Business & Money

Deck: 
The economic downturn is increasing utility pension plan costs and liabilities.
Fortnightly Magazine - January 1 2003
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Pension Plans May Slow Utility Growth in 2003

 


 

The economic downturn is increasing utility pension plan costs and liabilities.

While 401(k) stock option plans have increasingly displaced traditional pension plans in corporate America, many mature firms like electric utilities are still administering sizeable pension plans that in the recent economic downturn could compromise future earnings, according to a report by investment bank CIBC World Markets (CIBC).

William D. Hyler, utilities analyst at CIBC, finds that, "With a majority of companies targeting mid-single-digit growth rates, changes in pension-related expense items can meaningfully impact growth rates, hence dividend discount models. [Barring a major market recover], with payout ratios for many companies already rising in the wake of the earnings shortfalls, pension-related issues could affect the impact on future dividend growth." He adds that even FASB accounting rules that smooth out performance swings may not help some companies in the current market climate.

Utilities that have witnessed the largest positive swing in pension credits function of the growth in overfunded positions through 2000) are seen most vulnerable moving forward (see Table 1), the report says.

"We note that many utilities have benefited to the point that the pension line has contributed a meaningful percentage of reported earnings per share in recent years. However, even companies that continued to generate net pension expense will likely be negatively affected as the level of expenses rise," Hyler writes.

In addition, companies with significant underfunded positions (liabilities) could face rising future cash flows to fund plans in the future (see Table 2).

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