Utilities are enjoying some of the best financing terms anybody’s ever seen. Is the party winding down?
Michael T. Burr is Fortnightly’s editor-in-chief. Email him at burr@pur.com.
Utilities today enjoy the lowest all-in financing costs in recent memory. In August 2012, for example, Georgia Power sold $400 million in three-year senior secured notes with a 0.75-percent coupon. At that rate, investors buying those bonds will lose more to inflation than they’ll earn from the bonds—and yet demand for Georgia Power’s paper was so strong the company issued $50 million more debt than it had initially planned.
Indeed, Wall Street for the past couple of years has been throwing a party in honor of power and utility companies. The celebration includes utility stocks, which for a large portion of the past two years have outperformed the broader markets. Few utilities have issued new equity recently, but for those who have, Wall Street rolled out the red carpet.
Some signs, however, indicate the party might be winding down.
For one thing, regulatory commissions in many states are asking tough questions about returns on equity (ROE). The average allowed ROE has been declining for some years, but it’s still in the 10-percent range—even as utility stocks are trading higher than many have for the past decade. Low financing costs combined with high ROEs make for some uncomfortable conversations when utilities appear before regulators to seek rate recovery for capital expenditures.