Wind-power companies want to follow KKR & Co. and Blackstone Group LP in tapping a Reagan-era tax break for oil and gas companies when U.S. renewable energy tax credits start expiring at the end of this year.
Developers of wind farms and solar power plants have begun lobbying for legislation that would let them form master limited partnerships, a financial structure used by pipeline operators, drillers and mine operators, as well as private- equity companies such as KKR and Blackstone. The publicly traded equities, valued at more than $230 billion at the end of last year, pay no corporate taxes, passing tax liability directly to investors.
Eliminating the corporate tax burden increases the potential profit of master limited partnerships and makes them appealing to wealthy investors. The tax vehicles were responsible for building much of the U.S. oil and gas pipeline networks, and investors such as John McKenna say they may deliver the same boost to alternative energy projects.
“It would be a real boon to the renewable energy industry,” McKenna, chairman and chief executive officer of Washington-based investment bank Hamilton Clark Securities Co., said in an interview.
McKenna, who helped create the first master limited partnership, or MLP, in 1981, for Apache Petroleum LP, said extending the tax benefit to renewable energy will spur additional development. “It allows developers to find a cost- effective way to monetize assets as they complete them and plow it into new projects,” he said.
Resources, Real Estate
Eligibility for the partnerships, now limited mostly to oil and gas companies, has varied. Even the Boston Celtics of the National Basketball Association gained MLP status in 1986, though the team lost it when Congress restricted the break to natural resources and real estate entities the following year. New York-based Blackstone qualified with its initial public offering in 2007.
Expanding the partnerships to renewable energy projects may not be high on the agenda of the Obama administration and lawmakers, who are focused on the debt ceiling, reducing the deficit and debating what tax breaks should be eliminated.
“I’ve heard the issue raised, but I haven’t spent a lot of time on it,” Senator Jeff Bingaman, a New Mexico Democrat who is chairman of the Energy and Natural Resources Committee and a member of the Finance Committee, said in an interview.
That will change before long, according to investor Kenneth Locklin.
“As soon as we get past the debt-ceiling crisis I’d expect some action on this,” Locklin, managing director of Impax Asset Management LLC, said in an interview. Allowing the use of MLPs for wind and solar projects has bipartisan support and “would provide a stable policy to finance projects beyond current incentives.”
The London-based investment company has $3.3 billion under management in its renewable energy funds, and Locklin said it would consider investing in wind-farm MLPs if it could.
Wind and solar projects currently qualify for tax grants from the U.S. Treasury of as much as 30 percent of their construction costs. That program is set to expire at the end of this year. Underlying tax credits expire for wind in 2012 and for solar in 2016.
The credits helped make wind farms the second-fastest growing source of new electricity after natural gas, and trade groups led by the American Wind Energy Association and the American Council on Renewable Energy are lobbying to make master limited partnerships a long-term replacement to help the industry compete with fossil fuels.
“I sit here and smile every time I hear the oil and gas industry complain about losing tax breaks that they’ve had for a 100 years,” Denise Bode, chief executive officer of the American Wind Energy Association in Washington, said in an interview. “They got their start with cheap financing from MLPs and we want that, too.”
The wind group, along with companies such as NextEra Energy Inc., Shell Wind Energy Inc. and General Electric Co., are in the Renewables for Publicly Traded Partnerships Group, according to a lobbying registration form filed July 15. The group hired Capitol Counsel LLC, which includes former Representative Jim McCrery of Louisiana, top Republican on the House Ways and Means Committee in 2007 and 2008.
The coalition is making the request in a “tough climate” as Congress debates deficit reduction, McCrery said. The group, which also includes a unit of Vestas Wind Systems A/S, the world’s biggest turbine maker, and BrightSource Energy Inc., which builds solar-thermal plants, hopes bipartisan support for renewable energy will help advance the request.
“We’ve got this problem where investors, companies can’t use tax credits that were designed to make the investments a workable, financial deal,” he said. “We don’t really care how we solve the problem, but if we don’t solve the problem, we’re going to have fewer and fewer dollars invested in renewables.”
Forgoing corporate taxes on MLPs may cost the Treasury about $2.9 billion in revenue through 2014, according to the National Association of Publicly Traded Partnerships, citing a December report from the Joint Committee on Taxation. The Alexandria, Virginia-based trade group represents MLPs.
About 75 percent of MLPs now are in the energy industry. The largest pipeline company formed under the structure is Enterprise Products Partners LP, followed by Kinder Morgan Energy Partners. Tesoro Corp. the largest independent refiner in the U.S., in April separated its pipeline assets from its refining business to form Tesoro Logistics LP and avoid corporate income tax.
The Alerian MLP Index of 50 energy MLP’s has gained 15 percent in the past year, compared with a 0.2 percent decline in the Wilderhill New Energy Global Innovation Index of 100 clean energy companies over the same period. The S&P 500 index has gained 21 percent.
After Apache formed the first MLP in 1981, Congress included the tax-exempt structure in that year’s Tax Reform Act. That restricted the class of potential MLPs to companies that derive at least 90 percent of their revenue from finding, refining and marketing depletable minerals or natural resources.
Industries have been added since then, including real estate and financial management.
Under a 2008 law, Congress added industrial carbon dioxide, transportation biofuels, alcohol and certain other alternative fuels. All of this has helped wind and solar industry lobbyists make their case for inclusion.
“The whole MLP objective is to bring new capital into an industry that otherwise wouldn’t attract it,” said Soonyong Park, head of global portfolio solutions at investment firm Rogerscasey Inc., which has $315 billion under management. “It’s the infrastructure that the MLPs finance, so it’s natural to extend that to the wind and solar industry.”
Expanding eligibility may mean competition for investors interested in master limited partnerships, Mary Lyman, a spokeswoman for the National Association of Publicly Traded Partnerships, said in an interview.
“We’re quite happy to have more MLPs but none of our current members have shown any interest,” she said.
Some investors may consider the intermittent nature of wind and solar power as a risky fit for master limited partnerships, according to Chris Eades, portfolio manager for ClearBridge Advisors’ Energy MLP Opportunity Fund in New York, which last month raised $540 million.
“When you put up a wind or solar farm, it’s hostage to weather for both demand and supply, and it’s not a really stable revenue source,” Eades said in an interview. “This is a lower- risk way to get equity-like returns, and with oil and gas production rising, we will need new infrastructure.”
–With assistance from Richard Rubin in Washington. Editors: Will Wade, Larry Liebert
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