Back in April when MLPs could do no wrong, a Great Idea emerged from the halls of Congress. The tax breaks that were letting all those pipeline partnerships thrive would be extended to renewable energy ventures so that those too could prosper.

It was a bipartisan proposal, and the flurry of publicity surrounding its birth suggested passage might be right around the corner. And why not? Democrats liked renewables, while Republicans hated business taxes, so that the bill had something for everyone.

But this is Washington, so problems soon arose: Republicans demanded the elimination of other renewable subsidies as the price for supporting legislation. The bill’s Democratic co-sponsor declined.

The end result is that the legislation has made scant progress and is unlikely to pass. Its supposed benefits for the renewables industries were always doubtful.

But what’s beyond doubt is that gridlock in Washington makes repeal of the MLP tax structure the longest of longshots. In that sense, the struggles of the Master Limited Partnerships Parity Act should reassure any investor still worried about negative consequences from the often suggested comprehensive tax reform, which remains a lobbyist’s pipe dream.

The MLPPA (S.795, H.R.1696) was sponsored by Sen. Chris Coons (D-DE) and US Rep. Ted Poe (R-TX). The summary of the bill reads:

Master Limited Partnerships Parity Act – Amends the Internal Revenue Code, with respect to the tax treatment of publicly traded partnerships as corporations, to expand the definition of “qualifying income” for such partnerships to include income and gains from renewable and alternative fuels (in addition to fossil fuels), including energy derived from thermal resources, waste, renewable fuels and chemicals, energy efficient buildings, gasification, and carbon capture in secure geological storage.

The bill seeks the same treatment for certain renewable energy projects as that given to fossil fuel companies. Proponents have presented it as an issue of fairness, and one that will make a huge difference for renewable energy.

As I indicated in Is MLP Parity Act a Game Changer?, I disagree. Not about the fairness. I wouldn’t mind letting renewable energy companies set up MLPs. But I do disagree that it would be a game-changer for renewable energy.

Consider the kinds of businesses already organized into MLPs. The total market capitalization of all MLPs is approximately $445 billion at present. Nearly $400 billion of that is in the natural resource sector. The vast majority of that — perhaps 80 percent — is invested in midstream projects such as oil and gas pipelines.

Those who believe the MLP Parity Act will be a game-changer should consider why this is the case. Wouldn’t it be advantageous for ExxonMobil (NYSE: XOM) or Valero (NYSE: VLO) to become an MLP? There seems to be a widely held belief among renewable energy advocates that companies that are involved in natural resource extraction, transmission, and refining broadly benefit from MLP status. But that isn’t the case. The benefits are highly concentrated within one segment of the industry.

To produce the steady income that attracts investors, most MLPs require predictable cash flow and limited commodity risk. Pipeline companies fall into this category. They charge tolls for transporting oil and gas, and they are more insulated (albeit not completely) from the swings of commodity prices.

Thus an investor interested in the energy sector but not willing to ride a roller-coaster of commodity risk may opt for pipeline companies with their long-term, fixed-price transportation contracts and predictable yields.

Most renewable energy investments fall into a very different category. Where would an advanced biofuel company, for example, come up with the money for distributions during a lean patch? It could borrow the money needed to pay its distribution, I suppose, and even then any weakening of the Renewable Fuel Standard would still threaten to bankrupt the sector.

I can envision an MLP structure for a solar project with a long-term offtake agreement with a utility, but there would be a higher level of risk because the present renewable energy subsidies and mandates that could be rolled back.

These supports remain controversial. For example, Republicans had said they would only support the MLPPA if the current Production Tax Credit (PTC) and the solar Investment Tax Credit (ITC) were eliminated. The ITC is a 30 percent federal tax credit for solar systems on residential and commercial properties. The ITC is currently in effect through the end of 2016. The PTC is a tax credit paid for each kilowatt-hour (kWh) of renewable electricity produced.

Some Republicans protested that the MLPPA would merely place another layer of subsidy on top of these tax breaks, but Sen. Coons opposed eliminating the PTC and ITC in exchange for support on the MLPPA.

The bill’s long odds of passage got even longer with the recent announcement that Sen. Coons will be leaving the Senate Energy and Natural Resources Committee for the Senate Appropriations Committee.

I predict the bill won’t pass. If it manages to defy all odds, we will remain highly skeptical about adding renewable energy MLPs to our portfolios. But efforts to widen eligibility for MLP status do suggest that both parties in Congress see the tax structure as an economic prop for a crucial industry. And that means MLPs are here to stay even if the politicians do eventually tackle tax reform in earnest.   

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

Portfolio Update
Enterprise Pumps Up the Volume

The largest MLP of all of them reported quarterly results last week, and as might be inferred from the generally steady unit price, Enterprise Products Partners LP (NYSE: EPD) continued to do well. Low natural gas liquids prices and reduced gas processing margins are no big deal when your overall pipeline volumes are up 20 percent year-over-year.

Gross operating margin — the partnership’s preferred profit measure — was up 11 percent year-over-year. The distribution rose 7.1 percent in a year’s time, the 36th consecutive quarterly increase taking the prospective yield to 4.4 percent. Not bad considering the partnership retained a third of its distributable cash flow to finance growth projects that should  boost distributions down the road.

Still, this quarter wasn’t quite as lucrative as the superlative first quarter of this year, and the partnership fell a bit shy of analysts’ estimates both on the revenue and earnings. It’s also worth noting that debt has increased twice as fast as distributions in the last year.

Overall, Enterprise continues to benefit from the surging domestic gas and oil output in unconventional shale basins, and from the need to transport that energy to distant plants where it can be turned into refined fuels. On that score, analysts were most interested in the partnership’s plans for expanding its export and storage facilities along the Gulf Coast, including progress on the planned ATEX pipeline for transporting Appalachian natural gas liquids to Texas for processing.

Enterprise has plenty of runway ahead, and continues to provide an unmatched combination of scale and growth. Continue to buy below $66

— Igor Greenwald