Master Limited Partnerships Could Attract New Capital To Solar – Someday


In June, a bipartisan quartet of U.S. senators and representatives re-introduced legislation aimed at making renewable energy projects eligible under master limited partnership (MLP) tax rules. The purpose of the bill is to create the proverbial playing field so that investors in solar, wind, energy storage and similar projects can have access to the same tax structures as those enjoyed by investors in fossil fuel projects.

The benefit of MLPs is that they have publicly traded shares but are not taxed as corporations. Instead, the partners are taxed individually on the income from their shares, just as partnerships are. As currently defined, MLPs are available to investors in mining and resource-oriented energy projects, such as oil, natural gas and coal. The definition also extends to certain categories of closely related activities, such as fracking and pipeline projects.
Currently, the U.S. Internal Revenue Service (IRS) is developing new rules on which business activities qualify for MLP status. According to Keith Martin, a partner at Washington, D.C.-based Chadborne & Park LLP, ‘The IRS has been fielding a growing number of requests for private letter rulings from companies that provide services to the oil and gas trade and want to operate as MLPs.’ One extreme example Martin cites involves caterers seeking MLP status because they send food trucks to serve workers at natural gas extraction sites.

As the IRS works to produce its ‘exclusive list’ of MLP-worthy activities – comments will be accepted through Aug. 4 – many are wondering why such a beneficial business structure is not available for activities revolving around renewable resources. U.S. senators Chris Coons, D-Del., and Jerry Moran, R-Kan., and representatives Ted Poe, R-Texas, and Mike Thompson, D-Calif., are proposing through the Master Limited Partnerships Parity Act that a modification to the tax code could attract significant capital for renewable energy generation and fuel companies.

‘The bill would provide the same advantage of no double taxation to clean energy companies and even the playing field in terms of access to capital,’ says Marcus McGregor, director of investment research and product development at Conning in Hartford, Conn. ‘However, it may be a challenge to get it passed in the current political environment. The fact it's a bipartisan bill could give it traction with those advocating an 'all of the above' energy strategy – potentially after the next presidential election.’

He points out that the absence of MLPs for renewable energy companies is one of the reasons behind the popularity of yieldcos. Although many prominent yieldcos have formed and some of these are publicly traded, McGregor says they are not as elegant as MLPs because the latter do not require ‘blocking companies,’ which are C-corporations that are responsible for paying the taxes that are required.
‘You are still paying corporate taxes in the yieldco structure, whereas with the MLP, it is just the partners themselves paying taxes,’ McGregor says. ‘For a renewable energy company, you wouldn't have to have the blocker company or pay corporate taxes. In that sense, you get rid of a layer with just the simple MLP structure versus a yieldco.’

Whether a portfolio of solar assets would be more attractive to investors in a yieldco versus a MLP structure would depend on many factors, including underlying assets, the contracts in place and the relevant business plans. With credit and investing, you really have to look company-by-company to see what tax structure works best.

However, McGregor says the lack of such a choice is possibly keeping capital from entering the renewable energy field.

‘A lot of this depends on the investor climate, as well,’ he says, adding that skittishness because of commodity prices is keeping many investors on the fence. An MLP for solar could make some of that capital more readily available. ‘There are interesting ways in which solar companies are attempting to access that lower cost of capital. The whole idea of not paying any taxes to the government up front is what makes MLPs attractive.’

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