OAK BROOK, Ill. -- In the past year, a half dozen petroleum retailers have filed intent with the SEC to spin off parts of their companies into master limited partnerships, or MLPs. One of the core engines for MLP growth is its pass-through tax status, a benefit designed to support growth of the country's energy infrastructure. But President Barack Obama's recent re-election could put that advantage at risk.
"The energy-infrastructure business in particular is very capital-intensive; you have to get a lot of capital up front to build a pipeline or buy an ongoing system," said Mary S. Lyman, executive director of the National Association of Publicly Traded Partnerships (NAPTP), Arlington, Va., a trade association that represents MLPs. "It's also fairly low return. Particularly if you own a regulated pipeline, there's only a certain amount you're going to be able to give back to investors.
Mary Lyman"The MLP structure, by taking the corporate tax out of the equation, lowers the cost of capital so that the company can make investments and still provide investors with an attractive rate of return that they will want in an investment," she told CSP Daily News.
That is why it was particularly alarming to the MLP universe when energy MLPs were added to an annual list of tax expenditures circulated by a joint House-Senate Ways & Means Committee, which also specifies how much potential revenue is lost due to these expenditures.
According to Lyman, the revenue lost due to the pass-through tax structure of MLPs is "pretty small comparatively," or about $300 million a year, or $1.5 billion over five years.
"Since we're now on list of tax expenditures, that makes us more vulnerable when people say, 'Let's get rid of tax expenditures so we can lower the corporate rate'," said Lyman. "That's one reason we feel vulnerable with tax reform--although the fact that there's not a lot of revenue in taking our tax benefit away gives us some comfort."
A perhaps greater threat is that whenever there is a wholesale reform of the tax code, discussion always arise on how business entities should be taxed. "One question is: Should more entities be paying corporate tax?" she said. "Do we have the correct line between entities that pay corporate tax and those that can be pass-through and pass it on to investors like MLPs do? There are some people who say entities that are very large and traded should pay the corporate tax."
In fact, in a research report by investment firm Wells Fargo, analysts said Obama's re-election is "on the margin, a net negative for the MLP sector." The report says the president's Framework for Business Tax Reform calls out that "large companies are increasingly avoiding corporate tax liability by organizing themselves as pass-through businesses."
Lyman said the association is "pretty optimistic but cautious" that MLPs will not lose their tax benefit, and her group has been actively meeting with Ways & Means finance committee members to educate them about MLPs. Should they lose the status, it will put the brakes on the growth of the MLPs and the MLP structure.
(See Related Content below for a complete look at how MLPs are restructuring the midstream oil industry.)