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.