Clearway Energy, Inc. - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2020
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 001-36002
Clearway Energy, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 46-1777204 | ||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
300 Carnegie Center, Suite 300 | Princeton | New Jersey | 08540 | ||||||||
(Address of principal executive offices) | (Zip Code) |
(609) 608-1525
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Class A Common Stock, par value $0.01 | CWEN.A | New York Stock Exchange | ||||||
Class C Common Stock, par value $0.01 | CWEN | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of October 31, 2020, there were 34,599,645 shares of Class A common stock outstanding, par value $0.01 per share, 42,738,750 shares of Class B common stock outstanding, par value $0.01 per share, 81,558,845 shares of Class C common stock outstanding, par value $0.01 per share, and 42,738,750 shares of Class D common stock outstanding, par value $0.01 per share.
TABLE OF CONTENTS
Index
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION | |||||
GLOSSARY OF TERMS | |||||
PART I — FINANCIAL INFORMATION | |||||
ITEM 1 — FINANCIAL STATEMENTS AND NOTES | |||||
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||||
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |||||
ITEM 4 — CONTROLS AND PROCEDURES | |||||
PART II — OTHER INFORMATION | |||||
ITEM 1 — LEGAL PROCEEDINGS | |||||
ITEM 1A — RISK FACTORS | |||||
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |||||
ITEM 3 — DEFAULTS UPON SENIOR SECURITIES | |||||
ITEM 4 — MINE SAFETY DISCLOSURES | |||||
ITEM 5 — OTHER INFORMATION | |||||
ITEM 6 — EXHIBITS | |||||
SIGNATURES | |||||
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q of Clearway Energy, Inc., together with its consolidated subsidiaries, or the Company, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The words "believes," "projects," "anticipates," "plans," "expects," "intends," "estimates" and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors, risks and uncertainties include the factors described under Item 1A — Risk Factors in Part II of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020 and under Item 1A — Risk Factors in Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, as well as the following:
•The Company's ability to maintain and grow its quarterly dividend;
•Potential risks related to the Company's relationships with GIP and CEG, including the Company's ability to acquire assets from GIP or CEG;
•Potential risks related to COVID-19 or any other pandemic;
•The Company's ability to successfully identify, evaluate and consummate acquisitions from third parties;
•The Company's ability to raise additional capital due to its indebtedness, corporate structure, market conditions or otherwise;
•Changes in law, including judicial decisions;
•Hazards customary to the power production industry and power generation operations such as fuel and electricity price volatility, unusual weather conditions (including wind and solar conditions), catastrophic weather-related or other damage to facilities, unscheduled generation outages, maintenance or repairs, unanticipated changes to fuel supply costs or availability due to higher demand, shortages, transportation problems or other developments, environmental incidents, or electric transmission or gas pipeline system constraints and the possibility that the Company may not have adequate insurance to cover losses as a result of such hazards;
•The Company's ability to operate its businesses efficiently, manage maintenance capital expenditures and costs effectively, and generate earnings and cash flows from its asset-based businesses in relation to its debt and other obligations;
•The willingness and ability of counterparties to the Company's offtake agreements to fulfill their obligations under such agreements;
•The Company's ability to enter into contracts to sell power and procure fuel on acceptable terms and prices as current offtake agreements expire;
•Government regulation, including compliance with regulatory requirements and changes in market rules, rates, tariffs and environmental laws;
•Operating and financial restrictions placed on the Company that are contained in the project-level debt facilities and other agreements of certain subsidiaries and project-level subsidiaries generally, in the Clearway Energy Operating LLC amended and restated revolving credit facility and in the indentures governing the Senior Notes;
•Cyber terrorism and inadequate cybersecurity, or the occurrence of a catastrophic loss and the possibility that the Company may not have adequate insurance to cover losses resulting from such hazards or the inability of the Company's insurers to provide coverage;
•The Company's ability to engage in successful mergers and acquisitions activity; and
•The Company's ability to borrow additional funds and access capital markets, as well as the Company's substantial indebtedness and the possibility that the Company may incur additional indebtedness going forward.
Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause the Company's actual results to differ materially from those contemplated in any forward-looking statements included in this Quarterly Report on Form 10-Q should not be construed as exhaustive.
3
GLOSSARY OF TERMS
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:
2019 Form 10-K | Clearway Energy, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2019 | |||||||
2020 Convertible Notes | $45 million aggregate principal amount of 3.25% convertible notes due 2020, issued by Clearway Energy, Inc., which were repaid on June 1, 2020 | |||||||
2024 Senior Notes | $500 million aggregate principal amount of 5.375% unsecured senior notes due 2024, issued by Clearway Energy Operating LLC, which were repaid on January 3,2020 | |||||||
2025 Senior Notes | $600 million aggregate principal amount of 5.750% unsecured senior notes due 2025, issued by Clearway Energy Operating LLC | |||||||
2026 Senior Notes | $350 million aggregate principal amount of 5.00% unsecured senior notes due 2026, issued by Clearway Energy Operating LLC | |||||||
2028 Senior Notes | $850 million aggregate principal amount of 4.750% unsecured senior notes due 2028, issued by Clearway Energy Operating LLC | |||||||
Adjusted EBITDA | A non-GAAP measure, represents earnings before interest, tax, depreciation and amortization adjusted for mark-to-market gains or losses, asset write offs and impairments; and factors which the Company does not consider indicative of future operating performance | |||||||
AOCI | Accumulated Other Comprehensive Income | |||||||
ASC | The FASB Accounting Standards Codification, which the FASB established as the source of authoritative GAAP | |||||||
ASU | Accounting Standards Updates - updates to the ASC | |||||||
ATM Program | At-The-Market Equity Offering Program | |||||||
Bankruptcy Code | Title 11 of the U.S. Code | |||||||
Bankruptcy Court | U.S. Bankruptcy Court for the Northern District of California | |||||||
CAFD | A non-GAAP measure, Cash Available for Distribution is defined as of September 30, 2020 as Adjusted EBITDA plus cash distributions/return of investment from unconsolidated affiliates, adjustments to reflect CAFD generated by unconsolidated investments that were not able to distribute project dividends prior to PG&E's emergence from bankruptcy on July 1, 2020 and subsequent release post-bankruptcy, cash receipts from notes receivable, cash distributions from noncontrolling interests, adjustments to reflect sales-type lease cash payments, less cash distributions to noncontrolling interests, maintenance capital expenditures, pro-rata Adjusted EBITDA from unconsolidated affiliates, cash interest paid, income taxes paid, principal amortization of indebtedness, Walnut Creek investment payments, changes in prepaid and accrued capacity payments, and adjusted for development expenses. | |||||||
CEG | Clearway Energy Group LLC (formerly Zephyr Renewables LLC) | |||||||
CEG Master Services Agreements | Master Services Agreements entered into as of August 31, 2018 between the Company, Clearway Energy LLC and Clearway Energy Operating LLC, and CEG | |||||||
CEG ROFO Agreement | Right of First Offer Agreement, entered into as of August 31, 2018, by and between Clearway Energy Group LLC and Clearway Energy, Inc., and solely for purposes of Section 2.4, GIP III Zephyr Acquisition Partners, L.P., as amended by the First Amendment dated February 14, 2019, the Second Amendment dated August 1, 2019, the Third Amendment dated December 6, 2019 and the Fourth Amendment dated November 2, 2020 | |||||||
Clearway Energy LLC | The holding company through which the projects are owned by Clearway Energy Group LLC, the holder of Class B and Class D units of the Company, and Clearway Energy, Inc., the holder of the Class A and Class C units | |||||||
Clearway Energy Group LLC | The holder of the Company's Class B and Class D common shares and Clearway Energy LLC's Class B and Class D units | |||||||
Clearway Energy Operating LLC | The holder of the project assets that are owned by Clearway Energy LLC | |||||||
COD | Commercial Operation Date | |||||||
Company | Clearway Energy, Inc. together with its consolidated subsidiaries | |||||||
CVSR | California Valley Solar Ranch |
4
CVSR Holdco | CVSR Holdco LLC, the indirect owner of CVSR | |||||||
DGPV Holdco 1 | DGPV Holdco 1 LLC | |||||||
DGPV Holdco 2 | DGPV Holdco 2 LLC | |||||||
DGPV Holdco 3 | DGPV Holdco 3 LLC | |||||||
Distributed Solar | Solar power projects, typically less than 20 MW in size, that primarily sell power produced to customers for usage on site, or are interconnected to sell power into the local distribution grid | |||||||
Drop Down Assets | Collectively, assets under common control acquired by the Company from NRG from January 1, 2014 through the period ended August 31, 2018 and from CEG from August 31, 2018 through the period ending September 30, 2020 | |||||||
Economic Gross Margin | A non-GAAP measure, energy and capacity revenue less cost of fuels | |||||||
ECP | Energy Center Pittsburgh LLC, a subsidiary of the Company | |||||||
EPA | U.S. Environmental Protection Agency | |||||||
Exchange Act | The Securities Exchange Act of 1934, as amended | |||||||
FASB | Financial Accounting Standards Board | |||||||
GAAP | Accounting principles generally accepted in the U.S. | |||||||
GenConn | GenConn Energy LLC | |||||||
GIP | Collectively, Global Infrastructure Partners III-C Intermediate AIV 3, L.P., Global Infrastructure Partners III-A/B AIV 3, L.P., Global Infrastructure Partners III-C Intermediate AIV 2, L.P., Global Infrastructure Partners III-C2 Intermediate AIV, L.P. and GIP III Zephyr Friends & Family, LLC | |||||||
HLBV | Hypothetical Liquidation at Book Value | |||||||
LIBOR | London Inter-Bank Offered Rate | |||||||
MMBtu | Million British Thermal Units | |||||||
MW | Megawatts | |||||||
MWh | Saleable megawatt hours, net of internal/parasitic load megawatt-hours | |||||||
MWt | Megawatts Thermal Equivalent | |||||||
Net Exposure | Counterparty credit exposure to Clearway Energy, Inc. net of collateral | |||||||
NOLs | Net Operating Losses | |||||||
NPPD | Nebraska Public Power District | |||||||
NRG | NRG Energy, Inc. | |||||||
OCL | Other comprehensive loss | |||||||
O&M | Operation and Maintenance | |||||||
PG&E | Pacific Gas and Electric Company | |||||||
PG&E Bankruptcy | On January 29, 2019, PG&E Corporation and Pacific Gas and Electric Company filed voluntary petitions for relief under the Bankruptcy Code in the Bankruptcy Court. On July 1, 2020, PG&E emerged from bankruptcy | |||||||
PPA | Power Purchase Agreement | |||||||
PTC | Production Tax Credit | |||||||
RENOM | Clearway Renewable Operation & Maintenance LLC | |||||||
RPV Holdco | RPV Holdco 1 LLC | |||||||
RTO | Regional Transmission Organization | |||||||
SEC | U.S. Securities and Exchange Commission | |||||||
Senior Notes | Collectively, the 2025 Senior Notes, the 2026 Senior Notes and the 2028 Senior Notes | |||||||
SPP | Solar Power Partners | |||||||
SREC | Solar Renewable Energy Credit | |||||||
Tax Act | Tax Cuts and Jobs Act of 2017 | |||||||
Thermal Business | The Company's thermal business, which consists of thermal infrastructure assets that provide steam, hot water and/or chilled water, and in some instances electricity, to commercial businesses, universities, hospitals and governmental units |
5
UPMC Thermal Project | The University of Pittsburgh Medical Center Thermal Project, a 73 MWt district energy system that allows ECP to provide steam, chilled water and 7.5 MW of emergency backup power service to UPMC | |||||||
U.S. | United States of America | |||||||
Utah Solar Portfolio | Collection consists of Four Brothers Solar, LLC, Granite Mountain Holdings, LLC, and Iron Springs Holdings, LLC, which are equity investments owned by Four Brothers Capital, LLC, Granite Mountain Capital, LLC, and Iron Springs Capital, LLC, respectively | |||||||
Utility Scale Solar | Solar power projects, typically 20 MW or greater in size (on an alternating current, or AC, basis), that are interconnected into the transmission or distribution grid to sell power at a wholesale level | |||||||
VaR | Value at Risk | |||||||
VIE | Variable Interest Entity | |||||||
Wind TE Holdco | Wind TE Holdco LLC, an 814 net MW portfolio of twelve wind projects |
6
PART I - FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
CLEARWAY ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
(In millions, except per share amounts) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Operating Revenues | |||||||||||||||||||||||
Total operating revenues | $ | 332 | $ | 296 | $ | 919 | $ | 797 | |||||||||||||||
Operating Costs and Expenses | |||||||||||||||||||||||
Cost of operations | 95 | 84 | 275 | 245 | |||||||||||||||||||
Depreciation, amortization and accretion | 102 | 114 | 303 | 289 | |||||||||||||||||||
Impairment losses | — | — | — | 19 | |||||||||||||||||||
General and administrative | 9 | 7 | 30 | 20 | |||||||||||||||||||
Transaction and integration costs | 1 | — | 2 | 2 | |||||||||||||||||||
Development costs | 2 | 1 | 4 | 4 | |||||||||||||||||||
Total operating costs and expenses | 209 | 206 | 614 | 579 | |||||||||||||||||||
Operating Income | 123 | 90 | 305 | 218 | |||||||||||||||||||
Other Income (Expense) | |||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | 19 | 38 | 22 | 52 | |||||||||||||||||||
Gain on sale of unconsolidated affiliate | — | — | 49 | — | |||||||||||||||||||
Other income, net | — | 2 | 2 | 6 | |||||||||||||||||||
Loss on debt extinguishment | (6) | — | (9) | (1) | |||||||||||||||||||
Interest expense | (85) | (106) | (345) | (337) | |||||||||||||||||||
Total other expense, net | (72) | (66) | (281) | (280) | |||||||||||||||||||
Income (Loss) Before Income Taxes | 51 | 24 | 24 | (62) | |||||||||||||||||||
Income tax expense (benefit) | 9 | (11) | 13 | (14) | |||||||||||||||||||
Net Income (Loss) | 42 | 35 | 11 | (48) | |||||||||||||||||||
Less: Income (loss) attributable to noncontrolling interests and redeemable interests | 10 | (4) | (39) | (43) | |||||||||||||||||||
Net Income (Loss) Attributable to Clearway Energy, Inc. | $ | 32 | $ | 39 | $ | 50 | $ | (5) | |||||||||||||||
Earnings (Losses) Per Share Attributable to Clearway Energy, Inc. Class A and Class C Common Stockholders | |||||||||||||||||||||||
Weighted average number of Class A common shares outstanding - basic and diluted | 35 | 35 | 35 | 35 | |||||||||||||||||||
Weighted average number of Class C common shares outstanding - basic | 81 | 73 | 80 | 73 | |||||||||||||||||||
Weighted average number of Class C common shares outstanding - diluted | 81 | 75 | 80 | 73 | |||||||||||||||||||
Earnings (Losses) per Weighted Average Class A and Class C Common Share - Basic and Diluted | $ | 0.27 | $ | 0.36 | $ | 0.43 | $ | (0.04) | |||||||||||||||
Dividends Per Class A Common Share | $ | 0.3125 | $ | 0.20 | $ | 0.7325 | $ | 0.60 | |||||||||||||||
Dividends Per Class C Common Share | $ | 0.3125 | $ | 0.20 | $ | 0.7325 | $ | 0.60 |
See accompanying notes to consolidated financial statements.
7
CLEARWAY ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
(In millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Net Income (Loss) | $ | 42 | $ | 35 | $ | 11 | $ | (48) | |||||||||||||||
Other Comprehensive Income (Loss) | |||||||||||||||||||||||
Unrealized gain (loss) on derivatives, net of income tax (benefit) expense of $(1), $0, $0, $0 | 8 | (1) | — | 2 | |||||||||||||||||||
Other comprehensive income (loss) | 8 | (1) | — | 2 | |||||||||||||||||||
Comprehensive Income (Loss) | 50 | 34 | 11 | (46) | |||||||||||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests and redeemable interests | 14 | (4) | (39) | (42) | |||||||||||||||||||
Comprehensive Income (Loss) Attributable to Clearway Energy, Inc. | $ | 36 | $ | 38 | $ | 50 | $ | (4) |
See accompanying notes to consolidated financial statements.
8
CLEARWAY ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares) | September 30, 2020 | December 31, 2019 | |||||||||
ASSETS | (unaudited) | ||||||||||
Current Assets | |||||||||||
Cash and cash equivalents | $ | 359 | $ | 155 | |||||||
Restricted cash | 178 | 262 | |||||||||
Accounts receivable — trade | 156 | 116 | |||||||||
Accounts receivable — affiliate | — | 2 | |||||||||
Inventory | 42 | 40 | |||||||||
Prepayments and other current assets | 38 | 33 | |||||||||
Total current assets | 773 | 608 | |||||||||
Property, plant and equipment, net | 6,165 | 6,063 | |||||||||
Other Assets | |||||||||||
Equity investments in affiliates | 1,001 | 1,183 | |||||||||
Intangible assets, net | 1,371 | 1,428 | |||||||||
Deferred income taxes | 84 | 92 | |||||||||
Right of use assets, net | 256 | 223 | |||||||||
Other non-current assets | 75 | 103 | |||||||||
Total other assets | 2,787 | 3,029 | |||||||||
Total Assets | $ | 9,725 | $ | 9,700 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current Liabilities | |||||||||||
Current portion of long-term debt | $ | 361 | $ | 1,824 | |||||||
Accounts payable — trade | 46 | 74 | |||||||||
Accounts payable — affiliate | 22 | 31 | |||||||||
Derivative instruments | 36 | 16 | |||||||||
Accrued interest expense | 48 | 41 | |||||||||
Accrued expenses and other current liabilities | 89 | 71 | |||||||||
Total current liabilities | 602 | 2,057 | |||||||||
Other Liabilities | |||||||||||
Long-term debt | 6,357 | 4,956 | |||||||||
Derivative instruments | 150 | 76 | |||||||||
Long-term lease liabilities | 260 | 227 | |||||||||
Other non-current liabilities | 119 | 121 | |||||||||
Total non-current liabilities | 6,886 | 5,380 | |||||||||
Total Liabilities | 7,488 | 7,437 | |||||||||
Commitments and Contingencies | |||||||||||
Stockholders' Equity | |||||||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued | — | — | |||||||||
Class A, Class B, Class C and Class D common stock, $0.01 par value; 3,000,000,000 shares authorized (Class A 500,000,000, Class B 500,000,000, Class C 1,000,000,000, Class D 1,000,000,000); 201,482,846 shares issued and outstanding (Class A 34,599,645, Class B 42,738,750, Class C 81,405,701, Class D 42,738,750) at September 30, 2020 and 198,819,999 shares issued and outstanding (Class A 34,599,645, Class B 42,738,750, Class C 78,742,854, Class D 42,738,750) at December 31, 2019 | 1 | 1 | |||||||||
Additional paid-in capital | 1,918 | 1,936 | |||||||||
Accumulated deficit | (22) | (72) | |||||||||
Accumulated other comprehensive loss | (15) | (15) | |||||||||
Noncontrolling interest | 355 | 413 | |||||||||
Total Stockholders' Equity | 2,237 | 2,263 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 9,725 | $ | 9,700 |
See accompanying notes to consolidated financial statements.
9
CLEARWAY ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, | |||||||||||
(In millions) | 2020 | 2019 | |||||||||
Cash Flows from Operating Activities | |||||||||||
Net Income (Loss) | $ | 11 | $ | (48) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
Equity in earnings of unconsolidated affiliates | (22) | (52) | |||||||||
Distributions from unconsolidated affiliates | 51 | 32 | |||||||||
Depreciation, amortization and accretion | 303 | 289 | |||||||||
Amortization of financing costs and debt discounts | 12 | 14 | |||||||||
Amortization of intangibles and out-of-market contracts | 67 | 52 | |||||||||
Loss on debt extinguishment | 9 | 1 | |||||||||
Right-of-use asset amortization | 1 | 5 | |||||||||
Gain on sale of unconsolidated affiliate | (49) | — | |||||||||
Impairment losses | — | 19 | |||||||||
Changes in deferred income taxes | 13 | (14) | |||||||||
Changes in derivative instruments | 63 | 101 | |||||||||
Loss on disposal of asset components | (4) | 5 | |||||||||
Cash used in changes in other working capital | |||||||||||
Changes in prepaid and accrued liabilities for tolling agreements | 15 | 12 | |||||||||
Changes in other working capital | (29) | (42) | |||||||||
Net Cash Provided by Operating Activities | 441 | 374 | |||||||||
Cash Flows from Investing Activities | |||||||||||
Acquisitions | — | (100) | |||||||||
Acquisition of Drop Down Assets | (79) | (6) | |||||||||
Buyout of Wind TE Holdco noncontrolling interest | — | (19) | |||||||||
Consolidation of DGPV Holdco 3 LLC | 17 | — | |||||||||
Capital expenditures | (95) | (200) | |||||||||
Return of investment from unconsolidated affiliates | 53 | 37 | |||||||||
Investments in unconsolidated affiliates | (11) | (14) | |||||||||
Proceeds from sale of assets | 90 | — | |||||||||
Insurance proceeds | 5 | 2 | |||||||||
Net Cash Used in Investing Activities | (20) | (300) | |||||||||
Cash Flows from Financing Activities | |||||||||||
Net contributions (distributions) from noncontrolling interests | 147 | (15) | |||||||||
Buyout of Repowering Partnership II LLC noncontrolling interest | (70) | — | |||||||||
Net proceeds from the issuance of common stock | 58 | — | |||||||||
Payments of dividends and distributions | (147) | (116) | |||||||||
Payments of debt issuance costs | (10) | (15) | |||||||||
Proceeds from the revolving credit facility | 265 | 22 | |||||||||
Payments for the revolving credit facility | (265) | (22) | |||||||||
Proceeds from the issuance of long-term debt | 775 | 586 | |||||||||
Payments for long-term debt | (1,054) | (700) | |||||||||
Net Cash Used in Financing Activities | (301) | (260) | |||||||||
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | 120 | (186) | |||||||||
Cash, Cash Equivalents and Restricted Cash at beginning of period | 417 | 583 | |||||||||
Cash, Cash Equivalents and Restricted Cash at end of period | $ | 537 | $ | 397 | |||||||
See accompanying notes to consolidated financial statements.
10
CLEARWAY ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2020
(Unaudited)
(In millions) | Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||
Balances at December 31, 2019 | $ | — | $ | 1 | $ | 1,936 | $ | (72) | $ | (15) | $ | 413 | $ | 2,263 | |||||||||||||||||||||||||||
Net loss | — | — | — | (29) | — | (78) | (107) | ||||||||||||||||||||||||||||||||||
Unrealized loss on derivatives, net of tax | — | — | — | — | (6) | (6) | (12) | ||||||||||||||||||||||||||||||||||
Contributions from CEG, cash | — | — | — | — | — | 4 | 4 | ||||||||||||||||||||||||||||||||||
Contributions from tax equity interests, net of distributions, cash | — | — | — | — | — | 150 | 150 | ||||||||||||||||||||||||||||||||||
Net proceeds from the issuance of common stock under the ATM Program | — | — | 10 | — | — | — | 10 | ||||||||||||||||||||||||||||||||||
Distributions to tax equity investors, non-cash | — | — | — | — | — | (2) | (2) | ||||||||||||||||||||||||||||||||||
Common stock dividends and distributions to CEG | — | — | (24) | — | — | (18) | (42) | ||||||||||||||||||||||||||||||||||
Balances at March 31, 2020 | $ | — | $ | 1 | $ | 1,922 | $ | (101) | $ | (21) | $ | 463 | $ | 2,264 | |||||||||||||||||||||||||||
Net income | — | — | — | 47 | — | 29 | 76 | ||||||||||||||||||||||||||||||||||
Unrealized gain on derivatives, net of tax | — | — | — | — | 2 | 2 | 4 | ||||||||||||||||||||||||||||||||||
Contributions from CEG, non-cash | — | — | — | — | — | 8 | 8 | ||||||||||||||||||||||||||||||||||
Contributions from CEG, cash | — | — | — | — | — | 2 | 2 | ||||||||||||||||||||||||||||||||||
Distributions to tax equity interests, net of contributions, cash | — | — | — | — | — | (3) | (3) | ||||||||||||||||||||||||||||||||||
Consolidation of DGPV Holdco 3 | — | — | — | — | — | (43) | (43) | ||||||||||||||||||||||||||||||||||
Buyout of Repowering Partnership II LLC noncontrolling interest | — | — | — | — | — | (70) | (70) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||||||
Non-cash adjustment for change in tax basis | — | — | 7 | — | — | — | 7 | ||||||||||||||||||||||||||||||||||
Net proceeds from the issuance of common stock under the ATM Program | — | — | 28 | — | — | — | 28 | ||||||||||||||||||||||||||||||||||
Common stock dividends and distributions to CEG | — | — | (24) | — | — | (18) | (42) | ||||||||||||||||||||||||||||||||||
Balances at June 30, 2020 | $ | — | $ | 1 | $ | 1,934 | $ | (54) | $ | (19) | $ | 370 | $ | 2,232 | |||||||||||||||||||||||||||
Net income | — | — | — | 32 | — | 10 | 42 | ||||||||||||||||||||||||||||||||||
Unrealized gain on derivatives, net of tax | — | — | — | — | 4 | 4 | 8 | ||||||||||||||||||||||||||||||||||
Distributions to CEG, non-cash | — | — | — | — | — | (1) | (1) | ||||||||||||||||||||||||||||||||||
Distributions to tax equity interests, net of contributions, cash. | — | — | — | — | — | (6) | (6) | ||||||||||||||||||||||||||||||||||
Consolidation of DGPV Holdco 3 | — | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||||
Mesquite Star Drop Down | — | — | — | — | — | 4 | 4 | ||||||||||||||||||||||||||||||||||
Net proceeds from the issuance of common stock under the ATM Program | — | — | 20 | — | — | — | 20 | ||||||||||||||||||||||||||||||||||
Common stock dividends and distributions to CEG | — | — | (36) | — | — | (27) | (63) | ||||||||||||||||||||||||||||||||||
Balances at September 30, 2020 | $ | — | $ | 1 | $ | 1,918 | $ | (22) | $ | (15) | $ | 355 | $ | 2,237 |
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CLEARWAY ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2019
(Unaudited)
(In millions) | Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||
Balances at December 31, 2018 | $ | — | $ | 1 | $ | 1,897 | $ | (58) | $ | (18) | $ | 402 | $ | 2,224 | |||||||||||||||||||||||||||
Net loss | — | — | — | (20) | — | (27) | (47) | ||||||||||||||||||||||||||||||||||
Unrealized loss on derivatives, net of tax | — | — | — | — | (1) | (1) | (2) | ||||||||||||||||||||||||||||||||||
Buyout of Wind TE Holdco noncontrolling interest | — | — | (5) | — | — | (14) | (19) | ||||||||||||||||||||||||||||||||||
Contributions from tax equity interests, net of distributions, cash | — | — | — | — | — | 19 | 19 | ||||||||||||||||||||||||||||||||||
Contributions from CEG for Oahu Partnership, non-cash | — | — | — | — | — | 12 | 12 | ||||||||||||||||||||||||||||||||||
Cumulative effect of change in the accounting principle | — | — | — | (2) | — | (1) | (3) | ||||||||||||||||||||||||||||||||||
Common stock dividends and distributions to CEG | — | — | (22) | — | — | (17) | (39) | ||||||||||||||||||||||||||||||||||
Balances at March 31, 2019 | $ | — | $ | 1 | $ | 1,870 | $ | (80) | $ | (19) | $ | 373 | $ | 2,145 | |||||||||||||||||||||||||||
Net loss | — | — | — | (24) | — | (12) | (36) | ||||||||||||||||||||||||||||||||||
Unrealized gain on derivatives, net of tax | — | — | — | — | 3 | 2 | 5 | ||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests, net of contributions, cash | — | — | — | — | — | (30) | (30) | ||||||||||||||||||||||||||||||||||
Contributions from CEG for Kawailoa, Repowering Partnerships, non-cash | — | — | — | — | — | 6 | 6 | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 1 | (1) | — | — | — | ||||||||||||||||||||||||||||||||||
Non-cash adjustment for change in tax basis of assets | — | — | 2 | — | — | — | 2 | ||||||||||||||||||||||||||||||||||
Common stock dividends and distributions to CEG | — | — | (21) | — | — | (17) | (38) | ||||||||||||||||||||||||||||||||||
Balances at June 30, 2019 | $ | — | $ | 1 | $ | 1,852 | $ | (105) | $ | (16) | $ | 322 | $ | 2,054 | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | 39 | — | (4) | 35 | ||||||||||||||||||||||||||||||||||
Unrealized loss on derivatives, net of tax | — | — | — | — | (1) | — | (1) | ||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests, net of contributions, cash | — | — | — | — | — | (4) | (4) | ||||||||||||||||||||||||||||||||||
Contributions from CEG for Kawailoa, Repowering Partnerships, non-cash | — | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||||||
Non-cash adjustment for change in tax basis of assets | — | — | (1) | — | — | — | (1) | ||||||||||||||||||||||||||||||||||
Common stock dividends and distributions to CEG | — | — | (22) | — | — | (17) | (39) | ||||||||||||||||||||||||||||||||||
Balances at September 30, 2019 | $ | — | $ | 1 | $ | 1,830 | $ | (66) | $ | (17) | $ | 298 | $ | 2,046 |
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CLEARWAY ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Nature of Business
Clearway Energy, Inc., together with its consolidated subsidiaries, or the Company, is a publicly-traded energy infrastructure investor in and owner of modern, sustainable and long-term contracted assets across North America. The Company is sponsored by GIP III Zephyr Acquisition Partners, L.P. through its portfolio company, CEG. GIP is an independent fund manager that invests in infrastructure assets in energy and transport sectors.
The Company’s environmentally-sound asset portfolio includes over 6,201 MW of wind, solar and natural gas-fired power generation facilities. Through this diversified and contracted portfolio, the Company endeavors to provide its investors with stable and growing dividend income. Nearly all of these assets sell substantially all of their output pursuant to long-term offtake agreements with creditworthy counterparties. The weighted average remaining contract duration of these offtake agreements was approximately 13 years as of September 30, 2020 based on CAFD. The Company also owns thermal infrastructure assets with an aggregate steam and chilled water capacity of 1,456 net MWt and electric generation capacity of 39 net MW. These thermal infrastructure assets provide steam, hot and/or chilled water, and, in some instances, electricity to commercial businesses, universities, hospitals and governmental units in multiple locations, principally through long-term contracts or pursuant to rates regulated by state utility commissions.
The Company consolidates the results of Clearway Energy LLC through its controlling interest, with CEG's interest shown as noncontrolling interest in the financial statements. The holders of the Company's outstanding shares of Class A and Class C common stock are entitled to dividends as declared. CEG receives its distributions from Clearway Energy LLC through its ownership of Clearway Energy LLC Class B and Class D units.
As a result of the Class C common stock issuance under the ATM Programs during the nine months ended September 30, 2020, the Company owns 57.58% of the economic interests of Clearway Energy LLC, with CEG retaining 42.42% of the economic interests of Clearway Energy LLC as of September 30, 2020. For further discussion, see Note 9, Changes in Capital Structure.
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The following table represents the structure of the Company as of September 30, 2020:
![cwen-20200930_g1.jpg](https://www.sec.gov/Archives/edgar/data/0001567683/000156768320000036/cwen-20200930_g1.jpg)
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the SEC’s regulations for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The following notes should be read in conjunction with the accounting policies and other disclosures as set forth in the notes to the consolidated financial statements included in the Company's 2019 Form 10-K. Interim results are not necessarily indicative of results for a full year.
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present fairly the Company's consolidated financial position as of September 30, 2020, and the results of operations, comprehensive income (loss) and cash flows for the nine months ended September 30, 2020 and 2019.
PG&E Bankruptcy Update
On July 1, 2020, PG&E emerged from bankruptcy and assumed the Company's contracts without modification. In addition, PG&E paid to the Company's applicable projects the portion of the invoices corresponding to the electricity delivered for the period between January 1 and January 28, 2019. These invoices related to the pre-petition period services and any payment therefore required the approval by the Bankruptcy Court. During the three months ended September 30, 2020, the Company entered into waiver agreements with the lenders to the respective financing agreements related to the PG&E Bankruptcy and all previously restricted distributions were paid out of distribution reserve accounts at the Company's subsidiaries affected by the PG&E Bankruptcy as of October 31, 2020. A description of changes to the financial statements resulting from PG&E's emergence from bankruptcy is noted below in Note 2, Summary of Significant Accounting Policies, Note 5, Fair Value of Financial Instruments and Note 7, Long-term Debt.
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Note 2 — Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could be different from these estimates.
Cash and Cash Equivalents, and Restricted Cash
Cash and cash equivalents include highly liquid investments with an original maturity of three months or less at the time of purchase. Cash and cash equivalents held at project subsidiaries was $176 million and $125 million as of September 30, 2020 and December 31, 2019, respectively. During October 2020, the last of the previously restricted cash of $34 million was paid out of a distribution reserve account at a subsidiary affected by the PG&E Bankruptcy to Clearway Energy Operating LLC.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows:
September 30, 2020 | December 31, 2019 | ||||||||||
(In millions) | |||||||||||
Cash and cash equivalents | $ | 359 | $ | 155 | |||||||
Restricted cash | 178 | 262 | |||||||||
Cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | 537 | $ | 417 |
Restricted cash consists primarily of funds held to satisfy the requirements of certain debt agreements and funds held within the Company's projects that are restricted in their use. As of September 30, 2020, these restricted funds were comprised of $74 million designated to fund operating expenses, approximately $46 million designated for current debt service payments, and $28 million restricted for reserves including debt service, performance obligations and other reserves, as well as capital expenditures. The remaining $30 million is held in distribution reserve accounts.
Accumulated Depreciation, Accumulated Amortization
The following table presents the accumulated depreciation included in the property, plant and equipment, net, and accumulated amortization included in intangible assets, net, respectively, as of September 30, 2020 and December 31, 2019:
September 30, 2020 | December 31, 2019 | ||||||||||
(In millions) | |||||||||||
Property, Plant and Equipment Accumulated Depreciation | $ | 2,135 | $ | 1,880 | |||||||
Intangible Assets Accumulated Amortization | 461 | 394 |
Dividends to Class A and Class C common stockholders
The following table lists the dividends paid on the Company's Class A common stock and Class C common stock during the nine months ended September 30, 2020:
Third Quarter 2020 | Second Quarter 2020 | First Quarter 2020 | ||||||||||||||||||
Dividends per Class A share | $ | 0.3125 | $ | 0.2100 | $ | 0.2100 | ||||||||||||||
Dividends per Class C share | $ | 0.3125 | $ | 0.2100 | $ | 0.2100 |
Dividends on the Class A common stock and Class C common stock are subject to available capital, market conditions, and compliance with associated laws, regulations and other contractual obligations. The Company expects that, based on current circumstances, comparable cash dividends will continue to be paid in the foreseeable future.
On October 27, 2020, the Company declared quarterly dividends on its Class A common stock and Class C common stock of $0.318 per share payable on December 15, 2020 to stockholders of record as of December 1, 2020.
15
Noncontrolling Interests
Clearway Energy LLC Distributions to CEG
The following table lists distributions paid to CEG during the period ended September 30, 2020 on Clearway Energy LLC's Class B and D units:
Third Quarter 2020 | Second Quarter 2020 | First Quarter 2020 | ||||||||||||||||||
Distributions per Class B Unit | $ | 0.3125 | $ | 0.2100 | $ | 0.2100 | ||||||||||||||
Distributions per Class D Unit | $ | 0.3125 | $ | 0.2100 | $ | 0.2100 |
On October 27, 2020, Clearway Energy LLC declared a distribution on its Class B and Class D units of $0.318 per unit payable on December 15, 2020 to unit holders of record as of December 1, 2020.
Revenue Recognition
Revenue from Contracts with Customers
The Company applies the guidance in ASC 606, Revenue from Contracts with Customers, or Topic 606, when recognizing revenue associated with its contracts with customers. The Company's policies with respect to its various revenue streams are detailed below. In general, the Company applies the invoicing practical expedient to recognize revenue for the revenue streams detailed below, except in circumstances where the invoiced amount does not represent the value transferred to the customer.
Thermal Revenues
Steam and chilled water revenue is recognized as the Company transfers the product to the customer, based on customer usage as determined by meter readings taken at month-end. Some locations read customer meters throughout the month and recognize estimated revenue for the period between meter read date and month-end. For thermal contracts, the Company’s performance obligation to deliver steam and chilled water is satisfied over time and revenue is recognized based on the invoiced amount. The Thermal Business subsidiaries collect, and remit state and local taxes associated with sales to their customers, as required by governmental authorities. These taxes are presented on a net basis in the income statement.
As contracts for steam and chilled water are long-term contracts, the Company has performance obligations under these contracts that have not yet been satisfied. These performance obligations have transaction prices that are both fixed and variable, and which vary based on the contract duration, customer type, inception date and other contract-specific factors. For the fixed price contracts, the Company cannot accurately estimate the amount of its unsatisfied performance obligations as it will vary based on customer usage, which will depend on factors such as weather and customer activity.
Power Purchase Agreements
The majority of the Company’s revenues are obtained through PPAs or other contractual agreements. Energy, capacity and where applicable, renewable attributes, from the majority of the Company’s renewable energy assets and certain conventional energy plants is sold through long-term PPAs and tolling agreements to a single counterparty, which is often a utility or commercial customer. The majority of these PPAs are accounted for as leases. Previously ASC 840, and currently ASC 842, requires the minimum lease payments received to be amortized over the term of the lease and contingent rentals are recorded when the achievement of the contingency becomes probable. Management's judgment is required in determining the economic life of each generating facility, in evaluating whether certain lease provisions constitute minimum payments or represent contingent rent and other factors in determining whether a contract contains a lease and whether the lease is an operating lease or sales-type lease.
Renewable Energy Credits
Renewable energy credits, or RECs, are usually sold through long-term PPAs. Revenue from the sale of self-generated RECs is recognized when the related energy is generated and simultaneously delivered even in cases where there is a certification lag as it has been deemed to be perfunctory.
In a bundled contract to sell energy, capacity and/or self-generated RECs, all performance obligations are deemed to be delivered at the same time and hence, timing of recognition of revenue for all performance obligations is the same and occurs over time. In such cases, it is often unnecessary to allocate transaction price to multiple performance obligations.
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Disaggregated Revenues
The following tables represent the Company’s disaggregation of revenue from contracts with customers along with the reportable segment for each category for the three and nine months ended September 30, 2020 and 2019 respectively:
Three months ended September 30, 2020 | |||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Total | |||||||||||||||||||
Energy revenue(a) | $ | 3 | $ | 166 | $ | 27 | $ | 196 | |||||||||||||||
Capacity revenue(a) | 119 | — | 24 | 143 | |||||||||||||||||||
Contract amortization | (6) | (15) | (1) | (22) | |||||||||||||||||||
Other revenue | — | 6 | 9 | 15 | |||||||||||||||||||
Total operating revenue | 116 | 157 | 59 | 332 | |||||||||||||||||||
Less: Lease revenue | (122) | (153) | — | (275) | |||||||||||||||||||
Less: Contract amortization | 6 | 15 | 1 | 22 | |||||||||||||||||||
Total revenue from contracts with customers | $ | — | $ | 19 | $ | 60 | $ | 79 |
(a) The following amounts of energy and capacity revenue relate to leases and are accounted for under ASC 842:
(In millions) | Conventional Generation | Renewables | Thermal | Total | ||||||||||||||||||||||
Energy revenue | $ | 3 | $ | 153 | $ | — | $ | 156 | ||||||||||||||||||
Capacity revenue | 119 | — | — | 119 | ||||||||||||||||||||||
Total | $ | 122 | $ | 153 | $ | — | $ | 275 |
Nine months ended September 30, 2020 | |||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Total | |||||||||||||||||||
Energy revenue(a) | $ | 6 | $ | 486 | $ | 77 | $ | 569 | |||||||||||||||
Capacity revenue(a) | 338 | — | 50 | 388 | |||||||||||||||||||
Contract amortization | (18) | (46) | (2) | (66) | |||||||||||||||||||
Other revenue | — | 12 | 24 | 36 | |||||||||||||||||||
Mark-to-market for economic hedges | — | (8) | — | (8) | |||||||||||||||||||
Total operating revenue | 326 | 444 | 149 | 919 | |||||||||||||||||||
Less: Mark-to-market for economic hedges | — | 8 | — | 8 | |||||||||||||||||||
Less: Lease revenue | (344) | (449) | (1) | (794) | |||||||||||||||||||
Less: Contract amortization | 18 | 46 | 2 | 66 | |||||||||||||||||||
Total revenue from contracts with customers | $ | — | $ | 49 | $ | 150 | $ | 199 |
(a) The following amounts of energy and capacity revenue relate to leases and are accounted for under ASC 842:
(In millions) | Conventional Generation | Renewables | Thermal | Total | ||||||||||||||||||||||
Energy revenue | $ | 6 | $ | 449 | $ | 1 | $ | 456 | ||||||||||||||||||
Capacity revenue | 338 | — | — | 338 | ||||||||||||||||||||||
Total | $ | 344 | $ | 449 | $ | 1 | $ | 794 |
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Three months ended September 30, 2019 | |||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Total | |||||||||||||||||||
Energy revenue(a) | $ | 2 | $ | 167 | $ | 33 | $ | 202 | |||||||||||||||
Capacity revenue(a) | 89 | — | 14 | 103 | |||||||||||||||||||
Contract amortization | (1) | (16) | (1) | (18) | |||||||||||||||||||
Mark-to-market for economic hedges | — | (2) | — | (2) | |||||||||||||||||||
Other revenue | — | 2 | 9 | 11 | |||||||||||||||||||
Total operating revenue | 90 | 151 | 55 | 296 | |||||||||||||||||||
Less: Mark-to-market for economic hedges | — | 2 | — | 2 | |||||||||||||||||||
Less: Lease revenue | (91) | (160) | (1) | (252) | |||||||||||||||||||
Less: Contract amortization | 1 | 16 | 1 | 18 | |||||||||||||||||||
Total revenue from contracts with customers | $ | — | $ | 9 | $ | 55 | $ | 64 |
(a) The following amounts of energy and capacity revenue relate to leases and are accounted for under ASC 842:
(In millions) | Conventional Generation | Renewables | Thermal | Total | ||||||||||||||||||||||
Energy revenue | $ | 2 | $ | 160 | $ | 1 | $ | 163 | ||||||||||||||||||
Capacity revenue | 89 | — | — | 89 | ||||||||||||||||||||||
Total | $ | 91 | $ | 160 | $ | 1 | $ | 252 |
Nine months ended September 30, 2019 | |||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Total | |||||||||||||||||||
Energy revenue(a) | $ | 4 | $ | 441 | $ | 91 | $ | 536 | |||||||||||||||
Capacity revenue(a) | 253 | — | 41 | 294 | |||||||||||||||||||
Contract amortization | (4) | (46) | (2) | (52) | |||||||||||||||||||
Mark-to-market for economic hedges | — | (9) | — | (9) | |||||||||||||||||||
Other revenue | — | 6 | 22 | 28 | |||||||||||||||||||
Total operating revenue | 253 | 392 | 152 | 797 | |||||||||||||||||||
Less: Mark-to-market for economic hedges | — | 9 | — | 9 | |||||||||||||||||||
Less: Lease revenue | (257) | (416) | (2) | (675) | |||||||||||||||||||
Less: Contract amortization | 4 | 46 | 2 | 52 | |||||||||||||||||||
Total revenue from contracts with customers | $ | — | $ | 31 | $ | 152 | $ | 183 |
(a) The following amounts of energy and capacity revenue relate to leases and are accounted for under ASC 842:
(In millions) | Conventional Generation | Renewables | Thermal | Total | ||||||||||||||||||||||
Energy revenue | $ | 4 | $ | 416 | $ | 2 | $ | 422 | ||||||||||||||||||
Capacity revenue | 253 | — | — | 253 | ||||||||||||||||||||||
Total | $ | 257 | $ | 416 | $ | 2 | $ | 675 |
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Contract Amortization
Assets and liabilities recognized from power sales agreements assumed through acquisitions related to the sale of electric capacity and energy in future periods for which the fair value has been determined to be significantly less (more) than market are amortized to revenue over the term of each underlying contract based on actual generation and/or contracted volumes or on a straight-line basis, where applicable.
Contract Balances
The following table reflects the contract assets and liabilities included on the Company’s balance sheet as of September 30, 2020:
(In millions) | ||||||||
Accounts receivable, net - Contracts with customers | $ | 37 | ||||||
Accounts receivable, net - Leases | 119 | |||||||
Total accounts receivable, net | $ | 156 |
Recently Issued Accounting Standards Adopted in 2020
In March 2020, the FASB issued ASU 2020-4, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide for optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria is met. These amendments apply only to contracts that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company intends to apply the amendments to all its eligible contract modifications where applicable.
Recently Issued Accounting Standards Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective January 1, 2021, with early adoption permitted. The Company does not expect the effect of the new guidance to be material on its consolidated financial statements.
Reclassification
Certain prior year amounts have been reclassified for comparative purposes.
Note 3 — Acquisition and Dispositions
2019 Acquisition
Duquesne University District Energy System Acquisition — On May 1, 2019, the Company, through its indirect subsidiary ECP Uptown Campus LLC, acquired the Duquesne University district energy system, totaling 87 combined MWt, located in Pittsburgh, PA. As part of the acquisition, Duquesne University entered into a 40-year Energy Services Agreement through which ECP Uptown Campus LLC will fulfill the university's electricity, chilled water and steam requirements in exchange for monthly capacity payments. The transaction is reflected in the Company's Thermal segment. The total investment for the project was approximately $107 million.
2020 Dispositions
Sale of RPV Holdco 1 LLC — On May 14, 2020, the Company sold its interests in RPV Holdco 1 LLC, or RPV Holdco, to a third party for net proceeds of approximately $75 million. The Company previously accounted for its interest in RPV Holdco as an equity method investment. The sale of the investment resulted in a gain of approximately $49 million.
Sale of Energy Center Dover LLC and Energy Center Smyrna LLC Assets — On March 3, 2020, the Company, through Clearway Thermal LLC, sold 100% of its interests in Energy Center Dover LLC and Energy Center Smyrna LLC to DB Energy Assets, LLC.
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Note 4 — Investments Accounted for by the Equity Method and Variable Interest Entities
Entities that are Consolidated
The Company has a controlling financial interest in certain entities which have been identified as VIEs under ASC 810, Consolidations, or ASC 810. These arrangements are primarily related to tax equity arrangements entered into with third parties in order to monetize certain tax credits associated with wind and solar facilities, as further described in Note 5, Investments Accounted for by the Equity Method and Variable Interest Entities, to the consolidated financial statements included in the Company's 2019 Form 10-K.
Summarized financial information for the Company's consolidated VIEs consisted of the following as of September 30, 2020:
(In millions) | Oahu Solar Partnership | Kawailoa Partnership | Elbow Creek TE Holdco | Wildorado TE Holdco | DGPV Holdco 3 | Alta TE Holdco | Spring Canyon | Buckthorn Renewables LLC | Other (a) | ||||||||||||||||||||||||||||||||||||||||||||
Other current and non-current assets | $ | 25 | $ | 24 | $ | 10 | $ | 16 | $ | 61 | $ | 58 | $ | 3 | $ | 3 | $ | 5 | |||||||||||||||||||||||||||||||||||
Property, plant and equipment | 182 | 142 | 102 | 244 | 329 | 363 | 82 | 209 | 8 | ||||||||||||||||||||||||||||||||||||||||||||
Intangible assets | — | — | 1 | — | 1 | 228 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | 207 | 166 | 113 | 260 | 391 | 649 | 85 | 212 | 13 | ||||||||||||||||||||||||||||||||||||||||||||
Current and non-current liabilities | 125 | 116 | 27 | 12 | 276 | 44 | 5 | 7 | 3 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 125 | 116 | 27 | 12 | 276 | 44 | 5 | 7 | 3 | ||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interest | 25 | 35 | 74 | 107 | 3 | 38 | 29 | 62 | — | ||||||||||||||||||||||||||||||||||||||||||||
Net assets less noncontrolling interests | $ | 57 | $ | 15 | $ | 12 | $ | 141 | $ | 112 | $ | 567 | $ | 51 | $ | 143 | $ | 10 |
(a) Other is comprised of Crosswinds and Hardin projects.
The discussion below describes material changes to VIEs during the nine months ended September 30, 2020.
DGPV Holdco 3 LLC
DGPV Holdco 3 owns approximately 113 MW of distributed solar capacity, based on cash to be distributed, with a weighted average remaining contract life of approximately 21 years as of September 30, 2020. On May 29, 2020, the final construction projects for DGPV Holdco 3 were placed in service which resulted in a reconsideration event for consolidation of the entity. Upon the reconsideration event, the Company determined that it was the primary beneficiary of DGPV Holdco 3, as it is entitled to 99% of allocations of income and cash distributions from the entity. As such, effective on May 29, 2020, the Company consolidates DGPV Holdco 3, and shows the interest owned by CEG as noncontrolling interest. DGPV Holdco 3 owns an interest in two tax equity funds with tax equity investors, both of which are consolidated by DGPV Holdco 3, and the interests owned by the tax equity investors are shown as noncontrolling interests. The Company removed its investment in DGPV Holdco 3 of $155 million as of May 29, 2020 and recorded the difference between the net assets consolidated and the investment balance as a reduction to noncontrolling interests.
20
The following table shows the balances that were consolidated effective on May 29, 2020:
(In millions) | May 29, 2020 | ||||
Current assets | $ | 32 | |||
Property, plant and equipment | 331 | ||||
Intangible assets | 1 | ||||
Other non-current assets | 37 | ||||
Total assets | $ | 401 | |||
Debt | 206 | ||||
Other current and non-current liabilities | 84 | ||||
Total liabilities | $ | 290 | |||
Noncontrolling interests and redeemable noncontrolling interests | 6 | ||||
Net assets less noncontrolling interests | $ | 105 |
Prior to the reconsideration event described above, the Company invested $10 million of cash in DGPV Holdco 3 during the first half of 2020.
DGPV Holdco Consolidation
On November 2, 2020, the Company acquired the Class B membership interests in DGPV Holdco 1, DGPV Holdco 2 and DGPV Holdco 3, or DGPV Holdco Entities, from Renew DG Holdings LLC, a subsidiary of CEG, and an SREC contract for $44 million in cash consideration. The Company previously held the Class A membership interests in the DGPV Holdco Entities and accounted for its interests in DGPV Holdco 1 and DGPV Holdco 2 as equity method investments, while DGPV Holdco 3 was consolidated by the Company effective May 29, 2020 as described above. As further described in Note 7, Long-term Debt, subsequent to the acquisition of the remaining interests in the DGPV Holdco Entities, the Company transferred its interests to DG-CS Master Borrower LLC, and issued debt that was utilized to repay existing project-level debt outstanding and unwind interest rate swaps for certain of the tax equity arrangements related to the underlying project funds. Effective with the acquisition of the Class B membership interests of the DGPV Holdco Entities, the Company consolidates all of the DGPV Holdco Entities, including DG-CS Master Borrower LLC, and its subsidiaries, which consist of seven tax equity funds that collectively own approximately 172 distributed solar projects with a combined 286 MW of capacity. Each of the tax equity funds is a VIE, where the Company is the primary beneficiary and consolidates the fund, with the tax equity investor's interest shown as noncontrolling interest or redeemable noncontrolling interest. The acquired SREC contract, a contract to receive incremental cash flows related to renewable energy credits from certain of the underlying solar projects, will be considered a derivative financial instrument.
Repowering Partnership II LLC
On May 11, 2020, the Company acquired CEG's interest in Repowering Partnership II LLC, for cash consideration of $70 million. Repowering Partnership II LLC is no longer a VIE and subsequent to the acquisition, is a wholly-owned subsidiary of the Company. Repowering Partnership II LLC continues to own interests in two VIEs, Wildorado Repowering Tax Equity Holdco LLC, or Wildorado TE Holdco, and Elbow Creek Repowering Tax Equity Holdco LLC, or Elbow Creek TE Holdco. The Company removed the related noncontrolling interest balance of $8 million and recorded the difference between the cash paid and the noncontrolling interest balance removed as a reduction to noncontrolling interests.
On February 7, 2020, a third party tax equity investor purchased 100% of the Class A membership interests in Wildorado TE Holdco, for $148 million. In addition, the Company contributed $112 million to Wildorado TE Holdco. The combined proceeds were used to repay construction debt under the Repowering Partnership Holdco credit agreement, as described in Note 7, Long-term Debt. The third party tax equity investor, or Wildorado Investor, will receive 99% of allocations of taxable income and other items until the Wildorado Investor obtains a specified return on its initial investment, or the last day of the PTC period, whichever occurs sooner. At such time, the allocations to the Wildorado Investor will change to 5%. Until such time, the Wildorado Investor will receive a variable percentage of cash distributions. Wildorado TE Holdco is a VIE and the Repowering Partnership II LLC is the primary beneficiary through its position as managing member. As a result, the Company consolidates Wildorado TE Holdco, with the Wildorado Investor's interest shown as noncontrolling interest. In connection with the Wildorado TE Holdco closing, the allocations of income at Repowering Partnership II LLC changed to 60.14% for Wind TE Holdco LLC (the Company member) and 39.86% for CWSP Wildorado Elbow Holding LLC (the CEG member). As noted above, CEG no longer has an interest in Repowering Partnership II LLC as of June 30, 2020.
21
The Company utilizes the HLBV method to determine the net income or loss allocated to tax equity noncontrolling interest. The Company recorded a de minimis loss and a loss of $36 million attributable to the noncontrolling interest of Wildorado TE Holdco for the three and nine months ending September 30, 2020 and recorded a loss of $1 million and $9 million attributable to the noncontrolling interest of Elbow Creek TE Holdco for the three and nine months ending September 30, 2020, respectively.
Entities that are not Consolidated
The Company has interests in entities that are considered VIEs under ASC 810, but for which it is not considered the primary beneficiary. The Company accounts for its interests in these entities under the equity method of accounting, as further described in Note 5, Investments Accounted for by the Equity Method and Variable Interest Entities, to the consolidated financial statements included in the Company's 2019 Form 10-K.
Mesquite Star Pledgor LLC
On September 1, 2020, the Company, through its indirect subsidiary Mesquite Star HoldCo LLC, acquired the Class A membership interests in Mesquite Star Pledgor LLC from Clearway Renew LLC, a subsidiary of CEG, for $79 million in cash consideration. Mesquite Star Pledgor LLC is the primary beneficiary and consolidates its interest in a tax equity fund that owns the Mesquite Star wind project, a 419 MW utility scale wind project located in Fisher County, Texas. A majority of the project’s output is backed by contracts with investment grade counterparties with a 12 year weighted average contract life. The transaction is reflected in the Company's Renewables segment and was funded with cash on hand. Mesquite Star Pledgor LLC is a VIE and the Company is not the primary beneficiary. Accordingly, the Company recorded the acquired interest as an equity method investment. The membership interests acquired by the Company relate to interests under common control by GIP and were recorded at historical cost. The difference between the $79 million cash paid and the historical value of the Company's acquired interests of $83 million was recorded as an adjustment to noncontrolling interest.
The Company's maximum exposure to loss as of September 30, 2020 is limited to its equity investment in the unconsolidated entities, as further summarized in the table below:
Name | Economic Interest | Investment Balance | ||||||
(In millions) | ||||||||
Utah Solar Portfolio (a) | 50% | $ | 268 | |||||
Desert Sunlight | 25% | 257 | ||||||
Agua Caliente Solar | 16% | 89 | ||||||
GenConn | 50% | 90 | ||||||
DGPV Holdco 1 LLC (a) | 95% | 81 | ||||||
DGPV Holdco 2 LLC (a) | 95% | 63 | ||||||
San Juan Mesa | 75% | 42 | ||||||
Elkhorn Ridge | 66.7% | 39 | ||||||
Avenal | 50% | (5) | ||||||
Mesquite Star (a) | 50% | 77 | ||||||
$ | 1,001 |
(a) VIEs and tax equity structures and economic interest are based on cash to be distributed
The following tables present summarized financial information for the Company's significant equity method investments:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
(In millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Income Statement Data: | |||||||||||||||||||||||
DGPV Holdco 3 (a) | |||||||||||||||||||||||
Operating revenue | $ | — | $ | 9 | $ | 14 | $ | 22 | |||||||||||||||
Operating income | — | 6 | 6 | 11 | |||||||||||||||||||
Net income (loss) | $ | — | $ | 16 | $ | (12) | $ | 24 | |||||||||||||||
(a) Year to date as of the reconsideration event on May 29, 2020
22
(In millions) | As of September 30, 2020 | As of December 31, 2019 | |||||||||
Balance Sheet Data: | |||||||||||
DGPV Holdco 3 (a) | |||||||||||
Current assets | $ | — | $ | 39 | |||||||
Non-current assets | — | 371 | |||||||||
Current liabilities | — | 61 | |||||||||
Non-current liabilities | — | 216 | |||||||||
Redeemable noncontrolling interest | $ | — | $ | (1) | |||||||
(a) DGPV Holdco 3 was no longer an equity method investment as of the reconsideration event on May 29, 2020
23
Note 5 — Fair Value of Financial Instruments
Fair Value Accounting under ASC 820
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
•Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
•Level 2—inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
•Level 3—unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
In accordance with ASC 820, the Company determines the level in the fair value hierarchy within which each fair value measurement in its entirety falls, based on the lowest level input that is significant to the fair value measurement.
For cash and cash equivalents, restricted cash, accounts receivable, accounts receivable - affiliate, accounts payable, accounts payable - affiliate, accrued expenses and other liabilities, the carrying amounts approximate fair value because of the short-term maturity of those instruments and are classified as Level 1 within the fair value hierarchy.
The estimated carrying amounts and fair values of the Company’s recorded financial instruments not carried at fair market value are as follows:
As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Long-term debt, including current portion (a) | $ | 6,797 | $ | 6,873 | $ | 6,858 | $ | 6,957 |
(a) Excludes net debt issuance costs, which are recorded as a reduction to long-term debt on the Company's consolidated balance sheets.
The fair value of the Company's publicly-traded long-term debt is based on quoted market prices and is classified as Level 2 within the fair value hierarchy. The fair value of non-publicly traded long-term debt of the Company are based on expected future cash flows discounted at market interest rates, or current interest rates for similar instruments with equivalent credit quality and are classified as Level 3 within the fair value hierarchy. The following table presents the level within the fair value hierarchy for long-term debt, including current portion as of September 30, 2020 and December 31, 2019:
As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||
Level 2 | Level 3 | Level 2 | Level 3 | ||||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Long-term debt, including current portion | $ | 1,874 | $ | 4,999 | $ | 1,736 | $ | 5,221 |
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Recurring Fair Value Measurements
The Company records its derivative assets and liabilities at fair value on its consolidated balance sheet. The following table presents assets and liabilities measured and recorded at fair value on the Company's consolidated balance sheets on a recurring basis and their level within the fair value hierarchy:
As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||
Fair Value (a) | Fair Value (a) | ||||||||||||||||||||||
(In millions) | Level 2 | Level 3 | Level 2 | Level 3 | |||||||||||||||||||
Derivative liabilities: | |||||||||||||||||||||||
Commodity contracts | $ | — | $ | 17 | $ | — | $ | 9 | |||||||||||||||
Interest rate contracts | 169 | — | 83 | — | |||||||||||||||||||
Total liabilities | $ | 169 | $ | 17 | $ | 83 | $ | 9 |
(a) There were no derivative assets classified as Level 1, Level 2 or Level 3 and no liabilities classified as Level 1 as of September 30, 2020 and as of December 31, 2019.
The following table reconciles the beginning and ending balances for instruments that are recognized at fair value in the condensed consolidated financial statements using significant unobservable inputs:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
(In millions) | Fair Value Measurement Using Significant Unobservable Inputs (Level 3) | Fair Value Measurement Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
Beginning balance | $ | (17) | $ | (7) | $ | (9) | $ | — | ||||||||||||||||||
Total losses for the period included in earnings | — | (2) | (8) | (2) | ||||||||||||||||||||||
Purchases | — | — | — | (7) | ||||||||||||||||||||||
Ending balance | $ | (17) | $ | (9) | $ | (17) | $ | (9) | ||||||||||||||||||
Change in unrealized losses included in earnings for derivatives held as of September 30, 2020 | $ | — | $ | 8 |
Derivative Fair Value Measurements
The Company's contracts are non-exchange-traded and valued using prices provided by external sources. For some of the Company’s energy contracts, management receives quotes from multiple sources. To the extent that multiple quotes are received, the prices reflect the average of the bid-ask mid-point prices obtained from all sources believed to provide the most liquid market for the commodity. The remainder of the assets and liabilities represent contracts for which external sources or observable market quotes are not available. These contracts are valued based on various valuation techniques including, but not limited to, internal models based on a fundamental analysis of the market and extrapolation of the observable market data with similar characteristics. As of September 30, 2020, contracts valued with prices provided by models and other valuation techniques make up 9% of derivative liabilities.
The Company’s significant position classified as Level 3 includes physical power executed in illiquid markets. The significant unobservable inputs used in developing fair value include illiquid power tenors and location pricing, which is derived by extrapolating pricing and as a basis to liquid locations. The tenor pricing and basis spread are based on observable market data when available or derived from historic prices and forward market prices from similar observable markets when not available.
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The following tables quantify the significant unobservable inputs used in developing the fair value of the Company's Level 3 positions as of September 30, 2020:
September 30, 2020 | |||||||||||||||||||||||
Fair Value | Input/Range | ||||||||||||||||||||||
Assets | Liabilities | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average | |||||||||||||||||
(In millions) | |||||||||||||||||||||||
Power Contracts | $ | — | $ | (17) | Discounted Cash Flow | Forward Market Price (per MWh) | 9.21 | 37.46 | 16.32 |
The following table provides sensitivity of fair value measurements to increases/(decreases) in significant unobservable inputs as of September 30, 2020:
Significant Observable Input | Position | Change In Input | Impact on Fair Value Measurement | ||||||||
Forward Market Price Power | Buy | Increase/(Decrease) | Higher/(Lower) | ||||||||
Forward Market Price Power | Sell | Increase/(Decrease) | Lower/(Higher) |
The fair value of each contract is discounted using a risk-free interest rate. In addition, a credit reserve is applied to reflect credit risk, which is, for interest rate swaps, calculated based on credit default swaps using the bilateral method. For commodities, to the extent that the net exposure under a specific master agreement is an asset, the Company uses the counterparty’s default swap rate. If the net exposure under a specific master agreement is a liability, the Company uses a proxy of its own default swap rate. For interest rate swaps and commodities, the credit reserve is added to the discounted fair value to reflect the exit price that a market participant would be willing to receive to assume the liabilities or that a market participant would be willing to pay for the assets. As of September 30, 2020, the non-performance reserve was a $10 million gain recorded primarily in interest expense in the consolidated statements of operations. It is possible that future market prices could vary from those used in recording assets and liabilities and such variations could be material.
Concentration of Credit Risk
In addition to the credit risk discussion in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in the Company's 2019 Form 10-K, the following is a discussion of the concentration of credit risk for the Company's financial instruments. Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. The Company monitors and manages credit risk through credit policies that include: (i) an established credit approval process; (ii) monitoring of counterparties' credit limits; (iii) the use of credit mitigation measures such as margin, collateral, prepayment arrangements, or volumetric limits; (iv) the use of payment netting agreements; and (v) the use of master netting agreements that allow for the netting of positive and negative exposures of various contracts associated with a single counterparty. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. The Company seeks to mitigate counterparty risk by having a diversified portfolio of counterparties.
Counterparty credit exposure includes credit risk exposure under certain long-term agreements, including solar and other PPAs. As external sources or observable market quotes are not available to estimate such exposure, the Company estimates the exposure related to these contracts based on various techniques including, but not limited to, internal models based on a fundamental analysis of the market and extrapolation of observable market data with similar characteristics. The majority of these power contracts are with utilities with strong credit quality and public utility commission or other regulatory support. However, such regulated utility counterparties can be impacted by changes in government regulations or adverse financial conditions, which the Company is unable to predict.
26
Note 6 — Derivative Instruments and Hedging Activities
This footnote should be read in conjunction with the complete description under Item 15 — Note 7, Accounting for Derivative Instruments and Hedging Activities, to the consolidated financial statements included in the Company's 2019 Form 10-K.
Interest Rate Swaps
The Company enters into interest rate swap agreements in order to hedge the variability of expected future cash interest payments. As of September 30, 2020, the Company had interest rate derivative instruments on non-recourse debt extending through 2043, a portion of which were designated as cash flow hedges. Under the interest rate swap agreements, the Company pays a fixed rate and the counterparties to the agreements pay a variable interest rate.
Energy-Related Commodities
As of September 30, 2020, the Company had energy-related derivative instruments extending through 2029. At September 30, 2020, these contracts were not designated as cash flow or fair value hedges.
Volumetric Underlying Derivative Transactions
The following table summarizes the net notional volume buy of the Company's open derivative transactions broken out by type:
Total Volume | |||||||||||||||||
September 30, 2020 | December 31, 2019 | ||||||||||||||||
Commodity | Units | (In millions) | |||||||||||||||
Natural Gas | MMBtu | 1 | 2 | ||||||||||||||
Power | MWh | (2) | (2) | ||||||||||||||
Interest | Dollars | $ | 1,769 | $ | 1,788 | ||||||||||||
Fair Value of Derivative Instruments
The following table summarizes the fair value within the derivative instrument valuation on the balance sheet:
Fair Value | ||||||||||||||
Derivative Liabilities | ||||||||||||||
September 30, 2020 | December 31, 2019 | |||||||||||||
(In millions) | ||||||||||||||
Derivatives Designated as Cash Flow Hedges: | ||||||||||||||
Interest rate contracts current | $ | 7 | $ | 3 | ||||||||||
Interest rate contracts long-term | 14 | 11 | ||||||||||||
Total Derivatives Designated as Cash Flow Hedges | 21 | 14 | ||||||||||||
Derivatives Not Designated as Cash Flow Hedges: | ||||||||||||||
Interest rate contracts current | 29 | 13 | ||||||||||||
Interest rate contracts long-term | 119 | 56 | ||||||||||||
Commodity contracts long-term | 17 | 9 | ||||||||||||
Total Derivatives Not Designated as Cash Flow Hedges | 165 | 78 | ||||||||||||
Total Derivatives | $ | 186 | $ | 92 |
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The Company has elected to present derivative assets and liabilities on the balance sheet on a trade-by-trade basis and does not offset amounts at the counterparty master agreement level. As of September 30, 2020 and December 31, 2019, there was no outstanding collateral paid or received. The following tables summarize the offsetting of derivatives by the counterparty master agreement level as of September 30, 2020 and December 31, 2019:
As of September 30, 2020 | Gross Amounts of Recognized Assets/Liabilities | Derivative Instruments | Net Amount | ||||||||||||||
Commodity contracts: | (In millions) | ||||||||||||||||
Derivative liabilities | $ | (17) | $ | — | $ | (17) | |||||||||||
Total commodity contracts | (17) | — | (17) | ||||||||||||||
Interest rate contracts: | |||||||||||||||||
Derivative liabilities | (169) | — | (169) | ||||||||||||||
Total interest rate contracts | (169) | — | (169) | ||||||||||||||
Total derivative instruments | $ | (186) | $ | — | $ | (186) |
As of December 31, 2019 | Gross Amounts of Recognized Assets/Liabilities | Derivative Instruments | Net Amount | ||||||||||||||
Commodity contracts: | (In millions) | ||||||||||||||||
Derivative liabilities | $ | (9) | $ | (1) | $ | (10) | |||||||||||
Total commodity contracts | (9) | (1) | (10) | ||||||||||||||
Interest rate contracts: | |||||||||||||||||
Derivative liabilities | (83) | 1 | (82) | ||||||||||||||
Total interest rate contracts | (83) | 1 | (82) | ||||||||||||||
Total derivative instruments | $ | (92) | $ | — | $ | (92) |
Accumulated Other Comprehensive Loss
The following table summarizes the effects on the Company’s accumulated OCL balance attributable to interest rate swaps designated as cash flow hedge derivatives, net of tax:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Accumulated OCL beginning balance | $ | (39) | $ | (35) | $ | (31) | $ | (38) | |||||||||||||||
Reclassified from accumulated OCL to income due to realization of previously deferred amounts | 2 | (2) | 5 | 15 | |||||||||||||||||||
Mark-to-market of cash flow hedge accounting contracts | 6 | 1 | (5) | (13) | |||||||||||||||||||
Accumulated OCL ending balance, net of income tax benefit of $6, $6, $6 and $6, respectively | (31) | (36) | (31) | (36) | |||||||||||||||||||
Accumulated OCL attributable to noncontrolling interests | (16) | (19) | (16) | (19) | |||||||||||||||||||
Accumulated OCL attributable to Clearway Energy, Inc. | $ | (15) | $ | (17) | $ | (15) | $ | (17) | |||||||||||||||
Losses expected to be realized from OCL during the next 12 months, net of income tax benefit of $4 | $ | (9) | $ | (9) |
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Impact of Derivative Instruments on the Statements of Operations
Gains and losses related to the Company's derivatives are recorded in the consolidated statements of operations as follows:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Interest Rate Contracts (Interest Expense) | $ | 39 | $ | (28) | $ | (53) | $ | (82) | |||||||||||||||
Mark-to-market economic hedging activities (a) | — | — | (8) | — |
(a) Relates to long-term power hedge at Elbow Creek Wind Project LLC, or Elbow Creek.
A portion of the Company’s derivative commodity contracts relates to its Thermal Business for the purchase of fuel commodities based on the forecasted usage of the thermal district energy centers. Realized gains and losses on these contracts are reflected in the fuel costs that are permitted to be billed to customers through the related customer contracts or tariffs and, accordingly, no gains or losses are reflected in the consolidated statements of operations for these contracts.
See Note 5, Fair Value of Financial Instruments, for a discussion regarding concentration of credit risk.
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Note 7 — Long-term Debt
This note should be read in conjunction with the complete description under Item 15 — Note 10, Long-term Debt, to the consolidated financial statements included in the Company's 2019 Form 10-K. Long-term debt consisted of the following:
(In millions, except rates) | September 30, 2020 | December 31, 2019 | September 30, 2020 interest rate % (a) | Letters of Credit Outstanding at September 30, 2020 | |||||||||||||||||||
2020 Convertible Notes (b) | $ | — | $ | 45 | 3.250 | ||||||||||||||||||
2024 Senior Notes (c) | — | 88 | 5.375 | ||||||||||||||||||||
2025 Senior Notes | 600 | 600 | 5.750 | ||||||||||||||||||||
2026 Senior Notes | 350 | 350 | 5.000 | ||||||||||||||||||||
2028 Senior Notes | 850 | 600 | 4.750 | ||||||||||||||||||||
Clearway Energy LLC and Clearway Energy Operating LLC Revolving Credit Facility, due 2023 (d) | — | — | L+2.00 | 59 | |||||||||||||||||||
Project-level debt: | |||||||||||||||||||||||
Alpine, due 2022(e) | — | 119 | L+2.00 | — | |||||||||||||||||||
Alta Wind I-V lease financing arrangements, due 2034 and 2035 | 816 | 844 | 5.696 - 7.015 | 29 | |||||||||||||||||||
Buckthorn Solar, due 2025 | 127 | 129 | L+1.750 | 26 | |||||||||||||||||||
Carlsbad Holdco, due 2038 | 215 | 216 | 4.210 | 9 | |||||||||||||||||||
Carlsbad Energy Holdings LLC, due 2027 and 2038 | 568 | 582 | various | 67 | |||||||||||||||||||
Chestnut Borrower, LLC, due 2024 | 109 | — | L+2.50 | 8 | |||||||||||||||||||
CS4 Borrower, due 2026 | 103 | — | L+2.00 | 4 | |||||||||||||||||||
CVSR, due 2037 | 675 | 696 | 2.339 - 3.775 | — | |||||||||||||||||||
CVSR Holdco Notes, due 2037 | 176 | 182 | 4.680 | 13 | |||||||||||||||||||
Duquesne, due 2059 | 95 | 95 | 4.620 | — | |||||||||||||||||||
El Segundo Energy Center, due 2023 | 250 | 303 | L+1.875 - L+2.500 | 138 | |||||||||||||||||||
Energy Center Minneapolis Series D, E, F, G, H Notes, due 2025-2037 | 327 | 328 | various | — | |||||||||||||||||||
Laredo Ridge, due 2028 | 80 | 84 | L+2.125 | 10 | |||||||||||||||||||
Kansas South, due 2030 | 23 | 24 | L+2.25 | 2 | |||||||||||||||||||
Kawailoa Solar Holdings LLC, due 2026 | 82 | 82 | L+1.375 | 13 | |||||||||||||||||||
Marsh Landing, due 2023 | 164 | 206 | L+2.125 | 38 | |||||||||||||||||||
NIMH Solar, due 2024 | 193 | — | L+2.00 | 11 | |||||||||||||||||||
Oahu Solar Holdings LLC, due 2026 | 90 | 91 | L+1.375 | 11 | |||||||||||||||||||
Repowering Partnership Holdco LLC, due 2020 (c) | — | 228 | L+.85 | — | |||||||||||||||||||
South Trent, due 2028 | 39 | 43 | L+1.350 | 12 | |||||||||||||||||||
Tapestry, due 2031 | 147 | 156 | L+1.375 | 18 | |||||||||||||||||||
Utah Solar Holdings, due 2036 | 296 | — | 3.59 | 9 | |||||||||||||||||||
Utah Solar Portfolio, due 2022(e) | — | 254 | L+1.625 | — | |||||||||||||||||||
Viento, due 2023 | 35 | 42 | L+2.00 | 12 | |||||||||||||||||||
Walnut Creek, due 2023 | 140 | 175 | L+1.75 | 80 | |||||||||||||||||||
Other(f) | 242 | 296 | various | 29 | |||||||||||||||||||
Subtotal project-level debt: | 4,992 | 5,175 | |||||||||||||||||||||
Total debt | 6,792 | 6,858 | |||||||||||||||||||||
Less current maturities | (361) | (1,824) | |||||||||||||||||||||
Less net debt issuance costs | (79) | (78) | |||||||||||||||||||||
Add premiums(g) | 5 | — | |||||||||||||||||||||
Total long-term debt | $ | 6,357 | $ | 4,956 |
(a) As of September 30, 2020, L+ equals 3 month LIBOR plus x%, except for Viento, due 2023 and Kansas South, due 2030 where L+ equals 6 month LIBOR plus x%
(b) Matured and repaid in the second quarter of 2020
(c) Repaid in the first quarter of 2020, as further described below
(d) Applicable rate is determined by the borrower leverage ratio, as defined in the credit agreement
(e) Repaid in the third quarter of 2020, as further described below
(f) December 31, 2019 includes Blythe and Roadrunner debt outstanding of $14 million and $28 million, respectively which were repaid in the third quarter of 2020, as further described below
(g) Premiums relate to the 2028 Senior Notes
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The financing arrangements listed above contain certain covenants, including financial covenants that the Company is required to be in compliance with during the term of the respective arrangement. As of September 30, 2020, the Company was in compliance with all of the required covenants. The discussion below describes material changes to or additions of long-term debt for the nine months ended September 30, 2020.
Clearway Energy LLC and Clearway Energy Operating LLC Revolving Credit Facility
As of September 30, 2020, the Company had no outstanding borrowings under the revolving credit facility and $59 million in letters of credit outstanding. The Company had no borrowings under the revolving credit facility during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company borrowed $265 million under the revolving credit facility, and subsequently repaid $265 million utilizing the proceeds from the issuance of additional 2028 Senior Notes, as described below, and cash on hand.
2028 Senior Notes
On May 21, 2020, the Company completed the issuance of an additional $250 million in aggregate principal amount of its 4.750% Senior Notes due 2028. The 2028 Senior Notes bear interest at 4.75% and mature on March 15, 2028. Interest on the 2028 Senior Notes is payable semi-annually on March 15 and September 15 of each year, and interest payments will commence on September 15, 2020. The 2028 Senior Notes are unsecured obligations of Clearway Energy Operating, LLC and are guaranteed by Clearway Energy, LLC and by certain of Clearway Energy Operating LLC’s wholly owned current and future subsidiaries. The notes were issued at a price of 102% of par plus accrued interest from December 11, 2019. The net proceeds were utilized to repay the $45 million outstanding principal amount of the Company's 2020 Convertible Notes on June 1, 2020, as well as to repay amounts outstanding under the Company’s revolving credit facility and for general corporate purposes.
2024 Senior Notes Redemption
On January 3, 2020, the Company redeemed the $88 million aggregate principal amount of the 2024 Senior Notes that remained outstanding following the Company's tender offer for the 2024 Senior Notes in December 2019. The redemption was effectuated at a premium of 102.7% for a total consideration of $90 million and as a result, the Company recorded a loss on debt extinguishment in the amount of $3 million, which also included the write off of previously deferred financing fees related to the 2024 Senior Notes.
Project - level Debt
PG&E Bankruptcy
On July 1, 2020, PG&E emerged from bankruptcy and assumed the Company's contracts without modification. In addition, PG&E paid to the Company's applicable projects the portion of the invoices corresponding to the electricity delivered between January 1 and January 28, 2019. These invoices related to the pre-petition period services and any payment therefore required the approval of the Bankruptcy Court. During the three months ended September 30, 2020, the Company entered into waiver agreements with the lenders to the respective financing agreements related to the PG&E Bankruptcy.
Repowering Partnership Holdco LLC, due 2020
In February 2020, the Company repaid $260 million of construction debt outstanding under the construction loan facility. The repayment was effectuated with the proceeds from the tax equity contributions for Wildorado TE Holdco, as further descried in Note 4, Investments Accounted for by the Equity Method and Variable Interest Entities as well as with the contributions by the Company.
Consolidation of DGPV Holdco 3
Upon consolidation of DGPV Holdco 3, as described in Note 4, Investments Accounted for by the Equity Method and Variable Interest Entities, the Company consolidates additional non-recourse debt for certain subsidiaries as further described below.
Renew CS4 Borrower LLC, or CS4 Borrower, a consolidated subsidiary of DGPV Holdco 3, is party to a credit agreement for construction loans up to $97.4 million, an investment tax credit bridge loan, or ITC bridge loan, for up to $89.9 million and letter of credit facilities up to $4.9 million. The construction loan and the ITC bridge loan both have an interest rate of LIBOR plus an applicable margin of 2.00% per annum. As of June 30, 2020, all construction loans were converted to term loans and the ITC bridge loans were repaid in connection with tax equity funding. The term loan bears annual interest at a rate of LIBOR plus an applicable margin, which is 2.00% per annum through the third anniversary of the
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term conversion, and 2.25% per annum thereafter through the maturity date in June 2026. The borrowings are secured by the membership interests in the project companies.
Chestnut Borrower LLC, a consolidated subsidiary of DGPV Holdco 3, is party to a credit agreement for term loans of up to $120.3 million and letters of credit of up to $7.9 million. The loans bear annual interest at a rate of LIBOR plus an applicable margin, which is 2.50% per annum through the fifth anniversary of the financial closing date, or July 2022, and 2.75% per annum thereafter through the maturity date in April 2024. The borrowings are secured by the membership interests in the project companies.
DG-CS Master Borrower LLC
On November 2, 2020, DG-CS Master Borrower LLC, a wholly owned subsidiary of Clearway Energy Operating LLC, entered into a financing arrangement, which included the issuance of a $467 million term loan, as well as $30 million in letters of credit in support of debt service. The notes bear interest at 3.51% and mature on September 30, 2040. The proceeds from the loan were utilized to repay existing project-level debt outstanding for Chestnut Borrower LLC, Renew Solar CS 4 Borrower LLC, DGPV 4 Borrower LLC and Puma Class B LLC of $107 million, $102 million, $92 million and $73 million respectively and unwind related interest rate swaps in the amount of $42 million. The remaining proceeds were utilized to pay related fees and expenses and in part to acquire the Class B membership interests in the DGPV Holdco Entities and an SREC contract from CEG as further described in Note 4, Investments Accounted for by the Equity Method and Variable Interest Entities. Concurrent with the refinancing, the projects were transferred under DG-CS Master Borrower LLC and the obligations under the financing arrangement are supported by the Company's interest in the projects.
Utah Solar Holdings, LLC
On September 1, 2020, Utah Solar Holdings, LLC, or Utah Solar, entered into a financing arrangement, which included the issuance of approximately $296 million in senior secured notes supported by the Company’s interest in the Utah projects (Four Brothers, Granite Mountain and Iron Springs, previously defined as the Utah Solar Portfolio), as well as $16 million in letters of credit in support of debt service obligations. The notes bear interest at 3.59% per annum and mature on December 31, 2036. The proceeds from the issuance were utilized to repay existing debt outstanding of approximately $247 million for the Utah projects and to unwind the related interest rate swaps in the amount of $33 million. The remaining proceeds were utilized to pay related fees and expenses, with the remaining $9 million distributed to Clearway Energy Operating LLC.
NIMH Solar LLC
On September 30, 2020, NIMH Solar LLC, a wholly owned subsidiary of Clearway Energy Operating LLC, entered into a financing arrangement, which included the issuance of $193 million under a term loan facility, as well as $16 million in letters of credit in support of debt service and project obligations. The term loan bears annual interest rate of LIBOR, plus an applicable margin, which is 2.00% per annum through the third party anniversary of closing, and 2.125% per annum thereafter through the maturity date in September 2024. The proceeds from the term loan were utilized to repay existing project-level debt outstanding for Alpine, Blythe and Roadrunner of $117 million, $14 million and $27 million, respectively. The remaining proceeds were utilized to pay related fees and expenses and along with existing project level cash provided a distribution to Clearway Energy Operating LLC of $45 million. Concurrent with the refinancing, the Alpine, Blythe and Roadrunner projects were transferred under NIMH Solar LLC and the obligations under the financing arrangement are supported by the Company’s interests in the projects.
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Note 8 — Earnings Per Share
Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding. Shares issued during the year are weighted for the portion of the year that they were outstanding. Diluted earnings per share is computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares that were outstanding during the period.
The reconciliation of Clearway Energy, Inc.'s basic and diluted earnings per share is shown in the following tables:
Three months ended September 30, | |||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||
(In millions, except per share data) (a) | Common Class A | Common Class C | Common Class A | Common Class C | |||||||||||||||||||
Basic income per share attributable to Clearway Energy, Inc. common stockholders | |||||||||||||||||||||||
Net income attributable to Clearway Energy, Inc. | $ | 9 | $ | 22 | $ | 12 | $ | 27 | |||||||||||||||
Weighted average number of common shares outstanding — basic | 35 | 81 | 35 | 73 | |||||||||||||||||||
Earnings per weighted average common share — basic | $ | 0.27 | $ | 0.27 | $ | 0.36 | $ | 0.36 | |||||||||||||||
Diluted income per share attributable to Clearway Energy, Inc. common stockholders | |||||||||||||||||||||||
Net income attributable to Clearway Energy, Inc | $ | 9 | $ | 22 | $ | 12 | $ | 27 | |||||||||||||||
Weighted average number of common shares outstanding — diluted | 35 | 81 | 35 | 75 | |||||||||||||||||||
Earnings per weighted average common share — diluted | $ | 0.27 | $ | 0.27 | $ | 0.36 | $ | 0.36 |
(a) Basic and diluted earnings per share might not recalculate due to presenting values in millions rather than whole dollars.
Nine months ended September 30, | |||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||
(In millions, except per share data) (a) | Common Class A | Common Class C | Common Class A | Common Class C | |||||||||||||||||||
Basic and diluted income (loss) per share attributable to Clearway Energy, Inc. common stockholders | |||||||||||||||||||||||
Net income (loss) attributable to Clearway Energy, Inc. | $ | 15 | $ | 35 | $ | (2) | $ | (3) | |||||||||||||||
Weighted average number of common shares outstanding — basic and diluted | 35 | 80 | 35 | 73 | |||||||||||||||||||
Earnings (loss) per weighted average common share — basic and diluted | $ | 0.43 | $ | 0.43 | $ | (0.04) | $ | (0.04) |
(a) Basic and diluted earnings (losses) per share might not recalculate due to presenting values in millions rather than whole dollars.
The following table summarizes the Company's outstanding equity instruments that are anti-dilutive and were not included in the computation of the Company's diluted earnings per share, the 2020 Convertible Notes were repaid on June 1, 2020:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
2019 | 2019 | ||||||||||||||||
(In millions of shares) | |||||||||||||||||
2020 Convertible Notes - Common Class C | — | 2 |
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Note 9 — Changes in Capital Structure
At-the-Market Equity Offering Programs
On August 6, 2020, Clearway Energy, Inc. entered into an equity distribution agreement with Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC and UBS Securities LLC, as sales agents. Pursuant to the terms of the equity distribution agreement, Clearway Energy, Inc. may offer and sell shares of its Class C common stock from time to time through the sales agents up to an aggregate sales price of $150 million through an at-the-market equity offering program, or the 2020 ATM Program.
On August 9, 2016, Clearway Energy, Inc. entered into an equity distribution agreement, or EDA, with Barclays Capital Inc., Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC and RBC Capital Markets, LLC, as sales agents. Pursuant to the terms of the equity distribution agreement Clearway Energy, Inc., offered and sold shares of its Class C common stock from time to time through the sales agents up to an aggregate sales price of $150 million through an at-the-market equity offering program, or the 2016 ATM Program. As of June 30, 2020, the Company had completed the issuance of shares of Class C common stock totaling $150 million in gross proceeds under the 2016 ATM Program.
The following table summarizes Class C common stock shares sold under the ATM Programs during the nine months ended September 30, 2020:
Number of shares sold | Gross Proceeds from the sale of shares(a) (in millions) | ||||||||||
2020 ATM Program | 792,929 | $ | 21 | ||||||||
2016 ATM Program | 1,749,665 | 38 | |||||||||
Total Class C common stock sold during nine months ending September 30, 2020 | 2,542,594 | $ | 59 |
(a) The Company incurred commission fees of $0.2 million and $0.6 million during the three and nine months ended September 30, 2020, respectively
As of September 30, 2020, approximately $129 million of Class C common stock remains available for issuance under the 2020 ATM Program.
The Company utilized the proceeds of the sales under the ATM Programs to acquire 2,542,594 Class C units of Clearway Energy LLC and, as a result, as of September 30, 2020 the Company owned 57.58% of the economic interests of Clearway Energy LLC, with CEG retaining 42.42% of the economic interests of Clearway Energy LLC.
Dividends to Class A and Class C common stockholders
The following table lists the dividends paid on the Company's Class A common stock and Class C common stock during the nine months ended September 30, 2020:
Third Quarter 2020 | Second Quarter 2020 | First Quarter 2020 | ||||||||||||||||||
Dividends per Class A share | $ | 0.3125 | $ | 0.2100 | $ | 0.2100 | ||||||||||||||
Dividends per Class C share | $ | 0.3125 | $ | 0.2100 | $ | 0.2100 |
Dividends on the Class A common stock and Class C common stock are subject to available capital, market conditions, and compliance with associated laws, regulations and other contractual obligations. The Company expects that, based on current circumstances, comparable cash dividends will continue to be paid in the foreseeable future.
On October 27, 2020, the Company declared quarterly dividends on its Class A common stock and Class C common stock of $0.318 per share payable on December 15, 2020, to stockholders of record as of December 1, 2020.
The Company also has authorized 10 million shares of preferred stock, par value $0.01 per share. None of the shares of preferred stock have been issued.
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Note 10 — Segment Reporting
The Company’s segment structure reflects how management currently operates and allocates resources. The Company's businesses are segregated based on conventional power generation, renewable businesses which consist of solar and wind, and the thermal and chilled water business. The Corporate segment reflects the Company's corporate costs. The Company's chief operating decision maker, its Chief Executive Officer, evaluates the performance of its segments based on operational measures including adjusted earnings before interest, taxes, depreciation and amortization, or Adjusted EBITDA, and CAFD, as well as economic gross margin and net income (loss).
Three months ended September 30, 2020 | |||||||||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Corporate | Total | ||||||||||||||||||||||||
Operating revenues | $ | 116 | $ | 157 | $ | 59 | $ | — | $ | 332 | |||||||||||||||||||
Cost of operations | 21 | 33 | 41 | — | 95 | ||||||||||||||||||||||||
Depreciation, amortization and accretion | 34 | 61 | 7 | — | 102 | ||||||||||||||||||||||||
General and administrative | — | — | 1 | 8 | 9 | ||||||||||||||||||||||||
Transaction and integration costs | — | — | — | 1 | 1 | ||||||||||||||||||||||||
Development costs | — | — | 2 | — | 2 | ||||||||||||||||||||||||
Operating income (loss) | 61 | 63 | 8 | (9) | 123 | ||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | 3 | 16 | — | — | 19 | ||||||||||||||||||||||||
Other income, net | 1 | — | (1) | — | — | ||||||||||||||||||||||||
Loss on debt extinguishment | — | (6) | — | — | (6) | ||||||||||||||||||||||||
Interest expense | (17) | (39) | (6) | (23) | (85) | ||||||||||||||||||||||||
Income (loss) before income taxes | 48 | 34 | 1 | (32) | 51 | ||||||||||||||||||||||||
Income tax expense | — | — | — | 9 | 9 | ||||||||||||||||||||||||
Net Income (Loss) | $ | 48 | $ | 34 | $ | 1 | $ | (41) | $ | 42 | |||||||||||||||||||
Total Assets | $ | 2,615 | $ | 6,210 | $ | 627 | $ | 273 | $ | 9,725 |
Three months ended September 30, 2019 | |||||||||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Corporate | Total | ||||||||||||||||||||||||
Operating revenues | $ | 90 | $ | 151 | $ | 55 | $ | — | $ | 296 | |||||||||||||||||||
Cost of operations | 13 | 35 | 36 | — | 84 | ||||||||||||||||||||||||
Depreciation, amortization and accretion | 26 | 81 | 7 | — | 114 | ||||||||||||||||||||||||
General and administrative | — | 1 | 1 | 5 | 7 | ||||||||||||||||||||||||
Development costs | — | — | 1 | — | 1 | ||||||||||||||||||||||||
Operating income (loss) | 51 | 34 | 10 | (5) | 90 | ||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | 3 | 35 | — | — | 38 | ||||||||||||||||||||||||
Other income, net | — | 2 | — | — | 2 | ||||||||||||||||||||||||
Interest expense | (13) | (65) | (5) | (23) | (106) | ||||||||||||||||||||||||
Income (loss) before income taxes | 41 | 6 | 5 | (28) | 24 | ||||||||||||||||||||||||
Income tax benefit | — | — | — | (11) | (11) | ||||||||||||||||||||||||
Net Income (Loss) | $ | 41 | $ | 6 | $ | 5 | $ | (17) | $ | 35 |
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Nine months ended September 30, 2020 | |||||||||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Corporate | Total | ||||||||||||||||||||||||
Operating revenues | $ | 326 | $ | 444 | $ | 149 | $ | — | $ | 919 | |||||||||||||||||||
Cost of operations | 67 | 108 | 100 | — | 275 | ||||||||||||||||||||||||
Depreciation, amortization and accretion | 100 | 182 | 21 | — | 303 | ||||||||||||||||||||||||
General and administrative | — | 1 | 4 | 25 | 30 | ||||||||||||||||||||||||
Transaction and integration costs | — | — | — | 2 | 2 | ||||||||||||||||||||||||
Development costs | — | — | 4 | — | 4 | ||||||||||||||||||||||||
Operating income (loss) | 159 | 153 | 20 | (27) | 305 | ||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | 6 | 16 | — | — | 22 | ||||||||||||||||||||||||
Gain on sale of unconsolidated affiliate | — | — | — | 49 | 49 | ||||||||||||||||||||||||
Other income, net | 1 | 1 | — | — | 2 | ||||||||||||||||||||||||
Loss on debt extinguishment | — | (6) | — | (3) | (9) | ||||||||||||||||||||||||
Interest expense | (69) | (190) | (16) | (70) | (345) | ||||||||||||||||||||||||
Income (loss) before income taxes | 97 | (26) | 4 | (51) | 24 | ||||||||||||||||||||||||
Income tax expense | — | — | — | 13 | 13 | ||||||||||||||||||||||||
Net Income (Loss) | $ | 97 | $ | (26) | $ | 4 | $ | (64) | $ | 11 |
Nine months ended September 30, 2019 | |||||||||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Corporate | Total | ||||||||||||||||||||||||
Operating revenues | $ | 253 | $ | 392 | $ | 152 | $ | — | $ | 797 | |||||||||||||||||||
Cost of operations | 44 | 102 | 99 | — | 245 | ||||||||||||||||||||||||
Depreciation, amortization and accretion | 75 | 194 | 20 | — | 289 | ||||||||||||||||||||||||
Impairment losses | — | — | 19 | — | 19 | ||||||||||||||||||||||||
General and administrative | — | 1 | 2 | 17 | 20 | ||||||||||||||||||||||||
Transaction and integration costs | — | — | — | 2 | 2 | ||||||||||||||||||||||||
Development costs | — | — | 4 | — | 4 | ||||||||||||||||||||||||
Operating income (loss) | 134 | 95 | 8 | (19) | 218 | ||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | 7 | 45 | — | — | 52 | ||||||||||||||||||||||||
Other income, net | 1 | 4 | — | 1 | 6 | ||||||||||||||||||||||||
Loss on debt extinguishment | — | (1) | — | — | (1) | ||||||||||||||||||||||||
Interest expense | (45) | (213) | (13) | (66) | (337) | ||||||||||||||||||||||||
Income (loss) before income taxes | 97 | (70) | (5) | (84) | (62) | ||||||||||||||||||||||||
Income tax benefit | — | — | — | (14) | (14) | ||||||||||||||||||||||||
Net Income (Loss) | $ | 97 | $ | (70) | $ | (5) | $ | (70) | $ | (48) |
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Note 11 — Income Taxes
Effective Tax Rate
The income tax provision consisted of the following:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(In millions, except percentages) | |||||||||||||||||||||||
Income (loss) before income tax benefit | $ | 51 | $ | 24 | $ | 24 | $ | (62) | |||||||||||||||
Income tax expense (benefit) | 9 | (11) | 13 | (14) | |||||||||||||||||||
Effective income tax rate | 17.6 | % | (45.8) | % | 54.2 | % | 22.6 | % |
For the three and nine months ended September 30, 2020 and 2019 the overall effective tax rate was different than the statutory rate of 21% primarily due to taxable earnings and losses allocated to partners' interest in Clearway Energy LLC, which includes the effects of applying HLBV method of accounting for book purposes for certain partnerships.
For tax purposes, Clearway Energy LLC is treated as a partnership; therefore, the Company and CEG each record their respective share of taxable income or loss.
On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security (CARES) Act, or the Act, was signed into law, which includes modifications to the business interest expense disallowance and net operating loss provisions. While the Company expects to utilize previously disallowed interest expense during 2020 as a result of the modifications, the Company does not expect the Act to have a material impact on the consolidated financial statements. The Company will continue to assess the effects of the Act and ongoing government guidance related to COVID-19 that may be issued.
Note 12 — Related Party Transactions
In addition to the transactions and relationships described elsewhere in the notes to the consolidated financial statements, certain subsidiaries of CEG provide services to the Company's project entities. Amounts due to CEG subsidiaries are recorded as accounts payable - affiliate and amounts due to the Company from CEG subsidiaries are recorded as accounts receivable - affiliate in the Company's balance sheet. The disclosures below summarize the Company's material related party transactions with CEG and its subsidiaries that are included in the Company's operating revenues and operating costs.
O&M Services Agreements by and between the Company and Clearway Renewable Operation & Maintenance LLC
Various wholly-owned project subsidiaries of the Company in the Renewables segment are party to services agreements with Clearway Renewable Operation & Maintenance LLC, or RENOM, a wholly-owned subsidiary of CEG, which provides operation and maintenance, or O&M, to these subsidiaries. The Company incurred total expenses for these services of $9 million and $27 million for each of the three and nine months ended September 30, 2020, respectively. The Company incurred total expenses for these services of $8 million and $22 million for each of the three and nine months ended September 30, 2019, respectively. There was a balance of $9 million and $7 million due to RENOM as of September 30, 2020 and December 31, 2019, respectively.
Administrative Services Agreements by and between the Company and CEG
Various wholly-owned project subsidiaries of the Company are parties to administrative services agreements with Clearway Asset Services and Clearway Solar Asset Management, two wholly-owned subsidiaries of CEG, which provide various administrative services to the Company's subsidiaries. The Company incurred expenses under these agreements of $3 million and $7 million for each of the three and nine months ended September 30, 2020, respectively. The Company incurred expenses under these agreements of $2 million and $5 million for each of the three and nine months ended September 30, 2019, respectively.
CEG Master Services Agreements
The Company is a party to Master Services Agreements with CEG, or MSAs, pursuant to which CEG and certain of its affiliates or third party service providers provide certain services to the Company, including operational and administrative services, which include human resources, information systems, external affairs, accounting, procurement and risk management services, and the Company provides certain services to CEG, including accounting, internal audit, tax and treasury services, in exchange for the payment of fees in respect of such services. Amounts due to CEG or its subsidiaries related to these MSAs are recorded as accounts payable - affiliate and amounts due to the Company from CEG and subsidiaries are recorded as accounts
37
receivable - affiliate on the Company's consolidated balance sheet. The Company incurred expenses of $0.6 million and $2 million under these agreements for each of the three and nine months ended September 30, 2020, respectively. The expenses under these agreements were immaterial to the Company's financials for each of the three and nine months ended September 30, 2019.
Note 13 — Contingencies
This note should be read in conjunction with the complete description under Item 15 — Note 17, Commitments and Contingencies, to the Company's 2019 Form 10-K.
Contingencies
The Company's material legal proceedings are described below. The Company believes that it has valid defenses to these legal proceedings and intends to defend them vigorously. The Company records reserves for estimated losses from contingencies when information available indicates that a loss is probable and the amount of the loss, or range of loss, can be reasonably estimated. As applicable, the Company has established an adequate reserve for the matters discussed below. In addition, legal costs are expensed as incurred. Management assesses such matters based on current information and makes a judgment concerning its potential outcome, considering the nature of the claim, the amount and nature of damages sought, and the probability of success. The Company is unable to predict the outcome of the legal proceedings below or reasonably estimate the scope or amount of any associated costs and potential liabilities. As additional information becomes available, management adjusts its assessment and estimates of such contingencies accordingly. Because litigation is subject to inherent uncertainties and unfavorable rulings or developments, it is possible that the ultimate resolution of the Company's liabilities and contingencies could be at amounts that are different from its currently recorded reserves and that such difference could be material.
In addition to the legal proceedings noted below, the Company and its subsidiaries are party to other litigation or legal proceedings arising in the ordinary course of business. In management's opinion, the disposition of these ordinary course matters will not materially adversely affect the Company's consolidated financial position, results of operations, or cash flows.
Nebraska Public Power District Litigation
On January 11, 2019, Nebraska Public Power District, or NPPD, sent written notice to certain of the Company’s subsidiaries which own the Laredo Ridge and Elkhorn Ridge wind projects alleging an event of default under each of the PPAs between NPPD and the projects. NPPD alleges that the Company moved forward with certain transactions without obtaining the consent of NPPD. NPPD threatened to terminate the applicable PPAs by February 11, 2019 if the alleged default was not cured. The Company filed a motion for a temporary restraining order and preliminary injunction in the U.S. District Court for the District of Nebraska relating to the Laredo Ridge project, and a similar motion in the District Court of Knox County, Nebraska for the Elkhorn Ridge project, to enjoin NPPD from taking any actions related to the PPAs. On February 19, 2019, the U.S. District Court in the Laredo Ridge matter approved a stipulation between the parties to provide for an injunction preventing NPPD from terminating the PPA pending disposition of the litigation. On February 26, 2019, the Knox County District Court approved a similar stipulation relating to the Elkhorn Ridge project. On April 13, 2020, the U.S. District Court granted the wind projects' motion for summary judgment and permanently enjoined NPPD from terminating the PPAs in reliance on the alleged events of default. The U.S. District Court decision was appealed by NPPD on May 11, 2020 and the case in the Knox County District Court remains pending, but has been stayed pending the outcome of the U.S. District Court case. The Company believes the allegations of NPPD are meritless and the Company is vigorously defending its rights under the PPAs.
Buckthorn Solar Litigation
On October 8, 2019, the City of Georgetown, Texas, or Georgetown, filed a petition in the District Court of Williamson County, Texas naming Buckthorn Westex, LLC, the Company’s subsidiary that owns the Buckthorn Westex solar project, as the defendant, alleging fraud by nondisclosure and breach of contract in connection with the project and the PPA, and seeking (i) rescission and/or cancellation of the PPA, (ii) declaratory judgment that the alleged breaches constitute an event of default under the PPA entitling Georgetown to terminate, and (iii) recovery of all damages, costs of court, and attorneys’ fees. On November 15, 2019, Buckthorn Westex filed an original answer and counterclaims (i) denying Georgetown’s claims, (ii) alleging Georgetown has breached its contracts with Buckthorn Westex by failing to pay amounts due, and (iii) seeking relief in the form of (x) declaratory judgment that Georgetown’s alleged failure to pay amounts due constitute breaches of and an event of default under the PPA and that Buckthorn did not commit any events of default under the PPA, (y) recovery of costs, expenses, interest, and attorneys’ fees, and (z) such other relief to which it is entitled at law or in equity. Buckthorn Westex believes the allegations of Georgetown are meritless, and Buckthorn Westex is vigorously defending its rights under the PPA.
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Note 14 — Leases
Accounting for Leases
The Company evaluates each arrangement at inception to determine if it contains a lease. All of the Company’s leases are operating leases as of September 30, 2020.
Lessee
The Company records its operating lease liabilities at the present value at lease commencement date of the lease payments over the lease term. Lease payments include fixed payment amounts, as well as variable rate payments based on an index initially measured at lease commencement date. Variable payments, including payments based on future performance and based on index changes, are recorded as the expense is incurred. The Company determines the relevant lease term by evaluating whether renewal and termination options are reasonably to certain to be exercised. The Company uses its incremental borrowing rate to calculate the present value of the lease payments, based on information available at the lease commencement date.
The Company’s leases consist of land leases for numerous operating asset locations, real estate leases and equipment leases. The terms and conditions for these leases vary by the type of underlying asset.
Lease expense was comprised of the following:
Three months ended September 30, 2020 | Three months ended September 30, 2019 | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 | ||||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Operating lease cost - Fixed | $ | 5 | $ | 2 | $ | 14 | $ | 6 | |||||||||||||||
Operating lease cost - Variable | 2 | 3 | 7 | 10 | |||||||||||||||||||
Total lease cost | $ | 7 | $ | 5 | $ | 21 | $ | 16 |
The Company lease liabilities as of September 30, 2020 and December 31, 2019 comprised of the following:
September 30, 2020 | December 31, 2019 | |||||||||||||
(In millions, except term and rate) | ||||||||||||||
ROU Assets - operating leases, net | $ | 256 | $ | 223 | ||||||||||
Short-term lease liability - operating leases (a) | 7 | 7 | ||||||||||||
Long-term lease liability - operating leases | 260 | 227 | ||||||||||||
Total lease liability | $ | 267 | $ | 234 | ||||||||||
Weighted average remaining lease term | 24 | 25 | ||||||||||||
Weighted average discount rate | 4.3 | % | 4.4 | % | ||||||||||
Nine months ended September 30, 2020 | Nine months ended September 30, 2019 | |||||||||||||
Cash paid for operating leases | $ | 13 | $ | 7 |
(a) Short-term lease liability balances are included within the accrued expenses and other current liabilities line item of the consolidated balance sheets as of September 30, 2020 and December 31, 2019.
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Maturities of operating lease liabilities as of September 30, 2020 are as follows:
(In millions) | ||||||||
Remainder of 2020 | $ | 5 | ||||||
2021 | 18 | |||||||
2022 | 18 | |||||||
2023 | 18 | |||||||
2024 | 18 | |||||||
Thereafter | 332 | |||||||
Total lease payments | 409 | |||||||
Less imputed interest | (142) | |||||||
Total lease liability - operating leases | $ | 267 |
Oahu Solar Lease Agreements
The Oahu Solar projects are party to various land lease agreements with a wholly owned subsidiary of CEG. The projects are leasing the land for a period of 35 years, with the ability to renew the lease for two additional year periods. The Company has a lease liability of $20 million and $21 million as of September 30, 2020 and December 31, 2019, respectively, and a corresponding right-of-use asset of $18 million and $19 million related to leases as of September 30, 2020 and December 31, 2019, respectively.
Lessor
The majority of the Company’s revenue is obtained through PPAs or other contractual agreements that are accounted for as leases. These leases are comprised of both fixed payments and variable payments contingent upon volumes or performance metrics. The terms of the leases are further described in Item 2 — MD&A, Introduction, Environmental, Regulatory of this Form 10-Q. Many of the leases have renewal options at the end of the lease term. Termination may be allowed under specific circumstances in the lease arrangements, such as under an event of default. All but one of the Company’s leases are operating leases. The remaining lease met the criteria of a sales-type lease and the impact of this sales-type lease to the consolidated financial statements was immaterial. Certain of these leases have both lease and non-lease components, and the Company allocates the transaction price to the components based on standalone selling prices.
As disclosed in Note 2, Summary of Significant Accounting Policies, the following amounts of energy and capacity revenue are related to the Company’s operating leases:
Three months ended September 30, 2020 | ||||||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Total | ||||||||||||||||||||||
Energy revenue | $ | 3 | $ | 153 | $ | — | $ | 156 | ||||||||||||||||||
Capacity revenue | 119 | — | — | 119 | ||||||||||||||||||||||
Operating revenue | $ | 122 | $ | 153 | $ | — | $ | 275 |
Nine months ended September 30, 2020 | ||||||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Total | ||||||||||||||||||||||
Energy revenue | $ | 6 | $ | 449 | $ | 1 | $ | 456 | ||||||||||||||||||
Capacity revenue | 338 | — | — | 338 | ||||||||||||||||||||||
Operating revenue | $ | 344 | $ | 449 | $ | 1 | $ | 794 |
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Three months ended September 30, 2019 | ||||||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Total | ||||||||||||||||||||||
Energy revenue | $ | 2 | $ | 160 | $ | 1 | $ | 163 | ||||||||||||||||||
Capacity revenue | 89 | — | — | 89 | ||||||||||||||||||||||
Operating revenue | $ | 91 | $ | 160 | $ | 1 | $ | 252 |
Nine months ended September 30, 2019 | ||||||||||||||||||||||||||
(In millions) | Conventional Generation | Renewables | Thermal | Total | ||||||||||||||||||||||
Energy revenue | $ | 4 | $ | 416 | $ | 2 | $ | 422 | ||||||||||||||||||
Capacity revenue | 253 | — | — | 253 | ||||||||||||||||||||||
Operating revenue | $ | 257 | $ | 416 | $ | 2 | $ | 675 |
Minimum future rent payments under the operating leases for the remaining periods as of September 30, 2020.
(In millions) | |||||
Remainder of 2020 | $ | 117 | |||
2021 | 444 | ||||
2022 | 450 | ||||
2023 | 259 | ||||
2024 | 106 | ||||
Thereafter | 1,605 | ||||
Total lease payments | $ | 2,981 |
Property, plant and equipment, net related to the Company’s operating leases were as follows:
(In millions) | September 30, 2020 | December 31, 2019 | |||||||||
Property, plant and equipment | $ | 6,975 | $ | 6,942 | |||||||
Accumulated depreciation | (1,854) | (1,649) | |||||||||
Net property, plant and equipment | $ | 5,121 | $ | 5,293 |
Note 15 — Asset Impairments
The Company recorded an impairment loss of $19 million related to a facility in the Thermal segment during the second quarter of 2019. The fair value of the facility was determined using an income approach by applying a discounted cash flow methodology to the long-term budgets for each respective plant. The income approach utilized estimates of discounted future cash flows, which were Level 3 fair value measurement and include key inputs, such as forecasted power prices, operations and maintenance expense, and discount rates. The Company measured the impairment loss as the difference between the carrying amount and the fair value of the assets.
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ITEM 2 — Management's Discussion and Analysis of Financial Condition and the Results of Operations
The following discussion analyzes the Company's historical financial condition and results of operations.
As you read this discussion and analysis, refer to the Company's Consolidated Financial Statements to this Form 10-Q, which present the results of operations for the three and nine months ended September 30, 2020 and 2019. Also refer to the Company's 2019 Form 10-K, which includes detailed discussions of various items impacting the Company's business, results of operations and financial condition.
The discussion and analysis below has been organized as follows:
•Executive Summary, including a description of the business and significant events that are important to understanding the results of operations and financial condition;
•Known trends that may affect the Company’s results of operations and financial condition in the future;
•Results of operations, including an explanation of significant differences between the periods in the specific line items of the consolidated statements of income;
•Financial condition addressing liquidity position, sources and uses of cash, capital resources and requirements, commitments, and off-balance sheet arrangements; and
•Critical accounting policies which are most important to both the portrayal of the Company's financial condition and results of operations, and which require management's most difficult, subjective or complex judgment.
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Executive Summary
Introduction and Overview
Clearway Energy, Inc. together with its consolidated subsidiaries, or the Company, is a publicly-traded energy infrastructure investor in and owner of modern, sustainable and long-term contracted assets across North America. The Company is indirectly owned by Global Infrastructure Partners III. Global Infrastructure Management, LLC is an independent fund manager that invests in infrastructure assets in the energy and transport sectors, and Global Infrastructure Partners III is its third equity fund. The Company is sponsored by GIP through GIP's portfolio company, CEG.
The Company’s environmentally-sound asset portfolio includes over 6,201 MW of wind, solar and natural gas-fired power generation facilities, as well as district energy systems. Through this diversified and contracted portfolio, the Company endeavors to provide its investors with stable and growing dividend income. Substantially all of the Company's generation assets are under long-term contractual arrangements for the output or capacity from these assets. The Company also owns thermal infrastructure assets with an aggregate steam and chilled water capacity of 1,456 net MWt and electric generation capacity of 39 net MW. These thermal infrastructure assets provide steam, hot and/or chilled water, and, in some instances, electricity to commercial businesses, universities, hospitals and governmental units in multiple locations, principally through long-term contracts or pursuant to rates regulated by state utility commissions. The weighted average remaining contract duration of these offtake agreements was approximately 13 years as of September 30, 2020 based on CAFD.
As of September 30, 2020, the Company's operating assets are comprised of the following projects:
Projects | Percentage Ownership | Net Capacity (MW)(a) | Offtake Counterparty | Expiration | ||||||||||||||||||||||
Conventional | ||||||||||||||||||||||||||
Carlsbad | 100 | % | 527 | San Diego Gas & Electric | 2038 | |||||||||||||||||||||
El Segundo | 100 | % | 550 | Southern California Edison | 2023 | |||||||||||||||||||||
GenConn Devon | 50 | % | 95 | Connecticut Light & Power | 2040 | |||||||||||||||||||||
GenConn Middletown | 50 | % | 95 | Connecticut Light & Power | 2041 | |||||||||||||||||||||
Marsh Landing | 100 | % | 720 | Pacific Gas and Electric | 2023 | |||||||||||||||||||||
Walnut Creek | 100 | % | 485 | Southern California Edison | 2023 | |||||||||||||||||||||
2,472 | ||||||||||||||||||||||||||
Utility Scale Solar | ||||||||||||||||||||||||||
Agua Caliente | 16 | % | 46 | Pacific Gas and Electric | 2039 | |||||||||||||||||||||
Alpine | 100 | % | 66 | Pacific Gas and Electric | 2033 | |||||||||||||||||||||
Avenal | 50 | % | 23 | Pacific Gas and Electric | 2031 | |||||||||||||||||||||
Avra Valley | 100 | % | 26 | Tucson Electric Power | 2032 | |||||||||||||||||||||
Blythe | 100 | % | 21 | Southern California Edison | 2029 | |||||||||||||||||||||
Borrego | 100 | % | 26 | San Diego Gas and Electric | 2038 | |||||||||||||||||||||
Buckthorn Solar (b) | 100 | % | 154 | City of Georgetown, TX | 2043 | |||||||||||||||||||||
CVSR | 100 | % | 250 | Pacific Gas and Electric | 2038 | |||||||||||||||||||||
Desert Sunlight 250 | 25 | % | 63 | Southern California Edison | 2034 | |||||||||||||||||||||
Desert Sunlight 300 | 25 | % | 75 | Pacific Gas and Electric | 2039 | |||||||||||||||||||||
Kansas South | 100 | % | 20 | Pacific Gas and Electric | 2033 | |||||||||||||||||||||
Kawailoa (b) | 48 | % | 24 | Hawaiian Electric Company | 2041 | |||||||||||||||||||||
Oahu Solar Projects (b) | 95 | % | 58 | Hawaiian Electric Company | 2041 | |||||||||||||||||||||
Roadrunner | 100 | % | 20 | El Paso Electric | 2031 | |||||||||||||||||||||
TA High Desert | 100 | % | 20 | Southern California Edison | 2033 | |||||||||||||||||||||
Utah Solar Portfolio (b) | 50 | % | 265 | PacifiCorp | 2036 | |||||||||||||||||||||
1,157 | ||||||||||||||||||||||||||
Distributed Solar | ||||||||||||||||||||||||||
Apple I LLC Projects | 100 | % | 3 | Various | 2032 | |||||||||||||||||||||
AZ DG Solar Projects | 100 | % | 5 | Various | 2025 - 2033 | |||||||||||||||||||||
Clearway Chestnut Projects(b) | 99 | % | 59 | Various | 2032 - 2034 | |||||||||||||||||||||
Renew Solar CS4 Projects(b) | 99 | % | 54 | Various | 2029 - 2044 | |||||||||||||||||||||
SPP Projects | 100 | % | 25 | Various | 2026 - 2037 | |||||||||||||||||||||
Other DG Projects | 100 | % | 13 | Various | 2023 - 2039 | |||||||||||||||||||||
159 |
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Projects | Percentage Ownership | Net Capacity (MW)(a) | Offtake Counterparty | Expiration | ||||||||||||||||||||||
Wind | ||||||||||||||||||||||||||
Alta I | 100 | % | 150 | Southern California Edison | 2035 | |||||||||||||||||||||
Alta II | 100 | % | 150 | Southern California Edison | 2035 | |||||||||||||||||||||
Alta III | 100 | % | 150 | Southern California Edison | 2035 | |||||||||||||||||||||
Alta IV | 100 | % | 102 | Southern California Edison | 2035 | |||||||||||||||||||||
Alta V | 100 | % | 168 | Southern California Edison | 2035 | |||||||||||||||||||||
Alta X (b) | 100 | % | 137 | Southern California Edison | 2038 | |||||||||||||||||||||
Alta XI (b) | 100 | % | 90 | Southern California Edison | 2038 | |||||||||||||||||||||
Buffalo Bear | 100 | % | 19 | Western Farmers Electric Co-operative | 2033 | |||||||||||||||||||||
Crosswinds | 99 | % | 21 | Corn Belt Power Cooperative | 2027 | |||||||||||||||||||||
Elbow Creek (b) | 100 | % | 122 | Various | 2029 | |||||||||||||||||||||
Elkhorn Ridge | 66.7 | % | 54 | Nebraska Public Power District | 2029 | |||||||||||||||||||||
Forward | 100 | % | 29 | Constellation NewEnergy, Inc. | 2022 | |||||||||||||||||||||
Goat Wind | 100 | % | 150 | Dow Pipeline Company | 2025 | |||||||||||||||||||||
Hardin | 99 | % | 15 | Interstate Power and Light Company | 2027 | |||||||||||||||||||||
Laredo Ridge | 100 | % | 80 | Nebraska Public Power District | 2031 | |||||||||||||||||||||
Lookout | 100 | % | 38 | Southern Maryland Electric Cooperative | 2030 | |||||||||||||||||||||
Mesquite Star (b) | 50 | % | 210 | Various | 2032 - 2035 | |||||||||||||||||||||
Odin | 99.9 | % | 20 | Missouri River Energy Services | 2028 | |||||||||||||||||||||
Pinnacle | 100 | % | 55 | Maryland Department of General Services and University System of Maryland | 2031 | |||||||||||||||||||||
San Juan Mesa | 75 | % | 90 | Southwestern Public Service Company | 2025 | |||||||||||||||||||||
Sleeping Bear | 100 | % | 95 | Public Service Company of Oklahoma | 2032 | |||||||||||||||||||||
South Trent | 100 | % | 101 | AEP Energy Partners | 2029 | |||||||||||||||||||||
Spanish Fork | 100 | % | 19 | PacifiCorp | 2028 | |||||||||||||||||||||
Spring Canyon II (b) | 90.1 | % | 31 | Platte River Power Authority | 2039 | |||||||||||||||||||||
Spring Canyon III (b) | 90.1 | % | 26 | Platte River Power Authority | 2039 | |||||||||||||||||||||
Taloga | 100 | % | 130 | Oklahoma Gas & Electric | 2031 | |||||||||||||||||||||
Wildorado (b) | 100 | % | 161 | Southwestern Public Service Company | 2027 | |||||||||||||||||||||
2,413 | ||||||||||||||||||||||||||
Thermal generation | 100 | % | 39 | Various | Various | |||||||||||||||||||||
Total net generation capacity (c) | 6,240 | |||||||||||||||||||||||||
Thermal equivalent MWt(d) | 97.1 | % | 1,456 | Various | Various |
(a) Net capacity represents the maximum, or rated, generating capacity of the facility multiplied by the Company's percentage ownership in the facility as of September 30, 2020
(b) Projects are part of tax equity arrangements and ownership percentage is based on cash to be distributed, as further described in Item 1 — Note 4, Investments Accounted for by the Equity Method and Variable Interest Entities
© Clearway Energy, Inc.'s total generation capacity is net of 6 MWs for noncontrolling interest for Spring Canyon II and III. Clearway Energy, Inc.'s generation capacity including this noncontrolling interest was 6,246 MWs
(d) For thermal energy, net capacity represents MWt for steam or chilled water and excludes 19 MWt available under the right-to-use provisions contained in agreements between one of the Company's thermal facilities and certain customers
Additionally, the Company is party to partnerships the purpose of which is to own or purchase solar power generation projects, as well as other ancillary related assets from a related party via intermediate funds. The Company does not consolidate these partnerships and accounts for them as equity method investments. The Company's net interest in these projects is 165 MW based on cash to be distributed pursuant to the partnership agreements as of September 30, 2020. For further discussions, see Item 1— Note 4, Investments Accounted for by the Equity Method and Variable Interest Entities of this Form 10-Q and Item 15 — Note 5, Investments Accounted for by the Equity Method and Variable Interest Entities to the consolidated financial statements included in the Company's 2019 Form 10-K.
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Significant Events
Pacific Gas and Electric Company Bankruptcy Update
•On July 1, 2020, PG&E emerged from bankruptcy and assumed the Company's contracts without modification. In addition, PG&E paid to the Company's applicable projects the portion of the invoices corresponding to the electricity delivered for the period between January 1 and January 28, 2019. These invoices related to the pre-petition period services and any payment therefore required the approval by the Bankruptcy Court. During the three months ended September 30, 2020, the Company entered into waiver agreements with the lenders to the respective financing agreements related to the PG&E Bankruptcy and all previously restricted distributions were paid out of distribution reserve accounts at the Company's subsidiaries affected by the PG&E Bankruptcy as of October 31, 2020.
Financing Activities
•On November 2, 2020, DG-CS Master Borrower LLC, a wholly owned subsidiary of Clearway Energy Operating LLC, entered into a financing arrangement, which included the issuance of a $467 million term loan, as well as $30 million in letters of credit in support of debt service. The notes bear interest at 3.51% and mature on September 30, 2040. The proceeds from the loan were utilized to repay existing project-level debt outstanding for Chestnut Borrower LLC, Renew Solar CS 4 Borrower LLC, DGPV 4 Borrower LLC and Puma Class B LLC of $107 million, $102 million, $92 million and $73 million respectively and unwind related interest rate swaps in the amount of $42 million. The remaining proceeds were utilized to pay related fees and expenses and in part to acquire the Class B membership interests in the DGPV Holdco Entities and an SREC contract from CEG as further described in Note 4, Investments Accounted for by the Equity Method and Variable Interest Entities. Concurrent with the refinancing, the projects were transferred under DG-CS Master Borrower LLC and the obligations under the financing arrangement are supported by the Company's interest in the projects.
•On September 30, 2020, NIMH Solar LLC, a wholly-owned subsidiary of Clearway Energy Operating LLC, entered into a financing arrangement, which included the issuance of $193 million under a term loan facility, as well as $16 million in letters of credit in support of debt service and project obligations. The term loan bears annual interest rate of LIBOR, plus an applicable margin, which is 2.00% per annum through the third party anniversary of closing, and 2.125% per annum thereafter through the maturity date in September 2024. The term loans mature on September 30, 2024. The proceeds from the term loan were utilized to repay existing project-level debt outstanding for Alpine, Blythe and Roadrunner of $117 million, $14 million and $27 million, respectively. The remaining proceeds were utilized to pay related fees and expenses and along with existing project level cash provided a distribution to Clearway Energy Operating LLC of $45 million. Concurrent with the refinancing, the Alpine, Blythe and Roadrunner projects were transferred under NIMH Solar LLC and the obligations under the financing arrangement are supported by the Company’s interests in the projects.
•On September 1, 2020, Utah Solar Holdings, LLC, or Utah Solar, entered into a financing arrangement, which included the issuance of approximately $296 million in senior secured notes supported by the Company’s interest in the Utah projects (Four Brothers, Granite Mountain and Iron Springs, previously defined as the Utah Solar Portfolio). The notes bear interest at 3.59% per annum and mature on December 31, 2036. The proceeds from the issuance were utilized to repay existing debt outstanding of approximately $247 million for the Utah projects and to unwind the related interest rate swaps in the amount of $33 million. The remaining proceeds were utilized to pay related fees and expenses, with the remaining $9 million distributed to Clearway Energy Operating LLC.
•On May 21, 2020, Clearway Energy Operating LLC completed the sale of an additional $250 million aggregate principal amount of the 2028 Senior Notes. The 2028 Senior Notes bear interest at 4.75% and mature on March 15, 2028. Interest on the 2028 Senior Notes is payable semi-annually on March 15 and September 15 of each year, and interest payments will commence on September 15, 2020. The 2028 Senior Notes are unsecured obligations of Clearway Energy Operating LLC and are guaranteed by Clearway Energy LLC and by certain of Clearway Energy Operating LLC's wholly owned current and future subsidiaries. The proceeds from the additional 2028 Senior Notes were used to repay the $45 million outstanding principal amount of the Company's 2020 Convertible Notes on June 1, 2020, as well as to fund the repayment of outstanding borrowings under the Company's revolving credit facility and for general corporate purposes.
Drop Down Transactions
•On November 2, 2020, the Company acquired from CEG (i) the Class B membership interests in DGPV Holdco 1, DGPV Holdco 2 and DGPV Holdco 3, or DGPV Holdco Entities and (ii) an SREC contract for an aggregate of $44 million in cash consideration. The Company previously held the Class A membership interests in the DGPV Holdco Entities and accounted for its interests in DGPV Holdco 1 and DGPV Holdco 2 as equity method investments, while DGPV Holdco 3 was consolidated by the Company effective May 29, 2020.
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•On November 2, 2020, the Company entered into agreements with Clearway Renew LLC, a subsidiary of CEG, to acquire 100% of the cash equity interests in Langford Holding LLC, which owns the Langford wind project, for cash consideration of approximately $64 million, subject to closing adjustments. The Langford wind project is a 160 MW utility scale wind project located in West Texas that is expected to achieve repowering commercial operations and close in the fourth quarter of 2020.
•On November 2, 2020, the CEG ROFO Agreement was amended to (i) add the assets comprising the cash equity partnership offer from CEG to the ROFO pipeline (ii) memorialize as a ROFO asset the contract related to the monetization of renewable energy credits associated with assets within the DGPV Holdco Entities; and (iii) extend the third-party negotiation periods for CEG's residual interest in Kawailoa and Oahu assets as well as the assets comprising the cash equity partnership offer from CEG to November 2, 2021.
•On October 2, 2020, CEG offered the Company an opportunity to enter into partnership arrangements alongside a third-party equity investor, which will, at close, own a 100% cash equity interest in a portfolio that will include (i) 1,204 MW from six geographically diversified wind, solar and solar storage assets expected to reach COD between the fourth quarter of 2020 and the fourth quarter of 2022 and ii) CEG's remaining cash equity interest in Mesquite Star Pledgor LLC, which owns the Mesquite Star wind project, a 419 MW utility scale wind facility that reached COD in June 2020. The Company’s ownership stake in the partnership arrangements is subject to further negotiation with the Company acting as managing member for the applicable partnerships. The investment is subject to negotiation, both with CEG and the third-party capital investor, and the review and approval by the Company’s Independent Directors.
•On September 1, 2020, the Company, through its indirect subsidiary Mesquite Star HoldCo LLC, acquired the Class A membership interests in Mesquite Star Pledgor LLC from Clearway Renew LLC, a subsidiary of CEG, for $79 million in cash consideration. Mesquite Star Pledgor LLC is the primary beneficiary and consolidates its interest in a tax equity fund that owns the Mesquite Star wind project, a 419 MW utility scale wind project located in Fisher County, Texas. A majority of the project’s output is backed by contracts with investment grade counterparties with a 12 year weighted average contract life.
•On May 11, 2020, the Company acquired CEG's interest in Repowering Partnership II LLC for cash consideration of $70 million. Repowering Partnership II LLC is no longer a VIE and subsequent to the acquisition, is a wholly-owned subsidiary of the Company.
•On April 17, 2020, the Company entered into binding agreements related to the previously announced drop-down offer from CEG to enable the Company to acquire and invest in a portfolio of renewable energy projects. The following projects are included in the drop-down: (i) 100% of the equity interests in Rattlesnake Flat, LLC, which owns the Rattlesnake Wind Project, a 144 net MW wind facility located in Adams County, WA; (ii) CEG's interest in Repowering Partnership II LLC (Repowering 1.0), which the Company acquired on May 11, 2020; and (iii) a new partnership with CEG to repower the Pinnacle Wind Project, a 55 net MW wind facility located in Mineral County, WV. The Company expects to invest approximately $241 million in corporate capital subject to closing adjustments for the above mentioned transactions. Closing is subject to the timing of projects achieving commercial operations. The investment at commercial operations excludes, subject to closing adjustments, an additional $27 million payment in 2031 at the Pinnacle Wind Repowering Partnership.
Sale of Interest in RPV Holdco 1
•On May 14, 2020, the Company sold its interests in RPV Holdco 1 LLC, or RPV Holdco, to a third party for net proceeds of approximately $75 million. The Company previously accounted for its interest in RPV Holdco as an equity method investment. The sale of the investment resulted in a gain of approximately $49 million.
Consolidation of DGPV Holdco 3
•On May 29, 2020, the final construction projects owned by DGPV Holdco 3 were placed in service which resulted in a reconsideration event. The Company determined that it will consolidate DGPV Holdco 3 effective on May 29, 2020 and show the interest owned by CEG as noncontrolling interest as of that date. This resulted in the consolidation of assets of $401 million and liabilities of $290 million as of May 29, 2020.
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Black Start Services at Marsh Landing
•As of July 2020, all necessary regulatory approvals were obtained with respect to the Company's Marsh Landing project to provide black start capability in the greater San Francisco Bay area, which would restart Marsh Landing in the event of a blackout, under a five-year contract with the California Independent System Operator to support their emergency restoration of the electrical grid. The project has commenced construction activities and is expected to achieve commercial operations in the second quarter of 2021.
Environmental Matters
The Company is subject to a wide range of environmental laws during the development, construction, ownership and operation of facilities. These existing and future laws generally require that governmental permits and approvals be obtained before construction and maintained during operation of facilities. The Company is obligated to comply with all environmental laws and regulations applicable within each jurisdiction and required to implement environmental programs and procedures to monitor and control risks associated with the construction, operation and decommissioning of regulated or permitted energy assets. Federal and state environmental laws have historically become more stringent over time, although this trend could change in the future.
A number of regulations that may affect the Company are under review, including the publishing of the Affordable Clean Energy (ACE) rule, state solar photovoltaic module (solar panel) disposal and recycling regulations, and proposed federal MBTA incidental take legislation and regulations. The Company will evaluate the impact of the legislation and regulations as they are revised but cannot fully predict the impact of each until anticipated revisions and legal challenges are resolved. To the extent the proposed legislation and regulations restrict or otherwise impact the Company's operations, the proposed legislation and regulations could have a negative impact on the Company's financial performance.
Affordable Clean Energy Rule — The attention in recent years on GHG emissions has resulted in federal regulations and state legislative and regulatory action. In 2015, the EPA finalized the Clean Power Plan, or the CPP, which addressed GHG emissions from existing electric utility steam generating units. The CPP was challenged in court and in 2016 the U.S. Supreme Court stayed the CPP. In 2018, the EPA published the proposed ACE rule to replace the CPP. The ACE rule establishes emission guidelines for states to develop plans to address greenhouse gas emissions from existing power plants. The ACE rule also reinforces the states’ broad discretion in establishing and applying emissions standards to new emission sources. The ACE rule is currently being litigated in the D.C. Circuit.
Proposed State Solar Photovoltaic Module Disposal and Recycling Regulations — On October 1, 2015, California enacted SB 489, which authorized California’s Department of Toxic Substances Control to adopt regulations to designate discarded photovoltaic modules, which are classified as hazardous waste, as universal waste subject to universal waste management. On April 19, 2019, the department proposed regulations that would allow discarded photovoltaic modules to be managed as universal waste. Comments on the proposed regulations were due by June 10, 2019, but the date was extended to January 8, 2020, as a result of text modifications. The final regulations have not yet been approved by the CA Office of Administrative Law, but is expected before years end. If approved the regulations would be effective January 1, 2021.
Proposed Federal MBTA Incidental Take Legislation and Regulations — On January 15, 2020, the House Natural Resources Committee voted to advance a bill that would reinstate the interpretation that incidental take is prohibited under the MBTA, overriding the recent Trump-administration Solicitor’s Opinion M-37050 that held the MBTA only applies to intentional takings. The bill also develops a general permitting program that covers incidental take of migratory birds. To the extent that electric generation takes migratory birds, it typically is incidental to its operations.
On February 3, 2020, the U.S. Fish and Wildlife Service published in the Federal Register a notice of proposed rulemaking to solicit public comment on a proposed regulation that would codify Solicitor’s Opinion M-37050 defining the scope of certain prohibitions under the MBTA. The proposed rule would clarify that criminal liability for pursuing, hunting, taking, capturing, or killing or attempting to take, capture or kill migratory birds is limited to actions directed at migratory birds, their nests, or their eggs. The proposed rule would have the effect of clarifying that these prohibitions do not extend to actions that only incidentally take or kill migratory birds as a result of otherwise lawful activities. Comments on the proposed rule were due by March 19, 2020. The final rule has not yet been published. On June 5, 2020, the US Fish and Wildlife Service made available the draft Environmental Impact Statement (DEIS) for the proposed rule to define the scope of the MBTA. A 45-day comment period on the DEIS was opened. The U.S. Department of Interior (DOI) may be close to issuing the final DEIS and rule regarding incidental take.
On August 11, 2020, the Southern District Court in New York vacated the DOI Solicitor's Opinion M-37050, finding there was not an adequate legal basis for the policy changes articulated in the guidance document. The case will likely be
47
appealed by the Department of Justice (DOJ) and the DOI to the 2nd Circuit which notably has already found that the MTBA applied to incidental take. In light of the current Circuit Court splits on the issue, this would set the stage for a potential appeal to the Supreme Court.
Regulatory Matters
The Company’s regulatory matters are described in the Company’s 2019 Form 10-K in Item 1, Business — Regulatory Matters and Item 1A, Risk Factors.
Trends Affecting Results of Operations and Future Business Performance
The Company’s trends are described in the Company’s 2019 Form 10-K in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Trends Affecting Results of Operations and Future Business Performance.
Recent Developments Affecting Industry Conditions and the Company’s Business
In response to the ongoing coronavirus (COVID-19) pandemic, the Company has implemented preventative measures and developed corporate and regional response plans to protect the health and safety of its employees, customers and other business counterparties, while supporting the Company’s suppliers and customers’ operations to the best of its ability in the circumstances. The Company also has modified certain business practices (including discontinuing all non-essential business travel, implementing a temporary work-from-home policy for employees who can execute their work remotely and encouraging employees to adhere to local and regional social distancing, more stringent hygiene and cleaning protocols across the Company’s facilities and operations and self-quarantining recommendations) to support efforts to reduce the spread of COVID-19 and to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. The Company continues to evaluate these measures, response plans and business practices in light of the evolving effects of COVID-19.
There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature may cause the Company, its suppliers and other business counterparties to experience operational delays and delays in the delivery of materials and supplies and may cause milestones or deadlines relating to various projects to be missed.
As of the date of this report, the Company has not experienced any material financial or operational impacts related to COVID-19. All of the Company’s facilities have remained operational. The Company has experienced a decrease in volumetric sales at certain Thermal locations in part due to COVID-19 related impacts which has not resulted in any material financial impacts to the Company. The Company believes that all of its accounts receivable balances as of September 30, 2020 are collectible. The Company will continue to assess collectability based on any future developments.
The Company cannot predict the full impact that COVID-19 will have on the Company’s financial expectations, its financial condition, results of operations and cash flows, its ability to make distributions to its stockholders, the market prices of its common stock and its ability to satisfy its debt service obligations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments, including, among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability and the timing and extent to which normal economic and operating conditions resume. For additional discussion regarding risks associated with the COVID-19 pandemic, see Part II, Item 1A Risk Factors of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020.
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Consolidated Results of Operations
The following table provides selected financial information:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
(In millions) | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||
Operating Revenues | |||||||||||||||||||||||||||||||||||
Energy and capacity revenues | $ | 339 | $ | 305 | $ | 34 | $ | 957 | $ | 830 | $ | 127 | |||||||||||||||||||||||
Other revenues | 15 | 11 | 4 | 36 | 28 | 8 | |||||||||||||||||||||||||||||
Contract amortization | (22) | (18) | (4) | (66) | (52) | (14) | |||||||||||||||||||||||||||||
Mark-to-market economic hedging activities | — | (2) | 2 | (8) | (9) | 1 | |||||||||||||||||||||||||||||
Total operating revenues | 332 | 296 | 36 | 919 | 797 | 122 | |||||||||||||||||||||||||||||
Operating Costs and Expenses | |||||||||||||||||||||||||||||||||||
Cost of fuels | 28 | 20 | 8 | 58 | 54 | 4 | |||||||||||||||||||||||||||||
Operations and maintenance | 51 | 50 | 1 | 161 | 140 | 21 | |||||||||||||||||||||||||||||
Other costs of operations | 16 | 14 | 2 | 56 | 51 | 5 | |||||||||||||||||||||||||||||
Depreciation, amortization and accretion | 102 | 114 | (12) | 303 | 289 | 14 | |||||||||||||||||||||||||||||
Impairment losses | — | — | — | — | 19 | (19) | |||||||||||||||||||||||||||||
General and administrative | 9 | 7 | 2 | 30 | 20 | 10 | |||||||||||||||||||||||||||||
Transaction and integration costs | 1 | — | 1 | 2 | 2 | — | |||||||||||||||||||||||||||||
Development costs | 2 | 1 | 1 | 4 | 4 | — | |||||||||||||||||||||||||||||
Total operating costs and expenses | 209 | 206 | 3 | 614 | 579 | 35 | |||||||||||||||||||||||||||||
Operating Income | 123 | 90 | 33 | 305 | 218 | 87 | |||||||||||||||||||||||||||||
Other Income (Expense) | |||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | 19 | 38 | (19) | 22 | 52 | (30) | |||||||||||||||||||||||||||||
Gain on sale of unconsolidated affiliate | — | — | — | 49 | — | 49 | |||||||||||||||||||||||||||||
Other income, net | — | 2 | (2) | 2 | 6 | (4) | |||||||||||||||||||||||||||||
Loss on debt extinguishment | (6) | — | (6) | (9) | (1) | (8) | |||||||||||||||||||||||||||||
Interest expense | (85) | (106) | 21 | (345) | (337) | (8) | |||||||||||||||||||||||||||||
Total other expense, net | (72) | (66) | (6) | (281) | (280) | (1) | |||||||||||||||||||||||||||||
Income (Loss) Before Income Taxes | 51 | 24 | 27 | 24 | (62) | 86 | |||||||||||||||||||||||||||||
Income tax expense (benefit) | 9 | (11) | 20 | 13 | (14) | 27 | |||||||||||||||||||||||||||||
Net Income (Loss) | 42 | 35 | 7 | 11 | (48) | 59 | |||||||||||||||||||||||||||||
Less: Income (loss) attributable to noncontrolling interests and redeemable interests | 10 | (4) | 14 | (39) | (43) | 4 | |||||||||||||||||||||||||||||
Net Income (Loss) Attributable to Clearway Energy, Inc. | $ | 32 | $ | 39 | $ | (7) | $ | 50 | $ | (5) | $ | 55 |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
Business metrics: | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Renewables MWh generated/sold (in thousands) (a) | 1,815 | 1,786 | 5,746 | 5,183 | |||||||||||||||||||
Thermal MWt sold (in thousands) | 468 | 526 | 1,468 | 1,638 | |||||||||||||||||||
Thermal MWh sold (in thousands) | 15 | 79 | 53 | 138 | |||||||||||||||||||
Conventional MWh generated (in thousands) (a) (b) | 691 | 501 | 1,072 | 826 | |||||||||||||||||||
Conventional equivalent availability factor | 98.9 | % | 99.4 | % | 94.3 | % | 93.8 | % |
(a) Volumes do not include the MWh generated/sold by the Company's equity method investments.
(b) Volumes generated are not sold by the Company as the Conventional facilities sell capacity rather than energy.
49
Management’s Discussion of the Results of Operations for the Three Months Ended September 30, 2020 and 2019
Gross Margin
The Company calculates gross margin in order to evaluate operating performance as operating revenues less cost of sales, which includes cost of fuel, contract and emission credit amortization and mark-to-market for economic hedging activities.
Economic Gross Margin
In addition to gross margin, the Company evaluates its operating performance using the measure of economic gross margin, which is not a GAAP measure and may not be comparable to other companies’ presentations or deemed more useful than the GAAP information provided elsewhere in this report. Economic gross margin should be viewed as a supplement to and not a substitute for the Company's presentation of gross margin, which is the most directly comparable GAAP measure. Economic gross margin is not intended to represent gross margin. The Company believes that economic gross margin is useful to investors as it is a key operational measure reviewed by the Company's chief operating decision maker. Economic gross margin is defined as energy and capacity revenue less cost of fuels. Economic gross margin excludes the following components from GAAP gross margin: contract amortization, mark-to-market results, emissions credit amortization and (losses) gains on economic hedging activities. Mark-to-market results consist of unrealized gains and losses on contracts that are not yet settled.
The below tables present the composition of gross margin, as well as the reconciliation to economic gross margin, for the three months ended September 30, 2020 and 2019:
(In millions) | Conventional Generation | Renewables | Thermal | Total | |||||||||||||||||||
Three months ended September 30, 2020 | |||||||||||||||||||||||
Energy and capacity revenues | $ | 122 | $ | 166 | $ | 51 | $ | 339 | |||||||||||||||
Other revenues | — | 6 | 9 | 15 | |||||||||||||||||||
Cost of fuels | (1) | — | (27) | (28) | |||||||||||||||||||
Contract amortization | (6) | (15) | (1) | (22) | |||||||||||||||||||
Gross margin | 115 | 157 | 32 | 304 | |||||||||||||||||||
Contract amortization | 6 | 15 | 1 | 22 | |||||||||||||||||||
Economic gross margin | $ | 121 | $ | 172 | $ | 33 | $ | 326 | |||||||||||||||
Three months ended September 30, 2019 | |||||||||||||||||||||||
Energy and capacity revenues | $ | 91 | $ | 167 | $ | 47 | $ | 305 | |||||||||||||||
Other revenues | — | 2 | 9 | 11 | |||||||||||||||||||
Cost of fuels | — | — | (20) | (20) | |||||||||||||||||||
Contract amortization | (1) | (16) | (1) | (18) | |||||||||||||||||||
Mark-to-market for economic hedging activities | — | (2) | — | (2) | |||||||||||||||||||
Gross margin | 90 | 151 | 35 | 276 | |||||||||||||||||||
Contract amortization | 1 | 16 | 1 | 18 | |||||||||||||||||||
Mark-to-market for economic hedging activities | — | 2 | — | 2 | |||||||||||||||||||
Economic gross margin | $ | 91 | $ | 169 | $ | 36 | $ | 296 |
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Gross margin increased by $28 million during the three months ended September 30, 2020, compared to the same period in 2019, due to a combination of the drivers summarized in the table below:
Segment | (In millions) | |||||||
Conventional | Increase is due primarily to the acquisition of Carlsbad Energy in December 2019 | $ | 25 | |||||
Renewables | Increase of $12 million from the consolidation of the Chestnut and CS4 Funds in May 2020, an increase of $7 million due to the Oahu and Kawailoa facilities achieving COD in late 2019 and an increase of $5 million related to the completion of the repowering of Elbow Creek and Wildorado, offset by a decrease of $16 million related to lower wind energy production primarily at Alta as well as a decrease of $2 million due to lower generation at CVSR | 6 | ||||||
Thermal | Decrease of $2 million due to reduced customer demand in certain locations due to COVID-19 and a decrease of $1 million due to the sale of Dover in March 2, 2020 | (3) | ||||||
$ | 28 |
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense decreased by $12 million during the three months ended September 30, 2020, compared to the same period in 2019, due primarily to a $20 million decrease in the Renewables segment, as the prior year included accelerated depreciation of approximately $26 million at the Wildorado and Elbow Creek projects in connection with the repowering activities, while the current period includes additional depreciation of $3 million for the Oahu and Kawailoa projects which reached COD in late 2019 and $3 million of additional depreciation due to the consolidation of the Chestnut and CS4 Funds in May 2020. This was offset in part by an $8 million increase in the Conventional segment related to the acquisition of the Carlsbad Energy Center in December 2019.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliate decreased by $19 million during the three months ended September 30, 2020, compared to the same period in 2019, driven by decreases in HLBV earnings for the Utah, RPV and DGPV investments, as well as HLBV losses for Mesquite Star which was acquired September 1, 2020.
Loss on Debt Extinguishment
Loss on debt extinguishment of $6 million during the three months ended September 30, 2020, relates to the repayment of debt for the Utah Solar Portfolio, Alpine, Blythe and Roadrunner, in connection with the related refinancing activities, as further described in Item 1 — Note 7, Long-term Debt.
Interest Expense
Interest expense decreased by $21 million during the three months ended September 30, 2020, compared to the same period in 2019, due to the following:
(In millions) | ||||||||
Change in fair value of interest rate swaps | $ | (32) | ||||||
Reclassification of losses previously deferred in AOCI to the statement of operations in connection with project-level debt refinancing activities | 6 | |||||||
Additional interest expense for Carlsbad Energy Center which was acquired on December 5, 2019 | 3 | |||||||
Increase in Corporate interest expense due primarily to issuance of the additional Senior Notes due 2028 | 2 | |||||||
$ | (21) | |||||||
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Income Tax Expense (Benefit)
For the three months ended September 30, 2020, the Company recorded an income tax expense of $9 million on a pretax income of $51 million. For the same period in 2019, the Company recorded an income tax benefit of $11 million on a pretax income of $24 million.
For the three months ended September 30, 2020 and September 30, 2019, the overall effective tax rate was different than the statutory rate of 21% primarily due to taxable earnings and losses allocated to partners' interests in Clearway Energy LLC, which includes the effects of applying HLBV method of accounting for book purposes for certain partnerships.
Income Attributable to Noncontrolling Interests
For the three months ended September 30, 2020, the Company had income of $30 million attributable to CEG's economic interest in Clearway Energy LLC, loss of $1 million attributable to CEG's interests in the Kawailoa, Oahu and Repowering partnerships and losses of $19 million attributable to noncontrolling interests with respect to its tax equity financing arrangements and the application of the HLBV method.
For the three months ended September 30, 2019, the Company had income of $22 million attributable to CEG's economic interest in Clearway Energy LLC, partially offset by a loss of $17 million attributable to noncontrolling interests with respect to its tax equity financing arrangements and the application of the HLBV method, as well as a loss of $9 million attributable to CEG's interests in the Kawailoa, Oahu and Repowering partnerships.
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Management’s Discussion of the Results of Operations for the Nine Months Ended September 30, 2020 and 2019
Gross Margin
The Company calculates gross margin in order to evaluate operating performance as operating revenue less cost of sales, which includes cost of fuel, contract and emission credit amortization and mark-to-market for economic hedging activities.
Economic Gross Margin
In addition to gross margin, the Company evaluates its operating performance using the measure of economic gross margin, which is not a GAAP measure and may not be comparable to other companies’ presentations or deemed more useful than the GAAP information provided elsewhere in this report. Economic gross margin should be viewed as a supplement to and not a substitute for the Company's presentation of gross margin, which is the most directly comparable GAAP measure. Economic gross margin is not intended to represent gross margin. The Company believes that economic gross margin is useful to investors as it is a key operational measure reviewed by the Company's chief operating decision maker. Economic gross margin is defined as energy and capacity revenue less cost of fuels. Economic gross margin excludes the following components from GAAP gross margin: contract amortization, mark-to-market results, emissions credit amortization and (losses) gains on economic hedging activities. Mark-to-market results consist of unrealized gains and losses on contracts that are not yet settled.
The below tables present the composition of gross margin, as well as the reconciliation to economic gross margin, for the nine months ended September 30, 2020 and 2019:
(In millions) | Conventional Generation | Renewables | Thermal | Total | |||||||||||||||||||
Nine months ended September 30, 2020 | |||||||||||||||||||||||
Energy and capacity revenue | $ | 344 | $ | 486 | $ | 127 | $ | 957 | |||||||||||||||
Other revenue | — | 12 | 24 | 36 | |||||||||||||||||||
Cost of fuels | (3) | — | (55) | (58) | |||||||||||||||||||
Contract amortization | (18) | (46) | (2) | (66) | |||||||||||||||||||
Mark-to-market for economic hedges | — | (8) | — | (8) | |||||||||||||||||||
Gross margin | 323 | 444 | 94 | 861 | |||||||||||||||||||
Contract amortization | 18 | 46 | 2 | 66 | |||||||||||||||||||
Mark-to-market for economic hedges | — | 8 | — | 8 | |||||||||||||||||||
Economic gross margin | $ | 341 | $ | 498 | $ | 96 | $ | 935 | |||||||||||||||
Nine months ended September 30, 2019 | |||||||||||||||||||||||
Energy and capacity revenue | $ | 257 | $ | 441 | $ | 132 | $ | 830 | |||||||||||||||
Other revenue | — | 6 | 22 | 28 | |||||||||||||||||||
Cost of fuels | — | — | (54) | (54) | |||||||||||||||||||
Contract amortization | (4) | (46) | (2) | (52) | |||||||||||||||||||
Mark-to-market for economic hedging activities | — | (9) | — | (9) | |||||||||||||||||||
Gross margin | 253 | 392 | 98 | 743 | |||||||||||||||||||
Contract amortization | 4 | 46 | 2 | 52 | |||||||||||||||||||
Mark-to-market for economic hedging activities | — | 9 | — | 9 | |||||||||||||||||||
Economic gross margin | $ | 257 | $ | 447 | $ | 100 | $ | 804 |
53
Gross margin increased by $118 million during the nine months ended September 30, 2020, compared to the same period in 2019 primarily due to a combination of the following:
Segment | (In millions) | |||||||||||||
Conventional | Increase is due primarily to the acquisition of Carlsbad Energy in December 2019 | $ | 70 | |||||||||||
Renewables | Increases of $19 million due to the Oahu and Kawailoa facilities achieving COD in late 2019, $16 million from the consolidation of the Chestnut and CS4 Funds in May 2020, $9 million due to the prior year outage at CVSR and $8 million related to the completion of the repowering of Elbow Creek and Wildorado | 52 | ||||||||||||
Thermal | Decreases of $4 million related to the sale of Dover on March 2, 2020 and $2 million due to reduced customer demand in certain locations related to COVID-19, offset by an increase of $2 million related to the acquisition of the Duquesne University Energy System on May 1, 2019 | (4) | ||||||||||||
$ | 118 | |||||||||||||
Operations and Maintenance Expense
Operations and maintenance expense increased by $21 million during the nine months ended September 30, 2020, compared to the same period in 2019, primarily due to a $20 million increase in the Conventional segment related to the acquisition of the Carlsbad Energy Center in December 2019 and a $1 million increase in the Renewables segment.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense increased by $14 million during the nine months ended September 30, 2020, compared to the same period in 2019, due to a $24 million increase in the Conventional segment related to the acquisition of the Carlsbad Energy Center in December 2019, offset by a $10 million decrease in the Renewables segment, as the prior year included accelerated depreciation of approximately $26 million at the Wildorado and Elbow Creek projects in connection with the repowering activities, while the current period includes additional depreciation of $10 million related to the Oahu and Kawailoa projects which reached COD in late 2019 and $4 million of additional depreciation due to the consolidation of the Chestnut and CS4 Funds in May 2020.
Impairment Losses
Impairment losses of $19 million during the nine months ended September 30, 2019, relate to a facility within the Company's Thermal segment, as further described in Item 1 — Note 15, Asset Impairments.
General and Administrative Expense
General and administrative expense increased by $10 million during the nine months ended September 30, 2020, compared to the same period in 2019, primarily due to an increase in MSA fees charged by CEG, personnel costs and consulting fees.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliate decreased by $30 million during the nine months ended September 30, 2020, compared to the same period in 2019, driven by decreases in HLBV earnings for the Utah, RPV and DGPV investments, as well as HLBV losses for Mesquite Star which was acquired September 1, 2020.
Gain on Sale of Unconsolidated Affiliate
On May 14, 2020, the Company sold its interests in RPV Holdco 1 LLC, or RPV Holdco, to a third party which resulted in a gain on sale of investment of approximately $49 million. For further discussion on this transaction, see Note 3, Acquisition and Dispositions.
Loss on Debt Extinguishment
Loss on debt extinguishment of $9 million during the nine months ended September 30, 2020, is primarily related to the repayment of debt for the Utah Solar Portfolio, Alpine, Blythe and Roadrunner, related to refinancing activities, as further described in Item 1 — Note 7, Long-term Debt.
54
Interest Expense
Interest expense increased by $8 million during the nine months ended September 30, 2020, compared to the same period in 2019, primarily due to the following:
(In millions) | ||||||||
Additional interest expense for Carlsbad Energy Center which was acquired on December 5, 2019 | $ | 20 | ||||||
Increase in Corporate interest expense due primarily to additional revolver borrowings and the issuance of the additional Senior Notes due 2028 | 5 | |||||||
Change in fair value of interest rate swaps | 4 | |||||||
Decrease in interest expense due to lower principal balances of project level debt for the remainder of the portfolio | (13) | |||||||
Reclassification of earnings previously deferred in AOCI to the statement of operations in connection with project-level debt refinancing activities | (8) | |||||||
$ | 8 | |||||||
Income Tax Expense (Benefit)
For the nine months ended September 30, 2020, the Company recorded an income tax expense of $13 million on a pretax income of $24 million. For the same period in 2019, the Company recorded an income tax benefit of $14 million on a pretax loss of $62 million.
For the nine months ended September 30, 2020 and September 30, 2019, the overall effective tax rate was different than the statutory rate of 21% primarily due to the taxable earnings and losses allocated to the partners' interest in Clearway Energy LLC, which includes the effects of applying HLBV method of accounting for book purposes for certain partnerships.
Income Attributable to Noncontrolling Interests
For the nine months ended September 30, 2020, the Company had income of $47 million attributable to CEG's economic interest in Clearway Energy LLC offset by losses of $36 million attributable to CEG's interests in the Kawailoa, Oahu and Repowering partnerships and losses of $50 million attributable to noncontrolling interests with respect to its tax equity financing arrangements and the application of the HLBV method.
For the nine months ended September 30, 2019, the Company had a loss of $28 million attributable to CEG's interests in Clearway Energy LLC, as well as CEG's interests in Kawailoa, Oahu and Repowering partnerships. The Company also recorded a loss of $15 million attributable to noncontrolling interests with respect to its tax equity financing arrangements and the application of the HLBV method.
Liquidity and Capital Resources
The Company's principal liquidity requirements are to meet its financial commitments, finance current operations, fund capital expenditures, including acquisitions from time to time, service debt and pay dividends. As a normal part of the Company's business, depending on market conditions, the Company will from time to time consider opportunities to repay, redeem, repurchase or refinance its indebtedness. Changes in the Company's operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may cause the Company to seek additional debt or equity financing in future periods. There can be no guarantee that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions.
55
Current Liquidity Position
As of September 30, 2020 and December 31, 2019, the Company's liquidity was approximately $973 million and $842 million, respectively, comprised of cash, restricted cash and availability under the Company's revolving credit facility.
(In millions) | September 30, 2020 | December 31, 2019 | ||||||||||||
Cash and cash equivalents: | ||||||||||||||
Clearway Energy, Inc. and Clearway Energy LLC, excluding subsidiaries | $ | 183 | $ | 30 | ||||||||||
Subsidiaries | 176 | 125 | ||||||||||||
Restricted cash: | ||||||||||||||
Operating accounts | 74 | 129 | ||||||||||||
Reserves, including debt service, distributions, performance obligations and other reserves | 104 | 133 | ||||||||||||
Total cash, cash equivalents and restricted cash | 537 | 417 | ||||||||||||
Revolving credit facility availability | 436 | 425 | ||||||||||||
Total liquidity | $ | 973 | $ | 842 |
The Company's liquidity includes $178 million and $262 million of restricted cash balances as of September 30, 2020 and December 31, 2019, respectively. Restricted cash consists primarily of funds to satisfy the requirements of certain debt arrangements and funds held within the Company's projects that are restricted in their use. As of September 30, 2020, these restricted funds were comprised of $74 million designated to fund operating expenses, approximately $46 million designated for current debt service payments, and $28 million restricted for reserves including debt service, performance obligations and other reserves, as well as capital expenditures. The remaining $30 million is held in distribution reserve accounts.
As of September 30, 2020, the Company had no outstanding borrowings under the revolving credit facility and $59 million in letters of credit outstanding. The Company had no borrowings under the revolving credit facility during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company borrowed $265 million under the revolving credit facility, and subsequently repaid $265 million utilizing the proceeds from the issuance of additional 2028 Senior Notes, as described below, and cash on hand.
On July 1, 2020, PG&E emerged from bankruptcy and assumed the Company's contracts without modification. Subsequent to July 1, 2020, the Company collected all remaining receivables due from PG&E for pre-petition periods and during October 2020 the last cash distribution of $34 million was paid out of distribution reserve accounts at subsidiaries affected by the PG&E Bankruptcy to Clearway Energy Operating LLC.
Management believes that the Company's liquidity position, cash flows from operations, and availability under its revolving credit facility will be adequate to meet the Company's financial commitments; debt service obligations; growth, operating and maintenance capital expenditures; and to fund dividends to holders of the Company's Class A common stock and Class C common stock. Management continues to regularly monitor the Company's ability to finance the needs of its operating, financing and investing activity within the dictates of prudent balance sheet management.
Credit Ratings
Credit rating agencies rate a firm's public debt securities. These ratings are utilized by the debt markets in evaluating a firm's credit risk. Ratings influence the price paid to issue new debt securities by indicating to the market the Company's ability to pay principal, interest and preferred dividends. Rating agencies evaluate a firm's industry, cash flow, leverage, liquidity, and hedge profile, among other factors, in their credit analysis of a firm's credit risk.
The following table summarizes the credit ratings for the Company and its Senior Notes as of September 30, 2020:
S&P | Moody's | ||||||||||
Clearway Energy, Inc. | BB | Ba2 | |||||||||
5.750% Senior Notes, due 2025 | BB | Ba2 | |||||||||
5.000% Senior Notes, due 2026 | BB | Ba2 | |||||||||
4.750% Senior Notes, due 2028 | BB | Ba2 |
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Sources of Liquidity
The Company's principal sources of liquidity include cash on hand, cash generated from operations, proceeds from sales of assets, borrowings under new and existing financing arrangements and the issuance of additional equity and debt securities as appropriate given market conditions. As described in Item 1— Note 7, Long-term Debt, to this Form 10-Q and Item 15 — Note 10, Long-term Debt, to the consolidated financial statements included in the Company's 2019 Form 10-K, the Company's financing arrangements consist corporate level debt, which includes Senior Notes and the revolving credit facility; the ATM Programs; and project-level financings for its various assets.
Revolving Credit Facility
The Company has a total of $436 million available under the revolving credit facility as of September 30, 2020. The facility will continue to be used for general corporate purposes including financing of future acquisitions and posting letters of credit.
DG-CS Master Borrower LLC
On November 2, 2020, DG-CS Master Borrower LLC, a wholly owned subsidiary of Clearway Energy Operating LLC, entered into a financing arrangement, which included the issuance of a $467 million term loan, as well as $30 million in letters of credit in support of debt service. The notes bear interest at 3.51% and mature on September 30, 2040. The proceeds from the loan were utilized to repay existing project-level debt outstanding for Chestnut Borrower LLC, Renew Solar CS 4 Borrower LLC, DGPV 4 Borrower LLC and Puma Class B LLC of $107 million, $102 million, $92 million and $73 million respectively and unwind related interest rate swaps in the amount of $42 million. The remaining proceeds were utilized to pay related fees and expenses and in part to acquire the Class B membership interests in the DGPV Holdco Entities and an SREC contract from CEG as further described in Note 4, Investments Accounted for by the Equity Method and Variable Interest Entities. Concurrent with the refinancing, the projects were transferred under DG-CS Master Borrower LLC and the obligations under the financing arrangement are supported by the Company's interest in the projects.
Utah Solar Holdings, LLC
On September 1, 2020, Utah Solar Holdings, LLC, or Utah Solar, entered into a financing arrangement, which included the issuance of approximately $296 million in senior secured notes supported by the Company’s interest in the Utah projects (Four Brothers, Granite Mountain and Iron Springs, previously defined as the Utah Solar Portfolio). The notes bear interest at 3.59% per annum and mature on December 31, 2036. The proceeds from the issuance were utilized to repay existing debt outstanding of approximately $247 million for the Utah projects and to unwind the related interest rate swaps in the amount of $33 million. The remaining proceeds were utilized to pay related fees and expenses, with the remaining $9 million distributed to Clearway Energy Operating LLC.
NIMH Solar LLC
On September 30, 2020, NIMH Solar LLC, a wholly-owned subsidiary of Clearway Energy Operating LLC, entered into a financing arrangement, which included the issuance of $193 million under a term loan facility, as well as $16 million in letters of credit in support of debt service and project obligations. The term loan bears annual interest rate of LIBOR, plus an applicable margin, which is 2.00% per annum through the third party anniversary of closing, and 2.125% per annum thereafter through the maturity date in September 2024. The term loans mature on September 30, 2024. The proceeds from the term loan were utilized to repay existing project-level debt outstanding for Alpine, Blythe and Roadrunner of $117 million, $14 million and $27 million, respectively. The remaining proceeds were utilized to pay related fees and expenses and along with existing project level cash provided a distribution to Clearway Energy Operating LLC of $45 million. Concurrent with the refinancing, the Alpine, Blythe and Roadrunner projects were transferred under NIMH Solar LLC and the obligations under the financing arrangement are supported by the Company’s interests in the projects.
2028 Senior Notes
On May 21, 2020, Clearway Energy Operating LLC completed the sale of an additional $250 million aggregate principal amount of the 2028 Senior Notes. The 2028 Senior Notes bear interest at 4.75% and mature on March 15, 2028. Interest on the 2028 Senior Notes is payable semi-annually on March 15 and September 15 of each year, and interest payments will commence on September 15, 2020. The 2028 Senior Notes are unsecured obligations of Clearway Energy Operating, LLC and are guaranteed by Clearway Energy LLC and by certain of Clearway Energy Operating LLC’s wholly owned current and future subsidiaries. The notes were issued at a price of 102% of par plus accrued interest from December 11, 2019. The net proceeds were utilized to repay the $45 million outstanding principal amount of the Company's 2020 Convertible Notes on June 1, 2020, as well as repay amounts outstanding under the Company’s revolving credit facility and for general corporate purposes.
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ATM Programs
On August 6, 2020, the Company entered into an equity distribution agreement with Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC and UBS Securities LLC, as sales agents. Pursuant to the terms of the equity distribution agreement, the Company may offer and sell shares of its Class C common stock from time to time through the sales agents up to an aggregate sales price of $150 million through an at-the-market equity offering program, or the 2020 ATM Program. During the third quarter, the Company issued and sold 792,929 shares of Class C common stock for gross proceeds of $21 million. As of September 30, 2020, approximately $129 million of Class C common stock remains available for issuance under the 2020 ATM Program.
As of June 30, 2020, the Company completed the issuance of shares of Class C common stock totaling $150 million under the 2016 ATM Program. During the first half of 2020, the Company issued and sold 1,749,665 shares of Class C common stock for gross proceeds of $38 million under the 2016 ATM Program.
During the three and nine months ended September 30, 2020, the Company incurred commission fees of $0.2 million and $0.6 million, respectively, related to the ATM Programs.
The Company utilized the proceeds of the sales under the ATM Programs to acquire 2,542,594 Class C units of Clearway Energy LLC and, as a result, the Company currently owns 57.58% of the economic interests of Clearway Energy LLC, with CEG retaining 42.42% of the economic interests of Clearway Energy LLC.
Sale of Interest in RPV Holdco 1
On May 14, 2020, the Company sold its interests in RPV Holdco 1 LLC, or RPV Holdco, to a third party for net proceeds of approximately $75 million. The Company previously accounted for its interest in RPV Holdco as an equity method investment. The sale of the investment resulted in a gain of approximately $49 million.
Sale of Energy Center Dover LLC and Energy Center Smyrna LLC Assets
On March 3, 2020, the Company, through Thermal LLC, sold 100% of its interests in Energy Center Dover LLC and Energy Center Smyrna LLC to DB Energy Assets, LLC.
Uses of Liquidity
The Company's requirements for liquidity and capital resources, other than for operating its facilities, are categorized as: (i) debt service obligations, as described more fully in Item 1 — Note 7, Long-term Debt to the Consolidated Financial Statements; (ii) capital expenditures; (iii) acquisitions and investments; and (iv) cash dividends to investors.
Capital Expenditures
The Company's capital spending program is mainly focused on maintenance capital expenditures, consisting of costs to maintain the assets currently operating, such as costs to replace or refurbish assets, and growth capital expenditures consisting of costs to construct new assets, costs to complete the construction of assets where construction is in process, and capital expenditures related to acquiring additional thermal customers.
For the nine months ended September 30, 2020, the Company used approximately $95 million to fund capital expenditures, including growth expenditures of $79 million, $48 million of which were incurred in connection with the repowering of the Elbow Creek and Wildorado facilities completed in the first quarter of 2020, as well as $7 million in connection with Oahu and Kawailoa Partnerships. The Company also incurred $20 million of growth capital expenditures in the Thermal segment in connection with various development projects. In addition, the Company incurred $16 million in maintenance capital expenditures. The Company estimates $32 million of maintenance expenditures for 2020. These estimates are subject to continuing review and adjustment. Actual capital expenditures may vary from these estimates.
Acquisitions and Investments
The Company intends to acquire generation assets developed and constructed by CEG, as well as generation and thermal infrastructure assets from third parties where the Company believes its knowledge of the market and operating expertise provides a competitive advantage, and to utilize such acquisitions as a means to grow its CAFD.
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DGPV Holdco Consolidation
On November 2, 2020, the Company acquired the Class B membership interests in DGPV Holdco 1, DGPV Holdco 2 and DGPV Holdco 3, or DGPV Holdco Entities, as well as an SREC contract, from Renew DG Holdings LLC, a subsidiary of CEG for $44 million in cash consideration. The Company previously held the Class A membership interests in the DGPV Holdco Entities and accounted for its interests in DGPV Holdco 1 and DGPV Holdco 2 as equity method investments, while DGPV Holdco 3 was consolidated by the Company effective May 29, 2020. For further discussion, see Note 4 — Investments Accounted for by the Equity Method and Variable Interest Entities.
Purchase of Repowered Langford Wind Project
On November 2, 2020, the Company entered into agreements with Clearway Renew LLC, a subsidiary of CEG, to acquire 100% of the cash equity interests in Langford Holding LLC, which owns the Langford wind project, for cash consideration of approximately $64 million, subject to closing adjustments. The Langford wind project is a 160 MW utility scale wind project located in West Texas that is expected to achieve repowering commercial operations and close in the fourth quarter of 2020.
Mesquite Star Wind Drop Down Acquisition
On September 1, 2020, the Company, through its indirect subsidiary Mesquite Star HoldCo LLC, acquired the Class A membership interests in Mesquite Star Pledgor LLC from Clearway Renew LLC, a subsidiary of CEG, for $79 million in cash consideration. Mesquite Star Pledgor LLC is the primary beneficiary and consolidates its interest in a tax equity fund that owns the Mesquite Star wind project, a 419 MW utility scale wind project located in Fisher County, Texas. A majority of the project’s output is backed by contracts with investment grade counterparties with a 12 year weighted average contract life. The investment was funded with existing liquidity.
Cash Equity Partnership Offer
On October 2, 2020, CEG offered the Company an opportunity to enter into partnership arrangements alongside a third-party equity investor, which will, at close, own a 100% cash equity interest in a portfolio that will include (i) 1,204 MW from six geographically diversified wind, solar and solar storage assets expected to reach COD between the fourth quarter of 2020 and the fourth quarter of 2022 and ii) CEG's remaining cash equity interest in Mesquite Star Pledgor LLC, which owns the Mesquite Star wind project, a 419 MW utility scale wind facility that reached COD in June 2020. The Company’s ownership stake in the partnership arrangements is subject to further negotiation with the Company acting as managing member for the applicable partnerships. The investment is subject to negotiation, both with CEG and the third-party capital investor, and the review and approval by the Company’s Independent Directors.
Agreements to Acquire and Invest in a Portfolio of Renewable Energy Projects from CEG
On April 17, 2020, the Company entered into binding agreements related to the previously announced drop-down offer from CEG to enable the Company to acquire and invest in a portfolio of renewable energy projects. The following projects are included in the drop-down. The agreements commit the Company to invest approximately $241 million in corporate capital, subject to closing adjustments.
•Rattlesnake Wind: The Company signed agreements to acquire Rattlesnake Flat LLC, which owns the Rattlesnake Wind Project, a 144 net MW wind facility located in Adams County, WA. Corporate capital funding for the project and commercial operations for the project are expected to occur by the end of 2020.
•Remaining Interest in Repowering Partnership II LLC: On May 11, 2020 the Company acquired CEG's remaining interest in Repowering 1.0, which included the 161 MW Wildorado and 122 MW Elbow Creek wind projects, for cash consideration of $70 million.
•Pinnacle Wind Repowering: a new partnership with CEG to repower the Pinnacle Wind Project, a 55 net MW wind facility located in Mineral County, WV.
The Company expects to invest approximately $241 million in corporate capital subject to closing adjustments for the above mentioned transactions. Closing is subject to the timing of projects achieving commercial operations. The investment at commercial operations excludes, subject to closing adjustments, an additional $27 million payment in 2031 at the Pinnacle Wind Repowering Partnership. The Company entered into binding agreements to acquire and invest in a portfolio of renewable energy projects.
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Investment Partnership with CEG
During the nine months ended September 30, 2020, the Company invested $10 million in distributed generation partnerships with CEG.
Clearway Energy LLC and Clearway Energy Operating LLC Revolving Credit Facility
As of September 30, 2020, the Company had no outstanding borrowings under the revolving credit facility and $59 million in letters of credit outstanding. The Company had no borrowings under the revolving credit facility during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company borrowed $265 million under the revolving credit facility, and subsequently repaid $265 million utilizing the proceeds from the issuance of additional 2028 Senior Notes, as described above, and cash on hand.
2020 Convertible Notes
On June 1, 2020, the Company repaid its outstanding $45 million of 2020 Convertible Notes utilizing the proceeds from the issuance of additional 2028 Senior Notes as described above.
Cash Dividends to Investors
The Company intends to use the amount of cash that it receives from its distributions from Clearway Energy LLC to pay quarterly dividends to the holders of its Class A common stock and Class C common stock. Clearway Energy LLC intends to distribute to its unit holders in the form of a quarterly distribution all of the CAFD it generates each quarter, less reserves for the prudent conduct of the business, including among others, maintenance capital expenditures to maintain the operating capacity of the assets. Dividends on the Class A common stock and Class C common stock are subject to available capital, market conditions, and compliance with associated laws, regulations and other contractual obligations. The Company expects that, based on current circumstances, comparable cash dividends will continue to be paid in the foreseeable future.
The following table lists the dividends paid on the Company's Class A common stock and Class C common stock during the nine months ended September 30, 2020:
Third Quarter 2020 | Second Quarter 2020 | First Quarter 2020 | ||||||||||||||||||
Dividends per Class A share | $ | 0.3125 | $ | 0.2100 | $ | 0.2100 | ||||||||||||||
Dividends per Class C share | $ | 0.3125 | $ | 0.2100 | $ | 0.2100 |
On October 27, 2020, the Company declared quarterly dividends on its Class A common stock and Class C common stock of $0.318 per share payable on December 15, 2020, to stockholders of record as of December 1, 2020.
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Cash Flow Discussion
The following table reflects the changes in cash flows for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019:
Nine months ended September 30, | |||||||||||||||||
2020 | 2019 | Change | |||||||||||||||
(In millions) | |||||||||||||||||
Net cash provided by operating activities | $ | 441 | $ | 374 | $ | 67 | |||||||||||
Net cash used in investing activities | (20) | (300) | 280 | ||||||||||||||
Net cash used in financing activities | $ | (301) | $ | (260) | $ | (41) |
Net Cash Provided by Operating Activities
Changes to net cash provided by operating activities were driven by: | (In millions) | ||||
Increase in operating income adjusted for non-cash items | $ | 35 | |||
Increase in dividend distributions received from unconsolidated affiliates | 19 | ||||
Increase in working capital driven primarily by the timing of accounts receivable collections and payments of accounts payable | 13 | ||||
$ | 67 | ||||
Net Cash Used in Investing Activities
Changes to net cash used in investing activities were driven by: | (In millions) | ||||
Decrease in capital expenditures primarily driven by 2019 growth capital expenditures in the Renewables segment related to repowering of Elbow Creek and Wildorado | $ | 105 | |||
Acquisition of Duquesne University District Energy System on May 1, 2019 | 100 | ||||
Proceeds received from sale of RPV Holdco, Energy Center Dover LLC and Energy Center Smyrna LLC in 2020 | 90 | ||||
Payment to buy out an existing tax equity partner of Wind TE Holdco on January 2, 2019 | 19 | ||||
Increase in cash due to consolidation of DGPV Holdco LLC in May 2020 | 17 | ||||
Increase in net distributions from unconsolidated affiliates in 2020 | 16 | ||||
Increase in cash paid for Drop Down Assets due to investment in Mesquite Star in 2020, partially offset by acquisition of Oahu and Kawailoa partnership interests in 2019 | (73) | ||||
Other | 6 | ||||
$ | 280 | ||||
Net Cash Used in Financing Activities
Changes in net cash used in financing activities were driven by: | (In millions) | ||||
Increase in debt repayments in 2020 primarily driven by repayments of Renewable project level debt in 2020 partially offset by a reduction in Corporate level debt repayments in 2020 compared to 2019 | $ | (354) | |||
Payment to buy out CEG's noncontrolling interest in Repowering Partnership II LLC on May 11, 2020 | (70) | ||||
Increase in dividends paid to common stockholders in 2020 | (31) | ||||
Increase in debt proceeds in 2020 primarily driven by issuance of 2028 Senior Notes | 189 | ||||
Increase in net contributions received from noncontrolling interests in 2020 compared to 2019, primarily from tax equity contributions in Wildorado TE Holdco | 162 | ||||
Net proceeds received from issuance of common stock under the ATM Programs in 2020 | 58 | ||||
Other | 5 | ||||
$ | (41) | ||||
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NOLs, Deferred Tax Assets and Uncertain Tax Position Implications, under ASC 740
As of December 31, 2019, the Company has a cumulative federal NOL carry forward balance of $1 billion for financial statement purposes, of which $0.9 billion will begin expiring between 2033 to 2037 if unutilized. The Company does not anticipate any federal income tax payments for 2020. Additionally, as of December 31, 2019, the Company has a cumulative state NOL carryforward balance of $649 million for financial statement purposes, which will expire between 2023 to 2039 if unutilized. The Company does not anticipate significant income tax payments for state and local jurisdictions in 2020. Based on the Company's current and expected NOL balances generated primarily by accelerated tax depreciation of its property, plant and equipment, the Company does not expect to pay significant federal income tax for a period of approximately ten years inclusive of any NOL generated after 2017 or later subject to an 80% limitation against future taxable income pursuant to the Tax Act.
As of December 31, 2019, the Company has an interest disallowance carry forward of $219 million as a result of the proposed §163(j) regulation, which was enacted as part of the Tax Cut and Jobs Act. The disallowed interest deduction has an indefinite carry forward period and any limitations on the utilization of this carry forward have been factored into our valuation allowance analysis. These are proposed regulations which are not final and are subject to change in the regulatory review process. On July 28, 2020, the Internal Revenue Service issued final regulations under §163(j), which limits the deduction for business interest expense. The Company is currently analyzing the impact that the regulations will have on its consolidated financial statements and related income tax calculations.
On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security (CARES) Act, or CARES Act, was signed into law, which includes modifications to the business interest expense disallowance and net operating loss provisions. While the Company expects to utilize previously disallowed interest expense during 2020 as a result of the modifications, the Company does not expect the CARES Act to have a material impact on the consolidated financial statements. The Company will continue to assess the effects of the CARES Act and ongoing government guidance related to COVID-19 that may be issued.
On June 29, 2020, governor of California signed Assembly Bill 85, or AB 85, suspending California net operating loss (NOL) utilization and imposing a cap on the amount of business incentive credits companies can utilize, effective for tax years 2020, 2021, and 2022. After assessing the law change, the Company expects AB 85 to have an immaterial impact on the consolidated financial statements.
The Company is subject to examination by taxing authorities for income tax returns filed in the U.S. federal jurisdiction and various state jurisdictions. The Company is not subject to U.S. federal or state income tax examinations for years prior to 2013. The Company has no uncertain tax benefits.
Off-Balance Sheet Arrangements
Obligations under Certain Guarantee Contracts
The Company may enter into guarantee arrangements in the normal course of business to facilitate commercial transactions with third parties.
Retained or Contingent Interests
The Company does not have any material retained or contingent interests in assets transferred to an unconsolidated entity.
Obligations Arising Out of a Variable Interest in an Unconsolidated Entity
Variable interest in equity investments — As of September 30, 2020, the Company has several investments with an ownership interest percentage of 50% or less in energy and energy-related entities that are accounted for under the equity method. DGPV Holdco 1 LLC, DGPV Holdco 2 LLC and GenConn are variable interest entities for which the Company is not the primary beneficiary. The Company's pro-rata share of non-recourse debt held by unconsolidated affiliates was approximately $652 million as of September 30, 2020. This indebtedness may restrict the ability of these subsidiaries to issue dividends or distributions to the Company.
Contractual Obligations and Commercial Commitments
The Company has a variety of contractual obligations and other commercial commitments that represent prospective cash requirements in addition to the Company's capital expenditure programs, as disclosed in the Company's 2019 Form 10-K.
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Fair Value of Derivative Instruments
The Company may enter into fuel purchase contracts and other energy-related derivative instruments to mitigate variability in earnings due to fluctuations in spot market prices and to hedge fuel requirements at certain generation facilities. In addition, in order to mitigate interest rate risk associated with the issuance of variable rate debt, the Company enters into interest rate swap agreements.
The tables below disclose the activities of non-exchange traded contracts accounted for at fair value in accordance with ASC 820. Specifically, these tables disaggregate realized and unrealized changes in fair value; disaggregate estimated fair values at September 30, 2020, based on their level within the fair value hierarchy defined in ASC 820; and indicate the maturities of contracts at September 30, 2020. For a full discussion of the Company's valuation methodology of its contracts, see Derivative Fair Value Measurements in Item 1 — Note 5, Fair Value of Financial Instruments.
Derivative Activity (Losses) Gains | (In millions) | ||||
Fair value of contracts as of December 31, 2019 | $ | (92) | |||
Contracts realized or otherwise settled during the period | 51 | ||||
Contracts acquired during the period | (29) | ||||
Contracts removed during the period | 33 | ||||
Changes in fair value | (149) | ||||
Fair value of contracts as of September 30, 2020 | $ | (186) |
Fair value of contracts as of September 30, 2020 | |||||||||||||||||||||||||||||
Maturity | |||||||||||||||||||||||||||||
Fair Value Hierarchy (Losses) Gains | 1 Year or Less | Greater Than 1 Year to 3 Years | Greater Than 3 Years to 5 Years | Greater Than 5 Years | Total Fair Value | ||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||
Level 2 | $ | (36) | $ | (57) | $ | (31) | $ | (45) | $ | (169) | |||||||||||||||||||
Level 3 | — | (3) | (6) | (8) | (17) | ||||||||||||||||||||||||
Total | $ | (36) | $ | (60) | $ | (37) | $ | (53) | $ | (186) |
The Company has elected to disclose derivative assets and liabilities on a trade-by-trade basis and does not offset amounts at the counterparty master agreement level. As discussed below in Quantitative and Qualitative Disclosures about Market Risk - Commodity Price Risk, the Company, measures the sensitivity of the portfolio to potential changes in market prices using VaR, a statistical model which attempts to predict risk of loss based on market price and volatility. The Company's risk management policy places a limit on one-day holding period VaR, which limits the net open position.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements and related disclosures in compliance with GAAP requires the application of appropriate technical accounting rules and guidance as well as the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. The application of these policies necessarily involves judgments regarding future events, including the likelihood of success of particular projects, legal and regulatory challenges, and the fair value of certain assets and liabilities. These judgments, in and of themselves, could materially affect the financial statements and disclosures based on varying assumptions, which may be appropriate to use. In addition, the financial and operating environment may also have a significant effect, not only on the operation of the business, but on the results reported through the application of accounting measures used in preparing the financial statements and related disclosures, even if the nature of the accounting policies has not changed.
On an ongoing basis, the Company evaluates these estimates, utilizing historic experience, consultation with experts and other methods the Company considers reasonable. In any event, actual results may differ substantially from the Company's estimates. Any effects on the Company's business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the information that gives rise to the revision becomes known.
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The Company identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Company's financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. The Company's critical accounting policies include income taxes and valuation allowance for deferred tax assets, impairment of long lived assets and other intangible assets.
Recent Accounting Developments
See Item 1 — Note 2, Summary of Significant Accounting Policies, for a discussion of recent accounting developments.
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ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to several market risks in its normal business activities. Market risk is the potential loss that may result from market changes associated with the Company's power generation or with an existing or forecasted financial or commodity transaction. The types of market risks the Company is exposed to are commodity price risk, interest rate risk, liquidity risk, and credit risk. The following disclosures about market risk provide an update to, and should be read in conjunction with, Item 7A — Quantitative and Qualitative Disclosures About Market Risk, of the Company's 2019 Form 10-K.
Interest Rate Risk
The Company is exposed to fluctuations in interest rates through its issuance of variable rate debt. Exposures to interest rate fluctuations may be mitigated by entering into derivative instruments known as interest rate swaps, caps, collars and put or call options. These contracts reduce exposure to interest rate volatility and result in primarily fixed rate debt obligations when taking into account the combination of the variable rate debt and the interest rate derivative instrument. See Item 1 — Note 6, Derivative Instruments and Hedging Activities, for more information.
Most of the Company's project subsidiaries enter into interest rate swaps, intended to hedge the risks associated with interest rates on non-recourse project level debt. See Item 15 — Note 10, Long-term Debt, to the Company's audited consolidated financial statements for the year ended December 31, 2019 included in the 2019 Form 10-K for more information about interest rate swaps of the Company's project subsidiaries.
If all of the interest rate swaps had been discontinued on September 30, 2020, the Company would have owed the counterparties $177 million. Based on the credit ratings of the counterparties, the Company believes its exposure to credit risk due to nonperformance by counterparties to its hedge contracts to be insignificant.
The Company has long-term debt instruments that subject it to the risk of loss associated with movements in market interest rates. As of September 30, 2020, a 1% change in interest rates would result in an approximately $1 million change in market interest expense on a rolling twelve-month basis.
As of September 30, 2020, the fair value of the Company's debt was $6,873 million and the carrying value was $6,797 million. The Company estimates that a 1% decrease in market interest rates would have increased the fair value of its long-term debt by approximately $430 million.
Liquidity Risk
Liquidity risk arises from the general funding needs of the Company's activities and in the management of the Company's assets and liabilities.
Commodity Price Risk
Commodity price risks result from exposures to changes in spot prices, forward prices, volatilities, and correlations between various commodities, such as electricity, natural gas and emissions credits. The Company manages the commodity price risk of its merchant generation operations by entering into derivative or non-derivative instruments to hedge the variability in future cash flows from forecasted power sales or purchases of fuel. The portion of forecasted transactions hedged may vary based upon management's assessment of market, weather, operation and other factors.
Based on a sensitivity analysis using simplified assumptions, the impact of a $0.50 per MMBtu increase or decrease in natural gas prices across the term of the derivative contracts would cause a change of approximately $1 million to the net value of derivatives as of September 30, 2020. The impact of a $0.50 per MWh increase or decrease in power prices across the term of the derivatives contracts would cause a change of approximately $1 million to the net value of power derivatives as of September 30, 2020.
Counterparty Credit Risk
Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. The Company monitors and manages credit risk through credit policies that include: (i) an established credit approval process; and (ii) the use of credit mitigation measures such as prepayment arrangements or volumetric limits. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. The Company seeks to mitigate counterparty risk by having a diversified portfolio of counterparties. See Item 1 - Note 1, Nature of Business, and Note 5, Fair Value of Financial Instruments, to the consolidated financial statements for more information about concentration of credit risk.
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ITEM 4 — Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's management, including its principal executive officer, principal financial officer and principal accounting officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act. Based on this evaluation, the Company's principal executive officer, principal financial officer and principal accounting officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1 — LEGAL PROCEEDINGS
For a discussion of the material legal proceedings in which the Company was involved through September 30, 2020, see Item 1 — Note 13, Contingencies, to this Form 10-Q.
ITEM 1A — RISK FACTORS
Information regarding risk factors appears in Part I, Item 1A, Risk Factors, in the Company's 2019 Form 10-K, as supplemented by the risk factors disclosed in Part II, Item 1A, Risk Factors, in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. There have been no material changes in the Company's risk factors since those reported in its 2019 Form 10-K, as supplemented by the those reported in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 — DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 — MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 — OTHER INFORMATION
On November 2, 2020, Sarah Rubenstein was named the Company’s Vice President, Accounting and Controller, and the Company’s Principal Accounting Officer.
Ms. Rubenstein, 43, previously served as Assistant Controller of the Company since August 2018, where she was responsible for managing corporate accounting and financial reporting activities. Ms. Rubenstein served as Director of Accounting Research and Financial Reporting at NRG from 2012 to August 2018. In prior roles, Ms. Rubenstein served as Director of Finance at EPV Solar, Inc. and Senior Director of Financial Reporting at Warner Music Group. Ms. Rubenstein began her career as an auditor with PricewaterhouseCoopers.
In connection with her appointment, on November 2, 2020, Ms. Rubenstein received a grant of 5,122 Restricted Stock Units under the Company’s Equity Incentive Plan, with an aggregate value of $150,000. Each Restricted Stock Unit is equivalent in value to one share of the Company’s Class C Common Stock. Under the grant, Ms. Rubenstein will receive from the Company shares of Class C Common Stock ratably over a three-year period beginning on the first anniversary of the date of the grant.
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ITEM 6 — EXHIBITS
Number | Description | Method of Filing | ||||||||||||
4.1 | Incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on July 21, 2020. | |||||||||||||
4.2 | Incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on July 21, 2020. | |||||||||||||
4.3 | Incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed on July 21, 2020. | |||||||||||||
4.4 | Incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on August 20, 2020. | |||||||||||||
4.5 | Incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on August 20, 2020. | |||||||||||||
4.6 | Incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed on August 20, 2020. | |||||||||||||
10.1 | Filed herewith. | |||||||||||||
31.1 | Filed herewith. | |||||||||||||
31.2 | Filed herewith. | |||||||||||||
31.3 | Filed herewith. | |||||||||||||
32 | Furnished herewith. | |||||||||||||
101 INS | Inline XBRL Instance Document. | Filed herewith. | ||||||||||||
101 SCH | Inline XBRL Taxonomy Extension Schema. | Filed herewith. | ||||||||||||
101 CAL | Inline XBRL Taxonomy Extension Calculation Linkbase. | Filed herewith. | ||||||||||||
101 DEF | Inline XBRL Taxonomy Extension Definition Linkbase. | Filed herewith. | ||||||||||||
101 LAB | Inline XBRL Taxonomy Extension Label Linkbase. | Filed herewith. | ||||||||||||
101 PRE | Inline XBRL Taxonomy Extension Presentation Linkbase. | Filed herewith. | ||||||||||||
104 | Cover Page Interactive Data File (the cover page interactive data file does not appear in Exhibit 104 because its Inline XBRL tags are embedded within the Inline XBRL document). | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CLEARWAY ENERGY, INC. (Registrant) | ||||||||||||||
/s/ CHRISTOPHER S. SOTOS | ||||||||||||||
Christopher S. Sotos | ||||||||||||||
Chief Executive Officer (Principal Executive Officer) | ||||||||||||||
/s/ CHAD PLOTKIN | ||||||||||||||
Chad Plotkin | ||||||||||||||
Chief Financial Officer (Principal Financial Officer) | ||||||||||||||
/s/ SARAH RUBENSTEIN | ||||||||||||||
Sarah Rubenstein | ||||||||||||||
Date: November 5, 2020 | Vice President, Accounting & Controller (Principal Accounting Officer) | |||||||||||||
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