Earnings Call Transcript - CWEN Q1 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the Clearway Energy, Inc. First Quarter 2022 Earnings Conference Call. Please review the Safe Harbor and today's presentation as well as the risk factors in SEC filings.

Christopher Sotos, President and CEO

Good morning. Let me first thank you for taking the time to join today's call. Joining me this morning is Akil Marsh, Director of Investor Relations; 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. First quarter results, which on a seasonal basis is the smallest contributor for the full year within our sensitivity range with CAFD of $2 million for the quarter, which is historically our latest quarter for CAFD generation due to the timing of debt payments and low renewable generation. We also increased the dividend by 2% to $0.3536 per share, or $1.414 on an annualized basis, thereby keeping us on track to deliver the upper end of our range in dividend growth objectives for the year. Importantly, our sale of the Thermal business closed May 1st with $1.35 billion of expected net proceeds, which after accounting for $600 million of previously committed growth investments, leaves Clearway with $750 million in capital available to be allocated. As a result of the Thermal sale, we are revising our CAFD guidance for 2022 to $365 million. Clearway's performance CAFD outlook remains on track with less than $56 million on previously announced committed investments to fund and with CODs on track for 2022 and 2023 as previously planned. When completed these renewable assets will put Clearway's pro forma CAFD at $385 million or $1.90 per share with $750 million of unallocated capital remaining to be deployed. In working with our ClearWay group colleagues, we continue to advance the development of projects that we've announced previously. I want to take a moment to address some of the concerns out in the market generally regarding supply chain challenges and other risks. The broader economy here in our country is, of course, grappling with dislocations in supply and increasing the cost for labor, commodities and freight. Our electric power industry is no different. Uncertainties in the policy environment for renewable power certainly add to the dynamics that businesses like ours have to address. But amidst those pressures, we look at the business we have here in Clearway Energy Inc, as one that is very well insulated from those complexities, leaving us very confident in our ability to fulfill the upper range of our long-term DPS growth strategy of 5% to 8% through 2026. The Clearway enterprise as a whole has the benefit during these times of having tremendous scale, diversification, and financial flexibility, which together put our integrated enterprise in a sweet spot generally, and especially in market conditions like these. We see this from the fact the Clearway Group has a pipeline that is large enough and diversified enough that can provide Clearway Energy Inc with capital investment opportunities that will hold up across various market and policy scenarios. And because of its ownership interest in 85 million shares of CWEN, when Clearway Group builds projects, their goal is first how to meet the capital deployment needs we have while balancing providing our shareholders with strong CAFD accretion. This allows the entire enterprise during periods such as this, to be able to flex the system to assure that CWEN is able to invest its targeted capital deployment levels and also its targeted returns. A Group developments platform and its parentage in GIP are also large enough to demand prioritization with suppliers and other stakeholders when complex situations arise. They bring to the procurement work, a deep understanding of policy and global reach, which has led to supply chain strategies that are proving relatively resilient right now. And very importantly, the capital investment requirements we need to meet to drive the demand pressure those requirements at Clearway Energy Inc are substantial, but not so great that a sponsor can't be surgical about the choices it makes on supply chain. That is serving us well today, as a sponsor has been able to establish supply chains and project plans that are both policy resilient and redundant in their ability to enable our meeting the goals that we set for capital deployment. As a result of this, I am pleased to announce an increase in the amount of capital we expect to deploy relative to Clearway Group's development projects, to at least $300 million and approximate 8.5% cap yield. These development projects provide a strong start to the allocation of excess capital giving Clearway Energy Inc confidence it can achieve or beat the $2.15 CAFD per share outlook when the $750 million in proceeds from the Thermal sale are completely deployed. On the left side of the page, you can get a better view of Clearway Group's development scale with over 22 GWs development projects, an increase of 3 GW since last quarter, it is diversified among wind solar and battery with 6.7 GW of late-stage development. While execution of this pipeline will benefit from rational policy decision-making on trade and could be accelerated through enactment of clean energy tax credits that are currently being advanced through Congress, the pipeline is robust and can enable growth for Clearway Energy Inc across a spectrum of policy scenarios. Those of you who are long-term investors in Clearway, it is important to know that Clearway Group's pipeline is 5 times larger than at the time of GIP's investments. To elaborate further, facts and circumstances make us confident that we are positioned to deploy the $56 million in committed capital we have planned for investment and into Mililani 1, Waiawa and Daggett Solar during 2022 and 2023 because of their status in construction and because the supply chain is being used to fulfill the projects. With respect to the projects being constructed in Hawaii, those projects received their panel supply prior to the commencement of the investigation and are now advancing into commissioning and will be completed this year all without being subject to the risk of duties arising from the Commerce Department's inquiry. And second, with respect to Daggett, the project makes use of a supply chain designed to enable use of US-made polysilicon, processing that polysilicon into wafers, cells and modules for each step occurring outside of China. The scope of the anticircumvention petition did not target a supply chain of this configuration. A fact affirmed in a memo issued earlier this week on May 2nd by the Commerce Department in which it stated that the modules made with wafers produced outside of China were not subject to the inquiries. Turning to page 5. Let me spend some time reemphasizing Clearway Group's approach to development and how this scale supports CWEN as a whole. Moving to the right side of the slide, and looking ahead to the next wave of approach, we are planning with our sponsor, we believe should prove similarly resilient. The community solar funds that we now hold an option to invest in are fully operational or being constructed with solar modules already in the country today and across the range of subsequent projects that Clearway Group has planned for Texas Food expansion, expansion of our portfolio in Keso, REC and PJM. There's advancing projects that make use of both wind and solar technologies providing diversification against policy risk, and also has secured redundant monitor supplies for producers whose manufacturing footprint includes supply chain options that are outside of the scope of the Commerce Department's investigation as it is presently defined. As noted, these investments will have a weighted average contract tenor of 18 years and will total at least $300 million of capital deployment and an average 8.5% CAFD.

Chad Plotkin, CFO

Thank you, Chris, and turning to slide 8. Today, Clearway is reporting first quarter adjusted EBITDA of $260 million in cash available for distribution or CAFD of $2 million, an amount within the company's expected quarterly sensitivity range. During the quarter, the company's conventional segment performed in line with expectations. For renewables, the utility-scale Solar portfolio performed well as overall conditions led to production 6% over expectations. However, this was offset by more challenging operational conditions at our Wind portfolio, which impacted results during the quarter. Overall, while first-quarter CAFD results were at the lower end of the company's target quarterly sensitivity range, we note that due to the seasonality of our portfolio, the first quarter is generally a small contributor to full-year results. As previously discussed due to the original uncertainty of when the Thermal transaction would close, 2022 CAFD guidance was originally established as if CWEN owned the thermal business for the full year. With the Thermal sale now complete, we are updating our 2022 CAFD guidance to $365 million, which no longer factors in the expected contribution from the Thermal business beginning in May of this year. As a reminder, 2022 CAFD guidance continues to assume the achievement of full-year P50 renewable performance, and does not factor in the full contribution from existing committed growth investments, which informs the expected $385 million in pro forma CAFD, that Chris referenced earlier. Turning to the balance sheet, adhering to our long-term credit metrics while maintaining flexibility in how we fund growth continues to be core to our overall business strategy. Now with the Thermal sale complete, we have fully repaid the outstanding $640 million in short-term borrowings as of the end of the first quarter. With these repayments, the company's pro forma credit metrics are now back in line with long-term targets. There are no cash borrowings under the revolver and the company has virtually no interest rate exposure as 99% of our consolidated long-term debt is fixed with the earliest corporate maturity in 2028. With the strength of our balance sheet and the excess $750 million in proceeds from the Thermal sale, CWEN now has unprecedented flexibility to execute on its long-term objectives.

Christopher Sotos, President and CEO

Thank you, Chad. Our goals for the year are simple. First, to achieve our financial and operational commitments. We have closed the Thermal transaction. We are on track to hit our revised CAFD guidance for the year, and we intend to increase our dividend at the upper range of our long-term 5% to 8% DPS growth target. As we discussed during this presentation, we and our colleagues at Clearway Group are focused on allocating our excess capital to new drop-down assets and providing creative visibility to the achievement of the $2.15 in CAFD per share when deployed. And finally, we continue to engage in discussions to hedge our natural gas assets. In conclusion, I think overall the first quarter is really one about execution and moving forward with our growth plans.

Operator, Operator

Please open the lines for questions.

Julien Dumoulin-Smith, Analyst

A couple questions here. First off, congrats on the Thermal sale here. Just curious, a little bit more, if you can elaborate on how you think about redeploying proceeds, timeline, etc. And just what does that marketplace look like at present? How much does the trade and development activity, impairments, impact at all your ability to look at other assets that are already operating here? I mean, just curious on the timeline now that you got the cash in hand. And then I'll just throw the second question, a brief clarification. Just what were the operational issues and just tie to wind that you alluded to a second ago, Chad?

Christopher Sotos, President and CEO

Sure. Thanks, Julien. I'll take the first one and then I'll let Chad take the second. The timing of it will be that $300 million will be spent in conjunction with development projects. I would say over 2022, 2023 and 2024. In terms of the deployment of the remainder of that capital, we're really working to deploy it, frankly, now.

Chad Plotkin, CFO

Yes, sure. Julien, if you look at some of the data in the appendix, I'd say there were certain instances in the quarter where resource was not optimal to our expectations. We also had some availability challenges at some of the assets in Texas and the Midwest when we had some icing that happened in February and early March, which pushed down availability and then obviously pushed down revenue capture as well.

Julien Dumoulin-Smith, Analyst

And Chris, just going back to what you said a second ago, you flagged after a year you might return it to shareholders here. Again, that's, that's certainly not the core expectation here, right?

Christopher Sotos, President and CEO

Julien, the goal is to deploy the capital in the most efficient way possible. If the Great Depression hits and the stock hits $17, we might have a different view. But given where we are right now, the focus is on redeploying it into other assets.

Julien Dumoulin-Smith, Analyst

Got it. And at risk of pushing it a tad further, any evolving focus, as you think about wind and solar vs. the litany of other asset classes within energy transition?

Christopher Sotos, President and CEO

I don't think anything in particular, Julien. And once again, I don't think the majority of those excess proceeds would be in a completely different asset class. Maybe at the margin, but that's very minimal.

William Grippin, Analyst

My first question, just on the commerce memo a couple of days ago, it appears to clarify that the duty rates, if any, ultimately end up being applied on Southeast Asian module imports would be equal to the company's existing rate for imports from China. Do you think that potentially gives developers and manufacturers enough clarity now to kind of restart imports now that risk can actually be quantified?

Christopher Sotos, President and CEO

Craig, why don't you take that one, you're in the best position?

Craig Cornelius, President and CEO, Clearway Energy Group

Yes. First, just to emphasize that same memo provided the clarity that I think we were looking to see for the committed projects that we're advancing into construction and that align with the $56 million worth of upcoming investments for CWEN, as noted before. Our perspective remains the same, which is that we're grateful for that helpful gesture, but the fundamental revisiting of what product definition is within the scope of the inquiry, we still believe to be unlawful.

William Grippin, Analyst

Understood. Okay. And my last question here is just on the 8.5% target yield on the reinvestment of the $300 million.

Christopher Sotos, President and CEO

Sure. I think the rising rate environment, I don't think has translated precisely through where a marginal bid is externally for assets, that may take some time. So if your question is, should we expect to really do that much better than the 8.5%, especially on the development drop-downs from CEG, I don't think that's a good working assumption.

Colton Bean, Analyst

Chris, I think you just touched on this in terms of evaluation impacts, but I guess just broadly for the third-party M&A market, can you describe the level of activity you're seeing there and the opportunity set that you see for that remaining $450 million?

Christopher Sotos, President and CEO

Sure. I think to answer your question, Colton, there is a large amount of assets that are out there. I think, obviously, we do our own sourcing as well on a bilateral basis. We can really be patient in our capital deployment.

Colton Bean, Analyst

Great. And then just on the development pipeline, any change to your approach in securing long-lead items? Are you looking further afield maybe to earlier stage projects and starting those conversations a bit earlier than you otherwise would have?

Craig Cornelius, President and CEO, Clearway Energy Group

Yes, we've done that. I think I understand your question to be are we securing major components for projects at an earlier juncture in a project's life cycle than we might have historically in the industry and the answer is yes.

Michael Lapides, Analyst

I have two that are kind of unrelated to each other. I apologize for that. Question number one is just broadly speaking, when you're looking at utility-scale solar and storage contracts today and what the PPA prices were, and also at wind contracts today for what the PPA prices are, how much are PPA prices changing in the marketplace?

Craig Cornelius, President and CEO, Clearway Energy Group

Sure, Craig. Yes. Substantially, but what's interesting is that our customers relative to the range of alternative sources of supply still see financial benefit in those elevated PPA prices.

Michael Lapides, Analyst

Got it. Okay. That's super helpful. The second question, unrelated one, any update on the California gas plants?

Christopher Sotos, President and CEO

Michael, there's not a significant update. We are continuing to work on it. As we mentioned before, most of the California ISO's procurement occurs in the second and third quarters. We are in ongoing discussions with them, but we will likely have our next substantial update around the third quarter.

Noah Kaye, Analyst

Could you give us a bit more of an update on the battery supply situation? What you're seeing in terms of cost increases there, and when you can push out delivery dates?

Christopher Sotos, President and CEO

Craig.

Craig Cornelius, President and CEO, Clearway Energy Group

Yes. It's an interesting dynamic because there are so many different factors that converge. Accelerating demand for use of batteries and automotive applications has strained the supply expansions that were planned already by different manufacturers.

Noah Kaye, Analyst

Great. Thank you, Craig. And just a quick housekeeping item, if I can clarify there's a helpful table in the appendix around the contribution of committed or closed growth investments on a full-year basis to CAFD for 2023 and 2024.

Chad Plotkin, CFO

Yes, maybe I wasn't exactly following the question. So are you just asking how much of that incremental capital would come in 2022?

Noah Kaye, Analyst

No. How much of the CAFD contribution in 2022 is from the committed closed growth investments?

Chad Plotkin, CFO

Oh. Well, I think if you think about it from a timing perspective, while assuming we hit all of our targets on CODs and those begin to generate the revenue and associated CAFD, we would expect to see a pretty sizable bump up starting next year.

Operator, Operator

This does conclude today's question and answer session, and I would like to turn the conference back over to Chris Sotos for any further remarks.

Christopher Sotos, President and CEO

Thank you everyone for your time. I appreciate the support and everyone stay safe. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.