By Roger Conrad
Money is tight. And individual and institutional investors' appetite for risk continues to diminish. In this environment, companies closed out of the capital markets must fall back on their own resources until conditions improve or pair up with a stronger rival. This brings us to utilities.
These challenges create massive opportunities for names with superior costs of capital, especially in a North American energy landscape that's undergoing huge changes.
Thanks to their highly visible cash flow, utilities still enjoy low costs of capital, enabling them to pursue two major growth opportunities at the expense of the competition: the rise of gas-fired power generation and solar power.
Cost of capital
Our list compares the yield to maturity (YTM) on five- and 20-year debt for a handful of our favorite electric utilities and five blue-chip midstream operators, four of which are structured as master limited partnerships (MLP). This data is as of Feb. 12, 2016.
Dominion Resources /zigman2/quotes/206853976/composite D +0.06% : Five-year YTM: 2.37%, 20-year YTM: 4.1%
DTE Energy /zigman2/quotes/205073403/composite DTE +0.20% : Five-year YTM: 1.84%, 20-year YTM: 3.86%
NextEra Energy /zigman2/quotes/200558509/composite NEE +0.62% : Five-year YTM: 2.72%, 20-year YTM: 3.66%;
Southern Company /zigman2/quotes/208000495/composite SO -0.92% : Five-year YTM: 2.83%, 20-year YTM: 4.02%;
Energy Transfer Partners LP : Five-year YTM: 7.38%, 20-year YTM: 8.12%;
Enterprise Products Partners LP /zigman2/quotes/205356165/composite EPD -2.43% : Five-year YTM: 3.99%, 20-year YTM: 6.2%;
Kinder Morgan /zigman2/quotes/208455654/composite KMI -1.31% : Five-year YTM:6.11%, 20-year YTM: 7.69%
Plains All-American Pipeline LP /zigman2/quotes/207478323/composite PAA -5.37% : Five-year YTM: 6.3%, 20-year TRM: 7.64%
WIlliams Partners LP : Five-year YTM: 10.96%, 20-year YTM 8.87%
The utilities in our list have credit ratings that are a notch or two higher than the MLPs, though this discrepancy doesn't explain the wide yield spreads between bonds of the same maturities.
Yield-to-maturity quantifies the annual return you'd receive if you were to hold the bond through the final interest payment; the higher the yield-to-maturity, the greater the perceived credit and interest rate risk.