Q2 2023 Clearway Energy Inc Earnings Call
Yeah.
Good day and thank you for standing by welcome to the Clearway Energy, Inc. Second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one.
One on your telephone and wait for your name to be announced to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Chris Sotos, President and CEO .
Good morning, when you first thank you for taking the time to join Clearway Energy, Inc. Second quarter call joining.
Joining me. This morning are a kill Marsh director of Investor Relations, Sir with his team CFO and Craig Cornelius President and CEO of Clearway Energy group our sponsor <unk>.
It 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.
We'll 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 four.
Clearly had a soft first half of the year as weather and renewable resource conditions deviate substantially from historical averages across most geographies for the second quarter, clearly generate a $137 million of Kathy with the lowest quarterly wind production in the company's history.
As we look ahead to the balance of the year, we are updating and reducing our full year guidance to a range of $330 million to $360 million, which accounts for our first half results and reflects a range of potential outcomes and renewable resources and weather impacts on load.
Our results have stabilized in July and are materially on plan for the month.
We are cautious given the weak renewable resource and relatively mild weather in California through June .
Nonetheless enabled by our prudent financial management Clearway is announcing an increase in the dividend of 2% to $3 91 per share in the third quarter of 2023, or one 556, four on annualized basis, keeping on target to achieve the upper range of our dividend growth objectives for 2023.
Despite our challenges clearway continues its focus on growth and long term, Kathy and our asset base and.
In terms of Dropdowns from Clearway Energy group, we recently committed to acquire Cedar Creek win for $107 million had a greater than a 9% cash yield.
As well as Rosemont central storage for $32 million, an approximate 11% cash yield as such we are raising our pro forma Kathy outlook from $410 million to $420 million.
In terms of our continued growth trajectory, our sponsor's pipeline has grown over 30, gigawatts, including six nine gigawatts of mid stage projects expected to reach <unk> in the next four years.
We continue to work towards binding commitments on the remainder of dropdown 'twenty four with Texas Solar Novo, which all have an estimate capital commitment of $40 million.
Working with Clearway group on dropdown 25 that begins our deployment of $220 million of capital commitments. We have received our first off on these assets in the form of Dan's Mountain a wind farm with a target completion at year end 2024, and a greater than 9% cash yield.
Offers a subsequent dropdown 25 assets or anticipate for our sponsor over the balance of the year with the contribution of those assets targeted provide a cafe contribution consistent with our goals.
Youre clearly we are keenly aware of the capital market volatility in recent months.
To reiterate a key point are on capital, which is we have enough cash to fund our line of sight Dropdowns that underpin our $2 15 per share long term target.
Clearly also benefits from an undrawn revolver excess cash flow generation and unused leverage capacity to fund additional growth through this volatile period.
In summary, clearly continues to execute growth plan with a very strong internal liquidity profile. So is well positioned to grow beyond the $2 15 <unk> per share combined with the EPS growth rate in the upper range through 2026.
Turning to slide five to provide an overview of our recent capital commitments.
Unless side of the page review Cedar Creek Wind, a 160 megawatt Idaho project underpinned by a 25 year bus bar, a PPA for an investment grade utility.
This project should produce $10 million of <unk> annually for an approximate nine 3% cap to yield why she is commercial operations targeted for the first half of 2024.
On the right side of the page our Rosemont Central battery storage project is co located with our Rosemont Central solar facility.
This project is expected to require $32 million of capital with an approximate 11% cap deal achieved commercial operation in the first half of 2024.
This represents our continued diversification into a new asset class beyond wind and solar with <unk> owning or committing to invest in over 550 gross megawatts of storage today.
In summary, we continue to advance our growth objectives with these two high quality capital commitments.
Slide six provides an update about our path to invest at thermal excess proceeds and achieve our growth targets.
With our announced investments in Rosemont, and Cedar Creek, our pro forma <unk> outlook now increases of $420 million with a remaining capital targeted for investment in tech solar Nova and anticipate $220 million of commitments and dropped down 25%.
Offered from Clearway group, a wish to reasonably offered Trans mountain represents approximately 35% of this future commitment.
But our current challenges due to poor renewable resources in the first half of the year and ongoing capital market volatility clearly remains on track regarding continued executions versus $2 <unk> <unk> per share growing beyond now I will turn it over to Sarah Sarah.
Thanks, Chris.
Page eight we provide an overview of Q2 results, including adjusted EBITDA for the second quarter of 2023 of $316 million.
<unk> cash available for distribution of $137 million.
These results reflect the previously disclosed historically low wind production that resulted in an approximately $30 million reduction to second quarter revenue, including a decrease as compared to expectation of approximately $16 million for the Alta projects.
Results at the conventional segment were also below internal expectations.
Marsh landing in Walnut Creek facilities, whose initial tolling agreement ended in May and June respectively generated lower than expected merchant energy margin in the quarter because of milder than normal temperatures.
Despite the first half challenges impacting capp deep the company remains well positioned for growth with its long term cash per share outlook intact, our strong balance sheet large revolver capacity and pro forma credit metrics in line with target rating.
There continues to be no external equity needs for line of sight credits to meet the $2 15 of cash per share and resultant dividends per share objective.
Moving to page nine.
Let me provide a walk from our previous 2023 full year cost guidance of $410 million to our revised guidance range.
From the left the first quarter of 2023 reflected lower solar irradiance due to above average rainfall in California, which resulted in lower than normal solar revenues.
First quarter 2023 results also reflected extended outages at the conventional facilities that reduce the capacity revenue and increased maintenance costs compared to expectation.
As previously noted second quarter reflected historical low wind production, yielding a decrease in revenue compared to expectations of approximately $30 million.
With a material shortfall at the Alta facilities, along with generation underperformance across all wind facilities in the portfolio.
In addition, the conventional facilities generated lower than expected merchant energy margin due to milder than normal temperatures.
The impact of the first half of 2023 results led to a revision to full year 2023, Kathy guidance.
Down to a range of $330 million to $360 million.
We have observed more normal wind production trends for the month of July and while we have not altered our long term view of <unk> media and production estimate the revised guidance range reflects the possibility of that renewable resource may trend lower than normal for the balance of 2023.
Given the more volatile renewable resource experienced in 2023, thus far the.
The guidance range also reflects a sensitivity from merchant energy margin at the conventional facilities.
The remaining summer months, while temperatures increased during the month of July the company cannot predict how weather as well as other factors such as gas prices and the availability of other generation sources may impact energy margin at the convention facilities.
Finally, the revised guidance range reflects the expected timing of committed growth investments, including estimated project.
And with that I'll turn it back to Chris for closing remarks.
Thank you Sir.
Going to page 11.
Due to the challenging first half of the year and potential volatility in the back half of the year, we will be unable to achieve our original capital guidance of $410 million.
While we cannot control the weather all of us within the clear way enterprise take this very seriously and are continuing focus on improving results and forecasting of both the short and long term.
Despite these challenges we remain on track to support the upper range of our 5% to 8% long term dividend objective.
As discussed in previous years, the rationale for our long term payout ratio of 80% to 85% is precisely to manage three years. Like 2023 is that clearly can continue to grow its dividend based on long term cash flows without undue financial stress despite periods of short term negative weather volatility.
In addition, clearway continues to work through commitments for the remaining dropdown offers from October 2022, with our investments in Cedar Creek wind and Rosemont Central battery storage and our first offer on the next batch of Dropdowns with Dan's Mountain, we expect to have commitments completed for all dropdowns that underpin our $2 15 <unk>.
<unk> per share line of sight by the first half of 2024.
Beyond the $2.15 of cafe per share we continue to add projects such as the Cedar Hill Repowering that was discussed last quarter. The extension of the resource adequacy contracts on our California fleet and continued improvement in our operational performance in conclusion 2023, thus far has been a difficult year for clear way given the weakness in renewable resources.
And volatility in the capital markets. While these headwinds impact is currently clearway energy has always been about the long game about compounding our dividend overtime that leads to stock price appreciation.
Foundations of this long term growth are still intact.
Strong sponsorship and our key growth sector of America's infrastructure.
Significant development capital spent to provide growth opportunities for Clearway Energy Inc.
Disciplined capital and investment approach.
As clearly celebrates its 10th year of their existence, our ability to withstand and grow through its challenges.
<unk> has been demonstrating the long term operator open the lines for questions. Please.
Thank you.
Minder to ask a question. Please press star one on your telephone and wait to be announced to withdraw your question. Please press star one again.
One moment for questions.
Our first question comes from Julien Dumoulin Smith with Bank of America You May proceed.
Hey, good morning, Thanks, so much for the time I appreciate it Hey, Chris obviously.
You are talking a lot about the challenges past tense here through the first half of the year can you talk a little bit more about.
Today, Mark to market, if you will through part of the third quarter how were trends continuing.
The portfolio in terms of renewable generation.
Sure I think as I.
Mentioned in my comments July was on track for planned. So we didn't see a significant deviation on the <unk> basis for the portfolio as a whole.
So I think August its early days you want to get a full month in there but July was on track. So we're hoping that the weakness we saw in the first half of the year has abated.
Got it stabilized here.
And then more to the point in terms of the capital market backdrop, you alluded to the challenge at the same time clearly transaction multiples in the market have come and how do you see that is transforming and impacting the plan that you described are reaffirming here today in terms of acquisitions and acquisition multiple I mean, obviously there's puts.
And takes in terms of your financing plan, but can you speak to a little bit to what.
Transfer multiples or acquisition multiples you were contemplating past tense in the plan versus today, if you will.
I don't think they've shifted that much given I think kind of what youre, saying Julien maybe phrased differently is a lot of the volatility in the 10 year Treasury has really shown up past two weeks stepping out you look at it and so from my perspective, a lot of the multiples. We were looking at in terms of the acquisition, which are very similar to what we have for dropdowns.
Really hasnt changed that much I.
I think for US I don't know if what we're seeing in terms of about a 410, I think 10 year Treasury environment currently versus call. It a 3738, maybe three or four weeks ago.
Thats transfer through real seller price expectations to date, so long way of saying I don't think it has impacted us that much in the current period, but we'll have to see how sticky. This treasury environment is if it translates to M&A multiples.
Right, but your point is despite seeing.
Transactions in the quarter here at perhaps a lower headline multiple you wouldnt necessarily read into those as being indicative of the wider trends right. There more discrete to specific portfolios and the issues that might otherwise be embedded in them. If I hear you correct. I don't think you can extrapolate based upon the past three weeks of Treasury volatility Theres capitulation in there.
M&A market in terms of new levels.
Right or a more important more specifically transactions.
Action through the balance of the second quarter here.
If I hear you right, but.
And then just lastly here if you don't mind Super quick on.
Just.
Backdrop of California, I mean data points continue to accrue.
Across the forward curve at very robust prices, if not higher on higher quarter over quarter.
Again, I would love to come back to how you're thinking about your commercial strategy here and then ultimately extending out your outlook too.
Sure. So a couple of different questions there Julian I'll try to unpack it I think to your point some of the forwards are still very strong in California. However, I think as we're all familiar with.
With peaking assets when it occurs run times and exactly what the peak price achieved our critical assumptions in determining profitability. So right now you have a relatively cool environment in California, that's supposed to heat up kind of back end of next week or middle of next week. So I think in terms of run times and seeing really we're at it's probably much more on next week event there in current so for.
For us, especially the comments I gave.
July was kind of on plan, yes, there was tough for some days and then came in really well other days thats just the nature of peaking assets. So I think for the remainder of the year, we feel pretty good about we're at but once again, it's highly not only they don't know its highly dependent on weather highly depend on duration and severity of that weather.
In terms of a longer term or a pricing as we've talked about over the year, we bid in as part of the RFP conducted by the utilities in the second quarter, we anticipate getting any results and announce those on the November call.
Understood assets running okay in California here.
Yes.
Excellent wonderful. Thank you guys. Good luck.
Thank you.
One moment for questions.
Our next question comes from Mark Jarvi with CIBC you May proceed.
Thanks, Good morning, So just coming back to the last commentary on the California assets. Just what do you think we are guidance any changes at all within the guidance here now around expectations for energy margins in the back half of 2033.
Not in terms of the baseline number however, it does help inform the range if kind of some of the cooler weather that I talked about where to appear so maybe to answer your question. It doesn't really change our pinpoint estimate but in terms of helping inform the range yes. It does.
And then when you think of the range specifically those assets what do you think.
The renewable assets, bringing some more variability, particularly in waiting, but what's the sort of I guess the rate you think is conventional in terms of swing in terms of your expectations for the balance of the year.
Is it I don't know.
Is it narrower than the broader range that you've given or is about the same in terms of that sort of $30 million range.
I would say it would be within the range given it's not as though that the wind would our renewable assets would kind of offset a deviation in the gas fleet, if that's where you're going so it's not as though the deviation is wider than that the deviation on the conventional with tend to be within that range.
Got it and then just in terms of the offer here on Dan's mountain, 9% cap.
What informs out a bit lower than where I think the nine 5% range stocks trading at eight 5%. So how do you think about that transaction relative to your own currency in terms of your share price to be buying back stock at and if theres anything around.
Funding plan and you can optimize that bring up that cap to yield over time with Dan.
Sure a couple of different questions. There I'll try to unpack that I think part one for Dan We've put approximately in these four reasons sometimes ends up nine two the big point is when we first talked about dropdown 24 on dropdown 25, we talked about those on a weighted average basis being about $9 five for the entire fleet. Some of those are going to be below the 90.
I have some of those like Rosemont best are at 11, So I think the key point is each and when we say nine five it doesn't mean every asset is going to be nine five for greater that's the portfolio as a whole so I'm being a little bit lower so I'm being higher so I'd say its consistent with how we view things overall.
Second basically I mean, the asset is pretty attractive with a 12 year contracted basis. Once again longer is better but 12 is pretty strong in today's market and so overall, we think that that's once again subject to diligence and going in front of the GCN and alike.
That number doesn't surprise me, nor do I view it negatively.
To your point around stock buybacks and alike.
We look at I tend to think that as long as we can continue to find accretive acquisitions or dropdowns from our sponsor those tend to still be a better form of investment because it helps to diversify the portfolio broaden it out.
Keep adding to our PPA tenor of like if we were to yes.
Let's say stopped doing dropdowns and focus solely on stock buybacks.
Through time that PPA duration, we kind of walk in on you a bit so I think with the acquisitions that we just talked about exiting the dropdowns, we just talked about with Cedar Creek, and Rosemont as well as hopefully Dan's mountain you continue to see kind of that PPA duration being being done on an accretive basis for dropdowns versus dilution.
Okay that makes sense and then just.
Dividend increase is obviously, you've talked about not needing equity to get the $2 15, and drive 8% dividend growth, but given where the stocks are trading now in market condition. If you are not being rewarded for the increases do you start to moderate down at a lower end or do you just take a long long term view and stick with the planning here at 8% for the foreseeable future.
Sure I think subject to moving admissions I would inform you answered by a couple of things one as I talked about in response to earlier questions. I think we all need to see where the treasury market kind of settles out at this kind of a four handle that has been a pretty recent phenomenon, which I think has driven some of the weakness in the stock. So part one is where the treasury has kind of stabilized.
To me the difference and growing let's say at six versus eight to come up with.
Number that's lower than eight for purposes of the conversation isn't a significant deviation in terms of significant cash that's left in the balance sheet right at $410 million of Kathy every 1% is $4 million of casting so a 2% difference in growth is about $8 million, it's not a paradigm shift in saying well.
We have a lot more cash on the balance sheet.
With which to basically.
Invested assets were like so I don't see the dividend growth rate and changes in that really driving a significant deviation in.
Retained cash that can be available for investment.
To your question around.
How do we think about moderating that in the future that I think it will be based upon.
We're never valued for us I think that that's pushing the envelope, but if for example, the market just doesn't value dividends anymore, which to be clear I do not think is the case currently.
And then we kind of take a look at it again, but I think right now we're comfortable with the long term growth rate, we're comfortable with the high end of the range and everybody uses eight but just to be clear thats kind of six 5% to eight is the high end of our range and third I still see value in the dividend in terms of our equity holders I think we just need this 10 year to settle down a bit.
And then we'll kind of see where we're at.
Okay, all right I'll leave it there thanks for the time today.
Thank you.
One moment for questions.
Our next question comes from Andrew <unk> with Seaport Research Partners you May proceed.
Good morning, So one question on the gas plants. So.
Could you comment on the dispatch of the assets and how it differs versus.
What we saw for the output from these assets under the tolls.
I can't really say there is a difference that can really be identified angi, obviously, the tolling entities, probably random differently based upon what they're seeing in their portfolios versus just taking market signals. So I will say and it's also a little bit difficult because obviously, we've only got really two months of full data maybe three.
And also not around the full fleet. So I don't know if theres, a really good basis for that comparison Angie to be fair to your question.
Okay, I understand and then Ken.
Topics on on the <unk> per share expectation.
So so im looking at your <unk>.
Could that maturities.
While these bonds currently trade.
<unk>.
And I know that some of them are 2020.
And further out.
Is there a plan how to absorb.
The incremental interest expense from debt refinancing and that.
<unk> per share projections.
Sure I think to your question if I'm answering correctly, the corporate bonds are in 2028% to 2031% and 2032 and I think while again that gives us some time to continue to grow the portfolio.
And as you if those things are yielding nine it may make sense to buy those back at that period of time, because you obviously have a pretty strong cap deal that point. So I think for me, we've got a bit of time between now and then to one way to manage those to continue to grow the portfolio third is obviously the other two are very long dated with 2031.
<unk> thousand 32.
So hopefully that answers your question.
Thank you.
Thank you.
Our next question comes from Noah Kaye with Oppenheimer You May proceed.
Hey, Thanks for taking the questions, maybe just a little bit of cleanup math here.
Following prior questions I mean, the midpoint of your revised guide.
You've got the <unk> 23, plus <unk> 23 numbers in that very clear and then there is basically another $5 million.
Slightly lower <unk> at the midpoint in the back half is that.
Is it the right way to think about it.
Good luck for lower energy and okay. So the way I would put it.
Yes, the way I would put in there was given the first half results, we kind of skewed the range a bit to the downside just taking into account the first half of the year. Once again I think to some of the other questions. Fortunately, we haven't seen the weather patterns that persisted in the first half of the year in July . So we're hoping that the trend in July continues but long way to go.
So just a little bit of conservatism on basically difficult first half.
And then just not changing your view or actually I mean, you increased your pro forma cash view because of those portfolio additions, but not changing your view of.
The existing portfolios.
Pro forma long term EBITDA Kathy.
Guess, what what underpins that at this point.
<unk> talked about this being historically low quarter for wind production, obviously, some mean reversion would be implied but.
As a company that.
Is generally investing in the right side of the climate change.
You certainly have to look at some of these weather patterns and wonder is there anything to be concerned about so talk to us about your assessment of the portfolio and how hard you're kind of testing those long term assumptions.
Sure.
<unk> is typically any long term assumptions, we will update in November so just to be clear, it's not as though we don't see any adjustments at all occurring just simply we don't do that kind of every quarter. We do that comprehensively in November which takes into account any revisions that <unk>, which we've done in previous years.
Cost increases merchant curves and the extension of our <unk> contracts and the like so part one is that the long term view is typically done in November we're constantly comprehensively bring everything else down.
Two is I think to your question.
All of US on long term data Youll also if you look back at our historical production indices.
With the exception of this year, they really do oscillate around 100, you kind of have 93.
103 beg your pardon and 97% showing up so you do see kind of that oscillation around 100 pick your year some better some worse.
For us, it's really about continuing to get longer term data and refining that so in terms of like all our models necessarily wrong.
When we get enough data in them no. That's kind of weird used also to demonstrate that and I do think just this year is so.
I think not to minimize the question.
There is a reason that we kind of don't maximize leverages. A reason, we don't maximize payout ratio. There was questions about dividend growth easiest way for me to generate dividend growth is to move the payout ratio to 90 right doesn't require anything.
From my perspective, these years are going to happen and we try to basically run things in terms of being able to manage that to me.
Actually I'm not going to argue is a positive obviously, but.
Given the weakness of this year to view that we were able to amortize all project debt pay off all corporate interest and still generate at the midpoint $345 million of cash despite achieving <unk> 85 year in multiple parts of the fleet and some weakness in conventional.
Wish it was higher not making that point, but I think it actually shows the robustness of the system to deal with these weaknesses that we are going to see over a 10 year period once in a while in terms of the book.
I appreciate that and one last question if I could.
Just with Rosemont.
15 year R&D agreement in place with the fed hike.
Quality, Idaho U.
What kind of attributes do you need to see to invest in additional.
Standalone storage projects.
Assume you need some elements of long term revenue visibility.
Hopefully.
Desirable market, but just walk us through how you think about the invest ability of standalone storage.
Sure I think if youre, saying to invest in standalone storage purely on a merchant basis, where capacity and energy are open that's probably tough for us unless it fits in with other parts of our book, where we're trying to mitigate positions our scarcity pricing. So I think kind of step one from our view is that if you were to say hey, what's the likelihood of C. When investing in a 100%.
Merchant storage, that's not integrated with the rest of its portfolio.
Not a probable place we're going to invest and secondly, I think that because storage is a little bit nascent from.
And asset perspective.
The significant I think we use the term significant majority of the economics are from the capacity side of things. So we don't want to bet a lot on let's say merchant energy not that we don't need any of that would be a little bit too positive, but we're really trying to mitigate that through contracting as long as we can on the capacity side of things so far.
Our view you do need kind of that merchant dispatch, but it's not we're not going to take a 75% that in terms of economics on the merchant portion of it either but that's kind of your question.
Yes, that's fair.
Helpful. Thank you.
Thank you I'd now like to turn the call back over to Chris Sotos for any closing remarks.
Thank you once again appreciate everyones patience during this difficult year I think we're working it through and like I said July looks to have a reverse some of the trends we saw in the first half we hope it continues but thank you all for your support take care.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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