Clearway Energy, Inc.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Ladies and gentlemen, thank you for standing by, and welcome to the Clearway Energy Inc. Q2 2022 earnings call. At this time, all participants 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 1-1. I would now like to turn the call over to your host, Chris Sotos, President and CEO. You may begin.

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 Special Relations, and Craig Crenelius. President and CEO of Fairway Energy Group. Her will be available for the Q&A portion of her presentation. Before we begin, I'd like to quickly note that today's discussion contains overlooking statements, which are based on assumptions we believe to be reasonable out 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 metrics. information regarding our non-GAAP financial measures and reconciliations through mostly directly comparable GAAP measures, please refer to today's presentation. I would be remiss not recognizing this is the first call where our CFO, Chad Flock, is not participating. I want to thank Chad for all his contributions over the years and for ensuring an orderly transition of his responsibilities prior to his departure. We recently launched a search for his replacement and will take a deliberate and careful approach to ensure our executive leadership team has the appropriate skills and experience to continue to lead clearly forward. Turning to page 3, the first half of 2022 performed within our sensitivity ranges, with Clearway's diversified portfolio producing $176 million of CAFTI in the second quarter of 2022 and $174 million in the first half. Clearway increased its dividend by 2% to $0.3604 per share, or $1.442 on an annual basis, keeping us on target to achieve the upper range of our dividend growth objectives for the year. The program continues to solidify its pro forma CAFI outlook by a strong execution. We have now contracted the remaining 20% of capacity at the marsh landing project that had previously been open after the current tolling agreement ends. This project is now fully contracted on a wage average basis to approximately the end of 2026. We are also currently in the procurement processes regarding the open position at El Segundo and would expect to provide update on this by the third quarter earnings call. In addition, that we should close in the near term on the Capistrano acquisition, which based on our current expectations for new project level financing would result in long-term corporate capital for approximately $110 to $130 million, allowing us to increase our pro forma CAFTI outlook for approximately $400 million, up from $385 million and the resultant CAFTI per share to $1.98 from $1.90. The prior committed growth investments remain on track for their CODs in 2022 and 2023. Longer term, our Clearway Energy Group colleagues continue to work on the development projects that underpin our minimum 300 million capital commitment over the next 12 months, as well as growing their development pipeline to now 24.7 gigawatts with 6.7 gigawatts of waste-based projects. The first financial milestones underpinning our 300 million capital commitment goal are targeted for completion in late Q3 and early Q4 2022, as solar and storage projects planned for completion next year reach financial close and start construction. In total, the capital commitment opportunity for us across the projects Peerway Energy Group is planning to place in service through 2024 exceeds the $300 million goal we set at the beginning of the year. As the commercial profile and capital structure of those projects reach final resolution during the coming months, including potential changes to their tax credit qualifications arising out of the Inflation Reduction Act presently being considered in Congress, we will provide an update outlook on the capital commitments we expect to make to project investment opportunities offered by Peerway Energy Group over the near term. In addition, the sale of 50% of Clearway Energy Group to Total Energy is still on track with closing in the second half of 2022, with the outcome of Clearway Energy Inc. having an even stronger sponsor with leading capabilities as well as robust renewable generation goals. Subject to the provisions of applicable agreements and regulations, the companies have commenced planning for collaboration in several dimensions across the Clearway enterprise we expect will make us an even more productive participant in our country's clean energy markets as they grow and diversify in asset class. In line with this continued progress around executing on our growth plan, we have allocated approximately $420 million of the $750 million of excess sale proceeds from thermal, supporting $2.10 of CAFTE per share, with full allocation of the remaining $330 million of thermal proceeds, providing visibility to over $2.15 of CAFTE per share. Given this solid outlook, I continue to have great confidence in our ability to grow the dividend at the upper range of our 5% to 8% DPS growth target through 2026. In summary, where we continue to reduce risk in its portfolio through the expansion of new contracts on its natural gas portfolio, as well as investing in new assets to create growth in line with its long-term objectives. Turn to slide four to provide a bit more color on the quarter and where we stand overall from a financial perspective. For the first half of the year, Our total portfolio performance was very close to the midpoint of our sensitivity ranges, with adjusted EBITDA of $626 million and CAFTI of $174 million. Contributing to this is today's reporting of second quarter adjusted EBITDA of $366 million and $176 million in CAFTI. During the quarter, the company's renewable segment delivered strong results, led by above-average production at AltaWind portfolio and Clearway's utility-scale solar fleet. The performance of renewables was somewhat offset by weaker unexpected results in the conventional segment, primarily due to the El Segundo facility as we managed through an extended spring outage as well as a forced outage in June that ended in early July related to damaged cooling equipment. This event was managed expeditiously, and the facility is currently running at normal conditions. Overall, with the company's results for the first half of the year in line with our sensitivity ranges, we continue to maintain 2022 CAPTI guidance of $365 million. As a reminder, 2022 CAFTA guidance does include contribution from the thermal segment through April, given the timing of when the transaction closed and continues to assume the achievement of full year P50 renewable performance. Guidance does not, however, factor in the full contribution from existing growth investments and the Capistrano acquisition, which informs the update pro forma CAFTA outlook of $400 million, which I'll speak to on the next slide. From a balance sheet perspective, the company continues to have unprecedented flexibility to exude on its growth while not having to form new corporate capital. We have the $750 million from the thermal sale, of which approximately $330 million remains to be allocated. Our revolver is completely undrawn, and we are insulated from interest rate volatility with 99% of our debt fixed. Simply put, we are in a phenomenal position to move our company forward during a challenging macroeconomic backdrop. Let's turn to the next slide to speak about our latest transaction, Capistrano, and the value appreciation that comes from this allocation of capital. Page 5 provides an overview of the Capistrano acquisition. After assumed project-level debt capital formation, Capistrano should require approximately $110 to $130 million of long-term corporate capital, producing $12 to $14 million of five-year levered average capping for a significant 10.8% cap deal. We expect this transition to close in the second half of 2022. The project sells its energy under plus-par agreements with a rate average tenor of 10 years, and provide CLIN further diversification into Texas, Nebraska, and Wyoming. As part of the acquisition, Clearly Energy Group will fund $10 million toward the purchase price in exchange for an exclusive right to develop any repowering projects within this portfolio. In the event that a project were repowered, CLIN would remain the long-term owner of the asset. Overall, this acquisition provides an excellent stepping stone in our continued execution around accretive growth, utilizing the cash from the thermal sales. Page 6 provides an update as we continue to reinvest thermal sale proceeds to generate $2.15 or greater of CAFTI per share utilizing those funds. With the addition of Capistrano to our pro forma CAFTI outlook, we now see $1.98 of CAFTI per share. As discussed last quarter, the investment in the next drop-down portfolio should generate approximately $26 million of average asset level CAFTI, thereby providing clearly energy investors with visibility to $2.10 of CAFTI per share. with $330 million of proceeds remaining to be allocated. As Clearway continues to reinvest those proceeds and assume CAFTI yield at 8.5%, we should be able to achieve CAFTI per share of $215 or greater, reaffirming our ability to deliver at the upper end of the range of 5% to 8% DPS growth through 2026. In addition, I would like to remind our investors that these numbers merely account for the deployment of the $750 million of thermal proceeds and assume no additional CAFTI deployment between now and 2026. which is not our intent. Turning to page 7, Clearway's goals continue to focus on execution, closing the sale of thermal and achievement of our 2022 guidance with an increase in our dividend per share at the upper range of growth. We have signed a binding agreement to acquire the Capistrano portfolio, which in addition to its cap degeneration at a strong yield, also provides for repowering opportunities at sites that are well known to Clearway Energy Group, given their historical role with the assets. The federal will continue to pursue acquisitions of appropriate assets and appropriate returns. We will be patient and adhere to our underwriting standards. We continue to work with the Federal Energy Group around the latest potential drop-down assets, as well as the prospects for the enactment of the Energy Security and Climate Predictions of the Inflation Reduction Act to reach a conclusion. We will provide additional details in due course on how the terms of these assets and the aggregate capital and opportunity may be impacted. And finally, we are always focused on enhancing the value of our California natural gas portfolios. by signing the remaining 20% open capacity position at Marsh Landing through 2026, and also weighing the outcome of El Sabino's participation in procurement processes. In summary, Fairway Energy, Inc. is in an excellent position to grow its portfolio on accretive matter and strong risk-adjusted returns. Operator, please open the lines for questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your touchtone telephone. We'll pause for a moment while we compile our questions later. Our first question comes from Julian Dublin-Swith with Bank of America. Your line is open.