Mike Zaccardi, CFA, CMT

It was a busy week across the utilities space. There were many significant headlines that were indicative of the time we are in. From record renewable deals to storage taking off; a lot is happening. And here’s another – a utility company was able to lock-in a 5-year bond for well under 1%.

The Tennessee Valley Authority (TVA) took out a one-billion dollar 5-year loan at 0.75% to fund its operations. TVA said it will save about $15 million per year in interest expense with the new debt issuance. If I handed you a check each year for $15 million, would you take it?? I would.

I have written about interest rate risk for utilities in the past. This is such a golden-age for debt-heavy firms to borrow at rates like what TVA secured. For perspective, 75 basis points is about 1% below current inflation rate. In effect, the loan will depreciate over time, allowing for even more cost-savings for the Knoxville-based public power firm.

It also goes to show how opportunistic solid companies can be during this tough economic environment. While many energy companies are struggling just to stay afloat, those with a sound financial footing can pounce on opportunities that a near-term economic downturn presents.

What can other utilities do? Look into refinancing debt to lock-in lower rates. Or even take on more fixed rate debt if their balance sheet is strong enough. It takes proper risk management – stress testing, scenario analysis and the like, to determine if it is viable to become more financial levered. Attention has to be paid to the revenue side of the business – if that is in jeopardy due to the COVID-19 & economic shutdown-induced recession, more debt may not be wise.

Chart used with permission from Tradingview.com

https://www.tva.com/newsroom/press-releases/tva-sets-new-record-for-lowest-cost-borrowing