Clearway Energy Inc (CWEN) 2021 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Clearway Energy Inc. First Quarter 2021 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Christopher Sotos, President and Chief Executive Officer. Please go ahead.

Good morning. Let me first thank you for taking time to join today's call. Joining me this morning is Chad Plotkin, our Chief Financial Officer; and Craig Cornelius, President and CEO of Clearway Energy Group. 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 4. Financially, Clearway is reporting first quarter CAFD of negative 15 million, including the negative impacts from the February weather event in Texas, an acceleration of accrued interest due to the refinancing of the 2025 senior notes. These negative effects were significantly offset by the strong performance at our West Coast renewable projects, demonstrating the benefits of a scalable and diversified portfolio. As a result, we are maintaining our guidance at $325 million that we provided on our call in February.

As indicated previously, during the quarter, we were able to refinance our $600 million 2025 senior notes with a $925 million new Green Bond due in 2031 at a very attractive 3.75% interest rate. This issuance was used to refinance the 2025 bonds, repay our revolver borrowings with permanent capital and general corporate purposes, all while saving Clearway approximately $10 million in interest costs. Clearway has announced an increase in its dividend by 1.5% to $0.329 per share for the second quarter of 2021. This is on track for our DPS growth at the upper end of our 5% to 8% long-term target for 2021.

As one of our key strategic goals this year, I'm happy to announce more than 2 years prior to the expiration of the current tolling contracts in the middle of 2023, a new 7.5 year resource adequacy contract with an established load serving entity for 100 megawatts at Marsh Landing. Not only is this an important first step in mitigating future merchant exposure, but the pricing we were able to achieve while subject to confidentiality is sufficient to maintain the current CAFD profile of Marsh Landing if we were able to secure similar economics on the remaining capacity of the plant. It is important to recall that our gas plants will be materially debt-free at the expiration of the existing contracts.

While we still have a long way to go, I want to reiterate this is a strong step more than 2 years ahead of the expiry of these contracts at a constructive tenor in pricing and reinforces the strong position that our gas assets occupy. Our assets are some of the newest and most efficient in California. They are strategically located inside of major load pockets. Most importantly, they all have quick start and fast ramping capabilities, allowing California to address reliability needs related to its renewable energy goals. These attributes make Clearway's gas assets a critical part of California's overall supply stack as was demonstrated last summer.

During the quarter, we continue to execute on and advance renewable growth at Clearway. We closed the acquisition of the 264 megawatt Mt. Storm project, which is situated in our Pinnacle and BlackRock assets, allowing Clearway to effectively provide O&M services to these 3 sites. In a competitive market, efficiency is a key advantage in our ability to buildout platforms in certain geographic locations while achieving operational efficiencies is critical to our success. We continue to work with our sponsor, Clearway Group, on co-investing in a new partnership currently expected to be between 1.1 at 1.7 gigawatts, which will further diversify Clearway Energy and provide additional CAFD certainty with a weighted average contract tenor of approximately 14 years.

In addition, Clearway Group is continuing to grow its development efforts, and we expect its current 10-gigawatt pipeline to grow meaningfully in the second half of 2021. Finally, as I will discuss in more detail on the next slide, Clearway is increasing its pro forma CAFD per share outlook to $1.85 per share, which now supports our DPS growth objectives through 2023.

Turning to Page 5 to provide more color to our pro forma CAFD and dividend per share outlook. Given the investments in growth that we have made as well as the recently completed refinancing discussed, we are now increasing our pro forma CAFD outlook to $1.85 a share. If we assume that the CAFD profile of our assets remains constant, we can increase our dividend within our long-term 5% to 8% growth rate through the end of 2023, where we recognize that merchant exposure in California, resulting from the natural gas assets reaching contract maturity in 2023 as uncertainty. The current CAFD per share trajectory provides for flexibility to mitigate this uncertainty. Specifically, the company has cushion against the reduction in CAFD per share of approximately $0.10 while maintaining the ability to achieve our long-term DPS growth targets through this period of time.

For example, at $1.75 of CAFD per share, an 85% payout ratio, Clearway Energy could pay a dividend per share of $1.49, which would fall in line with the low end of our long-term dividend growth objectives of 5% to 8%. In addition, please note that $1.85 pro forma CAFD outlook does not include any further investments by Clearway and additional dropdowns or third-party M&A. So in summary, the company continues to execute, adding to visibility around future growth in CAFD and dividend per share as well as to increase the certainty around that growth trajectory.

With that, I'll hand the presentation over to Chad. Chad?

Thank you, Chris. And turning to Slide 7. Today, Clearway is reporting first quarter adjusted EBITDA of $198 million in cash available for distribution, or CAFD, of negative $15 million. Though these results came in below our expectations, we view overall financial performance favorably. There’s excellent production at our renewable portfolio on the West Coast and higher distributions from unconsolidated investments provided a substantial offset to the financial impact from the February winter event in Texas.

On the positive front, the prevailing winter weather in the quarter that impacted wind production in Texas and the Midwest had the effect of creating favorable renewable energy conditions in California, where production at the Alta wind project was up over 30% relative to expectations. Similarly, these same conditions led to above expectation performance for the West Coast-based utility scale solar projects.

On the negative side, and as previously disclosed, the company had estimated the full year cash impact from the February winter event in Texas to be in the $20 million to $30 million range. Today, we are narrowing that range to $25 million to $30 million. As in the first quarter, we realized an approximate $25 million impact to CAFD, which due to amounts attributed to third-party equity investors resulted in an approximate $50 million impact to adjusted EBITDA given the effect on fully consolidated revenue.

While there continues to be ongoing discussions in Texas on the long-term implications of the February event, we do believe the material impact to the company has passed. That said and based on our best available information, we continue to plan for some potential additional cash exposure, which is what informed the narrow range currently noted on the slide.

Further impacting quarterly results was a timing dynamic relating to the successful issuance of the green bonds due 2031 and the repayment of the outstanding 2025 senior notes. Specifically, the timing of when cash interest payments are made changed as roughly $14 million in accrued cash interest expense that would normally have been paid in the second quarter was accelerated into the first quarter. Because of this change in the timing of corporate interest payments and to improve visibility into quarterly expectations, we pro forma adjusted the normal seasonality disclosure in the appendix section of our earnings material to account for this modification. Please refer to Slide 14 of this presentation for this update.

In referring to this updated disclosure, I would remind you that the first quarter is generally a seasonally low part of the year as most of the company’s CAFD is generated in the second and third quarter. That said and to put some perspective on quarterly performance, if we excluded the approximate $25 million reduction to first quarter CAFD from the February Texas winter event, realized CAFD in the quarter would have been favorable to the modified pro forma first quarter expectations.

As noted in the last quarterly call, we indicated that the effect of the February event in Texas was essentially offset by the expected full year contribution from the closing of the 35% interest in Agua Caliente. So we did not raise CAFD guidance at that time to account for the growth investment.

Today, we are again maintaining full year CAFD guidance of $325 million, which continues to be based on the achievement of P50 median renewable energy production for the full year. But we do note that given the pro forma adjustment to our seasonality expectations and since we view the financial effect of the Texas event as outside of the scope of our normal sensitivity range, the company is currently trending favorably to our consolidated P50 financial outlook for the full year.

With that, I'll turn the call back to Chris for his closing remarks.

Thank you, Chad. Turning to Page 9. We are focused on our goals for 2021. Despite the shortfall due to the difficult Texas winter weather event in February, we are maintaining our guidance of $325 million of CAFD for 2021. Our scalable and diversified portfolio, particularly our West Coast renewable portfolio, performed well in the first quarter, mitigating a significant amount of the Texas impact. In addition, we remain on track to achieve the upper end of our DPS growth rate of 5% to 8% through 2021.

As a result of our continued growth investments through dropdowns and third-party M&A as well as refinancing activities, we have increased our pro forma CAFD outlook per share to $1.85, which provides a strong runway towards achieving our 5% to 8% dividend per share growth through 2023. We continue to work to increase this pro forma CAFD outlook and working with our sponsor, additional co-investment opportunities and we expect to see new transaction signed by the end of the year.

Finally, we are working to enhance the value of our California natural gas portfolio. We have closed on our first 100 megawatt contract, more than 2 years out from the current contract expiry at attractive tenor and price point. While we have a long way to go, I reiterate the value proposition that our gas assets in the region provide, and I anticipate that we will continue to make progress in this position over the next 2 years. Thank you.

Operator, open the lines for questions, please.

(Operator Instructions) Our first question comes from the line of Angie Storozynski with Seaport Global.

So congratulations on the resource adequacy contract that’s -- again, you didn't provide much as far as the terms are concerned. But again, the fact that CAFD is being maintained is really big. So -- and again, as you said, there's more work to come. Is there any sense of the timing for the remainder of the capacity when we could be expecting those RA contracts to be signed or renewed?

I don't think there's really a cadence. Angie, I think from our view, the reason we started early is to make sure we have flexibility during negotiations to really try to optimize and be disciplined on price. So I don't want to say, "Oh, we're going to have them all done by X period of time", because I think as I've indicated on other calls, it's going to take a while and it's going to be a variety of different counterparties. So there's not a specific date by which we say, "Well, we're going to kind of have our position or not". We are, yes, as I stated, kind of 2 years out from that period of time. So we're going to continue working on it and continue making progress, but it'll take some time to be fair to your question.

Okay. My second question is for Chad. I'm not sure I understood the comments about performance against your unchanged CAFD guidance. So the CAFD guidance still incorporates the Texas hit, right? So even though you assume a P50 performance of all of the renewable assets for the entire year, it does incorporate the hit, right? So even with the Texas hit, you're still trading -- trending well versus that CAFD guidance?

Yes. So I think the way I would think about it is Texas -- the issues in Texas we had which, bear in mind, part of why we kind of don't think about it in relative to how we normally think about our variability in the year was really because of the price excursion that happened with hitting the caps. But that being said, the way I look at it is, is Agua Caliente offset it.

So basically, obviously, we have the timing shift in interest. So upside in the base portfolio that may have existed before those 2 events would lead to us trending better than $325 million. So hopefully, that eases it. Said another way, the strong performance we had out in the West Coast has us in a favorable position, at least through the first quarter, assuming we operate at P50 for the remaining 3 quarters, you would technically be ahead of your $325 million.

Your question comes from the line of Colton Bean with Tudor, Pickering, Holt & Co.

So just to follow-up there on Angie's question around the Marsh Landing RA agreement, is there any background you can offer on how that came together and maybe how you would characterize the counterparty associated with that?

Sure. It is subject to confidentiality. So to be fair, your question is probably not a lot I can talk about, but we have an ongoing origination effort in California to manage our position in 2023. So we talked to a number of counterparties. We look at RA processes that maybe coming in the future between PG&E and SCE. And we're very active in the market and looking to manage the position over time. So I think this is something that, as I've talked about over the years, a lot of people -- it's difficult 3 years ahead of time to talk about looking at hedges.

And I think 2 years is kind of about the time frame that I've indicated, and we're along the lines that we've talked about over the years. From our view, in terms of some color that I can give you, it's a larger load serving entity in the region. Expectation is be investment grade rated and that’s -- once again, I want to make sure I stay within the confines of the confidentiality agreement, but that's at least some color I could give you on it.

Got it. Understood. And then just on the commentary on Clearway Group pipeline expanding in the back half of the year, is that an expansion in aggregate? Or is that moving more projects to the construction in an advanced bucket?

Craig, why don't you take that one?

Sure. Yes. Both is the answer to the question. So what we've reported was the state of the pipeline as of the end of the quarter. We've been busy this year. We've been busy across the country, the west, central and eastern regions. The vintages that we're developing and planning extend from the period through 2024 on which we provide disclosure and also vintages past 2024 that will underpin dividend per share growth well into the decade.

And we expect that you'll see evidence of that development work, which should give us some confidence about our ability to sustain growth for the company for quite some time as well as our advancement of projects that would be able to commence construction late this year and early next for the 2023 and 2024 vintages.

We've looked to shape that pipeline to match up in particular with the capital allocation plans and growth plans of Clearway Energy, Inc. and are feeling constructive about our ability to facilitate substantial project completion volumes over the course of the next 3 years that will hopefully support a constructive outlook for sustained growth.

Your next question comes from the line of Colin Rusch with Oppenheimer.

Can you talk a little bit about the growth in the energy storage pipeline? It looks like that had a pretty substantial bump here in the quarter. And how that's trending relative to the existing products you have or some of the products that you have in the pipeline?

Craig, if you don't mind.

Sure. Yes. The growth within storage, Colin, includes both planning for hybridization of existing operating assets that we have in the fleet as well as new development and construction planning for new paired resources that would include both solar and storage. And we have, in some instances, started to plan for standalone storage where the market structures allow for us to put in place long-term revenue contracts that would be consistent with the type of investment profile we look for Clearway Energy Inc. to make. So it's both standalone and paired resources. And on the paired front, planning for integration of storage with existing operating facilities within Clearway Energy, Inc. as well as new construction projects.

In general, at this point, if we're looking out over the course of the next 3 years, it appears that you could expect most of those resources to be in the west, not strictly California any longer. The prospect for storage attachment in the east is still something that is evolving. But as we look through the latter part of the decade, really everything that we're putting in for early-stage development includes potential options for battery integration.

That's super helpful. Then I guess the second thing is really around counterparties. We're seeing massive commitments being made to get to net zero by many, many corporations. And I'm wondering if there's an evolution in terms of your ability to sign bilateral agreements with corporates rather than just with large utilities and if that's changing some of the pricing dynamics and spread that you guys are able to capture in that development pipeline.

Yes. For what it's worth, the CEG team has been able to sign with corporates to date. In fact, you've probably seen that shift a little bit in the Lighthouse transaction that has some corporates as part of it. Now Craig, if there's any additional color that's further changed since the Biden plan has -- was announced.

Yes. Yes. I mean I think origination of contracts with commercial, industrial companies is something that's been a real focal point for us over, I'd say, the last 5 years, Colin. And over the 5.8 gigawatt late-stage pipeline that we've disclosed, commercial, industrial companies, our customers already are expected to be for a meaningful fraction of that pipeline and that also includes in states where historically they've made -- they’ve been less of a direct wholesale market participant, for example, in California.

With that said, we are pretty bullish also about continuing to expand our customer base of regulated utilities who've been a mainstay for us as well. In particular, in the west and Pacific northwest, where we've grown our pipeline materially to nearly 3 gigawatts worth of projects. And we like those customers also because they are able to sign contracts for very long tenor still and with settlement structures that we like.

So I think as we go forward, yes, we expect to continue to grow our pipeline with a balance of both commercial, industrial customers with whom we've built a good track record of servicing demand, but also with the utilities that have been great customers for us already and we'll be able to sign up for longer contract tenors that allow us to create a balanced profile like the one that Chris described for the 1.1 to 1.7 gigawatt portfolio that we have in development.

(Operator Instructions) Your next question comes from the line of Michael Lapides with Goldman Sachs.

My questions are probably Chad oriented here. Just curious, the green bond lowers long-term interest costs relative to the debt you took out. When you look at the capital structure, do you see significant opportunities for other refinancings that could make a material impact on long-term interest expense?

Yes, Michael, I think, one, I think the opportunity at the corporate level is somewhat limited because when we refinanced the 25 notes, that was the shortest maturity we had in the capital stack. So I think at the corporate level side, we -- I think we're kind of optimized. I think at the project level side, I think, Michael, we are always looking. I think the way Chris and I have defined it over the past few years, we're always mining at the project level to see what opportunities they have. I think there's always going to be some items that pop up from a materiality perspective. I'm not so sure that I would sit there and count on that per se to sort of add some additional improvement there, but we will always keep looking.

Got it. One other item really for the whole team, how are you -- I mean given the recent move over the last couple of months in all renewable related stocks or equities, including yours, how are you thinking about your cost of equity and how that impacts future financings of either acquisitions from third parties or dropdowns from your sponsor?

Yes. I think Michael it’s still a very constructive level. I think we've talked it out over the years and since May of 2016 when I took this role. Actually, it's a pretty good number for where we sit. So I think if you take $1.85, let's say, CAFD per share divided by about 27.8, you get about a mid-6s CAPD yield. Once again, if you want to use that as a proxy for lack of [prophecy] apples to apples, but it's still a very constructive equity CAPD yield. And so I think long way of saying is we still see it like to see it a little bit higher. No questions asked. We still view it as a very constructive CAFD yield acquisitions or dropdowns.

Your next question comes from the line of Keith Stanley with Wolfe Research.

Just one question. We saw a pretty sizable thermal business sale recently. It’s a smaller business for the company. So how do you think about thermal strategically within Clearway, is that core to the company? And how would you think about value there?

Sure. I mean as you know, Keith, we always kind of assess our portfolio for opportunities to drive value for shareholders. We've done dispositions previously in the past. I think there's no need to look at monetizing that asset. I think the prices that are out there in the market are interesting to us.

From our perspective, district energy is a premier infrastructure asset class. There's only 3 large district energy portfolios in the U.S. and we own one of them. We think it's a great business and a great portfolio of assets. So I think from that view, there's obviously interest in the portfolio, and we'll have to evaluate that. But I think, for us, we're going to be -- anything we look at can be extremely price disciplined.

At this time, there are no further questions. I'll turn it back over to Chris Sotos for closing remarks.

Well, thank you everyone for your time and appreciate the support. Thank you.

Thank you. Ladies and gentlemen, that concludes today's conference call. You may now disconnect.