The Covid-19 Crisis is an Opportunity for Utilities To Raise Funds from Public Markets
- Apr 14, 2020 8:38 pm GMT
The cloud of medical and economic uncertainty has a silver lining for utilities. They are busy mopping up cash from the markets. Bloomberg reports that U.S. utilities have raised almost $15 billion from bond markets in long term debt in recent times. Duke energy raised $550 million while Dominion raised $1.2 billion in 30-year notes from the markets. New York’s Consolidated Energy Inc. has issued 30-year bonds with a coupon rate of 3.95 percent. The situation is not very different across the pond. European utilities are also snapping up investor funds. As of this writing, 12 utilities have tapped public markets, raising an average of $1 billion from public markets.
It is easy to see why investors are drawn to utilities. With their regulated markets and predictable income streams, utilities offer refuge from unpredictable and competitive markets in uncertain times. The fund raises are also beneficial for utilities. The capital-intensive nature of the industry means that utilities need significant money to keep the lights on in their own offices. The Covid-19 crisis has shut down industrial plants and commercial establishments, the most lucrative source of revenue for utilities and demand for electricity is expected to crash due to the crisis. Cash from debt markets will help them tide over the steep decline in revenues once the crisis blows over.
At first glance, the utility playbook for this crisis might seem similar to the previous one in 2008. But there is a qualitative and quantitative difference between both. The 2008 financial crisis spiralled from the financial services industry onto other sectors of the economy. In contrast, the effect of this crisis is much more widespread and impacts all sectors of the economy. A measure of this severity lies in economic forecasts. IMF chief economist Gita Gopinath today forecast a -3 percent growth rate for the global economy this year, a downgrade of almost six percentage points from their earlier estimates.
The circumstances for the utility industry are also different. During the last financial crisis, utilities were beginning their journey towards the energy transition that is now already underway. Their capital requirements have ballooned. The Edison Electric Institute (EEI) estimated that the industry faced capital expenditures of almost as much as $150 billion “in the next couple of years” to finance the transition. The average capital expenditures around that time were around $75 billion. The same institute has forecast expenditures of $135.6 billion and $128 billion in 2019 and 2020.
The current wave of financing also portends a new paradigm for financing of utilities. The industry is capitalizing on the popularity of funds directed at Environmental, Social, and Governance (ESG) causes. Cash reserved for ESG causes is directed at companies that do environmental and social good through innovation. Utilities are one of the sectors that the funds are invested in. For example, PIMCO, one of the world’s biggest investors has put money into German utility company RWE. No wonder then, even as markets across the world tanked, ESG funds have been relatively slower in their decline.
Among the beneficiaries of cash reserved for ESG causes is NextEra Energy, which has the world’s biggest portfolio of solar farms. It is a favorite with investors and recently held a successful bond offering for Florida Power & Light, a subsidiary. Out of the 12 bond offerings for European utilities in the last month, seven were for green bonds, meaning they were for projects that reduced carbon emissions at utilities.
While they have not bucked market declines, ESG funds, some of which contain utilities in their holdings, have been spared its excesses. Bloomberg reports that ESG funds, which are meant to reward companies that do environmental and social good, fell by 12% since the start of this year as compared to a 23% decline in the S&P 500 during the same time period.
Of course, there are caveats to these impressive figures. The first one is that utilities are raising these funds at lower coupon rates as compared to previously, increasing the cost of their debt significantly. During the last financial crisis, coupon spreads were between 5.75% and 9.8%. FPL, in contrast, offered coupon rates of 2.85% for its five-year mortgage bonds last month.
The success of ESG funds, such as it is, also does not mean good tidings for utilities. The absence of a globally acceptable definition for utilities means that funds are at a liberty to include holdings of companies that may not necessarily fit the conventional definition of socially-conscious outfits. A WSJ post recently analyzed the constituents of such funds and found that Baker Hughes, global infrastructure oil provider, is among the most common holdings for such funds. Technology companies, which promise growth and profits, are another favorite. In other words, the opportunity for investors in ESG funds lies not in environmental creds but in immediate profits. Utilities, which function in regulated markets and promise a steady income stream in the form of dividends, are not popular.
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