Rising interest rates could challenge U.S. utilities to counterbalance higher financing costs as nearly $80 billion of debt maturities for the 20 largest holding companies come due through 2024, according to S&P Global Market Intelligence data.

With the Federal Reserve hiking rates to counter inflation, any debt financing that utility holding companies undertake cannot be passed on to customers. Instead, utilities will have to cut operations and maintenance spending and potentially implement interest rate hedges, which analysts at Mizuho Securities USA described as a "modest headwind" for utility holding companies facing near-term debt maturities.

"Utilities may struggle to find offsets to the higher financing expense," Mizuho said in a May 10 report. "If they look to raise the earnings power of the utility to offset the greater interest expense, they risk overearning and could be issued a show cause order by state regulators to reduce customer bills."

Exelon Corp. CFO Joe Nigro acknowledged May 9 that subsidiary Commonwealth Edison Co.'s distributed return on equity has benefited from higher interest rates, though the parent company is also experiencing a negative impact from rising debt expenses.

"A 50-basis-point move in Treasury rates is worth about 4 cents to ComEd," Nigro said on the company's earnings call. "On the flip side to that is when you look at our corporate debt, we show you a sensitivity to a 50-basis-point move. It's about a 1 cent impact."

Exelon has nearly $2.5 billion of debt maturing through 2024, according to S&P Global data.

CreditSights bond analyst Andrew DeVries does not expect rising rates to threaten or restrict holding company debt refinancing. Most utilities are already cutting operations and maintenance budgets to help manage rising customer bills resulting from soaring natural gas prices, DeVries said in an interview.

"You're seeing utilities still have to pay up 10, 15, 20 [basis points] to tap the markets on down days, but in the grand scheme of things, you're still issuing at 4.4% interest rates" tied to the 10-year Treasury yield, which is only 2 percentage points higher than the 2.5% rate at the end of 2021, DeVries said. "[It's] definitely worth paying attention to, but not exactly moving the EPS needle like a regulator deciding to clip out ... [capital expenditures] to help customer bills."

Moody's analyst Jeffrey Cassella agreed, saying in an interview that "if you're looking at a long period, interest rates are still relatively low."

Of the 20 biggest holding companies, Dominion Energy Inc. has the most debt coming due by the end of 2022, with $2.26 billion scheduled to mature, and the third-largest credit profile maturing through 2024. James Chapman, executive vice president and CFO, said May 5 that the company has offset refinancing risk by "locking in" low rates for any issuances through 2026.

"We manage that interest rate exposure through a variety of hedging and treasury activities, including through what is currently about $10 billion notional of pre-issuance interest rate hedges, which will help us keep future costs low," Chapman said during a first-quarter earnings call.

NextEra Energy Inc. has the most maturities of any utility holding company, with $14.9 billion of debt coming due through 2024. PG&E Corp. has the second-largest amount of debt maturing during that period at nearly $7.7 billion.

Edison International also has a significant chunk of debt maturities, but it was debt at the utility level that prompted Mizuho to downgrade the equity to a "neutral" rating from "buy" in light of the threat to the company's 5% to 7% EPS growth target rate through 2025.

"We estimate that [utility subsidiary Southern California Edison Co.] will have roughly $6 billion of interest-exposed disallowed debt, which is not recoverable in rates," Mizuho wrote separately May 10. "Every 1% increase in interest rates would reduce EPS by an estimated $0.11."

Southern California Edison financed that disallowed debt to pay claims related to catastrophic wildfire and mudslide events in 2017 and 2018. Edison International estimated its total losses from those events at $7.9 billion.

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