Clearway Energy (CWEN -0.92%) (CWEN.A -0.67%) is one of the largest renewable energy producers in the country. It sells the power those facilities produce under long-term, fixed-rate contracts, enabling it to generate steady cash flow to support its 4%-yielding dividend.
Clearway has grand ambitions for that high-yielding payout. It aims to grow its dividend in the upper end of its 5% to 8% annual-target range through at least 2026.
That high-end dividend growth rate is even more likely following news that global energy giant TotalEnergies (TTE 0.14%) is coming onboard as a strategic partner. Here's a look at the deal and what it means for Clearway Energy's future.
Bringing aboard a big-time partner
Clearway Energy is a renewable energy yieldco sponsored by its controlling investor, Global Infrastructure Partners (GIP), a leading global infrastructure investor. This sponsorship provides Clearway with several benefits, including the ability to acquire operating assets with cash flow from GIP and its affiliates to support its high-yielding dividend.
One of those affiliates is Clearway Energy Group (CEG), a leading developer of renewable energy assets, including onshore wind energy farms and solar energy projects. GIP currently owns 100% of CEG, which holds a 42% economic interest in Clearway Energy.
CEG routinely drops down fully contracted recently completed renewable energy projects to Clearway Energy. These transactions provide CEG with the cash to fund new developments, while supplying Clearway Energy with growing cash flow streams to steadily increase its dividend.
GIP recently agreed to sell half its stake in CEG to TotalEnergies. It will receive $1.6 billion in cash and a 50% interest in a TotalEnergies subsidiary that holds a 51% stake in solar-panel manufacturer SunPower. The deal is TotalEnergies' largest investment in the U.S. renewables market, enhancing its push away from oil and gas toward cleaner energy. Meanwhile, it will help bolster Clearway's growth prospects.
A powerful growth driver
The strategic partnership with TotalEnergies will enhance the future growth prospects of CEG and Clearway Energy. One notable benefit is that Clearway will have a right of first offer on all TotalEnergies U.S. onshore renewable assets.
The company currently controls more than 10 gigawatts (GW) of renewable energy capacity in the U.S., including those in operation, under construction, and in development. It recently purchased Core Solar, which has 4 GW of utility-scale solar and energy storage projects in development.
TotalEnergies will likely look to steadily sell off some assets to recycle that capital into new developments. That will provide Clearway Energy with an enormous opportunity to acquire high-quality, income-producing renewable energy assets in the future.
Another benefit of TotalEnergy's strategic partnership is that it brings significant power marketing capabilities and corporate relationships to the table. It can help CEG secure power purchase agreements for its development projects, potentially accelerating its ability to build out its extensive pipeline. That would provide Clearway Energy with additional drop-down acquisition opportunities.
Meanwhile, TotalEnergies could help Clearway Energy maximize the value of its operating assets by helping it secure new contracts as existing agreements expire. TotalEnergies could also enable Clearway Energy to expand its legacy assets by helping it get the contracts needed to support new wind repowering projects or solar expansions in the future.
Clearway Energy has ample financial capacity to pursue additional investments. The company recently closed the sale of its thermal business, generating $1.35 billion in net proceeds. It already has deals lined up for $600 million of those funds and is working with CEG on additional drop-down opportunities worth at least $300 million in the 2023 to 2024 time frame. That leaves it with more than $450 million of investment capacity.
The TotalEnergies partnership could provide attractive opportunities to put that capital to work. That should help the company achieve its goal of delivering dividend growth toward the upper end of its 5% to 8% annual-target range.
Enhancing its ability to deliver dividend growth
Clearway Energy already had a lot of the power it needed to deliver on its dividend-growth objective, thanks to its strategic relationship with CEG. However, with TotalEnergies coming aboard as a strategic partner, it should provide both companies with more growth opportunities. That increases the probability Clearway can deliver high-end dividend growth, further enhancing its appeal to investors seeking a renewable-powered passive-income stream.