Clearway Energy, Inc. (CWEN) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Clearway Energy Second Quarter 2019 Earnings Call. [Operator Instructions]. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, President and CEO; Chris Sotos. You may begin.

Thank you. 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; as well as 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 to the most directly comparable GAAP measures, please refer to today's presentation. Turning to Page 4. This is a challenging quarter and first half of 2019 Clearway Energy. With the outage at CVSR and continued poor weather conditions impacting renewable energy production through the end of June. Chad will discuss this in more detail, but these items and the importance of the second quarter have pushed expected performance outside of Clearway's probable distribution. Therefore, we are revising 2019 CAFD guidance, the $250 million, which assumes medium production for the rest of the year, while incorporating our growth investments as well. The contracts impacted by PG&E continue to perform, and from our perspective, the recent legislative actions in California had some -- significantly improved the prospects of a resolution of the bankruptcy process next year. In addition, we are announcing a third quarter dividend of $0.20 per share, the same dividend as last quarter. This is consistent with our view that until CWEN obtains additional visibility around the PG&E bankruptcy and has full access to its project distributions, dividends paid to shareholders will be aligned with available corporate liquidity and our target payout ratio. Looking forward, CWEN's pro forma CAFD outlook has now increased to $300 million due to our recent closing of the Repowering 1.0 Partnership with Clearway Group. We also continue to advance our prior growth commitments and renewables, with additional investment in the Hawaii Solar Phase 1 project and the DG partnerships. Lastly, we continue to focus on diversification of the platform with the addition of incremental growth at the thermal platform, with the closing of our Duquesne acquisition in May as well as our Mylan Labs project with anticipated COD in the second half of 2019. With the continued development efforts by our sponsor company, Clearway Group, we are pleased to announce the next expansion of the ROFO pipeline with the addition of 354 MW of new projects. Additionally, during the quarter, the company received an offer to acquire the existing ROFO asset, Mesquite Star. As part of this offer, we are negotiating with our colleagues at Clearway Group to structure a transaction, while being mindful of our capital constraints during the pendency of the PG&E bankruptcy. Clearway Group continues to dedicate significant capital to development despite the current situation in California, with investments for safe harbor equipment over 4 GW of projects for PTC eligibility and more than 1 GW of new revenue contracts executed or awarded during 2019. In addition, Carlsbad continues to be held by GIP as a future acquisition candidate for Clearway Energy. While 2019 has been a difficult year-to-date due to the tepid renewable resource in the first half of the year and PG&E, Clearway Energy continues to execute on growth and are working with Clearway Group, adding to our growth opportunities for the future. Turning to Page 5. On a quick review of the value attributes of the Repowering 1.0 investment we will make later this year. This investment, which encompasses both the 161 MW Wildorado and 122 MW Elbow Creek project, will extend the asset design lives, reduce capital and operational expenditures going forward as well as put in place new warranty coverage, all leading to reduced operational risk in the future. In addition, Elbow Creek was able to enter into new hedging arrangements, extending contract duration by seven years to 2029. Finally, as a result of installing new PTC-eligible equipment and improved operational performance, we were able to significantly improve CAFD by recapitalizing the projects on an unlevered basis with tax equity versus our current capitalization with project debt. In sum, for approximately $111 million investment, we achieved an 11% CAFD yield on a five year average basis, while significantly reducing revenue and operational risks of the projects while modifying the capital structure on a levered basis. I'd like to thank our colleagues at Clearway Group for their significant work to make this repowering a reality. Turning to Page 6. As we have indicated previously, our pro forma CAFD outlook was $295 million or $1.53 CAFD per share, with the Repowering 1.0 investment, I am pleased to say that we are able to increase the company's pro forma CAFD outlook to approximately $300 million or $1.55 CAFD per share. This update outlook assumes that the company would replace anticipated borrowings under the revolver to fund the Repowering 1.0 investment with permanent corporate debt, as we continue to see our corporate credit metrics within our targeted ratings level. Turning to Page 7. I want to highlight the additions to the ROFO pipeline awarded to Clearway Energy by the ongoing development work by Clearway Group, with over 350 MW added, representing geographic and renewable resource diversity coming online between late 2020 and 2021, we believe that these additions provide a strong runway for us to be able to execute on our existing growth opportunities, Carlsbad and existing ROFO assets, while managing our capital structure during this period. These new ROFO additions will help provide a longer-term view around CWEN's opportunities for growth going forward as well as increased geographic diversity and generation profile. Now I'm turning it over to Chad.

Thank you, Chris. Turning to Slide 9. Today, Clearway Energy is reporting second quarter adjusted EBITDA of $278 million and $68 million of Cash Available for Distribution or CAFD. For the first half of the year, Clearway is reporting $469 million of adjusted EBITDA and $55 million in CAFD. Because the contracts are performing, results continue to factor in the contribution of projects and investments impacted by the PG&E bankruptcy, which continue to be restricted from making distributions in the normal course. Through the second quarter, total CAFD contribution from the PG&E projects was approximately $19 million, including $15 million from unconsolidated investments. During the first half of the year, the company benefited from portfolio diversification with inline financial performance at both the Conventional and Thermal segment. Additionally, lower debt service of approximately $7 million resulting from the recapitalization of the Viento financing and both the timing of and captured savings related to O&M expenditures, provided a partial offset to otherwise very challenging dynamics across the renewable segment. As previously disclosed, on June 5, a fire occurred at the CVSR facility impacting around 1,200 acres of property. The fire did not damage the solar arrays but it did impact distribution infrastructure, compromising performance during the highest revenue month of the year. Though the facility was brought back to full operations on July 1, the company did lose revenue of nearly $9 million, which is essentially the same impact to reported CAFD as we expect most of the repair cost to be recovered under our insurance policies by year-end. In addition to the CVSR outage, the weak renewable energy condition that impacted the first quarter persisted through the second quarter as well. Below-normal wind resource and irradiance levels across the portfolio, including precipitation levels that were 30% above normal in the geographic areas near some of our key solar projects, drove overall renewable generation in the first six months of the year, well below the company's median expectations and sensitivity ranges. While these operational impacts have caused us to reduce full year financial expectations, they have not stopped the company from moving forward on key initiatives and meeting our commitments. In addition to progressing on growth investments and maintaining our recalibrated quarterly dividend of $0.20 per share, we continue to execute on optimizing the balance sheet. During the first half of the year, we took advantage of favorable market conditions by successfully refinancing $196 million in nonrecourse debt at both the Tapestry wind portfolio and South Trent Wind project. These actions resulted in lower cost financing, with the reduction in average financing margin near 30 basis points, maturity extensions by 10 and 8 years, respectively, and $8 million of incremental net capital available for growth. Now I'll turn to Slide 10 to discuss our modification to full year financial expectations. In line with our approach to financial guidance, the assessment of full year expectations is based in part on the impact of nonrecurring operational matters, and importantly, whether the achievement of full year P50 median renewable energy production targets are achievable within a normal distribution. Consistent with our prior disclosure, this distribution informs our target seasonality and quarterly sensitivity range as summarized on the right side of the slide, and in more detail, in the appendix section of the presentation. Importantly, we want to remind you that the achievement of full-year P50 median expectations is highly weighted to both the second and third quarter where the revenue contribution from renewable resource and the conventional fleet is highest. In the chart on the slide, we provide a walk showing the near-$45-million impact to full year CAFD expectations from both the CVSR outage and poor renewable energy conditions in the first half of the year. In addition, we also show the full year anticipated $25 million CAFD benefit resulting from our growth investments as well as timing of O&M expenditures and realized cost savings that we expect will enter to the platform this year. As we have pointed out in the past, weather patterns can result in variability and renewal production on an annual basis, and it's something we factor into our planning as the collection of real-time data informs our forecast and sensitivity ranges. In fact, on a trailing 36-month basis, the renewable portfolio has operated within these ranges. For this year, however, after adjusting for the CVSR outage and timing-related matters, first half renewable energy production was below our sensitivity range. So the ability to achieve current CAFD guidance would require second half performance to be above our target range. While we acknowledge that weather patterns could make this possible, we do not view this as a prudent expectation under a normal distribution, especially given the weight of the second quarter on renewable energy production. Simply put, we are concluding that 2019 will be a below-average production year in the portfolio. As such, we are modifying full year CAFD guidance to $250 million or a figure that is based on the realization of median P50 expectations in the second half of 2019. I'll now turn the call back to Chris for his closing remarks.

Thank you, Chad. Turning to Page 12. While the CSR outage and weak renewable resources had impacted the company during the first half of the year, we continue with our refrain for 2019 managing our platform through this period of uncertainty. While 2019 has been more difficult than forecasted and as a result we are having to reduce our 2019 guidance, we continue to maintain our balance sheet flexibility as the PG&E situation continues to evolve in a positive direction while finalizing our transition and integration requirements less than a year from the closing of the GIP transaction. With our focus on managing the near term, while enhancing our long-term prospects, we are pleased to see the benefits of a strong sponsor with the addition to the ROFO pipeline of projects available in the 2020 to 2021 period and through the commitment at the 1.0 -- our Repowering 1.0 Partnership, which will significantly increase the value of those assets. During this time, we also take into account the ongoing diversification opportunities for the company as GIP continues to hold Carlsbad as a future CWEN acquisition opportunity, and we continue to focus on growing our Thermal business. As always, we manage our growth with a view that is consistent with maintaining our target ratings to preserve our long-term capital formation capabilities. Thank you. Operator, please open the lines for questions.

[Operator Instructions]. And our first question comes from Julien Dumoulin with Bank of America.

Just wanted to follow a couple of things real quickly. First off, you talk about the -- further in the conversations on Mesquite Star, can you talk about when you would think about raising capital given the commentary around the tendency of the PG&E uncertainty? And then secondly, with respect to the PG&E situation, can you comment to the extent to which that they are successful on following through on this June 30, 2020, timeline as articulated in the legislation, when would you see your first round of distributions from projects in tandem with that? Would that be a 3Q '20 timeline? Just to clarify.

Sure. So for the two questions, your first one around capital formation regarding Mesquite Star, I think, frankly, that's something that we're -- it's too early to make a determination there, as obviously we're working with Clearway Group to see what structure works best. That may entail purchase of all or a portion of the project, a variety of different situations we're looking at. So I think, frankly, Julien, a little bit too early to tell as we're in the middle of negotiations with Clearway Group. To your second question around PG&E in June 2020, it's not as though that all of that cash would come out in the third quarter of 2020, the different project documents have different dates under which distributions can occur. Some of them are quarterly, some of them are semi-annually, but I would think, by the first quarter of 2021, for certain, we'd kind of be back on track from that perspective, but there may be a lag of three to six months depending on the exact project document that we're dealing with.

Got it. Okay. Excellent. And then separately, if you can comment a little bit further, just around this expanded ROFO commitment? I mean, how do you think about scaling up the use of capital even over the next couple of years here, again, just to reemphasize the concerns around PG&E and obviously, reduced just available capital given the results for this year, et cetera?

Sure. I think from our perspective, when we tend to look and the rating agencies do as well, really, on a long-term basis for what type of CAFD production we have and we use that for leverage ratios. So I think under most metrics right now, inclusive of the PG&E cash flows, on a P50 basis, we're kind of actually below a lot of the targeted leverage ratios we typically talk about. So I think from our perspective, once again, depending on lot of factors between now and the end of 2020, we need to look at: a, basically using that reduced leverage; b, using some of the cash we just talked about that would be freed up as PG&E kind of exits the bankruptcy process. So we look to capital formation in line with the ROFO pipeline, Carlsbad, et cetera, to see how that all meshes together. But there's a lot of moving parts, obviously, so I don't -- it's tough to kind of go through all, exactly how that'll roll out over the next 18 months. I think between our existing liquidity, obviously, where you see our bonds trading, our relatively low level of leverage with PG&E and the cash that should be distributed out of those accounts, we think we're in a pretty good position to close on those acquisition opportunities.

And our next question comes from Angie Storozynski with Macquarie.

So I have a question about PG&E. So we're clearly all following the bankruptcy process, do you have any sense: one, when is the -- basically, the cut-off date when PG&E can make a decision about potential cancellations or reopenings of their PPAs? And two, we've seen some bankruptcy court filings from some parties that seems to have willingly reduced the rates on some of their contracts, and is that something that you would, guys, consider?

Sure. So two different questions. Once again, I'm not going to pretend I'm a bankruptcy attorney, but really the rejection of contracts or the affirmation of contracts can happen at any time within the bankruptcy process. There's not really a set date by which that has to happen. So to be fair, it could happen anywhere within it, there's not an order or something of that nature. To your second question around the other filings, I think there's a couple of important distinctions to note in those renegotiated PPAs. One, those were really for projects that weren't built yet, they were contracts that were awarded, but the assets weren't built. And the reason that's important is because, to the point we've emphasized during the bankruptcy proceedings is that the rejection of our contracts would create an unsecured claim. As I understand, that's really not the case with these new contracts because the projects haven't been built yet. So I think that's a pretty important distinction between what you've probably seen out in the press and the nature of our contracts.

Okay. And in the meantime, so as we are waiting for the June 30 exit, is there any willingness of project lenders to maybe have some forbearances of some sort of waivers on the clauses of the debt, just to allow you to at least for partial distributions from these projects?

Chad, why don't you respond to that?

Sure, Angie. I think if you look in our disclosures, I mean, we have made some progress on forbearance agreements. To suggest though that, that progress includes the permitted distributions, that is not correct. I think -- look, I think, dependent on how the process goes and the sort of the veracity of when either a contract is assumed or facts on the ground, could lenders perhaps change their views with regards to what they're allowing? The answer is yes. I think for the most part, though, what I would be mindful of is that even if a contract were assumed, that doesn't actually mean a contract or a project credit agreement is not within an event of default, because in theory, the customer itself is still in bankruptcy, so there would still need to be some movement there. But obviously, things like having a distribution in the ordinary course is still going to require some movement with the lenders, but obviously, an assumption of the agreement itself in a binding assumption is the one that's most important for all of us.

Our next question comes from Colin Rusch with Oppenheimer.

This is maybe more of a technical question, but given some of the changes around bifacial solar modules and your footprint at this point, is there an opportunity to repower some of your solar projects and potentially sell into the merchant market as an access to some of the PPAs?

I think while bifacial solar modules are helpful, I think, unfortunately, a lot of our solar projects are relatively new, so I think -- as opposed to Elbow Creek which was a little bit older, kind of, 2009 COD Vintage, and there have been, obviously, pretty big improvements there and a relatively low PPA price as well, that's tougher in solar as a generalization. So we do look at that. But in terms of Repowering, I think we view it much more as a wind-centric exercise than solar, at least, as of today.

And then I guess, the second question is really around targeted credit ratings. Given what's happening with interest rates at this point, you guys have always kind of consistently talked about maintaining your credit rating. Is there an opportunity for you guys to try and creep up that rating at this point and help lower the cost of capital as you work through some of these refis?

Sure. I think moving to BB+ from BB, I think -- especially in the face of PG&A situation is probably a little bit aggressive from our perspective. Yes, moving to investment grade, I think, would take a whole different category and be pretty dilutive from a CAFD per share perspective, given the amount of equity need be issued. So I think the answer to your question simply, I think, no, we're pretty comfortable where we're at, a move from BB to BB+ is probably a little bit tough given the current PG&E situation from at least our view.

And our next question comes from Antoine Aurimond with Bank of America.

Just had a quick follow-up on PCG. So it is my understanding that some of the project level debt has some mandatory cash sweep after a certain period of time. I just wanted to make sure if we assume that PCG emerges from bankruptcy in June 2020. Does any of these mandatory gaps would kick in at that point?

Sure. And when we've answered it before, basically, there really aren't cash sweeps within a 12 month period. So I think from our perspective -- and also given that the contracts, I think to Angie's question, would probably be affirmed before that date, we don't think any cash sweeps would kind of hit by then, but we might be missing one. But I don't think there's any that we think would hit by that time frame.

Okay. So nothing material? Okay. Perfect.

No, not materially that we can think of.

And our next question comes from Mike Lapides with Goldman Sachs.

Just curious, let's say, the PG&E bankruptcy does resolve by the end of next summer and your contracts all remain in place, how are you thinking about the dividend? Do you put the dividend back in place at the old run rate? Or do you think about maybe not putting it in at that level, putting in at a different level, maybe retaining more cash and using that cash to help finance greater growth or even the other side of that coin? Just curious how you're thinking about it? Now that we've got legislation in California, things are -- they're not normal, but they are normalizing kind of not so slowly. How you're thinking about the long run distribution for Clearway?

Thanks, Mike. Yes, I think from our perspective, we would look to kind of reinstate the dividend, taking that CAFD number per share and multiplying it by somewhere probably between 80% and 85% to kind of go through that, but it's consistent with our payout ratio before. So that's where we think we would end up. I think, once again, depending on where facts and circumstances land, there could be a difference, but if you ask what the plan is, that's the plan. If it drops to $8 maybe we'll have a different answer.

Thank you. Ladies and gentlemen, this now concludes our Q&A portion of today's conference. I would like to turn the call back over to Chris Sotos, for any closing remarks.

Thank you. I think I just want to thank everyone for their time, and I look forward to talking next quarter as we continue to work through this PG&E situation, but appreciate everyone's time. Thank you.

Ladies and gentlemen, thank you for attending today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.