Utilities are entering a more difficult financing environment as interest rates climb, according to Tim Keller, managing director of U.S. Bank's power and utilities group. With capital expenditure plans rising year over year, partly to serve AI-driven data center demand, Keller said keeping those plans balanced against credit metrics will be "a little more challenging" as rates rise. He expects utilities to increasingly use convertible debt, which investors can later exchange for stock, if rates drift higher for longer.
Keller also noted that the U.S. Department of Energy has pulled back from fulfilling loans for some projects, leading utilities to approach banks for backup project financing. He said he expects more of that activity. Meanwhile, high fuel costs tied to the Iran War and the unresolved question of whether oil prices will fall once the Strait of Hormuz reopens have kept inflation sticky, complicating utility planning.
Data center growth remains a strong opportunity, but some jurisdictions have paused their initial enthusiasm, Keller said. He described the pause as hopefully temporary, while acknowledging that growth must be managed constructively for all parties. On mergers and acquisitions, he said sentiment has shifted since the spring, with no major deals announced since NextEra's May plan to acquire Dominion Energy, as unpredictable interest rates and geopolitics weigh on CFOs' minds.