Post-Election Outlook for Environmental & Energy

Industries

Andrew Paterson

Principal EBI / Verdigris Capital

Andrew Paterson

EBI / Verdigris Capital

571-308-5845

adpaterson@gmail.com

www.ebionline.org

Policy & Political Outlook for 2012-13 Uncertainty and difficult Budget Landscape

- Scenarios & Strategy Discussion –

November 9, 2012

Political Results 2012: Quick Summary

President:

Obama held serve with well-managed turnout and ground game.

Romney closed with debate performance, but not enough in key swing states.

Oct. 5 Jobs Report (for Sept.): +114,000 (health care, transport); 7.8% unemployment rate

Congress:

HOUSE: 242Rs – 193Ds, maybe lose 7-8 for 235Rs to 203Ds.

- GOP gain of Governors in key states makes for less swing back from 2010

- GOP picked up a couple more governors to 30

SENATE: 53Ds – 47Rs, Dems pull upsets for +2: 54Ds+1 Ind – 45Rs

- Dems protecting 23 seats to only 10 for GOP, but GOP candidates stumbled.

Obama veto pen can slow down budget riders by Republican House in Approps.

Obama-care not repealed; Dems will block a rollback in Senate.

A Major Tax Reform + Debt Ceiling deal will be forced in early 2013.

Wild Cards: Further flare-up in MidEast ; Oil prices; Euro crisis; Banks

3

2012 RESULTS: Early Observations

4

Quote of the week: George Will: “The public is seething about the status quo,

and may just choose to replicate it! Go figure.”

Dem Dick Tuck in CA 1966

(Reagan elected governor):

“The public has spoken…

those idiots !”

“Hey, the Chair won !”

Groundhog

Day in

America Victor Davis

Hanson

Headline Sampler

5

“Nation Grumpy -- votes to

continue headache”

2012: The Nation’s Divide, Assured

Red State.com

No change…

little hope

Romney Camp Retooling

Campaign After Latest Setback

Republicans: FAIL

Florida… still too close to call

Obama, Si se Puede !

“Congress: Go back

and do YOUR job!”

A Second Term.

Dow dives 2.4% on fears of

budget chaos and recession Obama > 47%

Where are “WE” ? (Congress)

6

Showdown:

Tax cuts expire in Dec. 2012 –

no lame duck action this time.

Obama likely will not sign an

extension of tax cuts without

the debt ceiling raised. He

does not face re-election.

GOP (House) wants the tax

cuts more than anything else.

A government shutdown does

nothing for anyone except 80

Tea Party members in House.

Perhaps Sequestration is put

off 6-12 months, but then cuts

hit and into 2014

Some Grand Bargain is

crafted with Divided Gov’t.

Quick takes… Lame Duck, Early Congress

• No clear resolution of Partisan Divide; Obama must engage

• Stock market remains unconvinced about divided Congress

• USA still in better shape than EU; China, Asia focused inward

Lame Duck (Nov. – Dec 2012):

Congress ratifies leaders week of Nov. 12 – not much change

Address Budget Sequestration first (extend maybe 6 months)

Possibly some small tax fixes (estate taxes)

Early in new Congress:

• Tax Reform + Debt Ceiling is job #1 to avert Fiscal Cliff (not in lame duck)

• Then mega-Omnibus for FY13 Appropriations (CR expires late Mar.)

• DOD drawdown terms; Army down, Navy up, Air Force flat

• Senate confirmations made easier by Democrats retaining control

• Transportation Bill (stalled for 4 years; GOP Governors screaming)

• Farm Bill – pressure from drought plagued farm states

• Energy ? Environmental regulations move ahead

7

CBO: Fiscal Cliff Looms for 2013

8

CBO Renews Fiscal Cliff Warning By National Journal Staff – Nov. 8, 2012

Fragile Economic Recovery… “Where are We?”

Economic Cycle Research

Institute (ECRI)

The Weekly Leading Index

(WLI) of the Economic Cycle

Research Institute (ECRI)

slipped fractionally in the

numbers released today. It is

now at 126.6, down from last

week's 126.7 (revised from

126.8).

Likewise, the WLI growth

indicator (WLIg) slipped slightly,

now at 5.9, down from last

week's 6.0. WLIg has now

spent ten consecutive weeks in

expansion territory, although it

is off its interim high of 6.1. But

for the past six weeks the WLI

has been jogging in place in a

narrow range (126.2 to 126.7).

9

http://dshort.com/articles/ECRI-Weekly-Leading-Index.html#ixzz1PqWIXGp0

NOW

2 Nov 2012

QE 1

QE 2

9/11 Credit

Crisis

QE 2.5

Fiscal

Cliff?

Budget Sequestration – Jan. 2013

Budget Control Act (Aug. 2011) poses cuts of $110B a year from 2013 to 2021

Half of cuts ($55B in 2013) to fall on DOD, but not military pay (health care a problem)

Example cuts at other agencies (FY2013): DHS (-$3.7B); DOE (-$2.4B); EPA (-$0.71)

Level of discretion within agencies not clarified yet by OMB; Spending continues

New revenues (expiration of tax cuts) do NOT stop sequestration

Congress allowed to add funds back to programs after cuts (Appropriations)

But budget caps remain for years to 2021 (Congress can repeal).

Scenarios:

A. Lame Duck deferral of BCA for 2013 by Congress (6 months?)

B. New Congress repeals or alters BCA early in FY2013 -- most likely

C. Cuts and deferrals within contracts; perhaps some contracts cancelled

D. Exceptions for national security, Medicare, or consent orders.

NET:

- Pro-active planning;Get on contract; DOD wary of cancelling contracts (termination costs)

- Defense spending subsiding worldwide (but civilian aerospace growing)

- Likely even more pressure on labor rates, overhead; Military consumables face cuts

- Some ID / IQ work could roll into 2014, but not weapons programs

10

Commission on Fiscal Responsibility & Reform

Areas for Cuts:

DOD: There’s a war on, but Gates sought cuts 10%+

Health care: more blood on the floor over spending

Prescription drugs (reverse expansion of 2004 bill)

Agriculture: How can a coalition be forged to take on

subsidies in this arena ?

Raising retirement age on Social Security

Discretionary spending (DOE, DEd, EPA, DOT, etc.)

Federal asset conversions (TVA, BPA, DOI…)

Anything Positive ?:

Room for Tax Reform (simplification)… ?

Value-added tax to encourage savings ? [unlikely]

Support for Infrastructure finance (paid for with energy

use charges, or gas taxes) ?

Infrastructure Bank favored by Unions, Chamber

11

Co-Chairmen:

Sen. Alan Simpson. Former Republican Senator (WY)

Erskine Bowles, Chief of Staff to President Clinton

Executive Director:

Bruce Reed, Policy Adviser to President Clinton

Commissioners:

Sen. Max Baucus (D-MT)

Sen. Kent Conrad (D-ND)

Sen. Richard Durbin (D-IL)

Rep. Xavier Becerra (D-CA 31)

Rep. Jan Schakowsky (D-IL 9)

Rep. John Spratt (D-SC 5) * [lost re-election]

Sen. Tom Coburn (R-OK)

Sen. Mike Crapo (R-ID)

Sen. Judd Gregg (R-NH)

Rep. Paul Ryan (R-WI 1)

Rep. Dave Camp (R-MI 4)

Rep. Jeb Hensarling (R-TX 5)

David Cote, Chairman and CEO, Honeywell Int’l

Ann Fudge, Former CEO, Young & Rubicam Brands

Alice Rivlin, Senior Fellow, Brookings Institute and

former Director, Office of Management & Budget

Andrew Stern, President, Service Employees Int’l Union.

www.fiscalcommission.gov

Is this effort looking better now ?

…Political Landscape for 2012-13

The Build-up

13

GOP gained 6 seats from Census (2012 vs. 2008)

14

States Locked in early, and Tossups

15

2012 Results for President: Obama 335, Romney 203

16

To win back the White House, GOP will need: FL, VA, OH + CO or WI*

All but CO have GOP governors now.

17

2008 Result: 365 / 173 No states flipped for GOP

GOP has few places it can go to regain states: OH, VA, FL, IN, NC, CO (+95)

http://www.electoral-vote.com/

Strong Dem (265)

Weak Dem (26)

Barely Dem (74)

Exactly tied (0)

Barely GOP (14)

Weak GOP (39)

Strong GOP (120) 270 Electoral votes needed to win

Map algorithm explained

Dem Pickups: CO FL IN IA NV NM NC OH VA

GOP Pickups: NONE

REVIEW:

Germany Red (SPD) vs. Blue (CDU/CSU) “Lander”

Bavaria Baden -

Wurttenberg

North Rhine -

Westphalia

Schleswig -

Holstein

Saar-

land

Mecklenburg –

W. Pomerania

Thuringia

Lower

Saxony

Brandenburg

Berlin

Saxony-

Anhalt

Saxony

Hessen

Bremen

Rhineland-

Palatinate

Hamburg

Divided Deutschland:

North v. South

Term Bundes Chancellor

1949-1963 Konrad Adenauer (CDU)

1963-1966 Ludwig Erhard (CDU)

1966-1969 Kurt Georg Kiesinger (CDU)

1969-1974 Willy Brandt (SPD)

1974-1982 Helmut Schmidt (SPD)

1982-1998 Helmut Kohl (CDU)

1998-2005 Gerhard Schröder (SPD)

2005- Angela Merkel (CDU)

U.S. not alone in being divided

September 19, 2005

Germany Loses Its Own Election

By Staff of DER SPIEGEL

German elections are over and both

Chancellor Gerhard Schröder and his

challenger Angela Merkel are claiming

victory. In truth, both did poorly -- but they

may end up leading Germany together

anyway. It will be a coalition of the losers.

Political Landscape: Outlook (Spring 2012)

Policy uncertainties will continue to increase going into 2012 election.

The 2010 election had deep results (like 1994) at federal and state level, not a typical election.

GOP will be able to use new lines in House to preserve gains from 2010, but not all.

Obama still slightly favored for re-election, unless the economy stagnates further.

If Obama wins, but Dems lose Senate seats, and House stays GOP, the mandate is mixed.

Republicans would still lack majorities Democrats enjoyed from 2007 to 2010. Gridlock.

• 2012 election could intensify Divided Government rather than resolve the partisan split.

• Neither party emerges with a mandate; a Romney win with a GOP Congress, too narrow.

• Contrast: Obama & Democrats clearly had a mandate from the 2008 election.

After 2008 election: House (+21Ds, 257Ds to 178Rs) Senate (+7Ds, 59Ds to 41Rs)

Federal deficit will not be easily resolved with divided government

Entitlement reform and Tax Deal holds the key to breaking Deadlock; GOP willing to disrupt

government rather than raise taxes (lessons from 1990 compromise; Tea Party coalition)

No spending bills will be finalized for 2013 before the new Congress in Jan. DOD budget may

get deferral (6-12mo.) of Sequestration, but Obama needs DOD cuts to pay for other priorities.

Most likely the Tax Cuts expire in Dec., then only some are re-enacted in Spring, retroactive.

A Romney win would mean cuts, rollbacks at EPA. Senate would prevent some cuts.

No cushion is built up for a Major Disruption (MidEast chaos, US quake, storms, epidemic, recession…)

19

What we said, EBJ Summit (March 2012)

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40

45

50

55

60

65

1976 78 80 82 84 86 88 90 92 94 96 98 2000 02 04 06 08 10 12

Senate Control, 1976-2010

Democrat Republican

Carter Reagan Bush, Sr Clinton GW Bush, Jr Obama

Control of SENATE by Party, 1976 - 2012

In 1994 Republicans recaptured what they

had under Reagan in the Senate.

The 2000 election split the Senate 50-50.

Dems +6 in 2006

and +8 in 2008

In 2014, Dems have 20 seats to defend, while only 13 GOP senators are up.

2012 Results for US Senate: 54Ds + 1 Ind vs. 45 Rs

21

Seats targeted early by GOP that Dems held or picked up. Candidates stumbled badly.

22

Control of HOUSE by Party, 1976 - 2012

100

150

200

250

300

350

1976 78 80 82 84 86 88 90 92 94 96 98 2000 02 04 06 08 10 12

House Control, 1976-2010

Democrat Republican

Carter Reagan Bush, Sr Clinton GWBush, Jr Obama

A realignment occurred in 1994 with

new district lines and the loss of

conservative Southern Democrats.

Democrats recapture House in

2006 as Iraq War festers.

Weak GOP seats were culled in 2006; no Dems lost in 2006 or 2008.

40 years of House rule by Democrats

Post-Watergate high water

mark for Democrats.

House flips to GOP,

without new lines

2012 Results for US House

23

With loss of South in 1994, Democrats remain concentrated in urban districts.

Hemp-

topia

NCSL (Spring 2012): States Recovering Slowly

State fiscal conditions continue to improve at a slow and steady pace. A spring 2012 survey found

revenue performance remains positive and expenditures in most states are stable. A number of states are

projecting to end the fiscal year with small unobligated balances. Few states have faced mid-year budget

shortfalls in fiscal year (FY) 2012. State lawmakers closed more than $500 billion in budget gaps over the

previous four fiscal years. In addition, fewer budget gaps are projected for FY 2013 compared with recent

years. A degree of uncertainty still lingers over state budgets.

Concerns about unemployment levels, potential federal deficit reduction actions, spending pressures

and global economic events, are contributing to a cautious state budget outlook.

Return to Peak Revenue Collections

For most states, FY 2008 marked the peak year of nominal revenue collections. The expectations for

return to peak collections vary widely. One-third of the states expect a return to peak during the current

fiscal year, though many others do not expect a return for at least three years or longer. Some states do not

have a projection. For those that do, however, it is important to note that the predictions are based on current

economic forecasts and existing tax law, which obviously could change.

• FY 2012: Fifteen states expect revenue collections to reach previous peak levels during current fiscal year.

• FY 2013: Minnesota, Montana, Ohio, Pennsylvania, Tennessee and Vermont.

• FY 2014: Colorado, New Jersey, Rhode Island, Washington and West Virginia.

• FY 2015: Florida, Idaho and Mississippi.

• FY 2016: Arizona, Georgia, Maine and South Carolina.

• FY 2017: California,

• FY 2018: Michigan.

• Fourteen states report that a return to peak revenue collections is currently unknown or not in the forecast

horizon. North Dakota (Bakken) is the only state where tax collections never fell on a year-over-year basis.

Twenty-three states and DC saw general sales tax collections coming in over the revenue estimate.

http://www.ncsl.org/issues-research/budget/state-budget-update-spring-2012.aspx

24

Status of States (July 2012)

25

State & Local governments are still cutting jobs back, while private sector slowly recovers.

Status of States (July 2012)

Changes in the Midwest: Recession, Recovery, Regional Realignments

(Council of State Governments)

Fiscal Leaders’ Roundtable, 14th Annual Midwestern Legislative

Conference (July 2012)

1.Recession has hit all regions hard, but Midwest (along with the Northeast)

has had more complex experience

2.After difficult years before recession, the Midwest and Northeast have seen

faster recovery than other states—growth of manufacturing jobs since early

2009; end of decline in construction and real personal income

3.Weak population growth continues in Midwest, especially children; but signs

that pop. shifts to Mountain, South, and Pacific states have slowed.

4.Some indicators of need for public services have grown disproportionately in

Midwest, including lack of health insurance, number of children in poverty;

however, K-12 pupils are expected to decline in near future.

5.To pay for services, Midwest states have seen little growth in state/local

revenues in recent years, even before recession.

6.Public resources going into K-12, higher education, and infrastructure have

typically grown at lower levels in Midwest than in other regions in recent years.

7.Raises questions about whether continued recovery of manufacturing,

construction, personal income can be sustained in the future without greater

public support for infrastructure, education, higher education.

http://www.rockinst.org/government_finance/

26

Strategy Point: US Regions recovering at different rates; West lagging the most.

Comparison: State Houses BEFORE 2010 election

Republicans Make Historic Gains in 2010

Republicans have added over 675 seats to their ranks in this election, dramatically surpassing 1994 gains. This number could go even

higher as the tallies in the undecided races are determined. The chamber switches thus far are all Democratic to Republican except for

Montana House which was tied and is now Republican, and the Oregon House which was Democratic and is now tied. This is the first

time in Alabama that Republicans have controlled the legislature since reconstruction. The North Carolina Senate has not been

Republican since 1870. And Republicans have reportedly taken over 100 seats in the New Hampshire House.

The Minnesota Senate will be controlled by the GOP for the first time since Minnesota switched back to partisan elections in 1974.

27

GOP turnout in 2010 triggered DEEP gains in states, not just broad wins in the Congress.

GOP gains in 2010

Alabama - House and Senate

Colorado - House

Indiana - House

Iowa - House

Louisiana - House

Maine – House and Senate

Michigan - House

Minnesota - House and Senate

Montana - House

New Hampshire - House and Senate

New York - Senate

North Carolina - House and Senate

Ohio - House

Pennsylvania - House

Wisconsin - Assembly and Senate

Tied : Oregon House; Alaska Senate

One chamber still has undecided seats:

New York House.

Source: NCSL.org

GOP Gains Leverage for 2012 via State Houses

Overall, Republicans have exclusive

control of redistricting in 202 districts,

Democrats hold authority in 47

districts, bipartisan or citizen

commissions will draw 92 districts,

control is divided in 87 districts, and

seven districts are in At Large states

that do not require redistricting.

About 200 more districts will be

created via participation by both

parties or by non-partisan panels.

California voters approved a ballot

measure Tuesday that transferred the

design of districts from the

Democratic-controlled Legislature to a

non-partisan commission.

Republicans won control of 19

legislative chambers across the USA.

Democrats won zero.

Republicans flipped both legislative

chambers in Alabama, Maine,

Minnesota, New Hampshire, North

Carolina and Wisconsin. The party

won control of houses of

representatives in Colorado, Indiana,

Iowa, Michigan, Montana, Ohio and

Pennsylvania.

28

SOURCE: NCSL

www.ncsl.org/tabid/21253/default.aspx

GOP governor

Independent Commission

Source: NCSL.org

2012 RESULTS: State Legislative Control

Overall, Republicans have exclusive

control of redistricting in 202 districts,

Democrats hold authority in 47

districts, bipartisan or citizen

commissions will draw 92 districts,

control is divided in 87 districts, and

seven districts are in At Large states

that do not require redistricting.

About 200 more districts will be

created via participation by both

parties or by non-partisan panels.

California voters approved a ballot

measure Tuesday that transferred the

design of districts from the

Democratic-controlled Legislature to a

non-partisan commission.

Republicans won control of 19

legislative chambers across the USA.

Democrats won zero.

Republicans flipped both legislative

chambers in Alabama, Maine,

Minnesota, New Hampshire, North

Carolina and Wisconsin. The party

won control of houses of

representatives in Colorado, Indiana,

Iowa, Michigan, Montana, Ohio and

Pennsylvania.

29 Source: NCSL.org

GOP Kept Gains from

2010 in Rust Belt