IG Utilities & HY Power 2025 Outlook: Ten Themes for 2025

• • • We have identified ten themes across investment grade regulated utilities and high yield power companies that we expect to play out in 2025, with datacenters being a part of over half our themes. The datacenter themes include rate design and capex on the regulated utility side and FERC clarity on co-location, land sales and/or co-location deals at existing gas plants and at least one small modular reactor going to FID on the IPP side.
    • Outside of datacenters, we continue to have a very favorable view on utility holdco hybrids and anticipate some first-ever opco hybrid issuance in 2025 based on management interactions at EEI. As a quick recap, prior to Moody’s raising its equity credit earlier this year from 25% to 50%, we had a handful of companies with hybrids and now have sixteen, with more expected and even opcos potentially coming to market. These securities are issued out of mostly mid BBB holdcos with low BBB ratings but pay mid BB yields. As the market evolves, issuers may no longer have to pay BB yields, which could reset the existing supply higher, especially the NC10s. The full regulated names are still preferred, and issuers with NC10s from this year include Duke, NiSource, NextEra, Dominion, and PPL.
    • Other themes include an anticipated wave of IPP IPOs (Calpine, Lightning, AlphaGen) that could lead to modest upside for bondholders and the impact of surging solar installations on power prices, especially in TX, along with the final resolution of the $3.4 bn of CEPFs at NextEra Energy Partners.
    • We expect stable credit metrics across opcos and holdcos with current FFO/debt of 19.3% for the opcos and 13.5% for the holdcos, and view overall bond spreads more as a function of the overall bond market and duration than specific to the group.The regulated utility sector is inherently defensive with no exposure to a recession or slowdown in consumer spending. Conversely, if growth accelerates and the Fed hikes interest rates in 2025, the long duration nature of the sector could lead to underperformance compared to overall corporates. The utility index (LUAU) shows an average maturity of 2039 and duration of 8.5 years versus overall corporates at 2036 and 7.0 years.
    • We expect $140 bn of new IG utility issuance in 2025 based on $220 bn of capex (an increase from EEI of $202 bn) that is 55% internally funded (actual 3Q24 LTM) and 10% equity funded for a new debt issuance of $77 bn. We add in $50 bn of 2025 maturities to arrive at $127 bn of issuance plus another $13 bn for capex outside the EEI capex universe for our official forecast of $140 bn. We expect $20-25 bn of that will be met with hybrids.

We are maintaining our Market perform on U.S. utility bonds versus overall corporates with the mentioned dynamic of duration keeping the utility index 4 bp wide to overall corporates (8.5 yrs duration vs. 7.0). Like many sectors, utilities are trading tight to treasuries but also within a tight range among themselves, which limits RV swap trades and the ability to find names with significant tightening potential. For example, at the 8-10 year level, after excluding Eversource Energy that still has offshore wind capex exposure from Revolution Wind, the entire mid BBB peer group trades in a 15 range of spreads from +70 to +85.