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Gas utilities see cash constraints, chance for investment under new tax law

Gas utilities expect near-term cash constraints from federal tax code changes as customers pay less and corporate deduction options become more limited, but some companies are hoping that the lower corporate rate will open capital investment opportunities.

The federal tax overhaul reduces the corporate tax rate to 21% from 35% starting in 2018, but utilities' taxes are passed along to consumers, so the lower corporate rate will translate to lower customer bills, resulting in less money flowing through to utilities. The code revisions also affect bonus depreciation, by which companies can more rapidly deduct the value of business assets, again cutting into expected access to cash.

PG&E Corp. officials said the changes to the tax code will cut the revenue the company collects from its customers by about $500 million per year.

"While the lower corporate tax rate will reduce federal tax payments in the long run, the elimination of bonus depreciation accelerates the amortization of our net operating loss carry-forward," Jason Wells, PG&E's senior vice president and CFO, said during the company's earnings call. "This results in PG&E becoming a federal cash taxpayer in 2020, which is a year earlier than our previous expectation of 2021." PG&E has 4.3 million natural gas customer accounts and 5.4 million electric customer accounts in California.

Altogether, PG&E expects the tax code changes to increase the company's equity needs by about $200 million in each of 2018 and 2019.

At Atmos Energy Corp., which has more than 3 million gas customers across several states, executives said the reduction in operating cash flow related to the tax code changes will increase financing needs by $500 million to $600 million through 2022.

Lower cash flow and possibly higher equity needs may affect utility companies' credit ratings. Spire Inc., which owns gas utilities in Missouri, Mississippi and Alabama, is working with regulators and credit ratings agencies to minimize the negative effects of the decreased cash flow on the company's credit, executives said.

"We've been clear from the start: The tax reform does impact our [funds from operations]," Steven Rasche, Spire's CFO, said during the company's most recent earnings call. "I'm confident that we are going to find the right combination of both regulatory relief and also the other tools that we and every public company has in our toolbox to make sure that we can get inside the metrics that make sense to support our current credit metrics."

But Rasche also sees the potential for the cuts to customers' bills to open up opportunities for investments in infrastructure. While Spire has not worked out such an arrangements, Rasche noted that some regulatory jurisdictions have indicated plans to use the benefits to customers to create programs to pay for capital spending projects.

NiSource Inc., which operates gas utilities in seven states, also sees opportunity in expected customer rate reductions from the tax code changes.

"In Ohio, we expect to include customer benefits from tax reform as part of our discussions around the capital expenditure program filing that requests the rider to recover deferred capital investments made since 2011, in which are not being recovered under the existing infrastructure modernization tracker," Joseph Hamrock, the parent company's president and CEO, said during NiSource's Feb. 20 earnings call. "These efforts, as well as others across the remaining jurisdictions, will take shape over the next six months or so."

Hamrock said he sees these efforts as a way for NiSource to keep its credit ratings up and meet its commitments to shareholders.

At the same time, the decrease in bonus depreciation can increase the value of companies' rate bases because the utilities will not be deducting the value of their assets to the same degree, Northwest Natural Gas Co. officials said during the company's most recent earnings call.

Companies with nonregulated business segments — such as Dominion Energy Inc., Spire and South Jersey Industries Inc. — noted that the corporate tax cuts should benefit earnings.

South Jersey executives deemed the tax regulation changes a "straight benefit" for the nonregulated businesses, while Spire officials said the tax code change translated to a $60 million benefit for the fourth quarter of 2017 because of lower GAAP tax expenses. Dominion Energy executives see lower tax rates improving the profitability of the company's nonregulated and long-term-contracted businesses.