Clearway Energy, Inc.

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Good day, and thank you for standing by. Welcome to the Clearway Energy, Inc. Fourth Quarter 2022 Earnings Conference 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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.

Thank you, and good morning. Let me first thank you for taking the time to join Clearway Energy, Inc.' 's fourth quarter call. Joining me this morning are 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 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 three. The company generated full-year CAFTI of $326 million short of its full-year guidance of $350 million, predominantly due to weak fourth-quarter wind resource and December's winter storms. While CAFTI generation in 2022 was below expectations, Clearway executed well to increase its long-term pro forma CAFTI through the closing of the thermal transaction and a commitment of nearly $350 million in new investments. In addition, with the contracting of El Segundo's capacity through 2026, we have reduced the volatility in the natural gas fleet, and Clearway is currently ahead of schedule in terms of repairs of the facility. Last week, Clearway announced it increased its dividend by 2% to $0.3745 per share, or $1.498 on an annualized basis, keeping us on target to achieve the upper range of our dividend growth objectives for 2023. We are also reaffirming our 2023 CAPTI guidance of $410 million. Clearway's sponsor continues its strong growth in its development pipeline, which now stands at nearly 28 gigawatts, with over 7 gigawatts of projects in late stages of development and nearly 5 gigawatts of revenue contracts contracted, awarded, or in late stages of negotiation as of the end of 2022. Furthermore, Clearway sponsors accelerating work to enable us to repower and augment our fleet, aided by incentives passed last year that will enable accretive investments that also extend the life of our assets, with over 1 gigawatt of potential repowerings over the next four years. As part of the previously announced Capistrano acquisition and a first step in that repowering campaign, we are pleased to disclose that the Cedar Hill project has recently amended its PPA in terms of what would allow for repowering in 2024. As part of this continued growth trajectory, Clearway now has committed to invest in Victory Pass and Erica projects with a commitment of $228 million, over half of the capital targeted for deployment and the currently offered drop-down from Clearway Energy Group. As a result, we are increasing our pro forma CAFI outlook from $390 million to $410 million continued line of sight for the remaining thermal proceeds deployment to achieve $2.15 of CAPTI per share. This deployment and accretive assets provide strong visibility to achieve the upper end of a range of 5% to 8% DPS growth rate through 2026. In summary, Clearway continues to execute its growth plan so that it's well positioned to fully deploy the thermal proceeds during 2024 and continue to grow beyond the $2.15 of CAPTI per share. Turn to slide four to provide more details on financial results. For the full year, FITR is reporting adjusted EBITDA of $1.160 million and cash available for distribution, or CAFTI, of $326 million. Fourth quarter results came in at $212 million of adjusted EBITDA and negative $2 million of CAFTI. In the quarter, the most notable headwind was an approximate $16 million negative impact from lower renewable performance. This was primarily due to weak wind resource, which was a trend observed throughout the industry in the quarter, as well as weaker wind resource at certain solar assets. The wind production index for Clearways Fleet, which represents a measure of actual production relative to internal P50 expectations, was 84% in the quarter for the wind portfolio, with all regions recording weak wind resource, including the Alta Wind Complex, our largest asset, whose wind production index measurement came in at 89% for the quarter. A second related but less significant driver of removal financial performance in the court was the impact that Winter Storm Elliott had in ERCOT and PJM during which we experienced modest adverse financial impacts from financial settlements on a select set of our wind assets when prices were elevated and generation was low at those facilities. Lastly, in the conventional segment, we made the decision in the fourth quarter to proactively accelerate the previously disclosed replacement of two bundles at El Segundo, while this impacted reported results in the quarter Accelerating the replacement during a period of relatively low toll pricing has put Clearway ahead of schedule to replace the two bundles at the facility. This will allow El Segundo to be well positioned to provide critical grid reliability services, as well as generate additional revenue from dispatching into the merchant power market in the second half of 2023. Turning to balance sheet activity in the quarter, we repaid the outstanding project level debt for El Segundo in December for approximately $130 million, as we have previously indicated on our last call. In connection with the repayment, $35 million of restricted cash held at the project level subsidiary, reserved for debt service payments, was distributed clearly, thereby reducing the near-term corporate liquidity impact. Turning to slide five, we want to provide an overview of our latest drop-down commitment, Victory Pass and Erica Solar. These investments represent a capital commitment of $228 million, with a five-year average asset CAFD of $20 million, yielding a 9% unlevered CAFD yield on asset which should reach COD in the second half of 2023. This investment expands our storage project base, which in this case is backed by a diverse set of four 15-year contracts with leading load-serving entities in California, and will add to a growing portfolio of battery resources that will be operating in Kaizo, providing critical and complementary resources in a system where they're greatly valued. Overall, the projects exhibit a very desirable commercial profile for us. They will serve a diversified set of high-quality customers, with contracts on a weighted average basis, have a contract duration of approximately 14 years, and they will be operated in a home market where we have great operational strength. The investments that Victory passed in Erica are an important first step toward deploying roughly a third of the $630 million in excess capital from the thermal sale, as we discussed on our last call beyond Capistrano. We expect to continue working with Clearway Group to provide further concrete visibility regarding this capital deployment in the coming months. Please turn to page six. Page 6 provides an update of progress on the previously discussed drop-downs from our sponsor. As you can see on the left side of the page, with a commitment on Victory Pass and Erica, Clearway can now increase its pro forma CAFTI outlook to $2.03 a share, as VP Erica achieves commercial operation in the second half of 2023. The remaining drop-downs that we are currently working on with Clearway Group represent an additional anticipated commitment of $180 million to then be followed by the next drop-down offer of approximately $220 million. Importantly, and as noted here, our sponsor is also offering these next set of drop-down opportunities and increased yields so we can continue to generate accretive total returns for our shareholders in today's market backdrop. When fully operational, these acquisitions will provide clear way with a clear line of sight to $2.15 of CAFTI per share. In summary, we continue to make progress in providing investors with further visibility into the redeployment of the thermal excess proceeds less than 12 months after the vestiture closed. Turning to page seven, 2022 was an excellent year in terms of execution for Clearway. We achieved year-over-year DPS growth at the high end of our target, added capacity contract length at El Segundo, and have visibility into deploying 100% of the thermal excess capital into drop-down assets and acquisitions to provide greater certainty around our $2.15 line-of-sight CAFTI per share goal. And looking forward to 2023, we continue to focus on our project's performance and continued execution around growth. Despite some of the volatility in 2022, the platform is well-positioned to achieve DPS growth at the upper range of our 5% to 8% long-term objective in 2023, given the accretive growth capital deployed in 2022 and operational improvements from Mandela's and Gundell. In addition, by year-end, we want to demonstrate additional growth beyond that currently embedded in our 215 of line-of-sight captive per share. While the accretive deployment of the thermal proceeds provide our investors with the longest visibility regarding growth in our platform's history, Our intent is not to sit on our hands for the next four years. Clearway will continue to source growth opportunities beyond the deployment of the formal proceeds that meet our core underwriting standards. In summary, Clearway Energy, Inc. continues its focus on food and growth as confidence, ability to meet its long-term objectives, due in part to strong sponsor support to ensure Clearway's success. Operator, please open the lines for questions.