Although the savings will be passed to customers in some form, the lower corporate rate included in a final tax reform bill from Congress will be a "net positive" for regulated utilities, potentially allowing some to accelerate capital expenditures over time, Wells Fargo LLC said in a Dec. 20 research note.
Republicans in Congress have proposed cutting the corporate rate to 21% from 35% as part of a final tax bill put together by a bicameral conference committee. After stripping some provisions from the bill to comply with budget rules, both the U.S. Senate and House of Representatives voted Dec. 20 in favor of the legislation, which will head to President Donald Trump's desk for signing.
Regulated utilities must pass the benefit of reduced taxes to customers in some way, but Wells Fargo said those entities will still benefit from the lower rate.
"We still view this as a net positive as it lowers customer rates, which, in some cases, could allow utilities to accelerate CapEx over time," the investment firm said.
The lower corporate rate could negatively affect cash flows, however. Wells Fargo said most regulated utilities will see cash flows decrease due to the elimination of bonus depreciation. In addition, lower earnings before interest, taxes, depreciation and amortization from the reduced customer rates may not be matched by lower cash tax payments to the extent some companies are not full cash tax payers, the report said. That dynamic could prompt rating agencies "to downgrade select names" and pressure utilities to issue more equity, according to Wells Fargo.
Moreover, companies with holding company debt will have a lower interest tax shield, while those that lack nonutility earnings may be unable to deduct parent company interest expense, depending on determinations from the Internal Revenue Service. But "companies in this situation have expressed an expectation that tax deductibility will likely be maintained," Wells Fargo said.
Finally, the firm said companies with nonutility operations will experience "an immediate uplift in earnings" tied to the reevaluation of deferred tax liabilities and a lower corporate rate.
Wells Fargo said companies with a "material positive disposition" on the tax reform bill include Exelon Corp., Public Service Enterprise Group Inc. and DTE Energy Co. Companies with negative exposure include Duke Energy Corp. and FirstEnergy Corp., but many of those companies can mitigate the impacts of tax reform through cost-cutting, capital expenditure hikes and greater capital efficiency, among other actions, the report said.
