Congress Spreads Some Cheer
On Dec. 18 President Obama signed into law the Consolidated Appropriations Act, 2016. This $1.15 trillion spending bill funds the federal government through next September and has big implications for the energy sector.
There are two provisions which are of most importance to energy investors, and more specifically income investors. The first is the extension of tax credits for wind and solar power.
Originally enacted in 1992, the Production Tax Credit (PTC) is a subsidy for electricity generated from renewable sources. The separate solar Investment Tax Credit (ITC), is a 30% federal tax credit for the capital cost of solar systems on residential and commercial properties. The ITC had been due to expire at the end of 2016.
These tax credits have been targeted for elimination by Republicans critical of their cost. Democrats, on the other hand, were staunch supporters on environmental grounds and based on the notion that fossil fuel producers enjoy offsetting subsidies. So Republicans traded an end of the 40-year old crude oil export ban for a long-term extension and then a phaseout of these tax credits.
The new law calls for the PTC for wind energy to remain in effect through 2016, but then gradually phases it out in 2017, 2018 and 2019 before expiration in January 2020. The ITC for solar will continue at the current 30% level for both commercial and residential systems through 2018; then it begins to phase out and settles at 10% in 2022.
These subsidies are now due to sunset just before the first set of state compliance deadlines for the EPA’s Clean Power Plan (CPP) come into effect in 2022. The CPP will require a 32% cut in utility-sector carbon emissions from 2005 levels by 2030. Utilities will likely begin investing significantly in wind and solar power to meet these mandates.
The new legislation’s impact on the renewable power sector will be broad and swift. Renewable energy shares have already risen sharply in the wake of the bill’s passage. The beaten-down solar yield “yieldco” vehicles should garner a lasting boost. The one we currently recommend, TerraForm Power (NASDAQ: TERP), has gone sideways over the last two weeks but remains an attractive value.
8Point3 Energy Partners (NASDAQ:CAFD), the joint First Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR) yieldco, rose more than 20% in the days following the bill’s passage. Others whose prospects have notably improved thanks to the legislation include NRG Yield (NYSE: NYLD), TransAlta Renewables (TSE: RNW) and Pattern Energy Group (NASDAQ: PEGI, TSE: PEG) all of which have also rallied of late.
The second provision of importance to investors is the repeal of the crude oil export ban. The U.S. has had one in place since 1975, one of a number of measures adopted at the time to forestall future oil crises. The ban made it difficult to ship crude oil to countries other than Canada. The shale oil boom created a glut of light, sweet crude in the U.S. Domestic refiners that had invested billions to process imported crudes that were becoming heavier and more sour year after year were suddenly awash in light, sweet crude oil from the shale oil plays.
U.S. crude oil producers have had to sell their product to U.S. refiners, who were happy to refine the discounted crude and then export the finished fuel products at full price, in competition with foreign rivals facing significantly higher input costs. Refiners had lobbied hard to preserve the export ban, while crude producers spent freely to get it repealed.
The repeal is a clear loss for domestic refiners and a gain for the oil producers. MLP investors in these sectors should take note. Just about every shale oil producer in the country will be a long-term beneficiary provided it survives until oil prices recover.
Less obvious may be the midstream beneficiaries. Those with good connections to, and storage on, the U.S. Gulf Coast should benefit. In particular, the owners of major pipelines from the crude oil storage hub at Cushing, Oklahoma leading to the Gulf Coast should do well.
One of the midstream MLPs with good connections from Cushing is Enterprise Products Partners (NYSE: EPD). The partnership recently announced that it will likely become the first company to export US oil following passage of the export ban repeal. The 600,000-barrel cargo of domestic light crude oil is scheduled to load at the Enterprise Hydrocarbon Terminal on the Houston Ship Channel during the first week of January. The crude was purchased by the Dutch trading company Vitol Group and is destined for a Vitol subsidiary’s refinery in Cressier, Switzerland
However, not everyone is as well-positioned as EPD to benefit from the new law. Join us at MLP Profits in 2016 as we continually update recommendations in response to new legislation and longer-term trends in the fast-moving commodity markets.
Tepper Presses SunEdison Over Yieldco Coups
If I were a famous hedge fund manager looking for a soft target to bully while still getting paid for lending it my capital, I could hardly do better than SunEdison (NYSE: SUNE).
Actual famous hedge fund manager David Tepper must have come to the same conclusion, because he’s been complaining loudly about the recent coup that allowed SunEdison to get some badly needed cash from its yieldco affiliates.
Tepper’s fund has accumulated a stake of nearly 10% in one of these yieldcos, TerraForm Power (NASDAQ: TERP), and while it’s not required to report its short sales, hedging TERP’s 11% yield with a bet against overextended and non-yielding sponsor SUNE wouldn’t be the dumbest idea.
Then one could publicise one’s objections to the yieldcos’ recent SUNE-orchestrated boardroom coups, demand that the company release further information to be used as ammunition against it and game the stock’s resulting volatility in holiday-thinned trading.
Tepper gets to talk his book and look righteous while doing so at the expense of a management whose machinations look legal but unseemly.
TERP is an Aggressive Portfolio buy below $14. SUNE remains a buy on pullbacks below $4.75, mostly as a spec play on an eventual buyout that would shift its assets to a new owner with deeper pockets and greater credibility.
— Igor Greenwald