A contractor works on photovoltaic modules on an AES Tiete SA solar farm in Brazil.
Jonne Roriz/Bloomberg
AES stock was dropping Friday after a UBS analyst voiced concerns about the effect higher interest rates would have on the utility company’s near-term future.
UBS analyst Gregg Orrill downgraded shares of
AES
(ticker: AES) to Neutral from Buy and cut his price target on the stock to $13 from $22.
“We downgrade AES to Neutral from Buy due to rising interest rates and earnings
deceleration at the Infrastructure segment driven by coal shutdowns,” Orrill wrote in a research note. AES announced more than a year ago its intention to exit coal by the end of 2025.
Higher interest rates, the analyst said, will represent a headwind to returns on new business “if the cost of financing is not passed along in power prices.”
“We expect renewable developers in general face the impact of passing along the higher cost of financing on new projects despite the benefits of the IRA taking full effect in 2024,” the analyst said. The IRA, or the Inflation Reduction Act, provides certain renewable energy projects with tax credit bonuses.
AES is definitely impacted by higher Treasury yields, but it’s a little late to be warning investors about it. The stock was down 1.8% to $12.38 at 2:31 p.m. after bouncing back from earlier losses that had made it the
S&P 500’s
worst performer earlier in the day. The stock’s rebound came as yields on the 10-year Treasury pulled back to 4.78% Friday afternoon, down from a peak of about 4.86%. The stock, though, has dropped 41% over the past three months, a decline that coincided with the rise in Treasury yields.
Chief Executive Andrés Gluski said in a statement to Barron’s that the company’s long-term contracted business model and emphasis on non-recourse project-level debt helps to insulate it from the financial impact of rising interest rates.
“We also do not take interest rate risk at the project level for our renewables: we incorporate the cost of financing into the pricing of our renewables sales, and hedge our long-term financing, at the time we sign our Power Purchase Agreements,” Gluski added. He added that despite rising interest rates, he sees renewable energy remaining competitive as one of the lowest-cost sources of energy throughout many parts of the U.S.
Write to Angela Palumbo at [email protected]
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