The impact of ownership structure on financing of U.S. energy utilities: An empirical investigation

The benefits of becoming a holding company have been scrutinized in several research papers. While some of the research findings were in favor of holdings, others favored standalone business structures and suggested that holdings were not financially beneficial. This paper attempts to evaluate this for the U.S. energy utility companies with their distinct characteristics. To quantify the bond-spread differences attributable to the business structure, we separated the outstanding bonds issued by standalone and holding energy utility companies and compared their yield spreads, controlling for the risk ratings, maturities, and issue sizes of debts. As yield spread computations of callable bonds require special attention due to provisions allowing early retirement, we employed option-adjusted spreads (OAS), incorporating the risk attributable to debt as well as cash-flow-related contingencies. After obtaining the option-adjusted yield spreads of outstanding stand-alone and holding energy utility company bonds separately, we used these values in a master regression equation to test the statistical and economic significance of the binary variable separating the yields of the two sets. Our work finds that when the S&P ranks and maturities are controlled, stand-alone utility companies finance with a slightly higher cost of credit compared to energy utility holdings. This work is the first empirical evaluation of the impact of business structure on the cost of debt financing of the U.S. energy utility holding companies.