Data Center Power Demand And Long Term PPAs Will Support Future Cash Flows

Catalysts

About Clearway Energy

Clearway Energy owns and operates a portfolio of renewable and flexible generation and storage assets under long-term contracts in the United States.

What are the underlying business or industry changes driving this perspective?

• Rising long-term power demand from data centers and large technology customers, including multi decade PPAs with hyperscalers and Google, supports a larger contracted asset base that can increase revenue visibility and support future earnings growth.
• Expansion of late stage wind, solar and storage projects, with 100% of 2026 and 2027 vintages already commercialized and a 2028 to 2029 pipeline larger than what is needed for internal CAFD targets, gives the company multiple ways to add contracted capacity that can lift CAFD and support dividend coverage.
• Repowering of more than 900 megawatts of wind assets and contract extensions in ERCOT, including new long-term offtake agreements with hyperscalers at higher prices and improved settlement terms, are expected to extend asset lives and can improve the quality and durability of CAFD and net margins.
• Growing focus on grid connected storage and hybrid projects, such as the Honeycomb battery portfolio and potential hybridization of existing solar fleets, aligns the company with power markets where renewables and storage are expected to be cost competitive, which can support higher future contracted revenue and potentially more stable earnings.
• Clear funding visibility through 2030, including retained cash flow, recent senior unsecured notes with tight spreads to treasuries and accretive equity issuance, positions the company to deploy corporate capital at CAFD yields of around 10.5% on identified projects, which can support CAFD per share growth and help sustain net margin performance.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Clearway Energy's revenue will grow by 12.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.8% today to 8.2% in 3 years time.
• Analysts expect earnings to reach $165.3 million (and earnings per share of $0.97) by about May 2029, down from $169.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $240.5 million in earnings, and the most bearish expecting $84.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 47.2x on those 2029 earnings, up from 27.9x today. This future PE is greater than the current PE for the US Renewable Energy industry at 34.9x.
• Analysts expect the number of shares outstanding to grow by 2.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.38%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If data center and hyperscaler power demand grows more slowly than management expects, the multi gigawatt PPA opportunity set and late stage pipeline tied to that demand could be oversized. This may reduce the pace of future contract signings and affect revenue visibility and earnings.
• The plan relies on deploying around 2 gigawatts of projects per year through and beyond 2030, using safe harbored tax credits and long-term PPAs. Any policy shift affecting tax credits or permitting, or delays in interconnection, could slow project completions and weigh on cash available for distribution and net margins.
• Clearway expects to deploy at least US$2.5b of corporate capital by 2030 at CAFD yields around 10% to 11%, funded by a mix of retained cash flow, corporate debt and ongoing equity issuance. If capital markets become less receptive or the cost of debt and equity rises, future projects may be less accretive, which could pressure earnings and CAFD per share.
• The growth plan assumes continued access to high quality long-term contracts in markets like ERCOT, California and the broader West. A weaker PPA pricing environment, fewer recontracting opportunities or lower than P50 renewable production could reduce future contracted cash flows and compress net margins.
• Management targets CAFD per share growth supported by a large late stage development pipeline that is bigger than what is needed to meet 2030 goals. If project returns in that pipeline end up below the 10.5% CAFD yield planning level because of higher construction costs or less favorable contract terms, the company may fall short of its long-term CAFD and earnings objectives.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $45.67 for Clearway Energy based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $56.0, and the most bearish reporting a price target of just $41.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $2.0 billion, earnings will come to $165.3 million, and it would be trading on a PE ratio of 47.2x, assuming you use a discount rate of 9.4%.
• Given the current share price of $38.93, the analyst price target of $45.67 is 14.8% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.