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Clearway Energy, Inc. (CWEN.A) Q2 2019 Earnings Call Transcript

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Clearway Energy, Inc. (NYSE: CWEN-A)
Q2 2019 Earnings Call
Aug. 6, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Clearway Energy second quarter 2019 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer section, and instructions will be given at that time. If anyone should require assistance during the conference, please press *0 on your touchtone telephone. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, President and CEO Chris Sotos. You may begin.

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, as well as 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 would 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.

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Turning to page 4, this was a challenging quarter and first half of 2019 for Clearway Energy, with the outage at CVSR and continued poor weather conditions impacting renewable energy production through the end of June. Chad will discuss this in more detail, but these items and the importance of the second quarter have pushed expected performance outside of Clearway's probable distribution. Therefore, we are revising 2019 CAFD guidance to $250 million, which assumes median production for the rest of the year while incorporating our growth investments as well.

The contracts enacted by PG&E continue to perform, and from our perspective, the recent legislative actions in California have significantly improved the prospects of a resolution on the bankruptcy process next year. In addition, we are announcing a third-quarter dividend of $0.20 per share, the same dividend as last quarter. This is consistent with our view that until CWEN obtains additional visibility around the PG&E bankruptcy and has full access to its project distributions, dividends paid to shareholders will be aligned with available corporate liquidity and our target payout ratio.

Looking forward, CWEN's pro forma CAFD outlook has now increased to $300 million due to our recent closing of the Repowering 1.0 partnership with Clearway Group. We also continue to advance our prior growth commitments in renewables, with additional investment in the Hawaii Solar Phase 1 project and the DG partnerships. Lastly, we continue to focus on diversification of the platform with the addition of incremental growth with the thermal platform, with the closing of our Duquesne acquisition in May, as well as our Mylan Labs project, with anticipated COD in the second half of 2019.

With the continued development efforts by our sponsor company, Clearway Group, we are pleased to announce the next expansion of the ROFO pipeline, with the addition of 354 megawatts of new projects. Additionally, during the quarter, the company received an offer to acquire the existing ROFO asset Mesquite Star. As part of this offer, we are negotiating with our colleagues at Clearway Group to structure the transaction, although being mindful of our capital constraints during the pendency of the PG&E bankruptcy.

Clearway Group continues to dedicate significant capital to development despite the current situation in California, with investments for safe harbor equipment over 4 gigawatts of projects for PTC eligibility and more than 1 gigawatt of new revenue contracts executed or awarded during 2019. In addition, Carlsbad continues to be held by GIP as a future acquisition candidate for Clearway Energy. While 2019 has been a difficult year to date due to the tepid renewable resource in the first half of the year and PG&E, Clearway Energy continues to execute on growth and are working with Clearway Group, adding to our growth opportunities for the future.

Turning to page 5, I will quickly review the value attributes of the Repowering 1.0 investment we will make later this year. This investment, which encompasses both the 161-megawatt Wildorado and the 122-megawatt Elbow Creek projects, will extend the assets' design lives, reduce capital and operational expenditures going forward, as well as put in place new warranty coverage, all leading to reduced operational risk in the future. In addition, Elbow Creek was able to enter into new hedging arrangements, extending contract duration by seven years to 2029.

Finally, as a result of installing new PTC-eligible equipment and improved operational performance, we were able to significantly improve CAFD by recapitalizing the projects on an unlevered basis with tax equity versus the current capitalization with project debt. In sum, for our approximately $111 million investment, we achieved an 11% CAFD yield on a five-year average basis while significantly reducing revenue and operational risks of the projects while modifying the capital structure on an unlevered basis. I would like to thank our colleagues at Clearway Group for their significant work to make this repowering a reality.

Turning to page 6, as we have indicated previously, our pro forma CAFD outlook was $295 million, or $1.53 CAFD per share. With the Repowering 1.0 investment, I am pleased to say that we are able to increase the company's pro forma CAFD outlook to approximately $300 million, or $1.55 CAFD per share. This updated outlook assumes that the company would replace anticipated borrowings under the revolver to fund the Repowering 1.0 investment with permanent corporate debt, as we continue to see our corporate credit metrics within our targeted ratings level.

Turning to page 7, I wanted to highlight the additions to ROFO pipeline awarded to Clearway Energy by the ongoing development work by Clearway Group. With over 350 megawatts added, representing geographic and renewable resource diversity coming online between late 2020 and 2021, we believe that these additions provide a strong runway for us to be able to execute on our existing growth opportunities -- Carlsbad and existing ROFO assets -- while managing our capital structure during this period. These new ROFO additions will help provide a longer-term view around CWEN's opportunities for growth going forward, as well as increased geographic diversity and generation profile. Now, I'll turn it over to Chad.

Chad Plotkin -- Chief Financial Officer

Thank you, Chris. Turning to slide 9, today, Clearway Energy is reporting second-quarter adjusted EBITDA of $278 million and $68 million of cash available for distribution, or CAFD. For the first half of the year, Clearway is reporting $469 million of adjusted EBITDA and $55 million in CAFD. Because the contracts are performing, results continue to factor in the contribution of projects and investments impacted by the PG&E bankruptcy, which continue to be restricted from making distributions in the normal course. Through the second quarter, total CAFD contribution from the PG&E projects was approximately $19 million, including $15 million from unconsolidated investments.

During the first half of the year, the company benefited from portfolio diversification with in-line financial performance at both the conventional and thermal segment. Additionally, lower debt service of approximately $7 million resulting from the recapitalization of the Viento and both the timing of and captured savings related to O&M expenditures provided a partial offset to otherwise very challenging dynamics across the renewable segment. As previously disclosed, on June 5th, a fire occurred at the CVSR facility, impacting around 1,200 acres of property. The fire did not damage the solar arrays, but it did impact distribution infrastructure, compromising performance during the highest revenue month of the year. Though the facility was brought back to full operations on July 1st, the company did lose revenue of nearly $9 million, which is essentially the same impact to reported CAFD, as we expect most of the repair costs to be recovered under our insurance policy by year end.

In addition to the CVSR outage, the weak renewable energy conditions that impacted the first quarter persisted through the second quarter as well. Below-normal wind resource and irradiance levels across the portfolio, including precipitation levels that were 30% above normal in the geographic areas near some of our key solar projects, drove overall renewable generation in the first six months of the year well below the company's median expectations and sensitivity ranges.

While these operational impacts have caused us to reduce full-year financial expectations, they have not stopped the company from moving forward on key initiatives and meeting our commitments. In addition to progressing on growth investments and maintaining our recalibrated quarterly dividend of $0.20 per share, we continue to execute on optimizing the balance sheet. During the first half of the year, we took advantage of favorable market conditions by successfully refinancing $196 million in non-recourse debt at both the Tapestry wind portfolio and South Trent wind project. These actions resulted in lower-cost financing, with the reduction in average financing margin near 30 basis points, maturity extensions by 10 and eight years respectively, and $8 million of incremental net capital available for growth.

Now, I'll turn to slide 10 to discuss our modification to full-year financial expectations. In line with our approach to financial guidance, the assessment of full-year expectations is based in part on the impact of non-recurring operational matters, and importantly, whether the achievement of full-year P50 median renewable energy production targets are achievable within a normal distribution.

Consistent with our prior disclosure, this distribution informs our target seasonality and quarterly sensitivity range, as summarized on the right side of the slide and in more detail in the Appendix section of the presentation. Importantly, we want to remind you that the achievement of full-year P50 median expectations is highly weighted to both the second and third quarter, where the revenue contribution from renewable resources and the conventional fleet is highest.

In the chart on the slide, we provide a walk showing the near $45 million impact to full-year CAFD expectations from both the CVSR outage and poor renewable energy conditions in the first half of the year. In addition, we also show the full-year anticipated $25 million CAFD benefit resulting from our growth investments, as well as timing of O&M expenditures and realized cost savings that we expect will inure to the platform this year.

As we have pointed out in the past, weather patterns can result in variability in renewable production on an annual basis and is something we factor into our planning, as the collection of real-time data informs our forecast and sensitivity ranges. In fact, on a trailing 36-month basis, the renewable portfolio has operated within these ranges.

For this year, however, after adjusting for the CVSR outage and timing-related matters, first-half renewable energy production was below our sensitivity range, sot he ability to achieve current CAFD guidance would require second-half performance to be above our target range. While we acknowledge that weather patterns could make this possible, we do not view this as a prudent expectation under a normal distribution, especially given the weight of the second quarter on renewable energy production. Simply put, we are concluding that 2019 will be a below-average production year in the portfolio. As such, we are modifying full-year CAFD guidance to $250 million, or a figure that is based on the realization of median P50 expectations in the second half of 2019. I'll now turn the call back to Chris for his closing remarks.

Christopher Sotos -- President and Chief Executive Officer

Thank you, Chad. Turning to page 12, while the CVSR outage and weak renewable resources have impacted the company during the first half of the year, we continue with our refrain for 2019: Managing our platform through this period of uncertainty. While 2019 has been more difficult than forecasted, and as a result, we are having to reduce our 2019 guidance, we continue to maintain our balance sheet flexibility as the PG&E situation continues to evolve in a positive direction while finalizing our transition and integration requirements less than a year from the closing of the GIP transaction.

With our focus on managing the near term while enhancing our long-term prospects, we are pleased to see the benefits of a strong sponsor, with the addition to the ROFO pipeline projects available in the 2020-2021 period and through the commitment at our Repowering 1.0 project, which will significantly increase the value of those assets. During this time, we also take into account the ongoing diversification opportunities for the company, as GIP continues to hold Carlsbad as a future CWEN acquisition opportunity. We continue to focus on growing our thermal business. As always, we manage our growth with a view that is consistent with maintaining our target ratings to preserve or long-term capital formation capabilities. Thank you. Operator, please open the lines for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have any questions or comments at this time, please press *1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press #. Once again, if you have any questions or comments, please press *1. One moment for questions. And, our first question comes from Julien Dumoulin with Bank of America. You may proceed.

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

Hey, good morning.

Christopher Sotos -- President and Chief Executive Officer

Good morning.

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

I just wanted to follow up a couple things real quickly. First, you talked about furthering the conversations on Mesquite Star. Can you talk about when you would think about raising capital given the commentary around the tendency of the PG&E uncertainty? And then, secondly, with respect to the PG&E situation, can you comment on the extent to which they are successful in following through on this June 30th, 2020 timeline, as articulated in the legislation? When would you see your first round of distributions from projects in tandem with that? Would that be a 3Q '20 timeline, just to clarify?

Christopher Sotos -- President and Chief Executive Officer

Sure. So, for the two questions, your first one around capital formation regarding Mesquite Star -- I think, frankly, that's something that's too early to make a determination there, as obviously, we're working with Clearway Group to see what structure works best. That may entail purchase of all or a portion of the project, a variety of different situations we're looking at, so I think, frankly, Julien, a little bit too early to tell, as we're in the middle of negotiations with Clearway Group.

To your second question around PG&E in June 2020, it's not as though that all of that cash would come out in the third quarter of 2020. The different project documents have different dates under which distributions can occur. Some of them are quarterly, some of them are semiannually, but I would think by the first quarter of 2021 for certain, we'd be back on track from that perspective, but there may be a lag of three to six months, depending on the exact project document that we're dealing with.

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

Got it. Okay, excellent. And then, separately, if you can comment a little bit further around the expanded ROFO commitment -- how do you think about scaling up the use of capital, even over the next couple years here? Again, just to reemphasize the concerns around PG&E, and obviously, reduced available capital given the results for this year, et cetera.

Christopher Sotos -- President and Chief Executive Officer

Sure. I think from our perspective, when we tend to look -- and, the rating agencies do as well -- really on a long-term basis for what type of CAFD production we have -- and, we use that for leverage ratios, so I think under most metrics right now, inclusive of the PG&E cash flows, on a P50 basis, we're kind of actually below a lot of the targeted leverage ratios we typically talk about, so I think from our perspective, once again, depending on a lot of factors between now and the end of 2020, we need to look at A). Basically using that reduced leverage, B). Using some of the cash we just talked about that would be freed up as PG&E exits the bankruptcy process, so we look to capital formation in line with the ROFO pipeline, Carlsbad, et cetera to see how all that meshes together.

But, there's a lot of moving parts, obviously, so it's tough to go through all exactly how that'll roll out over the next 18 months. I think between our existing liquidity, obviously, where you see our bonds trading, our relatively low level of leverage with PG&E, and the cash that should be distributed out of those accounts, we think we're in a pretty good position to close on those acquisition opportunities.

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

Fair enough. I'll leave it there. Thank you.

Operator

And, our next question comes from Angie Storozynski with Macquarie. You may proceed.

Angie Storozynski -- Macquarie Capital Partners -- Analyst

Thank you. I have a question about PG&E. So, we're clearly all following the bankruptcy process. Do you have any sense 1). When is basically the cutoff date when PG&E can make a decision about potential cancellations or reopenings of their PPAs, and 2). We've seen some bankruptcy court filings from some parties that seem to have willingly reduced the rates of their contracts. Is that something that you would consider? Thank you.

Christopher Sotos -- President and Chief Executive Officer

Sure. So, two different questions. Once again, I'm not going to pretend I'm a bankruptcy attorney, but really, the rejection of contracts or the affirmation of contracts can happen at any time within the bankruptcy process. There's not really a set date by which that has to happen, so to be fair, it can happen anywhere within it. There's not an order or something of that nature.

To your second question, around the other filings, I think there's a couple of important distinctions to note in those renegotiated PPAs. 1). Those are really for projects that weren't built yet. They were contracts that were awarded, but the assets weren't built. The reason that's important is because, to the point that we've emphasized, during the bankruptcy proceedings, the rejection of our contracts would create an unsecured claim. As I understand it, that's really not the case with these new contracts because the projects haven't been built yet, so I think that's a pretty important distinction between what you've probably seen out in the press and the nature of our contracts.

Angie Storozynski -- Macquarie Capital Partners -- Analyst

Okay. And, in the meantime, as we are waiting for the June 30th exit, is there any willingness of project lenders to maybe have some forbearances or some sort of waivers on the clauses of the debt, just to allow you to have partial distributions from these projects?

Christopher Sotos -- President and Chief Executive Officer

Chad, why don't you respond to that?

Chad Plotkin -- Chief Financial Officer

Sure. Angie, I think if you look in our disclosures, we have made some progress on forbearance agreements. To suggest, though, that that progress includes the permitted distributions, that is not correct. Look, I think dependent on how the process goes and the veracity of when either a contract is assumed or facts on the ground, could lenders perhaps change their views with regards to what they're allowing? The answer is yes.

I think for the most part, though, what I would be mindful of is that even if a contract were assumed, that doesn't actually mean a contract or a project credit agreement is not within an event of default, because in theory, the customer itself is still in bankruptcy, so there would still need to be some movement there, but obviously, things like having a distribution in the ordinary course is still going to require some movement with the lenders, but obviously, an assumption of the agreement itself and a binding assumption is the one that's most important for all of us.

Angie Storozynski -- Macquarie Capital Partners -- Analyst

Okay, thank you.

Operator

And, our next question comes from Colin Rusch with Oppenheimer. You may proceed.

Colin Rusch -- Oppenheimer & Co. -- Managing Director

Thanks so much. This is maybe more of a technical question, but given some of the changes around bifacial solar modules and your footprint at this point, is there an opportunity to repower some of your solar projects and potentially sell into the emerging market as access to some of the PPAs?

Christopher Sotos -- President and Chief Executive Officer

I think while bifacial solar modules are helpful, unfortunately, a lot of our solar projects are relatively new, so as opposed to Elbow Creek, which was a little bit of older, 2009 COD vintage, and there have been, obviously, pretty big improvements there and a relatively low PPA price as well, that's tougher in solar as a generalization. So, we do look at that, but in terms of repowering, I think we view it much more as a wind-centric exercise than solar, at least as of today.

Colin Rusch -- Oppenheimer & Co. -- Managing Director

The second question is really around targeted credit ratings, given what's happening with interest rates at this point. You guys have always consistently talked about maintaining your credit ratings. Is there an opportunity for you guys to try and creep up that rating at this point and help lower the cost of capital as you work through some of these refis?

Christopher Sotos -- President and Chief Executive Officer

Sure. I think moving to BB+ from BB, especially in the face of the PG&E situation, is probably a little bit aggressive from our perspective. Moving to investment-grade, I think, would take a whole different category and be pretty dilutive from a CAFD-per-share perspective, given the amount of equity that would need to be issued, so to answer your question simply, I think no, we're pretty comfortable where we're at. Our move from BB to BB+ is probably a little bit tough given the current PG&E situation, at least from our view.

Colin Rusch -- Oppenheimer & Co. -- Managing Director

Thanks so much.

Christopher Sotos -- President and Chief Executive Officer

Sure.

Operator

And, our next question comes from Antoine Aurimond from Bank of America. You may proceed.

Antoine Aurimond -- Bank of America Merrill Lynch -- Analyst

Hey, guys. How are you?

Cd

Good. Yourself?

Antoine Aurimond -- Bank of America Merrill Lynch -- Analyst

Good. Just had a quick follow-up on PCG. So, it's my understanding that some of the project-level debt has some mandatory cash sweep after a certain period of time. Just wanted to make sure -- if we assume that PCG emerges from bankruptcy in June 2020, does any of this mandatory cash sweep kick in at this point?

Christopher Sotos -- President and Chief Executive Officer

I think in when we've answered it before, basically, there really aren't cash sweeps within a 12-month period, so I think from our perspective -- and also, I think that given the contracts, to Angie's question, would probably be affirmed before that date, we don't think any cash sweeps would hit by then, but we might be missing one. But, I don't think there's any that we think would hit by that timeframe.

Antoine Aurimond -- Bank of America Merrill Lynch -- Analyst

So, nothing material. Perfect.

Christopher Sotos -- President and Chief Executive Officer

Not material that we can think of, no.

Antoine Aurimond -- Bank of America Merrill Lynch -- Analyst

Thanks.

Operator

And, our next question comes from Mike Lapides with Goldman Sachs. You may proceed.

Michael Lapides -- Goldman Sachs -- Managing Director

Hey, guys. Just curious -- let's say the PG&E bankruptcy does resolve by the end of next summer and your contracts all remain in place. How are you thinking about the dividend? Do you put the dividend back in place at the old run rate, or do you think about maybe not putting it in at that level, putting it in at a different level, maybe retaining more cash and using that cash to help finance greater growth, or even the other side of that coin? Just curious how you're thinking about it. Now that we've got legislation in California, things aren't normal, but they're normalizing...not so slowly -- how you're thinking about the long-term distribution for Clearway.

Christopher Sotos -- President and Chief Executive Officer

Thanks, Mike. From our perspective, we would look to reinstate the dividend, taking that CAFD number per share and multiplying it by somewhere probably between 80-85% to go through that, but consistent with our payout ratio before, so that's where we think we would end up. I think once again, depending on where facts and circumstances land, there could be a difference, but if you ask what the plan is, that's the plan. If we box the eight bucks, maybe we have a different answer.

Michael Lapides -- Goldman Sachs -- Managing Director

Understood. Thanks, guys. Much appreciated.

Christopher Sotos -- President and Chief Executive Officer

Sure.

Operator

Thank you. Ladies and gentlemen, this now concludes our Q&A portion of today's conference. I'd like to turn the call back over to Chris Sotos for any closing remarks.

Christopher Sotos -- President and Chief Executive Officer

Thank you. I just wanted to thank everyone for their time, and I look forward to talking to you next quarter as we continue to work through this PG&E situation, but I appreciate everyone's time. Thank you.

Operator

Ladies and gentlemen, thank you for attending today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

Duration: 25 minutes

Call participants:

Christopher Sotos -- President and Chief Executive Officer

Chad Plotkin -- Chief Financial Officer

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

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

Angie Storozynski -- Macquarie Capital Partners -- Analyst

Colin Rusch -- Oppenheimer & Co. -- Managing Director

Antoine Aurimond -- Bank of America Merrill Lynch -- Analyst

Michael Lapides -- Goldman Sachs -- Managing Director

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