GOP Tax Bill is win for utilities, power, infrastructure, and customers

GOP Tax Bill (GOPTB) looks to be positive for industries and companies in our coverage universe
Key aspects of GOPTB that affect our coverage industries and companies include, but not limited to:
21% corporate tax rate would be expected to reduce deferred income tax liability by some 40%
Interest expense deductibility capped at 30% of EBITDA for 2018-2021 and to 30% of EBIT after
100% investment deduction, except for utilities that would continue to deduct 100% interest
Preservation of existing investment tax credits (ITC) and production tax credits (PTC)
Repatriation of profits tax at 15.5% for cash and equivalent and 8% for non-liquid assets
Base-erosion & Anti-abuse Tax (BEAT) not impactful: If payments to foreign affiliates are 3% or more of a large company’s tax deductions then BEAT is imposed. We do not view this as relevant to companies that we cover, given 100% of PTC would be allowed to offset up to 80% of BEAT
AES Corp. faces large disqualification of interest expense deductibility but given its $3.7B in NOLs, we do not believe this to be an immediate issue; AES has time to remedy the situation:
NRG Energy shouldn’t have any issues with interest expense deductibility:
Exelon Corp. isn’t expected to have any problems with interest expense deductibility:
Cheniere Energy, oddly enough, shouldn’t have any problems with interest expense deductibility:
BKH, CNP, DUK, EIX, PCG, PNM, SRE should not have any issues with interest expense deductibility but may be able to use 100% investment deductibility to create win-win:
We note that the inability to deduct interest expense is limited to $0.21/$1 of lost deductibility
Loss of interest expense deduction could lead to some unexpected corporate behavior

Conclusion: Net effect of GOPTB looks to be positive, more so if utility holding companies are permitted to use non-utility subs to take advantage of the 100% capital investment deduction

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Corp. tax cut from 35% to 15% leads to 20%-30% upside; 2017 Outlook

• President-elect Trump has promised a corporate tax cut from 35% to 15%; if this tax cut is enacted, we believe that share prices should rise by some 20%-30%, but not likely for utilities
• Even if non-utility companies don’t change their growth/investment plans, we believe that the change in tax rate would accelerate their growth profile by giving these companies the ability to take the excess cash to pay-down debt faster or by earning interest income on the higher cash balance; however, we feel that it would be difficult to quantify the acceleration in growth profile unless specific plans are known
• If companies invest more than their depreciation expense then their P/E-multiple are likely to increase with a cut in tax rate, while investing less than their depreciation expense looks to reduce their P/E-multiple with a cut in tax rate; however, we feel that it would be difficult to quantify the actual change without knowing specific investment plans and depreciation expenses
• We set up a simple example to demonstrate our thesis:

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