To The Moon

$Clearway Energy Inc(CWEN)$ $NASDAQ(.IXIC)$  $DJIA(.DJI)$  

Clearway Energy, Inc. (CWEN) is an energy infrastructure yield company which seeks to makes long-term investments in contracted renewable energy assets in North America. CWEN owns 3.5GW of wind and solar assets, and 2.5GW of conventional natural gas fired power plants. CWEN has two key segments: (i) Renewable, which contributes c.75% of CWEN's adjusted EBITDA and (ii) Conventional, which contributes the remaining c. 25% of adjusted EBITDA. It has a solid sponsor, Clearway Energy Group (CEG), of which CEG is sponsored by Global Infrastructure Partners. CEG has an extensive development pipeline of 30GW solar, wind, and storage projects, including close to 2GW of dropdowns committed to CWEN for 2H23 - 1H24.

Investment Overview

Premier US yieldco backed by strong sponsors, a beneficiary of supportive US government policies. Growth prospects of CWEN is even rosier following TotalEnergies' recent acquisition of 50% stake in its parent Clearway Energy Group (that has 42% economic interests in CWEN). As part of this partnership, TotalEnergies will provide CWEN with access to its power trading capabilities and will give it priority on the farm down of its own developed projects. Coupled with Inflation Reduction Act 2022, which will see US government investing US$391bn on energy security and climate change, CWEN is poised for accelerated growth ahead.

1Q24 CAFD a strong beat. 1Q24 CAFD of USD52mn (-2% q/q, 1Q23 saw a loss of USD4mn) beat consensus estimates by +89%, contributed by lower debt service in the conventional fleet coinciding with the expiration of the tolling agreements, as well as higher wind generation for certain facilities. Following previous quarters, management raised 2Q24 quarterly dividend by +1.7% q/q to USD0.4102 per share, or USD1.6408 per share in annualized terms (implied yield of c. 7%) with targeted 7% DPS growth in 2024, in-line with estimates. Overall, we remain confident in management's ability to execute on its FY24F guidance, supported by various projects coming online in 2024 financed by remaining thermal proceeds, expected operational improvements in renewable energy production and more.

Raised Pro Forma CAFD outlook a positive signal. Management raised its pro forma 2026 CAFD outlook slightly by +1.2% to USD420mn, up from previous USD415mn, boosted by new growth commitments fueled by the deployment of thermal proceeds. Albeit a small increment, we see the raise as a positive signal amid the challenging interest rate environment on top of CWEN's reiteration for no external capital needed through 2026 in driving growth. Management has also cited potential room for upside, via rolling forward long-term contracts in California gas fleets at higher rates, enhancing revenue profiles of CWEN's plants amid tightening renewable capacity conditions in Western US, repowering or expanding existing portfolio (e.g., via storage), further dropdown opportunities from its Sponsor, and more, which may suggest room for further management guidance upgrade. Beyond 2026, we believe CWEN’s long-term growth outlook remains robust as supported by the sponsor’s strong development pipeline of 30GW (6x of CWEN’s current operational capacity), including 8GW of late-stage projects expected to feature commercial operations in the next 5 years, that could potentially be dropped down to CWEN.

Operational risks includes weather risks (e.g., lower wind/solar resources), power price volatility and recontracting risks (i.e., California gas generation facilities with contract expiration in 2023). Further, increasing interest rates could limit funding opportunities for new acquisitions.

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