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U.S. Regulated Utilities' Credit Metrics Could Strengthen Under Proposed Biden Tax Plan

Though most U.S. corporations financially benefited from the Tax Cuts and Jobs Act of 2017 (TCJA), which enhanced cash flow by lowering the corporate tax rate to 21% from 35%, many U.S. regulated utilities saw their credit measures weaken. This is because utilities fully recover their income tax expense from customers, and the reduced tax rate led to a decline in FFO. A further reduction in the industry's FFO reflected increased cash taxes paid, as utilities lost the ability to accelerate the deductibility of capital expenditures beyond typical modified accelerated cost recovery system (MACRS) depreciation. Collectively, these changes to the tax code weakened the utility industry's FFO to debt by about 200 basis points (bps).

Table 1

The Influence Of TCJA Provisions On U.S. Regulated Utilities And Holding Companies
Tax provision Benefit or burden Effect
Lower corporate tax rate Burden For utilities, revenue requirement was reduced. The benefit of a lower rate was passed onto ratepayers. Holding companies then lost the cash flow from differences between the statutory rate and their effective rate.
Loss of accelerated deductibility of capital expenditures Burden Utilities lost the opportunity to gain cash flow from tax-based stimulus. The effect on holding companies depended on their mix of utility and nonutility operations.
No Alternative Minimum Tax (AMT) Benefit Utilities and holding companies didn’t have to use their net operating loss carryforwards or tax credits to offset an AMT.
Source: S&P Global Ratings.

U.S. Democratic presidential candidate Joe Biden has proposed to roll back some of the provisions of the TCJA and highlighted the extension of renewable energy tax credits as a key agenda item. Based on what we know so far, the main proposals under the Biden tax plan most applicable for regulated utilities would include:

  • An increase in the statutory corporate tax rate to 28% from 21%;
  • A 15% minimum tax on book income of companies reporting net income greater than $100 million; and
  • Possible extensions of renewable energy tax credits, particularly for solar investments.

Table 2

Impact Of Key Biden Corporate Tax Proposals On Regulated Utilities And Holding Companies
Tax proposal Benefit or burden Effect
Increased corporate tax rate Benefit Revenue requirements could be increased and utilities will gain cash flow, lowering the difference between the statutory and effective tax rate.
Reinstatement of AMT Burden Companies’ minimum taxes would be increased, which could lead to a reduction in NOL and tax credit carryforwards.
Extension of Renewable Energy Tax Credits Benefit Utilities could benefit from the opportunity to gain cash flow from tax-based stimulus.
NOL--Net operating loss. Source: S&P Globlal Ratings.

How Increased Tax Rates Will Affect Utilities

Overall, we view the tax policy proposals outlined under Biden's tax plan as potentially beneficial for the utility industry's credit metrics, depending on the tax position of each company. Of the proposals, the flow through of the increased tax rate to customers could be the most significant change for utilities because it could materially increase FFO. Because of the higher tax rate, we expect cash taxes paid by regulated utilities to also increase; however, we expect utilities will offset this by using various tax credits and NOLs. For the utility industry, we expect FFO to debt to increase by about 100 basis points.

Table 3

Estimated Financial Impact For Utilities Of An Increase In The Corporate Tax Rate
S&P Global Ratings-adjusted metric Net impact For credit metrics
EBITDA and FFO Positive
Cash taxes Negative
Post-retirement benefit obligations* Positive
Asset retirement obligations* Positive
*We are holding all other factors for post-retirement benefits obgligations (PRBOs) and asset retirement obliigations (AROs) constant. S&P Global Ratings tax-adjusts PRBOs and AROs when adding them to its adjusted debt figures, so an increase in the effective tax rate would lower these adjustments holding other factors, such as anticipated investment returns on plan assets, constant. Source: S&P Global Ratings.

Tax Credits And The AMT

The Biden proposal seeks to reinstate the corporate AMT at a rate of 15% of book income for companies with net income greater than $100 million, which could increase the taxable income for many utilities. However, we believe the full effects of such a proposal are difficult to fully determine. Many utilities have significant net operating loss and tax credit carryforward positions, and heavy investments in renewable energy capital projects that are eligible for production and investment tax credits. We expect that many utilities will continue to benefit from these tax deductions/credits, keeping them in tax-advantaged positions over our ratings outlook period even if the AMT is reinstated to 15%.

Table 4

Select Companies' Alternative Minimum Tax Based On Year-End 2019
FY 2019 earnings before tax (A) Net income FY 2019 Current federal taxes FY 2019 (B) Taxes at 15% of earnings before tax FY 2019 (C) = A x 15% Estimated AMT payable (D) = C - B Estimated deferred tax assets related to federal tax credits and NOL carryforwards FY 2019 Estimated net AMT payable after tax credit and NOL carryforwards
Mil. $

Duke Energy Corp.

4,097

3,748

(299)

615 914 3,622 0

Southern Co.

6,527

4,739

156

979 823 1,751 0

Exelon Corp.

3,802

2,936

85

570 485 891 0

Dominion Energy Inc.

1,727

1,358

32

259 227 1,374 0

American Electric Power Co. Inc.

1,907

1,921

(7)

286 293 247 46

Sempra Energy

2,313

2,197

0

347 347 1,787 0

PPL Corp.

2,155

1,746

(10)

323 333 707 0

Consolidated Edison Inc.

1,736

1,343

0

260 260 904 0

FirstEnergy Corp.

1,117

912

(16)

168 184 450 0

Xcel Energy Inc.

1,500

1,372

(16)

225 241 639 0

DTE Energy Co.

1,324

1,169

(184)

199 383 1,437 0

Eversource Energy

1,190

909

57

179 122 4 117

Evergy Inc.

783

670

(40)

117 157 549 0

Ameren Corp.

1,016

828

(4)

152 156 25 131

American Water Works Co. Inc.

833

621

0

125 125 141 0

NiSource Inc.

507

383

0

76 76 659 0

Alliant Energy Corp.

626

557

(7)

94 100 416 0
To determine taxes at 15% of earnings at FY 2019 we multiply FY 2019 earnings before tax by 15%. To determine AMT payable we subtract current federal taxes FY 2019 from taxes at 15% of earnings before taxes FY 2019. NOL--Net operating loss. Source: S&P Global Ratings.

It All Hinges On Utilities' Management of Regulatory Risk

We expect that an increase to the U.S. corporate tax rate will likely result in a higher customer bill. This could complicate regulators' decisions, potentially affecting a utility's longer-term ability to effectively manage regulatory risk. Should the Biden tax plan be implemented, utilities would have to work effectively with their regulators to avoid overburdening the customer bill. This is especially true in the current economic environment that has been so constrained by COVID-19.

This report does not constitute a rating action.

Primary Credit Analysts:Sloan Millman, CFA, New York + 1 (212) 438 2146;
sloan.millman@spglobal.com
Gabe Grosberg, New York (1) 212-438-6043;
gabe.grosberg@spglobal.com
Kyle M Loughlin, New York (1) 212-438-7804;
kyle.loughlin@spglobal.com

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