MLP Fact Sheet
MLPs and Renewable Energy
Interest in new financing mechanisms for renewable energy has been elevated recently, especially those mechanisms which aim to tap into public capital markets. Public capital markets increase access to capital, and since renewable energy is a capital intensive industry in a growth phase, maximizing the investor pool can be beneficial.
Master Limited Partnerships (MLPs) are the leading example of this idea in the US energy policy debate. In both 2012 and 2013, a bipartisan bill to expand MLP access has been cosponsored by Senators Chris Coons (D-DE) and Jerry Moran (R-KS) and Representatives Ted Poe (R-TX-2) and Mike Thompson (D-CA-5), among others. This bill has drawn the attention and endorsement of a wide range of interests, including AWEA. MLPs are currently available to other energy sectors and not wind/renewables, so expansion of MLPs would level the playing field in the spirit of fair competition. Combining MLPs with current policy support in the same way current MLPs combine with tax support for competing energy sectors is a sound US energy policy vision.
What are MLPs?
MLPs are a corporate ownership structure that allows for retail investors to directly purchase an ownership stake in a large energy asset. Eligibility for MLP structures is limited by law to companies deriving at least 90% of income from activities with oil, gas, petroleum, coal, timber, and certain biofuels. The primary characteristic of MLPs is the combination of “pass through” tax treatment with public trading. This means that income and expenses of the partnership are claimed directly on the owner’s tax filings instead of having a separate corporate tax bill, which is tax treatment usually reserved for private partnerships or proprietorships. This efficient tax treatment combines with public trading which maximizes the investor pool for qualified assets. There are over 100 MLPs active in the US, with a combined market capitalization of over $350 billion. The transportation/distribution sector is the most active part of the industry.
Would MLPs Work for Wind Energy?
Wind energy projects are a strong fit for the MLP markets because the economic characteristics of wind projects are similar to the pipeline MLP sector which comprises nearly 75% of the current MLP market cap. Long term contracts, steady cash flows, and a strong risk profile for continued cash distributions are preferences of the current investor community and accurately describe an operating wind farm as well.
The Benefits of MLPs
The primary benefit that MLPs provide is to the investor community. Energy projects are a strong asset class for many investment portfolios, due to the cash generation profile, long term horizon, and strong risk proposition. Today’s retail investors showed their interest in energy assets by pumping over $20 billion of new equity capital into MLPs in 2012. However, they do not have a similar opportunity to invest in green assets, even though appetite for green investments is strong. Expanding MLPs offers fairness to the retail investors who do not currently have the chance to invest in a wind farm.