Clearway Energy, Inc. (NYSE:CWEN) Q1 2024 Earnings Call Transcript May 9, 2024
Clearway Energy, Inc. beats earnings expectations. Reported EPS is $-0.02439, expectations were $-0.27. CWEN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day. And thank you for standing by. Welcome to Clearway Energy, Inc. First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ 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 call over to your speaker today, Chris Sotos, outgoing President and CEO of Clearway Energy, Inc.
Chris Sotos: Good morning. Let me first thank you for taking the time to join Clearway Energy, Inc.’s first quarter call. Joining me this morning are Akil Marsh, Director of Investor Relations; Sarah Rubenstein, CFO; and Craig Cornelius, President and CEO of Clearway Energy Group, our sponsor, and incoming President and CEO of Clearway Energy, Inc. Before we begin, I’d like to quickly take note that today’s discussion will contain forward-looking statements, which are based on the 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’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. Turn to Page 4, CWEN’s first quarter delivered solid results, primarily due to strong renewable resource at Alta, generating $52 million of CAFD, establishing a strong start for the year, allowing for a reaffirmation of our 2024 guidance of $395 million. Clearway also increased its dividend by 1.7% for the quarter, bringing our quarterly dividend to $0.4102 A share, or $1.6408 on an annualized basis, in line with our targeted dividend growth of 7% for 2024. Our latest investments continue to achieve commercial operations, with Cedar Creek and Texas Solar Nova 2 now contributing to CWEN’s CAFD.
CWEN also committed to approximately $65 million of new corporate capital deployments since our last earnings fall, generating five-year annual average CAFD yields of approximately 10%, with the executed agreements on Dan’s Mountain, and Rosemont South 1. As a result of our continued execution on deployment of the thermal proceeds, CWEN is increasing our pro forma CAFD outlook to $420 million from $415 million. In the medium term through 2026, the remaining dropdown offers to fully allocate the thermal proceeds are on track to become commitments in 2024, allowing CWEN to achieve $2.15 of CAFD per share by 2026, with no external capital, and reaffirm the ability to achieve the upper range of 5% to 8% EPS growth through 2026. Finally, as Craig will go into more detail on a couple of slides, CWEN’s visibility to grow beyond 2026 continues to improve in several facets.
First, we have completed a joint development agreement with Clearway Group that optimized our Utah Solar assets, with the potential to invest up to $85 million in 2026 at a 10% CAFD yield. In addition, CWEN has executed RA contracts for Marsh Landing and Walnut Creek, with strong pricing, enhancing visibility into organic CAFD per share growth in 2027 and beyond. Importantly, these contracts were signed outside of the large procurement processes conducted by the utilities, and demonstrate the critical role Clearway’s gas assets play in the California grid. Finally, our sponsor’s 30-gigawatt renewable pipeline continues to develop, with approximately eight gigawatts of late-stage projects targeting CODS over the next five years. In summary, Clearway has started the year in a strong position, with solid CAFD performance, continued execution around our 2026 CAFD goals, and continued progress and growth for 2027 and beyond.
Page 5 provides a summary of Clearway’s $65 million of committed growth investments signed between our February call and now, with anticipated commercial operations in the first half of 2025. These investments are expected to generate five-year annual average CAFD deals of approximately 10%, underpinned by long-term contracts of 12 to 15 years, adding strong accretion to CWEN’s asset mix and strong returns on a risk-adjusted basis. On the left side of the page is Dan’s Mountain wind asset, at 55 megawatts and Clearway’s first in Maryland, providing additional exposure to the PGM market, with a strong long-term outlook for energy and REC pricing in the future. On the right side of the page, you see the corporate capital, anticipated CAFD for Rosemont South 1, a 257-megawatt solar plus storage project in California, with node-settled revenue contracts, with a diversified offtake profile.
Both of these investments continue to expand the fleet, with strong CAFD accretion and significant contracted tenors, adding to long-term CAFD growth prospects of CWEN. I’d be remiss if in my last call as CWEN CEO, I did not show our graph showing growth through 2026. Our sponsor, through Craig’s leadership, and the work of so many colleagues at Clearway Energy Group, had developed and dropped to CWEN over 1,800 megawatts in 15 different dropdown assets in order to redeploy the thermal proceeds efficiently and accretively. The Clearway enterprise has always been about execution, execution developing quality assets, execution and raising capital to fund them, both during construction and long-term, and execution of being stewards of those assets and the cash they generate over their useful lives.
Slide 6 demonstrates our path to $2.15 per share, with the remaining approximate $150 million of excess thermal proceeds to be deployed in approximately 10% five-year annual average CAFD yield. These remaining assets should achieve their commercial operation dates during 2025, putting CWEN in a good position for 2026 and beyond for CAFD generation and dividend growth. So, while I’m moving on from Clearway to find new opportunities, I feel confident that Craig, who has led so much of the execution, has put CWEN on its current growth trajectory through this volatile period, will continue the enterprise’s legacy of execution regardless of market challenges. Craig, turning over to you.
Craig Cornelius: Thanks Chris. I want to start just by saying how grateful all of us at Clearway are for the truly remarkable work that you’ve done over more than a decade to build up the business that we have become. As the results we achieved during the last quarter attests, you’re leaving Clearway Energy, Inc. in a strong position, with forward momentum. We look forward to honoring your legacy with execution and value creation in the quarters and years ahead. As Chris mentioned, CWEN is well positioned to be able to fully allocate the remaining thermal proceeds in 2024 via committed investments on dropdown offers that will enable CWEN to meet its previously stated goal for run rate CAFD per share in 2026. Together, the partnership interests offered already, and the pending offer, will provide the opportunity to invest approximately $150 million of corporate capital into projects with very solid long-term contractual structures at an accretive CAFD yield of 10%.
Once these offers go through CWEN’s customary rigorous underwriting and approval process, led by CWEN’s independent directors on the governance conflicts and nominating committee, these future potential commitments can complete CWEN’s growth investment path to achieving $2.15 of CAFD per share by 2026. To go into more details on the existing and pending offers, the first projects I’ll highlight are the Luna Valley and Daggett Storage 1 projects. Highly compatible with CWEN’s investment mandate, the project’s generation and capacity is underpinned by diversified node-settled contracts, with investment-grade load-serving entities, with terms of over 15 years. Subject to approval by its GCN committee, CWEN could commit to investments in the projects during the second quarter of 2024, with funding of investments in the projects to occur in the first half of 2025.
The final project planned for allocation of thermal proceeds is the Pine Forest Solar plus storage complex. The project’s 300 megawatts of solar generation will be fully contracted, with a diverse set of investment-grade counterparties, with 17 years average contract left. Meanwhile, its 200 megawatts of battery capacity will complement the solar generation at Pine Forest and balance our overall renewable generation fleet in Texas. An offer is planned for early this summer and subject to approval by CWEN’s GCN, we would aim for concluding an investment commitment in 2024, and funding the investment in Q4 2025. In conclusion, we are pleased to have a clear line of sight ahead towards meeting our previously stated goal of reaching $2.15 in run rate CAFD per share by 2026.
Turning to Slide 8, want to begin looking ahead beyond $2.15 in CAFD per share, to our levers for further growth in CAFD and dividends per share in the years beyond 2026. A first impactful lever, which we began to discuss in more detail over the last six months, is the potential to increase CAFD per share contributions from our California gas fleet as we contract open capacity in the fleet to deliver resource adequacy, or RA, in 2027 and beyond. Our natural gas assets are some of the most modern and clean plants in California and are located in extremely useful locations, where they provide peaking generation and RA capacity to help ensure the grid’s reliability during periods of high demand and harmonize the system with increasing renewable penetration.
In recent years, tight capacity conditions in the Western US, coupled with thoughtful system planning from regulators, have put a particular focus on the need for load-serving entities to procure clean dispatchable capacity from plants like ours. Together, these dynamics are allowing us to extend and enhance the revenue profile from our plants at levels that increase the CAFD per share contribution that we receive from each unit of their scarce and valuable capacity. Against that backdrop, we are pleased to announce today our first RA contract signings of the year for the fleet, with approximately 200 megawatts of new resource adequacy contracts signed for Marsh landing and Walnut Creek. The new contracts add tenor to our fleet’s contracted position over 2027 to 2030, bringing it up to 52% for 2027, at pricing reflective of today’s market for one and four-year RA contracts, with delivery beginning in late 2026.
With these contracts now complete, we continue to retain 875 megawatts of gas unit capacity for RA delivery in 2027, and 1,645 megawatts of capacity available for RA delivery over 2028 to 2030. From here, over the balance of 2024, we will continue to market the balance of the fleet’s open position for varying contract durations over 2027 to 2030 through both bilateral engagements and through the State’s central procurement entity RFP process. Our core strategy is focused on striking a sensible balance between extending contracted visibility for dividend planning, while also ensuring that the plants’ received revenue is reflective of the system value they deliver. In that strategy, we will aim to continue our practice of incrementally contracting forward in a way that provides high visibility through two years forward while seeking that right balance of visibility and value.
In the quarters to come, we’ll continue to update you on the status of our progress as we advance the marketing of our RA capacity, and would anticipate having a more complete update on the outlook of what that capacity could deliver in 2027 CAFD per share contribution. In the meantime, we want to be measured about the commitments that we make to you about what exactly that will be, but to affirm what we outlined in our last November call and since, if we were to contract the balance of our open position at the same average pricing secured under these recent contracts, that could enable CWEN CAFD per share growth at the low end of 5% to 8% into 2027, without a need for additional capital investment. Moving to Slide 9. In addition to organic growth and CAFD per share contribution from our gas fleet, we are beginning to look towards the other building blocks we can use to grow CAFD per share in 2027 and beyond.
First among those building blocks is the ability for CWEN to invest in repowerings, expansions, or hybridization of capacity around our existing well-cited fleet of renewable generation assets. We have had a track record of doing this successfully already with our wind fleet, and now see an opportunity set of over 1.6 gigawatts of projects that Clearway Group and CWEN are evaluating for potential execution over the next five years. As part of that opportunity set, we’re pleased to announce that CWEN has established an agreement with Clearway Group that aims to develop and build a family of contracted battery assets adjacent to CWEN’s existing fleet of solar projects in Utah, and what we hope is the first of many examples of how CWEN’s existing renewable project site inventory can one day house complementary battery capacity.
The first phase of this framework, which we’re calling Honeycomb, targets completion of 320 megawatts of storage capacity by mid 2026, to serve a long-term tolling agreement with an investment-grade utility. The agreement provides CWEN with the right to invest in these projects at a 10% targeted CAFD yield, if and when the projects reach a readiness for financial close and construction. Subject to CWEN investment and independent director approval, the expected CWEN investment opportunity for this initial 320 megawatt phase, is presently estimated to be up to $85 million in corporate capital. With funding of this potential project investment not expected to occur until the first half of 2026, we expect CWEN to be able to permanently fund this project with existing sources of liquidity, including retained CAFD and corporate debt capacity.
To be clear, CWEN will only exercise this option to the extent it is CAFD and value-accretive to CWEN shareholders when development is concluded and the projects are ready for a CWEN investment commitment decision. In addition to the opportunities for investment around CWEN’s existing assets, Clearway Group is advancing 4.4 gigawatts of late-stage newbuild project investment opportunities targeting CODs over 2026 to 2029, with the vast majority of the projects in markets where Clearway Group has a long track record of successful development execution. We are optimistic about where this family of projects can take CWEN’s growth prospects over time. Very importantly, we want to emphasize that our planning for that growth will emphasize first and foremost our ability to grow in a way that is financially accretive to CWEN shareholders.
The growth opportunities that we’ve outlined here are being planned thoughtfully in relation to CWEN’s historical capital allocation framework, which has served it very well over time, and which we intend to continue. To restate that framework, when funding corporate capital commitments. CWEN will look to maximize CAFD per share net of the cost of financing, while also assuring that investments meet long-term metrics aligned with its underwriting criteria. At a high level, we will source corporate growth capital from retained CAFD to the extent available as a first source of funds, followed by excess debt capacity, in line with our target BB rating as a second source of funds, and we will plan investments that call for external equity issuance only when financial market conditions make us confident that an incremental investment funded via equity would be accretive to shareholders.
As has been demonstrated consistently over time since the inception of CWEN in 2018, Clearway Group as a sponsor for Clearway Energy, Inc., will continue to advance its pipeline of development, mindful of the goals and context of CWEN, with pacing of development and corporate capital fundings to optimize value accretion for CWEN shareholders. From the combination of these building blocks for growth, we hope to see forward to the ability to grow the CAFD per share in dividends per share that we deliver to our shareholders in 2027 and beyond, and we expect to provide further information as it becomes available later this year. With that, I’ll turn it over to Sarah for the financial update. Sarah.
Sarah Rubenstein: Thanks, Craig. On Slide 11, we provide an overview of our financial results, which includes first quarter adjusted EBITDA of $211 million and CAFD of $52 million. First quarter results reflected strong wind resource at the Alta facilities, and the impact of timing of planned spring maintenance outages for certain gas plants, which will occur during the second quarter. This was offset in part by lower solar irradiance from higher-than-average rainfall. From a seasonality perspective, the first quarter is one of the contributors to full-year results. We are pleased with these strong first quarter results, and considering the smaller impact of first quarter, the previously mentioned timing impacts, and our observations on second quarter performance to date, we are reaffirming our full-year 2024 CAFD guidance of $395 million.
2024 CAFD guidance continues to reflect P50 median renewable energy production for the full year, as well as contributions from committed growth investments based on expected COD timing. The company continues to have no external capital needs to fund the line of sight growth needed to meet our dividend per share growth objectives through 2026, and pro forma credit metrics, in line with target ratings. With anticipated contributions from the remaining dropdown offers, line of site CAFD remains at $435 million or $2.15 per share. In addition, Clearway continues to demonstrate progress towards growth beyond the $2.15, with the additional RA contracts previously mentioned and potential for additional contracting at favorable rates, as well as further opportunities for dropdowns.
For example, the Honeycomb battery asset expansion project that we previously discussed. We do anticipate the dropdowns targeted for 2026 and beyond will require a source of external capital, and we expect to be able to utilize retained CAFD to the extent available, excess corporate debt capacity, while maintaining our target credit metrics and availability under our revolving credit facility. Depending on the relevant timing, we may also consider the use of our existing ATM facility. Now, I’ll turn it back to Craig for closing the mark.
Craig Cornelius: Thank you, Sarah. Turning to Slide 13, I’ll recap where we stand in making progress towards meeting the key goals that we’ve set for Clearway Energy, Inc. this year. Thanks to our solid first quarter results, CWEN remains on track to meet its 2024 CAFD guidance and its 2024 EPS growth goal of 7%. Beyond 2024, our path to $2.15 of CAFD per share looks increasingly clear, on the back of the commitment CWEN has now made for investments in Dan’s Mountain and Rosemont South, and with an eye to the current and pending offers that would finish allocation of the proceeds received from the sale of our district thermal business. Furthermore, we are in excellent position towards firming up our ability to grow CAFD per share within our long-term target of 5% to 8% in 2027.
The new RA contracts we signed at strong pricing and the joint development agreement signed for development of the Honeycomb battery assets, are the beginning of additional data points that we’ll share on our post 2026 growth outlook as we go through the year. Lastly, we continue to evaluate opportunistic third-party M&A, while adhering to our disciplined capital investment underwriting standards. Through these initiatives for future value creation and disciplined execution in our current core business, we are focused on delivering good outcomes for the shareholders of Clearway Energy, Inc., meeting the goals that we have set for this year and out through 2026, and extending on those in the years that follow. We are pleased with the momentum that we’ve built in 2024 thus far, and look forward to extending on that momentum in the days ahead.
Operator, please open the lines for questions.
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