Are MLP’s the New Inversion? Washington Renews Focus on Corporate Structure

Joe McMonigle
Senior Energy Analyst

Master Limited Partnerships (MLPs) have returned to the Washington spotlight, thanks to the $44 Billion Kinder Morgan deal announced August 10th to consolidate Kinder MLPs into a new entity.

As we are seeing with so-called corporate inversions, the Obama Administration is in hot pursuit of lost tax revenue. MLPs were already under the Treasury microscope and a top target of comprehensive tax reform in Congress. But now, following the Kinder Morgan deal, investors are contemplating if MLPs are the new inversion.

The Treasury Department announced on August 11th that it was reviewing the tax implications of MLP transactions. In addition, the IRS commissioner told Congress in April that the agency had paused issuing MLP approvals while it studied the broader policy effects. MLPs, however, are popular in Congress as an effective financing mechanism for oil and gas infrastructure. There is even talk about extending it to renewable energy, which would broaden the appeal.

In a longer note for clients, PRG provides more detailed analysis of MLPs and the potential risks ahead, including:

  • Potential executive action from the Administration on MLPs similar to inversions:
  • The different politics of MLPs and inversions;
  • Energy implications of potential tax extenders legislation;
  • Perhaps the biggest threat to MLPs in Congress.

For the detailed client note on MLPs and/or to schedule a call with Joe McMonigle, please contact Jessica Tou at jtou@potomacresearch.com or 617-682-7347.

Also related: The Potomac Energy Conference on Sept. 22nd in NYC. More information, click here.

Top 5 Energy Policy Trends

Joe McMonigle
Senior Energy Analyst

HEADWINDS FOR LNG EXPORTS
First the encouraging developments – the Department of Energy (DOE) finally gave an overdue conditional approval for the Oregon LNG project, and the Federal Energy Regulatory Commission (FERC) issued its final approval for Freeport LNG with noteworthy speed. However, two recent announcements from the DOE and EPA have ominous signs for LNG exports. In its conditional approval of Oregon LNG, DOE stated that going forward it would consider the effects of increased gas production on greenhouse emissions if FERC chose not to do so. EPA has also filed critical comments at FERC that the agency must consider greenhouse gas emissions as well. It’s starting to remind us of the Administration’s position on Keystone XL.

RENEWABLE FUEL STANDARD/ETHANOL
Senate races and ethanol politics are impacting the EPA’s upcoming final 2014 Renewable Fuel Standard (RFS) due in the late summer or early fall. The White House has given the impression that there will be “higher number,” but we view this as spin. There may be a marginal increase in this year’s ethanol number, but the final number will still be a cut from 2013 and significantly lower than the 2014 RFS goal.

CRUDE-BY-RAIL - ADMINISTRATION PUNTS TANK CAR STANDARD
The Administration and The Department of Transportation (DOT) have punted on real decisions for rail transport of crude rail by creatively proposing three options for a standard instead of a single proposed standard. Ultimately, we expect the final outcome to be generally positive for the oil and gas industry with a phased-in flexible standard. However, some refiners with older legacy tank cars will have more exposure. Tank car manufactures are big winners with a backlog of new tank car orders. Railroads also prevailed as the proposed rule did not include speed limits or additional personnel requirements.

CRUDE EXPORTS
Contrary to media reports, there has been no policy shift in lifting the ban on crude oil exports. Our timeline for any policy decisions remains near the end of the year or mid-2015. It is very unlikely the Administration or Congress would lift or create exceptions to the ban before the November election. Perceived impact on gasoline prices looms large. But Washington is “studying” the issue while keeping an eye on a potential crude supply glut that could force its hand.

EPA CARBON RULE
EPA’s timeline to complete its carbon regulation for the power sector is already behind schedule. We are certain to see multiple-year delays, and the policy will ultimately be left to President Obama’s successor. The final rule for new power plants, due in June, has not yet been released, probably because it will surely trigger lawsuits. Additional new signs of legal risks appeared in August as more states joined forces to litigate the carbon rule.

Also related: The Potomac Energy Conference on Sept. 22nd in NYC. More information, click here.

Flickers of Life for Democrats in Senate Races; Keystone Fallback; Postal Workers Protest

FRESH POLLS support our our view that it’s too early for Republicans to anticipate a takeover of the Senate this fall.  There could be methodology problems with some of these polls (registered voters vs. likely voters) but they appear to show that Sen. Mark Pryor (D) leads in Arkansas, Kay Hagan (D) is roughly even in North Carolina, and Mary Landrieu (D) is ahead in Louisiana.  All three are considered highly vulnerable.

MEANWHILE, Sen. Mitch McConnell (R) may be facing a surprisingly close race in Kentucky; his approval rating has risen a little, but it’s still in dangerous territory for an incumbent.  And we continue to think that voters in Georgia may rebel against the gun nuts and the “personhood” advocates and support Michelle Nunn (D), which could give the Democrats a pickup.

Read the Full Research Report Here

Barack Obama and John Boehner Face the Legacy Issue

AFTER THIS FALL’S ELECTIONS, Barack Obama and John Boehner essentially will be focusing on their legacies; Obama will have about two years left in office and Boehner is widely expected to step down, perhaps even sooner.  So an intriguing question arises: what “legacy” issues will they pursue?

Read the Full Research Report Here.

The Democrats’ Wish List — Three Major Issues

GOVERNMENT SHUTDOWN:   Just as the politicians abandon confrontation, here comes a government shutdown today as a major storm hits the East Coast.  Janet Yellen’s second day of testimony has been cancelled, along with just about everything else.  So this might be a good time to check in on the Democrats’ retreat . . .

A SHORT WISH LIST:  Democrats at their Eastern Maryland offsite are focusing on three major issues.  Here’s our take: … Read the Full Research Report Here