Tax Reform Creates Near-term Credit Pressure for U.S. Utilities

Proshare

Thursday, January 25, 2018   02.37PM / Fitch Ratings 

The Tax Cuts and Jobs Act signed into law on Dec. 22, 2017 has negative credit implications for U.S. regulated utilities and utility holding companies over the short-to-medium term, according to Fitch Ratings. A reduction in customer bills to reflect lower federal income taxes and return of excess accumulated deferred income taxes is expected to lower revenues and funds from operations (FFO) across the sector. Absent mitigating strategies on the regulatory front, this is expected to lead to weaker credit metrics and negative rating actions for those issuers that have limited headroom to absorb the leverage creep.
 

"We estimate that regulated utilities will, on average, see an approximately 6% reduction in net revenues if the tax rate changes are reflected in customer bills right away. This translates to an approximately 15% reduction in FFO that drives an approximately 45 basis points increase in FFO-adjusted leverage" said Shalini Mahajan, Managing Director at Fitch Ratings.
 

State regulators have begun to examine the impact of tax reform on the regulated utilities in their state. While most state regulators will seek to provide some sort of rate relief to customers, they may be open to a negotiated outcome that also preserves the creditworthiness of the utilities. Management actions to defend their credit profiles are also important in assessing the future rating trajectory of an issuer. Overall, Fitch expects rating actions to be limited and on a case by case basis. Holding companies are more vulnerable given the elevated leverage profile for many driven by past debt funded acquisitions.
 

Over a longer-term perspective, Fitch views tax reform as modestly positive for utilities. The sector retained the deductibility of interest expense, which would have otherwise significantly impacted cost of capital for this capital-intensive sector. The exemption from 100% capex expensing is also welcome news for the sector, which has seen years of bonus depreciation reduce rate base leading to lower earnings. Finally, the reduction in federal income taxes lowers cost of service to customers, providing utilities headroom to increase rates for capital investments.
 

Proshare Nigeria Pvt. Ltd.

Related News
1. Weaker UK Growth Forecasts Highlight Debt Challenge
2. Queen's Speech Cuts Chance of Near-Term UK Utility Reform
3. What A Westinghouse Bankruptcy Could Mean For U.S. Utilities
4. A new Africa energy world: A more positive power utilities outlook

READ MORE:
Related News
SCROLL TO TOP