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Business & Money

Energy experts debate the pros and cons of the Bush administration's proposal to eliminate the double taxation of dividends.
Fortnightly Magazine - January 15 2003

elimination of taxes on dividend income for individuals and corporations. White House officials have suggested that a dividend taxation only benefiting individuals is a more likely scenario," the company says, in an equity research report.

As to the issue of whether corporations or individuals, or both, should get the tax benefit, Merrill Lynch's Chief U.S. Strategist Richard Bernstein, in a report, says that the more corporations get to share the benefit, the less bullish the tax change could be for the equity market. "It's probably politically unfeasible for corporations to receive the full tax benefit, but we would not be surprised to see corporations lobby to share some of the benefit," he says.

In fact, the American Gas Association in late December called for repeal in three separate letters to the president, the vice president, and the Treasury, but the letter did not specify who should receive the benefit.

Were corporations able to share in the benefit, "firms would find it advantageous to shift the capital structure in favor of equities, away from debt, as the relative cost of equity financing would decline," says J.P. Morgan Equity Analyst Carlos Asilis, in a report.

But would repeal help some of the cash-strapped and debt-heavy energy merchants and diversified utilities teetering on the verge of bankruptcy? Could the repeal be the difference between a downgrade for some and not for others? The answer is a resounding no. Ellen Lapson, managing director at credit rating agency Fitch Ratings, says the utility industry is divided between the haves and the have-nots. "The have-nots are affected by their own bad investments in risky whole markets or those of their affiliates and are most likely to have cut their dividend. Then, there is another set of companies that have not been affected by wholesale events, such as vertically integrated utilities and distributors of gas and electricity," she says.

"The repeal is only going to help those who do not have problems, which are typically the utilities that continue to pay the biggest dividends. From a credit standpoint, [repeal] will be significant to the entire industry over the long run, but it is not likely to have any short-term impact on utility credit," Lapson says. Furthermore, if the repeal were passed today, she believes the dichotomy between the haves and the have-nots would only increase.

Business News Bytes

Ameren Projects Lower Earnings in 2003

Ameren announced that it expects to earn $2.80 to $3.05 per share, below the analyst consensus of $3.14 per share. In a press release, Chairman and CEO Charles W. Mueller says, "Our company and the energy sector as a whole are facing significant economic and market-related changes that we expect will put pressure on 2003 earnings. These challenges include weak energy markets, a soft economy, rising employee benefit costs, and escalating insurance and security costs."

El Paso Reports Strong Liquidity and More Asset Sales in 2003

El Paso Corp. has announced that liquidity stood at $3.4 billion as of Dec. 18. The company said in a release that collateral requirements from recent ratings actions "have