Clearway Energy: Q3 Outages Impact Performance But Strong Prospects For Long-Term Growth

NicoElNino

The renewable energy sector is an exciting industry for long-term investors. This year has seen a record in global energy investments, predicted to increase by 8% to reach $2.4 trillion by year-end. However, many companies still need to catch up in the business growth cycle and take on high costs to invest in advancing technologies required to produce and distribute alternative energy sources.

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Six Month Stock Trend (SeekingAlpha.com)

Clearway Energy, Inc. (NYSE:CWEN) is a mid-cap stock at $6.09 billion with a stock price that has been fluctuating throughout this year, although over the last six months, investors have seen returns of 8.63%. It has a price-to-earnings ratio of 6.9, well below the industry, beating earnings expectations this quarter by $0.13 with $0.28 per share. The company sold off its thermal business this year for $1.35 billion, acquired 413 MW in wind facilities and is backed by a prominent investor with access to various energy projects. Although cautious of the company’s reduction in its performance predictions for this year, the negative impact of outages in Q3 and high-interest rates. There is a lot more upside potential in the long run with the growth in MW assets, long-term full-capacity contracts and many projects expected to be commercially operational within the next three years, and government incentives to roll out clean energy initiatives. Therefore investors may want to take a bullish stance on this company.

Company Overview and Growth Drivers

CWEN, previously known as NRG Yield, Inc., was founded in 2012 in New Jersey. It is a large and diversified renewable energy business, providing energy through wind, solar and natural gas facilities. The company has over 7,500 MW of assets, 5000 MW generated through wind and solar facilities, and 2,500 MW through natural gas projects.

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Company Overview (Investor Presentation 2022)

CWEN has taken some significant actions this year. It completed the sale of its thermal business in May 2022 for net proceeds of $1.35 billion. This month it completed the acquisition of 413 MW Capistrano Wind for $415 million. It has also funded various dropdown projects, which are set to be commercially operated by the end of Q4 2022 beginning of Q1 2023. Noteworthy is that Global Infrastructure Partners III, one of the world’s most significant infrastructure funds, is investing in CWEN. It is a strong indicator for further portfolio growth down the line.

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Long Term Contracts (Investor Presentation 2022)

Financials and Valuation

CWEN has just released its third-quarter results. Based on the performance in Q3 due to outages in the conventional segment and the closing of the thermal business, the company has lowered its end-of-year predictions. The table below shows that net income increased yearly to $62 million, and EBITDA decreased to $322 million. The company also had a lower CAFD than last year of $154 million.

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Financials Q3 2022 (Clearway Energy Financial Report)

The liquidity of the company increased by $718 million to $1,539 million from the thermal business proceeds.

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Total Liquidity (SeekingAlpha.com)

Although financials are important, it is essential to look at the growth and future potential of a renewable energy company which typically has long-term contracts with its customers. Some of the facilities, El Segundo, Marsh Landing and Walnut Creek, have 100% of their capacity contracted until 2026. Furthermore, the new acquisition has added significantly more renewable energy MW.

The company has had a dividend program since 2015, and it has announced an increase in its dividends by 2% to reach $0.3672 per share on class A and C stock in the next quarter and an annual dividend of $1,469 per share. Below we have a chart of EPS performance since 2019. Earnings are fluctuating and are expected to reduce in the upcoming quarters. The industry is very seasonal, which is something to be aware of.

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EPS trending performance (SeekingAlpha.com)

If we compare CWEN to some of its peers in the market, we get a good idea that the company is well, if not undervalued, on several ratios. Furthermore, the stock is cheaper than alternatives such as NextEra Energy Partners, LP (FAKE) and Ormat Technologies, Inc. (ORA). It has a low price-to-earnings ratio of 6.76. There are different opinions about this stock. Seeking Alpha’s Quant rating gives it a Hold value of 3.11, while Zacks Rank gives it a Strong Buy rating. One cause for concern is that management has lowered their performance expectations for the next quarter. However, on the operations front, there is a log of upside potential for this stock in the next three years, in addition to sufficient backing by investors and government incentives.

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Relative Peer Valuation (SeekingAlpha.com)

risks

One of the issues to be wary of is that many seasonal and unpredictable factors impact operations. This last quarter conventional facilities were affected by outages which heavily impacted the expected income numbers. The majority of the company’s revenue is generated between May and September. There is higher productivity from wind and solar facilities and an increase in conventional prices during the summer months.

Currently, the company has a high total debt of $7.55 billion. Within the current market and increasing interest rates, this raises the question of what impact it will have on the company’s ability to pay off these debts. However, the company does not plan on raising corporate debt to fund further acquisition initiatives. Furthermore, the current debt has maturity dates from 2028 onwards, so there are a few more years before this will need to be addressed. However, suitable for investors to be aware of these debt obligations.

Final Thoughts

CWEN is set for long-term growth due to the backing of prominent investors, new acquisitions and projected projects that will bring in more big and long-term customers. Although, investors should be cautious of the company’s historically fluctuating performance and the impact of seasonality on operations. There is still a lot of upside potential for this renewable energy company in the sweet spot of receiving government incentives to improve the country’s energy usage for the next few years. Therefore I believe investors may want to take a bullish stance on this company.

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