Clearway Energy, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Clearway Energy, Inc. is a publicly-traded energy infrastructure owner with a focus on investments in clean energy and conventional power generation assets, largely contracted to other parties for long terms, with a focus on growing renewable assets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Clearway Energy (CWEN) is an independent power producer (IPP) that generates revenue by selling electricity from a portfolio of contracted facilities. The company’s operations are divided into three primary segments:

Conventional Generation: This segment utilizes power plants fueled by natural gas.
Renewable Generation: This area includes wind, solar, and solar-thermal power plants.
Thermal Segment: This division is focused on district energy systems

Clearway’s revenue drivers are primarily volume of energy produced, prices of commodities (like power, natural gas) and the contract terms that define their prices. The revenues are generally very steady and predictable, mostly because their contracts with utility companies are long term and have price escalators, some are linked to inflation or tied to markets. This gives some downside protection and predictable cash flows for investors. However, the contracts are often fixed at certain rates of production and do not account for excess supply of power, this means that CWEN can be limited on their upside (if they have capacity to supply even more energy to the market).

The company’s financials are impacted by interest rates, the price of fuel, the price of power, weather patterns (which can affect electricity demand, and production from wind and solar) and the ability to complete acquisitions and build out projects. They also depend heavily on long term contracts with their clients, meaning that their results are not that volatile. However, changes to interest rates can affect the company’s ability to raise funds and can lead to an increase in financing expenses (or lower returns from reinvestments) and have a direct effect on value of stock.

In the latest earning call, they discussed increasing their long term guidance to 2026, to $2.15 per share, from $2.05 previously. They also showed confidence in increasing dividends by 3-4% going forward. They also said the new facilities are going to be built over the next few years and will be fully operational by around 2027-2028.

The main talking points in the call were the increased guidance due to better and efficient operation from new projects as well as the company’s push towards renewable energy which will see it lower capex in the future. They also mentioned the importance of tax credits from the Inflation Reduction Act which will also help grow the company over time. They also stated, they “are very well-positioned to take advantage of incentives from the Inflation Reduction Act, particularly given our large portfolio of operating renewable generation, projects under construction, and growth opportunities.” They also mentioned the importance of their long term contracts and their ability to pass down price increases to their consumers which will help offset some of the risks of inflation.

Moat Analysis: 2 / 5 CWEN’s moat is rated 2 out of 5 because of limited competitive advantages. While the company does have some features that allow them to maintain steady performance and have predictability in their earnings, those are not very hard for other companies to replicate. Here’s a breakdown:

Intangible Assets: While Clearway has some contracts that are favorable for them, these aren’t enough to constitute a strong moat because their prices are almost always fixed to existing and future market rates, or based on cost, so there isn’t any specific proprietary technology that competitors cannot replicate. Their most relevant intangible assets are PPAs, contracts that often expire or that can be changed due to regulatory reasons. They don’t have proprietary technology or hard to replicate brand.
Switching Costs: Switching costs are relatively low. While it may be inconvenient for utilities to change power providers, contracts are often changed over time as different terms are offered. They are not tied to a specific platform where switching will incur extra costs to the consumer, rather contracts are generally interchangeable.
Network Effects: They don’t have a network effect. This isn’t a business that benefits from more users. A power generation company generates value almost solely on how efficiently it can turn its capital into cash, irrespective of how big the consumer base is.
Cost Advantages: While a lot of their facilities benefit from tax credits, they do not have a sustainable cost advantage. These tax benefits are always at the whim of the government (which can change with different political administrations, for example). Though, the company also tries to make use of new technologies and processes to reduce expenses, they are not inherently unique and can easily be copied or improved upon by a new competitor.

Legitimate Risks to the Moat & Business Resilience

Regulatory Risk: Changes in government regulations concerning energy production and incentives could significantly impact profitability. The main point is that their economic moat is mostly centered around tax benefits, and as we discussed before, this is very much at the mercy of the government.
Commodity Price Volatility: Fluctuations in natural gas, solar panel and other material prices and power prices can impact profitability and revenue. As discussed before, even when having long term contracts in place, these contracts often fluctuate based on the market and could lead to losses if the prices go down. Also any price fluctuations are mostly passed down to the consumer in the long term, so there is no guarantee that any increase in revenues will lead to an increase in profits (and may even see a decline).
Interest Rate Risk: Higher interest rates can increase their financing costs and reduce returns on new projects. Because the company is always involved with projects that are in various stages of construction, they continuously raise debt and are greatly affected by the increase in interest expenses. High interest rates also reduce the value of companies using Discounted Cash Flow valuations.
Acquisition and Integration Risk: Future growth depends on acquiring and integrating new power projects, which carries a risk of failing to integrate and meet projected results. As seen from the company’s most recent acquisition of SB Energy, these may also carry high amounts of debt that will need to be paid back over time.
Reliance on Contracts Their revenues are almost entirely dependent on long term contracts with utility companies, any change in the contracts or the inability to sign new contracts in the future will directly impact the bottom line.
Climate change The company’s assets are exposed to climate-related changes, weather patterns, which could impact their energy production and damage to equipment and facilities. Their renewable assets could also be limited by changes in weather patterns that are more prevalent in certain areas.
Customer concentration All the customers are concentrated in a small area in the US, which if severely affected would impact their company’s prospects. The bulk of their renewable revenue is generated from contracts with California based companies, meaning the California markets are critically important for future growth.
Operational Risk: Failure or delays in power generation facilities can disrupt cash flow and earnings. Power generation projects can fail to realize projected profits, face unexpected operational issues, and be limited by the amount of energy they can provide at a certain time. A single project’s performance also has a direct correlation to the company’s profits, so failures in one area could have a huge impact.
Dependence on Acquisitions Their aggressive growth strategy relies heavily on continuous acquisitions in the near future, any slowdown in that aspect could greatly affect the stock. As seen from recent acquisitions, even new companies can have large amounts of debt and can negatively affect profitability in the short term if not well integrated.

The company is reliant on long term agreements that have pricing escalators that do offer a level of predictability. They also manage risks very conservatively. However, any company in this industry faces a range of challenges and are sensitive to changes in the financial markets and regulatory conditions. The company does have substantial long term agreements, which does provide it with a level of insulation from short term financial pressures, that gives some business resilience.

Financial Deep Dive

Revenues: For the three months ending September 30, 2023, Clearway reported total revenues of $371 million.
Operating Profit/Loss: They generated an operating profit of $105 million.
Net Income/Loss: They reported a net loss of ($46) million in the most recent quarter.
Cash Flows: Cash from operating activities was $188 million and they did not raise cash from financing activities. They also spent $225 million on investing activities, showing that they use most of their cash in financing projects. They have $1.15 billion in cash.
Assets: Total assets were listed as $13.75 billion and total liabilities $9.2 billion at the end of December 2022, they have an excess of around $4.5 billion, however a significant chunk of their assets are long term assets related to infrastructure projects (which can be hard to sell).
Debt: They have a long term debt of around $7.6 billion, this was used to acquire new facilities, build out existing facilities and also pay existing debt obligations.
Equity: Total stockholders equity is around $4.5 billion.

While the company is profitable (considering operating profit) and their revenues are growing, their high level of debt and the continuous need for investing in projects does put some pressure in their financials. While they have large amounts of assets, they are almost all in projects, which means that they don’t have that much liquidity in cash.

They have also started paying dividends to their common stockholders. They are slowly increasing those dividends, with increases planned for the future. This could help attract more investors in the future.

Understandability: 3 / 5 Clearway’s business model is rated 3 out of 5 for understandability. While the basic concept is simple (selling electricity), the company has complex financial statements and there is a great need to understand the various elements of an energy company such as project finance, risk management, and a range of different contracts and terms. Most of the contracts also are unique to them and are usually not available to the public for analysis. It’s also difficult to properly assess the economics of different segments that may contain a myriad of complicated tax incentives and regulations. Understanding the effect of different policies, and regulations, on their profitability is also quite hard. They also have investments that are not fully consolidated, which makes it a little harder to fully understand the company from the outside.

Balance Sheet Health: 3 / 5 Clearway’s balance sheet health is rated 3 out of 5. They do have significant long term debt that is used to fund the development of their projects, which can be risky, it is not easily payable even if they have access to large amounts of cash (most cash are used for investments into long term projects, and less available in pure cash). However, they have more assets than liabilities, with their total assets being more than the sum of their debt and equity. Their long term contracts do provide a sense of stability to their finances, and they are actively looking for ways to deleverage and generate more cash in the long term. They also have a good interest coverage ratio, which means they should be able to handle their current debt loads.

Also, I would like to mention there are a lot of smaller companies in this space, that have a similar structure and are less profitable but more specialized than them, so investors should be careful to note when making comparisons.

This is a simplified overview of CWEN and its operations. You should note that many assumptions were made, some analysis is an oversimplification and there are always risks when investing in the markets. Always conduct proper and thorough research before making decisions.