Q4 2020 Clearway Energy Inc Earnings Call
Later, we will conduct day question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone.
As a reminder, this conference call may be recorded I would now like turn the conference over to your host Mr. Chris Sotos, President and CEO of Clearway energy.
Thank you.
Let me first thank you for taking the time to join us on his call joining.
Joining me this morning is Chad Plotkin, our Chief Financial Officer.
Kill Marsh, our Investor Relations manager and Craig Cornelius President and CEO of Clearway Energy group.
Credit 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 on our SEC filings. In addition, we will refer to both GAAP and non-GAAP financial measures for information regarding our <unk>.
Non-GAAP financial measures and reconciliations for the most directly comparable GAAP measures. Please refer to today's presentation.
Turning to page four.
First before I begin I want to say, thank you for all of our colleagues across the enterprise and to our partners for navigating through 2020, and making the passengers success for the company, where he was managing through the PGD bankruptcy for the impacts of the global pandemic the company executed across the platform and further position clear way for long term growth.
Financially clearway achieved full year cash of $295 million, which includes the effect of Covid we.
We invested or committed to and are committed to invest approximately 880 million on growth projects and execute on one point for billions of capital formation.
Clearly also has resumed to grow within its dividend with now a one 9% increase to 32.4 cents per share in the first quarter of 2021 on track for the upper end of our 5% to 8% growth target for the full year.
On a long term outlook is strong as ever certain of our projects did face on early challenge in 2021 due to the unprecedented weather events in the ERCOT market.
This event is expected to have an impact of between 20 or $30 million, depending on final settlements discussions with contractual counterparties any potential state sponsored actions while significant the company has proven to be resilient and the impact is very manageable and the overall liquidity and the shortfall does not affect the company's target EPS growth expectations, which we are reaffirming today.
In response to these events, where we are already working to enhance fleet resiliency and risk management through a combination of initiatives with our CPG colleagues.
Before I move on from discussing the financial impact from the Texas weather event I would be remiss if I did not highlight the incredible efforts of our operations team. While there are many advantages of having a large footprint in this sector the ability to deploy nearly 100 operators from other states for Texas sites control shoot damage and he started up facilities was critical I'm. So grateful to our team for volunteering to travel to climb towers in subzero.
<unk> help with the lights back on in Texas.
Long term and through the execution of new gross commitments since the third quarter of 2020 earnings call because it really has improved its pro forma Cathy for sure outlook with an increase to $1 80 per share from $1 71 that we announced just in November of last year.
This increase was driven by the execution of third party acquisitions, namely Mount Storm, which is anticipated to close in the first half of 'twenty 'twenty, one and the previously announced acquisition of the remaining interest in agriculture that day.
Growth was also driven by the co investment of one six gigawatt.
On diversified portfolio of assets and thousands of zone.
Each of these asset additions results and strong cash per share accretion, while supporting the long term weighted average contract life of the company's portfolio.
In addition, these assets add to clearway portfolio scale, and diversification, which are important factors in creating value and stable Kathy.
Looking forward to 2021, we have a wealth of opportunities to work on as.
As we and our colleagues at Clearway group construct the next stage of renewable portfolio co investments.
Clearway group has increased pipeline to 10.1 Gigawatts of which five four gigawatts are late stage, even after accounting for projects completed last year.
It's tailored for development pipeline for projects that are optimized for additional our fleet based on the resource profile customers technology and expected contract type anesthesia is development and capital structuring to align with the capital investment profile, we need to sustained 5% to eight per cent dividend per share growth roadmap into the coming years.
With those components, we are now working with Clearway group toward the next co investment commitment that could comprise between 1117 gigawatts of projects. These projects will span a diverse set of geographic geographies, including California, The Pacific Northwest and the southwest, including a mix of solar wind and battery storage technology with plant closings for these contingent since.
Stitchwort projects spanning 2021 for 2023, we see the opportunity to construct a well optimize supplement to clearway platform, adding to our growth going forward.
Turning to page five.
I want to highlight the two third party acquisitions, we announced since our third quarter call.
First on where we acquired Nrg's remaining 35 per cent of all current day.
Providing a 51% ownership in the asset underpinned by a 19 year remaining PPA life and a nine 9% cash to yield we are very excited about being able to add a well understood long tenured PPA asset at such attractive economics.
In addition, clearway it looks for Leverages operational footprint with the purchase of for 264 megawatt non storm wind project, which is located near the 110 megawatt Blackrock and the 35 megawatt pinnacle wind projects. This particular acquisition benefits from the leveraging of our diversified operational scale to optimize costs in the region. This transaction will be underpinned with a 10 year energy.
Hedge and generates a yield of 10, 3%.
While continued success in closing third party acquisitions can never be sure. We look forward to continuing to look at opportunities to expand our portfolio efficiently.
Turning to page six this for.
As an overview of our investment activity since the start of 2020 as you can see we have committed to point nearly $1 billion of capital generating approximately $100 million and asset level Cafe. These quality investments are expected to generate a cash yield of 10, 3% backed by the weighted average contract life of approximately 14 years these investments, particularly those.
Announcements for third quarter of 2020 on I was to increase our pro forma Kathy outlook to $1 80 per share versus $1 71 that we announced previously.
Through a combination of these investments leveraging our operational expertise on reach we are on track for our 2021 goals for Dps growth, but also importantly can now show a visible path forward in terms of growing our dividend per share by five to eight per cent through the end of 2022 at our targeted 80 to 85 per cent payout ratio.
With that I'll turn the discussion over to Chad Chad.
Thank you, Chris turning to slide eight where I'll provide an overview of the company's 2020 results and an update to our 2021 outlook.
Starting with 2020 today Clearway is reporting fourth quarter, adjusted EBITDA of $229 million and $30 million of cash available for distribution for Kathy.
These results bring full year of 2020, adjusted EBITDA to approximately one point O $8 billion and Kathy to $295 million.
During the fourth quarter the company realized higher distributions from several of its equity method investments as well as improved operating efficiencies on where crop cost across the portfolio.
However, moderate weakness primarily within the wind portfolio, which persisted for most of 2020 and an outage at El Segundo gas project during December did weigh down results.
Overall, while full year results were below the company's original $310 million guidance the variances within expected sensitivity ranges for the portfolio.
During 2020, the company continued to progress on its long term objectives through efficient capital formation and its disciplined capital allocation program. During the year. The company formed approximately $1 $4 billion on capital through project level debt optimization utilization of the ATM program additional green bond issuances.
And through the disposition of non strategic assets.
Additionally, the company was able to gain access to $168 million on cash that had been trapped due to the <unk> bankruptcy.
Through these efforts clearway has maintained its commitment to its balance sheet targets and was able to allocate the excess capital to its growth investments in a manner, leading to Kathy per share accretion.
As provided support in our ability to reset the dividend upon the resolution of the P. G E bankruptcy and as a company on a trajectory to reach to achieve the upper end of our 5% to 8% dividend growth target through the end of this year.
Now with the pending $96 million Mount Storm acquisition. The company has committed to $975 million and growth investments since the beginning of 2020 pricing clear way on a path to meet our growth objectives beyond 2021 as well.
Moving to our Kathy expectations for 2021.
Per my comments from our last quarterly call the timing of when the company's growth investments get realized into results is dependent upon when projects achieve commercial operations.
So as previously mentioned our forecast for 2021 does not factor in the full upside relative to our committed growth investments.
This includes the pending Mount Storm acquisition that is not expected to lead to a meaningful contribution in 2021 and as further discussed on the next slide when showing the company's update to its pro forma cap the outlook.
With the closing of the Agua Caliente transaction in February the company was expecting to increase its full year 2021 Cathy guidance.
While we note that renewable resource performance above our full year median expectations across the company's diversified portfolio such as what we have observed on the west coast. During February can insulate results from operational resource matters at certain projects.
We view the estimated financial exposure from the February conditions in ERCOT as an event outside the scope of the company's normal annual sensitivity ranges.
Given this dynamic we are now factoring in the estimated impact related to the ERCOT event into full year financial expectations.
Today, we are maintaining our 2021 Cathy guidance at $325 million in amounts still sufficient to allow the company to meet its expected dividend growth.
Let's now turn to slide nine to discuss the update to our pro forma Kathy.
In our last quarterly call, we indicated that the company's pro forma cap the outlook was $345 million.
This amount was based on growth commitments as of that time and capture the timing of when those projects would reach cfd.
Furthermore, this amount also adjusted for what we believe are temporary variances in 2021, such as COVID-19 related matters at the thermal segment and now the exposure we see in 2021 relative to the February weather event in Texas.
With new growth execution and commitments. We are pleased to say the company's outlook has continued to improve.
Since the November 3rd quarterly earnings call. The company has announced the Agua Caliente transaction for co investment in the one six gigawatt renewable portfolio and now the Mount Storm acquisition.
These investments alone are expected to deliver an incremental $50 million in five year average annual asset level Kathy to the company upon on all projects achieving C O D.
As noted in the chart because permanent capital will need to be for them to fund. These transactions, we make an assumption for the cost of the debt portion of this financing, which based on our target leverage ratios would yield approximately $9 million and additional interest expense assuming a range of three five to four 5% of new corporate debt.
So when combined with the asset level Kathy from the new committed growth investments, we now see an increase of over 11% and total Kathy potential with an updated pro forma cap the outlook of $385 million an amount that continues to support our long term dividend growth goals with that I'll turn the call back to Chris for closing remarks.
Thank you Chad.
Turning to page 11, and recapping 2020, clearly energy had a very strong year, we delivered on our financial commitments with Kathy within our sensitivity range and reset our dividend and growth trajectory. Following the resolution of the PGD bankruptcy.
In 2020, clearly committed to nearly 900 million of investments next year of $1 4 billion of capital formation through a combination of refinancing non recourse debt additional corporate capital and recycling of nonstrategic assets. These.
These investments allow clear way to enhance our pro forma Kathy outlook supporting our Dps growth in line with our long term targets.
And looking forward to 2021, we are targeting to deliver on our 2021 Cathy guidance taking into account for February Texas weather, while achieving dividend per share growth at the upper end of our range.
We look to continue to grow on a $1 eight pro forma Cathy for sure on outlook.
Further opportunistic M&A as well as continued work with our Clearway group colleagues to invest on a portfolio of at least one one gigawatts with 2021 through 2023 closing dates during the first half of 2021.
Finally, as we have discussed over the years 'twenty 'twenty, one is an important ear and positioning on gasoline, California beyond 2023.
<unk>, reducing risk on optimizing value on these assets going forward as the previous year has demonstrated the value of these assets through their importance to the grid during constrained periods. On the addition of black start to Marsh landing our gasoline is a valuable asset and we will work to optimize our in 2021, and we look forward to opt Inc. Updating you on our progress during the year.
Thank you operator open the lines for questions. Please.
At this time if you have any question. Please press Star then the number one on your telephone keypad.
And your first question comes from Julien Dumoulin Smith with Bank of America.
Hi can you hear me.
Yes.
Good morning, Julien Good morning team. Thanks for the time I just wanted to channel.
Hedging here.
Right.
And the impact of events.
Have your thoughts on the hedge portfolio and perhaps changing.
How do you guys do.
Engaging PPA going forward.
Thanks, Julien I think theres always a preference for ppas versus hedges don't get me wrong, but sometimes the market has certain constraints on it in terms of what's available I think from our view what we want to do is really look from a risk management on plant design perspective to a make sure that we have increased winter renovation on the light for ice sharing technology and some of those ERCOT assets, where you actually have.
Fixed physical delivery versus the PPA take or pay type of obligation and then also establish whether outage prediction predictors and train equipments that are procedures to mitigate those type of events. So I think from an operational side from risk management I think we want to incorporate liability tracking around these obligations to make sure we understand that but I think for all of that second on it.
It was as everyone's aware a pretty unprecedented effect in ERCOT, but I don't think people would see happening on a regular basis, but there was some other mitigating factors, we look to do going forward.
Got it and then just quickly.
How do you think about retrofitting to derisk for us going forward.
On a sort of nascent conversation if you can talk about that.
Some.
There is.
Yeah.
Yes.
For operational level retrofits that can be pursued here as well.
Yes, you broke up a little bit there Damian I think you asked about what retrofits, we could kind of do it for at the projects in Texas, Craig any particular user.
Yeah sure glad to address that yes. So.
Yes.
Our wind machines in Texas in General were rated for operation down to ambient temperatures like those that were observed in this event, but like many other operators I think we find that there are certain supplemental deployments that would be useful in particular in conditions like those that produce the ice that was observed in the <unk>.
Texas during this event and those include hydrophobic coatings for blades.
For the specification and fluids in lubricants that we use at machines and supplemental heater elements within the nacelle that will help assure that machine stay out of false during an event like this.
What we were pleased to see about the machines that we do have in Texas was that we were able to bring them back very quickly after icing began to shed during the return to a.
Above freezing temperatures so by way of example, Julien within hours of temperatures exceeding freezing we had brought all of our central Texas Bad assets back up online and within 24 hours they were producing at nameplate.
With a well calibrated operations work force and machines that are ready to run.
And the supplementation.
Ex that we have there at those plants with the types of coatings or fluid changes our heaters that we've deployed.
We are hopeful that we would be able to mitigate comparable operational risk and a future event.
Got it.
Cause estimate yet.
No.
He was asking if there's a cautious a bit.
Too early.
Yeah.
Understood. Thank you.
Your next question comes from Michael <unk> with Goldman Sachs.
Hey, guys. Thank you for taking my question I have two totally unrelated to each other one.
Can you just remind us what planned equity financings or equity like financing do you have on oil will likely have over the next year or so and then too.
Given what happened in California last year, a price spikes that would be probably enhanced value for existing fossil generation. How are you thinking about the avenues for potentially re contracting the assets over a longer term versus being on short term or a arrangements.
Sure I'll kind of take your second question first Michael and then hand, it to chat on the equity side. So I think in terms of looking at re contracting I do think that it does what happens, especially in California last year, I think does make it more conducive to longer term contracts. However, I want to be fair to your question that probably doesn't mean.
And 15 years that probably means maybe somewhere between five and 10 in a positive sense and so I think that's one thing that kind of once again, we want to make progress on this year I think Michael we've talked a lot over the years I think you've been back in 2016 I told you there for utilities would probably want to talk about re contracting one to two years I had a contract exploration well.
And so to me that's kind of consistent with what we've indicated and I think overtime I. Once again would hope to get something at least for part of the fleet more on the five to 10 year range I think what Youre, saying, Hey, <unk> I think that's a little bit aggressive to be fair to your question.
Sure and then and then Michael on your your comment with respect to equity capital needs I think maybe I'll I'll take it in two steps. If you go back to where we were in the third quarter, what we had intimated at that time as the capital formation that we had executed inclusive.
Cash that had come from the PGN <unk> projects was sufficient to fund all capital needs for the growth that we had executed through.
Backhaul, so effectively when you think about the announcement today, there's three investments I would point to which is Agua Caliente co investment in the partnership and then now Mount Storm. So that's call it up a little over $500 million of total capital needs in which we would need to form permanent capital around.
If you look at how we presented it if we're consistent with how we've generally financed our business and we use our normal kind of target leverage ranges, which.
As in line with our rating targets, we would seek to lever those at the corporate level between four to four and a half times. So if you look at our slide that we presented on slide eight you see that adding roughly $213 million of corporate debt. Now again. This is somewhat for scripted and I'm not going to tell you things don't move around a little bit, but just using that as a proxy so that intimate about a roundabout.
$300 million of equity that is ultimately required to fund those transactions. So I think as it relates to the equity needs I would tell you that we're can it continue similar to how we've historically done things whether or not it's utilizing our ATM program, whether or not it might be occasional smaller block type of transactions or as we even did this path.
Half year incremental capital that may come from optimization of project level debt on the disposition of projects net of whatever we need to do to maintain our leverage targets. Those are sort of the way that we would sort of fund the equity need I think the main point I'd raise is we're going to do things consistent with our balance sheet targets and try and continue to do things the way, we've done which is to maintain.
Flexibility by keeping a revolver that is relatively undrawn. So that as we're funding new growth, we can sort of be pretty pragmatic with the timing of when we placed that permanent capital.
Got it okay. Thank you Ted much appreciated and just coming back to California, a little bit Hmm.
Can you remind us are there any environmental either regulate regulation work constraints regarding continued operation of your fleet out there from the gas fleet.
No none that I'm aware of.
Got it. Thank you much appreciate it guys.
Okay.
Your next question comes from Colin Rusch with Oppenheimer.
Thanks, so much guidance.
Yes.
Historically, you've talked about not retrofit in existing projects that are under ppas with energy storage or any sort of on kind of a voltage management incremental investments I'm wondering if that thought process is starting to change as you see some of the instability on the on the network.
I think that really depends I think that the type of retrofits that question has typically been as kind of a little bit more all encompassing in terms of what you might have to do to take projects offline versus kind of you know taking on a wind turbine at a time and putting in some of the elements that Craig talked about so I think in terms of adding battery storage and are ready.
Trophic situations and taking turbines or panels offline to do that I still think we have high dollar value ppas that that math is tough to do.
If I'm understanding your question correctly.
Yes.
I'll take it offline with you guys, but I think that's the end of the heart of the matter.
Second question is are you guys thinking about changing.
The P 50 standard at all.
Some of the variability in the network at this point in terms of estimation and how you're operating the business.
Got it got it.
With no actually performance.
Sure simple answer is no any P 50 adjustments, we normally take as part of kind of our guidance that we've given on November calls, we typically go through the year re look how the P 51 drink visa and make adjustments at that time. So so to your question, it's not as though anything that's occurred would make us move our P 55 to date.
Perfect.
Just just to add though on that Colin as Youre aware.
When we when we produce an energy estimate for a project. We also take into account expectations of the grids performance, an outage time and so on so I think you know.
When when we're underwriting new projects I think we've demonstrated that our ability to incorporate expectations for those types of great outage events has been.
Reasonably on par so we take that into account and just on your other question with respect to California at least there are opportunities outstanding now for utilities to consider contracting for storage.
Storage capacity that is.
Incorporated as a supplement to existing operating assets and so where we've got the ability to offer something.
We're making plans to try to be able to make those offers and we will compete in the marketplace to see if utilities wanted to take us up on it.
Okay I appreciate it guys.
Okay and for any question. Please press Star then the number one on your telephone keypad.
Now at this time there are no further questions.
Alright, well. Thank you all for joining and look forward to talking to you in may take care.
That concludes today's conference. Thank you for your participation you may now disconnect.