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 with a focus on investments in clean energy and owner of modern, sustainable and long-term contracted assets across North America. The Company is sponsored by GIP and TotalEnergies through the portfolio company, Clearway Energy Group LLC, or CEG, which is equally owned by GIP and TotalEnergies. GIP is an independent infrastructure fund manager that makes equity and debt investments in infrastructure assets and businesses. TotalEnergies is a global multi-energy company.
The Company is one of the largest renewable energy owners in the U.S. with over 5,500 net MW of installed wind and solar generation projects. The Company’s over 8,000 net MW of assets also includes approximately 2,500 net MW of environmentally-sound, highly efficient natural gas-fired generation facilities. Through this environmentally-sound, diversified and primarily contracted portfolio, the Company endeavors to provide its investors with stable and growing dividend income. The majority of the Company’s revenues are derived from long-term contractual arrangements for the output or capacity from these assets.
The Company consolidates the results of Clearway Energy LLC through its controlling interest, with CEG’s interest shown as noncontrolling interest in the consolidated 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. From time to time, CEG may also hold shares of the Company’s Class A and/or Class C common stock.
As of March 31, 2023, the Company owned 57.88% of the economic interests of Clearway Energy LLC, with CEG owning 42.12% of the economic interests of Clearway Energy LLC.
The following table represents a summarized structure of the Company as of March 31, 2023:
Basis of Presentation
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 2022 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 March 31, 2023, and results of operations, comprehensive loss and cash flows for the three months ended March 31, 2023 and 2022.
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. They also impact the reported amounts of net earnings during the reporting periods. Actual results could be different from these estimates.
Cash, 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 $125 million and $121 million as of March 31, 2023 and December 31, 2022, respectively.
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 consolidated statements of cash flows:
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | (In millions) |
| Cash and cash equivalents | $ | 576 | | | $ | 657 | |
| Restricted cash | 437 | | | 339 | |
| Cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | $ | 1,013 | | | $ | 996 | |
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 March 31, 2023, these restricted funds were comprised of $143 million designated to fund operating expenses, $168 million designated for current debt service payments and $97 million restricted for reserves including debt service, performance obligations and other reserves as well as capital expenditures. The remaining $29 million is held in distributions reserve accounts.
Accumulated Depreciation and Accumulated Amortization
The following table presents the accumulated depreciation included in property, plant and equipment, net, and accumulated amortization included in intangible assets, net as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (In millions) |
| Property, Plant and Equipment Accumulated Depreciation | $ | 3,110 | | | $ | 3,024 | |
| Intangible Assets Accumulated Amortization | 925 | | | 877 | |
Dividends to Class A and Class C Common Stockholders
The following table lists the dividends paid on the Company's Class A and Class C common stock during the three months ended March 31, 2023:
| | | | | | | | | | | | | |
| | | | | | | First Quarter 2023 |
| Dividends per Class A share | | | | | | | $ | 0.3745 | |
| Dividends per Class C share | | | | | | | 0.3745 | |
Dividends on the Class A 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 May 3, 2023, the Company declared quarterly dividends on its Class A and Class C common stock of $0.3818 per share payable on June 15, 2023 to stockholders of record as of June 1, 2023.
Noncontrolling Interests
Clearway Energy LLC Distributions to CEG
The following table lists distributions paid to CEG during the three months ended March 31, 2023 on Clearway Energy LLC’s Class B and D units:
| | | | | | | | | | | | | |
| | | | | | | First Quarter 2023 |
| Distributions per Class B Unit | | | | | | | $ | 0.3745 | |
| Distributions per Class D Unit | | | | | | | 0.3745 | |
On May 3, 2023, Clearway Energy LLC declared a distribution on its Class B and Class D units of $0.3818 per unit payable on June 15, 2023 to unit holders of record as of June 1, 2023.
Redeemable Noncontrolling Interests
To the extent that a third party has the right to redeem their interests for cash or other assets, the Company has included the noncontrolling interest attributable to the third party as a component of temporary equity in the mezzanine section of the consolidated balance sheet. The following table reflects the changes in the Company’s redeemable noncontrolling interest balance for the three months ended March 31, 2023:
| | | | | | | | |
| | (In millions) |
| Balance at December 31, 2022 | | $ | 7 | |
| Cash distributions to redeemable noncontrolling interests | | (1) | |
| Comprehensive income attributable to redeemable noncontrolling interests | | 3 | |
| Balance at March 31, 2023 | | $ | 9 | |
Revenue Recognition
Disaggregated Revenues
The following tables represent the Company’s disaggregation of revenue from contracts with customers along with the reportable segment for each category:
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2023 |
| (In millions) | Conventional Generation | | Renewables | | | | | | Total |
Energy revenue (a) | $ | 1 | | | $ | 198 | | | | | | | $ | 199 | |
Capacity revenue (a) | 100 | | | 5 | | | | | | | 105 | |
| Contract amortization | (6) | | | (41) | | | | | | | (47) | |
| Other revenues | — | | | 12 | | | | | | | 12 | |
| Mark-to-market for economic hedges | — | | | 19 | | | | | | | 19 | |
| Total operating revenues | 95 | | | 193 | | | | | | | 288 | |
| Less: Mark-to-market for economic hedges | — | | | (19) | | | | | | | (19) | |
| Less: Lease revenue | (101) | | | (156) | | | | | | | (257) | |
| Less: Contract amortization | 6 | | | 41 | | | | | | | 47 | |
| Total revenue from contracts with customers | $ | — | | | $ | 59 | | | | | | | $ | 59 | |
| | | | | | | | | |
(a) The following amounts of energy and capacity revenue relate to leases and are accounted for under ASC 842:
| | | | | | | | | | | | | | | | | |
| (In millions) | Conventional Generation | | Renewables | | Total |
| Energy revenue | $ | 1 | | | $ | 152 | | | $ | 153 | |
| Capacity revenue | 100 | | | 4 | | | 104 | |
| Total | $ | 101 | | | $ | 156 | | | $ | 257 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 |
| (In millions) | Conventional Generation | | Renewables | | Thermal | | | | | | Total |
Energy revenue (a) | $ | — | | | $ | 195 | | | $ | 37 | | | | | | | $ | 232 | |
Capacity revenue (a) | 114 | | | — | | | 14 | | | | | | | 128 | |
| Contract amortization | (6) | | | (36) | | | — | | | | | | | (42) | |
| Other revenues | — | | | 14 | | | 8 | | | | | | | 22 | |
| Mark-to-market for economic hedges | — | | | (126) | | | — | | | | | | | (126) | |
| Total operating revenues | 108 | | | 47 | | | 59 | | | | | | | 214 | |
| Less: Mark-to-market for economic hedges | — | | | 126 | | | — | | | | | | | 126 | |
| Less: Lease revenue | (114) | | | (162) | | | (1) | | | | | | | (277) | |
| Less: Contract amortization | 6 | | | 36 | | | — | | | | | | | 42 | |
| Total revenue from contracts with customers | $ | — | | | $ | 47 | | | $ | 58 | | | | | | | $ | 105 | |
(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 | $ | — | | | $ | 162 | | | $ | 1 | | | $ | 163 | |
| Capacity revenue | 114 | | | — | | | — | | | 114 | |
| Total | $ | 114 | | | $ | 162 | | | $ | 1 | | | $ | 277 | |
Contract Balances
The following table reflects the contract assets and liabilities included on the Company’s consolidated balance sheets:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (In millions) |
| Accounts receivable, net - Contracts with customers | $ | 40 | | | $ | 37 | |
| Accounts receivable, net - Leases | 110 | | | 116 | |
| Total accounts receivable, net | $ | 150 | | | $ | 153 | |
Recently Adopted Accounting Standards
In March 2020, the FASB issued ASU No. 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 are met. These amendments apply only to contracts that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, which affects certain of the Company’s debt and interest rate swap agreements. The guidance is effective for all entities as of March 20, 2020 through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-6, Deferral of the Sunset Date of Reference Rate Reform, to extend the end of the transition period to December 31, 2024. As of March 31, 2023, the Company has amended the majority of the contracts that previously used LIBOR as a reference rate and elected to apply relief to certain modified cash flow interest rate swap and debt agreements. The adoption did not have a material impact on the Company’s financial statements. The Company intends to amend the remaining contracts that use LIBOR as a reference rate no later than June 30, 2023, the LIBOR cessation date.
Note 3 — Acquisitions and Dispositions
Acquisitions
Daggett 3 Drop Down — On February 17, 2023, the Company, through its indirect subsidiary, Daggett Solar Investment LLC, acquired the Class A membership interests in Daggett TargetCo LLC, the indirect owner of the Daggett 3 solar project, a 300 MW solar project with matching storage capacity that is currently under construction, located in San Bernardino, California, from Clearway Renew LLC, a subsidiary of CEG, for cash consideration of $21 million. Simultaneously, a cash equity investor acquired the Class B membership interests in Daggett TargetCo LLC from Clearway Renew LLC for cash consideration of $129 million. The Company and the cash equity investor then contributed their Class A and B membership interests, respectively, into Daggett Renewable Holdco LLC, a partnership between the Company and the cash equity investor, which consolidates Daggett TargetCo LLC. Daggett TargetCo LLC consolidates, as the indirect owner of the primary beneficiary, a tax equity fund, Daggett TE Holdco LLC, which owns the Daggett 3 solar project, as further described in Note 4, Investments Accounted for by the Equity Method and Variable Interest Entities. Daggett 3 has PPAs with investment-grade counterparties that have a 15-year weighted average contract duration that commence when the underlying operating assets reach commercial operations, which is expected to occur for the majority of the operating assets in the second quarter of 2023. The Daggett 3 operations are reflected in the Company’s Renewables segment and the acquisition was funded with existing sources of liquidity. The acquisition was determined to be an asset acquisition and the Company consolidates Daggett 3 on a prospective basis in its financial statements. The assets and liabilities transferred to the Company relate to interests under common control and were recorded at historical cost in accordance with ASC 805-50, Business Combinations - Related Issues. The difference between the cash paid of $21 million and the historical cost of the Company’s net assets acquired of $15 million was recorded as an adjustment to CEG’s noncontrolling interest balance. In addition, the Company reflected $21 million of the Company’s purchase price, which was contributed back to the Company by CEG to pay down the acquired long-term debt, in the line item contributions from CEG, net of distributions in the consolidated statement of stockholders’ equity.
The following is a summary of assets and liabilities transferred in connection with the acquisition as of February 17, 2023:
| | | | | | | | |
| (In millions) | | Daggett 3 |
| Restricted cash | | $ | 14 | |
| Property, plant and equipment | | 534 | |
| Right-of-use-assets, net | | 31 | |
| Derivative assets | | 27 | |
| | |
| Total assets acquired | | 606 | |
| | |
Long-term debt (a) | | 480 | |
| Long-term lease liabilities | | 33 | |
Other current and non-current liabilities (b) | | 78 | |
| Total liabilities assumed | | 591 | |
| Net assets acquired | | $ | 15 | |
(a) Includes a $181 million construction loan, $75 million sponsor equity bridge loan and $229 million tax equity bridge loan, offset by $5 million in unamortized debt issuance costs. See Note 7, Long-term Debt, for further discussion of the long-term debt assumed in the acquisition.
(b) Includes $32 million of project costs that were subsequently funded by CEG and will be repaid with the proceeds expected to be received when the project reaches substantial completion.
Note 4 — Investments Accounted for by the Equity Method and Variable Interest Entities
Entities that are not Consolidated
The Company has an interest in an entity that is considered a VIE under ASC 810, but for which it is not considered the primary beneficiary. The Company accounts for its interest in this entity and entities in which it has a significant investment under the equity method of accounting, as further described under 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 2022 Form 10-K.
The Company’s maximum exposure to loss as of March 31, 2023 is limited to its equity investment in the unconsolidated entities, as further summarized in the table below:
| | | | | | | | |
| Name | Economic Interest | Investment Balance |
| | (In millions) |
| Avenal | 50% | $ | 7 | |
| Desert Sunlight | 25% | 226 | |
| Elkhorn Ridge | 67% | 20 | |
GenConn (a) | 50% | 80 | |
| San Juan Mesa | 75% | 13 | |
| | |
| | $ | 346 | |
(a) GenConn is a variable interest entity.
Entities that are Consolidated
As further described under 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 2022 Form 10-K, 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. The Company also has a controlling financial interest in certain partnership arrangements with third-party investors, which have also been identified as VIEs. Under the Company’s arrangements that have been identified as VIEs, the third-party investors are allocated earnings, tax attributes and distributable cash in accordance with the respective limited liability agreements. Many of these arrangements also provide a mechanism to facilitate achievement of the investor’s specified return by providing incremental cash distributions to the investor at a specified date if the specified return has not yet been achieved.
The discussion below describes material changes to VIEs during the three months ended March 31, 2023.
Daggett Renewable Holdco LLC — As described in Note 3, Acquisitions and Dispositions, on February 17, 2023, Daggett Solar Investment LLC, an indirect subsidiary of the Company, acquired the Class A membership interests in Daggett TargetCo LLC while a cash equity investor acquired the Class B membership interests. The Company and the cash equity investor then contributed their Class A and B membership interests, respectively, into Daggett Renewable Holdco LLC, a partnership between the Company and the cash equity investor, and concurrently, Daggett TargetCo LLC became a wholly-owned subsidiary of Daggett Renewable Holdco LLC. The Company consolidates Daggett Renewable Holdco LLC as a VIE as the Company is the primary beneficiary, through its role as managing member. The Company recorded the noncontrolling interest of the cash equity investor in Daggett Renewable Holdco LLC at historical carrying amount, with the offset to additional paid-in capital. Daggett TargetCo LLC consolidates, as the indirect owner of the primary beneficiary, a tax equity fund, Daggett TE Holdco LLC, which owns the Daggett 3 solar project. The tax equity investor’s interest is shown as noncontrolling interest and the HLBV method is utilized to allocate the income or losses of Daggett TE Holdco LLC.
Summarized financial information for the Company’s consolidated VIEs consisted of the following as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Alta TE Holdco LLC | | Buckthorn Renewables, LLC | | DGPV Funds (a) | | Daggett Renewable Holdco LLC (b) | | Langford TE Partnership LLC | | Lighthouse Renewable Holdco LLC (c) |
| Other current and non-current assets | $ | 55 | | | $ | 3 | | | $ | 73 | | | $ | 147 | | | $ | 13 | | | $ | 122 | |
| Property, plant and equipment | 296 | | | 192 | | | 516 | | | 559 | | | 121 | | | 823 | |
| Intangible assets | 196 | | | — | | | 14 | | | — | | | 2 | | | — | |
| Total assets | 547 | | | 195 | | | 603 | | | 706 | | | 136 | | | 945 | |
| Current and non-current liabilities | 38 | | | 11 | | | 65 | | | 493 | | | 54 | | | 305 | |
| Total liabilities | 38 | | | 11 | | | 65 | | | 493 | | | 54 | | | 305 | |
| Noncontrolling interest | 38 | | | 26 | | | 18 | | | 231 | | | 65 | | | 513 | |
| Net assets less noncontrolling interest | $ | 471 | | | $ | 158 | | | $ | 520 | | | $ | (18) | | | $ | 17 | | | $ | 127 | |
(a) DGPV Funds is comprised of Clearway & EFS Distributed Solar LLC, DGPV Fund 4 LLC, Golden Puma Fund LLC, Renew Solar CS4 Fund LLC and Chestnut Fund LLC, which are all tax equity funds.
(b) Daggett Renewable Holdco LLC consolidates Daggett TE Holdco LLC, which is a consolidated VIE.
(c) Lighthouse Renewable Holdco LLC consolidates Mesquite Star Tax Equity Holdco LLC, Black Rock TE Holdco LLC, Mililani TE Holdco LLC and Waiawa TE Holdco LLC, which are consolidated VIEs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Lighthouse Renewable Holdco 2 LLC(a) | | Oahu Solar LLC | | Pinnacle Repowering TE Holdco LLC | | Rattlesnake TE Holdco LLC | | Rosie TargetCo LLC | | Wildorado TE Holdco LLC | | Other (b) |
| Other current and non-current assets | $ | 44 | | | $ | 39 | | | $ | 7 | | | $ | 15 | | | $ | 35 | | | $ | 25 | | | $ | 16 | |
| Property, plant and equipment | 357 | | | 162 | | | 101 | | | 182 | | | 236 | | | 205 | | | 151 | |
| Intangible assets | — | | | — | | | 16 | | | — | | | — | | | — | | | 1 | |
| Total assets | 401 | | | 201 | | | 124 | | | 197 | | | 271 | | | 230 | | | 168 | |
| Current and non-current liabilities | 132 | | | 22 | | | 5 | | | 17 | | | 98 | | | 21 | | | 74 | |
| Total liabilities | 132 | | | 22 | | | 5 | | | 17 | | | 98 | | | 21 | | | 74 | |
| Noncontrolling interest | 233 | | | 26 | | | 42 | | | 87 | | | 127 | | | 109 | | | 68 | |
| Net assets less noncontrolling interest | $ | 36 | | | $ | 153 | | | $ | 77 | | | $ | 93 | | | $ | 46 | | | $ | 100 | | | $ | 26 | |
(a) Lighthouse Renewable Holdco 2 LLC consolidates Mesquite Sky TE Holdco LLC, which is a consolidated VIE.
(b) Other is comprised of Elbow Creek TE Holdco LLC and Spring Canyon TE Holdco LLC.
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 — trade, accounts payable — trade, accounts payable — affiliates and accrued expenses and other current 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 carrying amounts and estimated fair values of the Company’s recorded financial instruments not carried at fair market value or that do not approximate fair value are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 | | As of December 31, 2022 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| (In millions) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Long-term debt, including current portion (a) | $ | 7,197 | | | $ | 6,760 | | | $ | 6,874 | | | $ | 6,288 | |
(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 debt securities, non-publicly traded long-term debt and certain notes receivable 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 March 31, 2023 | | As of December 31, 2022 |
| Level 2 | | Level 3 | | Level 2 | | Level 3 |
| | (In millions) |
Long-term debt, including current portion | $ | 1,902 | | | $ | 4,858 | | | $ | 1,834 | | | $ | 4,454 | |
Recurring Fair Value Measurements
The Company records its derivative assets and liabilities at fair market 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 March 31, 2023 | | As of December 31, 2022 |
| | | Fair Value (a) | | Fair Value (a) |
| (In millions) | | | Level 2 | | Level 3 | | | | Level 2 | | Level 3 | | |
| Derivative assets: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Interest rate contracts | | | $ | 91 | | | $ | — | | | | | $ | 89 | | | $ | — | | | |
Other financial instruments (b) | | | — | | | 18 | | | | | — | | | 17 | | | |
| Total assets | | | $ | 91 | | | $ | 18 | | | | | $ | 89 | | | $ | 17 | | | |
| Derivative liabilities: | | | | | | | | | | | | | |
| Commodity contracts | | | $ | — | | | $ | 334 | | | | | $ | — | | | $ | 353 | | | |
| Interest rate contracts | | | 1 | | | — | | | | | — | | | — | | | |
| Total liabilities | | | $ | 1 | | | $ | 334 | | | | | $ | — | | | $ | 353 | | | |
(a) There were no derivative assets classified as Level 1 or Level 3 and no liabilities classified as Level 1 as of March 31, 2023 and December 31, 2022.
(b) Includes SREC contract.
The following table reconciles the beginning and ending balances for instruments that are recognized at fair value in the consolidated financial statements using significant unobservable inputs:
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| | | | | | 2023 | | 2022 |
| (In millions) | | | | Fair Value Measurement Using Significant Unobservable Inputs (Level 3) |
| Beginning balance | | | | | | $ | (336) | | | $ | (154) | |
| Settlements | | | | | | 4 | | | 6 | |
| | | | | | | | |
| Additions due to loss of NPNS exception | | | | | | — | | | (21) | |
| Total gains (losses) for the period included in earnings | | | | | | 16 | | | (111) | |
| Ending balance | | | | | | $ | (316) | | | $ | (280) | |
Change in unrealized gains included in earnings for derivatives and other financial instruments held as of March 31, 2023 | | | | | | $ | 16 | | | |
Derivative and Financial Instruments Fair Value Measurements
The Company's contracts are non-exchange-traded and valued using prices provided by external sources. The Company uses quoted observable forward prices to value its commodity contracts. To the extent that observable forward prices are not available, the quoted prices reflect the average of the forward prices from the prior year, adjusted for inflation. As of March 31, 2023, contracts valued with prices provided by models and other valuation techniques make up 100% of derivative liabilities and other financial instruments.
The Company’s significant positions classified as Level 3 include physical commodity contracts 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 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.
The following table quantifies the significant unobservable inputs used in developing the fair value of the Company’s Level 3 positions:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Fair Value | | Input/Range |
| Assets | Liabilities | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average |
| (In millions) | | | | | |
| Commodity Contracts | $ | — | | $ | (334) | | Discounted Cash Flow | Forward Market Price (per MWh) | $ | 20.81 | | $ | 80.18 | | $ | 39.87 | |
| Other Financial Instruments | 18 | | — | | Discounted Cash Flow | Forecast annual generation levels of certain DG solar facilities | 58,539 MWh | 117,078 MWh | 112,897 MWh |
The following table provides the impact on the fair value measurements to increases/(decreases) in significant unobservable inputs as of March 31, 2023:
| | | | | | | | | | | |
| Significant Unobservable Input | Position | Change In Input | Impact on Fair Value Measurement |
| Forward Market Price Power | Sell | Increase/(Decrease) | Lower/(Higher) |
| Forecast Generation Levels | Sell | Increase/(Decrease) | Higher/(Lower) |
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 March 31, 2023, the non-performance reserve was a $35 million gain recorded primarily to total operating revenues 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 as disclosed under Item 15 — Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in the Company’s 2022 Form 10-K, the following item 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 on an as needed basis; (iii) as applicable, 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. A significant portion of these commodity 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. Certain subsidiaries of the Company sell the output of their facilities to PG&E, a significant counterparty of the Company, under long-term PPAs, and PG&E’s credit rating is below investment-grade.
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 2022 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 March 31, 2023, the Company had interest rate derivative instruments on non-recourse debt extending through 2031, 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 March 31, 2023, the Company had energy-related derivative instruments extending through 2033. At March 31, 2023, 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/(sell) of the Company’s open derivative transactions broken out by commodity:
| | | | | | | | | | | | | | | | | |
| | | Total Volume |
| | | March 31, 2023 | | December 31, 2022 |
| Commodity | Units | | (In millions) |
| | | | | |
| Power | MWh | | (17) | | | (18) | |
| Interest | Dollars | | $ | 1,678 | | | $ | 1,084 | |
| | | | | |
| | | | | |
Fair Value of Derivative Instruments
The following table summarizes the fair value within the derivative instrument valuation on the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value |
| | Derivative Assets | | Derivative Liabilities |
| March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
| (In millions) |
| Derivatives Designated as Cash Flow Hedges: | | | | | | | |
| Interest rate contracts current | $ | 6 | | | $ | 7 | | | $ | — | | | $ | — | |
| Interest rate contracts long-term | 14 | | | 18 | | | — | | | — | |
| Total Derivatives Designated as Cash Flow Hedges | $ | 20 | | | $ | 25 | | | $ | — | | | $ | — | |
| Derivatives Not Designated as Cash Flow Hedges: | | | | | | | |
| Interest rate contracts current | $ | 21 | | | $ | 19 | | | $ | — | | | $ | — | |
| Interest rate contracts long-term | 50 | | | 45 | | | 1 | | | — | |
| Commodity contracts current | — | | | — | | | 39 | | | 50 | |
| Commodity contracts long-term | — | | | — | | | 295 | | | 303 | |
| Total Derivatives Not Designated as Cash Flow Hedges | $ | 71 | | | $ | 64 | | | $ | 335 | | | $ | 353 | |
| Total Derivatives | $ | 91 | | | $ | 89 | | | $ | 335 | | | $ | 353 | |
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 level. As of March 31, 2023 and December 31, 2022, the amount of outstanding collateral paid or received was immaterial. The following tables summarize the offsetting of derivatives by counterparty:
| | | | | | | | | | | | | | | | | |
| Gross Amounts Not Offset in the Statement of Financial Position |
| As of March 31, 2023 | Gross Amounts of Recognized Assets/Liabilities | | Derivative Instruments | | Net Amount |
| Commodity contracts | (In millions) |
| | | | | |
| Derivative liabilities | $ | (334) | | | $ | — | | | $ | (334) | |
| Total commodity contracts | $ | (334) | | | $ | — | | | $ | (334) | |
| Interest rate contracts | | | | | |
| Derivative assets | $ | 91 | | | $ | (1) | | | $ | 90 | |
| Derivative liabilities | (1) | | | 1 | | | — | |
| Total interest rate contracts | $ | 90 | | | $ | — | | | $ | 90 | |
| Total derivative instruments | $ | (244) | | | $ | — | | | $ | (244) | |
| | | | | | | | | | | | | | | | | |
| Gross Amounts Not Offset in the Statement of Financial Position |
| As of December 31, 2022 | Gross Amounts of Recognized Assets/Liabilities | | Derivative Instruments | | Net Amount |
| Commodity contracts | (In millions) |
| | | | | |
| Derivative liabilities | $ | (353) | | | $ | — | | | $ | (353) | |
| Total commodity contracts | $ | (353) | | | $ | — | | | $ | (353) | |
| Interest rate contracts | |
| Derivative assets | $ | 89 | | | $ | — | | | $ | 89 | |
| | | | | |
| Total interest rate contracts | $ | 89 | | | $ | — | | | $ | 89 | |
| Total derivative instruments | $ | (264) | | | $ | — | | | $ | (264) | |
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the effects on the Company’s accumulated OCI (OCL) balance attributable to interest rate swaps designated as cash flow hedge derivatives, net of tax:
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2023 | | 2022 |
| | | | (In millions) |
| Accumulated OCI (OCL) beginning balance | | | | | $ | 24 | | | $ | (11) | |
| Reclassified from accumulated OCI (OCL) to income due to realization of previously deferred amounts | | | | | — | | | 2 | |
| | | | | | | |
| Mark-to-market of cash flow hedge accounting contracts | | | | | (3) | | | 12 | |
Accumulated OCI (OCL) ending balance, net of income tax expense of $2 and $2, respectively | | | | | 21 | | | 3 | |
| Accumulated OCI attributable to noncontrolling interests | | | | | 13 | | | 3 | |
| Accumulated OCI attributable to Clearway Energy, Inc. | | | | | $ | 8 | | | $ | — | |
Gains expected to be realized from OCI during the next 12 months, net of income tax expense of $1 | | | | | $ | 4 | | | |
Amounts reclassified from accumulated OCI (OCL) into income are recorded to interest expense.
Impact of Derivative Instruments on the Consolidated Statements of Operations
Mark-to-market gains/(losses) related to the Company’s derivatives are recorded in the consolidated statements of operations as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2023 | | 2022 |
| | | | (In millions) |
| Interest Rate Contracts (Interest expense) | | | | | $ | (21) | | | $ | 41 | |
Commodity Contracts (Mark-to-market for economic hedging activities) (a) | | | | | 18 | | | (125) | |
(a) Relates to long-term commodity contracts at Elbow Creek, Mesquite Star, Mt. Storm, Langford and Mesquite Sky. During the three months ended March 31, 2022, the commodity contract for Langford, which previously met the NPNS exception, no longer qualified for NPNS treatment and, accordingly, is accounted for as a derivative and marked to fair value through operating revenues.
See Note 5, Fair Value of Financial Instruments, for a discussion regarding concentration of credit risk.
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 2022 Form 10-K. The Company’s borrowings, including short-term and long-term portions, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except rates) | March 31, 2023 | | December 31, 2022 | | March 31, 2023 interest rate % (a) (b) | | Letters of Credit Outstanding at March 31, 2023 |
| | | | | | | |
| | | | | | | |
| 2028 Senior Notes | $ | 850 | | | $ | 850 | | | 4.750 | | | |
| 2031 Senior Notes | 925 | | | 925 | | | 3.750 | | | |
| 2032 Senior Notes | 350 | | | 350 | | | 3.750 | | | |
Clearway Energy LLC and Clearway Energy Operating LLC Revolving Credit Facility, due 2028 (c) | — | | | — | | | S+1.850 | | $ | 139 | |
| | | | | | | |
| Non-recourse project-level debt: | | | | | | | |
| Agua Caliente Solar LLC, due 2037 | 645 | | | 649 | | | 2.395-3.633 | | 45 | |
| Alta Wind Asset Management LLC, due 2031 | 12 | | | 12 | | | L+2.625 | | — | |
| Alta Wind I-V lease financing arrangements, due 2034 and 2035 | 709 | | | 709 | | | 5.696-7.015 | | 23 | |
| Alta Wind Realty Investments LLC, due 2031 | 21 | | | 22 | | | 7.000 | | | — | |
| Borrego, due 2024 and 2038 | 51 | | | 51 | | | Various | | — | |
| Buckthorn Solar, due 2025 | 119 | | | 119 | | | L+1.750 | | 20 | |
| Capistrano Wind Portfolio, due 2029 and 2031 | 152 | | | 156 | | | S+2.100-S+2.150 | | 33 | |
| Carlsbad Energy Holdings LLC, due 2027 | 114 | | | 115 | | | L+1.750 | | 77 | |
| Carlsbad Energy Holdings LLC, due 2038 | 407 | | | 407 | | | 4.120 | | | — | |
| Carlsbad Holdco, LLC, due 2038 | 197 | | | 197 | | | 4.210 | | | 5 | |
| CVSR, due 2037 | 612 | | | 627 | | | 2.339-3.775 | | — | |
| CVSR Holdco Notes, due 2037 | 151 | | | 160 | | | 4.680 | | | 13 | |
| Daggett 3, due 2023 and 2028 | 446 | | | — | | | S+1.262 | | 35 | |
| DG-CS Master Borrower LLC, due 2040 | 406 | | | 413 | | | 3.510 | | | 30 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Marsh Landing, due 2023 | 6 | | | 19 | | | L+2.375 | | 31 | |
| Mililani I, due 2027 | 47 | | | 47 | | | L+1.500 | | 6 | |
| NIMH Solar, due 2024 | 161 | | | 163 | | | S+2.150 | | 12 | |
| Oahu Solar Holdings LLC, due 2026 | 83 | | | 83 | | | L+1.375 | | 10 | |
| | | | | | | |
| Rosie Class B LLC, due 2027 | 76 | | | 76 | | | L+1.750 | | 17 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Utah Solar Holdings, due 2036 | 257 | | | 257 | | | 3.590 | | | 9 | |
| | | | | | | |
| Viento Funding II, LLC, due 2029 | 182 | | | 184 | | | S+1.475 | | 25 | |
| Waiawa, due 2028 | 47 | | | 97 | | | S+1.600 | | 12 | |
| Walnut Creek, due 2023 | 8 | | | 19 | | | L+1.875 | | 63 | |
| WCEP Holdings, LLC, due 2023 | 25 | | | 26 | | | L+3.000 | | — | |
| Other | 135 | | | 137 | | | Various | | 252 | |
| Subtotal non-recourse project-level debt | 5,069 | | | 4,745 | | | | | |
| Total debt | 7,194 | | | 6,870 | | | | | |
| Less current maturities | (366) | | | (322) | | | | | |
| Less net debt issuance costs | (62) | | | (61) | | | | | |
Add premiums (d) | 3 | | | 4 | | | | | |
| Total long-term debt | $ | 6,769 | | | $ | 6,491 | | | | | |
(a) As of March 31, 2023, L+ equals 3 month LIBOR plus x%, except Marsh Landing, due 2023 and Walnut Creek, due 2023, where L+ equals 1 month LIBOR plus x%.
(b) S+ equals SOFR plus x%.
(c) Applicable rate is determined by the borrower leverage ratio, as defined in the credit agreement.
(d) Premiums relate to the 2028 Senior Notes.
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 March 31, 2023, 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 three months ended March 31, 2023.
Clearway Energy LLC and Clearway Energy Operating LLC Revolving Credit Facility
On March 15, 2023, Clearway Energy Operating LLC refinanced the Amended and Restated Credit Agreement, which (i) replaced LIBOR with SOFR plus a credit spread adjustment of 0.10% as the applicable reference rate, (ii) increased the available revolving commitments to an aggregate principal amount of $700 million, (iii) extended the maturity date to March 15, 2028, (iv) increased the letter of credit sublimit to $594 million and (v) implemented certain other technical modifications.
As of March 31, 2023, the Company had no outstanding borrowings under the revolving credit facility and $139 million in letters of credit outstanding.
Project-level Debt
Waiawa
On March 30, 2023, when the Waiawa solar project reached substantial completion, the tax equity investor contributed an additional $41 million and CEG contributed an additional $8 million, which was utilized, along with the $17 million in escrow, to repay the $55 million tax equity bridge loan, to fund $10 million in construction completion reserves and to pay $1 million in associated fees. Subsequent to the Waiawa acquisition on October 3, 2022, the Company borrowed an additional $25 million in construction loans that was converted to a term loan in the amount of $47 million on March 30, 2023.
Daggett 3
On February 17, 2023, as part of the acquisition of Daggett 3, as further described in Note 3, Acquisitions and Dispositions, the Company assumed the project’s financing agreement, which included a $181 million construction loan that converts to a term loan upon the project reaching substantial completion, $229 million tax equity bridge loan and $75 million sponsor equity bridge loan. The sponsor equity bridge loan was repaid at acquisition date, along with $8 million in associated fees, utilizing all of the proceeds from the Company and cash equity investor, which were contributed back to the Company by CEG. The tax equity bridge loan will be repaid with the final proceeds received from the tax equity investor upon Daggett 3 reaching substantial completion, which is expected to occur in the second half of 2023, along with the $62 million that was contributed into escrow by the tax equity investor at acquisition date. Subsequent to the Daggett 3 acquisition, the Company borrowed an additional $36 million in construction loans.
Note 8 — Loss Per Share
Basic loss per common share is computed by dividing net loss 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 loss per share is computed in a manner consistent with that of basic loss per share while giving effect to all potentially dilutive common shares that were outstanding during the period.
The reconciliation of the Company’s basic and diluted loss per share is shown in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | 2022 |
(In millions, except per share data) (a) | Common Class A | | Common Class C | | Common Class A | | Common Class C |
| Basic and diluted loss per share attributable to Clearway Energy, Inc. common stockholders | | | | | | | |
| Net loss attributable to Clearway Energy, Inc. | $ | — | | | $ | — | | | $ | (9) | | | $ | (23) | |
| Weighted average number of common shares outstanding — basic and diluted | 35 | | | 82 | | | 35 | | | 82 | |
| Loss per weighted average common share — basic and diluted | $ | — | | | $ | — | | | $ | (0.28) | | | $ | (0.28) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(a) Net loss attributable to Clearway Energy, Inc. and basic and diluted loss per share might not recalculate due to presenting amounts in millions rather than whole dollars.
Note 9 — 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, wind and energy storage The Corporate segment reflects the Company’s corporate costs and includes eliminating entries. 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 net income (loss).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2023 | | | | |
| (In millions) | Conventional Generation | | Renewables | | | | Corporate (a) | | Total | | | | |
| Operating revenues | $ | 95 | | | $ | 193 | | | | | $ | — | | | $ | 288 | | | | | |
| Cost of operations, exclusive of depreciation, amortization and accretion shown separately below | 29 | | | 79 | | | | | — | | | 108 | | | | | |
| Depreciation, amortization and accretion | 33 | | | 95 | | | | | — | | | 128 | | | | | |
| | | | | | | | | | | | | |
| General and administrative | — | | | — | | | | | 10 | | | 10 | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Operating income (loss) | 33 | | | 19 | | | | | (10) | | | 42 | | | | | |
| Equity in earnings (losses) of unconsolidated affiliates | 1 | | | (4) | | | | | — | | | (3) | | | | | |
| | | | | | | | | | | | | |
| Other income, net | 1 | | | 1 | | | | | 6 | | | 8 | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Interest expense | (11) | | | (64) | | | | | (24) | | | (99) | | | | | |
| Income (loss) before income taxes | 24 | | | (48) | | | | | (28) | | | (52) | | | | | |
| Income tax benefit | — | | | — | | | | | (12) | | | (12) | | | | | |
| Net Income (Loss) | $ | 24 | | | $ | (48) | | | | | $ | (16) | | | $ | (40) | | | | | |
| Total Assets | $ | 2,203 | | | $ | 10,055 | | | | | $ | 491 | | | $ | 12,749 | | | | | |
(a) Includes eliminations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 |
| (In millions) | Conventional Generation | | Renewables | | Thermal | | Corporate (a) | | Total |
| Operating revenues | $ | 108 | | | $ | 47 | | | $ | 59 | | | $ | — | | | $ | 214 | |
| Cost of operations, exclusive of depreciation, amortization and accretion shown separately below | 21 | | | 68 | | | 39 | | | — | | | 128 | |
| Depreciation, amortization and accretion | 33 | | | 91 | | | — | | | — | | | 124 | |
| | | | | | | | | |
| General and administrative | — | | | — | | | 1 | | | 11 | | | 12 | |
| Transaction and integration costs | — | | | — | | | — | | | 2 | | | 2 | |
| Development costs | — | | | — | | | 1 | | | — | | | 1 | |
Operating income (loss) | 54 | | | (112) | | | 18 | | | (13) | | | (53) | |
| Equity in earnings of unconsolidated affiliates | 1 | | | 3 | | | — | | | — | | | 4 | |
| | | | | | | | | |
| Loss on debt extinguishment | — | | | (2) | | | — | | | — | | | (2) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Interest expense | (8) | | | (8) | | | (5) | | | (26) | | | (47) | |
| Income (loss) before income taxes | 47 | | | (119) | | | 13 | | | (39) | | | (98) | |
| Income tax benefit | — | | | — | | | — | | | (1) | | | (1) | |
| Net Income (Loss) | $ | 47 | | | $ | (119) | | | $ | 13 | | | $ | (38) | | | $ | (97) | |
(a) Includes eliminations.
Note 10 — Income Taxes
Effective Tax Rate
The income tax provision consisted of the following amounts:
| | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| | | | | 2023 | | 2022 |
| | | | (In millions, except percentages) |
| Loss before income taxes | | | | | $ | (52) | | | $ | (98) | |
| Income tax benefit | | | | | (12) | | | (1) | |
| Effective income tax rate | | | | | 23.1 | % | | 1.0 | % |
For both the three months ended March 31, 2023 and 2022, respectively, the overall effective tax rate was different than the statutory rate of 21% primarily due to the allocation of taxable earnings and losses based on the partners’ interest in Clearway Energy LLC, which includes the effects of applying the 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.
Note 11 — 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 and its project entities. Amounts due to CEG subsidiaries are recorded as accounts payable — affiliates and amounts due to the Company from CEG subsidiaries are recorded as accounts receivable — affiliates in the Company’s consolidated balance sheets. The disclosures below summarize the Company’s material related party transactions with CEG and its subsidiaries that are included in the Company’s operating costs.
O&M Services Agreements by and between the Company and Clearway Renewable Operation & Maintenance LLC
Various wholly-owned 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, services to these subsidiaries. The Company incurred total expenses for these services of $17 million and $15 million for the three months ended March 31, 2023 and 2022, respectively. There was a balance of $11 million and $14 million due to RENOM as of March 31, 2023 and December 31, 2022, respectively.
Administrative Services Agreements by and between the Company and CEG
Various wholly-owned subsidiaries of the Company are parties to services agreements with Clearway Asset Services LLC and Solar Asset Management LLC, two wholly-owned subsidiaries of CEG, which provide various administrative services to the Company's subsidiaries. The Company incurred expenses under these agreements of $4 million and $3 million for the three months ended March 31, 2023 and 2022, respectively. There was a balance of $1 million and $3 million due to CEG as of March 31, 2023 and December 31, 2022, 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. The Company incurred net expenses of $1 million under these agreements for each of the three months ended March 31, 2023 and 2022.
Note 12 — Contingencies
This note should be read in conjunction with the complete description under Item 15 — Note 16, Commitments and Contingencies, to the consolidated financial statements included in the Company’s 2022 Form 10-K.
The Company’s material legal proceeding is described below. The Company believes that it has a valid defense to this legal proceeding and intends to defend it 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 matter 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 proceeding 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 estimate of such contingency 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 proceeding 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.
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. In response to motions for partial summary judgment filed by each party, the court denied Georgetown’s motion in its entirety, granted Buckthorn Westex’s motion with respect to the fraud by nondisclosure claim and denied Buckthorn Westex’s motion with respect to the breach of contract claim. The case is expected to proceed to trial in October 2023. Buckthorn Westex believes the allegations of Georgetown are meritless, and Buckthorn Westex is vigorously defending its rights under the PPA.
