THE great artificial intelligence (AI) boom that’s fuelling US economic growth now depends heavily on credit markets to finance the investments, and utilities are among the key borrowers.
In the process, they could potentially turn one of the safest parts of the corporate-bond market into a slightly riskier one.
Companies will borrow more, boosting the supply of the bonds and potentially weighing on valuations.
At the same time, industry profits could face pressure as regulators try to keep a lid on rate increases.
Bond sales by US utilities grew 19% this year to a record US$158bil, funding rampant growth in power demand driven by the AI boom.
A lot more is coming: electric companies are expected to spend more than US$1.1 trillion on power plants, substations, and other grid infrastructure over the next five years, according to industry group Edison Electric Institute, up about 44% from the previous period.
Debt will help fund it.
Investors aren’t expecting utilities to struggle financially, for a simple reason: generating and delivering electricity in the United States is by and large a regulated industry, and that determines how much the companies can charge their customers.
Electric companies usually don’t start building projects until they have regulatory approval to recoup costs from customers, along with a healthy rate of return.
But the industry might become at least a little riskier for investors because so much more debt is coming.
JPMorgan Chase & Co recently forecast an 8% rise in utility-bond issuance next year, citing new data centres as well as investments to make the electric grid more resilient.
The upshot of more sales might be lower valuations in the form of wider spreads.
Investor fears of an AI bubble have also increased in recent months, sparking concern that power-sector investments might not be as safe as they once were.
While utilities have some protection from a tech pullback because of power contracts that require minimum payments and termination fees, a significant slowdown or contraction in AI-related spending would undermine the growth story they’ve been telling investors.
And there is a political risk for investors: Nationwide, electricity prices rose 5.1% during the 12 months through September, hovering near a record, government data shows. Politicians in multiple elections in November ran on promises to cut utility bills.
Regulators are facing pressure to keep rate increases relatively low, which could cut into returns for investors instead, said Tim Winter, an equity portfolio manager at Gabelli Funds.
“It’s really easy to run on, ‘Let’s beat up the utility, they’re making life hard for you guys,’” he said.
“The more the public is concerned and the more they’re unhappy customers, the more likely it is that it’ll be a challenging regulatory environment and then you don’t get the returns you want on your investment.”
For bond holders, the best bet way to insulate themselves against this kind of pressure might be to stick with buying notes issued by the regulated utilities themselves, and not the holding companies that are further away from the income-generating assets.
Andy DeVries, an analyst at bond research firm CreditSights, said that debt issued by operating companies is secured by actual assets like power plants and transmission lines, as well as the franchise to service customers in a particular service territory.
“With operating companies, no bondholder has lost principal in 50 years,” DeVries said. “With holding companies, some people have.”
PG&E Corp, holding company for Pacific Gas & Electric, has filed for bankruptcy twice in the last 25 years.
There is an upside to this investment: it will likely fuel profit growth for utilities.
“The utility sector is investing way more money than the cash flow it’s generating,” said Brian Savoy, chief financial officer at Duke Energy Corp. “Investors are happy with the risk they’re buying into, knowing that utilities are growing.”
Big utility bond sales this year have seen strong demand.
A US$1.15 bil sale of 2066 bonds by Florida Power & Light, a unit of NextEra Energy Inc, earlier this month was five times oversubscribed, according to data compiled by Bloomberg.
Duke and Evergy Inc saw demand for some notes they sold in November exceed offerings by more than six times.
That compares with an average book coverage of 3.9 times for dollar-denominated high-grade bonds issued in 2025, the data showed. — Bloomberg
Josh Saul and and Gerson Freitas Jr write for Bloomberg. The views expressed are the writers’ own.
