A Feb. 21, 2017, report by Bloomberg cites the significant potential negative earnings impact that some utility investors are being warned about, by the likes of Duke, Entergy, PPL, and NextEra Energy, due to concerns about tax reforms being “floated in Washington.” The reforms could impact utility earnings and cause utilities to cut dividends as a result.
The Trump tax reform announcement references a laudable concern, namely “Reducing or eliminating some corporate loopholes that cater to special interests.”
Interest expense, for many utilities, can range from 6 percent to 11 percent of annual revenue. And the fact that growth rates for utilities are low does not give them the same leeway they had in prior decades to repair and replace expensive, aging capital equipment and be assured of earning expected returns for those expenditures.
The nuances associated with this tax deduction for interest expense are not to be underestimated. The Bloomberg piece mentions a NextEra claim that the tax exception elimination could contribute to a cut in earnings of 10 cents to 15 cents a share, and Chief Executive Officer James Robo stressed in a call with investors that it’s “important for lawmakers proposing tax reforms to ‘get it right.’”
“Utilities are particularly dependent on the deduction because of the heavy debt loads they carry to pay for power plants and transmission lines. Its elimination would hit an industry that, facing weakening power demand, is consolidating and seeking financing for multibillion-dollar takeovers. The proposal also threatens to shrink dividends that investors have come to rely on during times of market volatility, and trade group Edison Electric Institute warned it could lead to higher utility bills.”
The full article is available at: Tax Break Long Coveted by Utilities Threatened by Reform.