Lack of Canadian tax competitiveness discourages even renewable energy
You know Canadian competitiveness is in big trouble when even investors in renewable energy – favoured by Canadian governments through subsidies, plus carbon taxes and regulatory overload on competing fossil-fuel energy — are leaving because they like lower U.S. taxes even more.
Juno Beach, Fla.-based NextEra Energy Partners LP said Monday the sale of its wind and solar generation assets in Ontario to the Canada Pension Plan Investment Board for US$582.3 million was specifically motivated by U.S. tax reform.
“We expect the sale of the Canadian portfolio to enable us to recycle capital back into U.S. assets, which benefit from a longer federal income tax shield and a lower effective corporate tax rate, allowing NextEra Energy Partners to retain more … in the future for every $1 invested,” Jim Robo, chairman and chief executive officer, said in a statement.
“We expect to accretively redeploy the proceeds from this transaction to acquire higher-yielding U.S. assets from either third parties or NextEra Energy Resources.”
The transaction includes the sale of six fully contracted wind and solar assets in Ontario with an average contract life of approximately 16 years and a combined total generating capacity of approximately 396 megawatts. The assets are wind generators Bluewater, Conestogo, Jericho, and Summerhaven, and solar generators Moore and Sombra.
For its part, CPPIB said the purchase gives it immediate scale in a sector where it wants to grow.
“Since December 2017, CPPIB has committed to wind and solar investments in Brazil, India and now Canada,” said Bruce Hogg, managing director and head of power and renewables.
“As power demand grows worldwide and with a focus on accelerating the energy transition, we will continue to seek opportunities to expand our power and renewables portfolio globally.”
Dan Tsubouchi, chief market strategist at Stream Asset Financial Management LP in Calgary, said the NextEra deal is the first he’s seen in the energy sector related specifically to taxation, but it should surprise no one and is likely the first of many.
Murphy Oil Corp. has also said it would repatriate Canadian retained earnings and that it sees the substantially lower tax rate in the U.S. as a big advantage for capital reinvestment.
Oil and gas companies with assets in Canada waited for the Canadian government to respond to U.S. tax reforms in the federal budget but when “it offered nothing on tax competitiveness,” the next step was to look at redeploying their capital, he said. In addition to reducing corporate taxes, the U.S. is allowing companies to immediately write off the full cost of new machinery and equipment, making the U.S. advantages hard to resist, Tsubouchi said.
“There will be more similar transactions in 2018,” he predicted. “It’s not just M&A that is being impacted, it will be capital allocation between Canada and the United States for U.S. companies and Canadian companies that operate on both sides of the border.”
Encana Corp., Crescent Point Energy Corp. and Enerplus Corp. could also favour U.S. plays versus Canadian plays; while companies like ConocoPhillips and Exxon Mobil Corp. could decide to sell Canadian non-core assets, he said.
RBC president and CEO Dave McKay told the Canadian Press that a “significant” investment exodus to the U.S. is already underway, especially in the energy and clean-technology sectors.
Latest data from Statistics Canada shows foreign direct investment in the country dropped to $31.4 billion last year, compared to $49.4 billion the year before.
The oil and gas sector is vulnerable to such capital transfer because the Canadian/U.S. business is highly integrated. The tax angle worsens Canada’s already depressed conditions versus the U.S. industry due to energy infrastructure bottlenecks and more stringent environmental regulations in Canada.
Convinced that an energy transition from fossil fuels to green energy is under way, the federal government hasn’t seemed too concerned about the decline of Canadian oil and gas. It should be concerned, however, that lack of tax competitiveness is bad for businesses across the board, even in those sectors it wants to grow.
Financial Post