On April 24, 2013, a bipartisan group of senators and representatives reintroduced a revised version of the Master Limited Partnership Parity Act (the MLP Parity Act) to the Senate and House. Currently, a company can qualify as a master limited partnership (MLP) only if at least 90 percent of its gross income consists of “qualifying income,” including income form the production and sale of oil and natural gas, coal extraction, and pipeline projects.
The MLP Parity Act would enable clean energy companies to qualify for MLP status by expanding the definition of “qualifying income” to include income from clean energy resources, including wind, solar, biomass, municipal solid waste, hydropower, and hydrokinetic energy. The expanded definition would also include waste-heat-to-power, carbon capture and storage, energy efficient building properties, and biochemicals, and would allow for income from certain transportation fuels to qualify, such as cellulosic, biodiesel, and algae‐based fuels. A company could qualify as an MLP under the MLP Parity Act only if at least 90 percent of its gross income is included in one or more categories of qualifying income, as modified by the MLP Parity Act.
MLPs offer significant benefits to investors. An MLP is a business structure that is taxed as a partnership, but its ownership interests are publicly traded like a corporation’s stock. This means that unlike corporations, which are subject to two-layers of tax (corporate-level tax on income and shareholder-level tax on the receipt of dividends), MLPs provide for a single-layer of tax. MLPs do not pay taxes on profits. Rather, the income of the MLP flows through to its partners, who are taxed on their share of the MLP’s income at their own rates and who are not taxed on the receipt of cash distributions from the MLP. In addition, taxable income of the partnership is reduced by non-cash deductible expenses (e.g., depreciation and amortization), which typically provide a “tax shield” to the partners of up to 80 to 90 percent of the amount of cash distributions from the MLP (i.e., partners recognize taxable income equal to 10 to 20 percent of the amount of cash received from the MLP). The tax-deferred portion of the distribution reduces a partner’s basis in its MLP units and is taxed upon a subsequent sale of the units. In addition to the tax benefits, MLPs enjoy greater liquidity than non-publicly traded limited partnerships, since the MLP units are publicly traded on national stock exchanges.
According to the Senate sponsors, a main objective of the bill is to “unleash significant private capital into the energy market.” Whether the updated MLP Parity Act will pass both houses of Congress, or become law, is uncertain. In addition, even if the bill passes, it also remains to be seen whether, or what type of, clean energy MLPs will attract significant investment. A common feature of current MLPs is that they have a steady stream of income, e.g. from oil pipeline operations, in order to fund regular distributions. How many clean energy companies fit the financial profile of an attractive MLP investment or whether investors will develop an appetite for companies that may not have the financial profile of current MLPs are other issues that will evolve if the MLP Parity Act becomes law.
of the Master Limited Partnership Parity Act (the MLP Parity Act) to the Senate and House. Currently, a company can qualify as a master limited partnership (MLP) only if at least 90 percent of its gross income consists of “qualifying income,” including income form the production and sale of oil and natural gas, coal extraction, and pipeline projects.
If you have any questions about this alert, please contact:
Elizabeth Karpinski Vonne