Clearway Energy, Inc.

Gentlemen, thank you for standing by and welcome to the ClearWay Energy third quarter 2020 earnings call. All lights have been placed on mute to prevent any background noise. After the presentation, there will be a question and answer session. Any instructions on how to do so will be given at the appropriate time. Thank you. Mr. Chris Soros, President and CEO of ClearWay Energy, sir, you may begin.

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 with the most directly comparable GAAP measures, please refer to today's presentation. Turning to page four. For the third quarter of 2020, Clearway achieved CAFTI of $171 million for a total of $265 million year-to-date. These results are within our expected sensitivity ranges. To date, the effects of COVID remain minor, with our teams maintaining safe and reliable operations through this difficult time. Clearway is announcing an increase in our quarterly dividend by 1.8% to 0.318 cents per share in the fourth quarter of 2020, and continues to see dividend per share growth at the upper end of our 5% to 8% long-term growth rate through 2021. As I will go into more detail later in this presentation, C1 has committed to invest approximately $450 million in new growth during 2020. This is comprised of today's announcement, encompassing total growth investments of approximately $108 million, while generating $13.8 million of average asset CAFTI over a five-year period, and our previous growth investments, totaling $339 million, while generating approximately $36 million of average asset CAFTI over a five-year period. In tandem with these accretive acquisitions, Clearway has also raised capital efficiently. We raised $24 million in equity during the quarter via the ATM program for a total of $63 million year-to-date. We clearly also refinanced and upsized several non-recourse debt facilities, releasing $96 million of new capital available for capital allocation at the corporate level. In addition, all cash trapped due to the PG&E situation has been released. As a result, we have sufficient capital to fund all of the currently committed investments. With this activity, we are updating our pro forma CAFTI per share view to $1.71 per share. which supports our target DPS growth and 80-85% payout ratio through 2021 at the high end of the growth range, as well as already positioning the company for growth beyond 21. This trajectory factors in the financings and contributions of the committed growth we just discussed, and does not include any additional growth opportunities. As we release the new growth, we continue to advance the opportunity set with Clearly Group. including the formal drop-down offer, the investment opportunity, and partnerships comprising 1.6 gigawatts of projects, comprised of 1.2 gigawatts of new projects, and increased interest in Mesquite Star, with an expected capital commitment in the range of $230 to $240 million, subject to negotiation by C1's independent directors. In addition, and also working with CEG... we're in the early stages of structuring an additional portfolio opportunity of 1.1 gigawatts with 2021 to 2023 commercial operation dates that we anticipate being offered to make a commitment on in the first half of 2021. All in all, 2020 has been a very successful growth year for C1 with sufficient pro forma CAFTI growth to achieve the high end of our long-term dividend growth targets in 2021. Turning to page five, I wanted to highlight our execution this year in new investments. In 2020, and as already disclosed, we have closed or committed to invest nearly $340 million of investments, representing around $36 million of annual CAFTI contribution on a five-year basis. This leads to a CAFTI yield of roughly 9.8%, with a weighted average life of 13 years contracted, excluding the Black Start project at Marsh Landing. And looking at the right side of the page, Today we are announcing an additional $108 million in investments, with $44 million invested to acquire CEG's residual interest in our distributed generation partnerships, as well as an SREC contract associated with these assets. This investment is expected to produce $5.3 million of CAFTI for a CAFTI yield of 12.2%. We've also committed to acquire the 160 megawatt Langford Wind Farm upon commercial completion of its repowering, expected by the end of this year, for $64 million. This asset, which is unlevered, has been designed around a commercial profile optimized to balance risk and return in the ERCOT market and is thus less contracted than is typical for our projects at approximately 35% hedged over 12 years. A revenue contract position that is supplemented by a contracted stream of reliable PTC pay-go cash flows. With those factors taken into account, we believe the expected 8.5 million in CAF degeneration and unlevered 13.2% CAF yield make for an attractive investment profile that takes into account the project's higher merchant position. As you can see in the investments listed on this page, I'd ask you to note our continuing emphasis on accretion. While the CAF yields these drop-downs create from our sponsor are helpful, they're matched with the profile of investments which takes into account the upfront cash flow weighted in the case of the distributed generation partnerships investment, and the merchant cash flows of Langford. So as we move to the future drop-down structure discussed on the next page, I would suggest yields on this structure will be more aligned with what we have executed in the past for similar type of assets while still providing for meaningful accretion on a highly diversified portfolio. Turning to page six, I want to provide a high-level overview of our CAFI outlook that Chad will have more detail on his part of the presentation. We're announcing 2021 guidance of $325 million resulting in $1.61 CAFTI per share and an update to our current pro forma CAFTI outlook to $345 million, leading to CAFTI per share of $1.71. These numbers do not include the drop-down opportunity for the new partnership investments as listed on the right side of the page. This drop-down opportunity is well diversified, comprising six new assets as well as increased ownership in Mesquite Star, with a greater than 14-year CAFTI weighted average contract life. It also further diversifies Clearway Energy into storage, with 395 megawatts, 1,580 megawatt hours of co-located storage in Hawaii and California. As we indicated on our last call, all it goes to provide more transparency to our shareholders regarding the capital needs of the business, and such we anticipate, subject to the approval of NAPAN directors, an investment required for this portfolio of between $230 and $240 million. As mentioned on the last slide, Given the structure and asset mix overall, we would anticipate the yields in this investment to be commensurate to the risk-adjusted profile of this substantial and diversified portfolio. While we are still working through the structure and other terms and conditions of the transaction with our CEG colleagues, I want to emphasize that while our ownership percentage will be approximately 50% for most of the assets, this is not a financing structure intended to provide capital to C1. In working with CEG and our anticipated partner, we are focused on optimizing ownership in these assets that allows for appropriate returns for CWIN, as well as an accretive yield on a diversified, contracted basis, while also allowing CEG to develop more assets at their target investment returns. When concluded, these assets will contribute beyond the $71 CAFTI per show pro forma outlook. This partnership platform we intend to continue to utilize in the future. and as such, will be followed by an additional 1.1 gigawatt portfolio offer in the first half of 2021. At Clearway Energy, we are excited about this new structure, allowing us to continue our growth trajectory at attractive, accretive, and further de-risk CAFTI yields. With that, I will turn the discussion over to Chad. Chad?

Thank you, Chris. And turning to slide eight. For the third quarter, Clearway is reporting adjusted EBITDA of $312 million. and cash available for distribution, or CAPTI, of $171 million. Clearway has now realized $853 million of adjusted EBITDA and $265 million of CAPTI year-to-date. During the quarter, the company benefited from strong availability at the conventional segment, as our California-based gas plants performed exceptionally well during the key summer months. This was especially evident during the extreme heat wave across the West Coast, where our California plants demonstrated their value as critical reliability resources in the state. While the conventional performance in the quarter was a welcome respite to the challenging West Coast weather conditions, the company's renewable portfolio did not benefit from the environmental and weather-related events. As noted in the appendix section of the presentation, the solar projects were especially challenged as the fires on the West Coast resulted in soiling and weak irradiance, leading to production below 95% of expectations between August and September. Additionally, wind production during the quarter across the portfolio was at 92% of expectations, as strong results in August were offset by a weaker July and September. As a company, we continue to closely monitor the business impacts related to the COVID-19 pandemic. Consistent with what we indicated last quarter, the company's projects have maintained safe and reliable operations, but we have observed a reduction in volumetric sales at the thermal segment, which continued into the third quarter. Though this impact is not material from a consolidated company perspective, we do currently anticipate the volumetric degradation to continue into next year, which I will discuss momentarily when walking through forward financial expectations. Lastly, in providing an offset to these items, CAPD results in the quarter were favorably impacted by the timing of project-level debt service due to the recent refinancings. Overall, while CAPD performance year-to-date is moderately below expectations, Since results are within the company's sensitivity ranges, we are maintaining CAPT guidance of $310 million. Now moving to capital formation. Inclusive of the DG Partnership Whole Co. refinancing completed this week, the company raised $96 million in new corporate capital through the upsizing of several non-recourse financings at an effective weighted average interest cost of 3.3%. Additionally, we continue to prudently utilize the ATM programing having raised an additional $24 million during the quarter. This brings total equity capital raised under the program year-to-date to $63 million. With the release of the $168 million in TRAPP PG&E project-related distributions and the $75 million previously raised through the residential solar portfolio sale in May that was used to acquire the remaining interest in repowering 1.0, the company is also well-positioned from a cash perspective. With these combined resources and the fact that the company's corporate revolver is completely undrawn, Clearway is essentially fully capitalized to accretively fund all committed growth it has made year-to-date while also preserving significant flexibility for new growth. As such, there is no requirement for any incremental new permanent capital except for new growth, including the most recent drop-down offer of the partnership investment opportunity. Turning to slide nine to discuss the company's updated pro forma CAFD outlook and 2021 expectations. In order to aid in understanding the various moves in our CAFD expectations, we provide a bridge commencing with our prior pro forma CAFD outlook of $340 million. First, due to the refinancing and upsizing of the non-recourse project debt facilities that provided $96 million in additional capital, CAFD is reduced by approximately $9 million due to additional principal and interest from these transactions. Next, we add in the $22 million of new asset-level CAFD from recent growth investments that were otherwise excluded from the prior pro forma outlook. This contribution is based on the expected five-year average CAFD profiles for these projects and include Mesquite Star in today's announcement of Langford Wind and the remaining interest in the DG partnerships. Next, While the company has had success in the identification of additional operational improvements, we are now factoring in around a $6 million budgetary impact that will reduce annual CAPTI expectations. This relates to increased cost associated with our overall insurance program and adjustments relative to support services under the MSA with Clearway Group and other back office requirements. Additionally, and consistent with the approach we have communicated to you around budgeting for renewable energy production, We have factored into our statistical modeling additional historical data, which had a modest effect on expected P50 median production estimates across the portfolio. With these changes, we are raising our pro forma CAFTI outlook to an approximate $345 million, or an amount that continues to be supportive of our ability to deliver on dividend growth within our payout ratio targets. Moving to 2021 expectations. Because our conveyance of our pro forma CAPD outlook is based on the five-year average asset CAPD profile for new investments, current year results will be affected by the timing of when a project reaches COD and the shape of the project's cash flow profile. In this regard, we anticipate a $17 million timing delta in 2021 related to the company's growth investments. Lastly, while we believe these are all temporary variances, We do foresee further impacts in 2021 of approximately $5 million due to COVID-19 related matters. This includes lower volumes at the thermal segment and the impact from California state taxes resulting from Assembly Bill 85 that was enacted at the end of June, which suspended the company's ability to utilize state net operating losses for the next three years. With these adjustments, Clearway is initiating 2021 CAPT guidance of $325 million and As noted, CAPTI guidance and the company's pro forma outlook are based on P50 renewable production expectations for the full year. Importantly, this also only factors in the committed and funded growth year to date, providing for additional upside to expectations upon the execution of new transactions, such as the 1.6 gigawatt partnership investment. And with that, I'll turn the call back to Chris for closing remarks.

Thank you, Chad. Turning to page 11, I wanted to take a moment not to read a list of what we have executed in 2020, but rather to provide an overview as to what we as a company are focused on. After coming out of the PG&E situation, as we had indicated, we have resumed increasing the dividend in line with our long-term targets, maintaining our credit metrics, and providing CAPTI within our sensitivity ranges. Second, we have executed a variety of growth investments to further diversify our portfolio and accretive assets that have served to drive our CAPTI per share to levels that will support ongoing dividend growth within our payout ratio objective. Third, We are working closely with our CEG colleagues to create an investment structure with equity partners that will provide a structure that emphasizes diversified contracted assets at accretive CAFTI yields, but also increases transparency around the capital required. We also believe that this will allow us to establish a more consistent timeframe of drop-down expectations in the future. All of this leads to an updated pro forma CAFTI of $345 million, or more importantly, $1.71 per share. which supports our long-term dividend growth rate at the high end of our targeted range for 2021, as well as growth beyond 2021. Thank you. Operator, please open the lines for questions.

Thank you, sir. At this time, I would like to remind everyone, in order to ask a question, please press star 1 in your phone. Again, star 1. If you wish to cancel your request, please press the pounder hashtag. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Julian Dimalin-Smith from Bank of America. Your line is open.

Is Anya stepping in for Julian? Good morning. Hey, morning. So I just wanted to ask, given the scarcity situation in California, could you talk about how you expect resource adequacy prices to trend? And also, is there potential to lock in longer tenors when you recontract the three thermal assets?

I think in terms of the pricing, obviously we'll have to see kind of where it turns out, but I definitely think what we saw in California would lead to higher pricing for resource adequacy. I also think the probability of being able to contract for longer tenor is higher, but I think as I've said consistently throughout the years, And I think also in our last quarter, I think that pace is going to really pick up in 2021 in terms of discussions around recontracting. So I wouldn't say there's any really new information since the last quarter we talked. But I do think, obviously, what's occurred is helpful for pricing and also for contracts.

Okay, great. And then also, could I ask about just on CAFTI yields, the latest announcements you've kind of put out there, the growth projects, have had pretty high CAFTI yields. How should we think about just future growth projects that you announced in terms of cap deals? How much opportunity is there to maintain rates near these levels?

Sure. I think these levels are difficult, and I tried to address in my comments. Some of it is due to Langford obviously having a less hedged position than typical, even though with the PAYGO structure, obviously contracted cash flows. So from our view in looking at the latest drop-down offer that we're working with our CEG colleagues and equity partner on, you know, that's about a 14-year weighted average CAFD life for contracts. So I don't think that type of CAFD level will be achievable. I think if you look back in our history, you know, you've seen kind of things, let's say, you know, in the nines in terms of CAFD yield. Once again, I don't want to negotiate here on the phone, but I think, you know, that type of range probably is more probable than the ranges that you see in the latest drop-downs that we announced today.

Okay, great. Thank you, guys.

Our next question comes from the line of Angie Staransky from Seaport Global. Your line is open. Good morning.

So I just have to follow up to this question that we just heard. So I understand that you're saying that this new partnership with CEG is not a financing partnership, but you will be presumably accepting some additional development and or construction risk. Can you at least tell us if there would be some incremental CAFTI versus third-party acquisition or acquisitions of operating projects that would be basically paying for that incremental risk that you're assuming?

Sure, just to make sure we're clear, there isn't any incremental risk. We're not taking development risk. These are projects that are through the development cycles, just to make sure we're all clear. That's not, and the partnership also is going to be with a third party, a long-term owner. Obviously, CEG is the current developer. It was kind of, you know, all three of us are working together to finalize that partnership. So I think CEG is still acting as developer and operator, similar to the dropdowns we've had before. So just for clarity.

But there are some projects, right? I mean, if I understand correctly, okay, so even if they're fully developed, you would be providing financing for some of them before they start commercial operations, right? So at the very least, you would be assuming some construction risk?

No, we really deploy capital at COD, at commercial operation date. So I don't think it'd be any different than what we've done historically.

Okay. Okay, I understand. Now, moving on, you said that you've adjusted some of your expectations regarding renewable power production volumes basically to reflect the last five years of data. Now, it looks like we're going to have La Niña continuing into next year. Is that something that could materially impact your especially wind production levels in 2021? Chad Launchcoat.

So yeah, so Angie, maybe to take this in two steps. So I think one of the things that we've done consistently that we've talked about just on the first point is just as a matter of sort of prudency, as we collect more historical data, we roll that through our modeling. And in some instances, it increases expected P50 in projects. In some instances, it can reduce it. I would say in the total, given the dollars, we're not talking about material moves overall, but We're just always trying to be honest with how we evaluate that. I think on the La Nina piece, look, I'm not going to venture to guess exactly how weather will do. I think I've seen some data points that suggest that you could have stronger production through the course of next year as a result of it. But I think, you know, from our perspective, I'd like to kind of see what shows up relative to expectations. But, you know, and then how that is dispersed geographically as well.

Okay, thank you. And last question on the lower thermal units that you said that that weakness could persist through 21 or into 21. I mean, can you give us an example? Is it just, you know, some of these projects support hotels or something like that, and hence there is some sensitivity to volumes?

Precisely, Angie. In our San Francisco operations, that tends to be more volumetric, and I'm sure as everyone on the phone is aware, hotel occupancy in San Francisco is lower due to COVID, so it is exactly that phenomenon.

Great. Thank you.

Our next question comes from the line of David Fishman from Goldman Sachs. Your line is open.

Hey, good morning.

Good morning.

Just I was hoping you could maybe provide a little bit more color just on the 17 million of timing related to the growth investments when we think about the bridge from your pro forma to 2021 and really just how it compares to the five-year CAFTA. Is it fair to kind of think the pro forma is kind of using almost like a year three average and it's a little bit below and then it becomes a little bit above years four and five? Or is it just something with kind of more the first year of operation? where you guys take a little bit more of a conservative approach.

Chad, why don't you go ahead?

Yeah, David, it's a good question. I think if you look at the appendix slide, page 17, we've tried to show that bridge. Most of that is picked up over the next two years, so you are correct. Like if I look at it on a five-year average basis, you may have a pickup in a couple years that are a little bit higher versus the next couple years. Like in 24 to 25, that may just slope down a little bit. Most of the delta, especially for this year, as you move into 2022, has a lot to do with expected, the timing of expected COD dates. And to Chris's point, we want to provide the number relative to how we've looked at underwriting the investment. But importantly, our capital outlay doesn't occur until we get to the COD date. So it is important to remember that our capital is not exposed until that point either. And I think the big driver on this one would be in our growth profile, a lot of that is related to the timing of Pinnacle, just given what we've seen in the observation of construction timelines. We're looking at a second half in service date, which has obviously delayed some of our original expectations as well.

Okay, thank you. That makes a lot of sense. And then just a couple other quick questions. On the Langford project, I think I heard in the earlier – prepared remarks that the 65% that isn't contracted under 12-year PPA, that's related to PAYGO financing. I just wanted to maybe clarify how that works. Is that just you receive a portion of the value of the production tax credit as you generate them from a tax equity investor?

Yes, but to be a little bit more precise, the 65% is on the revenue. So you can think about basically there's two cash flows, obviously. Revenue from the asset, about which 35% is hedged, 65% is open. And then also the pay-go, which obviously is contracted from a cash perspective, but obviously is subject to P50 risk in terms of production. So when we look at a combined basis, the contracted cash flows are subject to hitting the P50 risk. the PTC, the PAYGO structure, and then also 35% of revenue, with about 65% of revenue being open, not necessarily just PTC or PAYGO.

Okay, okay, understood. And then my last kind of just CAFTI-shaping question. In prior PowerPoints, you used to have a slide related to distributed generation and how the CAFTI trajectory changes over time. As part of the partnership that you acquired, did you effectively take out maybe the tax equity component that was reducing it over time? Or is that still kind of the structure where there's kind of five-year step changes?

You should still expect that step change, to be fair. We did not take out the tax equity.

Okay. Thank you. I appreciate the time.

Sure.

Great. Thank you, Dave.

Our next question comes from Brian of Colling Rush from Oppenheimer. Your line is open.

Thanks so much, guys. Now, as we see increased amounts of liquidity in the market and availability of capital be pretty widespread, are you seeing any changing dynamics in terms of the competitive landscape, both at the development level or at the project acquisition level?

I'll let Craig say this. On the project acquisition level, I think there we are seeing, you know, tightness in terms of CAFTA yields. I think once again, you know, as in all things, when you kind of need to look for the right intersection of where we can bid and add value to kind of really maintain our accretion. But I do think given current capital markets and liquidity, you probably are seeing tightness in terms of where third-party assets are trading. How about Craig, if you don't mind addressing the development side?

Yeah. Hi, Colin. I think for some parties, tax equity availability clearly is an issue. We've observed that amongst some competitors needing to elect to move projects out in time or otherwise be challenged in their tax equity financing options. We've been pleased to be in the circumstances where every project we intend to take into construction, including those that you've seen cited in these partnership investment opportunities, have been able to secure tax equity commitments from interested investors. And we're finding that there is some preference for quality in terms of sponsorship and project composition, which we benefit from in a market where there is some scarcity in terms of tax equity. In terms of construction debt and term debt, the markets remain truly as robust as we've ever seen them, both in terms of demand and the cost of financing that we're able to secure from that helps us in terms of being able to propel further development growth and also to be able to offer truly attractive investment profiles for the cash equity interests that show up in C1. On Project M&A, you know, I think what we've seen is a desire on the part of smaller developers from whom we might buy pre-construction assets to see the election outcome play out and what that might mean for timelines they need to develop in. Fortunately, we've engaged selectively on some situations like that and have also been able to propel growth in our organic development pipeline, which the disclosures indicate actually grew substantially in the prior quarter. So whether Project M&A is available to us or not, we actually feel quite confident about the ability to deliver a pipeline that will support CWIN's 5% to 8% dividend per share growth.

Great. And then just looking at how the industry moves forward with the lower-cost capital, the advent of really low-cost batteries, like really low-cost batteries being available, are you guys seeing a different type of opportunity in terms of increased distributed assets, different sorts of configurations and ability to serve load with the newer technologies that are available as you look at the development opportunity? And is there an opportunity for... some increased spread capture to emerge as you guys are probably a little bit more comfortable with some of those technologies than other folks.

Would you like me to take that one too, Chris?

Yes, please.

Okay. Yeah. You know, I think right now, Colin, our focus is more on central station storage solutions than behind-the-meter on-site storage solutions. commensurate with the pipeline and that we're developing and our operating assets, we do have smaller scale distributed solar projects being deployed, some of them on markets like Massachusetts that are paired with storage. But most of our focus on storage is in the combination of new construction projects like those you see cited in the 1.6 partnership, 1.6 gigawatt partnership investment opportunity where You know, in the case of the Daggett Solar Project, we will be building more storage at a single solar site than I think has actually been deployed before this year in CAISO. And projects like that in the future, as well as opportunities for hybridization or retrofitting of solar and storage into our existing operating fleet, including wind projects. And some of that same value capture you're citing is achievable in centrally interconnected storage resources as well. Whether there's a standalone storage ITC or a need to pair storage with solar, we're bullish the opportunity to deploy in that kind of format at some scale for C1 in the future.

Great. Thanks so much, guys.

Once again, if you wish to ask a question, please press star 1 on your phone. Again, star 1. Once again, star 1 to ask a question. There are no further questions at this time. Please continue.

Well, thank you, everyone, for attending, and I look forward to talking to you in February. Everyone stay safe. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you all for joining, and we all disconnect.