Q4 2023 Clearway Energy Inc Earnings Call
Participants
Christopher S. Sotos; President, CEO & Director; Clearway Energy, Inc.
Craig Cornelius; CEO & President; Clearway Energy Group LLC
Sarah Rubenstein; Executive VP, CFO & Principal Accounting Officer; Clearway Energy, Inc.
Justin Lars Clare; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division
Mark Thomas Jarvi; Executive Director of Institutional Equity Research; CIBC Capital Markets, Research Division
Michael B. Lonegan; Research Analyst; Evercore ISI Institutional Equities, 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. Fourth Quarter 2023 Earnings 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 of Clearway Energy, Inc. Please go ahead.
Christopher S. Sotos
Good morning. Let me first thank you for taking the time to join Clearway Energy, Inc.'s fourth 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 the 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 4.
Despite a difficult year from a renewable resource perspective, CWEN's 2023 CAFD came within its revised guidance range of $330 million to $360 million at $342 million, with the fourth quarter CAFD of $53 million.
Commercial operations were also achieved on Daggett II and Texas Solar Nova 1 in the fourth quarter, which will help drive CAFD in 2024 and beyond.
CWEN also committed to approximately $215 million of new corporate capital deployments in 2023 and average 5-year annual CAFD yield of approximately 10%, while further diversifying CWEN's fleet.
Looking to 2024, we are announcing a dividend increase of 1.7% for the quarter, bringing our quarterly dividend to $0.4033 per share or $1.6132 on an annualized basis, with targeted group growth of 7% for the full year of 2024.
Clearway is also reaffirming a CAFD guidance of $395 million for 2024, with CAFD results in line with expectations to date. Clearly, continues to execute on its long-term growth targets of $2.15 of CAFD per share and is reaffirming our ability to achieve the upper range of 5% to 8% of growth through 2026, without needing to raise external capital.
As we transition to focus on growth beyond 2026, we continue to manage our RA contracting positions in the 2026 to 2030 time frame, pursuing both value and certainty to drive value for shareholders. In addition, our sponsor's 29 gigawatt renewable pipeline continues to develop, with approximately 7 gigawatts of late-stage projects, targeting CODs over the next 4 years.
Clearway will continue to execute towards 2026 to $2.15 CAFD per share target during '24, while also focusing on providing further growth visibility beyond this CAFD goal in the years to come.
Please turn to Page 5. Page 5 is a summary of Clearway's over $215 million of committed growth investments announced in 2023, some of which are already operational, with respect to Texas Solar Nova 1, with the remainder to come online during 2024. These investments are expected to generate 5-year annual average CAFD yield of approximately 10%, underpinned by long-term contracts of 15 years and over.
The assets comprised diverse generation, with approximately 620 megawatts of wind and solar generation added and approximately 150 megawatts of storage. These assets are funded with the excess thermal proceeds and continued Clearway's execution for the $2.15 CAFD per share goal, when these proceeds are fully developed.
Please turn to Page 6. Slide 6 demonstrates our path to $2.15 per share, with the remaining approximately $200 million of excess thermal proceeds to be deployed in approximately 10% 5-year annual average CAFD yield. These remaining assets should hit their commercial operation dates during 2025.
As we move from finishing the deployment of our excess thermal proceeds into growth investments, we look to additional sources of growth beyond 2026. Our first avenue of growth has additional drops from our sponsor. We will provide additional color on potential drops on the next slide, and later this year, we'd anticipate providing estimates on capital deployment and CAFD yields for new projects beyond those identified here for use of the thermal proceeds.
Additional avenue of growth is resource adequacy awards and pricing in 2027 and beyond. As highlighted last call, we continue to add length to our RA capacity contracts as strong pricing to drive value.
Lastly, third-party M&A is always a focus. And while due to capital market volatility in 2023, we didn't execute on any third-party M&A, clearly, remains focused on this market in 2024.
Turning to Page 7. In order to provide additional color around opportunities from our sponsor's late-stage pipeline for the 2026 to 2027 time frame, we thought it was appropriate to provide a high-level summary of further potential drop-down activity for these years.
Our sponsor is working on over 4 gigawatts of fleet optimization and expansion opportunities with CODs in 2026 and 2027, which are well diversified between wind repowerings, additional new wind assets, solar storage hybrid assets and stand-alone storage projects. These investments are highly diversified also by offtaker and market, and will benefit from the ability to deploy domestic content and invest in energy communities under the IRA, thereby delivering competitively priced energy to customers, while meeting return requirements and reducing risk to Clearway's overall fleet.
In summary, while it's too early to provide details in terms of potential capital deployment return levels, investors can be assured there's a strong pipeline of growth at our sponsor that should add significant assets to Clearway Energy, Inc.'s portfolio through the middle of the decade. As always, we will raise capital prudently, with a focus on efficient execution to optimize accretion.
Now I'll turn it over to Sarah.
Sarah Rubenstein
Thanks, Chris. On Slide 9, we provide an overview of our financial results, which includes full year adjusted EBITDA of $1.058 billion and CAFD of $342 million, which was within the previously provided revised guidance range of $330 million to $360 million.
Fourth quarter adjusted EBITDA was $201 million and CAFD was $53 million, both consistent with revised internal expectations updated in August of 2023 to reflect renewable resource impact.
Our fourth quarter results reflected strong conventional availability and the benefit of timing of maintenance, capital expenditures and other items, offset in part by lower wind resource, which was a trend observed throughout the industry in the fourth quarter.
Despite the challenges impacting 2023 full year CAFD, the company remains well positioned for growth with a strong balance sheet, pro forma credit metrics in line with target ratings and 99% of its consolidated long-term debt with a fixed interest cost. In addition, the company's earliest corporate debt maturity is 2028, and there continues to be no external capital needs to fund the line of sight growth to meet our dividend per share growth objective through 2026.
The remaining thermal sale proceeds are available to fund committed 2023 investments and offered projects that are expected to facilitate achievement of line of sight CAFD per share, $2.15. We are reiterating our 2024 CAFD guidance at $395 million. Among other factors, our 2024 CAFD guidance continues to factor in current P50 median production estimates, previously disclosed expectations for maintenance capital expenditures in 2024 and timing of committed growth investments based on estimated project CODs, but excludes CAFD from committed growth investments beyond 2024.
Our pro forma CAFD outlook remains at $415 million, which, along with anticipated growth investments using the remaining thermal sale proceeds, supports our potential line of sight CAFD and dividend per share growth target.
Now I will turn it back to Chris for closing remarks.
Christopher S. Sotos
Thank you Sarah. Turning to Slide 11. Our goals for 2024 are simple. First, to focus on delivery of our 2024 CAFD guidance, while achieving our 7% DPS growth in 2024. In order to do this, we'll target to improve availability from the CapEx investments we are making in several of our sites.
Second, we continue to execute toward our $2.15 of CAFD per share target, once all the excess thermal proceeds are deployed and fully operational, while adhering to our underwriting standards.
Third, we want to begin the move in conversation around growth to beyond 2026 through a combination of additional RA contracting, providing visibility on further drop-downs in 2026, 2027 period as we progress through 2024, additional improvements in the existing fleet, the repowerings and like and finally, an eye to continue to pursue M&A at our disciplined capital targets.
Operator, please open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Michael Lonegan with Evercore ISI.
Michael B. Lonegan
So you highlighted the shift in the timing of maintenance CapEx. It looks like if you could spend any additional maintenance in the third quarter from the fourth quarter -- between the 2 quarters. You came in at $22 million for the year versus guidance for $35 million, yet you reiterated your maintenance CapEx forecast for 2024. Just wondering if you could share more detail about this?
Christopher S. Sotos
We're probably not going to get into a lot of details. Just as a lot of those numbers are immaterial to overall guidance and I'll turn it over to Sarah in terms of any further clarity. But for us, obviously, 2023 was a disappointing year from generation overall. So maintenance CapEx was not needed as much due to lower generation.
So I think from our perspective, while we kind of gave guidance for 2024 maintenance CapEx, to your point, we really look comprehensively at what happened in '23. Some of the availability shortfalls we saw for them where we can kind of spend those dollars to improve availability in '24 to move on.
So I think those are really kind of a lot of the points around maintenance CapEx. It's not a question of what we thought it was, unfortunately, due to the generation kind of being lower than we had targeted. Maintenance CapEx is also thereby lower and really kind of putting those 2 together. But Sarah, any other details?
Sarah Rubenstein
No, I think you've covered it. I mean maybe just to highlight the $395 million of CAFD that we're guiding to in 2024 includes any amount that we would potentially have decided not to do in 2023 and to do in 2024. So there's nothing that we have to worry about revising 2024 for.
And to Chris' point, I think overall, coming in lower than budget for maintenance CapEx for 2023 really just reflects our results for 2023.
Michael B. Lonegan
Great. And then second one for me, you reiterated that you still need external capital through 2026. You've been talking about how you're targeting 4x to 4.5x corporate debt to corporate EBITDA.
Just wondering, once you deploy all the thermal proceeds, presumably you'll organically delever the balance sheet a little bit. Just wondering if you could say where you expect to be within that leverage range now? And if you're at the low end, would you consider deploying excess capital to target the midpoint, for instance?
Christopher S. Sotos
Sure. I think a couple of questions in there. So hopefully, I'll unpack it. The first point is, it's not as though that we're actually going to rest on our laurel for $215 million by 2026. That's just where the number falls out, given the external -- given the capital from thermal. So we actually hope to do better. But right now, as we control a line of sight on, just for a point of clarity.
I think as we think about the overall debt, there's about $2.125 billion of bonds. And once we deploy over thermal proceeds on a run rate basis, that's about $435 million of CAFD. You had backward interest of about, call it, $90 billion to $95 billion. You get about 4x, call it that corporate debt to corporate EBITDA.
So I think to your question, there should be excess leverage capacity to be fair. I don't want to pin everything on one credit step. That's the easiest one we use to translate. We were in an 8% interest rate environment, obviously, other things move around. So I think to your question, we do think we'd be once all the thermal capital is deployed, on the low end of our target 4x to 4.5x. But also to be a little bit fair to your question, there's -- yes, agencies use a number of other metrics. It's just the simplest one to kind of walk through. So hopefully, that answered your question.
Operator
Our next question comes from the line of Mark Jarvi with CIBC.
Mark Thomas Jarvi
Maybe just going back to the comments around M&A, third-party M&A transaction in 2023, but might be more active in '24. How would you sort of frame the environment right now. It seemed like it was a bit of a buyer's market last year. Anecdotally, we're hearing that from some other peers that things are starting to pick up in terms of activity levels, a bit more competition. How would you frame right now, Chris?
Christopher S. Sotos
Sure. I think from our view, 2023, I think because of that volatility, I mean, we're well aware kind of where treasuries moved and also our stock in the fourth quarter is just very difficult for us to feel good about underwriting during that year, given that volatility and knowing we get accretion and being disciplined.
So for us and also I think a lot of sellers were kind of waiting to see where those markets came down to be able to move forward with sales. And I think while obviously, kind of the past, call it, month, we probably had 40-ish basis points of 10-year treasury volatility, that's obviously much less than we're all experiencing in the fourth quarter of last year.
So from my perspective, I think the overall target for M&A is hopefully more robust in '24 than it was in '23. And importantly, our ability to execute. I just think we had very volatile markets, which made kind of execution and underwriting very difficult in '23.
Mark Thomas Jarvi
And then how would you think about funding any M&A on top of the existing commitments?
Christopher S. Sotos
Yes, depending on what size of it is, we obviously have an unfunded revolver, which we kind of use the warehouse first. And I think to the previous question, we always kind of use excess cash. Whenever we borrow, if you look at our excess cash to basically pay back first, then any excess debt capacity, which was the previous question and then equity last.
So for us, depending on where capital markets are at the time and size of the acquisition, we obviously have significant revolver capacity, so we're not forced to go to the market at a certain size.
Mark Thomas Jarvi
Understood. And then as you look through the next 3 to 5 years, I know at some point, you guys will give us some more clarity on where you think the organic growth or so the drop down growth will come from. But besides -- is there anything else on the CAFD profile related to tax equity partnerships? Are there any like notable flips coming up, potential buyouts, anything that sort of changes the CAFD profile of the existing assets over the next 3 to 5 years?
Christopher S. Sotos
Those come up fairly regularly, like -- but those -- I wouldn't say are material drivers of a paradigm-changing number. Like in our disclosure, you see us kind of do one of those a year. In general, they tend to be pretty small. So to your question, those flips do come up, but they tend to not be material drivers of CAFD in the long term.
Mark Thomas Jarvi
Okay. And last question for me. I just -- obviously, you saw PPA prices rise over the last couple of years, return objectives moved higher, including our own CAFD targets. Assuming that rates plateau or go lower here, just updated you in terms of where you think returns are going to trend over the next 12 months here. How are you seeing that maybe there's -- maybe at CEG level in terms of where you're seeing PPA prices clear and more recently in terms of return potential?
Christopher S. Sotos
Craig, if you don't mind, speak for CEG.
Craig Cornelius
Sure. I think as the weighted average cost of capital for sponsors and project owners across the industry, rose over fiscal year 2023, the broad environment of industry participants factored that increased weighted average cost of capital into the prices they offered customers on new contracts. Those prices also took into account the equipment pricing environment that after the pandemic and other changes in trade policy became more elevated.
And in today's market, we see PPA prices remaining above where they were for comparable resources before the start of 2023. And we and other competitors, I think, are finding that customers still see value in those elevated PPA prices. In particular, for customers who either as load serving entities or as end-use customers see growing load and value the low emissions profile of the products that we're selling.
So we don't foresee meaningful declines in PPA prices from where they are today. And equally, because it's a competitive environment, we don't see an expectation for dramatic increases in returns that are produced for projects, but we are now able to support higher internal rates of return and higher CAFD yields on the new projects that we're creating, which take into account the elevated cost of capital for the industry generally.
Mark Thomas Jarvi
Got it. So any decline in PPA prices would really be more reflective of CapEx trends? And I guess financing costs and not so much a sacrifice in IR objectives?
Craig Cornelius
No, I don't think so. I mean I think we've sought to be disciplined. We need to deliver accretive growth for Clearway Energy, Inc. And I think in general, the industry's largest project sponsors have entered an era where we are all being cautious in the way projects are configured and created. And I think the largest customers having gone through all the disruption of the last 3 or 4 years, increasingly value engaging with project sponsors who can deliver projects with certainty.
Operator
Our next question comes from the line of Justin Clare with ROTH MKM.
Justin Lars Clare
Yes. So I was wondering if you could maybe just update us on the progress you're making on contracting the opening conventional capacity in 2027. Is it -- could we see in the near term here, some smaller amounts of that capacity contracted? Or is it more likely that something happens in the summer of this year.
And then beyond that, I was wondering if you could maybe just talk about the other levers that you're focused on for extending DPS growth into 2027? I know acquisitions is a part of it, but anything else meaningful that we should be considering?
Christopher S. Sotos
Sure. So for the first part of your question, like don't get me wrong, the major procurement initiative is kind of you bid as part of the RFP processes on the utilities and the grid and the like, really in kind of, call it, late first quarter, early second quarter, and you find out about those awards, call it, third quarter when they're binding late third quarter, maybe early fourth.
So I think to your point, in terms of a real paradigm change in terms of very -- much more significant capacity, that's when you'd see it. That being said, we're constantly in communications with a variety of counterparties on the smaller side to try to move those numbers up at prices that we think are good as well.
So to your question, if you were to say, hey, Chris, when do we see a multiple 100-megawatt move that's probably much more as part of that large procurement process. That being said, could you see smaller moves in the interim? Yes.
And then your second question about extending the other sources of growth to '27, not to minimize, it really is those 3 sources. RA is the big part of it, given pricing that we're seeing. We hope it holds. And like the question I just answered, we'll look to see what happens in the RFP processes kind of the spring and summer.
M&A is obviously critical as well as the repowerings and further drop-downs with the 2026 and '27 COD. And once again, we hope to provide more color on those as we progress through the year, and we feel better about what capital those products are going to take, so on and so forth. It's a little bit early now to do that.
Justin Lars Clare
Got it. Okay. Appreciate it. And then I did want to ask about the nonrecourse debt principal amortization schedule. It looks like the amount in 2024 that is expected, moved up significantly, $1.7 billion. I think last quarter, the expectation was $432 million. So could you just maybe walk us through the change there? And help us understand that?
Christopher S. Sotos
Let me get the schedule for a second.
Sarah Rubenstein
It's the projects under construction.
Christopher S. Sotos
Got it. Go ahead, Sarah, why don't you just answer.
Sarah Rubenstein
Yes. So we had several projects that we think that we acquired. I think you can see Victory Pass in Arica is the biggest piece of it, the 757 and then also the Rosie Class B, those 2 amounts are for projects under construction. And so once the construction is completed, that will get replaced by tax equity, cash equity, more permanent financing. So those maturities will go away as a result of other proceeds from other financing arrangements.
Christopher S. Sotos
The amortization on the existing project debt is about the same as it as before. That's really just as the 2 projects move from construction debt to permanent financing.
Sarah Rubenstein
Yes, that's right.
Operator
Our next question comes from the line of Noah Kaye with Oppenheimer & Company.
Noah Duke Kaye
Okay. Great. Yes, they cut out for a second, so I just want to make sure I've been called on.
I think it goes a little bit to one of the earlier questions, but too soon to talk about CAFD yield expectations for some of the 2026, 2027 potential projects? Any way to dimension that? And in particular, I know one of your peers have talked about kind of the return expectations for repower. So not sure if you can parse that out for us a bit.
Christopher S. Sotos
Yes. It would be simple to your question, no. We think it's too early. I think once again, if your question is, will it be 8? Probably not. But I think if you look at where CAFD yield have moved, and I think also you've noticed that, hopefully, our sponsors have been supportive of moving CAFD yields higher from where we first thought they would be, given the move-in treasuries that happened.
So if you look, I think it was probably August of 2022, we basically indicated CAFD on some of these reps would be about 8.5. And then we kind of moved them up in, I believe, it was the fourth quarter of '22, moved them up further in '23.
So yes, there's a feeling on that. The sizable they can move them to infinity. So I think for us, not to minimize your question, it really is seeing where the capital market is out at that time and where do we feel comfortable underwriting. So it is too early to tell. And I think the projects are a little bit too early stage currently to -- everybody feel good about the capital required and also what that cost of capital might be.
Noah Duke Kaye
Yes. It's good to see that just from a sponsor development standpoint, I mean, the kind of quantity of projects for '24 and '25 looks fairly consistent quarter-to-quarter. I did notice what appears to be some shift of target CODs '26 into '27. Anything we can understand or read into that? Does it speak to IRA clarifications or kind of more persistent in your connection model nights, anything like that? Maybe a great question.
Christopher S. Sotos
Yes. Craig, if you don't mind.
Craig Cornelius
Yes. Yes, perceptive question, Noah. Yes, we -- what that shift over '26 to '27 reflects principally is planned for certain projects to be able to make use of domestic content solutions and conservatism in the way that we're planning those project schedules, based on when and how the guidance that's required for being able to finance those solutions would materialize. But also just forecasting of project schedules in a way that we anticipate would be durable and also enabling a capitalization of the project by CWEN under foreseeable financial market conditions.
So right now, with respect to interconnection, we feel pretty solid about the family of projects that we are advancing that underpin the core of that 2026, 2027 volume for CWEN growth enablement. We have in excess of 15 gigawatts worth of late-stage interconnection positions and many gigawatts worth of high-voltage equipment that we've secured to be able to support the growth there in the mid-decade.
So I think we're not in a position where we're particularly concerned about some of the grid bottlenecks that have broadly impacted the industry to be able to support growth goals for CWEN. And instead, right now, as we're prosecuting projects for that mid-decade are just focused on how to set projects up to maximize value to construct a portfolio that will be diversified and beneficial for CWEN and to that project up for construction and funding schedules that provide us with useful flexibility for how and when the projects would be funded by CWEN.
Noah Duke Kaye
Very helpful, Craig. May I just ask a quick follow-up to someone who knows DC as well as anybody in the world. I just want to clarify whether or not you -- the development entity is still kind of waiting on finalization of domestic content guidance to make some of those FIDs and if so, kind of when you're thinking the guidance may actually be published?
Craig Cornelius
I mean, I think that we -- it's a balancing act, as I think you're alluding to, there are projects that we have planned for the -- say, 2026 vintage where we would ideally like to enable the use of additional domestic content solutions, that we think would be responsive to U.S. policy goals and value-enhancing. But there are certain timetables that support customer needs that eventually just have to be fulfilled.
So what we do is we advise the staff of the various agencies on the implications of the amount of time it takes to issue guidance for project timetables that aren't universally flexible in the industry. And I think it's understood by a lot of the folks who have to work through the policy process on domestic guidance that we're moving through time windows where it would be beneficial for that clarification of domestic content guidance to be issued in the course of the next 2 months if we want to be able to catch the 2026 vintage for a substantial fraction of the industry activity.
But for what we currently have planned for 2026, we have locked in supply chain solutions, that will allow those projects to be completed in that timetable and are no longer relying on the issuance of that guidance to be able to do so.
Operator
And I'm currently showing no further questions at this time. I'd like to hand the call back over to Chris Sotos for closing remarks.
Christopher S. Sotos
Thank you. Once again, I think 2023 was a difficult year from a resource perspective, but we hope to kind of bring things back on track in '24 and see a lot of progress over the course of the year that we hope to be able to illustrate to you in terms of driving CAFD forward on a future basis beyond '26.
So I appreciate everyone's patience during '23 and moving on to '24. Thank you, everyone.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.
