Clearway Energy Inc
NYSE:CWEN.A
Earnings Call Analysis
Q2-2023 Analysis
Clearway Energy Inc
Clearway started the year facing significant deviations from historical weather patterns, which led to reduced wind production and consequently impacted its financial results. The second quarter saw the company generating $137 million in cash available for distribution (CAFD), marking a record low wind production phase. Despite a disappointing first half, with careful financial oversight, Clearway managed to increase its quarterly dividend by 2% to $0.3891 per share, staying on course for the upper end of its 2023 dividend growth objectives.
Due to the underperformance in wind and solar resources, Clearway has revised its full-year 2023 CAFD guidance range from the previous $410 million to $330-$360 million. This adjustment factors in the performance of the first half of the year and the possibility that renewable resources may continue to trend lower. Even amidst a volatile market, Clearway anticipates maintaining growth with investments in projects like Cedar Creek Wind and the Rosamond Central storage facility, both promising higher CAFD yields.
Clearway is making decisive moves to bolster its asset base by committing to high-yield investments, such as the Cedar Creek Wind project, which is expected to contribute$10 million annually to CAFD at a yield of approximately 9.3%. In addition, the Rosamond Central Battery Storage project is slated to enhance company diversification, with an anticipated CAFD yield of around 11%. These endeavors contribute to the increase in pro forma CAFD outlook to $420 million and signify Clearway's strategic expansion beyond traditional renewable investments. The company holds a strong liquidity position, assuring stakeholders it has adequate capital to support ongoing and future projects, aligned with its $2.15 CAFD per share long-term target.
Clearway demonstrates a steadfast commitment to achieving long-term financial targets, despite reducing its original CAFD guidance due to the unexpected weather-related setbacks in the first half of the year. The company reassures investors of its intention to improve forecasting and results both in the short term and long term. The improvement endeavors and cautious approach to the volatile second half of the year reflect a disciplined strategy poised to support dividend growth objectives and secure Clearway's position in the renewable energy market.
You don't have any saved screeners yet
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 will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your host today Chris Sotos, President and CEO.
Good morning. Let me first thank you for taking the time to join Clearway Energy Inc.'s second quarter call. Joining me this morning is Akil Marsh, Director of Investor Relations; and Sarah Rubenstein, CFO; and Craig Cornelius, President and CEO of Clearway Energy Group, our sponsor. Craig will be available for the Q&A portion of our presentation.
Before we begin, I 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 four. Clearway 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, Clearway generated $137 million of CAFD 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 to $360 million, which accounts for our first half results and reflects a range of potential outcomes in renewable resources and weather impacts on load.
All 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 its dividend of 2% to $0.3891 per share in the third quarter of 2023 or $1.5564 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 CAFD and our asset base. In terms of drop-downs from Clearway Energy Group, we recently committed to acquire Cedar Creek Wind for $107 million at a greater than a 9% CAFD yield as well as Rosamond Central storage for $32 million and approximately 11% CAFD yield.
As such, we are raising our pro forma CAFD outlook from $410 million to $420 million. In terms of our continued growth trajectory, our sponsor's pipeline has grown over 30 gigawatts, including 6.9 gigawatts of late stage projects expected to reach COD in the next four years. We continue to work toward binding commitments on the remainder of drop-down 24 with Texas Solar Nova, which will have an estimated capital commitment of $40 million.
Working with Clearway Group on drop-down 25 that begins our deployment of $220 million of capital commitments. We have received our first offer on these assets in the form of Dans Mountain, a wind farm with a target completion at year-end 2024 and a greater than 9% CAFD yield offers a subsequent drop-down 25 assets are anticipated from our sponsor over the balance of the year.
With the contribution of those assets targeted to provide a CAFD contribution consistent with our goals. Here at Clearway, we are keenly aware of the capital market volatility of recent months. I want to reiterate a key point around capital, which is we have enough cash to fund our line of sight drop-downs that underpin our $2.15 per share long-term target. Clearway also benefits from an undrawn revolver, excess cash flow generation and unused leverage capacity to fund additional growth through this volatile period.
In summary, Clearway continues to execute its growth plan with a very strong internal liquidity profile, so it's well positioned to grow beyond the $2.15 CAFD per share combined with the DPS growth rate in the upper range through 2026.
Turning to slide five to provide an overview of our recent capital commitments. On the left side of the page review Cedar Creek Wind, a 160 megawatt Idaho project underpinned by a 25-year busbar PPA for an investment grade utility.
This project should produce 10 million of CAFD annually for an approximate 9.3% CAFD yield when achieved commercial operations targeted for the first half of 2024. On the right side of the page, our Rosamond Central Battery Storage project is co-located with the Rosamond Central Solar facility.
This project is expected to require $32 million of capital with an approximately 11% CAFD yield when achieved commercial operation in the first half of 2024. This represents our continued diversification into a new asset class beyond wind and solar, with CWEN owning or committing to invest in over 550 gross megawatts of storage to-date.
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 the thermal excess proceeds and achieve our growth targets with our announced investments in Rosamond and Cedar Creek.
Our pro forma CAFD outlook now increases to 420 million with our remaining capital targeted for investment in Texas Solar Nova and the anticipated $220 million of commitments in drop-down 25 offered from Clearway Group, of which the recently offered Dans Mountain represents approximately 35% of this future commitment.
Despite our current challenges due to poor renewable resources in the first half of the year and ongoing capital market volatility Clearway remains on track regarding continued execution versus $2.15 CAFD per share goal and beyond.
Now I'll turn it over to Sarah. Sarah?
Thanks, Chris. On page eight, we provide an overview of Q2 results, including adjusted EBITDA for the second quarter of 2023 of $316 million and 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 expectations of approximately $16 million for the Alta projects.
Results at the conventional segment were also below internal expectations. The Marsh Landing and Walnut Creek facilities whose initial tolling agreements 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 CAFD, the company remains well positioned for growth with its long-term CAFD per share outlook intact, a strong balance sheet, large revolver capacity and pro forma credit metrics in line with target ratings. There continues to be no external equity needs for line of sight growth to meet the $2.15 of CAFD per share and result in dividend per share objectives.
Moving to page nine. We provide a walk from our previous 2023 full year CAFD guidance of $410 million to our revised guidance range. Starting 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 reduced capacity revenue and increased maintenance costs compared to expectations. 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 CAFD 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 P50 median production estimates, the revised guidance range reflects the possibility 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 guidance range also reflects a sensitivity from merchant energy margin at the conventional facilities for 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 conventional facilities.
Finally, the revised guidance range reflects the expected timing of committed growth investments, including estimated project CODs.
And with that, I'll turn it back to Chris for closing remarks.
Thank you, Sarah. Turning to page 11. Due to the challenging first half of the year and potential volatility in the back half of the year we'll be unable to achieve our original CAFD guidance of $410 million.
While we do not control the weather, all of us within the Clearway enterprise take this very seriously and our continuing focus on improving results and forecasting in 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 through years like 2023 so that Clearway 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 drop-down offers from October 2022 with our investments in Cedar Creek Wind and Rosamond Central Battery Storage and our first offer on the next batch of drop-downs with Dans Mountain. We expect to have commitments completed for all drop-downs that underpin our $2.15 CAFD per share line of sight by the first half of 2024.
Beyond the $2.15 of CAFD per share, we continue to add projects such as the Cedro Hill Repowering that was discussed last quarter, the extension of 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 Clearway, given the weakness in renewable resources and volatility in the capital markets. While these headwinds impact us currently, Clearway Energy has always been about the long game, about compounding our dividend over time that leads to stock price appreciation.
The foundations of this long-term growth are still intact, strong sponsorship and a 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 Clearway celebrates its 10th year of existence, our ability to withstand and growth of these challenges has been demonstrated in the long term.
Operator, open the lines for questions, please.
Thank you. [Operator Instructions] Our first question comes from Julien Dumoulin-Smith with Bank of America. You may proceed.
Hey, good morning, team. Thanks so much for the time. I appreciate it. Chris, obviously, you're talking a lot about the challenges past tense here through the first half of the year. Can you talk a little bit more about sort of today mark-to-market, if you will, through part of the third quarter? How are trends continuing across the portfolio in terms of renewable generation?
Sure. I think as I mentioned in my comments, July was on track for plan. So we didn't see a significant deviation on a CAFD basis for the portfolio as a whole. So I think August it's 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. I see stabilized here. Yes. And then more to the point, in terms of the capital market backdrop, you alluded to the challenges. At the same time, clearly, transaction multiples in the market have come in. How do you see that as transforming and impacting the plan that you described or reaffirming here today in terms of acquisitions and acquisition multiples. I mean obviously there's puts and takes in terms of your financing plan. But can you speak to a little bit what the transfer multiples or acquisition multiples you were contemplating pass tense in the plan versus today, if you will.
I don't think they've shifted much given, I think, kind of what you're saying, Julien may phrase differently is a lot of the volatility in the 10-year treasury has really shown up past two weeks depending on how 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 drop-downs, really hasn't changed that much. 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 37, 38, maybe 3, 4 weeks ago as that's transferred through real seller price expectations to date. So a long-winded way of saying, I don't think it's impacted us that much in the current period, but we'll have to see how sticky this treasury environment is and if it translates to M&A multiples.
Right. But your point is that despite seeing some transactions in the quarter here at perhaps lower headline multiples, you wouldn't necessarily read into those as being indicative of the wider trends, right? They're more discrete to specific portfolios and the issues that might otherwise be embedded in them. If I hear you right.
Correct. I don't think you can extrapolate based upon the past three weeks of treasury volatility there's capitulation in the M&A market in terms of new levels.
Right or 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 the backdrop in California, 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 here, Julien. 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 peaking assets when it occurs, run times and exactly what the peak price achieved are 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 time and saying really where we're at, it's probably much more on next week event they're in current. So for us, while especially the comments I gave, July was kind of on plan. It was tough for some days and then came in really well other days. It's just the nature of peaking assets. So I think for the remainder of the year, we feel pretty good about where we're at. But once again, it's highly -- not to anything I don't know. It's highly dependent on the weather, highly dependent on duration and severity of that weather. In terms of the longer term, RA 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, everyone. So just coming back to the last commentary on the California assets. Just when you think about your guidance, is there any changes at all within the guidance you're now around expectations for energy margins in the back half 2023?
Not in terms of the baseline number. However, it does help inform the range of kind of some of the cooler weather that I talked about were to appear. So 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 like obviously there's the renewable assets, this brings some more variability in particular wind, but what's the sort of, I guess, the range that you think is conventional in terms of swings in terms of CAFD expectations for the balance of the year? Is it narrower than the broad range 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 or 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 would tend to be within that range.
Got it. And then just in terms of the offer here on Dans Mountain 9% CAFD what performs at a bit lower than where I think the 9.5% range stocks trading at 8.5%. So how do you think about that transaction relative to your own currency in terms of your share price, what would be buying back stock at? And if there's anything around the funding plan you could optimize to bring up that CAFD yield over time with Dan Mountain.
Sure. A couple of different questions there. I'll try to unpack that. I think part one for Dans we put approximately in these for reasons sometimes end up 9.2, the big point is when we first talked about drop-down 24 and drop-down 25, we talked about those on a weighted average basis being about 9.5% for the entire fleet. Some of those are going to be below the 9.5% some of those like Rosamond BESS are at 11%. So I think the key point is each -- when we say 9.5%, it doesn't mean every asset is going to be 9.5% or greater, that's the portfolio as a whole. Some being a little bit lower, some being higher. So I'd say it's consistent with how we view things overall. Second, basically, I mean, the asset is pretty attractive with a 12-year contracted basis. So once again, longer is better, but 12 is pretty strong in today's market. And so overall, we think that, that's -- it's again subject to diligence and going in front of the GCN and the like that number doesn't surprise me in order to view it negatively. To your point around stock buybacks and the like, that's something we look at. I tend to think that as long as we can continue to find accretive acquisitions or drop-downs from our sponsor, those tend to still be a better form of investment, because it helps diversify the portfolio, broaden it out and then also keep adding to our PPA tenor and the like, if we were to, let's say, stop doing drop-downs and focus solely on stock buybacks. Through time, that PPA duration would kind of walk in on you a bit. So I think with the acquisitions that we just talked about, actually, the dropdowns we just talked about with Cedar Creek and Rosamond as well as hopefully Dans Mountain, you continue to see kind of that PPA duration being done on an accretive basis for drop-downs versus dilution.
Okay. That makes sense, Chris. And then just coming to the dividend increase is, obviously, you've talked about noting equity to get the $2.15 and drive 8% dividend growth. But given the stocks in the trading now and market conditions, if you're not being rewarded for the increase, do you start to moderate down at the lower end? Or do you just take the long-term view and stick with the plan you're at 8% for the foreseeable future?
Sure. I think subject to moving conditions, I would inform your answer 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 four handle has been a pretty recent phenomenon, which I think has driven some of the weakness in the stock. So part one is where do treasuries kind of stabilize. Part two, to me, the difference in growing, let's say, at six versus eight to come up with a number that's lower than eight for purposes of the conversation, isn't a significant deviation in terms of significant cash that's left on the balance sheet, right? $410 million of CAFD, every 1% is $4 million of CAFD. 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 invest in 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 will be based upon, if we're never valued for it, right? I think that's pushing the envelope. But if, for example, the market just doesn't value dividends anymore, which I -- to be clear, I do not think is the case currently, 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 8%, but just to be clear, it's kind of 6.5% to 8% 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 tenure 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 Angie Storozynski with Seaport Research Partners. You may proceed.
Good morning. So one question on the gas plant. 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's a difference that can really be identified, Angie. Obviously, the tolling entities probably ran them differently based upon what they're seeing in their portfolios versus us 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 there's a really good basis for that comparison, Angie, to be fair to your question.
Okay. I understand. And then changing topics on the CAFD per share expectation. So I'm looking at your holdco debt maturities and where these bonds currently trade. So -- and I know that some of them are 2020 and further out. But I mean is there a plan how to absorb the incremental interest expense from that refinancing in that CAFD per share projection.
Sure. I think to your question, if I mentioned correctly though, the corporate bonds in 2028, 2031 and 2032. And I think while, again, that gives us some time to continue to grow the portfolio. It's in the end, Angie, if those things are yielding nine, they make sense to buy those back at that period of time, because you obviously have a pretty strong cap deal at that point. So I think for me, a) we've got a bit of time between now and then, 2) one way to manage those to continue to grow the portfolio. Third is, obviously, the other two are very long dated with 2031 and 2032. So hopefully that answers your question.
Yeah. Thank you.
Thank you. Our next question comes from Noah Kaye with Oppenheimer. You may proceed.
Hey, thanks for taking the question. So maybe just a little bit of clean-up math here following prior questions. I mean the midpoint of your revised guide. You've got the 1Q '23, plus 2Q '23 numbers in that deck very clear. And then there's basically another 5 million slightly lower CAFD at the midpoint in the back half. Is that -- is it the right way to think about the potential for lower energy. Okay, so --
The way I would put it, Noah, is 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 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 the trend in July continues, but yes a long way to go.
So just a little bit of conservative on, basically, not the first half. And then just not changing your view -- or actually, you increased your pro forma CAFD view because of those portfolio additions, but not changing your view of the existing portfolios pro forma long-term EBITDA CAFD. I guess what underpins that at this point? You 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 on 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. Part one is typically any long-term assumptions we'll 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 to the P50s, which we've done in previous years, cost increases, merchant curves and the extension of RA contracts and the like. So part one is the long-term view is typically done in November where we comprehensively bring everything else down. Part two is, I think, to your question, for us on long-term data, Alta, 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 and 90 -- actually 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. So I think for us, it's really about continuing to get longer-term data and refining that. So in terms of like are our models necessarily wrong, when we get enough data in them, no, and that's kind of we would use Alta to demonstrate that. And I do think just this year is, I think, not to minimize the question. There's a reason that we kind of don't maximize leverage. There's a reason we don't maximize payout ratio, right? As there was a question about dividend growth, easy way for me to generate dividend growth is to move the payout ratio to 90%, right? It doesn't require anything. I think 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, I would actually -- I'm not going to argue it's 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 a P9 or P85 year in multiple parts of the fleet and some weakness in conventional. Don't get wrong, yeah, 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.
Appreciate that. And one last question, if I could. Just with Rosamond, you have the 15-year RA agreement in place with the high-quality IOU. What kind of attributes do you need to see to invest in additional stand-alone storage projects. I assume you need some elements of long-term revenue visibility hopefully, in a desirable market. But just walk us through how you think about the investability of stand-alone storage.
Sure. I think if you're saying to invest in stand-alone storage purely on a merchant basis where capacity and energy are open, that's probably tough for us unless it like fits in with other parts of our book where we're trying to mitigate positions or 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 CWEN investing in a 100% merchant storage that's not integrated with the rest of its portfolio, that's not a probable place we're going to invest. Secondly, I think, that because storage is a little bit nascent from an asset perspective, the significant, I think, we used term like 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. 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 from our view, you do need kind of that merchant dispatch, but it's not -- we're not going to take a 75% bet in terms of economics on the merchant portion of it either, if that's kind of your question.
Yeah. That's very 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, I appreciate everyone's patience during this difficult year. I think we're working it through. And like I said, July looks to have reversed 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.