Coming to a Portfolio Near You: Renewable Energy MLPs
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Two weeks ago, Senators Christopher Coons (Democrat from Delaware) and Jerry Moran (Republican from Kansas) introduced Senate Bill S.3275 - Master Limited Partnership Parity Act (MLPPA). The MLPPA looks to amend the existing US internal revenue tax code governing the formation of Master Limited Partnerships (MLPs) in the energy sector. Simply put, if passed, this bipartisan legislation will make it possible for renewable energy companies to form MLPs.
What are MLPs?
An MLP is a type of business that gets the majority of its cash flows from government-approved sources. These sources are mostly related to the traditional energy sectors of oil and natural gas extraction, coal mining and energy pipelines.
The primary benefit of forming MLPs is to avoid the double-taxation US companies are subject to (a tax at the corporate level and a second tax at the individual shareholder level). MLPs allow for pass-through income, meaning there is no equivalent of corporate level income tax. Instead, taxes are only paid at the unitholders level ("shareholders" of MLP units). This enables MLPs to keep and invest more capital into existing and new projects and allow the MLP to distribute more of its earnings to unitholders.
What will the MLPPA do?
For three decades, the oil, natural gas and coal sectors have enjoyed preferential tax treatment by the US tax code through the use of MLPs. Renewable energy, however, has been unable to similarly benefit due to the sector’s MLP ineligibility. The Master Limited Partnership Parity Act looks to address this exclusion of renewable energy from the MLP game. The current tax code for MLPs specifies qualified sources as "depletable" resources. As one would guess from the term "renewable energy," this sector does not qualify as a depletable resource.
Thus we arrive at the problem that Senators Moran and Coons hope to address with this legislation. The additional qualified sources the MLPPA will include are solar, wind, biomass, geothermal, hydropower, hydrokinetics, and fuel cells. The legislation will also include transportation biofuels, such as Solazyme’s (NASDAQ: SZYM) algae-based tailored-oils.
Why should you care?
MLPs are another avenue for companies to attract private investors and access private capital. Investors are attracted to MLPs for their preferential tax treatment and ownership structure, which often result in high-yielding quarterly required distributions (QRDs; the MLP equivalent of stock dividends). Without this addition to the existing tax code, renewable energy companies will continue to compete for private investor dollars with one hand tied behind their backs.
Who will benefit if passed?
The Master Limited Partnership Parity Act looks to even the energy playing field and open up renewable energy to the same private investment opportunities that oil, coal and natural gas have benefited from.
The obvious beneficiaries will be the likes of First Solar (NASDAQ: FSLR), SunPower Corp. (NASDAQ: SPWR) and other manufactures of large-scale renewable energy products. Renewable energy MLPs just might be the answer for these solar manufacturers that have otherwise been absolutely crushed by the market since 2008.
The electric utilities are other possible beneficiaries. For the largest wind turbine operator in the United States, the MLPPA could make it possible for NextEra Energy (NYSE: NEE) to convert its massive wind farms into MLPs to unlock their value for shareholders.
The MLPPA is a common sense approach to encourage private investment in renewable energy projects. In a political environment where renewable energy has become as partisan as everything else in our nation's capital, I am pleasantly surprised that this bipartisan bill has come out of Washington in an election year. If passed, the increased market liquidity of private investments in renewable energy projects could be the hydrokinetic tide that lifts all renewable energy boats. Only time will tell.
WhichStocksWork has no positions in the stocks mentioned above. The Motley Fool owns shares of Solazyme and has the following options: short JAN 2012 $55.00 puts on NextEra Energy. Motley Fool newsletter services recommend First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.