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Utility Stocks: Your Who's Who

PART:
1 2 3 4 5 6 7 8 9 10
Part 6
Utility Stocks: Your Who's Who PART 6 OF 10

Utilities by Leverage: Measuring SO, NEE, and DUK

Utility leverage

Utilities’ leverages are very important metrics to assess—especially now that interest rates are increasing. As you can see in the chart below, the top three utilities’ leverages are largely stable, though Southern Company’s (SO) leverage increased sharply in 3Q16 in order to fund its AGL Resources’ acquisition.

We have considered net-debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio to measure utilities’ leverage. This ratio shows how many years it will take for a company to repay its debt using its EBITDA if debt and EBITDA are held constant.

Utilities by Leverage: Measuring SO, NEE, and DUK

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Are utilities’ leverages concerning?

Southern Company’s net-debt-to-EBITDA ratio was 5.7x at the end of 1Q17, while Duke Energy’s (DUK) and NextEra Energy’s (NEE) ratios were 4.7x and 3.8x, respectively.

Duke Energy’s and NextEra Energy’s flat leverage trends over the above period indicates that earnings have risen fairly in proportion with debt and shows financial soundness.

The Piedmont Natural Gas acquisition

Duke Energy also completed its Piedmont Natural Gas acquisition, which was mainly funded by debt, last year. But there wasn’t a significant change in its net-debt-to-EBITDA ratio due to its increase in earnings.

Utilities’ leverages are important metrics to measure, as utilities (XLU) tend to carry a lot of debt on their books due to their expensive infrastructures. Higher leverage can mean that dividends could fall if the company experiences hard times.

But why are higher interest rates negative for utilities? We’ll explore this question in the next part of this series.

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