Clearway Energy (CWEN 2.71%) (CWEN.A 2.63%) has had its share of ups and downs in recent years. Its prior sponsor mismanaged the renewable energy company, causing its performance to lag. Meanwhile, one of its largest customers, California utility PG&E (PCG 2.13%), went bankrupt last year, which affected the cash flow it generates from assets tied to that company.
But with a new sponsor taking over in late 2018, Clearway has started turning things around. That's clear with its 2020 outlook, which should see the company grow its cash flow by more than 20%. This optimistic outlook enabled the company to boost its dividend by 5%, pushing the yield up to 4.4%. Those growth trends should continue after the company signed deals to buy several wind power assets from its sponsor.
Image source: Getty Images.
Details of the deal
Clearway Energy noted earlier this year that its sponsor offered it the opportunity to acquire and invest in three wind-related projects:
- 100% of the equity in the 144 megawatt (MW) Rattlesnake Flat Wind Project in Washington State.
- The remaining interest in Repowering 1.0, which would give it sole ownership of that partnership. It owns the 161 MW Wildorado and 122 MW Elbow Creek wind projects in Texas that have already been repowered.
- A partnership with its sponsor to repower the 55 MW Pinnacle Wind Project, which will increase the generating capacity of a wind farm in West Virginia.
Clearway has now signed binding agreements to invest in all three of these opportunities. It expects to pour $241 million into these deals, which it will finance with existing corporate liquidity (cash and borrowing capacity). It anticipates closing each transaction by year-end. Combined, the company expects these investments to generate an average of $23 million of cash flow per year over the next five years. That will provide a nice boost to Clearway's cash flow, which was on track to hit $310 million this year before it made these deals.
An important diversifier
The increased cash flow from these new investments is one of the main drivers of these transactions for Clearway. But it's not the only factor. Other important ones are that it will boost its wind business, which will increase the company's regional and customer diversification.
Clearway already has a strong wind business, with 2,200 MW of generating capacity at the end of last year, which contributes 34% of its cash flow. While its solar portfolio is much smaller at 1,203 MW, it generates 29% of its cash flow. That's worth noting since Clearway has agreements to sell about a third of its solar output to PG&E. Meanwhile, that company also purchases about 30% of Clearway's conventional production (which contributes 15% of its cash flow).
Thus, the boost to its wind business will do several things. First, it will make it an even larger contributor to cash flow. Meanwhile, because these assets are outside of California, they'll reduce its overall exposure to that market and PG&E since the wind projects have power purchase agreements with several other customers. Furthermore, the geographic spread of these assets around the country is worth noting since wind resources tend to vary by region in the amount of energy produced versus capacity:
|
Region |
Q1 2019 |
Q2 |
Q3 |
Q4 |
Full year |
|---|---|---|---|---|---|
|
West (excluding California) |
88% |
97% |
105% |
106% |
99% |
|
Texas |
93% |
87% |
113% |
87% |
93% |
|
East |
73% |
114% |
93% |
94% |
91% |
Data source: Clearway Energy.
This geographical diversification will help smooth out its quarterly cash flow.
The power to keep growing the dividend
Clearway Energy had to reduce its dividend last year due to the bankruptcy of PG&E. Thanks to a series of acquisitions over the past several months, however, it was able to start growing its payout again in 2020. With these latest deals, the renewable energy company should have the power to keep increasing its dividend since the new investments will boost its cash flow and diversify its operations. Those factors make its dividend increasingly attractive to investors who are seeking a high yield powered by renewable energy.
