Vital Energy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 10 speakers on the call.

Operator

Thank you for standing by, and welcome to Clearway Energy Inc. 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 I would now like to hand the call over to President and CEO of Clearway Energy, Inc, Chris Sotos. Please go ahead.

Speaker 1

Good morning. Let me first thank you for taking the time to join Clearway Energy, Inc. Q3 call. Joining me this morning are Akhil Marsh, Director of Investor Relations Sarah Rubinstein, CFO and Craig Cornelius, President and CEO of Clearway Energy, our sponsor. Craig will be available for the Q and A portion of our presentation.

Speaker 1

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'll 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.

Speaker 1

Turning to Page 4. Given recent market volatility, we want 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, 1st 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 sponsors' historic return targets and recently disclosed development IRR targets by other market participants demonstrate that SeaOne's cost of capital remains well below the target returns of a pure developer, preserving this relationship and benefits for both parties. In addition, The sponsors hold approximately $1,800,000,000 of SeaOne shares, ensuring alignment of sponsor interest, the long term interest of SeaOne.

Speaker 1

The second ingredient for a successful yield show is a 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 green, lower cost energy has not changed. The demand to transition our grid away from fossil fuels has not diminished.

Speaker 1

Climate change a continual challenge for the globe, geared by companies, government's goals of boosting their carbon footprint, while the benefits of the IRA are also still intact. Most importantly, competitively priced with global generation when compared to the current grid cost of energy, all drive a compelling long term growth story to pursue. As part of these ingredients, we have clearly worked 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 C1's capital structure and no need for external capital to meet our DPS objectives through 2026. Pulling many of these elements together, CUN and working with the sponsors has negotiated an increased CAFD yield to 10% on dropdown assets of approximately $230,000,000 of corporate capital deployment that we will discuss later. Importantly, we reaffirm our continued write on-site 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 to achieve the high range of our 5% to 8% long term target.

Speaker 1

And looking beyond 2026, in addition to the strong long term global development demand we described earlier, Q1 also benefits from 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 year and a half of contracted RA value at strong pricing on a portion of our fleet. This pricing provides a strong foundation for SeaOne to continue its growth trajectory in 2027 beyond in line with its long term targets. In summary, despite challenging market conditions, the key elements that underpin a strong yieldco still exist: Significant cost of capital differences between the OTCO and the sponsor, strong development spend and demand for renewable assets, long term contracts, combined with a straightforward capital structure that translates into transparent growth. Turning to Slide 5.

Speaker 1

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 yield curve 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 SeaWend even in the increased cost of capital environment they're operating in. Clearway Group, which owns 85,000,000 total shares of C1, representing approximately $1,800,000,000 of value, also receives approximately $130,000,000 of dividends per year that helps fund the entity's development activities to ensure a strong supply of dropdown assets in the future. Importantly, Clearway Group and our sponsors not have any IDR or other special arrangements to derive value from the relationship with SeaOne.

Speaker 1

There's the increase in SeaOne stock price, dividends paid and margin on development assets that aligns value optimization for all entities. As evidenced in this relationship, Thoreau Group has agreed to prove the targeted yields on over $230,000,000 of C1 investments from approximately 9% to 9.5% CAF deal to 10%, providing additional accretion on our redeployed thermal capital and reaffirming our line of sight growth through 2026. Cruiserweight Group continues to invest heavily in development in line with line of sight dropdown growth through 2026 as well as flexibility for timing of dropdowns thereafter. Slide 6 provides an overview of CEG's 29 Gigawatt development pipeline, which has grown substantially in previous years. This pipeline, which is an important source of growth for SeaOne, continues to receive strong sponsor capital deployment to advance development projects that are well diversified among technology types and compatible with SeaOne's growth and diversification objectives.

Speaker 1

The significant sponsor support has been demonstrated allowing the platform to grow by over 2 gigawatts in the last 12 months and to nearly double the last 2 years. The continued importance of scale in this industry is critical to managing through volatile periods and being able to leverage a large development operational platform to weather these storms. To this point, Clearway Group has been able to procure cost effective supply agreements should enable domestic content qualification and or reduce interconnection timeline 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 SeaOne in the future. Turning to Page 7.

Speaker 1

During this period of market dislocation, there have been a number of questions around long term challenges, development of renewable assets and contracts. While the rapid increase in interest rates since May has created some headwinds in the near term and as all stakeholders have had to adjust the capital cost conditions, we did not see this as a long term impediment to the close of renewables at U. S. As a backdrop, the 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 options.

Speaker 1

It is not as though an increased cost of capital only impacts renewable assets. And 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 in economic terms as well. That being said, All of us within the Clearway Enterprise are cognizant of the increased capital costs that impacts all stakeholders during the period of readjustment in ED pricing. Long term asset owners like CEWIN, tax equity, non recourse debt providers, OEM suppliers, developers and PPA off takers alike.

Speaker 1

While we cannot forecast precisely how long it may take DPA 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 C1 take significant comfort in having Clearway Energy Group as one of the largest developers in the U. S. Backed by GIP and Total Energy's 2 of the largest companies in their respective industries to manage this period. Simply stated, all of us within 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. Turning to Slide 8.

Speaker 1

An additional ingredient for success, 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 financings to require a C1 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 through utilization of interest rate swaps and no corporate maturities through 2028. Siouen also nationally amortizes over $350,000,000 of non request 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 3 natural gas assets that became merchant in 2023. All of this leads to an overall conservative capital structure that correlates to a BBVA2 rating that has been maintained since 2016 through a variety of challenges and market headwinds.

Speaker 1

SeaOne'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 $40,000,000 of capital and a 10% CAFD. These projects consist of over 4 50 megawatts of solar located in Kent County, Texas and are underpinned by power contracts that are 18 years in duration was paired with the counterparties. In addition, discussions with Clearway Energy Group have been able to come to agreement to modify Dan's Mountain's CAFD yield to approximately 10% Approximately 9% benefited from a new Drop Down 25 offer of 3 solar assets and approximate CAF yield of 10% compared to the 9.5% that was targeted previously.

Speaker 1

These high quality assets are significantly weighted towards solar storage generation with fully contracted node settled unit contingent contracts to reduce volatility from the C1 fleet. These drop downs complete the allocation of the excess proceeds from the thermal sale close in May of 2022 and most recently an increased cap yields demonstrating a long term alignment of interest between CLN and its sponsors to continue to drive value for shareholders. Turning to Page 10, this is a graph that should be similar to you. There's a lock of our growth visibility through 2026. Starting on the left side of the page is our prior $420,000,000 CAFD outlook that you will achieve when the majority of the Drop Down 24 assets are operational on a full year basis.

Speaker 1

The second column is a reduction in CAFD of $10,000,000 for updating to reflect a variety of factors. Repissions to our P50 given weak resources in 2023, increased insurance costs, inflation as well as other factors. The 3rd column represents a $5,000,000 CAFD increase Our investments in TSN as well as the incremental contribution of the Seadrill Hill repowering prior to 2026, summing up to our updated pro form a CAFD outlook of $415,000,000 This, when added to the approximate $20,000,000 of CAFD, dropped down 25,000,000 discussed previously, ends at our updated line of sight CAFD of approximately $435,000,000 Importantly, we are maintaining the $2.15 CAFD per share guidance through 2026 that we've discussed previously. We believe the ability to maintain our long term CAFD line of sight and our growth trajectory speaks to the strengths of the C-onefour platform. Turning to Slide 11.

Speaker 1

Slide 11 provides a summary of C1's contracted and open positions in the resource adequacy market through the next 4 years. We currently have the benefit of approximately 100 percent of our capacity contracted through 2025, 87% contracted through 2026 and now with 42% contract end in 2027. As discussed throughout the year, Sumen participated in several RFP auctions and bilateral discussions. As a result, I was able to secure 2 contracts for approximately an additional year and a half 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 in these contracts We're extrapolating 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 dropdowns for external capital.

Speaker 1

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

Speaker 2

Thanks, Chris. On Slide 13, we provide an overview of our financial update, which includes a CAFD of 156 For the Q3 of 2023, based on results deferred to date as well as forecasted activities through the balance of 2023, We are reiterating our 2023 full year CAFD guidance range of $330,000,000 to $360,000,000 We are also introducing guidance for 2024 of $395,000,000 of full year CAFD, reflecting certain one time maintenance costs along with timing of growth investments, run rate and cash contributions are achieved after 2024. We will provide further detail in a moment. Our Our dividend per share growth outlook for 2024 remains aligned with our long term growth objectives. For the Q4, we are announcing a dividend increase 2 percent, dollars 0.3964 per share, which equates to $1.5856 Dividends per share on an annualized basis.

Speaker 2

For 2023, this reflects full year dividend growth as compared to 2022 of 8%, which is consistent with our long term growth target. In addition, we are announcing a dividend per share growth target for 2024 of 7% in line with our growth Turning to Slide 14, We highlight, Kathy, of $156,000,000 and adjusted EBITDA of $323,000,000 for the Q3 of 2023. Compared to our expectations, conventional energy gross margin was approximately $11,000,000,000 lower due to milder and tougher temperatures in California. Despite lower energy margins, the conventional facilities had strong availability and provided resource adequacy as expected. Solar Generation is also in line with internal expectations for the Q3, while Wind Generation for the overall sea wind Lower than anticipated in August September.

Speaker 2

3rd quarter CAFD was also to a lesser degree affected by increased fee expenses Year to date CAFD of $289,000,000 in Q3 of 2023 continues to reflect the Previously reported historically low weight production and lower than expected merchant energy margins with expansion facilities through the Q2 of 2023. The company continues to maintain its full year CAFD guidance range of $330,000,000 to $360,000,000 However, we anticipate that 2023 full year results will fall within the lower end of the guidance range. The full year CAFD guidance range reflects potential wins and slower variability for the second half of twenty twenty three and sensitivity for conventional gross margin, the majority of which was reflected in the 3rd quarter results since the 4th quarter represents Despite the challenges impacting 2023 CASB, the company remains well positioned for growth with a strong balance sheet And pro form a credit metrics in line with target rating. 99% of the 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 circle, there continues to be no external capital need to Moving to Slide 15, we are establishing our 2024 CAFD guidance at 395,000,000 As we walk our 2024 CAFD guidance to our updated pro form a CAFD outlook, We note that we have deferred the timing of the Capistrano debt refinancing until after 2024.

Speaker 2

Given our sizable cash balance and We have flexibility to be prudent on the timing of this refinancing and the incremental principal and interest payments In addition, the $395,000,000 of CAFD anticipated for 2024 reflects onetime maintenance costs and related outage time For required maintenance upgrades at specific legacy wind sites, these maintenance upgrades are required to return certain facilities to normal availability levels and are expected to have a one time impact to 2024 CAFD of $15,000,000 In addition, our pro form a CAFD outlook of $415,000,000 reflects full year CAFD for all stated growth assessments, including This is expected to be approximately $15,000,000 of incremental CAFD as compared to the portion of CAFD realized by these investments 2024. This is based on the anticipated timing of investments of our project COD, the majority of which are anticipated at mid Also reflected is the $395,000,000 of 2024 full year CAFD guidance, Along with the updated from former Kathy outlook, our updated P50 Renewable Production estimates as well as certain Cost increase is primarily driven by inflation. These amounts are individually immaterial and therefore we have not quantified them in detail. In addition, Virgin Energy margins for the conventional facilities are assumed 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 form a CAFD outlook.

Speaker 2

We continue to estimate long term virgin energy margin in the $1 to $1.50 per KAW funds reached diluted sensitivity at $20,000,000,000 of CAFD per $1 per kilowatt month increase or decrease. Based on these estimates, We arrive at our 2024 full year CAFD guidance of $395,000,000 and our updated pro form a CAFD outlook of $415,000,000 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.

Speaker 1

Thank you, Sarah. Turning to Page 17. While this year has been challenging from a CAFD generation perspective, we are maintaining our revised CAFD 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 Year and long term objectives achieved EPS growth of 8% in 2023. We are reaffirming our DPS growth objectives at the upper end of our long term growth target We continue to receive support from our sponsors in enhanced CAFD yields for the next contemplated dropdowns and the additional contract that our natural gas leader strong places for getting traction around visibility beyond 2026 continued growth in line with our long term CAFD targets.

Speaker 1

While I had intended to be able to provide you with a more precise CAFD per share growth outlook for 2027 beyond on this call, there are certain variables we frankly want more clarity on. While the resource adequacy contracting pricing environment is very constructive, we'd like to see how contracting plays out with the open positions in 2027 beyond. Additionally, as stated before, we and our sponsor have flexibility and timing of dropdowns for growth beyond 2026. Operator, open the lines for questions, please.

Operator

Thank you. Please standby while we compile the Q and A roster. Our first question comes from the line of Julien Dumoulin Smith of Bank of America.

Speaker 3

Hey, good morning team. Thank you guys very much. Appreciate the time. Can you guys hear me?

Speaker 1

Yes. Good morning.

Speaker 3

Hey, excellent. Good morning. Thank you. Look guys, nicely done on California here. Wanted to just get a little bit of a sense here, just what are you looking forward to provide an update here?

Speaker 3

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

Speaker 4

what you're seeing in California as well.

Speaker 1

Sure. I think in California and once again, unfortunately, we can't disclosed the price to the confidentiality, but the contracts that we had signed previously to kind of be able to give guidance through 'twenty six, Yes, we're seeing prices stronger than that we did those contracts back in the past. And so for us, we feel very good about the ability to extend those contracts by about a year and a half on those two 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 our long term CAFD guidance through 'twenty seven.

Speaker 1

With regard to drop downs, Julian, 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 That was very volatile currently. So for us, we've 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 cap yields 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 2015, continue our guidance in terms of being able to hit the upper end of the range through 'twenty six. We're starting to see some good green shoots for 'twenty seven and beyond, just not as tight as we would have liked it when we talked this time last year.

Speaker 3

Got it. All right. Fair enough. Excellent. Now with that said, let me just nitpick a little bit here.

Speaker 3

Instead of using a greater than, now you're using a tilde on the 215. Can you explain

Speaker 5

a little bit of what you're seeing? It sounds like

Speaker 3

a slight reduction in confidence and that seems despite the higher yield on the drop down 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 form a CAFD here goes to 205 from 208, so down 3p 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?

Speaker 1

No, no concern, Julian. There's a reason we try to map it out all for you. So the question yes, welcome to the question. I think to your it's not as though we have less Confidence in the $215,000,000 It's just before like we are giving you a point estimate 3 years out. So we might be a $0.01 higher low in terms of rounding and the like.

Speaker 1

The real driver behind the reduction from what you saw before from kind of a $440,000,000 to a $435,000,000 is really around the $10,000,000 that we took as a result of the P50 results we saw in 2023. Insurance is a little bit higher and other costs. So that's 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.

Speaker 1

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

Speaker 3

Okay, fair enough. It doesn't sound like there's anything too specific there from what I can tell. And then maybe just it seems like and then the drop down here, the wind drop down, do 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.

Speaker 1

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, Julian, 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.

Speaker 1

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

Speaker 3

morning and good luck and hopefully next year or next quarter we'll get an update at last as you nail things down.

Speaker 1

Well, I think once again, Julien, those RA contracts, they take time to basically, right, we'll participate or we're always engaged in bilateral discussions. The RFPs, as you know, kind of happen 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 dropdowns may look like in addition to more RA megawatts being contracted, that's what we'll kind of give more clarity around 2027.

Speaker 3

Excellent. Okay. Thank you, guys. Cheers. Speak to you.

Speaker 3

Thank

Operator

you. Our next question comes from the line of Angie Storozynski of Seaport. Please go ahead, Angie.

Speaker 6

Thank you. I just wanted to say, well played. This is how we do it basically. You pace yourselves with The dividend growth, you just lived within your means, and I'm hopeful that the stock will reflect This reality is versus what we're seeing at other youth costs. So, now as far as the growth is concerned, so obviously, you have a Sponsored that is supportive and willing to adjust the CAFD yield for the current interest rate environment.

Speaker 6

But how about Maybe organic growth, any sort of repowerings or expansions of existing sites, something that You could do on your own.

Speaker 1

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 Steve, as part of our thermal disposition.

Speaker 1

And so for us and looking at repowerings and kind of Craig's team and looking at what PPA can you renegotiate, what are turbine prices and the like, There is some of that organic growth, but as I've commented previously, it's not like we have 2 gigawatts that can be repowered in the next 2 years. Our main source of organic growth is really in that RA pricing. I think for us given the hedges that we did before in order to contract through the middle of 2026, That's probably where you have your main organic CAFD generator is depending on where those RA prices go in 2027 beyond.

Speaker 6

Okay. And then changing topics, obviously, the 2023 has been a challenging year for Actually a number of assets, but the results for the thermal assets were weaker than expected. Now How much of that weakness or lessons learned have you incorporated in your 'twenty four guidance, capacity?

Speaker 1

I think we intend hopefully a lot. From our perspective, we're much more in line in our 2024 guidance with that The upper end of that $1 to $1.50 we talked about, long term energy gross margin, obviously given when we gave guidance in November of 'twenty 2 for 2023, yes, as you're well familiar, the markets were much stronger for what were expected sparks that didn't show up in several of the months that we were looking for. So for us, we're materially kind of on the upper end of the range, is that lower $1,000 $1.50 I think the upper of the $1.50 that we have for long term EGM guidance. So to your point, We're being more conservative for full year 'twenty four, I mean we're for partial year 'twenty three.

Speaker 6

Awesome. Thank you.

Operator

Thank you. Our next question comes from the line of Mark Jarvi of CIBC.

Speaker 5

Yes. Good morning, everyone.

Speaker 7

So coming as you think about Expanding the time horizon for growth, you've got the thermal proceeds fully deployed now. Obviously, balance sheet funding clarity is really important in today's How do you think about as you extend that runway and you think about future drops communicating the funding plan in terms of how much clarity you can give and I guess how

Speaker 1

Sure. I think we've always been pretty prescriptive in how we viewed it. Yes, we have an undrawn revolver currently with significant liquidity underneath it. So we had to fund something we could on a temporary basis. I think how we'd fund it is in line with our long term view at about 4 to 4.5 times would be a corporate debt number of the corporate capital, the remaining being equity, obviously using any excess cash we have in the system first.

Speaker 1

Generally, we think we'd look to deviate from that long term funding model that has been successful in a wide variety. We may need to warehouse some facilities depending on where the volatility is for a period of time. I think for us, it wouldn't deviate from our long term funding model that has worked over a number of years.

Speaker 7

So I guess you'd be okay with if you saw, say, a couple of $100,000,000 funding gap for equity to hit your targets And say it's sort of a bit TBD in terms of the sources, you'd be fine with sort of laying that out there. And I guess if you saw the need for internal equity, would Be open to things like an ATM or something like that as you

Speaker 1

march forward? Yes. I mean, we used ATMs before, which we think are very effective equity funding mechanic. We've done smaller kind of issuances as well. So I think we do things very consistently with how we have in the past.

Speaker 1

I wouldn't anticipate any deviations. I just think that Maybe kind of to where your question is going, given how volatile things are currently, we may seek to kind of use our revolver more depending on size of the hold facilities until kind of market settled down and take a much more measured approach to getting that long term capital deployment given current volatility.

Speaker 7

Okay. That makes sense. Thanks, Chris. And then just on the conventional units, as you continue to operate them, as you see these RA processes, the contracting processes play out, So any updated thoughts in terms of ways to optimize them from a commercial strategy? And just curious in terms of the amount of capacity Could you have gotten more or was it just a trade off with price?

Speaker 7

Just kind of understanding the depth of the market and opportunities you're seeing

Speaker 1

right now in terms of contracting. Got it. Yes, it is very focused on price. You kind of yes, and apologies if you already know all this, but you kind of bid in on an auction basis and kind of see what you get awarded. We typically give kind of 1 1.5 year bids and 3 year bids, a combination of different price points to kind of see what the customer wants.

Speaker 1

The customer at the end chooses what price they're looking for in tenor. So to your point, it's not as though we could really optimize that conversation because it is a well attended auction, But we provide a number of price points as part of our submission. And at the end of the day, the customer picks the price point that they thought made the most sense.

Speaker 7

If you could do sort of a retrospective look at how you've been most recently, do you think there was an opportunity to clear more capacity as you think forward in the next processes?

Speaker 1

I don't think there's the ability to clear more just because what to cheat your question, what clear was what's accepted. You kind of don't really know exactly demand there is on the other side. So not to cheat your question, that's a little bit opaque for me to say directly what the number is.

Speaker 7

Okay. And just last question for me and maybe for Craig. Your views in terms of how tax equity transferability is pointing out, how that sort of impacts where you think actually returns could be for projects? And ultimately, I guess, where And maybe it comes back to Chris in terms of dropdown CACI yields potential under sort of a transferability scheme on funding.

Speaker 1

I'll kind of answer the last part and then Craig, let you answer kind of the first part of the question. So in terms of what it means for a CAF deal, I think that's really in our all in CAF I think Mark if your question is, if we're doing things at a 10% CAF yield now, would that lead to a 14% CAF yield? I don't think that's the right interpretation. I think basically all of the components will needed to be required because it passes through, as we talked a little bit on the call, the PPA price is affected by the and economic rents are significantly above market cap to yield simply due to that. But Craig, I'll let you answer the first part of the question.

Speaker 3

Yes, sure.

Speaker 8

Well, first, the market is really still taking shape and becoming organized. As you You may very well know, both the banks that traditionally provided fully integrated tax equity Solutions that would both monetize tax credits and depreciation are playing roles, to provide sponsors like us solutions to Monetized depreciation, while also looking to serve as clearinghouses for the disposition and Monetization of tax credits that projects produce there. They're certainly an important part of organizing this market. There are numerous other channels that are looking to establish themselves as more direct conduits to buyers of tax credits and The market structures for how everything from indemnities to timing of payments take place are still forming and stabilizing. And in that environment, as a sponsor that has a strong balance sheet, which we do, We want to make sure that we make smart choices about how and when we fix the structures that we'll employ.

Speaker 8

Other Sponsors may not be in a position to wait, but in the 6 months since guidance was first issued about how that transferability market would take shape. We've seen the structures and the depth of the market really improve in favor of projects and we expect that will continue. So when I look out to the future, my hope is that This market will really do many of the things that were hoped for when transferability was incorporated into the text of the statute by deepening the range of options that projects have to monetize tax credits. And what we eventually As an enterprise, we'll want to do is to try to come up with structures that we find most efficient for dispositioning the depreciation benefits that the projects we create produce.

Speaker 7

Okay. Thanks for the time today and thanks for pulling some other additional materials here in the presentation for us today. Thank you.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from the line of Noah Kaye of Oppenheimer and Company.

Speaker 4

Good morning. Thanks for taking the questions and appreciate all the incremental details And the disclosures and frankly the reframing of the platform here, points well taken. You called out the Capistrano refinancing timing. I just wanted to ask about the project level debt in the portfolio. It does appear like there's a fair amount of debt coming due over the next Few years for some of these projects at the project level.

Speaker 4

Just how are you thinking about any potential additional refinancings? Are all these basically going to be paid off at term?

Speaker 1

Sure. It depends on the market to be fair to your question, but I do think that we should be in good shape from a refinancing perspective. So the next 2 large project refinancings are what's referred to as NIM Solar in 2024, I believe Buckthorn in 2025 or 2026. So I think Buckthorn is backed by still is probably about a 20 year PPA still underneath it. So we have quite a bit of length there to be able to refinance.

Speaker 1

The NIM Solar assets, once again, that's kind of September of 2024. So from our view, that should be able to be refinanced. So we don't yes, not to minimize the question, we don't have a lot of About near term non recourse assets need to be refinanced.

Speaker 4

That doesn't impact the pro form a CAFD outlook?

Speaker 1

If the interest rates are drastically different, it may move it around. But keep in mind, NIM Solar is about $148,000,000 if I recall correctly. So 100 basis points to 200 basis points move overall is $3,000,000 not to minimize 3,000,000 but it's not a major driver.

Speaker 4

Yes. And just the key point here, right, is that your refi risk, both at the corporate level and at the project level is very minimal for the next several years.

Speaker 1

Correct. I'm not saying it's 0, but yes, it's not 10. It's maybe 3 depending on where you go.

Speaker 4

Okay, great. Appreciate adjusting the P50 expectations. Does that generally apply to How you look at future dropdowns or acquisitions as well? I mean, I'm sure there is some degree of regional resource Specificity here to the adjustments, but just talk to us a little bit about how you Model in expectations for P50 going forward and whether that's changed at all?

Speaker 1

Sure. Step 1, just for We have background. We always ask for an additional return on wind assets versus solar to take into account that volatility. So part one note to your question is we view wind as a riskier asset general because of that fee 50 volatility and we typically look for a higher IRR or CAF yield or both when we negotiate those, just for way of backdrop. The other part is, we haven't seen anything that we need to change how we model RP-fifty.

Speaker 1

Those are based upon long term rates, but I think as we've talked about in previous calls, once you're kind of getting through 5 years, we try to take a much more what's actual approach on asset than kind of what A statistical model may say, we're trying to be much more empirical and kind of use the most relevant near term data set as we adjust and blend the 2. So for us, to your point, while you're looking at future dropdowns or looking at other acquisitions, we try to take into account those deviations between What might be a 30 year, let's say, fiscal model and what we're seeing in the past 5 years, try to add on a premium for wind in certain regions that are showing more volatility. But once again, we're trying to get that as tight as we can. We take recent events into account. That's one reason you see the revision.

Speaker 1

But it really is trying to be comprehensive between Yes, not overestimating what's happened in the past 2 years either to make decisions either.

Speaker 4

Yes. All right. Thanks very much.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of Justin Clare of ROTH MKM.

Speaker 5

Yes. Thanks for taking my questions here.

Speaker 1

So First off, I just want to

Speaker 5

ask about the 2024 guide. It looks like about a $15,000,000 impact to the guide as a result of change in the expectation from growth investments. I was wondering if you could Provide a little bit more detail on the project timing and what led to that reduction for 2024?

Speaker 1

Sure. I'll let Sarah address it. But I think for us, we took a look at our 2023 results and obviously we're not happy with them. And part of that, as we talked about during the year, is due to P50 Generation, some of it's due to availability. So for us, we kind of took a comprehensive look at our overall portfolio and I'll let Sarah kind of reflect I think she wants to, but that's really the basis of it.

Speaker 2

Yes. And Justin, just to clarify, were you asking about the $15,000,000 of timing for growth investments?

Speaker 5

Yes, exactly. Just what led to that because it looks like it's impacting 2024 and then it's going to be a contributor in probably 2025. So just wanted to understand a bit more there.

Speaker 2

Yes. It's not a Change in 2024, it's just a bridge between 2024 and our pro form a outlook, which is Supposed to reflect sort of the full amount of CAFD once The dropdowns are sort of up and running and at their full CAFD amount. So It's really just a bridge item because we'll only be picking up a smaller portion of those in the 2020 More guidance because of the timing of the drop down or the project COD. So we'll have sort of like a fraction of that CAFD amount Just in 2024. But by the time we get to the pro form a outlook, we'll have the full amount and that difference is the 15.

Speaker 5

Got it. Okay. Okay. Thanks for that clarification. And then just I was wondering for the projects that you have committed investments for and then for those that are identified as potential dropdown opportunities in 2024, 2025 here.

Speaker 5

Can you talk about where you are in the process of securing the permits and the interconnection for these projects? Wondering if there's still risk there that Those factors could cause delays and just where you are in that process?

Speaker 1

Craig, if you wouldn't mind addressing that? Yes, sure.

Speaker 8

All of the projects that are listed on the set of Committed or potential future dropdown opportunities, have existing signed large generator interconnection agreements and have obtained all of the major permits that would influence their construction feasibility or schedule. So I think that you could consider the dates that are reflected here, high confidence dates. They've also secured All of the revenue contracts that would be necessary for financial closing, we procured all of the equipment for the projects and we are mature in the course of advancing financial structuring of the projects as well. Some of those projects now reflect dates that are later than the dates we would have hoped for 1 year ago and those reflect Observed experience from interconnecting utilities around the country and their ability to execute scope of large generator interconnection agreements and also timetables that have been observed as being elongated for the delivery of high voltage equipment. And we've taken further actions to derisk Time lines for these projects in particular, but also other projects in our pipeline to address what's being observed in terms of interconnection connection timelines as well.

Speaker 8

So we think these are pretty de risked in terms of the execution timetable that's reflected on the page.

Speaker 5

Okay, got it. Thanks very much.

Operator

Thank you. Our next question comes from the line of William Griffin of UBS.

Speaker 9

Great. Good morning, everybody. Thanks very much for the time. I guess just my first one here, just with the excess thermal proceeds now fully allocated, Yes. Could you speak to how you foresee sort of the future pacing of investment announcements?

Speaker 9

And maybe should we expect a quieter Next few quarters with respect to announcements?

Speaker 1

Yes, I think that question is, should we expect some large drop down announcement in the next 6 months? I doubt it. I think it's heavily conditioned upon how the Capital markets settle down or not. But I think to your question, because we are talking in essence, CEG is incredibly busy by getting the gigawatts we talked about Basically online in 2024 and 2025. Obviously, they're still developing while doing that.

Speaker 1

But I think at the end of the day, if your question is, should we expect a large dropdown announcement here in the near term, it might be a little quiet for a while for the reasons we talked about. Here in the near term, it might be a little quiet for a while for the reasons we talked about.

Speaker 9

Makes sense. And so in that light, I mean, do you continue to view the conventional assets as core to the Clearway strategy? And maybe how are you thinking about Potential opportunities to recycle those assets as you continue to contract the open capacity?

Speaker 1

Sure. I think for us, Obviously, we're willing to sell assets at what we think is a strong price. So if somebody offered us a good price for those assets, we'd look at that. However, it's always been part of our core strategy because it does provide diversification versus kind of simply wind and solar Resource availability. So for us, we think it's a very beneficial and we're obviously pretty bullish on what things will look like for, let's call it, through through the end of the decade in those assets.

Speaker 1

So we view them as core. That being said, if someone offered us a price that we thought made sense, we've shown we've been willing to transact on that in the past. And for us, we're pretty bullish through at least 2,030.

Speaker 9

Great. And just one last one for me. Could you elaborate a little bit on the one time maintenance items in the wind portfolio? And is that in any way related to the Siemens turbines in the fleet?

Speaker 1

Not specifically, like that's a variety of assets as I incorrectly answered the last question that somebody asked. Basically, that's a result of kind of Us looking at our fleet and recognizing some of the weaknesses that affected our 2023 results and saying, okay, how can we try to shore that up with what's a one time maintenance push here? Some portion of that's the Siemens assets, but some of them aren't. So it's really just looking at the overall fleet and some of the challenges we faced in 2023.

Speaker 9

I guess, are you getting any sort of warranty reimbursements or any cost reimbursement of any kind for these efforts?

Speaker 1

That's Overall, these things are negotiation, but that's the amount that we think we'll have to kind of net net lay out during the year.

Speaker 9

Fair enough. All right. Nice job. Thanks very much.

Speaker 3

Thank you.

Operator

Thank you. I would now like to turn the conference back to Chris So to for closing remarks.

Speaker 1

I just want to thank everybody for attending the call. I know this was a little bit longer than our typical calls, but really given kind of the volatility that we've seen, wanted to provide you as analysts or investors with kind of a much more comprehensive view of where we see we are and where we think we're going. And I think while obviously there's a number of challenges in the capital markets, we're able to reiterate where we are for 2024, Our growth rate to 26 and that we're seeing kind of positive things even in this volatile environment in 'twenty seven and beyond, but or to come as we walk through 24. Appreciate everyone's support.

Operator

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

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Earnings Conference Call
Vital Energy Q3 2023
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