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Clearway Energy, Inc (CWEN) Q4 2020 Earnings Call Transcript

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Clearway Energy, Inc (NYSE: CWEN)
Q4 2020 Earnings Call
Mar 1, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Clearway Energy, Inc. Fourth Quarter 2020 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to your host Mr. Chris Sotos, President and CEO of Clearway Energy.

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Christopher Sotos -- President and Chief Executive Officer

Thank you. Good morning. Let me first thank you for taking the time to join today's call. Joining me this morning is Chad Plotkin, our Chief Financial Officer; Akil Marsh, our Investor Relations Manager; and Craig Cornelius, President and CEO of Clearway Energy Group. Craig will be available for the Q&A portion of our presentation.

Before we begin, I'd like to quickly note that today's discussion will contain forward-looking statements which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. Please review the Safe Harbor in today's presentation, as well as the Risk Factors in our SEC filings. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's presentation.

Turning to Page 4. First, before I begin, I want to say thank you to all our colleagues across the Clearway Enterprise and to our partners for navigating through 2020 and making the past year a success for the Company. Whether it was managing through the PG&E bankruptcy or the impacts of the global pandemic, the Company executed across the platform and further positioned Clearway for long-term growth.

Financially, Clearway achieved full year CAFD of $295 million, which includes the effect of COVID. We invested or committed to -- or commit to invest approximately $880 million in growth projects and executed on $1.4 billion in capital formation. Clearway also has resumed the growth in this dividend with now a 1.9% increase to $0.324 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.

While our long-term outlook is as strong as ever, certain of our projects did face an 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 million or $30 million depending on final settlements, discussions with contractual counterparties and any potential state sponsored actions, while significant, the Company has proven to be resilient and the impact is very manageable to overall liquidity and the shortfall does not affect the Company's target DPS growth expectations, which we are reaffirming today. In response to these events, Clearway is already working to enhance fleet resiliency and risk management through a combination of initiatives with our CEG colleagues.

Before I move on from discussing the financial impact of 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 to our Texas sites to troubleshoot damage and restart our facilities was critical. I'm so grateful to our team for volunteering to travel, to climb towers in sub-zero temperatures to help put the lights back on in Texas.

Longer-term and through the execution of new growth commitments since the third quarter of 2020 earnings call, Clearway has improved its pro forma CAFD per share outlook with an increase to $1.80 per share from the $1.71 that we announced just in November of last year. This increase is driven by the execution of third-party acquisitions, namely Mount Storm, which is anticipated to close in the first half of 2021, and the previously announced acquisition of the remaining interest in Agua Caliente. Growth was also driven by the co-investment in the 1.6 gigawatt diversified portfolio of assets announced in December. Each of these asset additions results in strong CAFD per share accretion while supporting the long-term weighted average contract life of the Company's portfolio. In addition, these assets add to Clearway's portfolio of scale and diversification, which are important factors in creating value and stable CAFD.

Looking forward to 2021, we have a wealth of opportunities to work on as we and our colleagues at Clearway Group construct the next stage of renewable portfolio co-investments. Clearway Group has increased its pipeline to 10.1 gigawatts, of which 5.4 gigawatts are late stage even after accounting for projects completed last year. It's tailored to the development pipeline for projects that are optimized for addition in our fleet based on the resource profile, customers, technology and expected contract type, and it's phasing its development and capital structuring to align with the capital investment profile we need to sustain our 5% to 8% 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 1.1 gigawatts and 1.7 gigawatts of projects. These projects will span a diverse set of geographies, including California, the Pacific Northwest, and the Southwest, including a mix of solar, wind and battery storage technology. With planned closings for these constituent projects, spanning 2021 to 2023, we see the opportunity to construct a well-optimized supplement to Clearway platform adding to our growth going forward.

Turning to Page 5. I want to highlight the two third-party acquisitions we announced since our third quarter call. First, Clearway acquired NRG's remaining 35% of Agua Caliente, providing a 51% ownership in the asset, underpinned by a 19-year remaining PPA life and a 9.9% CAFD yield. We are very excited about being able to add a well-understood and long-tenured PPA asset at such attractive economics. In addition, Clearway looks to leverage its operational footprint with the purchase of the 264-megawatt Mount 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 cost in the region. This transaction will be underpinned with the 10-year energy head -- hedge and generates a CAFD yield of 10.3%. While continued success in closing third-party acquisitions can never be assured, we look forward to continuing to look at opportunities to expand our portfolio efficiently.

Turning to Page 6. This provides an overview of our investment activity since the start of 2020. As you can see, we have committed to deploy nearly $1 billion of capital, generating approximately $100 million in asset level CAFD. These quality investments are expected to generate a CAFD yield of 10.3%, backed by weighted average contract life of approximately 14 years. These investments, particularly those announced since the third quarter of 2020, allow us to increase our pro forma CAFD outlook to $1.80 per share versus $1.71 that we announced previously. Through the combination of these investments, leveraging our operational expertise and reach, we are on track to 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 5% to 8% through the end of 2022 at our targeted 80% to 85% payout ratio.

With that, I'll turn the discussion over to Chad. Chad?

Chad Plotkin -- Senior Vice President and Chief Financial Officer

Thank you, Chris. And turning to Slide 8 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, or CAFD. These results bring full year 2020 adjusted EBITDA to approximately $1.08 billion and CAFD 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 and lowered cost across the portfolio. However, moderate weakness primarily within the wind portfolio which persisted for most of 2020 and an outage at the 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 variance is within expected sensitivity ranges for the portfolio.

During 2020, the Company continued to progress on its long-term objectives through efficient capital formation and it's disciplined capital allocation program. During the year, the Company formed approximately $1.4 billion in 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 in cash that had been trapped due to the PG&E 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 of leading the CAFD per share accretion. This provided support in our ability to reset the dividend upon the resolution of the PG&E bankruptcy and has the 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 in growth investments since the beginning of 2020, placing Clearway on a path to meet our growth objectives beyond 2021 as well.

Moving to our CAFD expectations for 2021. From my comments from the 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 is further discussed on the next slide when showing the Company's update to its pro forma CAFD outlook.

With the closing of the Agua Caliente transaction in February, the Company was expecting to increase its full year 2021 CAFD 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 operation or 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. So, today we are maintaining our 2021 CAFD guidance at $325 million, an amount still sufficient to allow the Company to meet its expected dividend growth.

Let's now turn to Slide 9 to discuss the update to our pro forma CAFD. In our last quarterly call, we indicated that the Company's pro forma CAFD outlook was $345 million. This amount was based on growth commitments as of that time and captured the timing of when those projects would reach COD. 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 third quarterly earnings call, the Company has announced the Agua Caliente transaction, the co-investment in the 1.6 gigawatt renewable portfolio and now the Mount Storm acquisition. These investments alone are expect to deliver an incremental $50 million and five-year average annual asset level CAFD to the Company upon all projects achieving COD.

As noted in the chart, because permanent capital will need to be formed 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 in additional interest expense, assuming a range of 3.5% to 4.5% of new corporate debt. So, when combined with the asset level CAFD from the new committed growth investments, we now see an increase of over 11% in total CAFD potential with an updated pro forma CAFD 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.

Christopher Sotos -- President and Chief Executive Officer

Thank you, Chad.

Turning to Page 11 and recapping 2020, Clearway Energy had a very strong year. We delivered on our financial commitments, with CAFD within our sensitivity range, and reset our dividend in growth trajectory following the resolution of the PG&E bankruptcy. In 2020, Clearway committed to nearly $900 million of investments and executed on $1.4 billion of capital formation through a combination of refinancing non-recourse debt, additional corporate capital and recycling of non-strategic assets. These investments allow Clearway to enhance our pro forma CAFD 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 CAFD guidance, taking into account the February Texas weather events, while achieving dividend per share growth at the upper end of our range. We look to continue to grow our now $1.80 pro forma CAFD per share outlook through further opportunistic M&A, as well as continue to work with our Clearway Group colleagues to invest in our portfolio of at least 1.1 gigawatts with 2021 through 2023 closing dates during the first half of 2021.

Finally, as we have discussed over the years, 2021 is an important year in positioning our gas fleet in California beyond 2023. We are targeting reducing risk and 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 in addition of Black Start to Marsh Landing, our gas fleet is a valuable asset we will work to optimize during 2021. We look forward to updating you on our progress during the year.

Thank you. Operator, open the lines for questions please.

Questions and Answers:

Operator

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

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hi, can you hear me?

Christopher Sotos -- President and Chief Executive Officer

Yes. Good morning, Julien.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey, good morning, team. Thanks for the time. I just wanted to chat about hedging here. How do you think about Texas and the impact of events there in terms of your thoughts on the hedge portfolio and perhaps changing how you guys do engage in PPA versus hedge going forward?

Christopher Sotos -- President and Chief Executive Officer

Thanks, Julien. I think there is always a preference for PPAs versus hedge. 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 and plant design perspective to, a, make sure that we have increased winterization and the like for ice shearing [Phonetic] technology at some of those ERCOT assets, where you actually have a fixed physical delivery versus a PPA take or pay type of our obligation, and then also establish weather outage predictors and train equipment procedures to mitigate those type events. So, I think, that's from an operational side.

From a risk management, I think we want to incorporate liability tracking around these obligations to make sure we understand them. But I think, for all that's said and done, 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 those are some of the mitigating factors we look to do going forward.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. And then just quickly, if you can, how do you think about retrofitting to derisk Texas going forward? I know there has been a sort of nascent conversation, if you can talk about that? Obviously, there are some various asset for operational level retrofits that can be pursued here as well.

Christopher Sotos -- President and Chief Executive Officer

Yeah. You broke up a little bit there, Julien. I think you were asking about what retrofits we could kind of do at the projects in Texas. Craig, any particular views there?

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Yup, you got it.

Craig Cornelius -- Chief Executive Officer and President, Clearway Energy Group

Yeah, sure. Glad to address that. Yeah. So, 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 and conditions like those that produce the ice that was observed in Texas during this event. And those include hydrophobic coatings for blades, a change to the specification in fluids and lubricants that we use at machines, and supplemental heater elements within in the cell that will help assure that machine stay out of faults 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 above freezing temperatures. So, by way of example, Julien, within hours of temperatures exceeding freezing, we had brought all of our central Texas assets back up online, and within 24 hours, they were producing at nameplate. So, with the well-calibrated operations, workforce and machines that are ready to run and the supplementation of the specs that we have there at those plants with the types of coatings or fluid changes or heaters that we've deployed, we are hopeful that we would be able to mitigate comparable operational risks in the future event.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. And no cost estimate yet?

Christopher Sotos -- President and Chief Executive Officer

No, it's too early.

Craig Cornelius -- Chief Executive Officer and President, Clearway Energy Group

I'm sorry?

Christopher Sotos -- President and Chief Executive Officer

He was asking if there's a cost estimate. Yeah, it's too early.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Understood. Thank you.

Operator

Your next question comes from Michael Lapides with Goldman Sachs.

Michael Lapides -- Goldman Sachs -- Analyst

Hey, guys. Thank you for taking my question. I have two totally unrelated to each other. One, can you just remind us what plan to equity financings or equity-like financings you have or you will likely have over the next year or so? And then, two, given what happened in California last year, a price spike could be probably enhanced value for existing fossil generation, how are you thinking about the avenues for potentially recontracting the assets over a longer-term versus being on short-term RA arrangements?

Christopher Sotos -- President and Chief Executive Officer

So, I'll kind of take your second question first, Mike, and then hand it to Chad on the equity side. So, I think in terms of looking at recontracting, I do think that it does -- would have -- the situation 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 15 years. That probably means maybe somewhere between 5 and 10 in a positive sense. And so, I think, that's one thing that kind of -- yeah, once again, we want to make progress on this year. I think, Michael, we've talked a lot over the years. I think even back in 2016 I told you the utilities would probably want to talk about recontracting one to two years had a contract expiration were there. And so, to me, that's kind of consistent with what we've indicated, and I think, over time, once again, we'd hope to get something at least for part of the fleet, more on the 5 to 10 year range. I think, if you're saying, hey, 15, I think that's a little bit aggressive to be fair to your question.

Chad Plotkin -- Senior Vice President and Chief Financial Officer

Sure. And then, Michael, on your comment with respect to equity capital needs, I think maybe 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, is the capital formation that we had executed inclusive of the cash that had come from the PG&E projects was sufficient to fund all capital needs for the growth that we had executed through that call. So, effectively when you think about the announcement today, there is three investments I would point to, which is Agua Caliente, the co-investment in the partnership, and then now Mount Storm. So that's, call it, about 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 is in line with our rating targets, we would seek to lever those at the corporate level between 4 times to 4.5 times. So, if you look at our slide that we presented on Slide 8, you see that that imputes roughly $213 million of corporate debt. Now, again, this is somewhat prescriptive 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 intimates about -- around about $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 are going to 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 past year incremental capital that may come from optimization of project level debt, the disposition of projects, net of whatever we need to do to maintain our leverage target, 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 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 place that permanent capital.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Okay. Thank you, Chad. Much appreciated. And just coming back to California a little bit, can you remind us, are there any environmental either regulation or constraints regarding continued operation of your fleet out there in the gas fleet?

Christopher Sotos -- President and Chief Executive Officer

No, not that I'm aware of.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Thank you, Chris. Much appreciated, guys.

Operator

Your next question comes from Colin Rusch with Oppenheimer.

Colin Rusch -- Oppenheimer -- Analyst

Thanks so much guys. Historically, you've talked about not retrofitting existing projects that are under PPAs with energy storage or any sort of kind of voltage management, incremental investments. I'm wondering if that thought process is starting to change as you see some of the instability on the network?

Christopher Sotos -- President and Chief Executive Officer

I think that really depends. I think that the type of retrofits that question has typically been is kind of a little bit more all encompassing in terms of what you might have to do to take projects offline versus kind of taking 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 in a retrofit situations and taking turbines or panels offline to do that, I still think we have high dollar value PPAs, that math is tough to do, if I'm understanding your question correctly.

Colin Rusch -- Oppenheimer -- Analyst

Yeah. I'll take it offline with you guys, but I think that's the end of the heart of the matter. And the second question is, are you guys thinking about changing the the P50 standard at all, given some of the variability in the network at this point in terms of estimation and how you're operating the business and guiding us with the fleet performance?

Christopher Sotos -- President and Chief Executive Officer

Sure. Simple answer is no. Any P50 adjustments we normally take is part [Indecipherable] kind of our guidance that we gave on our November call. So, it's typically go through the year, relook how the P50 went during the year and make adjustments at that time. So, to your question, it's not as though anything that's occurred would make us move our P50 to date.

Colin Rusch -- Oppenheimer -- Analyst

Perfect. It's look like...

Craig Cornelius -- Chief Executive Officer and President, Clearway Energy Group

Just to add though on that comment is you're aware when we produce an energy estimate for a project, we also take into account expectations of the grid's performance and outage time and so on. So, I think, 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 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'll compete in the marketplace to see if utilities want to take us up on it.

Colin Rusch -- Oppenheimer -- Analyst

Okay. Appreciate it, guys.

Operator

[Operator Instructions] Now, at this time, there are no further questions.

Christopher Sotos -- President and Chief Executive Officer

All right. Well, thank you all for joining and I look forward to talking to you in May. Take care.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Christopher Sotos -- President and Chief Executive Officer

Chad Plotkin -- Senior Vice President and Chief Financial Officer

Craig Cornelius -- Chief Executive Officer and President, Clearway Energy Group

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

Colin Rusch -- Oppenheimer -- Analyst

More CWEN analysis

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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