Utilities generally carry a huge amount of debt on their books. Due to rising interest rates in the US, debt servicing becomes costlier, which eventually affects utilities’ profitability. Let’s analyze the debt profiles of NextEra Energy (NEE) and Dominion Energy (D) in this part. At the end of 4Q17, NextEra Energy had net debt of $33.4 billion, while Dominion Energy had net debt of $37.0 billion.
We’ve considered the net-debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratios of these utilities (XLU) to measure their leverages. The net-debt-to-EBITDA ratio shows how many years it will take for a company to repay its debt using its EBITDA if its debt and EBITDA are held constant.
NextEra Energy’s leverage ratio was close to 4.1x, while Dominion Energy had a ratio of around 6x. NextEra Energy’s relatively flat leverage trend over the last three years indicates that its earnings have risen fairly in proportion to its debt. Due to the ongoing SCANA (SCG) merger, Dominion Energy’s debt burden could significantly increase in the next few quarters.
Debt to equity
NextEra Energy’s debt-to-equity ratio is close to 1.2x, while Dominion Energy has a ratio around 2.2x. A debt-to-equity ratio tells investors how much debt is used for financing a company’s assets compared to its equity. A higher ratio suggests higher debt-servicing costs. Among the top utility stocks (XLU), Dominion’s debt-to-equity ratio seems to be on the higher side compared to its peers, which could concern investors.
On March 27, 2018, Dominion Energy announced a public offering of 20 million common shares in connection with forward sale agreements. The company expects to use net proceeds to reduce debt and capital investments.