U.S. tax reform reenergizes equity markets for utility companies

Reuters

Published Jun 12, 2018 11:42AM ET

U.S. tax reform reenergizes equity markets for utility companies

By Joshua Franklin

NEW YORK (Reuters) - U.S. utility companies in 2018 are selling new stock at the fastest clip in at least a decade after tax reform passed last year left many with a cash-flow shortfall they needed to plug.

By the start of June utility companies had issued almost $10 billion of common stock, by far the largest amount for this point in the year since the financial crisis, Thomson Reuters data showed.

The need to issue equity highlights how tax reform, viewed by many as a giveaway to corporate America, has come at a price for certain utility companies, diluting the holdings of some shareholders and delivering a hit to credit positions.

"In the short term, tax reform has been viewed as credit negative for the utility industry," said Ann Bulkley, senior vice president at Concentric Energy Advisors, an energy consulting firm.

The tax bill, enacted in December, tightened the pace at which some firms can write down past investments. State governments meanwhile responded to the bill by ordering utilities to pass on the tax cuts to customers.

For graphic on surge in demand click https://tmsnrt.rs/2Jtrg9M

Both resulted in less cash on hand for some companies to pay for new projects to replace aging infrastructure, industry experts said.

"Tax reform turned the industry on its head," said Ray Craig, head of JP Morgan's (N:JPM) power and utilities equity capital markets.

"We've seen discrete equity issuance in the sector around M&A activity in the past. This is the first time in years where there have been discrete equity offerings to strengthen the credit metrics and strengthen the balance sheet."

Equity raisings have come so far from the likes of Dominion Energy (N:D), Duke Energy (N:DUK) and Entergy Corp (N:ETR).

"Given that tax reform has changed the cash flow dynamic, more of the capital expenditure needs will have to be funded by equity than they had previously thought," Craig said.

Not all companies have sold shares to meet cash flow needs. Southern (N:SO) had the chance to sell some utilities at an attractive price, which had the ancillary effect of boosting cash flow.

To be sure, utility companies have welcomed the lower corporate tax rate and the continued ability to deduct an uncapped amount of interest payments from taxable income.

Southern Chief Executive Tom Fanning said tax reform overall is a boost.