybe just sneaking one more. I think double clicking on the point that you don't need equity incrementally to fund the growth through 26. Can you just walk us through a little bit more your thoughts around additional leverage capacity at the project level? And then just what's the comfort level for you in terms of an upper bound for consolidated leverage?

Sure. So a couple of different questions there. In terms of nonrecourse debt, we kind of have certain pockets. For example, we didn't lever on a nonrecourse basis, the other half of our Utah purchase when we basically got thermal proceeds. So there's kind of elements like that within the book. I do think the bigger lever though, that we might use before that, depending on exactly the nature of the asset, is that corporate debt. And I think just to give you kind of a range finder, our corporate debt overall is obviously about $2.125 billion in terms of the bonds that we have at our $410 million CAFD guidance, you've got between $90 million and $95 million of corporate interest. So that ratio gets you to kind of low 4x plus minus, and the upper range is about 4.5x at least from the rating agencies. Obviously, if they focus on one metric, they look at things like FFO to debt, interest rate environment matters, but just to give you a quick calc, just a rough calc.

Our next question comes from Angie Storozynski with Seaport.

So first, just one more question about project level debt and its availability and cost. So I mean, you show the allocation of thermal proceeds for -- to finance growth. But I'm assuming that there is obviously an assumption of project level debt that is being added to these assets. So could you comment on any increase in the cost of that debt and how that impacts your expected cash flow generation from these assets?

Sure. It doesn't -- I'll maybe answer your second question before the first. It doesn't affect the expected cash flow generation that significantly because, obviously, the corporate capital we're putting in is after those costs, and that's pretty well defined. I think to your point, the credit spreads aren't really showing that much volatility. I think it's more a sulfur swap to fixed phenomenon that may increase the cost there. But I don't think we've seen a significant increase in the credit spread on nonrecourse debt.

And Chris, if I could add to that, Angie. What we do as a business practice, Angie, is at the same time that we execute major revenue contracts for projects that will become part of the growth profile for [ sealing ]. We also put in place long-term interest rate hedges of some kind and secure major equipment for the projects. And we do that so that we can largely fix the stream of expected cash flows for a project when it is commercialized. That might not have been industry practice some years ago, but given what we've all observed around a more complex supply chain environment and also more complex interest rate environment. We find it useful to try to fix all those things simultaneously. So we do that, and that allows us to be confident in the CAFD per share contribution from any given asset even before a commitment is made by the yieldco, but certainly as of the date that the commitments made.

Okay. Okay. And then probably even more importantly, so we are increasingly scrutinizing the quality of CAFD of different yield costs, how it's financed. You guys have a pretty substantial debt amortization on an annual basis, especially associated with the 3 California assets. I mean, is there -- as you think about the future, is there a certain mix between Holdco nonamortizing debt and project level debt that you're comfortable with? And also, is there any deferred financing like anything -- I clearly don't see it, but anything that could catch up with you in the next couple of years, some sort of a deferred benefit of low short-term rates that we had over the last couple of years.

Sure. So a couple of different questions there. I think part one, in terms of the corporate bonds, there's nothing like that, the earliest corporate bond maturity is 2028 and then the next is 2031 and 2032. If we look to our nonrecourse project financing, we don't really have any large requirements for refinancing until the third quarter of 2024. And once again, yes, not to minimize that, but that's about $100 million, $150 million in terms of principal. And once again, to the point, the credit spreads aren't moving much, we'll see what happens on a SOFR swap basis. So I think nothing in 2023, really 2024, there is that 1 refinancing and all corporate debt is locked down until 2028. We're also about 99%, 98%, 99% fixed in terms of having our nonrecourse debt swapped. So overall, Angie, not a lot other than that repricing that may occur in the third quarter of 2024 when we redo that nonrecourse financing.

And when you say that you're within your credit targets, is it -- just remind me again, is it 4x Holdco debt to parent level CAFD? Or again, what is the metric that I'm trying to [ solve for ]?

Sure. Yes, it's basically between 4% and 4.5%, and that's kind of the calc I went through a little bit on the last quarter. So the way we look at that is you take your total corporate debt, the $2.125 billion of bonds. You divide that by corporate level CAFD plus corporate level interest. And so you take our $410 million of guidance, you add between, I think, it's between $90 million and $95 million of overall corporate interest that gives you, obviously, about $510 million. That's the ratio that gets you, like I said, to a low end of the 4% range. So we should be at the lower end of that range looking at that one. That's a key metric we try to solve for.

Our next question comes from Mark Jarvi with CIBC.

Just in terms of the commitments that you expect to finalize this quarter, is that [ occasion ] will be all done together? And I guess, is there any one of those projects that are a bit trickier to say I guess, get across the finish line to figure out that might be pushed out into subsequent quarters.

I don't think that the projects -- I mean the time line we have is the time line we think is appropriate in terms of those assets, if that's kind of what you're asking. And I think in terms of will all of them necessarily be signed at the exact same time, that's not probable. We kind of go through the assets as they come in different diligence speeds on them. Obviously, out of that first drop-down, we refer to as drop down 24%, which is Victory Pass/Arica plus the remaining $182 million of capital associated with that. We obviously did Victory Pass/Arica first because that was the furthest along. So to answer your question, don't expect them all to be done at one time. There'll probably be a variety of announcements coming out along the lines of the different assets; and two, the timing that we have in our appendix is what we think currently.

Okay. And just coming back to the 2.3 gigawatts of storage and wind repowering projects. What would you frame as a good success rate if you thought about that? Like do you see as potentially 50% of that in terms of [indiscernible] last couple of years? Or is it just too hard to give any numbers at this point given all the negotiations that have to come through?

Craig, would you want to take that one?

Sure. Yes, I think we've -- I think giving you a particular probability right now is probably premature. What we can say is this for all of the volume you see represented there, we have active engagement with and in most cases, with the existing customer for those facilities. And that is a very meaningful change over the picture just 1 year ago and I think reflects a recognition from load-serving entities across the country that the clean energy assets that were deployed first in our grid tend to be located in places where their resource and their place in the transmission position is especially useful. And between that locational value of our existing fleet and the substantial flexibility and economic benefit that the structure of incentives in the Inflation Reduction Act provides, there's a real strong catalyst for engagement with load-serving entities and other customers to contract for resources at these locations for a very long term at economics that are attractive to us and also to try to expand or supplement them where either the renewable resource can be increased in size or where we can augment it with batteries. And so what we see now is the ability to extend contracts for, I think, materially longer periods than repowering is generally supported before. You see that in the extended duration of the agreement we reached for Cedro Hill, and importantly, incentive structure for storage that allows us to deploy storage at those locations without some of the structuring complexities that one had to go through before the IRAs passage. So I feel pretty constructive that over time, we're going to be able to repower, expand or hybridize a pretty substantial fraction of our fleet. And it's really just a question of when we get to do that. And what you see on that page just represents the ones where we're in active conversations today.