A Master Limited Partnership
A MASTER LIMITED PARTNERSHIP set up to own solar and wind projects postponed a public offering in early February.
The company said it will operate for now using private capital.
Master limited partnerships are partnerships whose units are traded on a stock exchange or secondary market. Partnerships are not subject to federal income taxes; rather, each partner is taxed directly on his share of the partnership’s income. Under US tax law, any partnership whose units are publicly traded is taxed like a corporation. A master limited partnership, or MLP, is a partnership that is able to retain its status as a partnership, despite public trading, under a special rule in section 7704 of the US tax code that preserves partnership status as long as at least 90% of the partnership’s income each year comes from passive sources — like interest and dividends — or is income from producing, processing, refining, transporting or marketing minerals or natural resources. Wind and sunlight are not considered natural resources because they are inexhaustible.
The company — Sol-Wind Renewable Power, LP — planned to use a “self-help” MLP structure used by Fortress and Blackstone. (For a more detailed discussion about the structure, see “A New Structure for MLP Roll-Ups” in the January 2007 NewsWire.) Sol-Wind said it would have an initial portfolio of 185.6 megawatts of contracted solar projects and one contracted wind farm. All of the projects are in the US, with the exception of 5.9 megawatts of solar in Puerto Rico and 2.9 megawatts of solar in Canada. All of the projects were built in the last five years. Sol-Wind focuses on middle-market assets: solar ranging from 100 kilowatts to five megawatts and wind between from one and 10 megawatts in size.
The company said it would put all the projects under two corporate subsidiaries: one for US projects and the other for projects in other countries. It planned to raise $174 million from the public by listing on the New York Stock Exchange and $248.1 million from its sponsor, 40 North Investments, and use the money to buy the initial portfolio. The sponsor planned to retain 56.6% of the ownership interests through a mix of common and subordinated units. The sponsor would also have incentive distribution rights entitling the sponsor to as much as 50% of the excess cash flow after distributions of at least 37.38¢ per unit have been made each quarter on all the other units.
Sol-Wind said it has a pipeline of another 1,098.6 megawatts of solar and wind projects that it has entered into memoranda of understanding or holds rights of first refusal to acquire through the end of 2017. Some of the pipeline projects are in Japan, Mexico, the United Kingdom and Puerto Rico. The rest are on the US mainland.
The company planned to inject the money raised into the corporate subsidiaries that own the projects partly as equity and partly as debt. This would allow the company to “strip” earnings from the corporate subsidiaries as deductible interest on the debt, thereby subjecting the stripped earnings to only one level of tax at the level of the MLP partners. The remaining earnings would come up to the MLP as dividends. Sol-Wind said it expects “almost all” of its income to be dividends or interest. It said it does not expect the corporate subsidiaries to have “significant” taxable income for 15 or more years.
Interest in the MLP market could increase as an alternative to yield cos. The six existing yield cos have a combined market capitalization of $12 billion. There are 120 MLPs with a market capitalization of close to $600 billion. In 2013, MLPs raised $43 billion in initial public offerings, almost 17% of the entire US equity market. Almost 60% of MLPs are fewer than five years old. As many as another 25 MLPs are expected to come to market this year.
MLPs have expanded in recent years into new asset classes such as container ships, offshore oil services and wood pellets. At least one paper company is rumored to have a ruling request pending at the IRS to move part of its operations under an MLP.
The IRS put a hold in 2014 on any further rulings about qualification of entities as MLPs while it sorts out a “hamburger stand” issue. A third of MLP rulings in the year before the hold involved companies that provide services in connection with hydraulic fracturing of oil and gas. The IRS has been concerned about rulings creep as services become farther and farther removed from actual oil or gas production. For example, is owning hamburger stands at fracking sites to feed workers closely enough related to oil and gas production to qualify?
The IRS is expected to release the hold in the “not too distant future,” Erik Corwin, IRS deputy chief counsel (technical), said in early January.
In early February, President Obama called in his budget message to Congress to repeal “the exemption from the corporate income tax for publicly-traded partnerships with qualifying income and gains from activities relating to fossil fuels.” He proposed a January 1, 2021 effective date for the change.
Dave Camp (R-Michigan), who led the House tax-writing committee, but retired from Congress at the end of 2014, proposed in a comprehensive corporate tax reform bill last year to tax master limited partnerships, except for minerals and natural resources businesses, like corporations, effective after 2016. The Camp tax reform bill may serve as a starting point for any corporate tax reform discussions later this year.
Keith Martin in Washington