By Ezequiel Minaya
A flurry of regulated gas and electric utilities are passing
savings stemming from the recent tax overhaul to their customers, a
move welcomed by consumers but met with concern by credit ratings
analysts.
Utilities' tax payments, alongside other operating costs, are
built into retail rates and paid for by customers. Now that the
federal government has slashed the corporate tax rate to 21% from
35%, utilities will pay less tax, which will need to be reflected
in revised rates.
Rate changes will save a few dollars off the average customer's
bill. Although state authorities may give regulated utilities
little choice but to return tax savings to customers, credit
markets may still penalize the sector for the diminished cash
flow.
Moody's Investors Service Inc. reduced the outlook for 24
regulated utilities and utility holding companies to negative from
stable in January, saying they would be adversely impacted by tax
reform.
"If [cash flow]'s going to be smaller, to us the financial risk
has gone up," said Toby Shea, a senior credit officer at Moody's
who covers utilities.
The sector relies on borrowing large amounts of money to build
and maintain infrastructure such as power plants and transmission
lines. The steady stream of customer bill payments underpins
utilities' credit ratings, which in turn dictate their cost of
debt.
Regulated utilities will also have to refund some of the tax
payments they've collected from customers based on the 35% rate,
but haven't yet passed to the federal government. Companies can
refund this cash over years.
Utility holding company National Grid U.S. expects a non-cash
tax credit of $2 billion in 2018 as a result of the lower tax rate,
said Peggy Smyth, the company's finance chief.
"It's going to be returned to customers over a period of 20 to
30 years, " Ms. Smyth said.
National Grid's subsidiaries in New York, Massachusetts and
Rhode Island have requested more modest rate increases with a total
of $131 million in cuts linked to the new federal tax
legislation.
To do so, regulated utilities submit proposals to state public
utility commissions which approve retail rates. The calculation
allows companies to recover from customers the cost of providing
service including expenses like fuel, operations, depreciation and
income tax.
National Grid's New York customers will see first-year increases
of only 1.7% for electric and 2.4% for gas rates, as opposed to the
13% and 14% originally proposed, said James Denn, a spokesman for
the New York State Department of Public Service, the state's
utility regulator.
"It's the right thing to do for our customers," Ms. Smyth said.
"We view that as a pass-through cost and to the extent that the tax
rate is going down, we are going to build that into the new
rates."
Since January, more than a dozen utilities in states including
Massachusetts, Oregon, Florida and New York have made similar
moves.
The latest company was Duke Energy Corp. The utility's
subsidiaries in North Carolina last week filed paperwork with local
authorities seeking permission to cut retail rates or use its tax
savings to defray the cost of storm-related recovery efforts.
"Tax reform has presented us a unique opportunity to reduce
customer bills in the near term, while also helping to offset
future rate increases," said Steven Young, Duke Energy's finance
chief.
NextEra Energy Inc. subsidiary Florida Power & Light, or
FPL, last month said it plans to use its tax savings to pay for
$1.3 billion in recovery costs from Hurricane Irma. Though
customers won't see those savings, they will be spared a rate
increase.
"Yes definitely, that would be a help," said Zulay Fagre, a
property manager in South Florida and FPL customer. Ms. Fagre and
her husband support a family of six on $58,000 a year and keep a
tight budget. "I watch every penny," she said.
But other implications of the new tax law, including how credit
markets view the revised cash-flow of utilities, are less
clear.
"We're still reviewing the full impact of the legislation and
we're talking with our regulators and everything will depend on the
outcome of those discussions," said National Grid's Ms. Smyth,
adding that company leaders see the tax event as "economically
neutral."
Ratings firms are not as optimistic. The possible impact of tax
reform has triggered increasing scrutiny across the sector, said
Gabe Grosberg, director of S&P Global's North America regulated
utility team. S&P Global rates some 200 regulated
utilities.
"We look at each company," he said. "Some have sufficient
cushion, others don't have the cushion we are looking for." Earlier
last month, S&P changed its outlook for Dominion Energy Inc., a
Virginia-based gas-and-power company, to negative from stable.
The soured outlook means that there is at least a one in three
chance that the company's current triple B+ rating will be
downgraded within the next two years, Mr. Grosberg said. A lower
credit rating can result in higher interest rates, and therefore
higher payments on new or refinanced debt, though broader bond
market forces can temper that impact.
A spokesman for Dominion declined to comment.
Write to Ezequiel Minaya at ezequiel.minaya@wsj.com
(END) Dow Jones Newswires
February 07, 2018 05:14 ET (10:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.