Despite a favorable outlook for utility finance, cost pressures are straining rate structures.
Michael T. Burr is editor-in-chief of Public Utilities Fortnightly. E-mail him at burr@pur.com.
During the depths of the sub-prime lending crisis, when lenders and investors seemed on the verge of panicking, MidAmerican Energy went to market.
Specifically, in late August 2007, the Iowa-based utility holding company issued $1 billion of unsecured 30-year senior bonds, with a 6.5 percent coupon rate and a “BBB+” rating from Fitch. The flotation wasn’t just successful; it was oversubscribed.
“We saw significant demand beyond the billion dollars,” says Joe Sauvage, managing director and co-head of Lehman Brothers’ global power group, which served as MidAmerican’s bookrunner. “For the right transactions with the right structure, there is significant appetite—at the right market moment.”
In some situations, utility securities actually might benefit from volatile financial markets, as nervous investors and lenders seek a relative safe haven for their money. And few investments appear safer today than U.S. electric and gas utilities. Utility-stock valuations remain within sight of historic high levels, with price-to-earnings (PE) multiples exceeding 14-to-1. Balance sheets are strong, with most utilities having completed refinancing of their highest-cost debt obligations in the last few years. And dividend payouts are holding steady, even rising in some cases, as companies reward investors after a long period of relative austerity.