Q2 2023 Clearway Energy Inc Earnings Call

Participants

Christopher S. Sotos; President, CEO & Director; Clearway Energy, Inc.

Sarah Rubenstein; Executive VP, CFO & Principal Accounting Officer; Clearway Energy, Inc.

Agnieszka Anna Storozynski; Research Analyst; Seaport Research Partners

Julien Patrick Dumoulin-Smith; Director and Head of the US Power, Utilities & Alternative Energy Equity Research; BofA Securities, Research Division

Mark Thomas Jarvi; Executive Director of Institutional Equity Research; CIBC Capital Markets, Research Division

Noah Duke Kaye; Executive Director & Senior Analyst; Oppenheimer & Co. Inc., Research Division

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Clearway Energy, Inc. Second Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Sotos, President and CEO.

Christopher S. Sotos

Good morning. We first thank you for taking the time to join Clearway Energy, Inc.'s second 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 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 4, Clearway had a soft first half of the year as weather and renewable resource conditions deviate substantially from historical averages across most geographies. For the second quarter, Clearway generated $137 million of CAFD with the lowest quarterly wind production in the company's history.
As we look ahead to the balance of the year, we are updating and reducing our full-year guidance to a range of $330 million to $360 million, which accounts for our first half results and reflects a range of potential outcomes in renewable resources and weather impacts on load. All results have stabilized in July and are materially on plan for the month, we are cautious given the weak renewable resource and relatively mild weather in California through June.
Nonetheless, enabled by our prudent financial management, Clearway is announcing an increase in its dividend of 2% to $0.3891 per share in the third quarter of 2023 or $1.5564 on annualized basis, keeping on target to achieve the upper range of our dividend growth objectives for 2023.
Despite our challenges, Clearway continues its focus on growth in long-term CAFD and our asset base. In terms of drop-downs from Clearway Energy Group, we recently committed to acquire Cedar Creek Wind for $107 million at a greater than a 9% CAFD yield, as well as Rosamond Central Storage for $32 million and approximately 11% CAFD yield. As such, we are raising our pro forma CAFD outlook from $410 million to $420 million.
In terms of our continued growth trajectory, our sponsor's pipeline has grown over 30 gigawatts, including 6.9 gigawatts of late-stage projects expected to reach COD in the next 4 years. We continue to work toward binding commitments on the remainder of drop-down '24 with Texas Solar Nova, which will have an estimated capital commitment of $40 million.
Working with [Clearway] Group on drop-down '25 that begins our deployment of $220 million of capital commitments, we have received our first offer on these assets in the form of Dan's Mountain, a wind farm with a target completion at year-end 2024 and a greater than 9% CAFD yield. Offers of subsequent drop-down '25 assets are anticipated from our sponsor over the balance of the year, with the contribution of those assets targeted to provide a CAFD contribution consistent with our goals.
Here at Clearway, we are keenly aware of the capital market volatility in recent months. I want to reiterate a key point on capital, which is we have enough cash to fund our line-of-sight drop-downs that underpin our $2.15 per share long-term target. Clearway also benefits from an undrawn revolver, excess cash flow generation and unused leverage capacity to fund additional growth through this volatile period.
In summary, Clearway continues to execute its growth plan with a very strong internal liquidity profile, so it's well positioned to grow beyond the $2.15 CAFD per share, combined with the DPS growth rate in the upper range through 2026.
Turning to Slide 5 to provide an overview of our recent capital commitments. On the left side of the page, review Cedar Creek Wind, a 160-megawatt Idaho project underpinned by a 25-year busbar PPA for investment-grade utility. This project should produce $10 million of CAFD annually for an approximate 9.3% CAFD yield, expected to achieve commercial operations targeted for the first half of 2024.
On the right side of the page, our Rosamond Central battery storage project is co-located with the Rosamond Central solar facility. This project is expected to require $32 million of capital, with an approximate 11% CAFD yield, expected to achieve commercial operation in the first half of 2024.
This represents our continued diversification into a new asset class beyond wind and solar, with CWEN owning or committing to invest in over 550 gross megawatts of storage to date. In summary, we continue to advance our growth objectives with these 2 high-quality capital commitments.
Slide 6 provides an update about our path to invest the thermal excess proceeds and achieve our growth targets. With our announced investments in Rosamond and Cedar Creek, our pro forma CAFD outlook now increases to $420 million, with our remaining capital targeted for investment in Texas Solar Nova and the anticipated $220 million of commitments in drop-down '25 drop offered from Clearway Group, of which the recently offered Dan's Mountain represents approximately 35% of this future commitment.
Despite our current challenges due to poor renewable resources in the first half of the year and ongoing capital market volatility, Clearway remains on track regarding continued execution versus $2.15 CAFD per share goal and beyond. Now I'll turn it over to Sarah. Sarah?

Sarah Rubenstein

Thanks, Chris. On Page 8, we provide an overview of Q2 results, including adjusted EBITDA for the second quarter of 2023 of $316 million and cash available for distribution of $137 million. These results reflect the previously disclosed historically low wind production that resulted in an approximately $30 million reduction to second quarter revenue, including a decrease as compared to expectations of approximately [$16 million] for the Alta projects.
Results at the Conventional segment were also below internal expectations. The Marsh Landing and Walnut Creek facilities whose initial tolling agreements ended in May and June, respectively, generated lower-than-expected merchant energy margin in the quarter because of milder-than-normal temperatures.
Despite the first half challenges impacting CAFD, the company remains well positioned for growth with its long-term CAFD per share outlook intact, a strong balance sheet, large revolver capacity and pro forma credit metrics in line with target ratings. There continues to be no external equity needs for line-of-sight growth to meet the $2.15 of CAFD per share and resulting dividend per share objectives.
Moving to Page 9, we provide a walk from our previous 2023 full-year CAFD guidance of $410 million to our revised guidance range. Starting from the left, the first quarter of 2023 reflected lower solar irradiance due to above-average rainfall in California, which resulted in lower-than-normal solar revenues. First quarter 2023 results also reflected extended outages at the Conventional facilities that reduced capacity revenue and increased maintenance costs compared to expectations.
As previously noted, second quarter reflected historical low wind production, yielding a decrease in revenue compared to expectations of approximately $30 million with a material shortfall at the Alta facilities, along with generation underperformance across all-wind facilities in the portfolio. In addition, the Conventional facilities generated lower-than-expected merchant energy margin due to milder-than-normal temperatures.
The impact of the first half of 2023 results led to a revision to full year 2023 CAFD guidance down to a range of $330 million to $360 million.
We have observed more normal wind production trends for the month of July, and while we have not altered our long-term view of P50 median production estimates, the revised guidance range reflects the possibility that renewable resource may trend lower than normal for the balance of 2023, given the more volatile renewable resource experienced in 2023 thus far. The guidance range also reflects a sensitivity from merchant energy margin at the Conventional facilities for the remaining summer months.
While temperatures increased during the month of July, the company cannot predict how weather as well as other factors, such as gas prices and the availability of other generation sources, may impact energy margin at the Conventional facilities. Finally, the revised guidance range reflects the expected timing of committed growth investments, including estimated project CODs. And with that, I'll turn it back to Chris for closing remarks.

Christopher S. Sotos

Thank you, Sarah. Turning to Page 11. Through the challenging first half of the year and initial volatility in the back half of the year, we'll be unable to achieve our original CAFD guidance of $410 million. While we do not control the weather, all of us within the Clearway enterprise take this very seriously on our continuing focus on improving results and forecasting in both the short and long term.
Despite these challenges, we remain on track to support the upper range of our 5% to 8% long-term dividend objective. As discussed in previous years, the rationale for our long-term payout ratio of 80% to 85% is precisely to manage through years like 2023 that Clearway can continue to grow its dividend based on long-term cash flows without undue financial stress, despite periods of short-term negative weather volatility.
In addition, Clearway continues to work through commitments for the remaining drop-down offers from October 2022 with our investments in Cedar Creek Wind and Rosamond Central battery storage and our first offer on the next batch of drop-down's with Dan's Mountain.
We expect to have commitments completed for all drop-downs that underpin our $2.15 CAFD per share line of sight by the first half of 2024. Beyond the $2.15 of CAFD per share, we continue to add projects such as the Cedro Hill repowering that was discussed last quarter, the extension of resource adequacy contracts on our California fleet and continued improvement in our operational performance.
In conclusion, 2023 thus far has been a difficult year for Clearway, given the weakness in renewable resources and volatility in the capital markets. While these headwinds impact us currently, Clearway Energy has always been about the long game, about compounding our dividend over time that leads to stock price appreciation.
The foundations of this long-term growth are still intact, strong sponsorship in a key growth sector of America's infrastructure, significant development capital spent to provide growth opportunities for Clearway Energy, Inc., add disciplined capital and investment approach. As Clearway celebrates its tenth year of existence, our ability to withstand and grow through challenges has been demonstrated in the long term. Operator, open the lines for questions, please.

Question and Answer Session

Operator

(Operator Instructions). Our first question comes from Julien Dumoulin-Smith with Bank of America, you may proceed.

Julien Patrick Dumoulin-Smith

Chris, obviously, you're talking a lot about the challenges in the past 10 -- since through the first half of the year, can you talk a little bit more about sort of today mark-to-market, if you will, through part of the third quarter? How are trends continuing across the portfolio in terms of renewable generation?

Christopher S. Sotos

Sure. I think as I mentioned in my comments, July was on track for plan. So we didn't see a significant deviation on a CAFD basis for the portfolio as a whole. So I think August, it's early days, we want to get a full month in there. But July was on track. So we're hoping that the weakness we saw in the first half of the year has abated.

Julien Patrick Dumoulin-Smith

Got it. I see stabilized here. Yes. And then more to the point, in terms of the capital market backdrop, you alluded to the challenges. At the same time, clearly, transaction multiples in the market have come in.
How do you see that as transforming and impacting the plan that you described or reaffirming here today in terms of acquisitions and acquisition multiples? I mean obviously, there's puts and takes in terms of your financing plan. But can you speak to a little bit what the transfer multiples or acquisition multiples you were contemplating passed then from the plan versus today, if you will?

Christopher S. Sotos

I don't think they've shifted much, given, I think, kind of what you're saying, Julien, may phrase differently, is a lot of the volatility in the 10-year treasury has really shown up past 2 weeks, depending on how you look at it. And so from my perspective, a lot of the multiples we were looking at in terms of the acquisition, which are very similar to what we have for drop-downs, really hasn't changed that much. .
I think for us, I don't know if what we're seeing in terms of about a 410, I think, 10-year treasury environment currently versus, call it, a [37], 38, maybe 3, 4 weeks ago as that's transferred through real seller price expectations to date. So a [long-winded] way of saying, I don't think it's impacted us that much in the current period, but we'll have to see how sticky this treasury environment is and if it translates to M&A multiples.

Julien Patrick Dumoulin-Smith

Right. But your point is that despite seeing some transactions in the quarter here at perhaps lower headline multiples, you wouldn't necessarily read into those as being indicative of the wider trends, right? They're more discrete to specific portfolios and the issues that might otherwise be embedded in them, if I hear you right?

Christopher S. Sotos

Correct. I don't think you can extrapolate based upon the past 3 weeks of treasury volatility, there's capitulation in the M&A market in terms of new levels.

Julien Patrick Dumoulin-Smith

Right. Or more specifically, transactions action through the balance of the second quarter here, if I hear you right?

Christopher S. Sotos

Yes.

Julien Patrick Dumoulin-Smith

But -- and then just lastly here, if you don't mind, super quick, on just the backdrop in California, data points continue to accrue across the forward curve at very robust prices, if not higher, on higher quarter-over-quarter. Again, I would love to come back to how you're thinking about your commercial strategy here and then ultimately extending out your outlook, too.

Christopher S. Sotos

Sure. So a couple of different questions there, and I'll try to unpack it. I think to your point, some of the forwards are still very strong in California. However, I think as we're all familiar with peaking assets when it occurs, run times and exactly what the peak price achieved are critical assumptions in determining profitability. .
So right now, you have a relatively cooler environment in California that's supposed to heat up kind of back end of next week or middle of next week. So I think in terms of run time and saying really where we're at, it's probably much more on next week event they're in current.
So for us, while, especially as the comments I gave, July was kind of on plan. It was tough for some days and then came in really well other days. It's just the nature of peaking assets. So I think for the remainder of the year, we feel pretty good about where we're at. But once again, it's highly -- [not something] I don't know. It's highly dependent on the weather, highly dependent on duration and severity of that weather.
In terms of the longer term, RA pricing, as we've talked about over the year, we bid in as part of the RFP conducted by the utilities in the second quarter. We anticipate getting any results and announce those on the November call.

Julien Patrick Dumoulin-Smith

Understood. And assets running okay in California here?

Christopher S. Sotos

Yes.

Operator

Our next question comes from Mark Jarvi with CIBC.

Mark Thomas Jarvi

So just coming back to the last commentary on the California assets. Just when you think about your guidance, is there any changes that all went into the guidance here now around expectations for energy margins in the back half 2023?

Christopher S. Sotos

Not in terms of the baseline number. However, it does help inform the range of kind of some of the cooler weather that I talked about were to appear. So [may] to answer your question, it doesn't really change our pinpoint estimate. But in terms of helping inform the range, yes, it does.

Mark Thomas Jarvi

And then when you think of the range specific of those assets, what do you think -- like obviously, just the renewable assets, this brings some more variability in particular wind. But what's the sort of, I guess, the range that you think is Conventional in terms of swing in terms of CAFD expectations for the balance of the year? is it narrower than the broad range you've given or it is about the same in terms of that sort of [$30 million] range?

Christopher S. Sotos

I would say it would be within the range given. It's not as though that the wind would or renewable assets would kind of offset a deviation in the gas fleet, if that's where you're going. So it's not as though the deviation is wider than that. The deviation on the Conventional would tend to be within that range.

Mark Thomas Jarvi

Got it. And then just in terms of the offer here on Dan's Mountain, 9% CAFD, what [informs] that a bit lower than where I think the 9.5% range, stocks trading at 8.5%? So how do you think about that transaction relative to your own currency in terms of your share price, what you would be buying back stock at? And if there's anything around the funding plan you could optimize to bring up that cap yield over time with Dan's Mountain?

Christopher S. Sotos

Sure. A couple of different questions there. I'll try to unpack that. I think part 1 for Dan's, we put approximately in these for reasons in the [outset] sometimes end up 9.2, the big point is when we first talked about drop-down '24 and drop-down '25, we talked about those on a weighted average basis being about 9.5% for the entire fleet. Some of those are going to be below the 9.5%, some of those, like Rosamond [Best], are at 11%.
So I think the key point is each -- when we say 9.5%, it doesn't mean every asset is going to be 9.5% or greater, that's the portfolio as a whole, some being a little bit lower, some being higher. So I'd say it's consistent with how we view things overall.
Second, basically, I mean, the asset is pretty attractive with a 12-year contracted basis. So once again, longer is better, but 12 is pretty strong in today's market. And so overall, we think that, that's -- it's again subject to diligence and going in front of the [GCN] and the like, that number doesn't surprise me in order to view it negatively.
To your point around stock buybacks and the like, that's something we look at. I tend to think that as long as we can continue to find accretive acquisitions or drop-downs from our sponsor, those tenders still be form of investment, because it helps to diversify the portfolio, broaden it out and then also keep adding to our PPA tenor and the like.
If we were to, let's say, stop doing drop-downs and focus solely on stock buybacks, yes, through time, that PPA duration would kind of walk in on you a bit. So I think with the acquisitions that we just talked about, actually, the drop-downs we just talked about with Cedar Creek and Rosamond as well as hopefully Dan's Mountain, you continue to see kind of that PPA duration being done on an accretive basis for drop-downs versus dilution.

Mark Thomas Jarvi

Okay. That makes sense. And then just coming to the dividend increases, obviously, you've talked about [noting] equity to get the $2.15 and drive 8% dividend growth. But given the stocks that are trading now and market conditions, if you're not being rewarded for the increase, do you start to moderate down at the lower end? Or do you just take the long-term view and stick with the plan you're at 8% for the foreseeable future?

Christopher S. Sotos

Sure. I think subject to moving conditions, I would inform your answer by a couple of things. One, as I talked about in response to earlier questions, I think we all need to see where the treasury market kind of settles out at. This kind of 4 handle has been a pretty recent phenomenon, which I think has driven some of the weakness in the stock. So part 1 is where do treasuries kind of stabilize.
Part 2. To me, the difference in growing, let's say, at 6 versus 8, to come up with a number that's lower than 8 for purposes of the conversation, isn't a significant deviation in terms of significant cash that's left on the balance sheet, right? $410 million of CAFD, every 1% is $4 million of CAFD.
So a 2% difference in growth is about $8 million. It's not a paradigm shift in saying, "Well, we have a lot more cash on the balance sheet with which to basically invest in assets [or the] likes." So I don't see the dividend growth rate and changes in that really driving a significant deviation in retained cash that can be available for investment.
To your question around how do we think about moderating that in the future, that I think will be based upon -- if we're never valued for it, right? I think that's pushing the envelope. But if, for example, the market just doesn't value dividends anymore, which I -- to be clear, I do not think is the case currently, then we kind of take a look at it again.
But I think right now, we're comfortable with the long-term growth rate. We're comfortable with the high end of the range and everybody uses 8%, but just to be clear, it's kind of 6.5% to 8%, is the high end of our range. And third, I still see value in the dividend in terms of our equity holders. I think we just need this tenure to settle down a bit, and then we'll kind of see where we're at.

Operator

Our next question comes from Angie Storozynski with Seaport Research Partners.

Agnieszka Anna Storozynski

So one question on the gas plans. So could you comment on the dispatch of the assets and how it differs versus what we saw for the output from these assets under the tolls?

Christopher S. Sotos

I can't really say there's a difference that can really be identified, Angie. Obviously, the tolling entities probably ran them differently based upon what they're seeing in their portfolios versus us just taking market signals. .
So I will say -- and it's also a little bit difficult because obviously, we've only got really 2 months of full data, maybe 3 and also not around the full fleet. So I don't know if there's a really good basis for that comparison, Angie, to be fair to your question.

Agnieszka Anna Storozynski

Okay. I understand. And then changing the fix on the CAFD per share expectation. So I'm looking at your HoldCo debt maturities and where these bonds currently trade. So -- and I know that some of them are 2020 and further out. But I mean, is there a plan how to absorb the incremental interest expense from that refinancing in that CAFD per share projection?

Christopher S. Sotos

Sure. I think to your question, if I mentioned correctly though, corporate bonds are in 2028, 2031 and 2032. And I think while, again, that gives us some time to continue to grow the portfolio, if in the end, Angie, if those things are yielding 9, it may make sense to buy those back at that period of time because you obviously have a pretty strong cap deal there at that point. .
So I think for me, a, we got bit of time between now and then; 2, one way to manage those is to continue to grow the portfolio; third is, obviously, the other two are very long dated with 2031 and 2032. So hopefully, that answers your question.

Operator

Our next question comes from Noah Kaye with Oppenheimer.

Noah Duke Kaye

So maybe just a little bit of cleanup math here, following prior questions. I mean the midpoint of your revised guide, you've got the 1Q '23, plus 2Q '23 numbers in that, and that's very clear. And then there's basically another $5 million slightly lower CAFD at the midpoint in the back half. Is that -- is it the right way to think about the potential for lower energy and -- okay. So...

Christopher S. Sotos

The way I would put it, Noah, is given the first half results, we kind of skewed the range a bit to the downside, just taking into account the first half of the year. Once again, I think to some of the other questions, fortunately, we haven't seen the weather patterns that persisted in the first half of the year in July. So we're hoping the trend in July continues. But yes, a long way to go.

Noah Duke Kaye

So just a little bit of conservative on, basically, the first half?

Christopher S. Sotos

Yes.

Noah Duke Kaye

And then just not changing your view -- or actually, you increased your pro forma CAFD view because of those portfolio additions. But not changing your view of the existing portfolios pro forma long-term EBITDA CAFD, I guess what underpins that at this point? You talked about this being historically low quarter for wind production. Obviously, some of the reversion would be implied.
But as a company that is generally investing on the right side of the climate change, you certainly have to look at some of these weather patterns. And wonder, is there anything to be concerned about? So talk to us about your assessment of the portfolio and how hard you're kind of testing those long-term assumptions.

Christopher S. Sotos

Sure. Part 1 is typically any long-term assumptions we'll update in November. So just to be clear, it's not as though we don't see any adjustments at all occurring. Just simply, we don't do that kind of every quarter. We do that comprehensively in November, which takes into account any revisions 50-50, which we've done in previous years, cost increases, merchant curves and the extension of RA contracts and the like. So part 1 is, the long-term view is typically done in November, where we comprehensively bring everything else down. .
Part 2 is, I think, to your question, for us on long-term data, Alta, if you look back at our historical production indices, with the exception of this year, they really do oscillate around 100. You kind of have 93 and -- 103, beg your pardon, and 97 showing up. So you do see kind of that oscillation around 100, pick your year, some better, some worse. So I think for us, it's really about continuing to get longer-term data and refining that.
So in terms of like are all our models necessarily wrong, not when we get enough data in them, no, and that's kind of we would use Alta to demonstrate that. And I do think just this year is so -- I think, not to minimize the question, there's a reason that we kind of don't maximize leverage. There's a reason we don't maximize payout ratio, right?
As there was a question about dividend growth, easy way for me to generate dividend growth is to move the payout ratio to 90, right? It doesn't require anything. I think from my perspective, these years are going to happen, and we try to basically run things in terms of being able to manage that.
To me, I would actually -- I'm not going to argue it's a positive, obviously. But given the weakness of this year, to view that we were able to amortize all project debt, pay off all corporate interest and still generate at the midpoint, $345 million of cash despite a P90 or P85 year in multiple parts of the fleet into weakness in Conventional, [don't get me wrong], wish it was higher, not making that point, but I think it actually shows the robustness of the system to deal with these weaknesses that we are going to see over a 10-year period once in a while in terms of the book.

Noah Duke Kaye

Appreciate that. And one last question, if I could. Just with Rosamond, you have the 15-year RA agreement in place with "the high-quality IOU", what kind of attributes do you need to see to invest in additional stand-alone storage projects? I assume you need some elements of long-term revenue visibility, hopefully, in a desirable market. But just walk us through how you think about the investability of stand-alone storage.

Christopher S. Sotos

Sure. I think if you're saying to invest in stand-alone storage purely on a merchant basis where capacity and energy are open, that's probably tough for us, unless it like fits in with other parts of our book, where we're trying to mitigate positions or scarcity pricing. .
So I think kind of step 1 from our view is that if you were to say, "Hey, what's the likelihood of C1 investing in a 100% merchant storage?" that's not integrated with the rest of its portfolio, that's not a probable place we're going to invest. .
Secondly, I think that because storage is a little bit nascent from an asset perspective, the significant -- I think we -- a significant majority of the economics are from the capacity side of things. So we don't want to bet a lot on, let's say, merchant energy, not that we don't need any, that would be a little bit too positive.
But We're really trying to mitigate that through contracting as long as we can on the capacity side of things. So from our view, you do need kind of that merchant dispatch, but it's not -- we're not going to take a 75% bet in terms of economics on the merchant portion of it either, if that's kind of your question.

Operator

Thank you. I'd now like to turn the call back over to Chris Sotos for any closing remarks.

Christopher S. Sotos

Thank you. Once again, I appreciate everyone's patience during this difficult year. I think we're working it through. And like I said, July looks to have reversed some of the trends we saw in the first half. We hope it continues. But thank you all for your support. Take care.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.