Clearway Energy Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 22, 2024

There are 8 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Clearway Energy, Inc. 4th Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Sotos, President and CEO of Clearway Energy Inc. Please go ahead.

Speaker 1

Good morning. Let me first thank you for taking the time to join Clearway Energy Inc. Q4 call. Joining me this morning are Akhil Marsh, Director of Investor Relations Sarah Rubinstein, CFO and Craig Carnellianos, President and CEO of Clearway Energy Group, 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 note that today's discussion will contain forward looking statements, which are based on the assumptions that we believe to be reasonable as of this date. Actual results may differ materially. Please review the safe harbor in today's presentation as well as the risk factors in our SEC filings. In addition, we will refer to both GAAP and non GAAP financial measures. For information regarding our non GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's presentation.

Speaker 1

Turning to Page 4. Despite a difficult year from a renewable resource perspective, SeaOne's 2023 CAFD came within its revised guidance range of $330,000,000 to $360,000,000 at $342,000,000 with the Q4 CAFD of $53,000,000 Commercial operations were also achieved on NAGA II and Texas Solar Nova I in the 4th quarter, will help drive CAFD in 2024 and beyond. Suen also committed to approximately $215,000,000 of new corporate capital deployments in 2023 and average 5 year annual CAFD yield of approximately 10% while further diversifying SeaOne's fleet. Looking to 2024, we are announcing a dividend increase of 1.7 percent for the quarter, bringing our quarterly dividend to $0.4033 per share or $1.6132 on an annualized basis, the targeted growth of 7% for the full year of 2024. Clearway is also reaffirming its CAFD guidance of $395,000,000 for 2024 with CAFD results in line with expectations to date.

Speaker 1

Clearly continues to execute on its long term growth targets of $2.15 of CAFD per share and is reaffirming our ability to achieve the upper range of 5% to 8% of growth through 2026 without needing to raise external capital. As we transition to focus on growth beyond 2026, we continue to manage our RA contracting positions in the 2026 to 2,030 timeframe, pursuing both value and certainty to drive value for shareholders. In addition, our sponsor's 29 gigawatt renewable pipeline continues to develop with approximately 7 gigawatts of late stage projects targeting CODs over the next 4 years. 3rd, we will continue to execute towards its $2026, $2.15 CAFD per share target during 2024, while also focusing on providing further growth visibility beyond this CAFD goal in the years to come. Please turn to Page 5.

Speaker 1

Page 5 provides a summary of Clearway's over $215,000,000 of committed growth investments announced in 2023, some of which are already operational with respect to Texas Solar Nova 1 with the remainder to come online during 2024. These investments are expected to generate 5 year annual average CAFD yields of approximately 10% underpinned by long term contracts of 15 years and over. The assets comprise diverse generation with approximately 620 megawatts of wind and solar generation added and approximately 150 megawatts of storage. These assets are funded with the excess thermal proceeds and continued Clearway's execution with the $2.15 CAFD per share goal when these proceeds are fully developed. Please turn to Slide 6.

Speaker 1

Slide 6 demonstrates our path to $2.15 per share with the remaining approximately $200,000,000 of excess thermal proceeds to be deployed in approximate 10% 5 year annual average CAFD yield. These remaining assets should hit the commercial operation dates during 2025. As we move from finishing deployment of our excess thermal proceeds into growth investments, we look to additional sources of growth beyond 2026. Our first avenue of growth is additional drops from our sponsor. We will provide additional color on potential drops on the next slide and later this year we anticipate providing estimates on capital deployment and capped yields for new projects beyond those identified here for use of the thermal proceeds.

Speaker 1

Additional avenue of growth is resource adequacy awards and pricing in 2027 beyond. As highlighted last call, we continue to add length to our RA capacity contracts at strong pricing to drive value. Lastly, 3rd party M and A is always a focus while due to capital market volatility in 2023, we didn't execute on any third party M and A. ClearRay remains focused on this market in 2024. Turning to Page 7.

Speaker 1

In order to provide additional color around opportunities from our sponsors late stage pipeline for the 2026 to 2027 timeframe, we thought it was appropriate to provide a high level summary of further potential drop down activity for these years. Our sponsor is working on over 4 gigawatts of fleet optimization and expansion opportunities with CODs in 2026 and 2027, which are well diversified between wind repowerings, additional new wind assets, solar storage hybrid assets and standalone storage projects. These investments are highly diversified also by offtaker and market and will benefit from the ability to deploy domestic content and invest in energy communities under the IRA, thereby delivering competitively priced energy to customers while meeting return requirements and reducing risk to Clearway's overall fleet. In summary, while it's too early to provide details in terms of potential capital deployment and return levels, investors can be assured there's a strong pipeline of growth at our sponsor that should add significant assets to Clearway Energy Inc. Portfolio to the middle of the decade.

Speaker 1

As always, we will raise capital prudently with a focus on efficient execution to optimize accretion. Now, I'll turn it over to Sarah.

Speaker 2

Thanks, Chris. On Slide 9, we provide an overview of our financial results, which includes full year adjusted EBITDA of $1,058,000,000 and CAFD of $342,000,000 which was within the previously provided revised guidance range of $330,000,000 to $360,000,000 4th quarter adjusted EBITDA was $201,000,000 and CAFD was $53,000,000 both consistent with revised internal expectations updated in August of 2023 to reflect renewable resource impact. Our 4th quarter results reflected strong conventional availability and the benefit of timing of maintenance capital expenditures and other items offset in part by lower wind resource, which was a trend observed throughout the industry in the Q4. Despite the challenges impacting 2023 full year CAFD, the company remains well positioned for growth with a strong balance sheet, pro form a credit metrics in line with target ratings and 99% of its consolidated long term debt with a fixed interest cost. In addition, the company's earliest corporate debt maturity is 2028 and there continues to be no external capital needs to fund the line of sight growth to meet our dividends per share growth objectives through 2026.

Speaker 2

The remaining thermal sale proceeds are available to fund committed 2023 investments and offered projects that are expected to facilitate achievement of line of sight CAFD per share of $2.15 We are reiterating our 2024 guidance at $395,000,000 Among other factors, our 2024 CAFD guidance continues to factor in current P50 median production estimates, previously disclosed expectations for maintenance capital expenditures in 2024 and timing of committed growth investments based on estimated project CODs, but excludes CAFD from committed growth investments 2024. Our pro form a CAFD outlook remains at $415,000,000 which along with anticipated growth investments using the remaining thermal sale proceeds supports our potential line of sight CAFD and dividend per share growth target. Now I will turn it back to Chris for closing remarks.

Speaker 1

Thank you, Sarah. Turning to Slide 11, our goals for 2024 are simple. First, to focus on delivery of our 2024 CAFD guidance, while achieving our 7% DPS growth in 2024. In order to do this, we'll target to improve availability from the CapEx investment we are making in several of our sites. 2nd, we continue to execute toward our $2.15 of CAFD per share target once all the excess thermal proceeds are deployed and fully operational while adhering to our underwriting standards.

Speaker 1

3rd, we want to begin to move the conversation around growth to beyond 2026 through a combination of additional RA contracting, providing visibility on further drop downs in 2026, 2027 period as we progress through 2024, additional improvements in the existing fleet through repowerings and the like and finally an eye to continuing to pursue M and A at our disciplined capital targets. Operator, please open the lines for questions.

Operator

Thank you. Our first question comes from the line of Michael Lonergan with Evercore ISI. Your line is now open.

Speaker 3

Yes, hi, good morning. Thanks for taking my question. So you highlighted a shift in the timing of maintenance CapEx. It looks like you didn't spend any additional maintenance in the Q3 from the Q4 between the two quarters. You came in at 22,000,000

Speaker 4

dollars for the year versus guidance

Speaker 3

for $35,000,000 Yet you reiterated your maintenance CapEx forecast for 2024. Just wondering if you could share more detail about this.

Speaker 1

Sure. We're probably not going to get into a lot of detail just as a lot of those numbers are material to overall guidance. I'll turn it over to Sarah in terms of any further clarity. But for us, obviously, 2023 was a disappointing year from generation overall. So maintenance CapEx was not needed as much due to lower generation.

Speaker 1

So I think from our perspective, while we kind of gave guidance for 2024 maintenance CapEx, to your point, we really look comprehensively at what happened in 'twenty three, some of the availability shortfalls we suffered and where we can kind of spend those dollars to improve availability in 'twenty four to move on. So I think those are really kind of a lot of points around maintenance CapEx. It's not a question of what we thought it was unfortunately due to the generation kind of being lower than we had targeted, maintenance CapEx is also thereby lower and really kind of putting those 2 together. But Sarah, any other details?

Speaker 2

No, I think you covered it. I mean, maybe just to highlight the $395,000,000 of CAFD that we're guiding to in 2024 includes any amount that we would potentially have decided not to do in 2023 and to do in 2024. So there's nothing that we have to worry about revising 2024. And to Chris' point, I think overall the coming in lower than budget for maintenance CapEx for 2023 really just reflects our results for 2023.

Speaker 3

Great. Thank you. And then secondly for me, you reiterated that you still don't need external capital through 2026. You've been talking about how you're targeting 4 to 4.5 times corporate debt to corporate EBITDA. Just wondering, once you deploy all the thermal proceeds, presumably you'll organically delever the balance sheet a little bit.

Speaker 3

Just wondering if you could say where you expect to be within that leverage range now? And if you're at the low end, would you consider deploying excess capital to target the midpoint, for instance?

Speaker 1

Sure. Think couple of questions in there. So hopefully I'll unpack it. The first point is, it's not as though that we're actually going to rest on our laurels for $215,000,000 by 2026. That's just where the number falls out given the external given the capital from Thermal.

Speaker 1

So we actually hope to do better, but right now, that's what we can show a line of sight on just for a point of clarity. And I think as we think about the overall debt, there's about $2,125,000,000 of bonds. And once we deploy all the thermal proceeds on a run rate basis, that's about $435,000,000 of CAFD. You add that corporate interest of about, call it, dollars 90,000,000 to $95,000,000,000 you get about 4 times, call it, debt to corporate EBITDA. So I think to your question, there should be excess leverage capacity.

Speaker 1

To be fair. I don't want to pin everything on one credit stat. That's the easiest one we use to translate. If we're in an 8% interest rate environment, obviously, other things move around. So I think to your question, we do think we'd be once all the thermal capital is deployed on the low end of our target 4 to 4.5, but also be a little bit fair to your question.

Speaker 1

There's yeah, agencies use a number of other metrics, that's just the simplest one to kind of walk through. So hopefully I answered your question.

Speaker 3

Yes, thank you. Appreciate the time.

Operator

Thank you. Our next question comes from the line of Mark Jarvi with CIBC. Your line is now open.

Speaker 5

Yes. Good morning, everyone. Maybe just coming back to the comments around M and A, 3rd party M and A, I think, transaction 2023, like you might be more active in 2024. How would you sort of frame the environment right now? It seems like it was a bit of a buyer's market last year.

Speaker 5

Anecdotally, we're hearing it from some other peers that things are starting to pick up in terms of activity levels, a bit more competition. How would you frame it right now, Chris?

Speaker 1

Sure. I think from our view, 2023, I think because of that volatility, I mean, we're well aware kind of where treasury has moved and also our stock in the 4th quarter is just very difficult for us to feel good about underwriting during that year given that volatility and knowing we get accretion and being disciplined. So for us and also I think a lot of sellers were kind of waiting to see where those markets calm down to be able to move forward with sales. And I think while obviously kind of the past, call it, month, we probably had 40 ish basis points of 10 year treasury volatility. That's obviously much less than we were all experiencing in the Q4 of last year.

Speaker 1

So from my perspective, I think the overall target for M and A is hopefully more robust in 'twenty four than it was in 'twenty three. And importantly, I believe to execute, I just think we had very volatile markets, which made kind of execution and underwriting very difficult in 2023.

Speaker 5

And then how would you think about funding any M and A on top of the already existing commitments?

Speaker 1

Yes, depending on what size of it is. We obviously have an unfunded revolver, which we kind of use the warehouse first. And I think to the previous question, we always kind of use excess cash. Whatever we borrow, if you look at our excess cash to basically pay back first, then any excess debt capacity, which was the previous question, and then equity last. So for us, depending on where capital markets are at the time and size of the acquisition, we obviously have significant revolver capacity.

Speaker 1

So we're not forced to go to the markets at a certain size.

Speaker 5

Understood. And then as you look through the next 3 to 5 years, I know

Speaker 6

at some point you guys will

Speaker 5

give us some more clarity on where you think the organic growth or sort of the drop down growth will come from. But besides is there anything else on the CAFD profile related to tax equity partnerships? Are there any like notable flips coming up, potential buyouts, anything that sort of changes the CAFD profile of existing assets over

Speaker 6

the next 3 to 5 years?

Speaker 1

Those come up fairly regularly, like but those I wouldn't say are material drivers of a paradigm changing number. Like in our disclosure, you see us kind of do one of those a year. In general, they tend to be pretty small. So to your question, those flips do come up, but they tend to not be material drivers of CAFD in the long term.

Speaker 5

Okay. Last question for me is just obviously we saw PPA prices rise over the last couple of years, return objectives moved higher, including your own CAFD targets. Assuming that rates plateau or go lower here, just updated view in terms of where you think returns are going to trend over the next 12 months here. How are you seeing that? Maybe there's maybe at the CG level in terms of where you're seeing PPA prices clear in most recently in terms of return potential?

Speaker 5

Got it. Craig, if you don't mind, I'll speak for CVG.

Speaker 7

For sponsors and project owners across the industry rose over fiscal year 2023, the broad environment of industry participants factored that increased weighted average cost of capital into the prices they offered customers on new contracts. Those prices also took into account the equipment pricing environment that after the pandemic and other changes in trade policy comparable resources before the start of 2023. Comparable resources before the start of 2023. And we and other competitors, I think, are finding that customers still see value in those elevated PPA prices, in particular for customers who, either as load serving entities or as end use customers, see growing load and value the low emissions profile of the products that we're selling. So, we don't foresee meaningful declines in PPA prices from where they are today.

Speaker 7

And equally, because it's a competitive environment, we don't see an expectation for dramatic increases in returns that are produced for projects, but we are now able to support higher internal rates of return and higher cap yields on the new projects that we're creating, which take into account the elevated cost of capital for the industry generally.

Speaker 5

Got it. So any decline in TPA prices would really be more reflective of CapEx trends and I guess financing costs and not so much a sacrifice in IRR objectives?

Speaker 7

No, I don't think so. I mean, I think what I think we've sought to be disciplined. We need to deliver accretive growth for Clearway Energy Inc. And I think in general, the industry's largest project sponsors have entered an era where we are all being cautious in the way projects are configured and created. And I think the largest customers having gone through all the disruption Got it.

Speaker 7

Thanks, Greg. Thanks, Chris. Thank you.

Speaker 5

Got it. Thanks, Greg. Thanks, Chris.

Operator

Thank you. Our next question comes from the line of Justin Clare with Roth MKM. Your line is now open.

Speaker 4

Yes. Thanks for taking our questions here. So I was wondering if you could maybe just update us on the progress you're making on contracting the open conventional capacity in 2027. Is it could we see in the near term here some smaller amounts of that capacity contracted? Or is it more likely that something happens in the summer of this year?

Speaker 4

And then beyond that, was wondering if you could maybe just talk about the other levers that you're focused on for extending DPS growth into 2027. I know acquisitions is a part of it, but anything else meaningful that we should be considering?

Speaker 1

Sure. So for the first part of your question, like don't get me wrong, the major procurement initiative is kind of you bid as part of the RFP processes on the utilities and the grid and the like, really in kind of call it late Q1, early Q2. And you find out about those awards, call it Q3 when they're binding late Q3, maybe early 4th. So I think your point in terms of a real paradigm change in terms of very much more significant capacity, that's when you'd see it. That being said, we're constantly in communications with a variety of counterparties on the smaller side to try to move those numbers up at prices that we think are good as well.

Speaker 1

So to your question, if you were to say, hey, Chris, when we would see a multiple 100 megawatt move, that's probably much more as part of that large procurement process. That being said, could you see smaller moves in the interim? Yes. And then your second question about extending the other source of growth through 27, not to minimize, it really is those three sources. RA is the big part of it given pricing that we're seeing, we hope it holds.

Speaker 1

And like the question I just answered, we'll look to see what happens in the RFP processes kind of this spring summer. M and A is obviously critical as well as the repowerings and further drop downs with the 2026 and 'twenty seven COD. And once again, we hope to provide more color on those as we progress through the year and we feel better about what capital those products are going to take, so on and so forth. It's still a little bit early now to do that.

Speaker 4

Got it. Okay. Appreciate it. And then I did want to ask about the non recourse debt principal amortization schedule. It looks like the amount in 2024 that is expected moved up significantly $1,700,000,000 I think last quarter the expectation is $432,000,000 So could you just maybe walk us through the change there and help us understand that?

Speaker 1

Sure. Let me get the schedule for a second.

Speaker 2

It's the projects under construction.

Speaker 1

You got it. Go ahead, Sarah, why don't you just answer?

Speaker 2

Yes. So we had several projects we acquired. I think you can see Victory Path in Erika is the biggest piece of it, the $757,000,000 and then also the ROSI Class B. Those two amounts are for projects under And so once the construction is complete, that will get replaced by tax equity, cash equity, more permanent financing. So those maturities will go away as a result of other proceeds from other financing arrangements.

Speaker 4

Got it. Okay.

Speaker 1

So the way to think about it, the amortization on the existing project debt is about the same as it had before. That's really just as the 2 projects move from construction debt to permanent plans.

Speaker 2

Yes, that's right.

Speaker 4

Okay. I appreciate it. Thank you.

Operator

Thank you. Our next question comes from the line of Noah Kaye with Oppenheimer and Company. Your line is now open. Noah Kaye with Oppenheimer.

Speaker 6

Okay. Great. Yes, they cut out for a second. So I just want to make sure I was being called on. Thank you for taking the questions, folks.

Speaker 6

I think it goes a little bit to one of the earlier questions, but too soon to talk about CAFD yield expectations for some of these 2026, 2027 potential projects, any way to dimension that? And in particular, I know one of your peers has talked about kind of the return expectations for repower. So not sure if you can parse that out for us a bit.

Speaker 1

Yes. It'd be simple to your question. No, we think it's too early. I think once again, if your question is, will it be 8, probably not. But I think if you look at where CAF deals have moved, I think also you've noticed that hopefully our sponsors have been supportive of moving CAF deals higher from where we first thought they would be given the move in treasuries that happened.

Speaker 1

So if you look, I think it was probably August of 2022, we basically indicated cap deals on some of these drops would be about 8.5. And then we kind of moved them up in, I believe, it was the Q4 of 'twenty two, moved them up further in 'twenty three. So there's a ceiling on that. It's not as though they can move them to infinity. So I think for us, not to minimize your question, it really is seeing where the capital markets out that time and where do we feel comfortable underwriting.

Speaker 1

So it is too early to tell and I think the projects are a little bit too early stage currently for everybody to feel good about the capital required and also what that cost of capital might be.

Speaker 6

Yes. It's good to see that just from a sponsor development standpoint, I mean the kind of quantity of projects for 2024 and 2025 looks fairly consistent quarter to quarter. I did notice what appears to be some shift of target CODs of 26 into 27. Anything we can understand or read into that? Does it speak to IRA clarifications or kind of more persistent in their connection model next, anything like that?

Speaker 6

And maybe a Craig question. Yes. Go ahead.

Speaker 1

Yes, Craig, if you don't mind.

Speaker 7

Yes. Perceptive question, Noah. Yes, we what that shift over 26 to 27 reflects principally is a plan for certain projects to be able to make use of domestic content solutions and conservatism in the way that we're planning those project schedules based on when and how the guidance that's required for being able to finance those solutions would materialize. But also, just forecasting

Speaker 3

of project

Speaker 7

schedules in a way that we anticipate would be durable and also enabling of capitalization of the project by CLIN under foreseeable financial market conditions. So, right now with respect to interconnection, we feel pretty solid about the family of projects that we are advancing that underpin the core of that 2026, 2027 volume for C WAN growth enablement. We have in excess of 15 gigawatts worth of late stage interconnection queue positions and many gigawatts worth of high voltage equipment that we've secured to be able to support the growth there in the mid decade. So I think we're not in a position where we're particularly concerned about some of the grid bottlenecks that have broadly impacted the industry to be able to support growth goals for C1. And instead, right now, as we're prosecuting projects for that mid decade are just focused on how to set projects up to maximize value, to construct a portfolio that will be diversified and beneficial for CEWIN and to set projects up for construction and funding schedules that provide us with useful flexibility for how and when the projects would be funded by C1.

Speaker 6

Very helpful, Craig. May I just ask a quick follow-up to someone who knows DC as well as anybody in the world. I just want to clarify whether or not you the development entity is still kind of waiting on finalization of domestic content guidance to make some of those FIDs? And if so, kind of when you're thinking the guidance may actually be published?

Speaker 7

I mean, I think that we it's a balancing act. As I think you're alluding to, there are projects that we have planned for the say 2026 vintage where we would ideally like to enable the use of additional domestic content solutions that we think would be responsive to U. S. Policy goals and value enhancing. But there are certain timetables that support customer needs that eventually just have to be fulfilled.

Speaker 7

So what we do is we advise the staff of the various agencies on the implications of the amount of time it takes to issue guidance for project timetables that aren't universally flexible in the industry. And I think it's understood by a lot of the folks who have to work through the policy process on domestic guidance that we're moving through time windows where it would be beneficial for that clarification of domestic content guidance to be issued in the course of the next 2 months if we want to be able to catch the 2026 vintage for a substantial fraction of the industry activity. But for what we currently have planned for 2026, we have locked in supply chain solutions that will allow those projects to be completed in that timetable and are no longer relying on the issuance of that guidance to be able to

Speaker 4

do so.

Speaker 6

Yes. Very helpful. Thank you.

Operator

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Chris Sotos for closing remarks.

Speaker 1

Thank you. Once again, I think 2023 was year from a resource perspective, but we hope to kind of bring things back on track in 'twenty four and see a lot of progress over the course of the year that we hope to be able to illustrate to you in terms of driving CAFD forward on a future basis beyond 'twenty six. So appreciate everyone's patience during 'twenty three and moving on to 'twenty four. Thank you, everyone.

Operator

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

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