Q4 2019 Earnings Call
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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<unk> fourth quarter 2019 earnings conference call.
This time, all participants' lines are not listen only mode. After speakers presentation, there would be a question and answer session.
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I like Panda conference over to your Speaker today, Chris Sotos, President and CEO. Thank you and please go ahead Sir.
Thank you.
Good morning, My first thank everyone for taking the time to join todays call.
Joining me this morning, as Chad Plotkin, our Chief Financial Officer, as well as Craig grew nearly as president and CEO clearly energy group.
It will be available for the Q when a portion of our presentation.
Before we begin I'd like to quite quickly note that today's discussion will contain forward looking statements, which are based on assumptions that we believed to be reasonable as of the state.
Actual results may differ materially.
These are view the safe harbor in today's presentation as well as the risk factors in our SEC filings.
Addition, we refer to both GAAP and non-GAAP financial measures for information regarding our non-GAAP financial measures reconciliations to the most directly comparable GAAP measures. Please refer to these presentation.
Turning to page four.
I'm happy to report the despite weak renewable energy conditions in the fourth quarter clear was able to achieve its revised 2019, CAFD guidance with $254 million of Kathy generated.
Clearly continues to see the PG new situation involving positively with the contracts performing in their normal course anticipated resolution in the summer of 2020.
As you all know the PGD situation has made up more difficult to grow the company and we look forward to the resolution of the bankruptcy and our renewed ability to move forward.
Despite these challenges clearly is able to deployed or committed 386 million in corporate capital in 2019 to growth projects as well as raised 700 million of corporate capital to support these investments and our balance sheet.
Due to continued improvement the PGT situation a little the increased captive from non PGT sources, we took the opportunity to increase the first quarter 2020 dividend by 5% versus the previous quarter. The 21 cents per share from 20 cents per share.
Clearly views this dividend increase as appropriate relative to the transaction executing the fourth quarter of 2019, and we anticipate the dividend will be adjusted to a more normalized level once PGT emerges from bankruptcy.
To support future dividend growth falling conclusion of the PC new bankruptcy.
Are we execute on strong growth in 2018 across the platform as a result of these efforts based on a 2020 pro forma clear, which can be for sure outlook grew to $1.60 month.
And the conventional segment, we closed on the acquisition of calls that in the fourth quarter.
We're also pleased to announce at the company as filed with FERC on the Black start project at Marsh lending, which was originally awarded under a procurement in 2017.
We continue to advance discussions around the project, which if successful will provide marsh lending additional operational attributes deliver key reliability needs in the state of California.
The renewables business also showed strong growth with Hawaii solar phase one achieving commercial operation in 2019, and both locally and we'll Dorado, reaching commercial completion under the reporting 1.0 partnership within the last three months.
The total segment almost also completed a very successful year, we're $30 million invested across projects with long term contracts and very attractive returns.
In addition, clear what is increasing its 2020 guidance to $310 million from $295 million, primarily due to the call that acquisition related capital formation.
We're also reiterating our twentytwenty pro forma half the outlook of $320 million.
This pro forma outlook excludes any new growth for investments, including the dropdown currently under evaluation, which I will highlight next.
Supporting the company's growth outlook beyond 2020, clearly group has offered the company new portfolio opportunity. This includes the 144 million.
44 megawatt Rattlesnake wind farm, our residual interest in reporting 1.0, partially owned by the company and newly probably partnership at the 55 megawatt Pinnacle wind farm in West Virginia.
This dropdown portfolio transaction is subject to negotiation and the approval of the company's and defend directors as is consistent with our previous practice, we will update you on the overall economics subject to reaching definitive agreement, which we expect to complete within the first half from this year.
Turning to page five I want to discuss our continued growth and CAFD per share.
As can be seen in the chart the company's trajectory to support future dividend growth remained strong upon the PGT situation, reaching a conclusion.
After taking into account the fourth quarter 2019 financings the acquisition of Carlsbad and other items in the platform. We're now forecasting pro forma Kathy outlook of $1.61 per share up from $1.53 per share or an increase of over 5% prior to any dropdowns or growth in 2020.
In the short on the right we want to emphasize that the new dropdown offer under negotiation with clearly group would in addition to providing Kathy growth represent a further diversification outside of California with all assets anticipate to be an operation by the end to 2020.
Additionally, with the excess cash currently trap EGD projects, serving as equity to fund a portion of the new transactions, we see a pathway to CAFD per share an excess of $1.61 of pro forma Kathy outlook by the end of 2020 now turning it over to check jet.
Thank you, Chris turning to slide seven.
Today, clearly energy as reporting fourth quarter, adjusted EBITDA of $194 million and $22 million of cash available for distribution or Kathy.
These results, bringing full year reported adjusted EBITDA to $963 million and Kathy to $254 million.
As noted on the slide due to the December closing of the CRO that acquisition and the refinancing of the 2024 notes through the issuance of the new 2028 nodes reported cap ex we use these transactions as the impact during the month is not reflected of the expected long term caf de contribution from these deals.
For called Carlsbad. This relate to the timing of project level debt service during the year for the corporate refinancing it relate to the accelerated accrued unpaid interest relative to the redemption of a portion of the 2024 notes in December.
While full year reported financial results were in line with the Companys updated $250 million kept guidance the weakness in renewable energy production that was observed in the first half of the year reemerged in the fourth quarter offsetting the strong results in the third quarter.
Although the company did realize the benefit of higher distributions from unconsolidated subsidiaries that performance in the fourth quarter, just cemented and otherwise very difficult year across doable segment.
Despite this challenging business environment, the company's still made great strides on progressing as long term goals during the year.
As Chris mentioned, even with the limitations, resulting from the PD bankruptcy clear way was able to commit to are directly invest in $386 million of new accretive growth investments.
To support this growth.
And to execute on our liability management objectives in December the company raved $700 million in capital through a 100 million dollar equity offering and through the issuance of $600 million of new corporate debt due in 2028.
This debt with used to fund growth and to refinance the $500 million and outstanding 2024 notes, providing both a four year maturity extension and into interest cost savings as the equivalent coupon moved from 5.375% to 4.75%.
While the company remains committed to it long term targeted credit rating metrics.
Given that the company has not received distributions from the projects are investments impacted by the PGT bankruptcy over the past year. We did feel it was prudent to take action to mitigate any potential temporary constraints that may emerge under the corporate credit agreement and advancing our growth plans.
As such we reached agreement with the lenders in the revolving credit facility, allowing the company to increase the permitted borrower leverage ratio up to 6.0 times from 5.5 times in the last two quarters of 2020.
This modification provides the company more cushion and temporary flexibility to continue making growth investments during 2020, while waiting for the PGT process to reach final resolution whereby trapped cash from the associated projects can be released to the company.
As noted on the slide the project impacted by the PGT bankruptcy did generate $76 million and kept the during 2019.
Importantly, and with distribution, having now been restricted for over 12 months. We currently estimate that as at the end of 2019, approximately $120 million of excess cash is available to be distributed across clear waste PGT related projects or unconsolidated investments.
The timing of when this cash becomes available is subject to the PGT bankruptcy process in terms of various project financings.
Based on our view of the current bankruptcy timeline, our expectation is that this cash will be made available to the company in the second half of 2020, providing for additional growth capital.
Additionally, once the projects are free to distribute the company's credit metrics will normalize, allowing for more flexibility and capital allocation as the pro forma corporate credit ratio inclusive of the PGT related projects is more in line with our long term objectives.
Specifically when using the company's pro forma cap the outlook relative to current corporate borrowings the company's leverage ratio was approximately 4.0 times or a figure consistent with our rating targets.
Turning to slide eight to discuss update.
So this year as Kathy guidance.
During the third quarter 2019 earnings call in November we initiated 2020, Kathy guidance of $295 million and provided a pro forma outlook, Kathy a $320 million.
The Delta between these two figures related to the timing of when the company could execute on Carlsbad the completion of Repowering one daughter.
Associated capital formation to fund the transactions and expected budgetary drivers year over year in the based portfolio.
With the new 2028, corporate bonds issued Carlsbad and outflows.
And the Repowering partnership fully funded temporarily under the corporate revolver. We're pleased to announce an increase that we're waste full year 2020, Kathy guidance to $310 million from $295 million.
This guidance continues to include $99 million and cap the attributed to the PGT projects and is based on the company's P. 50 median renewable energy production expectations.
Please refer to the appendix section of the presentation for the underlying sensitivities to this estimate.
Since the budgetary drivers in the based portfolio have not changed we also continue to forecast an increase of around $10 million and expected, Kathy which will honor to the business. After 2020, leading to a continuing so the pro forma $320 million cap the outlook.
This amount does not factor in any additional growth on which clear way may execute such as subsequent dropdowns, providing for additional opportunity to increase the companys outlook through the course of 2020 and a pathway to further dividend growth upon conclusion of the PGT bankruptcy process.
With that I'll turn the call back to Chris.
Turning to page 10.
As a close of 2019 and beginning a decade I want to highlight clearly as achievement of our updated casualty guidance and the difficult renewable conditions during the year and navigating the PGT situation.
Well the did you situation is constrained clear way, we've been enviable managed this period, while maintaining our credit ratings continue invest in growth investments and most importantly, increasing CAFD per share.
Just as importantly for clear was first full year of independence as a public company, we finalize all transition and integration requirements, resulting from the GLP transaction and see ourselves on a clear footing to move forward.
As discussed during 2019, we executed a wide range of opportunities for growth across the platform with conventional renewable and thermal all contributing to CAFD per share growth going forward.
And looking to 2000 2036 to deliver US 2020 financial commitments in terms of cap to guidance as well as continued execution of growth consistent with our long term balance sheet objectives.
As a key component of growth for 2010 and beyond we're working with our sponsor design binding agreements with it recently offered dropdown of the 2020 steel do projects and to continue our thermal development efforts.
Finally, I wanted to think our investors for the patients they have demonstrated during the past year clearly it looks forward to a more normalized dividend level upon resolution of the PGT bankruptcy as significantly better visibility around the positive outcome than it did at this time last year.
Our recently announced dividend increase is a first step toward the normalization. Thank you operator, please open the lines for questions.
Thank you.
Ladies and gentlemen, as a reminder, test question you need to press Star one of your telephone to withdraw your question. Please press the pound key please stand by our composite queuing erosnow.
And our first question comes from the line of Julien Dumoulin Smith with Bank of America. Your line is open.
Okay.
If your phone is on you please UN mute.
And our next question comes from the line of carbon Rush with Oppenheimer. Your line is now open.
Thanks, so much guys. So.
In the the pipeline of projects that you're looking at there's a fair amount of storage and I'm curious if those are standalone storage projects or if those are tied with other systems and how we should think about that.
Craig if you wouldn't mind presents a question.
Sure.
Hi, Collyn, yes, all of the storage projects that you see referenced in the pipe pipeline or solar coupled storage projects. So we've we've sought to focus our attention there where we think we've got.
Particular strengths to apply both through qualification of the assets for eligible tax incentives and.
For deployment and design and operation consistent with what our strengths have been.
Those projects have been focused on the western markets, where we see a demonstrable value proposition today that load serving entities are prepared to commit to pay for over a long term.
Are you could think of that storage pipeline has being concentrated in California, and Arizona and Hawaii.
And as something that we look to grow as the deflation of the forward cost profile for storage.
Both in terms of Newbuilding operation allows for that to be a resource that is cost viable for load serving entities to pay for as we go forward overtime.
Okay. That's that's incredibly helpful. And then just in terms of the market dynamics around available projects.
Certainly we've seen a certain amount of distress with select on developers can you guys talk about how competitive.
Environment as for for going after some of those projects and.
Well you can think about in terms of Unlevered returns on those those projects is as you go through the acquisition of those things.
Sure Chris would you like need to take that.
Yes, okay.
Yes, one of the things that you might have noted in the pipeline disclosures for this quarter was somewhat meaningful expansion in a few different areas. One is just.
Just the growth overall of our advanced and intermediate stage pipeline, which increased more than 20% quarter over quarter.
And also some changes in geographic mix, where we've secured control over an increasing pipeline of projects outside of California out in the WACC and lastly, the substantial increase in 2021 cod eligible wind assets.
If you put that picture together, what you see is that we found.
Smaller developers now looking to.
Bring 80% PTC eligible wind assets into.
Final stages of development and construction needing the supportive enterprises like around the can post collateral for projects that can finish commercialization of them and finding that in a market, where turban suppliers and customers can make choices based on.
Certainty that a project will be completed that enterprises like around have some competitive strengths.
Okay, perfect I'll take the rest offline. Thanks, so much guys.
Thanks.
Thank you and our next question comes from the line of Stephen Byrd with Morgan Stanley. Your line is now.
Hi, good morning.
Good morning.
I wanted to first just walk through the the production index information for the the fourth quarter.
And just also sort of touch base on your expectations for 2020 anything that you saw in the fourth quarter.
That would require any sort of visions or or sort of what what would.
It was a relatively unusual quarter in terms of the index of course this does vary.
Quite a bit but any commentary around that.
Yes, I said once you good yes, Steve I think yes, you will see the way the way we look at that yeah. I mean, I think the fourth quarter was surprisingly low, especially out the west.
I think as you recall on the third quarter call I think the same question was asked and.
As a reminder, we take all of our historical information on an annual basis in sort of re run that through our various statistical models and prosecute that through various production curves on the technology, we have and when we looked at that over the historical data that we had we whatever modification was needed was already factored into our numbers.
I think as I look at the numbers I'd offer you two things one as we look at the portfolio over an extended period of time talking 36 month, and even 48 months, what we're seeing in the portfolio is production well within a re a tight standard deviation around.
Our existing PV excuse me.
Pete fifties.
The other point for what it's worth year to date at least through February of yesterday, we're almost right on top of our our expected production levels for the overall portfolio. So.
No I don't think Theres anything more acute in the fourth quarter. Other than 2019 was just a very challenging year.
That's helpful Chat and then just stepping way back.
Fairly common investor question. These days relates to the value of.
Nubile assets in the private market versus.
Versus the public Yieldco market and I guess that potentially presents both an opportunity in terms of possibly optimizing the portfolio if theres happens to be a.
The private buyer, who would who would pay more value than is reflected in in clear way stock.
So it could also potentially raise a question sort of competitive pressure or sort of ability to be the highest bidder for for assets just at a high level as you kind of look broadly at the degree of appetite there certainly increased investor interest in renewables overall, how to use just philosophically think about that.
Topic.
Yes, I think Steven My view is that yes. It was a very different view looking at an asset versus kind of how a company works. So I think the assets that you're talking about tend to have the longest the EPA is right kind of the where you see I'm sure like from a some of the parts analysis, if somebody's going to do that where the most value is the longer dated PA is.
Also we knew then keep in mind, if we sold off all those assets are you really walking in the PPA duration for the company as a whole, which exposes all of us to more risk and once again, you could debate would require deleveraging as well. The second point is as you are well familiar a lot of our assets are renewables, which through five year makers have pretty low basis and them as well.
So also you would tend to create a pretty big taxable gain if you did that on kind of let's just say you want to sell CVSR as a.
As an asset that has a long did PVA and low tax basis, basically walk the PPA and overall and then also you would walk in the Noel the third point out bring up is given the strong stock performance and really I'm very gratified to say so all the teams work in early first full year as an independent company, how we probably are.
I think has the best CAFTA yield since I've been in this chair since May of 2016, and so I think the Delta is that kind of you look out if you're looking at more of a market based what's what are high bidder is paying that delta as a heck of a lot different at this point that has really at any point since 2016.
Oh, good points and maybe just one last quick one just on the exact timing of.
The release of cash flows for projects, where PGT is a counterparty if we do CPG any exit by the deadline thats been inset could you just talk in more detail about mechanically.
When.
Cash would be released or are there any sort of flex points, there sort of uncertainty points, assuming again that PGT did fully emerge from chapter 11 by the deadline.
Yes, Stephen as Chad I think the way I would describe it as it really is.
The simple way to look at it is all book end. It book and one is you just follow the terms of the existing project financings and you would submit your normal withdraw certificates not again in the we then you would have that release and time and I think given the fact that many of these projects would release usually in the third quarter, you could see cash starting to come out.
Out as early as July.
The other book in and I'm is obviously you might imagine that we are going up as we have been continuously work with our lenders with I hope that maybe there is something we can do earlier than that but I, certainly I'm not going to commit any capability of that other than we know that if everything happens and they emerge by the end of June starting to see cash move in July as a.
Probable probable scenario.
That's great. Thanks, so much.
Thank you.
And our next question comes from a lot of David Fishman with Goldman Sachs. Your line is open.
Good morning.
Kind of piggybacking off of that question a little bit. So if you were to receive.
Some of the cash released in July and that's kind of the right timing of when you. Its thank you might be normalizing your dividend around that does it.
Very much think of it as as you have access to more cash not that you would use.
The kind of accrued cash for special dividends, and but just as it frees up your percentage of capacity the payout ratio should rise rise in accordance with.
In accordance with that.
Yes, as generalization totally make I agree with your statement I think a lot of at the checkpoint and the previous question. It really depends on how was rolled out over that period, but yes as soon as that cash just the release, we will definitely take steps toward more normalization of the dividend to run that levels you saw previously.
Okay and then.
Changing topics a little bit I was just wondering so last quarter.
Thank you guys mentioned that you were.
Given the opportunity to acquire some or all of Mr. Star and you all time that down.
And then this quarter, obviously, we're seeing some more.
New assets being added to the profile and being offered you guys Rattlesnake and whatnot could you just kind of high level talking about maybe some of the different differences of what would make some of these assets attractive.
To clear way versus maybe Misc Saar in which you didn't except previously and then also from clearly energy groups perspective.
Guys don't query energy.
Not acquire.
Those assets will drop down what happens to that Mark do you have definitely look to sell them and third market or do they hold the assets just kind of structurally what are they looking for.
Sure. Okay couple of questions, Eric Let me know if I hopefully couple them first I want to assure theres a clarification I want to make sure. We understand it's not that Mesquites dollar wasn't attractive. It was that Carlsbad was more attractive. So I think just to kind of go back to that time of the year. We've just come off a period of fire season, again that kind of was a negative in October and.
Our stock was recovering so I think we had the tough decision to say well do we want to do Mesquites dollar or Carlsbad, given where Carlsbad was in terms of a longer did PA diversification away from renewables to provides less volatility around 50.
Hi, CAFTA yield while we kind of made the decision to issue equity and purchase Carlsbad, but it wasn't because just for clarity that we thought mesquite star was bad asset or anything like that or are they on a sub optimal asset merely we had to make a choice and we made the choice for the more Kathy accretive asset.
Your second question, what's the difference now as I think a lot of the as we also talked about and some of these assets were added to the ROFO pipeline is a lot of these have fundings kind of after that June period of 2020 is we're really targeted and worked with clear way group to say what assets are available within their pipeline that hits codis for our funding.
Of those projects that are much more in the back half of 2020, which comports with the question you asked earlier about when cash would be released so I think hopefully answered your question.
Okay. So, yes, I mean high level, it's effectively yes, the timing of the cash release and from a speed Star was Carlsbad was the more attractive of the too.
I guess the last thing I'd, just say regarding that is couldnt be speed star be offered at a later date theoretically or is it just pay it was offered in the beginning the year. There was a decision to be made and now.
Hey look to pull that asset themselves. There is the ultimate third party.
I'm not going to speculate what what she IP would want to do I think.
I think there are always up for negotiation, but yes, we're focused on the Dropdowns that we described those call.
Okay. Thank you.
Thank you.
Last question constant on of Julien Dumoulin Smith with Bank of America. Your line is open.
Hey, guys sorry about earlier, thank you very much so I wouldn't I want to revisit just quickly sort of the high level observations on just given where the sector is and what that means for your corporate strategy right. So as you observed right yields has never been this tight.
What does that mean for yourselves, but I also want to rehash this little bit what does that mean for your peers and the ability to be awarded assets. Both from your sponsor and elsewhere right is yours, as you're seeing and especially if I can interact another it'll how does that drive your decision as you gain access once again to the PGT related.
In terms of.
Raising the dividend versus the attractiveness of pursuing.
Other external assets.
Got it so obviously as always Julian a couple of questions. There, let me know hopefully I cover what you're looking for.
As I think from our perspective as you look at the industry as a whole and our ability I think you're one of your things. Your question was ability to bid on other assets now let me consistent with what I said since 2016 is especially in terms of third party M&A opportunities I think at a 10% Caf deal, that's really really tough to do and in the nines, but given will retrade kind of eight and a half is where the university.
Opportunities open up and so I think you in terms of M&A ability once kind of were on the other side of June for size. We're in once again in many ways. The best position since may of 2016.
In terms of looking at assets with CPG and Dropdowns I think once again the very good trading yields that were out I think is very conducive to being able to drop assets from CTG led the earlier questions was around.
Third party acquisitions in that market I think as I answered that question in many ways. The delta between what a quote unquote top or more boost aggressive bidder might pay and what we can trade that to be accretive is in many ways. The tightness, it's ever been so I think I view that dynamic overall as a positive.
Your second question about cash release from PGT, and how that might affect acquisitions I really don't think that has a significant.
Impact on acquisitions, as we've said consistently since.
This PGT situation began his we'd obviously take that cash and not have a special dividend.
Basically the at least partially fund a lot of the assets. We just talked about as part of the dropdown, we're negotiating but I think once again, we target to normalize that dividend to kind of levels, where we were before once again after once again, assuming they emerge in June kind of over the second half of the year.
That's your question got him, but maybe.
Yes.
Let me just hit this.
With slightly differently, you talked about that spread being the tightest ever been right. So therefore does that mean on the margin at your bias to do more.
FFO and acquisitions, rather than necessarily putting the money back into.
Normalized in the dividend level against where it was prior to the situation.
That answers on them.
Okay, Alright fair enough sorry.
My question is a go far is your question is what would we think to moving the payout ratio to 40% or something like that to fund acquisitions that answers, but no I think frankly like thats counterintuitive, because our equities trading as well it is right in one sense, because the equities trading well our need to maintain cash is probably the least needed.
It's been since May of 2016, when you're equities trading at a 10% Kafeel cash is the best way to acquire and always you could argue the Congress history.
Got it excellent and then it related strategic question, if I if I can.
When you think about.
The.
Backdrop, again, where we stand in the industry and having.
Both developers and develop.
And the ability to abide developed assets.
You alluded to this earlier in some of the commentary about some of the advantages that you have in helping developers how do you think about potentially backwards integrating at this 0.2, especially given.
What are likely tighter returns on buying developed assets altogether irrespective, where you trade the rest of the market is likely gotten tighter there what about the opportunity to reverse.
To get more involved upstream as you kind of alluded to earlier ready given the working capital benefits counterparty benefits et cetera.
And I know you really have community solar effort relationship are ready as well so maybe elaborate on that as part of the Thats too.
Yes, I think a lot of those are kind of at the group level. If your question Julian is do we at this time thinks I think it makes sense too.
Backwards integrate reverse integrate kind of CTG indicee Len that answers or no.
From our perspective, I've always been consistent that.
The reason that you see yieldcos as a whole trade in a certain way and I think one reason, we're trading where we are is investors like the separation of risk. We obviously are the long term holders of long dated contracts with a long did it Noel and once again I think they look for the stability of those cash flows reverse reverse integrating wherever I can remember the phrase to use.
Kind of CTG into C.. One does then combine a development risk profile with what is a income producing vehicle.
For my two cents doesn't make sense.
All right excellent guys. Thank you very much the patients.
Thank you.
Thank you.
This concludes today's question and answer session I would now let's turn the call back to President and CEO, Chris Sotos for further remarks.
Thank you everyone for attending and look forward to talking next quarter I appreciate it. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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