By the Numbers: Increasing Legislative Risk for MLPs?

02/19/15 | Maria Halmo

On February 2nd, the Obama Administration released its budget for 2016. Since 2009, the President’s budget has had a long list of “fossil fuel tax preferences” it intends to eliminate. This year, fossil fuel publicly traded partnerships (i.e. energy MLPs) are included. They would be grandfathered until 2020 and would start paying corporate taxes in 2021. The Administration estimates that this would raise $303 million in the first year and $1.7 billion through 2025. Both amounts pale in comparison to the US national debt of $18.1 trillion and are dwarfed by the tens of billions spent each year by MLPs on the nation’s energy infrastructure.

Some information on the process: by law, the President submits a budget request to Congress between the first Monday in January and the first Monday in February. This is where we are now. It is then submitted to the Budget Committees of the House and Senate, as well as the Congressional Budget Office, which publicly publishes an analysis in March. The House and Senate consider the budget resolutions submitted by their respective committees, and by April 15th, are expected (but not required) to pass a resolution. Negotiations ensue. When there is a final budget passed by Congress, the President may either sign or veto it. Of course, this involves everything proceeding smoothly, which rarely happens. We digress.

Deficit Impact

In the past, Congress has simply ignored the Administration’s fossil fuel recommendations wholesale. A GOP-controlled Congress is unlikely to include this particular resolution simply because Obama suggested it. So, there are at least eight months before this could even potentially turn into a panic attack. Also, if the 120-odd energy MLPs with a total market capitalization of $500 billion would only pay $303 million in taxes anyway, how big of a hit would the stocks take?

The other major piece of legislation is permitting for Keystone XL. It has already been passed both the Senate (62-36) and the House (270-152). President Obama intends to veto it if it would “significantly exacerbate the problem of carbon pollution.” The Environmental Protection Agency (EPA) issued a letter warning that if Keystone XL is built by TransCanada (TRP), it is likely to increase greenhouse gas emissions given the current commodity price environment. If the President does veto the bill, the GOP is unlikely to be able to overcome the veto (four more votes in the Senate, and twenty in the House).

At this point, investors have discounted the pipeline ever getting approved, so were that to happen, it would be a marginal positive to the space, as well as a significant benefit to TRP, who has already spent $2.4 billion of the $8 billion projected cost. However, if it is not approved, it’s expected to be a neutral event for the investment world. There are already pipelines built providing takeaway capacity from the Canadian oil sands, and more are proposed. TRP itself has proposed Energy East, which would run from the oil sands to refineries in Eastern Canada. Kinder Morgan (KMI) has its Trans Mountain Pipeline, terminating near Seattle. Enbridge Inc (ENB) has its Mainline System, terminating near Chicago. The Express-Platte System, owned by Spectra Energy Partners (SEP), already runs south through Wyoming and west to Illinois. Additionally, while expensive, crude-by-rail is another takeaway option.

When should you panic about Keystone XL? Probably never. But if it goes through, maybe pop open a bottle of ginger ale?