Why Are Midsize Regulated Utilities Outshining the Biggies?
The investment rate recovery mechanism drives utilities (IDU) to spend more in their operational zones. This is a proven profit recipe for utilities that forces them to borrow more. As a result, debt on these utilities’ books increased enormously while their earnings growth declined. The graph below shows the leverage of selected utilities as of December 31, 2015.
Net debt-to-EBITDA ratio
The net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio is often used to measure a company’s ability to repay debt using its EBITDA. The ratio is commonly used by rating agencies to determine a company’s credit rating, with a lower ratio being considered better from a credit perspective. This also shows the riskiness of a company.
PPL Corporation has a net debt-to-EBITDA ratio of 4.8x—the highest among our selected group of utilities. By comparison, Xcel Energy (XEL) has a ratio of 4.3x while Consolidated Edison (ED) has a ratio of 3.8x. But Edison International’s (EIX) net debt-to-EBITDA ratio stands near 3x—the lowest of all.
More highly regulated operations are credit positive, according to rating agencies, due to what this means for comparative earnings stability. PPL Corporation and Xcel Energy thus have stable outlooks, both with credit ratings of “A-“ from Standard & Poor’s. Consolidated Edison has a negative outlook and an “A-” rating. At the end of the fourth quarter of 2015, utilities (IDU) overall had a credit rating of “BBB+” from Standard & Poor’s.
To read more on the credit ratings of large-cap regulated utilities (XLU), check out “ Utilities Debt: A Growth Driver or a Risk Alert? “
In the next part, we’ll discuss the forward dividend yields of regulated utilities (JXI).
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