Texas Blackout Boosts Macquarie Bank By Up To $270 Million

The deep freeze that plunged millions of Texans into darkness is rippling through energy markets in unexpected ways, producing a financial windfall for Macquarie bank and severe pain for other companies caught up in the disruption.

The extreme weather froze wind turbines and oil-and-gas wells, closed oil refiners and prompted power stations to trip offline, sending a jolt through energy markets. Wholesale power prices rocketed, as did spot prices for natural gas in Texas, Oklahoma, Kansas and Arkansas.

The turbulence led to a bonanza for commodity traders at Macquarie Group Ltd., whose ability to funnel gas and electricity around the country enabled them to capitalise on soaring demand and prices in states such as Texas.

The bank bumped up its guidance Monday for earnings in the year through March to reflect the windfall. It said that net profit after tax would be 5% to 10% higher than in the 2020 fiscal year. That equates to an increase of up to $273.1 million. In its previous guidance, issued Feb. 9, Macquarie said it expected profits to be slightly down on 2020.

“Extreme winter weather conditions in North America have significantly increased short-term client demand for Macquarie’s capabilities in maintaining critical physical supply across the commodity complex, and particularly in relation to gas and power,” the bank said.

Macquarie’s windfall shows how big profits can be made wagering on relative scarcity of natural gas in a country awash in the fuel.

The U.S. shale-drilling boom unleashed so much gas over the past decade that prices have been depressed to the point that producers with gushers have gone bankrupt. Yet gas buyers, such as power plants and manufacturers, are routinely left paying surging prices when demand peaks during winter storms.

Behind such instances of energy feast and famine is a gas infrastructure system that has failed to keep up with all the drilling. Pipelines laid decades before the shale boom are often in the wrong places, or too small to meet today’s demand. Having space reserved on certain pipelines can become incredibly lucrative when uncharacteristic weather causes swells in demand.

Scarcity in Texas and the Great Plains was amplified last week when temperatures dropped low enough to freeze shut many of the region’s gas wells and other energy infrastructure. Capacity on pipelines into the region became precious. Traders and energy firms that had paid in advance for the right to use these supply routes were suddenly in position to rake in huge profits as utilities vied for fuel deliveries.

Macquarie describes itself as the second-largest marketer of physical gas in North America behind BP PLC, with a team in Houston and access to 80% of pipelines spanning the U.S., according to a person familiar with the matter. The business, which Macquarie has built out for over a decade, received a boost from the acquisition of Cargill Inc.’s North America power and gas division in 2017.

The bank rents access to natural-gas pipelines and electricity networks across the U.S., enabling it to profit when prices in some regions are significantly higher than in others and when consumers are in urgent need of fuel or power. That was the case last week, when frozen energy infrastructure and the closure of oil-and-gas wells set off a race for natural gas among Texas power plants and other consumers.

Macquarie sent large volumes of gas from the north of the U.S. to the south, where the cold weather sent prices soaring last week, the person familiar with the matter said. It supplied electricity in Texas as well as gas to generate electrical power.

At one point, natural gas changed hands for more than $900 per million British thermal units at the ONEOK Gas Transportation hub in Oklahoma, according to commodities data provider S&P Global Platts. By Friday, prices at the hub had fallen back to about $14 per million British thermal units. That was still comparatively high: Benchmark futures for U.S. natural gas, which are tied to delivery at Henry Hub in Louisiana, have generally cost between $2.50 and $3.50 per million British thermal units in recent months.

Shares of Macquarie rose 3.4% on Monday after the company raised its profit outlook. They are now down 2.8% over the past 12 months.

Millions were left without power and heat in Texas last week as the lowest temperatures in decades wreaked havoc on the state’s utilities. Frozen water lines burst and left big residents in cities without safe drinking water. Stores closed because they had no power, which made food and water even more scarce.

Roughly 70 deaths, mostly in Texas, have been attributed to the cold weather, according to the Associated Press. Some are believed to have frozen to death in their homes.

Macquarie last year provided an undisclosed amount of investment capital to upstart Houston-based utility Griddy Energy LLC, whose business model is to pass variable wholesale electricity prices through to customers. Griddy customers complained of paying lofty sums when power prices shot up to thousands of dollars per megawatt hour last week, according to local Texas media reports.

One customer told the Dallas Morning News that his electric bill for five days stood at US$5000, the amount he would normally pay for several years of power. Another told the Dallas-Fort Worth NBC affiliate that he had been charged more than US$16000 for February.

A Griddy spokeswoman said an order by the state utility agency to the operator of the electricity grid to make market prices reflect the scarcity of power pushed up prices for its customers. On Feb. 12, the company started emailing and texting customers to say they might be better off switching providers for a short time to avoid exposure to wholesale prices, she said.

Corporate casualties from the freeze are also starting to emerge. Just Energy Group Inc., a Canada-based energy supplier, on Monday said it faced a financial hit of about US$250 million, in part from buying electricity at sky-high prices in Texas during the cold blast. The company, which said the blow could stop it from continuing as a going concern, saw its shares slump 31%.

In another instance, shares of Atmos Energy Corp. fell 4.4% Monday after the Dallas-based gas supplier said it would have to pay between US$2.5 billion and US$3.5 billion for gas it bought at elevated prices in Texas, Colorado and Kansas. Atmos may issue stock or raise debt to help to pay for the purchases, it said Friday.

German energy company RWE AG said its 2021 earnings would be hit by outages at the company’s wind turbines, as well as from high prices for electricity.

Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.

This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.

Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.

Here are three strategies useful for functional families.

Intrafamily loans

It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.

But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.

If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.

To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.

In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.

If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.

Asset gifts

Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.

The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.

Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.

However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.

These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.

But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.

Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.

The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.

Sellner doesn’t worry about his children using the funds for another purpose.

“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.

Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.

Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.

Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”

Disclaimers

A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.

Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.

Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.

Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.

Texas Blackout Boosts Macquarie Bank By Up To $270 Million

Macquarie shares up as a result of Texan deep freeze.

Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.

Intrafamily loans

Asset gifts

Disclaimers