Last month senators Chris Coons (D-DE) and Jerry Moran (R-KS), along with representatives Ted Poe (R-TX) and Mike Thompson (D-CA), introduced the Master Limited Partnerships Parity Act (MLPPA) of 2015 (S.1656 and H.R.2883). If this legislation sounds familiar, that’s because it’s the third time the bill has been introduced.

Its goal is to give renewable energy partnerships the same tax treatment (“parity”) as that afforded those profiting from fossil fuels.

When Congress legislated the rules for publicly traded partnerships in 1987 it required that at least 90 percent of an MLP’s income must come from qualifying sources such as real estate or natural resources. Section 613 of the tax code defines qualifying energy sources as depletable resources or their derivatives, such as crude oil, petroleum products, natural gas and coal.

Of course the advantage of the MLP structure for investors is that it is a tax-friendly investment vehicle. MLPs aren’t taxed at the corporate level, passing profits directly to the partners (unitholders) in the form of quarterly distributions. This arrangement avoids the double taxation of dividends affecting traditional corporations and their shareholders and, all things being equal, should therefore lead to more attractive returns.

That edge, in turn, gives MLPs a lower cost of capital than they would likely have as corporations, which can make some projects economically viable that wouldn’t have been in the absence of the favorable tax structure.

While case-by-case Internal Revenue Service rulings have expanded the range of activities qualifying for MLP treatment in recent years, MLPs are still overwhelmingly focused on fossil fuels. The MLP Parity Act would expand the definition of “qualified” sources to include renewable energy resources and infrastructure projects. According to the summary of the bill on Senator Coons’ website:

The MLP Parity Act simply expands the definition of “qualified” sources to include clean energy resources and infrastructure projects. Specifically included are those energy technologies that qualify under Sections 45 and 48 of the tax code, including wind, closed and open loop biomass, solar, municipal solid waste, hydropower, marine and hydrokinetic, fuel cells, and combined heat and power. It also includes waste-heat-to-power, carbon capture and storage, biochemicals, and energy-efficient buildings. The legislation also allows for a range of transportation fuels to qualify, including cellulosic, biodiesel, and algae-based fuels. 

The bill is co-sponsored by a bipartisan group of lawmakers including senators Debbie Stabenow (D-MI), Lisa Murkowski (R-AK), Michael Bennet (D-CO), Susan Collins (R-ME), Angus King (I-ME) and Cory Gardner (R-CO); and representatives Paul Gosar (R-AZ), Mark Amodei (R-NV), Peter Welch (D-VT), Jerry McNerney (D-CA), Mike Coffman (R-CO) and Earl Blumenauer (D-OR).

The notion of tax parity for energy projects regardless of their type seems like a no-brainer, but previous incarnations of this bill have failed to garner much support beyond the sponsors. The primary reason is that while few would object to the idea of giving equal treatment to renewable energy, many Republicans have indicated they would only support the MLPPA if certain renewable energy subsidies — namely the current Production Tax Credit (PTC) and the solar Investment Tax Credit (ITC) — are eliminated. Their objection has been that passing the MLPPA while allowing the current tax credits to remain in place doubly subsidizes renewable energy projects.

The ITC is a 30% federal tax credit for solar systems on residential and commercial properties, in effect through the end of 2016. The PTC is a tax credit paid for each kilowatt-hour (kWh) of renewable electricity produced. The PTC provides 2.3 cents per kilowatt-hour (¢/kWh) for wind, geothermal, and closed-loop biomass systems, and 1.1¢/kWh for other eligible technologies (typically through the first 10 years of operation). Eligibility for the PTC also effectively expires at the end of 2016, as projects must be under construction prior to January 1, 2017 to be eligible for this credit.

The Senate version of the MLPPA has been referred to that chamber’s Committee on Finance, while the House version was referred to the House Committee on Ways and Means. Allowing the current tax credits to expire at the end of 2016 while providing MLP status for renewable energy projects might be a compromise reluctant Republicans could stomach. If so, then the third time may be the charm for the MLPAA.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Warren’s Game of MLP Thrones   

MLPs and other midstream energy processors have continued to suffer market losses of late, as the weakest hands among their investors consider slumping energy prices and conclude that the U.S. shale boom will prove short-lived.

But behind the scenes, the savviest industry insiders continue to bet on an eventual recovery.

That’s certainly been the case with Kelcy Warren, the Energy Transfer family’s boss who has staked his flagship Energy Transfer Equity (NYSE: ETE) MLP on a bid for rival Williams (NYSE: WMB).

Until recently, Warren not only couldn’t get Williams to discuss a merger offer that carried a notional 32% premium at the time of its disclosure last month, but wasn’t even allowed to participate in the bidding process initiated by Williams in that offer’s wake. Energy Transfer was told that it could not be involved unless it agreed not to contest the pending merger between Williams and its affiliate Williams Partners (NYSE: WPZ) or other decisions of the Williams board.

But late last week informal reports filtered out that Energy Transfer was in fact allowed to sign a confidentiality agreement giving it access to Williams data on equal terms with other interested parties, without promising to tie its hands in this manner.

That, in turn, suggests that Williams may be serious about maximizing its value. Its stock now trades above what it would fetch based on the price of ETE units at the proposed exchange ratio, hinting at the market’s growing optimism that something will get done.

Continue to hold any WMB shares not sold when we recommended cutting your position in half on the day Energy Transfer’s offer leaked. As for ETE, it remains a Best Buy below $75 as the premier builder of midstream value.

This commodity slump will eventually pass, but long before it does ETE should start to profit from the latest deal struck with its affiliate Energy Transfer Partners (NYSE: ETP), which gave up open-ended incentives in yet another affiliate, Sunoco (NYSE: SUN), in exchange for short-term cash flow benefits.

Warren is a master of intramural deals transferring long-term value to ETE, which accounts for the bulk of his enormous personal fortune.

Lately he’s shoveled more of his eggs into that basket, spending $63 million on ETE units two weeks ago after buying $19 million worth from a colleague in January, and $61 million in the market near October’s lows.     

— Igor Greenwald