Clearway Energy, Inc. (CWEN) FY 2022 MD&A

Item 7 — Management’s Discussion and Analysis of Financial Condition and the Results of Operations

As you read this discussion and analysis, refer to the Company’s Consolidated Statements of Income to this Form 10-K. Also refer to Item 1 — Business and Item 1A — Risk Factors, which include detailed discussions of various items impacting the Company’s business, results of operations and financial condition. Discussions of the year ended December 31, 2020 that are not included in this Annual Report on Form 10-K and year-to-year comparisons of the year ended December 31, 2021 and the year ended December 31, 2020 can be found in “Management’s Discussion and Analysis of Financial Condition and the Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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;

•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;

•Known trends that may affect the Company’s results of operations and financial condition in the future; 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 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 became equally owned by GIP and TotalEnergies as of September 12, 2022, when TotalEnergies acquired, through its investment in an intermediate holding company, 50% of GIP’s interest in CEG. 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 weighted average remaining contract duration of these offtake agreements was approximately 11 years as of December 31, 2022 based on CAFD.

Significant Events

Thermal Disposition

•On May 1, 2022, the Company completed the sale of 100% of its interests in the Thermal Business to KKR for net proceeds of approximately $1.46 billion, inclusive of working capital adjustments, which excludes approximately $18 million in transaction expenses that were incurred in connection with the disposition. The transaction resulted in a gain on sale of business of approximately $1.29 billion, which is net of the $18 million in transaction expenses referenced above. See Item 15 — Note 3, Acquisitions and Dispositions, for further discussion.

Capistrano Wind Portfolio Acquisition

•On August 22, 2022, the Company acquired the Capistrano Wind Portfolio, which consists of five wind projects located in Nebraska, Texas and Wyoming with a combined capacity of 413 MW, from Capistrano Wind Partners LLC, an indirect subsidiary of CEG, for total net consideration of approximately $239 million. See Item 15 — Note 3, Acquisitions and Dispositions, for further discussion.

Drop Down Transactions

•On February 17, 2023, the Company, through a partnership with a third-party investor, acquired an interest in Daggett TargetCo LLC from Clearway Renew LLC, a subsidiary of CEG, for cash consideration of $21 million. The third-party investor also contributed cash consideration of $129 million, which was utilized to acquire their portion of the acquired entity. Daggett TargetCo LLC is the primary beneficiary and consolidates its interests in a tax equity fund, Daggett TE Holdco LLC, the owner of the Daggett 3 solar project, a 300 MW solar project with matching storage capacity that is currently under construction and located in San Bernardino, California. See Item 15 — Note 3, Acquisitions and Dispositions, for further discussion.

•On December 23, 2022, the Company, through an indirect subsidiary, entered into an agreement with CEG to acquire the Class A membership interests in a partnership formed to hold the interests in the Victory Pass and Arica solar and energy storage projects, which are both located in Riverside, California, upon the projects reaching certain milestones for a total purchase price of approximately $228 million in cash, subject to customary working capital adjustments. Victory Pass is a 200 MW solar facility and Arica is a 263 MW solar facility, each with an energy storage system. Upon the closing of the transaction, which is expected in the second half of 2023, the Company will own 40% of the partnership holding interests in Victory Pass and Arica, which are anticipated to be held in a tax equity fund with another third-party investor.

•On October 3, 2022, the Company, through a partnership with a third-party investor, acquired Waiawa BL Borrower Holdco LLC, the indirect owner, through its ownership interests in and consolidation of a tax equity fund, of the Waiawa solar project, a 36 MW solar project with matching storage capacity located in Honolulu, Hawaii, from Clearway Renew LLC for cash consideration of $20 million. The third-party investor also contributed cash consideration of $12 million, which was utilized to acquire their portion of the acquired entity. See Item 15 — Note 3, Acquisitions and Dispositions, for further discussion.

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•On March 25, 2022, the Company, through a partnership with a third-party investor, acquired Mililani BL Borrower Holdco LLC, the indirect owner, through its ownership interests in and consolidation of a tax equity fund, of the Mililani I solar project, a 39 MW solar project with matching storage capacity located in Honolulu, Hawaii, from Clearway Renew LLC for cash consideration of $22 million. The third-party investor also contributed cash consideration of $14 million, which was utilized to acquire their portion of the acquired entity. See Item 15 — Note 3, Acquisitions and Dispositions, for further discussion.

•In February 2022, in connection with 2021 Black Rock Drop Down, the Company paid an additional $23 million to Clearway Renew LLC as final funding after all remaining turbines of the project became operational. Concurrent with the final funding, the $59 million that was contributed in 2021 by third-party investors was released to Clearway Renew LLC. See Item 15 — Note 3, Acquisitions and Dispositions, for further discussion.

Resource Adequacy Agreements

•In August 2022, the Company contracted with SCE to sell 100% of El Segundo’s available capacity commencing in August 2023 and ending in August 2026.

•In July 2022, the Company contracted with several load serving entities to sell the remaining 20% of Marsh Landing’s available capacity commencing in May 2023. The agreements are for approximately three and a half years. Marsh Landing’s capacity is now 100% contracted for a weighted average contract tenor of approximately four years commencing in May 2023.

Corporate Financing Activities

•On May 3, 2022, the Company repaid (i) $305 million in outstanding borrowings under the revolving credit facility and (ii) $335 million in outstanding borrowings under the Bridge Loan Agreement utilizing proceeds received from the Thermal Disposition. See Item 15 — Note 10, Long-term Debt, for further discussion.

Project-level Financing Activities

•In connection with the Capistrano Wind Portfolio acquisition and the 2022 Drop Downs of Waiawa and Mililani I, the Company assumed non-recourse project-level debt. See Item 15 — Note 10, Long-term Debt, for further discussion of the non-recourse project-level debt associated with each project.

•On December 15, 2022, the Company repaid the outstanding project-level debt of El Segundo Energy Center in the amount of approximately $130 million, utilizing cash on hand. The project-level debt had an original maturity of August 2023.

•On March 16, 2022, the Company entered into a financing agreement which included the issuance of a $190 million term loan as well as $35 million in letters of credit, supported by the Company’s interests in the Elkhorn Ridge, Laredo Ridge, San Juan Mesa and Taloga wind projects. The proceeds from the term loan were used to pay off the existing debt in the amount of $186 million related to Laredo Ridge, Tapestry Wind LLC and Viento Funding II, LLC and to pay related financing costs. See Item 15 — Note 10, Long-term Debt, for further discussion.

Environmental Matters and Regulatory Matters

Details of environmental matters and regulatory matters are presented in Item 1 — Business, Regulatory Matters and Item 1A — Risk Factors. Details of some of this information relate to costs that may impact the Company’s financial results.

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Consolidated Results of Operations

The following table provides selected financial information:

(a) Volumes do not include the MWh generated/sold by the Company’s equity method investments.

(b) On May 1, 2022, the Company completed the sale of 100% of its interests in the Thermal Business to KKR.

(c) Volumes generated are not sold as the Conventional facilities sell capacity rather than energy.

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Management’s discussion of the results of operations for the years ended December 31, 2022 and 2021

Operating Revenues

Operating revenues decreased by $96 million for the year ended December 31, 2022, compared to the same period in 2021, due to a combination of the drivers summarized in the table below:

Cost of Fuels

Cost of fuels decreased by $46 million during the year ended December 31, 2022, compared to the same period in 2021, primarily due to the sale of the Thermal Business on May 1, 2022, as further described in Item 15 — Note 3, Acquisitions and Dispositions.

Operations and Maintenance Expense

Operations and maintenance expense increased by $16 million during the year ended December 31, 2022, compared to the same period in 2021, due to a combination of the drivers summarized in the table below:

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Other Costs of Operations Expense

Other costs of operations expense, which primarily consists of insurance and property taxes, increased by $14 million during the year ended December 31, 2022, compared to the same period in 2021, primarily due an increase in property taxes due to the acquisitions of the Utah Solar Portfolio, Mesquite Sky and Black Rock in 2021 and the acquisition of the Capistrano Wind Portfolio in 2022, as well as an increase in property taxes at certain wind projects.

Impairment Losses

The Company recorded impairment losses of $16 million and $6 million for the years ended December 31, 2022 and 2021, respectively, related to certain projects in the Renewables segment as further described in Item 15— Note 9, Asset Impairments.

Gain on Sale of Business

On May 1, 2022, the Company completed the sale of 100% of its interests in the Thermal Business to KKR resulting in a gain on sale of business of approximately $1.29 billion, as further described in Item 15 — Note 3, Acquisitions and Dispositions.

Other Income, Net

Other income, net increased $14 million during the year ended December 31, 2022, compared to the same period in 2021, primarily due to higher interest income earned on larger cash balances with investments in money market and time deposit accounts.

Loss on Debt Extinguishment

The Company recorded loss on debt extinguishment of $2 million during the year ended December 31, 2022, which reflects the write-off of previously deferred finance costs related to the Laredo Ridge, Tapestry Wind LLC and Viento Funding II, LLC, as further described in Item 15 — Note 10, Long-term Debt.

The Company recorded loss on debt extinguishment of $53 million during the year ended December 31, 2021, primarily driven by the write-off of previously deferred finance costs and payment of premiums related to the redemption of the 2026 Senior Notes and the 2025 Senior Notes in 2021, as further described in Item 15 — Note 10, Long-term Debt.

Interest Expense

Interest expense decreased by $80 million during the year ended December 31, 2022, compared to the same period in 2021 primarily due to:

Income Tax Expense

For the year ended December 31, 2022, the Company recorded income tax expense of $222 million on pretax income of $1,282 million. For the same period in 2021, the Company recorded an income tax expense of $12 million on pretax loss of $63 million. The primary driver of the $210 million increase in income tax expense is the increase in taxable earnings allocated to the Company in 2022 compared to 2021, including the gain recorded on the sale of the Thermal Business on May 1, 2022, as further described in Item 15 — Note 3, Acquisitions and Dispositions.

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A reconciliation of the U.S. federal statutory rate of 21% to the Company's effective rate is as follows:

The effective income tax rate may vary from period to period depending on, among other factors, the geographic and business mix of earnings and losses, earnings and losses allocated to partners’ interest in Clearway Energy LLC which includes the effects of applying the HLBV method of accounting for book purposes to certain partnerships, and changes in valuation allowances in accordance with ASC 740. These factors and others, including the Company’s history of pre-tax earnings and losses, are taken into account in assessing the ability to realize deferred tax assets.

Net Income (Loss) Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

For the year ended December 31, 2022, the Company had a net income of $478 million attributable to noncontrolling interests and redeemable noncontrolling interests comprised of the following:

For the year ended December 31, 2021, the Company had a net loss of $126 million attributable to noncontrolling interests and redeemable noncontrolling interests comprised of the following:

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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.

Current Liquidity Position

As of December 31, 2022 and 2021, the Company’s liquidity was approximately $1.37 billion and $821 million, respectively, comprised of cash, restricted cash and availability under the Company’s revolving credit facility.

The Company’s liquidity includes $339 million and $475 million of restricted cash balances as of December 31, 2022 and 2021, 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 December 31, 2022, these restricted funds were comprised of $109 million designated to fund operating expenses, approximately $55 million designated for current debt service payments, and $105 million restricted for reserves including debt service, performance obligations and other reserves, as well as capital expenditures. The remaining $70 million is held in distribution reserve accounts.

As of December 31, 2022, the Company had no outstanding borrowings under the revolving credit facility and $125 million in letters of credit outstanding. During the year ended December 31, 2022, the Company borrowed $80 million under the revolving credit facility, and subsequently repaid $325 million, $305 million of which was repaid on May 3, 2022, utilizing the proceeds received from the Thermal Disposition. The facility, which the Company expects to refinance prior to its expiration in April 2023, will continue to be used for general corporate purposes including financing of future acquisitions and posting letters of credit.

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.

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The following table summarizes the credit ratings for the Company and its Senior Notes as of December 31, 2022. The ratings outlook is stable.

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 15 — Note 10, Long-term Debt, the Company’s financing arrangements consist of corporate level debt, which includes Senior Notes and the revolving credit facility; the ATM Program; and project-level financings for its various assets.

Thermal Disposition

On May 1, 2022, the Company completed the sale of 100% of its interests in the Thermal Business to KKR for net proceeds of approximately $1.46 billion, inclusive of working capital adjustments, which excludes approximately $18 million in transaction expenses that were incurred in connection with the disposition. See Item 15 — Note 3, Acquisitions and Dispositions, for further discussion.

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 15 — Note 10, Long-term Debt; (ii) capital expenditures; (iii) off-balance sheet arrangements; (iv) acquisitions and investments, as described more fully in Item 15 — Note 3, Acquisitions and Dispositions; and (v) cash dividends to investors.

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Debt Service Obligations

Principal payments on debt as of December 31, 2022, are due in the following periods:

(a) At December 31, 2022, amount includes $97 million recorded in long-term debt on the Company’s consolidated balance sheet that is due in 2023 and is either being funded through long-term equity contributions or is converting to long-term debt.

El Segundo Energy Center

On December 15, 2022, the Company repaid the outstanding project-level debt of El Segundo Energy Center in the amount of approximately $130 million utilizing cash on hand.

Bridge Loan Agreement

On May 3, 2022, the Company repaid the $335 million in outstanding borrowings under the Bridge Loan Agreement utilizing proceeds received from the Thermal Disposition.

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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 during routine maintenance, and growth capital expenditures consisting of costs to construct new assets, and costs to complete the construction of assets where construction is in process.

For the years ended December 31, 2022 and 2021, the Company used approximately $112 million, and $151 million, respectively, to fund capital expenditures, including maintenance capital expenditures of $25 million for both years. Growth capital expenditures in 2022 of $83 million in the Renewables segment were funded through construction-related financing. Renewables segment capital expenditures included $34 million incurred in connection with the Mililani I solar project, $26 million incurred in connection with the Mesquite Sky wind project, $10 million incurred in connection with the Black Rock wind project, $5 million incurred in connection with the Rattlesnake wind project and $8 million incurred by other wind and solar projects. Prior to the sale of the Thermal Business on May 1, 2022, the Company incurred $4 million of growth capital expenditures in the Thermal segment in connection with various development projects.

The Company estimates $35 million of maintenance capital expenditures for 2023. These estimates are subject to continuing review and adjustment and actual capital expenditures may vary from these estimates.

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 December 31, 2022, the Company has several investments with an ownership interest percentage of 50% or less. GenConn is a variable interest entity 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 $325 million as of December 31, 2022. This indebtedness may restrict the ability of these subsidiaries to issue dividends or distributions to the Company. See also Item 15 — Note 5, Investments Accounted for by the Equity Method and Variable Interest Entities.

Contractual Obligations and Commercial Commitments

In addition to the Company’s capital expenditure programs, the Company has a variety of contractual obligations and other commercial commitments that represent prospective cash requirements. The following table summarizes the Company’s contractual obligations. See Item 15 — Note 10, Long-term Debt, Note 16, Commitments and Contingencies, and Note 17, Leases, for additional discussion.

(a) These contractual cash obligations were related to the Thermal Business, which was sold on May 1, 2022.

(b) Includes water right agreements, service and maintenance agreements, and LTSA commitments.

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Acquisitions and Investments

The Company intends to acquire generation assets developed and constructed by CEG as well as generation 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 business.

Daggett 3 Drop Down — On February 17, 2023, the Company, through a partnership with a third-party investor, acquired an interest in Daggett TargetCo LLC from Clearway Renew LLC for cash consideration of $21 million. Daggett TargetCo LLC is the primary beneficiary and consolidates its interest in a tax equity fund, Daggett TE Holdco LLC, the owner of the Daggett 3 solar project. Daggett 3 has PPAs with investment-grade counterparties that have a 15-year weighted average contract duration that commence when the project reaches commercial operations, which is expected to occur in the first half of 2023. The acquisition was funded with existing sources of liquidity.

Waiawa Drop Down — On October 3, 2022, the Company, through a partnership with a third-party investor, acquired Waiawa BL Borrower Holdco LLC, the indirect owner, through its ownership interests in and consolidation of a tax equity fund, of the Waiawa solar project, from Clearway Renew LLC for cash consideration of $20 million. Waiawa has a 20-year PPA with an investment-grade utility that commenced in January 2023. The acquisition was funded with existing sources of liquidity. As part of the acquisition, the Company assumed the project’s financing agreement, which includes a construction loan that converts to a term loan upon the project reaching substantial completion, which is expected to occur in the first half of 2023, a tax equity bridge loan that will be repaid upon the project reaching substantial completion and a sponsor equity bridge loan that was repaid at acquisition date.

Capistrano Wind Portfolio Acquisition — On August 22, 2022, the Company acquired the Capistrano Wind Portfolio from Capistrano Wind Partners LLC for total net consideration of approximately $239 million. The assets within the portfolio sell power under PPAs with investment-grade counterparties that have a weighted average remaining contract duration of approximately 10 years. The acquisition was funded with existing sources of liquidity. As part of the acquisition, the Company assumed non-recourse project-level debt held by the projects in the portfolio.

Mililani I Drop Down — On March 25, 2022, the Company, through a partnership with a third-party investor, acquired Mililani BL Borrower Holdco LLC, the indirect owner, through its ownership interests in and consolidation of a tax equity fund, of the Mililani I solar project from Clearway Renew LLC for cash consideration of $22 million. Mililani I has a 20-year PPA with an investment-grade utility that commenced in July 2022. The acquisition was funded with existing sources of liquidity. As part of the acquisition, the Company assumed the project’s financing agreement, which includes a construction loan that converted to a term loan on December 7, 2022 upon the project reaching substantial completion, a tax equity bridge loan that was repaid on December 7, 2022 and a sponsor equity bridge loan that was repaid at acquisition date.

Black Rock Drop Down — In February 2022, in connection with the 2021 Black Rock Drop Down, the Company paid an additional $23 million to Clearway Renew, LLC as final funding after all remaining turbines of the project became operational.

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 that is generated each quarter less reserves for the prudent conduct of the business. 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 year ended December 31, 2022:

On February 15, 2023, the Company declared a quarterly dividend on its Class A and Class C common stock of $0.3745 per share payable on March 15, 2023, to stockholders of record as of March 1, 2023.

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Cash Flow Discussion

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The following table reflects the changes in cash flows for the year ended December 31, 2022 compared to 2021:

Net Cash Provided by Operating Activities

Net Cash Provided by (Used In) Investing Activities

Net Cash (Used In) Provided by Financing Activities

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NOLs, Deferred Tax Assets and Uncertain Tax Position Implications, under ASC 740

As of December 31, 2022, the Company has a cumulative federal NOL carry forward balance of $481 million for financial statement purposes, of which $88 million will begin expiring in 2037 if unutilized. The Company does not anticipate material federal income tax payments until 2027. Additionally, as of December 31, 2022, the Company has a cumulative state NOL carryforward balance of $64 million for financial statement purposes, which will expire between 2023 to 2040 if unutilized. In addition, the Company has PTC and ITC carryforward balances totaling $18 million, which will expire between 2034 and 2042 if unutilized.

As a result of the sale of the Thermal Business, the Company, after the utilization of various state NOL carryforwards, has paid $9 million in state income taxes through December 31, 2022, and expects to pay approximately $19 million of additional state income taxes by April 15, 2023. The Company does not anticipate being subject to the corporate minimum tax on financial statement income as enacted by the recently passed the IRA, which is discussed in further detail below.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, or the CARES Act, was signed into law, which includes modifications to the business interest expense disallowance and net operating loss provisions. While the Company utilized previously disallowed interest expense during 2020 as a result of the modifications, the CARES Act did not 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 and its variants that may be issued.

On February 9, 2022, the governor of California signed Senate Bill 113, or SB 113, removing the suspension of California NOL utilization for tax year 2022. After assessing the law change, the Company expects SB 113 to have an immaterial impact on the consolidated financial statements.

The recently enacted IRA contains a number of revisions to the Internal Revenue Code, including a 15% corporate minimum income tax for certain taxpayers, a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022 and business tax credits and incentives for the development of clean energy projects and the production of clean energy. The Company continues to analyze the potential impact of the IRA and monitor guidance to be issued by the United States Department of the Treasury, but it does not anticipate the corporate minimum tax will apply to it or that the IRA will otherwise have a material impact on its consolidated financial statements

The Company is subject to examination by taxing authorities for income tax returns filed in the U.S. federal and various state jurisdictions. All tax returns filed by the Company for the year ended December 31, 2013 and forward remain subject to audit. As of December 31, 2022, the U.S. federal partnership returns of three of the Company’s subsidiaries are under audit by the IRS. The IRS has issued proposed adjustments with respect to one of the subsidiaries under audit. The Company believes that such proposed adjustments are incorrect and, in any case, would not impact the Company’s tax liability or the tax liability of such subsidiary. The IRS has not yet issued any proposed adjustments with respect to the other two subsidiaries under audit. In any case, the Company believes that the ultimate settlement of each of these audits will not be material to the Company’s financial condition, results of operations or liquidity. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in tax audits of the Company are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

The Company has no material uncertain tax benefits.

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Fair Value of Derivative Instruments

The Company may enter into commodity purchase contracts and other energy-related financial instruments to mitigate variability in earnings due to fluctuations in spot market prices. 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 December 31, 2022, based on their level within the fair value hierarchy defined in ASC 820; and indicate the maturities of contracts at December 31, 2022. For a full discussion of the Company’s valuation methodology of its contracts, see Derivative Fair Value Measurements in Item 15 — Note 6, Fair Value of Financial Instruments.

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.

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. 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.

The Company’s significant accounting policies are summarized in Item 15 — Note 2, Summary of Significant Accounting Policies. 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, accounting utilizing Hypothetical Liquidation at Book Value, or HLBV, acquisition accounting and determining the fair value of financial instruments.

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Income Taxes and Valuation Allowance for Deferred Tax Assets

In determining whether a valuation allowance is required for deferred tax assets, the Company must assess whether it believes it is more likely than not that the results of future operations will generate sufficient taxable income which includes the future reversal of existing taxable temporary differences to realize deferred tax assets. The Company considers the timing and future realization of net deferred tax assets, the profit before tax generated in recent years as well as projections of future earnings and estimates of taxable income in arriving at this conclusion. The realization of deferred tax assets is primarily dependent upon earnings in federal and various state and local jurisdictions. Judgment is also required to continually assess changing tax regulations, interpretations and new legislation to determine the impact on the Company’s tax position.

Hypothetical Liquidation at Book Value (HLBV)

Certain portions of the Company’s redeemable noncontrolling interest and noncontrolling interest represent third-party interests in the net assets under certain tax equity arrangements, which are consolidated by the Company, that were established to finance the cost of facilities eligible for certain tax credits and benefits. The Company has determined that the provisions in the contractual agreements of these structures represent substantive profit sharing arrangements. Further, the Company has determined that the appropriate methodology for calculating the redeemable noncontrolling interest and noncontrolling interest that reflects the substantive profit sharing arrangements is a balance sheet approach utilizing the HLBV method. Under the HLBV method, the amounts reported as redeemable noncontrolling interest and noncontrolling interest represent the amounts the investors to the tax equity arrangements would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual agreements, assuming the net assets of the funding structures were liquidated at their recorded amounts determined in accordance with GAAP. The investors’ interests in the results of operations of the funding structures are determined as the difference in redeemable noncontrolling interest and noncontrolling interest at the start and end of each reporting period, after taking into account any capital transactions between the structures and the funds’ investors. The calculations utilized to apply the HLBV method include estimated calculations of taxable income or losses for each reporting period as well as estimated calculations of tax capital accounts based on the relevant provisions of each agreement and the related tax guidance. In addition, these calculations often take into account the stipulated targeted investor return specified in the subsidiaries’ operating agreement and agreed by the members of the arrangement. In certain circumstances, the Company and its partners in the tax equity arrangements agree that certain tax benefits are to be utilized outside of the tax equity arrangements, which may result in differences in the amount an investor would hypothetically receive at the initial balance sheet date calculated strictly in accordance with related contractual agreements. These differences are recognized in the consolidated statement of income using a systematic and rational method over the period during which the investor is expected to achieve its target return. In certain cases, the Company must apply judgment in determining the methodology for applying these concepts in the HLBV method and changes in certain factors may have a significant impact on the amounts that an investor would receive upon a hypothetical liquidation. The use of the HLBV method to allocate income (loss) to the noncontrolling interest holders may create volatility in the consolidated statements of income.

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Acquisition Accounting

The Company applies ASC 805, Business Combinations, when accounting for acquisitions, with identifiable assets acquired and liabilities assumed recorded at their estimated fair values at acquisition date. For many of the Company’s acquisitions, the Company applies ASC 805-50, which provides that acquisitions of entities under common control are recorded at historical cost, except in the case where the ultimate parent has a different basis, such as when an acquiree did not elect to apply pushdown accounting. In those circumstances, the Company may also be required to record its acquired assets and liabilities at acquisition date fair value.

Significant judgment is required in determining the acquisition date fair value of the assets acquired and liabilities assumed, predominantly with respect to property, plant and equipment, power purchase agreements, asset retirement obligations and other contractual arrangements for third-party acquisitions. Evaluations include numerous inputs including forecasted cash flows that incorporate the specific attributes of each asset including age, useful life, equipment condition and technology as well as current replacement costs for similar assets. Other key inputs that require judgment include discount rates, comparable market transactions, estimated useful lives and probability of future transactions. The Company evaluates all available information as well as all appropriate methodologies, when determining the fair value of assets acquired and liabilities assumed in a business combination. In addition, once the appropriate fair values are determined, the Company must determine the remaining useful life for property, plant and equipment and the amortization period and method of amortization for each finite-lived intangible asset.

Financial Instruments

The Company records its financial instruments, which primarily consist of derivative financial instruments, at fair value. The Company determines the fair value of its financial instruments using discounted cash flow models that require the use of assumptions concerning the amount of estimated future cash flows. The assumptions are determined using external, observable market inputs when available. When observable market inputs are not available, the Company must apply significant judgment to determine market participant assumptions such as future electricity prices, future interest rates and discount rates. As these inputs are based on estimates, fair values may not reflect the amounts actually realized from the related transaction.

Recent Accounting Developments

See Item 15 — Note 2, Summary of Significant Accounting Policies, for a discussion of recent accounting developments.

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