Leveling the Playing Field for Energy Innovation
Bipartisan sponsors call to expand the definition of MLPs in the proposed Financing Our Energy Future Act
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Miller/Howard Investments
Leveling the Playing Field for Energy Innovation—
Monday, October 14, 2019
page 1 of 4
In June 2019, the bill formerly known as the
MLP Parity Act
, and now rebranded the
Financing Our
Energy Future Act,
1
was introduced in both the House and the Senate. The sponsors and co-sponsors
are a multi-partisan array of well-known senators and representatives hailing from the Republican,
Democratic, and Independent parties.
In pursuit of innovation and sustainable income, investors are looking for ways to support renewable energy
development and deployment. History has shown that the Master Limited Partnerships (MLP) structure is a
proven and effective tool for project financing.
INVESTMENT PRODUCTS: ARE NOT FDIC INSURED • MAY LOSE VALUE • ARE NOT BANK GUARANTEED
Continued on next page.
Leveling the Playing Field for Energy Innovation
Bipartisan sponsors call to expand the definition of MLPs in the proposed
Financing Our Energy Future Act
Monday, October 14, 2019
“
Financing Our Energy Future Act
would give clean energy projects access to
a tax advantage currently available only to oil, gas, and coal projects.”
—US Senator Chris Coons
•
Master Limited Partnerships (MLPs) provide
pass-through income favored by investors and
project developers alike.
•
Investor appetite for diverse energy sources and
technological innovation is increasing.
•
The Financing Our Energy Future Act
would
level the playing field by allowing renewable
energy companies access to the MLP structure.
We believe this would be good for innovation,
diversification, and the market.
•
Miller/Howard has supported this bill since its
first introduction in 2012 by issuing statements
and talking to lawmakers.
Leveling the Playing Field for Energy Innovation—
Monday, October 14, 2019
page 2 of 4
Leveling the Playing Field for Energy Innovation—
Monday, October 14, 2019
page 2 of 4
However, current regulations do not allow renewable energy companies to benefit from the MLP structure.
The Financing Our Energy Future Act
would level the playing field by allowing renewable energy companies
access to the MLP structure.
First, let’s step back and review the MLP structure, its benefits, and the current definition:
The MLP Structure:
Master Limited Partnerships are publicly-traded on stock exchanges and generally are in
-
come-oriented investments. The company, structured as an MLP, does not pay corporate taxes, as the income
is passed through to its investors. To paraphrase Senator Chris Coons, who helped introduce the
Financing Our
Energy Future Act:
‘MLPs are taxed like a partnership; traded like an equity.’
The Benefits:
From pass-through income to market access, the unique characteristics of this corporate
structure give these businesses access to private capital and liquidity. For income investors, MLPs can provide
tax-deferred distributions.
The Catch:
To be an MLP, 90% of the entity’s income must be “qualifying income”, which is defined as general
-
ly passive-type income such as interest, dividends, and rent, and also includes income and gains derived from
the exploration, development, mining or production, processing, refining, transportation, or marketing of
minerals or natural resources.
2
Renewable energy doesn’t qualify.
MLPs are limited, by their current definition, in their potential to help us
diversify and update our energy mix.
The good news is that lawmakers have noticed!
The Solution:
Expand the definition of qualifying income and level the playing field.
Since 2012, members of Congress have introduced—and reintroduced—bills that would extend the “publicly
traded partnership ownership structure to energy power generation projects and transportation fuels, and for
other purposes.” Note that the language subtly, but importantly, shifts the priority to
energy generation
over
source of energy generation.
1
These “other purposes” that the lawmakers propose adding to the definition include “disposal and utilization
of captured carbon oxide,” more commonly called ‘carbon capture, utilization, and storage’ (CCUS). Given that
carbon is a known global warming agent, and existing/potential regulatory responses to climate change pose
a material risk according to many companies, MLPs that perform CCUS could prove a beneficial, efficient,
market- and technology-driven solution for the energy sector. Further, technological advancement in the area
of CCUS could play a game-changing role in meeting the goals of the Paris Accord.
1
Yet the bill never seems to make it further than “referred to committee.”
Qualifying income for MLPs includes “income and gains derived from the
exploration, development, mining or production, processing, refining,
transportation (including pipelines transporting gas, oil, or products
thereof), or the marketing of any mineral or natural resource (including
fertilizer, geothermal energy, and timber)...”
3
Leveling the Playing Field for Energy Innovation—
Monday, October 14, 2019
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Leveling the Playing Field for Energy Innovation—
Monday, October 14, 2019
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MHI’s Support of the
MLP Parity Act/Financing Our Energy Future Act
over the Years:
•
2013:
Founder and CIO, Lowell Miller, issued a public statement and was quoted in a Ceres press release:
“There is no apparent logic to the current exclusion of renewable energy companies from the ability to
form publicly traded partnerships. A large part of the intent in permitting energy companies to become
MLPs was to encourage the development of domestic energy resources and infrastructure...To fail to
include renewable energy is, in effect, to say that the government and its tax system wants to implicitly
encourage carbon-based energy development and to discourage—or not encourage—renewable energy
development.”
•
2016:
We lobbied in Washington, DC. Representing Miller/Howard, our Lead ESG Analyst, Nicole Lee,
joined Ceres and other institutional investors, speaking directly to lawmakers about investor support for
the
MLP Parity Act
among other things.
•
2017:
John Cusick, CFA, the Portfolio Manager who leads our MLP Strategy, made this statement: “We
believe there is no downside to extending the definition of qualifying income to clean energy. The Act
would encourage renewable energy development, as the cost of capital for these companies would
likely be lower under the MLP structure. In addition, we view the development of alternative energy as
important for the future of energy security in the US. The further development of clean energy could also
result in job growth and have positive consequences for the economy. Lastly, as the definition of the MLP
structure is broadened, current partnerships will likely face lower concerns about changes in the tax code
as a greater number of entities would be impacted.”
More about Miller/Howard and MLPs:
MLP Metrics, Open Letter to MLP Management Teams
, and our Mid
-
stream/MLP engagement updates in our
annual Engagement Reports
.
1.
S.1841 -
Financing Our Energy Future Act
116th Congress (2019-2020)
2.
https://www.federalregister.gov/documents/2017/01/24/2017-01208/qualifying-income-from-activities-of-public
-
ly-traded-partnerships-with-respect-to-minerals-or
3.
Internal Revenue Code Section 7704(d)(1)(E)
Nicole Lee
Lead ESG Analyst
Miller/Howard Investments
Nicole Lee
provides ESG research and support to the investment team and operational leadership within the ESG team.
She also writes the firm’s biannual Shareholder Advocacy News. Nicole worked for several years as a clinic coordinator and
educator for a nonprofit health organization, during which time she also developed and conducted training programs
at two local universities. She received her BS in Sociology from Southern Utah University, and studied Public Health at
Westminster College.
John R. Cusick, CFA,
brings deep knowledge of the MLP sector to the firm’s portfolio management team. He was previously
senior vice president and research analyst at Wunderlich Securities Inc. in New York, covering energy in North America,
including partnerships focused on natural gas, liquids, and exploration & production. Prior to that, John spent more than
a decade at Oppenheimer & Co. in New York, where he started his career as a junior analyst working on the energy team,
and then as a senior research analyst specializing in the midstream sector. He earned his BA in Finance and Marketing from
Temple University, and his MBA in Finance from Fordham University School of Business in New York City.
John R. Cusick, CFA
Portfolio Manager
Miller/Howard Investments
Leveling the Playing Field for Energy Innovation—
Monday, October 14, 2019
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Leveling the Playing Field for Energy Innovation—
Monday, October 14, 2019
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BLG PJ2012 Leveling the Playing Field for Energy Innovation 1855 RIA PUB WF RBC
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DISCLOSURE
INVESTMENT PRODUCTS: ARE NOT FDIC INSURED - MAY LOSE VALUE - ARE NOT BANK GUARANTEED
Opinions and estimates offered constitute Miller/Howard Investments’ judgment and are subject to change
without notice, as are statements of financial market trends, which are based on current market conditions. All
investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are
risks inherent in any investment and there can be no assurance that any asset class will provide positive perfor
-
mance over any period of time. The material may also contain forward-looking statements that involve risk and
uncertainty, and there is no guarantee they will come to pass.
Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of
directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance
and should not be the only consideration for investment.
The information above is from sources deemed to be reliable and is provided strictly for the convenience of
our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions,
transaction costs, and changes to any assumptions may significantly affect the economics of any transaction.
The information and analyses contained herein are not intended as tax, legal, or investment advice and may not
be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or
other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any
investment returns — past, hypothetical, or otherwise — are not indicative of future performance. Investment
Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment
discipline, or investment manager based on performance alone. Consider, in addition to performance results, oth
-
er relevant information about each investment manager, as well as matters such as your investment objectives,
risk tolerance, and investment time horizon.
Risk Factors to Consider When Investing in Master Limited Partnerships (MLPs)
•
Cash distributions are not guaranteed and may fluctuate with the MLP’s operating or business performance.
•
MLPs typically have a General Partner that maintains an aggregate 2% General Partner interest. Unit holders
will have limited voting rights and do not own an interest in, vote with, or control the General Partner. The
General Partner often cannot be removed without its own consent, and the General Partner has conflicts of
interest and limited fiduciary responsibilities, which may permit it to favor its own interests to the detriment
of unit holders.
•
The MLP may issue additional common units, diluting existing unit holders’ interests.
•
Unit holders may be required to pay taxes on income from the MLP even if they do not receive cash distribu
-
tions.
•
The IRS could reclassify the MLP as a taxable entity, which could reduce the cash available for distribution to
unit holders.
If at any time the GP owns 85% or more of the issued and outstanding limited partner interests, the GP will have
the right to purchase all of the limited partnership interests not held by the GP at a price that may be undesirable.
Tax Considerations of MLPs
The tax treatment for investors in MLPs is different than that of an investment in stock, including (a) the investor’s
share of the MLP’s income, deductions and expenses are reported on Schedule K-1, not Form 1099, (b) because of
the possibility of unrelated business taxable income, charitable remainder trusts should not invest in this strategy,
and other non-taxable investors (such as ERISA and IRA accounts) should carefully consider whether to invest in
this strategy, (c) investors may have to file income tax returns in states in which the MLP’s do business and (d) MLP
tax information is sent directly from the partnership, which generally has until April 15th to provide this informa
-
tion. You should discuss these and any other tax implications with your tax advisor.
Past performance does not guarantee future results.
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