Clearway Energy, Inc. (NYSE:CWEN) Q3 2023 Earnings Call Transcript

Clearway Energy, Inc. (NYSE:CWEN) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Thank you for standing by, and welcome to Clearway Energy, Inc.’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to President and CEO of Clearway Energy, Inc., Chris Sotos. Please go ahead.

Chris Sotos: Good morning. We first thank you for taking the time to join Clearway Energy, Inc.’s third 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, our sponsor. Craig will be available for the Q&A portion of our presentation. Before we begin, I’d like to quickly take note that today’s discussion will contain forward-looking statements, which are based on the assumptions that we believe to be reasonable as of today. 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.

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. Given recent market volatility, we’re willing to change our customer investor call format, take a step back to reinforce the strength of our platform that sets us apart from competitors and the opportunities ahead of us. As such, first and foremost, critical to the YieldCo model is the difference of the YieldCo’s cost of capital compared to that of a development company. This difference has oscillated over time, and despite the current market volatility, our sponsor’s historic return targets and recently disclosed development IRR targets by other market participants demonstrate that CWEN’s cost of capital remains well below the target returns of a pure development, preserving this relationship and benefits for both parties.

In addition, sponsors hold approximately $1.8 billion of CWEN shares, ensuring alignment of sponsor interest or the long-term interest of CWEN. The second ingredient for a successful YieldCo, the strong supply of assets with long-term contracts. While the current volatile capital markets have created some dislocation in the near-term the fundamental strength of renewable assets in terms of transitioning the U.S. away from fossil fuels to green lower-cost energy has not changed. The demand to transition away from fossil fuels is not diminished. The climate change is a continual challenge for the globe shared by companies, government’s goals of producing their carbon footprint while the benefits of the IRA are also still intact. Most importantly, competitively priced renewable generation when compared with the current grid cost o energy, all drive a compelling long-term growth story for CWEN.

As part of these ingredients, we had Clearway work to optimize these larger macro elements in combination with a very straightforward corporate financing model that has underpinned no complex convertible or contingent equity financings and CWEN’s capital structure and no need for external capital to complete our DPS objectives through 2026. Pulling many of these elements together, CWEN, in working with the sponsors, has negotiated increased CAFD yield to 10% on drop-down assets of approximately $230 million of corporate capital deployment that we will discuss later. Importantly, we reaffirm our continued line of sight for $2.15 of CAFD per share. There’s no need for external corporate capital. And our consistent message over the past several years of visibility achieved a high range of our 5% to 8% long-term target.

And looking beyond 2026, in addition to the strong long-term goal development demand we described earlier, CWEN also benefits having strategic natural gas assets in California that are critical to assisting that state and transitioning away from fossil fuels. As evidence of this value, we have recently been awarded an additional approximate 1.5 years of contracted RA value, a strong pricing on a portion of our fleet. This pricing provides a strong foundation for CWEN to continue its growth trajectory in 2027 and beyond, in line with this long-term targets. In summary, despite challenging market conditions, the key elements that underpin a strong YieldCo still exists, significant cost of capital differences between the YieldCo and the sponsor, strong development spend and demand for renewable assets with long-term contracts, combined with a straightforward capital structure that translates into transparent growth.

Turning to Slide 5. Critical to the success of the YieldCo model is a strong sponsorship relationship. One key element of this is a cost of capital difference between the YieldCo and development. Given the return requirements of GIP and TotalEnergies as well as other recent examples of publicly disclosed development returns, that relationship continues to hold between Clearway Group and CWEN, even in the increased cost of capital environment we’re operating in. Clearway Group, which owns 85 million total shares of CWEN, representing approximately $1.8 billion of value, also receives approximately $130 million of dividends per year that helps fund and produce development activities to ensure a strong supply of drop down assets in the future.

Importantly, Clearway Group and their sponsors do not have any IDR or other special arrangements to drive value from the relationship with CWEN, as the increase in CWEN’s stock price, dividends paid and margin on development assets that aligns value optimization for all entities. As evidenced in this relationship, Clearway Group has agreed to improve the targeted yields on over $230 million of CWEN investments from approximately 9% to 9.5% CAFD yield to 10%, siding additional accretion on our redeployed thermal capital and reaffirming our line of sight growth through 2026. Clearway Group continues to invest heavily in development, in line with line of sight drop-down growth through 2026 as well as flexibility for timing of drop-downs thereafter.

Slide 6 provides an overview of CEG’s 29 gigawatts at development pipeline, which has grown substantially in previous years. This pipeline, which is an important source of growth for CWEN, continues to receive strong sponsor capital deployment to advanced development projects that are well diversified among technology types and compatible with CWEN’s growth and diversification objectives. The significant sponsor support has been demonstrated, allowing the platform to grow by over 2 gigawatts in the last 12 months and to near double the last 2 years. The continued importance of scale in this industry, it’s critical to managing through volatile periods and being able to leverage a large development and operational platform to weather the storms.

To this point, Clearway Group has been able to procure cost-effective supply agreements, should enable domestic content qualification and/or reduce interconnection time line risk for the 2025 to 2027 pipeline. In conclusion, the Clearway Group development platform has the benefit of leading scale in its class, is meeting sponsors to ensure supply of dropdown assets for CWEN in the future. Turning to Page 7. During this period of market dislocation, there have been a number of questions around long-term challenges in development of renewable assets with contracts. Although a rapid increase in interest rates since May has created some headwinds in the near-term and as all stakeholders have had adjusted capital cost conditions, we did not see this as a long-term impediment to the growth of renewables at the U.S. As a backdrop, renewable industry benefits from a variety of supportive federal and state policies as well as corporate ESG goals that drive long-term demand for renewable assets that are not as sensitive to price increases.

In addition, renewable PPAs are still competitively priced versus nonrenewable power outages, there is not as though an increased cost of capital only impacts renewable assets. It impacts all electricity-generating assets. Importantly, regardless of ESG or RPS standards, renewable assets produce electricity at prices that are competitive with other forms of generation, so are an attractive source of energy and economic terms as well. That being said, all of us within the Clearway enterprise are cognizant of the increased capital cost that impacts all stakeholders during the period of readjustment and PPA pricing: long-term asset earners like CWEN, tax equity, non-recourse debt providers, OEM suppliers, developers and PPA offtakers alike. We cannot forecast precisely how long it may take PPA prices to increase.

We can say the scale becomes ever more important during this period. As it is critical to be able to develop quality, cost-effective projects and we at CWEN take significant comfort in having Clearway Energy Group as one of the largest developers in the U.S., backed by GIP and Total Energies, 2 of the largest companies in the respective industries, to manage to this period. Simply stated, all of us with the Clearway enterprise recognize that we are in a period that require adjustments by all stakeholders. But we are in a more competitively advantaged position than most to manage through. Turning to Slide 8. An additional ingredient for success in the long-term is a straightforward capital allocation and financing strategy. As we’ve discussed through the years, we have a simple capital structure with no complex financing to require a CWEN common equity conversion or contingent issuance, no need for external capital either to meet our DPS growth through 2026.

We are also insulated from current interest rate volatility with 99% of our consolidated debt fixed, utilization of interest rate swaps and no corporate maturities through 2028. CWEN also naturally amortizes over $350 billion of nonrecourse debt per year as our debt amortization schedule is designed to limit risk around PPA renewal in different energy market environments, as was recently demonstrated with our three natural gas assets that became merchant in 2023. All of this leads to an overall conservative capital structure that correlates to a BB/Ba2 rating has been maintained since 2016 and through a variety of challenges and market headwinds. CWEN’s disciplined financial management has provided a strong foundation for sustainable growth through a variety of market conditions.

To provide further disclosure around our sponsor support and our latest drop-down offers, please turn to Page 9. We are excited to announce that we have a commitment to purchase Texas Solar Nova for approximately $40 million of capital and a 10% CAFD. These projects consist of over 450 megawatts of solar located in Kent County, Texas and are underpinned by power contracts that are 18 years in duration with creditworthy counterparties. In addition, discussions with Clearway Energy Group, we have been able to come to agreement to modify Dan’s Mountain’s CAFD yield to approximately 10% or approximately 9%, benefited from a new drop-down 25 offer of 3 solar assets and our approximate CAFD yield of 10% compared to the 9.5% of targeted previously.

These high-quality assets are significantly weighted towards solar and storage generation with fully contracted node settle unit contingent contracts to reduce volatility from the CWEN fleet. These drop-downs complete the allocation of the excess proceeds from the Thermal sales close in May of 2022 and most recently and increased CAFD yields, demonstrating the long-term alignment of interest between CWEN and sponsors to continue to drive value for shareholders. Turning to Page 10. This is a graph that should be familiar to you. There’s a lack of hard growth visibility through 2026. Starting on the left side of the page is our prior $420 million CAFD outlook that CWEN achieve when the majority of the drop down ’24 assets are operational on a full year basis.

The second column is a reduction in CAFD of $10 million are updating to reflect a variety of factors. Revisions to our P50 given wind resources in 2023, increased insurance costs, inflation as well as other factors. The third column represents a $5 million CAFD increase our investments in TSN as well as the incremental contribution to Cedro Hill Repowering prior to 2026, summing up to our updated pro forma CAFD outlook of $415 million. This, when added to approximately $20 million of CAFD dropped down ’25 discussed previously, that are updated line of sight CAFD of approximately $435 million. Importantly, we are maintaining the $2.15 CAFD per share guidance through 2026 that we have discussed previously. We believe the ability to maintain our long-term CAFD line of sight and our growth trajectory speaks to the strength of the CWEN platform.

Turning to Slide 11. Slide 11 provides a summary of CWEN’s contracted and open positions in the resource adequacy market through the next 4 years. We currently have the benefit of approximately 100% of our capacity contracted through 2025, 87% contracted through 2026 and now with 42% contracted in 2027. As discussed throughout the year, CWEN participated in several RFP auctions and bilateral discussions. As a result, it was able to secure two contracts for approximately an additional 1.5 years at strong pricing compared to previous contracts. While we cannot disclose the pricing of these contracts due to confidentiality provisions, we can say that the pricing achieved on these contracts would be extrapolated current uncontracted megawatts in 2027 and beyond, that would drive growth in 2027 for the low end of our 5% to 8% long-term CAFD per share growth target without requiring any other drop-downs of our external capital.

This is an important source of potential CAFD growth in the future, and while we do the extension of our RA contracts and strong pricing as an excellent signal of this growth in the future, we feel it is too early to declare a victory and incorporate this higher pricing into our 2027 and beyond view. Now I’ll turn it over to Sarah. Sarah?

Sarah Rubenstein: Thanks, Chris. On Slide 13, we provide an overview of our financial update that included CAFD of $156 million for the third quarter of 2023. Based on results occurred to date as well as forecasted activity through the balance of 2023, we are reiterating our 2023 full year CAFD guidance range of $330 million to $350 million. We are also introducing guidance for 2024 of $395 million of full year CAFD, reflecting certain onetime maintenance costs along with timing of gross investment since run rate CAFD contributions are achieved after 2024. We will provide further detail in a moment. Our dividend per share growth outlook for 2024 remains aligned to our long-term objectives. For the fourth quarter, we are announcing a dividend increase 2% or $0.3964 per share.

The decreased to $1.5856 dividend per share on an annualized basis. For 2023, this reflects full year dividend growth of as the 2022 of 8% which is distinct with our long-term growth market. In addition, we are announcing a dividend per share gross target for 2024 of 7% in line with our gross target in the upper part of the 5% to 8% range in 2026. Turning to Slide 14, we highlight CAFD of $156 million and adjusted EBITDA of $323 million for the third quarter of 2023. Compared to our expectations, the conventional energy gross margin was approximately $11 million lower due to milder temperatures in California. Despite lower energy margins, the conventional facility has strong availability and provided recourse advocacy our perspective. Solar generation is also implied to expectations for the third quarter, while regeneration with the overall CWEN is lower than anticipated in August and September.

Third quarter Q3, CAFD was also to a lesser degree affected by its previous expenses. Year-to-date, CAFD of 289 million third quarter of 2023 continues to reflect the previously reported this weak production and lower-than-expected merchant energy margins with extensional facilities through the second quarter of 2023. The company continues to maintain its full year CAFD guidance range of $330 million to $360 million. However, we anticipate that 2023 full year results will fall with the lower end of the guidance range. The full year CAFD guidance range reflects potential variability for the second half of 2023 and sensitivity for congenital gross margin, the majority of which was reflected in the third quarter results. Since the fourth quarter represents a smaller portion of the projected results as noted in our seasonality forecast by ’23.

Despite the challenges impacting 2023 CAFD, the company remains well positioned for growth with a strong balance sheet and pro forma credit metrics in line with target ratings. 99% of consolidated long-term debt has a fixed interest cost, either through fixed rate debt or through fixed rate swap. Due to the proceeds from the sales serve all there continues to be no external capital fees to define the line of sight growth in our dividend per share growth objective for 2026. Moving to Slide 15. We are establishing our 2024 CAFD guidance at $395 million. As we walk our 2024 CAFD guidance to our updated pro forma CAFD outlook, we note that we have deferred the timing of the Capistrano debt refinancing and so after 2024. Given our sizable cash balance and liquidity position, we have flexibility to be prudent on the timing of this refinancing and the incremental principal and interest statements are not in our 2024 CAFD guidance.

However, they are reflected in the updated pro forma CAFD outlook. In addition, the $395 million of CAFD anticipated for 2024 reflects onetime maintenance costs and related outage time for required maintenance upgrade on specific legacy wind sites. These maintenance upgrades are required to return certain facilities to normal availability levels and are expected to have a onetime impact to 2024 CAFD of $50 million. In addition, our pro forma CAFD outlook of $415 million reflects full year CAFD for all specific for this [ph] assessments, including Cedar Creek, Victory Pass, Arica and Rosamond South and Texas Solar Nova. The full year contribution of these growth investments is expected to be approximately $15 million of incremental CAFD as compared to the portion of CAFD realized by these investments in 2024.

This is based on the anticipated timing of assessments of our project COD, the majority of which are anticipated in mid-2024. Also reflected in the $395 million of 2024 full year CAFD guidance, along with the updated pro forma CAFD outlook, our updated P50 renewable production estimates as well as certain cost and decreases primarily driven client solutions. These amounts are individually immaterial, and therefore, we have not quantified them in detail. In addition, Merchant energy margins for the conventional facility are used to be materially in line with long-term assumptions previously provided, and no material change has been noted either in the full year CAFD guidance for 2024 or in the updated pro forma CAFD outlook. We continue to estimate long-term merchant energy margin in the $1 to $1.50 per kw monthly [ph] sensitivity at $20 million of CAFD per $1 per kilowatt increase.

Based on these estimates, we arrive at our 2024 full year CAFD guidance of $395 million and our updated pro forma CAFD outlook of $416 million which along with anticipated growth investments, using the remaining Thermal sale proceeds, support our long-term CAFD and dividend per share growth target. Now I will turn it back to Chris for closing remarks.

Chris Sotos: Thank you, Sarah. Turning to Page 17. While this has been challenging from a CAFD generation perspective, we are maintaining our revised CAFD range for guidance range for 2023. More importantly, during this difficult period, the strength of our platform allows us to reaffirm and continue with our consistently held near and long-term objectives, which is EPS grew 8% in 2023. We are reaffirming our EPS growth objectives at the upper end of our long-term growth target for 2026. We continue to proceed support from our sponsors and enhanced CAFD yields or the next contemplated drop-downs and the additional contract length in our natural gas strong prices. We’re getting traction around visibility beyond 2026, achieved both in line with our long-term CAFD targets.

While I had intended to be able to provide you with a more precise CAFD per share growth outlook for 2027 and beyond on this call, there are certain variables we think want more clarity on. While the resource adequacy contracting pricing environment is very constructive, we’d like to see how contracting plays out for conditions in 2027 and beyond. Additionally, as stated before, we and our sponsor have flexibility and timing of drop-downs for growth beyond 2026, be prudent on timing and structuring drop-downs or tax rate growth beyond 2026 and compete for the capital market environment to stay upon on us. Operator, open the lines for questions, please.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Julien Dumoulin-Smith of Bank of America.

Julien Dumoulin-Smith: Look, guys, nicely done in California here. I wanted to just get a little bit of a sense here. Just what are you looking for to provide an update here? I mean, just to pick up where you just left off here. I mean what specific parameters? Is it California specifically? Or is it other drop-downs? And then I have a few specific follow-ups, if you can? And maybe you can give us a little bit clearer sense of what you’re seeing in California as well?

Chris Sotos: Sure. I think in California, and once again, unfortunately we can’t disclose the price due to confidentiality. But the contracts that we had signed previously to kind of be able to give guidance through ’26, we’re seeing prices stronger than that weighted those contracts back in the past. And so for us, we feel very good about the ability to extend those contracts by about 1.5 years on those 2 assets into 2027. But as you can see from our charts and the like, we’re only about 42% of that capacity hedged in 2027, which makes it difficult to say, here’s exactly how CAFD works, and here’s what we’re going to target. So I think what we tried to talk about on the call was that if you keep kind of the other variables held constant, if you were to move that 2027 contract that we were able to secure and said we were able to contract the corresponding 58% open position at those rates, we could see being able to hit the low end of the long-term CAFD guidance through ’27.

With regard to drop-downs, Julien, which I think was kind of your second question. There, obviously, that’s 3 years in the future. We’re at a market that is very, now it is very volatile currently. So for us, we kind of looked at the strong sponsor support we’ve received in our most recent drop-down discussions. And then we’ll kind of see where the market goes over time to move those CAFD deals to what makes sense in the future. But I think right now, we’re kind of very confident and happy with our ability to reaffirm 2.15, continue our guidance in terms of being able to hit the upper end of the range through ’26. And we’re starting to see some good green shoots for ’27 and beyond, just not as tight as we would have liked it when we talked at this time last year.

Julien Dumoulin-Smith: All right. Fair enough. Now with that said, let me just nitpick a little bit here. Instead of using a greater than, now you’re using at tilde on the $2015. Can you explain a little bit of what you’re seeing? It sounds like a slight reduction in confidence, and that seems despite the higher yield on the dropdown at 10%. So in theory, I would have thought that estimate revisions would have been higher. And then maybe related to that, you tell me if it is or not, it looks like updated pro forma CAFD here goes to 2.05 from 2.08, so down $0.03 there. So I don’t, again, I don’t mean to nitpick too much here, but I’m curious on the signaling and what’s driving a little bit of a reduction, if you will, despite the higher drop-down yield environment.

Chris Sotos: No, no concern, Julien. There’s a reason we try to map it out all for you. So the question, yes, welcome the question. I think you, it’s not as though we have less confidence in the 2.15. It’s just before like we are giving you a point estimate 3 years out. So we might be $0.01 high or low in terms of routing and the like. The real driver behind the reduction from what you saw before from kind of a $440 million to $435 million is really around the $10 million that we took as a result of the P50 results we saw in 2023. Insurance is a little bit higher and other costs, just the main source of that deviation that you’re mentioning from what maybe you saw previously disclosed. Obviously, kind of we’re not happy with that, but as we talked about during this year, we incorporate actual performance into our estimates.

We try not to just be theoretical. We actually take into account what’s going on. 2023, stating the obvious, has not been a good year from wind resource or solar resource perspective. So we’ve taken into account going forward to make sure we can kind of tighten down our math.

Julien Dumoulin-Smith: Okay. Fair enough. It doesn’t sound like there’s anything too specific there from what I can tell. And then the drop down here, the wind drop down, do you mind talking about it? It seems like there’s a higher yield, but a higher valuation or sorry, I think I said that right.

Chris Sotos: Yes. There’s more capital just because of how it’s structured at the end. For us, we’re looking to really target the overall deployment. For us, Julien, a lot of people kind of count megawatts, We’re much more concerned about how much capital are we deploying at good quality projects with good accretive CAFD yields. So for us, to your point, the way it was finally structured resulted in a little bit higher capital deployment, but because it’s also at a higher CAFD yield, I’ll take it.

Julien Dumoulin-Smith: Okay. Fair enough. Excellent, guys. Appreciate your patience this morning and good luck. Hopefully, next year or next quarter, we’ll get an update at last, as you nail things down?

Chris Sotos: Well, I think, once again, Julien, those RA contracts. They take time to basically write we’ll participate or we’re always engaged in bilateral discussions. The RFPs, as you know, kind of happened in June or a little bit before during the year. We get our awards in November. So I don’t think there will necessarily be that many major updates between now and let’s say, the February call. I think, for us, as we continue to see if this market environment settles down and we can have more clarity around what drop-downs may look like, in addition to more RA megawatts being contracted, that’s we’ll kind of give more clarity around 2027.

Operator: Our next question comes from the line of Angie Storozynski of Seaport.

Angie Storozynski: I just wanted to say, well played. This is how we do with, basically. You pace yourself with the dividend growth, you just live within your means. And I’m hopeful that the stock will reflect this reality versus what we’re seeing at other YieldCo. So, now as far as the growth is concerned, obviously, you have a sponsor that is supportive and willing to adjust the capital yield for the current interest rate environment. But how about maybe organic growth? Any sort of repowers or expansions of existing sites, something that you could do on your own?

Chris Sotos: Sure. We look at that all the time, Angie. And I think what we’ve talked about is Seadrill Hill is a repowering. So we have some of that built already. I think for us and a little bit further discussion about the volatile capital market environment that you referenced, we kind of really need to see where we need to source new capital. As part of my prepared comments, we’ve kind of worked through all of the excess capital that we received as part of our Thermal disposition. And so for us, in looking at repowers and kind of Craig’s team and looking at what PPA can you renegotiate, what are turbine prices and the there is some of that organic growth. But as I commented previously, it’s not like we have 2 gigawatts that can be repowered in the next 2 years.