Whenever America debates energy policies, there's normally some heated rhetoric about one industry getting treated better than the other. Several fossil-fuel advocates are crying foul at the Obama administration, because they claim it's using the oil and gas sector as a piggy bank to finance alternative energy. Conversely, those cheering for alternative energy are pleading that these energy sources should receive the same benefits that other energy sources received when they got started years ago.
Any way you shake it, the perception is that helping one industry irrevocably hurts the other, but that doesn't necessarily have to be the case. There are options to give alternative energy more equal treatment without taking away from traditional fossil fuels. Let's look at one idea: the Master Limited Partnership Parity Act.
MLPs for everybody
For investors who have followed the energy sector lately, master limited partnerships have more than likely come up in conversation. This MLP structure provides unique tax advantages for qualifying companies and provides investors with high-yielding investments ideally suited for those seeking income investments. The key phrase there is "qualifying companies," and that's where the Master Limited Partnership Parity Act comes into play.
Under current rules, the only companies that are eligible for MLP status are those where more than 90% of revenue comes from the following sources:
- Interest, dividends, and capital gains.
- Rental income and capital gains from real estate.
- Income from commodity investments.
- Income from qualifying natural resource activities.
- Any gains from assets used to generate these types of income.
Under these regulations, natural resources that qualify are depletable resources such as oil, gas, coal, timber, minerals, and biofuels such as ethanol. The MLP Parity Act, though, would expand the definition of qualifying industries to include wind, biomass, geothermal, solar, municipal solid waste, hydropower, marine and hydrokinetic, fuel cells and combined heat and power projects, certain renewable transportation fuels, carbon capture and storage, waste heat to power, renewable chemicals, and energy-efficient building projects..
If companies that participate in these kinds of activities were able to gain MLP status, they would be able to create an investment vehicle that could be more attractive to investors because of the higher yield. This could spur greater private investment in these types of companies. At the same time, by granting MLP status to companies that operate in these sectors, it doesn't create an additional financial burden on the oil and gas industries that may occur from additional taxes to support alternative energy investments.
Despite the bill's bipartisan support and backing from giants Duke Energy (NYSE:DUK), DuPont (NYSE:DD), and NRG Energy (NYSE:NRG), the bill hasn't been able to get past committee despite several attempts. The most recent iteration of this bill is currently in deliberation in both the Senate Finance Committee and the House Ways and Means Committee. Govtrack.us, a website dedicated to tracking congressional activity and voting records, currently gives the bill a 1% chance of making it to the House or Senate floor for a vote.
Yes, MLP status for alternative energy companies would give them a needed boost in the equity markets, but not all companies are fit to be a good MLP investment. For a company to be a good investment as an MLP, it needs to generate a consistent cash flow that can cover its operations and still return a consistent distribution to its shareholders. Some of the most successful MLPs have been in the midstream sector of the oil and gas industry. Companies such as Enterprise Products Partners (NYSE:EPD) have thrived under this model because revenue is relatively predictable and it can continuously raise its distributions without seriously jeopardizing its operations.
Much of the alternative energy space is still young and growing, fast. Right now, there are only a handful of companies that could benefit from MLP status. As the industry matures and outcomes are more predictable, though, more and more companies will be in a position to take advantage of this unique business structure.
What a Fool believes
The energy industry has for hundreds of years been closely tied to politics, and political beliefs have always in some way or another influenced our thoughts on the energy sector. Regardless of whether you're bullish or bearish on the prospects of alternative energy fuels, a move like this would provide a more attractive investment vehicle for these companies and could potentially result in greater private investment, and in turn it might reduce the need for public funding for the sector.
Just as investing in only one company isn't the best idea, energy requires more than just one solution. Based on financial performances from this past quarter, fossil fuels and alternative energy can coexist and strive. Demand for energy will keep all of these different sectors busy for many years, and investors should plan their portfolios accordingly.