utility bond

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Utility Bond

A long-term bond issued by a utility company. Because utility companies have very large capital expenditures (they must build expensive infrastructure to provide their services), they use utility bonds to finance many of their projects. See also: Utilities sector.

utility bond

A long-term debt security that is issued by a utility.
Please compare the risk and return on utility bonds vis-á-vis risk and return on industrial bonds.

Utility bonds, like industrial bonds, range the full spectrum with regard to credit quality. Some utility companies have been able to successfully overcome more difficult times associated with bringing large construction projects into their ratepayers' rate base, thus enabling the companies to pass on to these ratepayers the costs of constructing the projects. Other companies have been forced to pass some or all of these costs on to their stockholders, meaning that these companies' earnings have been hurt severely. (The harm to earnings, of course, also adversely affects the utilities' bondholders because these companies' financial ratios—that is, interest-coverage ratios and debt to equity ratios—are reduced and credit rating agencies are likely to reduce credit ratings as a result. Lower credit ratings translate into higher bond yields and lower bond prices for bondholders.) This is an extremely abbreviated and simplistic explanation of why utility bonds at one time traded at relatively wide yield spreads to industrial bonds. The utility companies' financial ratios were influenced by political factors—such as whether the elected public utility commissioners would permit their reelection chances to be harmed by passing on unpopular rate increases to those same ratepayers who elected them—in addition to all the other factors that were almost beyond the control of the utilities, for example, high interest costs, energy conservation efforts, and environmental concerns. These factors all contributed to the market's perception of greater risk in the utility industry. Some of the factors have changed; others have been overcome by time, as projects have been completed and put into the rate bases of the utility companies of the nation. Still other very positive trends have occurred (such as high interest costs having been reduced through refinancing at lower interest costs). Now we observe that many utility companies are becoming cash cows. The excess cash flows generated by some of them have enabled them to buy companies in nonregulated industries, thus reducing their vulnerability to political influences and allowing them to participate in more growth-oriented businesses. In short, in many cases utility companies are turning the corner on their past problems, and their bonds are trading more and more like industrial bonds in those selected cases.

Stephanie G. Bigwood, CFP, ChFC, CSA, Assistant Vice President, Lombard Securities, Incorporated, Baltimore, MD
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References in periodicals archive ?
Indianapolis Life is a heavy buyer of utility bonds because those are regulated (by the federal government) and are not susceptible to investment risks' like leveraged buyouts, Trueblood says.
Revenues of just the electric, water and wastewater system secure the city's utility bonds.
Seguin's utility bonds are rated 'A+' with a Stable Outlook by Fitch, reflecting strong financial metrics, high debt service coverage, modest debt burden and adequate cash on hand.
The utility bonds (SMUD's direct debt) are secured by net revenues from the electric system while the project bonds (JPA debt) are secured by the revenue from the power purchase agreement between SMUD and the JPAs.
The public utility bonds are additionally secured by a pledge of the city's water and wastewater revenues.
Public power utility bonds in most cases are unsecured debt obligations supported solely by a pledge of net revenues generated by the utility including other legal structural protections, such as rate covenants, and debt service reserve fund requirements.
Public power utility bonds in most cases are unsecured debt obligations supported solely by a pledge of net revenues generated by the utility, including other legal structural protections, such as rate covenants, and debt service reserve fund requirements.

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