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I’m really bullish on Clearway Energy (NYSE:CWEN) (NYSE:CWEN.A) with the yieldco now forming one of the largest positions in my climate economy-focused portfolio. Decarbonization is a real and growing trend and I believe a lack of exposure would not be appropriate. At the core of the long thesis is that the runaway growth of renewables is absolutely critical to driving down US carbon emissions to secure a more sustainable future.
The bullishness is not unwarranted. Clearway last declared a quarterly per share dividend payout of $0.3672, a 1.9% increase from the prior payout and is targeting annual dividend growth in the upper range of 5% to 8% through 2026. Further, with French supermajor TotalEnergies (TTE) acquiring a 50% interest in Clearway’s sponsor, we’re going to see a greater wave of investments to expand an operational renewable portfolio that held 1.6 GW in utility-scale solar and 3.7 GW of onshore wind as of the end of the last reported fiscal 2022 third quarter.
This highlights the case for a long position. Clearway is set to grow operating assets to build cash available for distribution and increase its cash payouts to its investors. Hence, with the outlook for renewables for the next decade set to be characterized by hypergrowth we should see Clearway’s financials trade up to reflect this new green future.
Gearing Up For A Ramp Of Operating Assets
Clearway’s operating assets had a total capacity of 8,123 MW with renewables at 5,651 MW and conventional power at 2,472 MW. As of the end of its third quarter, its sponsor’s development pipeline stood at 26.8 GW. This included 6.8 GW expected to start commercial operations in the next three years. With the yieldco still flush with cash and equivalents of $793 million as of the end of its third quarter, we should see the continued deployment of this on additional drop-down assets.
This cash position was of course bolstered by the sale of its Thermal business to KKR in early 2022. This was broadly non-core and focused on thermal infrastructure assets that provided steam, hot water, and chilled water to a number of public and private entities across the US. The yieldco received offers from its sponsor during the third quarter to invest around $410 million in wind, solar, and solar plus storage projects with a capacity of around 1.4 GW. The expected CAFD yield on this is 9.5%. Critically, this will support Clearway’s target to grow dividends by around 8% over the next few years.
However, the yieldco recorded adjusted EBITDA of $322 million, down 4.45% from the year-ago comp. CAFD of $154 million was also down from $161 million in the year-ago quarter. The disruption of CAFD was largely driven by downtime at its 550 MW El Segundo natural gas-fired thermal power plant and a $17 million contribution in the prior quarter from the now-disposed Thermal business.
Whilst the El Segundo outage has been fixed, the yieldco was forced to revise down its 2022 CAFD guidance to $350 million from $365 million. The nine-month year-over-year comp for 2022 was still strong with a CAFD of $328 million versus $301 million.
Growth And The Decarbonization Of Energy
This disruption of operating assets is inherent to the industry and forms a key risk of an investment in Clearway. The scope of this risk is radically expanded on the back of black swan extreme weather events damaging power generation facilities within the yieldco’s operating portfolio.
Further, the conventional equivalent availability factor, which essentially captures the amount of time an asset is able to produce electricity over a specific period, is clearly variable for renewables. Not only would this differ due to seasonal variations in weather, but prolonged periods of high or low wind speeds also have an impact. This can be modeled but ultimately it’s a variance that comes with an investment in a yieldco. Most of Clearway’s revenues are generated from May through September.
The earliest maturity for Clearway’s corporate-level debt is 2028 with the other notes maturing in 2031 and 2032. This places the large cash position into view with the company having the flexibility to maintain investments into new assets before debt obligations come due. Total long-term debt stood at $6.52 billion as of the end of the third quarter, down from $6.94 billion in the year-ago comp. This drove a quarterly interest payment of $49 million. Clearway forms one of the best ways to gain exposure to the rising wave of decarbonization that’s sweeping across the US. I’ve been adding to my position over the last few weeks and intend to hold this for years against a yieldco gearing up for dividend growth of 8% for the next few years and which has a 4.6% yield on the Class A shares.