New power plant regulations announced by President Obama require that carbon emissions be reduced by 32% by 2030. Capital Alpha Partners has released a report, available here, that offers good background information, links to the new rules themselves and other sources, and provides a thorough analysis of the likely effects of the rules.
The rules will precipitate important changes for market sectors. In the utility space, they are likely to be positive, since clarity is replacing uncertainty. There is still the congressional process ahead, but the direction is now better known. We are overweight the utility sector in our US ETF accounts.
In the MLP space the outcome is different and depends on the subsector. I've been asked about coal MLPs, which we do not own.
I’ve asked Rick Daskin, our sub advisor on MLPs, to explain our reasoning with regard to coal.
Why we don’t own any exposure to coal MLPs
In Cumberland Advisors’ MLP strategy we do not currently have exposure to coal mining companies. Previously we did have a small exposure to AHGP (Alliance Holding GP), which is one of the strongest companies in the space. We sold it out months ago. Here is why.
For background, there are two basic kinds of coal. One type is used as a fuel source for heat and electricity. This is thermal coal. The other type is used in the production of steel and is called metallurgical coal. Our small exposure was to thermal coal. Alliance Holdings had large holdings in the Illinois basin, close to coal electric plants and with a fairly low cost of production. The micro conditions for this company, all things considered, were not bad. But we decided that the competitive landscape did not favor coal companies, either metallurgical coal or thermal coal. Metallurgical coal as an input to iron and steel is highly cyclical and subject to the vagaries of the price and demand for steel. Demand for steel has slowed with the slowdown in China’s growth. Thermal coal in the United States has formidable competition from natural gas, due both to the very attractive price of natural gas as a fuel for electric generation and to looming pollution regulation emanating from Washington requiring utilities to reduce greenhouse gases and other types of pollution. We could see that natural gas was in a supply surplus, likely to last a few more years. Demand for natural gas and thus prices will eventually rise, in our view, from new markets, principally exports, and the location of new chemical plants in the Gulf of Mexico area of the US. However, we also believed it would not be sufficient and timely enough to overcome the additional regulatory headwinds to help the coal industry.
As a result, we sold Alliance Holdings GP LP (NASDAQ:AHGP). Below is the entry to our investment log when we sold the position around 4/21/2015:
Reviewing AHGP holding
Given the MLP market correction, it is an appropriate time to review this holding, as there are other reinvestment opportunities if it does not make sense. Thermal coal continues to compete with natural gas as a fuel for electric generation but is challenged by pollution control regulation. AHGP is a small holding in our strategy.