Shares of Renewable Energy Group (REGI) gained as much as 12.5% today ahead of an important deadline in Washington. Lawmakers are working on a new federal spending deal before funding runs out this Friday. However, in order to have time to introduce, review, and vote on a new spending plan, lawmakers need to finalize the bill by the end of the day today (Dec. 16).
According to reporting by Bloomberg, lawmakers have been negotiating extensions to several tax credits, including the federal biodiesel mixture excise tax credit (BTC) for biodiesel and renewable diesel producers, that could be included in the federal spending bill. The BTC provides a $1-per-gallon tax credit for the first entity to blend biodiesel with petroleum-based fuel (usually the biodiesel producer), but it was allowed to expire on the last day of 2017.
Discussions over the weekend included proposals to retroactively reinstate the subsidy to cover all production starting from the first day of 2018 and extend the subsidy through the end of 2020. That would be the best-case scenario for Renewable Energy Group. As of 12:58 p.m. EST, the renewable energy stock had settled to a 12% gain.
The loss of the subsidy, unfavorable selling prices, and higher-than-usual input costs have combined to create a difficult margin environment this year. In the first nine months of 2019, Renewable Energy Group reported an operating loss of $104 million and operating cash outflow of $77 million.
However, the BTC has been retroactively reinstated each of the half dozen times it has expired in the past. That has prompted management to report both actual results (no BTC) and hypothetical results (if the BTC was active) for the last seven quarterly periods. Renewable Energy Group estimates that all production from the first day of 2018 through the end of September 2019 would have generated tax credits of $450 million total.
It's encouraging that there's strong bipartisan support for reinstating the BTC. If lawmakers agree this week to retroactively reinstate the subsidy, then Renewable Energy Group will collect a cool $450 million windfall (likely in early 2020).
It could use the funds to pay down debt and go all in on expanding production of renewable diesel, which is a premium fuel compared to biodiesel and likely the future of the company. Investors will know relatively soon -- lawmakers need to hammer out the details before the end of the day today. If the status quo remains, then the business will likely continue to struggle for the foreseeable future.