Clearway Energy, Inc.

And during Q&A, you can dial star 1-1.

Good day, and thank you for standing by. Welcome to the Clearway Energy third quarter 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 will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Sotos, President and CEO of Clearway Energy, Inc. Please go ahead.

Good morning. Let me first thank you for taking the time to join Clearway Energy Inc.' 's third quarter call. Joining me this morning is Akhil Marsh, Director of Investor Relations, and Craig Cornelius, President and CEO of Clearway Energy Group, our sponsor. 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'll 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 three. The company generated CAFTE of $154 million in the third quarter and $328 million through the first nine months of the year. The survey increased its dividend by 2% to 0.3672 cents per share, or at $1.469 on an annualized basis, keeping us on target to achieve the upper end of our dividend growth objectives for the year. Unfortunately, due to the previously announced operational issues at El Segundo and other items, we'll be revising our 2022 CAFTE guidance down from $365 to $350 million. Clearway continues to advance its growth and strategic initiatives by now having El Segundo's capacity fully contracted through 2026, along with Marsh Landing and Walnut Creek, We have closed the Capistrano wind acquisition, as well as funded the drop-down of Waiala Solar with the rest of the previously announced drop-down projects on track for commercial operations in the fourth quarter of 2022 or early 2023. We are also updating our full-form ACAFTI outlook with $390 million from $400 million, which I'll review in a couple slides. Clearway's long-term, steady-growth outlook is more transparent than ever with the latest offers from Clearway Energy Group for 1.4 gigawatts of assets. utilizing anticipated $410 million of capital at an approximate 9.5% CAF yield. As a result of our sponsors' continued development efforts, we also have visibility into additional drop-down offers, anticipating the first half of 2023, leading to the deployment of an approximate additional $220 million of Clearway Energy Inc.' 's corporate capital. Our sponsors' development pipeline also continues to grow. NOW STANDING AT 26.8 GIGAWATTS, INCLUDING 6.8 GIGAWATTS OF LATE-STAGE PROJECTS EXPECTED TO BEACH FOR COMMERCIAL OPERATIONS IN THE NEXT THREE YEARS. AS A RESULT OF THESE OFFERS, WE SEE THE 750 MILLION OF THERMAL PROCEEDS BEING DEPLOYED BY THE END OF 2024, SUPPORTING OUR GREATER THAN $2.15 CAFTE PER SHARE LONG-TERM CAFTE OUTLOOK. AT THIS LEVEL OF CAFTE GENERATION, CLEARWAY IS CONFIDENT IN ITS ABILITY TO GROW AT THE UPPER RANGE OF ITS 5 TO 8% DPS GROWTH TARGET THROUGH 2026. In summary, Clary continues to execute on the deployment of thermal proceeds into additional drop-down assets that, when combined with the contracted capacity of our California gas assets, create a very stable platform for continued growth in CAFTI and dividend per share. Turning to slide four to provide a bit more color on financial results. For the third quarter, Clary is reporting adjusted EBITDA of $322 million and cash available for distribution for CAFTI of $154 million. Year-to-date results came in at $948 million of adjusted EBITDA and $328 million of CAFI. Our third quarter results were negatively impacted by forced outages in the conventional segment. As we previously announced, the El Segundo Energy Center began a forced outage in late August at Units 7 and 8, and after initial repairs, returned to service on September 14. Additionally, Unit 2 at the Walnut Creek Facility experienced a less material forced outage in late September. The rest of the facility is currently running at normal conditions while components for Unit 2 are being repaired. The majority of the 2022 cash impact related to the El Segundo and Walnut Creek force outages occurred in the third quarter related to loss revenues, but O&M costs will also impact fourth quarter results. In the renewable segment, third quarter results were lower than the P50 expectations due to weaker than normal renewable conditions across the portfolio. This was somewhat offset by the timing of project level debt service that moved into the fourth quarter. given the expected full-year impact from the forced outages in the conventional segment, the company is revising its 2022 CAFTI guidance from $365 million to $350 million. Regarding the balance sheet, the company continues to have unprecedented flexibility to execute on its growth without having to form new corporate capital. The excess proceeds from the thermal sale remain available to be allocated to visible future growth from drop-downs, and we continue to expect our pro forma credit metrics to be in line with our target ratings. Furthermore, Our revolver is completely undrawn, and we continue to be insulated from interest rate volatility with nearly 99% of our debt being fixed. Turning to slide five to provide an overview of the company's pro forma CAFTI outlook, 2023 expectations, and underlying assumptions in our forecast. In order to explain the various moves in our CAFTI expectations, we provide a bridge commencing with our prior previously announced pro forma CAFTI outlook of $400 million. The company is updating the pro forma CAFTI outlook to account for updated forecasts as it results to a variety of pressures across the portfolio, including inflation, budgetary updates in the renewable segment, including basis differentials, and other portfolio and cost items. In aggregate, these various budgetary adjustments equate to approximately $10 million and result in updated pro forma CAFTI outlook of $390 million. Moving to the bridge for 2023 expectations from our updated pro forma CAFTI outlook, Because our pro forma CAFTI outlook is based on five-year average CAFTI profiles for new investments, 2023 expectations reflect $10 million less in CAFTI than our pro forma CAFTI outlook due to the timing of when projects reach operations and the shape of project cash flows, consistent with what we have disclosed previously. This $10 million will come back in 2024 and beyond. The next source of variance is the recently announced Capistrano wind acquisition. As we announced previously, we intend to refinance the existing non-recourse project debt of the assets. However, due to our significant cash balances currently, CRO believes there is no need to suffer negative arbitrage given limited currently forecasted cash needs for Clearway between now and the end of 2023, and therefore looks to refinance Capistrano at year-end of 2023, leading to a $10 million CAFTI output. As a final bridge to 2023 guidance, 2023 reflects energy gross margins in the conventional segment based on recent market pricing above the long-term projections in our pro forma CAFTI outlook. While our natural gas assets Marsh Landing, El Segundo, and Walnut Creek are fully contracted through 2026 in terms of revenue from resource adequacy contracts, starting in mid 2023, after their initial tolling agreements expire, the three facilities have the ability to generate additional revenue from dispatching into the merchant power market. Based on forward power markets and internal analysis, C1 currently expects the three facilities to generate energy margin for merchant power markets equating approximately $20 million of upside in 2023 relative to the long-term merchant energy assumption that underpins our pro forma CAFTI outlook. The table to the right outlines the merchant energy assumptions in our pro forma CAFTI outlook and our dollar per kilowatt month basis. With these adjustments described in the bridge, Clearway is initiating 2023 CAFTI guidance of $410 million. To close out the guidance and pro forma outlook discussion, it's important to note that the merchant energy margin estimate, the conventional segment on a pro forma basis, represents only approximately 5% of Clearway's asset level CAFTI. Our pro forma CAFTI outlook continues to be primarily underpinned by long-term contracted cash flows with creditworthy counterparties. The future upside to this outlook from the drop down of additional contracted renewable assets, which I'll discuss on the next slide. Page 6 provides an overview of the latest drop-down offers from our sponsor. As you can see on the left side of the page, these assets are predominantly solar, with deployments in Texas and California, and also include a utility-scale wind project in Idaho. We also see an expansion of our Rosamond investment with a battery storage asset, which benefits from an expected 15-year capacity offtake, and is well-positioned to capitalize on energy arbitrage opportunities in California related to the late-day ramp in net loads. In total, these assets represent a significant investment of $410 million in C1 corporate capital at a strong estimated CAF yield of 9.5% on the portfolio, which solves the majority of its output under agreements that have an average duration of 17 years. In addition, this investment will further the customer diversification of our fleet with the majority of the offtake with corporations, non-utility load serving entities in California, and an Idaho utility. In summary, OAS drop-down offers from our sponsor provide transparency into the redeployment of the thermal proceeds into a quality, well-diversified, and strong CAFTI-yielding selection of assets. Page 7 provides an update to our targeted CAFTI per share in excess of the 215 that reinforces our long-term view around growing the CUN dividend at the upper range of our 5% to 8% long-term targeted growth rate. Starting at our $390 million pro forma outlook that we discussed previously, we add in the latest offers from our sponsor, which, assuming binding agreements are achieved, will deploy $410 million of capital at a 9.5% cap-to-yield, as well as our current view around an additional impending offer from our sponsor in the first half of 2023 for $220 million of capital deployment, also at an anticipated 9.5% cap-to-yield. With these drop-downs and the previous announced acquisition of Capistrano Wind, Federal Oil has deployed all of its thermal sale proceeds by the end of 2024, with an undrawn revolver available to fund the additional capital needs required in the short term. As we described a year ago when we first announced the thermal sale, and since we received the proceeds in May, Clearway is now able to demonstrate the utilization of the entirety of these proceeds to drive CAFTI per share growth with an investment in high quality assets at attractive CAFTI yields. Turning to page eight, our goals for the year have not changed. We have closed the sale of thermal. We unfortunately must adjust our 2022 CAFTI guidance due to the forced outages in our conventional fleet that occurred in the third quarter. Despite this setback, Clearway is still able to increase our dividend per share at the upper range of growth during the year. In terms of growth in the future, we have closed on the acquisition of the Capistrano wind portfolio. More materially, we now have line of sight with our sponsor to the deployment of all the remaining thermal proceeds to drop-down assets over the course of the back half of 2023 and the end of 2024 at strong CAFTA yields and contract tenors. This deployment should provide our investors with increased confidence in Clearway's ability to drive CAFTI per share growth to $2.15 a share or higher. This does not imply that Clearway will stand still in terms of investing for growth and simply wait for these drop-downs to close. We continue to see opportunities in the market, but we'll continue to be disciplined and adhere to our learning standards. And finally, we are proud to complete the initial stage of our journey on the natural gas portfolio. We now have 100% of the capacity of our gas we've contracted to the end of 26 and look to engage in additional options in the future to further extend that runway. In summary, Clearway Energy Inc. continues its focus on prudent growth, has confidence and ability to meet its long-term growth objectives, do impart the strong sponsor support to ensure Clearway's success. Operator, please open the lines for questions.