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United States

Analysts say MLPs will be of limited use

UNITED STATES: Giving US wind energy developers access to capital markets through the creation of master limited partnerships (MLPs) will likely be of limited use as long as the main incentives to the sector are tax based, according to an analysis by consultancy firm IHS Emerging Energy Research (EER).

The industry has been pushing for access to MLPs - an investment vehicle used widely by pipeline and other energy-related companies - as a way to expand the pool of capital available to finance projects. MLPs are traded on stock exchanges like corporations but pay no corporate taxes. Instead, income passes through the partnership to individual investors, who pay on their personal tax returns. This ability to access stock-market investors, combined with the favourable tax treatment, allows MLPs to secure capital at a lower cost.

Restrictive rules

A problem facing the wind sector, however, is that the rules do not allow MLPs to pass on either the $0.022/kWh production tax credit, paid for the first ten years of a project's life, or other valuable tax write-offs through to their unit holders.

"Our view is that in the short term the impact of MLPs would be fairly limited simply because they wouldn't be able to take advantage of the tax benefits that are in place right now," said Nate Gagnon, a senior analyst at IHS EER.

If the PTC is extended, Gagnon said, the real bottleneck facing the industry is finding enough tax-motivated investors able to use the credits and "that is something MLPs just don't help".

If the PTC is not extended, there are still five years' worth of tax depreciation benefits available to project owners that could not be taken advantage of within an MLP. Once projects are fully depreciated, though, there may be a role for MLPs to play, said Gagnon.

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