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Bonds / Debt Markets

Solution in Search of a Problem

Utilities seeking financing for environmental upgrades should look to the markets for debt and equity, rather than trying to securitize those costs.

Figure 1 - Securitization by Purpose (% of Total)
Figure 2 - Risk Compression Caused By Securitization
Transactions Business & Money
Author Bio: 

Thomas Feldman is a principal at Concentric Energy Advisors.

Securitization fails the test for financing environmental capex.

Transactions (October 2012)

Exelon sells plants in Maryland and Cali; Mitsui buys into Viridity; Duke issues $1.2B; plus deals at TVA, Xcel, PG&E, etc. totaling $4.9B.


Last Call

Conditions are ideal for utility financing—but not forever. Although interest rates remain low, policy changes weigh on capital structures.

Figure 1 - 10-Year Bonds
Figure 2 - 30-Year Bonds
Figure 3 - Utility Bond Tenors
Figure 4 - Utility & Power Ratings Snapshot
Rising interest rates and unknown dividend tax policies could be a headwind for utility stocks. –Brian Tate, Wells Fargo Securities
Utilities have a  significant amount of capex planned in the near term, and bonus depreciation is not a funding strategy. –David Nastro, Morgan Stanley
There’s good reason to believe there will be a lot of M&A activity around contracted renewable assets in 2013. –Frank Napolitano, RBC Capital Markets
Sidebar Title: 
Pay It Forward
Sidebar Body: 

One way that some utilities have been getting ahead of market changes is by issuing equity to pre-fund costs they expect to incur later. This generally takes two forms: equity forward contracts, and mandatory convertible offerings. Examples include Pepco Holdings, which sold about $350 million in shares on a forward basis in March, and PPL, which sold about $270 million in April. Also, NextEra Energy issued $600 million in three-year, mandatory convertible bonds on May 1, and another $650 million in September.

Both approaches carry a premium, but they allow utilities to capture today’s high stock prices in a forward sale. And some issuers have found banks hungry enough to participate in equity deals that they’ll take a substantial haircut for the opportunity. (See “BofA loses $12m on bought convert,” IFR 1932, May 2012.)

However, terms likely will normalize as soon as the current confluence of forces drives utilities back into the equity markets in earnest.–MTB

Author Bio: 

Michael T. Burr is Fortnightly’s editor-in-chief. Email him at

Utilities are enjoying some of the best financing terms anybody’s ever seen. Is the party winding down?

Views from the Bond Side

Bond investors are keen for signs of a legitimate recovery, and will be looking to move into holdco bonds.

Op Ed
Author Bio: 

Josh Olazabal is a vice president in the credit research group at PIMCO’s Newport Beach office. Previously he was a consultant with McKinsey & Co., and worked in corporate development at Duke Energy before that.

How fixed income investors view the utility sector.

Transactions (September 2012)

Duke and Progress complete their merger; NRG agrees to acquire GenOn; Algonquin acquires National Grid's New Hampshire distribution business, and acquires an interest in Gamesa's Sandy Ridge wind project; plus other equity and debt transactions, totaling more than $34 billion.


Transactions (August 2012)

(August 2012)