Clearway Energy, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Clearway Energy, Inc. Second Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press Star 1 on your telephone. If you require any further assistance, please press Star 0. I would now like to hand the conference over to your speaker today, Chris Sotos. Thank you. Please go ahead, sir.

Good morning. Let me first thank you for taking the time to join today's call. Joining me this morning is Chad Plotkin, our Chief Financial Officer, Akhil Marsh, our Investor Relations Manager, and Craig Cornelius, President and CEO of Clearway Energy Group. Craig will be available for the Q&A portion of our presentation. Before we begin, I'd like to quickly note that today's discussion will contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. please review the safe harbor in today's presentation as well as the risk factors in our SEC filings. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's presentation. Turning to page four. For the second quarter of 2020, Clearway achieved CAFTI of $86 million for a total of $94 million in the first half of 2020. These results are within our expected sensitivity ranges. To date, the effects of COVID remain immaterial with our teams maintaining safe and reliable operations through this difficult time. As previously announced, we closed on the sale of our residential solar portfolio for $75 million and immediately recycled that capital to close the first project in the April dropdown for the remaining interest that Z1 did not already own in reparring 1.0 for $70 million. After a year and a half, I am happy to note that PG&E has emerged from bankruptcy, and consistent with our commitments, we are recalibrating the dividend in line with our long-term financial objectives. So today, we are announcing a 49% increase to the company's dividend to $1.25 a share annualized, which is in line with our payout ratio objectives relative to 2020 CAFTE guidance. As of the end of June, there was $168 million in project-level cash at the PG&E-related projects, and as we have indicated previously, We will allocate this to committed growth investments. Through this capital deployment and with the binding agreements in place we already have, Clearway Energy Inc. anticipates being able to increase the dividend at the upper end of our 5% to 8% long-term growth rate for 2021. In addition, during the quarter, we raised $278 million in corporate capital, with $250 million issued as a tack-on to the 2028 green bond and $28 million under the ATM program. The Clearway Energy Board has also authorized a new $150 million ATM program to fund growth within our balance sheet objectives. With the constraints from PG&E now behind us, during the quarter we were also able to advance new growth. First, we agreed to acquire an interest in the 419 megawatt Mesquite Star wind project, with SeaWind obtaining 50% of the cash flows through the middle of 2031, while the project is predominantly contracted. and then retaining 22.5% of the cash flows thereafter, while it's predominantly merchant. As you will recall, as a result of the PG&E bankruptcy, we initially had to forego any investment in Mesquite Star. We have been fortunate through this period to continue working with our colleagues at Clearway Group to find a solution to allow C1 to retain an interest in the project. Our ability to structure an innovative approach for this project that minimizes our capital exposure in the merchant period is a testament to the strength in our sponsor relationship and provides growth outside of the ROFA pipeline. In addition, clearly reached agreement with all parties regarding Black Start services at Marsh Landing with an anticipated COD in 2021. During the five-year pendency of the contract, C1 will receive a return of and on its capital, resulting in an exceptionally strong CAFTA yield. While the duration of the contract is not long, this important investment continues to highlight the importance of our gas assets in the California electricity market. We continue to work with CEG on the closing of additional investments announced last quarter, with both Rail Snake Wind and Pinnacle repowering remaining on track. Finally, we are acutely focused on driving growth for 2021 and beyond, especially in partnership with Clearway Group. We have received a drop-down offer from Clearway Group for 100% of the ownership interest in Langford, following its repowering, and the remaining interest in Hawaii Solar Phase 1. The Hawaii assets are already well-known to you, given C1's previous investments into those projects in 2019, while Langford Repowering provides another opportunity for C1 to diversify its portfolio by participating in an asset with a head structure similar to Elbow Creek and ERCON. In addition, we are engaged in structuring a co-investment in a 1.2 gigawatt portfolio of renewable assets under development by Clearway Group with expected commercial operation dates from 2021 to 2022. While we are in the early stages of this process, this sizable portfolio will provide additional growth on a longer-term basis with an estimated 15-year weighted average life for Clearway Energy Inc's CAFTI per share, which will support sustained dividend growth in the future. Turning to page five, I want to take a moment to reaffirm our long-term financial objectives, which you will see are consistent with what we articulated historically, including after the GIP deal closed in the fall of 2018. We are still targeting a 5% to 8% long-term dividend growth rate with achievement at the high end of the range by the end of 2021. This CAPTI per share is then distributed at an 80% to 85% payout ratio, which we believe creates a good balance between return of capital to shareholders, maintaining a cushion to operate within the company's sensitivity range, as well as keeping some cash in the business for self-funded growth and credit rating stability. From a leverage perspective, we continue to amortize on average over $350 million of project-level non-recourse debt annually, thereby reducing the risk to the portfolio when the current projects come off contract. In total, This financial strategy allows Clearway Energy, Inc. to target BBBA2 ratings, which have most recently been affirmed at stable by vacancies. Consistent with our messaging over the years, we believe that the combination of these financial policies provides flexibility for our long-term growth objectives on a sustainable basis. Turning to page six for an overview of our Mesquite Star investment. As discussed earlier, this was an asset that we had to forego due to the PG&E situation, so we're excited to be able to agree on an innovative structure with Clearway Group that aligns well with our investment criteria. The structure provides CLN with 50% of the economics during the predominantly contracted period through the middle of 2031, then dropping to 22.5 during the predominantly uncontracted period. This allows Clearway to benefit most from the contracted period of Mesquite's lifecycle, which is contracted to high-quality corporates who are a major source of renewable power procurement, or reducing the proportion of our economic return exposed to the merchant energy period. When the acquisition closes anticipated in the third quarter, this will further diversify our cash flows outside of California with an estimated five-year average asset CAFTI amount of approximately $8.3 million, resulting in a CAFTI yield of 10.5%. In conclusion, this asset will be a strong, contracted, creative contributor to C1's CAFTI profile through 2031, or reducing exposure during the merchant period. Turning to page 7, this slide illustrates our growth from 2020 to 2021 with additional color beyond. For 2020, we have $1.54 of CAFTI per share that we will use to reestablish our dividend at $1.25 a share on an annualized basis for 2020. Looking forward, and with what we have already executed or committed to invest, we see the ability to grow our dividend at the high end of our 5% to 8% target for 2021, given the $1.70 CAFTI per share, resulting anticipated dividend by the end of 2021 in a range of $1.34 to $1.36 per share. As Clearway works to maintain momentum in our CAFTI per share and therefore dividend per share growth, we've also been offered the Langford Repowering Investment and Clearway Group's residual interest in the Hawaii Phase I, which, subject to negotiation and approval by our independent directors, we would target closing these transactions by the end of 2020. Looking beyond 2020, we are working with our colleagues at Clearway Group on investing in a 1.2 gigawatt portfolio of renewable assets with CODs in 2021 and 2022, thereby creating longer-term runway for our growth in CAFTI per share. These efforts are enhanced by our development efforts in thermal and also the potential for third-party acquisitions, the latter of which is now more attractive to the company given the resolution of the PG&E bankruptcy. With that, I'll pass the discussion over to Chad. Chad?

Thank you, Chris. Turning to slide nine. Today, Clearway is reporting second quarter adjusted EBITDA of $316 million and cash available for distribution, or CAPD, of $86 million. These results bring first half 2020 adjusted EBITDA to $541 million and CAPD to $94 million. While COVID-19 remains a key focus across the enterprise, we are pleased to say that our projects have continued to operate safely and reliably. As indicated on the first quarter earnings call, we anticipated minimal financial impacts from the pandemic. Consistent with this view, during the second quarter, the primary observed business issue from the pandemic was at the thermal segment, where reduction in volumetric sales were materially offset by lower operating costs. Though results were significantly improved year over year, renewable energy conditions during the second quarter were below median expectations. This was primarily due to a challenging wind environment at Alta in May and June, as well as higher than normal rain at locations during April, which impacted the solar portfolio. Partially offsetting these conditions was the timing of debt service payments, including the impact from the May issuance of the additional $250 million of 2028 notes, which the company benefited from due to a deferral of interest payments. Excluding these items, CAPD results in the quarter would have been at the lower end of our sensitivity range, as noted in the appendix section of the presentation. Overall, and with results within our sensitivity range, we continue to maintain 2020 CAPD guidance of $310 million, which is now unencumbered by the PG&E projects due to its emergence from bankruptcy. In the second quarter, Clearway also continued its success in raising permanent corporate capital at levels supporting long-term accretion for the company. As mentioned, In May, we issued an additional $250 million of the existing 2028 green bonds. This financing occurred at attractive levels, as evidenced by an issuance price of 102 or a yield to worst of approximately 4.35%. The proceeds of this financing were used to repay all cash borrowings under the corporate revolver, which remains undrawn today. We also used the proceeds to retire the remaining $45 million of outstanding 2020 convertible notes that were due in June. During the quarter, Clearway also completed use of the existing $150 million ATM program by issuing $28 million of equity to support growth initiatives in line with our long-term balance sheet objectives. Like the tack-on bond issuance, this equity was raised at attractive levels with an implied cappy yield of just over 7%. This issuance also further demonstrated the efficacy of the ATM program to fund significant portion of Clearway's long-term equity needs at efficient prices. As such, the Board has authorized the company to move forward on a new $150 million ATM program. Following these financings and with the PG&E bankruptcy now resolved, Clearway's liquidity position is exceptionally strong and the company is well positioned to execute on growth within its balance sheet objectives. In addition to the fully undrawn revolver, Clearway has approximately $168 million of restricted cash that has been tied up at the PG&E projects. We have already received $83 million of this amount and will receive the balance by October or through the normal distribution windows. The company is also at its target ratings level and viewed stable by both S&P and Moody's. All these factors afford Clearway significant flexibility to execute on its long-term plans. And with that, I'll turn the call back to Chris for closing remarks and Q&A.

Thank you, Chad. Turning to page 11, I wanted to close on a couple points. First, we are delivering on our 2020 financial commitments with CAFI and leverage in line with our goals, resulting in stable ratings from both agencies. Second, and with PG&E behind us, we are resetting our dividend in line with our long-term financial policies, with the third quarter dividend now at $1.25 on an annualized basis, anticipated growth for 2021 at the upper end of our 5% to 8% long-term target growth rate. Third, we are focused on growing our long-term CAFTI per share to drive sustainable dividend growth with the acquisitions we announced last quarter, the new investment in Mesquite Star on attractive terms, engaging with CEG on the repowering of the Langford asset and their residual interest in Hawaii, and continuing to further with Clearway Group to increase our CAFTI per share with potential co-investment into 1.2 gigawatts of opportunities with CODs in 2021 and 2022. Finally, I wanted to take the opportunity to thank our shareholders, bondholders, banks, and employees for working with us and sticking by us through the PG&E situation. The situation has challenged the organization in numerous ways, and I cannot be prouder of how the team responded to the crisis and demonstrated the resiliency that is built into the C1 platform. I look forward to working on more growth in the future, free of the constraints of the past year and a half. Thank you. Operator, please open the line for questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And once again, that is star 1 if you would like to ask a question. And our first question is going to come from Julian Dumalin-Smith from Bank of America. Your line is now open.

Hey, good morning, team. Congratulations on the dividend hike and making it through everything, so. Hope you guys are well and safe. Absolutely. A few different questions coming up this morning. First conceptual one, just with respect to the gas assets versus renewables, I'm going to raise the analog of Dominion and some of the other utilities. And I know it's not necessarily direct parallel, but do you see any merits to eventually seeing a more thermal versus renewable portfolio split, whatever that means strategically? And then separately and related, You talk about diversification a little bit from California here, as emphasized by your latest acquisition. Do you see the future portfolio expansion, right, a la CEG or otherwise, to be outside of California to help de-emphasize that previous issue in terms of counterparty?

Sure. Thanks, Julian, and I hope you and your family are safe as well. In terms of your first question, I don't think that we necessarily take a view of Dominion that we want to take gas out from the portfolio entirely. I think as we've talked over the years, the gas fleet provides a very good hedge against some P50 volatility that obviously we see from time to time in wind and solar. I do see, in terms of investment, much more investment going forward into renewables than gas. Obviously, Carlsbad was a large investment, but if your question is, Do we see a lot in the near term? Not necessarily. So I'd say that natural gas would be diluted within the portfolio in terms of a CAFTI contributor as we continue to grow on average. So I think that's kind of how we view gas overall. To your second question in terms of California, it's not as though that we won't look at assets in California anymore. But I think given what did occur for the past year and a half, we often tend to look to see if we can diversify. So if we have a two assets that have the same IRRs or CAFTI yields at the same risk level, we'll definitely prefer something outside of California versus inside California for that reason.

Excellent. And then if I can follow up very briefly here, just in terms of the cadence of dividend growth and CAFTI growth here, when you talk about subsequent investments, this 1.2 gigawatt portfolio of 2122 CODs, is it to be assumed that that would largely be an end of 2122 CODs

investment such that that would backstop 22 growth, just to make sure I'm hearing you right.

I know you talked up the outlook on dividend growth to the higher end for 21, but it sounds like some of the growth projects are actually more aimed to 22 if you assume that they align with the COD for investment.

Simple answer is yes. Kind of to your question, I think looking at the $1.70 that we have for 21, that's what gives us confidence to be able to increase the dividend at the high end of our rate between 5 and 8 in 21. But to your question around the 1.2 gigawatts that we're working with Clearway Group, those would be much more for after 21 CAFTI guidance because obviously the projects need to come online.

Okay, excellent. So really, if you were to think out loud, when you think about what you already have visibility on here for 22, given just how large a portfolio 1.2 gigs would be, I don't want to push you too much, but what kind of clarity or line of sight in terms of CAFTI opportunity does that provide you in your view?

Yeah, we didn't really disclose that. And as we said, we're in early days with working with Craig and the CEG team to kind of work through it. So obviously when we have a binding agreement, we'll announce that. But until then, don't want to speculate.

Fair enough. Thank you guys very much. All the best. Again, congrats.

Thank you. And thank you. And our next question comes from Colin Rush from Oppenheimer & Company. Your line is now open.

Thanks so much, guys. Can you give us a sense of what you're seeing at the project-level debt markets right now in terms of cost of capital and terms? I mean, does the market feel liquid to you? You know, how much money did you raise on some of these assets? It seems like there might be some opportunities to – you know, be pretty proactive in terms of leveraging up some of the newer assets in specific.

Sure. So I'll hand it to Chad if there's anything to add. But, I mean, I think we see the project financing markets as actually pretty strong. I think, once again, there are dollars available for good projects. I would say that in terms of leverage, obviously the DSCRs that most of the banks are looking at are similar to what they would look at in a normalized market. But obviously, with the interest rate environment the way it is, the principal tends to be a little bit higher. I don't know, Chad, anything to add from a project financing perspective?

Yeah, no, Colin. You know, obviously, as it relates to new projects, I think the point that Chris raised was accurate. I mean, I think if your question is, do we see other opportunities in our portfolio to perhaps refinance or do anything that could drive additional capital back to the corporate enterprise? I mean, I think as you've found over the years, we're always as I say, mining the portfolio for opportunities, and we'll continue to look at that. But I think overall, to your point, I mean, we're seeing cost of capital very attractive in the market, not just at the project level, but also at the corporate level.

Okay. That's helpful. And then, you know, I know there's been a lot of discussion around energy storage, but we are also seeing any number of different bull bar technologies getting implemented across different portfolios. Is that something that you guys see as a, an opportunity in terms of, you know, selling into the ancillary services market with some incremental capex on the existing portfolio in some sort of meaningful way.

Sure, I'll kind of start off and then hand it to Craig to see if he has any additional color. But I think from our view, we constantly work with our colleagues at Clearway Energy Group to say what assets do we have that may make sense to put storage on. Obviously, we have a pretty good and wide footprint. So I think maybe, Colin, to answer your question, we look at those opportunities all the time to see what might make sense. But, Craig, I'll turn it over for you for how you're looking on the group side.

Yeah, sure. Hi, Colin. When we look at deployment of storage technology or other technologies like you've described. In most cases, we're focused on resource adequacy, tolling-type revenue contract structures to be able to underpin an investment because it's been our observation that ancillaries can be a market that um can compress relatively rapidly and we want to focus on using capital both at clearway group and clearway energy inc around investment opportunities that we expect will produce a reliable stream of cash flows over time consistent with our investment objectives so where we've been looking for retrofit opportunities for storage and and we see a number of them around the fleet uh we focused where the contracted revenue picture could actually be a pretty attractive one, and where ancillaries might be or energy arbitrage could be a returns enhancer, but not something we're relying upon in order to underpin the investment thesis. And we see chances to be able to do just that.

All right. And can you give us a sense of how big that opportunity is with the portfolio right now?

You know, it's a function of matching – project facts and circumstances with load serving entity appetite as you as your question indicates right now we are assessing an opportunity set that you know certainly is measured in many hundreds of megawatts and you know as those opportunities ripen and we reach a point where there's a commercial transaction that would merit disclosure, then I think you'll certainly hear more. But by virtue of the positioning of our incumbent fleet, certainly you could think of us as a company that is as well positioned as any to be able to make use of the opportunity for storage retrofit.

Okay. That's helpful, guys. Thank you so much.

And thank you. And our next question is going to come from Stephen Bird from Morgan Stanley. Your line is now open.

Hey, good morning. I hope you all and your families are doing well. Thank you. You as well, Stephen. I wanted to step back and just talk about potential election impacts. And I'm thinking about the possibility of a blue sweep. And the three things that I guess we often get asked about would be tax credit extension, a higher corporate tax rate, and then carbon regulation. just as a high level as you think about your business, both your current assets as well as your growth opportunity. How do you think about those kinds of impacts to your business?

Sure. Well, given it's a federal tax policy, I'll give a really easy answer. I think to your question, I think similar to as we think about the rate, not to minimize it, but the corporate rate we're not as concerned about as a generalization because of our NOL. So the difference in corporate tax rate because We're materially a minimal federal taxpayer for the next 10 years under our NOL. Basically, from our view, the tax rate really just affects the value of the NOL. So if corporate tax rates were to increase, once again, depending on how it intersects with the convoluted nature of federal tax policy, then of itself the tax rate doesn't necessarily create something. In terms of tax credits, I think once again a blue sweep would be beneficial from that perspective because obviously incentivizing additional renewal development and tax credits on that area I think are helpful as well just in terms of maintaining that NOL runway at that size. Third, in terms of how you view the overall regulatory or carbon regulation, There it's a little bit tougher to speculate, because obviously that in many ways is probably more convoluted than a corporate tax policy. But I do think overall, given where the fleet is positioned, a corporate tax rate, and given kind of the first question that was asked, are increasing as a percentage of the overall platform on renewable assets versus natural gas, I think overall would behoove us. And I think the other part as well is, and it's part of our gas fleet that I should have answered in the first question, is our gas fleet with the Dominion analog? is a little bit different because our gas fleet is really meant to back and enable renewables in California, with the exception of the Gen Con asset. So it's not just as though we have a peaker sitting out somewhere that kind of runs based upon merit. It's really there as part of helping California reach its renewable goals. So I think it's a little bit different type of gas asset, depending on where carbon legislation may come out.

That's really helpful. And then just separately thinking about – A very popular topic these days is green hydrogen. One of the key enablers of green hydrogen, in our view, is just very cheap renewable power, and you've got some quite excellent sites. Do you see that as a long-term potential in terms of potentially siting electrolyzers at any of your sites and providing very cheap power for creation of green hydrogen, or is that really sort of early days in terms of thinking about that?

I'll start and then turn it over to Craig. I think the one part in when people think of those different opportunities is, you know, for good or ill are, you know, PPA duration is pretty long. So that cheap power, which I agree with, you know, a lot of it's already contracted for. So just, you know, it's kind of a negative to that question in terms of the portfolio. But Craig, in terms of hydrogen and things you might be looking at?

Yeah, sure. Like others, we do see this as a potential higher value end product for renewable power plants in the long run. For some time, we've been evaluating the opportunity for renewable-driven electrolysis to produce hydrogen for industrial applications in Texas and for automotive applications in California. We see the long-run total addressable market as higher in the former category, but the opportunity in both. It's our assessment that our sizable existing operational footprint, which you touched on in both states, will provide a competitively advantaged foundation as different required conditions in the supply chain and the market come together over time. And I think it's our point of view that the progression of electrolyzers and the demand for hydrogen at a higher price point that it's currently sold at will hopefully converge with the contract evolution, in particular for assets in Texas, in a way that's favorable. So we spend time on this. We see an opportunity. We think others are right to see it. And in the long run, we think it could be favorable to the terminal value in the existing operating fleet.

That makes sense. So it sounds like, as you think about some of your contracts, that actually it could work out in the sense of the sort of confluence of the opportunity with contract expirations in some cases at least. Am I understanding that correctly?

Yeah, you know, your ideal project configuration probably looks like an operating wind project that has rolled off of its initial contract period that has a well-understood resource and a very low operating cost. and a new construction solar project, with the two of them relatively close to either existing gas distribution infrastructure or hydrogen end use. And you could think of our fleet, especially in a place like Texas, as being pretty well positioned for that kind of situation in the latter half of this decade.

Yep. That's really helpful. Thank you so much.

And thank you. And ladies and gentlemen, if you have a question, that is star 1. Again, if you have a question, that is star one. And our next question comes from David Fishman from Goldman Sachs. Your line is now open.

Good morning. Congrats on a return to normal here.

It's been a long time. I appreciate that.

Yeah. So I have a question kind of on the shape of the CAFD run rates as it relates to kind of pro forma guidance and thinking about dividends from that. So... My understanding is that the pro forma is about $1.70 of CAPT per share, but it seems like the 2021 DPS guidance of $1.34 to $1.36 is about 80%, but not quite on the low end. Is that simply just due to the kind of the timing of the escalation of some of these run rates in the pro forma? So maybe the first year or two, it's a little bit lighter, and then it escalates a little bit higher over the next couple of years? Just trying to think about the shape of the cash flows.

It's also that not all of the assets are necessarily fully online 1-1-January 21, so that's part of it as well.

Okay, so a timing there.

Sorry, part of it is to your point that some of the assets are new, basically will be in the first couple months of operation, and the second point is not all of them are up and running 1-1-21. Got it.

Okay, that makes sense. And then the pro forma number itself, so that doesn't include the announced Mesquite Star potential acquisition as well as the Black Star announcements. So those would be, you know, potentially incremental to that run rate. Obviously not necessarily for 1-1-21, but in general that would be incremental to the $340 million. Correct. Okay. And we should assume that the dividend growth could be raised proportionally to whatever you might revise the the pro forma guidance rate to in the future, or is it more looking to target within the 5% to 8% band?

Yep. Once again, we try to stay within a long-term objective. So I think, to your point, if we kind of, so to speak, got a lead and kind of were able to have higher CAF to do those investments, that would then increase the duration which we felt comfortable increasing the dividend at that 5% to 8% rate. Okay.

Got it. And then just the last question – On the black start at Marsh Landing, so the completion in 2021, as you go through that process, does that accelerate any of the potential conversations with kind of recontracting for the broader asset with the counterparty? And if it does or if it doesn't, when do you kind of expect for the three assets with the contracts coming due in 2023, kind of the dialogue there about recontracting the pickup?

I think it probably changes that dynamic marginally. Obviously, those entities are focused on the black start, not necessarily the PPA or recontracting. I think just being consistent, I've always said kind of two years a little bit early with a little bit of false precision. So I think those conversations will really get going in 2021. Okay.

That makes sense. And those are my questions. Thank you and congrats on obviously a great quarter and the return to normal.

Stay safe. Thank you. And thank you. And I'm showing no further questions. I would now like to turn the call back over to management for further remarks.

Thank you. Once again, thank you, everyone, for joining our call. I appreciate everyone's support over the past year and a half and really look forward to growth in the future. So thank you all for your time. Take care.

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