Utilities, Power & Clean Energy Trump Implications

Far and away the biggest negative from a Trump presidency is the impact on rooftop solar provider SunRun (unrated converts, no other bonds) and Sunnova (B2/NR/B+) that have dual interest rate exposure into a what will almost certainly be a higher interest rate environment under Donald Trump. At publishing time, the 10-year Treasury was up 15 bps to 4.45%. The dual negative exposure to higher interest rates comes from a higher discount rate on future revenues from lease and PPA contracts that have an average 20yr term as well as the use of significant variable rate asset backed securities used to fund the $25-35k per home capex of installing the rooftop solar systems. At publishing time, NOVA and RUN stocks were down 15-20%, respectively and we don’t disagree with these moves. However, those large declines also likely reflect worries on future solar tax credits in addition to higher rates.

Yieldcos Brookfield Renewables, Clearway Energy and NextEra Energy Partners have fairly similar dual exposure to interest rates and uncertainty over future growth as tax credits come into question. However, CWEN has strong interest rate hedges for their floating rate debt while NEP has minimal hedges and BEP comes out in between. For NEP, we had modeled out a $3.4 bn debt buyout of its CEPFs at 6.0% leading to a 50% dividend cut but that 6% could easily be 7.0% now and lead to an even higher dividend cut.

Investment grade utilities also have clear interest rate exposure on the equity side that might make management teams more reluctant to issue equity while we view the higher rates on both the opco (pass through) and holdco as easily manageable from a metrics viewpoint. As the graph in the body of this report shows, utility forward P/E ratios have an inverse relationship to rising interest rates. On the fundamental side, Eversource, NextEra and Dominion Energy (avg 45% vs group at 29%) showed a higher share of holdco debt/total debt at 1Q and these interest rates are obviously not recoverable from ratepayers. On the flip side, ConEd, PacGas and Edison International showed the lowest holdco debt/total debt (8% avg).