25 August 2006 — In a Bloomberg article published yesterday, author Aparajita Saha-Bubna writes that Duke Energy Corp., Dominion Resources Inc., American Electric Power Co. (AEP) and at least 15 other U.S. utilities need to sell debt just as their borrowing costs reach the highest in almost three years. The article states that electric and gas utilities with investment-grade credit ratings have $10 billion worth of bonds coming due through the end of this year. According to data compiled by Bloomberg, only banks have more debt coming due, with $30 billion maturing.
According to the article, Merrill Lynch & Co. indexes show that utilities are paying an average yield premium, or spread, of 102 basis points more than Treasuries, which is up from 74 basis points in March of last year. A basis point is 0.01 percentage point. The companies have about $20 billion of debt maturing in 2007 and almost $25 billion the year after, according to Fitch Ratings.
Stephan Haynes, assistant treasurer at AEP, was quoted in the article saying that borrowing is going to cost more. AEP has $306 million of bonds maturing by year-end and Haynes said the company will have to build higher borrowing rates into its projections.
The Bloomberg article states that bonds of gas and electric companies have returned 1.04 percent, including reinvested interest, so far this year. This is below the average 1.26 percent gain for investment-grade debt, according to Merrill indexes.
Specific statistics on AEP and Duke Energy are included in the Bloomberg article. It states that AEP’s yield spread on the 6.375 percent bonds that are due in 2036 and were sold by AEP’s Appalachian Power Co. unit has widened to 144 basis points from 140 basis points in April, when the company sold $250 million of the securities. When Appalachian Power sold the same amount of 30-year debt about a year ago, it paid a spread of 130 basis points, according to the Bloomberg article.
According to Trace, the bond-price reporting service of the NASD, an investor who bought $10 million of Appalachian Power’s 5.8 percent bonds due in 2035 when they were sold in September has lost $464,000 so far.
Bloomberg data reflects that Duke Energy Corp has $1.5 billion in debt maturing through December, Dominion Resources has $912 million in maturing notes and FirstEnergy Corp. has $1.12 billion of debt due by year-end. These amounts include debt sold by subsidiaries.
The article did not include comments from anyone with the three utilities, although the author did seek their input.
Ellen Lapson, a managing director in the global power group at Fitch Ratings in New York was quoted in the article, saying that utilities will notice the combination of refinancing and new borrowings if interest rates rise over the next two years.
The Federal Reserve has raised it target for the overnight lending rate between banks to 5.25 percent from just 1 percent in 2004. This rise has caused borrowing costs to climb and increased the spread for all investment-grade corporate bonds to about 98 basis points, the widest this year.
The Bloomberg article points out that because many utilities have higher credit ratings now than they did five years ago, the impact of these higher rates may be reduced. These higher credit ratings should allow some utilities to refinance at lower coupons.
However, this isn’t always true. The article points out that Commonwealth Edison Co., a unit of Chicago-based Exelon Corp., the largest operator of U.S. nuclear power plants, paid more to borrow $300 million of 5.95 percent 10-year notes earlier this week than it did when it last sold debt in March.
The new notes, secured by equipment and plants, were sold to yield 115 basis points more than Treasuries with the same maturities. By contrast, the company paid a coupon of 5.9 percent on 30-year securities five months ago. The new bonds are rated Baa2 by Moody’s, compared with Baa1, in March.
Robert McDonald, Commonwealth Edison’s chief financial officer, who was also quoted in the article, said the rising borrowing costs stem from “increasing Treasury rates and different credit ratings.”
Aparajita Saha-Bubna, the author of the Bloomberg story referenced here, can be contacted in New York at [email protected]