Clearway Energy, Inc. (CWEN) Q1 2020 Earnings Report, Transcript and Summary

Good morning. Let me first thank you for taking the time to join Clearway Energy’s First Quarter Earnings 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 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. For the first quarter of 2020, we achieved CAFD of $8 million, in line with our internal expectations and full year guidance. The PG&E contracts continue to perform as PG&E works through their bankruptcy process, and we’re looking forward to their emergence. As we await the resolution of the PG&E process, we are holding our quarterly dividend flat with last quarter at $0.21 per share. Regarding COVID-19, I first want to take a moment to thank all of our employees within the Clearway team for their hard work and focus during this difficult time. While the effects of COVID-19 have been felt across the entire country, I am pleased to say that to date, COVID effects on Clearway have been minimal, with our employees keeping safe and no material effect to operations or revenues. Given our observations to date and due to the characteristics of the Clearway portfolio, we also currently see no reason for the pandemic to materially impact financial results in the future. Ignoring operational matters that can always affect financial results across our portfolio, our conventional assets are backed by tolling agreements that are unaffected by an economic slowdown. Exposure in our renewable portfolio is generally around economic curtailment, they may not reimbursable pursuant to terms of the PPAs. We have not experienced any economic curtailment to date related to COVID-19, projects subject to unreimbursable economic curtailment, represent approximately 2% of full year CAFD, a relatively immaterial amount. In the Thermal platform, our customer profile remains strong with some volumetric impacts the steam and chilled water sales experienced in April. This amount is also not viewed as material for the entire enterprise, that would only represent around 2% of full year CAFD that persisted every month for the course of the full year. As I discussed earlier, Clearway sees PG&E’s emergence from bankruptcy on track for June of 2020. At the end of the first quarter, Clearway had $148 million of cash, they would anticipate would be released in the second half of the year as PG&E emerges from bankruptcy. During the quarter, we all signed binding agreements on our next drop-down transaction with Clearway Group to invest approximately $241 million of capital, that when all assets are fully operational, should add approximately $23 million in annual five-year average asset-level CAFD, garnering a 9.5% asset level CAFD yield. C1 is well positioned to fund their capital commitment, given the $148 million of cash restricted in PG&E projects that should be available soon after PG&E’s emergence from bankruptcy as well as our current revolver capacity. As a result of these investments and future capital deployment, Clearway is increasing its pro forma outlook to approximately $1.70 of CAFD per share, a 5.6% increase from our outlook in February. Turning to Page 5. I want to discuss the economics of the latest drop down transaction. As illustrated at the top of the page, these transactions will require approximately $241 million of corporate capital and produce $23 million of asset-level CAFD on an average five-year basis. In addition to the $241 million, Clearway will also pay an additional $27 million in 2031 to Clearway Group as part of this portfolio financing. Clearway Group, through its strong sponsor support, has agreed to obtain a portion of its compensation 11 years from now in order to increase accretion for all C1 shareholders, while still preserving for Clearway Energy, a strong long-term IRR at P50 results. This portfolio is a strong mix of projects with a 13-year weighted average contract life and diversification outside of California. This portfolio of wind projects includes the purchase of Clearway Group’s residual interest in the Wildorado and Elbow Creek assets, which are currently fully operational. The currently under construction 144-megawatt Rattlesnake project with a long day 20-year PPA and a repowering of the 55-megawatt Pinnacle project. The capital required and the associated CAFD of this portfolio are provided under the assumption that the project will achieve commercial operation in 2020. The Rattlesnake Wind Project is in active construction and on track without any impact experienced due to the COVID-19 pandemic to date. The Pinnacle Repowering project is construction ready at this time but may be delayed to 2021 out of an abundance of caution for site labor and feasible construction schedule considerations. In the event Pinnacle is completed in 2021, the full pro forma CAFD and C1 five-year CAFD yield would be materially maintained. As we’ve done in the past, we provide an update to investors if any material variances of these estimates occur. Page 6 provides an update to our CAFD per share growth outlook when factoring in the drop-down investments. Starting with our 2020 guidance of $310 million, our growth outlook was previously at $320 million or $1.61 of CAFD per share. After accounting for these investments and illustrative financing, Clearway now sees growth to $1.70 of CAFD per share, assuming $340 million of pro forma CAFD. While capital is fungible, as Chad will discuss shortly, for purposes of this calculation, we have shown the equity requirement for these investments could be funded entirely by the $148 million of PG&E-related trapped cash with the balance funded by corporate debt, well in line with our target credit ratios. This is a great outcome for Clearway, and we want to thank our Clearway Group colleagues for putting together a great transaction. The significant growth in CAFD per share is a testament to the strength of the overall platform and ability to set the stage for future dividend growth. With that, I’ll pass the discussion over to Chad. Chad?

Thank you, Chris. Turning to Slide 8. During the first quarter, Clearway Energy’s diversified portfolio operated within expectations as reported adjusted EBITDA of $225 million and cash available for distribution, or CAFD, of $8 million were within the company’s sensitivity ranges. As Chris mentioned, our employees and operating partners have navigated the COVID-19 pandemic exceptionally well with our projects continuing to operate both safely and reliably. During the quarter, Clearway did not experience any material impact to its consolidated financial results due to COVID-19. We also do not anticipate future impacts from the pandemic to create a deviation outside of the company’s normal full year sensitivity ranges as provided in the appendix section of today’s presentation. Given first quarter results were in line with expectations, and the impacts from COVID-19 are not expected to lead to material impacts during the year, today, we are also reiterating full year financial guidance of $310 million in cash available for distribution. As a reminder, financial guidance assumes the achievement of full year P50 median renewable energy production. CAFD guidance also includes the contribution from the projects impacted by the PG&E bankruptcy, including unconsolidated affiliates that have not been able to distribute cash as a result of the technical event of default under the project credit agreements. Despite the volatility in the capital markets during the quarter, we have also continued to focus on our growth objectives, including capital formation requirements for the company’s investments. Given our view of the company’s prospective liquidity, we are pleased to say that our available resources are sufficient to meet our current committed growth investments, including the $241 million needed for the latest drop-downs. First, during the quarter, we enhanced overall liquidity by utilizing the company ATM program. As noted on the slide, the company raised over $10 million at a weighted average price of $21.42 per share. This represents an approximate 7.3% CAFD yield at current guidance or an accretive level relative to recent growth investments. Next, because the projects and investments impacted by the PG&E bankruptcy have been subject to project dividend restrictions since the beginning of last year, Clearway has not been able to access the excess cash at these projects. As of the end of the first quarter, we estimate this amount to be approximately $148 million. Assuming this excess cash is allocated to the latest drop down commitment of $241 million, $93 million of remaining capital is still required. While the company will generate excess cash in normal operations, as noted on the slide, Clearway also has, as of the end of the first quarter, $253 million available under the revolving credit facility, providing temporary financing capacity to meet this remaining capital requirements. With these available resources, Clearway can be patient with accessing the capital markets, and most importantly, we can do so while managing the corporate balance sheet. Based on the company’s committed growth investments and funding plans, we estimate that our pro forma corporate leverage ratio will continue to be within our ratings target at a 4.0 to 4.5 times range. With that, I will turn the call back to Chris for closing remarks.

Thanks, Chad. Turning to Page 10. As we move forward into 2020, COVID-19 is a new challenge that we are all facing, and our number one goal is to keep the employees of Clearway safe and healthy, while maintaining safe and reliable operations. In terms of our financial commitments, we have reiterated our 2020 CAFD guidance with our first quarter numbers in line with expectations. While also focusing on near-term goals, we are also targeting growth in long-term CAFD per share with the recent agreement to purchase a portfolio of assets from Clearway Group at attractive terms. Clearway Energy is constantly working with Clearway Group to expand the ROFO pipeline as well as working with our Thermal division to develop additional organic growth in our systems. This, combined with third-party M&A activity, will allow Clearway Energy to continue its dividend growth goals into the future. Finally, we look forward to the normalization of our dividend growth upon resolution of PG&E bankruptcy expected in the summer of 2020. Thank you. Operator, please open the lines for questions.

[Operator Instructions] Our first question is from Julien Dumoulin-Smith from Bank of America.

I’ll keep it quick and high level here. There’s been some degree of concern in the renewal space amongst some with respect to supply chain on the current year and impacts just to execute operationally. I’d be curious on your reactions to that across any wind, solar, et cetera. And then related, I would be curious on your thoughts with respect to financing markets and the status there in around any financing activity you might be looking at given wider spreads, et cetera. There’s been a unique investor focus there of late, although it’s less clear, shall we say, in terms of what the ramifications are for you all and others in terms of practical all-in financing costs given the lower risk-free rate?

Thanks, Julien. So I’ll kind of answer the second question first in terms of financing markets, and then I’ll let Craig kind of address the supply chain question that you asked. I think in terms of financing markets, actually, we view them pretty constructively. I think when COVID-19 first happened, obviously, as you’re well aware, the capital markets were very volatile. We’ve seen kind of our bonds come down pretty significantly in terms of yield. And a lot of them are trading north of par today. So I think from a debt perspective, we actually see things as pretty constructive. On the equity side, obviously, there’s a bit of volatility there depending on the situation during that day. But overall, still they’re pretty constructive equity level. So from a capital markets perspective, in terms of financing, both debt and equity seem to be in good position. That being said, as we talked a lot about on the call, really, we view the trapped cash of PG&E as our primary source of liquidity to help basically fund the acquisitions we just talked about. So just to make sure while the capital markets are conducive, we really are looking to that cash to help fund the majority of those investments. Craig, if you don’t mind, the supply chain question.

Sure. Thanks for asking, Julien. Yes. I mean, I think what we’re finding is that an environment like this one is one where an enterprise with our relative scale and depth of experience can outperform relative to some of our peers. What we’ve found so far is that all of our major construction activities have been able to stay on track. That’s partly a function of the fact that we are pleased to remain a key priority for our suppliers, and we’ve worked proactively with them to assure that the components we require for our projects have gone through adaptive supply chain planning and our construction crews, both are adequately protected, but their activities have been sensibly planned and also because of the fact that we’d set our projects up in ways that were cautiously planned in relation to, say, key tax credit quest. So we’ve been able to come through this really with projects remaining largely on track relative to what we’d expected. With respect to capital formation for new projects that we’re developing. I think that’s also part of what you’re asking about. What we’ve seen is a continued preference amongst the major project lenders and tax equity investors for major developers on whom they can rely to complete projects and to whom I think they can look to for substantial volumes of business in the future. So while – surely, there’s an increased level of focus on risk mitigation and transactions, what we’re finding is basic quality that is durable in the projects that are being developed and the reliability of a sponsor matter quite a lot in these markets and that those things are rewarding us.

Excellent. And if I can follow-up very briefly on a more Clearway-specific question, if you don’t mind. With respect to dividend, obviously, we are getting very close here to ultimate resolution of the PG&E bankruptcy. Imminently, one might argue. How are you thinking about trajectory and dividend growth, baseline, et cetera? You talk about normalizing, but I just want to be very clear about what that means sort of in the near-term and in the longer term to be very clear about it?

Sure. I think not imminent enough, but fair enough, Julien. From our – 1.5 years has been a long time. So from our view, our payout ratio remains at 80%, 85% in terms of our target with our long-term dividend growth goals of 5% to 8% on a per share basis. The same that we talked about basically in September of 2018. So that really hasn’t changed at all. As we stated previously, depending on exactly when PG&E emerges from bankruptcy and the timing of the cash release thereafter, there may be a slope to how the dividend hits those metrics, but we anticipate having that normalized dividend to then grow in the future for the second half of 2020. So I think our goals haven’t changed at all from what we explained back in September of 2018. And I think as we’ve talked about over the course of this 1.5 years, the resumption of a normalized dividend will happen sometime in the back half of 2020, basically given exactly when the PG&E cash is resolved.

Got it. But to sort of nail you a little bit further on this. Say, presumably, if you’re on course for a PG&E bankruptcy resolution, you should conceivably get that by at least late 2020 and therefore, by 4Q, be able to follow through your payout ratio guidance, on a run rate basis as of that quarter, presumably. Again, not to put words in your mouth per se, but that seems to be what you’re saying.

Yes. Maybe to answer your question a little bit differently. If you’re saying would that happen in 2021, that answer’s no, it would happen in 2020.

Yes. Okay, fair enough. Thank you.

Thank you. Our next question is from Colin Rusch of Oppenheimer. Go ahead your question please.

Thanks so much guys. Just maybe another question for Craig. As you guys look at the opportunities for building out the portfolio of development projects, and/or seeing some smaller developers that are running into financial challenges. Can you talk a little bit about the opportunity set for Clearway and the competitive dynamics for acquiring some of those broken projects? And how you see yourselves positioned in that situation?

Sure. So first, I think we do expect that opportunity set to emerge. We’ve organized our controlled pipeline to create room for us to manage to completion incremental project activity in 2021 when we’d expect the principal COD vintage for some of that disruption to be available. And as you could imagine, have sort of active and growing dialogue with the tier of developer who would benefit from a company that has our wherewithal. I think the principal factors that inure to the benefit of a company like ourselves are the ability to bring safe harbor equipment for multiple safe harbor vintages to bear, for wind projects and solar projects, both, and we’ve got a multi-gigawatt safe harbor program that allows us to do that. The ability to arrange project financing for projects, which is becoming more challenging for more thinly capitalized developers. And the ability to complete revenue contracting processes in short order to the extent that developers haven’t yet organized revenue contracts for projects that they intend to build during the next 24 months. And we’re seeing opportunities that kind of check those boxes right now, including projects that folks had hoped to build this year, but more likely now, we’ll need to move to next year. Reaching a conclusion that, that is a choice the developer has to make, takes a little while, but based on our experience in similar situations of disruption over the last decade, I think we expect that to occur during the latter half of this year, and we look forward to transacting on opportunities as they present themselves.

Okay. That’s super helpful. And then thinking around distributed generation and potential changes in usage patterns. How far down the line are you guys in terms of understanding what some of those use patterns might look like in a more detailed way? And how some of the opportunities might emerge in terms of either acquiring additional portfolios or actually bidding on the new projects or new sets of projects to meet some of the more localized needs, an answer would be great?

Chris, do you want me to take that first?

Yes.

Okay. Well, I guess, a couple of observations. So within our operating fleet today, there’s sort of two – or I suppose, three families of distributed generation assets. The first is the remaining residential solar portfolio of assets owned by Clearway Energy, Inc., which NRG originally put together. Second and more substantially, on-site behind-the-meter distributed generation projects, which service commercial and industrial customers. And then third, virtual net metered community solar projects, which are sort of, call it, decentralized utility-scale power plants, which sell to customers that are municipalities or CMI customers or residential customers. In the case of really all three, they historically have been sized to account for substantially less than 100% of the total load for those customers. So we haven’t seen really in the case of any materiality situation where projects aren’t being able to produce and sell all the power they can make. And as we look ahead, I think what we’re finding is that for a lot of the commercial and industrial customers that have been driving growth of renewables, including for some of those asset classes. Their commitments to sustainability purchasing remain as strong as ever. And the value proposition we’re able to make to them from the projects that we’re principally developing today, which are large-scale projects or community solar projects is as good as ever. So our disclosures noted the gigawatts worth of projects where we have active awards or short-listed offerings. And what we’re finding for customers in that commercial and industrial segment, I think, you’re really asking about is that they are very bullish on continuing to procure and I think we find ourselves best positioned – we’ve concluded to deliver to them through the combination of large wholesale contracts and virtual net metered projects, which play to our strengths.

That’s actually super helpful as, thanks so much.

Our next question is from David Fishman of Goldman Sachs. Your line is open.

All right, good morning. Just a quick clarification on the impact and the delay on the small Pinnacle or potential delay on small Pinnacle Wind Repowering. Just from our standpoint, when we think about how you structure the contract, are the economics intended to remain intact, even if there’s a delay, so we might see a shift in the timing of the deferred payment or something like that? Or should we think, if this is just a one quarter delay or something like that, all will actually be the same?

I think they would largely be the same. I mean, it might be like 8/10th of a point difference in CAFD or something like that. But I think if there was something material, we’d obviously update everyone. But I think to the point, we don’t really anticipate a significant shift in economics, not at all.

Okay. And then on the $241 million financing illustration, just so we know, right now, it’s showing the first quarter 2020 PCG cash and then the remainder being financed with 5% debt. Is that roughly kind of a cash for step mix you’re thinking of? Or would you show if you had more cash on the next quarter, a higher amount of pro forma because of less interest expense?

Overall, yes. I mean, money is fungible to be fair to your question, it depends exactly what quarter it gets discoursed from the various project financings. But as a generalization, you’re correct.

Okay. And then is there a normal level of cash that we should think about? So as to the PCG, bankruptcy is resolved, you get your restricted cash, you have your current cash balances, what do you think about as a normal kind of operating level of cash that you want to have on end, just so we can think about maybe what your excess capital might be to be deployed for other growth investments?

Chad, why don’t you address that?

Yes, sure. Obviously, we – there’s a seasonality in our business, where cash balances will move. I think maybe, David, the best way to think about it on a normalized basis is if you just wanted to be simple and impute a payout ratio and we think about a payout ratio relative to CAFD, effectively, that would impute your delta as to what we would assume as available cash in any given year. So if you looked at guidance this year of $310 million of CAFD, assuming you hit all your expectations, you would say, okay, we’re going to have 20% of that should be available in any given year if you had an 80% payout ratio. So I think that’s the cleanest way to think of available cash on any given year.

Okay. So it’s more just think about it 1 minus the payout ratio, that’s going to be your incremental cash flow for allocation?

I think that is the best way to think about it.

Okay. And then just two more quick ones. Any update on the black start at Marsh Landing? On the potential timing? When that might occur? Or anything out there?

Chad?

Sure. I think we’re still working through that process, given the filing that we have at FERC, So I’ll sort of leave it there. Obviously, our goal is to be able to move forward on a project that works for all stakeholders. But we’re earnestly working through that, we’ll leave it at that. And I think given the size of the capital there, David. I wouldn’t suggest that, that number is going to be like a material impact to overall results. So – but it certainly is a high-quality project that does a lot to enhance the underlying asset that we have. So we’re certainly eager to move it forward, but we’re working judiciously to make sure it works for all the stakeholders.

Okay. And then last one for me. It looks like in the slide deck, the Langford Wind COD was pulled forward to 2020. Just assuming you do have an excess cash, is it fair for us to think that you might have appetite for incremental projects during 2020 beyond the binding agreement?

Just to be clear, we always say that, yes, this is where we intend to stop. So we always have appetite for projects. So I think your question, we’re always looking at projects like that or third-party M&A and organic thermal growth as well. So yes, this is the simple answer to your question.

Okay. Great, thanks.

[Operator Instructions] Our next question is from Durgesh Chopra of Evercore ISI. Your line is open.

Good morning guys. Thanks for taking my question. I – actually just one quickly for me. Some of your utility energy peers have talked about slowdown in renewable activity, specifically in Texas. So I just wanted to see if you’re hearing that and sort of any color or any – how should we think about your development plans? And if you’re seeing any slowdown from your customers, do you kind of think about your development plan going forward?

Sure. Craig, why don’t you take that, please?

Sure. We think what’s happening in Texas is actually healthy. So for our part, we have substantial project volume that is reflected in the 4.9 gigawatts of advanced, intermediate and construction-stage projects in our disclosures, which are in Texas, which by virtue of our history as an enterprise, including being within NRG, is a place of strength for us. So we have both solar and wind projects of meaningful scale amongst the largest in the state that remain on track for advancement that have been contracted with high-quality customers. And which we are advancing for construction over the course of the next two years. And our – at the same time, glad to see that some of the longer tail of smaller and less well capitalized developers have needed to push projects out in time because it’s been challenging for them to organize supply chain for those projects or to deliver a comparable value proposition to customers for the demand that there is out there. So what we see starting to happen, which I think is a good thing, is changes on the project supply side that appear to indicate that there should be some reduction in expectations for total new wind and solar construction volumes over the next couple of years, which are ultimately, I think, favorable for the overall health of the Texas market. And we’re still in a position to be able to provide a really attractive economic proposition for the customers that we’re looking to service through new projects that we’re developing. And I think are further hopeful that some of the other changes that are ongoing in Texas will mean that we’re able to find new levels of cost efficiency within the renewables industry as we build projects there during the next few years.

Got it. That’s all I had guys, thank you so much.

Thank you. We no longer have a question on queue. I would like to turn the call back to Chris Sotos.

So thank you. I wanted to thank everyone for taking the time, and everyone remains safe out there. So I look forward to talking next quarter. Take care.

This concludes today’s conference call. Thank you all for attending. You may now disconnect.