Clearway Energy, Inc.

Thank you for standing by and welcome to Clearway Energy Inc's third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. To remove yourself from the question queue, you may press star 1-1 again. I would now like to hand the call over to President and CEO of Clearway Energy Inc., Chris Sotos. Please go ahead. Good morning.

We first thank you for taking the time to join Clearway Energy Inc.' 's third quarter call. Joining me this morning are Akhil Marsh, Director of Investor Relations, Sarah Rutenstein, CFO, and Craig Cornelius, President and CEO of Clearway Energy, our sponsor. Craig will be available for the Q&A portion of our presentation. Before we begin, I'd like to quickly take note that today's discussion will contain forward-looking statements, which are based on the 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. 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. Given recent market volatility, we wanted to change our customer investor call format, take a step back, to reinforce the strength of our platform, what sets us apart from competitors, and the opportunities ahead of us. As such, first and foremost, critical to the Yieldco model is the difference of the Yieldco's cost of capital compared to that of a development company. This difference has oscillated over time, and despite the current market volatility, our sponsor's historic return targets and recently disclosed development IRR targets by other market participants demonstrate that C1's cost of capital remains well below the target returns of a pure developer, preserving this relationship and benefits for both parties. In addition, the sponsors hold approximately $1.8 billion of C1 shares, ensuring alignment of sponsor interests, the long-term interest of C1. The second ingredient for a successful yield show, the strong supply of assets with long-term contracts. While the current volatile capital markets have created some dislocation in the near term, the fundamental strength of renewable assets in terms of transitioning the U.S. away from fossil fuels to green, lower-cost energy has not changed. The demand to transition our grid away from fossil fuels has not diminished. To climate change, a continual challenge for the globe, feared by companies' government's goals of reducing their carbon footprint, while the benefits of the IRA are also still intact. Most importantly, competitively priced with local generation when compared to the current grid cost of energy, all drive a compelling long-term growth story for C1. As part of these ingredients, we at Clearway work to optimize these larger macro elements in combination with a very straightforward corporate financing model that has underpinned no complex convertible or contingent equity financings in C1's capital structure and no need for external capital to meet our DPS objectives through 2026. Pulling many of these elements together, at CUN and working with the sponsors has negotiated an increased CAFTI yield to 10% on drop-down assets for approximately $230 million of corporate capital deployment that we will discuss later. Importantly, we reaffirm our continued light on site for $2.15 of CAFTI per share with no need for external corporate capital and our consistent message over the past several years of visibility to achieve the high range of our 5% to 8% long-term target. And looking beyond 2026, In addition to the strong long-term global development demand we described earlier, CWIN also benefits from having strategic natural gas assets in California that are critical to assisting that state in transitioning away from fossil fuels. As evidence of this value, we have recently been awarded an additional approximate year and a half of contracted RA value at strong pricing on a portion of our fleet. This pricing provides a strong foundation for CWIN to continue its growth trajectory in 2027 and beyond in line with its long-term targets. In summary, despite challenging market conditions, the key elements that underpin a strong yield code still exist. Significant cost of capital differences between the yield code and the sponsor, strong development spend and demand for renewable assets, long-term contracts, combined with a straightforward capital structure that translates into transparent growth. Turning to slide five. Critical to the success of the yield code model is a strong sponsorship relationship. One key element of this is a cost of capital difference between the Yield Co. and Development Company. Given the return requirements of GIP and Total Energies, as well as other recent examples of publicly disclosed development returns, that relationship continues to hold between Clearway Group and CWIN, even in the increased cost of capital environment they're operating in. Clearway Group, which owns 85 million total shares of CWIN, representing approximately $1.8 billion of value, also receives approximately $130 million of dividends per year, It helps fund the entity's development activities to ensure a strong supply of drop-down assets in the future. Importantly, Clearway Group and our sponsors do not have any IDR or other special arrangements to derive value from their relationship with C1. It is the increase in C1 stock price, dividends paid, and margin on development assets that aligns value optimization for all entities. As evidence of this relationship, Clearway Group has agreed to move the targeted deals on over $230 million of C1 investments from approximately 9% to 9.5% cap yield to 10%, providing additional accretion on our redeployed thermal capital and reaffirming our line-of-sight growth through 2026. Clearway Group continues to invest heavily in development in line with line-of-sight drop-down growth through 2026, as well as flexibility for timing of drop-downs thereafter. Slide 6 provides an overview of CEG's 29 gigawatt development pipelines. which has grown substantially in previous years. This pipeline, which is an important source of growth for C1, continues to receive strong sponsor capital deployment to advance development projects that are well diversified among technology types and compatible with C1's growth and diversification objectives. The significant sponsor support has been demonstrated in allowing the platform to grow by over two gigawatts in the last 12 months and to nearly double in the last two years. The continued importance of scale in this industry It's critical to managing through volatile periods by being able to leverage a large development and operational platform to weather these storms. To this point, Clearway Group has been able to procure cost-effective supply agreements that should enable domestic content qualification and or reduce interconnection timeline risk for the 2025 to 2027 pipeline. In conclusion, the Clearway Group development platform has the benefit of leading scale in its class, leading sponsors, to ensure a supply of drop-down assets for C1 in the future. Turning to page 7. During this period of market dislocation, there have been a number of questions around long-term challenges in development of renewable assets for contracts. While the rapid increase in interest rates since May has created some headwinds in the near term, and as all stakeholders have had to adjust to the capital cost conditions, we do not see this as a long-term impediment to the growth of renewables in the U.S. As a backdrop, Renewable industry benefits from a variety of supportive federal and state policies, as well as corporate ESG goals that drive long-term demand for renewable assets that are not as sensitive to price increases. In addition, renewable PPAs are still competitively priced versus non-renewable power options. It is not as though an increased cost of capital only impacts renewable assets. It impacts all electricity generating assets. Importantly, regardless of ESG or RPS standards, Renewable assets produce electricity at prices that are competitive with other forms of generation, so are an attractive source of energy in economic terms as well. That being said, all of us within the Clearway enterprise are cognizant of the increased capital costs that impacts all stakeholders during this period of readjustment in PEP pricing. Long-term asset owners like CWIN, tax equity, non-recourse debt providers, OEM suppliers, developers, and PPA offtakers alike. We cannot forecast precisely how long it may take BPA prices to increase. We can say the scale becomes ever more important during this period, as it is critical to be able to develop quality, cost-effective projects, and we at CUN take significant comfort in having Clearway Energy Group as one of the largest developers in the U.S., backed by GIP and Total Energies, two of the largest companies in their respective industries, to manage this period. Simply stated, All of us within the Clearway Enterprise recognize that we are in a period that require adjustments by all stakeholders, but we are in a more competitively advantaged position than most to manage through. Turning to slide eight, an additional ingredient for success in the long term is a straightforward capital allocation and financing strategy. As we've discussed through the years, we have a simple capital structure. With no complex financing to require a C1 common equity conversion or contingent issuance, no need for external capital either to meet our DPS growth through 2026. We are also insulated from current interest rate volatility, with 99% of our consolidated debt fixed through utilization of interest rate swaps and no corporate maturities through 2028. CUN also nationally amortizes over $350 million of non-request debt per year, as our debt amortization schedule is designed to limit risk around PPA renewal in different energy market environments. as was recently demonstrated with our three natural gas assets that became merchant in 2023. All of this leads to an overall conservative capital structure that correlates to a BBBA2 rating that has been maintained since 2016 through a variety of challenges and market headwinds. C1's disciplined financial management has provided a strong foundation for sustainable growth through a variety of market conditions. To provide further disclosure around our sponsor's support on our latest drop-down offers, please turn to page 9. We are excited to announce that we have a commitment to purchase Texas Solar Nova for approximately $40 million of capital and a 10% CAFTE. These projects consist of over 450 megawatts of solar located in Kent County, Texas, and are underpinned by power contracts that are 18 years in duration with creditworthy counterparties. In addition, discussions with Clearway Energy Group have been able to come to agreement to modify Dan's Mountains CAFTE yield to approximately 10% for approximately 9% benefit from a new drop down 25 offer of three solar assets and our approximate CAF yield of 10% compared to the 9.5% that was targeted previously. These high-quality assets are significantly weighted towards solar and storage generation with fully contracted node-settle unit contingent contracts to reduce volatility from the C1 fleet. These dropdowns complete the allocation of the excess proceeds from the thermal sale close in May of 2022, and most recently, an increased CAF yields. demonstrating a long-term alignment of interest between CUN and its sponsors to continue to drive value for shareholders. Turning to page 10, this is a graph that should be familiar to you. It's a walk of our growth visibility through 2026. Starting on the left side of the page is our prior $420 million CAFTI outlook that CUN will achieve when the majority of the drop-down 24 assets are operational on a full-year basis. The second column is a reduction in CAFTI of $10 million for updating to reflect a variety of factors. provisions to our P50 given wind resources in 2023, increased insurance costs, inflation, as well as other factors. The third column represents a $5 million CAFTE increase for investments in TSN, as well as the incremental contribution of the Cedar Hill repowering prior to 2026, summing up to our updated pro forma CAFTE outlook of $415 million. This, when added to the approximate $20 million of CAFTE dropped on 25 discussed previously, ends at our updated line of site CAFTI of approximately $435 million. Importantly, we are maintaining the $2.15 CAFTI per share guidance through 2026 that we've discussed previously. We believe the ability to maintain our long-term CAFTI line of site and our growth trajectory speaks to the strengths of the C1-4 platform. Turning to slide 11. Slide 11 provides a summary of C1's contracted and open positions in the resource adequacy market through the next four years. We currently have the benefit of approximately 100% of our capacity contracted through 2025, 87% contracted through 2026, and now with 42% contracted in 2027. As discussed throughout the year, SUMAN participated in several RFP auctions and bilateral discussions, and as a result was able to secure two contracts for approximately an additional year and a half at strong pricing compared to previous contracts. While we cannot disclose the pricing of these contracts due to confidentiality provisions, We can say that the pricing achievement of these contracts would be extrapolated to current uncontracted megawatts in 2027 and beyond. That would drive growth in 2027 for the low end of our 5 to 8 long-term CAFTI per share growth target without requiring any other drop-downs for external capital. This is an important source of potential CAFTI growth in the future, and while we view the extension of our RA contracts as strong pricing as an excellent signal of this growth in the future, we feel it is too early to declare victories. and incorporate this higher pricing into our 2027 and beyond deal. Now I'll turn it over to Sarah.

Sarah? Thanks, Chris. On slide 13, we provide an overview of our financial update, which included a cap fee of $156 million for the third quarter of 2023. Based on results incurred to date, as well as forecasted activity through the balance of 2023, we are reiterating our 2023 full-year CAFI guidance reach of $330 to $360 million. We are also introducing guidance for 2024 of $395 million of full-year CAFI, reflecting certain one-time maintenance costs, along with timing of gross investment to run rate CAFI contributions are achieved after 2024. We will provide further detail in a moment. Our dividend per share growth outlook for 2024 remains aligned with our long-term growth objectives. For the fourth quarter, we are announcing a dividend increase of 2%, 39.64 cents per share. It decreased to $1.58.56 dividends per share on an annualized basis. For 2023, this reflects full-year dividend growth as compared to 2022 of 8%, which is the distance of our long-term growth market. In addition, we are announcing a dividend per share growth target for 2024 of 7% in compliance with our growth target in the upper part of the 5% to 8% range for 2026. Turning to slide 14, we highlight CAFI of $156 million and adjusted EBITDA of $323 million for the third quarter of 2023. Compared to our expectations, conventional energy close margin was approximately 11 billion lower due to milder temperate temperatures in California. Despite lower energy margins, the conventional facilities had strong availability and provided resource adequacy as expected. Solar generation was also in line with internal expectations for the third quarter, while wind generation for the overall C1 wind speed slower than anticipated in August and September. In the third quarter, CAFTI was also to a lesser degree affected by increased season expenses. Year-to-date CAFTI of $289 million in the third quarter of 2023 continues to reflect the previously reported historically low wind production and lower than expected merchant energy margins with expansion facilities through the second quarter of 2023. The company continues to maintain its full year CAFI guidance range, 330 to 360 million. However, we anticipate that 2023 full year results will fall within the lower end of the guidance range. The full year CAFI guidance range reflects potential wind and solar variability for the second half of 2023 and sensitivity for conventional growth margins, the majority of which was reflected in the third quarter results. since the fourth quarter represents a smaller portion of projected results as noted in our seasonality forecast by 23. Despite the challenges impacting 2023 Cassie, the company remains well positioned for growth with a strong balance sheet and pro forma credit metrics in line with target ratings. 99% of its consolidated long-term debt has a fixed interest cost, either through fixed-rate debt or through fixed-rate loss. Due to the proceeds from the sales thermal, there continues to be no external capital need to fund the line-of-sight growth fee, our dividend per share growth objective for 2026. Moving to slide 15, we are establishing our 2024 CAFSE guidance at $395 million. As we walk our 2024 CAFSI guidance to our updated pro forma CAFSI outlook, we know that we have deferred the timing of the Capistrano debt refinancing until after 2024. Given our sizable cash balance and liquidity position, we have flexibility to be prudent on the timing of this refinancing. And the incremental principal and interest payments are not in our 2024 CAFSI guidance. However, they are reflected in the updated pro forma CASI outlook. In addition, the $395 billion of CASI anticipated for 2024 reflects one-time maintenance costs and related outage time for required maintenance upgrades at specific Legacy Wind sites. These maintenance upgrades are required to return certain facilities to normal availability levels. and are expected to have a one-time impact to 2024 CAFI of $15 million. In addition, our pro forma CAFI outlook of $415 million reflects full-year CAFI for all submitted growth assessments, including Cedar Creek Victory Path, Erica, Rosie, Beth, and Texas Solar Nova. The full-year contribution of these growth investments is expected to be approximately 15 million of incremental CAFI as compared to the portion of CAFI realized by these investments in 2024. This is based on the anticipated timing of investment or project COD, the majority of which are anticipated in mid to late 2024. Also reflected is the 395 million of 2024 full-year CAFI guidance, along with the updated pro forma CAFI outlook, are updated P50 renewable production estimates as well as certain cost increases primarily driven by inflation. These amounts are individually immaterial and therefore we have not quantified them in detail. In addition, virgin energy margins for the conventional facilities are assumed to be materially in line with long-term assumptions previously provided and no material change has been noted either in the full-year CAFTI guidance for 2024 or in the updated pro forma CAFTI outlook. We continue to estimate long-term merchant energy margin in the $1 to $1.50 per KW month range, noted sensitivity at $20 billion of CAFTI per $1 per kilowatt month increase or decrease. Based on these estimates, we arrive at our 2024 full-year CAFTI guidance of 395 million and our updated pro forma CAFTI outlook of $415 million, which along with anticipated growth investments using the remaining thermal sale proceeds, support our long-term CAFTI and dividends for shared growth targets. Now I will turn it back to Chris for closing remarks.