U.S. Bank's Tim Keller says rising rates complicate utility capital spending

Utility capital spending has been "really well-balanced" against capital structure, with U.S. Bank's utility clients staying "onsides of their credit metrics," managing director Tim Keller said this week, adding the qualification that keeping that balance is "going to be a little more challenging with [interest] rates going higher as quickly as they have." The Federal Reserve raised its benchmark rate on Sept. 16, to 4% from 3.75%, its first increase since 2023, and William B. English, a finance professor at the Yale School of Management, called bond yields "soaring" as the 10-year Treasury yield rose above 5.6% last week for the first time since 2002.

A 2025 analysis by investment firm Redwheel found that U.S. utilities "exhibit a pronounced sensitivity to interest rate movements," with business models "built on long-term, regulated cash flows and capital-intensive infrastructure" meaning higher rates "raise the cost of debt and reduce the present value of future earnings," while independent power producers including Vistra, Constellation Energy and Talen Energy "have largely bucked the trend."

Keller pointed to "the amount of capital" the sector is deploying, describing power and utilities as a business that "has always been a very capital-intensive sector, and that's increasingly the case as capital plans have been ratcheted higher year over year for the last couple years, as a lot of our utility clients are seizing on the AI-driven data center opportunity."

A capital plan that grows on data-center demand now meets a benchmark rate that has just moved up for the first time since 2023, and the discipline Keller credits—sensitivity to capital structure and attention to credit metrics—is what gets tested when the plan grows and the cost of funding it rises. Capital plans were ratcheted higher over the last couple of years, a stretch in which the policy rate did not rise; the first increase since 2023 landed in mid-September, which means plans underwritten inside that window assumed a cost of debt that has now begun to change—the specific pressure behind Keller's caveat.

One funding channel is already thinning: as the U.S. Department of Energy has pulled back from fulfilling loans for certain projects, Keller said he has seen utilities approach banks seeking backup project financing in case the federal money does not come through, and he expects more of it. Federal lending has been a live part of this market—in September, the department backed a $1.9 billion loan for NextEra's Duane Arnold restart, a transaction this publication covered as the third federal bet on a revived reactor and the first anchored to a hyperscaler offtake.

Backup capacity is a different product from a construction loan, and a utility arranging bank financing against a federal loan that may never close is paying for a commitment it might not draw—a cost the DOE retreat imposes even on projects that never needed the federal money—while also shifting project risk from a federal balance sheet to commercial ones at a moment when the price of that risk is rising.

The demand side, in Keller's telling, has held, with U.S. Bank "really, really positively surprised at the resiliency" of the economy and, within it, of the power and utility sector, where he has watched "capital market transactions get larger and larger"; the condition he sets is a market one—"the demand has been there for the supply, and we need that to continue because the plans continue to get adjusted higher."

U.S. Bank's survey of finance chiefs across sectors points the same direction: about 68% of the CFOs rated their three-year outlook positive, up from 58% in the March and April wave, while 41% were positive on the next 12 months, a five-percentage-point gain since the spring. The 27-point spread between the two horizons—optimism that strengthens as the window widens—reads as confidence in a build, not in the next four quarters.

Geopolitical risk was a top concern for 38% of those surveyed, sitting alongside the rate picture rather than against it.

The arithmetic for a regulated utility is uncomfortable and hard to fix: rate-sensitive cash flows have to fund a capital plan that keeps getting adjusted higher, the Fed has started raising again, and the market that has absorbed ever-larger transactions has to keep absorbing them while the federal backstop narrows. The names that escape the squeeze, on Redwheel's reading, are the merchant generators whose earnings are not a rate-base calculation, the same dispatchable assets that have lately been contracted as data-center counterparties rather than priced as rate proxies; in October, Amazon signed a 20-year power purchase agreement with Constellation covering 690MW at Calvert Cliffs and supporting more than $3 billion of investment, including about 190MW of new nuclear capacity due online by 2032.

Keller's phrase for the thing that has to keep working is demand for supply; three numbers will say whether it does: the 10-year yield, whatever the Department of Energy does next with its loan pipeline, and the next round of utility capital plans, which have been ratcheting higher for two years and, on his account, are still being adjusted upward.