Clearway Energy (NYSE:CWEN) operates within the exciting yet volatile renewable energy sector. Amidst growing environmental concerns and increasing demand for green initiatives, pinpointing successful companies remains challenging. Many are still navigating early business cycles, grappling with profitability, and managing hefty capital investments. In my first article, I was bullish on Clearway Energy due to its secure, sponsor-backed contracts across diversified energy projects, promising a growth trajectory for the next three years. While capital costs have risen, the commitment to these projects remains strong, as indicated in the Q3 2023 earnings call. Additionally, its association with Total (TTE), owning 50% of the company, ensures access to capital, and it is committed to an annually growing dividend program. Despite market fluctuations and a one year drop of 18.98% in the stock following interest rate hikes and mixed results within the industry, I maintain my long-term bullish stance on Clearway. Its transparent growth strategy and access to capital position it well to meet growth targets.
Why is the company compelling
In my previous article, I outlined Clearway’s position as a renewable energy yieldco—a structure focused on owning long-term cash-generating assets and distributing dividends, largely facilitated by taking on debt. The company operates a diversified portfolio spanning wind, solar, and natural gas facilities, backed by influential investors like TotalEnergies and GIP.
The sponsor is aligned due to its ownership of $1.8 billion shares which drives improvements to targeted yields and CAFD yields, with visible growth projected well beyond 2026. Leveraging its YieldCo/sponsor structure, Clearway is committed to development spending and meeting the increasing demand for renewable assets with long term contracts. Its competitive pricing in the renewable energy market aligns with the increasing global appetite for green energy, spurred by climate change concerns and government incentives. Furthermore, Clearway’s strategic natural gas assets in California play a pivotal role in the state’s transition from fossil fuels.
Financial updates and guidance
In Q3 2023, Clearway reported a cash available for distribution (‘CAFD’) of $156 million and an adjusted EBITDA of $323 million, and this fell short of expectations due to lower production from wind and solar, reduced energy margins, and increased maintenance costs. Despite this, the full-year CAFD guidance for FY 2023 remains steady within the range of $330 to $350 million, with a projected increase to $395 million for FY 2024.
The company remains committed to its dividend program, aiming for steady growth. For Q4 2023, the dividend will rise by 2% to $0.39 per share, following an 8% year-over-year increase in 2023. Looking ahead, Clearway targets a 7% growth in dividends for 2024.
Due to the business setup, Clearway operates with a substantial amount of debt. This is also a characteristic prevalent in the renewable energy sector. With a total debt and lease balance of $8.12 billion as of Q3 2023, the company faces interest expenses totaling $48 million for the quarter, less than the prior three quarters. This significant debt is a result of substantial capital employed for its renewable energy projects, including non-recourse project-level debt that’s partially hedged to manage future cash interest payments. Clearway’s total debt-to-equity ratio stands at 190.21%; the impact of rising interest rates remains a concern for its financial stability, although the nearest debt maturity occurs from 2028 onwards, providing some leeway for the company to manage its debt structure.
If we look at Seeking Alpha’s quant rating, we can see that the company has an A- valuation. In contrast, its price-to-earnings ratio falls well below the utility sector median of 18.30. The company has delivered profits, which is not the case for many of its renewable energy peers. Furthermore, we can see that the price-to-book ratio of 1.38 is attractive compared to the industry median of 1.71. The company has beaten the S&P 500 index over the last quarter; however, we can see that it has underperformed in the previous nine months. The renewable energy sector is risky to invest in due to near-term headwinds majorly impacting the stock and high-interest rates hurting capital-heavy projects. However, the company benefits from long-term contracts and strong and aligned sponsorship backing within a green industry that has strong long-term tailwinds for upside potential.
Clearway faces challenges amidst rising inflation and interest rates, impacting project costs. Concerns linger regarding the hedging for 2027 contracts, with only 42% currently secured, posing uncertainty for Cash Available for Distribution. Addressing this might involve securing additional contracts to hedge the remaining capacity and ensure clearer future cash flows. Seasonality and operational unpredictability, particularly affecting wind and solar facilities during summer, also warrant caution. Regarding its debt, while the recent sale of its thermal business provides capital to meet 2026 targets, the company maintains relatively high debt levels. No immediate plans exist to raise further corporate debt, with existing debt maturing from 2028 onwards, but investor attention should remain on these obligations.
Clearway has shown that it has the financials, backing and future contracts in place to navigate through the short-term headwinds of the renewable energy sector. The demand for renewable energy is increasing, initiated by government incentives, more attractive pricing and increasing environmental concerns. Despite industry complexities, Clearway maintains a strong position due to its secured sponsor-backed contracts and diversified energy projects. Although recent interest rate hikes and market fluctuations led to a temporary dip in the stock, the company has had clear growth through long-term contracts and strategic partnerships. Therefore, I maintain a bullish stance on this stock.