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The Housing Recovery Bodes Well for Utilities

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As the nascent recovery in the housing market gains momentum, it will boost demand for utilities, which will flow through to their rate base -- and eventually their stocks

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Over the past three years, US corporations have enjoyed the most favorable borrowing conditions in history. Rather than pile on additional debt, however, management's response has been to continue deleveraging. Companies have also taken advantage of historically low rates to refinance maturing debt at much lower interest rates, simultaneously cutting costs and eliminating future refinancing risk.

This month, a unit of "BBB-" rated Ameren Corp (NYSE:AEE) became the latest electric company to sell 30-year bonds at a coupon of less than 4%. "BBB" rated energy midstream master limited partnership Enterprise Products Partners (NYSE:EPD) has bonds maturing Jan. 15, 2068, that now yield just 4.37% to maturity.

Ameren, however, has cut its debt maturing in two years from over 50% of its market capitalization in May 2010 to just 4.4% now. Similarly, Enterprise has cut its debt from over 50% to just 2.5%.

Both companies have used low rates to reduce debt risk, just as American households have done. And the result is both are better positioned to invest and grow than they've been in decades. Additionally, they now have the financial strength to weather a potential shock to the global economy.

The most visible risk to the economy in the coming months is still the so-called fiscal cliff that many fear would result if Congress and the president don't roll back the tax hikes and spending cuts agreed to in last year's federal debt ceiling compromise.

However, it's extremely unlikely that the outcome will be anywhere near as negative as the election-year rhetoric would suggest. In fact, high-placed members of both parties are starting to make clear that a deal will be reached in time to avert a catastrophe, and that the November election is about what kind of deal we'll see.
No positions in stocks mentioned.
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